Spectrum Brands, Inc.

HARBINGER GROUP INC.

Date: December 11, 2012

/s/ Thomas A. Williams

Thomas A. Williams

Executive Vice President and Chief Financial Officer

View:

Download DOC

Download PDF

Download XLS

Form 8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): December 11, 2012

HARBINGER GROUP INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction

of incorporation)


1-4219				74-1339132
(Commission File Number)				(IRS Employer Identification No.)

450 Park Avenue, 27^th Floor, New York, NY				10022
(Address of Principal Executive Offices)				(Zip Code)

(212) 906-8555

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01

Other Events.

Harbinger Group Inc. (“HGI”) is hereby providing its investors with certain financial and other information relating the previously announced: (a) agreement between HGI Energy Holdings, LLC, its wholly-owned subsidiary, and EXCO Resources, Inc., to enter into a joint venture transaction to form a partnership for the purpose of holding certain oil, gas and mineral leases and wells and certain related assets (the “EXCO/HGI Partnership”) and (b) agreement by and between Spectrum Brands, Inc., its majority-owned subsidiary, and Stanley Black & Decker, Inc. (“Stanley Black & Decker”) to acquire the residential hardware and home improvement business of Stanley Black & Decker and certain of its subsidiaries (“HHI”).

More specifically, HGI is also providing investors with: (i) a description of the expected business of EXCO/HGI Partnership, certain related financial statements and the related consent of KPMG LLP, filed with this report as Exhibits 99.1, 99.2 and 23.1, respectively, (ii) a description of the expected business of HHI and certain related financial statements, filed with this report as Exhibits 99.3 and 99.4, respectively, (iii) certain unaudited pro forma financial statements of HGI, filed with this report as Exhibit 99.4, (iv) a report and consent of Lee Keeling and Associates, Inc., independent consulting petroleum engineers of HGI, with respect to the properties expected to be contributed to EXCO/HGI Partnership, filed with this report as Exhibits 23.2 and 99.6, respectively; and (iv) HGI’s Certificate of Incorporation and Bylaws, as currently in effect, filed with this report as Exhibits 3.1 and 3.2.

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Some of the statements contained in herein, including statements regarding the transaction to form the EXCO/HGI Partnership (the “Energy Transaction”) and the acquisition of the HHI business, and certain oral statements made by our representatives from time to time regarding the matters discussed herein are or may be forward-looking statements. Such forward-looking statements are based upon management’s current expectations that are subject to risks and uncertainties that could cause actual results, events and developments to differ materially from those set forth in or implied by such forward-looking statements. These statements and other forward-looking statements made from time-to-time by HGI and its representatives are based upon certain assumptions and describe future plans, strategies and expectations of HGI, are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may” or similar expressions. Factors that could cause actual results, events and developments to differ include, without limitation, the risk that closing of the acquisition of the HHI business or closing of the Energy Transaction will not occur, will be delayed or will close on terms materially different than expected, including, in the case of the Energy Transaction, (i) as a result of title and environmental diligence of properties to be acquired, commodity price risks, drilling and production risks, (ii) financing plans for the EXCO/HGI Partnership and the Energy Transaction, (iii) reserve estimates and values, statements about the EXCO/HGI Partnership’s properties and potential reserves and production levels. Other factors could cause actual results, events and developments to differ include, without limitation, the ability of HGI’s subsidiaries (including, following the closing of the Energy Transaction, the Partnership) to generate sufficient net income and cash flows to make upstream cash distributions, capital market conditions, that HGI may not be successful in identifying any suitable future acquisition opportunities, the risks that may affect the performance of the operating subsidiaries of HGI and those factors listed under the caption “Risk Factors” in HGI’s most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission. All forward-looking statements described herein are qualified by these cautionary statements and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized. HGI does not undertake any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operation results.

Item 9.01

Financial Statements and Exhibits.

(d) Exhibits


Exhibit No.		Description

3.1		Certificate of Incorporation of Harbinger Group Inc.

3.2		Bylaws of Harbinger Group Inc.

23.1		Consent by KPMG LLP, regarding EXCO Resources, Inc.’s Certain Conventional and Natural Gas Properties

23.2		Consent by Lee Keeling and Associates, Inc.

99.1		Business Description of EXCO/HGI Partnership

99.2		Financial Statements of EXCO Resources, Inc.’s Certain Conventional and Natural Gas Properties

99.3		Business Description of HHI

99.4		Combined Financial Statements of the HHI Group for the Fiscal Years Ended December 31, 2011 and January 1, 2011 and Combined Financial Statements of the HHI Group for the Six Months Ended June 30, 2012 and July 2, 2011

99.5		Unaudited Pro Forma Condensed Combined Financial Statements of Harbinger Group Inc.

99.6		Report of Lee Keeling and Associates, Inc.

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 hereunto duly authorized.

EXHIBIT INDEX


Exhibit No.		Description

3.1		Certificate of Incorporation of Harbinger Group Inc.

3.2		Bylaws of Harbinger Group Inc.

23.1		Consent by KPMG LLP, regarding Exco Resources, Inc.’s Certain Conventional Oil and Natural Gas Properties

23.2		Consent by Lee Keeling and Associates, Inc.

99.1		Business Description of EXCO/HGI Partnership

99.2		Financial Statements of Exco Resources, Inc.’s Certain Conventional Oil and Natural Gas Properties

99.3		Business Description of HHI

99.4		Combined Financial Statements of the HHI Group for the Fiscal Years Ended December 31, 2011 and January 1, 2011 and Combined Financial Statements of the HHI Group for the Six Months Ended June 30, 2012 and July 2, 2011

99.5		Unaudited Pro Forma Condensed Combined Financial Statements of Harbinger Group Inc.

99.6		Report of Lee Keeling and Associates, Inc.

Certificate of Incorporation of Harbinger Group inc.

Exhibit 3.1

CERTIFICATE OF INCORPORATION

HARBINGER GROUP INC.

The undersigned, for purposes of incorporating a corporation under the General Corporation Law of the State of Delaware, does hereby certify as follows:

ARTICLE I — NAME

The name of the corporation is Harbinger Group Inc. (the “Corporation”).

ARTICLE II — REGISTERED OFFICE AND AGENT

The address of the Corporation’s registered office in the State of Delaware is 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle. The name of the Corporation’s registered agent at such address is Corporation Service Company.

ARTICLE III — PURPOSE

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “DGCL”).

ARTICLE IV — CAPITALIZATION

(a) Authorized Shares. The total number of shares of stock which the Corporation shall have authority to issue is 510,000,000 shares consisting of 500,000,000 shares of common stock, par value $.01 per share (“Common Stock”) and 10,000,000 shares of preferred stock, par value $.01 per share (“Preferred Stock”).

(b) Preferred Stock. Shares of Preferred Stock may be issued in one or more series, from time to time, with each such series to consist of such number of shares and to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the board of directors of the Corporation (the “Board of Directors”), and the Board of Directors is hereby expressly vested with authority, to the full extent now or hereafter provided by law, to adopt any such resolution or resolutions. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, determination of the following:

(i) The number of shares constituting that series and the distinctive designation of that series;

(ii) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;

(iii) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;

(iv) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine;

(v) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

(vi) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund;

(vii) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and

(viii) Any other relative rights, preferences and limitations of that series.

ARTICLE V — BOARD OF DIRECTORS

(a) Number of Directors and Newly Created Directorships.

(i) Subject to any special rights of the holders of any class or series of stock to elect directors, the number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by the Board of Directors in the manner provided in this Certificate of Incorporation and the Bylaws of the Corporation (the “Bylaws”).

(ii) If the number of directors is changed, any increase or decrease shall be apportioned by resolution of the Board of Directors among the classes so as to maintain a number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. To the extent reasonably possible, consistent with the foregoing, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation and newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the members of the Incumbent Board (as defined below) then in office, although less than a quorum. The “Incumbent Board” shall mean those directors listed in Article VI(b) of this Certificate of Incorporation, provided that (A) any person becoming a director subsequent to such date whose election, or nomination for election by the Corporation’s stockholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Corporation, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended) or (B) any person appointed by the Incumbent Board to fill a vacancy, shall also be considered a member of the Incumbent Board.

(b) Classified Board of Directors. Subject to any special right of the holders of any class or series of stock to elect directors, the Board of Directors shall be classified with respect to the time for which they severally hold office into three classes, as nearly equal in number as possible. The initial Class III directors shall serve for a term expiring at the first annual meeting of stockholders of the Corporation following the filing of this Certificate of Incorporation; the initial Class I directors shall serve for a term expiring at the second annual meeting of stockholders following the filing of this Certificate of Incorporation; and the initial Class II directors shall serve for a term expiring at the third annual meeting of stockholders following the filing of this Certificate of Incorporation. Each director in each class shall hold office until his or her successor is duly elected and qualified, subject, however, to prior death, resignation, retirement or removal from office. At each annual meeting of stockholders beginning with the first annual meeting of stockholders following the filing of this Certificate of Incorporation, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in the third year following the year of their election, with each director in each such class to hold office until his or her successor is duly elected and qualified.

(i) Subject to any special rights of the holders of any class or series of stock to elect directors, neither the Board of Directors nor any individual director may be removed without cause.

(ii) Subject to any limitation imposed by law and any special rights of the holders of any class or series of stock to elect directors, any director may be removed with cause by the holders of a majority of the voting power of the Corporation entitled to vote at an election of directors.

(d) Vacancies. Subject to the rights of the holders of any series or class of stock to elect directors, any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall be filled by the vote of a majority of the members of the Incumbent Board then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Subject to any special rights of the holders of any series or class of stock to elect directors and except as otherwise provided by law, in the event of a vacancy in the Board of Directors, the remaining directors may exercise the powers of the full Board of Directors until the vacancy is filled. Any director elected in accordance with this section shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director’s successor shall have been elected and qualified.

ARTICLE VI — INCORPORATOR; INITIAL BOARD OF DIRECTORS

(a) Incorporator. The name and mailing address of the incorporator of the Corporation is Tracy A. Romano, c/o Kaye Scholer LLP, 425 Park Avenue, New York, NY 10022.

(b) Initial Board of Directors. The powers of the incorporator shall terminate upon the filing of this Certificate of Incorporation. The names and mailing addresses of the persons who are to serve as the initial Board of Directors shall be as follows:


Name and Class		Address

Lap Wai Chan – Class I		171 E. 64th Street
		New York, NY 10065
Lawrence M. Clark, Jr. – Class I		c/o Harbinger Capital Partners, LLC,
		450 Park Avenue, 30th Floor,
		New York, NY, 10022
Peter A. Jenson – Class I		c/o Harbinger Capital Partners, LLC,
		450 Park Avenue, 30th Floor,
		New York, NY, 10022
Philip A. Falcone – Class II		c/o Harbinger Capital Partners, LLC,
		450 Park Avenue, 30th Floor,
		New York, NY, 10022
Keith Hladek – Class II		c/o Harbinger Capital Partners, LLC,
		450 Park Avenue, 30th Floor,
		New York, NY, 10022
Robert V. Leffler, Jr. – Class III		2607 N. Charles Street
		Baltimore, MD 21218
Thomas Hudgins – Class III		4700 North Ocean Blvd.
		Myrtle Beach, SC 29577

ARTICLE VII — LIMITATION OF DIRECTOR LIABILITY; INDEMNIFICATION AND

ADVANCEMENT OF EXPENSES

(a) Limitation of Director Liability. The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by the DGCL, including, without limitation, paragraph (7) of subsection (b) of Section 102 thereof, as the same may be amended or supplemented. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.

(b) Indemnification. The Corporation shall have the power, to the fullest extent permitted by Section 145 of the DGCL, as the same may be amended or supplemented, to indemnify any person by reason of the fact that the person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those

indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person.

(c) Effect of Amendment. Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Corporation’s Certificate of Incorporation inconsistent with this Article VII, whether by amendment to this Certificate of Incorporation or by merger, reorganization, recapitalization or other corporate transaction having the effect of amending this Certificate of Incorporation, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.

ARTICLE VIII — MEETINGS OF STOCKHOLDERS

(a) Annual Meetings of Stockholders. The annual meeting of stockholders shall be held in accordance with the procedures set forth in the Bylaws.

(b) Special Meetings of Stockholders. Special Meetings of Stockholders may be called in accordance with the procedures set forth in the Bylaws.

ARTICLE IX — BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS

(a) The Corporation elects not to be governed by Section 203 of the DGCL.

(b) Notwithstanding any other provision(s) of this Article IX, the Corporation shall not engage in any Business Combination (as defined below) with any Interested Stockholder (as defined below) for a period of three years following the time that such stockholder became an Interested Stockholder, unless:

(i) Prior to such time the Board of Directors approved either the Business Combination or the transaction which resulted in the stockholder becoming an Interested Stockholder;

(ii) Upon consummation of the transaction which resulted in the stockholder becoming an Interested Stockholder, the Interested Stockholder owned at least 85% of the Voting Stock (as defined below) of the Corporation outstanding at the time the transaction commenced, excluding for purposes of determining the Voting Stock outstanding (but not the outstanding Voting Stock owned by the Interested Stockholder) those shares owned (A) by persons who are directors and also officers and (B) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

(iii) At or subsequent to such time the Business Combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least a majority of the outstanding Voting Stock which is not owned by the Interested Stockholder.

(i) The Corporation does not have a class of Voting Stock that is: (A) listed on a national securities exchange; or (B) held of record by more than 2,000 stockholders, unless any of the foregoing results from action taken, directly or indirectly, by an Interested Stockholder or from a transaction in which an individual, corporation, partnership, unincorporated association or other entity (a “Person”) becomes an Interested Stockholder;

(ii) A stockholder becomes an Interested Stockholder inadvertently and (A) as soon as practicable divests itself of ownership of sufficient shares so that the stockholder ceases to be an Interested Stockholder; and (B) would not, at any time within the three-year period immediately prior to a Business Combination between the Corporation and such stockholder, have been an Interested Stockholder but for the inadvertent acquisition of ownership;

(iii) The Business Combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required hereunder of a proposed transaction which,

(A) Constitutes one of the transactions described in the second sentence of this paragraph;

(B) Is with or by a Person who either was not an Interested Stockholder during the previous three years or who became an Interested Stockholder with the approval of the Board of Directors or during the period described in paragraph (iv) of this subsection (c); and

(C) Is approved or not opposed by a majority of the members of the Board of Directors then in office (but not less than one) who were directors prior to any Person becoming an Interested Stockholder during the previous three years or were recommended for election or elected to succeed such directors by a majority of such directors.

The proposed transactions referred to in the preceding sentence are limited to

(1) A merger or consolidation of the Corporation (except for a merger in respect of which, pursuant to Section 251(f) of the DGCL, no vote of the stockholders of the Corporation is required);

(2) A sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation (other than to any direct or indirect wholly-owned subsidiary or to the Corporation) having an aggregate market value equal to 50% or more of either the aggregate market value of all of the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding Stock (as defined below) of the Corporation; or

(3) A proposed tender or exchange offer for 50% or more of the outstanding Voting Stock of the Corporation.

The Corporation shall give not less than 20 days’ notice to all Interested Stockholders prior to the consummation of any of the transactions described in clause (1) or (3) of this paragraph; or

(iv) The Business Combination is with an Interested Stockholder who became an Interested Stockholder at a time when the restrictions contained in this section did not apply by reason of paragraph (i) of this subsection (c).

(d) As used in this Article IX only, the term:

(i) “Affiliate” means a Person that directly, or indirectly through one or more intermediaries, Controls (as defined below), or is controlled by, or is under common control with, another Person.

(ii) “Associate,” when used to indicate a relationship with any Person, means: (A) Any other Person of which such Person is a director, officer or partner or is, directly or indirectly, the Owner (as defined below) of 20% or more of any class of Voting Stock; (B) Any trust or other estate in which such Person has at least a 20% beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (C) Any relative or spouse of such Person, or any relative of such spouse, who has the same residence as such Person.

(iii) “Business Combination,” when used in reference to any corporation and any Interested Stockholder of such corporation, means:

(A) Any merger or consolidation of the Corporation or any direct or indirect majority-owned subsidiary of the Corporation with the Interested Stockholder, or with any Person if the merger or consolidation is caused by the Interested Stockholder and as a result of such merger or consolidation Article IX(b) is not applicable to the surviving Person;

(B) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a stockholder of such corporation, to or with the Interested Stockholder, whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding Stock of the Corporation;

(C) Any transaction which results in the issuance or transfer by the Corporation or by any direct or indirect majority-owned subsidiary of the Corporation of any Stock of the Corporation or of such subsidiary to the Interested Stockholder, except: (1) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into Stock of such corporation or any such subsidiary which securities were outstanding prior to the time that the Interested Stockholder became such; (2) pursuant to a merger under Section 251(g) of the DGCL; (3) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into Stock of such corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of Stock of such corporation subsequent to the time the Interested Stockholder became such; (4) pursuant to an exchange offer by the Corporation to purchase Stock made on the same terms to all holders of said Stock; or (5) any issuance or transfer of Stock by the Corporation; provided, however, that in no case under items (3)-(5) of this subparagraph shall there be an increase in the Interested Stockholder’s proportionate share of the Stock of any class or series of the Corporation or of the Voting Stock of the Corporation;

(D) Any transaction involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation which has the effect, directly or indirectly, of increasing the proportionate share of the Stock of any class or series, or securities convertible into the Stock of any class or series, of the Corporation or of any such subsidiary which is owned by the Interested Stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of Stock not caused, directly or indirectly, by the Interested Stockholder; or

(E) Any receipt by the Interested Stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of such corporation), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted in subparagraphs (A)-(D) of this section) provided by or through the Corporation or any direct or indirect majority-owned subsidiary.

(iv) “Control,” including the terms “controlling,” “controlled by” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. A Person who is the Owner of 20% or more of the outstanding Voting Stock of any other Person shall be presumed to have control of such Person, in the absence of proof by a preponderance of the evidence to the contrary. Notwithstanding the foregoing, a presumption of control shall not apply where such Person holds Voting Stock, in good faith and not for the purpose of circumventing this section, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such Person.

(v) “Interested Stockholder” means any Person (other than the Corporation and any direct or indirect majority-owned subsidiary of the Corporation) that is the Owner of 15% or more of the outstanding Voting Stock of the Corporation, or is an Affiliate or Associate of the Corporation and was the Owner of 15% or more of the outstanding Voting Stock of the Corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such Person is an Interested Stockholder, and the Affiliates and Associates of such Person, provided, however, that the term “Interested Stockholder” shall not include;

(A) any Person whose ownership of shares in excess of the 15% limitation set forth herein is the result of action taken solely by the Corporation; provided that such Person shall be an Interested Stockholder if thereafter such Person acquires additional shares of Voting Stock of the Corporation, except as a result of further corporate action not caused, directly or indirectly, by such Person. For the purpose of determining whether a Person is an Interested Stockholder, the Voting Stock of the Corporation deemed to be outstanding shall include Stock deemed to be owned by the Person through application of paragraph (ix) of this subsection but shall not include any other unissued Stock of such Corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise; and

(B) any Person that would have been deemed to be an Interested Stockholder of Zapata Corporation, a Nevada corporation (“Zapata Nevada”), immediately prior to the consummation of the merger contemplated by the Agreement and Plan of Merger between Zapata Nevada and the Corporation if the terms and conditions of this Article IX had been included in the articles of incorporation of Zapata Nevada. For avoidance of doubt, the following Persons and their Affiliates are not Interested Stockholders: any Person, investment fund, managed account or special purpose entity which is directly or indirectly controlled or managed by, or is under common control with, or controls, Harbinger Holdings, LLC and/or each of its affiliates and/or subsidiaries, or any successor thereto, or is otherwise controlled or managed, directly or indirectly, by Philip A. Falcone.

(vi) “Stock” means, with respect to any corporation, capital stock and, with respect to any other Person, any equity interest.

(vii) “Voting Stock” means, with respect to any corporation, Stock of any class or series entitled to vote generally in the election of directors and, with respect to any Person that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such Person. Every reference to a percentage of voting stock shall refer to such percentage of the votes of such voting stock.

(viii) “Owner,” including the terms “own” and “owned,” when used with respect to any Stock, means a Person that individually or with or through any of its Affiliates or Associates:

(A) Beneficially owns such Stock, directly or indirectly; or

(B) Has (i) the right to acquire such Stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Owner of Stock tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates or Associates until such tendered Stock is accepted for purchase or exchange; or (ii) the right to vote such Stock pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Owner of any Stock because of such Person’s right to vote such Stock if the agreement, arrangement or understanding to vote such Stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to ten or more Persons; or

(C) Has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (ii) of subparagraph (B) of this paragraph), or disposing of such Stock with any other Person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, such Stock.

ARTICLE X — CORPORATE OPPORTUNITIES

(a) Certain Acknowledgements. In recognition and anticipation that (i) a director of the Corporation (each, an “Overlap Person”) may now serve and may in the future serve as a director, officer, partner, manager, representative, agent or employee of one or more Other Entities (as defined below), (ii) an Overlap Person may be presented with opportunities whether in his or her capacity as a director, officer, partner, manager, representative, agent or employee of the Corporation, one or more Other Entities or otherwise, (iii) the Corporation, directly or indirectly, may engage in the same, similar or related lines of business as those engaged in by an Other Entity, (iv) from time to time, the Corporation or its subsidiaries may be interested, or potentially interested, in the same or similar business opportunities as an Other Entity, (v) the Corporation will derive substantial benefits from the service of the Overlap Persons as directors of the Corporation and its subsidiaries, and (vi) it is in the best interests of the Corporation that the rights of the Corporation, and the duties of any Overlap Person, be determined and delineated as provided in this Article X in respect of any Potential Business Opportunities (as defined below) and in respect of the agreements and transactions referred to herein. The provisions of this Article X will, to the

fullest extent permitted by law, regulate and define the conduct of the business and affairs of the Corporation and its directors who are Overlap Persons in connection with any Potential Business Opportunities. Any Person purchasing or otherwise acquiring any shares of capital stock of the Corporation, or any interest therein, will be deemed to have notice of and to have consented to the provisions of this Article X.

(b) As used in this Article X, the term or terms:

(i) “directors,” “officers,” “employees” and “agents” of any Person will be deemed to include those Persons who hold similar positions or exercise similar powers and authority with respect to any Other Entity that is a non-corporate Person.

(ii) “Disqualified Opportunity” means a Potential Business Opportunity that meets any of the following criteria: (A) the acquisition of an equity interest in a Person that does not entitle the Corporation to elect a majority of the members of the board of directors, general partner, managing member or similar governing body of such Person, (B) the extension of credit to any Person, or the acquisition of any interest or participation in any debt, (C) the acquisition of debt, equity or other interests in a Person or business that is reasonably believed by an Other Entity or an Overlap Person to be distressed or insolvent or to be in default with respect to any debt, (D) the extension of credit to, or the acquisition of debt or equity or other interests or assets in, a Person or business that is in a bankruptcy or insolvency proceeding, including, but not limited to, providing debtor-in-possession financing or the purchase of interests in a Person, assets or business in connection with a bankruptcy or insolvency proceeding or reorganization or liquidation relating to or arising from a bankruptcy or insolvency proceeding, (E) an acquisition of assets that does not constitute a whole company, operating division of a Person or line of business, or (F) investments in any other industry in which the Corporation is not then engaged and that the Board of Directors designates from time to time as being a Disqualified Opportunity.

(iii) “Other Entity” means any Person (other than the Corporation and any Person that is controlled by the Corporation) for which an Overlap Person serves as a director, officer, partner, member, manager, representative, agent, adviser, fiduciary or employee, including, but not limited to, any Person, investment fund, managed account or special purpose entity which is directly or indirectly controlled or managed by, or is under common control with, or controls, Harbinger Holdings, LLC and/or each of its affiliates and/or subsidiaries, or any successor thereto, or is otherwise controlled or managed, directly or indirectly, by Philip A. Falcone.

(iv) “Potential Business Opportunity” means a potential transaction or matter (and any such actual or potential business opportunity) that may constitute or present a business opportunity for the Corporation or any of its subsidiaries, in which the Corporation or any of its subsidiaries could, but for the provisions of this Article X, have an interest or expectancy.

(v) “Restricted Potential Business Opportunity” means a Potential Business Opportunity that satisfies all of the following conditions: (A) such Potential Business Opportunity was expressly presented or offered to the Overlap Person solely in his or her capacity as a director or officer of the Corporation; (B) the Corporation possessed, or would reasonably be expected to be able to possess, the resources, including cash, necessary to exploit such Potential Business Opportunity; (C) such Potential Business Opportunity relates exclusively to the business of the Corporation as the business of the Corporation at such time is determined by the Board of Directors from time to time in good faith; and (D) such Potential Business Opportunity does not constitute a Disqualified Opportunity.

(c) Duties of Directors Regarding Potential Business Opportunities; Renunciation of Interest in Potential Business Opportunities. If a director of the Corporation who is an Overlap Person is presented or offered, or otherwise acquires knowledge of, a Potential Business Opportunity: (i) such Overlap Person will, to the fullest extent permitted by law, have no duty or obligation to refrain from referring such Potential Business Opportunity to any Other Entity and, if such Overlap Person refers such Potential Business Opportunity to an Other Entity, such Overlap Person shall have no duty or obligation to refer such Potential Business Opportunity to the Corporation or to any of its subsidiaries or to give any notice to the Corporation or to any of its subsidiaries regarding such Potential Business Opportunity (or any matter related thereto); (ii) any Other Entity may participate, engage or invest in any such Potential Business Opportunity notwithstanding that such Potential Business Opportunity may have been referred to such Other Entity by an Overlap Person; and (iii) if a director who is an Overlap Person refers a Potential

Business Opportunity to an Other Entity then, as between the Corporation and such Other Entity, the Corporation shall not have any interest, expectancy or right in or to such Potential Business Opportunity or to receive any income or proceeds derived therefrom solely as a result of such Overlap Person having been presented or offered, or otherwise acquiring knowledge of such Potential Business Opportunity. The Corporation hereby renounces, to the fullest extent permitted by law, any interest or expectancy in any Potential Business Opportunity that is a Disqualified Opportunity or that is not a Restricted Potential Business Opportunity. In the event the Board of Directors declines to pursue a Restricted Potential Business Opportunity, any Overlap Person shall be free to refer such Restricted Potential Business Opportunity to an Other Entity.

(d) Certain Agreements and Transactions Permitted. No contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof) entered into between the Corporation and/or any of its subsidiaries, on the one hand, and any Other Entity, on the other hand, shall be void or voidable or be considered unfair to the Corporation or any of its subsidiaries because an Other Entity is a party thereto, or because any directors, officers, partners, managers, representative, agents or employees of an Other Entity were present at or participated in any meeting of the Board of Directors, or a committee thereof, of the Corporation, or the Board of Directors, or committee thereof, of any subsidiary of the Corporation, that authorized the contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof), or because his, her or their votes were counted for such purpose. The Corporation may, from time to time, enter into and perform, and cause or permit any of its subsidiaries to enter into and perform, one or more contracts, agreements, arrangements or transactions (or amendments, modifications or supplements thereto) with an Other Entity. To the fullest extent permitted by law, no such contract, agreement, arrangement or transaction (nor any such amendments, modifications or supplements), nor the performance thereof by the Corporation, an Other Entity or any subsidiary thereof, shall be considered contrary to any fiduciary duty owed to the Corporation (or to any subsidiary of the Corporation, or to any stockholder of the Corporation or any of its subsidiaries) by any director or officer of the Corporation (or by any director or officer of any subsidiary of the Corporation) who is an Overlap Person. To the fullest extent permitted by law, no director or officer of the Corporation or any subsidiary of the Corporation who is an Overlap Person thereof shall have or be under any fiduciary duty to the Corporation (or to any subsidiary of the Corporation, or to any stockholder of the Corporation or any of its subsidiaries) to refrain from acting on behalf of the Corporation or an Other Entity, or any of their respective subsidiaries, in respect of any such contract, agreement, arrangement or transaction or performing any such contract, agreement, arrangement or transaction in accordance with its terms and shall be deemed (i) not to have breached his or her duties of loyalty to the Corporation or to any of its subsidiaries or to any stockholder of the Corporation or any of its subsidiaries, and (ii) not to have derived an improper personal benefit therefrom.

(e) Amendment of Article X. No alteration, amendment or repeal, or adoption of any provision inconsistent with, any provision of this Article X, whether by amendment to this Certificate of Incorporation or by merger, reorganization, recapitalization or other corporate transaction having the effect of amending this Certificate of Incorporation, will have any effect upon: (i) any agreement between the Corporation or a subsidiary thereof and any Other Entity thereof, that was entered into before the time of such alteration, amendment or repeal or adoption of any such inconsistent provision (the “Amendment Time”), or any transaction entered into in connection with the performance of any such agreement, whether such transaction is entered into before or after the Amendment Time; (ii) any transaction entered into between the Corporation or a subsidiary thereof and any Other Entity, before the Amendment Time; (iii) the allocation of any business opportunity between the Corporation or any subsidiary thereof and any Other Entity before the Amendment Time; or (iv) any duty or obligation owed by any director of the Corporation or any subsidiary of the Corporation (or the absence of any such duty or obligation) with respect to any Potential Business Opportunity which such director was offered, or of which such director or officer otherwise became aware, before the Amendment Time (regardless of whether any proceeding relating to any of the above is commenced before or after the Amendment Time).

ARTICLE XI — AMENDMENTS TO THE CERTIFICATE OF INCORPORATION AND BYLAWS

(a) Amendments to the Certificate of Incorporation. Notwithstanding any other provisions of this Certificate of Incorporation, and notwithstanding that a lesser percentage may be permitted, from time to time, by applicable law, no provision of this Certificate of Incorporation may be altered, amended or repealed in any respect, nor may

any provision inconsistent therewith be adopted, unless such alteration, amendment, repeal or adoption is approved by the affirmative vote of the holders of at least fifty percent (50%) of the capital stock of the Corporation entitled to vote generally in an election of directors, voting together as a single class.

(b) Adoption, Amendment and Repeal of the Bylaws. In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized to make, alter, amend and repeal the Bylaws of the Corporation subject to the power of the stockholders of the Corporation to alter, amend or repeal the Bylaws; provided, however, that with respect to the powers of stockholders to make, alter, amend or repeal the By-laws, the affirmative vote of the holders of majority of the Corporation’s outstanding voting stock shall be required to make, alter amend or repeal the Bylaws of the Corporation.

(i) Any amendments to Article IX, whether by amendment to this Certificate of Incorporation or by merger, reorganization, recapitalization or other corporate transaction having the effect of amending this Certificate of Incorporation, shall not be effective until 12 months after the adoption of such amendment and shall not apply to any Business Combination, as defined in Article IX, between the Corporation and any Person who became an Interested Stockholder, as defined in Article IX, of the Corporation on or prior to such adoption; and

(ii) Any amendments to Article IX, whether by amendment to this Certificate of Incorporation or by merger, reorganization, recapitalization or other corporate transaction having the effect of amending this Certificate of Incorporation, shall not apply to restrict a Business Combination between the Corporation and an Interested Stockholder of the Corporation if the Interested Stockholder became such prior to the effective date of the amendment.

IN WITNESS WHEREOF, the undersigned incorporator has executed this Certificate of Incorporation this 3rd day of November, 2009.

/s/ Tracy Romano

Incorporator

Bylaws of Harbinger Group Inc.

Exhibit 3.2

BYLAWS

HARBINGER GROUP INC.

(A DELAWARE CORPORATION)

Article I.

Meetings of Stockholders

SECTION 1.01 Annual Meetings. If required by applicable law, an annual meeting of stockholders shall be held for the election of directors at such date, time and place, if any, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. Only such business as is properly designated by resolution of the Board of Directors or otherwise brought before such meeting in accordance with the Corporation’s Certificate of Incorporation (“Certificate of Incorporation”) and these Bylaws may be transacted at the annual meeting.

SECTION 1.02 Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by either (a) the Chairman of the Board of Directors or (b) by the Secretary or other officer of the Corporation upon delivery of a written request executed by three directors or, if there are fewer than three directors in office at that time, by all incumbent directors, which request shall specify the purpose of and business to be conducted at such special meeting. Special meetings may not be called by any other person or persons. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

SECTION 1.03 Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a notice of the meeting shall be given that shall state the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, the record date for determining the stockholders entitled to vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting) and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the Certificate of Incorporation or these Bylaws, the notice of any meeting shall be given not less than ten nor more than 60 days before the date of the meeting to each stockholder entitled to vote at the meeting as of the record date for determining the stockholders entitled to notice of the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Corporation. The attendance of any stockholder at a meeting, whether in person or by proxy, without protesting at the beginning of the meeting that the meeting is not lawfully called or convened, shall constitute a waiver of notice by such stockholder.

SECTION 1.04 Adjournments. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for stockholders entitled to vote is fixed for the adjourned meeting, the Board of Directors shall fix a new record date for notice of such adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record entitled to vote at such adjourned meeting as of the record date for notice of such adjourned meeting.

SECTION 1.05 Quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, at each meeting of stockholders the presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum. In the absence of a quorum, the person presiding over such meeting or stockholders present acting by a majority in voting power thereof, may adjourn the meeting from time to time in the manner provided in Section 1.04 of these Bylaws until a quorum shall attend. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any subsidiary of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.

SECTION 1.06 Organization. Meetings of stockholders shall be presided over by the Chairman of the Board of Directors or, in his or her absence, by the Chief Executive Officer or, in his or her absence, by the President or, in his or her absence, by a Vice President or, in the absence of the foregoing persons, by a chairman designated by the

Board of Directors or, in the absence of such designation, by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence, or at the request of the Secretary or the person presiding over the meeting, any other person may be selected to act as secretary of the meeting.

