e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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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
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o |
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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)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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74-1339132
(I.R.S. Employer
Identification No.) |
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450 Park Avenue, 27th Floor
New York, NY
(Address of principal executive offices)
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10022
(Zip Code) |
(212) 906-8555
(Registrants 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):
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-accelerated Filer o
(Do not check if a smaller reporting company)
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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 registrants common stock outstanding as of August 10,
2011.
HARBINGER GROUP INC.
TABLE OF CONTENTS
2
PART I: FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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July 3, |
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September 30, |
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2011 |
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2010 (A) |
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(Unaudited) |
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ASSETS |
Consumer Products and Other: |
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Cash and cash equivalents |
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$ |
449,190 |
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$ |
256,831 |
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Short-term investments |
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140,045 |
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53,965 |
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Receivables, net |
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411,248 |
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406,447 |
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Inventories, net |
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548,376 |
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530,342 |
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Prepaid expenses and other current assets |
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95,757 |
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94,078 |
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Total current assets |
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1,644,616 |
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1,341,663 |
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Properties, net |
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216,690 |
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201,309 |
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Goodwill |
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621,907 |
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600,055 |
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Intangibles, net |
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1,751,812 |
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1,769,360 |
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Deferred charges and other assets |
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110,747 |
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103,808 |
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4,345,772 |
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4,016,195 |
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Insurance: |
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Investments: |
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Fixed maturities, available-for-sale, at fair value |
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15,714,228 |
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Equity securities, available-for-sale, at fair value |
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310,345 |
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Derivative investments |
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205,185 |
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Other invested assets |
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40,853 |
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Total investments |
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16,270,611 |
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Cash and cash equivalents |
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740,623 |
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Accrued investment income |
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202,295 |
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Reinsurance recoverable |
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1,626,233 |
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Intangibles, net |
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501,820 |
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Deferred tax assets |
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182,125 |
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Other assets |
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50,346 |
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19,574,053 |
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Total assets |
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$ |
23,919,825 |
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$ |
4,016,195 |
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LIABILITIES AND EQUITY |
Consumer Products and Other: |
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Current portion of long-term debt |
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$ |
26,677 |
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$ |
20,710 |
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Accounts payable |
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310,109 |
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333,683 |
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Accrued and other current liabilities |
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272,383 |
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313,617 |
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Total current liabilities |
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609,169 |
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668,010 |
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Long-term debt |
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2,218,958 |
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1,723,057 |
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Equity conversion option of preferred stock |
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79,740 |
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Employee benefit obligations |
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96,644 |
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97,946 |
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Deferred tax liabilities |
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312,789 |
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277,843 |
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Other liabilities |
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61,794 |
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71,512 |
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3,379,094 |
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2,838,368 |
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Insurance: |
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Contractholder funds |
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14,684,482 |
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Future policy benefits |
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3,626,275 |
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Liability for policy and contract claims |
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77,303 |
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Note payable |
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95,000 |
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Other liabilities |
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466,029 |
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18,949,089 |
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Total liabilities |
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22,328,183 |
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2,838,368 |
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Commitments and contingencies |
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Temporary equity: |
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Redeemable preferred stock |
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186,219 |
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Harbinger Group Inc. stockholders equity: |
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Common stock |
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1,392 |
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1,392 |
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Additional paid-in capital |
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867,061 |
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855,767 |
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Accumulated deficit |
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(44,661 |
) |
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(150,309 |
) |
Accumulated other comprehensive income (loss) |
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102,828 |
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(5,195 |
) |
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Total Harbinger Group Inc. stockholders equity |
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926,620 |
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701,655 |
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Noncontrolling interest |
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478,803 |
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476,172 |
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Total permanent equity |
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1,405,423 |
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1,177,827 |
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Total liabilities and equity |
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$ |
23,919,825 |
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$ |
4,016,195 |
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(A) |
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Derived from the audited consolidated financial statements as of September 30,
2010. |
See accompanying notes to condensed consolidated financial statements.
3
HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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Three Month Period Ended |
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Nine Month Period Ended |
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July 3, 2011 |
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July 4, 2010 |
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July 3, 2011 |
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July 4, 2010 |
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(Unaudited) |
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(Unaudited) |
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Revenues: |
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Consumer Products and Other: |
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Net sales |
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$ |
804,635 |
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$ |
653,486 |
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$ |
2,359,586 |
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$ |
1,778,012 |
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Insurance: |
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Premiums |
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25,118 |
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25,118 |
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Net investment income |
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176,885 |
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176,885 |
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Net investment gains |
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1,228 |
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1,228 |
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Insurance and investment product fees and other |
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26,424 |
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26,424 |
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229,655 |
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229,655 |
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Total revenues |
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1,034,290 |
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653,486 |
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2,589,241 |
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1,778,012 |
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Operating costs and expenses: |
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Consumer Products and Other: |
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Cost of goods sold |
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510,941 |
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400,617 |
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1,511,215 |
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1,131,101 |
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Selling, general and administrative expenses |
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222,939 |
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193,781 |
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690,493 |
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523,293 |
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733,880 |
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594,398 |
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2,201,708 |
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1,654,394 |
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Insurance: |
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Benefits and other changes in policy reserves |
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129,959 |
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129,959 |
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Acquisition and operating expenses, net of deferrals |
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28,595 |
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28,595 |
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Amortization of intangibles |
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21,340 |
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21,340 |
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179,894 |
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179,894 |
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Total operating costs and expenses |
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913,774 |
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594,398 |
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2,381,602 |
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1,654,394 |
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Operating income |
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120,516 |
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|
59,088 |
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207,639 |
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|
123,618 |
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Interest expense |
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(51,904 |
) |
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(132,238 |
) |
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(192,650 |
) |
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(230,130 |
) |
Bargain purchase gain from business acquisition |
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134,668 |
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134,668 |
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Other income (expense), net |
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7,086 |
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(1,312 |
) |
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|
7,049 |
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(8,296 |
) |
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Income (loss) from continuing operations before
reorganization items and income taxes |
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210,366 |
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(74,462 |
) |
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156,706 |
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(114,808 |
) |
Reorganization items expense, net |
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3,646 |
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Income (loss) from continuing operations before
income taxes |
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210,366 |
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(74,462 |
) |
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156,706 |
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(118,454 |
) |
Income tax expense |
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3,720 |
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|
12,460 |
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|
63,906 |
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|
45,016 |
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Income (loss) from continuing operations |
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206,646 |
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(86,922 |
) |
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|
92,800 |
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(163,470 |
) |
Loss from discontinued operations, net of tax |
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(2,735 |
) |
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Net income (loss) |
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206,646 |
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(86,922 |
) |
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|
92,800 |
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(166,205 |
) |
Less: Net income (loss) attributable to noncontrolling interest |
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13,015 |
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(35,304 |
) |
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(18,811 |
) |
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(35,304 |
) |
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Net income (loss) attributable to controlling interest |
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193,631 |
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(51,618 |
) |
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|
111,611 |
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(130,901 |
) |
Less: Preferred stock dividends and accretion
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5,963 |
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5,963 |
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Net income
(loss) attributable to common and participating preferred stockholders
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$ |
187,668 |
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|
$ |
(51,618 |
) |
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$ |
105,648 |
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$ |
(130,901 |
) |
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Basic and diluted income (loss) per common share attributable
to controlling interest: |
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Continuing operations |
|
$ |
1.03 |
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|
$ |
(0.39 |
) |
|
$ |
0.58 |
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|
$ |
(0.98 |
) |
Discontinued operations |
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|
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|
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(0.02 |
) |
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|
Net income (loss) |
|
$ |
1.03 |
|
|
$ |
(0.39 |
) |
|
$ |
0.58 |
|
|
$ |
(1.00 |
) |
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|
|
|
|
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|
See accompanying notes to condensed consolidated financial statements.
4
HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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|
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: |
|
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|
|
|
|
|
|
Bargain purchase gain from business acquisition |
|
|
(134,668 |
) |
|
|
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|
Depreciation of properties |
|
|
34,785 |
|
|
|
39,488 |
|
Amortization of intangibles |
|
|
64,413 |
|
|
|
31,744 |
|
Stock-based compensation |
|
|
22,902 |
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|
|
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.
5
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. HGIs 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 Companys 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 Companys
financial statements to provide a more meaningful presentation of the transaction to the Companys
stockholders. Accordingly, the Companys financial statements have been retrospectively adjusted to
reflect as the Companys historical financial statements, those of SBI prior to June 16, 2010 and
the combination of Spectrum Brands, HGI and HGIs other subsidiaries thereafter. HGIs 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 Companys 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
6
conform to the fiscal year end of Spectrum Brands. As a result of this change in fiscal year end,
the Companys 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 FGLs operations have been included in the Companys Condensed Consolidated Financial
Statements commencing April 6, 2011.
FGLs 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. FGLs 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 Companys retrospectively adjusted annual consolidated financial statements
and notes thereto which are included in the Companys 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:
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 HGIs 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 Companys 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.
8
(3) Investments
Consumer Products and Other
HGIs 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 Companys 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
FGLs 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).
9
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 FGLs 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:
10
|
|
|
|
|
|
|
|
|
|
|
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 FGLs current evaluation of these securities in accordance with its impairment policy and
FGLs 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 Companys Condensed Consolidated Statements of
Operations were as follows:
11
|
|
|
|
|
|
|
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 Companys 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 |
) |
|
|
|
|
12
Concentrations of Financial Instruments
As of July 3, 2011, FGLs most significant investment in one industry was FGLs 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, FGLs exposure to sub-prime and Alternative-A residential
mortgage-backed securities was $314,182 and $36,222 or 1.9% and 0.2% of FGLs 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
Companys 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 instruments 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:
13
|
|
|
|
|
|
|
|
|
|
|
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). |
14
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
15
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 counterpartys 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:
16
|
|
|
|
|
|
|
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 contracts
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 FGLs risk
tolerance. FGLs FIA hedging
17
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 FGLs 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
Moodys Investor Services or A- from Standard and Poors 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 FGLs 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 |
|
Barclays 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 FGLs ratings have
increased the threshold amount in FGLs 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 Companys 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 Companys own credit risk. The Companys
estimate of an exchange price is the price in an orderly transaction between market participants to
sell the
18
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 Companys 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 investments level within the fair value hierarchy is based on
the lower level of input that is significant to the fair value measurement. The Companys
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 Companys consolidated financial instruments
for which the disclosure of fair values is required were as follows (asset/(liability)):
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 FGLs
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 Companys 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):
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
HGIs 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.
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
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.
23
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
Companys consolidated debt consists of the following:
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 HGIs 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, HGIs
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.
25
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 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 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.
26
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 Companys 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 Companys 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 Stocks 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
27
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 managements 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.
28
Fair value measurements of the Companys defined benefit plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
|
September 30, |
|
|
|
2011(A) |
|
|
2010(A) |
|
U.S. Defined Benefit Plan Assets: |
|
|
|
|
|
|
|
|
Common collective trustsequity |
|
$ |
44,173 |
|
|
$ |
36,723 |
|
Common collective trustsfixed income |
|
|
18,000 |
|
|
|
22,067 |
|
Other |
|
|
776 |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined Benefit Plan Assets |
|
$ |
62,949 |
|
|
$ |
58,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Defined Benefit Plan Assets: |
|
|
|
|
|
|
|
|
Common collective trustsequity |
|
$ |
33,298 |
|
|
$ |
28,090 |
|
Common collective trustsfixed income |
|
|
10,859 |
|
|
|
9,725 |
|
Insurance contractsgeneral 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 Companys defined benefit plan assets are based on observable market price inputs
(Level 2).
Each collective trusts 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
FGLs 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
Companys 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 FGLs
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 |
|
|
|
|
|
|
|
|
29
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, FGLs former
parent. OM Re transferred assets with a fair value of $653,684 to FGL Insurance in settlement of
all of OM Res 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), OMGUKs 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 FGLs
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.
30
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 Wiltons 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 Insurances 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 HGIs 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
31
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
recipients 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 Companys 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 Companys 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.
HGIs 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
32
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 Companys 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:
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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.
34
(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.
35
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 FGLs 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 Companys 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 FGLs 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 Companys 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 FGLs 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 Companys 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 Companys insurance subsidiaries. As of
July 3, 2011 and December 31,
2010, each of FGLs insurance subsidiaries has exceeded the minimum RBC requirements.
The Companys 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 FGLs 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.
36
(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 HGIs 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 managements 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 FGLs 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
FGLs statutory capital between the date of the initially negotiated purchase price and the FGL
Acquisition Date and (d) an independent appraisal of FGLs business indicated
that its fair value was in excess of the purchase price.
37
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 Streets
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
managements 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 Res obligations under these reinsurance
agreements. Such amounts are reflected in FGLs 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 FGLs 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 FGLs 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 FGLs 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:
38
|
|
|
|
|
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 Companys 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.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 FGLs
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 FGLs 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 Stops 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
40
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:
41
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:
42
|
|
|
|
|
|
|
|
|
|
|
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 customers 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 |
|
|
|
|
|
43
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 Companys 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.
44
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 Companys 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 Companys 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 Companys 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 Streets 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 Companys board of
directors approved the Reinsurance Agreement, the Investment Management Agreement, the Trust
Agreement and the transactions contemplated thereby. The FGL Special Committees 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.
HFGs 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 Funds guaranty of HFGs 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.
45
(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 Companys reportable
business segments are organized in a manner that reflects how HGIs 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 Companys 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.
46
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
This Managements 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
Managements 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
47
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 FGLs 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.
48
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).
FGLs 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.
FGLs most important IMOs are referred to as Power Partners. FGLs 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 FGLs 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.
49
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.
FGLs 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):
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
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
52
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 FGLs
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):
53
|
|
|
|
|
|
|
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 years 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
54
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
55
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 FGLs 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 FGLs statutory capital between the
date of the initially negotiated purchase price and the date of the FGL Acquisition and (d) an independent appraisal of FGLs 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
Venezuelas 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.
56
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
HGIs 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. HGIs 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 HGIs
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, HGIs 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 FGLs 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, FGLs strategic plans, financial results and condition,
FGLs 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, HGIs 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
57
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 FGLs 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.
FGLs insurance subsidiaries have used cash flows from operations and investment activities to fund
their liquidity requirements. FGLs 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.
FGLs 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, FGLs 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 FGLs 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, FGLs 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 FGLs 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 |
|
|
|
|
|
|
|
|
58
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.
59
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
60
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.
61
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
62
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):
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 FGLs
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 HGIs 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.
64
FGL
Valuation of Investments
FGLs 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% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managements 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 securitys 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
65
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
FGLs 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 FGLs 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 FGLs 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
66
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. FGLs 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 FGLs 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.
67
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 FGLs 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 FGLs 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 FGLs investment portfolio.
As part of FGLs 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 securitys expected cash flows and is used to measure a securitys
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. FGLs 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 HGIs 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 FGLs
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 FGLs 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 years 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 years 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 Companys management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Companys 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 Companys management,
including the CEO and CFO, concluded that, as of July 3, 2011, the Companys 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 SECs rules and forms, and is accumulated and communicated
to the Companys management, including the Companys CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure.
Notwithstanding the foregoing, there can be no assurance that the Companys 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 Companys 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 Companys 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 FGLs 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 Companys internal controls
over financial reporting made during the quarter ended July 3,
2011 that materially affected, or is reasonably likely to materially affect, the
Companys 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, managements 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
HGIs 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:
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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; |
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the need to provide sufficient capital to our operating businesses; |
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our dependence on distributions from our subsidiaries to fund our operations and
payments on our debt; |
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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; |
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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; |
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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; |
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the impact of additional material charges associated with our oversight of acquired
companies and the integration of our financial reporting; |
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the impact of restrictive stockholder agreements and securities laws on our ability
to dispose of equity interests we hold; |
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the controlling effect of our principal stockholders whose interests may conflict
with interests of our other stockholders and holders of our senior secured notes; |
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the effect interests of our officers, directors, stockholders and their respective
affiliates may have in certain transactions in which we are involved; |
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our dependence on certain key personnel; |
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the impact of potential losses and other risks from changes in our investment
portfolio; |
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our ability to effectively increase the size of our organization and manage our
growth; |
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the impact of a determination that we are an investment company or personal holding
company; |
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the impact of future claims arising from operations, agreements and transactions
involving former subsidiaries; |
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the impact of expending significant resources in researching acquisition or
investment targets that are not consummated; |
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tax consequences associated with our acquisition, holding and disposition of target
companies and assets; and |
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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:
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the impact of Spectrum Brands Inc.s (Spectrum
Brands) substantial indebtedness on its business, financial
condition and results of operations; |
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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; |
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any failure to comply with financial covenants and other provisions and restrictions
of Spectrum Brands debt instruments; |
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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; |
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the impact of expenses resulting from the implementation of new business strategies,
divestitures or current and proposed restructuring activities; |
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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; |
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interest rate and exchange rate fluctuations; |
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the loss of, or a significant reduction in, sales to a significant retail
customer(s); |
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competitive promotional activity or spending by competitors or price reductions by
competitors; |
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the introduction of new product features or technological developments by competitors
and/or the development of new competitors or competitive brands; |
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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; |
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changes in consumer spending preferences and demand for Spectrum Brands Holdings
products; |
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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; |
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the cost and effect of unanticipated legal, tax or regulatory proceedings or new laws
or regulations (including environmental, public health and consumer protection
regulations); |
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public perception regarding the safety of Spectrum Brands products, including the
potential for environmental liabilities, product liability claims, litigation and other
claims; |
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the impact of pending or threatened litigation; |
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changes in accounting policies applicable to Spectrum Brands business; |
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government regulations; |
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the seasonal nature of sales of certain of Spectrum Brands products; |
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the effects of climate change and unusual weather activity; and |
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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:
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Harbinger F&Gs ability to replace the Reserve Facility; |
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Harbinger F&Gs ability to consummate the Raven Springing Amendment; |
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Wilton Res ability or willingness to meet its financial obligations under the Raven
Springing Amendment; |
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F&G Holdings insurance subsidiaries ability to maintain and improve their financial
strength ratings; |
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Harbinger F&Gs 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; |
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F&G Holdings ability to control its business in a highly regulated industry, which
is subject to numerous legal restrictions and regulations; |
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availability of reinsurance and credit risk associated with reinsurance; |
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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; |
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F&G Holdings ability to mitigate the reserve strain associated with Regulation XXX
and Guideline AXXX; |
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the impact of interest rate fluctuations on F&G Holdings; |
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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; |
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F&G Holdings ability to defend itself against litigation (including class action
litigation) and respond to enforcement investigations or regulatory scrutiny; |
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the performance of third parties including distributors and technology service
providers, and providers of outsourced services; |
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the impact of new accounting rules or changes to existing accounting rules on F&G
Holdings; |
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F&G Holdings ability to protect its intellectual property; |
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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; |
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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; |
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the impact of man-made catastrophes, pandemics, computer virus, network security
branches and malicious and terrorist acts on F&G Holdings; |
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F&G Holdings ability to compete in a highly competitive industry; |
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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 |
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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 Companys 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 managements 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 partners 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 managements 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:
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incur additional indebtedness; |
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create liens or engage in sale and leaseback transactions; |
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pay dividends or make distributions in respect of capital stock; |
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make certain restricted payments; |
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sell assets; |
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engage in transactions with affiliates, except on an arms-length basis; or |
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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:
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make it difficult for us to satisfy our obligations with respect to our senior
secured notes and any other outstanding future debt obligations; |
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increase our vulnerability to general adverse economic and industry conditions or a
downturn in our business; |
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impair our ability to obtain additional financing in the future for working capital,
investments, acquisitions and other general corporate purposes; |
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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 |
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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 holders 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:
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default and foreclosure on our assets if our operating revenues after an investment
or acquisition are insufficient to repay our financial obligations; |
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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; |
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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; |
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our inability to pay dividends on our capital stock; |
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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
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limitations on our flexibility in planning for and reacting to changes in our
business and in the industries in which we operate; |
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an event of default that triggers a cross default with respect to other financial
obligations, including our senior secured notes and our Preferred Stock; |
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increased vulnerability to adverse changes in general economic, industry, financial,
competitive legislative, regulatory and other conditions and adverse changes in
government regulation; and |
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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 investors 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 Capitals
decisions regarding its investment in us. We are one investment in Harbinger Capitals portfolio.
Numerous considerations regarding Harbinger Capital, including investor contributions and
redemptions, portfolio performance, mix and concentration, and portfolio financing arrangements,
could influence Harbinger Capitals 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. Falcones and Harbinger Capitals 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. Falcones and Harbinger Capitals 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 corporations 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:
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employee redeployment, relocation or severance; |
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integration of information systems; |
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combination of research and development teams and processes; and |
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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 managements 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 managements 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:
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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; |
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increase its vulnerability to general adverse economic, industry, financial,
competitive, legislative, regulatory and other conditions; |
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limit its flexibility in planning for, or reacting to, changes in its business and
the industry in which it operates; |
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restrict its ability to make strategic acquisitions, dispositions or exploiting
business opportunities; |
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place it at a competitive disadvantage compared to its competitors that have less
debt; and |
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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 realize the value of its assets and opportunities fully
because of the need to dedicate a portion of cash flow from operations to payments on debt. In
addition, the Spectrum Brands Senior Secured Facilities contain financial covenants relating to
maximum leverage and minimum interest coverage. Such covenants could limit the flexibility of
Spectrum Brands restricted entities in planning for, or reacting to, changes in the industries in
which they operate. Spectrum Brands ability to comply with these covenants is subject to certain
events outside of its control. If Spectrum Brands is unable to comply with these covenants, the
lenders under the Spectrum Brands Senior Secured Facilities or Spectrum Brands Senior Subordinated
Toggle Notes could terminate their commitments and the lenders under its Spectrum Brands Senior
Secured Facilities or Spectrum Brands Senior Subordinated Toggle Notes could accelerate repayment
of its outstanding borrowings, and, in either case, Spectrum Brands may be unable to obtain
adequate refinancing of outstanding borrowings on favorable terms. If Spectrum Brands is unable to
repay outstanding borrowings when due, the lenders under the Spectrum Brands Senior Secured
Facilities or Spectrum Brands Senior Subordinated Toggle Notes will also have the right to proceed
against the collateral granted to them to secure the indebtedness owed to them. If Spectrum Brands
obligations under the Spectrum Brands Senior Secured Facilities and the Spectrum Brands Senior
Subordinated Toggle Notes are accelerated, it cannot assure you that its assets would be sufficient
to repay in full such indebtedness.
The sale or other disposition by HGI, the holder of a majority of the outstanding shares of
Spectrum Brands Holdings common stock, to non-affiliates of a sufficient amount of the common
stock of Spectrum Brands Holdings would constitute a change of control under the agreements
governing Spectrum Brands debt.
HGI owns a majority of the outstanding shares of the common stock of Spectrum Brands Holdings. The
sale or other disposition by HGI to non-affiliates of a sufficient amount of the common stock of
Spectrum Brands Holdings, including any foreclosure on or sale
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of Spectrum Brands Holdings common
stock pledged as collateral for our senior secured notes, could constitute a change of control
under the agreements governing Spectrum Brands debt. Under the Spectrum Brands Term Loan and the
Spectrum Brands ABL Facility, a change of control is an event of default and, if a change of
control were to occur, Spectrum Brands would be required to get an amendment to these agreements to
avoid a default. If Spectrum Brands was unable to get such an amendment, the lenders could
accelerate the maturity of each of the Spectrum Brands Term Loan and the Spectrum Brands ABL
Facility. In addition, under the indenture governing the Spectrum Brands Senior Secured Notes and
the 2019 Indenture, upon a change of control of Spectrum Brands Holdings, Spectrum Brands is
required to offer to repurchase such notes from the holders at a price equal to 101% of principal
amount of the notes plus accrued interest or obtain a waiver of default from the holders of such
notes. If Spectrum Brands was unable to make the change of control offer or obtain a waiver of
default, it would be an event of default under the indentures that could allow holders of such
notes to accelerate the maturity of the notes.
Spectrum Brands faces risks related to the current economic environment.
The current economic environment and related turmoil in the global financial system has had and may
continue to have an impact on Spectrum Brands business and financial condition. Global economic
conditions have significantly impacted economic markets within certain sectors, with financial
services and retail businesses being particularly impacted. Spectrum Brands ability to generate
revenue depends significantly on discretionary consumer spending. It is difficult to predict new
general economic conditions that could impact consumer and customer demand for Spectrum Brands
products or its ability to manage normal commercial relationships with its customers, suppliers and
creditors. The recent continuation of a number of negative economic factors, including constraints
on the supply of credit to households, uncertainty and weakness in the labor market and general
consumer fears of a continuing economic downturn could have a negative impact on discretionary
consumer spending. Spectrum Brands net sales expectations have been impacted by the challenging
retail environment. If the economy continues to deteriorate or fails to improve, Spectrum Brands
business could be negatively impacted, including as a result of reduced demand for its products or
supplier or customer disruptions. Any weakness in discretionary consumer spending could have a
material adverse effect on its revenues, results of operations and financial condition. In
addition, Spectrum Brands ability to access the capital markets may be restricted at a time when
it could be necessary or beneficial to do so, which could have an impact on its flexibility to
react to changing economic and business conditions.
Spectrum Brands Holdings may not be able to retain key personnel or recruit additional qualified
personnel, which could materially affect its business and require it to incur substantial
additional costs to recruit replacement personnel.
Spectrum Brands Holdings is highly dependent on the continuing efforts of its senior management
team and other key personnel. Any developments, changes or events that adversely affects Spectrum
Brands Holdings ability to attract and retain key management, sales, marketing and technical
personnel could have a material adverse effect on Spectrum Brands Holdings business. In addition,
Spectrum Brands Holdings currently does not maintain key person insurance covering any member of
its management team.
Spectrum Brands participates in very competitive markets and it may not be able to compete
successfully, causing it to lose market share and sales.
The markets in which Spectrum Brands participates are very competitive. In the consumer battery
market, its primary competitors are Duracell (a brand of The Procter & Gamble Company), Energizer
and Panasonic (a brand of Matsushita Electrical Industrial Co., Ltd.). In the electric shaving and
grooming and electric personal care product markets, its primary competitors are Braun (a brand of
Procter & Gamble), Norelco (a brand of Koninklijke Philips Electronics NV), and Vidal Sassoon and
Revlon (brands of Helen of Troy Limited). In the pet supplies market, its primary competitors are
Mars Corporation, The Hartz Mountain Corporation and Central Garden & Pet Company. In the Home and
Garden Business, its principal national competitors are The Scotts Miracle-Gro Company, Central
Garden & Pet and S.C. Johnson & Son, Inc. Spectrum Brands principal national competitors within
the small appliances market include Jarden Corporation, DeLonghi America, Euro-Pro Operating LLC,
Metro Thebe, Inc., d/b/a HWI Breville, NACCO Industries, Inc. (Hamilton Beach) and SEB S.A. In each
of these markets, Spectrum Brands also faces competition from numerous other companies. In
addition, in a number of its product lines, Spectrum Brands competes with its retail customers, who
use their own private label brands, and with distributors and foreign manufacturers of unbranded
products. Significant new competitors or increased competition from existing competitors may
adversely affect the business, financial condition and results of its operations.
Spectrum Brands competes for consumer acceptance and limited shelf space based upon brand name
recognition, perceived product quality, price, performance, product features and enhancements,
product packaging and design innovation, as well as creative marketing, promotion and distribution
strategies, and new product introductions. Spectrum Brands ability to compete in these consumer
product markets may be adversely affected by a number of factors, including, but not limited to,
the following:
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Spectrum Brands competes against many well-established companies that may have
substantially greater financial and other resources, including personnel and research
and development, and greater overall market share than Spectrum Brands. |
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In some key product lines, Spectrum Brands competitors may have lower production
costs and higher profit margins than it, which may enable them to compete more
aggressively in offering retail discounts, rebates and other promotional incentives. |
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Product improvements or effective advertising campaigns by competitors may weaken
consumer demand for Spectrum Brands products. |
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Consumer purchasing behavior may shift to distribution channels where Spectrum Brands
does not have a strong presence. |
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Consumer preferences may change to lower margin products or products other than those
Spectrum Brands markets. |
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Spectrum Brands may not be successful in the introduction, marketing and manufacture
of any new products or product innovations or be able to develop and introduce, in a
timely manner, innovations to its existing products that satisfy customer needs or
achieve market acceptance. |
Some competitors may be willing to reduce prices and accept lower profit margins to compete with
Spectrum Brands. As a result of this competition, Spectrum Brands could lose market share and
sales, or be forced to reduce its prices to meet competition. If its product offerings are unable
to compete successfully, its sales, results of operations and financial condition could be
materially and adversely affected.
Spectrum Brands may not be able to realize expected benefits and synergies from future acquisitions
of businesses or product lines.
Spectrum Brands may acquire partial or full ownership in businesses or may acquire rights to market
and distribute particular products or lines of products. The acquisition of a business or of the
rights to market specific products or use specific product names may involve a financial commitment
by Spectrum Brands, either in the form of cash or equity consideration. In the case of a new
license, such commitments are usually in the form of prepaid royalties and future minimum royalty
payments. There is no guarantee that Spectrum Brands will acquire businesses or product
distribution rights that will contribute positively to its earnings. Anticipated synergies may not
materialize, cost savings may be less than expected, sales of products may not meet expectations,
and acquired businesses may carry unexpected liabilities.
Sales of certain of Spectrum Brands products are seasonal and may cause its operating results and
working capital requirements to fluctuate.
On a consolidated basis Spectrum Brands Holdings financial results are approximately equally
weighted between quarters, however, sales of certain product categories tend to be seasonal. Sales
in the consumer battery, electric shaving and grooming and electric personal care product
categories, particularly in North America, tend to be concentrated in the December holiday season
(Spectrum Brands Holdings first fiscal quarter). Sales of Spectrum Brands Holdings small electric
appliances peak from July through December primarily due to the increased demand by customers in
the late summer for back-to-school sales and in the fall for the holiday season. Demand for pet
supplies products remains fairly constant throughout the year. Demand for home and garden control
products sold though the Home and Garden Business typically peaks during the first six months of
the calendar year (Spectrum Brands Holdings second and third fiscal quarters). As a result of this
seasonality, Spectrum Brands Holdings inventory and working capital needs fluctuate significantly
during the year. In addition, orders from retailers are often made late in the period preceding the
applicable peak season, making forecasting of production schedules and inventory purchases
difficult. If Spectrum Brands Holdings is
unable to accurately forecast and prepare for customer orders or its working capital needs, or
there is a general downturn in business or economic conditions during these periods, its business,
financial condition and results of operations could be materially and adversely affected.
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Spectrum Brands is subject to significant international business risks that could hurt its business
and cause its results of operations to fluctuate.
Approximately 40% of Spectrum Brands net sales for the fiscal quarter ended July 3, 2011 were from
customers outside of the U.S. Spectrum Brands pursuit of international growth opportunities may
require significant investments for an extended period before returns on these investments, if any,
are realized. Its international operations are subject to risks including, among others:
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currency fluctuations, including, without limitation, fluctuations in the foreign
exchange rate of the Euro; |
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changes in the economic conditions or consumer preferences or demand for its products
in these markets; |
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the risk that because its brand names may not be locally recognized, Spectrum Brands
Holdings must spend significant amounts of time and money to build brand recognition
without certainty that it will be successful; |
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labor unrest; |
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political and economic instability, as a result of terrorist attacks, natural
disasters or otherwise; |
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lack of developed infrastructure; |
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longer payment cycles and greater difficulty in collecting accounts; |
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restrictions on transfers of funds; |
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import and export duties and quotas, as well as general transportation costs; |
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changes in domestic and international customs and tariffs; |
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changes in foreign labor laws and regulations affecting its ability to hire and
retain employees; |
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inadequate protection of intellectual property in foreign countries; |
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unexpected changes in regulatory environments; |
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difficulty in complying with foreign law; |
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difficulty in obtaining distribution and support; and |
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adverse tax consequences. |
The foregoing factors may have a material adverse effect on Spectrum Brands ability to increase or
maintain its supply of products, financial condition or results of operations.
Adverse weather conditions during its peak selling season for Spectrum Brands home and garden
control products could have a material adverse effect on its Home and Garden Business.
Weather conditions in the U.S. have a significant impact on the timing and volume of sales of
certain of Spectrum Brands lawn and garden and household insecticide and repellent products.
Periods of dry, hot weather can decrease insecticide sales, while periods of cold and wet weather
can slow sales of herbicides.
Spectrum Brands products utilize certain key raw materials; any increase in the price of, or
change in supply and demand for, these raw materials could have a material and adverse effect on
its business, financial condition and profits.
The principal raw materials used to produce Spectrum Brands products including zinc powder,
electrolytic manganese dioxide powder, petroleum-based plastic materials, steel, aluminum, copper
and corrugated materials (for packaging) are sourced either on a global or regional basis by
Spectrum Brands or its suppliers, and the prices of those raw materials are susceptible to price
fluctuations due to supply and demand trends, energy costs, transportation costs, government
regulations, duties and tariffs, changes in
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currency exchange rates, price controls, general
economic conditions and other unforeseen circumstances. In particular, during the past two years,
Spectrum Brands experienced extraordinary price increases for raw materials, particularly as a
result of strong demand from China. Although Spectrum Brands may increase the prices of certain of
its goods to its customers, it may not be able to pass all of these cost increases on to its
customers. As a result, its margins may be adversely impacted by such cost increases. Spectrum
Brands cannot provide any assurance that its sources of supply will not be interrupted due to
changes in worldwide supply of or demand for raw materials or other events that interrupt material
flow, which may have an adverse effect on its profitability and results of operations.
Spectrum Brands regularly engages in forward purchase and hedging derivative transactions in an
attempt to effectively manage and stabilize some of the raw material costs it expects to incur over
the next 12 to 24 months; however, Spectrum Brands hedging positions may not be effective, or may
not anticipate beneficial trends, in a particular raw material market or may, as a result of
changes in its business, no longer be useful for it. In addition, for certain of the principal raw
materials Spectrum Brands uses to produce its products, such as electrolytic manganese dioxide
powder, there are no available effective hedging markets. If these efforts are not effective or
expose Spectrum Brands to above average costs for an extended period of time, and Spectrum Brands
is unable to pass its raw materials costs on to its customers, its future profitability may be
materially and adversely affected. Furthermore, with respect to transportation costs, certain modes
of delivery are subject to fuel surcharges which are determined based upon the current cost of
diesel fuel in relation to pre-established agreed upon costs. Spectrum Brands may be unable to pass
these fuel surcharges on to its customers, which may have an adverse effect on its profitability
and results of operations.
In addition, Spectrum Brands has exclusivity arrangements and minimum purchase requirements with
certain of its suppliers for the Home and Garden Business, which increase its dependence upon and
exposure to those suppliers. Some of those agreements include caps on the price Spectrum Brands
pays for its supplies and in certain instances, these caps have allowed Spectrum Brands to purchase
materials at below market prices. When Spectrum Brands attempts to renew those contracts, the other
parties to the contracts may not be willing to include or may limit the effect of those caps and
could even attempt to impose above market prices in an effort to make up for any below market
prices paid by Spectrum Brands prior to the renewal of the agreement. Any failure to timely obtain
suitable supplies at competitive prices could materially adversely affect Spectrum Brands
business, financial condition and results of operations.
Spectrum Brands may not be able to fully utilize its U.S. net operating loss carryforwards.
As of July 3, 2011, Spectrum Brands is estimating that at September 30, 2011 it will have U.S.
federal and state net operating loss carryforwards of approximately $1,156 million and $1,006
million, respectively. These net operating loss carryforwards expire through years ending in 2032.
As of July 3, 2011, Spectrum Brands management determined that it continues to be more likely than
not that the net U.S. deferred tax asset, excluding certain indefinite lived intangibles, will not
be realized in the future and as such recorded a full valuation allowance to offset the net U.S.
deferred tax asset, including its net operating loss carryforwards. In addition, Spectrum Brands
has had changes of ownership, as defined under Section 382 of the Code, that continue to subject a
significant amount of Spectrum Brands U.S. net operating losses and other tax attributes to
certain limitations. Spectrum Brands estimates that approximately $299 million of its federal and
$463 million of its state net operating losses will expire unused due to Section 382 of the Code.
As a consequence of the merger of Salton, Inc. and Applica Incorporated in December of 2007 (which
created Russell Hobbs), as well as earlier business combinations and issuances of common stock
consummated by both companies, use of the tax benefits of Russell Hobbs loss carryforwards is also
subject to limitations imposed by Section 382 of the Code. The determination of the limitations is
complex and requires significant judgment and analysis of past transactions. Spectrum Brands
analysis to determine what portion of Russell Hobbs carryforwards are restricted or eliminated by
that provision is ongoing and, pursuant to such analysis, Spectrum
Brands expects that a significant portion of these carryforwards will not be available to offset
future taxable income, if any. In addition, use of Russell Hobbs net operating loss and credit
carryforwards is dependent upon both Russell Hobbs and Spectrum Brands achieving profitable results
in the future. Russell Hobbs net operating loss carryforwards are subject to a full valuation
allowance as of July 3, 2011.
If Spectrum Brands is unable to fully utilize its net operating losses, other than those restricted
under Section 382 of the Code, as discussed above, to offset taxable income generated in the
future, its results of operations could be materially and negatively impacted.
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Consolidation of retailers and Spectrum Brands dependence on a small number of key customers for a
significant percentage of its sales may negatively affect its business, financial condition and
results of operations.
As a result of consolidation of retailers and consumer trends toward national mass merchandisers, a
significant percentage of Spectrum Brands sales are attributable to a very limited group of
customers. Spectrum Brands largest customer accounted for approximately 25% of its consolidated
net sales for the fiscal quarter ended July 3, 2011. As these mass merchandisers and retailers grow
larger and become more sophisticated, they may demand lower pricing, special packaging, or impose
other requirements on product suppliers. These business demands may relate to inventory practices,
logistics, or other aspects of the customer-supplier relationship. Because of the importance of
these key customers, demands for price reductions or promotions, reductions in their purchases,
changes in their financial condition or loss of their accounts could have a material adverse effect
on Spectrum Brands business, financial condition and results of operations.
Although Spectrum Brands has long-established relationships with many of its customers, it does not
have long-term agreements with them and purchases are generally made through the use of individual
purchase orders. Any significant reduction in purchases, failure to obtain anticipated orders or
delays or cancellations of orders by any of these major customers, or significant pressure to
reduce prices from any of these major customers, could have a material adverse effect on Spectrum
Brands business, financial condition and results of operations. Additionally, a significant
deterioration in the financial condition of the retail industry in general could have a material
adverse effect on its sales and profitability.
In addition, as a result of the desire of retailers to more closely manage inventory levels, there
is a growing trend among them to purchase products on a just-in-time basis. Due to a number of
factors, including (i) manufacturing lead-times, (ii) seasonal purchasing patterns and (iii) the
potential for material price increases, Spectrum Brands may be required to shorten its lead-time
for production and more closely anticipate its retailers and customers demands, which could in
the future require it to carry additional inventories and increase its working capital and related
financing requirements. This may increase the cost of warehousing inventory or result in excess
inventory becoming difficult to manage, unusable or obsolete. In addition, if Spectrum Brands
retailers significantly change their inventory management strategies, Spectrum Brands may encounter
difficulties in filling customer orders or in liquidating excess inventories, or may find that
customers are cancelling orders or returning products, which may have a material adverse effect on
its business.
Furthermore, Spectrum Brands primarily sells branded products and a move by one or more of its
large customers to sell significant quantities of private label products, which Spectrum Brands
does not produce on their behalf and which directly compete with Spectrum Brands products, could
have a material adverse effect on Spectrum Brands business, financial condition and results of
operations.
As a result of its international operations, Spectrum Brands faces a number of risks related to
exchange rates and foreign currencies.
Spectrum Brands international sales and certain of its expenses are transacted in foreign
currencies. During the fiscal quarter ended July 3, 2011,
approximately 40% of Spectrum Brands
net sales and 42% of its operating expenses were denominated in foreign currencies. Spectrum
Brands expects that the amount of its revenues and expenses transacted in foreign currencies will
increase as its Latin American, European and Asian operations grow and, as a result, its exposure
to risks associated with foreign currencies could increase accordingly. Significant changes in the
value of the U.S. dollar in relation to foreign currencies will affect its cost of goods sold and
its operating margins and could result in exchange losses or otherwise have a material effect on
its business, financial condition and results of operations. Changes in currency exchange rates may
also affect Spectrum Brands sales to, purchases from and loans to its subsidiaries as well as
sales to, purchases from and bank lines of credit with its customers, suppliers and creditors that
are denominated in foreign currencies.
Spectrum Brands sources many products from, and sells many products in, China and other Asian
countries. To the extent the Chinese Renminbi (RMB) or other currencies appreciate with respect
to the U.S. dollar, it may experience fluctuations in its results of operations. Since 2005, the
RMB has no longer been pegged to the U.S. dollar at a constant exchange rate and instead fluctuates
versus a basket of currencies. Although the Peoples Bank of China regularly intervenes in the
foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the
RMB may appreciate or depreciate within a flexible peg range against the U.S. dollar in the medium
to long term. Moreover, it is possible that in the future Chinese authorities may lift restrictions
on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
While Spectrum Brands may enter into hedging transactions in the future, the availability and
effectiveness of these transactions may be limited, and it may not be able to successfully hedge
its exposure to currency fluctuations. Further, Spectrum Brands may not be successful in
implementing customer pricing or other actions in an effort to mitigate the impact of currency
fluctuations and, thus, its results of operations may be adversely impacted.
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A deterioration in trade relations with China could lead to a substantial increase in tariffs
imposed on goods of Chinese origin, which potentially could reduce demand for and sales of Spectrum
Brands products.
Spectrum Brands purchases a number of its products and supplies from suppliers located in China.
China gained Permanent Normal Trade Relations (PNTR) with the U.S. when it acceded to the World
Trade Organization (WTO), effective January 2002. The U.S. imposes the lowest applicable tariffs
on exports from PNTR countries to the U.S. In order to maintain its WTO membership, China has
agreed to several requirements, including the elimination of caps on foreign ownership of Chinese
companies, lowering tariffs and publicizing its laws. China may not meet these requirements, it may
not remain a member of the WTO, and its PNTR trading status may not be maintained. If Chinas WTO
membership is withdrawn or if PNTR status for goods produced in China were removed, there could be
a substantial increase in tariffs imposed on goods of Chinese origin entering the U.S. which could
have a material negative adverse effect on its sales and gross margin.
Spectrum Brands international operations may expose it to risks related to compliance with the
laws and regulations of foreign countries.
Spectrum Brands is subject to three European Union (EU) Directives that may have a material
impact on its business: Restriction of the Use of Hazardous Substances in Electrical and Electronic
Equipment, Waste of Electrical and Electronic Equipment and the Directive on Batteries and
Accumulators and Waste Batteries, discussed below. Restriction of the Use of Hazardous Substances
in Electrical and Electronic Equipment requires Spectrum Brands to eliminate specified hazardous
materials from products it sells in EU member states. Waste of Electrical and Electronic Equipment
requires Spectrum Brands to collect and treat, dispose of or recycle certain products it
manufactures or imports into the EU at its own expense. The EU Directive on Batteries and
Accumulators and Waste Batteries bans heavy metals in batteries by establishing maximum quantities
of heavy metals in batteries and mandates waste management of these batteries, including
collection, recycling and disposal systems, with the costs imposed upon producers and importers
such as Spectrum Brands. Complying or failing to comply with the EU Directives may harm Spectrum
Brands business. For example:
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Although contracts with its suppliers address related compliance issues, Spectrum
Brands may be unable to procure appropriate Restriction of the Use of Hazardous
Substances in Electrical and Electronic Equipment compliant material in sufficient
quantity and quality and/or be able to incorporate it into Spectrum Brands product
procurement processes without compromising quality and/or harming its cost structure. |
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Spectrum Brands may face excess and obsolete inventory risk related to non-compliant
inventory that it may continue to hold in fiscal 2011 for which there is reduced demand,
and it may need to write down the carrying value of such inventories. |
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Spectrum Brands may be unable to sell certain existing inventories of its batteries
in Europe. |
Many of the developing countries in which Spectrum Brands operates do not have significant
governmental regulation relating to environmental safety, occupational safety, employment practices
or other business matters routinely regulated in the U.S. or may not rigorously enforce such
regulation. As these countries and their economies develop, it is possible that new regulations or
increased enforcement of existing regulations may increase the expense of doing business in these
countries. In addition, social legislation in many countries in which Spectrum Brands operates may result in significantly higher expenses
associated with labor costs, terminating employees or distributors and closing manufacturing
facilities. Increases in Spectrum Brands costs as a result of increased regulation, legislation or
enforcement could materially and adversely affect its business, results of operations and financial
condition.
Spectrum Brands may not be able to adequately establish and protect its intellectual property
rights, and the infringement or loss of its intellectual property rights could harm its business.
To establish and protect its intellectual property rights, Spectrum Brands relies upon a
combination of national, foreign and multi-national patent, trademark and trade secret laws,
together with licenses, confidentiality agreements and other contractual arrangements. The measures
that Spectrum Brands takes to protect its intellectual property rights may prove inadequate to
prevent third parties from infringing or misappropriating its intellectual property. Spectrum
Brands may need to resort to litigation to enforce or defend its intellectual property rights. If a
competitor or collaborator files a patent application claiming technology also claimed by Spectrum
Brands, or a trademark application claiming a trademark, service mark or trade dress also used by
Spectrum Brands, in order
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to protect its rights, it may have to participate in expensive and time
consuming opposition or interference proceedings before the U.S. Patent and Trademark Office or a
similar foreign agency. Similarly, its intellectual property rights may be challenged by third
parties or invalidated through administrative process or litigation. The costs associated with
protecting intellectual property rights, including litigation costs, may be material. For example,
several million dollars have been spent on protecting the patented automatic litter box business
over the last few years. Furthermore, even if Spectrum Brands intellectual property rights are not
directly challenged, disputes among third parties could lead to the weakening or invalidation of
its intellectual property rights, or its competitors may independently develop technologies that
are substantially equivalent or superior to its technology. Obtaining, protecting and defending
intellectual property rights can be time consuming and expensive, and may require Spectrum Brands
to incur substantial costs, including the diversion of the time and resources of management and
technical personnel.
Moreover, the laws of certain foreign countries in which Spectrum Brands operates or may operate in
the future do not protect, and the governments of certain foreign countries do not enforce,
intellectual property rights to the same extent as do the laws and government of the U.S., which
may negate Spectrum Brands competitive or technological advantages in such markets. Also, some of
the technology underlying Spectrum Brands products is the subject of nonexclusive licenses from
third parties. As a result, this technology could be made available to Spectrum Brands competitors
at any time. If Spectrum Brands is unable to establish and then adequately protect its intellectual
property rights, its business, financial condition and results of operations could be materially
and adversely affected.
Spectrum Brands licenses various trademarks, trade names and patents from third parties for certain
of its products. These licenses generally place marketing obligations on Spectrum Brands and
require Spectrum Brands to pay fees and royalties based on net sales or profits. Typically, these
licenses may be terminated if Spectrum Brands fails to satisfy certain minimum sales obligations or
if it breaches the terms of the license. The termination of these licensing arrangements could
adversely affect Spectrum Brands business, financial condition and results of operations.
Spectrum Brands licenses the use of the Black & Decker brand for marketing in certain small
household appliances in North America, South America (excluding Brazil) and the Caribbean. Sales of
Black & Decker branded products represented approximately 11% of the total consolidated revenue in
the fiscal quarter ended July 3, 2011. In July 2011, The Black & Decker Corporation (BDC)
extended the license agreement through December 2015. The failure to renew the license agreement
with BDC or to enter into a new agreement on acceptable terms could have a material adverse effect
on Spectrum Brands financial condition, liquidity and results of operations.
Claims by third parties that Spectrum Brands is infringing their intellectual property and other
litigation could adversely affect its business.
From time to time in the past, Spectrum Brands has been subject to claims that it is infringing the
intellectual property of others. Spectrum Brands currently is the subject of such claims and it is
possible that third parties will assert infringement claims against Spectrum Brands in the future.
An adverse finding against Spectrum Brands in these or similar trademark or other intellectual
property litigations may have a material adverse effect on Spectrum Brands business, financial
condition and results of operations. Any such claims, with or without merit, could be time
consuming and expensive, and may require Spectrum Brands to incur substantial costs, including the
diversion of the resources of management and technical personnel, cause product delays or require
Spectrum Brands to enter into licensing or other agreements in order to secure continued access to
necessary or desirable intellectual property. If Spectrum Brands is deemed to be infringing a third
partys intellectual property and is unable to continue using that intellectual property as it had
been, its business and results of operations could be harmed if it is unable to successfully
develop non-infringing alternative
intellectual property on a timely basis or license non-infringing alternatives or substitutes, if
any exist, on commercially reasonable terms. In addition, an unfavorable ruling in intellectual
property litigation could subject Spectrum Brands to significant liability, as well as require
Spectrum Brands to cease developing, manufacturing or selling the affected products or using the
affected processes or trademarks. Any significant restriction on Spectrum Brands proprietary or
licensed intellectual property that impedes its ability to develop and commercialize its products
could have a material adverse effect on its business, financial condition and results of
operations.
Spectrum Brands dependence on a few suppliers and one of its U.S. facilities for certain of its
products makes it vulnerable to a disruption in the supply of its products.
Although Spectrum Brands has long-standing relationships with many of its suppliers, it generally
does not have long-term contracts with them. An adverse change in any of the following could have a
material adverse effect on its business, financial condition and results of operations:
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the terms and conditions upon which it purchases products from its suppliers,
including applicable exchange rates, transport costs and other costs, its suppliers
willingness to extend credit to it to finance its inventory purchases and other factors
beyond its control; |
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financial condition of its suppliers; |
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political instability in the countries in which its suppliers are located; |
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its ability to import outsourced products; |
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its suppliers noncompliance with applicable laws, trade restrictions and tariffs; or |
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its suppliers ability to manufacture and deliver outsourced products according to
its standards of quality on a timely and efficient basis. |
If Spectrum Brands relationship with one of its key suppliers is adversely affected, Spectrum
Brands may not be able to quickly or effectively replace such supplier and may not be able to
retrieve tooling, molds or other specialized production equipment or processes used by such
supplier in the manufacture of its products.
In addition, Spectrum Brands manufactures the majority of its foil cutting systems for its shaving
product lines, using specially designed machines and proprietary cutting technology, at its
Portage, Wisconsin facility. Damage to this facility, or prolonged interruption in the operations
of this facility for repairs, as a result of labor difficulties or for other reasons, could have a
material adverse effect on its ability to manufacture and sell its foil shaving products which
could in turn harm its business, financial condition and results of operations.
Spectrum Brands faces risks related to its sales of products obtained from third-party suppliers.
Spectrum Brands sells a significant number of products that are manufactured by third party
suppliers over which it has no direct control. While Spectrum Brands has implemented processes and
procedures to try to ensure that the suppliers it uses are complying with all applicable
regulations, there can be no assurances that such suppliers in all instances will comply with such
processes and procedures or otherwise with applicable regulations. Noncompliance could result in
Spectrum Brands marketing and distribution of contaminated, defective or dangerous products which
could subject it to liabilities and could result in the imposition by governmental authorities of
procedures or penalties that could restrict or eliminate its ability to purchase products from
non-compliant suppliers. Any or all of these effects could adversely affect Spectrum Brands
business, financial condition and results of operations.
Class action and derivative action lawsuits and other investigations, regardless of their merits,
could have an adverse effect on Spectrum Brands business, financial condition and results of
operations.
Spectrum Brands and certain of its officers and directors have been named in the past, and may be
named in the future, as defendants of class action and derivative action lawsuits. In the past,
Spectrum Brands has also received requests for information from government authorities. Regardless
of their subject matter or merits, class action lawsuits and other government investigations may
result in significant cost to Spectrum Brands, which may not be covered by insurance, may divert
the attention of management or may otherwise have an adverse effect on its business, financial
condition and results of operations.
Spectrum Brands may be exposed to significant product liability claims which its insurance may not
cover and which could harm its reputation.
In the ordinary course of its business, Spectrum Brands may be named as a defendant in lawsuits
involving product liability claims. In any such proceeding, plaintiffs may seek to recover large
and sometimes unspecified amounts of damages and the matters may remain unresolved for several
years. Any such matters could have a material adverse effect on Spectrum Brands business, results
of operations and financial condition if it is unable to successfully defend against or settle
these matters or if its insurance coverage is insufficient to satisfy any judgments against
Spectrum Brands or settlements relating to these matters. Although Spectrum Brands has product
liability insurance coverage and an excess umbrella policy, its insurance policies may not provide
coverage for certain, or any,
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claims against Spectrum Brands or may not be sufficient to cover all
possible liabilities. Additionally, Spectrum Brands does not maintain product recall insurance.
Spectrum Brands may not be able to maintain such insurance on acceptable terms, if at all, in the
future. Moreover, any adverse publicity arising from claims made against Spectrum Brands, even if
the claims were not successful, could adversely affect the reputation and sales of its products. In
particular, product recalls or product liability claims challenging the safety of Spectrum Brands
products may result in a decline in sales for a particular product. This could be true even if the
claims themselves are ultimately settled for immaterial amounts. This type of adverse publicity
could occur and product liability claims could be made in the future.
Spectrum Brands may incur material capital and other costs due to environmental liabilities.
Spectrum Brands is subject to a broad range of federal, state, local, foreign and multi-national
laws and regulations relating to the environment. These include laws and regulations that govern:
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remediation of contamination associated with release of hazardous substances at its
facilities and at off-site disposal locations. |
Risk of environmental liability is inherent in Spectrum Brands business. As a result, material
environmental costs may arise in the future. In particular, it may incur capital and other costs to
comply with increasingly stringent environmental laws and enforcement policies, such as the EU
Directives: Restriction of the Use of Hazardous Substances in Electrical and Electronic Equipment,
Waste of Electrical and Electronic Equipment and the Directive on Batteries and Accumulators and
Waste Batteries, discussed above. Moreover, there are proposed international accords and treaties,
as well as federal, state and local laws and regulations that would attempt to control or limit the
causes of climate change, including the effect of greenhouse gas emissions on the environment. In
the event that the U.S. government or foreign governments enact new climate change laws or
regulations or make changes to existing laws or regulations, compliance with applicable laws or
regulations may result in increased manufacturing costs for Spectrum Brands products, such as by
requiring investment in new pollution control equipment or changing the ways in which certain of
its products are made. Spectrum Brands may incur some of these costs directly and others may be
passed on to it from its third-party suppliers. Although Spectrum Brands believes that it is
substantially in compliance with applicable environmental laws and regulations at its facilities,
it may not always be in compliance with such laws and regulations or any new laws and regulations
in the future, which could have a material adverse effect on Spectrum Brands business, financial
condition and results of operations.
From time to time, Spectrum Brands has been required to address the effect of historic activities
on the environmental condition of its properties or former properties. Spectrum Brands has not
conducted invasive testing at all of its facilities to identify all potential environmental
liability risks. Given the age of its facilities and the nature of its operations, material
liabilities may arise in the future in connection with its current or former facilities. If
previously unknown contamination of property underlying or in the vicinity of its manufacturing
facilities is discovered, Spectrum Brands could be required to incur material unforeseen expenses.
If this occurs, it may have a material adverse effect on Spectrum Brands business, financial
condition and results of operations. Spectrum Brands is
currently engaged in investigative or remedial projects at a few of its facilities and any
liabilities arising from such investigative or remedial projects at such facilities may have a
material effect on Spectrum Brands business, financial condition and results of operations.
Spectrum Brands is also subject to proceedings related to its disposal of industrial and hazardous
material at off-site disposal locations or similar disposals made by other parties for which it is
responsible as a result of its relationship with such other parties. These proceedings are under
the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA)
or similar state or foreign jurisdiction laws that hold persons who arranged for the disposal or
treatment of such substances strictly liable for costs incurred in responding to the release or
threatened release of hazardous substances from such sites, regardless of fault or the lawfulness
of the original disposal. Liability under CERCLA is typically joint and several, meaning that a
liable party may be responsible for all of the costs incurred in investigating and remediating
contamination at a site. Spectrum Brands occasionally is identified by federal or state
governmental agencies as being a potentially responsible party for response actions contemplated at
an off-site facility. At the existing sites where Spectrum Brands has been notified of its status
as a potentially responsible party, it is either premature to determine if Spectrum Brands
potential liability, if any, will be material or it does not believe that its liability, if any,
will be material. Spectrum Brands may be named as a potentially responsible party under CERCLA or
similar state or foreign
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jurisdiction laws in the future for other sites not currently known to
Spectrum Brands, and the costs and liabilities associated with these sites may have a material
adverse effect on Spectrum Brands business, financial condition and results of operations.
Compliance with various public health, consumer protection and other regulations applicable to
Spectrum Brands products and facilities could increase its cost of doing business and expose
Spectrum Brands to additional requirements with which Spectrum Brands may be unable to comply.
Certain of Spectrum Brands products sold through, and facilities operated under, each of its
business segments are regulated by the Environmental Protection Agency (the EPA), the U.S. Food
and Drug Administration (FDA) or other federal consumer protection and product safety agencies
and are subject to the regulations such agencies enforce, as well as by similar state, foreign and
multinational agencies and regulations. For example, in the U.S., all products containing
pesticides must be registered with the EPA and, in many cases, similar state and foreign agencies
before they can be manufactured or sold. Spectrum Brands inability to obtain, or the cancellation
of, any registration could have an adverse effect on its business, financial condition and results
of operations. The severity of the effect would depend on which products were involved, whether
another product could be substituted and whether its competitors were similarly affected. Spectrum
Brands attempts to anticipate regulatory developments and maintain registrations of, and access to,
substitute chemicals and other ingredients, but it may not always be able to avoid or minimize
these risks.
As a distributor of consumer products in the U.S., certain of Spectrum Brands products are also
subject to the Consumer Product Safety Act, which empowers the U.S. Consumer Product Safety
Commission (the Consumer Commission) to exclude from the market products that are found to be
unsafe or hazardous. Under certain circumstances, the Consumer Commission could require Spectrum
Brands to repair, replace or refund the purchase price of one or more of its products, or it may
voluntarily do so. For example, in April 2011 Spectrums United Pet Group, in cooperation with the
Consumer Products Safety Commission, voluntarily recalled approximately 1.2 million aquarium
heaters sold under the Marineland Stealth and Marineland Stealth Pro brands. Any additional
repurchases or recalls of Spectrum Brands products could be costly to it and could damage the
reputation or the value of its brands. If Spectrum Brands is required to remove, or it voluntarily
removes its products from the market, its reputation or brands could be tarnished and it may have
large quantities of finished products that could not be sold. Furthermore, failure to timely notify
the Consumer Commission of a potential safety hazard can result in significant fines being assessed
against Spectrum Brands. Additionally, laws regulating certain consumer products exist in some
states, as well as in other countries in which Spectrum Brands sells its products, and more
restrictive laws and regulations may be adopted in the future.
The Food Quality Protection Act (FQPA) established a standard for food-use pesticides, which is
that a reasonable certainty of no harm will result from the cumulative effect of pesticide
exposures. Under the FQPA, the EPA is evaluating the cumulative effects from dietary and
non-dietary exposures to pesticides. The pesticides in certain of Spectrum Brands products that
are sold through the Home and Garden Business continue to be evaluated by the EPA as part of this
program. It is possible that the EPA or a third party active ingredient registrant may decide that
a pesticide Spectrum Brands uses in its products will be limited or made unavailable to Spectrum
Brands. Spectrum Brands cannot predict the outcome or the severity of the effect of the EPAs
continuing evaluations of active ingredients used in its products.
In addition, the use of certain pesticide and fertilizer products that are sold through Spectrum
Brands global pet supplies business and through the Home and Garden Business may, among other
things, be regulated by various local, state, federal and foreign environmental and public health
agencies. These regulations may require that only certified or professional users apply the
product,
that users post notices on properties where products have been or will be applied or that certain
ingredients may not be used. Compliance with such public health regulations could increase Spectrum
Brands cost of doing business and expose Spectrum Brands to additional requirements with which it
may be unable to comply.
Any failure to comply with these laws or regulations, or the terms of applicable environmental
permits, could result in Spectrum Brands incurring substantial costs, including fines, penalties
and other civil and criminal sanctions or the prohibition of sales of its pest control products.
Environmental law requirements, and the enforcement thereof, change frequently, have tended to
become more stringent over time and could require Spectrum Brands to incur significant expenses.
Most federal, state and local authorities require certification by Underwriters Laboratory, Inc.
(UL), an independent, not-for-profit corporation engaged in the testing of products for
compliance with certain public safety standards, or other safety regulation certification prior to
marketing electrical appliances. Foreign jurisdictions also have regulatory authorities overseeing
the safety of consumer products. Spectrum Brands products may not meet the specifications required
by these authorities. A determination that any of Spectrum Brands products are not in compliance
with these rules and regulations could result in the imposition of fines or an award of damages to
private litigants.
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Public perceptions that some of the products Spectrum Brands produces and markets are not safe
could adversely affect Spectrum Brands.
On occasion, customers and some current or former employees have alleged that some products failed
to perform up to expectations or have caused damage or injury to individuals or property. Public
perception that any of its products are not safe, whether justified or not, could impair Spectrum
Brands reputation, damage its brand names and have a material adverse effect on its business,
financial condition and results of operations.
If Spectrum Brands is unable to negotiate satisfactory terms to continue existing or enter into
additional collective bargaining agreements, it may experience an increased risk of labor
disruptions and its results of operations and financial condition may suffer.
Approximately 20% of Spectrum Brands total labor force is employed under collective bargaining
agreements. One of these agreements, which covers approximately 12% of the labor force under
collective bargaining agreements, or approximately 2% of Spectrum Brands total labor force, is
scheduled to expire on September 30, 2011. While Spectrum Brands currently expects to negotiate
continuations to the terms of these agreements, there can be no assurances that it will be able to
obtain terms that are satisfactory to it or otherwise to reach agreement at all with the applicable
parties. In addition, in the course of its business, Spectrum Brands may also become subject to
additional collective bargaining agreements. These agreements may be on terms that are less
favorable than those under its current collective bargaining agreements. Increased exposure to
collective bargaining agreements, whether on terms more or less favorable than existing collective
bargaining agreements, could adversely affect the operation of Spectrum Brands business, including
through increased labor expenses. While it intends to comply with all collective bargaining
agreements to which it is subject, there can be no assurances that Spectrum Brands will be able to
do so and any noncompliance could subject it to disruptions in its operations and materially and
adversely affect its results of operations and financial condition.
Significant changes in actual investment return on pension assets, discount rates and other factors
could affect Spectrum Brands results of operations, equity and pension contributions in future
periods.
Spectrum Brands results of operations may be positively or negatively affected by the amount of
income or expense it records for its defined benefit pension plans. GAAP requires that Spectrum
Brands calculate income or expense for the plans using actuarial valuations. These valuations
reflect assumptions about financial market and other economic conditions, which may change based on
changes in key economic indicators. The most significant year-end assumptions Spectrum Brands used
to estimate pension income or expense are the discount rate and the expected long-term rate of
return on plan assets. In addition, Spectrum Brands is required to make an annual measurement of
plan assets and liabilities, which may result in a significant change to equity. Although pension
expense and pension funding contributions are not directly related, key economic factors that
affect pension expense would also likely affect the amount of cash Spectrum Brands would contribute
to pension plans as required under the Employee Retirement Income Security Act of 1974, as amended
(ERISA).
If Spectrum Brands goodwill, indefinite-lived intangible assets or other long-term assets become
impaired, Spectrum Brands will be required to record additional impairment charges, which may be
significant.
A significant portion of Spectrum Brands long-term assets consist of goodwill, other
indefinite-lived intangible assets and finite-lived intangible assets recorded as a result of past
acquisitions. Spectrum Brands does not amortize goodwill and indefinite-lived intangible assets,
but rather reviews them for impairment on a periodic basis or whenever events or changes in
circumstances indicate that their carrying value may not be recoverable. Spectrum Brands considers
whether circumstances or conditions exist which suggest that the carrying value of its goodwill and
other long-lived assets might be impaired. If such circumstances or conditions exist, further steps
are required in order to determine whether the carrying value of each of the individual assets
exceeds its fair market value. If analysis indicates that an individual assets carrying value does
exceed its fair market value, the next step is to record a loss equal to the excess of the
individual assets carrying value over its fair value.
The steps required by GAAP entail significant amounts of judgment and subjectivity. Events and
changes in circumstances that may indicate that there is impairment and which may indicate that
interim impairment testing is necessary include, but are not limited to: strategic decisions to
exit a business or dispose of an asset made in response to changes in economic; political and
competitive conditions; the impact of the economic environment on the customer base and on broad
market conditions that drive valuation considerations by market participants; Spectrum Brands
internal expectations with regard to future revenue growth and the assumptions it makes when
performing impairment reviews; a significant decrease in the market price of its assets; a
significant adverse change in the extent or manner in which its assets are used; a significant
adverse change in legal factors or the business
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climate that could affect its assets; an
accumulation of costs significantly in excess of the amount originally expected for the acquisition
of an asset; and significant changes in the cash flows associated with an asset. As a result of
such circumstances, Spectrum Brands may be required to record a significant charge to earnings in
its financial statements during the period in which any impairment of its goodwill,
indefinite-lived intangible assets or other long-term assets is determined. Any such impairment
charges could have a material adverse effect on Spectrum Brands business, financial condition and
operating results.
Risks Related to the Fidelity & Guaranty Acquisition and Related Arrangements
If Harbinger F&G fails to replace the Reserve Facility by December 31, 2012 or the CARVM Facility
by December 31, 2015, OM Group can foreclose on the shares of F&G Holdings and FGL Insurance that
Harbinger F&G owns.
Under the F&G Stock Purchase Agreement, Harbinger F&G must replace the Reserve Facility as soon as
practicable, but in any event no later than December 31, 2012, with a facility that enables FGL
Insurance to take full credit on its statutory financial statements for the business reinsured
under the Reserve Facility.
Similarly, Harbinger F&G will be required to replace the CARVM Facility as soon as practicable, but
in any event no later than December 31, 2015, with a facility that enables FGL Insurance to take
full credit on its statutory financial statements for the business covered under the CARVM
Facility. In order to secure these and certain other secured obligations, Harbinger F&G and F&G
Holdings have pledged to OM Group the shares of capital stock of F&G Holdings and FGL Insurance
(the Pledged Shares). If Harbinger F&G is unable to replace the Reserve Facility by December 31,
2012 or the CARVM Facility by December 31, 2015 or otherwise defaults on its obligations under the
F&G Stock Purchase Agreement with respect to the Reserve Facility, the CARVM Facility or other
secured obligations, OM Group has the right to receive any and all cash dividends, payments or
other proceeds paid in respect of the Pledged Shares and, at OM Groups option, subject to
regulatory approval of a change of control, cause the Pledged Shares to be registered in the name
of OM Group (or a nominee of OM Group). OM Group would thereafter be able to exercise (i) all
voting, corporate or other rights pertaining to such shares at any shareholders meeting and (ii)
any rights of conversion, exchange and subscription and any other rights, privileges or options
pertaining to the Pledged Shares as if OM Group were the sole owner thereof. The intercompany loans
acquired by Harbinger F&G are not pledged for the benefit of OM Group.
If OM Group were to foreclose on the Pledged Shares it would result in Harbinger F&Gs total loss
of the business of F&G Holdings and FGL Insurance and their direct and indirect subsidiaries
(including FGL NY Insurance) and would have a material adverse effect on our business, financial
condition and results of operations.
As described under Item 5. Other Information The Fidelity & Guaranty Acquisition Wilton
Transaction, in order to mitigate the risk associated with Harbinger F&Gs obligation to replace
the Reserve Facility by December 31, 2012, Harbinger F&G has entered into the Commitment Agreement
with Wilton Re U.S. Holdings, Inc. (Wilton) to effect reinsurance by Wilton Reassurance Company
(Wilton Re) of the business currently reinsured under the Reserve Facility and thereby
replace the Reserve Facility in satisfaction of Harbinger F&Gs requirement in respect thereof
under the F&G Stock Purchase Agreement. However, if the Raven Springing Amendment is terminated or
Harbinger F&G is unable to consummate the Raven Springing Amendment under the Commitment Agreement
in a timely manner or at all, Harbinger F&G may not be able to replace the Reserve Facility by
December 31, 2012.
The Raven Springing Amendment is subject to important closing conditions. Compliance with these
conditions may impose costs or limitations on F&G Holdings business or, if Harbinger F&G is unable
or unwilling to meet such conditions, it may be unable to replace the Reserve Facility by December
31, 2012.