SECTION 1.07 Voting; Proxies. Except as otherwise provided by or pursuant to the provisions of the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary of the Corporation a revocation of the proxy or a new proxy bearing a later date. Voting at meetings of stockholders need not be by written ballot. At all meetings of stockholders for the election of directors at which a quorum is present a plurality of the votes cast shall be sufficient to elect. All other elections and questions presented to the stockholders at a meeting at which a quorum is present shall, unless otherwise provided by the Certificate of Incorporation, these Bylaws, the rules or regulations of any stock exchange applicable to the Corporation, or applicable law or pursuant to any regulation applicable to the Corporation or its securities, be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock of the Corporation which are present in person or by proxy and entitled to vote thereon.

SECTION 1.08 Fixing Date for Determination of Stockholders of Record.

(a) In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, unless otherwise required by law, not be more than 60 nor less than 10 days before the date of such meeting. If the Board of Directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance herewith at the adjourned meeting.

(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not be more than 60 days prior to such other action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

SECTION 1.09 List of Stockholders Entitled to Vote. The officer who has charge of the stock ledger shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting (provided, however, if the record date for determining the stockholders entitled to vote is less than ten days before the date of the meeting, the list shall reflect the stockholders entitled to vote as of the tenth day

before the meeting date), arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting at least ten days prior to the meeting (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of meeting or (b) during ordinary business hours at the principal place of business of the Corporation. If the meeting is to be held at a place, then a list of stockholders entitled to vote at the meeting shall be produced and kept at the time and place of the meeting during the whole time thereof and may be examined by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 1.09 or to vote in person or by proxy at any meeting of stockholders.

SECTION 1.10 Action by Written Consent of Stockholders. To the fullest extent and in the manner permitted by law, any action required or permitted to be taken at a meeting of the stockholders or of a class or series of stockholders may be taken without a meeting of the stockholders or of such class or series of stockholders upon the consent in writing signed by such stockholders who would have been entitled to vote the minimum number of votes that would be necessary to authorize the action at a meeting at which all the stockholders entitled to vote thereon were present and voting. The consents shall be filed with the Secretary.

SECTION 1.11 Inspectors of Election. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (a) ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each such share, (b) determine the shares of capital stock of the Corporation represented at the meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (e) certify their determination of the number of shares of capital stock of the Corporation represented at the meeting and such inspectors’ count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election.

SECTION 1.12 Conduct of Meetings. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the person presiding over any meeting of stockholders shall have the right and authority to convene and (for any or no reason) to adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such presiding person, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the presiding person of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to stockholders entitled to vote at the meeting, their duly authorized and constituted proxies or such other persons as the presiding person of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions or comments by participants. The presiding person at any meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a

matter or business was not properly brought before the meeting and if such presiding person should so determine, such presiding person shall so declare to the meeting and any such matter or business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board of Directors or the person presiding over the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

SECTION 1.13 Notice of Stockholder Business and Nominations.

(a) Annual Meetings of Stockholders.

Nominations of persons for election to the Board of Directors of the Corporation and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders only:

(i) pursuant to the Corporation’s notice of meeting (or any supplement thereto);

(ii) by or at the direction of the Board of Directors or any committee thereof; or

(iii) by any stockholder of the Corporation who was a stockholder of record of the Corporation at the time the notice provided for in Section 1.13(c)(i) is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.13(c)(i).

(b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (i) by or at the direction of the Board of Directors or any committee thereof or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time the notice required by Section 1.13(c)(i) is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice requirements set forth in Section 1.13(c)(i).

(c) Stockholder’s Notice. For any nominations or other business to be properly brought before an annual meeting or special meeting by a stockholder pursuant Section 1.13(a)(iii) or Section 1.13(b)(ii), the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and any such proposed business (other than the nominations of persons for election to the Board of Directors) must constitute a proper matter for stockholder action.

(i) Timing of Stockholder’s Notice.

(A) For a stockholder’s notice with respect to an annual meeting to be timely, it must be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 90th day, nor earlier than the close of business on the 120^th day, prior to the first anniversary of the preceding year’s annual meeting (provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 70 days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the 120^th day prior to such annual meeting and not later than the close of business on the later of the 90^th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation). Notwithstanding anything in the previous sentence to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased effective at the annual meeting and there is no public announcement by the Corporation naming the nominees for the additional directorships at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 1.13 shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10^th day following the day on which such public announcement is first made by the Corporation.

(B) For a stockholder’s notice with respect to a special meeting of stockholders called by the Corporation for the purpose of electing one or more directors to the Board of Directors to be timely, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by Section 1.13(b)(ii) shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120^th day prior to such special meeting and not later than the close of business on the later of the 90^th day prior to such special meeting or the 10^th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting.

(C) In no event shall the public announcement of an adjournment or postponement of an annual meeting or special meeting commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

(ii) Content of Stockholder’s Notice. The stockholder’s notice shall set forth:

(A) as to each person whom the stockholder proposes to nominate for election as a director (y) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to and in accordance with Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules and regulations promulgated thereunder, and (z) such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected;

(B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and

(C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, (2) the class or series and number of shares of capital stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (3) a description of any agreement, arrangement or understanding with respect to the nomination or proposal between or among such stockholder and/or such beneficial owner, any of their respective affiliates or associates, and any others acting in concert with any of the foregoing, including, in the case of a nomination, the nominee, (4) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the stockholder’s notice by, or on behalf of, such stockholder and such beneficial owners, whether or not such instrument or right shall be subject to settlement in underlying shares of capital stock of the Corporation, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder or such beneficial owner, with respect to shares of stock of the Corporation, (5) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, (6) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (y) otherwise to solicit proxies or votes from stockholders in support of such proposal or nomination, and (7) any other information relating to such stockholder and beneficial owner, if any, required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in an election contest pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder.

(iii) Other Information. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation, including, but not limited to, requiring proposed nominees to respond to a questionnaire providing information about the candidate’s background and qualifications, to represent that he or she has no agreements with

any third party as to voting or compensation in connection with his or her service as a director, and to agree to abide by applicable confidentiality, governance, conflicts, stock ownership and trading policies of the Corporation. The foregoing notice requirements of this Section 1.13(c) shall be deemed satisfied by a stockholder with respect to business other than a nomination if the stockholder has notified the Corporation of his, her or its intention to present a proposal at an annual meeting in compliance with applicable rules and regulations promulgated under the Exchange Act and such stockholder’s proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting.

(d) General.

(i) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.13 shall be eligible to be elected at an annual or special meeting of stockholders of the Corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.13. Except as otherwise provided by law, the person presiding over the meeting shall have the power and duty:

(A) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.13 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies or votes in support of such stockholder’s nominee or proposal in compliance with such stockholder’s representation as required by clause (6) of Section 1.13(c)(ii)(C) hereof); and

(B) if any proposed nomination or business was not made or proposed in compliance with this Section 1.13, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. Notwithstanding the foregoing provisions of this Section 1.13, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 1.13, to be considered a qualified representative of the stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of stockholders.

(ii) For purposes of this Section 1.13, “public announcement” shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press or other national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and regulations promulgated thereunder.

(iii) Notwithstanding the foregoing provisions of this Section 1.13, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in this Section 1.13; provided however, that any references in these Bylaws to the Exchange Act or the rules and regulations promulgated thereunder are not intended to and shall not limit any requirements applicable to nominations or proposals as to any other business to be considered pursuant to this Section 1.13 (including Section 1.13(a)(iii) and Section 1.13(b) hereof), and compliance with Section 1.13(a)(iii) and Section 1.13(b) shall be the exclusive means for a stockholder to make nominations or submit other business (other than, as provided in the last sentence of Section 1.13(c)(iii), matters brought properly under and in compliance with Rule 14a-8 of the Exchange Act, as may be amended from time to time). Nothing in this Section 1.13 shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to applicable rules and regulations promulgated under the Exchange Act or (B) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation.

Article II.

Board of Directors

SECTION 2.01 Number; Qualifications. Subject to the Certificate of Incorporation, the Board of Directors shall initially consist of seven members and the size of the Board of Directors may be decreased or increased, from time to time, by resolution of the Board of Directors. Directors need not be stockholders.

SECTION 2.02 Election; Resignation; Vacancies. Each director shall be elected in the manner specified in the Certificate of Incorporation and these Bylaws and shall hold office until such time as is set forth therein and herein. Any director may resign at any time upon notice to the Corporation. Unless otherwise provided by law or the Certificate of Incorporation, any newly created directorship or any vacancy occurring in the Board of Directors for any reason may be filled only by a majority of the remaining members of the Board of Directors, although such majority is less than a quorum, and each director so elected shall hold office until the expiration of the term of office of the director whom he or she has replaced or until his or her successor is elected and qualified.

SECTION 2.03 Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine.

SECTION 2.04 Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, Chief Executive Officer, or by the Secretary upon written request of any three members of the Board of Directors or, if there are fewer than three directors in office at that time, by all incumbent directors. Notice of a special meeting of the Board of Directors shall be given by the person or persons calling the meeting orally or in writing, by telephone, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least 24 hours before the date and time of the meeting.

SECTION 2.05 Telephonic Meetings Permitted. Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting thereof by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 2.05 shall constitute presence in person at such meeting.

SECTION 2.06 Quorum; Vote Required for Action. At all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum or, if there are fewer directors then in office than the number of directors required to constitute such a quorum, a majority of the members of the Board of Directors then in office shall constitute a quorum. Except in cases in which the Certificate of Incorporation, these Bylaws or applicable law otherwise provides, a majority of the votes entitled to be cast by the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

SECTION 2.07 Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board of Directors or, in his or her absence, by a chairman chosen at the meeting. The Secretary or other person chosen by the Secretary shall act as secretary of the meeting, but in his or her absence, the chairman of the meeting may appoint any person to act as secretary of the meeting.

SECTION 2.08 Action by Unanimous Consent of Directors. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmissions are filed with the minutes of proceedings of the Board of Directors or committee in accordance with applicable law.

SECTION 2.09 Fees and Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor.

Article III.

Committees

SECTION 3.01 Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it.

SECTION 3.02 Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws.

Article IV.

Officers

SECTION 4.01 Officers. The officers of the Corporation may consist of a Chairman of the Board of Directors, a Chief Executive Officer, a Chief Financial Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, a Controller and such other officers as the Board of Directors may from time to time determine, each of whom shall be elected by the Board of Directors, each to have such authority, functions or duties as set forth in these Bylaws or as determined by the Board of Directors. Each officer shall be chosen by the Board of Directors and shall hold office for such term as may be prescribed by the Board of Directors and until such person’s successor shall have been duly chosen and qualified, or until such person’s earlier death, disqualification, resignation or removal.

SECTION 4.02 Removal, Resignation and Vacancies. Any officer of the Corporation may be removed, with or without cause, by the Board of Directors, without prejudice to the rights, if any, of such officer under any contract to which he or she is a party. Any officer may resign at any time upon written notice to the Corporation, without prejudice to the rights, if any, of the Corporation under any contract to which such officer is a party. If any vacancy occurs in any office of the Corporation, the Board of Directors may elect a successor to fill such vacancy until the earlier of such officer’s resignation, removal, death or until a successor shall have been duly chosen and qualified.

SECTION 4.03 Chairman of the Board of Directors. The Board of Directors may, by resolution adopted by a majority of the Board of Directors, at any time designate one of its members as Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at the meetings of the Board, shall be responsible for the orderly conduct by the Board of Directors of its oversight of the business and affairs of the Corporation and its other duties as provided by law, the Certificate of Incorporation and these Bylaws and shall have such other authority and responsibility as the Board of Directors may designate. A Chairman of the Board shall be considered an officer of the Corporation unless designated as a non-executive Chairman of the Board by a resolution of the Board of Directors.

SECTION 4.04 Chief Executive Officer. The Chief Executive Officer shall have general supervision and direction of the business and affairs of the Corporation, shall be responsible for corporate policy and strategy, and shall report directly to the Board of Directors or, if directed by the Board of Directors, to the Chairman of the Board of Directors. Unless otherwise provided in these Bylaws, all other officers of the Corporation shall report directly to the Chief Executive Officer or as otherwise determined by the Chief Executive Officer. The Chief Executive Officer shall, if present and in the absence of the Chairman of the Board of Directors, preside at meetings of the stockholders and of the Board of Directors.

SECTION 4.05 Chief Financial Officer. The Chief Financial Officer shall exercise all the powers and perform the duties of the office of the chief financial officer and in general have overall supervision of the financial operations of the Corporation. The Chief Financial Officer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as the Chief Executive Officer or the Board of Directors may from time to time determine.

SECTION 4.06 President. The President shall be the chief operating officer of the Corporation, with general responsibility for the management and control of the operations of the Corporation. The President shall have the power to affix the signature of the Corporation to all contracts that have been authorized by the Board of Directors or the Chief Executive Officer. The President shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as the Chief Executive Officer or the Board of Directors may from time to time determine.

SECTION 4.07 Vice Presidents. Each Vice President shall have all such powers and duties as from time to time may be assigned to him or her by the Board of Directors, the Chief Executive Officer or the President.

SECTION 4.08 Treasurer. The Treasurer shall supervise and be responsible for all the funds and securities of the Corporation, the deposit of all moneys and other valuables to the credit of the Corporation in depositories of the Corporation, borrowings and compliance with the provisions of all indentures, agreements and instruments governing such borrowings to which the Corporation is a party, the disbursement of funds of the Corporation and the investment of its funds, and in general shall perform all of the duties incident to the office of the Treasurer. The Treasurer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as the Chief Executive Officer, the Chief Financial Officer or the Board of Directors may from time to time determine.

SECTION 4.09 Controller. The Controller shall be the chief accounting officer of the Corporation. The Controller shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as the Chief Executive Officer, the Chief Financial Officer or the Board of Directors may from time to time determine.

SECTION 4.10 Secretary. The powers and duties of the Secretary are: (a) to act as Secretary at all meetings of the Board of Directors, of the committees of the Board of Directors and of the stockholders and to record the proceedings of such meetings in a book or books to be kept for that purpose; (b) to see that all notices required to be given by the Corporation are duly given and served; (c) to act as custodian of the seal of the Corporation and affix the seal or cause it to be affixed to all certificates of stock of the Corporation and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these Bylaws; (d) to have charge of the books, records and papers of the Corporation and see that the reports, statements and other documents required by law to be kept and filed are properly kept and filed; and (e) to perform all of the duties incident to the office of Secretary. The Secretary shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as the Chief Executive Officer or the Board of Directors may from time to time determine.

SECTION 4.11 Additional Matters. The Board of Directors, the Chief Executive Officer and the President of the Corporation shall have the authority to designate employees of the Corporation to have the title of Vice President, Assistant Vice President, Assistant Treasurer or Assistant Secretary. Any employee so designated shall have the powers and duties determined by the officer making such designation. The persons upon whom such titles are conferred shall not be deemed officers of the Corporation unless elected by the Board of Directors.

SECTION 4.12 Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.

SECTION 4.13 Resignations. Any officer may resign at any time by giving notice in writing or by electronic transmission notice to the Board of Directors, Chairman of the Board, President or Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the Corporation under any contract with the resigning officer.

Article V.

Stock

SECTION 5.01 Certificates. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Every holder of stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board of Directors or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation certifying the number of shares owned by such holder in the Corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent, or registrar at the date of issue.

SECTION 5.02 Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

SECTION 5.03 Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of capital stock, subject to the provisions of the Certificate of Incorporation and applicable law. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.

Article VI.

Indemnification and Advancement of Expenses

SECTION 6.01 Indemnification and Advancement of Expenses. Each person who is or was a director of the Corporation shall be indemnified and advanced expenses by the Corporation to the fullest extent permitted from time to time by the General Corporation Law of the State of Delaware as it exists on the date hereof or as it may hereafter be amended (but, if permitted by applicable law, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws as presently or hereafter in effect. The Corporation may, by action of the Board of Directors, provide indemnification and advance expenses to officers, employees and agents (other than directors) of the Corporation, to directors, officers, employees or agents of a subsidiary, 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 the request of the Corporation (each of the foregoing, a “Covered Person”), with the same scope and effect as the foregoing indemnification of directors of the Corporation. The Corporation shall be required to indemnify any person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors or is a proceeding to enforce such person’s claim to indemnification pursuant to the rights granted by these Bylaws or otherwise by the Corporation. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification or advancement of expenses greater or different than that provided in this Article VI.

SECTION 6.02 Amendment or Repeal. Any right to indemnification or to advancement of expenses of any Covered Person arising hereunder shall not be eliminated or impaired by an amendment to or repeal of these Bylaws after the occurrence of the act or omission that is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought.

SECTION 6.03 Indemnification and Advancement of Expenses. This Article VI shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Covered Persons when and as authorized by appropriate corporate action.

Article VII.

Miscellaneous

SECTION 7.01 Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors.

SECTION 7.02 Seal. The corporate seal shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors.

SECTION 7.03 Manner of Notice. Except as otherwise provided herein or permitted by applicable law, notices to directors and stockholders shall be in writing and delivered personally or mailed to the directors or stockholders at their addresses appearing on the books of the Corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, and except as prohibited by applicable law, any notice to stockholders given by the Corporation under any provision of applicable law, the Certificate of Incorporation or these Bylaws shall be effective if given by a single written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any stockholder who fails to object in writing to the Corporation, within 60 days of having been given written notice by the Corporation of its intention to send the single notice permitted under this Section 7.03, shall be deemed to have consented to receiving such single written notice. Notice to directors need not be in writing and may be given by telecopier, telephone, electronic mail or other means of electronic transmission.

SECTION 7.04 Waiver of Notice of Meetings of Stockholders, Directors and Committees. Any waiver of notice, given by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in a waiver of notice.

SECTION 7.05 Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or by means of, or be in the form of, any information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time.

SECTION 7.06 Amendment of Bylaws. These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the Board of Directors or by the affirmative vote of the holders of at least a majority of the Corporation’s outstanding voting stock, subject to and only in accordance with the provisions of the Certificate of Incorporation.

Consent by KPMG LLP

Exhibit 23.1

Consent of Independent Auditor

The Board of Directors

EXCO Resources, Inc.:

We consent to the incorporation by reference in the registration statement on Form S-3 (No. 333-180070) of Harbinger Group, Inc. of our report dated December 6, 2012 with respect to statements of revenues and direct operating expenses of the Certain Conventional Oil and Natural Gas Properties of EXCO Resources, Inc. for the years ended December 31, 2011, 2010 and 2009, which report appears in the Current Report on Form 8-K of Harbinger Group Inc. to be filed on December 11, 2012.

/s/ KPMG LLP

Dallas, Texas

December 10, 2012

Consent by Lee Keelin and Associates, Inc.

Exhibit 23.2

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

As independent petroleum engineers, Lee Keeling and Associates, Inc. hereby consents to the use of the name Lee Keeling and Associates, Inc., to references to Lee Keeling and Associates, Inc. and to the incorporation by reference of information contained in its report dated December 10, 2012 titled “Estimated Proved Reserves and Future Net Cash Flow Constant Pricing Interests Owned by EXCO Resources, Inc.” in the Registration Statement on Form S-3 (No. 333-180070) of Harbinger Group Inc. (the “Registration Statement”). Lee Keeling and Associates, Inc. further consents to the use of Lee Keeling and Associates, Inc. in the “Experts” section of the Registration Statement.

/s/ Lee Keeling and Associates, Inc.

Tulsa, Oklahoma

December 10, 2012

Business Description of EXCO/HGI Partnership

Exhibit 99.1

Business Description of EXCO/HGI Partnership

On November 5, 2012, HGI Energy, our wholly owned subsidiary, signed definitive agreements with EXCO Resources, Inc., a publicly-traded independent oil and natural gas production company and EXCO Operating Company, LP, to create the EXCO/HGI Partnership. The EXCO/HGI Partnership will purchase and operate EXCO’s conventional oil and gas assets in West Texas, East Texas and North Louisiana.

Under the terms of the EXCO/HGI Purchase Agreement, and subject to the terms, conditions and purchase price adjustments set forth therein, the EXCO/HGI Partnership will acquire oil and gas assets from EXCO Parent for approximately $725 million of total consideration, subject to customary closing adjustments to reflect an effective date of July 1, 2012. The purchase by the EXCO/HGI Partnership will be funded with approximately $225 million of bank debt, $372.5 million in cash contributed from HGI and $127.5 million in oil and gas properties and related assets being contributed by EXCO Parent. In exchange for its cash investment, HGI will receive a 75% limited partnership interest in the EXCO/HGI Partnership and a 50% member interest in the General Partner of the EXCO/HGI Partnership. The General Partner will own a 2% interest in the EXCO/HGI Partnership, thus giving HGI directly and indirectly a net 74.5% total equity interest in the EXCO/HGI Partnership. In exchange for its asset contribution, EXCO Parent will receive approximately $597.5 million in cash proceeds as well as a 25% limited partner interest and a 50% member interest in the General Partner, for a net 25.5% total equity interest in the EXCO/HGI Partnership.

We expect that the EXCO/HGI Partnership will make quarterly distributions of available free cash flow after capital expenditures and debt service. Distributable cash, after an anticipated 30-50% dedication to debt service, will be distributed 2% to the General Partner and 98% to the limited partners until a specified distribution threshold is met, at which time the distributions above the threshold will be allocated 25% to the general partner and 75% to the limited partners. The EXCO/HGI Partnership has been structured with these incentive distribution rights to the General Partner to give EXCO Parent upside incentives to maintain efficient operations and to grow cash flows for the benefit of all partners of the EXCO/HGI Partnership.

The EXCO/HGI Partnership will produce and develop the contributed assets. Additionally, EXCO Parent and HGI intend to add incremental cash flow to the EXCO/HGI Partnership through the opportunistic acquisition of other mature, conventional oil and gas assets over time. EXCO will continue to operate the properties on a contract-basis and provide other related services pursuant to operating and administrative services agreements with the EXCO/HGI Partnership. The EXCO/HGI Partnership will be governed by its General Partner, which will have a Board of Directors consisting initially of two EXCO Parent directors and two HGI directors.

Description of the EXCO/HGI Partnership Properties

The Contributed Properties include EXCO Parent’s existing Cotton Valley assets in its Holly, Waskom, Danville and Vernon fields in East Texas and North Louisiana. These properties are located in Gregg, Harrison and Panola counties in Texas and Caddo, De Soto and Jackson parishes in Louisiana, and include all depths from the base of the Cotton Valley and above. The Contributed Properties will include the equity interests of Vernon Gathering LLC, which is an EXCO Parent subsidiary that owns a gas gathering system associated with the Vernon field.

The Contributed Properties will also include all of EXCO Parent’s rights (excluding all depths below the base of the Canyon Sand intervals) in its Canyon Sand field and certain other conventional assets in the Permian Basin of West Texas. These properties are located in Irion, Tom Green, Sterling and Dawson counties.

We expect that the Contributed Properties will have estimated proved reserves as discussed below, of which approximately 80% are proved developed producing with long-lived and predictable production profiles. Approximately 81% of these reserves are natural gas; approximately 9% of these reserves are oil; and approximately 10% of these reserves are natural gas liquids. The assets include more than 1,400 producing wells and approximately 124,000 net mineral leasehold acres, of which approximately 90% are held by production.

The table below shows selected characteristics of the Partnership Properties (as of the July 1, 2012 effective date).


	East Texas/ West Texas		North Louisiana		Total
Gross Acres		29,715		168,442		198,157
Net Acres		27,158		96,548		123,706
Gross Producing Wells		423		997		1,420
Daily Production:
Oil (Bbls/D)		1,464		250		1,714
Ngl (Bbls/D)		1,435		—		1,435
Natural Gas (Mcf/D)		7,038		74,182		81,220
Total Daily Production (Mcfe/D)		24,432		75,682		100,114
Proved Reserves (Mmcfe) (1)						456,464

(1)

As discussed further below, the estimated proved reserves attributable to the properties being contributed to the EXCO/HGI Partnership, using the unweighted average prices for the twelve months ended June 30, 2012 of $3.15 per Mmbtu of natural gas and $95.67 per Bbl of crude oil as required by Regulation S-X under the Securities Act, were 466,204 Mmcfe.

The above data is subject to change at or prior to closing, based on changes for title and environmental diligence, third party consents and preferential rights, and other closing conditions.

The EXCO/HGI Partnership’s interest in the leases comprising the Contributed Properties will generally be limited to certain shallow depths, and EXCO will retain the deep rights. To the extent that EXCO Parent has existing facilities that serve both the shallow rights contributed to the EXCO/HGI Partnership and the deep rights retained by EXCO Parent, the EXCO/HGI Partnership will have concurrent rights with EXCO Parent in such facilities, which will be subject to a Shared Use Agreement to be entered into between the EXCO/HGI Partnership and EXCO Parent at closing.

EXCO/HGI Partnership Oil and Natural Gas Reserves

The following table summarizes proved reserves of the Contributed Partnership as of July 1, 2012 (the “EXCO/HGI Partnership Properties”). This information was prepared in accordance with the rules and regulations of the SEC.


Oil (Mbbls)
Developed			4,691.261
Undeveloped			1,891.204
Total			6,582.465
Natural Gas (Mmcf)
Developed			357,530.098
Undeveloped			13,033.048
Total			370,563.146


Natural Gas Equivalent Reserves (Mmcfe)
Developed			414,719.512
Undeveloped			41,714.332
Total			456,463.844

These estimates were calculated in accordance with Regulation S-X of the Securities Act using unweighted average prices for the twelve months ended June 30, 2012 of $3.15 per Mmbtu of natural gas, $95.67 per Bbl of crude oil and $59.32 per Bbl of NGL. These estimated proved reserves were based on a report of Lee Keeling and Associates, Inc., an independent petroleum engineering firm located in Tulsa, Oklahoma (the “Reserve Engineer”). EXCO’s internal technical employees responsible for reserve estimates and interaction with this independent engineer include corporate officers with petroleum and other engineering degrees, professional certifications and industry experience similar to those of the Reserve Engineer.

Estimates of oil and natural gas reserves are projections based on a process involving an independent third party engineering firm’s extensive visits, collection of any and all required geological, geophysical, engineering and economic data, and such firm’s complete external preparation of all required estimates and are forward-looking in nature. These reports rely on various assumptions, including definitions and economic assumptions required by the SEC, which include the use of constant oil and natural gas pricing, use of current and constant operating costs and current capital costs. We have also made assumptions relating to availability of funds and timing of capital expenditures for development of the EXCO/HGI Partnership Properties’ proved undeveloped reserves based on EXCO’s current planned drilling program for the EXCO/HGI Partnership Properties as discussed and reviewed with Harbinger. The actual drilling program for the EXCO/HGI Partnership remains subject to final review and agreement between EXCO and Harbinger. These reports should not be construed as the current market value of our proved reserves. The process of estimating oil and natural gas reserves is also dependent on geological, engineering and economic data for each reservoir. Because of the uncertainties inherent in the interpretation of this data, we cannot ensure that the reserves will ultimately be realized. The actual results of the EXCO/HGI Partnership Properties could differ materially.

The Reserve Engineer also examined our estimates with respect to reserve categorization, using the definitions for proved reserves set forth in SEC Regulation S-X Rule 4-10(a) and SEC staff interpretations and guidance. In preparing an estimate of our proved reserves attributable to the Partnership Properties, the Reserve Engineer did not independently verify the accuracy and completeness of information and data furnished by EXCO or us with respect to ownership interests, oil and natural gas production, well test data, historical costs of operation and development, product prices, or any agreements relating to current and future operations of the properties and sales of production. However, if in the course of the examination something came to the attention of the Reserve Engineer which brought into question the validity or sufficiency of any such information or data, the Reserve Engineer did not rely on such information or data until they had satisfactorily resolved their questions relating thereto or had independently verified such information or data. The Reserve Engineer determined that their estimates of proved reserves conform to the guidelines of the SEC, including the criteria of “reasonable certainty,” as it pertains to expectations about the recoverability of proved reserves in future years, under existing economic and operating conditions, consistent with the definition in Rule 4-10(a)(24) of SEC Regulation S-X.

Risks Related to EXCO/HGI Partnership

The consummation of the acquisition of the EXCO/HGI Partnership is subject to certain conditions, some of which are out of our control; failure to close the acquisition of the EXCO/HGI Partnership could, under certain circumstances, result in payment of a termination fee to EXCO Parent.

The closing of the acquisition of the EXCO/HGI Partnership is subject to certain conditions some of which are out of our control including, among others, obtaining required regulatory approvals, obtaining certain third party consents and other customary closing conditions. In addition, under the EXCO/HGI Purchase Agreement, each of EXCO and HGI Energy may terminate the EXCO/HGI Purchase Agreement in the event that the adjustments to the aggregate value of the Contributed Properties resulting from title defects, environmental defects or the failure to obtain required third party consents, waivers of applicable preferential purchase rights or waivers of maintenance of uniform interest provisions exceed $70 million. There is no guarantee that these conditions will be satisfied, or that the acquisition of the EXCO/HGI Partnership will not be delayed or will occur on terms materially different than those expected, including, as a result of title and environmental diligence of properties to be acquired, commodity price risks, drilling and production risks, risks related to transaction financing plans and reserve estimates and values and potential reserves and production levels.

EXCO Parent has certain termination rights under the EXCO/HGI Purchase Agreement that, if exercised by EXCO Parent (subject to the satisfaction of certain specified requirements in the EXCO/HGI Purchase Agreement), may result in the payment by HGI Energy to EXCO Parent of a termination fee of $60 million. Upon the satisfaction of certain conditions, HGI has guaranteed the obligation of HGI Energy to pay such termination fee to EXCO Parent.

Fluctuations in oil and natural gas prices, which have been volatile at times, may adversely affect the revenues of the EXCO/HGI Partnership as well as its ability to secure an adequate borrowing capacity, repay indebtedness and obtain additional capital on attractive terms.

The future financial condition, access to capital, cash flow and results of operations of the EXCO/HGI Partnership will depend upon the prices it receives for its oil and natural gas. The EXCO/HGI Partnership will be particularly dependent on prices for natural gas because a large portion of the proved reserves attributable to the properties being contributed to the EXCO/HGI Partnership are natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond the control of the EXCO/HGI Partnership. Factors that affect the prices the EXCO/HGI Partnership will receive for its oil and natural gas include:

•

supply and demand for oil and natural gas and expectations regarding supply and demand;

•

the level of domestic production;

•

the availability of imported oil and natural gas;

•

political and economic conditions and events in foreign oil and natural gas producing nations, including embargoes, continued hostilities in the Middle East and other sustained military campaigns, and acts of terrorism or sabotage;

•

the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

•

the cost and availability of transportation and pipeline systems with adequate capacity;

•

the cost and availability of other competitive fuels;

•

fluctuating and seasonal demand for oil, natural gas and refined products;

•

concerns about climate change or other conservation initiatives and the extent of governmental price controls and regulation of production;

•

regional price differentials and quality differentials of oil and natural gas;

•

the availability of refining capacity;

•

technological advances affecting oil and natural gas production and consumption;

•

weather conditions and natural disasters;

•

foreign and domestic government relations; and

•

overall economic conditions.

In the past, including during the last five years, prices of oil and natural gas have been extremely volatile, and we expect this volatility to continue. The revenues, cash flow and profitability of the EXCO/HGI Partnership and its ability to secure an adequate borrowing capacity, repay indebtedness and obtain additional capital on attractive terms will depend substantially upon oil and natural gas prices.

Changes in the differential between NYMEX or other benchmark prices of oil and natural gas and the reference or regional index price used to price the EXCO/HGI Partnership’s actual oil and natural gas sales could have a material adverse effect on the results of operations and financial condition of the EXCO/HGI Partnership.

The reference or regional index prices that EXCO has historically used, and that the EXCO/HGI Partnership is expected to use, to price the EXCO/HGI Partnership’s oil and natural gas sales sometimes reflect a discount to the relevant benchmark prices, such as NYMEX. The difference between the benchmark price and the price references in a sales contract is called a differential. We cannot accurately predict oil and natural gas differentials. Changes in differentials between the benchmark price for oil and natural gas and the reference or regional index price references in the EXCO/HGI Partnership’s sales contracts could have a material adverse effect on the EXCO/HGI Partnership’s results of operations, cash flows and financial condition.

There are risks associated with the EXCO/HGI Partnership’s drilling activity that could impact the results of our operations.

Drilling involves numerous risks, including the risk that the EXCO/HGI Partnership will not encounter commercially productive oil or natural gas reservoirs. The EXCO/HGI Partnership is expected to incur significant expenditures to identify and acquire properties and to drill and complete wells. Additionally, seismic and other technology will not allow the EXCO/HGI Partnership to know conclusively prior to drilling a well that oil or natural gas is present or economically producible. The costs of drilling and completing wells are often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, weather conditions and shortages or delays in the delivery of equipment. EXCO has historically experienced, and the EXCO/HGI Partnership may in the future experience, some delays in contracting for drilling rigs, and obtaining fracture stimulation crews and materials, which result in increasing costs to drill wells. All of these risks could adversely affect the EXCO/HGI Partnership’s results of operations, cash flows and financial condition.

Increased drilling in the shale formations may cause pipeline and gathering system capacity constraints that may limit the EXCO/HGI Partnership’s ability to sell natural gas and/or receive market prices for its natural gas.

The Haynesville/Bossier shale wells being retained by EXCO Parent have generally reported very high initial production rates. If drilling in the Haynesville/Bossier shale continues to be successful, the amount of natural gas being produced in the area from these new wells, as well as natural gas produced from other existing wells, may exceed the capacity of the various gathering and intrastate or interstate transportation pipelines currently available. If this occurs, it will be necessary for new interstate and intrastate pipelines and gathering systems to be built.

Because of the current economic climate, certain planned pipeline projects for the Haynesville/Bossier shale areas may not occur because the prospective owners of these pipelines may be unable to secure the necessary financing. In addition, capital constraints could limit the EXCO/HGI Partnership’s ability to build intrastate gathering systems necessary to transport its natural gas to interstate pipelines. In such event, this could result in wells being shut in awaiting a pipeline connection or capacity and/or natural gas being sold at much lower prices than those quoted on NYMEX or than we currently project, which would adversely affect the EXCO/HGI Partnership’s results of operations.