The closing of the Raven Springing Amendment is subject to the closing conditions set forth in the
Commitment Agreement, which include among other things, that (i) all applicable governmental
approvals shall have been obtained and shall remain in effect without the imposition of adverse
restrictions or conditions, (ii) no event shall have occurred that is reasonably likely to enjoin,
restrain or restrict in a manner adverse to the parties the proposed reinsurance transactions or to
prohibit or impose adverse conditions upon any of the parties with respect to the consummation
thereof, (iii) no action, suit, proceeding or investigation before, and no order, injunction or
decree shall have been entered by, any court, arbitrator or other governmental authority that is
reasonably likely to enjoin, restrain, set aside or prohibit or impose adverse conditions upon, or
to obtain substantial damages in respect of, the consummation of the proposed reinsurance
transactions and which would be reasonably expected to impose on the parties or their affiliates
additional loss, liability, cost, expense or risk, (iv) the representations and warranties of FGL
Insurance shall be true and correct as of certain dates specified in the Commitment Agreement, (v)
the parties shall have performed in all material respects their respective obligations and shall
have complied in all material respects with the agreements and covenants required to be performed
or
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complied by them, and (vi) certain documents and certain certifications shall have been
delivered (including certifications as to the solvency of the parties). See Item 5. Other
Information F&G Stock Purchase Agreement and Related Arrangements Wilton Transaction. There
can be no assurance that the required regulatory approvals, if any, will be obtained in a timely
manner or at all. In addition, the governmental authorities from which these approvals may be
required have broad discretion in administering the applicable regulations. As a condition to
approval of the Raven Springing Amendment, these governmental authorities may impose requirements
(including increased capital requirements) or place limitations on the conduct of the business of
F&G Holdings after the completion of the Raven Springing Amendment. These requirements or
limitations could have the effect of imposing additional costs or restrictions following approval,
which could have a material adverse effect on the operating results or financial condition of F&G
Holdings or cause Harbinger F&G or Wilton Re to abandon the Raven Springing Amendment. In addition,
if Harbinger F&G is not able to satisfy the closing conditions to the Raven Springing Amendment and
such conditions are not waived, the closing of such amendment may be delayed or may not occur at
all. As a result, Harbinger F&G may be unable to satisfy its requirement to replace the Reserve
Facility by December 31, 2012, which would entitle OM Group to foreclose on the Pledged Shares and
exercise other rights in relation thereto.
The Raven Springing Amendment may be terminated under certain circumstances.
The Raven Springing Amendment is subject to termination (i) by either party if the closing of the
reinsurance transactions thereunder has not occurred by November 30, 2013, (ii) by FGL Insurance on
five days advance notice if Wilton Re has failed to perform a material obligation under the Raven
Springing Amendment that has prevented the closing of the transactions thereunder to have occurred
by November 30, 2012 and (iii) by either party on five days advance notice to the other party if
all conditions precedent to the closing under the Raven Springing Amendment have been satisfied or
waived and closing has not occurred as a result of the failure to obtain or maintain in effect any
material required governmental approvals required for consummation of the transactions contemplated
by the Raven Springing Amendment. If the Raven Springing Amendment is terminated, Harbinger F&G may
be unable to replace the Reserve Facility by December 31, 2012 or at all. If Harbinger F&G is
unable to satisfy its requirement to replace the Reserve Facility by December 31, 2012, the OM
Group would be entitled to foreclose on the Pledged Shares and exercise other rights in relation
thereto.
The inability or unwillingness of Wilton Re to meet its financial obligations under the Raven
Springing Amendment could harm the business or cause Harbinger F&G to be unable to replace the
Reserve Facility by December 31, 2012.
Under the F&G Stock Purchase Agreement, Harbinger F&G must replace the Reserve Facility as soon as
practicable, but in no event later than December 31, 2012, with a facility that enables FGL
Insurance to take full credit on its statutory financial statements for the business reinsured
under the Reserve Facility. Even if Harbinger F&G satisfies all of its obligations to complete the
Raven Springing Amendment, if, for any reason, Wilton Re does not meet its obligations under the
Raven Springing Amendment, Harbinger F&G may be unable to replace the Reserve Facility by December
31, 2012, which would entitle OM Group to foreclose on the Pledged Shares and exercise other rights
in relation thereto.
Following the completion of the Raven Springing Amendment, F&G Holdings is subject to Wilton Res
credit risk.
F&G Holdings is subject to Wilton Res credit risk with respect to F&G Holdings ability to recover
amounts due from Wilton Re because ceded reinsurance arrangements do not eliminate F&G Holdings
insurance subsidiaries obligation to pay claims to their policy holders. Wilton Re may become
financially unsound or choose to dispute its contractual obligations when its reinsurance
obligations become due. The inability or unwillingness of Wilton Re to meet its financial
obligations to Harbinger F&G under the Raven Springing Amendment (and its other reinsurance
agreements with FGL Insurance) could have a material adverse effect on the business, operating
results and financial condition of F&G Holdings. Also see F&G Holdings reinsurers could fail
to meet assumed obligations, increase rates, or be subject to adverse developments that could
materially adversely affect F&G Holdings business, financial condition and results of operations.
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Under the Reserve Facility, Harbinger F&G may be required to post significant amounts of collateral
in a short period of time.
As described under Item 5. Other Information The Fidelity & Guaranty Acquisition The
Reserve Facility and the CARVM Facility, during the term of the Reserve Facility, Harbinger F&G
is required to post collateral to the Administrative Agent (for the benefit of Nomura Bank
International plc (NBI)) based on the outputs of a mutually agreed collateralization model. If
the amounts called for by the model based on calculations to be performed at least weekly exceed
$30 million, Harbinger F&G will be required to post cash collateral in the amount of such excess
(to the extent not already posted, and subject to a $250,000 de minimis threshold), subject to a
limit on the total aggregate collateral posted by both Harbinger F&G and Old Mutual equal to the
face amount of the letter of credit under the Reserve Facility. Following a demand from Nomura
International plc (the Administrative Agent), collateral must be posted by Harbinger F&G on the
same or the following business day and required collateral posting under the collateralization
model may fluctuate significantly in a short period of time. Any additional collateral must be
contributed to Harbinger F&G by HRG or made available to Harbinger F&G by its subsidiaries. Any
required collateral postings could adversely affect our financial condition and liquidity, which
could adversely affect our ability to service our debt. As of
August 11, 2011, HRG posted $19 million (see
Liability and Capital Resources).
As a result of the Fidelity & Guaranty Acquisition, F&G Holdings may not be able to retain key
personnel or recruit additional qualified personnel, which could materially affect its business and
require it to incur substantial additional costs to recruit replacement personnel.
F&G Holdings is highly dependent on its senior management team and other key personnel for the
operation and development of its business. As a result of the Fidelity & Guaranty Acquisition, F&G
Holdings current and prospective management team and employees could experience uncertainty about
their future roles. This uncertainty may adversely affect F&G Holdings ability to attract and
retain key management, sales, marketing and technical personnel. Any failure to attract and retain
key members of F&G Holdings management team or other key personnel could have a material adverse
effect on F&G Holdings business, financial condition and results of operations.
Risks Related to F&G Holdings Business
A continuation of our existing financial strength ratings, a financial strength ratings downgrade
or other negative action by a ratings organization could adversely affect F&G Holdings financial
condition and results of operations.
Various nationally recognized statistical rating organizations (rating organizations) review the
financial performance and condition of insurers, including F&G Holdings insurance subsidiaries,
and publish their financial strength ratings as indicators of an insurers ability to meet
policyholder and contract holder obligations. These ratings are important to maintaining public
confidence in F&G Holdings products, its ability to market its products, and its competitive
position. Any downgrade or other negative action by a ratings organization with respect to the
financial strength ratings of F&G Holdings insurance subsidiaries could materially adversely
affect F&G Holdings in many ways, including the following: reducing new sales of insurance and
investment products; adversely affecting relationships with distributors, IMOs and sales agents;
increasing the number or amount of policy surrenders and withdrawals of funds; requiring a
reduction in prices for F&G Holdings insurance products and services in order to remain
competitive; or adversely affecting F&G Holdings ability to obtain reinsurance at a reasonable
price, on reasonable terms, or at all. A downgrade of sufficient magnitude could result in F&G
Holdings insurance subsidiaries being required to collateralize reserves, balances, or obligations
under reinsurance, and securitization agreements.
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Additionally, under some of its derivative contracts, F&G Holdings has agreed to maintain certain
financial strength ratings. A downgrade below these levels could result in termination of the
contracts, at which time any amounts payable by F&G Holdings or the counterparty would be dependent
on the market value of the underlying derivative contracts. Downgrades of F&G Holdings insurance
subsidiaries 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.
Rating organizations assign ratings based upon several factors. While most of these factors relate
to the rated company, some factors relate to the views of the rating organization, general economic
conditions, and circumstances outside the rated companys control. In addition, rating
organizations use various models and formulas to assess the strength of a rated company, and from
time to time rating organizations have, in their discretion, altered the models. Changes to the
models could impact the rating organizations judgment of the rating to be assigned to the rated
company.
Upon the announcement of the Fidelity & Guaranty Acquisition, the financial strength ratings of F&G
Holdings insurance subsidiaries were downgraded to B++ by A.M. Best Company due to the fact that,
following the consummation of the Fidelity & Guaranty Acquisition, F&G Holdings no longer had an
ultimate parent company with business operations in the insurance industry. Subsequent to such
downgrades, our sales of new policies have decreased, due, in part, to such downgrades. If our
financial strength ratings are not upgraded, we anticipate that our sales of new policies will
continue to be adversely impacted and that we could see increased surrenders of existing policies.
F&G Holdings cannot predict what actions the rating organizations may take in the future, and F&G
Holdings insurance subsidiaries may not be able to improve its insurance subsidiaries current
financial strength ratings, which could adversely affect F&G Holdings financial condition and
results of operations.
The amount of statutory capital that F&G Holdings insurance subsidiaries have and the amount of
statutory capital that they must hold to maintain their financial strength and credit ratings and
meet other requirements can vary significantly from time to time and are sensitive to a number of
factors outside of F&G Holdings control.
F&G Holdings insurance subsidiaries are subject to regulations that provide minimum capitalization
requirements based on risk-based capital (RBC) formulas for life insurance companies. The RBC
formula for life insurance companies establishes capital requirements relating to insurance,
business, asset, interest rate, and certain other risks.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending
on a variety of factors, including the following: the amount of statutory income or losses
generated by F&G Holdings insurance subsidiaries (which itself is sensitive to equity market and
credit market conditions), the amount of additional capital F&G Holdings insurance subsidiaries
must hold to support business growth, changes in reserve requirements applicable to F&G Holdings
insurance subsidiaries, F&G Holdings ability to secure capital market solutions to provide reserve
relief, changes in equity market levels, the value of certain fixed-income and equity securities in
its investment portfolio, the credit ratings of investments held in its portfolio, the value of
certain derivative instruments, changes in interest rates, credit market volatility, changes in
consumer behavior, as well as changes to the Capital Markets and Investments Analytics Office of
the National Association of Insurance Commissioners (NAIC), formerly known as the Securities
Valuation Office, RBC formula. Most of these factors are outside of F&G Holdings control. The
financial strength and credit ratings of F&G Holdings insurance subsidiaries are significantly
influenced by their statutory surplus amounts and capital adequacy ratios. Rating agencies may
implement changes to their internal models that have the effect of increasing or decreasing the
amount of statutory capital F&G Holdings insurance subsidiaries must hold in order to maintain
their current ratings. In addition, rating agencies may downgrade the investments held in F&G
Holdings portfolio, which could result in a reduction of F&G Holdings capital and surplus and/or
its RBC ratio.
In extreme equity market declines, the amount of additional statutory reserves F&G Holdings
insurance subsidiaries are required to hold for fixed indexed products may decrease at a rate less
than the rate of change of the markets. This mismatch could result in a reduction of capital,
surplus, and/or RBC ratio of F&G Holdings and its insurance subsidiaries.
F&G Holdings is highly regulated and subject to numerous legal restrictions and regulations.
F&G Holdings business is subject to government regulation in each of the states in which it
conducts business. Such regulation is vested in state agencies having broad administrative, and in
some instances discretionary, authority with respect to many aspects of F&G Holdings business,
which may include, among other things, premium rates and increases thereto, underwriting practices,
reserve requirements, marketing practices, advertising, privacy, policy forms, reinsurance reserve
requirements, acquisitions, mergers, and capital adequacy, and is concerned primarily with the
protection of policyholders and other customers rather than shareowners. At any given time, a
number of financial and/or market conduct examinations of F&G Holdings and its insurance
subsidiaries may be
102
ongoing. From time to time, regulators raise issues during examinations or audits of F&G Holdings
and its insurance subsidiaries that could, if determined adversely, have a material impact on F&G
Holdings.
Under insurance guaranty fund laws in most states, insurance companies doing business therein can
be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. F&G
Holdings cannot predict the amount or timing of any such future assessments.
Although F&G Holdings business is subject to regulation in each state in which it conducts
business, in many instances the state regulatory models emanate from the NAIC. State insurance
regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance
companies and their products. Changes in these laws and regulations, or in interpretations thereof,
are often made for the benefit of the consumer and at the expense of the insurer and, thus, could
have a material adverse effect on F&G Holdings business, operations and financial condition. F&G
Holdings is also subject to the risk that compliance with any particular regulators interpretation
of a legal or accounting issue may not result in compliance with another regulators interpretation
of the same issue, particularly when compliance is judged in hindsight. There is an additional risk
that any particular regulators interpretation of a legal or accounting issue may change over time
to F&G Holdings detriment, or that changes to the overall legal or market environment, even absent
any change of interpretation by a particular regulator, may cause F&G Holdings to change its views
regarding the actions it needs to take from a legal risk management perspective, which could
necessitate changes to F&G Holdings practices that may, in some cases, limit its ability to grow
and improve profitability.
Some of the NAIC pronouncements, particularly as they affect accounting issues, take effect
automatically in the various states without affirmative action by the states. Statutes,
regulations, and interpretations may be applied with retroactive impact, particularly in areas such
as accounting and reserve requirements. Also, regulatory actions with prospective impact can
potentially have a significant impact on currently sold products. The NAIC continues to work to
reform state regulation in various areas, including comprehensive reforms relating to life
insurance reserves.
At the federal level, bills are routinely introduced in both chambers of the U.S. Congress which
could affect insurance companies. In the past, Congress has considered legislation that would
impact insurance companies in numerous ways, such as providing for an optional federal charter for
insurance companies or a federal presence in insurance regulation, pre-empting state law in certain
respects regarding the regulation of reinsurance, increasing federal oversight in areas such as
consumer protection, solvency regulation and other matters. F&G Holdings cannot predict whether or
in what form reforms will be enacted and, if so, whether the enacted reforms will positively or
negatively affect F&G Holdings or whether any effects will be material.
The Dodd-Frank Wall Street and Consumer Protection Act (the Dodd-Frank Act) makes sweeping
changes to the regulation of financial services entities, products and markets. Certain provisions
of the Dodd-Frank Act are or may become applicable to F&G Holdings, its competitors or those
entities with which F&G Holdings does business, including but not limited to: the establishment of
federal regulatory authority over derivatives, the establishment of consolidated federal regulation
and resolution authority over systemically important financial services firms, the establishment of
the Federal Insurance Office, changes to the regulation of broker dealers and investment advisors,
changes to the regulation of reinsurance, changes to regulations affecting the rights of
shareholders, the imposition of additional regulation over credit rating agencies, and the
imposition of concentration limits on financial institutions that restrict the amount of credit
that may be extended to a single person or entity. Numerous provisions of the Dodd-Frank Act
require the adoption of implementing rules and/or regulations. In addition, the Dodd-Frank Act
mandates multiple studies, which could result in additional legislation or regulation applicable to
the insurance industry, F&G Holdings, its competitors or the entities with which F&G Holdings does
business. Legislative or regulatory requirements imposed by or promulgated in connection with the
Dodd-Frank Act may impact F&G Holdings in many ways, including but not limited to: placing F&G
Holdings at a competitive disadvantage relative to its competition or other financial services
entities, changing the competitive landscape of the financial services sector and/or the insurance
industry, making it more expensive for F&G Holdings to conduct its business, requiring the
reallocation of significant company resources to government affairs, legal and compliance-related
activities, or otherwise have a material adverse effect on the overall business climate as well as
F&G Holdings financial condition and results of operations.
F&G Holdings may also be subject to regulation by the United States Department of Labor when
providing a variety of products and services to employee benefit plans governed by the Employee
Retirement Income Security Act of 1974, as amended (ERISA). Severe penalties are imposed for
breach of duties under ERISA.
Other types of regulation that could affect F&G Holdings include insurance company investment laws
and regulations, state statutory accounting practices, antitrust laws, minimum solvency
requirements, federal privacy laws, insurable interest laws, federal anti-money laundering and
anti-terrorism laws.
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F&G Holdings cannot predict what form any future changes in these or other areas of regulation
affecting the insurance industry might take or what effect, if any, such proposals might have on
F&G Holdings if enacted into law. In addition, because F&G Holdings activities are relatively
concentrated in a small number of lines of business, any change in law or regulation affecting one
of those lines of business could have a disproportionate impact on F&G Holdings compared to other
insurance companies.
F&G Holdings reinsurers could fail to meet assumed obligations, increase rates, or be subject to
adverse developments that could materially adversely affect F&G Holdings business, financial
condition and results of operations.
F&G Holdings, through its insurance subsidiaries, cedes material amounts of insurance and transfers
related assets and certain liabilities to other insurance companies through reinsurance. However,
notwithstanding the transfer of related assets and certain liabilities, F&G Holdings remains liable
with respect to ceded insurance should any reinsurer fail to meet the obligations assumed.
Accordingly, F&G Holdings bears credit risk with respect to its reinsurers, including its
reinsurance arrangements with Wilton. See The inability or unwillingness of Wilton Re to meet
its financial obligations under the Raven Springing Amendment could harm the business or cause
Harbinger F&G to be unable to replace the Reserve Facility by December 31, 2012. The failure,
insolvency, inability or unwillingness to pay under the terms of the reinsurance agreement with F&G
Holdings could materially adversely affect F&G Holdings business, financial condition and results
of operations.
F&G Holdings ability to compete is dependent on the availability of reinsurance or other
substitute financing solutions. Premium rates charged by F&G Holdings are based, in part, on the
assumption that reinsurance will be available at a certain cost. Under certain reinsurance
agreements, the reinsurer may increase the rate it charges F&G Holdings for the reinsurance.
Therefore, if the cost of reinsurance were to increase, if reinsurance were to become unavailable,
if alternatives to reinsurance were not available to F&G Holdings, or if a reinsurer should fail to
meet its obligations, F&G Holdings business financial condition and results of operations could be
materially adversely affected.
In recent years, access to reinsurance has become more costly for the insurance industry, including
F&G Holdings. In addition, the number of life reinsurers has decreased as the reinsurance industry
has consolidated. The decreased number of participants in the life reinsurance market resulted in
increased concentration of risk for insurers, including F&G Holdings. If the reinsurance market
further contracts, F&G Holdings ability to continue to offer its products on terms favorable to it
could be adversely impacted resulting in adverse consequences to F&G Holdings business, operations
and financial condition.
In addition, reinsurers are facing many challenges regarding illiquid credit and/or capital
markets, investment downgrades, rating agency downgrades, deterioration of general economic
conditions, and other factors negatively impacting the financial services industry generally. If
such events cause a reinsurer to fail to meet its obligations, F&G Holdings business, financial
condition and results of operations could be materially adversely affected.
F&G Holdings results of operations and financial condition may be negatively affected should
actual experience differ from managements assumptions and estimates.
F&G Holdings makes certain assumptions and estimates regarding 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. These
assumptions and estimates are also used to estimate the amounts of VOBA, policy liabilities and
accruals, future earnings, and various components of F&G Holdings consolidated balance sheet.
These assumptions are also used in making decisions crucial to the operation of F&G Holdings
business, including the pricing of products and expense structures relating to products. These
assumptions and estimates incorporate assumptions about many factors, none of which can be
predicted with certainty. F&G Holdings actual experiences, as well as changes in estimates, are
used to prepare F&G Holdings consolidated statement of operations. To the extent F&G Holdings
actual experience and changes in estimates differ from original estimates, F&G Holdings business,
operations and financial condition may be materially adversely affected.
The calculations F&G Holdings uses to estimate various components of its balance sheet and
consolidated statements of operations are necessarily complex and involve analyzing and
interpreting large quantities of data. F&G Holdings currently employs various techniques for such
calculations and from time to time it will develop and implement more sophisticated administrative
systems and procedures capable of facilitating the calculation of more precise estimates. However,
assumptions and estimates involve judgment, and by their nature are imprecise and subject to
changes and revisions over time. Accordingly, F&G Holdings results may be adversely affected from
time to time, by actual results differing from assumptions, by changes in estimates, and by changes
resulting from implementing more sophisticated administrative systems and procedures that
facilitate the calculation of more precise estimates.
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F&G Holdings financial condition or results of operations could be adversely impacted if its
assumptions regarding the fair value and future performance of its investments differ from actual
experience.
F&G Holdings makes assumptions regarding the fair value and expected future performance of its
investments. Expectations that F&G Holdings investments in residential and commercial
mortgage-backed securities will continue to perform in accordance with their contractual terms are
based on assumptions a market participant would use in determining the current fair value and
consider the performance of the underlying assets. It is possible that the underlying collateral of
these investments will perform worse than current market expectations and that such reduced
performance may lead to adverse changes in the cash flows on F&G Holdings holdings of these types
of securities. This could lead to potential future other-than-temporary impairments within F&G
Holdings portfolio of mortgage-backed and asset-backed securities. In addition, expectations that
F&G Holdings investments in corporate securities and/or debt obligations will continue to perform
in accordance with their contractual terms are based on evidence gathered through its normal credit
surveillance process. It is possible that issuers of corporate securities in which F&G Holdings has
invested will perform worse than current expectations. Such events may lead F&G Holdings to
recognize potential future other-than-temporary impairments within its portfolio of corporate
securities. It is also possible that such unanticipated events would lead F&G Holdings to dispose
of certain of those holdings and recognize the effects of any market movements in its financial
statements.
It is possible that actual values will differ from F&G Holdings assumptions. Such events could
result in a material change in the value of F&G Holdings investments, business, operations and
financial condition.
As discussed under Item 5. Other Information Fidelity & Guaranty Acquisition The Front
Street Reinsurance Transaction, we intend to have a newly created subsidiary, Front Street,
reinsure a portion of F&Gs insurance and have an affiliate of Harbinger Capital manage certain
investments on its behalf. We believe Harbinger Capitals investment expertise will benefit us by
improving returns on these investments, but if Harbinger Capital is unable to achieve satisfactory
returns, we could be required to fund additional capital to Front Street to satisfy its reinsurance
requirements.
F&G Holdings could be forced to sell investments at a loss to cover policyholder withdrawals.
Certain products offered by F&G Holdings allow policyholders to withdraw their funds under defined
circumstances. In order to meet such funding obligations, F&G Holdings manages its liabilities and
configures its investment portfolios so as to provide and maintain sufficient liquidity to support
expected withdrawal demands and contract benefits and maturities. However, in order to provide
necessary long-term returns, a certain portion of F&G Holdings assets are relatively illiquid.
There can be no assurance that withdrawal demands will match F&G Holdings estimation of withdrawal
demands. If F&G Holdings experiences unexpected withdrawal activity, whether as a result of
financial strength downgrades or otherwise, it could exhaust its liquid assets and be forced to
liquidate other less liquid assets, possibly at a loss or on other unfavorable terms. If F&G
Holdings is forced to dispose of assets at a loss or on unfavorable terms, it could have a material
adverse effect on F&G Holdings business, financial condition and results of operations.
Interest rate fluctuations could negatively affect F&G Holdings interest earnings and spread
income, or otherwise impact its business.
Interest rates are subject to volatility and fluctuations. For the past several years interest
rates trended downwards, engendering concern about their ability to remain low. In addition, as a
result of uncertain domestic and global political, credit and financial market conditions, credit
markets and interest rates face risks arising from liquidity and credit concerns. In order to meet
its policy and contractual obligations, F&G Holdings must earn a sufficient return on its invested
assets. Significant changes in interest rates expose F&G Holdings 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 F&G Holdings interest earnings and
spread income (the difference between the returns F&G Holdings earns on its investments and the
amounts it must credit to policyholders and contract holders). While F&G Holdings develops and
maintains asset/liability management programs and procedures designed to mitigate the effect on
interest earnings and spread income in rising or falling interest rate environments, no assurance
can be given that changes in interest rates will not materially adversely affect F&G Holdings
business, financial condition and results of operations.
Additionally, F&G Holdings asset/liability management programs and procedures incorporate
assumptions about the relationship between short-term and long-term interest rates and
relationships between risk-adjusted and risk-free interest rates, market liquidity, and other
factors. The effectiveness of F&G Holdings asset/liability management programs and procedures may
be negatively affected whenever actual results differ from these assumptions.
105
Changes in interest rates may also impact F&G Holdings business in other ways, including affecting
the attractiveness of certain of F&G Holdings products. Lower interest rates may result in lower
sales of certain of F&G Holdings insurance and investment products. However, during periods of
declining interest rates, certain life insurance and annuity products may be relatively more
attractive investments to consumers, resulting in increased premium payments on products with
flexible premium features, repayment of policy loans and increased persistency, or a higher
percentage of insurance policies remaining in force from year to year during a period when F&G
Holdings investments carry lower returns, and F&G Holdings could become unable to earn its spread
income should interest rates decrease significantly.
F&G Holdings expectation for future interest earnings and spreads is an important component in
amortization of VOBA and significantly lower interest earnings or spreads that may cause F&G
Holdings to accelerate amortization, thereby reducing net income in the affected reporting period.
Higher interest rates may increase the cost of debt and other obligations having floating rate or
rate reset provisions and may result in lower sales of other products. During periods of increasing
market interest rates, F&G Holdings 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 increase the net unrealized loss position of F&G Holdings
investment portfolio and, if long-term interest rates rise dramatically within a six- to
twelve-month time period, certain of F&G Holdings products may be exposed to disintermediation
risk. Disintermediation risk refers to the risk that policyholders may surrender their contracts in
a rising interest rate environment, requiring F&G Holdings to liquidate assets in an unrealized
loss position. This risk is mitigated to some extent by the high level of surrender charge
protection provided by F&G Holdings products. Increases in crediting rates, as well as surrenders
and withdrawals, could have a material adverse effect on F&G Holdings business, financial
condition and results of operations.
F&G Holdings investments are subject to market, credit, legal, and regulatory risks. These risks
could be heightened during periods of extreme volatility or disruption in financial and credit
markets.
F&G Holdings invested assets and derivative financial instruments are subject to risks of credit
defaults and changes in market values. Periods of extreme volatility or disruption in the financial
and credit markets could increase these risks. Underlying factors relating to volatility affecting
the financial and credit markets could lead to other-than-temporary impairments of assets in F&G
Holdings investment portfolio.
The value of F&G Holdings mortgage-backed investments depends in part on the financial condition
of the borrowers and tenants for the properties underlying those investments, as well as general
and specific circumstances affecting the overall default rate.
Significant continued financial and credit market volatility, changes in interest rates, credit
spreads, credit defaults, real estate values, market illiquidity, declines in equity prices, acts
of corporate malfeasance, ratings downgrades of the issuers or guarantors of these investments, and
declines in general economic conditions, either alone or in combination, could have a material
adverse impact on F&G Holdings results of operations, financial condition, or cash flows through
realized losses, other-than-temporary impairments, changes in unrealized loss positions, and
increased demands on capital. In addition, market volatility can make it difficult for F&G Holdings
to value certain of its assets, especially if trading becomes less frequent. Valuations may include
assumptions or estimates that may have significant period-to-period changes that could have an
adverse impact on F&G Holdings results of operations or financial condition.
Equity market volatility could negatively impact F&G Holdings business.
Equity market volatility can affect F&G Holdings profitability in various ways, in particular as a
result of guaranteed minimum withdrawal benefits in its products. 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, resulting in a reduction in F&G Holdings net income.
The rate of amortization of VOBA costs relating 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.
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Credit market volatility or disruption could adversely impact F&G Holdings financial condition or
results from operations.
Significant volatility or disruption in credit markets could have a material adverse effect on F&G
Holdings business, financial condition and results of operations. As a result of the uncertain
domestic and global political, credit and financial market conditions, credit markets face risks
arising from liquidity and credit concerns. Changes in interest rates and credit spreads could
cause market price and cash flow variability in the fixed income instruments in F&G Holdings
investment portfolio. Significant volatility and lack of liquidity in the credit markets could
cause issuers of the fixed-income securities in F&G Holdings investment portfolio to default on
either principal or interest payments on these securities. Additionally, market price valuations
may not accurately reflect the underlying expected cash flows of securities within F&G Holdings
investment portfolio.
Changes in federal income taxation laws, including any reduction in individual income tax rates,
may affect sales of our products and profitability.
The annuity and life insurance products that F&G Holdings markets generally provide the
policyholder with certain federal income tax advantages. For example, federal income taxation on
any increases in non-qualified annuity contract values (i.e., the inside build-up) is deferred
until it is received by the policyholder. With other savings investments, such as certificates of
deposit and taxable bonds, the increase in value is generally taxed each year as it is realized.
Additionally, life insurance death benefits are generally exempt from income tax.
From time to time, various tax law changes have been proposed that could have an adverse effect on
F&G Holdings business, including the elimination of all or a portion of the income tax advantages
described above for annuities and life insurance. If legislation were enacted to eliminate the tax
deferral for annuities, such a change would have a material adverse effect on F&G Holdings ability
to sell non-qualified annuities. Non-qualified annuities are annuities that are not sold to a
qualified retirement plan.
Beginning in 2013, distributions from non-qualified annuity policies will be considered investment
income for purposes of the newly enacted Medicare tax on investment income contained in the Health
Care and Education Reconciliation Act of 2010. As a result, in certain circumstances a 3.8% tax
(Medicare Tax) may be applied to some or all of the taxable portions of distributions from
non-qualified annuities to individuals whose income exceeds certain threshold amounts. This new tax
may have a material adverse effect on F&G Holdings ability to sell non-qualified annuities to
individuals whose income exceeds these threshold amounts and could accelerate withdrawals due to
additional tax. The constitutionality of the Health Care and Education Reconciliation Act of 2010
is currently the subject of multiple litigation actions initiated by various state attorneys
general, and the Act is also the subject of several proposals in the U.S. Congress for amendment
and/or repeal. The outcome of such litigation and legislative action as it relates to the Medicare
Tax is unknown at this time.
F&G Holdings may be required to increase its valuation allowance against its deferred tax assets,
which could materially adversely affect F&G Holdings capital position, business, operations and
financial condition.
Deferred tax assets refer to assets that are attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets in essence represent future savings of taxes that would otherwise be paid in
cash. The realization of the deferred tax assets is dependent upon the generation of sufficient
future taxable income, including capital gains. If it is determined that the deferred tax assets
cannot be realized, a deferred tax valuation allowance must be established, with a corresponding
charge to net income.
Based on F&G Holdings current assessment of future taxable income, including available tax
planning opportunities, F&G Holdings anticipates that it is more likely than not that it will not
generate sufficient taxable income to realize all of its deferred tax assets. If future events
differ from F&G Holdings current forecasts, the valuation allowance may need to be increased from
the current amount, which could have a material adverse effect on F&G Holdings capital position,
business, operations and financial condition.
Financial services companies are frequently the targets of litigation, including class action
litigation, which could result in substantial judgments.
F&G Holdings, like other financial services companies, is involved in litigation and arbitration in
the ordinary course of business. Although F&G Holdings does not believe that the outcome of any
such litigation or arbitration will have a material impact on its financial condition or results of
operations, F&G Holdings cannot predict such outcome, and a judgment against F&G Holdings could be
substantial. More generally, F&G Holdings operates in an industry in which various practices are
subject to scrutiny and potential
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litigation, including class actions. In addition, F&G Holdings sells its products through IMOs,
whose activities may be difficult to monitor. Civil jury verdicts have been returned against
insurers and other financial services companies involving sales, underwriting practices, product
design, product disclosure, administration, denial or delay of benefits, charging excessive or
impermissible fees, recommending unsuitable products to customers, breaching fiduciary or other
duties to customers, refund or claims practices, alleged agent misconduct, failure to properly
supervise representatives, relationships with agents or other persons with whom the insurer does
business, payment of sales or other contingent commissions, and other matters. Such lawsuits can
result in the award of substantial judgments that are disproportionate to the actual damages,
including material amounts of punitive non-economic compensatory damages. In some states, juries,
judges, and arbitrators have substantial discretion in awarding punitive and non-economic
compensatory damages, which creates the potential for unpredictable material adverse judgments or
awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited
appellate review. In addition, in some class action and other lawsuits, financial services
companies have made material settlement payments.
Companies in the financial services industry are sometimes the target of law enforcement
investigations and the focus of increased regulatory scrutiny.
The financial services industry, including insurance companies, is sometimes the target of law
enforcement and regulatory investigations relating to the numerous laws and regulations that govern
such companies. Some financial services companies have been the subject of law enforcement or other
actions resulting from such investigations. Resulting publicity about one company may generate
inquiries into or litigation against other financial services companies, even those who do not
engage in the business lines or practices at issue in the original action. It is impossible to
predict the outcome of such investigations or actions, whether they will expand into other areas
not yet contemplated, whether they will result in changes in insurance regulation, whether
activities currently thought to be lawful will be characterized as unlawful, or the impact, if any,
of such scrutiny on the financial services and insurance industry or F&G Holdings.
F&G Holdings is dependent on the performance of others.
Various other parties provide services or are otherwise involved in F&G Holdings business
operations, and F&G Holdings results may be affected by the performance of those other parties.
For example, F&G Holdings is dependent upon independent distribution channels to sell its products,
and certain assets are managed by third parties. Additionally, F&G Holdings operations are
dependent on various service providers and on various technologies, some of which are provided
and/or maintained by certain key outsourcing partners and other parties.
The other parties upon which F&G Holdings depends may default on their obligations to F&G Holdings
due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure,
fraud, or other reasons. Such defaults could have a material adverse effect on F&G Holdings
financial condition and results of operations. In addition, certain of these other parties may act,
or be deemed to act, on behalf of F&G Holdings or represent F&G Holdings in various capacities.
Consequently, F&G Holdings may be held responsible for obligations that arise from the acts or
omissions of these other parties.
F&G Holdings ability to conduct its business is dependent upon consumer confidence in the industry
and its products. The conduct of competitors and financial difficulties of other companies in the
industry could undermine consumer confidence and adversely affect retention of existing business
and future sales of F&G Holdings annuity and insurance products.
The occurrence of computer viruses, network security breaches, disasters, or other unanticipated
events could affect the data processing systems of F&G Holdings or its business partners and could
damage F&G Holdings business and adversely affect its financial condition and results of
operations.
F&G Holdings retains confidential information in its computer systems, and relies on sophisticated
commercial technologies to maintain the security of those systems. Despite F&G Holdings
implementation of network security measures, its servers could be subject to physical and
electronic break-ins, and similar disruptions from unauthorized tampering with its computer
systems. Anyone who is able to circumvent F&G Holdings security measures and penetrate F&G
Holdings computer systems could access, view, misappropriate, alter, or delete any information in
the systems, including personally identifiable customer information and proprietary business
information. In addition, an increasing number of states require that customers be notified of
unauthorized access, use, or disclosure of their information. Any compromise of the security of F&G
Holdings computer systems that results in inappropriate access, use or disclosure of personally
identifiable customer information could damage F&G Holdings reputation in the marketplace, deter
people from purchasing F&G Holdings products, subject F&G Holdings to significant civil and
criminal liability and require F&G Holdings to incur significant technical, legal and other
expenses.
108
In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a
computer virus, a terrorist attack or war, F&G Holdings computer systems may be inaccessible to
its employees, customers, or business partners for an extended period of time. Even if F&G
Holdings employees are able to report to work, they may be unable to perform their duties for an
extended period of time if F&G Holdings data or systems are disabled or destroyed. Any such
occurrence could materially adversely affect F&G Holdings business, operations and financial
condition.
F&G Holdings insurance subsidiaries ability to grow depends in large part upon the continued
availability of capital.
F&G Holdings insurance subsidiaries long-term strategic capital requirements will depend on many
factors, including their accumulated statutory earnings and the relationship between their
statutory capital and surplus and various elements of required capital. To support long-term
capital requirements, F&G Holdings insurance subsidiaries may need to increase or maintain their
statutory capital and surplus through financings, which could include debt, equity, financing
arrangements and/or other surplus relief transactions. Adverse market conditions have affected and
continue to affect the availability and cost of capital from external sources and HGI is not
obligated, and may choose or be unable, to provide financing or make any capital contribution to
F&G Holdings insurance subsidiaries. Consequently, financings, if available at all, may be
available only on terms that are not favorable to F&G Holdings insurance subsidiaries. If F&G
Holdings insurance subsidiaries cannot maintain adequate capital, they may be required to limit
growth in sales of new policies, and such action could materially adversely affect F&G Holdings
business, operations and financial condition.
New accounting rules, changes to existing accounting rules, or the grant of permitted accounting
practices to competitors could negatively impact F&G Holdings.
Following the consummation of the Fidelity & Guaranty Acquisition, F&G Holdings is required to
comply with GAAP. A number of organizations are instrumental in the development and interpretation
of GAAP such as the SEC, the Financial Accounting Standards Board and the American Institute of
Certified Public Accountants. GAAP is subject to constant review by these organizations and others
in an effort to address emerging accounting rules and issue interpretative accounting guidance on a
continual basis. F&G Holdings can give no assurance that future changes to GAAP will not have a
negative impact on F&G Holdings. GAAP includes the requirement to carry certain investments and
insurance liabilities at fair value. These fair values are sensitive to various factors including,
but not limited to, interest rate movements, credit spreads, and various other factors. Because of
this, changes in these fair values may cause increased levels of volatility in F&G Holdings
financial statements.
In addition, F&G Holdings insurance subsidiaries are required to comply with statutory accounting
principles (SAP). SAP and various components of SAP (such as actuarial reserving methodology) are
subject to constant review by the NAIC and its task forces and committees as well as state
insurance departments in an effort to address emerging issues and otherwise improve financial
reporting. Various proposals are currently or have previously been pending before committees and
task forces of the NAIC, some of which, if enacted, would negatively affect F&G Holdings. The NAIC
is also currently working to reform state regulation in various areas, including comprehensive
reforms relating to life insurance reserves and the accounting for such reserves. F&G Holdings
cannot predict whether or in what form reforms will be enacted and, if so, whether the enacted
reforms will positively or negatively affect F&G Holdings. In addition, the NAIC Accounting
Practices and Procedures manual provides that state insurance departments may permit insurance
companies domiciled therein to depart from SAP by granting them permitted accounting practices. F&G
Holdings cannot predict whether or when the insurance departments of the states of domicile of its
competitors may permit them to utilize advantageous accounting practices that depart from SAP, the
use of which is not permitted by the insurance departments of the states of domicile of F&G
Holdings and its insurance subsidiaries. With respect to regulations and guidelines, states
sometimes defer to the interpretation of the insurance department of the state of domicile. Neither
the action of the domiciliary state nor action of the NAIC is binding on a state. Accordingly, a
state could choose to follow a different interpretation. F&G Holdings can give no assurance that
future changes to SAP or components of SAP or the grant of permitted accounting practices to its
competitors will not have a negative impact on F&G Holdings.
F&G Holdings risk management policies and procedures could leave it exposed to unidentified or
unanticipated risk, which could negatively affect its business or result in losses.
F&G Holdings has developed risk management policies and procedures and expects to continue to
enhance these in the future. Nonetheless, F&G Holdings policies and procedures to identify,
monitor, and manage both internal and external risks may not effectively mitigate these risks or
predict future exposures, which could be different or significantly greater than expected. These
identified risks may not be the only risks facing F&G Holdings. Additional risks and uncertainties
not currently known to F&G
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Holdings, or that it currently deem to be immaterial, may adversely affect F&G Holdings business,
financial condition and/or operating results.
Difficult conditions in the economy generally could adversely affect F&G Holdings business,
operations and financial condition.
A general economic slowdown could adversely affect F&G Holdings in the form of changes in consumer
behavior and pressure on F&G Holdings investment portfolios. Changes in consumer behavior could
include decreased demand for F&G Holdings products and elevated levels of policy lapses, policy
loans, withdrawals, and surrenders. F&G Holdings investments, including investments in
mortgage-backed securities, could be adversely affected as a result of deteriorating financial and
business conditions affecting the issuers of the securities in F&G Holdings investment portfolio.
F&G Holdings may not be able to protect its intellectual property and may be subject to
infringement claims.
F&G Holdings relies on a combination of contractual rights and copyright, trademark, and trade
secret laws to establish and protect its intellectual property. Although F&G Holdings uses a broad
range of measures to protect its intellectual property rights, third parties may infringe or
misappropriate its intellectual property. F&G Holdings may have to litigate to enforce and protect
its copyrights, trademarks, trade secrets, and know-how or to determine their scope, validity, or
enforceability, which represents a diversion of resources that may be significant in amount and may
not prove successful. The loss of intellectual property protection or the inability to secure or
enforce the protection of F&G Holdings intellectual property assets could adversely impact F&G
Holdings business and its ability to compete effectively.
F&G Holdings also may be subject to costly litigation in the event that another party alleges its
operations or activities infringe upon that partys intellectual property rights. F&G Holdings may
also be subject to claims by third parties for breach of copyright, trademark, trade secret, or
license usage rights. Any such claims and any resulting litigation could result in significant
liability for damages or be enjoined from providing certain products or services to its customers
or utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets,
or licenses, or alternatively could be required to enter into costly licensing arrangements with
third parties, all of which could have a material adverse effect on F&G Holdings business, results
of operations, and financial condition.
F&G Holdings business could be interrupted or compromised if it experiences difficulties arising
from outsourcing relationships.
In addition to services provided by third-party asset managers, F&G Holdings outsources the
following functions to third-party service providers, and expects to do so in the future: (i) new
business administration, (ii) hosting of financial systems, (iii) services of existing policies,
(iv) call centers and (v) underwriting administration of life insurance applications. If F&G
Holdings does not maintain an effective outsourcing strategy or third-party providers do not
perform as contracted, F&G Holdings may experience operational difficulties, increased costs and a
loss of business that could have a material adverse effect on its results of operations. In
addition, F&G Holdings reliance on third-party service providers that it does not control does not
relieve F&G Holdings of its responsibilities and requirements. Any failure or negligence by such
third-party service providers in carrying out their contractual duties may result in F&G Holdings
becoming subjected to liability to parties who are harmed and ensuing litigation. Any litigation
relating to such matters could be costly, expensive and time-consuming, and the outcome of any such
litigation may be uncertain. Moreover, any adverse publicity arising from such litigation, even if
the litigation is not successful, could adversely affect the reputation and sales of F&G Holdings
and its products.
F&G Holdings is exposed to the risks of natural and man-made catastrophes, pandemics and malicious
and terrorist acts that could materially adversely affect F&G Holdings business, financial
condition and results of operations.
Natural and man-made catastrophes, pandemics and malicious and terrorist acts present risks that
could materially adversely affect F&G Holdings operations and results. A natural or man-made
catastrophe, pandemic or malicious or terrorist act could materially adversely affect the mortality
or morbidity experience of F&G Holdings or its reinsurers. Such events could result in a
substantial increase in mortality experience. Although F&G Holdings participates in a risk pooling
arrangement that partially mitigates the impact of multiple deaths from a single event, claims
arising from such events could have a material adverse effect on F&G Holdings business, operations
and financial condition, either directly or as a result of their affect on its reinsurers or other
counterparties. Such events could also have an adverse effect on lapses and surrenders of existing
policies, as well as sales of new policies. While F&G Holdings has taken steps to identify and
manage these risks, such risks cannot be predicted with certainty, nor fully protected against even
if anticipated.
110
In addition, such events could result in a decrease or halt in economic activity in large
geographic areas, adversely affecting the marketing or administration of F&G Holdings business
within such geographic areas and/or the general economic climate, which in turn could have an
adverse affect on F&G Holdings business, operations and financial condition. The possible
macroeconomic effects of such events could also adversely affect F&G Holdings asset portfolio.
F&G Holdings operates in a highly competitive industry, which could limit its ability to gain or
maintain its position in the industry and could materially adversely affect F&G Holdings business,
financial condition and results of operations.
F&G Holdings operates in a highly competitive industry. F&G Holdings encounters significant
competition in all of its product lines from other insurance companies, many of which have greater
financial resources and higher financial strength ratings than F&G Holdings and which may have a
greater market share, offer a broader range of products, services or features, assume a greater
level of risk, have lower operating or financing costs, or have different profitability
expectations than F&G Holdings. Competition could result in, among other things, lower sales or
higher lapses of existing products.
F&G Holdings annuity products compete with fixed index, fixed rate and variable annuities sold by
other insurance companies and also with mutual fund products, traditional bank investments and
other retirement funding alternatives offered by asset managers, banks and broker-dealers. F&G
Holdings insurance products compete with those of other insurance companies, financial
intermediaries and other institutions based on a number of factors, including premium rates, policy
terms and conditions, service provided to distribution channels and policyholders, ratings by
rating agencies, reputation and commission structures.
Consolidation in the insurance industry and in distribution channels may result in increasing
competitive pressures on F&G Holdings. Larger, potentially more efficient organizations may emerge
from consolidation. In addition, some mutual insurance companies have converted to stock ownership,
which gives them greater access to capital markets and greater ability to compete. The ability of
banks to increase their securities-related business or to affiliate with insurance companies may
materially and adversely affect sales of all of F&G Holdings products by substantially increasing
the number and financial strength of potential competitors. Consolidation and expansion among
banks, insurance companies, and other financial service companies with which F&G Holdings does
business could also have an adverse affect on F&G Holdings business, operations and financial
condition if they demand more favorable terms than F&G Holdings previously offered or if they elect
not to continue to do business with F&G Holdings following consolidation or expansion.
F&G Holdings ability to compete is dependent upon, among other things, its ability to develop
competitive and profitable products, its ability to maintain low unit costs, and its maintenance of
adequate financial strength ratings from rating agencies. F&G Holdings ability to compete is also
dependent upon, among other things, its ability to attract and retain distribution channels to
market its products, the competition for which is vigorous. F&G Holdings competes for marketers and
agents primarily on the basis of F&G Holdings financial position, support services, compensation
and product features. Such marketers and agents may promote products offered by other life
insurance companies that may offer a larger variety of products than F&G Holdings offers. F&G
Holdings competitiveness for such marketers and agents also depends upon the long-term
relationships it develops with them. If F&G Holdings is unable to attract and retain sufficient
marketers and agents to sell its products, F&G Holdings ability to compete and its revenues will
suffer.
F&G Holdings ability to maintain competitive unit costs is dependent upon the level of new sales
and persistency of existing business.
F&G Holdings ability to maintain competitive unit costs is dependent upon a number of factors,
such as the level of new sales, persistency of existing business, and expense management. A
decrease in sales or persistency without a corresponding reduction in expenses may result in higher
unit costs. F&G Holdings business plan includes expense reductions, but there can be no assurance
that such reductions will be achieved.
In addition, lower persistency may result in higher or more rapid amortization of VOBA costs, which
would result in higher unit costs and lower reported earnings. Although many of F&G Holdings
products contain surrender charges, such charges decrease over time and may not be sufficient to
cover the unamortized VOBA costs with respect to the insurance policy or annuity contract being
surrendered.
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There may be adverse consequences if the independent contractor status of F&G Holdings IMOs is
successfully challenged.
F&G Holdings sells its products through a network of approximately 250 IMOs representing
approximately 25,000 independent agents and managing general agents. These IMOs are treated by F&G
Holdings as independent contractors who own their own businesses. However, the tests governing the
determination of whether an individual is considered to be an independent contractor or an employee
are typically fact sensitive and vary from jurisdiction to jurisdiction. Laws and regulations that
govern the status of F&G Holdings IMOs are subject to change or interpretation by various
authorities. If a federal or state authority or court enacts legislation (or adopts regulations) or
adopts an interpretation that change the manner in which employees and independent contractors are
classified or makes any adverse determination with respect to some or all of F&G Holdings
independent contractors, F&G Holdings could incur significant costs in complying with such laws,
regulations or interpretations, including, in respect of tax withholding, social security payments
and recordkeeping, or F&G Holdings could be held liable for the actions of such independent
contractors or may be required to modify its business model, any of which could have a material
adverse effect on F&G Holdings business, financial condition and results of operations. In
addition, there is the risk that F&G Holdings may be subject to significant monetary liabilities
arising from fines or judgments as a result of any such actual or alleged non-compliance with
federal, state, or provincial tax or employment laws. Further, if it were determined that F&G
Holdings IMOs should be treated as employees, F&G Holdings could possibly incur additional
liabilities with respect to any applicable employee benefit plan.
If F&G Holdings is unable to implement a new GAAP financial reporting process, it may not be able
to report its financial results accurately or on a timely basis.
Following the consummation of the Fidelity & Guaranty Acquisition, F&G Holdings is required to
prepare its financial statements in compliance with GAAP. For the pre-acquisition periods (2008
through March 2011), F&G Holdings prepared its financial statements in accordance with
International Financial Reporting Standards (IFRS). As a result, F&G did not have the appropriate
internal resources and processes established to convert previously prepared IFRS financial
information to US GAAP financial statements, and needed to utilize manual workarounds. F&G Holdings
will no longer use this method going forward and is implementing a process for the preparation of
financial statements in accordance with GAAP without first preparing the information in accordance
with IFRS. F&G Holdings inability to complete the development and implementation of procedures and
controls relating to the preparation of GAAP financial statements under the new process could
materially adversely affect F&G Holdings ability to report its financial condition and results of
operations in the future in a timely and reliable manner, which could in turn affect the Companys
ability to prepare and report consolidated financial information accurately and in a timely manner.
See also Risks Related to HGI 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 and Risks Related to F&G Holdings Business New accounting
rules, changes to existing accounting rules, or the grant of permitted accounting practices to
competitors could negatively impact F&G Holdings.
Risks Related to Front Streets Business
There can be no assurance that Front Street will be able to effectively implement its business
strategy or that its business will be successful.
Front Street is a Bermuda company that was formed in March 2010 to act as a long-term reinsurer and
to provide reinsurance to the specialty insurance sectors of fixed, deferred and payout annuities.
Front Street intends to enter into long-term reinsurance transactions with insurance companies,
existing reinsurers, and pension arrangements, and may also pursue acquisitions in the same sector.
To date, Front Street has not entered into any reinsurance contracts, and may not do so until it is
capitalized according to its business plan, which was approved by the Bermuda Monetary Authority in
March 2010. There can be no assurance that Front Street will be able to successfully enter into
reinsurance transactions, that such transactions will be successful, or that Front Street will be
able to achieve its anticipated investment returns.
In order to operate its business, Front Street will be subject to capital and other regulatory
requirements and a highly competitive landscape. In addition, among other things, any of the
following could negatively impact Front Streets ability to implement its business strategy
successfully: (i) failure to accurately assess the risks associated with the businesses that Front
Street will reinsure, (ii) failure to obtain desirable financial strength ratings or any subsequent
downgrade or withdrawal of any of Front Streets financial strength ratings, (iii) exposure to
credit risk associated with brokers with whom Front Street will conduct business, (iv) failure of
the loss limitation methods that Front Street employs to mitigate its loss exposure, (v) loss of
key personnel, (vi) unfavorable changes in
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applicable laws or regulations, (vii) inability to provide collateral to ceding companies or
otherwise comply with U.S. insurance regulations, (viii) inability to gain or obtain market
position and (ix) exposure to litigation.
As contemplated by the terms of the F&G Stock Purchase Agreement, on May 19, 2011, the Special
Committee unanimously recommended to the Board for approval (i) the Reinsurance Agreement to be
entered into by Front Street and FGL Insurance, pursuant to which Front Street would reinsure up to
$3 billion of insurance obligations under annuity contracts of FGL Insurance and (ii) the
Investment Management Agreement to be entered into by Front Street and HCP, an affiliate of the
Harbinger Parties, pursuant to which HCP would be appointed as the investment manager of up to $1
billion of assets securing Front Streets reinsurance obligations under the Reinsurance Agreement,
which assets will be deposited in a reinsurance trust account for the benefit of FGL Insurance
pursuant to the Trust Agreement. On May 19, 2011, the Board approved the Front Street Reinsurance
Transaction.
The Reinsurance Agreement and the Trust Agreement and the transactions contemplated thereby are
subject to, and may not be entered into or consummated without, the approval of the Maryland
Insurance Administration, which may be granted in whole, in part, or not at all. The F&G Stock
Purchase Agreement provides for up to a $50 million post-closing reduction in purchase price for
the Fidelity & Guaranty Acquisition if, among other things, the Front Street reinsurance
transaction is not approved by the Maryland Insurance Administration or is approved subject to
certain restrictions or conditions, including if HCP is not allowed to be appointed as the
investment manager for $1 billion of assets securing Front Streets reinsurance obligations under
the Reinsurance Agreement. See Item 5. Other Information The Fidelity & Guaranty Acquisition
The Front Street Reinsurance Transaction.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
See Item 5. Other Information The Preferred Stock Offering below. The shares of preferred
stock were not registered under the Securities Act in reliance on Section 4(2) thereunder.
Item 3. Defaults upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
Provided below is certain information with respect to recent developments and the Companys
business.
THE SPECTRUM BRANDS ACQUISITION
On June 16, 2010, Spectrum Brands Holdings completed the SB/RH Merger pursuant to the Agreement and
Plan of Merger, dated as of February 9, 2010, as amended, by and among Spectrum Brands Holdings,
Russell Hobbs, Spectrum Brands, Battery Merger Corp. and Grill Merger Corp. (the Merger
Agreement). As a result of the completion of the SB/RH Merger, Russell Hobbs became a wholly owned
subsidiary of Spectrum Brands, Spectrum Brands became a wholly owned subsidiary of Spectrum Brands
Holdings and the stockholders of Spectrum Brands immediately prior to the consummation of the SB/RH
Merger received shares of Spectrum Brands Holdings common stock in exchange for their shares of
Spectrum Brands common stock. Immediately prior to the SB/RH Merger, the Harbinger Parties owned
approximately 41% of the outstanding shares of Spectrum Brands common stock and 100% of the
outstanding capital stock of Russell Hobbs and had an outstanding term loan to Russell Hobbs. Upon
the completion of the SB/RH Merger, the stockholders of Spectrum Brands (other than the Harbinger
Parties) owned approximately 35% of the outstanding shares of Spectrum Brands Holdings common stock
and the Harbinger Parties owned approximately 65% of the outstanding shares of Spectrum Brands
Holdings common stock. In connection with the consummation of the SB/RH Merger, the Spectrum Brands
common stock was delisted from the NYSE and shares of Spectrum Brands Holdings common stock were
listed on the NYSE under the ticker symbol SPB.
On January 7, 2011, we completed the Spectrum Brands Acquisition pursuant to the Exchange
Agreement. As a result, the Harbinger Parties contributed 27,756,905 shares of Spectrum Brands
Holdings common stock, (or approximately 54.5% of the then outstanding Spectrum Brands Holdings
common stock, as of such date) to us in exchange for 119,909,829 newly issued shares of our common
stock. This exchange ratio of 4.32 to 1.00 was based on the respective volume weighted average
trading prices of our common stock ($6.33) and Spectrum Brands Holdings common stock ($27.36) on
the NYSE for the 30 trading days from and including July 2, 2010
113
to and including August 13, 2010 (the day we received the Harbinger Parties proposal for the
Spectrum Brands Acquisition). After the completion of the Spectrum Brands Acquisition, the
Harbinger Parties owned a majority of our then issued and outstanding shares of common stock.
Upon the consummation of the Spectrum Brands Acquisition, the Harbinger Parties, Avenue
International Master, L.P. and certain of its affiliates (the Avenue Parties), and Spectrum
Brands Holdings entered into a registration rights agreement, dated as of February 9, 2010 (the
Spectrum Brands Holdings Registration Rights Agreement). Following the consummation of the
Spectrum Brands Acquisition, we also became a party to the Spectrum Brands Holdings Registration
Rights Agreement.
Under the Spectrum Brands Holdings Registration Rights Agreement, we may demand that Spectrum
Brands Holdings register all or a portion of our shares of Spectrum Brands Holdings common stock
for sale under the Securities Act, so long as the anticipated aggregate offering price of the
securities to be offered is (i) at least $30 million if registration is to be effected pursuant to
a registration statement on Form S-1 or a similar long-form registration or (ii) at least $5
million if registration is to be effected pursuant to a registration statement on Form S-3 or a
similar short-form registration. We also have piggy back rights to participate in registered
offerings initiated by Spectrum Brands Holdings or certain other holders.
Following the consummation of the Spectrum Brands Acquisition, we also became a party to the
Stockholder Agreement, dated as of February 9, 2010 (the Spectrum Brands Holdings Stockholder
Agreement), by and among the Harbinger Parties and Spectrum Brands Holdings. Under the Spectrum
Brands Holdings Stockholder Agreement, the parties agree that, among other things:
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Spectrum Brands Holdings will maintain (i) a special nominating committee of its
board of directors (the Special Nominating Committee) consisting of three Independent
Directors (as defined in the Spectrum Brands Holdings Stockholder Agreement), (ii) a
nominating and corporate governance committee of its board of directors (the Nominating
and Corporate Governance Committee) and (iii) an Audit Committee in accordance with the
rules of the NYSE (the NYSE rules); |
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for so long as we (together with our affiliates, including the Harbinger Parties) own
40% or more of Spectrum Brands Holdings outstanding voting securities, we will vote our
shares of Spectrum Brands |
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Holdings common stock to effect the structure of Spectrum Brands Holdings board of
directors described in the Spectrum Brands Holdings Stockholder Agreement and to ensure
that Spectrum Brands Holdings chief executive officer is elected to its board of
directors; |
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neither Spectrum Brands Holdings nor any of its subsidiaries will be permitted to pay
any monitoring or similar fee to us or our affiliates, including the Harbinger Parties; |
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we will not effect any transfer of Spectrum Brands Holdings equity securities to any
person that would result in such person and its affiliates beneficially owning 40% or
more of Spectrum Brands Holdings outstanding voting securities (a 40% Stockholder),
unless (i) such person agrees to be bound by the terms of the Spectrum Brands Holdings
Stockholder Agreement, (ii) the transfer is pursuant to a bona fide acquisition of
Spectrum Brands Holdings approved by Spectrum Brands Holdings board of directors and a
majority of the members of the Special Nominating Committee, (iii) the transfer is
otherwise specifically approved by Spectrum Brands Holdings board of directors and a
majority of the Special Nominating Committee, or (iv) the transfer is of 5% or less of
Spectrum Brands Holdings outstanding voting securities; |
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we will have certain inspection rights so long as we and our affiliates, including
the Harbinger Parties, own, in the aggregate, at least 15% of the outstanding Spectrum
Brands Holdings voting securities; and |
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we will have certain rights to obtain Spectrum Brands information, at our expense,
for so long as we own at least 10% of the outstanding Spectrum Brands Holdings voting
securities. |
The Spectrum Brands Holdings Stockholder Agreement also provided that we would not, and we will not
permit any of our affiliates, including the Harbinger Parties, to make any public announcement with
respect to, or submit a proposal for, or offer in respect of, a Going-Private Transaction (as
defined in the Spectrum Brands Holdings Stockholder Agreement) of Spectrum Brands Holdings unless
such action is specifically requested in writing by the board of directors of Spectrum Brands
Holdings with the approval of a majority
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of the members of the Special Nominating Committee. This limitation terminated on June 16, 2011.
The other provisions of the Spectrum Brands Holdings Stockholder Agreement (other than with respect
to information and investigation rights) will terminate on the date on which we and our affiliates
(including the Harbinger Parties) no longer beneficially own 40% of outstanding Spectrum Brands
Holdings voting securities. The Spectrum Brands Holdings Stockholder Agreement terminates when any
person or group owns 90% or more of the outstanding voting securities of Spectrum Brands Holdings.
In addition, under Spectrum Brands Holdings certificate of incorporation, no 40% Stockholder
shall, or shall permit any of its affiliates or any group which such 40% Stockholder or any person
directly or indirectly controlling or controlled by such 40% Stockholder is a member of, to engage
in any transactions that would constitute a Going-Private Transaction, unless such transaction
satisfies certain requirements.
In order to permit the collateral agent to exercise the remedies under the Senior Notes Indenture
and foreclose on the Spectrum Brands Holdings common stock pledged as collateral for our senior
secured notes upon an event of default under the Senior Notes Indenture, on January 7, 2011,
simultaneously with the closing of the Spectrum Brands Acquisition, the collateral agent became a
party to the Spectrum Brands Holdings Stockholder Agreement and will, upon an event of default
under the Senior Notes Indenture, and subject to certain exceptions, become subject to all of its
covenants, terms and conditions to the same extent as HGI prior to such event of default.
THE FIDELITY & GUARANTY ACQUISITION
On March 7, 2011, we entered into the Transfer Agreement with the Master Fund, pursuant to which,
on March 9, 2011, (i) we acquired from the Master Fund a 100% membership interest in Harbinger F&G
and (ii) the Master Fund transferred to Harbinger F&G the sole issued and outstanding Ordinary
Share of FS Holdco. In consideration for the interests in FS Holdco and Harbinger F&G, we agreed to
reimburse the Master Fund for certain expenses incurred by the Master Fund (up to a maximum of
$13.3 million) in connection with the Fidelity & Guaranty Acquisition and to submit certain
expenses of the Master Fund for reimbursement by OM Group under the F&G Stock Purchase Agreement.
Following the consummation of the foregoing acquisitions, Harbinger F&G became a direct
wholly-owned subsidiary of HGI, FS Holdco became an indirect wholly-owned subsidiary of Harbinger
F&G and Front Street became the indirect wholly-owned subsidiary of Harbinger F&G.
On April 6, 2011, pursuant to the F&G Stock Purchase Agreement, Harbinger F&G acquired from OM
Group all of the outstanding shares of capital stock of F&G Holdings and certain intercompany loan
agreements between OM Group, as lender, and F&G Holdings, as borrower, in consideration for $350
million. As described further herein, the $350 million purchase price may be reduced by up to $50
million post-closing if certain regulatory approvals are not obtained. Following the consummation
of the Fidelity & Guaranty Acquisition, (i) F&G Holdings became a direct wholly-owned subsidiary of
Harbinger F&G and (ii) FGL Insurance and FGL NY Insurance became the wholly-owned subsidiaries of
F&G Holdings. FGL Insurance and FGL NY Insurance are our principal insurance companies.
The Reserve Facility and the CARVM Facility
Life insurance companies operating in the United States are required to calculate required reserves
for life and annuity policies based on statutory principles. These methodologies are governed by
Regulation XXX (applicable to term life insurance policies), Guideline AXXX (applicable to
universal life insurance policies with secondary guarantees) and the Commissioners Annuity Reserve
Valuation Method, known as CARVM (applicable to annuities). Under Regulation XXX, Guideline AXXX
and CARVM, insurers are required to establish statutory reserves for such policies that many market
participants believe are excessive.
Insurers often use ceded reinsurance to facilitate the financing of certain of these excess
reserves. Prior to the closing of the Fidelity & Guaranty Acquisition, FGL Insurance had financed
these reserves through various reinsurance contracts consisting of: (i) four reinsurance contracts
between FGL Insurance and Old Mutual Reassurance (Ireland) Limited, a subsidiary of OM Group (OM
Ireland), pursuant to which OM Ireland reinsured life insurance policies subject to Regulation XXX
and Guideline AXXX reserve requirements (the XXX/AXXX Agreements) and (ii) one reinsurance
contract pursuant to which OM Ireland reinsured annuities subject to CARVM reserve requirements
(the CARVM Treaty). Following the consummation of the Fidelity & Guaranty Acquisition, OM Ireland
is no longer an affiliate of FGL Insurance. FGL Insurance stopped cessions to OM Ireland with
respect to XXX/AXXX Agreements on September 30, 2010 and with respect to annuities under the CARVM
Treaty on December 31, 2010. The liabilities ceded under the XXX/AXXX Agreements were recaptured by
FGL Insurance in connection with the consummation of the Fidelity & Guaranty Acquisition.
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Reserve Facility. In connection with the consummation of the Fidelity & Guaranty Acquisition, OM
Group consummated a reserve funding transaction with FGL Insurance with respect to the policies
previously reinsured by OM Ireland under the XXX/AXXX Agreements (the Reserve Facility). As
contemplated by the F&G Stock Purchase Agreement, the reinsurance and related financing provided by
the XXX/AXXX Agreements was replaced by the Reserve Facility as follows:
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The life insurance policies previously ceded to OM Ireland under the XXX/AXXX
Agreements (the Recaptured Policies) were recaptured by FGL Insurance. |
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Certain of the Recaptured Policies (the Raven Policies) that were issued prior to
March 31, 2010 were then ceded by FGL Insurance to Raven Reinsurance Company, a newly
formed special purpose captive reinsurer domiciled in Vermont that is owned by FGL
Insurance (the Vermont Captive). The Recaptured Policies issued after March 31, 2010
were retained by FGL Insurance. Assets backing the economic reserves associated with the
Raven Policies (that is, the non-excess reserves required by statutory accounting
requirements) are held by FGL Insurance on a funds-withheld basis. The excess reserves
associated with the Raven Policies are secured by a reinsurance credit trust established
by the Vermont Captive for the benefit of FGL Insurance. The assets in trust consist of
(i) a letter of credit (the Letter of Credit) issued by NBI and (ii) certain senior
trust notes (the Senior Trust Notes) issued by a Delaware trust (which were submitted
to the Capital Markets and Investment Analytics Office of the NAIC) that in turn, holds
notes issued by an affiliate of NBI, which notes may in certain circumstances be put to
such affiliate of NBI. The Reserve Facility will initially provide FGL Insurance
financing for the excess reserves through the Letter of Credit and the Senior Trust
Notes. The face amount of the Letter of Credit and the Senior Trust Notes is $535
million in the aggregate (the Total L/C Exposure) may be reduced in certain
circumstances. |
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FGL Insurance transferred $250,000, the amount of the Vermont Captives statutory
minimum capital, to the regulatory account of the Vermont Captive in exchange for common
stock issued by the Vermont Captive to FGL Insurance. |
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OM Group contributed $95 million to the Vermont Captive in exchange for a surplus
note, which amount will be held in a surplus account of the Vermont Captive, along with
other amounts received by the Vermont Captive in excess of the Reserve Facilitys
minimum capital and surplus requirements. |
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During the term of the Reserve Facility, the Vermont Captive and Harbinger F&G have
agreed to maintain Total Modified Adjusted Capital (generally defined with reference to
the definition of Total Adjusted Capital in applicable Vermont statutes as in effect as
of December 31, 2009, subject to certain exclusions) of the Vermont Captive at a level
equal to the greater of (x) 300% of the Vermont Captives Company Action Level Risk
Based Capital (generally defined with reference to applicable Vermont statutes and the
risk-based capital factors and formula prescribed by the NAIC, each as in effect as of
December 31, 2009) requirement or (y) $95 million (the greater of such amounts, Minimum
Capital Amount). In the event that the Vermont Captive fails to maintain the Minimum
Capital Amount for any quarter, Harbinger F&G is required to make a capital contribution
equal to the amount of the shortfall for deposit into the surplus account. If Harbinger
F&G fails to make the capital contribution, OM Group is required to make the capital
contribution equal to the shortfall. |
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For the benefit of NBI, FGL Insurance paid a structuring fee to the Administrative
Agent in the amount of $13.7 million. |
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Until December 31, 2012, the Vermont Captive and Harbinger F&G are jointly and
severally obligated to pay to the Administrative Agent (for the benefit of NBI) a
portion of the Facility Fee described below, of up to 150 basis points per annum on the
face amount of the Total L/C Exposure. Until December 31, 2012, any portion of the
Facility Fee above the Total L/C Exposure will be paid by Old Mutual plc (Old Mutual).
The Facility Fee is calculated as the amount accrued with respect to the Total L/C
Exposure at an annual rate equal to the greatest of (x) 60 basis points plus 50% of a
rate (the CDS Rate) generally reflecting the cost of credit default swap protection on
senior unsecured debt of Old Mutual as of April 7, 2011, (y) 75% of the CDS Rate and (z)
125 basis points. |
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During the term of the Reserve Facility, Harbinger F&G
and Old Mutual is required
to post collateral to the Administrative Agent (for the benefit of NBI) based on the
outputs of a mutually agreed collateralization model. If the amounts called for by the
model based on calculations to be performed at least weekly exceed $15 million, then Old
Mutual will be required to post cash collateral in the amount of such excess (to the
extent not already posted) up to an additional $15 million and, to the extent such
calculations call for amounts exceeding $30 million, Harbinger F&G will |
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be required to post cash collateral in the amount of such excess (to the extent not
already posted), subject to a limit on the total aggregate collateral posted by both
Harbinger F&G and Old Mutual equal to the Total L/C Exposure.