The General Partner will not have any of its own employees, but instead will have employees supplied by EXCO Parent, either dedicated to the needs of the EXCO/HGI Partnership or shared with EXCO Parent to supply competent, knowledgeable and competitive employees, including members of management, for the success of the EXCO/HGI Partnership.

Pursuant to the terms of the joint venture transaction, EXCO will supply to the General Partner of the EXCO/HGI Partnership certain employees that will be dedicated to the needs of the EXCO/HGI Partnership, and will also share certain employees with the EXCO/HGI Partnership to fill other needs. The General Partner, therefore, will not employ any of its own personnel. While HGI Energy will participate in the decision-making of the EXCO/HGI Partnership as members of the board of directors of the General Partner and have certain rights regarding dedicated and shared employees who perform services for the EXCO/HGI Partnership, it will rely to an extent on the decisions of EXCO Parent’s employees, including those of management, for the day-to-day operations of the EXCO/HGI Partnership. EXCO Parent’s failure to provide competent and competitive employees, including members of management, could adversely affect the business, cash flows, financial performance and results of operations of the EXCO/HGI Partnership.

In addition, the EXCO/HGI Partnership will engage EXCO Parent as operator of substantially all of the properties it owns. In the event that EXCO Parent terminates its operating agreements with the EXCO/HGI Partnership, or otherwise resigns as operator, either HGI Energy or the EXCO/HGI Partnership may incur additional expense engaging and transitioning employees for the EXCO/HGI Partnership to replace those provided by EXCO, which additional expense could have an adverse affect the business, cash flows or financial performance of the EXCO/HGI Partnership.

Our failure to resolve any material disagreements with EXCO relating to the EXCO/HGI Partnership could have a material adverse effect on the success of the operations, financial condition and results of operations of the EXCO/HGI Partnership.

Each of EXCO Parent and HGI Energy will have an initial 50% interest in the General Partner of the EXCO/HGI Partnership. In addition, EXCO Parent will serve as operator of the oil and gas properties being contributed to the EXCO/HGI Partnership. We will depend on EXCO Parent in many ways for the success of the EXCO/HGI Partnership, such as for performance of its duties as a prudent operator or to make agreed payments of substantial carried costs pertaining to the EXCO/HGI Partnership and its share of capital and other costs of the EXCO/HGI Partnership. EXCO Parent’s performance of these obligations or the ability of EXCO Parent to meet its obligations under these arrangements is outside our control. If EXCO Parent does not meet or satisfy its obligations under the operating and other service agreements with the EXCO/HGI Partnership, the performance and success of the EXCO/HGI Partnership, and its value to us, may be adversely affected. If EXCO Parent, or any future joint venture partner (if any), is unable to meet its obligations, the EXCO/HGI Partnership may be forced to undertake the obligations itself and/or incur additional expenses and delays in order to have some other party perform such obligations. In such cases we may also be required to enforce our rights, which may cause disputes among our joint venture partner and us. If any of these events occur, they may adversely impact us, the EXCO/HGI Partnership, and its or our financial performance and results of operations.

As with any joint venture transaction, the EXCO/HGI Partnership arrangement may involve risks not otherwise present when exploring and developing properties independently, including, for example:

•

EXCO Parent may share certain approval rights over major decisions, which may result in a failure to mutually agree to take action, delays and related additional expenses, and decisions and actions that are taken to obtain mutual consent that are sub-optimal for the EXCO/HGI Partnership or HGI Energy;

•

disputes between us and EXCO Parent may result in litigation or arbitration that would increase expenses, delay or terminate projects and prevent the officers and directors of the General Partner of the EXCO/HGI Partnership from focusing their time and effort on its business;

•

the possibility that EXCO Parent might become insolvent or bankrupt, which may result in its removal from the joint venture or failure to perform and may result in HGI Energy having to pay EXCO Parent’s share of joint venture liabilities in order to operate the EXCO/HGI Partnership;

•

the possibility that the EXCO/HGI Partnership may incur liabilities as a result of an action taken by EXCO Parent, which would reduce the value of our interests in the EXCO/HGI Partnership;

•

that under certain circumstances, neither EXCO Parent nor us has the power to control the EXCO/HGI Partnership, and an impasse could be reached which might have a negative influence on our investment in the joint venture; and

•

EXCO Parent may decide to sell its interest in the EXCO/HGI Partnership or resign as operator of the EXCO/HGI Partnership and we may be unable to, or be unable to timely, replace EXCO Parent or raise the necessary financing to purchase EXCO’s interest.

The failure to resolve disagreements with EXCO Parent could adversely affect the business of the EXCO/HGI Partnership, which would in turn negatively affect the EXCO/HGI Partnership’s results of operations, cash flows and financial condition. See Risk Factors—Risks Related to HGI—“Our participation in any future joint investment could be adversely affected by our lack of sole decision-making authority, our reliance on a partner’s financial condition and disputes between us and our partners.”

In connection with the closing of the EXCO/HGI Partnership, the EXCO/HGI Partnership will incur a substantial amount of indebtedness, which may adversely affect its cash flow and ability to operate its business, remain in compliance with debt covenants and make payments on its debt and distributions to us.

Pursuant to the EXCO/HGI Purchase Agreement, at the closing, the EXCO/HGI Partnership is expected to enter into a credit agreement and incur $225.0 million of indebtedness (as adjusted according to the EXCO/HGI Purchase Agreement). To service its indebtedness, the EXCO/HGI Partnership will be required to generate a significant amount of cash. The EXCO/HGI Partnership’s ability to generate cash depends on many factors beyond its control, and any failure to meet its debt obligations could harm its business, financial condition and results of operations. In particular, the EXCO/HGI Partnership’s reserves, borrowing base, production and cash flows can be negatively impacted by declines in natural gas prices. If the EXCO/HGI Partnership’s operating cash flow and other capital resources are insufficient to fund its debt obligations, it may be forced to sell assets, seek additional equity or debt capital or restructure its debt. These remedies may not be available on commercially reasonable terms, or at all. In addition, such credit agreement may contain covenants imposing operating and financial restrictions on the EXCO/HGI Partnership’s business and require the satisfaction of certain financial tests.

The EXCO/HGI Partnership may be unable to acquire or develop additional reserves, which would reduce its revenues and access to capital.

The long-term success of the EXCO/HGI Partnership will depend upon its ability to find, develop or acquire additional oil and natural gas reserves that are profitable to produce. Pursuant to the transaction agreements, upon consummation of the transaction, the EXCO/HGI Partnership will be granted rights of first refusal to certain oil and gas acquisitions or dispositions planned by either us or EXCO Parent. However, such rights terminate after a change of control of either party, if EXCO no longer serves as operator of the EXCO/HGI Partnership assets, or if either party disposes of its interest in the EXCO/HGI Partnership. Additional factors that may hinder the EXCO/HGI Partnership’s ability to acquire or develop additional oil and natural gas reserves include competition, access to capital, prevailing oil and natural gas prices and the number and attractiveness of properties for sale. If the EXCO/HGI Partnership is unable to conduct successful development activities or acquire properties containing proved reserves, its total proved reserves will generally decline as a result of production. Also, its production will generally decline. In addition, if the EXCO/HGI Partnership’s reserves and production decline, then the amount it will be able to borrow under its credit agreement will also decline. The EXCO/HGI Partnership may be unable to locate additional reserves, drill economically productive wells or acquire properties containing proved reserves.

Development and exploration drilling and strategic acquisitions are the main methods of replacing reserves. However, development and exploration drilling operations may not result in any increases in reserves for various reasons. The EXCO/HGI Partnership’s future oil and natural gas production depends on its success in finding or acquiring additional reserves. If it fails to replace reserves through drilling or acquisitions, its level of production and cash flows will be adversely affected.

The EXCO/HGI Partnership may not identify all risks associated with the acquisition of oil and natural gas properties, and any indemnifications it receives from sellers may be insufficient to protect it from such risks, which may result in unexpected liabilities and costs to it.

It is expected that the EXCO/HGI Partnership will acquire additional oil and natural gas properties in the pursuit of its business strategy. Any future acquisitions will require an assessment of recoverable reserves, title, future oil and natural gas prices, operating costs, potential environmental risks and liabilities, potential tax and Employee Retirement Income Security Act, or ERISA, liabilities, and other liabilities and other similar factors. As is common in the industry and depending on the size of the acquisition, it may not be feasible for the EXCO/HGI Partnership to review in detail every individual property involved in an acquisition. For example, for larger acquisitions, the review efforts of the EXCO/HGI Partnership may be focused on the higher-valued properties. Even a detailed review of properties and records may not reveal material existing or potential issues or provide the EXCO/HGI Partnership with sufficient information to assess fully their deficiencies and capabilities. Such issues, including deficiencies in the mechanical integrity of equipment or environmental conditions, may require significant remedial expenditures and could result in material liabilities and costs that negatively impact the EXCO/HGI Partnership’s results of operations, cash flow and financial condition.

Even if we or the EXCO/HGI Partnership are able to identify such issues with an acquisition, the seller may be unwilling or unable to provide effective contractual protection or indemnity against all or part of these problems. Even if a seller agrees to provide indemnity, the indemnity may not be fully enforceable and may be limited by floors and caps on such indemnity.

The EXCO/HGI Partnership may not correctly evaluate reserve data or the exploitation potential of properties as it engages in its acquisition, exploration, development and exploitation activities.

The future success of the EXCO/HGI Partnership will depend on the success of its acquisition, exploration, development and exploitation activities. The EXCO/HGI Partnership’s decisions to purchase, explore, develop or otherwise exploit properties or prospects will depend in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses and seismic and other information, the results of which are often inconclusive and subject to various interpretations, which could significantly reduce the EXCO/HGI Partnership’s ability to generate cash needed to service its debt, to fund its capital program and other working capital requirements and to pay distributions to us.

The EXCO/HGI Partnership may encounter obstacles to marketing its oil and natural gas, which could adversely impact its revenues.

The EXCO/HGI Partnership is expected to enter into an agreement pursuant to which EXCO will market and sell the EXCO/HGI Partnership’s oil and natural gas. The effective marketing and sale of the EXCO/HGI Partnership’s oil and natural gas production will depend upon the availability and capacity of natural gas gathering systems, pipelines and other transportation facilities. The EXCO/HGI Partnership will be primarily dependent upon third parties, including an affiliate of EXCO Parent, to transport its products. Transportation space on the gathering systems and pipelines to be used for the EXCO/HGI Partnership’s oil and natural gas is occasionally limited or unavailable due to repairs, outages caused by accidents or other events, or improvements to facilities or due to space being utilized by other companies that have priority transportation agreements. Historically, EXCO Parent has experienced production curtailments in East Texas/North Louisiana resulting from capacity restraints, offsetting fracturing stimulation operations and short term shutdowns of certain pipelines that the EXCO/HGI Partnership will acquire for maintenance purposes. As a result, EXCO Parent has begun to shut in production on adjacent wells when conducting completion operations. Due to the high production capabilities of these wells, these volumes can be significant. In addition, the EXCO/HGI Partnership’s access to transportation options can also be affected by U.S. federal and state regulation of oil and natural gas production and transportation, general economic conditions and changes in supply and demand. These factors and the availability of markets are beyond

the EXCO/HGI Partnership’s control. If market factors dramatically change, the impact on the EXCO/HGI Partnership’s revenues could be substantial and could adversely affect its ability to produce and market oil and natural gas, which would negatively impact the EXCO/HGI Partnership’s results of operation, cash flows and financial condition.

The EXCO/HGI Partnership cannot control the development of the properties it will own but which EXCO does not operate, which may adversely affect its production, revenues and results of operations.

All of the wells being contributed to the EXCO/HGI Partnership will be operated by either EXCO Parent pursuant to contract operating agreements, or by third parties other than EXCO Parent. As a result, the success and timing of the EXCO/HGI Partnership’s drilling and development activities on its properties, particularly those operated by third parties, will depend upon a number of factors outside of the EXCO/HGI Partnership’s control, including:

•

the timing and amount of capital expenditures;

•

the operators’ expertise and financial resources;

•

the approval of other participants in drilling wells; and

•

the selection of suitable technology.

While the timing and amount of capital expenditures on properties operated by EXCO will remain subject in part to approval by the General Partner and the budget of the EXCO/HGI Partnership, such expenditures and budget will also remain subject to approvals by EXCO Parent in accordance with our partnership agreements. If drilling and development activities are not conducted on these properties or are not conducted on a timely basis, the EXCO/HGI Partnership may be unable to increase its production, offset normal production declines or may lose production leases due to non-production, which may adversely affect its production, revenues and results of operations.

The EXCO/HGI Partnership’s estimates of oil and natural gas reserves will involve inherent uncertainty, which could materially affect the quantity and value of its reported reserves, its financial condition and the value of our interest therein.

Numerous uncertainties are inherent in estimating quantities of proved oil and natural gas reserves, including many factors beyond our control. This offering circular contains estimates of the proved oil and natural gas reserves attributable to the properties being acquired by the EXCO/HGI Partnership. These estimates are based upon reports of independent petroleum engineers and information provided by EXCO. These reports rely upon various assumptions, including assumptions required by the SEC as to oil and natural gas prices, drilling and operating expenses, capital expenditures, ad valorem and state severance taxes and availability of funds. These estimates should not be construed as the current market value of the EXCO/HGI Partnership’s estimated proved reserves. The process of estimating oil and natural gas reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, engineering and economic data for each reservoir. As a result, the estimates are inherently imprecise evaluations of reserve quantities and future net revenue. The actual future production, revenues, taxes, development expenditures, operating expenses and quantities of the EXCO/HGI Partnership’s recoverable oil and natural gas reserves may vary substantially from those we have assumed in the estimates. Any significant variance in our assumptions could materially affect the quantity and value of reserves, or the amount of PV-10 and Standardized Measure of the reserves, and the EXCO/HGI Partnership’s financial condition. In addition, the EXCO/HGI Partnership’s reserves, the amount of PV-10 and Standardized Measure, may be revised downward or upward based upon production history, results of future exploitation and development activities, prevailing oil and natural gas prices and other factors. A material decline in prices paid for the EXCO/HGI Partnership’s production can adversely impact the estimated volumes and values of its reserves. Similarly, a decline in market prices for oil or natural gas may adversely affect its PV-10 and Standardized Measure. Any of these negative effects on the EXCO/HGI Partnership’s reserves or PV-10 and Standardized Measure may decrease the value of our interest in the EXCO/HGI Partnership or its ability to pay distributions to us.

The EXCO/HGI Partnership will be exposed to operating hazards and uninsured risks that could adversely impact its results of operations and cash flow.

The EXCO/HGI Partnership’s operations will be subject to the risks inherent in the oil and natural gas industry, including the risks of:

•

fires, explosions and blowouts;

•

pipe failures;

•

abnormally pressured formations; and

•

environmental accidents such as spills, leaks, ruptures or discharges of natural gas, natural gas liquids, oil, process water, well fluids or other hazardous substances into the environment (including impacts to groundwater).

These events may result in substantial losses to the EXCO/HGI Partnership from:

•

injury or loss of life;

•

severe damage to or destruction of property, natural resources and equipment;

•

pollution or other environmental damage;

•

environmental clean-up responsibilities;

•

regulatory investigation;

•

penalties and suspension of operations; or

•

attorneys’ fees and other expenses incurred in the prosecution or defense of litigation.

As is customary in the oil and gas production industry, the EXCO/HGI Partnership is expected to be insured against some, but not all, of these risks. Such insurance may not be adequate to cover these potential losses or liabilities. Furthermore, insurance coverage may not continue to be available at commercially acceptable premium levels or at all. Due to cost considerations, from time to time the EXCO/HGI Partnership may decline to obtain coverage for certain losses and liabilities, including drilling activities. Losses and liabilities arising from uninsured or under-insured events could require the EXCO/HGI Partnership to make large unbudgeted cash expenditures that could adversely impact its results of operations, cash flow and financial condition.

The EXCO/HGI Partnership will be subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting its operations.

The EXCO/HGI Partnership’s oil and natural gas development and production operations will be subject to complex and stringent laws and regulations. In order to conduct its operations in compliance with these laws and regulations, it must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. The EXCO/HGI Partnership may incur substantial costs in order to comply with these existing laws and regulations. In addition, such costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to the EXCO/HGI Partnership’s operations.

The EXCO/HGI Partnership’s business will be subject to federal, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration for, and the production and sale of, oil and natural gas. Failure to comply with such laws and regulations, as interpreted and enforced, could have a material adverse effect on the EXCO/HGI Partnership’s results of operations, cash flows and financial condition.

Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation.

President Obama’s proposed fiscal year 2011, fiscal year 2012 and fiscal year 2013 Budgets included proposed legislation that would, if enacted into law, make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies such as the EXCO/HGI Partnership. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the manufacturing deduction for certain domestic production activities, and (iv) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear whether any such changes will be enacted or how soon any such changes could become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could eliminate certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect the EXCO/HGI Partnership’s results of operations, cash flows and financial condition.

Climate change regulations could result in increased operating costs and reduced demand for the EXCO/HGI Partnership’s oil and natural gas production.

GHGs, including carbon dioxide, a product of the combustion of natural gas, and methane, a primary component of natural gas, may be contributing to the warming of the Earth’s atmosphere, resulting in climatic changes. Federal, state and regional initiatives to reduce GHG emissions may adversely affect the EXCO/HGI Partnership’s operations. For example, the EPA’s so-called GHG tailoring rule imposes federal prevention of significant deterioration (PSD) permit requirements for new sources and modifications, and Title V operating permits for all sources, that have the potential to emit specific quantities of GHGs. Such permitting requirements could require the EXCO/HGI Partnership to install controls or implement other measures to reduce GHG emissions from new or modified sources. In addition, the EPA requires certain petroleum and natural gas sources to monitor, document and annually report their GHG emissions. These existing requirements, or any future GHG laws, regulations or permit requirements, could result in increased compliance costs or reduced demand for the EXCO/HGI Partnership’s oil and gas production, which could negatively affect the EXCO/HGI Partnership’s results of operations, cash flows and financial condition.

The EXCO/HGI Partnership is subject to extensive environmental regulation, which could result in substantial liabilities and expenditures.

The EXCO/HGI Partnership is subject to numerous federal, state and local laws, regulations and permit requirements relating to the protection of the environment, including those governing the discharge of materials into the water and air, the generation, management and disposal of petroleum products, process water, well fluids and hazardous substances and wastes and the remediation of contamination. Pursuant to such requirements, the EXCO/HGI Partnership could incur material costs and be subject to clean-up costs, fines and civil and criminal sanctions and third-party claims for property damage, natural resources damage and personal injury. Such requirements not only expose the EXCO/HGI Partnership to liability for its own activities, but may also expose it to liability for the conduct of others or for actions by the EXCO/HGI Partnership that were in compliance with all applicable laws at the time those actions were taken.

In addition, the EXCO/HGI Partnership could incur substantial expenditures to comply with current or future environmental laws, regulations and permits. Such environmental requirements have grown more stringent over time. For example, federal and state regulators have become increasingly focused on air emissions associated with the oil and gas industry. On August 16, 2012, the EPA published a rule that subjects oil and gas operations to new and amended requirements under both the New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants programs of the Clean Air Act (“CAA”). Among other things, the revised requirements imposed emission reduction measures on natural gas processing plants and other oil and gas operations, added reduced emission completion standards applicable to hydraulically fractured gas wells and established maximum achievable control technology standards for certain glycol dehydrators and storage vessels. These requirements will result in increased operating and compliance costs and increased regulatory burdens.

The liabilities and expenditures of the EXCO/HGI Partnership relating to environmental matters could have a material adverse effect on the EXCO/HGI Partnership’s results of operations, cash flows and financial condition.

The EXCO/HGI Partnership may experience a financial loss if any of its significant customers fail to pay it for its oil or natural gas.

The EXCO/HGI Partnership’s ability to collect the proceeds from the sale of oil and natural gas from its customers will depend on the payment ability of its customer base, which includes several significant customers. If any one or more of its significant customers fails to pay it for any reason, the EXCO/HGI Partnership could experience a material loss. In addition, in recent years, it has become more difficult for oil and gas producers to maintain and grow a customer base of creditworthy customers because a number of energy marketing and trading companies have discontinued their marketing and trading operations, which has significantly reduced the number of potential purchasers for oil and natural gas production. As a result, the EXCO/HGI Partnership may experience a material loss as a result of the failure of its customers to pay it for prior purchases of its oil or natural gas.

Competition in the EXCO/HGI Partnership’s industry is intense and it may be unable to compete in acquiring properties, contracting for drilling equipment and hiring experienced personnel.

The oil and natural gas industry is highly competitive. We anticipate that the EXCO/HGI Partnership will encounter strong competition from other independent operators and from major oil companies in acquiring properties, contracting for drilling equipment and securing trained personnel. Many of these competitors have financial and technical resources and headcount substantially larger than the EXCO/HGI Partnership’s. As a result, the EXCO/HGI Partnership’s competitors may be able to pay more for desirable leases, or to evaluate, bid for and purchase a greater number of properties or prospects than the EXCO/HGI Partnership’s financial or personnel resources will permit. The oil and natural gas industry has periodically experienced shortages of drilling rigs, equipment, pipe and personnel, which has delayed development drilling and other exploitation activities and has caused significant expense/cost increases. The EXCO/HGI Partnership may experience difficulties in obtaining drilling rigs and other services in certain areas as well as an increase in the cost for these services and related material and equipment. We are unable to predict when, or if, such shortages may again occur or how such shortages and price increases will affect the EXCO/HGI Partnership’s development and exploitation program. Although EXCO Parent will provide certain operating and administrative services to us, competition has also been strong in hiring experienced personnel, particularly in petroleum engineering, geoscience, accounting and financial reporting, tax and land professions. In addition, competition is strong for attractive oil and natural gas producing properties, oil and natural gas companies, and undeveloped leases and drilling rights. The EXCO/HGI Partnership may be outbid by competitors in its attempts to acquire properties or companies. All of these challenges could make it more difficult to execute the EXCO/HGI Partnership’s growth strategy.

If pipelines or other facilities interconnected to the EXCO/HGI Partnership’s gathering and transportation pipelines become unavailable to transport or process natural gas, the EXCO/HGI Partnership’s revenues and cash flow could be adversely affected.

The EXCO/HGI Partnership is expected to contract with TGGT Holdings, LLC (“TGGT”), an affiliate of EXCO Parent and another third party, and other third parties to obtain access to pipelines and other facilities for the gathering and transportation of its oil and natural gas. Much of the natural gas transported by the EXCO/HGI Partnership’s pipelines must be treated or processed before delivery into a pipeline for natural gas. If the processing and treating plants to which the EXCO/HGI Partnership delivers natural gas were to become temporarily or permanently unavailable for any reason, or if throughput were reduced because of testing, line repair, damage to pipelines, reduced operating pressures, lack of capacity or other causes, the EXCO/HGI Partnership’s customers would be unable to deliver natural gas to end markets. For example, in the second quarter of 2011, we understand that an incident occurred at a TGGT amine treating facility in northwest Red River Parish, Louisiana resulting in an immediate shut-down of the facility. If any similar events occur, they could materially and adversely affect the EXCO/HGI Partnership’s results of operations, cash flows and financial condition.

The EXCO/HGI Partnership will operate in a litigious environment.

The EXCO/HGI Partnership will operate in a litigious environment in which any constituent could bring suit regarding existing or planned operations of the EXCO/HGI Partnership or allege a violation of an existing contract or applicable law. Any such action could delay when planned operations can actually commence or could cause a halt to existing production until such alleged violations are resolved by the courts. Not only could the EXCO/HGI Partnership incur significant legal and support expenses in defending its rights, but halting existing production or delaying planned operations could impact its future operations and financial condition. Such legal disputes can also distract management and other personnel from their primary responsibilities.

The EXCO/HGI Partnership’s business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.

As an oil and natural gas producer, the EXCO/HGI Partnership will face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the safety of the EXCO/HGI Partnership’s or EXCO Parent’s management and other personnel; threats to the security of the EXCO/HGI Partnership’s facilities and infrastructure or third party facilities and infrastructure, such as processing plants and pipelines; and threats from terrorist acts. Although the EXCO/HGI Partnership plans to utilize various procedures and controls to monitor these threats and mitigate its exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities, essential to the EXCO/HGI Partnership’s operations and could have a material adverse effect on its reputation, financial position, results of operations, or cash flows. Cybersecurity attacks in particular are evolving and include but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage the EXCO/HGI Partnership’s reputation and lead to financial losses from remedial actions, loss of business or potential liability.

Financial Statements of EXCO/HGI Partnership

Exhibit 99.2

Independent Auditors’ Report

The Board of Directors and Stockholders

EXCO Resources, Inc.:

We have audited the accompanying statements of revenues and direct operating expenses of EXCO Resources, Inc.’s Certain Conventional Oil and Natural Gas Properties (the Properties or the Company) for the years ended December 31, 2011, 2010, and 2009. These statements of revenues and direct operating expenses are the responsibility of EXCO Resources, Inc.’s management. Our responsibility is to express an opinion on these statements of revenues and direct operating expenses based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of revenues and direct operating expenses are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of revenues and direct operating expenses, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement of revenues and direct operating expenses presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying statements of revenues and direct operating expenses referred to above were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. The statements of revenues and direct operating expenses are not intended to be a complete presentation of the revenues and expenses for the Properties.

In our opinion, the statements of revenues and direct operating expenses referred to above present fairly, in all material respects, the revenues and direct operating expenses of EXCO Resources, Inc.’s Certain Conventional Oil and Natural Gas Properties for the years ended December 31, 2011, 2010, and 2009 in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Dallas, Texas

December 6, 2012

EXCO Resources, Inc.

Certain Conventional Oil and Natural Gas Properties

Statements of Revenues and Direct Operating Expenses

Years ended December 31, 2011, 2010 and 2009 and

Nine months ended September 30, 2012 and 2011 (Unaudited)


	Year ended December 31,						Nine months ended September 30,		Nine months ended September 30,
(amounts in thousands)	2011		2010		2009		2012		2011
							(Unaudited)		(Unaudited)
Revenues
Oil and natural gas revenues	$	224,302	$	242,273	$	299,337	$	118,922	$	174,207

Direct operating expenses:
Lease operating expenses		56,465		61,143		74,581		33,700		41,031
Severance and ad valorem taxes		19,733		21,813		26,603		14,324		16,109
Gathering and treating expenses		13,293		17,642		26,951		9,838		10,280

Total direct operating expenses		89,491		100,598		128,135		57,862		67,420


Excess of revenues over direct operating expenses	$	134,811	$	141,675	$	171,202	$	61,060	$	106,787

See accompanying notes to statements of revenues and direct operating expenses.

EXCO Resources, Inc.

Certain Conventional Oil and Natural Gas Properties

Notes to Statement of Revenues and Direct Operating Expenses

Years ended December 31, 2011, 2010 and 2009

Note 1. Basis of Presentation

The accompanying historical statements of revenues and direct operating expenses present the revenues less direct operating expenses of certain shallow conventional non-shale oil and natural gas properties owned by EXCO Resources, Inc., or EXCO, EXCO Operating Company, Inc., or EOC, and Vernon Gathering, LLC, each of which are wholly owned subsidiaries of EXCO, and hereinafter collectively referred to as the Partnership Properties, to a newly formed partnership entity, EXCO/HGI JV Assets, LLC, or the Partnership.

Terms of the transaction are set forth in a Unit Purchase and Contribution Agreement, or UPCA, dated November 5, 2012 between EXCO and its aforementioned subsidiaries and HGI Energy Holdings, LLC, a wholly owned subsidiary of Harbinger Group Inc., or HGI. In exchange for the contribution of the Partnership Properties, at closing, EXCO will receive cash consideration of $597.5 million, subject to customary purchase price adjustments to reflect an effective date of July 1, 2012, a 25.5% limited partner interest in the Partnership and a 50% interest in the general partner of the Partnership. The remaining 74.5% of the Partnership will be owned by HGI.

The transaction contemplated by the UPCA is subject to customary pre and post-closing adjustments, including expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, customary title and environmental reviews, closing conditions and regulatory approvals, and is expected to close in early 2013.

The historical statements of revenues and direct operating expenses of the Partnership Properties are presented in order to comply with the rules and regulations of the Securities and Exchange Commission for businesses acquired or probable to be acquired. These statements were prepared from the historical accounting records of EXCO.

Since separate historical financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, have never been prepared for the Partnership Properties, certain indirect expenses, as further described in Note 4. Excluded Expenses, were not allocated to the Partnership Properties and have been excluded from the accompanying statements. Any attempt to allocate these expenses would require significant and judgmental allocations, which would be arbitrary and would not be indicative of the performance of the properties on a stand-alone basis. Accordingly, the financial statements required under Rule 3-05 of Securities and Exchange Commission Regulation S-X (balance sheet, income statement, cash flow and statement of stockholders’ equity) prepared in accordance GAAP are not presented and these statements of revenues and direct operating expenses do not represent a complete set of financial statements reflecting financial position, results of operations, partners’ equity and cash flows of the Partnership Properties and are not necessarily indicative of the results of operations for the Partnership Properties going forward.

Note 2. Significant Accounting Policies

Use of Estimates

GAAP requires management to make estimates and assumptions that affect the amounts reported in the statements of revenues and direct operating expenses. Actual results could be different from those estimates.

Revenue Recognition

Oil and natural gas revenues reflect the sales method of accounting. Under the sales method, revenues are recognized based on actual volumes of oil and natural gas sold to purchasers. There were no significant imbalances with other revenue interest owners attributable to the Partnership Properties during any of the periods presented in these statements.

Direct Operating Expenses

Direct operating expenses are recognized on an accrual basis and consist of direct expenses of operating the Partnership Properties. The direct operating expenses include lease operating expenses, gathering and treating costs and production and other tax expenses.

•

Lease operating expenses include lifting costs, well repair expenses, surface repair expenses, well workover costs, and other field expenses. Lease operating expenses also include expenses directly associated with support personnel, support services, equipment, and facilities directly related to oil and natural gas production activities.

•

Gathering and transportation expenses include the costs to gather and transport oil and natural gas. There are two types of agreements in which oil and gas are sold, both of which include a transportation charge. One is a netback arrangement, under which the Proposed Partnership will sell oil or natural gas at the wellhead and collect a price, net of the transportation incurred by the purchaser. In this case, the sales at the price received from the purchaser will be reported net of the transportation costs. Under the other arrangement, the Proposed Partnership will sell oil or natural gas at a specific delivery point, pay transportation to a third party and receive proceeds from the purchaser with no transportation deduction. In this case, the transportation costs are recorded as gathering and transportation expense. Due to these two distinct selling arrangements, computed realized prices, before the impact of derivative financial instruments, include revenues which are reported under two separate bases.

•

Production and other taxes consist of severance and ad valorem taxes.

Note 3. Contingencies

The activities of the Partnership Properties are subject to potential claims and litigation in the normal course of operations. EXCO management does not believe that any liability resulting from any pending or threatened litigation will have a materially adverse effect on the operations or financial results of the Partnership Properties.

Note 4. Excluded Expenses

Prior to the formation of the Partnership, the Partnership Properties were part of a larger organization where indirect general and administrative expenses, interest, income taxes, and other indirect expenses were not allocated to the Partnership Properties and have therefore been excluded from the accompanying statements of revenues and direct operating expenses. In addition, such indirect expenses are not indicative of costs which would have been incurred by the Partnership Properties on a stand-alone basis.

Also, depreciation, depletion and amortization and accretion of discounts attributable to asset retirement obligations have been excluded from the accompanying statements of revenues and direct operating expenses as such amounts would not necessarily be indicative of those expenses which would have been incurred based on the amounts to be allocated to the oil and gas properties in connection with the formation of the Partnership and contributions of assets and cash by the Partnership equity holders.

Note 5. Related Parties

EXCO has an equity investment in TGGT Holdings, LLC, or TGGT, which provides gathering and treating services to certain Partnership Properties. In addition, TGGT also purchases natural gas from certain Partnership Properties. For the twelve months ended December 31, 2011, 2010 and 2009, EXCO paid to TGGT approximately $6.0 million, $9.4 million and $24.8 million, respectively, in gathering and treating fees related to the Partnership Properties and TGGT purchased approximately $27.9 million, $33.2 million and $1.7 million of gas produced by the Partnership Properties for the twelve months ended December 31, 2011, 2010 and 2009.

Note 6. Subsequent events

We have evaluated our activity after December 31, 2011 until the date of issuance of our statements of revenue and direct operating expenses on December 6, 2012, and are not aware of any events that have occurred subsequently to December 31, 2011 that would require adjustments to or disclosures in the statements.

Note 7. Supplemental Information Relating to Oil and Natural Gas Producing Activities (Unaudited)

Estimated Quantities of Proved Reserves

Independent engineering firms are retained to provide annual year-end estimates of future net recoverable oil and natural gas reserves. The estimated proved net recoverable reserves shown below include only those quantities that are expected to be commercially recoverable at prices and costs in effect at the balance sheet dates under existing regulatory practices and with conventional equipment and operating methods. Proved Developed Reserves represent only those reserves that might be recovered through existing wells. Proved Undeveloped Reserves include those reserves that might be recovered from new wells on undrilled acreage or from existing wells on which we must make a relatively major expenditure for recompletion or secondary recovery operations. All of the reserves are located onshore in the continental United States of America.

Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of our oil and natural gas properties. Estimates of fair value should also consider unproved reserves, anticipated future oil and natural gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is subjective and imprecise.

The following table sets forth estimates of the proved oil and natural gas reserves (net of royalty interests) and changes therein, for the Partnership Properties for the periods indicated.


(amounts in thousands)	Oil (Bbls)			Natural Gas (Mcf)			Mcfe (1)

January 1, 2009		7,509			873,564			918,618
Production		(779	)		(64,358	)		(69,032	)
Extensions and discoveries		183			32,288			33,386
Revisions of previous estimates
Changes in performance and costs		(724	)		(102,243	)		(106,587	)
Changes in performance and other factors		(383	)		(54,013	)		(56,311	)
Purchases of proved reserves in place		—			218			218
Sales of proved reserves m place		(1,071	)		(183,879	)		(190,305	)


December 31, 2009		4,735			501,577			529,987
Production		(629	)		(42,118	)		(45,892	)
Extensions and discoveries		1,616			26,024			35,720
Revisions of previous estimates:
Changes in prices and costs		635			68,499			72,309
Changes in performance and other factors		670			72,263			76,283
Purchases of proved reserves in place		—			96			96
Sales of proved reserves in place		—			—			—


December 31, 2010		7,027			626,341			668,503
Production		(690	)		(35,614	)		(39,754	)
Extensions and discoveries		912			7,722			13,194
Revisions of previous estimates:
Changes in prices and costs		(794	)		(133,428	)		(138,192	)
Changes in performance and other factors		(302	)		(50,735	)		(52,547	)
Purchases of proved reserves in place		—			4,672			4,672
Sales of proved reserves in place		—			—			—


December 31, 2011		6,153			418,958			455,876


December 31, 2009:
Proved developed reserves		2,896			419,854			437,230
Proved undeveloped reserves		1,839			81,723			92,757

Total proved reserves		4,735			501,577			529,987


December 31, 2010:
Proved developed reserves		4,330			482,307			508,287
Proved undeveloped reserves		2,697			144,034			160,216

Total proved reserves		7,027			626,341			668,503


December 31,2011:
Proved developed reserves		4,364			400,364			426,548
Proved undeveloped reserves		1,789			18,594			29,328

Total proved reserves		6,153			418,958			455,876

(1)	Mcfe – one thousand cubic feet equivalent calculated by converting one Bbl of oil to six Mcf of natural gas.

Standardized Measure of Discounted Future Net Cash Flows

Summarized below is the Standardized Measure related to the Partnership Properties proved oil, natural gas reserves. The following summary is based on a valuation of proved reserves using discounted cash flows based on prices as prescribed by the SEC, costs and economic conditions and a 10% discount rate. The additions to proved reserves from the purchase of reserves in place, and new discoveries and extensions could vary significantly from year to year; additionally, the impact of changes to reflect current prices and costs of reserves proved in prior years could also be significant. Accordingly, the present value of future net cash flows does not purport to be an

estimate of the fair market value of the Partnership Properties proved reserves, nor should it be indicative of any trends. An estimate of fair value would also take into account, among other things, anticipated changes in future prices and costs, the expected recovery of reserves in excess of proved reserves and a discount factor more representative of the time value of money, and the risks inherent in producing oil and natural gas.

The following table sets forth estimates of the standardized measure of discounted future net cash flows form proved reserves of oil and natural gas for the periods indicated.


(amounts in thousands)

Year ended December 31, 2009
Estimated future cash inflows	$	1,936,212
Future development costs		(286,305	)
Future production costs		(843,671	)

Future net cash flows		806,236
Discount of future net cash flows at 10%		(374,995	)

Standardized measure of discounted future net cash flows	$	431,241


Year ended December 31, 2010
Estimated future cash inflows	$	3,421,997
Future development costs		(449,293	)
Future production costs		(1,537,209	)

Future net cash flows		1,435,495
Discount of future net cash flows at 10%		(764,251	)

Standardized measure of discounted future net cash flows	$	671,244


Year ended December 31, 2011
Estimated future cash inflows	$	2,655,911
Future development costs		(225,688	)
Future production costs		(1,236,551	)

Future net cash flows		1,193,672
Discount of future net cash flows at 10%		(552,664	)

Standardized measure of discounted future net cash flows	$	641,008

Capital expenditures for the Partnership Properties were $60.8 million, $110.0 million and $123.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.

The following table sets forth the changes in standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves attributable to the Partnership Properties for the periods indicated.


(amounts in thousands)	Year ended December 31, 2011			Year ended December 31, 2010			Year ended December 31, 2009

Standardized measure – beginning of year	$	671,244		$	431,241		$	1,324,036

Sales and transfers of oil and natural gas produced (net of production costs)		(134,811	)		(141,675	)		(171,202	)
Net change in prices and productions costs		59,592			189,928			(680,736	)
Extensions and discoveries, net of future development and production costs		45,574			57,396			28,328
Previously estimated development costs incurred		18,358			45,803			74,817
Changes in estimated future development costs		182,803			(88,356	)		211,484
Revisions of previous quantity estimates		(172,538	)		137,640			(254,892	)
Purchase of reserves in place		3,851			78			192
Sales of reserves in place		—			—			(227,479	)
Accretion of discount		69,275			45,417			133,788
Other		(102,340	)		(6,228	)		(7,095	)

Change for the year		(30,236	)		240,003			(892,795	)

Standardized measure – End of Period	$	641,008		$	671,244		$	431,241

Business Description of HHI

Exhibit 99.3

Business Description of HHI

HHI is a leading U.S. provider of residential locksets and builder’s hardware, and a leading provider of faucets.

On a global basis HHI is one of the largest producers of tubular residential locksets, producing and selling over 36 million locksets annually (with a production of about 154,000 locks per day). HHI offers a broad range of innovative, high quality products across a variety of price points and geographies.

Headquartered in Lake Forest, California, HHI has sales offices and distribution centers in the U.S., Canada, Mexico, and Asia. HHI has over 4,500 total customers serving over 40,000 ship-to locations, including retailers, non-retail distributors and homebuilders. HHI’s two primary customers include The Home Depot, Inc. (“The Home Depot”) and Lowe’s Companies, Inc. (“Lowe’s”), accounting for 45% of sales.

HHI Products

Residential Locksets

HHI provides a broad range of residential locksets and door hardware, including knobs, levers, deadbolts, handlesets and electronics. HHI offers its security hardware under three main brands, Kwikset, Weiser and Baldwin. On a global basis HHI is one of the largest producers of tubular residential locksets, producing and selling over 36 million locksets annually, over 50 million when including the TLM Residential Business. Kwikset includes opening to mid-price point residential door hardware sold primarily in the U.S. retail and wholesale channels. Products are offered under the three brands Safe Lock, Kwikset and Kwikset Signature Series. Weiser offers opening to mid-price point residential door hardware sold primarily in the Canadian retail and wholesale channels. Baldwin offers high price point luxury hardware sold globally through the showroom and lumber yard channels.

For the LTM period ended June 30, 2012, sales of door hardware and security products (excluding TLM) represented approximately 61% of total net sales, or $571.0 million.

Builder’s Hardware

HHI also offers other hardware products that include hinges, security hardware, screen and storm door products, garage door hardware, window hardware and floor protection under the Stanley and National Hardware brand names throughout the U.S. and Canada. Although the product line is largely harmonized between the brands, the dual branding approach has been utilized to protect legacy business with key customers and avoid channel conflict. Additionally, in some cases the products are dual branded in order to reduce SKU count. HHI maintains strong relationships with leading independent, two step and co-op retail store chains through its direct sales force that manages shelf stock inventory and replenishment orders.

For the LTM period ended June 30, 2012, sales of builders’ hardware products represented approximately 19% of total net sales, or $181.7 million.

Faucets

HHI provides kitchen, bath, shower, faucets and other plumbing products through its Pfister brand. Pfister is recognized for bringing showroom styles to the mass market at affordable prices and offers a lifetime warranty on all of its products.

For the LTM period ended June 30, 2012, sales of plumbing products represented approximately 20% of total net sales, or $186.5 million.

Manufacturing Overview

HHI has a global manufacturing footprint with 9 facilities in the U.S., China, Mexico and the Asia-Pacific region, in addition to several key supplier relationships. In general, high labor content processes are located in low-cost labor regions, with higher automation processes being located closer to the end customer. Each facility is primarily focused on a specific business unit. However there are several interdependencies between facilities.

The facilities are supported by several centralized functions such as productivity, sourcing, transportation, supply chain, quality, human resources and manufacturing engineering.

Brands

HHI has a broad range of brands and product offerings that meet consumer needs across a variety of price points and geographies. HHI has both lower priced point products as well as well recognized, prestige brands.

HHI offers its products under five main brands: Kwikset, accounting for $409 million of 2011 sales, Weiser with $65 million in sales, Baldwin with $64 million in sales, Stanley/National Hardware with $153 million in sales, and Pfister with $197 million in sales. The remaining sales are under certain less significant brands.

Kwikset includes opening to mid priced point residential door hardware sold primarily in the U.S. retail and wholesale channels. Products are offered under the three brand names of Safe Lock, Kwikset and Kwikset Signature Series. Weiser offers opening to mid price point residential door hardware sold primarily in the Canadian retail and wholesale channels. Baldwin offers high price point luxury door hardware sold globally through the showroom and lumber yard channels, with limited retail presence.

Stanley and National hardware are sold throughout the U.S. and Canada in the retail channels, and are sold under the Stanley and the National Hardware brand names. Although the product line is largely harmonized between the brands, the dual branding approach has protected legacy business with key customers while avoiding channel conflict. In some cases, the products are dual branded to reduce SKU count.

Pfister has a broad range of product offerings and platforms tailored to meet consumer needs across a variety of price points and geographies. HHI also offers a select range of specialized and international brands such as Safe Lock, Fanal, Geo by Black & Decker, Stanley and Fortis.

Suppliers

The Plumbing segment has one key supplier partner, Lota, a longtime supplier which provides contract manufacturing services to Pfister. In business for over 25 years, Lota is one of the largest faucet contract manufacturers in the world. Lota’s primary faucet manufacturing location is in Xiamen, China. Lota operates under a contract specifying quality, service and cost ranges for a 12-month period. While this company provides a significant amount of Pfister products, all of the major product platforms (including the chassis on which the faucets are based) can be produced at multiple locations externally and internally, for example at HHI’s Xiamen, China manufacturing facility.

Customers

HHI’s customer base is well diversified with no single customer accounting for more than 25% of total fiscal year 2011 revenue, and the top ten customers represented 58% and 76% of fiscal year 2011 revenue for the security and hardware and plumbing segments, respectively. HHI has a proven history of attracting and retaining the highest quality customers across the entire platform. For example, HHI has maintained relationships with big box retailers such as The Home Depot and Lowe’s for more than three decades.

Sales and Distribution

HHI employs a large direct sales team across all brands and channels it serves. It also uses indirect sales agencies where HHI’s strategy requires a broader model. Pfister also has hospitality national account managers who primarily focus on working with key architects, designers and property management firms. Once a hospitality account is won, the projects are serviced and maintained by a territory manager who sits within the field sales team. In addition to a base salary, sales staff at HHI receives incentive compensation which is based on both net sales and margin achieved.

The retail and maintenance repair & operations sales team within retail sales is comprised of directors and national account managers who call on the major customers in these channels. For the largest customers, such as The Home Depot and Lowe’s, the directors are solely focused on those specific businesses while the national account managers are often responsible for multiple customers. In addition, HHI has a retail field operations team that is focused on brand and event marketing, product training, regional account support and store level execution.

In addition, HHI has a sales and customer support team exclusively dedicated to serving The Home Depot and Lowe’s, comprised of employees focusing on sales and employees focusing on Collaborative Planning Forecasting and Replenishment (“CPFR”). The CPFR team works directly with these two customers to determine their demand needs and manages the communication back into HHI’s supply chain.

Some of HHI’s international sales and distribution functions are currently a shared resource with other Stanley Black & Decker business units. Similar to the U.S. model, Canada sales directors call on the major retail accounts, The Home Depot and Lowe’s, and a field sales team covers non-retail customers. In most other markets, the primary customer base is comprised of small “mom and pop” home improvement locations that are serviced by local wholesale distribution.

Marketing

HHI’s marketing strategy aims to improve preference for its brands by enhancing the customer experience, investing in new product development and delivering impactful, effective brand marketing. The product marketing team for the international channel is based in Lake Forest, CA and is complemented by local resources as required.

HHI consistently invests in both customer and consumer marketing. The investments vary by brand, product category and region, and are designed to maximize brand presence, market impact and return on investment. The total marketing budget in 2011 was $13 million, representing 1.4% of net sales. The breakdown by region is illustrated in the table below.

Competition

Competition within the industry varies based on location as well as product segment. The main source of competition for locks includes other third party manufacturers such as Schlage, a division of Ingersoll-Rand and private label import brands such as Defiant and Gatehouse.

Pfister’s major U.S. competitors are Masco, Fortune Brands, Kohler, and American Standard. Glacier Bay and AquaSource are The Home Depot and Lowe’s private label brands, respectively.

Employees

As of July 2012, HHI employed 6,272 employees. None of HHI’s employees are under collective bargaining arrangements or labor unions.

Legal, Environmental and Insurance

HHI is involved in various legal matters arising in the normal course of business.

HHI is subject to complex and increasingly stringent foreign, federal, state and local laws, regulations and permits governing the protection of the environment and human health and safety. HHI incurs significant costs to comply with such requirements and could be subject to fines, penalties or other sanctions if it violates such laws, regulations or permit terms. HHI also could be held responsible for costs arising from any contamination relating to its current or former properties or third party waste disposal sites, even if it was not at fault. In addition to potentially significant investigation and remediation costs, any such contamination can give rise to third party claims for fines or penalties, natural resource damages, personal injury or property damage.

Risks Related to the Hardware Acquisition

Spectrum Brands may not realize the anticipated benefits of the Hardware Acquisition.

The Hardware Acquisition involves the integration of two companies that have previously operated independently. The integration of Spectrum Brands’ operations with those of HHI is expected to result in financial and operational benefits, including increased top line growth, margins, revenues and cost savings and be accretive to earnings per share, earnings before interest, taxes, depreciation and amortization and free cash flow before synergies. There can be no assurance, however, regarding when or the extent to which Spectrum Brands will be able to realize these increased top line growth, margins, revenues, cost savings or accretions to earnings per share, earnings before interest, taxes, depreciation and amortization or free cash flow 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 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 and HHI 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’ business.

HGI’s operating results contributed by Spectrum Brands after the Hardware Acquisition may materially differ from the pro forma information presented in this offering circular.

HGI’s operating results contributed by Spectrum Brands after the Hardware Acquisition may be materially different from those shown in the pro forma information, which represents only a combination of our historical results with those of HHI. The merger, financing, integration, restructuring and transaction costs related to the Hardware Acquisition could be higher or lower than currently estimated, depending on how difficult it will be to integrate Spectrum Brands’ business with that of HHI.

At the First Closing Spectrum Brands will assume certain potential liabilities relating to the HHI Business.

Following the First Closing, Spectrum Brands will have assumed certain potential liabilities relating to the HHI Business. To the extent Spectrum Brands has not identified such liabilities or to the extent the indemnifications obtained from Stanley Black & Decker are insufficient to cover known liabilities, these liabilities could have a material adverse effect on Spectrum Brands’ business.

Integrating Spectrum Brands’ business with that of HHI may divert Spectrum Brands’ management’s attention away from operations.

Successful integration of Spectrum Brands’ and HHI’s operations, products and personnel may place a significant burden on its management and other internal resources. The diversion of management’s attention, and any difficulties encountered in the transition and integration process, could harm Spectrum Brands’ business, financial conditions and operating results.

Spectrum Brands will supply certain products and services to Stanley Black & Decker and its subsidiaries pursuant to the terms of certain supply agreements for a period of time after each of the First Closing and the Second Closing. Spectrum Brands’ provision of products and services under these agreements will require Spectrum Brands to dedicate resources of the HHI Business and the TLM Residential Business and may result in liabilities to Spectrum Brands.

Certain products and services currently used by Stanley Black & Decker are produced and provided using equipment of the HHI Business and the TLM Residential Business that Spectrum Brands will be acquiring or certain equipment belonging to Stanley Black & Decker and its subsidiaries that will continue to be located for a period of time after each of the First Closing and the Second Closing at facilities operated by the HHI Business and the TLM Residential Business and maintained by us pursuant to certain specifications. At each of the First Closing and the Second Closing, Spectrum Brands and Stanley Black & Decker will enter into supply agreements (each, a “Supply Agreement”), whereby Spectrum Brands will provide Stanley Black & Decker and its subsidiaries with certain of these products and services for a period of time. This will require Spectrum Brands to dedicate resources of the HHI Business and the TLM Residential Business towards the provision of these products and services and may result in liabilities to it. These Supply Agreements are an accommodation to Stanley Black & Decker and its subsidiaries as part of the Hardware Acquisition, and the pricing of the products and services is on terms more favorable to Stanley Black & Decker and its subsidiaries than it would be in the ordinary course of business.

As a result of the Hardware Acquisition, Spectrum Brands 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 is highly dependent on the continuing efforts of its senior management team and other key personnel. As a result of the Hardware Acquisition, Spectrum Brands’ current and prospective employees could experience uncertainty about their future roles. This uncertainty may adversely affect Spectrum Brands’ ability to attract and retain key management, sales, marketing and technical personnel. Any failure to attract and retain key personnel could have a material adverse effect on Spectrum Brands’ business after consummation of the Hardware Acquisition. In addition, Spectrum Brands currently does not maintain “key person” insurance covering any member of its management team.

General customer uncertainty related to the Hardware Acquisition could harm Spectrum Brands.

Spectrum Brands’ customers may, in response to the consummation of the Hardware Acquisition, delay or defer purchasing decisions. If Spectrum Brands’ customers delay or defer purchasing decisions, its revenues could materially decline or any anticipated increases in revenue could be lower than expected.

Spectrum Brands only has the right to use certain Stanley Black & Decker trademarks, brand names and logos for a limited period of time. If Spectrum Brands fails to establish in a timely manner a new, independently recognized brand name with a strong reputation, its revenue and profitability could decline.

In connection with Spectrum Brands’ acquisition of HHI, it received a limited right to use certain Stanley Black & Decker trademarks, brand names and logos in marketing its products and services for only five years. Pursuant to a transitional trademark license agreement, Stanley Black & Decker granted Spectrum Brands the right to use the “Stanley” and “Black & Decker” marks and logos, and certain other marks and logos, for up to five years after the First Closing in connection with certain products and services. When Spectrum Brands’ right to use the Stanley Black & Decker trademarks, brand names and logos expires, it may not be able to maintain or enjoy comparable name recognition or status under its new brand. If Spectrum Brands is unable to successfully manage the transition of its business to its new brand, its reputation among its customers could be adversely affected, and its revenue and profitability could decline.

Spectrum Brands will rely on Stanley Black & Decker and its subsidiaries to provide it with certain key services for its business pursuant to the terms of certain transition services agreements for limited transition periods. If Stanley Black & Decker and its subsidiaries fail to perform their obligations under these agreements or if Spectrum Brands does not find equivalent replacement services, Spectrum Brands may be unable to provide these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to it, or at all.

Certain key services are currently provided to the HHI Business and the TLM Residential Business by Stanley Black & Decker and its subsidiaries, including services related to treasury, accounting, risk management, payroll, sourcing, sales and support, information technology, and employee benefit plans. At each of the First Closing and the Second Closing, Spectrum Brands and Stanley Black & Decker will enter into a Transition Services Agreement (each, a “Transition Services Agreement”), whereby Stanley Black & Decker and its subsidiaries will provide the HHI Business and the TLM Residential Business with certain of these key services for an initial transition period of generally six months, though the initial transition period of certain services is longer, and the provision of each service may be extended at an increased cost to Spectrum Brands. In some cases, such services will be provided on a more limited basis than the HHI Business and the TLM Residential Business had received previously. Spectrum Brands believes it is necessary for Stanley Black & Decker and its subsidiaries to provide these services to the HHI Business and the TLM Residential Business to facilitate the efficient operation of Spectrum Brands’ business as it goes through the transition and integration process. Once the transition periods specified in the Transition Services Agreements have expired, or if Stanley Black & Decker and its subsidiaries fail to perform their obligations under the Transition Services Agreements, Spectrum Brands will be required to extend the provision of services under such agreements at an increased cost to it, to provide these services itself or to obtain substitute arrangements with third parties. After the applicable transition period, Spectrum Brands may be

unable to provide these services internally because of financial or other constraints or be unable to implement substitute arrangements on a timely and cost-effective basis on terms that are favorable to it, or at all.

If Stanley Black & Decker is unable to acquire all the outstanding interests of TLM Taiwan, Spectrum Brands will not be able to acquire the TLM Residential Business.

Spectrum Brands’ acquisition of the TLM Residential Business will take place after the First Closing. Additionally, there are other conditions that must be satisfied in order for this acquisition to close, such as Stanley Black & Decker acquiring all of the outstanding interests of TLM Taiwan. There can be no assurances that these closing conditions will be met and that Spectrum Brands consummates the Second Closing.

The consummation of the Hardware Acquisition is subject to certain conditions including, among others, required regulatory approvals, obtaining certain third party consents and other customary closing conditions, some of which are out of Spectrum Brands’ control.

The closing of the Hardware Acquisition is subject to certain conditions including, among others, obtaining required regulatory approvals, obtaining certain third party consents and other customary closing conditions, some of which are out of Spectrum Brands’ control. The Second Closing will take place after the completion of the first closing and is subject to certain additional conditions, including among others, obtaining required regulatory approvals, the consummation of the acquisition by Stanley Black & Decker of all of the issued and outstanding shares of TLM Taiwan (with which Spectrum Brands has no involvement) and other customary closing conditions, some of which are out of Spectrum Brands’ control. There is no guarantee that these conditions will be satisfied or that the Hardware Acquisition will be consummated.

Failure to complete the Hardware Acquisition could, under certain circumstances, result in Spectrum Brands being required to pay a termination fee to Stanley Black & Decker.

Stanley Black & Decker has certain termination rights under the HHI Acquisition Agreement that, if exercised by Stanley Black & Decker (subject to the satisfaction of certain specified requirements in the HHI Acquisition Agreement), may result in the payment by Spectrum Brands to Stanley Black & Decker of a termination fee. In the event that the debt financing required to consummate the Hardware Acquisition is not funded at the time the First Closing would otherwise occur pursuant to the HHI Acquisition Agreement, Spectrum Brands may be required (subject to the satisfaction of certain specified requirements in the Acquisition Agreement) to pay to Stanley Black & Decker a termination fee of $56 million. In the event that the Hardware Acquisition is not consummated due to certain material breaches of the HHI Acquisition Agreement by Spectrum Brands, Spectrum Brands may be required (subject to the satisfaction of certain specified requirements in the Acquisition Agreement) to pay to Stanley Black & Decker a termination fee of $78 million.

Combined Financial Statements of the HHI Group

Exhibit 99.4

HHI Financial Statements

The HHI Group

Combined Balance Sheets


	December 31, 2011		January 1, 2011
	(In Millions)
Assets
Current assets:
Cash and cash equivalents	$	44.8	$	47.7
Accounts receivable, net		108.1		93.1
Inventories, net		171.2		158.1
Prepaid expenses		4.2		7.7
Deferred taxes		22.4		23.0
Other current assets		2.7		2.6

Total current assets		353.4		332.2

Property, plant and equipment, net		110.7		107.3
Goodwill		573.6		583.3
Customer relationships, net		39.9		45.2
Trade names, net		110.7		119.5
Patents and technology, net		20.5		23.4
Affiliate notes receivable		33.5		21.6
Other assets		5.0		7.2

Total assets	$	1,247.3	$	1,239.7


Liabilities and business equity
Current liabilities:
Accounts payable	$	115.7	$	74.4
Current portion of affiliate debt		138.0		132.3
Accrued expenses		64.5		45.3

Total current liabilities		318.2		252.0

Long-term affiliate debt		273.7		373.9
Deferred taxes		45.7		45.5
Post-retirement benefits		27.3		24.7
Other liabilities		41.3		34.7

Commitments and contingencies (Notes Q and R)

Business equity:
Parent Company’s net investment and accumulated earnings		514.5		466.6
Accumulated other comprehensive income		24.3		39.6

Parent Company’s net investment and accumulated earnings and accumulated other comprehensive income		538.8		506.2
Non-controlling interest		2.3		2.7

Total business equity		541.1		508.9


Total liabilities and business equity	$	1,247.3	$	1,239.7

See notes to combined financial statements.

The HHI Group

Combined Statements of Operations


	Fiscal Years Ended
	December 31, 2011			January 1, 2011
	(In Millions)
Net sales:
Trade	$	942.9		$	849.1
Affiliate		32.1			15.1

Total net sales		975.0			864.2

Costs and expenses:
Cost of sales – trade		639.6			604.0
Cost of sales – affiliate		30.1			13.8
Selling, general and administrative		189.8			178.8
Provision for doubtful accounts		0.8			0.1
Other affiliate income		(1.0	)		(1.0	)
Other – net		21.7			14.6
Restructuring charges		3.2			11.9
Interest expense – affiliate, net		42.7			41.9
Interest (income) expense – trade, net		(0.6	)		3.9

Total costs and expenses		926.3			868.0

Earnings (loss) before income taxes		48.7			(3.8	)
Income taxes (benefit)		12.3			(0.7	)

Net earnings (loss)		36.4			(3.1	)
Net income attributable to non-controlling interests		(0.6	)		(0.4	)

Net earnings (loss) attributable to Parent Company	$	35.8		$	(3.5	)

See notes to combined financial statements.

The HHI Group

Combined Statements of Cash Flows


	Fiscal Years Ended
	December 31, 2011			January 1, 2011
	(In Millions)
Operating activities
Net earnings (loss) attributable to Parent Company	$	35.8		$	(3.5	)
Net income attributable to non-controlling interests		(0.6	)		(0.4	)

Net earnings (loss)		36.4			(3.1	)
Adjustments to reconcile net earnings (loss) to cash provided by (used in) operating activities:
Depreciation and amortization of property, plant and equipment		26.2			28.9
Asset impairment		—			0.9
Amortization of intangibles		17.0			13.3
Inventory step-up amortization		—			31.3
Provision for doubtful accounts		0.8			0.1
Deferred taxes		(6.2	)		(22.5	)
Changes in operating assets and liabilities:
Accounts receivable		(16.7	)		0.7
Inventories		(13.9	)		(4.3	)
Accounts payable		41.3			12.6
Prepaid expenses and other current assets		3.9			(14.6	)
Other assets		2.0			2.7
Accrued expenses		19.0			(22.5	)
Other liabilities		15.3			(27.4	)

Net cash provided by (used in) operating activities		125.1			(3.9	)

Investing activities
Capital expenditures		(22.6	)		(14.7	)
Proceeds from sales of assets		0.1			0.6

Net cash used in investing activities		(22.5	)		(14.1	)

Financing activities
Cash remitted to Parent		(749.7	)		(651.5	)
Cash received from Parent		751.0			755.4
Lending to affiliates through notes receivable		(11.8	)		—
Repayments on affiliate debt		(94.7	)		(77.7	)

Net cash (used in) provided by financing activities		(105.2	)		26.2

Effect of exchange rate changes on cash		(0.3	)		1.7

(Decrease) increase in cash and cash equivalents		(2.9	)		9.9
Cash and cash equivalents, beginning of year		47.7			37.8

Cash and cash equivalents, end of year	$	44.8		$	47.7

See notes to combined financial statements.

The HHI Group

Combined Statements of Changes in Business Equity

Fiscal Years Ended December 31, 2011 and January 1, 2011 (In Millions)


	Parent Company’s Net Investment and Accumulated Earnings			Accumulated Other Comprehensive Income (Loss)			Non-Controlling Interest			Total Business Equity

Balance at January 3, 2010	$	486.3		$	16.7		$	2.3		$	505.3
Comprehensive income:
Net income (loss)		(3.5	)		—			0.4			(3.1	)
Currency translation adjustment		—			24.7			—			24.7
Change in pension, net of tax		—			(1.8	)		—			(1.8	)

Total comprehensive income		(3.5	)		22.9			0.4			19.8
Net transfers to the Parent		(16.2	)		—			—			(16.2	)

Balance at January 1, 2011		466.6			39.6			2.7			508.9
Comprehensive income:
Net income		35.8			—			0.6			36.4
Currency translation adjustment		—			(13.2	)		—			(13.2	)
Change in pension, net of tax		—			(2.1	)		—			(2.1	)

Total comprehensive income		35.8			(15.3	)		0.6			21.1
Dividends declared		(10.3	)		—			(1.0	)		(11.3	)
Net transfers to the Parent		22.4			—			—			22.4

Balance at December 31, 2011	$	514.5		$	24.3		$	2.3		$	541.1

See Notes to combined financial statements.

The HHI Group

Notes to Combined Financial Statements

A. Nature of Activities and Basis of Presentation

Description of Business

On March 12, 2010, a wholly owned subsidiary of The Stanley Works was merged with and into the Black & Decker Corporation (“Black & Decker”), with the result that Black & Decker became a wholly owned subsidiary of The Stanley Works (the “Merger”). The combined company was thereafter renamed Stanley Black & Decker, Inc. (the “Parent”).

These financial statements combine the legacy Stanley National Hardware (“SNH”) operations with the legacy Black and Decker Hardware and Home Improvement (“HHI”) operations. The combined company, the HHI Group (hereinafter referred to as “the Company”), offers a broad range of door security hardware as well as residential products, including locksets and interior and exterior hardware. The Company’s brand names include Baldwin, Weiser, Kwikset, Stanley National Hardware, Fanal, Geo and Pfister. The Company is operated by a single management team.

Approximately half of the Company’s sales are in the retail channel, including 24% to The Home Depot and 21% to Lowes in 2011, and 22% to The Home Depot and 24% to Lowes in 2010. The remaining sales of the Company are in the non-retail or new construction channels. Further, approximately 87% of the Company’s revenues for fiscal years 2011 and 2010 are generated from the U.S. and Canada, with the remainder spread across Latin America and Asia.

Basis of Presentation

The results of operations and cash flows of HHI have been included in the Company’s combined financial statements from the time of the Merger on March 12, 2010 (see Note F, Merger). The combined financial statements include the accounts of the Company and its majority-owned subsidiaries which require consolidation, after the elimination of intercompany accounts and transactions. The Company’s fiscal year ends on the Saturday nearest to December 31. There were 52 weeks in the fiscal years 2011 and 2010.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.

A. Nature of Activities and Basis of Presentation (continued)

Corporate Allocations

The Combined Balance Sheets include the assets and liabilities attributable to the Company’s operations. The Combined Statements of Operations includes certain allocated corporate expenses of the Parent attributable to the Company. These expenses include costs associated with legal, finance, treasury, accounting, human resources, employee benefits, insurance and stock-based compensation. Corporate costs are allocated on the basis of usage or another reasonable basis when usage is not identifiable. Management believes the assumptions and methodologies underlying the allocation of expenses are reasonable. Notwithstanding, the expenses allocated to the Company are not necessarily indicative of the actual level of expenses that would have been incurred if the Company had been an independent entity and had otherwise managed these functions. The following table summarizes the allocation of corporate expenses to specific captions within the Combined Statements of Operations.


	2011		2010
	(In Millions)

Cost of sales – trade	$	5.0	$	4.7
Selling, general and administrative		24.4		21.8

Total corporate allocations	$	29.4	$	26.5

Related Party Transactions

Affiliate Sales and Expenses

Transactions the Company had with affiliated companies owned by the Parent have been included in the Combined Statements of Operations. These sales and related costs may not be indicative of sales pricing or volume in the event the Company is sold. The following table summarizes affiliate sales transactions:


Description	2011			2010
	(In Millions)

Affiliate sales	$	32.1		$	15.1
Affiliate cost of sales		30.1			13.8

Net gross margin on affiliate sales		2.0			1.3
Cost of sales – trade, mark-up on affiliate purchases		10.9			9.7
Net interest expense – affiliate		42.7			41.9
Other affiliate income		(1.0	)		(1.0	)

Net affiliate loss before provision for income taxes	$	(50.6	)	$	(49.3	)

The Company purchases certain products it sells from third party vendors through affiliate global purchasing agents of the Parent. The Combined Statements of Operations includes the affiliate mark-up arising from inventory purchase transactions between the Company and affiliates of the Parent. Mark-ups on affiliate purchases of $10.9 million and $9.7 million were included within cost of sales – trade in the Combined Statements of Operations for the fiscal years ended December 31, 2011 and January 1, 2011, respectively. The mark-up on affiliate purchase transactions is cash settled through the Parent’s centralized cash management program and reduces the net cash provided by operating activities in the Combined Statements of Cash Flows.

Other affiliate income represents royalty fees the Company charges to an affiliate of the Parent. The other affiliate income is assumed to be cash settled, as described below, and consequently reduces the net cash provided by operating activities in the Combined Statements of Cash Flows.

A. Nature of Activities and Basis of Presentation (continued)

Cash Management and Business Equity

The Parent utilizes a centralized approach to cash management and financing of operations in the U.S. As a result of the Company’s participation in the Parent’s central cash management program, all the Company’s U.S. cash receipts are remitted to the Parent and all cash disbursements are funded by the Parent. Other transactions with the Parent and related affiliates include purchases and sales and miscellaneous other administrative expenses incurred by the Parent on behalf of the Company. The net amount of any receivable from or payable to the Parent and other affiliates, with the exception of affiliate debt and notes receivable, are reported as a component of business equity. There are no terms of settlement or interest charges associated with the intercompany account balances. All transactions with the Parent and other related affiliates outside of the Company are considered to be effectively settled for cash in the Combined Statements of Cash Flows at the time the transaction is recorded.

An analysis of the cash transactions solely with the Parent follows:


	2011			2010
	(In Millions)

Cash funding from Parent	$	751.0		$	755.4
Cash remitted to Parent		(749.7	)		(651.5	)
Taxes paid by Parent		0.8			13.9

Affiliate Debt

A summary of the Company’s affiliate debt arrangements at December 31, 2011 and January 1, 2011 and related party interest expense are shown below:


	Interest Rate	2011			2010

Affiliate notes payable due 2013	0.0% – 7.2%	$	58.8		$	77.8
Affiliate notes payable due 2015	10.8%		319.9			395.4
Affiliate notes payable on demand	2.0%		33.0			33.0

Total affiliate debt, including current maturities			411.7			506.2
Less: affiliate notes payable on demand classified as current			(33.0	)		(33.0	)
Less: principle payments due within 1 year for other notes payable			(105.0	)		(99.3	)

Long-term related party debt		$	273.7		$	373.9


Interest expense – affiliate, net		$	42.7		$	41.9

Affiliate Notes Receivable

The Company has a variety of notes receivable agreements with affiliates of the Parent. These loans bear interest at fixed rates ranging from 0.9% to 2.5% and have maturity dates ranging from 2013 through 2015. Affiliate notes receivable were $33.5 million and $21.6 million at December 31, 2011 and January 1, 2011, respectively.