Harbinger F&G has been required to post additional collateral
and may be required to make additional postings in the future. Following a demand from the
Administrative Agent, collateral must be posted by Harbinger F&G on the same or the
following business day and required collateral posting under the collateralization model
may fluctuate significantly in a short period of time. Any additional collateral must be
funded by HRG or made available to Harbinger F&G by its subsidiaries. To the extent that
the amounts called for by the collateralization model decrease and collateral has already
been posted by Harbinger F&G or by Old Mutual, cash in the amount of the decrease would
be returned to Harbinger F&G or to Old Mutual, as the case may be. Each of these
transfers of cash is subject to a $250,000 de minimis threshold. |
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In the event that FGL Insurance requests a draw on the assets in the reinsurance
credit trust, NBI may direct the payment of the disbursement amount from either the
Letter of Credit or the Senior Trust Notes. In the event of disbursement by NBI under
either instrument, Harbinger F&G is obligated to make an immediate reimbursement to the
Administrative Agent (for the benefit of NBI). If Harbinger F&G fails to make such
reimbursement, the Vermont Captive is required to make the reimbursement. If both
Harbinger F&G and the Vermont Captive fail to make the reimbursement, OM Group is
required to reimburse the Administrative Agent for NBIs benefit. |
Under the F&G Stock Purchase Agreement, OM Groups obligation to provide the Reserve Facility
terminates upon the earlier of (i) replacement of the Reserve Facility by a facility or facilities
that enable FGL Insurance to take full credit on its statutory financial statements for all of the
business reinsured under the Reserve Facility; (ii) December 31, 2012; and (iii) the occurrence of
any transaction pursuant to which Harbinger Capital and its affiliates collectively cease to own,
directly or indirectly, an aggregate of at least 40% of the outstanding equity ownership or other
economic interest in or voting securities or voting power of FGL Insurance or any parent company of
FGL Insurance or cease to control FGL Insurance or any parent company of FGL Insurance (other than
an initial public offering of FGL Insurances stock or any transaction conducted in connection with
such offering) if, after the consummation of such transaction, FGL Insurance would reasonably be
expected to have a financial strengths rating by A.M. Best Company of below A- (a Non-Qualifying
Change of Control).
Pursuant to the F&G Stock Purchase Agreement, Harbinger F&G agreed to replace the Reserve Facility
as soon as practicable, but in no event later than December 31, 2012, with a facility that enables
FGL Insurance to take full credit on its statutory financial statements for the business reinsured
under the Reserve Facility. In order to secure this and certain other obligations under the F&G
Stock Purchase Agreement, Harbinger F&G and F&G Holdings have pledged to OM Group the Pledged
Shares. In the event that the Reserve Facility is not replaced by that date, OM Group may foreclose
on the Pledged Shares and exercise other rights in relation thereto. See Other Agreements
below. Alternatively, OM Group may agree to extend the Reserve Facility for successive three-month
periods, until December 31, 2015, at a stepped-up Facility Fee payable solely by the Vermont
Captive and Harbinger F&G. To the extent OM Group, rather than Harbinger F&G, posts collateral to
the Administrative Agent (for the benefit of NBI), Harbinger F&G will be required to pay to OM
Group the amount of any such collateral posted by OM Group under the Reserve Facility plus interest
on such amount. In addition, upon the earlier of December 31, 2012 or the date that the Reserve
Facility is replaced, Harbinger F&G will be required to purchase from OM Group the $95 million
surplus note OM Group acquired to capitalize the Vermont Captive.
The CARVM Facility. Under the F&G Stock Purchase Agreement, OM Group is required to support
certain annuity reserves through letters of credit or other financing sponsored by OM Group (the
CARVM Facility) to enable FGL Insurance to take full credit on its statutory financial statements
for certain annuity liabilities that are subject to CARVM reserve requirements. OM Groups
obligation to provide the CARVM Facility terminates upon the earliest of (i) replacement of the
CARVM Facility by a facility or facilities that enable FGL Insurance to take full credit on its
statutory financial statements for all CARVM business (as described further below); (ii) December
31, 2015; and (iii) the occurrence of a Non-Qualifying Change of Control. To satisfy OM Groups
obligation to provide the CARVM Facility, these annuity liabilities remained reinsured under the
CARVM Treaty. The CARVM Treaty is expected to remain in place until December 31, 2015, by which
time the amount of the excess CARVM reserves is expected to have been substantially reduced because
the amount of excess reserves required under CARVM diminishes over time.
Harbinger F&G will be required to replace the CARVM Facility as soon as practicable, but in any
event no later than December 31, 2015, with a facility that enables FGL Insurance to take full
credit on its statutory financial statements for the business covered under the CARVM Facility. In
the event that the CARVM Facility is not replaced by that date, OM Group may foreclose on the
Pledged Shares and exercise other rights in relation thereto. See Other Agreements below. In
addition, on the earlier of December 31, 2015 or the date that the CARVM Facility is replaced,
Harbinger F&G will be required to pay to OM Group the amount of any collateral posted by OM Group
under the CARVM Facility plus interest on such amount.
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The Front Street Reinsurance Transaction
As contemplated by the terms of the F&G Stock Purchase Agreement, on May 19, 2011, the Special
Committee unanimously recommended to the Board for approval (i) the Reinsurance Agreement to be
entered into by Front Street and FGL Insurance, pursuant to which Front Street would reinsure up to
$3 billion of insurance obligations under annuity contracts of FGL Insurance and (ii) the
Investment Management Agreement to be entered into by Front Street and HCP, an affiliate of the
Harbinger Parties, pursuant to which HCP would be appointed as the investment manager of up to $1
billion of assets securing Front Streets reinsurance obligations under the Reinsurance Agreement,
which assets will be deposited in a reinsurance trust account for the benefit of FGL Insurance
pursuant the Trust Agreement. On May 19, 2011, our Board approved the Front Street Reinsurance
Transaction.
The Reinsurance Agreement and the Trust Agreement and the transactions contemplated thereby are
subject to, and may not be entered into or consummated without, the approval of the Maryland
Insurance Administration. The F&G Stock Purchase Agreement provides for up to a $50 million
post-closing reduction in purchase price for the Fidelity & Guaranty Acquisition if, among other
things, the Reinsurance Agreement and the Trust Agreement and the transactions contemplated thereby
are not approved by the Maryland Insurance Administration or are approved subject to certain
restrictions or conditions, including if HCP is not allowed to be appointed as the investment
manager for $1 billion of assets securing Front Streets reinsurance obligations under the
Reinsurance Agreement. The Reinsurance Agreement and the Trust Agreement were
submitted as part of a Form D filing with the Maryland Insurance
Administration on July 26, 2011.
Indemnification
The F&G Stock Purchase Agreement includes customary mutual indemnification provisions relating to
breaches of representations, warranties and covenants. In addition, Harbinger F&G agreed to
indemnify OM Group for, among other things, any losses arising out of the provision by OM Group of
the CARVM Facility and the Reserve Facility, in each case, including with respect to any obligation
to post collateral, reimburse for a draw on a letter of credit or contribute capital, except to the
extent such losses were caused by OM Group.
Wilton Transaction
On January 26, 2011, Harbinger F&G entered into an agreement (the Commitment Agreement) with
Wilton, pursuant to which Wilton agreed to cause Wilton Re, its wholly owned subsidiary and a
Minnesota insurance company, to enter into certain coinsurance arrangements with FGL Insurance
following the closing of the Fidelity & Guaranty Acquisition. Pursuant to the Commitment Agreement,
Wilton Re is required to reinsure certain of FGL Insurances policies that are subject to redundant
reserves under Regulation XXX and Guideline AXXX and that are currently reinsured by the Vermont
Captive under the Reserve Facility (the Raven Block), as well as another block of FGL Insurances
in-force traditional, universal and interest sensitive life insurance policies (the Camden
Block). Upon the completion of such reinsurance transactions, substantially all of FGL Insurances
in-force life insurance business issued prior to April 1, 2010 will have been reinsured. Under the
Commitment Agreement, these coinsurance arrangements are required to be effected pursuant to two
separate amendments to the existing Automatic Reinsurance Agreement, by and between FGL Insurance
and Wilton Re, effective as of December 31, 2007.
The amendment relating to the reinsurance of the Camden Block was executed on April 6, 2011 and the
reinsurance thereunder became effective as of April 1, 2011. Under the Commitment Agreement,
Harbinger F&G had the right to choose between two alternative structures for the implementation of
the reinsurance of the Raven Block, one of which provided that Wilton Re will reinsure the Raven
Block effective on or about November 30, 2012, subject to certain closing conditions described
below (the Raven Springing Amendment). Effective April 26, 2011, Harbinger F&G elected the Raven
Springing Amendment, and FGL Insurance and Wilton Re executed the Raven Springing Amendment on May
10, 2011. The Raven Springing Amendment is intended to mitigate the risk associated with Harbinger
F&Gs obligation under the F&G Stock Purchase Agreement to replace the Reserve Facility by December
31, 2012.
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 of 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.
The closing of the Raven Springing Amendment is subject to the closing conditions set forth in the
Commitment Agreement, which include among other things, that (i) all material governmental
approvals shall have been obtained and shall remain in effect without
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the imposition of adverse restrictions or conditions, (ii) no event shall have occurred that is
reasonably likely to enjoin, restrain or restrict in a manner adverse to the parties the proposed
reinsurance transactions or to prohibit or impose adverse conditions upon any of the parties with
respect to the consummation thereof, (iii) no action, suit, proceeding or investigation before, and
no order, injunction or decree shall have been entered by, any court, arbitrator or other
governmental authority that is reasonably likely to enjoin, restrain, set aside or prohibit or
impose adverse conditions upon, or to obtain substantial damages in respect of, the consummation of
the proposed reinsurance transactions and which would be reasonably expected to impose on the
parties or their affiliates additional loss, liability, cost, expense or risk, (iv) the
representations and warranties of FGL Insurance shall be true and correct as of certain dates
specified in the Commitment Agreement, (v) the parties shall have performed in all material
respects their respective obligations and shall have complied in all material respects with the
agreements and covenants required to be performed or complied by them, and (vi) certain documents
and certain certifications shall have been delivered (including certifications as to the solvency
of the parties). Any of the foregoing conditions may be waived by the party that is the beneficiary
of such condition. In order to increase the closing certainty in respect of the reinsurance
transactions contemplated under the Raven Springing Amendment, the Commitment Agreement permits
either party to remedy the failure to satisfy any of the foregoing conditions through
indemnification or other remedy that would put the other party in a position to realize an
equivalent benefit of its bargain as contemplated under the proposed transactions.
The Raven Springing Amendment may require regulatory approval, which may include approval from the
Maryland Insurance Administration for the recapture of the Raven Block from the Vermont Captive 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 of 2011.
The Raven Springing Amendment is subject to termination (i) by either party if the closing of the
reinsurance transactions thereunder has not occurred by November 30, 2013, (ii) by FGL Insurance on
five days advance notice if Wilton Re has failed to perform a material obligation under the Raven
Springing Amendment that has prevented the closing of the transactions thereunder to have occurred
by November 30, 2012 and (iii) by either party on five days advance notice to the other party if
all conditions precedent to the closing under the Raven Springing Amendment have been satisfied or
waived and closing has not occurred as a result of the failure to obtain or maintain in effect any
material required governmental approvals required for consummation of the transactions contemplated
by the Raven Springing Amendment.
Wilton Res reinsurance of the Raven Block and the Camden Block will not extinguish FGL Insurances
liability with respect to such business because FGL Insurance remains directly liable to
policyholders and is required to pay the full amount of its policy obligations in the event that
Wilton Re fails to satisfy its obligations with respect to the reinsured business.
Other Agreements
In connection with the F&G Stock Purchase Agreement, Harbinger F&G has entered into the Guarantee
and Pledge Agreement (the Pledge Agreement). Pursuant to the Pledge Agreement, Harbinger F&G and
F&G Holdings have granted security interests in the Pledged Shares to OM Group in order to secure
certain of Harbinger F&Gs obligations arising under the F&G Stock Purchase Agreement, including
its indemnity obligations and its obligations with respect to the replacement of the CARVM Facility
and the Reserve Facility, its obligation to return to OM Group any collateral posted by OM Group in
connection with the Reserve Facility or the CARVM Facility and its obligation to purchase the $95
million surplus note OM Group acquired to capitalize the Vermont Captive as described above
(collectively, the Secured Obligations). In the event that Harbinger F&G defaults or breaches
such covenants, OM Group could foreclose upon the Pledged Shares. OM Group would also have the
right to receive any and all cash dividends, payments or other proceeds paid in respect of the
Pledged Shares, and at OM Groups option, subject to regulatory approval of a change of control,
cause the Pledged Shares to be registered in the name of OM Group or a nominee, such that OM Group
may thereafter exercise (i) all voting, corporate or other rights pertaining to the Pledged Shares
and (ii) any rights of conversion, exchange and subscription and any other rights, privileges or
options pertaining to the Pledged Shares as if OM Group were the sole owner thereof. Prior to
causing the Pledged Shares to be registered in the name of OM Group or a nominee, OM Group or such
nominee would be required to obtain the prior approval of the Maryland Insurance Administration,
the New York Insurance Department and the Vermont Department of Banking, Investment and Health Care
Administration for such change of control.
THE PREFERRED STOCK ISSUANCE
On
May 13, 2011, and August 5, 2011, we sold an aggregate of
400,000
shares of Preferred Stock to certain institutional investors (the
Preferred Stock Purchasers) including CF Turul LLC, an
affiliate of Fortress Investment Group LLC (the Fortress
Purchaser), at a purchase price of $1,000 per share
(the Purchase Price), resulting in aggregate gross proceeds to
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us of
$400 million. The proceeds are being used for general corporate purposes, which may include
acquisitions and other investments. Funding of the initial tranche occurred on May 13, 2011 (the
Initial Preferred Stock Issue Date). Of the 400,000 aggregate shares of Preferred Stock, 280,000
were issued in the first tranche and are referred to as our Series A Preferred Stock and
120,000 were issued in the second tranche and are referred to as our Series A-2 Preferred Stock.
Each
share of Series A Preferred Stock is initially convertible into shares of our common stock at a
conversion price of $6.50, and each share of series A-2 Preferred Stock is initially convertible into shares of our common
stock at a conversion price of $7.00 per share, in each case. subject to adjustment (which are to be made on a weighted
average basis) for dividends, certain distributions, stock splits, combinations, reclassifications,
reorganizations, recapitalizations and similar events, as well as in connection with issuances of
our common stock (and securities convertible or exercisable for our common stock) below such price
(the Conversion Price). Until certain regulatory filings are made and approvals are obtained,
Preferred Stock may not be converted if upon such conversion the holders beneficial ownership
would exceed certain thresholds.
The Preferred Stock will accrue a cumulative quarterly cash dividend at an annualized rate of 8%.
The Purchase Price of the Preferred Stock will accrete quarterly 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 also entitled to participate in cash and in-kind
distributions to holders of our shares of common stock on an as converted basis.
On the
seventh anniversary of the Initial Preferred Stock Issue Date, holders of the Preferred Stock are
entitled to cause us to redeem the Preferred Stock at the Purchase Price per share plus accrued but
unpaid dividends. Each share of Preferred Stock that is not so redeemed will be automatically
converted into shares of our common stock at the Conversion Price then in effect.
Upon a change of control (which is defined in a manner similar to the Senior Notes Indenture except
that references to Permitted Holders are deemed to also include the Preferred Stock Purchasers
and their affiliates), holders of the Preferred Stock are entitled to cause us to redeem their
Preferred Stock at a price per share of Preferred Stock equal to the sum of 101% of the Purchase
Price and any accrued and unpaid dividends, including accrued and unpaid cash and accreting
dividends for the then current dividend period.
At any
time after the third anniversary of the Initial Preferred Stock Issue Date, we may redeem the
Preferred Stock, in whole but not in part, at a price per share equal to 150% of the Purchase Price
plus accrued but unpaid dividends, subject to the holders right to convert prior to such
redemption.
After
the third anniversary of the Initial Preferred Stock Issue Date, we may force the conversion of the
Preferred Stock into shares of our common stock if the thirty day volume weighted average price of
shares of our common stock (VWAP) and the daily VWAP exceed 150% of the then applicable
Conversion Price for at least twenty trading days out of the thirty trading day period used to
calculate the thirty day VWAP. In the event of a forced conversion, the holders of Preferred Stock
will have the ability to elect cash settlement in lieu of conversion if certain market liquidity
thresholds for our common stock are not achieved. In addition, for so long as the Fortress
Purchaser owns sufficient combined voting power (through ownership of Preferred and shares of our
common stock) to entitle it to nominate directors to our Board or appoint observers (as described
below) or exercise certain consent rights, our ability to force conversion of the Preferred Stock
is limited such that after any such conversion the Fortress Purchaser will have the right to retain
one share of Preferred Stock, enabling it to continue to exercise its right to nominate directors,
appoint observers or exercise consent rights associated with the Preferred Stock, but such
Preferred Stock will have no other rights or preferences. Once the Fortress Purchaser ceases to own
sufficient combined voting power to exercise these rights, the retained share of Preferred Stock
will be automatically cancelled.
In the event of our liquidation or wind up, the holders of Preferred Stock will be entitled to
receive per share the greater of (i) 150% of the Purchase Price, plus any accrued and unpaid
dividends and (ii) the value that would be received if the share of Preferred Stock were converted
into shares of our common stock immediately prior to the liquidation or winding up.
Prior to the fifth anniversary of the Preferred Stock Issue Date, subject to meeting certain
ownership thresholds, certain Preferred Stock Purchasers will be entitled to participate, on a pro
rata basis in accordance with their ownership percentage, determined on an as converted basis, in
issuances of equity and equity linked securities by us. In addition, subject to meeting certain
ownership thresholds, certain Preferred Stock Purchasers will be entitled to participate in
issuances of preferred securities and in debt transactions.
Consent
of the holders of Initial Preferred Stock is required before any fundamental change can be made to
the Preferred Stock, including changes to the terms of the Preferred Stock with respect to
liquidation preference, dividend, or redemption rights. Consent of the holders of a majority of
Preferred Stock is required before, subject to certain exceptions, any material action may be taken
with respect to the Preferred Stock, including issuing stock senior or pari passu to the Preferred
Stock and incurring debt, or permitting a subsidiary to incur debt or selling assets or permitting
a subsidiary to sell assets not otherwise permitted by the Senior Notes Indenture (or any
120
replacement
thereof). While the Fortress Purchaser continues to own at least 50%
of the Preferred
Stock purchased on the Initial Preferred Stock Issue Date (either as Preferred Stock or shares of our
common stock upon conversion), consent of the Fortress Purchaser is required before any action may
be taken which requires approval by a majority of the holders of Preferred Stock or any action with
respect to certain related party transactions between HGI and its affiliates.
Subject to certain approval from certain insurance regulatory authorities, so long as the Fortress
Purchaser owns at least 50% of the Preferred Stock purchased on the Initial Preferred Stock Issue Date or
10% of our outstanding shares of common stock on an as converted basis, the Fortress Purchaser will
have the right to appoint one director to our Board who will be entitled to be a member of any
committee of our Board (except for any special committee formed to consider a related party
transaction involving the Fortress Purchaser).
If the Fortress Purchaser does not appoint a director to our Board, subject to meeting certain
ownership thresholds, the Fortress Purchaser has the right to appoint an observer to attend all
meetings of our Board, any committee of our Board, and the board of any of our wholly owned
subsidiaries on which it does not have a director.
Upon a specified breach event (described below) the size of our Board will be increased by one or
two directors, depending on whether the Fortress Purchaser has appointed a director to our Board
prior to such breach. The Fortress Purchaser, or a majority of Preferred Stock Purchasers if the
Fortress Purchaser at that time owns less than a threshold amount, in either shares of our common
stock or Preferred Stock, will have the right to appoint one or two directors, reasonably
acceptable to our Board.
Subject to meeting certain ownership thresholds, in the event that Mr. Falcone ceases to have
principal responsibility for our investments for a period of more than 90 consecutive days, other
than as a result of temporary disability, and the Fortress Purchaser does not approve our proposed
business continuity plan (a Director Addition Event), the Fortress Purchaser may appoint such
number of directors that, when the total number of directors appointed by the Fortress Purchaser is
added to the number of independent directors, that number of directors is equal to the number of
directors employed by or affiliated with us or Harbinger Capital.
Notwithstanding all of the foregoing, the Fortress Purchasers representation on our Board will
always be less than or proportionate to its ownership of our securities and must otherwise comply
with the rules of the NYSE and certain insurance regulatory authorities.
We are
subject to additional restrictions under the Preferred Stocks certificates of designation,
including that upon a specified breach event (such as an event of default under the Senior Notes
Indenture, our failure to pay any dividends on the Preferred Stock for a period longer than 90
days, our failure to maintain a 1:1 ratio of cash and cash equivalents to fixed charges until March
31, 2012, our failure to perform certain covenants under the certificate of designation or the
delisting of our shares of common stock) we will be prohibited from making certain restricted
payments, incurring certain debt, and entering into certain agreements to purchase debt or equity
interests in portfolio companies of Harbinger Capital or its affiliates (other than HGI) or to sell
equity interests in portfolio companies of HGI to Harbinger Capital or its affiliates.
The holders of the Preferred Stock have certain registration rights pursuant to a Registration
Rights Agreement, by and among us and the Preferred Stock Purchasers (the
Preferred Registration Rights Agreement). Pursuant to the Preferred Registration Rights
Agreement, we are obligated to use our commercially reasonable efforts to cause a registration
statement with respect to the shares of our common stock underlying the Preferred Stock to be filed
under the Securities Act by October 10, 2011 and declared effective by January 25, 2012. We have
agreed to keep the registration statement effective until all of the shares of our common stock
covered therein has been sold or may be sold without volume or manner of sale restrictions under
Rule 144 of the Securities Act.
121
BUSINESS
Our Company
We are a holding company that is majority owned by the Harbinger Parties. We were incorporated in
Delaware in 1954 under the name Zapata Corporation and reincorporated in Nevada in April 1999 under
the same name. On December 23, 2009, we reincorporated in Delaware under the name Harbinger Group
Inc. Our common stock trades
on the NYSE under the symbol HRG. Our principal executive offices are located at 450 Park Avenue,
27th Floor, New York, New York 10022.
We intend to make investments in companies that we consider to be undervalued or fairly valued with
attractive assets or businesses. We intend to seek long-term investments that are able to generate
high returns and significant cash flow to maximize long-term value for our stockholders. We are
focused on obtaining controlling equity stakes in companies that operate across a diversified set
of industries. We view the Spectrum Brands Acquisition and the Fidelity & Guaranty Acquisition as
the 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 equity 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, a multi-billion dollar private investment firm based in New York, and an affiliate of the
Harbinger Parties. 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 will enhance 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.
Philip Falcone, who serves as Chairman of the Board, Chief Executive Officer and President, has
been the Chief Investment Officer of the Harbinger Capital affiliated funds since 2001. Mr. Falcone
has over two decades of experience in leveraged finance, distressed debt and special situations. In
addition to Mr. Falcone, Harbinger Capital employs a wide variety of professionals with expertise
across various industries, including our targeted sectors.
Our Strategy
The key elements of our business strategy will include the following:
Seek to acquire attractively valued assets. We intend to make investments in companies that we
consider to be undervalued or fairly valued with attractive assets or businesses. We intend to seek
long-term investments that are able to generate high returns and significant cash flow to maximize
long-term value for our stockholders. We plan to utilize our relationship with Harbinger Capital to
identify and evaluate acquisition opportunities. We intend to seek a variety of investment
opportunities, including investments in companies where we believe a catalyst for value realization
is already present or where we can engage with companies to unlock value. We also intend to seek
investments in companies that are in default, bankruptcy or in some other stage of financial
failure or distress. Over time, we plan to become a holding company focused on obtaining
controlling equity stakes in subsidiaries that operate across a diversified set of industries. In
addition to our intention to acquire controlling equity interests, we may also from time to time
make investments in debt instruments and acquire minority equity interests in companies.
Actively manage our business. We intend to take an active approach to managing our investments in
companies in which we acquire a controlling interest. Such activities may include assembling senior
management teams with the expertise to operate the businesses and providing management of such
companies with specific operating objectives. We will bring an owners perspective to our operating
businesses and we will hold management accountable for their performance.
122
Focused investment philosophy. We intend to employ a focused investment philosophy to seek out
investments that may exhibit one or more of the following underlying characteristics:
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Scarcity Situations with finite resources where we believe we can clearly quantify
and impact supply/demand dynamics; |
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Complexity Government, legal and regulatory controls can be onerous; we believe
our ability to navigate this complexity provides us with a substantial advantage; and |
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Action We believe our ability to actively engage with companies and work with them
to encourage consolidation, restructuring or other corporate action creates a catalyst
to unlock value. |
Competition
We may pay acquisition consideration in the form of cash, our debt or equity securities, or a
combination thereof. In addition, as a part of our acquisition strategy we may consider raising
additional capital through the issuance of equity or debt securities, including the issuance of
further shares of Preferred Stock. We believe that our status as a public entity with potential
access to the public equity markets may give us a competitive advantage over privately-held
entities with a similar business objective to acquire certain target businesses on favorable terms.
While we generally focus our attention in the United States, we may investigate acquisition
opportunities outside of the United States when we believe that such opportunities might be
attractive.
In identifying, evaluating and selecting a target business, we may encounter intense competition
from other entities having similar business objectives such as strategic investors, private equity
groups and special purpose acquisition corporations. Many of these entities are well established
and have extensive experience identifying and effecting business combinations directly or through
affiliates. Many of these competitors may possess greater technical, human and other resources than
us, and our financial resources may be relatively limited when contrasted with many of these
competitors. Any of these factors may place us at a competitive disadvantage in successfully
negotiating a business combination.
The Harbinger Parties and their affiliates include other vehicles that actively are seeking
investment opportunities, and any one of those vehicles may at any time be seeking investment
opportunities similar to those targeted by us. Our directors and officers who are affiliated with
the Harbinger Parties may consider, among other things, asset type and investment time horizon in
evaluating opportunities for us. In recognition of the potential conflicts that these persons and
our other directors may have with respect to corporate opportunities, our amended and restated
certificate of incorporation permits our board of directors from time to time to assert or renounce
our interests and expectancies in one or more specific industries. In accordance with this
provision, we have determined that we will not seek business combinations or acquisitions of
businesses engaged in the wireless communications industry. However, a renunciation of interests
and expectancies in specific industries does not preclude us from seeking business acquisitions in
those industries. We have had discussions regarding potential investments in various industries,
including wireless communications.
Employees
At July 3, 2011, we employed nine persons. In the normal course of business, we use contract
personnel to supplement our employee base to meet our business needs. We believe that our employee
relations are generally satisfactory. We intend to hire additional employees as a result of our
growth and the increasing complexity of our business.
Properties
Our principal executive office is located at 450 Park Avenue, 27th Floor, New York, New York 10022,
where we lease approximately 2,350 square feet of office space.
Legal and Environmental Matters Regarding Our Business
We are 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
123
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.
We are also involved in other litigation and claims incidental to our 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 our offshore
drilling and bulk-shipping affiliates. Based on currently available information, including legal
defenses available to us, and given our reserves and related insurance coverage, we do not believe
that the outcome of these legal and environmental matters will have a material effect on our
financial position, results of operations or cash flows.
Spectrum Brands Holdings
Spectrum Brands Holdings is a global branded consumer products company with leading market
positions in seven major product categories: consumer batteries, pet supplies, home and garden
control, electric shaving and grooming, electric personal care, portable lighting products and
small appliances. Spectrum Brands Holdings is a leading worldwide marketer of alkaline, zinc
carbon, hearing aid and rechargeable batteries, battery-powered lighting products, electric shavers
and accessories, grooming products and hair care appliances, aquariums and aquatic health supplies,
specialty pet supplies, insecticides, repellants and herbicides.
Spectrum Brands Holdings manages its businesses in three vertically integrated, product-focused
reporting segments:
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Global Batteries & Appliances, which consists of its worldwide battery, electric
shaving and grooming, electric personal care, portable lighting business and small
appliances primarily in the kitchen and home product categories; |
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Global Pet Supplies, which consists of its worldwide pet supplies business; and |
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Home and Garden Business, which consists of its home and garden and insect control
business. |
Spectrum Brands Holdings sells its products in approximately 130 countries through a variety of
trade channels, including retailers, wholesalers and distributors, hearing aid professionals,
industrial distributors and OEMs and enjoy strong name recognition in our markets under the
Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80 years,
and under the Tetra, 8-in-l, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs,
Farberware and various other brands.
Spectrum Brands Holdings strategy is to provide quality and value to retailers and consumers
worldwide. Most of its products are marketed on the basis of providing the same performance as its
competitors for a lower price or better performance for the same price. Spectrum Brands Holdings
goal is to provide the highest returns to its customers and retailers, and to offer superior
merchandising and category management. Its promotional spending focus is on winning at the point of
sale, rather than incurring significant advertising expenses. Spectrum Brands Holdings operates in
several business categories in which it believes there are high barriers to entry and Spectrum
Brands Holdings strives to achieve a low cost structure with a global shared services
administrative structure, helping it to maintain attractive margins. This operating model, which
Spectrum Brands Holdings refers to as the Spectrum value model, is what Spectrum Brands Holdings
believes will drive returns for investors and customers.
F&G Holdings
F&G Holdings is a provider of annuity and life insurance products in the United States. Based in
Baltimore, Maryland, F&G Holdings operates its annuity and life insurance operations in the United
States through its subsidiaries FGL Insurance and FGL NY Insurance.
F&G Holdings principal products are immediate annuities, deferred annuities (including fixed
indexed annuities) and life insurance products (including fixed indexed universal life), which it
sells, as of June 30, 2011, through a network of approximately 250 IMOs representing approximately
25,000 independent agents and managing general agents. As of March 31, 2011, F&G Holdings had
approximately 790,000 policyholders nationwide and distributes its products throughout the United
States.
F&G Holdings deferred annuities include fixed index annuities and fixed rate annuities. Fixed
indexed annuities allow contract owners the possibility of earning credits based on the performance
of a specified market index without risk to principal. The value to the contractholder of a fixed
indexed annuity contract is equal to the sum of deposits paid, premium bonuses and credits earned
(index credits), up to an overall limit on the amount of interest that an annuity will earn (a
cap) or a percentage of the gain of a
124
market index that will be credited to an annuity (a participation rate) based on the annual
appreciation in a recognized index or benchmark.
Fixed rate annuities include annual reset and multi-year rate guaranteed policies. During the
accumulation period, the account value of the annuity is credited with interest earned at a
crediting rate guaranteed for no less than one year at issue, but which may be guaranteed for up to
seven years, and thereafter we have the discretionary ability to change the crediting rate based on
the guaranteed period of the contract at a rate above the guaranteed minimum rate.
Immediate annuities provide a fixed amount of income for either a defined number of years, the
annuitants lifetime or the longer of a defined number of years or the annuitants lifetime, in
exchange for a single premium.
F&G Holdings offers indexed universal life insurance policies. Holders of universal life insurance
policies earn returns on their policies which are credited to the policyholders account value. The
insurer periodically deducts its expenses and the cost of life insurance protection from the
account value. The balance of the account value is credited interest at a fixed rate or returns
based on the performance of a market index, or both, at the option of the policyholder, using a
method similar to that described above for fixed indexed annuities.
F&G Holdings profitability depends in large part upon the amount of assets under management, its
ability to manage its operating expenses, the costs of acquiring new business (principally
commissions to agents and bonuses credited to policyholders) and the investment spreads earned on
its contractholder fund balances. Managing investment spreads involves the ability to manage an
investment portfolio to maximize returns and minimize risks such as interest rate changes and
defaults or impairment of investments and its ability to manage interest rates credited to
policyholders and costs of the options purchased to fund the annual index credits on the fixed
index annuity.
Under 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. 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
interest credited to annuity contractholder fund balances.
Products
Annuity Products
F&G Holdings, through its insurance subsidiaries, issues a broad portfolio of deferred annuities
(fixed indexed and fixed rate annuities) and immediate annuities. A deferred annuity is a type of
contract that accumulates value on a tax deferred basis and typically begins making specified
periodic or lump sum payments a certain number of years after the contract has been issued. An
immediate annuity is a type of contract that begins making specified payments within one annuity
period (e.g. one month or one year) and typically pays principal and earnings in equal payments
over some period of time.
As part of its significant product consolidation, FGL Insurance and FGL NY Insurance reduced from
51 in 2008 to 21 in 2011 the number of products in their portfolios of annuity products. The
following table presents the deposits on annuity policies issued by FGL Insurance and FGL NY
Insurance, as well as reserves required by accounting principles generally accepted in the United
States (GAAP Reserves), for the fiscal years 2009 and 2010:
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Deposits on Annuity Policies |
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GAAP Reserves |
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2009 |
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2010 |
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2009 |
|
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2010 |
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(In millions) |
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Products |
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Fixed Indexed Annuities |
|
$ |
599 |
|
|
$ |
755 |
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$ |
9,592 |
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|
$ |
9,327 |
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Fixed Rate Annuities |
|
$ |
47 |
|
|
$ |
253 |
|
|
$ |
3,384 |
|
|
$ |
3,430 |
|
Single Premium Immediate Annuities |
|
$ |
192 |
|
|
$ |
245 |
|
|
$ |
3,713 |
|
|
$ |
3,599 |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
$ |
838 |
|
|
$ |
1,253 |
|
|
$ |
16,689 |
|
|
$ |
16,356 |
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125
Deferred Annuities
Fixed Indexed Annuities. FGL Insurances fixed indexed annuities allow contract owners the
possibility of earning credits based on the performance of a specified market index without risk to
principal. The contracts include a provision for a minimum guaranteed surrender value calculated in
accordance with applicable law. A market index tracks the performance of a specific group of stocks
representing a particular segment of the market, or in some cases an entire market. For example,
the S&P 500 Composite Stock Price Index is an index of 500 stocks intended to be representative of
a broad segment of the market. Most fixed indexed annuity policies allow policyholders to allocate
funds once a year among several different crediting strategies, including one or more index based
strategies and a traditional fixed rate strategy.
The value to the contractholder of a fixed indexed annuity contract is equal to the sum of deposits
paid, premium bonuses (described below) and credits earned (index credits), up to an overall
limit on the amount of interest that an annuity will earn (a cap) or a percentage of the gain of
a market index that will be credited to an annuity (a participation rate) based on the annual
appreciation (based in certain situations on monthly averages or monthly point-to-point
calculations) in a recognized index or benchmark. Caps generally range from 3.5% to 6% when
measured annually and 1.5% to 5.2% when measured monthly and participation rates generally range
from 30% to 100%, of the performance of the applicable market index.
Approximately 90% and 80% of the fixed indexed annuity sales for the years ending December 31, 2010
and December 31, 2009, respectively, involved premium bonuses by which FGL Insurance and FGL NY
Insurance increased the initial annuity deposit by a specified premium bonus of 3% and vested bonus
of 5% to 8%. FGL Insurance and FGL NY Insurance made compensating adjustments in the commission
paid to the agent or the surrender charges on the policy to offset the premium bonus.
Fixed Rate Annuities. Fixed rate annuities include annual reset and multi-year rate guaranteed
policies. Fixed rate annual reset annuities issued by FGL Insurance and FGL NY Insurance have an
annual interest rate (the crediting rate) that is guaranteed for the first policy year. After the
first policy year, FGL Insurance and FGL NY Insurance have the discretionary ability to change the
crediting rate once annually to any rate at or above a guaranteed minimum rate. Fixed rate
multi-year guaranteed annuities are similar to fixed rate annual reset annuities except that the
initial crediting rate is guaranteed for a specified number of years before it may be changed at
the discretion of FGL Insurance and FGL NY Insurance. For fiscal year 2010, FGL Insurance and FGL
NY Insurance did not sell any fixed rate annual reset annuities. For fiscal year 2010, FGL
Insurance and FGL NY Insurance sold $253 million of fixed rate multi-year guaranteed annuities. As
of December 31, 2010, crediting rates on outstanding (i) fixed rate annuities generally ranged from
1.5% to 6.0% and (ii) multi-year guaranteed annuities ranged from 1.5% to 6.25%. The average
crediting rate on all outstanding fixed rate annuities at December 31, 2010 was 4.35%.
Withdrawal Options for Deferred Annuities. After the first year following the issuance of a
deferred annuity policy, holders of deferred annuities are typically permitted penalty-free
withdrawals up to 10% of the prior years value, subject to certain limitations. Withdrawals in
excess of allowable penalty-free amounts are assessed a surrender charge if such withdrawals are
made during the penalty period of the deferred annuity policy (a surrender charge). The penalty
period typically ranges from 5 to 14 years for fixed indexed annuities and 3 to 10 years for fixed
rate annuities. This surrender charge initially ranges from 9% to 17.5% of the contract value for
fixed index annuities and 5% to 12% of the contract value for fixed rate annuities and generally
decreases by approximately one to two percentage points per year during the penalty period. Certain
annuity contracts contain a market value adjustment provision that may increase or decrease the
amounts available for withdrawal upon full surrender. The policyholder may elect to take the
proceeds of the surrender either in a single payment or in a series of payments over the life of
the policyholder or for a fixed number of years (or a combination of these payment options). In
addition to the foregoing withdrawal rights, policyholders may also elect to have additional
withdrawal rights by purchasing a guaranteed minimum withdrawal benefit.
Immediate Annuities
FGL Insurance and FGL NY Insurance also sell single premium immediate annuities (SPIAs), which
provide a series of periodic payments for a fixed period of time or for the life of the
policyholder, according to the policyholders choice at the time of issue. The
126
amounts, frequency and length of time of the payments are fixed at the outset of the annuity
contract. SPIAs are often purchased by persons at or near retirement age who desire a steady stream
of payments over a future period of years.
Life Insurance
FGL Insurance and FGL NY Insurance offer indexed universal life insurance policies. Holders of
universal life insurance policies earn returns on their policies which are credited to the
policyholders cash value account. The insurer periodically deducts its expenses and the cost of
life insurance protection from the cash value account. The balance of the cash value account is
credited interest at a fixed rate or returns based on the performance of a market index, or both,
at the option of the policyholder, using a method similar to that described above for fixed indexed
annuities.
For their 2009 and 2010 fiscal years, FGL Insurance and FGL NY Insurance have together written
approximately $63 million in premiums for indexed universal life insurance policies. As part of
their significant product consolidations, FGL Insurance and FGL NY Insurance reduced from nine in
2008 to two in 2011 the number of products in their life insurance product portfolios.
As of December 31, 2010, FGL Insurance and FGL NY Insurance together have issued approximately
$1.51 billion (face amount), net, in life insurance policies. The collective premiums generated by
total indexed life insurance policies issued by FGL Insurance and FGL NY Insurance for fiscal years
2009 and 2010 was $32.4 million and $30.5 million, respectively.
A significant portion of the indexed universal life business is subject to a pending reinsurance
arrangement with Wilton Re. See F&G Stock Purchase Agreement and Related Arrangements Wilton
Transaction above.
Investments
The types of assets in which F&G Holdings may invest are influenced by various state laws, which
prescribe qualified investment assets applicable to insurance companies. Within the parameters of
these laws, F&G Holdings invests in assets giving consideration to three primary investment
objectives: (i) income-oriented total return, (ii) yield maintenance/enhancement and (iii) capital
preservation/risk mitigation.
F&G Holdings investment portfolio is designed to provide a stable earnings contribution and
balanced risk portfolio across asset classes and is primarily invested in high quality corporate
bonds with low exposure to consumer-sensitive sectors.
For
more information about F&G Holdings investment portfolio,
see Note 3 to our financial statements included in Part 1
Item 1. Financial Statements.
Derivatives
F&G Holdings fixed indexed annuity contracts (the FIA Contracts) permit the holder to elect to
receive a return based on an interest rate or the performance of a market index. F&G Holdings 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 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, F&G Holdings purchases new
one-, two- or three-year call options to fund the next index credit. F&G Holdings attempts to
manage the cost of these purchases through the terms of its FIA Contracts, which permit F&G
Holdings to change caps or participation rates, subject to certain guaranteed minimums that must be
maintained. The change in the fair value of the call options and futures contracts is designed to
offset the change in the fair value of the FIA Contracts embedded derivative. 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 instruments terms or upon early
termination and the changes in fair value of open positions.
F&G Holdings is exposed to credit loss in the event of nonperformance by its counterparties on the
call options. F&G Holdings attempts to reduce the credit risk associated with such agreements by
purchasing such options from large, well-established financial institutions.
127
Marketing and Distribution
F&G Holdings offers its products through a network of approximately 250 IMOs, representing
approximately 25,000 agents, and identifies its most important 28 IMOs as Power Partners. F&G
Holdings Power Partners are currently comprised of 19 annuity IMOs and 9 life insurance IMOs. In
fiscal year 2010, these Power Partners accounted for approximately 62% of F&G Holdings annual
sales volume. F&G Holdings believes that its relationships with these IMOs are strong. The average
tenure of the top ten Power Partners is approximately 12 years.
F&G Holdings Power Partners play an important role in the development of F&G Holdings products.
Over the last ten years, the majority of F&G Holdings best selling products have been developed in
conjunction with its Power Partners. F&G Holdings intends to continue to have the Power Partners
play an important role in the development of its products in the future, which it believes provides
it with integral feedback throughout the development process and assists it with competing for
shelf space for new design launches.
In 2003 F&G Holdings introduced a rewards program, the Power Agent Incentive Rewards (PAIR)
Program, to incentivize annuity product sales and strengthen distributor relationships. The PAIR
Program is structured as a non-contributory deferred compensation program that allows select
producers to share in profitability of new product sales. F&G Holdings believes the PAIR Program
drives loyalty amongst top producers and incentivizes them to focus on profitable sales. Over the
past five years, PAIR agents have produced nearly 29% of F&G Holdings total deferred annuity
sales. As of June 30, 2011, there was approximately $14.3 million in PAIR vested account
balances.
A PAIR Program for life insurance products was introduced in 2009 and operates substantially in the
same manner as the PAIR Program for annuities.
Outsourcing
In addition to services provided by third-party asset managers, F&G Holdings outsources the
following functions to third-party service providers:
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hosting of financial systems, |
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service of existing policies, |
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call centers, and |
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underwriting administration of life insurance applications. |
F&G Holdings closely manages its outsourcing partners and integrates their services into its
operations. F&G Holdings believes that outsourcing such functions allows it to focus capital and
personnel resources on its core business operations and perform differentiating functions, such as
actuarial, product development and risk management functions. In addition, F&G Holdings believes an
outsourcing model provides predictable pricing, service levels and volume capabilities and allows
it to exploit technological developments to enhance its customer self-service and sales processes
that it may not be able to take advantage of if it were required to deploy its own capital.
F&G Holdings outsources its new business and existing policy administration for fixed indexed
annuity and life products to Transaction Applications Group, Inc., a subsidiary at Dell Inc.
(Transaction Group). Under this arrangement, Transaction Group manages all of F&G Holdings call
center and processing requirements. F&G Holdings and Transaction Group have entered into a
seven-year relationship expiring in June 2014.
F&G Holdings has partnered with Hooper Holmes, Inc. (Hooper Holmes) to outsource its life
insurance underwriting function. Under the terms of the arrangement Hooper Holmes has assigned F&G
Holdings a team of five underwriters with Fellow Management Life Institute. F&G Holdings and Hooper
Holmes have entered into a three-year relationship expiring in December 2012.
F&G Holdings believes that it has a good relationship with its principal outsource service
providers.
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Competition and Ratings
F&G Holdings ability to compete is dependent upon many factors which include, among other things,
its ability to develop competitive and profitable products, its ability to maintain low unit costs,
and its maintenance of adequate financial strength ratings from ratings agencies.
Following is a summary of the financial strength ratings of FGL Insurance and its wholly-owned
subsidiary, FGL NY Insurance:
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Financial Strength |
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Outlook Statement |
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Moodys |
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November 3, 2010 |
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Ba1 |
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Stable |
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August 6, 2010 |
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Baa3 |
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On review for possible downgrade |
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March 11, 2010 |
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Baa3 |
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Developing |
Fitch |
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April 7, 2011 |
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BBB |
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Stable |
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August 9, 2010 |
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BB |
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Positive |
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March 29, 2010 |
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BB |
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Rating watch evolving |
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March 11, 2010 |
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BBB- |
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Rating watch negative |
A.M. Best |
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August 12, 2010 |
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B++ |
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Stable |
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March 11, 2010 |
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A- |
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Under review with developing implications |
Financial strength ratings generally involve quantitative and qualitative evaluations by rating
agencies of a companys financial condition and operating performance. Generally, rating agencies
base their ratings upon information furnished to them by the insurer and upon their own
investigations, studies and assumptions. Ratings are based upon factors of concern to
policyholders, agents and intermediaries and are not directed toward the protection of investors
and are not recommendations to buy, sell or hold securities.
In addition to the financial strength ratings, rating agencies use an outlook statement to
indicate a medium or long term trend which, if continued, may lead to a rating change. A positive
outlook indicates a rating may be raised and a negative outlook indicates a rating may be lowered.
A stable outlook is assigned when ratings are not likely to be changed. Outlooks should not be
confused with expected stability of the issuers financial or economic performance. A rating may
have a stable outlook to indicate that the rating is not expected to change, but a stable
outlook does not preclude a rating agency from changing a rating at any time without notice.
Moodys ratings currently range from Aaa (Exceptional) to C (Poor). Within Moodys investment
grade categories, Aaa (Exceptional) and Aa (Excellent) are the highest, followed by A (Good)
and Baa (Good). The first two speculative grade categories are Ba (questionable) and B
(poor). Publications of Moodys indicate that Moodys assigns a Ba1 rating to companies that have a
moderate (and thereby not well safeguarded) ability to meet their ongoing obligations to
policyholders.
Fitch ratings currently range from AAA (reliable and stable) to D (defaulted on obligations and
will generally default on most or all obligations). Within Fitchs investment grade categories,
AAA (reliable and stable) and AA (reliable and stable) are the highest, followed by A
(economic situation can affect financial situation) and BBB (satisfactory). The first two
non-investment grade categories are BB (financial situation prone to changes) and B (financial
situation noticeably changes). Fitch also uses intermediate +/- modifiers for each category
between AA and CCC. Accordingly, BBB+ is a higher investment grade than a BBB which in turn is
a higher investment grade than a BBB-. Publications of Fitch indicate that Fitch assigns ratings
according to strength of a company and a BBB rating is qualified as satisfactory on its scale.
A.M. Best Company ratings currently range from A++ (Superior) to F (In Liquidation), and
include 16 separate ratings categories. Within these categories, A++ (Superior) and A+
(Superior) are the highest, followed by A (Excellent) and A- (Excellent) then followed by B++
(Good) and B+ (Good). Publications of A.M. Best Company indicate A.M. Best Company assigns a B++
rating to companies that have a good ability to meet their ongoing obligations to policyholders.
A.M. Best Company, Fitch and Moodys review their ratings of insurance companies from time to time.
There can be no assurance that any particular rating will continue for any given period of time or
that it will not be changed or withdrawn entirely if, in their
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judgment, circumstances so warrant.
While the degree to which ratings adjustments will affect sales and persistency is unknown, we
believe if F&G Holdings ratings were to be negatively adjusted for any reason, it could experience
a material decline in the sales of its products and the persistency of its existing business. See
Item 1A. Risk Factors Risks Related to F&G Holdings Business F&G Holdings operates in a
highly competitive industry, which could limit its ability to gain or maintain its position in the
industry and could materially adversely affect F&G Holdings business, financial condition and
results of operations; Item 1A. Risk Factors Risks Related to F&G Holdings Business A
financial strength ratings downgrade or other negative action by a ratings organization could
adversely affect F&G Holdings financial condition and results of operations; and Item 1A. Risk
Factors Risks Related to F&G Holdings Business The amount of statutory capital that F&G
Holdings insurance subsidiaries have and the amount of statutory capital that they must hold to
maintain its financial strength and credit ratings and meet other requirements can vary
significantly from time to time and is sensitive to a number of factors outside of F&G Holdings
control.
Risk Management
Risk management is a critical part of F&G Holdings business. F&G Holdings seeks to assess risk to
its business through a formalized process involving (i) identifying short-term and long-term
strategic and operational objectives, (ii) utilizing risk identification tools to examine events
that may prevent F&G Holdings from achieving goals, (iii) assigning risk identification and
mitigation responsibilities to individual team members within functional groups, (iv) analyzing the
potential qualitative and quantitative impact of individual risks, (v) evaluating risks against
risk tolerance levels to determine which risks should be mitigated, (vi) mitigating risks by
appropriate actions and (vii) identifying, documenting and communicating key business risks in a
timely fashion.
The responsibility for monitoring, evaluating and responding to risk is allocated first to F&G
Holdings management and employees, second to those occupying specialist functions, such as legal
compliance and risk teams, and third to those occupying independent functions, such as internal and
external audits and the audit committee of the board of directors.
Reinsurance
F&G Holdings, through its subsidiary FGL Insurance, both cedes reinsurance to other insurance
companies and assumes reinsurance from other insurance companies. F&G Holdings uses reinsurance
both to diversify its risks and to manage loss exposures. FGL Insurance seeks reinsurance coverage
in order to limit its exposure to mortality losses and enhance capital management. The use of
reinsurance permits F&G Holdings to write policies in amounts larger than the risk it is willing to
retain, and also to write a larger volume of new business. The portion of risks exceeding the
insurers retention limit is reinsured with other insurers.
In instances where FGL Insurance is the ceding company, it pays a premium to the other company (the
reinsurer) in exchange for the reinsurer assuming a portion of FGL Insurances liabilities under
the policies it has issued. Use of reinsurance does not discharge the liability of FGL Insurance as
the ceding company because FGL Insurance remains directly liable to its policyholders and is
required to pay the full amount of its policy obligations in the event that its reinsurers fail to
satisfy their obligations. FGL Insurance collects reinsurance from its reinsurers when FGL
Insurance pays claims on policies that are reinsured. In instances where FGL Insurance assumes
reinsurance from another insurance company, it accepts, in exchange for a reinsurance premium, a
portion of the liabilities of the other insurance company under the policies that the ceding
company has issued to its policyholders.
Ceding Company
FGL Insurance is provided reinsurance as the ceding company by accredited or licensed
reinsurers and unaccredited or unlicensed reinsurers. See the section entitled Regulation
Credit for Reinsurance Regulation below.
Reinsurance
Provided by Unaccredited or Unlicensed Reinsurers. As of
June 30, 2011, the total
reserves ceded by FGL Insurance to unauthorized reinsurers was ceded
to OM Ireland and Raven Re and totaled
approximately $1,183.7 million.
Reinsurance
Provided by Accredited or Licensed Reinsurers. As of June 30, 2011, the total
reserves ceded by FGL Insurance to licensed or accredited affiliate reinsurers was approximately
$1,554.4 million.
Following the consummation of the Fidelity & Guaranty Acquisition, OM Ireland is no longer an
affiliate of FGL Insurance and the life insurance policies previously ceded to OM Ireland under
certain reinsurance agreements were recaptured by FGL Insurance on
April 7, 2011. The CARVM Treaty, under which OM Ireland reinsures certain annuity liabilities from
FGL Insurance, currently remains in effect. On January 26, 2011, Harbinger F&G entered into the
Commitment Agreement with Wilton Re. Upon the
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completion of the reinsurance of the Raven Block and
the
Camden Block by Wilton Re, substantially all of FGL Insurances in-force life insurance
business issued prior to April 1, 2010 will have been reinsured with third party reinsurers.
Reinsurer
FGL Insurance provides reinsurance as the reinsurer to four non-affiliate insurance companies. As
of July 3, 2011, FGL Insurance was the reinsurer of $201.2 million total reserves assumed under
policies issued by non-affiliate insurers.
Employees
As of
July 3, 2011, F&G Holdings had 143 employees. F&G Holdings believes that it has a good
relationship with its employees.
Litigation
There are no material legal proceedings, other than ordinary routine litigation incidental to the
business of F&G Holdings and its subsidiaries, to which F&G Holdings or any of its subsidiaries is
a party or of which any of their properties is subject.
Regulation
Overview
FGL Insurance and FGL NY Insurance are subject to comprehensive regulation and supervision in their
respective domiciles, Maryland and New York, and in each state in which they do business. FGL
Insurance does business throughout the United States, except for New York. FGL NY Insurance does
business only in New York. FGL Insurances principal insurance regulatory authority is the Maryland
Insurance Administration. State insurance departments throughout the United States also monitor FGL
Insurances insurance operations as a licensed insurer. The New York Insurance Department regulates
the operations of FGL NY Insurance, which is domiciled and licensed in New York. The Vermont
Department of Banking, Insurance, Securities & Health Administration regulates the operations of
the Vermont Captive that was formed in connection with the Reserve Facility. The purpose of these
regulations is primarily to protect policyholders and beneficiaries and not general creditors of
those insurers or creditors of HGI. Many of the laws and regulations to which FGL Insurance and FGL
NY Insurance are subject are regularly re-examined, and existing or future laws and regulations may
become more restrictive or otherwise adversely affect their operations.
Generally, insurance products underwritten by FGL Insurance and FGL NY Insurance must be approved
by the insurance regulators in each state in which they are sold. Those products are also
substantially affected by federal and state tax laws. For example, changes in tax law could reduce
or eliminate the tax-deferred accumulation of earnings on the deposits paid by the holders of
annuities and life insurance products, which could make such products less attractive to potential
purchasers. A shift away from life insurance and annuity products could reduce FGL Insurances and
FGL NY Insurances income from the sale of such products, as well as the assets upon which FGL
Insurance and FGL NY Insurance earn investment income. In addition, insurance products may also be
subject to ERISA.
State insurance authorities have broad administrative powers over FGL Insurance and FGL NY
Insurance with respect to all aspects of the insurance business including:
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licensing to transact business; |
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licensing agents; |
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prescribing which assets and liabilities are to be considered in determining
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regulating premium rates for certain insurance products; |
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approving policy forms and certain related materials; |
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regulating unfair trade and claims practices; |
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establishing reserve requirements and solvency standards; |
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regulating the availability of reinsurance or other substitute financing solutions,
the terms thereof and the ability of an insurer to take credit on its financial
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fixing maximum interest rates on life insurance policy loans and minimum accumulation
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regulating the type, amounts and valuations of investments permitted and other
matters. |
Financial Regulation
State insurance laws and regulations require FGL Insurance and FGL NY Insurance to file reports,
including financial statements, with state insurance departments in each state in which they do
business, and their operations and accounts are subject to examination by those departments at any
time. FGL Insurance and FGL NY Insurance prepare statutory financial statements in accordance with
accounting practices and procedures prescribed or permitted by these departments.
NAIC has approved a series of statutory accounting principles that have been adopted, in some cases
with certain modifications, by all state insurance departments. These statutory principles are
subject to ongoing change and modification. For instance, the NAIC adopted, effective with the
annual reporting period ending December 31, 2010, revisions to the Annual Financial Reporting Model
Regulation (or the Model Audit Rule) related to auditor independence, corporate governance and
internal control over financial reporting. These revisions require that insurance companies, such
as FGL Insurance and FGL NY Insurance, file reports with state insurance departments regarding
their assessments of internal control over financial reporting. The reports filed by FGL Insurance
and FGL NY Insurance with state insurance departments did not identify any material weakness over
financial reporting. Moreover, compliance with any particular regulators interpretation of a legal
or accounting issue may not result in compliance with another regulators interpretation of the
same issue, particularly when compliance is judged in hindsight. Any particular regulators
interpretation of a legal or accounting issue may change over time to FGL Insurances and/or FGL NY
Insurances detriment, or changes to the overall legal or market environment, even absent any
change of interpretation by a particular regulator, may cause FGL Insurance and FGL NY Insurance to
change their views regarding the actions they need to take from a legal risk management
perspective, which could necessitate changes to FGL Insurances and/or FGL NY Insurances practices
that may, in some cases, limit their ability to grow and improve profitability.
State insurance departments conduct periodic examinations of the books and records, financial
reporting, policy filings, market conduct and business practices of insurance companies domiciled
in their states, generally once every three to five years. Examinations are generally carried out
in cooperation with the insurance departments of other states under guidelines promulgated by the
NAIC. State insurance departments also have the authority to conduct examinations of
non-domiciliary insurers that are licensed in their states. The Maryland Insurance Administration
completed a routine financial examination of FGL Insurance for the three-year period ended December
31, 2009, and found no material deficiencies or proposed any adjustments to the financial
statements as filed. The New York Insurance Department is currently conducting a routine financial
examination of FGL NY Insurance for the three year period ended December 31, 2010.
Dividend and Other Distribution Payment Limitations
The Maryland Insurance Code and the New York Insurance Law regulate the amount of dividends that
may be paid in any year by FGL Insurance and FGL NY Insurance, respectively. Each year FGL
Insurance and FGL NY Insurance may pay a certain amount of dividends or other distributions without
being required to obtain the prior consent of the Maryland Insurance Administration or the NY
Insurance Department, respectively. However, in order to pay any dividends or distributions
(including the payment of any dividends or distributions for which prior written consent is not
required), FGL Insurance and FGL NY Insurance must provide advance written notice to the Maryland
Insurance Administration or the NY Insurance Department, respectively. Upon receipt of such notice,
the Maryland Insurance Administration or the NY Insurance Department may impose restrictions or
prohibit the payment of such dividends or other distributions based on their assessment of various
factors, including the statutory surplus levels and risk-based capital (RBC) ratios of FGL
Insurance and FGL NY Insurance, respectively.
Without first obtaining the prior written approval of the Maryland Insurance Administration, FGL
Insurance may not pay dividends or make other distributions, if such payments, together with all
other such payments within the preceding twelve months, exceed the lesser of (i) 10% of FGL
Insurances statutory surplus as regards policyholders as of December 31 of the preceding year; or
(ii) the net
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gain from operations of FGL Insurance (excluding realized capital gains for the
12-month period ending December 31 of the preceding year and pro rata distributions made on any
class of FGL Insurances own securities). In addition, dividends may be paid only out of statutory
surplus. FGL Insurances statutory net gain from operations as of December 31, 2010 was $295.1
million and its statutory surplus as of December 31, 2010 was $902.1 million. On December 20, 2010,
FGL Insurance paid a dividend to OM Group in the amount of $59 million with respect to its 2009
results. Based on its 2010 fiscal year results, FGL Insurance may be able to declare an ordinary
dividend up to $31.2 million through December 20, 2011 (taking into account the December 20, 2010
dividend payment of $59 million). 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 ($90.2 million) less any dividends paid in the previous twelve months. For example, if
the company pays a dividend of $31.2 million on or before December 20, 2011, it may declare an
additional dividend of $59 million between December 21, 2011 and December 31, 2011. The foregoing
discussion of dividends that may be paid by FGL Insurance is included for illustrative purposes
only. Any payment of dividends by FGL Insurance is subject to the regulatory restrictions described
above and the approval of such payment by the board of directors of FGL Insurance, which must
consider various factors, including general economic and business conditions, tax considerations,
FGL Insurances strategic plans, financial results and condition, FGL Insurances expansion plans,
any contractual, legal or regulatory restrictions on the payment of dividends, and such other
factors the board of directors of FGL Insurance considers relevant.
Without first obtaining the prior written approval of the NY Insurance Department, FGL NY Insurance
may not pay dividends and make other distributions, if such payments, together with all other such
payments within the preceding twelve months, exceed the lesser of (i) 10% percent of its statutory
surplus to policyholders as of the immediately preceding calendar year; or (ii) its net gain from
operations for the immediately preceding calendar year, not including realized capital gains. In
addition, dividends may be paid only out of earned statutory surplus. FGL NY Insurances statutory
net gain from operations as of December 31, 2010 was $3.6 million and its statutory capital and
surplus were $41.9 million. FGL NY Insurance did not declare or pay any dividends in its fiscal
year 2010.
Surplus and Capital
FGL Insurance and FGL NY Insurance are subject to the supervision of the regulators in which they
are licensed to transact business. Regulators have discretionary authority in connection with the
continuing licensing of these entities to limit or prohibit sales to policyholders if, in their
judgment, the regulators determine that such entities have not maintained the minimum surplus or
capital or that the further transaction of business will be hazardous to policyholders.
Risk-Based Capital
In order to enhance the regulation of insurers solvency, the NAIC adopted a model law to implement
RBC requirements for life, health and property and casualty insurance companies. All states have
adopted the NAICs model law or a substantially similar law. 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, (iv) market risk and (v)
business risk. In general, RBC is calculated by applying factors to various asset, premium, claim,
expense and reserve items, taking into account the risk characteristics of the insurer. Within a
given risk category, these factors are higher for those items with greater underlying risk and
lower for items with lower underlying risk. The RBC formula is used as an early warning regulatory
tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory
action, and not as a means to rank insurers generally. Insurers that have less statutory capital
than the RBC calculation requires are considered to have inadequate capital and are subject to
varying degrees of regulatory action depending upon the level of capital inadequacy. As of the most
recent annual statutory financial statement filled with insurance regulators on February 28, 2011,
the RBC ratios for each of FGL Insurance and FGL NY Insurance each exceeded the minimum RBC
requirements.
Insurance Regulatory Information System Tests
The NAIC has developed a set of financial relationships or tests known as the Insurance Regulatory
Information System (IRIS) to assist state regulators in monitoring the financial condition of
U.S. insurance companies and identifying companies that require special attention or action by
insurance regulatory authorities. Insurance companies generally submit data annually to the NAIC,
which in turn analyzes the data using prescribed financial data ratios, each with defined usual
ranges. Generally, regulators will begin to
investigate or monitor an insurance company if its ratios fall outside the usual ranges for four or
more of the ratios. If an insurance company has insufficient capital, regulators may act to reduce
the amount of insurance it can issue. Neither FGL Insurance nor FGL NY Insurance is currently
subject to regulatory restrictions based on these ratios.
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Insurance Reserves
State insurance laws require insurers to analyze the adequacy of reserves annually. The respective
appointed independent actuaries for FGL Insurance and FGL NY Insurance must each submit an opinion
that their respective reserves, when considered in light of the respective assets FGL Insurance and
FGL NY Insurance hold with respect to those reserves, make adequate provision for the contractual
obligations and related expenses of FGL Insurance and FGL NY Insurance. FGL Insurance and FGL NY
Insurance have filed all of the required opinions with the insurance departments in the states in
which they do business.
Credit for Reinsurance Regulation
States regulate the extent to which insurers are permitted to take credit on their financial
statements for the financial obligations that the insurers cede to reinsurers. Where an insurer
cedes obligations to a reinsurer which is neither licensed nor accredited by the state insurance
department, the ceding insurer is not permitted to take such financial statement credit unless the
unlicensed or unaccredited reinsurer secures the liabilities it will owe under the reinsurance
contract. Under the laws regulating credit for reinsurance, the permissible means of securing such
liabilities are (i) the establishment of a trust account by the reinsurer in a qualified U.S.
financial institution, such as a member of the Federal Reserve, with the ceding insurer as the
exclusive beneficiary of such trust account with the unconditional right to demand, without notice
to the reinsurer, that the trustee pay over to it the assets in the trust account equal to the
liabilities owed by the reinsurer; (ii) the posting of an unconditional and irrevocable letter of
credit by a qualified U.S. financial institution in favor of the ceding company allowing the ceding
company to draw upon the letter of credit up to the amount of the unpaid liabilities of the
reinsurer; and (iii) a funds withheld arrangement by which the ceding company withholds transfer
to the reinsurer of the reserves which support the liabilities to be owed by the reinsurer, with
the ceding insurer retaining title to and exclusive control over such reserves. Both FGL Insurance
and FGL NY Insurance are subject to such credit for reinsurance rules in Maryland and New York,
respectively, insofar as they enter into any reinsurance contracts with reinsurers which are
neither licensed nor accredited in Maryland and New York.
Insurance Holding Company Regulation
As the indirect parent companies of FGL Insurance and FGL NY Insurance, HGI and Harbinger F&G are
subject to the insurance holding company laws in Maryland and New York. These laws generally
require each insurance company directly or indirectly owned by the holding company to register with
the insurance department in the insurance companys state of domicile and to furnish annually
financial and other information about the operations of companies within the holding company
system. Generally, all transactions affecting the insurers in the holding company system must be
fair and reasonable and, if material, require prior notice and approval or non-disapproval by its
domiciliary insurance regulator.
Most states, including Maryland and New York, have insurance laws that require regulatory approval
of a direct or indirect change of control of an insurer or an insurers holding company. Such laws
prevent any person from acquiring control, directly or indirectly, of HGI, Harbinger F&G, FGL
Insurance or FGL NY Insurance unless that person has filed a statement with specified information
with the insurance regulators and has obtained their prior approval. Under most states statutes,
including those of Maryland and New York, acquiring 10% or more of the voting stock of an insurance
company or its parent company is presumptively considered a change of control, although such
presumption may be rebutted. Accordingly, any person who acquires 10% or more of the voting
securities of HGI, Harbinger F&G, FGL Insurance or FGL NY Insurance without the prior approval of
the insurance regulators of Maryland and New York will be in violation of those states laws and
may be subject to injunctive action requiring the disposition or seizure of those securities by the
relevant insurance regulator or prohibiting the voting of those securities and to other actions
determined by the relevant insurance regulator.
In connection with the Fidelity & Guaranty Acquisition, Harbinger F&G made filings with the
Maryland Insurance Administration and the New York Insurance Department for approval to acquire
control over FGL NY Insurance. On March 31, 2011, the Maryland Insurance Administration approved
Harbinger F&Gs application to acquire control over FGL Insurance. On April 1, 2011, the New York
Insurance Department approved Harbinger F&Gs application to acquire control over FGL NY Insurance.
Insurance Guaranty Association Assessments
Each state has insurance guaranty association laws under which member insurers doing business in
the state may be assessed by state insurance guaranty associations for certain obligations of
insolvent or rehabilitated insurance companies to policyholders and claimants. Typically, states
assess each member insurer in an amount related to the member insurers proportionate share of the
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business written by all member insurers in the state. Although no prediction can be made as to the
amount and timing of any future assessments under these laws, FGL Insurance and FGL NY Insurance
have established reserves that they believe are adequate for assessments relating to insurance
companies that are currently subject to insolvency proceedings.
Market Conduct Regulation
State insurance laws and regulations include numerous provisions governing the marketplace
activities of insurers, including provisions governing the form and content of disclosure to
consumers, illustrations, advertising, sales and complaint process practices. State regulatory
authorities generally enforce these provisions through periodic market conduct examinations. In
addition, FGL Insurance and FGL NY Insurance must file, and in many jurisdictions and for some
lines of business obtain regulatory approval for, rates and forms relating to the insurance written
in the jurisdictions in which they operate. FGL Insurance is currently the subject of nine ongoing
market conduct examinations in various states, including a review by the New York State Insurance
Department related to the possible unauthorized sale of insurance by FGL Insurance within the State
of New York. Market conduct examinations can result in monetary fines or remediation and generally
require FGL Insurance to devote significant resources to the management of such examinations. FGL
Insurance does not believe that any of the current market conduct examinations it is subject to
will result in any fines or remediation orders that will be material to its business.
Regulation of Investments
FGL Insurance and FGL NY Insurance are subject to state laws and regulations that require
diversification of their investment portfolios and limit the amount of investments in certain asset
categories, such as below investment grade fixed income securities, equity real estate, other
equity investments, and derivatives. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of
measuring surplus and, in some instances, would require divestiture of such non-qualifying
investments. We believe that the investment portfolios of FGL Insurance and FGL NY Insurance as of
July 3, 2011 complied in all material respects with such regulations.
Privacy Regulation
F&G Holdings operations are subject to certain federal and state laws and regulations that require
financial institutions and other businesses to protect the security and confidentiality of personal
information, including health-related and customer information, and to notify customers and other
individuals about their policies and practices relating to their collection and disclosure of
health-related and customer information and their practices relating to protecting the security and
confidentiality of such information. These laws and regulations require notice to affected
individuals, law enforcement agencies, regulators and others if there is a breach of the security
of certain personal information, including social security numbers, and require holders of certain
personal information to protect the security of the data. F&G Holdings operations are also subject
to certain federal regulations that require financial institutions and creditors to implement
effective programs to detect, prevent and mitigate identity theft. In addition, F&G Holdings
ability to make telemarketing calls and to send unsolicited e-mail or fax messages to consumers and
customers or uses of certain personal information, including consumer report information, is
regulated. Federal and state governments and regulatory bodies may be expected to consider
additional or more detailed regulation regarding these subjects and the privacy and security of
personal information.
Fixed Indexed Annuities
In recent years, the SEC had questioned whether fixed indexed annuities, such as those sold by FGL
Insurance and FGL NY Insurance, should be treated as securities under the federal securities laws
rather than as insurance products exempted from such laws. Treatment of these products as
securities would require additional registration and licensing of these products and the agents
selling them, as well as cause FGL Insurance and FGL NY Insurance to seek additional marketing
relationships for these products. On December 17, 2008, the SEC voted to approve Rule 151A under
the Securities Act of 1933, as amended (Rule 151A), and apply federal securities oversight to
fixed index annuities issued on or after January 12, 2011. On July 12, 2010, however, the District
of Columbia Circuit Court of Appeals vacated Rule 151A. In addition, under the Dodd-Frank Act,
annuities that meet specific requirements, including requirements relating to certain state
suitability rules, are specifically exempted from being treated as securities by the SEC. FGL
Insurance and FGL NY Insurance expect that the types of fixed indexed annuities they sell will meet
these
requirements and therefore are exempt from being treated as securities by the SEC. It is possible
that state insurance laws and regulations will be amended to impose further requirements on fixed
indexed annuities.
135
The Dodd-Frank Act
The Dodd-Frank Act makes sweeping changes to the regulation of financial services entities,
products and markets. Certain provisions of the Dodd-Frank Act are or may become applicable to F&G
Holdings, its competitors or those entities with which F&G Holdings does business. These changes
include the establishment of federal regulatory authority over derivatives, the establishment of
consolidated federal regulation and resolution authority over systemically important financial
services firms, the establishment of the Federal Insurance Office, changes to the regulation of
broker dealers and investment advisors, the implementation of an exemption of FIAs from SEC
regulation if certain suitability practices are implemented as noted above, changes to the
regulation of reinsurance, changes to regulations affecting the rights of shareholders, the
imposition of additional regulation over credit rating agencies, and the imposition of
concentration limits on financial institutions that restrict the amount of credit that may be
extended to a single person or entity. Numerous provisions of the Dodd-Frank Act require the
adoption of implementing rules and/or regulations. In addition, the Dodd-Frank Act mandates
multiple studies, which could result in additional legislation or regulation applicable to the
insurance industry, F&G Holdings, its competitors or the entities with which F&G Holdings does
business. Legislative or regulatory requirements imposed by or promulgated in connection with the
Dodd-Frank Act may impact F&G Holdings in many ways, including but not limited to: placing F&G
Holdings at a competitive disadvantage relative to its competition or other financial services
entities, changing the competitive landscape of the financial services sector and/or the insurance
industry, making it more expensive for F&G Holdings to conduct its business, requiring the
reallocation of significant company resources to government affairs, legal and compliance-related
activities, or otherwise have a material adverse effect on the overall business climate as well as
F&G Holdings financial condition and results of operations.
Until various studies are completed and final regulations are promulgated pursuant to the
Dodd-Frank Act, the full impact of the Dodd-Frank Act on investments, investment activities and
insurance and annuity products of FGL Insurance and FGL NY Insurance remain unclear.
Front Street
Front Street is a Bermuda company that was formed in March 2010 to act as a long-term reinsurer and
to provide reinsurance to the specialty insurance sectors of fixed, deferred and payout annuities.
Front Street intends to enter into long-term reinsurance transactions with insurance companies,
existing reinsurers, and pension arrangements, and may also pursue acquisitions in the same sector.
To date, Front Street has not entered into any reinsurance contracts, and may not do so until it is
capitalized according to its business plan, which was approved by the Bermuda Monetary Authority in
March 2010.
Front Street intends to focus on life reinsurance products including:
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reinsurance solutions that improve the financial position of Front Streets clients
by increasing their capital base and reducing leverage ratios through the assumption of
reserves; and |
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providing clients with exit strategies for discontinued lines, closed blocks in
run-off, or lines not providing a good fit for a companys growth strategies. With Front
Streets ability to manage these contracts, its clients will be able to concentrate
their efforts and resources on core strategies. |
As contemplated by the terms of the F&G Stock Purchase Agreement, on May 19, 2011, the Special
Committee of the Board of the Company, comprised of independent directors under the rules of the
NYSE, unanimously recommended to the Board for approval (i) the Reinsurance Agreement to be entered
into by Front Street and FGL Insurance, pursuant to which Front Street would reinsure up to $3
billion of insurance obligations under annuity contracts of FGL and (ii) the Investment Management
Agreement to be entered into by Front Street and HCP, an affiliate of the Harbinger Parties,
pursuant to which HCP would be appointed as the investment manager of up to $1 billion of assets
securing Front Streets reinsurance obligations under the Reinsurance Agreement, which assets will
be deposited in a reinsurance trust account for the benefit of FGL Insurance pursuant to the Trust
Agreement. On May 19, 2011, the Board approved the Front Street Reinsurance Transaction.
The Reinsurance Agreement and the Trust Agreement and the transactions contemplated thereby are
subject to, and may not be entered into or consummated without, the approval of the Maryland
Insurance Administration. The F&G Stock Purchase Agreement
provides for up to a $50 million post-closing reduction in purchase price for the Fidelity &
Guaranty Acquisition if, among other things, the Front Street reinsurance transaction is not
approved by the Maryland Insurance Administration or is approved subject to certain restrictions or
conditions, including if HCP is not allowed to be appointed as the investment manager for $1
billion of assets
136
securing Front Streets reinsurance obligations under the Reinsurance Agreement.
See The Fidelity & Guaranty Acquisition The Front Street Reinsurance Transaction.
Item 6. Exhibits
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Exhibit No. |
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Description of Exhibits |
2.1
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Agreement and Plan of Merger, dated as of
November 4, 2009, by and between, Zapata
Corporation (Zapata), a Nevada corporation,
and Harbinger Group Inc., a Delaware corporation
and wholly-owned subsidiary of Zapata
(Incorporated herein by reference to Exhibit 2.1
to the Companys Current Report on Form 8-K
filed December 28, 2009 (File No. 1-4219)). |
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2.2
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Contribution and Exchange Agreement, dated as of
September 10, 2010, by and among Harbinger Group
Inc., Harbinger Capital Partners Master Fund I,
Ltd., Harbinger Capital Partners Special
Situations Fund, L.P. and Global Opportunities
Breakaway Ltd. (Incorporated herein by reference
to Exhibit 2.1 to the Companys Current Report
on Form 8-K filed September 14, 2010 (File No.
1-4219)). |
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2.3
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Amendment, dated as of November 5, 2010, to the
Contribution and Exchange Agreement, dated as of
September 10, 2010, by and among Harbinger Group
Inc., Harbinger Capital Partners Master Fund I,
Ltd., Harbinger Capital Special Situations Fund,
L.P. and Global Opportunities Breakaway Ltd
(Incorporated herein by reference to Exhibit
10.3 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2010
filed November 9, 2010 (File No. 1-4219)). |
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2.4
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Transfer Agreement, dated as of March 7, 2011,
between Harbinger Group Inc. and Harbinger
Capital Partners Master Fund I, Ltd.
(Incorporated herein by reference to Exhibit 2.1
to the Companys Current Report on Form 8-K
filed March 10, 2011 (File No. 1-4219)). |
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2.5
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First Amended and Restated Stock Purchase
Agreement, dated as of February 17, 2011,
between Harbinger OM, LLC and OM Group (UK)
Limited (Incorporated herein by reference to
Exhibit 2.2 to the Companys Current Report on
Form 8-K filed March 10, 2011 (File No.
1-4219)). |
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2.6
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Letter Agreement, dated April 6, 2011, between
OM Group (UK) Limited and Harbinger OM, LLC
(Incorporated herein by reference to Exhibit 2.2
to the Companys Current Report on Form 8-K
filed April 11, 2011 (File No. 1-4219)). |
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2.7
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Letter Agreement, dated April 6, 2011, from Old
Mutual PLC and OM Group (UK) Limited to
Harbinger OM, LLC (Incorporated herein by
reference to Exhibit 2.3 to the Companys
Current Report on Form 8-K filed April 11, 2011
(File No. 1-4219)). |
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3.1
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Certificate of Incorporation of Harbinger Group
Inc. (Incorporated herein by reference to
Exhibit 3.1 to the Companys Current Report on
Form 8-K filed December 28, 2009 (File No.
1-4219)). |
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3.2
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Bylaws of Harbinger Group Inc. (Incorporated
herein by reference to Exhibit 3.2 to the
Companys Current Report on Form 8-K filed
December 28, 2009 (File No. 1-4219)). |
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3.3
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Certificate of Designation of Series A
Participating Convertible Preferred Stock of
Harbinger Group Inc., dated as of May 12, 2011
(incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed May
13, 2011 (File No. 1-4219)). |
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3.4*
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Certificate of Amendment of
Certificate of Designation of Series A Participating Convertible
Preferred Stock Of Harbinger Group Inc., dated as of August 5, 2011. |
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3.5*
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Certificate of Designation of Series A-2 Participating Convertible Preferred Stock Of Harbinger
Group Inc., dated as of August 5, 2011.
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4.1
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Indenture governing the 10.625% Senior Secured
Noted due 2015, dates as of November 15, 2010,
by and among Harbinger Group Inc. and Wells
Fargo, National Association, as trustee
(Incorporated herein by reference to Exhibit 4.1
to the Companys Registration Statement on Form
S-4 filed January 28, 2011 (File No.
333-171924)). |
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4.2
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Supplemental Indenture, dated June 22, 2011, to
the indenture governing the Companys 10.625%
Senior Secured Notes due 2015, dated November
15, 2010, by and between the Company and Wells
Fargo Bank, National Association, a national
banking association, as trustee. (Incorporated
herein by reference to Exhibit No. 4.1 to the
Companys Current Report on form 8-K filed June
23, 2011 (File No. 1-4219)). |
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4.3
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Second Supplemental Indenture, dated June 28,
2011, to the indenture governing the Companys
10.625% Senior Secured Notes due 2015, dated
November 15, 2010, by and between the Company
and Wells Fargo Bank, National Association, a
national banking association, as trustee.
(Incorporated herein by reference to Exhibit No.
4.1 to the Companys Current Report on form 8-K
filed June 28, 2011 (File No. 1-4219)). |
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4.4
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Form of Exchange Note (Included as Exhibit A to
Exhibit 4.1 to the Companys Registration
Statement on Form S-4 filed January 28, 2011
(File No. 333-171924)). |
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4.5
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Security Agreement, dated as of January 7, 2011,
between Harbinger Group Inc. and Wells Fargo
Bank, National Association (Incorporated herein
by reference to Exhibit 4.4 to the Companys
Registration Statement on Form S-4 filed January
28, 2011 (File No. 333-171924)). |
137
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Exhibit No. |
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Description of Exhibits |
4.6
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Collateral Trust Agreement, dated as of January
7, 2011, between Harbinger Group Inc. and Wells
Fargo Bank,
National Association (Incorporated
herein by reference to Exhibit 4.5 to the
Companys Registration Statement on Form S-4
filed January 28, 2011 (File No. 333-171924)). |
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10.1
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Securities Purchase Agreement, dated May 12, 2011, by and among Harbinger Group
Inc., CF Turul LLC, Providence TMT Debt Opportunity Fund II, L.P., PECM Strategic Funding L.P., and
Wilton Re Holdings Limited (Incorporated herein by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K filed May 13, 2011 (File No. 1-4219)). |
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10.2*
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Securities Purchase Agreement, dated August 1, 2011, by and among Harbinger Group
Inc. and the purchasers of Series A-2 Participating Convertible Preferred Stock named therein. |
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10.3*
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First Amendment to Securities Purchase Agreement, dated August 4, 2011, by and
among Harbinger Group Inc. and the purchasers of Series A-2 Participating Convertible Preferred
Stock named therein. |
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10.4
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Registration Rights Agreement, dated as of May 12, 2011, by and among Harbinger Group
Inc. and the Holders party thereto (incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed May 13, 2011 (File No. 1-4219)). |
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10.5*
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Amendment and Joinder to Registration Rights Agreement, dated as of May 12, 2011, by
and among Harbinger Group Inc. and the Holders party thereto. |
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10.6
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Registration Rights Agreement, dated as of June 28, 2011, between HGI and the initial
purchaser named therein (Incorporated herein by reference to Exhibit No. 4.2 to the Companys
Current Report on Form 8-K filed June 28, 2011 (File No. 1-4219)). |
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31.1*
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Certification of CEO Pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2*
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Certification of CFO Pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1**
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Certification of CEO Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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32.2**
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Certification of CFO Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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101.INS
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XBRL Instance Document.*** |
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101.SCH
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XBRL Taxonomy Extension Schema.*** |
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase.*** |
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101.DEF
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XBRL Taxonomy Definition Linkbase. *** |
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101.LAB
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XBRL Taxonomy Extension Label Linkbase.*** |
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase.*** |
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Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The
registrant will furnish supplementally a copy of any omitted exhibit or schedule to the Securities
and Exchange Commission upon request. |
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Filed herewith |
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** |
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Furnished herewith |
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*** |
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To be filed by amendment |
138
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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HARBINGER GROUP INC.
(Registrant)
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Dated: August 12, 2011 |
By: |
/s/ FRANCIS T. McCARRON
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Executive Vice President and
Chief Financial Officer |
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(on behalf of the Registrant and
as Principal
Financial Officer) |
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139
exv3w4
Exhibit 3.4
EXECUTION COPY
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATION
OF SERIES A PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
HARBINGER GROUP INC.
The undersigned, Francis T. McCarron, Executive Vice President of Harbinger Group Inc., a
corporation organized and existing under the General Corporation Law of the State of Delaware (the
DGCL), DOES HEREBY CERTIFY:
FIRST. That resolutions of the Board of Directors of Harbinger Group Inc. have been duly
adopted, setting forth a proposed amendment of the Certificate of Designation of Series A
Participating Convertible Preferred Stock of Harbinger Group Inc. (the Series A Certificate of
Designation), declaring said amendment to be advisable and calling for a submission of said
amendment to the stockholders for consideration thereof. The resolutions setting forth the
proposed amendment are as follows:
RESOLVED, that SECTION 4(b) of the Series A Certificate of Designation is hereby amended and
restated in its entirety as follows:
(b) In addition to the voting rights provided for by SECTION 4(a) and any voting rights to
which the Holders may be entitled to under law:
(i) for so long as any Preferred Shares, shares of Series A-2 Preferred Stock, or shares of
Additional Permitted Preferred Stock are outstanding, the Company may not, directly or indirectly,
take any of the following actions (including by means of merger, consolidation, reorganization,
recapitalization or otherwise) without the prior written consent of the Majority Holders:
(A) amend the Certificate of Incorporation (excluding for this purpose this Certificate of
Designation) or the By-Laws of the Company (including by means of merger, consolidation,
reorganization, recapitalization or otherwise), in each case, in a manner adverse to the Holders;
(B) create or issue any (x) Senior Securities or (y) except as permitted under SECTION 9(b)
and otherwise by this Certificate of Designation, Parity Securities or Additional Permitted
Preferred Stock;
(C) incur, or permit any Subsidiary Guarantor to incur, any Debt (excluding any Debt incurred
to refinance the Senior Notes) not otherwise permitted by the terms of the Indenture;
(D) make, or permit any Subsidiary Guarantor to make, any Asset Sales not otherwise permitted
by the terms of the Indenture;
(E) make, or to the extent within the Companys control, permit any of its Subsidiaries to
make, any Restricted Payments not otherwise permitted by the terms of the Indenture;
(F) create a new Subsidiary of the Company not in existence on the Original Issue Date for the
primary purpose of issuing Equity Securities of such Subsidiary or incurring Debt the proceeds of
which will, directly or indirectly, be used to make dividends or other distributions or payments of
cash to holders of the Companys Capital Stock other than the Holders; provided, that for the
avoidance of doubt, the foregoing shall not prohibit dividends or other distributions to the
Company; or
(G) agree to do, directly or indirectly, any of the foregoing actions set forth in clauses (A)
through (F), unless such agreement expressly provides that the Companys obligation to undertake
any of the foregoing is subject to the prior approval of the Majority Holders; and
(ii) for so long as the Fortress Investor Group owns Preferred Shares equal to or greater than
50% of the Initial Preferred Share Amount, neither the Company nor, to the extent within the
Companys control, any of its Subsidiaries may, directly or indirectly, take any of the following
actions (including by means of merger, consolidation, reorganization, recapitalization or
otherwise) without the prior written consent of the Fortress Investor:
(A) create or issue any (x) Senior Securities or (y) except as permitted under SECTION 9(b)
and otherwise by this Certificate of Designation, Parity Securities or Additional Permitted
Preferred Stock;
(B) incur, or permit any Subsidiary Guarantor to incur, any Debt (excluding any Debt incurred
to refinance the Senior Notes) not otherwise permitted by the terms of the Indenture;
(C) make, or permit any Subsidiary Guarantor to make, any Asset Sales not otherwise permitted
by the terms of the Indenture;
(D) make, or to the extent within the Companys control, permit any of its Subsidiaries to
make, any Restricted Payments not otherwise permitted by the terms of the Indenture;
(E) acquire or, to the extent within the Companys control, permit any Subsidiary of the
Company to acquire, any limited partnership interest, general partnership interest, Equity
Securities, Debt or other instrument issued by a Harbinger Affiliate that is a private collective
investment vehicle;
(F) create a new Subsidiary of the Company not in existence on the Original Issue Date for the
primary purpose of issuing Equity Securities or incurring Debt the proceeds of which will, directly
or indirectly, be
used to make dividends or other distributions or payments of cash to holders of the Companys
Capital Stock other than the Holders; provided, that for the avoidance of doubt, the foregoing
shall not prohibit dividends or other distributions to the Company;
(G) effect any stock split or combination, reclassification or similar event with respect to
the Series A Preferred Stock; or
(H) agree to do, directly or indirectly, any of the foregoing actions set forth in clauses (A)
through (G), unless such agreement expressly provides that the Companys obligation to undertake
any of the foregoing is subject to the prior approval of the Fortress Investor for so long as the
Fortress Investor Group owns a number of Preferred Shares equal to or greater than 50% of the
Initial Preferred Share Amount; and
(iii) for so long as the Fortress Investor Group owns Preferred Shares equal to or greater
than 50% of the Initial Preferred Share Amount (whether held in the form of Preferred Shares or
Common Stock issued to the Fortress Investor Group upon the conversion of Preferred Shares),
neither the Company nor, to the extent within the Companys control, any of its Subsidiaries may,
directly or indirectly, take any of the following actions (including by means of merger,
consolidation, reorganization, recapitalization or otherwise) without the prior written consent of
the Fortress Investor:
(A) enter into any Related Party Transaction not otherwise permitted pursuant to the Existing
Indenture (including, for the avoidance of doubt, any Specified Related Party Transaction or any
Related Party Transaction excluded from the definition of Specified Related Party Transaction, in
each case to the extent any such transaction is not permitted by the Existing Indenture); provided,
that once the Market Capitalization/Liquidity Threshold is satisfied, the dollar thresholds in
Sections 4.13(a) and 4.13(b) of the Existing Indenture will be deemed for purposes of this SECTION
4(b)(iii)(A) to increase to any higher thresholds as set forth in the Indenture, as in effect from
time to time;
(B) enter into any Specified Related Party Transaction unless (x) such Specified Related Party
Transaction shall have been approved by a majority of the members of the Board who are
disinterested in the subject matter of such Specified Related Party Transaction (or, in the case
of contingent bonuses to officers, directors or employees, such contingent bonuses shall have been
approved by a committee of the Board comprised of independent directors) and (y) with respect to a
Specified Related Party Transaction having a value of $15,000,000 or more and which is an
Extraordinary Transaction for which a fairness opinion is customarily given by nationally
recognized investment
banking firms, a fairness opinion from a nationally recognized investment
banking firm has been obtained; or
(C) agree to do any of the foregoing actions set forth in clauses (A) and (B), unless such
agreement expressly provides that the Companys
obligation to undertake any of the foregoing is subject to the prior approval of the Fortress
Investor for so long as the Fortress Investor Group owns a number of Preferred Shares equal to or
greater than 50% of the Initial Preferred Share Amount (whether held in the form of Preferred
Shares or Common Stock issued to the Fortress Investor Group upon the conversion of Preferred
Shares); and
(iv) for so long as any Preferred Shares, shares of Series A-2 Preferred Stock, or shares of
Additional Permitted Preferred Stock are outstanding, neither the Company nor, to the extent within
the Companys control, any of its Subsidiaries may, directly or indirectly, take any of the
following actions (including by means of merger, consolidation, reorganization, recapitalization or
otherwise) without the prior written consent of each of the Holders:
(A) make any repurchase, redemption or other acquisition for value of Preferred Shares, shares
of Series A-2 Preferred Stock or shares of Additional Permitted Preferred Stock, unless such
redemption is made on the same terms and on a pro rata basis among all Holders (other than Holders
that are granted an equal opportunity to participate in such transaction but elect not to do so);
or
(B) agree to do, directly or indirectly, any of the foregoing actions set forth in clause (A),
unless such agreement expressly provides that the Companys obligation to undertake any of the
foregoing is subject to the prior approval of each of the Holders; and
(v) for so long as any Preferred Shares are outstanding, the Company may not, directly or
indirectly, take any of the following actions (including by means of merger, consolidation,
reorganization, recapitalization or otherwise) without the prior written consent of the Series A
Majority Holders:
(A) amend, repeal, alter or add, delete or otherwise change the powers, preferences, rights or
privileges of the Series A Preferred Stock;
(B) effect any stock split or combination, reclassification or similar event with respect to
the Series A Preferred Stock; or
(C) agree to do, directly or indirectly, any of the foregoing actions set forth in clauses (A)
and (B), unless such agreement expressly provides that the Companys obligation to undertake any of
the foregoing is subject to the prior approval of the Series A Majority Holders; and
(vi) for so long as any Preferred Shares are outstanding, neither the Company nor, to the
extent within the Companys control, any of its Subsidiaries may, directly or indirectly, take any
of the following actions (including by means of merger, consolidation, reorganization,
recapitalization or otherwise) without the prior written consent of each of the holders of
Preferred Shares:
(A) amend, repeal, alter or add, delete or otherwise change the powers, preferences, rights or
privileges of the Series A Preferred Stock set forth in the Specified Sections (including by means
of merger, consolidation, reorganization, recapitalization or otherwise) in a manner adverse to the
holders of Preferred Shares (whether by means of an amendment or other change to the Specified
Sections or by means of an amendment or other change to any definitions used in the Specified
Sections or any other terms of this Certificate of Designation affecting the Specified Sections);
or
(B) agree to do, directly or indirectly, any of the foregoing actions set forth in clause (A),
unless such agreement expressly provides that the Companys obligation to undertake any of the
foregoing is subject to the prior approval of each of the holders of Preferred Shares.
RESOLVED, that the second sentence of SECTION 5(b) of the Series A Certificate of Designation
is deleted in its entirety and replaced with the following: The Company may exercise its option
under this SECTION 5(b) by providing the Holders with a notice, which notice shall specify that the
Company is exercising the option contemplated by this SECTION 5(b), the Forced Conversion Trigger
Date and the Conversion Date on which the conversion shall occur (which Conversion Date shall be
not less than four (4) Business Days following the date such notice is provided to the Holders);
provided that, once delivered, such notice shall be irrevocable, unless the Company obtains the
written consent of (x) the Series A Majority Holders and (y) for so long as the Fortress Investor
Group owns a number of Preferred Shares equal to or greater than 50% of the Initial Preferred Share
Amount, the Fortress Investor.
RESOLVED, that the second sentence of SECTION 5(g)(v) of the Series A Certificate of
Designation is deleted in its entirety and replaced with the following: In the event that holders
of Common Stock have the opportunity to elect the form of consideration to be received in the
Transaction, the Company shall make adequate provision whereby the Holders shall have a reasonable
opportunity to determine the form of consideration into which all of the Preferred Shares, shares
of Series A-2 Preferred Stock and shares of Additional Permitted Preferred Stock, treated as a
single class, shall be convertible from and after the effective date of the Transaction.
RESOLVED, that the first paragraph of SECTION 9(b) of the Series A Certificate of Designation
is deleted in its entirety and replaced with the following: After the date hereof, the Company may
issue additional shares of
Series A Preferred Stock or Parity Securities provided that the
aggregate purchase price of all outstanding shares of Series A Preferred Stock and Parity
Securities may not, except to the extent set forth in the second sentence following this sentence,
exceed $400.0 million. For purposes hereof, the term Additional Permitted Preferred
Stock shall mean the $280 million of Series A Preferred Stock issued on the Original Issue
Date together with the next $120 million of Series A Preferred Stock, Series A-2 Preferred Stock or
other Parity Securities issued after the Original Issue Date. The Company shall not, on or after
the Original Issue Date, issue any (x) Parity Securities in excess of the Additional
Permitted Preferred Stock authorized by the first sentence of this SECTION 9(b) or (y) Senior
Securities unless one of the following conditions (the Incurrence Based Issuance Limits) is
satisfied (and, in the case of Senior Securities, subject to receipt of the required approval of
the Majority Holders and, if applicable, the Fortress Investor, as set forth under SECTIONS
4(b)(i)(B) and 4(b)(ii)(A)):
RESOLVED, that the third paragraph of SECTION 9(b)(ii) of the Series A Certificate of
Designation is deleted in its entirety and replaced with the following: For the avoidance of
doubt, no Series A Preferred Stock or Parity Securities shall be issuable or deemed issued pursuant
to the third sentence of this SECTION 9(b) unless and until the aggregate issue price of Series A
Preferred Stock issued on the Original Issue Date plus the aggregate issue price of all
subsequently issued Additional Permitted Preferred Stock issued or deemed issued pursuant to the
first sentence of this SECTION 9(b) equals $400 million.
RESOLVED, that references made in SECTION 11(d)(i) of the Series A Certificate of Designation
to Section 11(e)(ii) shall be replaced with references to Section 11(d)(ii).
RESOLVED, that references made in SECTION 11(d)(ii) of the Series A Certificate of Designation
to Section 11(e)(i) shall be replaced with references to Section 11(d)(i).
RESOLVED, that SECTION 10(i) of the Series A Certificate of Designation is deleted in its
entirety and replaced with the following: Change of Control shall have the meaning set
forth in the Existing Indenture; provided, however, that references to Permitted Holders therein
shall be deemed to refer to the Harbinger Affiliates, the Fortress Investor and their respective
Affiliates.
RESOLVED, that SECTION 10(rr) of the Series A Certificate of Designation is deleted in its
entirety and replaced with the following: Holders means the holders of outstanding
Preferred Shares, shares of Series A-2 Preferred Stock, and shares of Additional Permitted
Preferred Stock as they appear in the records of the Company.
RESOLVED, that SECTION 10(fff) of the Series A Certificate of Designation is deleted in its
entirety and replaced with the following: Majority Holders means Holders (other than the
Company, its employees, its Subsidiaries
or Harbinger Affiliates) owning more than 50% of the
Regular Liquidation Preference of the issued and outstanding Preferred Shares, shares of Series A-2
Preferred Stock and shares of Additional Permitted Preferred Stock, taken as a whole; provided
that, for purposes of such calculation, the Preferred Shares, shares of Series A-2 Preferred Stock
and shares of Additional Permitted Preferred Stock held by the Company, its employees, its
Subsidiaries or any Harbinger Affiliate shall be treated as not outstanding.
RESOLVED, that SECTION 10(qqq) of the Series A Certificate of Designation is deleted in its
entirety and replaced with the following: Preferred
Shares means the shares of Series A Preferred Stock, but shall exclude, for the
avoidance of doubt, shares of Series A-2 Preferred Stock.
RESOLVED, that SECTION 10(eeee) of the Series A Certificate of Designation is deleted in its
entirety and replaced with the following: Specified Sections means SECTION 1(b), SECTION
2, SECTION 3, SECTION 4(a), SECTION 4(b)(i), SECTION 4(b)(iv), SECTION 4(b)(v), SECTION 4(b)(vi),
SECTION 4(e), SECTION 5, SECTION 6, SECTION 9(e), SECTION 11(a), SECTION 11(b), SECTION 11(c),
SECTION 11(d), SECTION 11(f) or the definitions of Majority Holders or Series A Majority Holders.
RESOLVED, that SECTION 10 of the Series A Certificate of Designation is hereby amended to add
the following additional defined terms:
(ssss) Series A-2 Preferred Stock means the Series A-2 Participating Convertible
Preferred Stock of the Company, par value $0.01 per share.
(tttt) Series A Majority Holders means holders of Preferred Shares (other than the
Company, its employees, its Subsidiaries or Harbinger Affiliates) owning more than 50% of the
Regular Liquidation Preference of the issued and outstanding Preferred Shares; provided that, for
purposes of such calculation, the Preferred Shares held by the Company, its employees, its
Subsidiaries or any Harbinger Affiliate shall be treated as not outstanding.
SECOND. In lieu of a meeting and vote of the stockholders of Harbinger Group Inc., the
stockholders have consented in writing to said amendment in accordance with the provisions of
Section 228 of the DGCL.
THIRD. The aforesaid amendment was duly adopted in accordance with the applicable provisions
of Sections 242 and 228 of the DGCL.
IN WITNESS WHEREOF, said Harbinger Group Inc. has caused this Certificate of Amendment to be
executed by a duly authorized officer of Harbinger Group Inc. as of August 5, 2011.
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HARBINGER GROUP INC. |
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By:
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/s/ Francis T. McCarron
Name:
Francis T. McCarron |
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Title: Executive Vice President |
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& Chief Financial Officer |
exv3w5
Exhibit 3.5
Execution Version
CERTIFICATE OF DESIGNATION
OF SERIES A-2 PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
HARBINGER GROUP INC.
The undersigned, Francis T. McCarron, Executive Vice President of Harbinger Group Inc.
(including any successor in interest, the Company), a corporation organized and existing
under the General Corporation Law of the State of Delaware (the DGCL), does hereby
certify, in accordance with Sections 103 and 151 of the DGCL, that the following resolutions were
duly adopted by its Board of Directors (the Board) on July 28, 2011:
WHEREAS, the Companys Certificate of Incorporation (the Certificate of
Incorporation), authorizes 10,000,000 shares of preferred stock, par value $0.01 per share
(the Preferred Stock), issuable from time to time in one or more series;
WHEREAS, the Certificate of Incorporation authorizes the Board to provide by resolution for
the issuance of the shares of Preferred Stock in one or more series, the number of shares in each
series, the voting powers, if any, and such designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations and restrictions thereof;
WHEREAS, the Board desires, pursuant to its authority as aforesaid, to designate a new series
of Preferred Stock, set the number of shares constituting such series, and the voting powers,
designations, preferences and relative, participating, optional or other special rights, and the
qualifications, limitations and restrictions thereof;
WHEREAS, on May 13, 2011, the Company issued 280,000 shares of Series A Participating
Convertible Preferred Stock of the Company, par value $0.01 per share (the Existing Series A
Preferred Stock), to certain Persons (such Persons, the Existing Holders), which
Existing Series A Preferred Stock was designated by the Board pursuant to the Certificate of
Designation of Series A Participating Convertible Preferred Stock of Harbinger Group Inc., dated as
of May 12, 2011 (the Existing Series A Certificate of Designation); and
WHEREAS, it is the Companys intention that the Existing Series A Preferred Stock and the
Series A-2 Preferred Stock shall have equivalent powers, preferences, rights and privileges, other
than with respect to (x) terms and provisions specifically applicable to, or for the benefit of,
the Fortress Investor and/or its Affiliates, and (y) the Conversion Price and the conversion price
of the Existing Series A Preferred Stock.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby designates a new series of
Preferred Stock, consisting of the number of shares set forth herein, with the voting powers,
designations, preferences and relative, participating, optional or other special rights, and the
qualifications, limitations and restrictions relating to such series as follows:
SECTION 1. Number; Designation; Rank.
(a) This series of convertible participating preferred stock is designated as the Series A-2
Participating Convertible Preferred Stock (the Series A-2 Preferred Stock). The maximum
number of shares constituting the Series A-2 Preferred Stock is 120,000 shares, par value $0.01 per
share.
(b) The Series A-2 Preferred Stock ranks, with respect to the payment of dividends, redemption
payments, rights (including as to the distribution of assets upon liquidation, dissolution or
winding-up of the Company) or otherwise:
(i) senior in preference and priority to the Common Stock and each other class or series of
Capital Stock of the Company, except for (x) any class or series of Capital Stock hereafter issued
in compliance with the terms hereof and the terms of which expressly provide that it will rank
senior to or on parity, without preference or priority, with the Series A-2 Preferred Stock with
respect to the payment of dividends, redemption payments, rights (including as to the distribution
of assets) upon liquidation, dissolution or winding-up of the Company, or otherwise (collectively
with the Common Stock, the Junior Securities) or (y) the Existing Series A Preferred
Stock;
(ii) on parity, without preference and priority, with (x) the Existing Series A Preferred
Stock, and (y) each other class or series of Capital Stock of the Company hereafter issued in
compliance with the terms hereof and the terms of which expressly provide that it will rank on
parity, without preference or priority, with the Series A-2 Preferred Stock with respect to the
payment of dividends, redemption payments, rights (including as to the distribution of assets) upon
liquidation, dissolution or winding-up of the Company, or otherwise (collectively, the Parity
Securities); and
(iii) junior in preference and priority to each other class or series of Preferred Stock or
any other Capital Stock of the Company hereafter issued in compliance with the terms hereof and the
terms of which expressly provide that it will rank senior in preference or priority to the Series
A-2 Preferred Stock with respect to the payment of dividends, redemption payments, rights
(including as to the distribution of assets) upon liquidation, dissolution or winding-up of the
Company or otherwise (collectively, Senior Securities).
SECTION 2. Dividends.
(a) Cash Dividends. Holders shall be entitled to receive, out of funds legally
available for the payment of dividends to the Companys stockholders under Delaware law, on each
Preferred Share, cumulative cash dividends at a per annum rate of 8.00% on the amount of the
Purchase Price (Cash Dividends). Such Cash Dividends shall begin to accrue and be
cumulative from the Issue Date. Cash Dividends shall be payable quarterly with respect to each
Dividend Period in arrears on the first Dividend Payment Date after such Dividend Period. If and
to the extent that the Company does not for any reason (including because there are insufficient
funds legally available for the payment of dividends) pay the entire Cash Dividend payable for a
particular
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Dividend Period in cash on the applicable Dividend Payment Date for such period (whether or
not there are funds of the Company legally available for the payment of dividends to the Companys
stockholders under Delaware law or such dividends are declared by the Board), during the period in
which such Cash Dividend remains unpaid, an additional accreting dividend (the Cash Accretion
Dividends) shall accrue and be payable at an annual rate equal to the Dividend Rate on the
amount of the unpaid Cash Dividend through the daily addition of such Cash Accretion Dividends to
the Purchase Price (whether or not such Cash Accretion Dividends are declared by the Board).
(b) Accreting Dividends. In addition to the Cash Dividend, for each Dividend Period
beginning on or after the Issue Date, the Holders shall be entitled to receive on each Preferred
Share additional dividends at the per annum rates set forth in this SECTION 2(b) (the Basic
Accreting Dividends and, together with the Cash Accretion Dividends, the Participating
Accretion Dividends and the In-Kind Participating Dividends, the Accreting Dividends; the
Accreting Dividends, together with the Cash Dividend and the Participating Dividends, the
Dividends). Basic Accreting Dividends shall accrue and be cumulative from the Issue
Date. Basic Accreting Dividends shall be payable quarterly with respect to each Dividend Period in
arrears on the first Dividend Payment Date after such Dividend Period by the addition of such
amount to the Purchase Price, whether or not declared by the Board. Such Basic Accreting Dividend
for any Dividend Period shall be at a per annum rate (the Accreting Dividend Rate)
determined as follows:
(i) If Net Asset Value as of the last day of any Dividend Period is less than 120% of the May
13 NAV, a per annum rate of 4.00% of the Purchase Price for the next succeeding Dividend Period;
(ii) If Net Asset Value as of the last day of any Dividend Period is equal to or greater than
120% and less than or equal to 140% of the May 13 NAV, a per annum rate of 2.00% of the Purchase
Price for the next succeeding Dividend Period; and
(iii) If Net Asset Value as of the last day of any Dividend Period is greater than 140% of the
May 13 NAV, no additional per annum rate for the next succeeding Dividend Period;
provided, however, that the Basic Accreting Dividend with respect to the period from the
Original Issue Date to September 30, 2011 shall be payable at a per annum rate of 4.00% of the
Purchase Price.
(c) Participating Cash Dividends. If the Company declares, makes or pays any cash
dividend or distribution in respect of all or substantially all holders of Common Stock (a
Common Dividend), each Holder shall receive a dividend (in addition to the Dividends
provided for by SECTION 2(a) and SECTION 2(b)) in respect of each Preferred Share held thereby, in
an amount equal to the product of (x) the amount of such Common Dividend paid per share of Common
Stock, multiplied by (y) the number of shares of Common Stock issuable if such Preferred Share had
been converted into shares of Common Stock immediately prior to the record date for such Common
Dividend (such amount per share of Preferred Stock, the Participating Cash Dividend). Participating Cash Dividends shall be
payable to Holders on the record date for such Common
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Dividend at the same time and in the same
manner as the Common Dividend triggering such Participating Cash Dividend is paid. If and to the
extent that the Company does not for any reason pay the entire Participating Cash Dividend when the
Common Dividend is paid to the holders of Common Stock, during the period in which such
Participating Cash Dividend remains unpaid, an additional accreting dividend (the
Participating Accretion Dividends) shall accrue and be payable at an annual rate equal to
the Dividend Rate on the amount of the unpaid Participating Cash Dividend through the daily
addition of such Participating Accretion Dividends to the Purchase Price (whether or not such
Participating Accretion Dividends are declared by the Board).
(d) In-Kind Participating Dividends. If the Company distributes shares of its Capital
Stock, evidences of its indebtedness or other assets, securities or property, to all or
substantially all holders of Common Stock (an In-Kind Common Dividend), including without
limitation any spin-off of one or more subsidiaries or businesses of the Company but excluding: (I)
dividends or distributions referred to in SECTIONS 5(g)(i)(A) and 5(g)(i)(B); and (II) cash
dividends with respect to which Holders are entitled to Participating Cash Dividends, then the
Holders shall receive in such distribution or other transaction, at the same time and in the same
manner as holders of Common Stock, the same type and amount of consideration (the In-Kind
Participating Dividend and, collectively with the Participating Cash Dividend, the
Participating Dividends) as Holders would have received if, immediately prior to the
record date of such In-Kind Common Dividend, they had held the number of shares of Common Stock
issuable upon conversion of the Preferred Shares. To the extent that the Company establishes or
adopts a stockholder rights plan or agreement (i.e., a poison pill), the Company shall ensure
that the Holders will receive, as an In-Kind Participating Dividend, rights under the stockholder
rights plan or agreement with respect to any shares of Common Stock that at the time of such
distribution would be issuable upon conversion of the Preferred Shares. If and to the extent that
the Company does not for any reason pay the entire In-Kind Participating Dividend when the Common
Dividend is paid to the holders of Common Stock, during the period in which such In-Kind
Participating Dividend remains unpaid, an additional accreting dividend (the In-Kind Accretion
Dividends) shall accrue and be payable at an annual rate equal to the Dividend Rate on the
amount of the unpaid In-Kind Participating Dividend through the daily addition of such In-Kind
Accretion Dividends to the Purchase Price (whether or not such In-Kind Accretion Dividends are
declared by the Board).
(e) Dividends (other than Participating Dividends) payable on the Series A-2 Preferred Stock
in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of
twelve 30-day months. The amount of Dividends (other than Participating Dividends) payable on the
Series A-2 Preferred Stock on any date prior to the end of a Dividend Period, and for the initial
Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day
months, and actual days elapsed over a 30-day month.
(f) Cash Dividends and Accreting Dividends that are payable on Series A-2 Preferred Stock on
any Dividend Payment Date will be payable to Holders of record on the applicable record date, which
shall be the fifteenth (15th) calendar day before the applicable Dividend Payment Date,
or, with respect to any Cash Dividends not paid on the scheduled Dividend Payment Date therefor,
such record date fixed by the Board (or a duly authorized committee of the
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Board) that is not more than sixty (60) nor less than ten (10) days prior to such date on
which such accrued and unpaid Cash Dividends are to be paid (each such record date, a Dividend
Record Date). Any such day that is a Dividend Record Date shall be a Dividend Record Date
whether or not such day is a Business Day.
(g) The quarterly dividend periods with respect to Cash Dividends and Accreting Dividends
shall commence on and include January 1, April 1, July 1 and October 1 (other than the initial
Dividend Period, which shall commence on and include the Issue Date) and shall end on and include
the last calendar day of the calendar quarter ending March 31, June 30, September 30 and December
31 preceding the next Dividend Payment Date (a Dividend Period).
SECTION 3. Liquidation Preference.
(a) Upon any Liquidation Event, each Preferred Share entitles the Holder thereof to receive
and to be paid out of the assets of the Company legally available for distribution to the Companys
stockholders, before any distribution or payment may be made to a holder of any Junior Securities,
an amount in cash per share equal to the greater of: (i) 150% of the sum of (A) the Purchase Price,
plus (B) all accrued and unpaid Dividends (including, without limitation, accrued and unpaid Cash
Dividends and accrued and unpaid Accreting Dividends for the then current Dividend Period), if any,
on such share to the extent not included in the Purchase Price (such sum, after the 150% multiplier
and as adjusted, the Regular Liquidation Preference), and (ii) an amount equal to the
amount the Holder of such share would have received upon such Liquidation Event had such Holder
converted such Preferred Share into Common Stock (or Reference Property, to the extent applicable)
immediately prior thereto (the Participating Liquidation Preference, and such greater
amount, the Liquidation Preference).
(b) If upon any such Liquidation Event, the assets of the Company legally available for
distribution to the Companys stockholders are insufficient to pay the Holders the full Liquidation
Preference and the holders of all Parity Securities the full liquidation preferences to which they
are entitled, the Holders and the holders of such Parity Securities will share ratably in any such
distribution of the assets of the Company in proportion to the full respective amounts to which
they are entitled.
(c) After payment to the Holders of the full Liquidation Preference to which they are
entitled, the Holders as such will have no right or claim to any of the assets of the Company.
(d) The value of any property not consisting of cash that is distributed by the Company to the
Holders will equal the Fair Market Value thereof on the date of distribution.
(e) No holder of Junior Securities shall receive any cash upon a Liquidation Event unless the
entire Liquidation Preference in respect of the Preferred Shares has been paid in cash. To the
extent that there is insufficient cash available to pay the entire Liquidation Preference in
respect of the Preferred Shares and any liquidation preference in respect of Parity Securities in
full in cash upon a Liquidation Event, the Holders and the holders of such Parity Securities will share
ratably in
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any cash available for distribution in proportion to the full respective amounts to
which they are entitled upon such Liquidation Event.
SECTION 4. Voting Rights.
(a) The Holders are entitled to vote on all matters on which the holders of shares of Common
Stock are entitled to vote and, except as otherwise provided herein or by law, the Holders shall
vote together with the holders of shares of Common Stock as a single class. As of any record date
or other determination date, each Holder shall be entitled to the number of votes such Holder would
have had if all Preferred Shares held by such Holder on such date had been converted into shares of
Common Stock immediately prior thereto, except that:
(i) at no time shall a Holder have voting rights pursuant to SECTION 4(a) or otherwise in
respect of more than 9.9% of the Total Current Voting Power unless such Holder has received any
approvals from the Insurance Regulatory Authorities required to be obtained by such Holder in order
for such Holder to possess voting rights in respect of the Company in excess of 9.9% of the Total
Current Voting Power; and
(ii) in the event that any Holder would be required to file any Notification and Report Form
pursuant to the HSR Act as a result of the receipt of any Accreting Dividends by such Holder, the
voting rights of such Holder pursuant to this Section 4(a) shall not be increased as a result of
such Holders receipt of such Accreting Dividends unless and until such Holder and the Company
shall have made their respective filings under the HSR Act and the applicable waiting period shall
have expired or been terminated in connection with such filings. The Company shall make all
required filings and reasonably cooperate with and assist such Holder in connection with the making
of such filing and obtaining the expiration or termination of such waiting period and shall be
reimbursed by such Holder for any reasonable and documented out-of-pocket costs incurred by the
Company in connection with such filings and cooperation.
(b) In addition to the voting rights provided for by SECTION 4(a) and any voting rights to
which the Holders may be entitled to under law:
(i) for so long as any Preferred Shares, shares of Existing Series A Preferred Stock, or
shares of Additional Permitted Preferred Stock are outstanding, the Company may not, directly or
indirectly, take any of the following actions (including by means of merger, consolidation,
reorganization, recapitalization or otherwise) without the prior written consent of the Majority
Holders:
(A) amend the Certificate of Incorporation (excluding for this purpose this Certificate of
Designation) or the By-Laws of the Company (including by means of merger, consolidation,
reorganization, recapitalization or otherwise), in each case, in a manner adverse to the Holders;
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(B) create or issue any (x) Senior Securities or (y) except as permitted under SECTION 8(b)
and otherwise by this Certificate of Designation, Parity Securities or Additional Permitted
Preferred Stock;
(C) incur, or permit any Subsidiary Guarantor to incur, any Debt (excluding any Debt incurred
to refinance the Senior Notes) not otherwise permitted by the terms of the Indenture;
(D) make, or permit any Subsidiary Guarantor to make, any Asset Sales not otherwise permitted
by the terms of the Indenture;
(E) make, or to the extent within the Companys control, permit any of its Subsidiaries to
make, any Restricted Payments not otherwise permitted by the terms of the Indenture;
(F) create a new Subsidiary of the Company not in existence on the Original Issue Date for the
primary purpose of issuing Equity Securities of such Subsidiary or incurring Debt the proceeds of
which will, directly or indirectly, be used to make dividends or other distributions or payments of
cash to holders of the Companys Capital Stock other than the Holders; provided, that for the
avoidance of doubt, the foregoing shall not prohibit dividends or other distributions to the
Company; or
(G) agree to do, directly or indirectly, any of the foregoing actions set forth in clauses (A)
through (F), unless such agreement expressly provides that the Companys obligation to undertake
any of the foregoing is subject to the prior approval of the Majority Holders; and
(ii) for so long as any Preferred Shares, shares of Existing Series A Preferred Stock, or
shares of Additional Permitted Preferred Stock are outstanding, neither the Company nor, to the
extent within the Companys control, any of its Subsidiaries may, directly or indirectly, take any
of the following actions (including by means of merger, consolidation, reorganization,
recapitalization or otherwise) without the prior written consent of each of the Holders:
(A) make any repurchase, redemption or other acquisition for value of Preferred Shares, shares
of Existing Series A Preferred Stock or shares of Additional Permitted Preferred Stock, unless such
redemption is made on the same terms and on a pro rata basis among all Holders (other than Holders
that are granted an equal opportunity to participate in such transaction but elect not to do so);
or
(B) agree to do, directly or indirectly, any of the foregoing actions set forth in clause (A),
unless such agreement expressly provides that the Companys obligation to undertake any of the
foregoing is subject to the prior approval of each of the Holders; and
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(iii) for so long as any Preferred Shares are outstanding, the Company may not, directly or
indirectly, take any of the following actions (including by means of merger,
consolidation, reorganization, recapitalization or otherwise) without the prior written
consent of the Series A-2 Majority Holders:
(A) amend, repeal, alter or add, delete or otherwise change the powers, preferences, rights or
privileges of the Series A-2 Preferred Stock;
(B) effect any stock split or combination, reclassification or similar event with respect to
the Series A-2 Preferred Stock; or
(C) agree to do, directly or indirectly, any of the foregoing actions set forth in clauses (A)
and (B), unless such agreement expressly provides that the Companys obligation to undertake any of
the foregoing is subject to the prior approval of the Series A-2 Majority Holders; and
(iv) for so long as any Preferred Shares are outstanding, neither the Company nor, to the
extent within the Companys control, any of its Subsidiaries may, directly or indirectly, take any
of the following actions (including by means of merger, consolidation, reorganization,
recapitalization or otherwise) without the prior written consent of each of the holders of
Preferred Shares:
(A) amend, repeal, alter or add, delete or otherwise change the powers, preferences, rights or
privileges of the Series A-2 Preferred Stock set forth in the Specified Sections (including by
means of merger, consolidation, reorganization, recapitalization or otherwise) in a manner adverse
to the holders of Preferred Shares (whether by means of an amendment or other change to the
Specified Sections or by means of an amendment or other change to any definitions used in the
Specified Sections or any other terms of this Certificate of Designation affecting the Specified
Sections); or
(B) agree to do, directly or indirectly, any of the foregoing actions set forth in clause (A),
unless such agreement expressly provides that the Companys obligation to undertake any of the
foregoing is subject to the prior approval of each of the holders of Preferred Shares.
(c) The agreements of the Company in SECTION 4(b) insofar as they govern or purport to govern
conduct concerning any Subsidiary of the Company are being made by the Company solely in its
capacity as the controlling shareholder of such Subsidiary and not in any fiduciary capacity of it
or any of the Subsidiarys officers or directors, and nothing herein shall require the Company to
act in any way that would cause any shareholder, director or officer of any such Subsidiary to act
in a manner that would violate legally imposed fiduciary duties applicable to any such shareholder,
director or officer.
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(d) Notwithstanding anything to the contrary contained in SECTION 4(b), the Holders shall have
no voting or consent rights (but will continue to have voting rights to the extent set forth in
SECTION 4(a)) in connection with any FS/OM Permitted Activities.
(e) Notwithstanding anything to the contrary contained in this SECTION 4, the Company may not,
directly or indirectly, take any action otherwise approved pursuant to Section
4(b) if such action would have a materially adverse and disproportionate effect on the powers,
preferences, rights, limitations, qualifications and restrictions or privileges of any Holder with
respect to any shares of Series A-2 Preferred Stock held by any Holder, without the prior approval
of such Holder.
(f) Written Consent. Any action as to which a class vote of the holders of Preferred
Stock, or the holders of Preferred Stock and Common Stock voting together, is required pursuant to
the terms of this Certificate of Designation may be taken without a meeting, without prior notice
and without a vote, if a consent or consents in writing, setting forth the action so taken, shall
be signed by the holders of outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the Company.
SECTION 5. Conversion. Each Preferred Share is convertible into shares of Common
Stock (or Reference Property, to the extent applicable) as provided in this SECTION 5, except that
Preferred Shares may not be converted into Common Stock with respect to any Holder to the extent
that, following such conversion, such Holder would Beneficially Own more than 9.9% of the Companys
outstanding Common Stock until the receipt by such Holder of any approvals from the Insurance
Regulatory Authorities required to be obtained by such Holder in order for such Holder to
Beneficially Own in excess of 9.9% of the Companys outstanding Common Stock.
Notwithstanding anything to the contrary herein, if any of the approvals from the Insurance
Regulatory Authorities required to be obtained by a Holder in order for such Holder to Beneficially
Own in excess of 9.9% of the Companys outstanding Common Stock have not been obtained at (x) a
time when the Company desires to exercise its right to convert shares of Series A-2 Preferred Stock
pursuant to SECTION 5(b) or (y) the Maturity Date in connection with the automatic conversion of
the shares of Series A-2 Preferred Stock pursuant to SECTION 5(c), the Company will not be entitled
to convert any Holders Series A-2 Preferred Stock (and, in the case of SECTION 5(c), the Series
A-2 Preferred Stock shall not automatically convert) to the extent conversion would cause such
Holder to Beneficially Own more than 9.9% of the Companys outstanding Common Stock (any such
shares of Series A-2 Preferred Stock that are not converted as a result of the foregoing
limitation, the Regulated Shares). From and after the date of the conversions
contemplated by SECTIONS 5(b) or 5(c), as applicable, each Regulated Share shall have no rights,
powers, preferences or privileges other than the right to (i) convert into Common Stock if and when
the approvals from the Insurance Regulatory Authorities required to be obtained by such Holder in
order for such Holder to Beneficially Own in excess of 9.9% of the Companys outstanding Common
Stock have been obtained and (ii) receive dividends and distributions pursuant to SECTIONS 2(c) and
2(d).
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(a) Conversion at the Option of Holders of Series A-2 Preferred Stock. Subject to
SECTION 5(b) hereof, each Holder is entitled to convert, at any time and from time to time, at the
option and election of such Holder, any or all outstanding Preferred Shares held by such Holder and
receive therefor the property described in SECTION 5(d) upon such conversion. In order to convert
Preferred Shares into shares of Common Stock (or Reference Property, to the extent applicable), the
Holder must surrender the certificates representing such Preferred Shares at the office of the
Companys transfer agent for the Series A-2 Preferred Stock (or at the principal office of the
Company, if the Company serves as its own transfer agent), together with (x) written notice
that such Holder elects to convert all or part of the Preferred Shares represented by such
certificates as specified therein, (y) a written instrument or instructions of transfer or other
documents and endorsements reasonably acceptable to the transfer agent or the Company, as
applicable (if reasonably required by the transfer agent or the Company, as applicable), and (z)
funds for any stock transfer, documentary, stamp or similar taxes, if payable by the Holder
pursuant to SECTION 5(f)(i). Except as provided in SECTION 5(b) and in SECTION 5(c), the date the
transfer agent or the Company, as applicable, receives such certificates, together with such notice
and any other documents and amounts required to be paid by the Holder pursuant to this SECTION 5,
will be the date of conversion (the Conversion Date).
(b) Conversion at the Option of the Company. Beginning on the third (3rd)
anniversary of May 13, 2011, the Company shall have the right, at its option, to cause all shares
of Series A-2 Preferred Stock to be automatically converted (without any further action by the
Holder and whether or not the certificates representing the Preferred Shares are surrendered), in
whole but not in part, into the property described in SECTION 5(d) within eight (8) Business Days
of any day (the Forced Conversion Trigger Date) on which all of the Company Conversion
Conditions are satisfied from time to time. The Company may exercise its option under this SECTION
5(b) by providing the Holders with a notice, which notice shall specify that the Company is
exercising the option contemplated by this SECTION 5(b), the Forced Conversion Trigger Date and the
Conversion Date on which the conversion shall occur (which Conversion Date shall be not less than
four (4) Business Days following the date such notice is provided to the Holders); provided that,
once delivered, such notice shall be irrevocable, unless the Company obtains the written consent of
the Series A-2 Majority Holders. For the avoidance of doubt, (x) the Holders shall continue to
have the right to convert their Preferred Shares pursuant to SECTION 5(a) until and through the
Conversion Date contemplated in this SECTION 5(b) and (y) if any Preferred Shares are converted
pursuant to SECTION 5(a), such Preferred Shares shall no longer be converted pursuant to this
SECTION 5(b) and the Companys notice delivered to the Holders pursuant to this SECTION 5(b) shall
automatically terminate with respect to such Preferred Shares. Notwithstanding the foregoing, any
notice delivered by the Company under this SECTION 5(b) in accordance with SECTION 10(g) shall be
conclusively presumed to have been duly given at the time set forth therein, whether or not such
Holder of Preferred Shares actually receives such notice, and neither the failure of a Holder to
actually receive such notice given as aforesaid nor any immaterial defect in such notice shall
affect the validity of the proceedings for the conversion of the Preferred Shares as set forth in
this SECTION 5(b). The Company shall issue a press release for publication on the Dow Jones News
Service or Bloomberg Business News (or if either such service is not available, another broadly
disseminated news or press release service selected by the Company) prior to the opening of
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business on the first Business Day following any date on which the Company provides notice to
Holders pursuant to this SECTION 5(b) announcing the Companys election to convert Preferred Shares
pursuant to this SECTION 5(b).
(c) Automatic Conversion on Maturity Date. In the event that any Holder has not
elected to have its Preferred Shares redeemed by the Company on the Maturity Date (as defined
herein) pursuant to SECTION 6(a), then such Holders Preferred Shares shall be automatically
converted (without any further action by the Holder and whether or not the certificates
representing the Preferred Shares are surrendered), in whole and not in part, into the property
described in
SECTION 5(d), effective as of the Maturity Date, which shall be deemed to be the Conversion
Date for purposes of this SECTION 5(c). As promptly as practicable (but in no event more than
five (5) Business Days) following the Maturity Date, the Company shall deliver a notice to any
Holder whose Preferred Shares have been converted by the Company pursuant to this SECTION 5(c),
informing such Holder of the number of shares of Common Stock into which such Preferred Shares have
been converted, together with certificates evidencing such shares of Common Stock. Notwithstanding
the foregoing, any notice delivered by the Company in compliance with this SECTION 5(c) shall be
conclusively presumed to have been duly given, whether or not such Holder of Preferred Shares
actually receives such notice, and neither the failure of a Holder to actually receive such notice
given as aforesaid nor any immaterial defect in such notice shall affect the validity of the
proceedings for the conversion of the Preferred Shares as set forth in this SECTION 5(c). The
Company shall issue a press release for publication on the Dow Jones News Service or Bloomberg
Business News (or if either such service is not available, another broadly disseminated news or
press release service selected by the Company) prior to the opening of business on the first
Business Day following the Maturity Date announcing the aggregate number of Preferred Shares being
converted pursuant to this SECTION 5(c) and the number of shares of Common Stock issuable in
connection therewith, as well as the aggregate number of Preferred Shares redeemed on the Maturity
Date and the purchase price paid by the Company therefor.
(d) Amounts Received Upon Conversion. Upon a conversion of Preferred Shares pursuant
to SECTION 5(a), (b) or (c), the Holder of such converted Preferred Shares shall, subject to the
limitations and adjustments pursuant to the first paragraph of SECTION 5, receive in respect of
each Preferred Share:
(i) a number of shares of Common Stock (or Reference Property, to the extent applicable) equal
to the amount (the Conversion Amount) determined by dividing (A) the Purchase Price for
the Preferred Share to be converted by (B) the Conversion Price in effect at the time of
conversion; provided that, notwithstanding the foregoing, if the Company has elected to convert all
Preferred Shares pursuant to SECTION 5(b) and the Public Float Hurdle is not met on the Forced
Conversion Trigger Date, then each Holder may elect, by delivery of a notice to the Company no
later than the close of business on the Business Day immediately prior to the Conversion Date, to
receive, in lieu of Common Stock (or Reference Property, to the extent applicable), cash equal to
the Conversion Amount multiplied by the Thirty Day VWAP as of the close of business on the Business
Day immediately preceding the Conversion Date, which cash amount shall be delivered to the electing
Holders within forty-five (45) calendar days of the date that
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the last Holder electing to receive
cash pursuant to this SECTION 5(d)(i) has provided the Company with notice thereof;
(ii) cash in an amount equal to the amount of any accrued but unpaid Cash Dividends and
Participating Cash Dividends (to the extent not included in the Purchase Price) on the Preferred
Shares being converted; provided that, to the extent the Company is prohibited by law or by
contract from paying such amount, then the Company shall provide written notice to the applicable
Holder of such inability to pay, and at the written election of the Holder (which written election
shall be delivered to the Company within five (5) Business Days of receipt of such written notice
from the Company), the Company shall either pay such amount as soon as payment is no longer so
prohibited or issue Common Stock (or Reference Property, to the extent applicable) in the
manner specified in SECTION 5(d)(i) as if the amount of such accrued but unpaid Cash Dividends
and Participating Cash Dividends were added to the Purchase Price;
(iii) a number of shares of Common Stock (or Reference Property, to the extent applicable)
equal to the amount determined by dividing (A) the amount of any accrued but unpaid Accreting
Dividends (to the extent not included in the Purchase Price) on the Preferred Shares being
converted by (B) the Conversion Price in effect at the time of Conversion; and
(iv) any accrued and unpaid In-Kind Participating Dividends.
Notwithstanding the foregoing, in the event any Holder would be required to file any Notification
and Report Form pursuant to the HSR Act as a result of the conversion of any Preferred Shares into
the property described above in this Section 5(d), at the option of such Holder upon written notice
to the Company, the effectiveness of such conversion shall be delayed (only to the extent necessary
to avoid a violation of the HSR Act), until such Holder shall have made such filing under the HSR
Act and the applicable waiting period shall have expired or been terminated; provided, however,
that in such circumstances such Holder shall use commercially reasonable efforts to make such
filing and obtain the expiration or termination of such waiting period as promptly as reasonably
practical and the Company shall make all required filings and reasonably cooperate with and assist
such Holder in connection with the making of such filing and obtaining the expiration or
termination of such waiting period and shall be reimbursed by such Holder for any reasonable and
documented out-of-pocket costs incurred by the Company in connection with such filings and
cooperation. Notwithstanding the foregoing, if the conversion of any Preferred Share is delayed
pursuant to the preceding sentence at (x) a time when the Company desires to exercise its right to
convert shares of Series A-2 Preferred Stock pursuant to SECTION 5(b) or (y) the Maturity Date in
connection with the automatic conversion of the shares of Series A-2 Preferred Stock pursuant to
SECTION 5(c), from and after the date of the conversions contemplated by SECTIONS 5(b) or 5(c), as
applicable, such Preferred Share not then converted shall have no rights, powers, preferences or
privileges other than the rights provided by this paragraph and the right to (i) convert into
Common Stock if and when such Holder shall have made such filing under the HSR Act and the waiting
period in connection with such filing under the HSR Act shall have expired or been terminated and
(ii) receive dividends and distributions pursuant to SECTIONS 2(c) and 2(d).
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(e) Fractional Shares. No fractional shares of Common Stock (or fractional shares in
respect of Reference Property, to the extent applicable) will be issued upon conversion of the
Series A-2 Preferred Stock. In lieu of fractional shares, the Company shall pay cash in respect of
each fractional share equal to such fractional amount multiplied by the Thirty Day VWAP as of the
closing of business on the Business Day immediately preceding the Conversion Date. If more than
one Preferred Share is being converted at one time by the same Holder, then the number of full
shares issuable upon conversion will be calculated on the basis of the aggregate number of
Preferred Shares converted by such Holder at such time.
(f) Mechanics of Conversion.
(i) As soon as reasonably practicable after the Conversion Date, or in the case of Regulated
Shares, the date on which the Holder thereof provides evidence to the Company
that such Holder has obtained the approvals from the Insurance Regulatory Authorities required
to be obtained by such Holder to Beneficially Own in excess of 9.9% of the Companys outstanding
Common Stock, (and in any event within four (4) Trading Days after either such date), the Company
shall issue and deliver to such Holder one or more certificates for the number of shares of Common
Stock (or Reference Property, to the extent applicable) to which such Holder is entitled, together
with, at the option of the Holder, a check or wire transfer of immediately available funds for
payment of fractional shares and any payment required by SECTION 5(d)(ii) in exchange for the
certificates representing the converted Preferred Shares (including any Regulated Shares). Such
conversion will be deemed to have been made on the Conversion Date, or in the case of Regulated
Shares, the date on which the Holder thereof provides evidence to the Company that such Holder has
obtained the approvals from the Insurance Regulatory Authorities required to be obtained by such
Holder to Beneficially Own in excess of 9.9% of the Companys outstanding Common Stock, and the
Person entitled to receive the shares of Common Stock (or Reference Property, to the extent
applicable) issuable upon such conversion shall be treated for all purposes as the record holder of
such shares of Common Stock (or Reference Property, to the extent applicable) on such date. The
delivery of the Common Stock upon conversion of Preferred Shares (including any Regulated Shares)
shall be made, at the option of the applicable Holder, in certificated form or by book-entry. Any
such certificate or certificates shall be delivered by the Company to the appropriate Holder on a
book-entry basis or by mailing certificates evidencing the shares to the Holders at their
respective addresses as set forth in the conversion notice. In cases where fewer than all the
Preferred Shares represented by any such certificate are to be converted, a new certificate shall
be issued representing the unconverted Preferred Shares (or Regulated Shares). The Company shall
pay any documentary, stamp or similar issue or transfer tax due on the issue of Common Stock (or
Reference Property, to the extent applicable) upon conversion or due upon the issuance of a new
certificate for any Preferred Shares (or Regulated Shares) not converted to the converting Holder;
provided that the Company shall not be required to pay any such amounts, and any such amounts shall
be paid by the converting Holder, in the event that such Common Stock or Preferred Shares are
issued in a name other than the name of the converting Holder.
(ii) For the purpose of effecting the conversion of Preferred Shares (including any Regulated
Shares), the Company shall: (A) at all times reserve and keep available,
-13-
free from any preemptive
rights, out of its treasury or authorized but unissued shares of Common Stock (or Reference
Property, to the extent applicable) the full number of shares of Common Stock (or Reference
Property, to the extent applicable) deliverable upon the conversion of all outstanding Preferred
Shares (including Regulated Shares) after taking into account any adjustments to the Conversion
Price from time to time pursuant to the terms of this SECTION 5 and any increases to the Purchase
Price from time to time and assuming for the purposes of this calculation that all outstanding
Preferred Shares are held by one holder) and (B) without prejudice to any other remedy at law or in
equity any Holder may have as a result of such default, take all actions reasonably required to
amend its Certificate of Incorporation, as expeditiously as reasonably practicable, to increase the
authorized and available amount of Common Stock (or Reference Property, to the extent applicable)
if at any time such amendment is necessary in order for the Company to be able to satisfy its
obligations under this SECTION 5. Before taking any action which would cause an adjustment
reducing the Conversion Price below the then par value of the shares of Common Stock (or Reference
Property, to the extent applicable) issuable upon conversion of the Series A-2 Preferred Stock, the
Company will take any corporate action which may be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of Common Stock (or
Reference Property, to the extent applicable) upon the conversion of all outstanding Preferred
Shares at such adjusted Conversion Price.
(iii) From and after the Conversion Date, or in the case of Regulated Shares, the date on
which the Holder thereof provides evidence to the Company that such Holder has obtained the
approvals from the Insurance Regulatory Authorities required to be obtained by such Holder to
Beneficially Own in excess of 9.9% of the Companys outstanding Common Stock, the Preferred Shares
(including any Regulated Shares) converted on such date, will no longer be deemed to be outstanding
and all rights of the Holder thereof including the right to receive Dividends, but excluding the
right to receive from the Company the Common Stock (or Reference Property, to the extent
applicable) or any cash payment upon conversion, and except for any rights of Holders (including
any voting rights) pursuant to this Certificate of Designation which by their express terms
continue following conversion or, for the avoidance of doubt, rights which by their express terms
continue following conversion pursuant to any of the other Transaction Agreements (as defined in
the Securities Purchase Agreement) shall immediately and automatically cease and terminate with
respect to such Preferred Shares (including any Regulated Shares); provided that, in the event that
a Preferred Share or Regulated Share is not converted due to a default by the Company or because
the Company is otherwise unable to issue the requisite shares of Common Stock (or Reference
Property, to the extent applicable), such Preferred Share or Regulated Share will, without
prejudice to any other remedy at law or in equity any Holder may have as a result of such default,
remain outstanding and will continue be entitled to all of the rights attendant to such Preferred
Share or Regulated Share (as the case may be) as provided herein.
(iv) If the conversion is in connection with any sale, transfer or other disposition of the
shares of Common Stock (or Reference Property, to the extent applicable) issuable upon conversion
of Preferred Shares made pursuant to the Tag-Along Agreement (as defined in the Securities Purchase
Agreement), the conversion may, at the option of any Holder tendering Preferred Shares for
conversion, be conditioned upon the closing of such sale, transfer or the disposition of the
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shares of Common Stock (or Reference Property, to the extent applicable) issuable upon conversion of such
Preferred Shares, in which event such conversion of such Preferred Shares shall not be deemed to
have occurred until immediately prior to the closing of such sale, transfer or other disposition.
(v) The Company shall comply with all federal and state laws, rules and regulations and
applicable rules and regulations of the Exchange on which shares of the Common Stock (or Reference
Property, to the extent applicable) are then listed. If any shares of Common Stock (or Reference
Property, to the extent applicable) to be reserved for the purpose of conversion of Preferred
Shares require registration with or approval of any Person or group (as such term is defined in
Section 13(d)(3) of the Exchange Act) under any federal or state law or the rules and regulations
of the Exchange on which shares of the Common Stock (or Reference Property, to the extent
applicable) are then listed before such shares may be validly issued or delivered upon conversion,
then the Company will, as expeditiously as reasonably practicable, use commercially reasonable
efforts to secure such registration or approval, as the case may be. So long as any Common Stock
(or Reference Property, to the extent applicable) into which the Preferred Shares are then
convertible is then listed on an Exchange, the Company will list and keep listed on any such
Exchange, upon official notice of issuance, all shares of such Common Stock (or Reference
Property, to the extent applicable) issuable upon conversion.
(vi) All shares of Common Stock (or Reference Property, to the extent applicable) issued upon
conversion of the Preferred Shares (including any Regulated Shares) will, upon issuance by the
Company, be duly and validly issued, fully paid and nonassessable, not issued in violation of any
preemptive or similar rights arising under law or contract and free from all taxes, liens and
charges with respect to the issuance thereof, and the Company shall take no action which will cause
a contrary result.
(g) Adjustments to Conversion Price.