B. Significant Accounting Policies

Foreign Currency

For foreign operations with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates; income and expenses are translated using weighted-average exchange rates. Translation adjustments are reported in a separate component of business equity and exchange gains and losses on transactions are included in earnings.

Cash Equivalents

Highly liquid investments with original maturities of three months or less are considered cash equivalents.

Accounts Receivable

Trade receivables are stated at gross invoice amount less discounts, other allowances and provision for uncollectible accounts.

Allowance for Doubtful Accounts

The Company estimates its allowance for doubtful accounts using two methods. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. Second, a reserve is determined for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful.

Inventories

Certain U.S. inventories are valued at the lower of Last-In First-Out (“LIFO”) cost or market because the Company believes it results in better matching of costs and revenues. Other inventories are valued at the lower of First-In, First-Out (“FIFO”) cost or market primarily because LIFO is not permitted for statutory reporting outside the U.S. See Note D, Inventories, for a quantification of the LIFO impact on inventory valuation.

Property, Plant and Equipment

The Company generally values property, plant and equipment, including capitalized software, at historical cost less accumulated depreciation and amortization. Costs related to maintenance and repairs which do not prolong the assets useful life are expensed as incurred. Depreciation and amortization are provided using straight-line methods over the estimated useful lives of the assets as follows:


		Useful Life (Years)

Land improvements		10 – 20
Buildings		40
Machinery and equipment		3 – 15
Computer software		3 – 5

Leasehold improvements are depreciated over the shorter of the estimated useful life or the term of the lease.

B. Significant Accounting Policies (continued)

The Company reports depreciation and amortization of property, plant and equipment in cost of sales and selling, general and administrative expenses (“SG&A”) based on the nature of the underlying assets. Depreciation and amortization related to the production of inventory and delivery of services are recorded in cost of sales. Depreciation and amortization related to distribution center activities, selling and support functions are reported in SG&A.

The Company assesses its long-lived assets for impairment when indicators that the carrying values may not be recoverable are present. In assessing long-lived assets for impairment, the Company groups its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are generated (“asset group”) and estimates the undiscounted future cash flows that are directly associated with and expected to be generated from the use of and eventual disposition of the asset group. If the carrying value is greater than the undiscounted cash flows, an impairment loss must be determined and the asset group is written down to fair value. The impairment loss is quantified by comparing the carrying amount of the asset group to the estimated fair value, which is determined using weighted-average discounted cash flows that consider various possible outcomes for the disposition of the asset group.

Goodwill and Intangible Assets

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Intangible assets acquired are recorded at estimated fair value. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are tested for impairment annually during the third quarter, and at any time when events suggest an impairment more likely than not has occurred. To assess goodwill for impairment, the Company determines the fair value of its reporting units, which are primarily determined using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including future growth rates, discount factors and tax rates. In the event the carrying value of a reporting unit exceeded its fair value, an impairment loss would be recognized to the extent the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of the goodwill.

Indefinite-lived intangible asset carrying amounts are tested for impairment by comparing to current fair market value, usually determined by the estimated cost to lease the asset from third parties. Intangible assets with definite lives are amortized over their estimated useful lives generally using an accelerated method. Under this accelerated method, intangible assets are amortized reflecting the pattern over which the economic benefits of the intangible assets are consumed. Definite-lived intangible assets are also evaluated for impairment when impairment indicators are present. If the carrying value exceeds the total undiscounted future cash flows, a discounted cash flow analysis is performed to determine the fair value of the asset. If the carrying value of the asset were to exceed the fair value, it would be written down to fair value. No goodwill or other intangible asset impairments were recorded during 2011 or 2010.

Interest Expense

The Combined Statements of Operations included an allocation of $4.5 million of interest expense associated with the Parent Company’s junior subordinated debt issued by The Stanley Works on November 22, 2005. The outstanding junior subordinated debt was paid by the Parent in December 2010. The debt has not been reflected in the Combined Financial Statements as the Company did not assume the debt nor has the Company guaranteed or pledged its assets as collateral for the debt.

B. Significant Accounting Policies (continued)

Financial Instruments

The Company participates in the Parent’s centralized hedging functions which are primarily designed to minimize exposure on foreign currency risk. These hedging instruments are recorded in the financial statements of the Parent and as such, the effects of such hedging instruments are not reflected in the Combined Statements of Operations or Combined Balance Sheets. In 2010, HHI employed derivative financial instruments to manage risks, specifically commodity prices, which were not used for trading or speculative purposes. The Company recognizes these derivative instruments in the Combined Balance Sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in business equity as a component of other comprehensive income, depending on whether the derivative financial instrument is undesignated or qualifies for hedge accounting, and if so, whether it represents a fair value, cash flow, or net investment hedge. Changes in the fair value of derivatives accounted for as fair value hedges are recorded in earnings in the same caption as the changes in the fair value of the hedged items. Gains and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. In the event it becomes probable the forecasted transaction to which a cash flow hedge relates will not occur, the derivative would be terminated and the amount in other comprehensive income would generally be recognized in earnings.

Stock Based Compensation

Certain employees of the Company have historically participated in the stock-based compensation plans of the Parent. The plans provide for discretionary grants of stock options, restricted stock units, and other stock-based awards. All awards granted under the plan consist of the Parent’s common shares. As such, all related equity account balances remained at the Parent, with only the allocated expense for the awards provided to Company employees, as well as an allocation of expenses related to the Parent’s corporate employees who participate in the plan, being recorded in the Combined Financial Statements.

Stock options are granted at the fair market value of the Parent’s stock on the date of grant and have a 10-year term. Compensation cost relating to stock-based compensation grants is recognized on a straight-line basis over the vesting period, which is generally four years.

Revenue Recognition

The Company’s revenues result from the sale of tangible products, where revenue is recognized when the earnings process is complete, collectability is reasonably assured, and the risks and rewards of ownership have transferred to the customer, which generally occurs upon shipment of the finished product, but sometimes is upon delivery to customer facilities.

Provisions for customer volume rebates, product returns, discounts and allowances are recorded as a reduction of revenue in the same period the related sales are recorded. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is an identifiable benefit and evidence of the fair value of the advertising, in which case the expense is classified as SG&A.

B. Significant Accounting Policies (continued)

Cost of Sales and Selling, General and Administrative

Cost of sales includes the cost of products and services provided reflecting costs of manufacturing and preparing the product for sale. These costs include expenses to acquire and manufacture products to the point that they are allocable to be sold to customers. Cost of sales is primarily comprised of inbound freight, direct materials, direct labor as well as overhead which includes indirect labor, facility and equipment costs. Cost of sales also includes quality control, procurement and material receiving costs as well as internal transfer costs. SG&A costs include the cost of selling products as well as administrative function costs. These expenses generally represent the cost of selling and distributing the products once they are available for sale and primarily include salaries and commissions of the Company’s sales force, distribution costs, notably salaries and facility costs, as well as administrative expenses for certain support functions and related overhead.

Advertising Costs

Television advertising is expensed the first time the advertisement airs, whereas other advertising is expensed as incurred. Advertising costs are classified in SG&A and amounted to $15.8 million in 2011 and $15.6 million in 2010. Expense pertaining to cooperative advertising with customers reported as a reduction of net sales was $52.0 million in 2011 and $60.0 million in 2010.

Sales Taxes

Sales and value added taxes collected from customers and remitted to governmental authorities are excluded from Net sales reported in the Combined Statements of Operations.

Shipping and Handling Costs

The Company generally does not bill customers for freight. Shipping and handling costs associated with inbound freight are reported in cost of sales. Shipping costs associated with outbound freight are reported as a reduction of net sales and amounted to $24.6 million and $23.5 million in 2011 and 2010, respectively. Distribution costs are classified as SG&A and amounted to $35.7 million and $32.4 million in 2011 and 2010.

Postretirement Defined Benefit Plan

For Company-sponsored plans, the Company uses the corridor approach to determine expense recognition for each defined benefit pension and other postretirement plan. The corridor approach defers actuarial gains and losses resulting from variances between actual and expected results (based on economic estimates or actuarial assumptions) and amortizes them over future periods. For pension plans, these unrecognized gains and losses are amortized when the net gains and losses exceed 10% of the greater of the market-related value of plan assets or the projected benefit obligation at the beginning of the year. For other postretirement benefits, amortization occurs when the net gains and losses exceed 10% of the accumulated postretirement benefit obligation at the beginning of the year. For ongoing, active plans, the amount in excess of the corridor is amortized on a straight-line basis over the average remaining service period for active plan participants. For plans with primarily inactive participants, the amount in excess of the corridor is amortized on a straight-line basis over the average remaining life expectancy of inactive plan participants.

Income Taxes

The Company’s operations are included in separate income tax returns filed with the appropriate taxing jurisdictions, except for U.S. federal and certain state and foreign jurisdictions in which the Company’s operations are included in the income tax returns of the Parent or an affiliate.

B. Significant Accounting Policies (continued)

The provision for income taxes is computed as if the Company filed on a combined stand-alone or separate tax return basis, as applicable. The provision for income taxes does not reflect the Company’s inclusion in the tax returns of the Parent or an affiliate. It also does not reflect certain actual tax efficiencies realized by the Parent in its combined tax returns that include the Company, due to legal structures it employs outside the Company. Certain income taxes of the Company are paid by the Parent or an affiliate on behalf of the Company. The payment of income taxes by the Parent or affiliate on behalf of the Company is recorded within Parent Company’s net investment and accumulated earnings on the Combined Balance Sheets.

Deferred income taxes and related tax expense have been recorded by applying the asset and liability approach to the Company as if it was a separate taxpayer. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Combined Financial Statements. Deferred tax liabilities and assets are determined based on the differences between the book values and the tax bases of the particular assets and liabilities, using enacted tax rates and laws in effect for the years in which the differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that a portion of the deferred tax asset balance will not be realized.

The Company records uncertain tax positions in accordance with ASC 740 which requires a two step process, first management determines whether it is more likely than not that a tax position will be sustained based on the technical merits of the position and second, for those tax positions that meet the more likely than not threshold, management recognizes the largest amount of the tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related taxing authority. The Company maintains an accounting policy of recording interest and penalties on uncertain tax positions as a component of the income tax expense in the Combined Statements of Operations.

Subsequent Events

The Company has evaluated all subsequent events through May 21, 2012, the date the financial statements were available to be issued.

New Accounting Standards

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220).” This ASU revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Effective January 1, 2012, the Company will adopt the requirements of this ASU.

In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment (revised standard).” The revised standard is intended to reduce the costs and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will consider this new guidance as it conducts its annual goodwill impairment testing in 2012.

C. Accounts Receivable


	2011			2010
	(In Millions)

Gross accounts receivable	$	110.2		$	94.6
Allowance for doubtful accounts		(2.1	)		(1.5	)

Accounts receivable, net	$	108.1		$	93.1

Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. Adequate reserves have been established to cover anticipated credit losses.

The Company was part of the Parent’s accounts receivable sale program in fiscal 2010 and 2011. According to the terms of that program, the Parent is required to sell certain of its trade accounts receivables at fair value to a wholly owned, consolidated, bankruptcy-remote special purpose subsidiary (“BRS”). The BRS, in turn, must sell such receivables to a third-party financial institution (“Purchaser”) for cash and a deferred purchase price receivable. The Purchaser’s maximum cash investment in the receivables at any time is $100.0 million. The purpose of the program is to provide liquidity to the Parent. These transfers are accounted for as sales under ASC 860 “Transfers and Servicing”. Receivables are derecognized from the Combined Balance Sheets when the BRS sells those receivables to the Purchaser. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred purchase price receivable. At December 31, 2011 and January 1, 2011, the Parent, as well as the Company, did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.

At January 1, 2011, $2.6 million of net receivables were derecognized, with no amounts being derecognized at December 31, 2011, as the Company ended its participation in the program during the year. All cash flows under the program are reported as a component of changes in accounts receivable within operating activities in the Combined Statements of Cash Flows since all the cash from the Purchaser is either received upon the initial sale of the receivable; or from the ultimate collection of the underlying receivables and the underlying receivables are not subject to significant risks, other than credit risk, given their short-term nature.

D. Inventories


	2011		2010
	(In Millions)

Finished products	$	130.2	$	115.0
Work in process		13.5		10.6
Raw materials		27.5		32.5

Total	$	171.2	$	158.1

Net inventories in the amount of $78.0 million at December 31, 2011 and $74.8 million at January 1, 2011 were valued at the lower of LIFO cost or market. If the LIFO method had not been used, inventories would have been $14.6 million higher than reported at December 31, 2011 and $11.9 million higher than reported at January 1, 2011.

E. Property, Plant and Equipment


	2011			2010
	(In Millions)

Land	$	6.7		$	5.9
Land improvements		6.2			6.0
Buildings		50.2			32.6
Leasehold improvements		11.3			11.6
Machinery and equipment		116.2			105.2
Computer software		14.4			12.1

Property, plant and equipment, gross		205.0			173.4

Less: accumulated depreciation and amortization		(94.3	)		(66.1	)

Property, plant and equipment, net	$	110.7		$	107.3

Depreciation and amortization expense associated with property, plant and equipment was $26.2 million and $28.9 million for the year ended December 31, 2011 and January 1, 2011, respectively.

F. Merger

As more fully described in Note A Basis of Presentation, the Merger occurred on March 12, 2010. The fair value of consideration transferred by the Parent for HHI acquired from Black & Decker was $798.5 million, inclusive of Black & Decker shares outstanding and employee related equity awards. The consideration transferred was treated as a capital contribution to the Company in the Combined Financial Statements and included as part of the net transfers to the Parent in the Statement of Changes in Business Equity. The transaction was accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed be recognized at their fair values as of the date of acquisition. The purchase price allocation for the acquired businesses was completed in 2010.

F. Merger (continued)

HHI sells residential and commercial hardware, including door knobs and handles, locksets and faucets. The Merger complemented the Company’s existing hardware product offerings and further diversified the Company’s product lines. The following table summarizes the fair values of major assets acquired and liabilities of HHI assumed as part of the Merger:


	(In Millions)

Cash and cash equivalents	$	9.2
Accounts receivable, net		73.4
Inventories, net		142.3
Prepaid expenses and other current assets		11.0
Property, plant and equipment		82.2
Trade names		108.0
Customer relationships		43.0
Patents and technology		25.0
Other assets		0.3
Accounts payable		(33.4	)
Accrued liabilities		(38.6	)
Deferred tax liabilities		(75.6	)
Other long term liabilities		(52.7	)

Total identifiable net assets		294.1

Goodwill		504.4

Total consideration transferred by the Parent and contributed to the Company	$	798.5

As of the merger date, the expected fair value of accounts receivable approximated the historical cost. The gross contractual receivable was $76.3 million, of which $2.9 million was not expected to be collectible. Inventory includes a $31.3 million fair value adjustment, which was expensed through cost of sales during 2010 as the corresponding inventory was sold.

The weighted-average useful lives assigned to the finite-lived intangible assets are trade names – 15 years; customer relationships – 12 years; and patents and technology – 10 years. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected cost synergies of the combined business, assembled workforce, and the going concern nature of HHI. It is estimated that $19.9 million of goodwill, relating to HHI’s pre-merger historical tax basis, will be deductible for tax purposes.

F. Merger (continued)

Actual and Pro-Forma Impact of the Merger

The Company’s Combined Statements of Operations for the fiscal year ending January 1, 2011 includes $662.8 million in net sales and $10.4 million in net income relating to HHI.

The following table presents supplemental pro-forma information as if the Merger had occurred on January 3, 2010. This pro-forma information includes merger related charges for the period. The pro-forma results are not necessarily indicative of what the Company’s combined net earnings would have been had the Company completed the Merger on January 3, 2010. In addition, the pro-forma results do not reflect the expected realization of any cost savings associated with the Merger.


	2010
	(In Millions)

Net sales	$	1,063.2
Net earnings		1.4

The 2010 pro-forma results were calculated by combining the results of the HHI Group with the HHI business’s stand-alone results from January 3, 2010 through March 12, 2010. The following adjustments were made to account for certain costs which would have been incurred during this pre-Merger period.

•

Elimination of the historical pre-Merger intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the Merger that would have been incurred from January 3, 2010 to March 12, 2010.

•

Additional depreciation related to property, plant and equipment fair value adjustments that would have been expensed from January 3, 2010 to March 12, 2010.

•

The modifications above were adjusted for the applicable tax impact.

G. Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill are as follows:


	2011			2010
	(In Millions)

Beginning balance	$	583.3		$	71.8
Addition from the merger		—			504.4
Foreign currency translation		(9.7	)		7.1

Ending balance	$	573.6		$	583.3

G. Goodwill and Intangible Assets (continued)

Intangible Assets

Intangible assets at December 31, 2011 and January 1, 2011 were as follows:


	2011					2010
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
	(In Millions)
Amortized intangible assets – definite lives:
Patents and technology	$	25.0	$	(4.5	)	$	25.0	$	(1.6	)
Trade names		108.0		(15.4	)		108.0		(6.7	)
Customer relationships		65.1		(25.2	)		65.6		(20.4	)

Total	$	198.1	$	(45.1	)	$	198.6	$	(28.7	)

Total indefinite-lived trade names are $18.1 million at December 31, 2011 and $18.2 million at January 1, 2011, relating to the National Hardware tradename, with the change in value due to fluctuations in currency rates. Future amortization expense in each of the next five years amounts to $17.7 million for 2012, $17.8 million for 2013, $17.2 million for 2014, $15.9 million for 2015, $14.5 million for 2016 and $69.9 million thereafter.

H. Accrued Expenses

Accrued expenses at December 31, 2011 and January 1, 2011 were as follows:


	2011		2010
	(In Millions)

Payroll and related taxes	$	10.6	$	11.4
Customer rebates and sales returns		11.7		7.3
Accrued restructuring costs		7.8		8.9
Accrued freight		4.1		3.7
Insurance and benefits		5.9		5.1
Accrued litigation		5.0		2.5
ESOP		4.5		0.8
Warranty costs		4.4		4.3
Other		10.5		1.3

Total	$	64.5	$	45.3

I. Fair Value Measurements and Commodity Contracts

Fair Value Measurements

ASC 820 defines, establishes a consistent framework for measuring, and expands disclosure requirements about fair value. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs and significant value drivers are observable.

Level 3 – Instruments that are valued using unobservable inputs.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The assets and liabilities that are recorded at fair value on a recurring basis are derivative financial instruments, which are all considered Level 2 in the fair value hierarchy. The fair values of debt instruments are estimated using a discounted cash flow analysis using the Company’s marginal borrowing rates. The fair value of affiliate debt was $445.5 million and $559.1 million at December 31, 2011 and January 1, 2011, respectively.

Assets Recorded at Fair Value on a Nonrecurring Basis

The following table presents the fair value and hierarchy level used in determining the fair value of this asset group (in millions):


	Carrying Value January 1, 2011		Level 1		Level 2		Level 3		Impairment

Long-lived assets held and used	$	20.8	$	—	$	—	$	20.8	$	(0.9	)

As described in Note N, Restructuring and Asset Impairments, during 2010 the Company recorded a $0.9 million asset impairment relating to certain U.S. manufacturing operations with a net book value of $21.7 million. These fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method, which are classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows within these analyses was based on our most recent operational budgets, long-range strategic plans and other estimates.

I. Fair Value Measurements and Commodity Contracts (continued)

Commodity Contracts

In conjunction with the Merger, commodity contracts to purchase 7.4 million pounds of zinc and copper were assumed. These contracts were used to manage price risks related to material purchases used in the manufacturing process. The objective of the contracts was to reduce the variability of cash flows associated with the forecasted purchase of these commodities. During 2010 all assumed commodity contracts either matured or were terminated. No notional amounts were outstanding as of December 31, 2011 or January 1, 2011. The income statement impacts related to commodity contracts not designated as hedging instruments were as follows (in millions):

J. Stock Based Compensation

Stock Options: For the year ended December 31, 2011, there were 28,000 options in the common stock of the Parent granted to employees of the Company with 204,074 options outstanding at year end. Stock option expense recognized for the year ended December 31, 2011 was $0.3 million. Expense was recognized based on the fair value of the option awards granted to participating employees of the Company. For the year ended January 1, 2011, there were 35,250 options granted to employees of the Company, 209,466 options outstanding at year end and stock option expense recognized of $0.2 million. As of December 31, 2011, unrecognized compensation expense amounted to $1.0 million.

Employee Stock Purchase Plan: The Employee Stock Purchase Plan (“ESPP”) of the Parent enables eligible employees in the United States and Canada to subscribe at any time to purchase shares of common stock on a monthly basis at the lower of 85% of the fair market value of the shares on the grant date ($53.00 per share for fiscal year 2011 purchases) or 85% of the fair market value of the shares on the last business day of each month. ESPP compensation cost is recognized ratably over the one-year term based on actual employee stock purchases under the plan.

During 2011 and 2010, 12,092 shares and 5,538 shares were issued to employees of the Company at average prices of $50.85 and $37.53 per share, respectively. Total compensation expense recognized by the Company amounted to $0.3 million and $0.1 million for 2011 and 2010, respectively.

Restricted Share Units: Compensation cost for restricted share units (“RSU”) granted to employees of the Company is recognized ratably over the vesting term, which varies but is generally 4 years. RSU grants totaled 9,336 shares and 12,753 shares in 2011 and 2010, respectively. The weighted-average grant date fair value of the RSU’s granted in 2011 and 2010 were $61.79 and $59.99, respectively. Total compensation expense recognized for RSU’s amounted to $0.2 million and $0.1 million for 2011 and 2010, respectively. As of December 31, 2011 unrecognized compensation cost amounted to $1.0 million.

Long-Term Performance Awards: The Parent has granted Long Term Performance Awards (“LTIPs”) under its 1997, 2001 and 2009 Long Term Incentive Plans to senior management employees of the Company for achieving Parent performance measures. Awards are payable in shares of the Parent common stock, which may be restricted if the employee has not achieved certain stock ownership levels, and generally no award is made if the employee terminates employment prior to the payout date.

J. Stock Based Compensation (continued)

Working capital incentive plan: In 2010, the Parent initiated a bonus program under its 2009 Long Term Incentive Plan that provides executives the opportunity to receive stock in the event certain working capital turn objectives are achieved by June 2013 and are sustained for a period of at least six months. The ultimate issuances of shares, if any, will be determined based on achievement of objectives during the performance period. A single employee of the Company was issued 2,742 shares under this plan in 2010.

Other Long-Term Performance Awards: A potential maximum of 5,484 LTIP grants were made in 2010 and a potential maximum of 3,851 LTIP grants were made in 2011 to an employee of the Company. Each grant has separate annual performance goals for each year within the respective three year performance period associated with each award. Parent earnings per share and return on capital employed represent 75% of the share payout of each grant, with the remaining 25% a market-based element, measuring the Parent’s common stock return relative to peers over the performance period. The ultimate delivery of shares will occur in 2013 and 2014 for the 2010 and 2011 grants, respectively. Total payouts are based on actual performance in relation to these goals. Total compensation expense recognized for LTIP awards amounted to $0.1 million in both 2011 and 2010.

K. Accumulated Other Comprehensive Income

Accumulated other comprehensive income at the end of each fiscal year was as follows:


	2011			2010
	(In Millions)

Currency translation adjustment	$	36.3		$	49.5
Pension loss, net of tax		(12.0	)		(9.9	)

Accumulated other comprehensive income	$	24.3		$	39.6

L. Employee Benefit Plans

Employee Stock Ownership Plan (“ESOP”)

Most of the Company’s U.S. employees, including Black & Decker employees beginning on January 1, 2011, are allowed to participate in a tax-deferred 401(k) savings plan administered and sponsored by the Parent. Eligible employees may contribute from 1% to 25% of their eligible compensation to a tax-deferred 401(k) savings plan, subject to restrictions under tax laws. Employees generally direct the investment of their own contributions into various investment funds. In 2011 and 2010, an employer match benefit was provided under the plan equal to one-half of each employee’s tax-deferred contribution up to the first 7% of their compensation. Participants direct the entire employer match benefit such that no participant is required to hold the Parent’s common stock in their 401(k) account. The Company’s employer match benefit totaled $2.1 million and $0.3 million in 2011 and 2010, respectively. The increase is attributable to the HHI integration into the ESOP in 2011.

In addition, approximately 1,500 of the Company’s U.S. salaried and non-union hourly employees are eligible to receive a non-contributory benefit under the Core benefit plan. Core benefit allocations range from 2% to 6% of eligible employee compensation based on age. Approximately 1,157 U.S. employees also receive a Core transition benefit, allocations of which range from 1% – 3% of eligible compensation based on age and date of hire. Approximately 207 U.S. employees are eligible to receive an additional average 1.3% contribution actuarially designed to replace previously curtailed pension benefits. The Company’s allocations for benefits earned under the Core plan were $4.5 million in 2011 and $0.8 million in 2010. Assets held in participant Core accounts are invested in target date retirement funds which have an age-based allocation of investments. The increase is attributable to the HHI integration into the Core plan in 2011.

L. Employee Benefit Plans (continued)

The Parent accounts for the ESOP under ASC 718-40, “Compensation – Stock Compensation – Employee Stock Ownership Plans”. Net ESOP activity recognized is comprised of the cost basis of shares released, the cost of the aforementioned Core and 401(k) match defined contribution benefits, less the fair value of shares released and dividends on unallocated ESOP shares. The Company’s net ESOP activity resulted in expense of $3.7 million and $1.1 million in 2011 and 2010, respectively. The 401(k) employer match and Core benefit elements of net ESOP expense represent the actual benefits earned by the Company’s participants in each year, while the cost basis of shares released, the fair value of shares released and the dividends on unallocated shares elements are based on the proportion of the Company’s actual earned benefits in relation to the Parent’s ESOP total earned benefits. The increase in net ESOP expense in 2011 is related to the merger of a portion of the U.S. Black & Decker 401(k) defined contribution plan into the ESOP and extending the Core benefit to these employees. ESOP expense is affected by the market value of the Parent’s common stock on the monthly dates when shares are released. The market value of shares released averaged $68.12 per share in 2011 and $58.56 per share in 2010.

Parent Sponsored Pension Plans

The Company participates in certain U.S. and Canadian plans sponsored solely by the Parent. All participants in the plans are employees or former employees of the Parent, either directly or through its subsidiaries. The primary U.S. plan was curtailed in 2010 and the other plans are generally also curtailed with no additional service benefits to be earned by participants. The Company’s expense associated with the parent sponsored plans was $3.2 million and $5.0 million for 2011 and 2010, respectively.

Defined Contribution Plans

In addition to the ESOP, various other defined contribution plans are sponsored worldwide, including a tax-deferred 401(k) savings plan covering substantially all Black & Decker U.S. employees. The expense for such defined contribution plans, aside from the earlier discussed ESOP, was $1.5 million and $2.4 million for 2011 and 2010, respectively. The decrease in other defined contribution plan expense in 2011 relative to 2010 pertains to the merger of the Black & Decker U.S. defined contribution plan into the ESOP.

L. Employee Benefit Plans (continued)

Defined Benefit Plans

Pension and other benefit plans – The Company sponsors pension plans covering 284 domestic employees and 3,970 foreign employees (primarily in Mexico). Benefits are generally based on salary and years of service, except for U.S. collective bargaining employees whose benefits are based on a stated amount for each year of service.

The components of net periodic pension expense are as follows:


	U.S. Plan						Non-U.S. Plans
	2011			2010			2011		2010
	(In Millions)

Service cost	$	0.2		$	0.3		$	0.7	$	0.4
Interest cost		3.4			3.5			0.5		0.4
Expected return on plan assets		(3.4	)		(3.7	)		—		—
Amortization of actuarial loss		0.3			0.7			0.1		—

Net periodic pension expense	$	0.5		$	0.8		$	1.3	$	0.8

The Company provides medical and dental fixed subsidy benefits for certain retired employees in the United States. Approximately 27 participants are covered under this plan. Net periodic post-retirement benefit expense was comprised of the following elements:


	Other Benefit Plan
	2011			2010
	(In Millions)

Interest cost	$	0.2		$	0.2
Prior service credit amortization		(0.2	)		(0.1	)

Net periodic post-retirement benefit (income) expense	$	—		$	0.1

Changes in plan assets and benefit obligations recognized in other comprehensive income in 2011 are as follows:


	2011
	(In Millions)

Current year actuarial loss	$	3.1
Amortization of actuarial loss		(0.2	)
Currency		(0.1	)

Total loss recognized in other comprehensive income (pre-tax)	$	2.8

The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit costs during 2012 total $0.4 million, representing the amortization of actuarial losses.

L. Employee Benefit Plans (continued)

The changes in the pension and other post-retirement benefit obligations, fair value of plan assets, as well as amounts recognized in the Combined Balance Sheets, are shown below (in millions):


	U.S. Plan						Non-U.S. Plans						Other Benefits
	2011			2010			2011			2010			2011			2010
Change in benefit obligation
Benefit obligation at end of prior year	$	67.3		$	63.3		$	7.2		$	1.3		$	4.4		$	4.7
Service cost		0.2			0.3			0.7			0.4			—			—
Interest cost		3.4			3.5			0.5			0.4			0.2			0.2
Settlements/curtailments		—			—			(0.1	)		—			—			—
Actuarial (gain) loss		6.8			3.9			(1.4	)		1.6			(0.7	)		—
Foreign currency exchange rates		—			—			(0.7	)		0.2			—			—
Acquisitions, divestitures and other		(0.2	)		—			—			3.7			—			—
Benefits paid		(3.5	)		(3.7	)		(0.5	)		(0.4	)		(0.4	)		(0.5	)

Benefit obligation at end of year	$	74.0		$	67.3		$	5.7		$	7.2		$	3.5		$	4.4


Change in plan assets
Fair value of plan assets at end of prior year	$	53.3		$	50.8		$	—		$	—		$	—		$	—
Actual return on plan assets		5.1			6.2			—			—			—			—
Employer contributions		0.5			—			0.5			0.4			0.4			0.5
Acquisitions, divestitures and other		(0.2	)		—			—			—			—			—
Benefits paid		(3.5	)		(3.7	)		(0.5	)		(0.4	)		(0.4	)		(0.5	)

Fair value of plan assets at end of plan year		55.2			53.3			—			—			—			—

Funded status – assets less the benefit obligation		(18.8	)		(14.0	)		(5.7	)		(7.2	)		(3.5	)		(4.4	)
Unrecognized net actuarial loss (gain)		20.2			15.4			0.2			1.8			(2.2	)		(1.7	)

Net amount recognized	$	1.4		$	1.4		$	(5.5	)	$	(5.4	)	$	(5.7	)	$	(6.1	)


Amounts recognized in the Combined Balance Sheets
Current benefit liability	$	—		$	—		$	(0.2	)	$	(0.2	)	$	(0.5	)	$	(0.6	)
Non-current benefit liability		(18.8	)		(14.0	)		(5.5	)		(7.0	)		(3.0	)		(3.8	)

Net liability recognized	$	(18.8	)	$	(14.0	)	$	(5.7	)	$	(7.2	)	$	(3.5	)	$	(4.4	)
Accumulated other comprehensive loss (gain) (pre-tax):
Actuarial loss (gain)	$	20.2		$	15.4		$	0.2		$	1.8		$	(2.2	)	$	(1.7	)

Net amount recognized	$	1.4		$	1.4		$	(5.5	)	$	(5.4	)		(5.7	)	$	(6.1	)

The increase in the U.S. projected benefit obligation from actuarial losses in 2011 primarily pertains to the 75 basis point decline in the discount rate.

L. Employee Benefit Plans (continued)

The accumulated benefit obligation for all defined benefit pension plans was $77.2 million at December 31, 2011 and $71.1 million at January 1, 2011. Information regarding pension plans in which the accumulated benefit obligations exceed plan assets and pension plans in which projected benefit obligations (inclusive of anticipated future compensation increases) exceed plan assets follows:


	U.S. Plan				Non-U.S. Plans
	2011		2010		2011		2010
	(In Millions)

Projected benefit obligation	$	74.0	$	67.3	$	5.7	$	7.2
Accumulated benefit obligation	$	74.0	$	67.3	$	3.2	$	3.8
Fair value of plan assets	$	55.2	$	53.3	$	—	$	—

The major assumptions used in valuing pension and post-retirement plan obligations and net costs were as follows:


	Pension Benefits												Other Benefits
	U.S. Plans						Non-U.S. Plans						U.S. Plan
	2011			2010			2011			2010			2011			2010
Weighted-average assumptions used to determine benefit obligations at year end
Discount rate		4.50	%		5.25	%		8.75	%		7.25	%		4.00	%		5.00	%
Rate of compensation increase		—	%		—	%		4.75	%		4.75	%		—	%		—	%

Weighted-average assumptions used to determine net periodic benefit cost
Discount rate		5.25	%		5.75	%		7.25	%		9.00	%		5.00	%		5.50	%
Rate of compensation increase		—	%		—	%		4.75	%		4.75	%		—	%		—	%
Expected return on plan assets		6.75	%		7.50	%		—	%		—	%		—	%		—	%

The expected rate of return on plan assets is determined considering the returns projected for the various asset classes and the relative weighting for each asset class considering the target asset allocations. In addition the Company considers historical performance, the recommendations from outside actuaries and other data in developing the return assumption. The Company expects to use a weighted-average rate of return assumption of 6.5% for the U.S. plan, in the determination of fiscal 2012 net periodic benefit expense.