(i) The Conversion Price shall be subject to the following adjustments:
(A) Common Stock Dividends or Distributions. If the Company issues shares of Common Stock as
a dividend or distribution on shares of Common Stock, or if the Company effects a share split or
share combination with respect to shares of Common Stock, the Conversion Price will be adjusted
based on the following formula:
where,
CP0 = the Conversion Price in effect immediately prior to the open of business on
the Ex-Date for such dividend or distribution, or the open of business on the effective date of
such share split or share combination, as the case may be;
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CP1 = the Conversion Price in effect immediately after the open of business on the
Ex-Date for such dividend or distribution, or the open of business on the effective date of such
share split or share combination, as the case may be;
OS0 = the number of shares of Common Stock outstanding immediately prior to the
open of business on the Ex-Date for such dividend or distribution, or the open of business on the
effective date of such share split or share combination, as the case may be; and
OS1 = the number of shares of Common Stock outstanding immediately after such
dividend or distribution, or such share split or share combination, as the case may be.
Any adjustment made under this SECTION 5(g)(i)(A) shall become effective immediately after the open
of business on the Ex-Date for such dividend or distribution, or immediately after the open of
business on the effective date for such share split or share combination. If any dividend or
distribution of the type described in this SECTION 5(g)(i)(A) is declared but not so paid or made,
or any share split or combination of the type described in this SECTION 5(g)(i)(A) is announced but
the outstanding shares of Common Stock are not split or combined, as the case may be, the
Conversion Price shall be immediately readjusted, effective as of the date the Board determines not
to pay such dividend or distribution, or not to split or combine the outstanding shares of Common
Stock, as the case may be, to the Conversion Price that would then be in effect if such dividend,
distribution, share split or share combination had not been declared or announced.
(B) Rights, Options or Warrants on Common Stock. If the Company distributes to all or
substantially all holders of its Common Stock any rights, options or warrants entitling them, for a
period expiring not more than sixty (60) days immediately following the record date of such
distribution, to purchase or subscribe for shares of Common Stock at a price per share less than
the average of the Daily VWAP of the Common Stock over the ten (10) consecutive Trading Day period
ending on the Trading Day immediately preceding the Ex-Date for such distribution, the Conversion
Price will be adjusted based on the following formula:
where,
CP0 = the Conversion Price in effect immediately prior to the open of business on
the Ex-Date for such distribution;
CP1 = the Conversion Price in effect immediately after the open of business on the
Ex-Date for such distribution;
OS0 = the number of shares of Common Stock outstanding immediately prior to the
open of business on the Ex-Date for such distribution;
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X = the number of shares of Common Stock equal to the aggregate price payable to exercise all
such rights, options or warrants divided by the average of the Daily VWAP of the Common Stock over
the ten (10) consecutive Trading Day period ending on the Trading Day immediately preceding the
Ex-Date for such distribution; and
Y = the total number of shares of Common Stock issuable pursuant to all such rights, options
or warrants.
Any adjustment made under this SECTION 5(g)(i)(B) will be made successively whenever any such
rights, options or warrants are distributed and shall become effective immediately after the open
of business on the Ex-Date for such distribution. To the extent that shares of Common Stock are
not delivered prior to the expiration of such rights, options or warrants, the Conversion Price
shall be readjusted following the expiration of such rights to the Conversion Price that would then
be in effect had the decrease in the Conversion Price with respect to the distribution of such
rights, options or warrants been made on the basis of delivery of only the number of shares of
Common Stock actually delivered. If such rights, options or warrants are not so distributed, the
Conversion Price shall be immediately readjusted, effective as of the date the Board determines not
to make such distribution, to the Conversion Price that would then be in effect if such
distribution had not occured.
In determining whether any rights, options or warrants entitle the holders to subscribe for or
purchase shares of Common Stock at less than such average of the Daily VWAP for the ten (10)
consecutive Trading Day period ending on the Trading Day immediately preceding the Ex-Date for
such distribution, and in determining the aggregate offering price of such shares of the Common
Stock, there shall be taken into account any consideration received by the Company for such rights,
options or warrants and any amount payable on exercise or conversion thereof, the fair market value
of such consideration, if other than cash, to be reasonably determined by the Board in good faith.
(C) Tender Offer or Exchange Offer Payments. If the Company or any of its Subsidiaries makes
a payment in respect of a tender offer or exchange offer for Common Stock, if the aggregate value
of all cash and any other consideration included in the payment per share of Common Stock (as
reasonably determined in good faith by the Board) exceeds the average of the Daily VWAP of the
Common Stock over the ten (10) consecutive Trading Day period commencing on, and including, the
Trading Day next succeeding the date on which such tender offer or exchange offer expires, the
Conversion Price will be decreased based on the following formula:
where,
CP1 = the Conversion Price in effect immediately after the close of business on the
last Trading Day of the ten (10) consecutive Trading Day period commencing on, and including, the
Trading Day next succeeding the date such tender or exchange offer expires;
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CP0 = the Conversion Price in effect immediately prior to the close of business on
the last Trading Day of the ten (10) consecutive Trading Day period commencing on, and including,
the Trading Day next succeeding the date such tender or exchange offer expires;
OS0 = the number of shares of Common Stock outstanding immediately prior to the
date such tender or exchange offer expires;
SP1 = the average of the Daily VWAP of the Common Stock over the ten (10)
consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the
date such tender or exchange offer expires;
AC = the aggregate value of all cash and any other consideration (as reasonably determined in
good faith by the Board) paid or payable for shares purchased in such tender or exchange offer; and
OS1 = the number of shares of Common Stock outstanding immediately after the date
such tender or exchange offer expires (after giving effect to such tender offer or exchange offer
and excluding fractional shares).
The adjustment to the Conversion Price under this SECTION 5(g)(i)(C) will occur at the close
of business on the tenth (10th) Trading Day immediately following, but excluding, the
date such tender or exchange offer expires; provided that, for purposes of determining the
Conversion Price, in respect of any conversion during the ten (10) Trading Days immediately
following, but
excluding, the date that any such tender or exchange offer expires, references within this
SECTION 5(g)(i)(C) to ten (10) consecutive Trading Days shall be deemed replaced with such lesser
number of consecutive Trading Days as have elapsed between the date such tender or exchange offer
expires and the relevant conversion date.
(D) Common Stock Issued at Less than Conversion Price. If, after the Original Issue Date, the
Company issues or sells any Common Stock (or Option Securities or Convertible Securities, to the
extent set forth in this SECTION 5(g)(i)(D)), other than Excluded Stock, for no consideration or
for consideration per share less than the Conversion Price in effect as of the date of such
issuance or sale, the Conversion Price in effect immediately prior to each such issuance or sale
will (except as provided below) be adjusted at the time of such issuance or sale based on the
following formula:
where,
CP1 = the Conversion Price in effect immediately following such issuance or sale;
CP0 = the Conversion Price in effect immediately prior to such issuance or sale;
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OS0 = the number of shares of Common Stock outstanding immediately prior to
such issuance or sale (treating for this purpose as outstanding all shares of Common Stock issuable
upon the conversion or exchange of (x) all Preferred Shares issued on the Original Issue Date, (y)
all shares of Existing Series A Preferred Stock and Additional Permitted Preferred Stock and (z)
all convertible, exchangeable or exercisable Equity Securities of the Company not listed in (x) or
(y) if the conversion price, exercise price or exchange price applicable to such Equity Securities
of the Company is below Market Value on the determination date) outstanding immediately prior to
such issuance or sale;
X = the number of shares of Common Stock that the aggregate consideration received by the
Company for the number of shares of Common Stock so issued or sold would purchase at a price per
share equal to CP0; and
Y = the number of additional shares of Common Stock so issued.
For the purposes of any adjustment of the Conversion Price pursuant to this SECTION
5(g)(i)(D), the following provisions shall be applicable:
(1) In the case of the issuance of Common Stock for cash, the amount of the consideration
received by the Company shall be deemed to be the amount of the cash proceeds received by the
Company for such Common Stock after deducting therefrom any discounts or commissions allowed, paid
or incurred by the Company for any underwriting or otherwise in connection with the issuance and
sale thereof
(2) In the case of the issuance of Common Stock (otherwise than upon the conversion of shares
of Capital Stock or other securities of the Company) for a consideration in whole or in part other
than cash, including securities acquired in exchange therefor (other than securities by their terms
so exchangeable), the consideration other than cash shall be deemed to be the fair market value
thereof as reasonably determined by the Board in good faith.
(3) For the avoidance of doubt, the provisions of this SECTION 5(g)(i)(D) shall apply to any
issuance of Additional Permitted Preferred Stock that are Convertible Securities and meet the
criteria for requiring an adjustment under this SECTION 5(g)(i)(D).
(4) In the case of (A) the issuance of Option Securities (whether or not at the time
exercisable) or (B) the issuance of Convertible Securities (whether or not at the time so
convertible or exchangeable):
i) the issuance of Option Securities shall be deemed the issuance of all shares of Common
Stock deliverable upon the exercise of such Option Securities;
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ii) such Option Securities shall be deemed to be issued for a consideration equal to the value
of the consideration (determined in the manner provided in SECTION 5(g)(i)(D)(1) and (2)), if any,
received by the Company for such Option Securities, plus the exercise price, strike price or
purchase price provided in such Option Securities for the Common Stock covered thereby;
iii) the issuance of Convertible Securities shall be deemed the issuance of all shares of
Common Stock deliverable upon conversion of, or in exchange for, such Convertible Securities;
iv) such Convertible Securities shall be deemed to be issued for a consideration equal to the
value of the consideration (determined in the manner provided in SECTION 5(g)(i)(D)(1) and (2) and
excluding any cash received on account of accrued interest or accrued dividends), if any, received
by the Company for such Convertible Securities, plus the value of the additional consideration
(determined in the manner provided in SECTION 5(g)(i)(D)(1) and (2)) to be received by the Company
upon the conversion or exchange of such Convertible Securities, if any;
v) upon any change in the number of shares of Common Stock deliverable upon exercise of any
Option Securities or Convertible Securities or upon any change in the consideration to be received
by the Company upon the exercise, conversion or exchange of such securities, the Conversion Price
then in effect shall be readjusted to such Conversion Price as would have been in effect had such
change been in effect, with respect to any Option Securities or Convertible Securities outstanding
at the time of the change, at the time such Option Securities or Convertible Securities originally
were issued;
vi) upon the expiration or cancellation of Option Securities (without exercise), or the
termination of the conversion or exchange rights of Convertible Securities (without conversion or
exchange), if the Conversion Price shall have been adjusted upon the issuance of such expiring,
canceled or terminated securities, the Conversion Price shall be readjusted to such Conversion
Price as would have been obtained if, at the time of the original issuance of such Option
Securities or Convertible Securities, the expired, canceled or terminated Option Securities or
Convertible Securities, as applicable, had not been issued;
vii) if the Conversion Price shall have been fully adjusted upon the issuance of any such
options, warrants, rights or convertible or exchangeable securities, no further adjustment of the
Conversion Price shall be made for the actual issuance of Common Stock upon the exercise,
conversion or exchange thereof; and
viii) if any issuance of Common Stock, Option Securities or Convertible Securities would also
require an adjustment pursuant to any other adjustment provision of this SECTION 5(g)(i), then only
the adjustment most favorable to the Holders shall be made.
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(ii) If the Company issues rights, options or warrants that are only exercisable upon the
occurrence of certain triggering events (each, a Trigger Event), then the Conversion
Price will not be adjusted pursuant to SECTION 5(g)(i)(B) until the earliest Trigger Event occurs,
and the Conversion Price shall be readjusted to the extent any of these rights, options or warrants
are not exercised before they expire (provided, however, that, for the avoidance of doubt, if such
Trigger Event would require an adjustment pursuant to SECTION 5(g)(i)(D), such adjustment pursuant
to SECTION 5(g)(i)(D) shall be made at the time of issuance of such rights, options or warrants in
accordance with such Section).
(iii) Notwithstanding anything in this SECTION 5(g) to the contrary, if a Conversion Price
adjustment becomes effective pursuant to any of clauses (A), (B) or (C) of this SECTION 5(g)(i) on
any Ex-Date as described above, and a Holder that converts its Preferred Shares on or after such
Ex-Date and on or prior to the related record date would be treated as the record holder of shares
of Common Stock as of the related Conversion Date based on an adjusted Conversion Price for such
Ex-Date and participate on an adjusted basis in the related dividend, distribution or other event
giving rise to such adjustment, then, notwithstanding the foregoing Conversion Price adjustment
provisions, the Conversion Price adjustment relating to such Ex-Date will not be made for such
converting Holder. Instead, such Holder will be treated as if such Holder were the record owner of
the shares of Common Stock on an un-adjusted basis and participate in the related dividend,
distribution or other event giving rise to such adjustment.
Notwithstanding anything in this SECTION 5(g) to the contrary, no adjustment under SECTION 5(g)(i)
need be made to the Conversion Price unless such adjustment would require a decrease of at least 1%
of the Conversion Price then in effect. Any lesser adjustment shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment, if any, which, together
with any adjustment or adjustments so carried forward, shall amount to a decrease of at least 1% of
such Conversion Price; provided that, on the date of any conversion of the Preferred Shares
pursuant to SECTION 5, adjustments to the Conversion Price will be made with respect to any such
adjustment carried forward that has not been taken into account before such date. In addition, at
the end of each year, beginning with the year ending December 31, 2011, the Conversion Price shall
be adjusted to give effect to any adjustment or adjustments so carried forward, and such
adjustments will no longer be carried forward and taken into account in any subsequent adjustment.
(iv) Adjustments Below Par Value. The Company shall not take any action that would
require an adjustment to the Conversion Price such that the Conversion Price, as adjusted to give
effect to such action, would be less than the then-applicable par value per share of the Common
Stock, except that the Company may undertake a share split or similar event if such share split
results in a corresponding reduction in the par value per share of the Common Stock such that the
as-adjusted new Conversion Price per share would not be below the new as-adjusted par value per
share of the Common Stock following such share split or similar transaction and the Conversion
Price is adjusted as provided under SECTION 5(g)(i)(A) and any other applicable provision of
SECTION 5(g).
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(v) Reference Property. In the case of any Going Private Event or recapitalization,
reclassification or change of the Common Stock (other than changes resulting from a subdivision,
combination or reclassification described in SECTION 5(g)(i)(A)), a consolidation, merger or
combination involving the Company, a sale, lease or other transfer to a third party of all or
substantially all of the assets of the Company (or the Company and its Subsidiaries on a
consolidated basis), or any statutory share exchange, in each case as a result of which the Common Stock
would be converted into, or exchanged for, stock, other securities, other property or assets
(including cash or any combination thereof) (any of the foregoing, a Transaction), then,
at the effective time of the Transaction, the right to convert each Preferred Share will be changed
into a right to convert such Preferred Share into the kind and amount of shares of stock, other
securities or other property or assets (including cash or any combination thereof) (the
Reference Property) that a Holder would have received in respect of the Common Stock
issuable upon conversion of such Preferred Shares immediately prior to such Transaction. In the
event that holders of Common Stock have the opportunity to elect the form of consideration to be
received in the Transaction, the Company shall make adequate provision whereby the Holders shall
have a reasonable opportunity to determine the form of consideration into which all of the
Preferred Shares, shares of Existing Series A Preferred Stock and shares of Additional Permitted
Preferred Stock, treated as a single class, shall be convertible from and after the effective date
of the Transaction. For so long as the Fortress Investor Group owns a number of shares of Existing
Series A Preferred Stock equal to or greater than 50% of the Initial Preferred Share Amount, such
determination shall be made by the Fortress Investor; thereafter, any such election shall be made
by the Majority Holders. Any such determination by the Holders shall be subject to any limitations
to which all holders of Common Stock are subject, such as pro rata reductions applicable to any
portion of the consideration payable in the Transaction, and shall be conducted in such a manner as
to be completed at approximately the same time as the time elections are made by holders of Common
Stock. The provisions of this SECTION 5(g)(v) and any equivalent thereof in any such securities
similarly shall apply to successive Transactions. The Company shall not become a party to any
Transaction unless its terms are in compliance with the foregoing.
(vi) Rules of Calculation; Treasury Stock. All calculations will be made to the
nearest one-hundredth of a cent or to the nearest one-ten thousandth of a share. Except as
explicitly provided herein, the number of shares of Common Stock (or Reference Property, to the
extent applicable) outstanding will be calculated on the basis of the number of issued and
outstanding shares of Common Stock (or Reference Property, to the extent applicable), not including
shares held in the treasury of the Company. The Company shall not pay any dividend on or make any
distribution to shares of Common Stock (or Reference Property, to the extent applicable) held in
treasury.
(vii) No Duplication. If any action would require adjustment of the Conversion Price
pursuant to more than one of the provisions described in this SECTION 5 in a manner such that such
adjustments are duplicative, only one adjustment (which shall be the adjustment most favorable to
the Holders) shall be made.
(viii) Notice of Record Date. In the event of:
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(A) any event described in SECTION 5(g)(i)(A), (B), (C) or (D);
(B) any Transaction to which SECTION 5(g)(v) applies;
(C) the dissolution, liquidation or winding-up of the Company; or
(D) any other event constituting a
Change of Control or a Going Private Event;
then the Company shall mail to the Holders at their last addresses as shown on the records of the
Company, at least twenty (20) days prior to the record date specified in (A) below or twenty (20)
days prior to the date specified in (B) below, as applicable, a notice stating:
(A) the record date for the dividend, other distribution, stock split or combination or, if a
record is not to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, other distribution, stock split or combination; or
(B) the date on which such reclassification, change, dissolution, liquidation, winding-up or
other event constituting a Transaction, Change of Control or Going Private Event, or any
transaction which would result in an adjustment pursuant to SECTION 5(g)(i)(D), is estimated to
become effective or otherwise occur, and the date as of which it is expected that holders of Common
Stock of record will be entitled to exchange their shares of Common Stock for Reference Property,
other securities or other property deliverable upon such reclassification, change, liquidation,
dissolution, winding-up, Transaction, Change of Control or Going Private Event or that such
issuance of Common Stock, Option Securities or Convertible Securities is anticipated to occur.
(ix) Certificate of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this SECTION 5, the Company at its expense shall
as promptly as reasonably practicable compute such adjustment or readjustment in accordance with
the terms hereof and furnish to each Holder a certificate, signed by an officer of the Company (in
his or her capacity as such and not in an individual capacity), setting forth (A) the calculation
of such adjustments and readjustments in reasonable detail, (B) the facts upon which such
adjustment or readjustment is based, (C) the Conversion Price then in effect, and (D) the number of
shares of Common Stock (or Reference Property, to the extent applicable) and the amount, if any, of
Capital Stock, other securities or other property (including but not limited to cash and evidences
of indebtedness) which then would be received upon the conversion of a Preferred Share.
(x) No Upward Revisions to Conversion Price. For the avoidance of doubt, except in
the case of a reverse share split or share combination resulting in an adjustment under SECTION
5(g)(i)(A) effected with the approvals, if any, required pursuant to SECTION 4(b), in no event
shall any adjustment be made pursuant to this SECTION 5 that results in an increase in the
Conversion Price.
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SECTION 6. Redemption.
(a) Redemption at Option of Holder on Maturity Date. Each Holder shall have the right
to require the Company to redeem such Holders Preferred Shares, in whole or in part, on the
seventh (7th) anniversary of May 13, 2011 (the Maturity Date) at a price per
share payable, subject to SECTION 6(e), in cash and equal to the Redemption Price. At any time
during the period beginning on the thirtieth (30th) calendar day prior to the Maturity
Date (the Holder Redemption Notice Period), each Holder may deliver written notice to the
Company notifying the Company of such Holders election to require the Company to redeem all or a
portion of such Holders Preferred Shares on the Maturity Date (the Election Notice). No
later than thirty (30) calendar days prior to the commencement of the Holder Redemption Notice
Period, the Company shall deliver a notice to each Holder including the following information: (A)
informing the Holder of the Maturity Date and such Holders right to elect to have all or a portion
of its Preferred Shares redeemed by Company on the Maturity Date, (B) the Redemption Price payable
with respect to each share of Series A-2 Preferred Stock on the Maturity Date in connection with
any such redemption (to the extent the Redemption Price is known or can be calculated, and to the
extent not capable of being calculated, the manner in which such price will be determined); (C)
that any certificates representing Preferred Shares which a Holder elects to have redeemed must be
surrendered for payment of the Redemption Price at the office of the Company or any redemption
agent located in New York City selected by the Company therefor together with any written
instrument or instructions of transfer or other documents and endorsements reasonably acceptable to
the redemption agent or the Company, as applicable (if reasonably required by the redemption agent
or the Company, as applicable); (D) that, upon a Holders compliance with clause (C), payment of
the Redemption Price with respect to any Preferred Shares to be made on the Maturity Date will be
made to the Holder within five (5) Business Days of the Maturity Date to the account specified in
such Holders redemption election notice; (E) that any Holder may withdraw its Election Notice with
respect to all or a portion of its Preferred Shares at any time prior to 5:00 p.m. (New York City
time) on the Business Day immediately preceding the Maturity Date; and (F) the number of shares of
Common Stock (or, if applicable, the amount of Reference Property) and the amount of cash, if any,
that a Holder would receive upon conversion of a Preferred Share if a Holder does not elect to have
its Preferred Shares redeemed. The Company shall issue a press release for publication
on the Dow Jones News Service or Bloomberg Business News (or if either such service is not
available, another broadly disseminated news or press release service selected by the Company)
prior to the opening of business on the first Business Day following any date on which the Company
provides notice to Holders pursuant to this SECTION 6(a) disclosing the right of Holders to have
the Company redeem Preferred Shares pursuant to this SECTION 6(a).
(b) Optional Redemption by the Company. On and after the third (3rd)
anniversary of May 13, 2011, the Company may, at its option, redeem all (but not less than all) of
the outstanding Preferred Shares for cash equal to the Redemption Price. If the Company elects to
redeem the Preferred Shares pursuant to this SECTION 6(b), the Company shall deliver a notice of
redemption to the Holders not less than thirty (30) or more than sixty (60) calendar days prior to
the date specified for redemption (the Optional Redemption Date), which notice shall
include: (A) the Optional Redemption Date; (B) the Redemption Price; (C) that on the Optional
Redemption Date, if
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the Holder has not previously elected to convert Preferred Shares into Common
Stock, each Preferred Share shall automatically and without further action by the Holder thereof
(and whether or not the certificates representing such Preferred Shares are surrendered) be
redeemed for the Redemption Price; (D) that payment of the Redemption Price will be made to the
Holder within five (5) business days of the Redemption Date to the account specified by such Holder
to the Company in writing; (E) that the Holders right to elect to convert its Preferred Shares
will end at 5:00 p.m. (New York City time) on the Business Day immediately preceding the Optional
Redemption Date; and (F) the number of shares of Common Stock (or, if applicable, the amount of
Reference Property) and the amount of cash, if any, that a Holder would receive upon conversion of a Preferred Share if a Holder elect to convert
its Preferred Shares prior to the Optional Redemption Date. Notwithstanding the foregoing, any
notice delivered by the Company under this SECTION 6(b) in accordance with SECTION 10(g) shall be
conclusively presumed to have been duly given at the time set forth therein, whether or not such
Holder of Preferred Shares actually receives such notice, and neither the failure of a Holder to
actually receive such notice given as aforesaid nor any immaterial defect in such notice shall
affect the validity of the proceedings for the redemption of the Preferred Shares as set forth
herein. The Company shall issue a press release for publication on the Dow Jones News Service or
Bloomberg Business News (or if either such service is not available, another broadly disseminated
news or press release service selected by the Company) prior to the opening of business on the
first Business Day following any date on which the Company provides notice to Holders pursuant to
this SECTION 6(b) announcing the Companys election to redeem Preferred Shares pursuant to this
SECTION 6(b).
(c) Redemption at Option of the Holder upon a Change of Control.
(i) If a Change of Control occurs, each Holder shall have the right to require the Company to
redeem its Preferred Shares pursuant to a Change of Control Offer, which Change of Control Offer
shall be made by the Company in accordance with Section 6(c)(ii). In such Change of Control Offer,
the Company will offer a payment (such payment, a Change of Control Payment) in cash per
Preferred Share equal to the sum of (x) 101% of the Purchase Price, and (y) accrued and unpaid
Dividends thereon, if any, to the extent not included in the Purchase Price (including, without
limitation, accrued and unpaid Cash Dividends and accrued and unpaid Accreting Dividends for the
then current Dividend Period).
(ii) Within thirty (30) days following any Change of Control, the Company will mail a notice
(a Change of Control Offer) to each Holder describing the transaction or transactions
that constituted such Change of Control and offering to redeem the Preferred Shares on the date
specified in such notice (the Change of Control Payment Date), which date shall be no
earlier than thirty (30) days and no later than sixty-one (61) days from the date such notice is
mailed. In addition, such Change of Control Offer shall further state: (A) the amount of the
Change of Control Payment; (B) that the Holder may elect to have all or any portion of its
Preferred Shares redeemed pursuant to the Change of Control Offer, (C) that any Preferred Shares to
be redeemed must be surrendered for payment of the Change of Control Payment at the office of the
Company or any redemption agent selected by the Company therefor together with any written
instrument or instructions of transfer or other documents and endorsements reasonably acceptable to
the
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redemption agent or the Company, as applicable (if reasonably required by the redemption agent
or the Company, as applicable); (D) that, upon a Holders compliance with clause (C), payment of
the Change of Control Payment with will be made to the Holder on the Change of Control Payment Date
to the account specified by such Holder to the Company in writing; (E) the date and time by which
the Holder must make its election, (F) that any Holder may withdraw its election notice with
respect to all or a portion of their Preferred Shares at any time prior to 5:00 p.m. (New York City
time) on the Business Day immediately preceding the Change of Control Payment Date; and (G) the
amount and type of property that the Holder would receive in connection with such Change of Control
if the Holder elects to convert its Preferred Shares in connection with the Change of Control. The
Company shall issue a press release for publication on the Dow Jones News Service or Bloomberg
Business News (or if either such service is not available, another broadly disseminated news or
press release service selected by the Company) prior to the opening of business on the first
Business Day following any date on which the Company provides notice to Holders pursuant to this
SECTION 6(c) disclosing the right of Holders to have the Company redeem Preferred Shares pursuant
to this SECTION 6(c).
(iii) On the Change of Control Payment Date, the Company will, to the extent lawful: (A)
accept for payment all Preferred Shares validly tendered pursuant to the Change of Control Offer;
and (B) make a Change of Control Payment to each Holder that validly tendered Preferred Shares
pursuant to the Change of Control Offer.
(iv) Notwithstanding anything to the contrary contained in this SECTION 6(c), the Company
shall not be required to consummate the repurchase of Preferred Shares contemplated by this SECTION
6(c) unless and until the Company has repurchased the Senior Notes as required by the Indenture
with regard to the Change of Control (provided, however, that the failure to repurchase Preferred
Shares at any time required by this SECTION 6(c), even if such repurchase cannot be made as a
result of this clause (iv), will constitute a Specified Breach Event).
(v) If at any time prior to consummation of a transaction that would constitute a Change of
Control, the Company has publicly announced (whether by press release, SEC filing or otherwise)
such transaction or prospective transaction or the entry by the Company into any definitive
agreement with respect thereto, the Company shall, within five (5) Business Days of the issuance of
such public announcement, deliver a written notice to each Holder notifying them of the same and
the anticipated date of consummation of such transaction.
(vi) The Company will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer and makes the Change of Control Payment
in the manner, at the times and otherwise in compliance with the requirements set forth herein
applicable to a Change of Control Offer made by the Company and purchases all Preferred Shares
validly tendered under such Change of Control Offer.
(vii) A Change of Control Offer may be made in advance of a Change of Control, conditional
upon such Change of Control, if a definitive agreement is in place for the Change of Control at the
time of making of the Change of Control Offer.
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(d) Notwithstanding anything in this SECTION 6 to the contrary, each Holder shall retain the
right to elect to convert any Preferred Shares to be redeemed at any time prior to 5:00 p.m. (New
York City time) on the Business Day immediately preceding any Redemption Date. Any Preferred
Shares that a Holder elects to convert prior to the Redemption Date shall not be redeemed pursuant
to this SECTION 6.
(e) Insufficient Funds. Any redemption of the Preferred Shares pursuant to this
SECTION 6 shall be payable out of any cash legally available therefor, provided, however, that,
other than in respect of a redemption pursuant to SECTION 6(b) (which the Company may only
effectuate to the extent it has sufficient cash legally available therefor), if there is not a
sufficient amount of cash legally available to pay the Redemption Price in full in cash, then the
Company may pay that portion of the Redemption Price with respect to which it does not have cash
legally available therefor out of the remaining assets of the Company legally available therefor
(valued at the fair market value thereof on the date of payment, as reasonably determined in good
faith by the Board). If the Company anticipates not having sufficient cash legally available for a
redemption pursuant to SECTION 6(a) or SECTION 6(c), the redemption notice delivered to Holders
shall so specify, and indicate the nature of the other assets expected to be distributed and the
fair market value of the same as reasonably determined by the Board as aforesaid. At the time of
any redemption pursuant to this SECTION 6, the Company shall take all actions required or permitted
under Delaware law to permit the redemption of the Preferred Shares, including, without limitation,
through the revaluation of its assets in accordance with Delaware law, to make cash funds (and to
the extent cash funds are insufficient, other assets) legally available for such redemption. In
connection with any redemption pursuant to SECTION 6(c), to the extent that Holders elect to have
their Preferred Shares redeemed and the Company has insufficient funds to redeem such Preferred
Shares (after taking into account the amount of any repurchase obligations the Company has or
expects to have under the Senior Notes (or any other Debt ranking senior to the Series A-2
Preferred Stock), Senior Securities or any Parity Securities resulting from the same facts and
circumstances as the Change of Control hereunder), the Company shall use any available funds to
redeem a portion of such Preferred Shares and Parity Securities (if any are being redeemed) ratably
in proportion to the full respective amounts to which they are entitled; provided, however, that
the failure for any reason to redeem all Preferred Shares required to be redeemed under SECTION
6(c) when required shall constitute a Specified Breach Event.
(f) Mechanics of Redemption.
(i) The Company (or a redemption agent on behalf of the Company, as applicable) shall pay the
applicable Redemption Price on the Redemption Date or the required payment date therefor upon
surrender of the certificates representing the Preferred Shares to be redeemed and receipt of any
written instrument or instructions of transfer or other documents and endorsements reasonably
acceptable to the redemption agent or the Company, as applicable, to the extent required by
SECTIONS 6(a), 6(b) and 6(c); provided that, if such certificates are lost, stolen or destroyed,
the Company may require an affidavit certifying to such effect and, if requested, an agreement
indemnifying the Company from any losses incurred in connection therewith, in each
case, in form and substance reasonably satisfactory to the Company, from such Holder prior to paying such
amounts.
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(ii) Following any redemption of Preferred Shares on any Redemption Date, the Preferred Shares
so redeemed will no longer be deemed to be outstanding and all rights of the Holder thereof shall
cease, including the right to receive Dividends; provided, however, that any rights of Holders
pursuant to this Certificate of Designation that by their terms survive redemption of the Preferred
Shares and, for the avoidance of doubt, any rights that survive pursuant to any of the other
Transaction Agreements (as defined in the Securities Purchase Agreement), shall survive in
accordance with their terms. The foregoing notwithstanding, in the event that a Preferred Share is
not redeemed by the Company when required, such Preferred Share will remain outstanding and will
continue to be entitled to all of the powers, designations, preferences and other rights (including
but not limited to the accrual and payment of dividends and the conversion rights) as provided
herein.
SECTION 7. Specified Breach Events.
(a) The following events shall constitute Specified Breach Events:
(i) an Event of Default has occurred and is continuing under the Indenture; or an event of
default has occurred and is continuing with respect to any other indenture, credit agreement or
similar documentation related to an aggregate of $25,000,000 or more in principal amount of
indebtedness of the Company for borrowed money incurred after the Original Issue Date; provided
that, a Specified Breach Event shall cease to exist once the underlying event of default in respect
of such indebtedness has been waived or cured or such indebtedness has been repaid;
(ii) any Significant Subsidiary fails to repay any indebtedness for borrowed money within any
applicable grace period after final maturity or the acceleration of any indebtedness for borrowed
money of a Significant Subsidiary because of a default, in each case where the total amount of such
unpaid or accelerated indebtedness exceeds $25,000,000; provided that, such a Specified Breach
Event shall cease to exist once the underlying event of default in respect of such indebtedness has
been waived or cured or such indebtedness has been repaid;
(iii) the Company fails to declare and pay any Cash Dividends or Accreting Dividends due on
any Dividend Payment Date and such failure continues for a period of ninety (90) days; provided
that, any such Specified Breach Event shall cease to exist once all Cash Dividends and Accreting
Dividends in arrears through the end of the most recently completed Dividend Period have been
declared and paid in full;
(iv) the Company fails to comply with the Cash Maintenance Ratio covenant set forth in SECTION
8(a) for a period of ninety (90) days; provided that, any such Specified Breach Event shall cease
to exist on the date that an officer of the Company executes a certificate, which shall be sent to
the Holders, certifying to facts showing that the Company is in compliance with such covenant for a
subsequent fiscal quarter;
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(v) the Company defaults in the performance of, or breaches the covenants contained in, the
following sections of this Certificate of Designation or the Securities Purchase Agreement and such
default or breach, if curable, is not cured within ninety (90) days: SECTION 2(c) (Participating
Cash Dividends); SECTION 2(d) (In-Kind Participating Dividends); the proviso contained in SECTION
5(d)(i) (Amounts Received Upon Conversion); SECTION 6(a) (Redemption at Option of Holder on
Maturity Date); SECTION 6(c) (Redemption at Option of Holder Upon a Change of Control) (including,
without limitation, any delay or failure to repurchase the Preferred Shares as a result of
provisions of SECTION 6(c)(iv)); and SECTION 8(b) (Issuance of Additional Preferred Stock); and
(vi) if the Company voluntarily delists its Common Stock so that the Common Stock ceases to be
listed on at least one (1) Exchange or the Company shall take any action with the intent to cause
the Common Stock to cease to be listed on at least one (1) Exchange, except, in either case, in
connection with (A) a Going Private Event, (B) a merger or consolidation involving
the Company or (C) a sale by the Company of all or substantially all of its consolidated
assets, in each case where such transaction is authorized in accordance with the terms set forth
in, or not prohibited by, this Certificate of Designation and where none of the transaction
consideration consists of Common Stock that is listed on an Exchange; provided that, such a
Specified Breach Event shall cease to exist upon the Common Stock again being listed on at least
one (1) Exchange.
(b) Upon a Specified Breach Event and during any time that a Specified Breach Event is
continuing, the Company (which, for the avoidance of doubt shall not be deemed to include any
Subsidiaries of the Company except to the extent specified below) shall be prohibited from:
(i) making, and to the extent within the Companys control, permitting any of its Subsidiaries
to make, any Restricted Payments (other than repurchases of shares of Common Stock in connection
with the termination of an employees, officers or directors service to the Company or any of its
Subsidiaries otherwise permitted pursuant to the terms of this Certificate of Designation
(including, without limitation, SECTION 4, if applicable));
(ii) for so long as the Indenture limits the Companys ability to incur subordinated
indebtedness, incurring any subordinated indebtedness (including for this purpose, Additional
Permitted Preferred Stock or Parity Securities) pursuant to SECTION 4.06(b)(3) of the Indenture (or
a similar provision) to the extent the Company could not do so if the Preferred Shares and any
Parity Securities were assumed to be subordinated indebtedness for the purposes of the Indenture;
(iii) incurring, and to the extent within the Companys control, permitting any Intermediate
Holding Company from incurring, any Debt (which term shall include, for this purpose, Senior
Securities, Additional Permitted Preferred Stock and Parity Securities and shall exclude, in the
case of any Intermediate Holding Company, Debt permitted to be incurred under the Indenture and
incurred to finance acquisitions of businesses or operating assets to be held by a Portfolio
Company in which such Intermediate Holding Company holds an equity interest or to refinance other
indebtedness of such Intermediate Holding Company or any of its Subsidiaries (but only in such
amount as is necessary to pay the acquisition purchase price or pay the refinanced
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indebtedness, as the case may be, together with any fees and expenses related thereto) if after giving effect to
such incurrence, the Collateral Coverage Ratio would be less than 1.0:1.0;
(iv) entering, and to the extent within the Companys control, permitting any of its
Subsidiaries from entering, into any agreement for the purchase of any debt or Equity Securities of
any Portfolio Company of any Harbinger Affiliate from any Harbinger Affiliate; and
(v) entering, and to the extent within the Companys control, permitting any of its
Subsidiaries to enter, into any agreement for the sale by the Company of Equity Securities of any
Portfolio Company of the Company to any Harbinger Affiliate;
provided, however, that clauses (iv) and (v) shall in no way limit or restrict (x) any FS/OM
Permitted Activities or (y) the sale or contribution by a Harbinger Affiliate to the Company or any
Subsidiary of the Company of shares of Capital Stock of Spectrum on commercially reasonable terms
at prevailing market prices using the Thirty Day VWAP for the purpose of ensuring that the
Companys holdings in Spectrum do not constitute investment securities under the Investment Company Act of
1940, as amended.
Notwithstanding anything to the contrary in this SECTION 7(b), the agreements of the Company in
this SECTION 7(b) insofar as they govern or purport to govern conduct concerning any Subsidiary of
the Company are being made by the Company solely in its capacity as the controlling shareholder of
such Subsidiary and not in any fiduciary capacity of it or any of the Subsidiarys officers or
directors, and nothing herein shall require the Company to act in any way that would cause any
shareholder, director or officer of any such Subsidiary to act in a manner that would violate
legally imposed fiduciary duties applicable to any such shareholder, director or officer.
(c) Subject to applicable law and compliance with the rules of The New York Stock Exchange and
the Insurance Regulatory Authorities (including the requirement that an individual appointed as a
Specified Breach Director not be found at any time or from time to time to be untrustworthy by
the Insurance Regulatory Authorities), upon a Specified Breach Event and during any time that a
Specified Breach Event is continuing, upon the Companys receipt of a written notice from the
Fortress Investor (at any time when the Fortress Investor Group owns a number of shares of Existing
Series A Preferred Stock equal to or greater than 50% of the Initial Preferred Share Amount) or
from the Majority Holders (at any time when the Fortress Investor Group owns a number of shares of
Existing Series A Preferred Stock less than 50% of the Initial Preferred Share Amount), the Company
shall, notwithstanding any other provision of this Certificate of Designation, increase the size of
the Board by one (1) directorship (or at any time when the Purchaser Director (as defined in the
Existing Series A Certificate of Designation) is not serving on the Board, two (2) directorships)
(a Specified Breach Director) and the Specified Breach Director(s) shall be elected as
set forth in this section; provided that as a condition precedent to the election of a Specified
Breach Director, the Fortress Investor or the Majority Holders, as applicable, shall be required to
provide to the Company the duly executed and delivered written resignation of the Person to be
elected as a Specified Breach Director, providing that effective immediately and automatically
(without any further action by any Person) upon the earlier to occur of (x) the expiration of the
applicable Breach Period or (y) the number of Fortress Representatives being reduced pursuant to
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SECTION 8(c) of the Existing Series A Certificate of Designation, such Specified Breach Director
shall resign from the Board. For the avoidance of doubt, no Specified Breach Director shall be
elected to the Board unless the written resignation referred to in the preceding sentence is
delivered to the Company prior thereto. A Specified Breach Director need not be an independent
director of the Board pursuant to the rules of the Exchange on which the Companys Common Stock is
then traded. Subject to applicable law and compliance with the rules of The New York Stock
Exchange and the Insurance Regulatory Authorities (including the requirement that an individual
appointed as a Specified Breach Director not be found at any time or from time to time to be
untrustworthy by the Insurance Regulatory Authorities), the Fortress Investor (at any time when
the Fortress Investor Group owns a number of shares of Existing Series A Preferred Stock equal to
or greater than 50% of the Initial Preferred Share Amount) or the Majority Holders (at any time
when the Fortress Investor Group owns a number of shares of Existing Series A Preferred Stock less
than 50% of the Initial Preferred Share Amount) shall be entitled to nominate and elect the
Specified Breach Director(s) (which nominees shall be reasonably acceptable to any governance or
nominating committee of the Board (or the Board if no such committee then exists)). At any time
when the Fortress Investor Group owns a number of shares of Existing Series
A Preferred Stock less than 50% of the Initial Preferred Share Amount, the Specified Breach
Directors shall be elected (i) by the written consent of the Majority Holders or (ii) at a special
meeting of the Holders (which shall be called by the Secretary of the Company at the request of any
Holder) to be held within thirty (30) days of the occurrence of the Specified Breach Event, or, if
the Specified Breach Event occurs less than sixty (60) days before the date fixed for the next
annual meeting of the Companys stockholders, at such annual meeting. At any meeting at which the
Specified Breach Director(s) will be elected, the Specified Breach Director(s) shall be elected by
the holders of a majority of the shares of Existing Series A Preferred Stock held by the Fortress
Investor Group (at any time when the Fortress Investor Group owns a number of shares of Existing
Series A Preferred Stock equal to or greater than 50% of the Initial Preferred Share Amount) or by
the Majority Holders (at any time when the Fortress Investor Group owns a number of shares of
Existing Series A Preferred Stock less than 50% of the Initial Preferred Share Amount). The
Specified Breach Director(s) will serve until there ceases to be any Preferred Shares or shares of
Existing Series A Preferred Stock outstanding or until no Specified Breach Event exists or is
continuing, whichever occurs earliest (the Breach Period) and, upon the expiration of an
applicable Breach Period, the director seat(s) held by the Specified Breach Director(s) shall be
automatically eliminated and the size of the Board shall be reduced accordingly. If there is a
vacancy in the office of a Specified Breach Director during a Breach Period, then the vacancy may
only be filled by a nominee (which nominees shall be reasonably acceptable to any governance or
nominating committee of the Board (or the Board if no such committee then exists)) upon the written
consent or vote of the Fortress Investor (at any time when the Fortress Investor Group owns a
number of shares of Existing Series A Preferred Stock equal to or greater than 50% of
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the Initial Preferred Share Amount) or the Majority Holders (at any time when the Fortress Investor Group owns
a number of shares of Existing Series A Preferred Stock less than 50% of the Initial Preferred
Share Amount. Each Specified Breach Director will be entitled to one (1) vote on any matter with
respect to which the Board votes. During the Breach Period, any Specified Breach Director may be
removed at any time with or without cause by, and shall not be removed otherwise than by, the
written consent or vote of the Fortress Investor (at any time when the Fortress Investor Group owns
a number of shares of Existing Series A Preferred Stock equal to or greater than 50% of the Initial
Preferred Share Amount) or the Majority Holders (at any time when the Fortress Investor Group owns
a number of shares of Existing Series A Preferred Stock less than 50% of the Initial Preferred
Share Amount). If after the appointment of a Specified Breach Director the applicable Breach
Period expires, if so requested by the Company, the Investor shall promptly cause to resign, and
take all other action reasonably necessary, or reasonably requested by the Company, to cause the
prompt removal of, such Specified Breach Director. The Investor Director (as defined in the
Existing Series A Certificate of Designation), if any, the Additional Preferred Directors (as
defined in the Existing Series A Certificate of Designation), if any and the Specified Breach
Directors (if any), shall be spread as evenly as practicable among the classes of directors.
Notwithstanding anything to the contrary contained in this SECTION 7(c), no Specified Breach
Directors shall be appointed (whether or not a Specified Breach Event has occurred and is
continuing) during any period when Additional Preferred Directors have been appointed to the Board.
(d) Whether or not a Specified Breach Event has occurred and is continuing under SECTION
7(a)(iii), if the Company fails to declare and pay Dividends (other than Participating Dividends)
due on any Dividend Payment Date or Participating Dividends when dividends are paid to the holders
of Common Stock, then until such accrued and unpaid Dividends are paid, the
Company shall be prohibited from (i) declaring, paying or setting apart for payment, any
dividends or other distributions on the Common Stock or other Junior Securities, (ii) redeeming,
purchasing or otherwise acquiring for any consideration any Common Stock or Junior Securities and
(iii) declaring, paying or setting apart for payment, any dividends or other distributions on any
Parity Securities; provided that, dividends or distributions otherwise prohibited by clause (iii)
may be declared, paid or set aside on a pro rata basis among the Preferred Shares and the shares of
Parity Securities in proportion to the amounts to which they are entitled.
(e) Notwithstanding any other provisions of this Certificate of Designation or the Securities
Purchase Agreement, if at any time (i) the number of Fortress Representatives to which the Fortress
Investor is then entitled (collectively, the Fortress Director Representation Amount)
exceeds (ii) the number (the Proportionate Representation Amount) equal to, rounded up to
the nearest whole number (A) the percentage of the Companys Voting Stock held by the Fortress
Investor Group (assuming, for such purposes, that any securities held by the Fortress Investor
Group and convertible, exchangeable or exercisable for Voting Stock of the Company are so
converted, exchanged or exercised), divided by (B) the number of votes applicable to all Voting
Stock of the Company (assuming, for such purposes, that any securities held by the Fortress
Investor Group and convertible, exchangeable or exercisable for Voting Stock of the Company are so
converted, exchanged or exercised), multiplied by (C) the total number of seats on the Board, then,
unless not required pursuant to the rules of The New York Stock Exchange or any other stock
exchange on which the Companys Common Stock may then be listed, the Fortress Director
Representation Amount and, if necessary, the number of Fortress Representatives shall be reduced
until the Fortress Director Representation Amount and the number of Appointed Directors equals the
greater of one and the Proportionate Representation Amount;
provided, however, that the Fortress Director Representation Amount and the number of Fortress
Representatives shall thereafter again be increased from time to time if and to the extent that, at
such
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time, the Fortress Investor would be entitled to appoint such additional Fortress
Representatives and the appointment of such additional Fortress Representatives would not cause the
Fortress Director Representation Amount to exceed the Proportionate Representation Amount. Any
vacancy created on the Board as a result of the operation of the foregoing procedures shall be
required to be filled by the Company by an individual who is independent as defined in Section
303A of The New York Stock Exchange Listed Company Manual and who is not, nor ever has been, an
employee of the Company, any of its Subsidiaries, any Harbinger Affiliate or any Portfolio Company
of any Harbinger Affiliate.
SECTION 8. Covenants.
(a) Cash Maintenance Ratio. During the period beginning on the Original Issue Date
and ending on March 31, 2012, the Company shall not permit, on the last day of each fiscal quarter
ending on or prior to March 31, 2012, the ratio of the Companys Cash Equivalents to Fixed Charges
for the prior four (4) quarters then ended to be less than 1.0 to 1.0 (the Cash Maintenance
Ratio); provided that, for the first three (3) fiscal quarters ending after the Original Issue
Date, the actual amount of Fixed Charges incurred since the Original Issue Date shall be annualized
to reflect a full year of 365 days.
(b) Issuance of Additional Preferred Stock. After the date hereof, the Company may
issue additional shares of Series A-2 Preferred Stock or Parity Securities provided that the
aggregate purchase price of all outstanding shares of Series A-2 Preferred Stock and Parity
Securities may not, except to the extent set forth in the second sentence following this sentence,
exceed $400.0 million. For purposes hereof, the term Additional Permitted Preferred
Stock shall mean the $280 million of Series A Preferred Stock issued on May 12, 2011 together
with the $120 million of Series A-2 Preferred Stock issued on the Original Issue Date. The Company
shall not, on or after the Original Issue Date, issue any (x) Parity Securities in excess of the
Additional Permitted Preferred Stock authorized by the first sentence of this SECTION 8(b) or (y)
Senior Securities unless one of the following conditions (the Incurrence Based Issuance
Limits) is satisfied (and, in the case of Senior Securities, subject to receipt of the
required approval of the Majority Holders and, if applicable, the Fortress Investor, as set forth
under SECTIONS 4(b)(i)(B) and 4(b)(ii)(A) of the Existing Series A Certificate of Designation):
(i) if the Companys Total Secured Debt is less than $400.0 million, the Pro Forma Collateral
Coverage Ratio after such issuance would be greater than the number equal to (x) the collateral
coverage ratio set forth in Section 4.18 of the Indenture (or a successor provision) applicable at
times when the Companys Total Secured Debt outstanding is less than $400.0 million less (y) 0.5
(which, for example, means the Pro Forma Collateral Coverage Ratio exceeds 1.5 to 1.0 as of the
date hereof because the collateral coverage ratio set forth in the Indenture as in effect on the
date hereof is 2.0 to 1.0); or
(ii) if the Companys Total Secured Debt is equal to or greater than $400.0 million, the Pro
Forma Collateral Coverage Ratio after such issuance would be greater than the number equal to (x)
the collateral coverage ratio set forth in Section 4.18 of the Indenture (or a successor provision)
applicable at times when the Companys Total Secured Debt outstanding is
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equal to or greater than $400.0 million, the
Pro Forma Collateral Coverage Ratio after such issuance would be greater than the number equal to
(x) the collateral coverage ratio set forth in Section 4.18 of the Indenture (or a successor
provision) applicable at times when the Companys Total Secured Debt outstanding is equal to or
greater than $400.0 million less (y) 0.5 (which, for example, means the Pro Forma Collateral
Coverage Ratio exceeds 2.0 to 1.0 as of the date hereof because the collateral coverage ratio set
forth in the Indenture as in effect on the date hereof is 2.5 to 1.0).
Notwithstanding the foregoing, the Incurrence Based Issuance Limits shall cease to apply, and
the conditions in the foregoing clauses (i) and (ii) shall be deemed satisfied, from and after the
first date on which both (x) the Company Conversion Conditions and (y) the Public Float Hurdle are
satisfied.
For the avoidance of doubt, no Series A-2 Preferred Stock or Parity Securities shall be
issuable or deemed issued pursuant to the third sentence of this SECTION 8(b) unless and until the
aggregate issue price of the Existing Series A Preferred Stock issued on May 13, 2011, plus the
Series A-2 Preferred Stock issued on the Original Issue Date, plus the aggregate issue price of
Additional Permitted Preferred Stock issued or deemed issued pursuant to the first sentence of this
SECTION 8(b) equals $400 million.
Any Parity Securities or Senior Securities issued after the Original Issue Date pursuant to
the third sentence of this SECTION 8(b), are referred to herein as the Additional Preferred
Securities).
(c) Use of Proceeds from Preferred Shares. The Company shall not, within 180 days
after May 13, 2011, (i) make any Restricted Payments, or (ii) redeem or repurchase any of the
Senior Notes; provided that, notwithstanding the foregoing, the Company may pursuant to this
covenant (x) (a) repurchase or redeem Equity Securities of the Company or any securities that are
linked to Equity Securities of the Company held by employees of the Company upon such employees
termination, death or disability, (b) repurchase Equity Securities of the Company deemed to occur
upon the exercise of stock options or warrants if the Equity Securities represent all or a portion
of the exercise price thereof (or related withholding taxes) and (c) make Restricted Payments to
allow the customary payment of cash in lieu of the issuance of fractional shares upon the exercise
of options or warrants or upon the conversion or exchange of Equity Securities of the Company; and
(y) make Restricted Payments or redeem or repurchase any of the Senior Notes to the extent that the
funds used to make such Restricted Payments or to redeem or repurchase any of the Senior Notes, as
applicable, consist of either dividend proceeds from operations received by the Company from
earnings of its Subsidiaries or proceeds from an initial public offering of F&G (as defined in the
Securities Purchase Agreement) or a Subsidiary thereof. For the avoidance of doubt, to the extent
any of the foregoing actions are subject to any other covenants or conditions pursuant to any other
provisions of this Certificate of Designation (including, without limitation, SECTION 4), such
action shall be required to comply with such other provisions.
(d) Certificates. The Company shall promptly, and in no event later than 30 days
after the last day of any calendar quarter, furnish to each Holder a certificate of an officer of
the Company setting forth, as of the end of such calendar quarter the Cash Maintenance Ratio and
the calculation of the same (provided that the Company shall not be obligated to provide the
information required by this sentence from and after such time as the covenant in SECTION 8(a)
ceases to be applicable).
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(i) The Company shall promptly, and in no event later than the 30th day after the first day of
a Dividend Period for which the Accreting Dividend rate has been adjusted pursuant to SECTION 2(b),
furnish to each Holder a certificate of an officer of the Company setting forth, as of the end of
the prior Dividend Period the Net Asset Value as of the end of such prior Dividend Period and the
calculation of the same.
(ii) If the Company issues any Additional Preferred Securities pursuant to SECTION 8(b), the
Company shall promptly, and in no event later than five (5) days after the date of such issuance,
furnish to each Holder a certificate of an officer of the Company setting forth, to the extent
required to be complied with in connection with such issuance, the amount of Total Secured Debt and
the Collateral Coverage Ratio as of the date of such issuance, the Pro Forma Collateral Coverage
Ratio after giving effect to such issuance, and the calculations relating to the same;
(iii) If the Company takes any action, which pursuant to this Certificate of Designation
requires the Public Float Hurdle to be met, the Company shall promptly, and in no event later than
five (5) days after the date of such action, furnish to each Holder a certificate of an officer of
the Company setting forth, to the extent required to be complied with in connection with such
action, the Public Market Capitalization as of the date of such action and an analysis of the
Public Float Hurdle.
SECTION 9. Additional Definitions. For purposes of these resolutions, the following
terms shall have the following meanings:
(a) Affiliate means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common control with, such
Person.
(b) Asset Sale shall have the meaning set forth in the Indenture.
(c) Beneficial Owner has the meaning assigned to such term in Rule 13d-3 and Rule
13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular
person (as that term is used in Section 13(d)(3) of the Exchange Act), such person shall be
deemed to have beneficial ownership of all securities that such person has the right to acquire
by conversion or exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms Beneficially Owns and
Beneficially Owned shall have a corresponding meaning.
(d) Business Day means any day except a Saturday, Sunday or other day on which
commercial banks in New York, New York are authorized or obligated to close.
(e) Capital Stock means, with respect to any Person, any and all shares of stock of
a corporation, partnership interests or other equivalent interests (however designated, whether
voting or non-voting) in such Persons equity, entitling the holder to receive a share of the
profits and losses, and a distribution of assets, after liabilities, of such Person.
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(f) Cash Equivalents means:
(i) United States dollars, or money in other currencies received in the ordinary course of
business;
(ii) U.S. Government Obligations or certificates representing an ownership interest in U.S.
Government Obligations with maturities not exceeding one year from the date of acquisition;
(iii) (A) demand deposits, (B) time deposits and certificates of deposit with maturities of
one year or less from the date of acquisition, (C) bankers acceptances with maturities not
exceeding one year from the date of acquisition, and (D) overnight bank deposits, in each case with
any bank or trust company organized or licensed under the laws of the United States or any state
thereof having capital, surplus and undivided profits in excess of $500 million whose short-term
debt is rated A-2 or higher by S&P or P-2 or higher by Moodys;
(iv) repurchase obligations with a term of not more than seven (7) days for underlying
securities of the type described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above;
(v) commercial paper rated at least P-1 by Moodys or A-1 by S&P and maturing within six (6)
months after the date of acquisition; and
(vi) money market funds at least 95% of the assets of which consist of investments of the type
described in clauses (i) through (v) above.
(g) Certificate of Designation means this certificate of designation for the Series
A-2 Preferred Stock, as such shall be amended from time to time.
(h) Change of Control shall have the meaning set forth in the Existing Indenture;
provided, however, that references to Permitted Holders therein shall be deemed to refer to the
Harbinger Affiliates, the Fortress Investor and their respective Affiliates.
(i) Collateral Coverage Ratio means, as of any determination date, the Collateral
Coverage Ratio as set forth in the Indenture, except that (x) all assets of the Company and the
Guarantors (as defined in the Indenture) (including Excluded Property (as defined in the
Indenture)) shall be considered to be Collateral whether or not pledged to secure indebtedness of
the Company or its Subsidiaries and (y) clause (ii) of such definition shall be deemed to refer to
all Debt (as defined in the Indenture), whether or not secured by liens on the Collateral, and
the term Debt shall further be deemed to include all outstanding Preferred Shares and all
outstanding Parity Securities and Senior Securities (including any shares of Preferred Stock that
would be outstanding after taking into account the consummation of the proposed issuance of
Preferred Stock). In the event that any version of the Indenture no longer contains a Collateral
Coverage Ratio (or substantially similar test), then the term Collateral Coverage Ratio shall be
deemed to refer to the definition of Collateral Coverage Ratio (or such substantially similar
definition) set
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forth in the last version of the Indenture containing such ratio; provided,
however, that if the Company no longer has any indebtedness outstanding, then any covenants
utilizing the Collateral Coverage Ratio shall no longer be in effect (subject to the 365-day
reinstatement and related non-circumvention provisions of the last sentence contained in the
definition of the term Indenture herein).
(j) Common Stock means the shares of common stock, par value $0.01 per share, of the
Company or any other Capital Stock of the Company into which such Common Stock shall be
reclassified or changed.
(k) Company Conversion Conditions means the following: (i) the Thirty Day VWAP
exceeds 150% of the then applicable Conversion Price (as defined in the Existing Series A
Certificate of Designation) of the Existing Series A Preferred Stock; and (ii) the Daily VWAP
exceeds 150% of the then applicable Conversion Price (as defined in the Existing Series A
Certificate of Designation) of the Existing Series A Preferred Stock for at least twenty (20)
Trading Days out of the thirty (30) Trading Days used to calculate the Thirty Day VWAP in clause
(i) of this definition.
(l) control (including, with correlative meanings, the terms controlling,
controlled by and under common control with) with respect to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities, by contract or
otherwise. For the avoidance of doubt, as of the date hereof (but without precluding a different
determination as of any date subsequent to the date hereof dependent on the relevant facts and
circumstances at such time), the Company shall not be considered to control Spectrum.
(m) Conversion Price means initially $7.00, as adjusted from time to time as
provided in SECTION 5.
(n) Convertible Securities means securities by their terms convertible into or
exchangeable for Common Stock or options, warrants or rights to purchase such convertible or
exchangeable securities.
(o) Daily VWAP means the volume-weighted average price per share of Common Stock (or
per minimum denomination or unit size in the case of any security other than Common Stock) as
displayed under the heading Bloomberg VWAP on the Bloomberg page for the <equity> AQR
page corresponding to the ticker for such Common Stock or unit (or its equivalent successor if
such page is not available) in respect of the period from the scheduled open of trading until the
scheduled close of trading of the primary trading session on such Trading Day (or if such
volume-weighted average price is unavailable, the market value of one share of such Common Stock
(or per minimum denomination or unit size in the case of any security other than Common Stock) on
such Trading Day. The volume weighted average price shall be determined without regard to
after-hours trading or any other trading outside of the regular trading session trading hours.
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(p) Debt shall have the meaning set forth in the Indenture.
(q) Dividend Payment Date means January 15, April 15, July 15 and October 15 of each
year, commencing on July 15, 2011; provided that, if any such Dividend Payment Date would otherwise
occur on a day that is not a Business Day, such Dividend Payment Date shall instead be the
immediately succeeding Business Day.
(r) Dividend Rate means for any Dividend Period, 8.00% plus the applicable Accreting
Dividend Rate for such Dividend Period.
(s) Equity Securities means, with respect to any Person: (i) shares of Capital
Stock of such Person, (ii) any rights, options, warrants or similar securities to subscribe for,
purchase or otherwise acquire any shares of the Capital Stock of such Person, and (iii) Capital
Stock or other securities (including debt securities) directly or indirectly convertible into or
exercisable or exchangeable for any shares of Capital Stock of such Person.
(t) Exchange means the NASDAQ Global Market, the NASDAQ Global Select Market, The
New York Stock Exchange or any of their respective successors.
(u) Exchange Act means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
(v) Excluded Stock means: (i) shares of Common Stock issued by the Company in an
event subject to, and for which the Conversion Price is subject to adjustment pursuant to, SECTION
5(g)(i)(A); (ii) Option Securities or shares of Common Stock (including upon exercise of Option
Securities) issued to any director, officer or employee pursuant to compensation arrangements
approved by the Board in good faith and otherwise permitted to be issued, or not prohibited, by any
other provision of this Certificate of Designation; (iii) the issuance of shares of Common Stock
upon conversion of the Preferred Shares or upon the exercise or conversion of Option Securities and
Convertible Securities of the Company outstanding on the Original Issue Date or otherwise
permitted to be issued, or not prohibited, by any other provision of this Certificate of
Designation; and (iv) Common Stock that becomes issuable in connection with, or as a result of,
accretions to the face amount of, or payments in kind with respect to, Preferred Shares, Option
Securities and Convertible Securities of the Company outstanding on the Original Issue Date or
otherwise permitted to be issued, or not prohibited, by any other provision of this Certificate of
Designation.
(w) Ex-Date means the first date on which the Common Stock trades on the applicable
exchange or in the applicable market, regular way, without the right to receive the issuance,
dividend or distribution in question from the Company or, if applicable, from the seller of the
Common Stock on such exchange or market (in the form of due bills or otherwise) as determined by
such exchange or market.
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(x) Existing Indenture means the indenture, dated as of November 15, 2010, by and
between the Company and Wells Fargo Bank, National Association, as trustee, governing the Senior
Notes, as in effect on the Original Issue Date.
(y) Fair Market Value shall have the meaning set forth in the Indenture, provided
that, the initial Fair Market Value of all Investments of the Company shall be deemed to be the
purchase price paid by the Company therefor and the Fair Market Value of Harbinger F&G on May 13,
2011 shall be deemed to be $350.0 million, provided, further, that for purposes of the calculation
of Net Asset Value, the Fair Market Value of any Investment of the Company shall be valued twice
per annum at the end of the same two fiscal quarters as provided in the Indenture (or, if the
Indenture shall cease to be in effect or shall provide for valuations at times other than twice per
annum, then at the end of the same two fiscal quarters as provided in the then most recent
Indenture).
(z) Fixed Charges means, without duplication, the sum of (i) cash interest payments
on the Senior Notes, (ii) cash interest payments on other indebtedness for borrowed money, (iii)
Cash Dividends payable on the Preferred Shares, and (iv) cash dividends payable on Parity
Securities and Senior Securities.
(aa) Fortress Investor means CF Turul LLC, a Delaware limited liability company, or
its successor.
(bb) Fortress Investor Group means the Fortress Investor, its Affiliates and its
managed funds.
(cc) Fortress Representatives shall mean any Investor Director, Additional Preferred
Directors, Specified Default Directors, Director Replacement Observer and Fortress Board Observer,
in each case as defined in the Existing Series A Certificate of Designation.
(dd) Front Street Re means, collectively, FS Holdco Ltd. (Cayman), Front Street
Holdings Ltd (Cayman) and Front Street Re Ltd. (Bermuda), and their respective successors.
(ee) Front Street Specified Affiliate means FS Holdco Ltd., Front Street Re, Ltd.
and any of their respective Subsidiaries and successors and any other Subsidiary of FS Holdco Ltd.
formed to conduct a reinsurance business.
(ff) FS/OM Permitted Activities means:
(i) any reinsurance transaction entered into by any Front Street Specified Affiliate that is
approved by a committee of independent directors of the Company (including without limitation the
appointment of a Harbinger Affiliate as investment manager of any assets underlying such
transaction, the investment of any such assets in debt or equity securities issued by, or the
purchase of assets or investments from, any Harbinger Affiliate, or the formation of any
subsidiaries to implement such transaction);
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(ii) asset management activity of any Harbinger F&G Affiliate that are (x) conducted on
customary market terms, (y) conducted in the ordinary course of business and on terms that are
substantially economically similar (in the aggregate) to the terms in effect as of the date of this
Agreement with respect to the asset management activities conducted on behalf of Harbinger F&G
Affiliates by Goldman Sachs Asset Management and Barrow, Hanley, Mewhinney & Strauss (regardless of
whether such asset management activities are conducted by the Company or any of its Subsidiaries
(including, any Harbinger F&G Affiliates) or any Harbinger Affiliate), or (z) approved by a
committee of independent directors of the Company (including without limitation the appointment of
a Harbinger Affiliate as the investment manager for such assets, the investment of any such assets
in debt or equity securities issued by, or the purchase of assets or investments from, any
Harbinger Affiliate or the formation of any subsidiary to implement such transaction); and
(iii) asset management activity of any other financial services company that is a Subsidiary
of the Company (including without limitation the appointment of a Harbinger Affiliate as the
investment manager for such assets, the investment of any such assets in debt or equity securities
issued by, or the purchase of assets or investments from, any Harbinger Affiliate or
the formation of any Subsidiary to implement such transaction) (other than the asset
management activities described in clause (ii) above) that are either in the ordinary course of
business or approved by a committee of independent directors of the Company; provided, such
asset management activities do not include operating as a hedge fund or private equity business
(unless such activities are managed by a Subsidiary of the Company and not by any Harbinger
Affiliate); provided further, that reinsurance activities shall not, for this purpose, be
considered a hedge fund or private equity business operation.
(gg) Going Private Event means either: (A) the Company or any Harbinger Affiliate
entering into a plan of merger or other agreement or arrangement providing for the acquisition of
the Company by any Harbinger Affiliate in a transaction subject to Rule 13e-3 of the Exchange Act
or (ii) a Harbinger Affiliate launching a tender offer subject to Rule 13e-3 of the Exchange Act
for the outstanding shares of Common Stock not held by the Harbinger Affiliates.
(hh) Governmental Entity shall mean any United States or non-United States federal,
state or local government, or any agency, bureau, board, commission, department, tribunal or
instrumentality thereof or any court, tribunal, or arbitral or judicial body.
(ii) Harbinger Affiliates means Philip A. Falcone, Harbinger Capital Partners, or
any limited partnership, limited liability company, corporation or other entity that is an
Affiliate of Philip A. Falcone or Harbinger Capital Partners (other than the Company and its
Subsidiaries).
(jj) Harbinger Capital Partners means, collectively, Harbinger Capital Partners LLC
and Harbinger Capital Partners II LP.
(kk) Harbinger F&G means Harbinger F&G, LLC (formerly known as Harbinger OM, LLC).
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(ll) Harbinger F&G Affiliate means Harbinger F&G and any of its Subsidiaries and any
of their respective successors.
(mm) hereof; herein and hereunder and words of similar import
refer to this Certificate of Designation as a whole and not merely to any particular clause,
provision, section or subsection.
(nn) Holders means the holders of outstanding Preferred Shares, shares of Existing
Series A Preferred Stock, and shares of Additional Permitted Preferred Stock as they appear in the
records of the Company.
(oo) HSR Act means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the regulations promulgated thereunder.
(pp) Independent Director means any director on the Board that is independent as
defined in Section 303A of The New York Stock Exchange Listed Company Manual, other than any
director that is employed by a Harbinger Affiliate.
(qq) Indenture means the indenture, dated as of November 15, 2010, by and between
the Company and Wells Fargo Bank, National Association, as trustee, governing the Senior Notes as
amended, supplemented or otherwise modified, and, in the event that the Senior Notes are refinanced
or replaced with indebtedness ranking senior to the Series A-2 Preferred Stock, shall be deemed to
refer to any agreement governing the terms of such indebtedness (provided, that in the event more
than one agreement would constitute an Indenture, with respect to any provision in this
Certificate of Designation incorporating a provision of the Indenture, the term Indenture shall
mean the agreement most favorable to the Holders with respect to such provision). Further, if at
any time the Company ceases to be a party to an Indenture, the terms hereof referring to the
provisions of the Indenture shall be suspended, except that if the Company enters into an
agreement regarding indebtedness ranking senior to the Series A-2 Preferred Stock within 365 days
of the termination of the last Indenture, then the term Indenture shall be deemed to refer to
such agreement and the provisions hereof that were previously suspended shall once again be
effective (provided, however, that if the Company directly or indirectly structures any financing
activity, or the timing thereof, with the purpose or intent of causing any such suspension with a
view towards thereafter entering into a new Indenture, then such suspension shall be deemed not to
have taken effect and the Company shall be deemed to have continued to be subject to the provisions
of the prior Indenture).
(rr) Initial Preferred Share Amount means 205,000 shares of Existing Series A
Preferred Stock, as adjusted for any splits, combinations, reclassifications or similar
adjustments.
(ss) Intermediate Holding Company means any Subsidiary of the Company that has no
assets other than Equity Interests in other Subsidiaries of the Company.
(tt) Insurance Regulatory Authorities means the Vermont Department of Banking,
Insurance, Securities and Health Care Administration, the New York State Insurance Department, the
Maryland Insurance Administration, the Bermuda Monetary Authority or any other
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Governmental Entity
regulating an insurance business of the Company or any of its controlled Affiliates.
(uu) Investment has the meaning ascribed to such term in the Indenture.
(vv) Investment Securities with respect to a Person means debt or equity securities
issued by such Person or similar obligations of, or participations in, such Person.
(ww) Issue Date means, with respect to a Preferred Share, the date on which such
share is first issued by the Company.
(xx) Lien means any mortgage, pledge, security interest, encumbrance, lien or charge
of any kind (including any conditional sale or other title retention agreement or capital lease).
(yy) Liquidation Event means (i) the voluntary or involuntary liquidation,
dissolution or winding-up of the Company, (ii) the commencement by the Company of any case under
applicable bankruptcy, insolvency or other similar laws now or hereafter in effect, including
pursuant to Chapter 11 of the U.S. Bankruptcy Code, (iii) the consent to entry of an order for
relief in an involuntary case under applicable bankruptcy, insolvency or other similar laws now or
hereafter in effect, including pursuant to Chapter 11 of the U.S. Bankruptcy Code, and (iv)
the consent to the appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee or similar official of the Company, or any general assignment for the benefit of
creditors.
(zz) Majority Holders means Holders (other than the Company, its employees, its
Subsidiaries or Harbinger Affiliates) owning more than 50% of the Regular Liquidation Preference of
the issued and outstanding Preferred Shares, shares of Existing Series A Preferred Stock and shares
of Additional Permitted Preferred Stock, taken as a whole; provided that, for purposes of such
calculation, the Preferred Shares, shares of Existing Series A Preferred Stock and shares of
Additional Permitted Preferred Stock held by the Company, its employees, its Subsidiaries or any
Harbinger Affiliate shall be treated as not outstanding.
(aaa) Market Disruption Event means the occurrence or existence for more than one
half hour period in the aggregate on any scheduled Trading Day for the Common Stock (or Reference
Property, to the extent applicable) of any suspension or limitation imposed on trading (by reason
of movements in price exceeding limits permitted by the applicable Exchange or otherwise) in the
Common Stock (or Reference Property, to the extent applicable) or in any options, contracts or
future contracts relating to the Common Stock (or Reference Property, to the extent applicable),
and such suspension or limitation occurs or exists at any time before 4:00 p.m. (New York City
time) on such day.
(bbb) Market Value on any date means the closing sale price per share (or if no
closing sale price is reported, the average of the closing bid and ask prices or, if more than one
in either case, the average of the average closing bid and the average closing ask prices) on such
date as reported on the principal Exchange on which shares of the Common Stock are then listed. If
the
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Common Stock is not so listed or traded, the Market Value will be an amount reasonably
determined by the Board in good faith to be the fair value of the Common Stock.
(ccc) May 13 NAV means $893,520,931.
(ddd) Net Asset Value means the amount, valued twice per annum at the end of the
same two fiscal quarters as provided in the Indenture, equal to (A) the sum of (1) the Cash
Equivalents of the Company plus (2) the Fair Market Value of the Companys Investments (other than
Cash Equivalents), less (B) all liabilities of the Company determined in accordance with GAAP,
including those related to the Companys Investments to the extent not taken into account in the
calculation of the Fair Market Value of the Companys Investments; provided that for purposes
hereof, (i) the derivative attributable to the conversion feature in any series of Preferred Stock
will not be considered a liability of the Company, (ii) the face amount of any Series A-2 Preferred
Stock and any Parity Securities (as well as any cash dividends accrued thereon) will be considered
a liability of the Company, (iii) the amount of the fees and expenses paid by the Company on behalf
of itself or any third party in connection with the issuance of the first $400 million aggregate
purchase price of Existing Series A Preferred Stock, Series A-2 Preferred Stock and Additional
Preferred Securities will be included in the calculation of the Companys Cash Equivalents, in each
case upon the first calculation of Net Asset Value following payment of such fees or expenses, (iv)
the face amount of Preferred Stock that constitutes Senior Securities and dividends accrued thereon
will be considered a liability of the Company and (v) the face amount of Preferred Stock that is a
Junior Security and dividends accrued thereon will not be considered a liability of the Company;
provided, further, that at the option of the Company, Net Asset Value may be recalculated as of
December 31, 2011 solely for purposes of the Dividend Period(s) beginning on and after January 1,
2012.
(eee) Option Securities means options, warrants or other rights to purchase or
acquire Common Stock, as well as stock appreciation rights, phantom stock units and similar rights
whose value is derived from the value of the Common Stock.
(fff) Original Issue Date means Closing Date (as such term is defined in the
Securities Purchase Agreement).
(ggg) Person means any individual, corporation, limited liability company, limited
or general partnership, joint venture, association, joint-stock company, trust, unincorporated
organization, government, any agency or political subdivisions thereof or other Person as
contemplated by Section 13(d) of the Exchange Act.
(hhh) Portfolio Company means, with respect to a referent Person, any other Person
that issues Investment Securities if (i) such Investment Securities are the subject of an
investment by the referent Person, (ii) at least 10% of the class of Investment Securities are
Beneficially Owned by the referent Person and (iii) such Investment Securities are not (A) cash or
cash equivalents, (B) marketable direct obligations issued or unconditionally guaranteed by the
government of any OECD country, or issued by any agency thereof, maturing within one year from the
date of acquisition thereof, (C) money market instruments, commercial paper or other short-term
debt obligations having at the date of purchase by such Person the highest or second highest rating
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obtainable from either Standard & Poors Ratings Services or Moodys Investors Services, Inc., or
their respective successors, (D) interest bearing accounts at a registered broker-dealer, (E) money
market mutual funds, (F) certificates of deposit or similar financial instruments maturing within
one year from the date of acquisition thereof issued by commercial banks incorporated under the
laws of the United States, any state thereof, the District of Columbia, any other OECD country or
political subdivision thereof, each having at the date of acquisition by the Partnership combined
capital and surplus of not less than $100 million, or (G) overnight repurchase agreements with
primary U.S. Federal Reserve Bank dealers collateralized by direct U.S. Government obligations or
similar arrangements with the central banks of OECD countries.
(iii) Preferred Shares means the shares of Series A-2 Preferred Stock.
(jjj) Pro Forma Collateral Coverage Ratio means, with respect to a potential
issuance of shares of Additional Preferred Securities, the Collateral Coverage Ratio calculated to
give pro forma effect to the issuance of such Additional Preferred Securities.
(kkk) Public Float Hurdle means, as of any relevant measurement date, that the
Public Market Capitalization is greater than the aggregate Market Value of the shares of Common
Stock into which all issued and outstanding shares of Existing Series A Preferred Stock may be
converted.
(lll) Public Market Capitalization means, as of any relevant measurement date, the
aggregate Market Value of all issued and outstanding shares of Common Stock, other than shares of
Common Stock held by Harbinger Affiliates.
(mmm) Purchase Price means $1,000 per share, as the same may be increased pursuant
to SECTION 2; provided that, in connection with a Going Private Event, the Purchase Price shall be
adjusted to be an amount equal to the greater of (i) an amount equal to the Regular Liquidation
Preference (disregarding for the purposes of calculating the Regular Liquidation Preference the
last sentence of this definition) or (ii) the value of the consideration to be received per share
of Common Stock in such Going Private Event (reasonably determined in good faith by the Board).
Notwithstanding the foregoing, for purposes of determining Cash Dividends payable pursuant to
SECTION 2(a) and the Liquidation Preference payable upon a Liquidation Event pursuant to SECTION 3,
no adjustment to the Purchase Price pursuant to the first proviso of the preceding sentence shall
be taken into account.
(nnn) Redemption Date means the Maturity Date, any Optional Redemption Date or any
Change of Control Payment Date, as applicable.
(ooo) Redemption Price means with respect to each Preferred Share: (i) in
connection with a redemption pursuant to SECTION 6(a), the Purchase Price plus all accrued and
unpaid Dividends (to the extent not included in the Purchase Price, including, without limitation,
accrued and unpaid Cash Dividends and accrued and unpaid Accreting Dividends for the then current
Dividend Period), if any, on each Preferred Share to be redeemed, (ii) in connection with a
redemption pursuant to SECTION 6(b), 150% of the sum of the Purchase Price plus all accrued and
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unpaid Dividends (to the extent not included in the Purchase Price, including, without limitation,
accrued and unpaid Cash Dividends and accrued and unpaid Accreting Dividends for the then current
Dividend Period), if any, on each Preferred Share to be redeemed, or (iii) in connection with a
Change of Control, the Change of Control Payment.
(ppp) Restricted Payment means any dividend, distribution or other payment in
respect of the Common Stock or any Junior Securities, (other than, in the case of Junior
Securities, regularly scheduled dividend payments) or the repurchase, redemption or other
acquisition of any shares of Common Stock or any Junior Securities.
(qqq) Securities Purchase Agreement means that certain securities purchase
agreement, dated August 1, 2011 (as amended by First Amendment to Securities Purchase
Agreement, dated as of August 4, 2011), among the Company, Quantum Partners LP, a Cayman Islands
exempted limited partnership, JHL Capital Group Master Fund L.P., a Cayman Islands
exempted limited partnership, DDJ High Yield Fund, an entity organized under the laws of the
Province of Ontario, Canada, General Motors Hourly-Rate Employes Pension Trust 7N1H, a trust
maintained by General Motors Corporation, a Delaware corporation, General Motors Salaried Employes
Pension Trust 7N1I, a trust maintained by General Motors Corporation, Stichting Pensioenfonds
Hoogovens, a Dutch pension plan regulated by the Dutch Central Bank, Caterpillar Inc. Master
Retirement Trust, a trust maintained by Caterpillar, Inc., a Delaware corporation, J.C. Penney
Corporation, Inc. Pension Plan Trust, a trust maintained by J.C. Penney Corporation, Inc., a
Delaware corporation, Stichting Bewaarder Interpolis Pensioenen Global High Yield Pool, a Dutch
tax transparent pool of assets, Stichting Pensioenfonds voor Fysiotherapeuten, a Dutch pension
plan regulated by the Dutch Central Bank, Houston Municipal Employees Pension System, a pension
plan organized pursuant to Texas government code, UAW Retiree Medical Benefits Trust, a trust
consisting of three separate employees beneficiary associations, DDJ Distressed and Special
Situations Fund, L.P., a Delaware limited partnership, Russell Investment Company Russell Global
Opportunistic Credit Fund, a Massachusetts business trust, DDJ Capital Management Group Trust -
High Yield Investment Fund, a trust maintained by The Bank of New York Mellon, a New York State
chartered bank, as trustee, Luxor Capital Partners, LP, a Delaware limited partnership, Luxor
Wavefront, LP, a Delaware limited partnership, Luxor Capital Partners Offshore Fund, LP, a Cayman
Islands limited partnership, OC 19 Master Fund, L.P. LCG , a Cayman Islands limited partnership
and GAM Equity Six Inc., a British Virgin Islands company.
(rrr) Senior Notes means the 10.625% Senior Secured Notes Due November 15, 2015
issued under the Indenture.
(sss) Series A-2 Majority Holders means holders of Preferred Shares (other than the
Company, its employees, its Subsidiaries or Harbinger Affiliates) owning more than 50% of the
Regular Liquidation Preference of the issued and outstanding Preferred Shares; provided that, for
purposes of such calculation, the Preferred Shares held by the Company, its employees, its
Subsidiaries or any Harbinger Affiliate shall be treated as not outstanding.
(ttt) Significant Subsidiary means any Subsidiary, or group of Subsidiaries, that
would, taken together, be a significant subsidiary as defined in Article 1, Rule 1-02 (w)(1) or
(2) of
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Regulation S-X promulgated under the Securities Act of 1933, as amended, as such regulation
is in effect on the Original Issue Date.
(uuu) Specified Sections means SECTION 1(b), SECTION 2, SECTION 3, SECTION 4(a),
SECTION 4(b), SECTION 4(e), SECTION 5, SECTION 6, SECTION 8(d), SECTION 10(a), SECTION 10(b),
SECTION 10(c), SECTION 10(d), SECTION 10(f) or the definitions of Majority Holders or Series A-2
Majority Holders.
(vvv) Spectrum means Spectrum Brands Holdings, Inc., a Delaware corporation.
(www) Subsidiary means with respect to any Person, any corporation, association or
other business entity of which more than 50% of the outstanding Voting Stock is owned, directly or
indirectly, by, or of which more than 50% of the economic value accrues to, or, in the case of a
partnership, the sole general partner or the managing partner or the only general partners of which
are, such Person and one or more Subsidiaries of such Person (or a combination thereof). Unless
otherwise specified, Subsidiary means a Subsidiary of the Company.
(xxx) Subsidiary Guarantor means any entity that is a Guarantor pursuant to the
Indenture.
(yyy) Thirty Day VWAP means, with respect to a security, the average of the Daily
VWAP of such security for each day during a thirty (30) consecutive Trading Day period
ending immediately prior to the date of determination. Unless otherwise specified, Thirty
Day VWAP means the Thirty Day VWAP of the Common Stock.
(zzz) Total Secured Debt means, with respect to any Person, all outstanding Debt of
such Person that is secured by Liens on the assets of such Person.
(aaaa) Total Current Voting Power shall mean, with respect to any entity, at the
time of determination of Total Current Voting Power, the total number of votes which may be cast in
the general election of directors of such entity (or, in the event the entity is not a corporation,
the governing members, board or other similar body of such entity).
(bbbb) Trading Day means any day on which (i) there is no Market Disruption Event
and (ii) The New York Stock Exchange or, if the Common Stock (or Reference Property, to the extent
applicable) is not listed on The New York Stock Exchange, the principal national securities
exchange on which the Common Stock (or Reference Property, to the extent applicable) is listed and
is open for trading or, if the Common Stock (or Reference Property, to the extent applicable) is
not so listed, admitted for trading or quoted, any Business Day. A Trading Day only includes those
days that have a scheduled closing time of 4:00 p.m. (New York City time) or the then standard
closing time for regular trading on the relevant exchange or trading system.
(cccc) Transaction Agreements shall have the meaning ascribed to such term in the
Securities Purchase Agreement.
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(dddd) U.S. Government Obligations means obligations issued or directly and fully
guaranteed or insured by the United States of America or by any agent or instrumentality thereof,
provided that the full faith and credit of the United States of America is pledged in support
thereof.
(eeee) Voting Stock means, with respect to any Person, Capital Stock of any class or
kind ordinarily having the power to vote for the election of directors, managers or other voting
members of the governing body of such Person.
(ffff) Each of the following terms is defined in the SECTION set forth opposite such term:
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Term |
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Section |
Accreting Dividend |
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2(b) |
Accreting Dividend Rate |
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2(b) |
Additional Preferred Securities |
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8(b)(ii) |
Additional Permitted Preferred Stock |
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8(b) |
Basic Accreting Dividend |
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2(b) |
Board |
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Preamble |
Breach Period |
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7(c) |
Cash Accretion Dividends |
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2(a) |
Cash Dividends |
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2(a) |
Cash Maintenance Ratio |
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8(a) |
Certificate of Incorporation |
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Recitals |
Change of Control Offer |
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6(c)(ii) |
Change of Control Payment |
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6(c)(i) |
Change of Control Payment Date |
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6(c)(ii) |
Common Dividend |
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2(c) |
Company |
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Preamble |
Conversion Amount |
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5(d)(i) |
Conversion Date |
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5(a) |
DGCL |
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Preamble |
Dividend Period |
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2(g) |
Dividend Record Date |
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2(f) |
Dividends |
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2(b) |
Election Notice |
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6(a) |
Existing Purchasers |
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Recitals |
Existing Series A Certificate of Designation |
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Recitals |
Existing Series A Preferred Stock |
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Recitals |
Forced Conversion Trigger Date |
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5(b) |
Fortress Director Representation Amount |
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7(e) |
Holder Redemption Notice Period |
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6(a) |
Incurrence Based Issuance Limits |
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8(b) |
In-Kind Accretion Dividends |
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2(d) |
In-Kind Common Dividend |
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2(d) |
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Term |
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Section |
In-Kind Participating Dividend |
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2(d) |
Junior Securities |
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1(b)(i) |
Liquidation Preference |
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3(a) |
Maturity Date |
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6(a) |
Optional Redemption Date |
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6(b) |
Parity Securities |
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1(b)(ii) |
Participating Accretion Dividends |
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2(c) |
Participating Cash Dividend |
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2(c) |
Participating Dividends |
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2(d) |
Participating Liquidation Preference |
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3(a) |
Preferred Stock |
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Recitals |
Proportionate Representation Amount |
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8(e) |
Reference Property |
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5(g)(v) |
Regular Liquidation Preference |
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3(a) |
Regulated Shares |
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5 |
Senior Securities |
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1(b)(iii) |
Series A-2 Preferred Stock |
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1(a) |
Specified Breach Director |
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7(c) |
Transaction |
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5(g)(v) |
Trigger Event |
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5(g)(ii) |
SECTION 10. Miscellaneous. For purposes of this Certificate of Designation, the
following provisions shall apply:
(a) Share Certificates. If any certificates representing Preferred Shares shall be
mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and in substitution for
and upon cancellation of the mutilated certificate, or in lieu of and substitution for the lost,
stolen or destroyed certificate, a new Preferred Share certificate of like tenor and representing
an equivalent number of Preferred Shares, but only upon receipt of evidence of such loss, theft or
destruction of such certificate and indemnity by the holder thereof, if requested, reasonably
satisfactory to the Company.
(b) Status of Cancelled Shares. Preferred Shares which have been converted, redeemed,
repurchased or otherwise cancelled shall be retired and, following the filing of any certificate
required by the DGCL, have the status of authorized and unissued shares of Preferred Stock, without
designation as to series, until such shares are once more designated by the Board as part of a
particular series of Preferred Stock of the Company.
(c) Severability. If any right, preference or limitation of the Series A-2 Preferred
Stock set forth in this Certificate of Designation is invalid, unlawful or incapable of being
enforced by reason of any rule of law or public policy, all other rights, preferences and
limitations set forth in this Certificate of Designation which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall, nevertheless, remain in
full force and effect, and
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no right, preference or limitation herein set forth shall be deemed
dependent upon any other such right, preference or limitation unless so expressed herein.
(d) Remedies.
(i) Except with respect to the Specified Breach Events specified in SECTIONS 7(a)(v) and
7(a)(vi), the remedies set forth in SECTIONS 7(b), 7(c) and 7(d) shall be the sole remedies
available to any Person upon the occurrence of a Specified Breach Event. In addition to the
remedies provided for in SECTIONS 7(b), 7(c) and 7(d), the Holders shall retain all rights and
remedies available to them at law or in equity as provided in SECTION 10(d)(ii) below in connection
with any Specified Breach Event specified in SECTIONS 7(a)(v) and 7(a)(vi). With respect to a
Specified Breach in SECTION 7(a)(iii), for the avoidance of doubt, Holders retain all rights and
remedies available at law or in equity as provided in SECTION 10(d)(ii) for any failure to pay any
Dividends when and to the extent required in connection with the conversion of any Preferred
Shares, in connection with a redemption of Preferred Shares on the Maturity Date, on an Optional
Redemption Date or in connection with a Change of Control, upon any Liquidation Event or otherwise
in connection with the redemption, repayment, repurchase, retirement, conversion or maturity of
Preferred Shares, and such events do not constitute a Specified Breach within the meaning of
SECTION 7(a)(iii)).
(ii) The Company acknowledges that the obligations imposed on it in this Certificate of
Designation are special, unique and of an extraordinary character, and irreparable damages, for
which money damages, even if available, would be an inadequate remedy, would occur in the event
that the Company does not perform the provisions of this Agreement in accordance with
its specified terms or otherwise breaches such provisions. Except as specifically provided in
SECTION 10(d)(i), the Holders shall be entitled to seek an injunction, specific performance and
other equitable relief to prevent breaches of this Certificate of Designation and to seek to
enforce specifically the terms and provisions hereof, this being in addition to any other remedy to
which they are entitled, at law or in equity, including without limitation money damages.
(e) Renunciation under DGCL Section 122(17). Pursuant to Section 122(17) of the
Delaware General Corporation Law, the Company renounces any interest or expectancy of the Company
in, or being offered an opportunity to participate in, business opportunities that are presented to
one or more of the Specified Breach Directors other than any business opportunities that are
presented to any such Specified Breach Director solely in their capacity as a director of the
Company.
(f) Headings. The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions hereof.
(g) Notices. All notices or communications in respect of Preferred Stock shall be in
writing and shall be deemed delivered (a) three (3) Business Days after being sent by registered or
certified mail, return receipt requested, postage prepaid, (b) one (1) Business Day after being
sent via a reputable nationwide overnight courier service guaranteeing next business day delivery,
(c) on the date of delivery if delivered personally, or (d) if by facsimile, upon written
confirmation of receipt
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by facsimile. Notwithstanding the foregoing, if Preferred Stock is issued
in book-entry form through The Depository Trust Company or any similar facility, such notices may
be given to the beneficial holders of Preferred Stock in any manner permitted by such facility.
(h) Other Rights. The shares of Preferred Stock shall not have any rights,
preferences, privileges or voting powers or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or
in the Certificate of Incorporation or as provided by applicable law and regulation.
[Rest of page intentionally left blank.]
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IN WITNESS WHEREOF, the Company has caused this Certificate of Designation to be executed by a
duly authorized officer of the Company as of August 5, 2011.
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HARBINGER GROUP INC. |
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By:
Name:
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/s/ Francis T. McCarron
Francis T. McCarron
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Title:
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Executive Vice President & Chief Financial Officer |
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[SIGNATURE PAGE TO CERTIFICATE OF DESIGNATION]
exv10w2
Exhibit 10.2
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
by and among
HARBINGER GROUP INC.,
QUANTUM PARTNERS LP,
DDJ HIGH YIELD FUND,
GENERAL MOTORS HOURLY-RATE EMPLOYES PENSION TRUST 7N1H,
GENERAL MOTORS SALARIED EMPLOYES PENSION TRUST 7N1I,
STICHTING PENSIOENFONDS HOOGOVENS,
CATERPILLAR INC. MASTER RETIREMENT TRUST,
J.C. PENNEY CORPORATION, INC. PENSION PLAN TRUST,
STICHTING BEWAARDER INTERPOLIS PENSIOENEN GLOBAL HIGH YIELD POOL,
STICHTING PENSIOENFONDS VOOR FYSIOTHERAPEUTEN,
HOUSTON MUNICIPAL EMPLOYEES PENSION SYSTEM,
UAW RETIREE MEDICAL BENEFITS TRUST,
DDJ DISTRESSED AND SPECIAL SITUATIONS FUND, L.P.,
RUSSELL INVESTMENT COMPANY RUSSELL GLOBAL OPPORTUNISTIC CREDIT FUND,
DDJ CAPITAL MANAGEMENT GROUP TRUST HIGH YIELD INVESTMENT FUND,
and
JHL CAPITAL GROUP MASTER FUND L.P.
August 1, 2011
This Securities Purchase Agreement contains a number of representations and warranties
which the Company and the Purchasers have made to each other. The assertions embodied in those
representations and warranties are qualified by information in a confidential disclosure letter
that the Company and the Purchasers have exchanged in connection with signing the Securities
Purchase Agreement. The disclosure letter contains information that has been included
in the general prior public disclosures of the Company, as well as additional non-public
information. While we do not believe that this non-public information is required to be publicly
disclosed by the Company under the applicable securities laws, that information does modify,
qualify and create exceptions to the representations and warranties set forth in the Securities
Purchase Agreement. In addition, these representations and warranties were made as of the date of
the Securities Purchase Agreement. Information concerning the subject matter of the representations
and warranties may have changed since the date of the Securities Purchase Agreement, which
subsequent information may or may not be fully reflected in the public disclosures of the Company.
Moreover, representations and warranties are frequently utilized in Securities Purchase Agreements
as a means of allocating risks, both known and unknown, rather than to make affirmative factual
claims or statements. Accordingly, ONLY THE PARTIES TO THIS AGREEMENT SHOULD RELY ON THE
REPRESENTATIONS AND WARRANTIES AS CURRENT CHARACTERIZATIONS OF FACTUAL INFORMATION ABOUT THE
COMPANY OR THE PURCHASERS.
TABLE OF CONTENTS
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SECURITIES PURCHASE AGREEMENT |
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1 |
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1. Definitions |
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2 |
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2. Authorization, Purchase and Sale of Shares |
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2.1 Authorization, Purchase and Sale |
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2.2 Closing |
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13 |
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3. Representations and Warranties of the Company |
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14 |
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3.1 Organization and Power |
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14 |
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3.2 Capitalization |
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14 |
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3.3 Authorization |
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3.4 Registration Requirements |
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3.5 No Conflict |
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3.6 Consents |
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3.7 Permits |
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3.8 SEC Reports; Financial Statements |
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3.9 Litigation |
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20 |
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3.10 Absence of Certain Changes |
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3.11 Compliance with Law |
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3.12 Intellectual Property |
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3.13 Employee Benefits |
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22 |
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3.14 Labor Relations |
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23 |
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3.15 Taxes |
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24 |
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3.16 NYSE |
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25 |
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3.17 Investment Company Act |
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25 |
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3.18 Brokers |
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3.19 Subsidiaries |
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26 |
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3.20 Environmental Matters |
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3.21 Assets |
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3.22 Insurance |
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28 |
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3.23 Material Contracts |
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3.24 Right of First Refusal; Stockholders Agreement; Voting and
Registration Rights |
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3.25 Anti-Takeover Statutes |
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3.26 No Additional Understandings |
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3.27 Spectrum and F&G. |
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3.28 No Other Representations and Warranties |
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34 |
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4. Representations and Warranties of the Purchasers |
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34 |
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4.1 Organization |
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4.2 Authorization |
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34 |
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4.3 No Conflict |
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35 |
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4.4 Consents |
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4.5 Brokers |
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35 |
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4.6 Purchase Entirely for Own Account |
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35 |
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4.7 Investor Status |
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4.8 Securities Not Registered |
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36 |
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4.9 Financing |
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36 |
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4.10 Equity Securities of the Company |
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36 |
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4.11 Indebtedness |
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36 |
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5. Covenants |
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37 |
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5.1 Regulatory Approval |
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37 |
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5.2 Shares Issuable Upon Conversion |
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38 |
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5.3 Commercially Reasonable Efforts; Further Assurances; Notification |
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38 |
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5.4 Standstill |
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39 |
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5.5 Participation Rights |
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40 |
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5.6 Hedging Restrictions |
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5.7 Form 8-K. |
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5.8 Tax Characterization. |
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5.9 Confidential Information |
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5.10 Amendment to Certificate of Designation. |
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5.11 Most Favored Nation Status |
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45 |
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6. Conditions Precedent |
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45 |
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6.1 Conditions to the Obligation of the Purchasers to Consummate the Closing |
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6.2 Conditions to the Obligation of the Company to Consummate the Closing |
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46 |
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7. Additional Covenants |
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7.1 Material Non-Public Information |
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7.2 Information Rights |
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46 |
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8. Transfer Restrictions |
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47 |
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9. Legends; Securities Act Compliance |
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47 |
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10. Indemnification; Survival |
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10.1 Company Indemnification |
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10.2 Survival of Representations and Warranties |
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10.3 Purchaser Indemnification |
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48 |
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10.4 Limitations |
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49 |
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10.5 Procedures |
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49 |
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10.6 Additional Limitations |
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10.7 Exclusive Remedies |
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50 |
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ii
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11. Termination |
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11.1 Conditions of Termination |
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11.2 Effect of Termination |
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12. Miscellaneous Provisions |
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12.1 Public Statements or Releases |
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12.2 Interpretation |
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51 |
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12.3 Notices |
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12.4 Severability |
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12.5 Governing Law; Jurisdiction; WAIVER OF JURY TRIAL |
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55 |
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12.6 Specific Performance |
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12.7 Delays or Omissions; Waiver |
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12.8 Fees; Expenses |
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56 |
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12.9 Assignment |
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12.10 No Third Party Beneficiaries |
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12.11 Counterparts |
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12.12 Entire Agreement; Amendments |
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12.13 Freedom to Pursue Opportunities |
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12.14 No Person Liability of Directors, Officers, Owners, Etc |
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58 |
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12.15 Nature of Purchasers Obligations and Rights |
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58 |
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Annexes
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Annex A |
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Shares and Purchasers |
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Exhibits |
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Exhibit A
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Form of Certificate of Designation |
Exhibit B
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Form of Registration Rights Amendment and Joinder |
Exhibit C
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Form of Tag-Along Agreement |
Exhibit D
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Form of Legal Opinion |
Exhibit E
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Form of Amendment to Certificate of Designation |
iii
INDEX OF DEFINED TERMS
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Term |
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Section |
Agreement |
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Preamble |
Basket Amount |
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10.4 |
Capitalization Date |
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3.2(a) |
Certificate of Designation |
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Recitals |
Change |
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1 |
Closing |
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2.2(a) |
Closing Date |
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2.2(a) |
Company |
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Preamble |
Company Annual Report |
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3.8(a) |
Company Financial Statements |
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3.8(c) |
Company Indemnified Parties |
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10.3 |
Company Indemnified Party |
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10.3 |
Company Intellectual Property |
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3.12(c) |
Company SEC Filings |
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3.8(a) |
Confidential Information |
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5.9(a) |
Consent |
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3.6 |
Contracts |
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3.23(a)(v) |
Convertible Preferred Stock |
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Recitals |
DDJ |
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4.10 |
DDJ Purchasers |
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Preamble |
DGCL |
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Recitals |
Disclosure Letter |
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3 |
DTC |
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9(b) |
Environmental Permits |
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3.20(a)(i) |
ERISA Affiliate |
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3.13(d) |
Existing Certificate of Designation |
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Recitals |
Existing Series A Preferred Stock |
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Recitals |
Existing Series A Transaction Agreements |
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Recitals |
First Amendment to the Certificate of Designation |
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5.10 |
Foreign Benefit Plans |
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3.13(f) |
Form S-4 |
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3.8(a) |
GAAP |
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3.8(c) |
Indemnified Party |
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10.5 |
Indemnifying Party |
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10.5 |
Insurance Regulatory Authorities |
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5.1(b) |
JHL Purchaser |
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Preamble |
Law |
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3.5 |
Laws |
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3.5 |
Leased Real Property |
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3.21(b) |
Lien |
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3.5 |
iv
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Term |
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Section |
Material Contract |
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3.23(a) |
New York Court |
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12.5(b) |
NYSE |
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3.16(a) |
F&G Financial Statements |
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3.8(f) |
Preferred Stock |
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3.2(a) |
Protected Information |
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5.1(b) |
Purchaser Adverse Effect |
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4.3 |
Purchaser Indemnified Parties |
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10.1 |
Purchaser Indemnified Party |
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10.1 |
Registration Rights Agreement |
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Recitals |
Registration Rights Amendment and Joinder |
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Recitals |
Rule 144 |
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4.8(a) |
Securities Exercise Notice |
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5.5(b)(ii) |
Securities Participation Amount |
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5.5(a) |
Securities Participation Right |
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5.5(a) |
Securities Participation Rights Notice |
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5.5(b)(i) |
Share |
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2.1 |
Share Purchase Price |
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2.1 |
SFM |
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5.7 |
Shares |
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2.1 |
Soros Purchaser |
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Preamble |
Spectrum Financial Statements |
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3.8(e) |
Spectrum SEC Reports |
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3.27(o) |
Standstill Period |
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5.4(a) |
Survival Period |
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10.2 |
Tag-Along Agreement |
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Recitals |
Third Party Intellectual Property |
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3.12(c) |
Zap.Com Financial Statements |
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3.8(d) |
Zap.Com SEC Reports |
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3.8(b) |
v
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this Agreement), dated August 1, 2011, by and among Harbinger
Group Inc., Delaware corporation (the Company), Quantum Partners LP, a Cayman Islands exempted
limited partnership (the Soros Purchaser), JHL Capital Group Master Fund L.P., a Cayman
Islands exempted limited partnership (the JHL Purchaser), DDJ High Yield Fund, an
entity organized under the laws of the Province of Ontario, Canada, General Motors Hourly-Rate
Employes Pension Trust 7N1H, a trust maintained by General Motors Corporation, a Delaware
corporation, General Motors Salaried Employes Pension Trust 7N1I, a trust maintained by General
Motors Corporation, Stichting Pensioenfonds Hoogovens, a Dutch pension plan regulated by the Dutch
Central Bank, Caterpillar Inc. Master Retirement Trust, a trust maintained by Caterpillar, Inc., a
Delaware corporation, J.C. Penney Corporation, Inc. Pension Plan Trust, a trust maintained by J.C.
Penney Corporation, Inc., a Delaware corporation, Stichting Bewaarder Interpolis Pensioenen Global
High Yield Pool, a Dutch tax transparent pool of assets, Stichting Pensioenfonds voor
Fysiotherapeuten, a Dutch pension plan regulated by the Dutch Central Bank, Houston Municipal
Employees Pension System, a pension plan organized pursuant to Texas government code, UAW Retiree
Medical Benefits Trust, a trust consisting of three separate employees beneficiary associations,
DDJ Distressed and Special Situations Fund, L.P., a Delaware limited partnership, Russell
Investment Company Russell Global Opportunistic Credit Fund, a Massachusetts business trust, and
DDJ Capital Management Group Trust High Yield Investment Fund, a trust maintained by The Bank of
New York Mellon, a New York State chartered bank, as trustee (collectively, the DDJ Purchasers).
WHEREAS, on May 13, 2011, the Company issued 280,000 shares of Series A Participating
Convertible Preferred Stock, par value $0.01 per share, of the Company (the Existing Series A
Preferred Stock) for a purchase price of $1,000 per share thereof;
WHEREAS, in connection with the issuance of the Existing Series A Preferred Stock, the
Company, certain of the Harbinger Affiliates (as defined below) and the purchasers of the Existing
Series A Preferred Stock entered into a Securities Purchase Agreement, a Registration Rights
Agreement (as amended and supplemented by the Registration Rights Amendment and Joinder (as defined
below), the Registration Rights Agreement), a Corporate Opportunities Agreement, a Tag-Along
Agreement, and the Certificate of Designation of Series A Participating Convertible Preferred Stock
of Harbinger Group Inc. (the Existing Certificate of Designation), in each case dated as of May
12, 2011 (collectively, the Existing Series A Transaction Agreements);
WHEREAS, the Company has authorized the issuance and sale of 75,000 shares of Series A-2
Participating Convertible Preferred Stock, par value $0.01 per share, of the Company (the
Convertible Preferred Stock), the rights, preferences and privileges of which are to be set forth
in a Certificate of Designation, in the form attached hereto as Exhibit A (the Certificate
of Designation), which shares of Convertible Preferred Stock shall be convertible into authorized
but unissued shares of Common Stock (as defined below);
WHEREAS, subject to the terms and conditions set forth herein, the Company desires to issue
and sell to the several Purchasers, and the several Purchasers desire to purchase from the Company,
the Shares (as defined below);
WHEREAS, the Board (as defined below) has (i) determined that it is in the best interests of
the Company and its stockholders, and declared it advisable, to enter into this Agreement and the
other Transaction Agreements (as defined below) to which the Company is a party providing for the
transactions contemplated hereby and thereby in accordance with the General Corporation Law of the
State of Delaware (the DGCL), upon the terms and subject to the conditions set forth herein, and
(ii) approved the execution, delivery and performance of this Agreement and the other Transaction
Agreements to which the Company is a party and the consummation of the transactions contemplated
hereby and thereby in accordance with the DGCL upon the terms and conditions contained herein and
therein;
WHEREAS, each Purchaser has approved the execution, delivery and performance of this Agreement
and the other Transaction Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby in accordance with applicable law upon the terms and
conditions contained herein and therein; and
WHEREAS, as a condition to the consummation of the transactions contemplated hereby, on the
Closing Date the Purchasers, the Company and/or certain of the Harbinger Affiliates and holders of
Existing Series A Preferred Stock will enter into (i) an amendment and joinder to the Registration
Rights Agreement in the form attached as Exhibit B hereto (the Registration Rights
Amendment and Joinder), and (ii) the Amended and Restated Tag-Along Side Letter in the form
attached as Exhibit C hereto (the Tag-Along Agreement).
NOW THEREFORE, in consideration of the mutual agreements, representations, warranties and
covenants herein contained, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have the
following respective meanings:
Accreting Dividends shall have the meaning set forth in the Certificate of Designation.
Acquisition Date means July 9, 2009.
Additional Permitted Preferred Stock shall have the meaning set forth in the Certificate of
Designation.
Affiliate means, with respect to any Person, any other Person that directly, or indirectly
through one or more intermediaries, controls, is controlled by or is under common control with,
such specified Person. Notwithstanding the foregoing, (i) none of the Company, its Subsidiaries or
its other controlled Affiliates, nor any Harbinger Affiliates shall be considered Affiliates of any
Purchaser, (ii) no Purchaser shall be considered an Affiliate of any Portfolio Company in which
such Purchaser or any of its Affiliates have made a debt or equity investment (provided, however,
that for purposes of Sections 5.4 and 5.6 hereof, a Purchaser shall be considered
an Affiliate of any such Portfolio Company if such Portfolio Company has received material
confidential information regarding the Company or any of its Subsidiaries from such
2
Purchaser or any of its Affiliates in violation of Section 5.10 (disregarding for this
purpose clause (v) of Section 5.10(a)), and (iii) no Purchaser shall be considered an
Affiliate of any other Purchaser or any of such other Purchasers Affiliates; provided,
however, that a Portfolio Company shall be deemed to be an Affiliate of a Purchaser if such
Purchaser, directly or indirectly, encouraged, directed or caused such Portfolio Company to take
any action that would have been prohibited by the terms of this Agreement if such Portfolio Company
had been an Affiliate of such Purchaser but for clause (ii) of this definition.
Agreement shall have the meaning set forth in the preamble.
Antitrust Laws means the HSR Act and any foreign antitrust Laws.
Basket Amount shall have the meaning set forth in Section 10.4.
Beneficially Own, Beneficially Owned, or Beneficial Ownership shall have the meaning set
forth in Rule 13d-3 of the rules and regulations promulgated under the Exchange Act;
provided, however, that, other than for purposes of the definition of Hedging
Agreement, a Person will be deemed to be the beneficial owner of any security which may be
acquired by such Person whether within 60 days or thereafter, upon the conversion, exchange or
exercise (without giving effect to any provision governing such security that would limit, reduce
or otherwise restrict the conversion, exchange or exercise features of such security) of any
rights, options, warrants or similar securities to subscribe for, purchase or otherwise acquire
such security; provided, further, that for purposes of Section 5.4, the
Convertible Preferred Stock shall be deemed to be convertible at any time notwithstanding the
limitations on conversion thereof contained in SECTION 5 of the Certificate of Designation.
Benefit Plans with respect to any Person shall mean each material employee benefit plan
(within the meaning of Section 3(3) of ERISA), and all stock purchase, stock option, severance,
employment, change-in-control, fringe benefit, collective bargaining, bonus, incentive, deferred
compensation, employee loan and all other employee benefit plans, agreements, programs, policies or
other arrangements, whether or not subject to ERISA (including any funding mechanism therefor now
in effect or required in the future as a result of the transaction contemplated by this Agreement
or otherwise), whether formal or informal, oral or written, legally binding or not, under which any
employee of such Person or its Subsidiaries has any present or future right to benefits or which
are contributed to, sponsored by or maintained by the Person or any of its Subsidiaries.
Board shall mean the Board of Directors of the Company.
Business Day shall mean any day, other than a Saturday, Sunday and any day which is a legal
holiday under the laws of the State of New York or is a day on which banking institutions located
in the State of New York are authorized or required by Law or other governmental action to close.
Capitalization Date shall have the meaning set forth in Section 3.2(a).
Certificate of Designation shall have the meaning set forth in the recitals.
3
Closing shall have the meaning set forth in Section 2.2.
Closing Date shall have the meaning set forth in Section 2.2.
Code shall mean the Internal Revenue Code of 1986, as amended.
Common Stock shall mean the Common Stock, par value $0.01 per share, of the Company, or any
other shares of capital stock into which the Common Stock shall be reclassified or changed.
Company shall have the meaning set forth in the preamble.
Company Annual Report shall have the meaning set forth in Section 3.8(a).
Company Change in Control Event means any transaction or series of transactions (as a result
of a tender offer, merger, consolidation, reorganization or otherwise) that results in, (i) the
sale, lease, exchange, conveyance, transfer or other disposition (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property or assets of the
Company and its Subsidiaries (taken as a whole) to any Person or group (within the meaning of
Section 13(d)(3) of the Exchange Act) (including any liquidation, dissolution or winding up of the
affairs of the Company, or any other distribution made, in connection therewith); (ii) any Person
or group (within the meaning of Section 13(d)(3) of the Exchange Act) becoming the ultimate
Beneficial Owner, directly or indirectly, of 35% or more of the voting power of the Voting Stock of
the Company other than a Harbinger Affiliate or the Fortress Investor (as defined in the
Certificate of Designation) (aggregated with its Affiliates); provided, that such event
shall not be deemed a Change of Control so long as one or more Harbinger Affiliates shall
Beneficially Own more of the voting power of the Voting Stock of the Company than such person or
group; or (iii) the Continuing Directors ceasing to constitute a majority of the members of the
Board. For purposes of this definition, (x) any direct or indirect holding company of the Company
shall not itself be considered a Person for purposes of clause (ii) above or a person or group
for purposes of clause (ii) above, provided that no person or group (other than the
Harbinger Affiliates or another such holding company) Beneficially Owns, directly or indirectly,
more than 50% of the voting power of the voting stock of such company, and a majority of the voting
stock of such holding company immediately following it becoming the holding company of the Company
is Beneficially Owned by the Persons who Beneficially Owned the voting power of the Voting Stock of
the Company immediately prior to it becoming such holding company and (y) a Person shall not be
deemed to have beneficial ownership of securities subject to a stock purchase agreement, merger
agreement or similar agreement until the consummation of the transactions contemplated by such
agreement.
Company Financial Statements shall have the meaning set forth in Section 3.8(c).
Company Indemnified Party shall have the meaning set forth in Section 10.3.
Company Intellectual Property shall have the meaning set forth in Section 3.12(c).
Company Option shall mean an option to acquire shares of Common Stock that was issued under
any Company Stock Plan.
4
Company SEC Filings shall have the meaning set forth in Section 3.8(a).
Company Stock Plans shall mean the plans listed on Section 1.2 of the Disclosure
Letter.
Company Voting Stock shall mean securities of any class or kind ordinarily having the power
to vote generally for the election of Directors of the Company or its successor (including the
Common Stock and the Convertible Preferred Stock).
Confidential Information shall have the meaning set forth in Section 5.9(a).
Consent shall have the meaning set forth in Section 3.6.
Continuing Directors means, as of any date of determination, any member of the Board who
was: (x) a member of the Board on the Closing Date; (y) nominated for election or elected pursuant
to any of the Transaction Agreements, or (z) nominated for election or elected to such Board with
the approval of the Harbinger Affiliates or a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
Contracts shall have the meaning set forth in Section 3.23(a)(v).
control (including the terms controlling controlled by and under common control with)
with respect to any Person shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management policies of such Person, whether through the
ownership of voting securities, by contract or otherwise. For the avoidance of doubt, as of the
date hereof (but without precluding a different determination as of any date subsequent to the date
hereof dependent on the relevant facts and circumstances at such time), the Company shall not be
considered to control Spectrum.
Conversion Shares shall mean the shares of Common Stock issuable upon the conversion of the
Convertible Preferred Stock as provided for in the Certificate of Designation.
Convertible Preferred Stock shall have the meaning set forth in the recitals.
DDJ Purchasers shall have the meaning set forth in the preamble.
DGCL shall have the meaning set forth in the recitals.
Director means any member of the Board.
Disclosure Letter shall have the meaning set forth in Section 3.
DTC shall have the meaning set forth in Section 9(b).
Environmental Law shall mean any and all Laws relating to the protection of the environment
(including ambient air, surface water, groundwater or land) or natural resources and any other Laws
concerning human exposure to Hazardous Substances.
Environmental Permits shall have the meaning set forth in Section 3.20(a)(i).
5
ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended.
ERISA Affiliate shall have the meaning set forth in Section 3.13(d).
Equity Securities shall mean, with respect to any Person, (i) shares of capital stock of, or
other equity or voting interest in, such Person, (ii) any securities convertible into or
exchangeable for shares of capital stock of, or other equity or voting interest in, such Person,
(iii) options, warrants, rights or other commitments or agreements to acquire from such Person, or
that obligates such Person to issue, any capital stock of, or other equity or voting interest in,
or any securities convertible into or exchangeable for shares of capital stock of, or other equity
or voting interest in, such Person, (iv) obligations of such Person to grant, extend or enter into
any subscription, warrant, right, convertible or exchangeable security or other similar agreement
or commitment relating to any capital stock of, or other equity or voting interest (including any
voting debt) in, such Person and (v) the capital stock of such Person.
Exchange Act shall mean the Securities Exchange Act of 1934, as amended, and all of the
rules and regulations promulgated thereunder.
Existing Certificate of Designation shall have the meaning set forth in the recitals.
Existing Series A Preferred Stock shall have the meaning set forth in the recitals.
Existing Series A Transaction Agreements shall have the meaning set forth in the recitals.
F&G shall mean Fidelity & Guaranty Life Holdings, Inc., a Delaware corporation (f/k/a Old
Mutual U.S. Life Holdings, Inc.).
F&G Purchase Agreement shall mean the First Amended and Restated Stock Purchase Agreement,
dated as of February 17, 2011, between OM Group (UK) Limited and Harbinger F&G.
F&G Financial Statements shall have the meaning set forth in Section 3.8(f).
First Amendment to the Certificate of Designation shall have the meaning set forth in
Section 5.10.
Foreign Benefit Plans shall have the meaning set forth in Section 3.13(f).
Form S-4 shall have the meaning set forth in Section 3.8(a).
GAAP shall have the meaning set forth in Section 3.8(c).
Governmental Entity shall mean any United States or non-United States federal, state or
local government, or any agency, bureau, board, commission, department, tribunal or instrumentality
thereof or any court, tribunal, or arbitral or judicial body.
6
Harbinger Affiliate shall mean any of Philip A. Falcone, Harbinger Capital Partners, or any
limited partnership, limited liability company, corporation or other entity that controls, is
controlled by, or is under common control with Philip A. Falcone or Harbinger Capital Partners
(other than the Company and its Subsidiaries).
Harbinger Capital Partners shall mean Harbinger Capital Partners LLC and Harbinger Capital
Partners II LP, collectively.
Harbinger F&G shall mean Harbinger F&G, LLC (f/k/a Harbinger OM, LLC).
Hazardous Substance shall mean any substance, material or chemical that is characterized or
regulated under any Environmental Law as hazardous, a pollutant, waste, a contaminant,
toxic or words of similar meaning or effect, or that could result in liability under any
Environmental Law, and shall include petroleum and petroleum products, polychlorinated biphenyls,
lead, crystalline silica and asbestos.
Hedging Agreement shall mean any swap, forward or option contract or any other agreement,
arrangement, contract or transaction that hedges the direct economic exposure to a decline in value
resulting from ownership by any Person of the Common Stock, the Convertible Preferred Stock or the
equity securities of any Subsidiary of the Company that are traded on a national securities
exchange, regardless of whether any such agreement, arrangement, contract or transaction is to be
settled by delivery of securities, in cash or otherwise; provided, however, that,
for the avoidance of doubt, in no event shall an agreement providing for (i) the direct Transfer of
Common Stock or Convertible Preferred Stock actually Beneficially Owned by such Person or (ii)
transactions involving an index-based portfolio of securities that includes Common Stock or common
equity securities of any Subsidiary (provided that the value of such Common Stock or common equity
securities of any Subsidiary, as applicable, in such portfolio is not more than 10% of the total
value of the portfolio of securities, or if the value of such Common Stock or common equity
securities of any Subsidiary, as applicable, is more than 10% of the total value of the portfolio
of securities, then such transaction was not entered into for purposes of hedging such Common Stock
or common equity securities of a Subsidiary, as applicable) be deemed a Hedging Agreement
hereunder.
Hedging Limitation Period shall mean the period from the date hereof until the earlier of
(i) the twelve (12) month anniversary of the Closing or (ii) the occurrence of a Specified Breach
Event.
HSR Act shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
all of the rules and regulations promulgated thereunder.
Indemnified Party shall have the meaning set forth in Section 10.5.
Indemnifying Party shall have the meaning set forth in Section 10.5.
Insurance Regulatory Authorities shall have the meaning set forth in Section 5.1(b).
Insurance Subsidiaries shall have the meaning set forth in the F&G Purchase Agreement.
7
Intermediate Holding Company Subsidiary shall mean any Subsidiary of the Company that is a
holding company that holds equity interests in two (2) or more Portfolio Companies engaged in
unrelated lines of business; provided, however, that (w) Spectrum shall not be
considered an Intermediate Holding Company Subsidiary, (x) the reinsurance and insurance businesses
shall be considered to be a single line of business, (y) any Portfolio Company that operates in
more than one (1) Specified Industry shall be an Intermediate Holding Company Subsidiary and (z)
any Portfolio Company that operates in only one (1) Specified Industry shall not be an Intermediate
Holding Company Subsidiary.
Intellectual Property shall mean all U.S. or foreign intellectual property, including (i)
patents, trademarks, service marks, trade names, domain names, other source indicators and the
goodwill of the business symbolized thereby, copyrights, works of authorship in any medium, designs
and trade secrets, (ii) applications for and registrations of such patents, trademarks, service
marks, trade names, domain names, copyrights and designs (Registered Intellectual Property),
(iii) inventions, processes, formulae, methods, schematics, technology, know-how, computer software
programs and applications, and (iv) other tangible or intangible proprietary or confidential
information and materials.
JHL shall have the meaning set forth in Section 5.7.
JHL Purchaser shall have the meaning set forth in the preamble.
Knowledge shall mean, with respect to the Company, the knowledge of any of the Persons set
forth on Section 1.1 of the Disclosure Letter. Such individuals will be deemed to have
knowledge of a particular fact or other matter if (i) such individual has or at any time had
actual knowledge of such fact or other matter or (ii) a prudent individual would be expected to
discover or otherwise become aware of such fact or other matter in the course of conducting a
reasonably diligent review concerning the existence thereof with each employee of the Company or
any of its Subsidiaries who reports directly to such individual and who (x) has responsibilities or
(y) would reasonably be expected to have actual knowledge of circumstances or other information, in
each case, that would reasonably be expected to be pertinent to such fact or other matter.
Notwithstanding the foregoing, the Company will be deemed to have knowledge of any fact or matter
of which an officer of the Company has received written notice (whether in hard copy, digital or
electronic format).
Law shall have the meaning set forth in Section 3.5.
Leased Real Property shall have the meaning set forth in Section 3.21(b).
Legal Proceeding shall mean any action, suit, litigation, petition, claim, arbitration,
proceeding (including any civil, criminal, administrative, investigative or appellate proceeding),
hearing, inquiry, or investigation by or before, or otherwise involving, any court or other
Governmental Entity or arbitral body.
Liability shall mean any liability, obligation or commitment of any kind (whether accrued,
absolute, contingent, matured, unmatured or otherwise and whether or not required to be recorded or
reflected on a balance sheet prepared in accordance with GAAP).
8
Lien shall have the meaning set forth in Section 3.5.
Losses shall mean any and all actions, causes of action, suits, claims, liabilities, losses,
damages, penalties, judgments, costs and out-of-pocket expenses in connection therewith (including
reasonable attorneys fees and expenses), it being agreed that Losses may include any losses that
any Person deciding any dispute in respect thereof (whether a court, jury or other Person) may
determine are recoverable, including if so determined to be recoverable, losses that represent
diminution in value.
Material Adverse Effect shall mean any fact, circumstance, event, change, effect, occurrence
or development (each, a Change) that, individually or in the aggregate with all other Changes,
has a material adverse effect on or with respect to the business, operations, assets (including
intangible assets), liabilities, results of operation or financial condition of the Company and its
Subsidiaries taken as a whole, provided, however, that a Material Adverse Effect
shall not include any Change (by itself or when aggregated or taken together with any and all other
Changes) (i) generally affecting the industries in which the Company and its Subsidiaries operate
or economic conditions in the United States (including changes in the capital or financial markets
generally); (ii) resulting from any outbreak or escalation of hostilities or acts of war or
terrorism, political instability or other national or international calamity, crisis or emergency,
or any governmental or other response to any of the foregoing, in each case whether or not
involving the United States; (iii) resulting from changes (or proposed changes) in Law or GAAP (or
authoritative interpretations thereof); (iv) resulting from changes in the market price or trading
volume of the Companys or Spectrums securities or from the failure of the Company or any of its
Subsidiaries to meet projections, forecasts or estimates (it being understood that the causes
underlying such failure may be considered in determining whether a Material Adverse Effect has
occurred or would reasonably be expected to occur); (v) acts of God (including earthquakes, storms,
fires, floods and natural catastrophes), (vi) effects relating to or arising from the announcement
of the execution of this Agreement or the Existing Series A Transaction Agreements or the
transactions contemplated hereby or thereby or the identity of any Purchaser or a Purchasers
Affiliates, including the loss of any customers, suppliers or employees; (vii) effects resulting
from compliance with the terms and conditions of this Agreement or any other Transaction Agreement
to which the Company is a party by the Company or any of its Subsidiaries or consented to in
writing by a Purchaser, (viii) the seasonality of the business of the Company or any of its
Subsidiaries, or (ix) any breach of this Agreement by a Purchaser, except to the extent that, with
respect to clauses (i), (ii), (iii), (iv) and (v), the impact of such Changes is disproportionately
adverse to the Company and its Subsidiaries. For purposes of Sections 3.8(f),
3.8(g) and 3.27(q),it is expressly agreed that with respect to the historical
financial statements of F&G referenced therein, no error or omission or alleged error or omission
therein will be considered in determining whether a Material Adverse Effect has occurred unless and
then only to the extent such error or omission would have or would reasonably be expected to result
in a Fair Market Value (as defined in the Indenture) of F&G as of May 13, 2011 that is less than
$350 million and would otherwise constitute a Material Adverse Effect (and then only to the extent
the Fair Market Value of F&G as of May 13, 2011 is less than $350 million).
Material Contracts shall have the meaning set forth in Section 3.23(a).
9
New York Court shall have the meaning set forth in Section 12.5(b).
Notes shall mean the Companys 10.625% Senior Secured Notes due 2015.
NYSE shall have the meaning set forth in the Section 3.16(a).
Participation Rights Fraction shall mean, in the case of any Purchaser, a fraction, the
numerator of which is the product of (A) the number of shares of Common Stock held by such
Purchaser on a fully-diluted basis from either the Shares or the Common Stock issuable on
conversion of the Shares, as of such date, multiplied by (B) 0.75, and the denominator of which is
the number of shares of Common Stock then outstanding on a fully-diluted basis, as of such date.
Permitted Liens means, (a) local, state and federal Laws, including, without limitation,
zoning or planning restrictions, and utility lines, easements, permits, covenants, conditions,
restrictions, rights-of-way, oil, gas or mineral leases of record and other restrictions or
limitations on the use of real property or irregularities in title thereto, which do not materially
impair the value of such properties or the continued use of such property for the purposes for
which the property is currently being used by the Company or any Subsidiary, (b) Liens for Taxes
not yet due and payable, that are payable without penalty or that are being contested in good faith
and for which adequate reserves have been recorded on the Company Financial Statements, (c) Liens
for carriers, warehousemens, mechanics, repairmens, workers and similar Liens incurred in the
ordinary course of business, consistent with past practice, in each case for sums not yet due and
payable or due but not delinquent or being contested in good faith by appropriate proceedings and
for which adequate reserves have been recorded on the Company Financial Statements, (d) Liens
incurred in the ordinary course of business, consistent with past practice, in connection with
workers compensation, unemployment insurance and other types of social security or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return of money bonds and similar obligations, which do not materially
impair the value of the underlying property or the continued use of such property for the purposes
for which the property is currently being used by the Company or any Subsidiary, (e) Liens granted
under equipment leases with third parties entered into in the ordinary course of business
consistent with past practice, (f) Liens permissible under any applicable loan agreements and
indentures, (g) restrictions arising under applicable securities Laws and (h) Liens securing the
Notes.
Person shall mean an individual, partnership, corporation, limited liability company,
business trust, joint stock company, trust, unincorporated association, joint venture or any other
entity or organization.
Portfolio Company shall have the meaning set forth in the Certificate of Designation.
Preferred Stock shall have the meaning set forth in Section 3.2(a).
Protected Information shall have the meaning set forth in Section 5.1(b).
Purchasers means, collectively, the Soros Purchaser, the DDJ Purchasers and the JHL
Purchaser.
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Purchaser Adverse Effect shall have the meaning set forth in the Section 4.3.
Purchaser Indemnified Party shall have the meaning set forth in Section 10.1.
Registered Intellectual Property shall have the meaning set forth in the definition of
Intellectual Property.
Registration Rights Agreement shall have the meaning set forth in the recitals.
Registration Rights Amendment and Joinder shall have the meaning set forth in the recitals.
Representatives means, with respect to any Person, such Persons Affiliates (other than any
Portfolio Company) and their respective directors, officers, employees, managers, trustees,
principals, stockholders, members, general or limited partners, agents and other representatives.
Rule 144 shall have the meaning set forth in Section 4.8(a).
SEC shall mean the Securities and Exchange Commission.
Securities Act shall mean the Securities Act of 1933, as amended, and all of the rules and
regulations promulgated thereunder.
Securities Exercise Notice shall have the meaning set forth in Section 5.5(b)(ii).
Securities Participation Amount shall have the meaning set forth in Section 5.5(a).
Securities Participation Right shall have the meaning set forth in Section 5.5(a).
Securities Participation Rights Notice shall have the meaning set forth in Section
5.5(b)(i).
SFM shall have the meaning set forth in Section 5.7.
Shares shall have the meaning set forth in Section 2.1.
Share Purchase Price shall have the meaning set forth in the Section 2.1.
Significant Subsidiary shall mean any Subsidiary or group of Subsidiaries that would, taken
together, be a significant subsidiary as defined in Article 1, Rule 1-02 (w)(1) or (2) of
Regulation S-X promulgated under the Securities Act, as such regulation is in effect from time to
time; provided, however, that Spectrum and its Subsidiaries shall be deemed not to
be Significant Subsidiaries of the Company for purposes of Section 3.
Soros Purchaser shall have the meaning set forth in the preamble.
Specified Breach Event shall have the meaning set forth in the Certificate of
Designation.
11
Specified Industries shall mean the consumer products, insurance and financial products,
agriculture, power generation and water and natural resources industries.
Spectrum shall mean Spectrum Brands Holdings, Inc., a Delaware corporation.
Spectrum Financial Statements shall have the meaning set forth in the Section
3.8(e).
Spectrum SEC Reports shall have the meaning set forth in the Section 3.27(p).
Standstill Period shall have the meaning set forth in Section 5.4(a).
Subsidiary of any Person shall mean any corporation, partnership, joint venture, limited
liability company, trust or other form of legal entity (whether incorporated or unincorporated) of
which (or in which) more than 50% of (i) the Total Current Voting Power; (ii) the interest in the
capital or profits of such partnership, joint venture or limited liability company; or (iii) the
beneficial interest in such trust or estate; is, directly or indirectly, owned or controlled by
such Person, by such Person and one or more of its other Subsidiaries or by one or more of such
Persons other Subsidiaries; provided, however, that Spectrum and F&G and their
respective Subsidiaries shall be deemed not to be Subsidiaries of the Company for purposes of
Section 3 (other than Sections 3.2, 3.8(e), 3.8(f), 3.8(g), 3.10(a), 3.23(a)(i),
3.23(a)(vii) and 3.26) or for purposes of the definition of Benefit Plan;
provided, further, however, that F&G and its Subsidiaries shall be deemed
to be Subsidiaries of the Company for purposes of Sections 3.19. For the avoidance of
doubt, Spectrum, F&G and their respective Subsidiaries shall be deemed to be Subsidiaries of the
Company for purposes of the definition of Material Adverse Effect.
Survival Period shall have the meaning set forth in Section 10.2.
Tag-Along Agreement shall have the meaning set forth in the recitals.
Tax Returns shall mean returns, reports, information statements and other documentation
(including any additional or supporting material) filed or required to be filed in connection with
the calculation, determination, assessment or collection of any Tax, including any schedules or
amendments thereto.
Taxes shall mean any and all taxes, levies, fees, imposts, duties and charges of whatever
kind (including any interest, penalties or additions to the tax imposed in connection therewith or
with respect thereto) imposed by any Governmental Authority, including, without limitation, taxes
imposed on, or measured by, income, franchise, profits or gross receipts, and any ad valorem, value
added, sales, use, service, real or personal property, capital stock, license, payroll,
withholding, employment, social security, workers compensation, unemployment compensation,
utility, severance, production, excise, stamp, occupation, premium, windfall profits, transfer and
gains taxes and customs or duties.
Third Party Intellectual Property shall have the meaning set forth in Section
3.12(c).
Total Current Voting Power shall mean, with respect to any entity, at the time of
determination of Total Current Voting Power, the total number of votes which may be cast in the
12
general election of directors of such entity (or, in the event the entity is not a
corporation, the governing members, board or other similar body of such entity).
Transaction Agreements shall mean this Agreement, the Certificate of Designation, the
Tag-Along Agreement, the Registration Rights Amendment and Joinder and the First Amendment to the
Certificate of Designation.
Transfer shall mean the direct or indirect transfer, sale, assignment, exchange,
distribution, mortgage, pledge or disposition of any Equity Securities of the Company.
Treasury Regulation shall mean the Treasury Regulations promulgated under the Code.
Voting Stock shall mean securities of any class or kind ordinarily having the power to vote
generally for the election of (x) Directors of the Company or its successor (including the Common
Stock and the Convertible Preferred Stock) or (y) directors of any Subsidiary of the Company.
Wholly Owned Subsidiary means (x) any Subsidiary of the Company of which the Company owns,
either directly or indirectly, 100% of the outstanding equity interests of such Subsidiary
(excluding qualifying shares held by directors), and (y) Zap.Com.
Zap.Com shall mean Zap.Com Corporation, a corporation formed under the Laws of the State of
Nevada.
Zap.Com Financial Statements shall have the meaning set forth in Section 3.8(d).
Zap.Com SEC Reports shall have the meaning set forth in Section 3.8(b).
2. Authorization, Purchase and Sale of Shares.
2.1 Authorization, Purchase and Sale. Subject to and upon the terms and conditions of
this Agreement, the Company will issue and sell to the several Purchasers, and the several
Purchasers will purchase from the Company, at the Closing, the number of shares of Convertible
Preferred Stock set forth next to each such Purchasers name on Annex A (each, a Share
and collectively, the Shares). The purchase price per Share shall be $1,000 and the aggregate
purchase price (the Share Purchase Price) for the Shares shall be the amount set forth on
Annex A.
2.2 Closing.
(a) The closing of the purchase and sale of the Shares (the Closing) shall take place at the
offices of Paul, Weiss, Rifkind, Wharton & Garrison LLP, 1285 Avenue of the Americas, New York, New
York 10019 on August 5, 2011, following the satisfaction or waiver of each of the conditions set
forth in Section 6 (other than those conditions which, by their terms, are to be satisfied
or waived at the Closing), or at such other place or such other date as agreed to by the parties
hereto (the Closing Date).
13
(b) At the Closing:
(i) the Company shall deliver to each Purchaser one or more certificates representing the
Shares purchased by such Purchaser; and
(ii) each Purchaser shall deliver, or cause to be delivered, to the Company an amount equal to
the portion of the Share Purchase Price set forth next to such Purchasers name on Annex A
by wire transfer of immediately available funds to an account that the Company shall designate at
least one (1) Business Day prior to the Closing Date.
3. Representations and Warranties of the Company. Except as set forth in the disclosure
letter delivered by the Company to the Purchasers on the date hereof (the Disclosure Letter) (it
being agreed that disclosure of any item in any section of the Disclosure Letter shall also be
deemed disclosure with respect to any other Section of this Agreement to which the relevance of
such item is reasonably apparent) or as disclosed in the Company SEC Filings, Spectrum SEC Reports
or the Zap.com SEC Reports, filed and publicly available prior to the date of this Agreement and
only as and to the extent disclosed therein (but excluding any risk factor disclosures contained
under the heading Risk Factors, any disclosure of risks included in any forward-looking
statements disclaimer or any other statements that are similarly forward-looking), the Company
hereby represents and warrants to the Purchasers as follows:
3.1 Organization and Power.
(a) Each of the Company and its Subsidiaries is a legal entity duly organized, validly
existing and in good standing under the Laws of its respective jurisdiction of organization. Each
of the Company and its Subsidiaries has the requisite corporate power and authority to carry on its
respective business as it is presently being conducted and to own, lease or operate its respective
properties and assets, except as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
(b) Each of the Company and its Subsidiaries is duly qualified to do business and is in good
standing as a foreign corporation (or other legal entity) in each jurisdiction where the ownership,
leasing or operation of its assets or properties or conduct of its business requires such
qualification, except where the failure to be so qualified or in good standing would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The
organizational or governing documents of the Company and each of its Subsidiaries are in full force
and effect. Neither the Company nor any Subsidiary is in violation of its organizational or
governing documents. The Company has delivered or made available to the Purchasers complete and
correct copies of the certificates of incorporation and bylaws or other constituent documents, as
amended to date and currently in full force and effect, of the Company and its Significant
Subsidiaries.
3.2 Capitalization.
(a) As of the date of this Agreement, the authorized shares of capital stock of the Company
consist of 500,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value
$0.01 per share (Preferred Stock). As of the close of business on July 22, 2011 (the
Capitalization Date), (i) 139,284,286 shares of Common Stock were issued
14
and outstanding, (ii) 6,273,241 shares of Common Stock were reserved for issuance under the
Company Stock Plans, (iii) 280,000 shares of Existing Series A Preferred Stock were issued and
outstanding, (v) a sufficient number of shares of Common Stock were reserved for issuance upon
conversion of the Existing Series A Preferred Stock, and (v) zero shares of Common Stock or
Preferred Stock were held by the Company as treasury shares. All outstanding shares of Common
Stock are validly issued, fully paid, nonassessable and free of preemptive or similar rights.
Since the Capitalization Date, the Company has not sold or issued or repurchased, redeemed or
otherwise acquired any shares of the Companys capital stock (other than issuances pursuant to the
exercise of any Company Option or vesting of any share unit award that had been granted under any
Company Stock Plan, or repurchases, redemptions or other acquisitions pursuant to agreements
contemplated by a Company Stock Plan). No Subsidiary of the Company owns any Equity Securities of
the Company.
(b) As of the Capitalization Date, with respect to the Company Stock Plans, (i) there were
404,833 shares of Common Stock underlying outstanding Company Options to acquire shares of Common
Stock, such outstanding Company Options having a weighted average exercise price per share as of
the Capitalization Date of $6.18, (ii) there were zero shares of Common Stock issuable upon the
vesting of outstanding share award units, and (iii) 5,868,408 additional shares of Common Stock
were reserved for issuance for future grants pursuant to the Company Stock Plans. All shares of
Common Stock reserved for issuance as noted in the foregoing sentence, when issued in accordance
with the respective terms thereof, are or will be validly issued, fully paid, nonassessable and
free of preemptive or similar rights. Each Company Option was granted with an exercise price per
share equal to or greater than the per share fair market value (as such term is used in Code
Section 409A and the regulations and other interpretive guidance issued thereunder) of the Common
Stock underlying such Company Option on the grant date thereof and was otherwise issued in material
compliance with applicable Law.
(c) Except as set forth in this Section 3.2, as of the date of this Agreement, there
are no outstanding Equity Securities of the Company and no other obligations by the Company or any
of its Subsidiaries to make any payments based on the price or value of any Equity Securities of
the Company. Except as set forth in the Existing Series A Transaction Agreements, there are no
outstanding agreements of any kind which obligate the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any Equity Securities of the Company.
(d) Except as set forth in the Transaction Agreements, the Existing Series A Transaction
Agreements or in any registration rights agreements filed as exhibits to the Companys SEC Reports,
neither the Company nor any of its Subsidiaries is a party to any agreement relating to the voting
of, requiring registration of, or granting any preemptive, anti-dilutive rights or rights of first
refusal or other similar rights with respect to any Equity Securities of the Company.
(e) Upon the filing of the Certificate of Designation with the Secretary of State of the State
of Delaware, (i) the Convertible Preferred Stock will be duly authorized and (ii) a sufficient
number of Conversion Shares will have been duly authorized and validly reserved for issuance upon
conversion of the Shares in accordance with the Certificate of Designation. When the Shares are
issued and paid for in accordance with the provisions of this
15
Agreement and the Certificate of Designation, all such Shares will be duly authorized, validly
issued, fully paid, nonassessable and free of preemptive or similar rights except as set forth in
the Transaction Agreements. When Conversion Shares are issued in accordance with the provisions of
the Certificate of Designation all such Conversion Shares will be duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights.
3.3 Authorization. The Company has all requisite corporate power to enter into each
of the Transaction Agreements to which it is a party and to consummate the transactions
contemplated by each of the Transaction Agreements to which it is a party and to carry out and
perform its obligations thereunder. All corporate action on the part of the Company, its officers
and directors necessary for the authorization of the Convertible Preferred Stock and the
authorization, execution, delivery and performance of the Transaction Agreements to which the
Company is a party has been taken. The execution, delivery and performance of the Transaction
Agreements to which the Company is a party by the Company and the issuance of the Common Stock upon
conversion of the Shares, in each case in accordance with their terms, and the consummation of the
other transactions contemplated herein do not require any approval of the Companys stockholders.