L. Employee Benefit Plans (continued)

Pension Plan Assets

Plan assets are invested in equity securities, government and corporate bonds and other fixed income securities, and money market instruments. The Company’s worldwide asset allocations at December 31, 2011 and January 1, 2011 by asset category and the level of the valuation inputs within the fair value hierarchy established by ASC 820 are as follows (in millions):

2011

Level 1

Level 2

Asset Category

Cash and cash equivalents

0.6

0.2

0.4

Equity securities

U.S. equity securities

16.3

2.8

13.5

Foreign equity securities

9.0

—

Fixed income securities

Government securities

15.3

14.4

0.9

Corporate securities

13.7

—

13.7

Other

0.3

—

0.3

Total

55.2

26.4

28.8


	2010		Level 1		Level 2
Asset Category
Cash and cash equivalents	$	12.8	$	5.4	$	7.4
Equity securities
U.S. equity securities		21.9		3.7		18.2
Foreign equity securities		11.2		11.2		—
Fixed income securities
Government securities		3.2		3.0		0.2
Corporate securities		1.6		—		1.6
Other		2.6		—		2.6

Total	$	53.3	$	23.3	$	30.0

U.S. and foreign equity securities primarily consist of companies with large market capitalizations and to a lesser extent mid and small capitalization securities. Government securities primarily consist of U.S. Treasury securities and foreign government securities with de minimus default risk. Corporate fixed income securities include publicly traded U.S. and foreign investment grade and to a small extent high yield securities. Other investments include U.S. mortgage backed securities. The level 2 investments are primarily comprised of institutional mutual funds that are not publicly traded; the investments held in these mutual funds are generally level 1 publicly traded securities.

The Company’s investment strategy for pension plan assets includes diversification to minimize interest and market risks. Plan assets are rebalanced periodically to maintain target asset allocations. Currently, the Company’s target allocations include 50% in equity securities and 50% in fixed income securities. Maturities of investments are not necessarily related to the timing of expected future benefit payments, but adequate liquidity to make immediate and medium term benefit payments is ensured.

Contributions

The Company’s funding policy for its defined benefit plans is to contribute amounts determined annually on an actuarial basis to provide for current and future benefits in accordance with federal law and other regulations. The Company expects to contribute approximately $3.2 million to its pension and other post-retirement benefit plans in 2012.

L. Employee Benefit Plans (continued)

Expected Future Benefit Payments

Benefit payments, inclusive of amounts attributable to estimated future employee service, are expected to be paid as follows over the next 10 years:


	Total		Year 1		Year 2		Year 3		Year 4		Year 5		Years 6-10
	(In Millions)

Future payments	$	44.7	$	4.2	$	4.2	$	4.2	$	4.2	$	4.2	$	23.7

These benefit payments will be funded through a combination of existing plan assets and amounts to be contributed in the future by the Company.

M. Other Costs and Expenses

Other-net is primarily comprised of intangible asset amortization expense (See Note G Goodwill and Intangible Assets for further discussion), currency related gains or losses, and environmental expense. Research and development costs, which are classified in SG&A, were $7.9 million and $6.9 million for fiscal years 2011 and 2010, respectively.

N. Restructuring and Asset Impairments

A summary of the restructuring reserve activity from January 1, 2011 to December 31, 2011 is as follows (in millions):


	January 1, 2011		Additions		Usage			December 31, 2011
2011 Actions
Severance and related costs	$	—	$	2.8	$	(0.4	)	$	2.4
Pre-2011 Actions
Severance and related costs		8.9		0.4		(3.9	)		5.4

Total	$	8.9	$	3.2	$	(4.3	)	$	7.8

2011 Actions: During 2011, the Company recognized $2.8 million of severance charges associated with the Merger and other cost actions initiated in the current year. The charges relate to the reduction of approximately 100 employees.

Pre-2011 Actions: For the year ended January 1, 2011 the Company initiated restructuring activities associated with the Merger, largely related to employee related actions. As of January 1, 2011, the reserve balance related to these pre-2011 actions totaled $8.9 million. Utilization of the reserve balance related to pre-2011 actions was $3.9 million in 2011. The vast majority of the remaining reserve balance of $5.4 million is expected to be utilized in 2012.

N. Restructuring and Asset Impairments (continued)

A summary of the restructuring reserve activity from January 3, 2010 to January 1, 2011 is as follows (in millions):


	January 3, 2010		Additions		Usage			January 1, 2011
2010 Actions
Severance and related costs	$	—	$	11.0	$	(2.1	)	$	8.9
Asset Impairment (facility closure)		—		0.9		(0.9	)		—

Severance and related costs		—		11.9		(3.0	)		8.9
Pre-2010 Actions
Severance and related costs		0.2		—		(0.2	)		—

Total	$	0.2	$	11.9	$	(3.2	)	$	8.9

2010 Actions: During 2010, the Company recognized $11.0 million of severance charges associated with the Merger primarily relating to the shut-down of certain U.S. manufacturing facilities and distribution centers. The charges relate to the reduction of approximately 550 employees. Additionally the Company recorded a $0.9 million asset impairment on the related facilities.

O. Business Segments and Geographic Areas

Business Segments

The Company operates as one reportable segment, inclusive of its plumbing-related products, lock and hardware products which have been aggregated consistent with the criteria in ASC 280. The Company’s operations are principally managed on a products and services basis. In accordance with ASC 280, Segment Reporting, the Company reports segment information based upon the management approach. The management approach designates the internal reporting used by the chief operating decision maker, or the CODM for making decisions about resource allocations to segments and assessing performance. The CODM allocates resources to and assesses the performance of the operating segment using information based on earnings before interest, taxes, depreciation, and amortization.

Geographic Areas

Geographic net sales and long-lived assets are attributed to the geographic regions based on the geographic location of each Company subsidiary.


	2011		2010
	(In Millions)
Net sales
United States	$	743.1	$	657.7
Canada		105.3		107.7
Other Americas		91.4		71.2
Asia		35.2		27.6

Combined	$	975.0	$	864.2


Property, plant and equipment
United States	$	102.6	$	98.5
Canada		4.4		4.7
Other Americas		3.5		3.8
Asia		0.2		0.3

Combined	$	110.7	$	107.3

P. Income Taxes

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2011 and January 1, 2011 were as follows:


	2011		2010
	(In Millions)
Deferred tax liabilities:
Amortization of intangibles	$	61.6	$	66.4
Depreciation		3.7		—
Other		2.3		2.7

Total deferred tax liabilities	$	67.6	$	69.1


Deferred tax assets:
Accruals	$	22.9	$	20.2
Employee benefit plans		9.6		9.6
Inventories		7.3		11.2
Operating loss and tax credit carry forwards		12.2		12.0
Restructuring charges		2.9		3.0
Allowance for doubtful accounts		1.2		1.8
Depreciation		—		0.6
Other		3.1		2.8

Total deferred tax assets	$	59.2	$	61.2


Net deferred tax liabilities before valuation allowance	$	8.4	$	7.9
Valuation allowance		12.2		11.9

Net deferred tax liabilities after valuation allowance	$	20.6	$	19.8

Net operating loss carry forwards of $16.8 million and $16.1 million respectively, at December 31, 2011 and January 1, 2011, are available to reduce future tax obligations of certain U.S. state and foreign companies. The net operating loss carry forwards have various expiration dates beginning in 2012 with certain jurisdictions having indefinite carry forward periods.

P. Income Taxes (continued)

A valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or a portion of these assets will not be realized. The Company has recorded a valuation allowance of $12.2 million and $11.9 million for deferred tax assets existing as of December 31, 2011 and January 1, 2011, respectively. During 2011, the valuation allowance, which is primarily attributable to state net operating loss carry forwards, increased by $0.3 million.

The classification of deferred taxes as of December 31, 2011 and January 1, 2011 were as follows (in millions):


	2011					2010
	Deferred Tax Asset		Deferred Tax Liability			Deferred Tax Asset		Deferred Tax Liability

Current	$	22.4	$	(0.7	)	$	23.0	$	(0.3	)
Non-current		3.4		(45.7	)		3.0		(45.5	)

Total	$	25.8	$	(46.4	)	$	26.0	$	(45.8	)

Income tax expense (benefit) as of December 31, 2011 and January 1, 2011 consisted of the following:


	2011			2010
	(In Millions)

Current:
Federal	$	(1.2	)	$	12.2
Foreign		18.0			8.6
State		1.7			1.0

Total current		18.5			21.8

Deferred:
Federal		(3.1	)		(22.7	)
Foreign		(3.2	)		0.8
State		0.1			(0.6	)

Total deferred		(6.2	)		(22.5	)

Provision (benefit) for income taxes	$	12.3		$	(0.7	)

P. Income Taxes (continued)

In general, there were no income taxes paid directly to any taxing authority by the Company for fiscal years 2011 and 2010. Any liability owed by the Company due to taxable income generated is settled through intercompany transfers with the Parent. Had the company paid its own tax liabilities during tax years December 31, 2011 and January 1, 2011, the net payments would have been approximately $20.2 million and $22.1 million, respectively.

The reconciliation of federal income tax at the statutory federal rate to income tax at the effective rate is as follows:


	2011			2010
	(In Millions)

Tax at statutory rate	$	17.1		$	(1.3	)
State income taxes, net of federal benefits		0.3			0.3
Difference between foreign and federal income tax		(4.7	)		(2.1	)
NOL and valuation allowance items		0.9			(0.2	)
Transfer price adjustments		(1.0	)		2.1
Other-net		(0.3	)		0.5

Income taxes	$	12.3		$	(0.7	)

The components of earnings (loss) before provision for income taxes consisted of the following:


	2011			2010
	(In Millions)

United States	$	(9.5	)	$	(37.3	)
Foreign		58.2			33.5

Earnings (loss) before income taxes	$	48.7		$	(3.8	)

Any undistributed foreign earnings of the Company at December 31, 2011, are considered to be invested indefinitely or will be remitted substantially free of additional U.S. tax. Accordingly, no provision has been made for taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount of such liability.

The gross unrecognized tax benefit at December 31, 2011 is zero due to the settlement of a U.S. tax audit during fiscal year 2011. The liability for potential penalties and interest related to unrecognized tax benefits was increased $0.1 million for the tax year ended January 1, 2011, with no change during the tax year ended December 31, 2011. The liability for potential penalties and interest totaled $0.5 million January 1, 2011. There were no penalties or interest outstanding at the end of the 2011 tax year. The Company classifies all tax-related interest and penalties in the provision for income taxes.

The Company considers many factors when evaluating and estimating its tax positions and the impact on income tax expense, which may require periodic adjustments and which may not accurately anticipate actual outcomes. As of December 31, 2011 the company no longer requires a liability for unrecognized tax benefits.

The Company is subject to the examination of its income tax returns by the Internal Revenue Service (IRS) and other tax authorities in conjunction with the IRS audit of the Parent. The tax years under examination vary by jurisdiction. The Company is included in the IRS examination of the Parent for tax years 2008 and 2009. The Company also files many state and foreign income tax returns in jurisdictions with varying statutes of limitations. Tax years 2008 and forward generally remain subject to examination by most state tax authorities. In foreign jurisdictions, tax years 2007 and forward generally remain subject to examination.

Q. Commitments and Guarantees

Commitments

The Company has non-cancelable operating lease agreements, principally related to facilities, vehicles, machinery and equipment. Rental expense for operating leases was $12.8 million in 2011, and $14.2 million in 2010.

The following is a summary of the Company’s future commitments which span more than one future fiscal year:


	Total		2012		2013		2014		2015		2016		Thereafter
	(In Millions)

Operating lease obligations	$	46.3	$	8.8	$	5.6	$	5.2	$	4.6	$	3.4	$	18.7

Guarantees

The Company issued a standby letter of credit for $0.3 million to guarantee future payments which may be required under an insurance program.

The Company provides product and service warranties. The types of warranties offered generally range from one year to limited lifetime, while certain products carry no warranty. Further, the Company sometimes incurs discretionary costs to service its products in connection with product performance issues. Historical warranty and service claim experience forms the basis for warranty obligations recognized. Adjustments are recorded to the warranty liability as new information becomes available.

Following is a summary of the warranty activity for the years ended December 31, 2011, and January 1, 2011:


	2011			2010
	(In Millions)

Beginning balance	$	4.3		$	0.2
Warranties issued		8.1			2.8
Liability assumed in the merger		—			3.7
Warranty payments		(8.0	)		(2.4	)

Ending balance	$	4.4		$	4.3

R. Contingencies

The Company is involved in various legal proceedings relating to environmental issues, employment, product liability, workers’ compensation claims and other matters. The Company periodically reviews the status of these proceedings with both inside and outside counsel, as well as an actuary for risk insurance. Management believes that the ultimate disposition of these matters will not have a material adverse effect on operations or financial condition taken as a whole.

The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures. Subject to the imprecision in estimating future contingent liability costs, the Company does not expect that any sum it may have to pay in connection with these matters in excess of the amounts recorded will have a materially adverse effect on its financial position, results of operations or liquidity.

R. Contingencies (continued)

In connection with the Merger, the Company assumed certain commitments and contingent liabilities. HHI is a party to litigation and administrative proceedings with respect to claims involving the discharge of hazardous substances into the environment. Some of these assert claims for damages and liability for remedial investigations and clean-up costs with respect to sites that have never been owned or operated by HHI but at which HHI has been identified as a potentially responsible party. Other matters involve current and former manufacturing facilities.

In the event that no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. In the normal course of business, the Company is involved in various lawsuits and claims. In addition, the Company is a party to a number of proceedings before federal and state regulatory agencies relating to environmental remediation. Also, the Company, along with many other companies, has been named as a PRP in a number of administrative proceedings for the remediation of various waste sites, including 3 active Superfund sites. Current laws potentially impose joint and several liabilities upon each PRP. In assessing its potential liability at these sites, the Company has considered the following: whether responsibility is being disputed, the terms of existing agreements, experience at similar sites, and the Company’s volumetric contribution at these sites.

The Company’s policy is to accrue environmental investigatory and remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The amount of liability recorded is based on an evaluation of currently available facts with respect to each individual site and includes such factors as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. The liabilities recorded do not take into account any claims for recoveries from insurance or third parties. As assessments and remediation progress at individual sites, the amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. As of December 31, 2011 and January 1, 2011, the Company had reserves of $26.7 million and $25.3 million, respectively, for remediation activities associated with Company-owned properties, as well as for Superfund sites, for losses that are probable and estimable. Of the 2011 amount, $1.6 million is classified as current and $25.1 million as long-term which is expected to be paid over the estimated remediation period. The range of environmental remediation costs that is reasonably possible is $19.0 million to $44.0 million which is subject to change in the near term. The Company may be liable for environmental remediation of sites it no longer owns. Liabilities have been recorded on those sites in accordance with policy.

The environmental liability for certain sites that have cash payments beyond the current year that are fixed or reliably determinable have been discounted using a rate of 2.1% to 3.8%, depending on the expected timing of disbursements. The discounted and undiscounted amount of the liability relative to these sites is $7.7 million and $16.0 million, respectively. The payments relative to these sites are expected to be $0.8 million in 2012, $0.7 million in 2013, $0.7 million in 2014, $0.8 million in 2015, $0.4 million in 2016 and $12.6 million thereafter.

The HHI Group

Combined Balance Sheets


	(Unaudited)
	June 30, 2012		December 31, 2011
	(In Millions)
Assets
Current assets:
Cash and cash equivalents	$	48.5	$	44.8
Accounts receivable, net		121.4		108.1
Inventories, net		168.8		171.2
Prepaid expenses		4.7		4.2
Deferred taxes		25.3		22.4
Other current assets		3.9		2.7

Total current assets		372.6		353.4

Property, plant and equipment, net		102.9		110.7
Goodwill		572.6		573.6
Customer relationships, net		37.1		39.9
Trade names, net		106.1		110.7
Patents and technology, net		18.6		20.5
Affiliate notes receivable		33.3		33.5
Other assets		7.5		5.0

Total assets	$	1,250.7	$	1,247.3


Liabilities and business equity
Current liabilities:
Accounts payable	$	122.1	$	115.7
Current portion of affiliate debt		132.5		138.0
Accrued expenses		49.8		64.5

Total current liabilities		304.4		318.2

Long-term affiliate debt		227.9		273.7
Deferred taxes		46.9		45.7
Post-retirement benefits		27.1		27.3
Other liabilities		34.3		41.3

Commitments and contingencies (Notes P and Q)

Business equity:
Parent Company’s net investment and accumulated earnings		585.3		514.5
Accumulated other comprehensive income		22.0		24.3

Parent Company’s net investment and accumulated earnings and accumulated other comprehensive income		607.3		538.8
Non-controlling interest		2.8		2.3

Total business equity		610.1		541.1

Total liabilities and business equity	$	1,250.7	$	1,247.3

See notes to unaudited combined financial statements.

The HHI Group

Combined Statements of Operations

(Unaudited)


	Six Months Ended
	June 30, 2012			July 2, 2011
	(In Millions)
Net sales:
Trade	$	472.7		$	475.7
Affiliate		20.6			15.2

Total net sales		493.3			490.9

Costs and expenses:
Cost of sales – trade		318.9			315.6
Cost of sales – affiliate		19.8			14.6
Selling, general and administrative		91.1			96.4
Provision for doubtful accounts		0.1			0.4
Other affiliate income		(0.5	)		(0.6	)
Other – net		9.5			10.7
Restructuring charges		2.7			3.6
Interest expense – affiliate, net		17.6			22.6
Interest income – trade, net		(0.3	)		(0.3	)

Total costs and expenses		458.9			463.0

Earnings before income taxes		34.4			27.9
Income taxes		10.6			8.6

Net earnings		23.8			19.3
Net income attributable to non-controlling interests		(0.5	)		(0.3	)

Net earnings attributable to Parent Company	$	23.3		$	19.0

See notes to unaudited combined financial statements.

The HHI Group

Combined Statements of Cash Flows

(Unaudited)


	Six Months Ended
	June 30, 2012			July 2, 2011
	(In Millions)
Operating activities
Net earnings	$	23.8		$	19.3
Net income attributable to non-controlling interests		(0.5	)		(0.3	)

Net earnings attributable to Parent Company		23.3			19.0
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization of property and equipment		12.7			14.2
Amortization of intangibles		9.0			8.5
Provision for doubtful accounts		0.1			0.4
Deferred taxes		(5.0	)		(1.1	)
Changes in operating assets and liabilities:
Accounts receivable		(13.2	)		(38.9	)
Inventories		2.1			(12.6	)
Accounts payable		6.4			36.7
Prepaid expenses and other current assets		(4.7	)		(3.1	)
Other assets		(2.5	)		(0.7	)
Accrued expenses		(15.0	)		14.6
Other		37.9			32.9

Net cash provided by operating activities		51.1			69.9

Investing activities
Capital expenditures		(4.7	)		(14.6	)
Proceeds from sales of assets		—			0.1

Net cash used in investing activities		(4.7	)		(14.5	)

Financing activities
Cash received from Parent		373.0			513.1
Cash remitted to Parent		(364.8	)		(526.5	)
Receipts from (lending to) affiliates through notes receivable		0.2			(0.2	)
Repayments on affiliate debt		(51.3	)		(45.0	)

Net cash used in financing activities		(42.9	)		(58.6	)

Effect of exchange rate changes on cash		0.2			0.5

Increase (decrease) in cash and cash equivalents		3.7			(2.7	)
Cash and cash equivalents, beginning of period		44.8			47.7

Cash and cash equivalents, end of period	$	48.5		$	45.0

See notes to unaudited combined financial statements.

The HHI Group

Combined Statements of Changes in Business Equity

For the Six Months Ended June 30, 2012 and July 2, 2011

(In Millions, Unaudited)


	Parent Company’s Net Investment and Accumulated Earnings		Accumulated Other Comprehensive Income			Non- Controlling Interest		Total Business Equity

Balance at January 1, 2011	$	466.6	$	39.6		$	2.7	$	508.9
Net income		19.0		—			0.3		19.3
Currency translation adjustment		—		21.3			—		21.3
Change in pension, net of tax		—		1.3			—		1.3
Net transfers to the Parent		8.0		—			—		8.0

Balance at July 2, 2011		493.6		62.2			3.0		558.8

Balance at December 31, 2011		514.5		24.3			2.3		541.1
Net income		23.3		—			0.5		23.8
Currency translation adjustment		—		(2.8	)		—		(2.8	)
Change in pension, net of tax		—		0.5			—		0.5
Net transfers to Parent		47.5		—			—		47.5

Balance at June 30, 2012	$	585.3	$	22.0		$	2.8	$	610.1

See notes to unaudited combined financial statements.

The HHI Group

Combined Statements of Comprehensive Income

(Unaudited)


	Six Months Ended
	June 30, 2012			July 2, 2011
	(In Millions)

Net earnings attributable to Parent Company	$	23.3		$	19.0
Other comprehensive income, net of tax
Currency translation adjustment and other		(2.8	)		21.3
Pension		0.5			1.3

Total other comprehensive income, net of tax		(2.3	)		22.6

Comprehensive income attributable to Parent Company	$	21.0		$	41.6

See notes to unaudited combined financial statements.

June 30, 2012

A. Nature of Activities and Basis of Presentation

Description of Business

These unaudited financial statements combine the legacy Stanley National Hardware (“SNH”) operations with the legacy Black and Decker Hardware and Home Improvement (“HHI”) operations. The combined company, the HHI Group (hereinafter referred to as “the Company”), offers a broad range of door security hardware as well as residential products, including locksets and interior and exterior hardware. The Company’s brand names include Baldwin, Weiser, Kwikset, Stanley National Hardware, Fanal, Geo and Pfister. The Company is operated by a single management team.

Approximately half of the Company’s sales are in the retail channel, including 26% to The Home Depot and 20% to Lowes for the six months ended June 30, 2012, and 23% to The Home Depot and 21% to Lowes for the six months ended July 2, 2011. The remaining sales of the Company are in the non-retail or new construction channels. Further, approximately 89% of the Company’s revenues for both the six months ended June 30, 2012 and July 2, 2011 are generated from the U.S. and Canada, with the remainder spread across Latin America and Asia.

Basis of Presentation

The unaudited combined financial statements include the accounts of the Company and its majority-owned subsidiaries which require consolidation, after the elimination of intercompany accounts and transactions. There were 26 weeks in both the six month period ended June 30, 2012 and July 2, 2011.

The accompanying unaudited combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included and are of a normal, recurring nature. Operating results for the six months ended June 30, 2012 and July 2, 2011 are not necessarily indicative of the results that may be expected for a full fiscal year.

A. Nature of Activities and Basis of Presentation (continued)

Corporate Allocations

The Unaudited Combined Balance Sheets include the assets and liabilities attributable to the Company’s operations. The Unaudited Combined Statements of Operations includes certain allocated corporate expenses of the Parent attributable to the Company. These expenses include costs associated with legal, finance, treasury, accounting, human resources, employee benefits, insurance and stock-based compensation. Corporate costs are allocated on the basis of usage or another reasonable basis when usage is not identifiable. Management believes the assumptions and methodologies underlying the allocation of expenses are reasonable. Notwithstanding, the expenses allocated to the Company are not necessarily indicative of the actual level of expenses that would have been incurred if the Company had been an independent entity and had otherwise managed these functions. The following table summarizes the allocation of corporate expenses to specific captions within the Unaudited Combined Statements of Operations.


	Six Months Ended
	June 30, 2012		July 2, 2011
	(In Millions)

Cost of sales – trade	$	2.4	$	2.5
Selling, general and administrative		10.9		12.5

Total corporate allocations	$	13.3	$	15.0

Related Party Transactions

Affiliate Sales and Expenses

Transactions the Company had with affiliated companies owned by the Parent have been included in the Unaudited Combined Statements of Operations. These sales and related costs may not be indicative of sales pricing or volume in the event the Company is sold. The following table summarizes affiliate sales transactions:


	Six Months Ended
Description	June 30, 2012			July 2, 2011
	(In Millions)

Affiliate sales	$	20.6		$	15.2
Affiliate cost of sales		19.8			14.6

Net gross margin on affiliate sales		0.8			0.6
Cost of sales – trade, mark-up on affiliate purchases		5.1			5.5
Net interest expense – affiliate		17.6			22.6
Other affiliate income		(0.5	)		(0.6	)

Net affiliate loss before provision for income taxes	$	(21.4	)	$	(26.9	)

A. Nature of Activities and Basis of Presentation (continued)

The Company purchases certain products it sells from third party vendors through affiliate global purchasing agents of the Parent. The Unaudited Combined Statements of Operations includes the affiliate mark-up arising from inventory purchase transactions between the Company and affiliates of the Parent. Mark-ups on affiliate purchases of $5.1 million and $5.5 million were included within cost of sales – trade in the Unaudited Combined Statements of Operations for the six months ended June 30, 2012 and July 2, 2011, respectively. The mark-up on affiliate purchase transactions is cash settled through the Parent’s centralized cash management program and reduces the net cash provided by operating activities in the Unaudited Combined Statements of Cash Flows.

Cash Management and Business Equity

The Parent utilizes a centralized approach to cash management and financing of operations in the U.S. As a result of the Company’s participation in the Parent’s central cash management program, all the Company’s U.S. cash receipts are remitted to the Parent and all cash disbursements are funded by the Parent. Other transactions with the Parent and related affiliates include purchases and sales and miscellaneous other administrative expenses incurred by the Parent on behalf of the Company. The net amount of any receivable from or payable to the Parent and other affiliates, with the exception of affiliate debt and notes receivable, are reported as a component of business equity. There are no terms of settlement or interest charges associated with the intercompany account balances. All transactions with the Parent and other related affiliates outside of the Company are considered to be effectively settled for cash in the Unaudited Combined Statements of Cash Flows at the time the transaction is recorded.

An analysis of the cash transactions solely with the Parent follows:


	Six Months Ended
	June 30, 2012			July 2, 2011
	(In Millions)

Cash received from Parent	$	373.0		$	513.1
Cash remitted to Parent		(364.8	)		(526.5	)
Taxes paid by Parent		6.7			0.4

A. Nature of Activities and Basis of Presentation (continued)

Affiliate Debt

A summary of the Company’s affiliate debt arrangements at June 30, 2012 and December 31, 2011 and related party interest expense are shown below:


	Interest Rate	June 30, 2012			December 31, 2011

Affiliate notes payable due 2013	0.0% – 7.2%	$	48.4		$	58.8
Affiliate notes payable due 2015	10.8%		279.0			319.9
Affiliate notes payable on demand	2.0%		33.0			33.0

Total affiliate debt, including current maturities			360.4			411.7
Less: affiliate notes payable on demand classified as current			(33.0	)		(33.0	)
Less: principle payments due within 1 year for other notes payable			(99.5	)		(105.0	)

Long-term related party debt		$	227.9		$	273.7

Net affiliate interest expense amounted to $17.6 million and $22.6 million for the six months ending June 30, 2012 and July 2, 2011, respectively.

Affiliate Notes Receivable

The Company has a variety of notes receivable agreements with affiliates of the Parent. These loans bear interest at fixed rates ranging from 0.9% to 2.5% and have maturity dates ranging from 2013 through 2015. Affiliate notes receivable were $33.3 million and $33.5 million at June 30, 2012 and December 31, 2011, respectively.

B. Significant Accounting Policies

Foreign Currency

Cash Equivalents

Highly liquid investments with original maturities of three months or less are considered cash equivalents.

B. Significant Accounting Policies (continued)

Accounts Receivable

Trade receivables are stated at gross invoice amount less discounts, other allowances and provision for uncollectible accounts.

Allowance for Doubtful Accounts

Inventories

Property, Plant and Equipment


		Useful Life (Years)

Land improvements		10 – 20
Buildings		40
Machinery and equipment		3 – 15
Computer software		3 – 5

Leasehold improvements are depreciated over the shorter of the estimated useful life or the term of the lease.

B. Significant Accounting Policies (continued)

Goodwill and Intangible Assets

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Intangible assets acquired are recorded at estimated fair value. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are tested for impairment annually during the third quarter, and at any time when events suggest impairment more likely than not has occurred. To assess goodwill for impairment, the Company determines the fair value of its reporting units, which are primarily determined using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including future growth rates, discount factors and tax rates. In the event the carrying value of a reporting unit exceeded its fair value, an impairment loss would be recognized to the extent the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of the goodwill.

As required by the Company’s policy, goodwill and an indefinite lived tradename were tested for impairment in the third quarter of 2011. Based on the testing, the Company determined that the fair value of its reporting unit and indefinite lived tradename exceeded their carrying values. The Company will perform its annual impairment testing for the 2012 fiscal year during the third quarter of 2012. No goodwill or other intangible asset impairments were recorded during the six month period ended June 30, 2012 or July 2, 2011.

B. Significant Accounting Policies (continued)

Financial Instruments

The Company participates in the Parent’s centralized hedging functions which are primarily designed to minimize exposure on foreign currency risk. These hedging instruments are recorded in the financial statements of the Parent and as such, the effects of such hedging instruments are not reflected in the Unaudited Combined Statements of Operations or Unaudited Combined Balance Sheets. Changes in the fair value of derivatives are recognized periodically either in earnings or in business equity as a component of other comprehensive income, depending on whether the derivative financial instrument is undesignated or qualifies for hedge accounting, and if so, whether it represents a fair value, cash flow, or net investment hedge. Changes in the fair value of derivatives accounted for as fair value hedges are recorded in earnings in the same caption as the changes in the fair value of the hedged items. Gains and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. In the event it becomes probable the forecasted transaction to which a cash flow hedge relates will not occur, the derivative would be terminated and the amount in other comprehensive income would generally be recognized in earnings.

Stock Based Compensation

Certain employees of the Company have historically participated in the stock-based compensation plans of the Parent. The plans provide for discretionary grants of stock options, restricted stock units, and other stock-based awards. All awards granted under the plan consist of the Parent’s common shares. As such, all related equity account balances remained at the Parent, with only the allocated expense for the awards provided to Company employees, as well as an allocation of expenses related to the Parent’s corporate employee’s who participate in the plan, being recorded in the Unaudited Combined Financial Statements.

Revenue Recognition

B. Significant Accounting Policies (continued)

Cost of Sales and Selling, General and Administrative

Advertising Costs

Television advertising is expensed the first time the advertisement airs, whereas other advertising is expensed as incurred. Advertising costs are classified in SG&A and amounted to $8.2 million and $7.8 million for the six months ended June 30, 2012 and July 2, 2011, respectively. Expense pertaining to cooperative advertising with customers reported as a reduction of net sales was $20.3 million and $20.7 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

Sales Taxes

Sales and value added taxes collected from customers and remitted to governmental authorities are excluded from Net sales reported in the Unaudited Combined Statements of Operations.

Shipping and Handling Costs

The Company generally does not bill customers for freight. Shipping and handling costs associated with inbound freight are reported in cost of sales. Shipping costs associated with outbound freight are reported as a reduction of net sales and amounted to $14.3 million and $13.0 million for the six months ended June 30, 2012 and July 2, 2011, respectively. Distribution costs are classified as SG&A and amounted to $16.9 million and $17.7 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

Postretirement Defined Benefit Plan

B. Significant Accounting Policies (continued)

Income Taxes

The provision for income taxes is computed as if the Company filed on a combined stand-alone or separate tax return basis, as applicable. The provision for income taxes does not reflect the Company’s inclusion in the tax returns of the Parent or an affiliate. It also does not reflect certain actual tax efficiencies realized by the Parent in its combined tax returns that include the Company, due to legal structures it employs outside the Company. Certain income taxes of the Company are paid by the Parent or an affiliate on behalf of the Company. The payment of income taxes by the Parent or affiliate on behalf of the Company is recorded within Parent company’s net investment and accumulated earnings on the Unaudited Combined Balance Sheet.

Deferred income taxes and related tax expense have been recorded by applying the asset and liability approach to the Company as if it was a separate taxpayer. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the combined financial statements. Deferred tax liabilities and assets are determined based on the differences between the book values and the tax bases of the particular assets and liabilities, using enacted tax rates and laws in effect for the years in which the differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that a portion of the deferred tax asset balance will not be realized.

New Accounting Standards

B. Significant Accounting Policies (continued)

In January of 2012, the Company adopted ASU 2011-05, “Comprehensive Income (Topic 220),” which revised the manner in which the Company presents comprehensive income in the financial statements. The new guidance requires entities to report components of comprehensive income in either (1) continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU did not change the items that must be reported in other comprehensive income.

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment (revised standard).” This revised standard provides entities with the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. An entity can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets. Moreover, an entity can bypass the qualitative assessment and perform the quantitative impairment test for any indefinite-lived intangible asset in any period. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company will consider this new guidance as it conducts its annual impairment testing during the third quarter of 2012.

Subsequent Events

The Company has evaluated all subsequent events through August 30, 2012, the date of issuance of these financial statements and footnotes.

C. Accounts Receivable


	June 30, 2012			December 31, 2011
	(In Millions)

Gross accounts receivable	$	123.5		$	110.2
Allowance for doubtful accounts		(2.1	)		(2.1	)

Accounts receivable, net	$	121.4		$	108.1

Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. Adequate reserves have been established to cover anticipated credit losses.

C. Accounts Receivable (continued)

The Company was part of the Parent’s accounts receivable sale program in fiscal 2010 and 2011. According to the terms of that program, the Parent is required to sell certain of its trade accounts receivables at fair value to a wholly owned, consolidated, bankruptcy-remote special purpose subsidiary (“BRS”). The BRS, in turn, must sell such receivables to a third-party financial institution (“Purchaser”) for cash and a deferred purchase price receivable. The Purchaser’s maximum cash investment in the receivables at any time is $100.0 million. The purpose of the program is to provide liquidity to the Parent. These transfers are accounted for as sales under ASC 860 “Transfers and Servicing”. Receivables are derecognized from the Combined Balance Sheets when the BRS sells those receivables to the Purchaser. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred purchase price receivable. At December 31, 2011, the Parent, as well as the Company, did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.

At December 31, 2011, as the Company ended its participation in the program during the year, no amounts were derecognized. All cash flows for the six months ended July 2, 2011 under the program are reported as a component of changes in accounts receivable within operating activities in the Unaudited Combined Statements of Cash Flows since all the cash from the Purchaser is either received upon the initial sale of the receivable or from the ultimate collection of the underlying receivables and the underlying receivables are not subject to significant risks, other than credit risk, given their short-term nature.