Upon their respective execution by the Company and the other parties thereto and assuming that they
constitute legal and binding agreements of each Purchaser party thereto, each of the Transaction
Agreements to which the Company is a party will constitute a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms, except that such
enforceability (a) may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
and other similar Laws affecting or relating to creditors rights generally, and (b) is subject to
general principles of equity (regardless of whether considered in a proceeding in equity or at
Law).
3.4 Registration Requirements. Subject to the accuracy of the representations made by
the Purchasers in Section 4, the offer, sale and issuance of the Shares and the conversion
of the Shares into Common Stock in accordance with the Certificate of Designation (i) has been and
will be made in compliance with applicable exemptions from the registration and prospectus delivery
requirements of the Securities Act and (ii) will have been registered or qualified (or are exempt
from registration and qualification) under the registration, permit or qualification requirements
of all applicable Blue Sky laws.
3.5 No Conflict. The execution, delivery and performance of the Transaction
Agreements to which the Company is a party by the Company, the issuance of the Shares and the
Common Stock upon conversion of the Shares and the consummation of the other transactions
contemplated hereby and by the other Transaction Agreements to which the Company is a party will
not (i) conflict with or result in any violation of any provision of the certificate of
incorporation or bylaws of the Company, or, upon its filing with the Secretary of State of the
State of Delaware, the Certificate of Designation, (ii) result in any breach or violation of, or
default (with or without notice or lapse of time, or both) under, require consent under, or give
rise to a right of termination, cancellation, modification or acceleration of any obligation or to
the loss of any benefit under any mortgage, Contract, purchase or sale order, instrument, permit,
concession, franchise, right or license binding upon the Company or any of its Subsidiaries or
result in the creation of any liens, claims, mortgages, encumbrances, pledges, security interests,
equities or charges of any kind (each, a Lien) upon any of the properties, assets or rights of
the Company or any of its Subsidiaries, except as would not, individually or in the aggregate,
16
reasonably be expected to have a Material Adverse Effect or to prevent or materially delay or
hinder the ability of the Company to perform its obligations under the Transaction Agreements, or
(iii) subject to the matters referred to in Section 3.6, conflict with or violate any
applicable material law, statute, code, ordinance, rule, regulation, or agency requirement of or
undertaking to or agreement with any Governmental Entity, including common law (collectively,
Laws and each, a Law) or any judgment, order, injunction or decree issued by any Governmental
Entity.
3.6 Consents. No consent, approval, order, or authorization of, or filing or
registration with, or notification to (any of the foregoing being a Consent), any Governmental
Entity is required on the part of the Company or its Subsidiaries in connection with (a) the
execution, delivery or performance of the Transaction Agreements to which the Company is a party
and the consummation of the transactions contemplated hereby and thereby, or (b) the issuance of
the Shares or the issuance of the Common Stock upon conversion of the Shares in accordance with the
Certificate of Designation; other than (i) the filing of the Certificate of Designation with the
Secretary of State of the State of Delaware, (ii) the expiration or termination of any applicable
waiting periods under the Antitrust Laws with respect to performance under the Transaction
Agreements, or the consummation of transactions, in each case occurring after the Closing, (iii)
those to be obtained, in connection with the registration of the Shares under the Registration
Rights Agreement, under the applicable requirements of the Securities Act and any related filings
and approvals under applicable state securities laws, (iv) such filings as may be required under
any applicable requirements of the Exchange Act or the rules of the NYSE and (v) such Consents the
failure of which to make or obtain would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect or to prevent or materially delay or hinder the ability
of the Company to perform its obligations under the Transaction Agreements.
3.7 Permits. The Company and each of its Subsidiaries possess all permits, licenses,
authorizations, consents, approvals and franchises of Governmental Entities that are required to
conduct its business, except for such permits or licenses the absence of which would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the
ability of the Company and its Subsidiaries, taken as a whole, to conduct their businesses
consistent with past practices.
3.8 SEC Reports; Financial Statements.
(a) The Company has filed all forms, reports and documents with the SEC that have been
required to be filed by it under applicable Laws since the Acquisition Date (collectively, with the
Registration Statement on Form S-4 (File No. 333-171924) as amended or superseded by a filing prior
to the date of this Agreement (the Form S-4), the Company SEC Filings), including the Annual
Report of the Company on Form 10-K for the fiscal year ended December 31, 2010, as amended through
the date of this Agreement (the Company Annual Report). Each Company SEC Filing complied as of
its filing date as to form in all material respects with the applicable requirements of the
Securities Act or the Exchange Act, as the case may be, each as in effect on the date such Company
SEC Filing was filed (and, if amended or superseded by a filing prior to the date of this
Agreement, on the date of such amended or superseded filing). As of its filing date (and, if
amended or superseded by a filing prior to the date of this Agreement, on the date of such amended
or superseded filing), each Company SEC
17
Filing did not contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. Other than Spectrum and Zap.Com, none of the Companys
Subsidiaries is required to file any forms, reports or other documents with the SEC pursuant to
Sections 13(a) or 15(d) of the Exchange Act. Since the Acquisition Date, no executive officer of
the Company or Zap.Com has failed to make the certifications required by him or her under Section
302 and 906 of the Sarbanes Oxley Act of 2002 with respect to any Company SEC Filing or Zap.Com SEC
Report. There are no transactions that have occurred since the Acquisition Date that are required
to be disclosed in the Company SEC Filings pursuant to Item 404 of Regulation S-K that have not
been disclosed in the Company SEC Filings.
(b) Zap.Com has filed all forms, reports and documents with the SEC that have been required to
be filed by it under applicable Laws since January 1, 2010 (the Zap.Com SEC Reports). Each
Zap.Com SEC Report complied as of its filing date, as to form in all material respects with the
applicable requirements of the Securities Act or the Exchange Act, as the case may be, each as in
effect on the date such Zap.Com SEC Report was filed (and, if amended or superseded by a filing
prior to the date of this Agreement, on the date of such amended or superseded filing). As of its
filing date (and, if amended or superseded by a filing prior to the date of this Agreement, on the
date of such amended or superseded filing), each Zap.Com SEC Report did not contain any untrue
statement of a material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were made, not
misleading.
(c) The consolidated financial statements (including all related notes and schedules) of the
Company and its Subsidiaries included in the Company SEC Filings and (collectively, the Company
Financial Statements) (i) comply as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, and (ii) fairly present, in all material respects, the
consolidated financial position of the Company and its Subsidiaries as of the dates indicated and
the results of their operations and their cash flows for the periods therein specified, all in
accordance with United States generally accepted accounting principles applied on a consistent
basis (GAAP) throughout the periods therein specified (except as otherwise noted therein, and in
the case of quarterly financial statements except for the absence of footnote disclosure and
subject, in the case of interim periods, to normal year-end adjustments).
(d) The financial statements (including all related notes and schedules) of Zap.Com included
in the Zap.Com SEC Reports (collectively, the Zap.Com Financial Statements) (i) comply as to form
in all material respects with the published rules and regulations of the SEC with respect thereto,
and (ii) fairly present, in all material respects, the consolidated financial position of Zap.Com
and its Subsidiaries as of the dates indicated and the results of their operations and their cash
flows for the periods therein specified, all in accordance with GAAP throughout the periods therein
specified (except as otherwise noted therein, and in the case of quarterly financial statements
except for the absence of footnote disclosure and subject, in the case of interim periods, to
normal year-end adjustments).
18
(e) To the Companys Knowledge, the financial statements (including all related notes and
schedules) of Spectrum included in the Spectrum SEC Reports (collectively, the Spectrum Financial
Statements) (i) comply as to form in all material respects with the published rules and
regulations of the SEC applicable with respect thereto, and (ii) fairly present, in all material
respects, the consolidated financial position of Spectrum and its Subsidiaries as of the dates
indicated and the results of their operations and their cash flows for the periods therein
specified, all in accordance with GAAP throughout the periods therein specified (except as
otherwise noted therein, and in the case of quarterly financial statements except for the absence
of footnote disclosure and subject, in the case of interim periods, to normal year-end
adjustments).
(f) To the Companys Knowledge, the financial statements (including all related notes and
schedules) of F&G included in the Form S-4 (collectively, the F&G Financial Statements) (i)
comply as to form in all material respects with the published rules and regulations of the SEC
applicable with respect thereto, and (ii) fairly present, in all material respects, the
consolidated financial position of F&G and its Subsidiaries as of the dates indicated and the
results of their operations and their cash flows for the periods therein specified, all in
accordance with GAAP throughout the periods therein specified (except as otherwise noted therein,
and in the case of quarterly financial statements except for the absence of footnote disclosure and
subject, in the case of interim periods, to normal year-end adjustments), except, in each case, as
would not and would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect.
(g) Except as disclosed on Section 3.8(g) of the Disclosure Letter, there are no
Liabilities of the Company or any of its Subsidiaries of any kind whatsoever, other than: (i)
Liabilities disclosed and provided for in the Company Financial Statements, the Spectrum Financial
Statements, the F&G Financial Statements or in the Zap.Com Financial Statements; (ii) Liabilities
incurred in the ordinary course of business consistent with past practice; (iii) Liabilities
incurred in connection with the transactions contemplated by this Agreement, the other Transaction
Agreements or the Existing Series A Transaction Agreements, in each case to which the Company is a
party or (iv) Liabilities that would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect.
(h) The Companys principal executive officer and its principal financial officer have (i)
devised and maintained a system of internal accounting controls sufficient to provide reasonable
assurances regarding the reliability of financial reporting and preparation of financial statements
in accordance with GAAP, and have evaluated such system at the times required by the Exchange Act
and in any event no less frequently than at reasonable intervals and (ii) disclosed to the
Companys management, auditors and the audit committee of the Board (x) all significant
deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the Companys or any of its Subsidiaries
(other than Spectrum, Harbinger F&G and their Subsidiaries, as to which no representation is made
pursuant to this clause (ii)(x)) ability to record, process, summarize and report financial
information and (y) any fraud, whether or not material, that involves management or other employees
who have a significant role in the internal controls of the Company, and the Company has provided
to the Purchasers copies of any written materials relating to the foregoing. To the Companys
Knowledge, Spectrums principal
19
executive officer and its principal financial officer have disclosed to Spectrums management,
auditors and the audit committee of Spectrums board of directors (x) all significant deficiencies
and material weaknesses in the design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect Spectrums or any of its Subsidiaries ability to
record, process, summarize and report financial information and (y) any fraud, whether or not
material, that involves management or other employees who have a significant role in the internal
controls of Spectrum. As of the date of this Agreement, the Company has no Knowledge of any
material weaknesses in the internal controls over financial reporting of Harbinger F&G and its
Subsidiaries, that would reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect. The Company has established and maintains disclosure controls and
procedures (as such term is defined in Rule 13a 15 under the Exchange Act); such disclosure
controls and procedures are designed to ensure that material information relating to the Company
and its Subsidiaries (other than Harbinger F&G and its Subsidiaries as to which the Company is in
the process of implementing its disclosure controls and procedures.) required to be included in the
Companys periodic reports under the Exchange Act is made known to the Companys principal
executive officer and its principal financial officer by others within those entities, and such
disclosure controls and procedures are sufficient to ensure that the Companys principal executive
officer and its principal financial officer are made aware of such material information required to
be included in the Companys periodic reports required under the Exchange Act. There are no
outstanding loans made by the Company or any of its Subsidiaries to any executive officer (as
defined in Rule 3b-7 under the Exchange Act) or director of the Company. Neither the Company,
since the Acquisition Date, nor any Subsidiary of the Company, since the date that the Company
acquired (either directly or indirectly) a majority of the outstanding capital stock of such
Subsidiary, has made any loans to any executive officer (as defined in Rule 3b-7 under the Exchange
Act) or director of the Company or any of its Subsidiaries.
3.9 Litigation. Except as set forth on Section 3.9 of the Disclosure Letter,
there are no (i) investigations or, to the Knowledge of the Company, proceedings pending or
threatened by any Governmental Entity with respect to the Company or any of its Subsidiaries or any
of their properties or assets, (ii) Legal Proceedings pending or, to the Knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries, or any of their respective
properties or assets, at Law or in equity that would reasonably be expected to result in liability
to the Company or its Subsidiaries in excess of $250,000, or (iii) orders, judgments or decrees of
any Governmental Entity against the Company or any of its Subsidiaries.
3.10 Absence of Certain Changes. Since December 31, 2010 and except as disclosed on
Section 3.10 of the Disclosure Letter, the business of the Company and its Subsidiaries has
been conducted in the ordinary course of business consistent with past practices and there has not
been:
(a) any Change which, individually or in the aggregate, has had or would reasonably be
expected to have a Material Adverse Effect;
(b) any declaration, setting aside or payment of any dividend or other distribution with
respect to any shares of capital stock of the Company, or any repurchase,
20
redemption or other acquisition by the Company or any of its Subsidiaries of any outstanding
shares of capital stock or other securities of the Company or any of its Subsidiaries;
(c) any incurrence, assumption or guarantee by the Company or any of its Subsidiaries of any
indebtedness for borrowed money in excess of $25,000, individually, or $100,000, in the aggregate,
or the repurchase, redemption or repayment of any indebtedness for borrowed money of the Company or
any of its Subsidiaries in excess of $25,000, individually, or $100,000, in the aggregate;
(d) any event of default (or event which with notice, the passage of time or both, would
become an event of default) in the payment of any indebtedness for borrowed money in an aggregate
principal amount in excess of $100,000 by the Company or any of its Subsidiaries;
(e) any change in any methods of accounting by the Company or any of its Subsidiaries, except
as may be appropriate to conform to changes in GAAP; or
(f) any material Tax election made by the Company or any of its Subsidiaries or any settlement
or compromise of any material Tax liability by the Company or any of its Subsidiaries, except (i)
as required by applicable Law or (ii) with respect to any material Tax election, consistent with
elections historically made by the Company.
3.11 Compliance with Law. The Company and each of its Subsidiaries are in compliance
with and are not in default under or in violation of, and have not received any written notices of
non-compliance, default or violation with respect to, any material Laws, in each case, except as,
individually or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect or to materially delay or hinder the ability of the Company to perform its obligations under
the Transaction Agreements.
3.12 Intellectual Property.
(a) The Company and its Subsidiaries own, license, sublicense or otherwise possess legally
enforceable rights to use all Intellectual Property necessary to conduct the business of the
Company and its Subsidiaries, as currently conducted, free and clear of all Liens (other than
non-exclusive licenses granted in the ordinary course of business), except as would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except
as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse
Effect, all Intellectual Property developed for the Company or any of its Subsidiaries by any
employees, contractors and consultants of the Company or any of its Subsidiaries is exclusively
owned by the Company or one of its Subsidiaries, free and clear of all Liens (other than
non-exclusive licenses granted in the ordinary course of business or Permitted Liens).
(b) All Registered Intellectual Property owned by the Company or any of its Subsidiaries is
subsisting and has not expired or been cancelled or abandoned and, to the Companys Knowledge, is
valid and enforceable, except, in each case, as would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. To the
21
Companys Knowledge, no third party is infringing, violating or misappropriating any of the
Company Intellectual Property in any material respect.
(c) The execution and delivery of the Transaction Agreements to which the Company is a party
by the Company and the consummation of the transactions contemplated hereby and thereby will not
result in the breach of, or create on behalf of any third party the right to terminate or modify,
(i) any license or other agreement relating to any Intellectual Property owned by the Company or
any of its Subsidiaries (the Company Intellectual Property), or (ii) any license, sublicense and
other agreement as to which the Company or any of its Subsidiaries is a party and pursuant to which
the Company or any of its Subsidiaries is authorized to use any third party Intellectual Property,
excluding generally commercially available, off-the-shelf software programs licensed for a license
fee of less than $50,000 in the aggregate (the Third Party Intellectual Property), except, in
either case, as would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
(d) The conduct of the business of the Company and its Subsidiaries has not infringed,
violated or constituted a misappropriation of any Intellectual Property of any third party and as
currently conducted does not infringe, violate or constitute a misappropriation of any Intellectual
Property of any third party, except, in either case, as would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. Neither the Company nor any
of its Subsidiaries (i) has received any written claim or notice alleging any such infringement,
violation or misappropriation, or (ii) has been or is subject to any settlement, order, decree,
injunction, or stipulation imposed by any Governmental Entity that may affect the use, validity or
enforceability of Company Intellectual Property.
(e) The Company and its Subsidiaries take all reasonable actions to protect the Company
Intellectual Property and to protect and preserve the confidentiality of their trade secrets,
including disclosing trade secrets to a third party only where such third party is bound by a
confidentiality agreement, except as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
3.13 Employee Benefits.
(a) Prior to the date hereof, a complete and correct copy of each Benefit Plan of the Company
has been delivered or otherwise made available to the Purchasers.
(b) Except as would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect, with respect to any Benefit Plan of the Company, no Legal Proceeding has
been threatened, asserted, instituted, or, to the Knowledge of the Company, is anticipated (other
than non-material routine claims for benefits, and appeals of such claims), and, to the Knowledge
of the Company, no facts or circumstances exist that would give rise to any such Legal Proceeding.
(c) Except as would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect, each Benefit Plan of the Company has been established and administered in
accordance with its terms, and in compliance with the applicable
22
provisions of ERISA, the Code and all other applicable laws, rules and regulations, and each
Benefit Plan of the Company that is intended to be qualified under Section 401(a) of the Code has
received a favorable determination or opinion letter from the Internal Revenue Service to the
effect that such Benefit Plan of the Company is qualified under the Code and nothing has occurred
that would reasonably be expected to cause the loss of such qualification.
(d) Except as set forth on Section 3.13(d) of the Disclosure Letter, neither the
Company, any of its Subsidiaries, nor any other entity which, together with the Company or any of
its Wholly Owned Subsidiaries would be treated as a single employer under Section 4001 of ERISA or
Section 414 of the Code (each such entity, an ERISA Affiliate) sponsors, maintains, contributes
to, or has had in the past six (6) years an obligation at any time to sponsor, maintain or
contribute to, or has any liability in respect of (i) any defined benefit pension plan (as
defined in Section 3(35) of ERISA), (ii) any employee benefit plan (as defined in Section 3(3) of
ERISA) subject to Section 412 of the Code or Section 302 of ERISA or Title IV of ERISA, including
any multiemployer plan (as defined in Section 4001(a)(15) of ERISA), (iii) any other plan which
is subject to Section 4063, 4064 or 4069 of ERISA, or (iv) any employee pension benefit plan
(within the meaning of Section 3(2) of ERISA) that is not intended to be qualified under Section
401(a) of the Code. Except as set forth in Section 3.13(d) of the Disclosure Letter, and
except as required by Section 4980B of the Code, no Benefit Plan of the Company provides any
retiree or post-employment medical, disability or life insurance benefits to any person. The
assets of any defined benefit pension plan equal or exceed the projected benefit obligation of such
plan, as determined using the actuarial assumptions used for purposes of the Company Financial
Statements.
(e) Except as would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect, neither the execution of the Transaction Agreements nor the consummation
of the transactions contemplated hereby and thereby will (i) accelerate the time of payment or
vesting or increase the amount of compensation or benefits due to any Company employee, or (ii)
give rise to any other liability or funding obligation under any Benefit Plan of the Company or
otherwise, including liability for severance pay, unemployment compensation or termination pay.
(f) Except as set forth on Section 3.13(f) of the Disclosure Letter, no Benefit Plan
of the Company is maintained outside the jurisdiction of the United States, or covers any employee
residing or working outside the United States (any such Benefit Plan the Foreign Benefit Plans).
Except as would not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect, all Foreign Benefit Plans that are required to be funded are fully funded, and with
respect to all other Foreign Benefit Plans, adequate reserves therefor have been established on the
accounting statements of the Company or its applicable Subsidiary.
3.14 Labor Relations.
(a) (i) Except as would not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect or as set forth on Section 3.14 of the Disclosure Letter, no
Company employee is represented by a labor union or works council and, to the Knowledge of the
Company, no organizing efforts have been conducted within the last
23
three years or are now being conducted, (ii) neither the Company nor any of its Subsidiaries
is a party to any material collective bargaining agreement or other labor contract or collective
agreement, and (iii) neither the Company nor any of its Subsidiaries currently has, or, to the
Knowledge of the Company, is there now threatened, a strike, picket, work stoppage, work slowdown
or other material labor dispute.
(b) (i) Each of the Company and its Subsidiaries has complied with all applicable laws
relating to the employment of labor, including all applicable laws relating to wages, hours,
collective bargaining, employment discrimination, civil rights, safety and health, workers
compensation, pay equity and the collection and payment of withholding and/or social security
taxes, except as would not, individually or in the aggregate, have a Material Adverse Effect and
(ii) neither the Company nor any of its Subsidiaries has incurred any liability or obligation under
the Worker Adjustment and Retraining Notification Act or any similar state or local Law within the
last two years which remains unsatisfied.
3.15 Taxes.
(a) The Company and each of its Subsidiaries have filed all Tax Returns required to have been
filed as of the date hereof (or extensions have been duly obtained) and such Tax Returns are
correct and complete in all respects and have paid all Taxes required to have been timely paid by
them in full through the date hereof, except to the extent such Taxes are both (i) being challenged
in good faith and (ii) adequately provided for on the financial statements of the Company and its
Subsidiaries in accordance with GAAP, except as would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(b) Neither the Company nor any of its Subsidiaries has any current liability, and to the
Knowledge of the Company, there are no events or circumstances which would result in any liability,
for Taxes of any Person (other than the Company and its Subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise, except as would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(c) None of the Company or any of its Subsidiaries is a party to, is bound by or has any
obligation under any Tax sharing or Tax indemnity agreement or similar Contract or arrangement
other than any such agreement or similar Contract or arrangement between the Company and any of its
Subsidiaries.
(d) All Taxes required to be withheld, collected or deposited by or with respect to Company
and each of its Subsidiaries have been timely withheld, collected or deposited as the case may be,
and to the extent required, have been paid to the relevant taxing authority, except as would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(e) No deficiencies for any Taxes have been proposed or assessed in writing against or with
respect to the Company or any of its Subsidiaries, and there is no outstanding audit, assessment,
dispute or claim concerning any Tax liability of the Company or any of its Subsidiaries pending or
raised by an authority in writing, except as would not,
24
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
No written claim has been made by any Governmental Entity in a jurisdiction where neither the
Company nor any of its Subsidiaries files Tax Returns that the Company or any of its Subsidiaries
is or may be subject to taxation by that jurisdiction. Neither the Company nor any of its
Subsidiaries has granted any waiver of any federal, state, local or foreign statute of limitations
with respect to, or any extension of a period for the assessment of, any material Tax.
(f) There are no Liens with respect to Taxes upon any of the assets or properties of either
the Company or any of its Subsidiaries, other than with respect to Taxes not yet delinquent, except
as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse
Effect.
(g) No closing agreement pursuant to Section 7121 of the Code (or any similar provision of
state, local or foreign law) has been entered into by or with respect to the Company or any of its
Subsidiaries.
(h) Neither the Company nor any of its Subsidiaries has participated in a listed transaction
within the meaning of Treasury Regulation Section 1.6011-4(b)(2).
(i) The representations and warranties expressly set forth in this Section 3.15 shall
be the only representations and warranties, express or implied, written or oral, with respect to
the subject matter contained in this Section 3.15.
3.16 NYSE.
(a) Shares of the Common Stock are registered pursuant to Section 12(b) of the Exchange Act
and are listed on The New York Stock Exchange (the NYSE), and there is no action pending by the
Company or any other Person to terminate the registration of the Common Stock under the Exchange
Act or to delist the Common Stock from NYSE, nor has the Company received any notification that the
SEC or the NYSE is currently contemplating terminating such registration or listing.
(b) The shares of Common Stock issuable upon conversion of the Shares have been approved by
the NYSE for listing on the NYSE.
(c) The representations and warranties expressly set forth in this Section 3.16 shall
be the only representations and warranties, express or implied, written or oral, with respect to
the subject matter contained in this Section 3.16.
3.17 Investment Company Act(a) . The Company is not, nor immediately after the
Companys receipt of the Share Purchase Price from the Purchasers, will the Company be, an
investment company within the meaning of, and required to be registered under, the Investment
Company Act of 1940, as amended.
3.18 Brokers. Except for Jefferies & Company, Inc., the Company has not retained,
utilized or been represented by any broker or finder who is entitled to any brokerage, finders or
other fee or commission in connection with the transactions contemplated by this Agreement.
25
3.19 Subsidiaries.
(a) As of the date hereof, the Company has no Subsidiaries other than as listed in Exhibit
21.1 to the Company Annual Report and Harbinger F&G and any Subsidiaries thereof, which are listed
on Section 3.19 of the Disclosure Letter.
(b) Except as set forth on Section 3.19 of the Disclosure Letter, all of the
outstanding shares of capital stock of, or other equity or voting interest in, each Subsidiary of
the Company (i) have been duly authorized, validly issued and are fully paid and nonassessable and
(ii) are owned, directly or indirectly, by the Company, free and clear of all Liens (other than
restrictions under applicable securities Laws and Liens securing the Notes).
3.20 Environmental Matters.
(a) Except as would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect or as set forth on Section 3.20 of the Disclosure Letter:
(i) The Company and its Subsidiaries and their respective operations are and have been in
compliance with all, and have not violated any, applicable Environmental Laws, which compliance
includes the possession and maintenance of, and compliance with, all permits, licenses,
authorizations, waivers, exemptions, registrations, consents, approvals and franchises from
Governmental Entities required under applicable Environmental Laws (Environmental Permits) for
the operation of the business of the Company and its Subsidiaries; the Company has no reason to
believe that any such Environmental Permits will be modified, revoked or otherwise made
ineffective, or will not be renewed on terms substantially the same as those currently in effect.
(ii) Neither the Company nor any of its Subsidiaries, nor any other entity for which the
Company or any of its Subsidiaries is responsible, has transported, produced, processed,
manufactured, generated, used, treated, handled, stored or disposed of any Hazardous Substances,
except in compliance with applicable Environmental Laws and in a manner that would not result in
liability under any applicable Environmental Law. No Hazardous Substance has been released by the
Company, the Subsidiaries, or to the Knowledge of the Company, by any other Person (including,
without limitation, any of the predecessors in interest to the Company or any of its Subsidiaries),
at, on, about or under (i) any property now or formerly owned, operated or leased by the Company,
its Subsidiaries or their respective predecessors in interest; or (ii) any property to which the
Company, its Subsidiaries or their respective predecessors in interest has sent waste;
(iii) Neither the Company nor any of its Subsidiaries, nor, to the Knowledge of the Company,
any of their respective predecessors in interest has exposed any employee or any third party to
Hazardous Substances in violation of, or in a manner that would result in liability under, any
applicable Environmental Law or tort law;
(iv) Neither, the Company nor any of its Subsidiaries, nor, to the Knowledge of the Company,
any of their respective predecessors in interest, is a party to or the subject of any pending, or,
to the Knowledge of the Company, threatened, Legal Proceeding
26
alleging Liabilities under or noncompliance with any Environmental Law or seeking to impose
any financial responsibility for any investigation, cleanup, removal, containment or any other
remediation or compliance under any Environmental Law. Neither the Company nor any of its
Subsidiaries, nor, to the Knowledge of the Company, any of their respective predecessors in
interest, is subject to any orders, judgments or decrees or agreement by or with any Governmental
Entity or third party imposing any Liabilities with respect to any Environmental Laws or any
Hazardous Substances;
(v) There are no liabilities of any third party arising out of or related to Environmental
Laws or Hazardous Substances that the Company, its Subsidiaries or, to the Knowledge of the
Company, their respective predecessors in interest has expressly agreed to assume, to indemnify or
retain by contract or otherwise;
(vi) Neither the Company nor the Subsidiaries has received any notice, claim, subpoena, or
summons from any Person alleging: (i) any environmental liability relating to the Company, the
Subsidiaries, or their respective predecessors in interest; or (ii) any violation by the Company,
the Subsidiaries or their respective predecessors in interest of any Environmental Law;
(vii) Neither the Company nor any of its Subsidiaries has manufactured any products that are
not or were not in compliance with all Environmental Laws applicable to such products to be
imported, sold, or otherwise marketed in any jurisdiction in which such products are currently, or
have been, imported, sold, or otherwise marketed; and
(viii) None of the products currently or formerly manufactured, produced, distributed, sold,
leased, licensed, repaired, delivered, installed, conveyed or otherwise put into the stream of
commerce by the Company or any of its Subsidiaries, or, to the Knowledge of the Company, any other
Person for which the Company or any of its Subsidiaries is responsible by contract or operation of
law, contains or has contained (i) asbestos; or (ii) any other Hazardous Substance that has
resulted in or would reasonably be expected to result in any liability to the Company or any of its
Subsidiaries.
(b) As of the date hereof, all reports of environmental site assessments, reviews, audits,
investigations or similar evaluations, and any material documents in the possession or control of
the Company or any of its Subsidiaries concerning (i) environmental conditions at any facilities or
real property ever owned, operated or leased by the Company, the Subsidiaries or any of their
respective predecessors in interest; or (ii) any environmental liability of the Company, its
Subsidiaries or any of their respective predecessors in interest have been made available to the
Purchasers.
(c) The representations and warranties expressly set forth in this Section 3.20 shall
be the only representations and warranties, express or implied, written or oral, with respect to
the subject matter contained in this Section 3.20.
3.21 Assets.
(a) The Company and its Subsidiaries have good and marketable title to all of its or their
real or personal properties (whether tangible or intangible), rights and assets,
27
except as would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect, in each case, free and clear of all Liens (other than Permitted Liens).
The properties and assets owned and leased by the Company and its Subsidiaries are sufficient to
carry on their businesses as they are now being conducted except as would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
(b) Except as would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect, the Company or a Subsidiary of the Company has good and valid leasehold
interests in all of its leased properties, whether as lessee or sublessee (the Leased Real
Property), in each case, sufficient to conduct its respective businesses as currently conducted,
free and clear of all Liens (other than Permitted Liens), assuming the timely discharge of all
obligations owing under or related to Leased Real Property. Neither the Company nor any of its
Subsidiaries owns any real property.
3.22 Insurance. The Company and its Subsidiaries have and maintain in effect policies
of insurance covering the Company, its Subsidiaries or any of their respective employees,
properties or assets, including policies of life, property, fire, workers compensation, products
liability, directors and officers liability and other casualty and liability insurance, that is
in a form and amount that is customarily carried by persons conducting business similar to that of
the Company and its Subsidiaries and which the Company reasonably believes are adequate for the
operation of its business. All such insurance policies are in full force and effect, no written
notice of cancellation has been received by the Company as of the date hereof and, to the Knowledge
of the Company, no such notice is imminent, and there is no existing default or event which, with
the giving of notice or lapse of time or both, would constitute a default, by any insured
thereunder, except for such defaults that would not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect. There is no material claim pending under any of
such policies as to which coverage has been denied or disputed by the underwriters of such policies
and there has been no threatened termination of any such policies, except as would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
3.23 Material Contracts.
(a) Except as filed as an exhibit to the Company SEC Filings, Spectrum SEC Reports or Zap.com
SEC Reports, there are none of the following (each a Material Contract):
(i) Contracts restricting the payment of dividends upon, or the redemption, repurchase or
conversion of, the Convertible Preferred Stock or the Common Stock issuable upon conversion
thereof;
(ii) joint venture, partnership, limited liability or other similar Contract or arrangement
relating to the formation, creation, operation, management or control of any partnership or joint
venture that is material to the business of the Company and its Subsidiaries, taken as a whole;
28
(iii) any Contract relating to the acquisition or disposition of any business, stock or assets
that is material to the business of the Company and its Subsidiaries, taken as a whole, other than
in the ordinary course of business consistent with past practice;
(iv) Contracts containing any covenant (x) limiting the right of the Company or any of its
Subsidiaries to engage in any line of business or in any geographic area, or (y) prohibiting the
Company or any of its Subsidiaries from engaging in business with any Person or levying a fine,
charge or other payment for doing so;
(v) material contracts (as such term is defined in Item 601(b)(10) of Regulation S-K of the
SEC, excluding any exhibits, schedules and annexes to such material contracts that are not required
to be filed with the SEC, and those agreements and arrangements described in Item 601(b)(10)(iii))
with respect to the Company and its Subsidiaries required to be filed with the SEC (the Material
Contracts, together with any lease, binding commitment, option, insurance policy, benefit plan or
other contract, agreement, instrument or obligation (whether oral or written) to which the Company
or any of its Subsidiaries may be bound, the Contracts);
(vi) Contracts relating to indebtedness for borrowed money of the Company or any of its
Subsidiaries in an amount exceeding $500,000;
(vii) Contracts that would be binding on the Purchasers or any of their Affiliates after the
Closing;
(viii) Contracts with any Governmental Entity that imposes any material obligation or
restriction on the Company or any of its Subsidiaries, taken as a whole; and
(ix) any material Contract with any current or former director, officer or employee.
(b) Each Material Contract is valid and binding on the Company (and/or each such Subsidiary of
the Company party thereto) and, to the Knowledge of the Company, on each other party thereto, and
is in full force and effect, and neither the Company nor any of its Subsidiaries that is a party
thereto, nor, to the Knowledge of the Company, any other party thereto, is in breach of, or default
under, any such Material Contract, and no event has occurred that with notice or lapse of time or
both would constitute such a breach or default thereunder or would result in the termination
thereof or would cause or permit the acceleration or other change of any right or obligation of the
loss of any benefit thereunder by the Company or any of its Subsidiaries, or, to the Knowledge of
the Company, any other party thereto, except for such failures to be in full force and effect and
such breaches and defaults that would not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect.
3.24 Right of First Refusal; Stockholders Agreement; Voting and Registration
Rights. Except as set forth on Section 3.24 of the Disclosure Letter or as
provided for in this Agreement, the other Transaction Agreements or the Existing Series A
Transaction Agreements, no party has any right of first refusal, right of first offer, right of
co-sale, preemptive right, anti-dilution right or other similar right regarding Equity Securities of the Company.
Except as
set
29
forth on Section 3.24 of the Disclosure Letter, there are no provisions of the
Companys organizational documents and no Material Contracts other than the Certificate of
Designation, this Agreement, the other Transaction Agreements or the Existing Series A Transaction
Agreements, which (a) may affect or restrict the voting rights of the Purchasers with respect to
the Shares in their capacity as stockholders of the Company, (b) restrict the ability of the
Purchasers, or any successor thereto or assignee or transferee thereof, to transfer the Shares, (c)
would adversely affect the Companys or the Purchasers right or ability to consummate the
transactions contemplated by this Agreement or comply with the terms of the other Transaction
Agreements or the Certificates of Designation and the transactions contemplated hereby or thereby,
(d) require the vote of more than a majority of the Companys issued and outstanding Common Stock
or require a separate class vote, voting together as a single class, to take or prevent any
corporate action (other than those matters expressly requiring a different vote under the
provisions of the DGCL) or (e) entitle any party to nominate or elect any director of the Company
or require any of the Companys stockholders to vote for any such nominee or other person as a
director of the Company.
3.25 Anti-Takeover Statutes. To the extent necessary, the Board has taken all
required actions so that the restrictions on business combinations set forth in Article IX, Section
(b) of the Companys certificate of incorporation are not applicable to the Transaction Agreements
and the transactions contemplated hereby and thereby, including the acquisition of Beneficial
Ownership by the Purchasers of additional shares of voting stock of the Company pursuant to
additional issuances contemplated by the Certificate of Designation or through the exercise of the
Purchasers rights set forth in Section 5.5, and any other acquisition of Beneficial
Ownership by the Purchasers of additional shares of voting stock of the Company made in compliance
with Section 5.4. The Company has elected in its certificate of incorporation not to be
governed by Section 203 of the DGCL and no other state takeover statute or similar regulation
applies to or purports to apply to the Transaction Agreements and the transactions contemplated
hereby and thereby.
3.26 No Additional Understandings. Other than the Transaction Agreements, (x) none of
the Company, its Subsidiaries or any of the Harbinger Affiliates is a party to any agreement or
other legally binding arrangement, whether oral or written, with any Purchaser or any Affiliate
thereof relating to the Shares or the transactions contemplated by the Transaction Agreements and
(y) none of the Purchasers or any of their Affiliates have been paid or are entitled to any
transaction or similar fees or compensation from the Company, any of its Subsidiaries, or any
Harbinger Affiliates (other than reimbursement of actual out-of-pocket costs and expenses as
provided in Section 12.8) in connection herewith or therewith.
3.27 Spectrum and F&G.
(a) As of the date hereof, the Company directly or indirectly owns 27,756,905 shares of common
stock of Spectrum free and clear of all Liens (other than restrictions under applicable securities
Laws and Liens securing the Notes).
(b) Organization. Each of Spectrum and F&G and their respective Subsidiaries are
validly existing and in good standing under the laws of their respective
jurisdictions of organization; and each of them is duly qualified to do business as a foreign
30
corporation in good standing in all other jurisdictions in which its ownership or lease of property
or the conduct of its business requires such qualification, except where the failure to be so
qualified and in good standing would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect.
(c) No Conflicts. The execution, delivery and performance of the Transaction
Agreements, the issuance of the Shares and the Common Stock upon conversion of the Shares and the
consummation of the other transactions contemplated hereby and by the other Transaction Agreements
will not (i) conflict with or result in any violation of any provision of the certificate of
incorporation or bylaws of Spectrum or Harbinger F&G or any of their respective Subsidiaries, (ii)
result in any breach or violation of, or default (with or without notice or lapse of time, or both)
under, require consent under, or give rise to a right of termination, cancellation, modification or
acceleration of any obligation or to the loss of any benefit under any mortgage, Contract, purchase
or sale order, instrument, permit, concession, franchise, right or license binding upon Spectrum or
Harbinger F&G or any of their respective Subsidiaries or result in the creation of any Lien upon
any of the properties, assets or rights of Spectrum or Harbinger F&G or any of their respective
Subsidiaries, or (iii) subject to the matters referred to in Section 3.27(d), conflict with
or violate any applicable Law or any judgment, order, injunction or decree issued by any
Governmental Entity, except in each case with respect to clauses (i), (ii) and (iii), as would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect or to
prevent or materially delay or hinder the ability of the Company to perform its obligations under
the Transaction Agreements.
(d) No Consents. No Consent of any Governmental Entity is required on the part of
Spectrum or Harbinger F&G or any of their respective Subsidiaries in connection with (a) the
execution, delivery or performance of the Transaction Agreements party and the consummation of the
transactions contemplated hereby and thereby, or (b) the issuance of the Shares or the issuance of
the Common Stock upon conversion of the Shares in accordance with the Certificate of Designation;
other than (i) such filings as may be required under any applicable requirements of the Exchange
Act, and (ii) such Consents the failure of which to make or obtain would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect or to prevent or materially
delay or hinder the ability of the Company to perform its obligations under the Transaction
Agreements.
(e) Permits. Each of Spectrum and its Subsidiaries possess all permits, licenses,
authorizations, consents, approvals and franchises of Governmental Entities that are required to
conduct its business, except for such permits or licenses the absence of which would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(f) Litigation. To the Knowledge of the Company, except as disclosed on Section
3.27(f) of the Disclosure Letter, and except as disclosed in the Spectrum SEC Reports and the
disclosure schedules to the F&G Purchase Agreement, there are no (i) investigations or proceedings
pending or threatened by any Governmental Entity with respect to Spectrum or F&G or any of their
respective Subsidiaries or any of their properties or assets, (ii) Legal Proceedings pending or,
to the Knowledge of the Company, threatened against or affecting Spectrum or F&G or any of their
respective Subsidiaries, or any of their respective properties or
assets, at law or in equity, or (iii) orders, judgments or decrees of any Governmental Entity
31
against Spectrum or F&G or any of their respective Subsidiaries, except in the case of each of
clauses (i), (ii), and (iii), which would not reasonably be expected to have a Material Adverse
Effect.
(g) Compliance with Law. Except as set forth on Section 3.27(g) of the
Disclosure Letter, each of Spectrum and F&G and each of their respective Subsidiaries are in
compliance with and are not in default under or in violation of, and have not received any written
notices of non-compliance, default or violation with respect to, any Laws, in each case, except as,
individually or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect.
(h) Insurance. Except as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect, each of Spectrum and F&G and each of their respective
Subsidiaries have and maintain in effect policies of insurance covering such entities, their
respective Subsidiaries or any of their respective employees, properties or assets, including
policies of life, property, fire, workers compensation, products liability, directors and
officers liability and other casualty and liability insurance, that is in a form and amount that
is customarily carried by persons conducting business similar to that of such entities and which
the Company reasonably believes are adequate for the operation of their respective businesses.
(i) Intellectual Property. To the Knowledge of the Company, each of Spectrum and F&G
and their respective subsidiaries: (i) own, possess or can acquire on reasonable terms, adequate
trademarks, trade names and other rights to inventions, know how, patents, copyrights, confidential
information and other intellectual property (collectively, intellectual property rights)
necessary to conduct the business now operated by them, or presently employed by them, except where
the failure to own, possess or acquire such intellectual property rights would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect, and (ii) have not
received any written notice of infringement of or conflict with asserted rights of others with
respect to any intellectual property rights that would reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect.
(j) Benefit Plans. To the Knowledge of the Company, except as would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect, each Benefit Plan of
Spectrum and Benefit Plan of F&G and their respective Subsidiaries has been established and
administered in accordance with its terms, and in compliance with the applicable provisions of
ERISA, the Code and all other applicable laws, rules and regulations.
(k) Labor Matters. To the Knowledge of the Company, no labor dispute with the
employees of Spectrum or F&G, or any of their respective Subsidiaries, exists or is imminent,
except such labor disputes as would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect.
(l) Taxes. To the Knowledge of the Company, Spectrum, F&G and their respective
Subsidiaries have filed all Tax Returns that are required to be filed or have requested extensions
thereof (except in any case in which the failure so to file would not have a
Material Adverse Effect); and, to the Knowledge of the Company, Spectrum, F&G and their
32
respective Subsidiaries have paid all Taxes required to be paid by them, except for any such Taxes
currently being contested in good faith or as would not, individually or in the aggregate, have a
Material Adverse Effect.
(m) Environmental Matters. To the Knowledge of the Company, none of Spectrum or F&G
or their respective Subsidiaries is in violation of any Environmental Law, owns or operates any
real property contaminated with any substance that is subject to any environmental laws, is liable
for any off site disposal or contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation, contamination, liability or claim would
reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; nor to
the Knowledge of the Company is there any pending investigation which would reasonably be expected
to lead to such a claim.
(n) Title to Property. To the Knowledge of the Company, each of Spectrum, F&G and
their respective Subsidiaries have good and marketable title in fee simple to all real property
owned by them, good title to all personal property owned by them and valid leasehold interests in
real and personal property being leased by them, in each case, as of the date hereof, free from all
liens, charges, encumbrances and defects, except (x) for Permitted Liens as such term is defined in
the Indenture, (y) for such as would not, individually or in the aggregate, reasonably be expected
to interfere in any material respect with the use made and proposed to be made of such property by
the Company and its Subsidiaries, or (z) for such as would not otherwise have a Material Adverse
Effect.
(o) Spectrum SEC Compliance. To the Companys Knowledge, Spectrum has filed all
forms, reports and documents with the SEC that have been required to be filed by it under
applicable Laws since October 1, 2009 (the Spectrum SEC Reports). To the Companys Knowledge,
each Spectrum SEC Report complied as of its filing date, as to form in all material respects with
the applicable requirements of the Securities Act or the Exchange Act, as the case may be, each as
in effect on the date such Spectrum SEC Report was filed (and, if amended or superseded by a filing
prior to the date of this Agreement, on the date of such amended or superseded filing). To the
Companys Knowledge, as of its filing date (and, if amended or superseded by a filing prior to the
date of this Agreement, on the date of such amended or superseded filing), each Spectrum SEC Report
did not contain any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the circumstances under
which they were made, not misleading.
(p) F&G. The acquisition contemplated by the F&G Purchase Agreement has been
consummated. Except as set forth on Section 3.27(p) of the Disclosure Letter, to the
Knowledge of the Company, there has not been any breach of the representations and warranties made
by OM Group (UK) Limited to Harbinger F&G in Article III of the F&G Purchase Agreement that has
given or would reasonably be expected to give rise to a claim for indemnification under the F&G
Purchase Agreement. Except as would not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect, each of the Insurance Subsidiaries possess all permits,
licenses, authorizations, consents, approvals and franchises that are required by applicable Law to
conduct their business in the ordinary course of business.
33
(q) Form S-4. To the Companys Knowledge, as of its effective date (and, if
thereafter amended or superseded by a filing prior to the date of this Agreement, on the date of
such amended or superseded filing), the financial statements of Spectrum and its subsidiaries
incorporated by reference into the Form S-4, the financial statements of F&G and its subsidiaries
incorporated by reference into the Form S-4 and the information contained in Annexes A through E
included in the Form S-4 did not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, except as would not and would not
reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
3.28 No Other Representations and Warranties. Except for the representations and
warranties contained in Section 3 (including, or as qualified by, the Disclosure Letter),
the Company makes no other representation or warranty, express or implied, written or oral, and
hereby, to the maximum extent permitted by applicable Law, disclaims any such representation or
warranty, whether by the Company or any other Person, with respect to the Company or with respect
to any other information (including, without limitation, pro-forma financial information, financial
projections or other forward-looking statements) provided to or made available to any Purchaser in
connection with the transactions contemplated hereby. Neither the Company nor any other Person
will have or be subject to any liability or indemnification obligation to any Purchaser or any
other Person resulting from any other express or implied representation or warranty with respect to
the Company, unless any such information is expressly included in a representation or warranty
contained in Section 3 or in an applicable section of the Disclosure Letter.
4. Representations and Warranties of the Purchasers. Each Purchaser represents and
warrants, severally and not jointly, to the Company as follows:
4.1 Organization. Such Purchaser is a legal entity duly organized, validly existing
and in good standing under the Laws of the jurisdiction of its organization.
4.2 Authorization. Such Purchaser has all requisite corporate power to enter into
this Agreement and the other Transaction Agreements to which such Purchaser is a party and to
consummate the transactions contemplated by the Transaction Agreements to which such Purchaser is a
party and to carry out and perform its obligations thereunder. All corporate or member action on
the part of such Purchaser or the holders of the capital stock or other equity interests of such
Purchaser necessary for the authorization, execution, delivery and performance of the Transaction
Agreements to which such Purchaser is a party has been taken. Upon their respective execution by
such Purchaser and the other parties thereto and assuming that they constitute legal and binding
agreements of the Company, each of the Transaction Agreements to which such Purchaser is a party
will constitute a legal, valid and binding obligation of such Purchaser, enforceable against such
Purchaser in accordance with its terms, except that such enforceability (a) may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other similar Laws affecting or
relating to creditors rights generally, and (b) is subject to general principles of equity
(regardless of whether considered in a proceeding in equity or at Law).
34
4.3 No Conflict. The execution, delivery and performance of the Transaction
Agreements to which such Purchaser is a party by such Purchaser, the issuance of the Shares and the
Common Stock upon conversion of the Shares in accordance with the Certificate of Designation and
the consummation of the other transactions contemplated hereby will not (i) conflict with or result
in any violation of any provision of the certificate of incorporation or by-laws or other
equivalent organizational document, in each case as amended, of such Purchaser, (ii) result in any
breach or violation of, or default (with or without notice or lapse of time, or both) under,
require consent under, any Contract binding upon such Purchaser or (iii) subject to the matters
referred to in Section 4.4, conflict with or violate any applicable Laws or any judgment,
order, injunction or decree issued by any Governmental Entity, except in the case of each of
clauses (i), (ii) and (iii) as would not, individually or in the aggregate, be reasonably expected
to materially delay or hinder the ability of such Purchaser to perform its obligations under the
Transaction Agreements (with respect to each Purchaser, a Purchaser Adverse Effect).
4.4 Consents. No Consent of any Governmental Entity is required on the part of such
Purchaser in connection with (a) the execution, delivery or performance of the Transaction
Agreements to which such Purchaser is a party and the consummation of the transactions contemplated
hereby and thereby, and (b) the issuance of the Shares or the issuance of the Common Stock upon
conversion of the Shares in accordance with the Certificate of Designation, other than (i) the
expiration or termination of any applicable waiting periods under the Antitrust Laws with respect
to the performance under the Transaction Agreements, or consummation of transactions, in each case
occurring after the Closing, (ii) those to be obtained, in connection with the registration of the
Shares under the Registration Rights Agreement, under the applicable requirements of the Securities
Act and any related filings and approvals under applicable state securities Laws, (iii) such
filings and approvals as may be required by any federal or state securities Laws, including
compliance with any applicable requirements of the Exchange Act, and (iv) such Consents the failure
of which to make or obtain would not, individually or in the aggregate, reasonably be expected to
have a Purchaser Adverse Effect.
4.5 Brokers. Such Purchaser has not retained, utilized or been represented by any
broker or finder in connection with the transactions contemplated by this Agreement whose fees the
Company would be required to pay.
4.6 Purchase Entirely for Own Account. Such Purchaser is acquiring the Shares for its
own account solely for the purpose of investment, not as nominee or agent, and not with a view to,
or for sale in connection with, any distribution of the Shares in violation of the Securities Act,
and such Purchaser has no present intention of selling, granting any participation in, or otherwise
distributing the same, in violation of the Securities Act. Such Purchaser has no present
agreement, undertaking, arrangement, obligation or commitment providing for the disposition of the
Shares.
4.7 Investor Status. Such Purchaser certifies and represents to the Company that such
Purchaser is an accredited investor as defined in Rule 501 of Regulation D promulgated under the
Securities Act. Such Purchasers financial condition is such that it is able to bear the risk of
holding the Shares for an indefinite period of time and the risk of loss of its entire investment.
Such Purchaser has been afforded the opportunity to receive information
35
from, and to ask questions of and receive answers from the management of, the Company
concerning this investment so as to allow it to make an informed investment decision prior to its
investment and has sufficient knowledge and experience in investing in companies similar to the
Company so as to be able to evaluate the risks and merits of its investment in the Company.
4.8 Securities Not Registered.
(a) Such Purchaser understands that the Shares and the Conversion Shares have not been
approved or disapproved by the SEC or by any state securities commission nor have the Shares or the
Conversion Shares been registered under the Securities Act, by reason of their issuance by the
Company in a transaction exempt from the registration requirements of the Securities Act, and that
the Shares and the Conversion Shares must continue to be held by such Purchaser unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from such registration.
Such Purchaser understands that the exemptions from registration afforded by Rule 144 under the
Securities Act (Rule 144) (the provisions of which are known to it) depend on the satisfaction of
various conditions, and that, if applicable, Rule 144 may afford the basis for sales only in
limited amounts.
(b) The Shares and the Conversion Shares shall be subject to the restrictions contained
herein.
(c) It is understood that the Shares and the Conversion Shares, and any securities issued in
respect thereof or in exchange therefor, may bear one or all of the legends set forth in
Section 9.
4.9 Financing. Such Purchaser has (and at the Closing will have) an amount of cash
sufficient to enable it to consummate the transactions contemplated hereunder (including the
purchase of the Shares set forth next to such Purchasers name on Annex A) on the terms and
conditions set forth in this Agreement.
4.10 Equity Securities of the Company. Such Purchaser does not Beneficially Own any
Equity Securities of the Company except, as of the Closing, the Shares. For the avoidance of doubt,
anything in this Section 4.10 to the contrary notwithstanding, the parties hereto
acknowledge, that all the representations and warranties made by the DDJ Purchaser in this
Section 4.10 are being made only with respect to the account managed by DDJ Capital
Management, LLC (DDJ) and shall not apply to any Shares that may be beneficially owned by the DDJ
Purchaser that are not held through such Account.
4.11 Indebtedness. Except as disclosed to the Company in writing on or prior to the
date hereof, neither such Purchaser nor any of its Affiliates owns any debt securities or other
indebtedness issued by the Company or any of its Subsidiaries. For the avoidance of doubt, anything
in this Section 4.11 to the contrary notwithstanding, the parties hereto acknowledge, that
all the representations and warranties made by the DDJ Purchaser in this Section 4.11 are
being made only with respect to the account managed by DDJ and shall not apply to any Shares that
may be beneficially owned by the DDJ Purchaser that are not held through such Account.
36
5. Covenants.
5.1 Regulatory Approval.
(a) [Reserved.]
(b) To the extent a filing, notification or submission is to be made under applicable
insurance laws with the Vermont Department of Banking, Insurance, Securities and Health Care
Administration, the New York State Insurance Department, the Maryland Insurance Administration, the
Bermuda Monetary Authority or any other Governmental Entity regulating an insurance business of the
Company or any of its controlled Affiliates (the Insurance Regulatory Authorities) in connection
with the exercise by a Purchaser of its rights under the Transaction Agreements, upon the request
of such Purchaser, the Company shall reasonably cooperate and assist such Purchaser in the making
by it of any such filing, notification or submission with the Insurance Regulatory Authorities,
including by promptly furnishing any information or documentation as those authorities may
reasonably require or request from such Purchaser in connection with such filing, notification or
submission. Each Purchaser hereto shall promptly inform the Company (and vice versa) of any
meetings or hearings to be held with or before any Insurance Regulatory Authority regarding any of
the transactions contemplated by the Transaction Agreements applicable to such Purchaser, and shall
afford the Company or such Purchaser, as applicable, the opportunity to attend all such meetings
and hearings to the extent permitted by such Insurance Regulatory Authority and applicable Law,
except as to any portion of such meeting that addresses Protected Information (as defined below) of
such Purchaser. Each Purchaser shall permit the Company and their counsel (and vice versa) the
opportunity to review in advance, and comment upon, any proposed written communication to any
Insurance Regulatory Authority, and provide the Company or such Purchaser, as applicable, with
copies of all filings made by the Company or such Purchaser, as applicable, and all correspondence
between such Purchaser (or its advisors) or the Company with any Insurance Regulatory Authority and
any other information supplied by such Purchaser or the Company to, or received from, any Insurance
Regulatory Authority, in each case relating to the transactions contemplated by the Transaction
Agreements relating to such Purchaser, except to the extent prohibited by such Insurance Regulatory
Authority or applicable Law or in the event any Insurance Regulatory Authority requires or requests
a Purchaser or the Company or any of their Affiliates to provide or a Purchaser or the Company or
any of their Affiliates otherwise provides: (i) personal financial information, including, but not
limited to, any individual tax return or statement of net worth, or any other information that is
of a personal or private nature, about any individual who is an employee, officer, director,
general partner or limited partner (including the identity of any such limited partner) of such
party or any of its Affiliates, or (ii) information that is either confidential or constitutes a
trade secret of such party (the information described in the preceding clauses (i) and (ii),
Protected Information), such party shall have no obligation to provide to the other party, and
the other party shall have no right to review, such Protected Information, the other party shall
not seek Protected Information from any such Insurance Regulatory Authority, and in the event any
Insurance Regulatory Authority were to share such information with the other party, the other party
agrees upon discovering this fact, to cease accessing or reading any Protected Information, not to
disclose such information to any third party, and to return it (otherwise unread) to such party.
Subject to applicable Law, each Purchaser and the Company shall have the right to file Protected
Information separately from
37
other correspondence, filings or communications, or to redact Protected Information from such
documents prior to sharing them with the other party.
(c) Each Purchaser hereto shall promptly inform the Company (and vice versa) of any material
communication from the Insurance Regulatory Authorities or any other Governmental Entity regarding
any of the transactions contemplated by this Agreement relating to such Purchaser. If any
Purchaser or the Company or any Affiliate thereof receives a request for additional information or
documentation from any such Governmental Entity with respect to the transactions contemplated by
this Agreement relating to such Purchaser, then such party will endeavor in good faith to make, or
cause to be made, as soon as reasonably practicable and, if permitted by applicable Law, after
consultation with the other party, an appropriate response in compliance with such request;
provided, however, the foregoing shall not require any party to disclose or
otherwise provide any Protected Information.
5.2 Shares Issuable Upon Conversion. The Company will at all times have reserved and
available for issuance such number of shares of Common Stock as shall be from time to time
sufficient to permit the conversion in full of the outstanding Shares into Common Stock, including
as may be adjusted for share splits, combinations or other similar transactions as of the date of
determination or due to the accrual of Accreting Dividends.
5.3 Commercially Reasonable Efforts; Further Assurances; Notification.
(a) Upon the terms and subject to the conditions set forth in this Agreement, each of the
Purchasers and the Company shall use commercially reasonable efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, and to assist and cooperate with the other parties or
parties hereto in doing, all things reasonably necessary, proper or advisable under applicable Law
to consummate and make effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement and the other Transaction Agreements, including using commercially
reasonable efforts to: (i) cause the conditions to the Closing set forth in Section 6 to
be satisfied; (ii) obtain all necessary actions or non-actions, waivers, consents, approvals,
orders and authorizations from Governmental Entities and make all necessary registrations,
declarations and filings with Governmental Entities; and (iii) execute or deliver any additional
instruments reasonably necessary to consummate the transactions contemplated by, and to fully carry
out the purposes of, this Agreement and the other Transaction Agreements.
(b) Each party agrees to cooperate with each other and their respective officers, employees,
attorneys, accountants and other agents, and, generally, do such other reasonable acts and things
in good faith as may be reasonably necessary to effectuate the transactions contemplated by this
Agreement and the other Transaction Agreements, subject to the terms and conditions hereof and
thereof and compliance with applicable Law, including taking reasonable action to facilitate the
filing of any document or the taking of reasonable action to assist the other parties hereto in
complying with the terms hereof and thereof.
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5.4 Standstill.
(a) Each Purchaser hereby agrees that from Closing until the date that is the earlier of (i)
the date such Purchaser ceases to hold any Shares and (ii) three (3) years following the Closing
(the Standstill Period), such Purchaser shall not, and shall cause its Affiliates not to,
directly or indirectly:
(i) make, or in any way participate, directly or indirectly, in any solicitation of
proxies to vote (as such terms are used in the rules of the SEC), or seek to advise or influence
any Person (other than (x) such Purchaser or its Affiliates, or (y) in accordance with and
consistent with the recommendation of the Board) with respect to the voting of any Company Voting
Stock;
(ii) authorize or commence any tender offer or exchange offer for shares of Company Voting
Stock (for the avoidance of doubt, tendering into any tender offer or exchange offer not otherwise
violating this clause this Section 5.4(a)(ii) will not violate this Section
5.4(a)(ii));
(iii) form, join or in any way participate in a group as defined in Section 13(d)(3) of the
Exchange Act, for the purpose of voting, acquiring, holding, or disposing of any Company Voting
Stock;
(iv) submit to the Board a written proposal for or offer of (with or without conditions), any
merger, recapitalization, reorganization, business combination or other extraordinary transaction
involving the Company, or make any public announcement with respect to such proposal or offer;
(v) request the Company or any of its Affiliates, directly or indirectly, to amend or waive
any provision of this Section 5.4; or
(vi) enter into any arrangements with any third party concerning any of the foregoing.
(b) If, at any time prior to the termination of the Standstill Period, (i) the Company has
entered into a definitive agreement, the consummation of which would result in a Company Change in
Control Event, (ii) any Person shall have commenced and not withdrawn a bona fide public tender or
exchange offer which if consummated would result in a Company Change in Control Event and the Board
has not recommended that the stockholders of the Company reject such offer within the time period
contemplated by Rule 14e 3 under the Exchange Act, or (iii) the Company files or consents to the
filing against the Company of a petition for relief or reorganization or arrangement or any other
petition in bankruptcy, insolvency, reorganization or other similar Law, makes an assignment for
the benefit of creditors or consents to the appointment of a custodian, receiver, trustee or other
officer with similar powers with respect to the Company or with respect to any substantial part or
its property, then, in each case, for so long as such condition continues to apply, the limitation
on the actions described in clauses (i), (ii), (iii), (iv), (v) and (vi) of Section 5.4(a)
(and any related acquisition of Beneficial Ownership by such Purchaser and/or their Affiliates)
shall not be applicable to such Purchaser.
39
(c) Anything in this Section 5.4 to the contrary notwithstanding, this Section
5.4 shall not be construed to prohibit or restrict (i) any actions taken by any designee,
nominee or appointee on the Board, in their capacities as a member of the Board and in compliance
with and subject to his or her fiduciary duties as a member of the Board or (ii) the Purchaser from
making non-public suggestions, recommendations and proposals regarding the future management of, or
business plans of, the Company to the Companys management or its Board after the occurrence of a
Specified Breach Event (as defined in the Certificate of Designation) that would not require any
Person to publicly disclose such suggestions, recommendations or proposals.
(d) Anything in this Section 5.4 to the contrary notwithstanding, this Section
5.4 shall not prohibit or restrict any activity of the Soros Purchaser in an account under the
discretionary investment management of a third-party investment adviser, provided that the Soros
Purchaser does not instruct or advise such third-party investment adviser to act in a manner that
would be considered a breach of the terms of this Section 5.4.
(e) For the avoidance of doubt, anything in this Section 5.4 to the contrary
notwithstanding, the parties hereto acknowledge, that all the covenants made by the DDJ Purchaser
in this Section 5.4 are being made only with respect to the account managed by DDJ and
shall not apply to any Shares that may be beneficially owned by the DDJ Purchaser that are not held
through such Account.
5.5 Participation Rights.
(a) At any time prior to the fifth (5th) anniversary of the Closing Date, for so long as a
Purchaser (along with its Affiliates) owns at least 50% of the Shares issued to such Purchaser and
its Affiliates at the Closing, the Company shall not issue, or agree to issue, any Equity
Securities of the Company to any Person unless the Company offers such Purchaser the right (the
Securities Participation Right) to purchase in the aggregate up to the number of such Equity
Securities of the Company (the Securities Participation Amount) equal to the product of (x) the
total number of such offered shares of Equity Securities of the Company multiplied by (y) such
Purchasers Participation Rights Fraction, at the same price per security (payable in cash, except
to the extent that the consideration for such issuance is an exchange of Convertible Preferred
Stock) and otherwise upon the same terms and conditions as those offered to such Person in
accordance with the procedures set forth in this Section 5.5; provided that the
Securities Participation Rights shall not be applicable to the issuance of the following Equity
Securities of the Company: (i) an underwritten registered public offering of Common Stock for cash
(which shall exclude for this purpose any registered direct offering to one or more purchasers
(other than to or through brokers, dealers, underwriters or market makers, in each case purchasing
for resale to investors) in an aggregate amount greater than the lesser of $5 million and 1% of the
shares the Companys Common Stock then outstanding), (ii) an issuance of equity or equity linked
securities pursuant to any director, officer or employee compensation arrangements approved by the
Board that is permitted, or not prohibited by, the Certificate of Designation, (iii) an issuance of
equity to a seller, or in the case of a merger, the shareholders of the target company, and the
employees or officers of any target company in connection with a bona fide merger, business
combination transaction or acquisition of stock or assets outside of
40
the ordinary course (other than any merger, business combination or acquisition transaction
involving a Harbinger Affiliate), (iv) a conversion of shares of one class of capital stock of the
Company into shares of another class of capital stock of the Company in accordance with the terms
of such securities, (v) a stock split or other subdivision or combination, or a stock dividend made
to all holders on a pro rata basis of any Equity Securities of the Company, (vi) an issuance of
Equity Securities of the Company that is incidental to and is issued as part of a debt financing
from a bank, institutional lender or similar financial institution, (vii) an issuance of Additional
Permitted Preferred Stock (as defined in the Certificate of Designation), or (viii) an issuance of
preferred stock that is not convertible into Common Stock (or Equity Securities of the Company that
are convertible into Common Stock) and non-voting (treating preferred stock that is entitled to
elect no more than two directors upon a default resulting from the failure to pay six (6) or more
consecutive quarterly dividends as non-voting for this purpose). For purposes of clarity, the
parties agree that the issuance of Conversion Shares shall not be subject to the Securities
Participation Rights. In no event will any Existing Series A Preferred Stock, Convertible Preferred
Stock or Additional Permitted Preferred Stock (or any Common Stock issuable in connection with the
conversion of any Existing Series A Preferred Stock, Convertible Preferred Stock or Additional
Permitted Preferred Stock) issued in connection with or as a result of accretions to the face
amount of, or payments in kind with respect to, any Existing Series A Preferred Stock, Convertible
Preferred Stock or Additional Permitted Preferred Stock, Option Securities and Convertible
Securities of the Company outstanding on the Closing or otherwise permitted to be issued, or not
prohibited, by the Certificate of Designation or the Existing Certificate of Designation be subject
to the Securities Participation Rights.
(b) Securities Participation Rights Process.
(i) The Company shall send a written notice (the Securities Participation Rights Notice) to
each applicable Purchaser stating the number of Equity Securities of the Company to be offered, a
description of the terms of such Equity Securities of the Company if not Common Stock, the price
and terms on which it proposes to offer such Equity Securities of the Company (including a
description of any non-cash consideration sufficiently detailed to permit a valuation thereof), and
a reference to such Purchasers Securities Participation Rights hereunder.
(ii) Within ten (10) Business Days after the delivery of the Securities Participation Rights
Notice, each such Purchaser may elect by written notice to the Company (the Securities Exercise
Notice) to purchase such Equity Securities of the Company, at the price and on the terms specified
in the Securities Participation Rights Notice (or, if such price includes non-cash consideration,
an amount of cash equal to the fair market value of such non-cash consideration, except to the
extent that the consideration for such issuance is an exchange of Convertible Preferred Stock), up
to such Purchasers Securities Participation Amount (or, in the event that the offered securities
are preferred securities that are not convertible into Common Stock or Equity Securities of the
Company that are convertible into Common Stock, up to such Purchasers Preferred Participation
Amount). A Securities Exercise Notice shall constitute a binding agreement of such Purchaser to
purchase the amount of Equity Securities of the Company so specified at the price and other terms
set forth in the Securities Participation Rights Notice. Assuming delivery of the Securities
Participation Rights Notice in accordance with the terms hereof, the failure of any Purchaser to
respond within such ten (10)
41
Business Day period shall be deemed a waiver of such Purchasers rights under this Section
5.5 with respect to the offering described in the applicable Securities Participation Rights
Notice. Notwithstanding anything to the contrary herein, at any time prior to the issuance of the
Equity Securities of the Company (whether or not a Securities Exercise Notice shall have been
delivered), the Company may elect (in its sole discretion), upon written notice to the applicable
Purchasers, not to issue such Equity Securities of the Company and rescind, in such event, the
applicable Securities Participation Rights Notice without liability to any Person hereunder.
(iii) Subject to the last sentence of this Section 5.5(b)(iii), the Company may offer
the Equity Securities of the Company specified in the Securities Participation Rights Notice in
excess of the Securities Participation Amount, if any, to any Person or Persons at a price not less
than, and on terms no more favorable to such offerees than, those set forth in such Securities
Participation Rights Notice, at any time after the Securities Participation Rights Notice is sent
but on or before the 90th day after the Securities Participation Rights Notice was sent. In
addition, during the period beginning ten (10) Business Days after the Securities Participation
Rights Notice was sent and ending on the 90th day after the Securities Participation Rights Notice
was sent, the Company may offer any Equity Securities of the Company of the Securities
Participation Amount that are not timely elected to be purchased by the applicable Purchasers in
accordance herewith to any other Person or Persons, provided that if such Equity Securities
of the Company are to be offered at a price less than, or on terms materially more favorable to
such offerees than, those specified in the Securities Participation Rights Notice, the Company
shall promptly notify the applicable Purchasers in writing of such modified terms and such
Purchasers shall have five (5) Business Days after the receipt of such notice in which to elect to
purchase the Securities Participation Amount of such Equity Securities of the Company at the price
and on the terms specified in such subsequent notice.
(iv) The closing of the purchase of Equity Securities of the Company by each Purchaser
pursuant to this Section 5.5(b) shall occur as promptly as practicable following delivery
of the Securities Exercise Notice to the Company by all Purchasers; provided that such
closing shall be subject to and shall occur not earlier than the later of (x) concurrently with the
closing of the purchase of Equity Securities of the Company by such offeree and (y) ten (10)
Business Days after delivery of the Securities Exercise Notice by each Purchaser to the Company.
The closing of the purchase of Equity Securities of the Company by the applicable Purchasers
pursuant to this Section 5.5(b) shall also be subject to the receipt of any necessary
regulatory approvals, the expiration of any required waiting periods and applicable Law.
(v) Notwithstanding anything to the contrary contained in this Agreement, in the event any
Purchaser would be required to file any Notification and Report Form pursuant to the HSR Act as a
result of the purchase of Equity Securities of the Company by such Purchaser pursuant to this
Section 5.5, the closing of such purchase by such Purchaser shall be delayed (in whole, or
at the option of such Purchaser, only to the extent necessary to avoid a violation of the HSR Act),
until such Purchaser shall have made such filing under the HSR Act and such Purchaser shall have
received early termination clearance in respect thereof or the waiting period in connection with
such filing under the HSR Act shall have expired. In such circumstances such Purchaser shall use
commercially reasonable efforts to make such filing and obtain such clearance or expiration of such
waiting period as promptly as reasonably practical
42
and the Company shall use commercially reasonable efforts to make all required filings and
reasonably cooperate with and assist such holder in connection with the making of such filing and
obtaining such clearance or expiration of such waiting period.
5.6 Hedging Restrictions. Each Purchaser agrees that from Closing until the date that
is the earlier of (i) the date such Purchaser ceases to hold any Shares and (ii) the expiration of
the Hedging Limitation Period, such Purchaser shall not, and shall cause each of its Affiliates not
to, enter into any Hedging Agreement with respect to the Common Stock or the Convertible Preferred
Stock or the equity securities of any Subsidiary of the Company that are traded on a national
securities exchange. For the avoidance of doubt, following the Hedging Limitation Period, nothing
in this Section 5.6 shall prohibit such Purchaser or its Affiliates from entering into any
Hedging Agreement with respect to the Common Stock or the Convertible Preferred Stock or the equity
securities of any Subsidiary of the Company, including any transactions involving an index-based
portfolio of securities that includes Common Stock or the equity securities of any Subsidiary of
the Company (regardless of the value of such Common Stock or equity securities of any Subsidiary of
the Company in such portfolio relative to the total value of the portfolio of securities) or
involving the purchase or sale of derivative securities or any short sale of the Common Stock or
the equity securities of any Subsidiary of the Company. Anything in this Section 5.6 to the
contrary notwithstanding, this Section 5.6 shall not prohibit or restrict any activity of
the Soros Purchaser in an account under the discretionary investment management of a third-party
investment adviser, provided that the Soros Purchaser does not instruct or advise such third-party
investment adviser to act in a manner that would be considered a breach of the terms of this
Section 5.6. For the avoidance of doubt, anything in this Section 5.6 to the
contrary notwithstanding, the parties hereto acknowledge, that all the covenants made by the DDJ
Purchaser in this Section 5.6 are being made only with respect to the account managed by
DDJ and shall not apply to any Shares that may be beneficially owned by the DDJ Purchaser that are
not held through such Account.
5.7 Form 8-K. The Company shall, promptly following the date hereof (but in any event
within the time period required by the rules and regulations of the SEC), file a Current Report on
Form 8-K, disclosing the material terms of the transactions contemplated hereby and filing the
Transaction Agreements as exhibits thereto, provided that the Company shall afford the Purchasers
with reasonable opportunity to review and comment on such Current Report on Form 8-K prior to the
filing thereof. Notwithstanding the foregoing, except as required by Law, court order, subpoena,
stock exchange, self-regulatory organization, governmental agency or regulatory body (including
pursuant to any rules or regulations of any of the foregoing), the Company, the Companys
controlled Affiliates and the Companys Representatives shall not directly or indirectly use or
refer to Soros Fund Management LLC (SFM), the Soros name, or any derivation thereof, or the
funds advised by SFM, for any purpose whatsoever (including, without limitation, in any filing with
any governmental authority, any press release, any public announcement or statement, advertisement
or in any interview or other discussion with any reporter or other member of the media) without the
prior written consent of SFM with respect to each such use or reference. Notwithstanding the
foregoing, except as required by Law, court order, subpoena, stock exchange, self-regulatory
organization, governmental agency or regulatory body (including pursuant to any rules or
regulations of any of the foregoing), the Company, the Companys controlled Affiliates and the
Companys Representatives shall not directly or indirectly use or refer to JHL Capital Group LLC
(JHL), the JHL name, or any
43
derivation thereof, or the funds advised by JHL, for any purpose whatsoever (including,
without limitation, in any filing with any governmental authority, any press release, any public
announcement or statement, advertisement or in any interview or other discussion with any reporter
or other member of the media) without the prior written consent of JHL with respect to each such
use or reference. Notwithstanding the foregoing, except as required by Law, court order, subpoena,
stock exchange, self-regulatory organization, governmental agency or regulatory body (including
pursuant to any rules or regulations of any of the foregoing), the Company, the Companys
controlled Affiliates and the Companys Representatives shall not directly or indirectly use or
refer to DDJ, the DDJ name, or any derivation thereof, or the funds and/or the accounts advised
by DDJ, for any purpose whatsoever (including, without limitation, in any filing with any
governmental authority, any press release, any public announcement or statement, advertisement or
in any interview or other discussion with any reporter or other member of the media) without the
prior written consent of DDJ with respect to each such use or reference.
5.8 Tax Characterization. Unless otherwise required by a determination, as defined
in Section 1313(a) of the Code, the parties agree to treat the Convertible Preferred Stock as stock
other than preferred stock for U.S. federal, and to the extent applicable, state and local income
tax purposes.
5.9 Confidential Information.
(a) Each Purchaser recognizes that Confidential Information may have been and may be disclosed
to such Purchaser by the Company or any of its Affiliates. Each Purchaser shall not engage in the
unauthorized use, and shall cause its Affiliates not to engage in the unauthorized use, or make any
unauthorized disclosure to any third party, of any Confidential Information without the prior
written consent of the Company and shall use due care to ensure that such Confidential Information
is kept confidential, including by treating such information as such party would treat its own
Confidential Information. Notwithstanding the foregoing, the Purchasers shall have the right to
share any Confidential Information with any of their Representatives, each of whom shall be
required to agree to keep confidential such Confidential Information to the extent required of the
Purchaser under this Section 5.9. With respect to each Purchaser, at the Closing, the
confidentiality agreement entered into by the Company and such Purchaser prior to the date hereof
shall terminate. As used herein, Confidential Information means all information, knowledge,
systems or data relating to the business, operations, finances, policies, strategies, intentions or
inventions of the Company and/or its Subsidiaries (including any of the terms of this Agreement)
from whatever source obtained, except for any such information, knowledge, systems or data which
(i) has become publicly known and made generally available through no wrongful act of such
Purchaser, (ii) has been rightfully received by such Purchaser from a third party who, to the
knowledge of such Purchaser, is not bound any obligations of confidentiality with respect to such
information, knowledge, systems or data, (iii) is independently developed by such Purchaser without
use of Confidential Information, (iv) is already known by a Portfolio Company of such Purchaser or
is already in the possession of a Portfolio Company of such Purchaser prior to the date hereof, or
(v) subject to the obligations set forth in Section 5.9(b), is required by law, court
order, subpoena, stock exchange, self-regulatory organization, governmental agency, or regulatory
body to be disclosed.
44
(b) If any Purchaser is requested to disclose any Confidential Information by any Governmental
Entity or for any regulatory reason, such Purchaser will promptly notify the Company, as is
reasonably practicable and legally permissible under the circumstances, to permit it to seek a
protective order or take other action that the Board in its discretion deems appropriate, and such
Purchaser will cooperate in any such efforts to obtain a protective order or other reasonable
assurance that confidential treatment will be accorded such Confidential Information, at the
Companys sole cost and expense. If, in the absence of a protective order, such Purchaser is
compelled to disclose any such information in any proceeding or pursuant to legal process, such
Purchaser may disclose to the party compelling disclosure only the part of such Confidential
Information as is required to be disclosed (in which case, prior to such disclosure, such Purchaser
will advise and, if requested by the Board, consult with the Company and its counsel as to such
disclosure and the nature and wording of such disclosure) and such Purchaser will use its
commercially reasonable efforts to obtain confidential treatment therefor. Notwithstanding the
foregoing, the Purchaser shall not be required to notify the Company if it is required to disclose
Confidential Information pursuant to a routine regulatory inquiry or blanket document request, not
targeting the Company or the Board.
5.10 Amendment to Certificate of Designation. Each Purchaser hereby consents and
agrees to the adoption, execution and filing by the Company of the First Amendment to the
Certificate of Designation of Series A Participating Convertible Preferred Stock, attached as
Exhibit E (the First Amendment to the Certificate of Designation), for all purposes of
SECTION 4 of the Certificate of Designation.
5.11 Most Favored Nation Status. With respect to the next $45 million of Additional
Permitted Preferred Stock issued or sold by the Company, prior to the time when the Purchasers
cease to own any shares of Convertible Preferred Stock, the Company shall not (x) sell any such
Additional Permitted Preferred Stock with a cash dividend rate, an accreting dividend rate or a
combined dividend rate that is higher than the dividend rates applicable to the Convertible
Preferred Stock, (y) sell any such Additional Permitted Preferred Stock for a price per share less
than $1,000 or (z) pay to any Person that is acquiring such Additional Permitted Preferred Stock
any transaction fee or similar fee or compensation in connection therewith other than reimbursement
of actual out-of-pocket costs and expenses.
6. Conditions Precedent.
6.1 Conditions to the Obligation of the Purchasers to Consummate the Closing. The
obligations of the Purchasers to consummate the transactions to be consummated at the Closing, and
to purchase and pay for the Shares pursuant to this Agreement, are subject to the satisfaction of
the following conditions precedent:
(a) the Company shall have filed with the Secretary of State of the State of Delaware the
Certificate of Designation;
45
(b) the Purchasers shall have received the Registration Rights Amendment and Joinder, duly
executed and delivered by the parties thereto (other than the Purchasers);
(c) the Purchasers shall have received the Tag-Along Agreement, duly executed and delivered by
the parties thereto (other than the Purchasers);
(d) the Purchasers shall have received from Paul, Weiss, Rifkind, Wharton & Garrison LLP,
counsel to the Company, an opinion substantially in the form attached hereto as Exhibit D;
(e) no Law shall be in effect and no judgment or order shall have been entered, in each case
that restrains, enjoins or prohibits the performance of all or any part of this Agreement or the
consummation of all or any part of the transactions contemplated hereby, or declares unlawful the
transactions contemplated hereby or would cause any of the transactions contemplated hereby to be
rescinded; and
(f) since December 31, 2010, there shall not have occurred any Material Adverse Effect.
6.2 Conditions to the Obligation of the Company to Consummate the Closing. The
obligation of the Company to consummate the transactions to be consummated at the Closing, and to
issue and sell to the Purchasers the Shares pursuant to this Agreement, is subject to the
satisfaction of the following conditions precedent:
(a) each Purchaser shall have executed and delivered each Transaction Agreement to which such
Purchaser is a party;
(b) the Certificate of Designation shall have been duly filed and accepted by the Secretary of
State of the State of Delaware; and
(c) no Law shall be in effect and no judgment or order shall have been entered, in each case
that restrains, enjoins or prohibits the performance of all or any part of this Agreement or the
consummation of all or any part of the transactions contemplated hereby, or declares unlawful the
transactions contemplated hereby or would cause any of the transactions contemplated hereby to be
rescinded.
7. Additional Covenants.
7.1 Material Non-Public Information. If any Purchaser has notified the Company in
writing that it does not want to receive any material nonpublic information regarding the Company
and its Subsidiaries, the Company shall thereafter not disclose material nonpublic information to
such Purchaser, or to advisors to or representatives of such Purchaser (in their capacity as such)
until such time as such Purchaser may again request in writing to receive such information.
7.2 Information Rights(1) . For so long as a Purchaser and its Affiliates
collectively own at least 12,500 Shares (or Common Stock issued upon conversion of such
46
Shares) (as adjusted for any stock splits, combinations, re-classifications or the like),
whether or not the Company is required to file any forms, reports or documents with the SEC, the
Company shall deliver to each such Purchaser all quarterly and annual financial information that
would be required to be contained in a filing with the SEC on Form 10-Q or Form 10-K, as
applicable, if the Company were required to file such Form with the SEC and, with respect to the
annual information only, a report thereon by the Companys independent registered accountants.
Notwithstanding the foregoing, the Companys obligation under this Section 7.2 to deliver the
foregoing information shall be deemed to have been satisfied upon the filing of the abovementioned
forms, reports and documents with the SEC in accordance with applicable Laws.
8. Transfer Restrictions. Each Purchaser understands and agrees that the Shares and
any Conversion Shares may be offered, resold, pledged or otherwise transferred only (a) in a
transaction not involving a public offering, (b) pursuant to an exemption from registration under
the Securities Act provided by Rule 144 thereunder (if available), (c) pursuant to an effective
registration statement under the Securities Act, (d) to the Company or one of its Subsidiaries, (e)
to any Affiliate of such Purchaser (provided such Person is an institutional investor) or (f) to
any other holder of shares of Convertible Preferred Stock and to any Affiliates thereof (provided
such Person is an institutional investor); in each of cases (a) through (e) in accordance with any
applicable state and federal securities laws; provided that as a condition precedent to a
transfer of any Shares or Conversion Shares to an Affiliate of a Purchaser pursuant to clause (e),
any such Affiliate shall assume, on a several and not joint basis, all then continuing obligations
of such Purchaser hereunder pursuant to a written agreement reasonably acceptable to the Company.
Any purported transfer of Shares or Conversion Shares other than in compliance with the terms
hereof shall be void ab initio.
9. Legends; Securities Act Compliance.
(a) Each certificate representing the Shares and each certificate representing Conversion
Shares will bear a legend conspicuously thereon to the following effect:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS
AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS THE SAME ARE REGISTERED AND QUALIFIED IN
ACCORDANCE WITH THE SAID ACT AND ANY OTHER APPLICABLE STATE SECURITIES LAWS
OR SUCH OFFER, SALE, TRANSFER OR OTHER DISPOSITION IS EXEMPT FROM
REGISTRATION UNDER SUCH ACT AND ANY OTHER APPLICABLE STATE SECURITIES LAWS.
(b) Removal of Legends. The legend set forth above will be removed and the Company shall issue
a certificate representing Conversion Shares without such legend to the holder of such certificate
or issue to such holder by electronic delivery at the applicable balance account at The Depository
Trust Company (DTC), if (i) such Conversion Shares are
47
registered for resale under the Securities Act, (ii) such Conversion Shares are sold or
transferred pursuant to Rule 144 (assuming the transferor is not an Affiliate of the Company) or
Rule 144A, or (iii) such Conversion Shares are eligible for sale under Rule 144 without regard to
the volume, notice, manner of sale or current public information requirements of Rule 144. The
Company shall cause its counsel to issue a legal opinion to the Companys transfer agent on the
effective date of a Shelf Registration Statement (as such term is defined in the Registration
Rights Agreement) to cover any removal of legend pursuant to clause (i) of this Section 9(b) and
the transferor shall provide to the Company an opinion of counsel to cover any removal of legend
pursuant to clauses (ii) and (iii) of this Section 9(b). For further clarity, if any portion of
the Shares are converted at a time when there is an effective Shelf Registration Statement to cover
the resale of the Conversion Shares under clause (i) of this Section 9(b), or if such Conversion
Shares may be sold under Rule 144 under clause (iii) of this Section 9(b), then such Conversion
Shares shall be issued free of all legends. Following the effective date of a Shelf Registration
Statement, or at such earlier time as a legend is no longer required for Shares or Conversion
Shares, the Company will no later than three (3) Business Days following the delivery by a
Purchaser to the Company or the transfer agent (with notice to the Company) of (i) a legended
certificate representing such Shares or Conversion Shares (endorsed or with stock powers attached,
signatures guaranteed, and otherwise in form necessary to affect the reissuance and/or transfer) or
(ii) a conversion notice in the manner stated in Section 5 of the Certificate of Designation to
effect the conversion of such Shares in accordance with its terms and an opinion of counsel to the
extent required, deliver or cause to be delivered to such Purchaser a certificate representing such
Conversion Shares that is free from all restrictive and other legends. The Company may not make any
notation on its records or give instructions to the transfer agent that enlarge the restrictions on
transfer set forth in this Section 9(b).
10. Indemnification; Survival.
10.1 Company Indemnification. The Company shall defend, indemnify, exonerate and hold
free and harmless each Purchaser and its Affiliates and their respective directors, officers and
employees (each, a Purchaser Indemnified Party and, collectively, the Purchaser Indemnified
Parties) from and against any and all Losses actually incurred by such Indemnified Parties that
arise out of, or result from: (i) any inaccuracy in or breach of the Companys representations or
warranties in this Agreement or (ii) the Companys breach of its agreements or covenants in this
Agreement.
10.2 Survival of Representations and Warranties. The representations and warranties
contained herein shall survive until 5:00 p.m. EDT on the fifteen (15) month anniversary of the
Closing, other than the representations and warranties set forth in Sections 3.1,
3.2, 3.3, 3.4 and 3.26, which shall survive indefinitely (the
Survival Period). For the avoidance of doubt, all other covenants, agreements and obligations
contained in this Agreement shall survive indefinitely (unless a different period is specifically
provided for pursuant to the provisions of this Agreement expressly relating thereto).
10.3 Purchaser Indemnification. Each Purchaser, severally and not jointly, shall
defend, indemnify, exonerate and hold free and harmless the Company and its Affiliates and their
respective directors, officers and employees (each a Company Indemnified Party and collectively,
the Company Indemnified Parties) from and against any and all Losses
48
actually incurred by such Company Indemnified Parties that arise out of, or result from: (i)
any inaccuracy in or breach of such Purchasers representations or warranties in this Agreement or
(ii) such Purchasers breach of its agreements or covenants in this Agreement.
10.4 Limitations. Notwithstanding anything in this Agreement to the contrary, (i) no
indemnification claims for Losses shall be asserted by the Purchaser Indemnified Parties under
Section 10.1 or by the Company Indemnified Parties under Section 10.3 unless and
until (x) the aggregate amount of Losses that would otherwise be payable under Section 10.1
or Section 10.3, as applicable, exceeds $2,000,000 (the Basket Amount), whereupon the
Purchaser Indemnified Party or Company Indemnified Party, as applicable, shall be entitled to
receive only amounts for Losses in excess of the Basket Amount or (y) Losses have been asserted
against such Person in accordance with this Section 10.4, and (ii) the aggregate liability
of the Company or any Purchaser for Losses under Section 10.1 or Section 10.3, as
applicable, shall in no event exceed the applicable Share Purchase Price.
10.5 Procedures. A party entitled to indemnification hereunder (each, an Indemnified
Party) shall give written notice to the party from whom indemnification is sought (the
Indemnifying Party) of any claim with respect to which it seeks indemnification promptly after
the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification
hereunder; provided, that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Section 10 unless
and to the extent that the Indemnifying Party shall have been materially prejudiced by the failure
of such Indemnified Party to so notify such party. Such notice shall describe in reasonable detail
such claim. In case any such action, suit, claim or proceeding is brought against an Indemnified
Party, the Indemnifying Party shall be entitled to assume and conduct the defense thereof, with
counsel reasonably satisfactory to the Indemnified Party unless (i) such claim seeks remedies, in
addition to or other than, monetary damages that are reasonably likely to be awarded, (ii) such
claim involves a criminal proceeding or (iii) counsel to the Indemnified Party advises such
Indemnifying Party in writing that such claim involves a conflict of interest that would reasonably
be expected to make it inappropriate for the same counsel to represent both the Indemnifying Party
and the Indemnified Party. If any one of the foregoing clauses (i) through (iii) applies, the
Indemnified Party shall be entitled to retain its own counsel at the cost and expense of the
Indemnifying Party (except that the Indemnifying Party shall only be liable for the legal fees and
expenses of one law firm for all Indemnified Parties, taken together with respect to any single
action or group of related actions, other than local counsel). If the Indemnifying Party assumes
the defense of any claim, the Indemnified Party shall nevertheless be entitled to hire, at its own
expense, separate counsel and participate in the defense thereof; provided, that all Indemnified
Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents
(including court papers) received by the Indemnified Party relating to the claim, and each
Indemnified Party shall reasonably cooperate in the defense or prosecution of such claim. Such
reasonable cooperation shall include the retention and (upon the Indemnifying Partys reasonable
request) the provision to the Indemnifying Party of records and information that are reasonably
relevant to such claim, and making employees available on a mutually convenient basis to provide
additional information and explanation of any material provided hereunder. The Indemnifying Party
shall not be liable for any settlement of any action, suit, claim or proceeding effected without
its prior written consent (not to be unreasonably withheld, conditioned or delayed). The
Indemnifying Party further agrees that it will not, without the
49
Indemnified Partys prior written consent (which shall not be unreasonably withheld,
conditioned or delayed), settle or compromise any claim or consent to entry of any judgment in
respect thereof in any pending or threatened action, suit, claim or proceeding in respect of which
indemnification has been sought or may be hereunder unless such settlement or compromise includes
an unconditional release of such Indemnified Party from all liability arising out of such action,
suit, claim or proceeding and is solely for monetary damages.
10.6 Additional Limitations. Notwithstanding anything contained herein to the
contrary, Losses shall not include (i) any Losses to the extent such Losses could not have been
reasonably foreseen by the parties as of the Closing, and (ii) punitive damages, except to the
extent payable by an Indemnified Party to a third party. No party hereto shall be obligated to
indemnify any other Person with respect to any representation, warranty, covenant or condition
specifically waived in writing by any other party on or prior to the Closing.
10.7 Exclusive Remedies. Notwithstanding anything to the contrary herein, the
provisions of Section 10 and Section 12.6 shall be the sole and exclusive remedies
of parties under this Agreement following the Closing for any and all breaches or alleged breaches
of any representations or warranties, covenants or agreements of the parties contained in this
Agreement. For the avoidance of doubt, this Section 10 shall not prevent the parties from
obtaining specific performance or other non-monetary remedies at in equity or at Law pursuant to
Section 12.6 of this Agreement and shall not limit other remedies that may be available to
the parties under any of the Transaction Agreements (other than this Agreement).
11. Termination.
11.1 Conditions of Termination. Notwithstanding anything to the contrary contained
herein, this Agreement may be terminated at any time before the Closing by either the Company, on
the one hand, or any Purchaser, on the other hand, if the Closing shall not have occurred on or
prior to 5:00 p.m., New York time, on August 5, 2011.
11.2 Effect of Termination. In the event of any termination pursuant to Section
11.1 hereof, this Agreement shall become null and void and have no further effect, with no
liability on the part of the Company or any Purchaser, or their directors, partners, members,
employees, affiliates, officers, stockholders or agents or other representatives, with respect to
this Agreement, except (a) for the terms of this Section 11.2 and Section 12
(Miscellaneous Provisions), which shall survive the termination of this Agreement, and (b) that
nothing in this Section 11 shall relieve any party or parties hereto, as applicable, from
liability or damages incurred or suffered by any other party resulting from any intentional (x)
breach of any representation or warranty of such first party or (y) failure of such first party to
perform a covenant thereof. As used in the foregoing sentence, intentional shall mean an act or
omission by such party which such party actually knew, or reasonably should have known, would
constitute a breach of this Agreement by such party.
12. Miscellaneous Provisions.
12.1 Public Statements or Releases. Neither the Company nor any Purchaser shall make
any public release or announcement with respect to the existence or terms of this
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Agreement or the transactions provided for herein without the prior approval of the other
parties, which shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the
foregoing, nothing in this Section 12.1 shall prevent any party from making any public
release required (in the exercise of its reasonable judgment) in order to satisfy its obligations
under law or under the rules or regulations of any United States national securities exchange, in
which case the party or parties, as applicable, required to make the release or announcement shall,
to the extent reasonably practicable, allow the other party or parties, as applicable, reasonable
time to comment on such release or announcement in advance of such issuance.
12.2 Interpretation. The words hereof, herein and hereunder and words of
similar import when used in this Agreement will refer to this Agreement as a whole and not to any
particular provision of this Agreement, and section and subsection references are to this Agreement
unless otherwise specified. The headings in this Agreement are included for convenience of
reference only and will not limit or otherwise affect the meaning or interpretation of this
Agreement. Whenever the words include, includes or including are used in this Agreement,
they will be deemed to be followed by the words without limitation. The phrases the date of
this Agreement, the date hereof and terms of similar import, unless the context otherwise
requires, will be deemed to refer to the date set forth in the first paragraph of this Agreement.
The meanings given to terms defined herein will be equally applicable to both the singular and
plural forms of such terms. All matters to be agreed to by any party hereto must be agreed to in
writing by such party unless otherwise indicated herein. Except as specified otherwise herein,
references to agreements, policies, standards, guidelines or instruments, or to statutes or
regulations, are to such agreements, policies, standards, guidelines or instruments, or statutes or
regulations, as amended or supplemented from time to time (or to successors thereto). All
references herein to the Subsidiaries of a Person shall be deemed to include all direct and
indirect Subsidiaries of such Person, unless otherwise indicated or the context otherwise requires.
The parties hereto agree that they have been represented by counsel during the negotiation and
execution of the Transaction Agreements and, therefore, waive the application of any Law, holding
or rule of construction providing that ambiguities in an agreement or other document will be
construed against the party drafting such agreement or document.
12.3 Notices. All notices, requests, consents, and other communications under this
Agreement shall be in writing and shall be deemed delivered (a) three (3) Business Days after being
sent by registered or certified mail, return receipt requested, postage prepaid (b) one (1)
Business Day after being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, (c) on the date of delivery if delivered personally, or (d) if by
facsimile, upon written confirmation of receipt by facsimile, in each case to the intended
recipient as set forth below:
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(a) |
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if to the Company, addressed as follows: |
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Harbinger Group Inc.
450 Park Avenue
27th Floor
New York, New York 10022
Attention: Francis T. McCarron
Facsimile: (212) 906-8559 |
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with copies (which shall not constitute notice) to:
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Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019
Attention: Jeffrey D. Marell and Kelley D. Parker
Facsimile: (212) 757-3990 |
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(b) |
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if to the Soros Purchaser, to: |
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Quantum Partners LP
c/o Soros Fund Management LLC
888 Seventh Avenue
New York, New York 10106
Attention: Maryann Canfield
Facsimile: (646) 731-5551 |
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with a copy to (which shall not constitute notice) to: |
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Soros Fund Management LLC
888 Seventh Avenue
New York, New York 10106
Attention: Alex Shapiro
Facsimile: (646) 731-5802 |
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(c) |
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if to a DDJ Purchaser (as applicable), to: |
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DDJ High Yield Fund
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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General Motors Hourly-Rate Employes Pension Trust 7N1H
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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General Motors Salaried Employes Pension Trust 7N1I
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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Stichting Pensioenfonds Hoogovens
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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Caterpillar Inc. Master Retirement Trust
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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J.C. Penney Corporation, Inc. Pension Plan Trust
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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Stichting Bewaarder Interpolis Pensioenen Global High Yield Pool
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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Stichting Pensioenfond voor Fysiotherapeuten
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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Houston Municipal Employees Pension System
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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UAW Retiree Medical Benefits Trust
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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DDJ Distressed and Special Situations Fund, L.P.
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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Russell Investment Company Russell Global Opportunistic Credit Fund
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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DDJ Capital Management Group Trust High Yield Investment Fund
c/o DDJ Capital Management, LLC
130 Turner Street, Building 3, Suite 600
Waltham, MA 02453
Attention: Legal Department
Facsimile: (781) 283-8541 |
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(d) |
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if to the JHL Purchaser, to: |
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JHL Capital Group Master Fund L.P.
c/o JHL Capital Group LLC
900 N. Michigan Avenue
Suite 1340
Chicago, IL 60611
Attention: David Weiss
Facsimile: (312) 628-7351 |
Any party may change the address to which notices, requests, consents or other communications
hereunder are to be delivered by giving the other parties notice in the manner set forth in this
Section 12.3.
12.4 Severability. In the event that any provision of this Agreement, or the
application thereof, becomes or is declared by a court of competent jurisdiction to be illegal,
void or unenforceable, the remainder of this Agreement will continue in full force and effect and
the application of such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further agree to replace such
void or unenforceable provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of such void or
unenforceable provision.
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12.5 Governing Law; Jurisdiction; WAIVER OF JURY TRIAL.
(a) This Agreement shall be governed by and construed in accordance with the laws of the State
of New York, regardless of the laws that might otherwise govern under applicable principles of
conflicts of law thereof.
(b) Each of the parties hereto irrevocably (i) agrees that any legal suit, action or
proceeding brought by any party hereto against arising out of or based upon this Agreement may be
instituted in any United States federal court or New York State court located in the Borough of
Manhattan in The City of New York (a New York Court), (ii) waives, to the fullest extent it may
effectively do so, any objection which it may now or hereafter have to the laying of venue of any
such proceeding and (iii) submits to the non-exclusive jurisdiction of a New York Court in any such
suit, action or proceeding.
(c) EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY PURCHASER OR THE COMPANY IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
12.6 Specific Performance. The parties hereto agree that the obligations imposed on
them in this Agreement are special, unique and of an extraordinary character, and that irreparable
damages for which money damages, even if available, would not be an adequate remedy, would occur in
the event that the parties hereto do not perform the provisions of this Agreement in accordance
with its specified terms or otherwise breach such provisions. The parties acknowledge and agree
that the parties shall be entitled to seek an injunction, specific performance and other equitable
relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which they are entitled, at law or in equity;
and the parties hereto further agree to waive any requirement for the securing or posting of any
bond or other security in connection with the obtaining of any such injunctive or other equitable
relief. Each of the parties agrees that it will not oppose the granting of an injunction, specific
performance and other equitable relief as provided herein on the basis that (x) either party has an
adequate remedy at law or (y) an award of specific performance is not an appropriate remedy for any
reason at law or equity.
12.7 Delays or Omissions; Waiver. No delay or omission to exercise any right, power,
or remedy accruing to a party upon any breach or default of another party under this Agreement
shall impair any such right, power, or remedy of such party, nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. No waiver of any term,
provision or condition of this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or be construed as, a further or continuing waiver of any such
term, provision or condition or as a waiver of any other term, provision or condition of this
Agreement. Any agreement on the part of a party or parties hereto to any waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party or parties, as
55
applicable. Any delay in exercising any right under this Agreement shall not constitute a
waiver of such right.
12.8 Fees; Expenses.
(a) Except as set forth in this Section 12.8, all fees and expenses incurred in
connection with the Transaction Agreements and the transactions contemplated hereby and thereby
shall be paid by the party or parties, as applicable, incurring such expenses whether or not the
transactions contemplated hereby and thereby are consummated.
(b) The Company shall pay any and all documentary, stamp or similar issue or transfer Tax
payable in connection with this Agreement, the issuance of the Shares at Closing and the issuance
of the Conversion Shares.
(c) Each party shall pay for any filing fees associated with any filings made by it to the
Insurance Regulatory Authorities.
12.9 Assignment. None of the parties may assign its rights or obligations under this
Agreement without the prior written consent of the other parties, provided,
however, that each Purchaser may assign its right and obligations hereunder to an Affiliate
of such Purchaser without the prior written consent of the Company or any other Purchaser;
provided, further, that as a condition precedent to such assignment (x) any such
Affiliate shall assume, on a several and not joint basis, all then continuing obligations of such
Purchaser hereunder pursuant to a written agreement reasonably acceptable to the Company, and (y)
no assignment and assumption shall relieve such Purchaser from any liability hereunder;
provided, further, that any assignment to an Affiliate shall only be effective for
so long as such Person remains an Affiliate of the applicable Purchaser and the rights assigned to
such Person shall cease to be of further force and effect when such Person ceases to be an
Affiliate of the applicable Purchaser. Subject to the preceding sentence, this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the parties to this Agreement and their
respective successors and permitted assigns. Any purported assignment other than in compliance
with the terms hereof shall be void ab initio.
12.10 No Third Party Beneficiaries. Except for Section 10 (with respect to
which all Indemnified Parties shall be third party beneficiaries), this Agreement does not create
any rights, claims or benefits inuring to any Person that is not a party hereto nor create or
establish any third party beneficiary hereto. Without limiting the foregoing, the representations
and warranties in this Agreement are the product of negotiations among the parties hereto and are
for the sole benefit of the parties hereto. In some instances, the representations and warranties
in this Agreement may represent an allocation among the parties hereto of risks associated with
particular matters regardless of the knowledge of any of the parties hereto. Consequently, Persons
other than the parties hereto may not rely upon the representations and warranties in this
Agreement as characterizations of actual facts or circumstances as of the date of this Agreement or
as of any other date.
12.11 Counterparts. This Agreement may be executed and delivered (including by
facsimile or electronic transmission) in any number of counterparts, and by the different
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parties hereto in separate counterparts, each of which when executed shall be deemed an
original, but all of which taken together shall constitute a single instrument.
12.12 Entire Agreement; Amendments. This Agreement and the documents and instruments
and other agreements among the parties hereto as contemplated by or referred to herein, including
the Disclosure Letter and the Annexes and Exhibits hereto, constitute the entire agreement between
the parties hereto respecting the subject matter hereof and supersede all prior agreements,
negotiations, understandings, representations and statements respecting the subject matter hereof,
whether written or oral. No modification, alteration, waiver or change in any of the terms of this
Agreement shall be valid or binding upon the parties hereto unless made in writing and duly
executed by the Company, on the one hand, and the Purchasers holding a majority of the Shares
issued at the Closing (whether held in the form of Convertible Preferred Stock or Common Stock
issued upon the conversion of Convertible Preferred Stock), on the other hand; provided,
however, that any modification, alteration, waiver or change that (a) has a
disproportionate and adverse effect on any right of any Purchaser under this Agreement, (b)
increases any restriction or imposes any additional restriction upon any Purchaser or any successor
or assigns thereof with respect to the Shares acquired by such Purchaser at Closing or with respect
to any Common Stock acquired upon conversion thereof or otherwise or (c) increases in any respect
the obligations or liabilities of any Purchaser under this Agreement shall not be effective against
such Purchaser without the written approval of such Purchaser; provided, further,
no modification, alteration, waiver or change with respect to Section 5.4 (Standstill) or
5.6 (Hedging Restrictions) for the benefit of any Purchaser shall be effective unless such
modification, alteration, waiver or change is made equally applicable to all Purchasers;
provided, further, that with respect to the rights and obligations of any Purchaser
under Sections 2 (Authorization, Purchase and Sale of Shares), 5.4 (Standstill),
5.5 (Participation Rights), 5.6 (Hedging Restrictions), 5.10
(Confidentiality), 5.11 (Most Favored Nation Status), 6.1 (Conditions to the
Obligation of the Purchasers to Consummate Closing), 7.1 (Material Non-Public Information),
7.2 (Information Rights), 11 (Termination), and 12.13 (Freedom to Pursue
Opportunities) such provisions may be amended with respect to the rights and obligations of such
Purchaser by written instrument duly executed by the Company, on the one hand, and such Purchaser,
on the other hand; provided, further, that Sections 3 (Representations and
Warranties of the Company), 4 (Representations and Warranties of the Purchasers),
5.2 (Shares Issuable Upon Conversion), 5.8 (Tax Characterization), 10
(Indemnification; Survival) and this 12.12 shall not be modified, altered, waived or
changed unless made in writing and duly executed by each of the parties hereto.
12.13 Freedom to Pursue Opportunities. Each of the parties hereto expressly acknowledges
and agrees that: (i) each Purchaser has the right to, and shall have no duty (contractual or
otherwise) not to, directly or indirectly engage in the same or similar business activities or
lines of business as the Company or any of its Subsidiaries, including those deemed to be competing
with the Company or any of its Subsidiaries; and (ii) in the event that a Purchaser acquires
knowledge of a potential transaction or matter that may be a corporate opportunity for each of the
Company and such Purchaser, such Person shall have no duty (contractual or otherwise) to
communicate or present such corporate opportunity to the Company or any of its Subsidiaries, as the
case may be, and, notwithstanding any provision of this Agreement to the contrary, shall not be
liable to the Company or its Affiliates for breach of any duty (contractual or otherwise) by reason
of the fact that such Purchaser, directly or indirectly,
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pursues or acquires such opportunity for itself, directs such opportunity to another Person, or
does not present such opportunity to the Company.
12.14 No Person Liability of Directors, Officers, Owners, Etc. No director, officer,
employee, incorporator, shareholder, managing member, member, general partner, limited partner,
principal or other agent of any of the Purchasers or the Company shall have any liability for any
obligations of the Purchasers or the Company, as applicable, under this Agreement or for any claim
based on, in respect of, or by reason of, the respective obligations of the Purchasers or the
Company, as applicable, under this Agreement. Each party hereby waives and releases all such
liability. This waiver and release is a material inducement to each partys entry into this
Agreement.
12.15 Nature of Purchasers Obligations and Rights. The obligations of each Purchaser
under this Agreement or any Transaction Agreement are several and not joint with the obligations of
any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser under this Agreement or any other Transaction Agreement.
Nothing contained herein or in any other Transaction Agreement, and no action taken by any
Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or create a presumption
that the Purchasers are in any way acting in concert or as a group with respect to such obligations
or the transactions contemplated by this Agreement or any other Transaction Agreement. Each
Purchaser confirms that it has independently participated in the negotiation of the transactions
contemplated hereby and has been represented by separate counsel. All rights, powers and remedies
provided to the Purchasers under this Agreement or otherwise available in respect hereof at law or
in equity shall be cumulative and not alternative or exclusive, and the exercise or beginning of
the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of
any other rights, powers or remedies by such party or any other party.
[Remainder of the Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year
first above written.
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COMPANY:
HARBINGER GROUP INC.
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By: |
/s/ Francis T. McCarron
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Name: |
Francis T. McCarron |
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Title: |
Executive Vice President & Chief
Financial Officer |
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[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
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QUANTUM PARTNERS LP
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By: |
/s/ Jay A. Schoenfarber
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Name: |
Jay A. Schoenfarber |
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Title: |
Attorney-in-Fact |
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[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
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JHL CAPITAL GROUP MASTER FUND L.P.
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By: |
/s/ James H. Litinsky
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Name: |
James H. Litinsky |
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Title: |
Managing Member
JHL Capital Group LLC |
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[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
Caterpillar Inc. Master Retirement Trust
By: DDJ Capital Management, LLC, on behalf of
Caterpillar Inc. Master Retirement Trust, in its
capacity as investment manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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DDJ Capital Management Group Trust High Yield Investment Fund
By: DDJ Capital Management, LLC, in its capacity as Investment Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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DDJ High Yield Fund
By: DDJ Capital Management, LLC, its attorney-in-fact
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
General Motors Hourly-Rate Employes Pension Trust 7N1H
By: State Street Bank and Trust Company, solely in
its capacity as Trustee for General Motors
Hourly-Rate Employes Pension Trust (Account 7N1H),
and not in its individual capacity, as directed by
DDJ Capital Management, LLC, as Investment Manager
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By: |
/s/ Kimberly A. Dinsmore
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Name: |
Kimberly A. Dinsmore |
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Title: |
Client Services Officer State Street
Bank and Trust Company |
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General Motors Salaried Employes Pension Trust 7N1I
By: State Street Bank and Trust Company, solely in
its capacity as Trustee for General Motors Salaried
Employes Pension Trust (Account 7N1I), and not in its
individual capacity, as directed by DDJ Capital
Management, LLC, as Investment Manager
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By: |
/s/ Kimberly A. Dinsmore
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Name: |
Kimberly A. Dinsmore |
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Title: |
Client Services Officer State Street
Bank and Trust Company |
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Houston Municipal Employees Pension System
By: DDJ Capital Management, LLC, in its capacity as Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
J.C. Penney Corporation, Inc. Pension Plan Trust
By: DDJ Capital Management, LLC, on behalf of J.C.
Penney Corporation, Inc. Pension Plan Trust, in its
capacity as investment manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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Russell Investment Company Russell Global
Opportunistic Credit Fund
By: DDJ Capital Management, LLC, in its capacity as
Money Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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Stichting Bewaarder Interpolis Pensioenen
Global High Yield Pool
By: Syntrus Achmea Asset Management, as asset manager
By: DDJ Capital Management, LLC, as subadviser
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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Stichting Pensioenfonds Hoogovens
By: DDJ Capital Management, LLC, on behalf of
Stichting Pensioenfonds Hoogovens, in its capacity as
Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
Stichting Pensioenfonds voor Fysiotherapeuten
By: DDJ Capital Management, LLC, in its capacity as
investment manager
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By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
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Title: |
President |
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UAW Retiree Medical Benefits Trust
By: State Street Bank and Trust company, solely in
its capacity as Trustee for UAW Retiree Medical
Benefits Trust, as directed by DDJ Capital
Management, LLC, and not in its individual capacity
|
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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DDJ Distressed and Special Situations Fund, L.P.
By: DDJ/GP Distressed and Special Situations, LLC, its General Partner
By: DDJ Capital Management, LLC, Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
Annex A
Shares and Purchasers
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Purchaser |
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Shares |
|
Share Purchase Price |
Quantum Partners LP |
|
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25,000 |
|
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$ |
25,000,000.00 |
|
DDJ High Yield Fund |
|
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250 |
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$ |
250,000.00 |
|
General Motors Hourly-Rate Employes Pension
Trust 7N1H |
|
|
3,750 |
|
|
$ |
3,750,000.00 |
|
General Motors Salaried Employes Pension
Trust 7N1I |
|
|
2,000 |
|
|
$ |
2,000,000.00 |
|
Stichting Pensioenfonds Hoogovens |
|
|
1,250 |
|
|
$ |
1,250,000.00 |
|
Caterpillar Inc. Master Retirement Trust |
|
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2,500 |
|
|
$ |
2,500,000.00 |
|
J.C. Penney Corporation, Inc. Pension Plan
Trust |
|
|
3,000 |
|
|
$ |
3,000,000.00 |
|
Stichting Bewaarder Interpolis Pensioenen Global High Yield Pool |
|
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3,250 |
|
|
$ |
3,250,000.00 |
|
Stichting Pensioenfonds voor Fysiotherapeuten |
|
|
1,000 |
|
|
$ |
1,000,000.00 |
|
Houston Municipal Employees Pension System |
|
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1,000 |
|
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$ |
1,000,000.00 |
|
UAW Retiree Medical Benefits Trust |
|
|
3,750 |
|
|
$ |
3,750,000.00 |
|
|
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|
|
|
|
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|
Purchaser |
|
Shares |
|
Share Purchase Price |
DDJ Distressed and Special Situations Fund,
L.P. |
|
|
1,000 |
|
|
$ |
1,000,000.00 |
|
Russell Investment Company Russell Global
Opportunistic Credit Fund |
|
|
2,000 |
|
|
$ |
2,000,000.00 |
|
DDJ Capital Management Group Trust High
Yield Investment Fund |
|
|
250 |
|
|
$ |
250,000.00 |
|
JHL Capital Group Master Fund L.P. |
|
|
25,000 |
|
|
$ |
25,000,000.00 |
|
|
|
|
|
|
|
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TOTAL: |
|
|
75,000 |
|
|
$ |
75,000,000.00 |
|
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
Exhibit A
Form of Certificate of Designation
[see attached]
Exhibits B
Form of Registration Rights Amendment and Joinder
[see attached]
Exhibit C
Form of Tag-Along Agreement
[see attached]
Exhibit D
Form of Legal Opinion
[see attached]
Exhibit E
Form of Amendment to Certificate of Designation
[see attached]
exv10w3
Exhibit 10.3
Execution Version
First Amendment
to
Securities Purchase Agreement
This First Amendment (this Amendment) to the Purchase Agreement (as defined below),
is entered into as of August 4, 2011, by and among Harbinger Group Inc., Delaware corporation (the
Company), Quantum Partners LP (the Soros Purchaser), DDJ High Yield Fund, an
entity organized under the laws of the Province of Ontario, Canada, General Motors Hourly-Rate
Employes Pension Trust 7N1H, a trust maintained by General Motors Corporation, a Delaware
corporation, General Motors Salaried Employes Pension Trust 7N1I, a trust maintained by General
Motors Corporation, Stichting Pensioenfonds Hoogovens, a Dutch pension plan regulated by the Dutch
Central Bank, Caterpillar Inc. Master Retirement Trust, a trust maintained by Caterpillar, Inc., a
Delaware corporation, J.C. Penney Corporation, Inc. Pension Plan Trust, a trust maintained by J.C.
Penney Corporation, Inc., a Delaware corporation, Stichting Bewaarder Interpolis Pensioenen Global
High Yield Pool, a Dutch tax transparent pool of assets, Stichting Pensioenfonds voor
Fysiotherapeuten, a Dutch pension plan regulated by the Dutch Central Bank, Houston Municipal
Employees Pension System, a pension plan organized pursuant to Texas government code, UAW Retiree
Medical Benefits Trust, a trust consisting of three separate employees beneficiary associations,
DDJ Distressed and Special Situations Fund, L.P., a Delaware limited partnership, Russell
Investment Company Russell Global Opportunistic Credit Fund, a Massachusetts business trust, DDJ
Capital Management Group Trust High Yield Investment Fund, a trust maintained by The Bank of New
York Mellon, a New York State chartered bank, as trustee (collectively, the DDJ
Purchasers), JHL Capital Group Master Fund L.P. (the JHL Purchaser), Luxor Capital
Partners, LP, a Delaware limited partnership, Luxor Wavefront, LP, a Delaware limited partnership,
Luxor Capital Partners Offshore Fund, LP, a Cayman Islands limited partnership, OC 19 Master Fund,
L.P. LCG, a Cayman Islands limited partnership, and GAM Equity Six Inc., a British Virgin Islands
company (collectively, the Luxor Purchasers). Capitalized terms used in this Amendment
and not otherwise defined herein shall have the meanings ascribed to them in the Purchase
Agreement.
WHEREAS, the parties hereto (other than the Luxor Purchasers) entered into that certain
Securities Purchase Agreement, dated as of August 1, 2011 (the Purchase Agreement); and
WHEREAS, in order for the Luxor Purchasers to be joined as Purchasers under the Purchase
Agreement, the parties hereto wish to amend certain provisions of the Purchase Agreement and agree
that all other terms and conditions of the Purchase Agreement otherwise remain unchanged except as
expressly set forth herein.
NOW THEREFORE, the Purchase Agreement is amended as follows:
1. The third recital in the Purchase Agreement is hereby amended and restated in their
entirety as follows:
WHEREAS, the Company has authorized the issuance and sale of 120,000 shares
of Series A-2 Participating Convertible Preferred Stock, par value $0.01 per
share, of the Company (the Convertible Preferred Stock), the rights,
preferences and privileges of which are to be set forth in a Certificate of
Designation, in the form attached hereto as Exhibit A (the Certificate
of Designation), which shares of Convertible Preferred Stock shall be
convertible into authorized but unissued shares of Common Stock (as defined
below);
2. The following definitions set forth in Section 1 of the Purchase Agreement are hereby
amended and restated in their entirety as follows:
Purchasers means, collectively, the Soros Purchaser, the DDJ Purchasers,
the JHL Purchaser and the Luxor Purchasers.
3. Section 1 of the Purchase Agreement is hereby amended to add the following definition:
Luxor Purchasers shall mean, collectively, Luxor Capital Partners, LP, a Delaware
limited partnership, Luxor Wavefront, LP, a Delaware limited partnership, Luxor Capital
Partners Offshore Fund, LP, a Cayman Islands limited partnership, OC 19 Master Fund, L.P. -
LCG, a Cayman Islands limited partnership, and GAM Equity Six Inc., a British Virgin Islands
company.
4. Section 5.11 of the Purchase Agreement is hereby deleted in its entirety and replaced with
a reference to [Reserved.]
5. New subsection (e) is hereby added to Section 12.3 of the Purchase Agreement as follows:
(e) if to the Luxor Purchasers, to:
Luxor Capital Group, LP
1114 Avenue of the Americas, 29th Floor
New York, NY 10036
Attn: Operations Group
Fax: (212) 763-8001
6. Annex A of the Purchase Agreement is hereby amended and restated in its entirety as set
forth on Exhibit A hereto.
7. Each of the Luxor Purchasers agrees that upon execution of this Amendment, such Luxor
Purchaser shall become a party to the Purchase Agreement and shall be fully bound by, and subject
to, all of the representations, warranties, covenants, terms and conditions of the Purchase
Agreement as though an original party thereto and shall be deemed a Purchaser for all purposes
thereof and entitled to all the rights incidental thereto.
2
8. Except as expressly amended herein, all provisions of the Purchase Agreement shall remain
in full force and effect.
9. This Amendment shall be governed by and construed in accordance with the laws of the State
of New York, regardless of the laws that might otherwise govern under applicable principles of
conflicts of law thereof.
10. This Amendment may be signed in any number of counterparts each of which shall be an
original and all of which shall together constitute one and the same agreement. Any counterpart or
other signature hereupon delivered by facsimile shall be deemed for all purposes as constituting
good and valid execution and delivery of this Amendment by such party.
[Signature Pages Follows]
3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year
first above written.
|
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COMPANY:
HARBINGER GROUP INC.
|
|
|
By: |
/s/ Francis T. McCarron
|
|
|
|
Name: |
Francis T. McCarron |
|
|
|
Title: |
Executive Vice President & Chief
Financial Officer |
|
|
[Signature Page to First Amendment to the Purchase Agreement]
|
|
|
|
|
|
QUANTUM PARTNERS LP
By: QP GP LLC, its General Partner
|
|
|
By: |
/s/ Jay A. Schoenfarber
|
|
|
|
Name: |
Jay A. Schoenfarber |
|
|
|
Title: |
Attorney-in-Fact |
|
|
[Signature Page to First Amendment to the Purchase Agreement]
|
|
|
|
|
|
JHL CAPITAL GROUP MASTER FUND L.P.
|
|
|
By: |
/s/ James H. Litinsky
|
|
|
|
Name: |
James H. Litinsky |
|
|
|
Title: |
Managing Member
JHL Capital Group LLC |
|
|
[Signature Page to First Amendment to the Purchase Agreement]
|
|
|
|
|
|
Caterpillar Inc. Master Retirement Trust
By: DDJ Capital Management, LLC, on behalf of
Caterpillar Inc. Master Retirement Trust, in its
capacity as investment manager
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
|
DDJ Capital Management Group Trust High Yield
Investment Fund
By: DDJ Capital Management, LLC, in its capacity as
Investment Manager
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
|
DDJ High Yield Fund
By: DDJ Capital Management, LLC, its attorney-in-fact
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
[Signature Page to First Amendment to the Purchase Agreement]
|
|
|
|
|
|
General Motors Hourly-Rate Employes Pension
Trust 7N1H
By: State Street Bank and Trust Company, solely in
its capacity as Trustee for General Motors
Hourly-Rate Employes Pension Trust (Account 7N1H),
and not in its individual capacity, as directed by
DDJ Capital Management, LLC, as Investment Manager
|
|
|
By: |
/s/ Kimberly A. Dinsmore
|
|
|
|
Name: |
Kimberly A. Dinsmore |
|
|
|
Title: |
Client Services Officer State Street
Bank and Trust Company |
|
|
|
General Motors Salaried Employes Pension Trust
7N1I
By: State Street Bank and Trust Company, solely in
its capacity as Trustee for General Motors Salaried
Employes Pension Trust (Account 7N1I), and not in its
individual capacity, as directed by DDJ Capital
Management, LLC, as Investment Manager
|
|
|
By: |
/s/ Kimberly A. Dinsmore
|
|
|
|
Name: |
Kimberly A. Dinsmore |
|
|
|
Title: |
Client Services Officer State Street
Bank
and Trust Company |
|
|
|
Houston Municipal Employees Pension System
By: DDJ Capital Management, LLC, in its capacity as
Manager
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
[Signature Page to First Amendment to the Purchase Agreement]
|
|
|
|
|
|
J.C. Penney Corporation, Inc. Pension Plan Trust
By: DDJ Capital Management, LLC, on behalf of J.C.
Penney Corporation, Inc. Pension Plan Trust, in its
capacity as investment manager
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
|
Russell Investment Company Russell Global
Opportunistic Credit Fund
By: DDJ Capital Management, LLC, in its capacity as
Money Manager
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
|
Stichting Bewaarder Interpolis Pensioenen
Global High Yield Pool
By: Syntrus Achmea Asset Management, as asset manager
By: DDJ Capital Management, LLC, as subadviser
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
|
Stichting Pensioenfonds Hoogovens
By: DDJ Capital Management, LLC, on behalf of
Stichting Pensioenfonds Hoogovens, in its capacity as
Manager
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
[Signature Page to First Amendment to the Purchase Agreement]
|
|
|
|
|
|
Stichting Pensioenfonds voor Fysiotherapeuten
By: DDJ Capital Management, LLC, in its capacity as
investment manager
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
|
UAW Retiree Medical Benefits Trust
By: State Street Bank and Trust company, solely in
its capacity as Trustee for UAW Retiree Medical
Benefits Trust, as directed by DDJ Capital
Management, LLC, and not in its individual capacity
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
|
DDJ Distressed and Special Situations Fund, L.P.
By: DDJ/GP Distressed and Special Situations, LLC,
its General Partner
By: DDJ Capital Management, LLC, Manager
|
|
|
By: |
/s/ David J. Breazzano
|
|
|
|
Name: |
David J. Breazzano |
|
|
|
Title: |
President |
|
|
[Signature Page to First Amendment to the Purchase Agreement]
|
|
|
|
|
|
LUXOR CAPITAL PARTNERS, LP
|
|
|
By: |
/s/ Norris Nissim
|
|
|
|
Name: |
Norris Nissim |
|
|
|
Title: |
General Counsel |
|
|
|
LUXOR CAPITAL PARTNERS OFFSHORE MASTER FUND, LP
|
|
|
By: |
/s/ Norris Nissim
|
|
|
|
Name: |
Norris Nissim |
|
|
|
Title: |
General Counsel |
|
|
|
LUXOR WAVEFRONT, LP
|
|
|
By: |
/s/ Norris Nissim
|
|
|
|
Name: |
Norris Nissim |
|
|
|
Title: |
General Counsel |
|
|
|
GAM EQUITY SIX INC.
|
|
|
By: |
/s/ Norris Nissim
|
|
|
|
Name: |
Norris Nissim |
|
|
|
Title: |
General Counsel |
|
|
|
OC 19 MASTER FUND, L.P. LCG
|
|
|
By: |
/s/ Norris Nissim
|
|
|
|
Name: |
Norris Nissim |
|
|
|
Title: |
General Counsel |
|
|
[Signature Page to First Amendment to the Purchase Agreement]
Exhibit A
Annex A
Shares and Purchasers
|
|
|
|
|
|
|
|
|
Purchaser |
|
Shares |
|
Share Purchase Price |
Luxor Capital Partners, LP |
|
|
14,384 |
|
|
$ |
14,384,000.00 |
|
Luxor Capital Partners Offshore Master Fund, LP |
|
|
22,263 |
|
|
$ |
22,263,000.00 |
|
Luxor Wavefront, LP |
|
|
5,159 |
|
|
$ |
5,159,000.00 |
|
OC 19 Master Fund, LP |
|
|
1,603 |
|
|
$ |
1,603,000.00 |
|
GAM Equity Six, Inc.: |
|
|
1,591 |
|
|
$ |
1,591,000.00 |
|
Quantum Partners LP |
|
|
25,000 |
|
|
$ |
25,000,000.00 |
|
DDJ High Yield Fund |
|
|
250 |
|
|
$ |
250,000.00 |
|
General Motors Hourly-Rate Employes Pension Trust 7N1H |
|
|
3,750 |
|
|
$ |
3,750,000.00 |
|
General Motors Salaried Employes Pension Trust 7N1I |
|
|
2,000 |
|
|
$ |
2,000,000.00 |
|
Stichting Pensioenfonds Hoogovens |
|
|
1,250 |
|
|
$ |
1,250,000.00 |
|
Caterpillar Inc. Master Retirement Trust |
|
|
2,500 |
|
|
$ |
2,500,000.00 |
|
|
|
|
|
|
|
|
|
|
Purchaser |
|
Shares |
|
Share Purchase Price |
J.C. Penney Corporation, Inc. Pension Plan Trust |
|
|
3,000 |
|
|
$ |
3,000,000.00 |
|
Stichting Bewaarder Interpolis Pensioenen Global High Yield Pool |
|
|
3,250 |
|
|
$ |
3,250,000.00 |
|
Stichting Pensioenfonds voor Fysiotherapeuten |
|
|
1,000 |
|
|
$ |
1,000,000.00 |
|
Houston Municipal Employees Pension System |
|
|
1,000 |
|
|
$ |
1,000,000.00 |
|
UAW Retiree Medical Benefits Trust |
|
|
3,750 |
|
|
$ |
3,750,000.00 |
|
DDJ Distressed and Special Situations Fund, L.P. |
|
|
1,000 |
|
|
$ |
1,000,000.00 |
|
Russell Investment Company Russell Global Opportunistic Credit Fund |
|
|
2,000 |
|
|
$ |
2,000,000.00 |
|
DDJ Capital Management Group Trust High Yield Investment Fund |
|
|
250 |
|
|
$ |
250,000.00 |
|
JHL Capital Group Master Fund L.P. |
|
|
25,000 |
|
|
$ |
25,000,000.00 |
|
|
|
|
|
|
|
|
TOTAL: |
|
|
120,000 |
|
|
$ |
120,000,000.00 |
|
exv10w5
Exhibit 10.5
Execution Version
REGISTRATION RIGHTS AMENDMENT AND JOINDER
by and among
HARBINGER GROUP INC.
and the HOLDERS party hereto
Dated: August 5, 2011
REGISTRATION RIGHTS AMENDMENT AND JOINDER
WHEREAS, CF Turul LLC, a Delaware limited liability company, PECM Strategic Funding L.P., a
Cayman Islands limited partnership, Providence TMT Debt Opportunity Fund II, L.P., a Cayman Islands
limited partnership, and Wilton Re Holdings Limited, a Bermuda limited company (together, the
Current Parties), entered into the Registration Rights Agreement, dated as of May 12,
2011 (the Registration Rights Agreement), in connection with the purchase by the Current
Parties of Series A Participating Convertible Preferred Stock of the Company (the Series A
Shares).
WHEREAS, Quantum Partners LP, a Cayman Islands exempted limited partnership, DDJ High Yield
Fund, an entity organized under the laws of the Province of Ontario, Canada, General Motors
Hourly-Rate Employes Pension Trust 7N1H, a trust maintained by General Motors Corporation, a
Delaware corporation, General Motors Salaried Employes Pension Trust 7N1I, a trust maintained by
General Motors Corporation, Stichting Pensioenfonds Hoogovens, a Dutch pension plan regulated by
the Dutch Central Bank, Caterpillar Inc. Master Retirement Trust, a trust maintained by
Caterpillar, Inc., a Delaware corporation, J.C. Penney Corporation, Inc. Pension Plan Trust, a
trust maintained by J.C. Penney Corporation, Inc., a Delaware corporation, Stichting Bewaarder
Interpolis Pensioenen Global High Yield Pool, a Dutch tax transparent pool of assets, Stichting
Pensioenfonds voor Fysiotherapeuten, a Dutch pension plan regulated by the Dutch Central Bank,
Houston Municipal Employees Pension System, a pension plan organized pursuant to Texas government
code, UAW Retiree Medical Benefits Trust, a trust consisting of three separate employees
beneficiary associations, DDJ Distressed and Special Situations Fund, L.P., a Delaware limited
partnership, Russell Investment Company Russell Global Opportunistic Credit Fund, a Massachusetts
business trust, DDJ Capital Management Group Trust High Yield Investment Fund, a trust maintained
by The Bank of New York Mellon, a New York State chartered bank, as trustee, JHL Capital Group
Master Fund L.P., a Cayman Islands exempted limited partnership, Luxor Capital Partners, LP, a
Delaware limited partnership, Luxor Wavefront, LP, a Delaware limited partnership, Luxor Capital
Partners Offshore Fund, LP, a Cayman Islands limited partnership, OC 19 Master Fund, L.P. LCG ,
a Cayman Islands limited partnership and GAM Equity Six Inc., a British Virgin Islands company
(collectively, the New Parties) desire to purchase Series A-2 Participating Convertible
Preferred Stock of the Company (the Series A-2 Shares) pursuant to a Securities Purchase
Agreement, dated as of August 1, 2011 (the Additional Purchase Agreement).
WHEREAS, the Current Parties desire to treat the New Parties as Additional Purchasers under
the Registration Rights Agreement and the New Parties desire to become Additional Purchasers and
Holders, as such terms are used in the Registration Rights Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and
for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. The Current Parties, the New Parties and Harbinger Group Inc., a Delaware corporation (the
Company), hereby agree that the definitions of the following terms in the Registration
Rights Agreement are hereby amended and restated in their entirety as follows:
Additional Purchasers means, collectively, the New Parties.
Certificate of Designation means the Certificate of Designation of Series A
Participating Convertible Preferred Stock, dated as of May 12, 2011, the Certificate of Designation
of Series A-2 Participating Convertible Preferred Stock, dated as of August 5, 2011.
Holder (collectively, the Holders) means each Person who is a purchaser of
Series A Shares pursuant to the Purchase Agreement or the Additional Purchase Agreement for so long
as it holds any Registrable Securities and each of its successors and assigns and direct and
indirect transferees who Beneficially Own Registrable Securities.
Series A Shares means the Companys Series A Participating Convertible Preferred
Stock and the Companys Series A-2 Participating Convertible Preferred Stock.
2. Each New Party hereby accedes to and ratifies the Registration Rights Agreement and
covenants and agrees with the Current Parties and the Company to be bound by the terms of the
Registration Rights Agreement as a Holder and to duly and punctually perform and discharge all
liabilities and obligations whatsoever from time to time to be performed or discharged by it under
or by virtue of the Registration Rights Agreement in all respects as if named as a party therein.
3. The Company and each Existing Party covenants and agrees that each New Party shall be
entitled to all the benefits of the terms and conditions of the Registration Rights Agreement to
the intent and effect that the New Party shall be deemed, with effect from the date on which the
New Party executes this instrument, to be a party to the Registration Rights Agreement as a
Holder.
[Remainder of Page Intentionally Left Blank]
2
IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this
Registration Rights Amendment and Joinder on the date first written above.
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COMPANY: |
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HARBINGER GROUP INC. |
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By: |
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/s/ Francis T. McCarron |
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Name:
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Francis T. McCarron |
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Title:
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Executive Vice President & Chief |
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Financial Officer |
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[Signature Page to Registration Rights Amendment and Joinder]
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CF TURUL LLC |
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By: |
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/s/ Glenn P. Cummins |
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Name:
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Glenn P. Cummins |
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Title:
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Authorized Signatory |
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PROVIDENCE TMT DEBT OPPORTUNITY FUND II, L.P. |
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By: |
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/s/ John Wells |
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Name:
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John Wells |
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Title:
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Authorized Signatory |
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PECM STRATEGIC FUNDING L.P. |
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By: |
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/s/ John Wells |
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Name:
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John Wells |
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Title:
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Authorized Signatory |
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WILTON RE HOLDINGS LIMITED |
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By: |
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/s/ Perry H. Braun |
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Name:
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Perry H. Braun |
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Title:
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Senior Vice President |
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[Signature Page to Registration Rights Amendment and Joinder]
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QUANTUM PARTNERS LP
By: QP GP LLC, its General Partner |
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By: |
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/s/ Jay A. Schoenfarber |
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Name:
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Jay A. Schoenfarber |
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Title:
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Attorney-in-Fact |
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JHL CAPITAL GROUP MASTER FUND L.P. |
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By: |
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/s/ James H. Litinsky |
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Name:
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James H. Litinsky |
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Title:
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Managing Member |
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JHL Capital Group LLC |
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[Signature Page to Registration Rights Amendment and Joinder]
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Caterpillar Inc. Master Retirement Trust
By: DDJ Capital Management, LLC, on behalf of Caterpillar
Inc. Master Retirement Trust, in its capacity as investment
manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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DDJ Capital Management Group Trust High Yield
Investment Fund
By: DDJ Capital Management, LLC, in its capacity as
Investment Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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DDJ High Yield Fund
By: DDJ Capital Management, LLC, its attorney-in-fact
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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[Signature Page to Registration Rights Amendment and Joinder]
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General Motors Hourly-Rate Employees Pension Trust
7N1H
By: State Street Bank and Trust Company, solely in its
capacity as Trustee for General Motors Hourly-Rate
Employees Pension Trust (Account 7N1H), and not in its
individual capacity, as directed by DDJ Capital Management,
LLC, as Investment Manager
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By: |
/s/ Kimberly A. Dinsmore
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Name: |
Kimberly A. Dinsmore |
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Title: |
Client Services Officer State Street Bank and
Trust Company |
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General Motors Salaried Employees Pension Trust 7N1I
By: State Street Bank and Trust Company, solely in its
capacity as Trustee for General Motors Salaried Employees
Pension Trust (Account 7N1I), and not in its individual
capacity, as directed by DDJ Capital Management, LLC, as
Investment Manager
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By: |
/s/ Kimberly A. Dinsmore
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Name: |
Kimberly A. Dinsmore |
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Title: |
Client Services Officer State Street Bank and
Trust Company |
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Houston Municipal Employees Pension System
By: DDJ Capital Management, LLC, in its capacity as Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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[Signature Page to Registration Rights Amendment and Joinder]
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J.C. Penney Corporation, Inc. Pension Plan Trust
By: DDJ Capital Management, LLC, on behalf of J.C. Penney
Corporation, Inc. Pension Plan Trust, in its capacity as
investment manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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Russell Investment Company Russell Global
Opportunistic Credit Fund
By: DDJ Capital Management, LLC, in its capacity as Money
Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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Stichting Bewaarder Interpolis Pensioenen Global High Yield
Pool
By: Syntrus Achmea Asset Management, as asset manager
By: DDJ Capital Management, LLC, as subadviser
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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Stichting Pensioenfonds Hoogovens
By: DDJ Capital Management, LLC, on behalf of Stichting
Pensioenfonds Hoogovens, in its capacity as Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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[Signature Page to Registration Rights Amendment and Joinder]
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Stichting Pensioenfonds voor Fysiotherapeuten
By: DDJ Capital Management, LLC, in its capacity as
investment manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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UAW Retiree Medical Benefits Trust
By: State Street Bank and Trust company, solely in its
capacity as Trustee for UAW Retiree Medical Benefits Trust,
as directed by DDJ Capital Management, LLC, and not in its
individual capacity
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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DDJ Distressed and Special Situations Fund, L.P.
By: DDJ/GP Distressed and Special Situations, LLC,
its General Partner
By: DDJ Capital Management, LLC, Manager
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By: |
/s/ David J. Breazzano
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Name: |
David J. Breazzano |
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Title: |
President |
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[Signature Page to Registration Rights Amendment and Joinder]
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Luxor Capital Partners, LP
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By: |
/s/ Norris Nissim
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Name: |
Norris Nissim |
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Title: |
General Counsel |
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Luxor Capital Partners Offshore Master Fund, LP
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By: |
/s/ Norris Nissim
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Name: |
Norris Nissim |
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Title: |
General Counsel |
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Luxor Wavefront, LP
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By: |
/s/ Norris Nissim
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Name: |
Norris Nissim |
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Title: |
General Counsel |
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GAM Equity Six Inc.
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By: |
/s/ Norris Nissim
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Name: |
Norris Nissim |
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Title: |
General Counsel |
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OC 19 Master Fund, L.P. LCG
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By: |
/s/ Norris Nissim
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Name: |
Norris Nissim |
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Title: |
General Counsel |
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[Signature Page to Registration Rights Amendment and Joinder]
exv31w1
Exhibit 31.1
CERTIFICATION OF CEO PURSUANT TO RULE 13a-14(a) or 15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Philip A. Falcone, certify that:
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1. |
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I have reviewed this quarterly report on Form 10-Q of Harbinger Group Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
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3. |
|
Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
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5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors
and the audit committee of the registrants board of directors (or persons performing the
equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: August 12, 2011
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/s/ PHILIP A. FALCONE
|
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Philip A. Falcone |
|
Chairman of the Board, President and
Chief Executive Officer |
|
exv31w2
Exhibit 31.2
CERTIFICATION OF CFO PURSUANT TO RULE 13a-14(a) or 15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Francis T. McCarron, certify that:
|
1. |
|
I have reviewed this quarterly report on Form 10-Q of Harbinger Group Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
|
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors
and the audit committee of the registrants board of directors (or persons performing the
equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: August 12, 2011
|
|
|
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|
/s/ FRANCIS T. McCARRON
|
|
Francis T. McCarron |
|
Executive Vice President and
Chief Financial Officer |
|
exv32w1
Exhibit 32.1
CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harbinger Group Inc. (the Company) on Form 10-Q for
the quarter ended July 3, 2011 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Philip A. Falcone, as Chairman of the Board, President and Chief
Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 to the best of my knowledge, that:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and result of operations of the Company. |
|
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|
|
/s/ PHILIP A. FALCONE
|
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Philip A. Falcone |
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Chairman of the Board, President and
Chief Executive Officer
August 12, 2011 |
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This Certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
exv32w2
Exhibit 32.2
CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harbinger Group Inc. (the Company) on Form 10-Q for
the quarter ended July 3, 2011 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Francis T. McCarron, as the Executive Vice President and Chief Financial
Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 to the best of my knowledge, that:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and result of operations of the Company. |
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|
/s/ FRANCIS T. McCARRON
|
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Francis T. McCarron |
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Executive Vice President and
Chief Financial Officer
August 12, 2011 |
|
This Certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.