D. Inventories


	June 30, 2012		December 31, 2011
	(In Millions)

Finished products	$	124.8	$	130.2
Work in process		13.1		13.5
Raw materials		30.9		27.5

Total	$	168.8	$	171.2

Net inventories in the amount of $87.8 million at June 30, 2012 and $78.0 million at December 31, 2011 were valued at the lower of LIFO cost or market. If the LIFO method had not been used, inventories would have been $13.2 million higher than reported at June 30, 2012 and $14.6 million higher than reported at December 31, 2011.

E. Property, Plant and Equipment


	June 30, 2012			December 31, 2011
	(In Millions)

Land	$	6.6		$	6.7
Land improvements		6.2			6.2
Buildings		50.2			50.2
Leasehold improvements		11.4			11.3
Machinery and equipment		117.6			116.2
Computer software		14.6			14.4

Property, plant and equipment, gross		206.6			205.0
Less: accumulated depreciation and amortization		(103.7	)		(94.3	)

Property, plant and equipment, net	$	102.9		$	110.7

Depreciation and amortization expense associated with property, plant and equipment was $12.7 million and $14.2 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

F. Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill are as follows:


	Six Months Ended June 30, 2012
	(In Millions)

Beginning balance	$	573.6
Foreign currency translation		(1.0	)

Ending balance	$	572.6

F. Goodwill and Intangible Assets (continued)

Intangible Assets

Intangible assets at June 30, 2012 and December 31, 2011 were as follows:


	June 30, 2012					December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
	(In Millions)
Amortized intangible assets – definite lives:
Patents and technology	$	25.1	$	(6.5	)	$	25.0	$	(4.5	)
Trade names		108.0		(20.0	)		108.0		(15.4	)
Customer relationships		64.9		(27.8	)		65.1		(25.2	)

Total	$	198.0	$	(54.3	)	$	198.1	$	(45.1	)

Total indefinite-lived trade names are $18.1 million at June 30, 2012 and December 31, 2011, relating to the National Hardware tradename. Future amortization expense for the six months ending December 29, 2012 amounts to $8.4 million. Future amortization expense in each of the next five fiscal years amounts to $17.8 million for 2013, $17.2 million for 2014, $15.9 million for 2015, $14.5 million for 2016, $13.3 million for 2017 and $56.6 million thereafter.

G. Accrued Expenses

Accrued expenses at June 30, 2012 and December 31, 2011 were as follows:


	June 30, 2012		December 31, 2011
	(In Millions)

Payroll and related taxes	$	9.7	$	10.6
Customer rebates and sales returns		9.7		11.7
Accrued restructuring costs		7.0		7.8
Accrued freight		3.3		4.1
Insurance and benefits		5.3		5.9
Accrued litigation		—		5.0
Accrued income taxes		2.3		3.0
ESOP		1.9		4.5
Warranty costs		4.2		4.4
Other		6.4		7.5

Total	$	49.8	$	64.5

H. Fair Value Measurements

Fair Value Measurements

Level 1 – Quoted prices for identical instruments in active markets.

Level 3 – Instruments that are valued using unobservable inputs.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The fair values of debt instruments are estimated using a discounted cash flow analysis using the Company’s marginal borrowing rates. The fair value of affiliate debt was $386.0 and $445.5 at June 30, 2012 and December 31, 2011, respectively.

I. Stock Based Compensation

Stock Options: During the six month period ended June 30, 2012 there were 12,500 options in the common stock of the Parent granted to employees of the Company. No options were granted during the six months ended July 2, 2011. At June 30, 2012 and December 31, 2011, there were 181,962 and 204,074 options outstanding, respectively. Stock option expense recognized for both the six months ended June 30, 2012 and July 2, 2011 was $0.2 million. Expense was recognized based on the fair value of the option awards granted to participating employees of the Company. As of June 30, 2012 and December 31, 2011, unrecognized compensation expense amounted to $1.0 million.

Employee Stock Purchase Plan: The Employee Stock Purchase Plan (“ESPP”) of the Parent enables eligible employees in the United States and Canada to subscribe at any time to purchase shares of common stock on a monthly basis at the lower of 85% of the fair market value of the shares on the grant date ($48.94 per share for fiscal year 2012 purchases) or 85% of the fair market value of the shares on the last business day of each month. ESPP compensation cost is recognized ratably over the one-year term based on actual employee stock purchases under the plan.

During the six month periods ended June 30, 2012 and July 2, 2011, 2,285 shares and 6,046 shares were issued to employees of the Company at average prices of $48.94 and $50.42 per share, respectively. Total compensation expense recognized by the Company for the six months ended June 30, 2012 and July 2, 2011 was $0.3 million and $0.1 million, respectively.

I. Stock Based Compensation (continued)

Restricted Share Units: Compensation cost for restricted share units (“RSU”) granted to employees of the Company is recognized ratably over the vesting term, which varies but is generally 4 years. RSU grants totaled 24,715 shares for the six months ended June 30, 2012. There were no RSU grants during the six month period ended July 2, 2011. The weighted-average grant date fair value of the RSU’s granted in 2012 was $74.38. Total compensation expense recognized for RSU’s amounted to $0.1 million for both the six months ended June 30, 2012 and July 2, 2011. As of June 30, 2012 and December 31, 2011, unrecognized compensation cost amounted to $1.0 million.

Other Long-Term Performance Awards: There were no LTIP grants made in the six month period ended June 30, 2012. A potential maximum of 3,851 LTIP grants were made in 2011 to an employee of the Company. Each grant has separate annual performance goals for each year within the respective three year performance period associated with each award. Parent earnings per share and return on capital employed represent 75% of the share payout of each grant, with the remaining 25% a market-based element, measuring the Parent’s common stock return relative to peers over the performance period. The ultimate delivery of shares will occur in 2014 for the 2011 grant. Total payouts are based on actual performance in relation to these goals. Total compensation expense recognized for LTIP awards for both the six months ended June 30, 2012 and July 2, 2011 was $0.1 million.

J. Employee Benefit Plans

Employee Stock Ownership Plan (“ESOP”)

Most of the Company’s U.S. employees are allowed to participate in a tax-deferred 401(k) savings plan administered and sponsored by the Parent. Eligible employees may contribute from 1% to 25% of their eligible compensation to a tax-deferred 401(k) savings plan, subject to restrictions under tax laws. Employees generally direct the investment of their own contributions into various investment funds. During the six month periods ended June 30, 2012 and July 2, 2011, an employer match benefit was provided under the plan equal to one-half of each employee’s tax-deferred contribution up to the first 7% of their compensation. Participants direct the entire employer match benefit such that no participant is required to hold the Parent’s common stock in their 401(k) account. The Company’s employer match benefit for the six months ended June 30, 2012 and July 2, 2011 totaled $1.0 million and $1.2 million, respectively.

J. Employee Benefit Plans (continued)

In addition, approximately 1,500 of the Company’s U.S. salaried and non-union hourly employees are eligible to receive a non-contributory benefit under the Core benefit plan. Core benefit allocations range from 2% to 6% of eligible employee compensation based on age. Approximately 1,200 U.S. employees also receive a Core transition benefit, allocations of which range from 1% – 3% of eligible compensation based on age and date of hire. Approximately 200 U.S. employees are eligible to receive an additional average 1.2% contribution actuarially designed to replace previously curtailed pension benefits. The Company’s allocations for benefits earned under the Core plan for the six months ended June 30, 2012 and July 2, 2011 were $1.9 million and $1.3 million, respectively. Assets held in participant Core accounts are invested in target date retirement funds which have an age-based allocation of investments.

The Parent accounts for the ESOP under ASC 718-40, “Compensation – Stock Compensation – Employee Stock Ownership Plans”. Net ESOP activity recognized is comprised of the cost basis of shares released, the cost of the aforementioned Core and 401(k) match defined contribution benefits, less the fair value of shares released and dividends on unallocated ESOP shares. The Company’s net ESOP activity during the six months ended June 30, 2012 and July 2, 2011 resulted in expense of $1.7 million and $1.4 million, respectively. The 401(k) employer match and Core benefit elements of net ESOP expense represent the actual benefits earned by the Company’s participants in each year, while the cost basis of shares released, the fair value of shares released and the dividends on unallocated shares elements are based on the proportion of the Company’s actual earned benefits in relation to the Parent’s ESOP total earned benefits. ESOP expense is affected by the market value of the Parent’s common stock on the monthly dates when shares are released. The market value of shares released during the six month periods ended June 30, 2012 and July 2, 2011 averaged $71.29 and $73.95 per share, respectively.

Parent Sponsored Pension Plans

The Company participates in certain U.S. and Canadian plans sponsored solely by the Parent. All participants in the plans are employees or former employees of the Parent, either directly or through its subsidiaries. The primary U.S. plan was curtailed in 2010 and the other plans are generally also curtailed with no additional service benefits to be earned by participants. The Company’s expense associated with the parent sponsored plans for the six months ended June 30, 2012 and July 2, 2011 was $1.5 million and $1.6 million, respectively.

J. Employee Benefit Plans (continued)

Defined Contribution Plans

In addition to the ESOP, various other defined contribution plans are sponsored worldwide, including a tax-deferred 401(k) savings plan covering certain U.S. employees. The expense for such defined contribution plans, aside from the earlier discussed ESOP, was $0.7 million and $0.8 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

Defined Benefit Plans

Pension and other benefit plans – The Company sponsors pension plans covering approximately 300 domestic employees and 4,000 foreign employees (primarily in Mexico). Benefits are generally based on salary and years of service, except for U.S. collective bargaining employees whose benefits are based on a stated amount for each year of service.

Following are the components of net periodic benefit cost:


	U.S. Plan						Non-U.S. Plans
	Six Months Ended						Six Months Ended
	June 30, 2012			July 2, 2011			June 30, 2012		July 2, 2011

Service cost	$	0.1		$	0.1		$	0.3	$	0.3
Interest cost		1.6			1.7			0.3		0.3
Expected return on plan assets		(1.8	)		(1.7	)		—		—
Amortization of actuarial loss		0.3			0.2			—		—

Net periodic pension expense	$	0.2		$	0.3		$	0.6	$	0.6

J. Employee Benefit Plans (continued)

The Company provides medical and dental fixed subsidy benefits for certain retired employees in the United States. Approximately 30 participants are covered under this plan. Net periodic post-retirement benefit expense was comprised of the following elements:


	Other Benefit Plan
	Six Months Ended
	June 30, 2012			July 2, 2011
	(In Millions)

Interest cost	$	—		$	0.1
Prior service credit amortization		(0.1	)		(0.1	)

Net periodic post-retirement benefit (income) expense	$	(0.1	)	$	—

Changes in plan assets and benefit obligations recognized in other comprehensive income during the six months ended June 30, 2012 are as follows:


	Six Months Ended
	June 30, 2012
	(In Millions)

Current year actuarial loss	$	0.1
Amortization of actuarial gain		(0.2	)

Total gain recognized in other comprehensive income (pre-tax)	$	(0.1	)

The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit costs during 2013 total $0.2 million, representing the amortization of actuarial losses.

J. Employee Benefit Plans (continued)

The changes in the pension and other post-retirement benefit obligations, fair value of plan assets, as well as amounts recognized in the Unaudited Combined Balance Sheets, are shown below:


	U.S. Plans						Non-U.S. Plans						Other Benefits
	June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011
Change in benefit obligation
Benefit obligation at end of prior year	$	74.0		$	67.3		$	5.7		$	7.2		$	3.5		$	4.4
Service cost		0.1			0.2			0.2			0.7			—			—
Interest cost		1.7			3.4			0.3			0.5			0.1			0.2
Settlements/curtailments		—			—			—			(0.1	)		—			—
Actuarial (gain) loss		0.9			6.8			—			(1.4	)		(0.9	)		(0.7	)
Foreign currency exchange rates		—			—			0.1			(0.7	)		—			—
Acquisitions, divestitures and other		(0.1	)		(0.2	)		—			—			—			—
Benefits paid		(1.8	)		(3.5	)		(0.5	)		(0.5	)		(0.2	)		(0.4	)

Benefit obligation at end of period	$	74.8		$	74.0		$	5.8		$	5.7		$	2.5		$	3.5


Change in plan assets
Fair value of plan assets at end of prior year	$	55.2		$	53.3		$	—		$	—		$	—		$	—
Actual return on plan assets		1.7			5.1			—			—			—			—
Employer contributions		0.4			0.5			0.5			0.5			0.2			0.4
Acquisitions, divestitures and other		—			(0.2	)		—			—			—			—
Benefits paid		(1.8	)		(3.5	)		(0.5	)		(0.5	)		(0.2	)		(0.4	)

Fair value of plan assets at June 30, 2012	$	55.5		$	55.2		$	—		$	—		$	—		$	—

Funded status – assets less the benefit obligation	$	(19.3	)	$	(18.8	)	$	(5.8	)	$	(5.7	)	$	(2.5	)	$	(3.5	)
Unrecognized net actuarial loss (gain)		20.9			20.2			0.2			0.2			(2.9	)		(2.2	)

Net amount recognized	$	1.6		$	1.4		$	(5.6	)	$	(5.5	)	$	(5.4	)	$	(5.7	)


Amounts recognized in the Unaudited Combined Balance Sheets
Current benefit liability	$	—		$	—		$	(0.3	)	$	(0.2	)	$	(0.3	)	$	(0.5	)
Non-current benefit liability		(19.3	)		(18.8	)		(5.5	)		(5.5	)		(2.2	)		(3.0	)

Net liability recognized	$	(19.3	)	$	(18.8	)	$	(5.8	)	$	(5.7	)	$	(2.5	)	$	(3.5	)

Accumulated other comprehensive loss (gain) (pre-tax):
Actuarial loss (gain)	$	20.9		$	20.2		$	0.2		$	0.2		$	(2.9	)	$	(2.2	)

Net amount recognized	$	1.6		$	1.4		$	(5.6	)	$	(5.5	)	$	(5.4	)	$	(5.7	)

J. Employee Benefit Plans (continued)

The accumulated benefit obligation for all defined benefit pension plans was $78.3 million at June 30, 2012 and $77.2 million at December 31, 2011. Information regarding pension plans in which the accumulated benefit obligations exceed plan assets and pension plans in which projected benefit obligations (inclusive of anticipated future compensation increases) exceed plan assets follows:


	U.S. Plan				Non-U.S. Plans
	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
	(In Millions)

Projected benefit obligation	$	74.8	$	74.0	$	5.8	$	5.7
Accumulated benefit obligation	$	74.8	$	74.0	$	3.5	$	3.2
Fair value of plan assets	$	55.5	$	55.2	$	—	$	—

The major assumptions used in valuing pension and post-retirement plan obligations and net costs were as follows:


	Pension Benefits												Other Benefits
	U.S. Plans						Non-U.S. Plans						U.S. Plan
	June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011
Weighted-average assumptions used to determine benefit obligations at year end
Discount rate		4.50	%		4.50	%		8.75	%		8.75	%		4.00	%		4.00	%
Rate of compensation increase		—	%		—	%		4.75	%		4.75	%		—	%		—	%

Weighted-average assumptions used to determine net periodic benefit cost
Discount rate		4.50	%		5.25	%		8.75	%		7.25	%		4.00	%		5.00	%
Rate of compensation increase		—	%		—	%		4.75	%		4.75	%		—	%		—	%
Expected return on plan assets		6.50	%		6.75	%		—	%		—	%		—	%		—	%

J. Employee Benefit Plans (continued)

Pension Plan Assets

Plan assets are invested in equity securities, government and corporate bonds and other fixed income securities, and money market instruments. The Company’s worldwide asset allocations at June 30, 2012 and December 31, 2011 by asset category and the level of the valuation inputs within the fair value hierarchy established by ASC 820 are as follows:


	June 30, 2012		Level 1		Level 2
Asset Category
Cash and cash equivalents	$	1.1	$	0.5	$	0.6
Equity securities:
U.S. equity securities		11.3		2.0		9.3
Foreign equity securities		13.7		13.7		—
Fixed income securities:
Government securities		15.6		14.4		1.2
Corporate securities		13.8		—		13.8

Total	$	55.5	$	30.6	$	24.9


	December 31, 2011		Level 1		Level 2
Asset Category
Cash and cash equivalents	$	0.6	$	0.2	$	0.4
Equity securities:
U.S. equity securities		16.3		2.8		13.5
Foreign equity securities		9.0		9.0		—
Fixed income securities:
Government securities		15.3		14.4		0.9
Corporate securities		13.7		—		13.7
Other		0.3		—		0.3

Total	$	55.2	$	26.4	$	28.8

J. Employee Benefit Plans (continued)

U.S. and foreign equity securities primarily consist of companies with large market capitalizations and to a lesser extent mid and small capitalization securities. Government securities primarily consist of U.S. Treasury securities and foreign government securities with de minims default risk. Corporate fixed income securities include publicly traded U.S. and foreign investment grade and to a small extent high yield securities. Other investments include U.S. mortgage backed securities. The level 2 investments are primarily comprised of institutional mutual funds that are not publicly traded; the investments held in these mutual funds are generally level 1 publicly traded securities.

Contributions

The Company’s funding policy for its defined benefit plans is to contribute amounts determined annually on an actuarial basis to provide for current and future benefits in accordance with federal law and other regulations. The Company expects to contribute approximately $2.8 million and $2.4 million to its pension and other post-retirement benefit plans during the six months ended December 29, 2012 and in 2013, respectively.

Expected Future Benefit Payments

Benefit payments, inclusive of amounts attributable to estimated future employee service, are expected to be paid as follows over the next 10 years:


	Total		Year 1		Year 2		Year 3		Year 4		Year 5		Years 6-10
	(In Millions)
Future payments	$	44.7	$	4.2	$	4.2	$	4.2	$	4.2	$	4.2	$	23.7

These benefit payments will be funded through a combination of existing plan assets and amounts to be contributed in the future by the Company.

K. Accumulated Other Comprehensive Income

Accumulated other comprehensive income is as follows:


	June 30, 2012			December 31, 2011
	(In Millions)

Currency translation adjustment	$	33.5		$	36.3
Pension loss, net of tax		(11.5	)		(12.0	)

Accumulated other comprehensive income	$	22.0		$	24.3

L. Other Costs and Expenses

Other-net is primarily comprised of intangible asset amortization expense (See Note F Goodwill and Intangible Assets for further discussion), currency related gains or losses, and environmental expense. Research and development costs, which are classified in SG&A, were $3.2 million and $3.3 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

M. Restructuring

A summary of the restructuring reserve activity from December 31, 2011 to June 30, 2012 is as follows (in millions):


	December 31, 2011		Additions		Usage			June 30, 2012
2012 Actions
Severance and related costs	$	—	$	2.7	$	(0.3	)	$	2.4
Pre-2012 Actions
Severance and related costs		7.8		—		(3.2	)		4.6

Total	$	7.8	$	2.7	$	(3.5	)	$	7.0

2012 Actions: During the six months ended June 30, 2012, the Company recognized $2.7 million of severance charges associated with cost actions initiated in the current year. The charges relate to the reduction of approximately 150 employees.

M. Restructuring (continued)

Pre-2012 Actions: For the year ended December 31, 2011 the Company initiated restructuring activities associated with the Merger, largely related to employee related actions. As of December 31, 2011, the reserve balance related to these pre-2012 actions totaled $7.8 million.

Utilization of the reserve balance related to pre-2012 actions was $3.2 million in 2012. The vast majority of the remaining reserve balance of $4.6 million is expected to be utilized in 2012 and early in 2013.

N. Business Segments and Geographic Areas

Business Segments

Geographic Areas

Geographic net sales and long-lived assets are attributed to the geographic regions based on the geographic location of each Company subsidiary.


	Six Months Ended
	June 30, 2012		July 2, 2011
	(In Millions)
Net sales
United States	$	376.3	$	374.2
Canada		52.8		52.7
Other America		45.3		49.0
Asia		18.9		15.0

Combined	$	493.3	$	490.9

N. Business Segments and Geographic Areas (continued)


	June 30, 2012		December 31, 2011
	(In Millions)
Property, plant and equipment
United States	$	94.7	$	102.6
Canada		4.3		4.4
Other Americas		3.6		3.5
Asia		0.3		0.2

Combined	$	102.9	$	110.7

O. Income Taxes

Significant components of the Company’s deferred tax assets and liabilities as of June 30, 2012 and December 31, 2011 were as follows:


	June 30, 2012		December 31, 2011
	(In Millions)
Deferred tax liabilities:
Amortization of intangibles	$	58.9	$	61.6
Depreciation		5.0		3.7
Other		3.3		2.3

Total deferred tax liabilities	$	67.2	$	67.6


Deferred tax assets:
Accruals	$	23.7	$	22.9
Employee benefit plans		9.7		9.6
Inventories		8.5		7.3
Operating loss and tax credit carry forwards		13.2		12.2
Restructuring charges		2.8		2.9
Allowance for doubtful accounts		1.0		1.2
Other		3.3		3.1

Total deferred tax assets	$	62.2	$	59.2

Net deferred tax liabilities before valuation allowance	$	5.0	$	8.4
Valuation allowance	$	12.1	$	12.2

Net deferred tax liabilities after valuation allowance	$	17.1	$	20.6

O. Income Taxes (continued)

Net operating loss carry forwards of $21.3 million and $16.8 million respectively, at June 30, 2012 and December 31, 2011, are available to reduce future tax obligations of certain U.S. state and foreign companies. The net operating loss carry forwards have various expiration dates beginning in the second half of 2012 with certain jurisdictions having indefinite carry forward periods.

A valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or a portion of these assets will not be realized. The Company has recorded a valuation allowance of $12.1 million and $12.2 million for deferred tax assets existing as of June 30, 2012 and December 31, 2011, respectively.

The classification of deferred taxes as of June 30, 2012 and December 31, 2011 were as follows (in millions):


	June 30, 2012					December 31, 2011
	Deferred Tax Asset		Deferred Tax Liability			Deferred Tax Asset		Deferred Tax Liability

Current	$	25.3	$	(0.7	)	$	22.4	$	(0.7	)
Non-current		5.2		(46.9	)		3.4		(45.7	)

Total	$	30.5	$	(47.6	)	$	25.8	$	(46.4	)

Income tax expense for the six months ended June 30, 2012 and July 2, 2011 consisted of the following:


	June 30, 2012			July 2, 2011
	(In Millions)
Current:
Federal	$	6.3		$	(0.4	)
Foreign		8.9			9.3
State		0.4			0.8

Total current	$	15.6		$	9.7

Deferred:
Federal	$	(2.5	)	$	0.9
Foreign		(2.5	)		(2.2	)
State		—			0.2

Total deferred		(5.0	)		(1.1	)

Provision for income taxes	$	10.6		$	8.6

In general, there were no income taxes paid directly to any taxing authority by the Company for the six month periods ended June 30, 2012 and July 2, 2011. Any liability owed by the Company due to taxable income generated is settled through intercompany transfers with the Parent. Had the Company paid its own tax liabilities during tax periods ended June 30, 2012 and July 2, 2011, the net payments would have been approximately $15.6 million and $9.7 million, respectively.

O. Income Taxes (continued)

The reconciliation of federal income tax at the statutory federal rate to income tax at the effective rate for the six months ended June 30, 2012 and July 2, 2011 is as follows:


	June 30, 2012			July 2, 2011
	(In Millions)

Tax at statutory rate	$	12.0		$	9.8
State income taxes, net of federal benefits		0.4			0.2
Difference between foreign and federal income tax		(1.3	)		(0.9	)
NOL and valuation allowance items		(0.1	)		0.5
Other, net		(0.4	)		(1.0	)

Income taxes on continuing operations	$	10.6		$	8.6

The components of earnings before provision for income taxes for the six months ended June 30, 2012 and July 2, 2011 consisted of the following:


	June 30, 2012		July 2, 2011
	(In Millions)

United States	$	11.1	$	3.6
Foreign		23.3		24.3

Earnings before income taxes	$	34.4	$	27.9

Any undistributed foreign earnings of the Company at June 30, 2012, are considered to be invested indefinitely or will be remitted substantially free of additional U.S. tax. Accordingly, no provision has been made for taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount of such liability. The Company classifies all tax-related interest and penalties in the provision for income taxes.

The Company considers many factors when evaluating and estimating our tax positions and the impact on income tax expense, which may require periodic adjustments and which may not accurately anticipate actual outcomes. As of June 30, 2012 the company no longer requires a liability for unrecognized tax benefits. The Company is subject to the examination of its income tax returns by the Internal Revenue Service (IRS) and other tax authorities in conjunction with the IRS audit of the Parent. The tax years under examination vary by jurisdiction. The Company is included in the IRS examination of the Parent for tax years 2008 and 2009. The Company also files many state and foreign income tax returns in jurisdictions with varying statutes of limitations. Tax years 2008 and forward generally remain subject to examination by most state tax authorities. In foreign jurisdictions, tax years 2007 and forward generally remain subject to examination.

P. Commitments and Guarantees

Commitments

The Company has non-cancelable operating lease agreements, principally related to facilities, vehicles, machinery and equipment. Rental expense for operating leases was $6.1 and $7.2 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

The following is a summary of the Company’s future commitments which span more than one future fiscal year:


	Total		Remaining 2012		2013		2014		2015		2016		2017

Operating lease obligations	$	23.8	$	2.7	$	5.6	$	5.3	$	4.7	$	3.5	$	2.0

Guarantees

The Company issued a standby letter of credit for $0.3 million to guarantee future payments which may be required under an insurance program.

Following is a summary of the warranty activity for the six months ended June 30, 2012 and July 2, 2011:


	June 30, 2012			July 2, 2011
	(In Millions)

Beginning balance	$	4.4		$	4.3
Warranties issued		4.4			3.2
Warranty payments		(4.6	)		(2.9	)

Ending balance	$	4.2		$	4.6

Q. Contingencies

The Company’s policy is to accrue environmental investigatory and remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The amount of liability recorded is based on an evaluation of currently available facts with respect to each individual site and includes such factors as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. The liabilities recorded do not take into account any claims for recoveries from insurance or third parties. As assessments and remediation progress at individual sites, the amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. As of June 30, 2012 and December 31, 2011, the Company had reserves of $26.9 million and $26.7 million, respectively, for remediation activities associated with Company-owned properties, as well as for Superfund sites, for losses that are probable and estimable. Of the 2012 amount, $1.6 million is classified as current and $25.3 million as long-term which is expected to be paid over the estimated remediation period.

Q. Contingencies (continued)

The range of environmental remediation costs that is reasonably possible is $19.0 million to $44.7 million which is subject to change in the near term. The Company may be liable for environmental remediation of sites it no longer owns. Liabilities have been recorded on those sites in accordance with policy.

The environmental liability for certain sites that have cash payments beyond the current year that are fixed or reliably determinable have been discounted using a rate of 2.1% to 3.8%, depending on the expected timing of disbursements. The discounted and undiscounted amount of the liability relative to these sites is $7.7 million and $15.6 million, respectively. The payments relative to these sites are expected to be $0.4 million in the remainder of 2012, $0.7 million in 2013, $0.7 million in 2014, $0.8 million in 2015, $0.4 million in 2016, and $12.6 million thereafter.

Unudited Pro Forma Condensed Combined Financial Statements

Exhibit 99.5

Unaudited Pro Forma Condensed Combined Financial Statements

of Harbinger Group Inc.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(Amounts in millions, except per share amounts)

The following unaudited pro forma condensed combined condensed financial statements for the year ended September 30, 2012, the date of our latest publicly available financial information, gives effect to (i) the HHI Acquisition and related financing, (ii) the joint venture with EXCO Resources, Inc. (“EXCO”), and (iii) the refinancing of the existing $500 of Senior Secured Notes with $650 of new Senior Secured Notes. Unless as indicated otherwise, words defined in this section shall have the meanings ascribed to them solely for purposes of this section.

The unaudited pro forma condensed combined financial statements shown below reflect historical financial information and have been prepared on the basis that the HHI acquisition by Spectrum Brands will be accounted for as a business combination using the acquisition method of accounting. Accordingly, the consideration transferred and the assets acquired and liabilities assumed, will be measured at their respective fair values with any excess of the consideration transferred over the fair value of the net asset acquired reflected as goodwill. The unaudited pro forma condensed combined financial statements presented assume that the HHI Business will become a wholly-owned subsidiary of Spectrum Brands. In addition, the joint venture with EXCO (“the Joint Venture”) will be accounted for using the equity method of accounting, pursuant to a gross proportionate presentation, as HGI has significant influence but does not control the joint venture. Accordingly HGI will reflect 74.5% of the Joint Venture’s assets, liabilities, revenues and expenses in its financial statements, which is equal to its economic interest in the Joint Venture.

The following unaudited pro forma condensed combined balance sheet as of September 30, 2012 is presented on a basis to reflect (i) the HHI Acquisition and related financing (ii) 74.5% of the Joint Venture, and (iii) the refinancing of the existing $500 of Senior Secured Notes with $650 of new Senior Secured Notes as if each had occurred as of such date. The unaudited pro forma condensed combined statement of operations for the year ended September 30, 2012 is presented on a basis to reflect (i) the full-period effect of the HHI Acquisition, (ii) 74.5% of the full-period effect of the Joint Venture and (iii) the refinancing of the existing $500 of Senior Secured Notes with $650 of new Senior Secured Notes, as if each had occurred on October 1, 2011. Because of different fiscal year-ends, and in order to present results for comparable periods, the unaudited pro forma condensed combined statement of operations for the fiscal year ended September 30, 2012 combines the historical consolidated statement of operations of HGI for the year then ended with the historical results of operations of HHI for the twelve-month period ended July 1, 2012 and 74.5% of the historical statement of revenues and direct operating expenses of the Joint Venture for the twelve months ended September 30, 2012. See Note 1, Conforming Interim Periods, to the unaudited pro forma condensed combined financial statements for additional information. Pro forma adjustments are made in order to reflect the potential effect of the transactions indicated above on the unaudited pro forma condensed combined balance sheet and statements of operations.

The unaudited pro forma condensed combined financial statements and the notes thereto were based on, and should be read in conjunction with:

•

HGI’s historical audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2012;

•

HHI’s historical audited combined financial statements and notes thereto for the fiscal year ended December 31, 2011;

•

HHI’s unaudited combined financial statements and notes thereto for the six months ended June 30, 2012 and July 2, 2011;

•

The audited statements of revenues and direct operating expenses and related notes thereto, for EXCO Resources, Inc. Certain Conventional Oil and Natural Gas Properties for the fiscal year ended December 31, 2011; and

•

The unaudited statements of revenues and direct operating expenses for EXCO Resources, Inc. Certain Conventional Oil and Natural Gas Properties for the nine months ended September 30, 2012 and 2011.

The process of valuing HHI’s and the Joint Venture’s tangible and intangible assets and liabilities, as well as evaluating accounting policies for conformity, is still in the preliminary stages. Accordingly, the purchase price adjustments included in the unaudited pro forma condensed combined financial statements are preliminary and have been made solely for the purpose of providing these unaudited pro forma condensed combined financial statements. For purposes of the unaudited pro forma condensed combined financial statements, HGI has made preliminary adjustments, where sufficient information is available to make a fair value estimate, to those tangible and intangible assets to be acquired and liabilities to be assumed based on preliminary estimates of their fair value as of September 30, 2012 and excess purchase price is reflected as goodwill. For those assets and liabilities where insufficient information is available to make a reasonable estimate of fair value, the unaudited pro forma condensed combined financial statements reflect the carrying value of those assets and liabilities at September 30, 2012. A final determination of these fair values, which cannot be made prior to the completion of the acquisitions, will include management’s consideration of a final valuation. HGI currently expects that the process of determining fair value of the tangible and intangible assets will be completed within one year of closing the transactions. Material revisions to HGI’s preliminary estimates could be necessary as more information becomes available through the completion of this final determination. The actual amounts recorded following the completion of the transactions may be materially different from the information presented in these unaudited pro forma condensed combined financial statements due to a number of factors, including:

•

timing of closing the transactions;

•

changes in the net assets of HHI and the Joint Venture;

•

changes in the market conditions and financial results which may impact cash flow projections in the valuation; and

•

other changes in market conditions which may impact the fair value of HHI’s and the Joint Venture’s net assets.

HGI’s historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (i) directly attributable to the HHI Acquisition, the Joint Venture, and the refinancing of the existing $500 of Senior Secured Notes with $650 of new Senior Secured Notes, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on HGI’s results.

The unaudited pro forma condensed combined financial statements do not reflect any revenue enhancements, cost savings from operating efficiencies, synergies or other restructurings, or the costs and related liabilities that would be incurred to achieve such revenue enhancements, cost savings from operating efficiencies, synergies or restructurings, which could result from the transactions.

The pro forma adjustments are based upon available information and assumptions that the management believes reasonably reflect the HHI Acquisition, the Joint Venture and the

refinancing of the existing $500 of Senior Secured Notes with $650 of new Senior Secured Notes. The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and do not purport to represent what our actual consolidated results of operations or our consolidated financial position would have been had the HHI Acquisition, the Joint Venture and other identified events occurred on the date assumed, nor are they necessarily indicative of our future consolidated results of operations or financial position.

Harbinger Group Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Balance Sheet

As of September 30, 2012

(Amounts in millions, except per share amounts)


	Historical				Pro Forma Adjustments														Pro Forma Combined
	Harbinger Group Inc.		HHI June 30, 2012		HHI Historical 7(a)			HHI Pro Forma			Notes	Joint Venture			Notes	Senior Secured Notes		Notes	Pro Forma Combined
					(In millions)
ASSETS
*Consumer Products and Other*:
Cash and cash equivalents	$	408.9	$	48.5	$	—		$	152.5		7(b)		(372.5	)	9(a)	$	55.9	11(a)		293.3
Short-term investments		181.8		—		—			—				—				—			181.8
Receivables, net		414.4		121.4		—			—				—				—			535.8
Inventories, net		452.6		168.8		—			41.6		7(c)		—				—			663.0
Prepaid expenses and other current assets		86.3		33.9		—			—				—				—			120.2

Total current assets		1,544.0		372.6		—			194.1				(372.5	)			55.9			1,794.1
Properties, net		214.3		102.9		(4.0	)		(2.5	)	7(d)		—				—			310.7
Goodwill		694.2		572.6		—			75.8		7(e)		—				—			1,342.6
Intangibles, net		1,714.9		161.8		—			304.0		7(f)		—				—			2,180.7
Deferred charges and other assets		82.1		40.8		(33.3	)		57.9		7(g)		—				5.4	11(b)		152.9

		4,249.5		1,250.7		(37.3	)		629.3				(372.5	)			61.3			5,781.0

*Insurance and Financial Services*:
Investments:
Fixed maturities, available-for-sale, at fair value		16,088.9		—		—			—				—				—			16,088.9
Equity securities, available-for-sale, at fair value		248.1		—		—			—				—				—			248.1
Derivative investments		200.7		—		—			—				—				—			200.7
Asset-backed loans and other invested assets		198.9		—		—			—				—				—			198.9

Total investments		16,736.6		—		—			—				—				—			16,736.6
Cash and cash equivalents		1,061.8		—		—			—				—				—			1,061.8
Accrued investment income		191.6		—		—			—				—				—			191.6
Reinsurance recoverable		2,363.1		—		—			—				—				—			2,363.1
Intangibles, net		273.5		—		—			—				—				—			273.5
Deferred tax assets		279.6		—		—			—				—				—			279.6
Other assets		44.8		—		—			—				—				—			44.8

		20,951.0		—		—			—				—				—			20,951.0

*Oil and Gas*:
Cash and cash equivalents		—		—		—			—				277.5		9(a)		—			277.5
		—		—		—			—				167.6		9(b)		—			167.6
		—		—		—			—				(445.1	)	9(c)		—			(445.1	)

Total current assets		—		—		—			—				—				—			—
Oil and natural gas properties (full cost accounting method)
Unproved oil and natural gas properties		—		—		—			—				33.4		9(c)		—			33.4
Proved developed and undeveloped oil and natural gas properties		—		—		—			—				510.5		9(c)		—			510.5

Total—Oil and natural gas properties		—		—		—			—				543.9				—			543.9
Gas gathering and other oil and natural gas assets		—		—		—			—				22.3		9(c)		—			22.3
Deferred financing costs		—		—		—			—				3.3		9(b)		—			3.3

		—		—		—			—				569.5				—			569.5

Total assets	$	25,200.5		1,250.7		(37.3	)	$	629.3			$	197.0			$	61.3		$	27,301.5


	Historical					Pro Forma Adjustments															Pro Forma Combined
	Harbinger Group Inc.			HHI June 30, 2012		HHI Historical 7(a)			HHI Pro Forma			Notes	Joint Venture		Notes		Senior Secured Notes			Notes	Pro Forma Combined
						(In millions)
LIABILITIES AND EQUITY
*Consumer Products and Other*:
Current portion of long-term debt	$	16.4			132.5		(132.5	)		(3.9	)	7(h)(i)		—			$	—				12.5
Accounts payable		325.9			122.1		—			—				—				—				448.0
Accrued and other current liabilities		336.9			49.8		(4.2	)		(2.7	)	7(j)		—				(19.9	)	11(c)		359.9

Total current liabilities		679.2			304.4		(136.7	)		(6.6	)			—				(19.9	)			820.4
Long-term debt		2,150.6			227.9		(227.9	)		1,523.7		7(h)(i)		—				152.3		11(d)		3,826.6
Equity conversion option of preferred stock		232.0			—		—			—				—				—				232.0
Employee benefit obligations		95.1			27.1		(21.5	)		—				—				—				100.7
Deferred tax liabilities		382.4			46.9		—			105.5		7(k)		—				—				534.8
Other liabilities		31.9			34.3		(27.7	)		—				—				—				38.5

		3,571.2			640.6		(413.8	)		1,622.6				—				132.4				5,553.0

*Insurance and Financial Services*:
Contractholder funds		15,290.5			—		—			—				—				—				15,290.5
Future policy benefits		3,614.8			—		—			—				—				—				3,614.8
Liability for policy and contract claims		91.1			—		—			—				—				—				91.1
Other liabilities		714.7			—		—			—				—				—				714.7

		19,711.1			—		—			—				—				—				19,711.1

*Oil and Gas*:
Current portion of asset retirement obligations		—			—		—			—				0.1		9(c)		—				0.1
Revenue suspense		—			—		—			—				12.4		9(c)		—				12.4
Other current liabilities		—			—		—			—				—		9(c)		—				—

Total current liabilities		—			—		—			—				12.5								12.5
Long-term debt		—			—		—			—				171.0		9(b)		—				171.0
Asset retirement obligations—non-current portion		—			—		—			—				13.5		9(c)		—				13.5

														197.0				—				197.0

Total liabilities		23,282.3			640.6		(413.8	)		1,622.6				197.0				132.4				25,461.1

Commitments and contingencies
Temporary equity:
Redeemable preferred stock		319.2			—		—			—				—				—				319.2

Stockholders’ equity:
Common stock		1.4			—		—			—				—				—				1.4
Additional paid-in capital		861.2			—		—			—				—				—				861.2
Accumulated deficit		(98.2	)		585.3		376.5			(965.6	)	7(l)		—				(71.1	)	11(a)(b)(d)		(173.1	)
Accumulated other comprehensive income (loss)		413.2			22.0		—			(22.0	)	7(l)		—				—				413.2

Total stockholders’ equity		1,177.6			607.3		376.5			(987.6	)			—				(71.1	)			1,102.7
Noncontrolling interest		421.4			2.8		—			(5.7	)	7(m)		—				—				418.5

Total permanent equity		1,599.0			610.1		376.5			(993.3	)			—				(71.1	)			1,521.2

Total liabilities and equity	$	25,200.5		$	1,250.7	$	(37.3	)	$	629.3			$	197.0			$	61.3			$	27,301.5

See accompanying notes to unaudited pro forma condensed combined financial statements.

Harbinger Group Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Statement of Operations

For The Year Ended September 30, 2012

(Amounts in millions, except per share amounts)


	Historical						Pro Forma Adjustments
	Harbinger Group Inc. Year Ended September 30, 2012		HHI Twelve Months Ended June 30, 2012		HGI’s 74.5% Equity Interest in Joint Venture Twelve Months Ended September 30, 2012		HHI Historical 7(a)			HHI Pro Forma		Notes	Joint Venture			Notes	Senior Secured Notes		Notes	Pro Forma Combined
	(Amounts in millions, except per share amounts)
Revenues:
*Consumer Products and Other*:
Net sales	$	3,252.4	$	977.4	$	—	$	24.1		$	—			—				—			4,253.9

*Insurance and Financial Services*:														—
Premiums		55.3		—		—		—			—			—							55.3
Net investment income		722.7		—		—		—			—			—							722.7
Net investment gains		410.0		—		—		—			—			—							410.0
Insurance and investment product fees and other		40.3		—		—		—			—			—				—			40.3

		1,228.3		—		—		—			—			—				—			1,228.3

Oil and Gas:
Oil and natural gas revenues		—		—		125.9		—			—			—				—			125.9

Total revenues		4,480.7		977.4		125.9		24.1			—			—				—			5,608.1

Operating costs and expenses:
*Consumer Products and Other*:
Cost of goods sold		2,136.8		678.2		—		(0.2	)		—	7(n)		—							2,814.8
Selling, general and administrative expenses		870.8		207.8		—		1.7			8.6	7(o)(p)(s)		(0.8	)	9(d)		—			1,088.1

		3,007.6		886.0		—		1.5			8.6			(0.8	)			—			3,902.9

*Insurance and Financial Services*: Benefits and other changes in policy reserves		777.4		—		—		—			—			—							777.4
Acquisition and operating expenses, net of deferrals		125.7		—		—		—			—			—							125.7
Amortization of intangibles		160.7		—		—		—			—			—				—			160.7

		1,063.8		—		—		—			—			—				—			1,063.8

Oil and Gas: Oil and natural gas operating costs		—		—		36.7		—			—			—				—			36.7
Production and ad valorem taxes		—		—		13.3		—			—			—				—			13.3
Gathering and transportation		—		—		9.5		—			—			—				—			9.5
Depreciation, depletion and amortization		—		—		—		—			—			50.2		9(e)		—			50.2
Accretion of discount on asset retirement obligations		—		—		—		—			—			1.2		9(f)		—			1.2
General and administrative expenses		—		—		—		—			—			6.6		9(g)		—			6.6

Total operating expenses		—		—		59.5		—			—			58.0				—			117.5


	Historical								Pro Forma Adjustments
	Harbinger Group Inc. Year Ended September 30, 2012			HHI Twelve Months Ended June 30, 2012			HGI’s 74.5% Equity Interest in Joint Venture Twelve Months Ended September 30, 2012		HHI Historical 7(a)		HHI Pro Forma			Notes			Joint Venture			Notes		Senior Secured Notes		Notes			Pro Forma Combined
	(Amounts in millions, except per share amounts)
Total operating costs and expenses		4,071.4			886.0			59.5		1.5		8.6						57.2					—					5,084.2

Operating income (loss)		409.3			91.4			66.4		22.6		(8.6	)					(57.2	)				—					523.9

Interest expense		(251.0	)		(37.7	)		—		37.7		(87.0	)		7	(q)		(4.9	)		9(h)		1.8		11	(e)		(341.1	)
Increase in fair value of equity conversion feature of preferred stock		(156.6	)		—			—		—		—						—					—					(156.6	)
Gain on contingent purchase price reduction		41.0			—			—		—		—						—					—					41.0
Other (expense) income, net		(17.5	)		1.5			—		—		—						—					—					(16.0	)

Income (loss) from continuing operations before income taxes		25.2			55.2			66.4		60.3		(95.6	)					(62.1	)				1.8					51.2
Income tax (benefit) expense		(85.3	)		14.3			—		22.3		—			7	(r)		—			9(i)		—		11	(f)		(48.7	)

Income (loss) from continuing operations		110.5			40.9			66.4		38.0		(95.6	)					(62.1	)				1.8					99.9
Less: Income (loss) from continuing operations attributable to Noncontrolling interest		21.1			0.8			—		—		(7.9	)		7	(t)		—					—					14.0

Income (loss) from continuing operations attributable to controlling interest		89.4			40.1			66.4		38.0		(87.7	)					(62.1	)				1.8					85.9
Less: Preferred stock dividends and accretion		59.6			—			—		—		—						—					—					59.6

Net Income (loss) from continuing operations attributable to common and participating preferred stockholders	$	29.8		$	40.1		$	66.4	$	38.0	$	(87.7	)				$	(62.1	)			$	1.8				$	26.3

Income (loss) from continuing operations per common share attributable to controlling interest:
Basic	$	0.15																										0.13
Diluted	$	0.15																										0.13
Weighted-average common shares:
Basic		139.4																										139.4
Diluted		139.8																										139.8

See accompanying notes to unaudited pro forma condensed combined financial statements.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS

(Amounts in millions, except per share amounts)

(1) CONFORMING INTERIM PERIODS

HHI

HGI’s fiscal year end is September 30 while HHI’s fiscal year ends on the Saturday nearest to December 31. In order for the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended September 30, 2012 to be comparable, we have derived the results of operations of HHI for the twelve-month period ended June 30, 2012 by combining the historical unaudited consolidated statement of operations for the six month period ended June 30, 2012 and the historical audited consolidated statement of operations for the year ended December 31, 2011 while subtracting the historical unaudited consolidated statement of operations for the six month period ended July 2, 2011.


	Historical
	Year Ended December 31, 2011			Six Months Ended June 30, 2012			Six Months Ended July 2, 2011			Twelve Months Ended June 30, 2012
Revenues:
Net sales	$	975.0		$	493.3		$	490.9		$	977.4

Operating costs and expenses:
Cost of goods sold		669.7			338.7			330.2			678.2
Selling, general and administrative expenses		215.5			103.4			111.1			207.8

		885.2			442.1			441.3			886.0

Operating income		89.8			51.2			49.6			91.4
Interest expense		(42.7	)		(17.6	)		(22.6	)		(37.7	)
Other income, net		1.6			0.8			0.9			1.5

Income from continuing operations before income taxes		48.7			34.4			27.9			55.2
Income tax expense		12.3			10.6			8.6			14.3

Income from continuing operations	$	36.4		$	23.8		$	19.3		$	40.9

The Joint Venture

HGI’s’s fiscal year end is September 30 while the Joint Venture’s fiscal year end is December 31. In order for the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended September 30, 2012 to be comparable, we have derived 74.5% of the results of operations of the Joint Venture for the year ended September 30, 2012 by combining 74.5% of the historical unaudited statement of revenues and direct expenses for the nine month period ended September, 30, 2012 and 74.5% of the historical audited statement of revenues and direct expenses for the year ended December 31, 2011 while subtracting the historical unaudited statement of revenues and direct expenses for the nine month period ended September 30, 2011.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)


	Historical								HGI’s 74.5% Equity Interest
Revenues:	Year Ended December 31, 2011		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011		Twelve Months Ended September 30, 2012		Twelve Months Ended September 30, 2012
Oil and natural gas revenues	$	224.3	$	118.9	$	174.2	$	169.0	$	125.9

Direct operating expenses:
Oil and natural gas operating costs		56.5		33.7		41.0		49.2		36.7
Production and ad valorem taxes		19.7		14.3		16.1		17.9		13.3
Gathering and transportation		13.3		9.8		10.3		12.8		9.5

Total direct operating expenses		89.5		57.8		67.4		79.9		59.5

Excess of revenues over direct operating expenses	$	134.8	$	61.1	$	106.8	$	89.1	$	66.4

(2) BASIS OF PRO FORMA PRESENTATION

The unaudited pro forma condensed combined financial statements have been prepared using the historical consolidated financial statements of HGI, HHI and the statement of revenues and direct expenses for the Joint Venture. The HHI Acquisition is accounted for using the acquisition method of accounting. The Joint Venture has been accounted for using the equity method of accounting, pursuant to a gross proportionate presentation, as HGI has significant influence but does not control the Joint Venture. Accordingly HGI will reflect 74.5% of the joint venture’s assets, liabilities, revenues and expenses in its financial statements which is equal to its economic interest in the joint venture.

Since separate historical financial statements in accordance with accounting principles generally accepted in the United States of America, or US GAAP, have never been prepared for the Joint Venture, certain indirect expenses, as further described in Note 10. Excluded Costs, were not allocated to the Joint Venture and have been excluded from the accompanying statements. Any attempt to allocate these expenses would require significant and judgmental allocations, which would be arbitrary and would not be indicative of the performance of the properties on a stand-alone basis. Accordingly, these statements of revenues and direct operating expenses do not represent a complete set of financial statements reflecting financial position, results of operations, and partners’ equity of the Joint Venture and are not indicative of the results of operations for the Joint Venture’s properties going forward.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

(3) HHI ACQUISITION

HGI will account for the transaction by recording the assets and liabilities of HHI as of the completion date of the acquisition at their respective fair values and conforming the accounting policies of HHI to those used by HGI. Pursuant to Accounting Standards Codification (“ASC”) 805, under the acquisition method, the total estimated purchase price (consideration transferred) will be measured at the closing date of the acquisition. In preparing these unaudited pro forma condensed combined financial statements, the assets and liabilities of HHI have been measured based on various preliminary estimates using assumptions that HGI management believes are reasonable utilizing information currently available. Use of different estimates and judgments could yield materially different results.

For purposes of measuring the estimated fair value of the assets acquired and liabilities assumed as reflected in the unaudited pro forma condensed combined financial statements, HGI used the guidance in ASC Topic 820, “Fair Value Measurement and Disclosure”, which established a framework for measuring fair values. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, under ASC 820, fair value measurements for an asset assume the highest and best use of that asset by market participants. As a result, HGI may be required to value assets of HHI at fair value measures that do not reflect HGI’s intended use of those assets. Use of different estimates and judgments could yield different results.

The unaudited pro forma condensed combined financial statements as of and for the year ended September 30, 2012 gives effect to the acquisition of the HHI Business by HGI. For the period presented, the financial statements of HHI do not include the TLM Residential Business, the acquisition of which is subject to separate closing conditions in connection with a second closing. The unaudited pro forma condensed combined financial statements shown below reflect historical financial information and have been prepared on the basis that the transaction is accounted for under ASC 805. The acquisition of the HHI Business by HGI will be accounted for using the acquisition method of accounting. Accordingly, the consideration transferred in the acquisition by HHI, that is, the assets acquired and liabilities assumed, will be measured at their respective fair values with any excess reflected as goodwill. The unaudited pro forma condensed combined financial statements presented assume that the HHI Business will become a wholly owned subsidiary of Spectrum Brands.

The unaudited pro forma condensed combined balance sheet as of September 30, 2012 is presented on a basis to reflect the acquisition as if it had occurred on such date. The unaudited pro forma condensed combined statements of operations for the year ended September 30, 2012 is presented on a basis to reflect the HHI acquisition as if it had occurred on October 1, 2011. Because of different fiscal period ends, and in order to present results for comparable periods, the unaudited pro forma condensed combined statement of operations for the year ended September 30, 2012 combines HGI historical consolidated statement of operations for the year then ended with the HHI conforming statement of operations for the twelve months ended June 30, 2012. Refer to note 1 for conforming interim periods.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

(4) SIGNIFICANT ACCOUNTING POLICIES—HHI ACQUISITION

The unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies between HGI and HHI. Upon consummation of the acquisition, HGI will review the accounting policies of HHI to ensure conformity of such accounting policies to those of HGI and, as a result of that review, HGI may identify differences between the accounting policies of the two companies, that when conformed, could have a material impact on the combined financial statements. At this time, HGI is not aware of any difference that would have a material impact on the unaudited pro forma condensed combined financial statements.

(5) ESTIMATE OF CONSIDERATION EXPECTED TO BE TRANSFERRED—HHI ACQUISITION

The acquisition method of accounting requires that the consideration transferred in a business combination be measured at fair value as of the closing date of the acquisition. The expected consideration for HHI is $1,300.0 in cash.

(6)

PRELIMINARY CONSIDERATION TRANSFERRED TO NET ASSETS ACQUIRED—HHI ACQUISITION

For the purposes of the unaudited pro forma condensed combined financial statements, and based on the estimated consideration expected to be transferred on an assumed acquisition date of September 30, 2012, HGI has estimated that the amounts recorded in accounting for the acquisition of HHI would be as follows:


Current assets	$	414.2
Property, plant and equipment		96.4
Goodwill		648.4
Intangible assets		465.8
Other assets		7.5

Total assets acquired		1,632.3

Current liabilities		167.7
Other long-term liabilities		164.6

Total liabilities assumed		332.3

Total preliminary purchase price allocation	$	1,300.0

(7) HISTORICAL AND PRO FORMA ADJUSTMENTS—HHI ACQUISITION

(a)	HHI Historical Adjustments reflect the exclusion of certain assets, liabilities, equity and operations included within HHI’s financial statements that are not included in the acquisition.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

(b)	The $152.5 net adjustment to cash is reflective of the following adjustments:


Cash Adjustment Calculation
New Term Loan Facility	$	800.0
New Senior Notes		1,090.0
Deferred financing costs		(64.6	)
Accrued interest paid		(2.7	)
Cancellation of Old Term Loan Facility		(370.2	)
Expected consideration for HHI acquisition		(1,300.0	)

Pro forma adjustment	$	152.5

(c)	To record HHI inventory at estimated fair value. Based on preliminary valuations, HGI estimates that as of July 1, 2012, the fair value of HHI inventory exceeds book value by approximately $41.6.

(d)	Adjustment reflects the revaluation of property, plant and equipment to estimated fair value.

(e)	Adjustment reflects the elimination of HHI historical goodwill in accordance with acquisition accounting, and the establishment of $648.4 for goodwill resulting from the transaction, based on a preliminary valuation of assets acquired and liabilities assumed.

(f)	To reverse HHI’s existing intangible assets and record identifiable intangible assets at the estimated fair value. Based on preliminary valuations, HGI currently estimates that the intangible assets of HHI will be increased by approximately $304.0.

As part of the acquisition, certain HHI intangible assets were identified and an estimated fair value was made based on preliminary information available. Specifically, the identifiable intangible assets consisted of customer relationships, HHI portfolio of trade names, proprietary technology and a license agreement. The $465.8 assigned fair value of intangible assets is based on a preliminary valuation. The identifiable assets were valued using historical metrics to the extent possible. In addition, other similar transactions were considered. Furthermore, the projected cash flows associated with each asset were considered over the life of the intangible assets when applicable, and discounted back to present value. The customer relationships and proprietary technology intangible assets are amortized, using the straight line method, over their estimated useful lives. Customer relationships were valued utilizing the multi-period excess earnings method. The relief-from-royalty method was used to value the proprietary technology and HHI portfolio of trade names.

The preliminary estimates of useful lives of the intangible assets subject to amortization that will be acquired are approximately as follows: 15 years for customer relationships, 10 years for proprietary technology and five years for a license agreement. The trade names are considered as indefinite-lived intangible assets and are not amortized. The preliminary estimates of the intangible assets that will be acquired are as follows: $75.0 for customer relationships, $44.0 for proprietary technology, $14.0 for a license agreement and $332.8 for trade names.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

(g)

Adjustment reflects the write-off of unamortized deferred financing fees associated with the termination of Spectrum Brand’s Term Loan Facility maturing 2016 of $6.7. Deferred financing fees expected to be incurred in connection with the new bank facilities, as described in (h) below, to be obtained at the time of the acquisition transaction are estimated at $64.6. HGI estimates the annual amortization related to such deferred financing fees will approximate $8.0.

(h)	Adjustment reflects the cancellation of Spectrum Brand’s Term Loan Facility maturing 2016 as of September 30, 2012. As of September 30, 2012, the balance of Spectrum Brand’s Term Loan Facility maturing 2016 was $370.2.

(i)	Adjustment reflects new debt which will be obtained at the time of the acquisition transaction consisting of the following


New Term Loan Facility	$	800.0
Senior Notes		1,090.0

Total outstanding of new debt	$	1,890.0

(j)	Adjustment reflects the elimination of accrued interest of $2.7 associated with Spectrum Brands Term Loan Facility.

(k)	Deferred tax adjustments of $105.5 to reflect the tax effect of the pro forma adjustment related to acquired assets, assuming a 35% effective tax rate.

(l)	Adjustment reflects the elimination of historical equity of HHI and net impact of the pro forma adjustments associated with Spectrum Brands’ debt refinancing, net of non-controlling interest.

(m)	The adjustment reflects the net impact of the elimination of HHI’s non-controlling interests and the net impact of the Spectrum Brands’ debt refinancing.

(n)

HGI estimates cost of sales will increase by approximately $41.6 during the first inventory turn subsequent to the acquisition date due to the sale of HHI inventory that was subject to the estimated write-up in accounting for the acquisition. This cost has been excluded from the pro forma adjustments as this amount is considered non-recurring. See (b) above for further explanation on the estimated write-up of inventory.

(o)	Adjustment reflects decreased depreciation expense associated with the fair value of HHI property, plant and equipment of $0.5 for the twelve months ended June 30, 2012.

(p)	Adjustment reflects increased amortization expense associated with the fair value of HHI amortizing intangible assets of $12.2 for the twelve months ended June 30, 2012.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

(q)	The transaction will result in substantial changes to HGI’s debt structure. The interest expense adjustments are estimated to result in a net increase to interest expense of approximately $87.0 for the related year to the year ended September 30, 2012. The adjustment consists of the following:


	Assumed Interest Rate			Year Ended September 30, 2012
New Term Loan Facility—USD ($700)		4.75	%	$	33.6
New Term Loan Facility—CAD ($100)		5.00	%		5.1
New Senior Notes, due 2020 ($520)		6.38	%		33.5
New Senior Notes, due 2022 ($570)		6.63	%		38.2
Amortization of debt issuance costs		—			8.0

Total pro forma interest expense					118.4
Less: elimination of interest expense on retired debt					(31.4	)

Pro forma adjustment				$	87.0

An assumed increase or decrease of ¹/₈% in the interest rate of the New Term Loan Facility would impact total pro forma interest expense presented above by $1.0 for the fiscal year ended September 30, 2012.

(r)

As a result of Spectrum Brands’ and HHI’s existing income tax loss carry forwards in the U.S., for which full valuation allowances have been provided, the only pro forma deferred income tax established was discussed in (k) above, and no income tax has been provided related to the acquisition adjustments that impacted pretax income as described above.

(s)

HGI estimates that expenses related to this transaction will be approximately $75.0. These costs include fees for investment banking services, legal, accounting, due diligence, tax, valuation, printing and other various services necessary to complete this transaction. In accordance with ASC 805, these fees are expensed as incurred. HGI has incurred $3.1 of transaction costs in its historical financial results for the period presented. These costs have been excluded from the unaudited pro forma condensed combined statement of operations as these amounts are considered non-recurring.

(t)

Adjustment reflects (i) elimination of historic non-controlling interest in HHI’s income from continuing operations and (ii) recording of non-controlling interest in Spectrum Brands’ pro forma decrease in income from continuing operations resulting from the assumed HHI acquisition and related debt transactions using a non-controlling interest factor of 42.6%.

Stanley Black & Decker has certain termination rights under the Acquisition Agreement that, if exercised by Stanley Black & Decker (subject to the satisfaction of certain specific requirements in the Acquisition Agreement), may result in a reverse termination fee. The unaudited pro forma condensed combined financial statements have been prepared under the assumption that the acquisition will be completed and do not reflect any potential termination fees.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

(8) THE JOINT VENTURE

The joint venture will be formed through a series of integrated transactions between EXCO and HGI, resulting in the formation of the General Partner and the Partnership, which has been referred to in these pro forma financial statements as the “Joint Venture”. Under the terms of the respective agreements, the Joint Venture will acquire certain oil and gas assets from EXCO for approximately $725 of total consideration. The acquisition will be funded with approximately $225 of bank debt, $372.5 in cash contributed from HGI and $127.5 of EXCO’S retained interest in the joint venture. Immediately after the closing and the consummation of the transactions, the Partnership ownership will be 73.5% by HGI and 24.5% by EXCO and 2% by the General Partner. In addition, HGI and EXCO will each own a 50% member interest in the General Partner and each will have equal representation on the General Partner’s board of directors.

For accounting purposes, the series of transactions will be accounted for as if the General Partner directly acquired the oil and gas assets from EXCO due to the General Partner controlling the Partnership and neither member controlling the General Partner. Accordingly, the General Partner will apply the acquisition method of accounting due to the group of assets meeting the definition of a business and consequently will reflect the assets acquired and liabilities assumed at their respective fair values. These fair value measurements will also be reflected by the Partnership due to all of its outstanding voting securities being held by the General Partner.

HGI will account for the Joint Venture using the equity method of accounting, pursuant to a gross proportionate presentation, as HGI has significant influence but does not control the Joint Venture. Accordingly, HGI will reflect 74.5% of the Joint Venture’s assets, liabilities, revenues and expenses in its financial statements, representing its economic interest in the Joint Venture.

(9) PRO FORMA ADJUSTMENTS—JOINT VENTURE

(a)	Pro forma adjustment to reflect the $372.5 cash investment in the Joint Venture by HGI. HGI’s 74.5% economic interest related to this cash contribution is $277.5.

(b)

Pro forma adjustment to reflect the Joint Venture’s draw of $229.5 under the proposed $400.0 revolving credit facility pursuant to a Commitment Letter dated November 5, 2012 to HGI and EXCO from JP Morgan. The initial draw includes $229.5 that will be used to fund EXCO for its contribution to the Joint Venture and $4.5 to pay bank fees and expenses in connection with obtaining the revolving credit facility. HGI’s 74.5% economic interest in the net cash received is $167.6.

(c)

Pro forma adjustments to reflect the opening balance sheet of the Joint Venture. The transaction reflects the contribution by EXCO of their conventional oil and natural gas properties and related gathering assets located in East Texas/North Louisiana, or the Joint Venture’s Assets, in exchange for cash of $597.5 and a 25.5% equity interest (or an imputed investment of $127.5) in the Joint Venture. HGI’s 74.5% economic interest in the cash paid to EXCO is $445.1.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

The assets acquired and the liabilities assumed by the Joint Venture and HGI’s corresponding 74.5% economic interest in these assets and liabilities were estimated as follows:


	Joint Venture			HGI’s 74.5% Economic Interest
Oil and natural gas properties—proved	$	685.2		$	510.5
Oil and natural gas properties—unproved		44.8			33.4
Gas gathering, compression and treating facilities		29.9			22.3
Asset retirement obligations		(18.3	)		(13.6	)
Revenue suspense		(16.6	)		(12.4	)

	$	725.0		$	540.2

(d)	HGI has incurred $0.8 of transaction costs in its historical financial results for the periods presented. These costs have been excluded from the unaudited pro forma condensed combined statement of operations as these amounts are considered non-recurring.

(e)

Pro forma adjustment to provide for 74.5% of depreciation, depletion and amortization for the twelve months ended September 30, 2012 based on 74.5% pro forma fair value attributable to the amortizable full cost pool and historical oil and natural gas production for such period as if the Joint Venture had occurred on October 1, 2011.

(f)	Pro forma adjustment to reflect 74.5% accretion of discount for the twelve months ended September 30, 2012 with respect to the asset retirement obligations attributable to the Joint Venture.

(g)

Pro forma adjustment to reflect 74.5% of general and administrative costs for the twelve months ended September 30, 2012 for estimated contractual reimbursements to EXCO pursuant to a proposed Administrative Services Agreement, or ASA, and other direct general and administrative expenses to the Joint Venture stipulated in the ASA.

(h)

Pro forma adjustment to reflect 74.5% of the interest expense for the twelve months ended September 30, 2012 as if the revolving credit facility and the initial borrowing under the facility had taken place on October 1, 2011 and was outstanding for the full twelve months, based on an interest rate of 2.45%. This amount includes 74.5% of amortization of deferred financing costs incurred in connection with revolving credit facility of $0.7. An increase or decrease of ¹/₈% in the assumed interest rate of the credit facility would impact 74.5% pro forma interest expense presented above by $0.5 for the fiscal year ended September 30, 2012.

(i)

The Joint Venture is not directly subject to federal income taxes. Instead, its taxable income or loss is allocated to its individual partners, whether or not cash distributions are paid. As a result of HGI’s existing income tax loss carry forwards in the U.S., for which full valuation allowances have been provided, no income tax (benefit)/expense has been provided related to the pro-forma Joint Venture adjustments that impacted pretax income.

(10) EXCLUDED COSTS—SENIOR SECURED JOINT VENTURE

Prior to the formation of the Joint Venture, the Joint Venture’s properties were part of a much larger organization where indirect general and administrative expenses, interest, income taxes, and

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

other indirect expenses were not allocated to the Joint Venture’s properties and have therefore been excluded from the accompanying statements of revenues and direct operating expenses. In addition, such indirect expenses are not indicative of costs which would have been incurred by the Joint Venture’s properties on a stand-alone basis. Also, depreciation, depletion and amortization and accretion of discounts attributable to asset retirement obligations have been excluded from the accompanying statements of revenues and direct operating expenses as such amounts would not necessarily be indicative of those expenses which would have been incurred based on the amounts to be allocated to the oil and gas properties in connection with the formation of the Joint Venture and contributions of assets and cash by the Joint Venture’s equity holders.

(11) PRO FORMA ADJUSTMENTS—NOTES

(a)

HGI plans to refinance its existing Senior Secured Notes of $500 with new Senior Secured Notes of $650. Under the terms of the existing Senior Secured Notes, HGI may be redeem the Senior Secured Notes at 100% of the principal amount plus a Breakage Fee, plus accrued and unpaid interest. The breakage fees were calculated as $57.2. This amount has been excluded from the unaudited pro forma condensed combined statement of operations as such amount is considered non-recurring.

The $55.9 net adjustment to cash is reflective of the following adjustments:


Existing Senior Secured Notes	$	(500.0	)
Accrued Interest Paid		(19.9	)
Breakage Fees Paid*		(57.2	)
New Long Term Debt		650.0
Deferred Financing Costs		(17.0	)

Pro Forma Adjustment	$	55.9

The breakage fee has been calculated based on the transaction occurring on September 30, 2012. This amount will be reduced as the transaction date moves closer to May 15, 2013, which is a factor in determining this amount, as stipulated in the agreement.

(b)

Adjustment reflects the write-off of unamortized deferred financing fees associated with the extinguishment of the existing Senior Secured Notes of $11.6. Deferred financing fees expected to be incurred in connection with the new Senior Secured Notes are estimated at $17.0. HGI estimates the annual amortization related to such deferred financing fees will approximate $2.8.

(c)	Adjustment reflects $19.9 of accrued interest which is payable upon the extinguishment of the prior debt.

(d)	The pro forma impact on debt was $152.3, net of discounts, after the extinguishment of existing senior secured notes.


Issuance of New Senior Secured Notes—USD ($650)	$	650.0
Extinguishment of Existing Senior Secured Notes—USD ($500)		(500.0	)
Reversal of net discount on existing notes		2.3

Pro forma adjustment	$	152.3

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS—(Continued)

(Amounts in millions, except per share amounts)

(e)	The expected reduction in the interest expense related to the issuance of the existing notes for the year ended September 30, 2012 was calculated as follows:


Estimated interest expense on New Senior Secured Notes	$	52.0
Amortization of debt issuance costs		2.8

Total pro forma interest expense		54.8
Less: Elimination of historical interest expense		56.6

Pro forma reduction in interest expense	$	(1.8	)

An increase or decrease of ¹/₈% in the assumed interest rate would impact total pro forma interest expense by $0.8 for the fiscal year ended September 30, 2012.

(f)	The decrease in pro forma interest expense will not have an impact on HGI’s current and deferred tax position due to HGI’s existing income tax loss carry forwards in the U.S., for which valuation allowances have been provided.

Report of Lee Keeling and Associates, Inc.

Exhibit 99.6

LOGO

LOGO