Acquisitions

Acquisitions Completed in Fiscal 2013

Spectrum Brands’ Acquisition of Stanley Black & Decker’s Hardware and Home Improvement Business

On December 17, 2012, Spectrum Brands completed the cash acquisition of the HHI Business from Stanley Black & Decker. A portion of the HHI Business, consisting of the purchase of certain assets of TLM Taiwan closed on April 8, 2013.

The following table summarizes the preliminary consideration paid for the HHI Business:



Negotiated sales price, excluding TLM Taiwan	$	1,300.0
Working capital and other adjustments at December 17, 2012 close	(10.7		)
Final working capital adjustment	(7.7		)
Final purchase price, excluding TLM Taiwan	1,281.6
Negotiated sales price, TLM Taiwan	100.0
Final TLM Taiwan working capital and other adjustments	(6.5		)
Total HHI Business purchase price	$	1,375.1

The HHI Business is a major manufacturer and supplier of residential locksets, residential builders’ hardware and faucets with a portfolio of recognized brand names, including Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL and Pfister, as well as patented technologies such as the SmartKey, a re-keyable lockset technology, and Smart Code Home Connect. Customers of the HHI Business include retailers, non-retail distributors and homebuilders. Headquartered in Lake Forest, California, the HHI Business has a global sales force and operates manufacturing and distribution facilities in the U.S., Canada, Mexico and Asia.

The results of the HHI Business operations since December 17, 2012, excluding TLM Taiwan, are included in the Company’s Consolidated Statements of Operations. The results of TLM Taiwan operations since April 8, 2013 are included in the Company’s Consolidated Statements of Operations.

Preliminary Valuation of Assets and Liabilities

The preliminary fair values of net tangible and intangible assets acquired and liabilities assumed in connection with the purchase of the HHI Business, excluding TLM Taiwan, have been recognized in the Consolidated Balance Sheets based upon their preliminary values at December 17, 2012. The preliminary fair values of the net tangible and intangible assets acquired and liabilities assumed in connection with the TLM Taiwan purchase have been recognized in the Consolidated Balance Sheets based upon their preliminary values at April 8, 2013. The excess of the purchase price over the preliminary fair values of the net tangible and intangible assets was recorded as goodwill, and includes value associated with greater product diversity, stronger relationships with core retail partners, cross-selling opportunities in all channels and a new platform for potential future global growth using the Spectrum Brands’ existing international infrastructure, most notably in Europe. The majority of goodwill recorded is not expected to be deductible for income tax purposes. The preliminary fair values recorded were based upon a preliminary valuation and the estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary valuation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, certain legal matters, amounts for income taxes including deferred tax accounts, amounts for uncertain tax positions, and net operating loss carryforwards inclusive of associated limitations and valuation allowance, the determination of identifiable intangible assets and the final amount of residual goodwill. Additionally, finalized fair values associated with deferred tax accounts could have a material effect on Spectrum Brands’ estimated reversal of its consolidated U.S. valuation allowances recognized during the measurement period. See Note 23, Income Taxes, for further information. Spectrum Brands expects to continue to obtain information to assist it in determining the fair values of the net assets acquired at the acquisition date during the measurement period.

The preliminary valuation of the assets acquired and liabilities assumed for the HHI Business, including a reconciliation to the preliminary valuation reported as of December 30, 2012, is as follows:



	HHI Business Preliminary Valuation			TLM Taiwan Preliminary Valuation					Preliminary Valuation
	December 30, 2012			June 30, 2013		Adjustments/reclassifications			September 30, 2013
Cash	$	17.4		$	0.8	$	5.8		$	24.0
Accounts receivable	104.6			—		4.0			108.6
Inventory	207.2			1.1		0.1			208.4
Prepaid expenses and other	13.3			2.2		(6.2		)	9.3
Property, plant and equipment	104.5			36.8		(2.9		)	138.4
Intangible assets	470.0			17.1		2.0			489.1
Other long-term assets	3.1			0.1		4.4			7.6
Total assets acquired	920.1			58.1		7.2			985.4
Accounts payable	130.1			—		8.0			138.1
Deferred tax liability - current	7.1			—		0.1			7.2
Accrued liabilities	37.6			0.2		5.0			42.8
Deferred tax liability - long-term	104.7			1.9		9.8			116.4
Other long-term liabilities	11.2			8.1		0.4			19.7
Total liabilities assumed	290.7			10.2		23.3			324.2
Total identifiable net assets	629.4			47.9		(16.1		)	661.2
Non-controlling interests	(2.2		)	—		(1.7		)	(3.9		)
Goodwill	662.1			45.6		10.1			717.8
Total net assets acquired	$	1,289.3		$	93.5	$	(7.7	)	$	1,375.1

Since the preliminary valuation on December 30, 2012, Spectrum Brands recorded $45.6 of goodwill related to the acquisition of TLM Taiwan on April 8, 2013, and recorded adjustments to the preliminary valuation of assets and liabilities, excluding TLM Taiwan, resulting in a net increase to goodwill of $10.1. The preliminary goodwill increased $9.8 as a result of recording certain state and foreign valuation allowances against deferred tax assets, $2.9 resulting from a reduction in certain property, plant and equipment asset values and $7.0 from changes in working capital and other asset and liability accounts based on new information obtained by Spectrum Brands. The preliminary goodwill decreased $7.7 as a result of the final working capital adjustment related to the December 17, 2012 close and $2.0 as a result of new information related to intangible assets which increased their value. The changes in estimates were the result of additional accounting information provided by Stanley Black & Decker during the period, as well as items identified by management. Spectrum Brands believes that the information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but it is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change further. Spectrum Brands expects to complete the purchase accounting process as soon as practicable but no later than one year from the acquisition date.

Preliminary Pre-Acquisition Contingencies Assumed

Spectrum Brands has evaluated and continues to evaluate pre-acquisition contingencies relating to the HHI Business that existed as of the acquisition date. Based on the evaluation to date, Spectrum Brands has preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, Spectrum Brands has recorded its best estimates for these contingencies as part of the preliminary valuation of the assets and liabilities acquired for the HHI Business. Spectrum Brands continues to gather information relating to all pre-acquisition contingencies that it has assumed from the HHI Business. Any changes to the pre-acquisition contingency amounts recorded during the measurement period will be included in the final valuation and related amounts recognized. Subsequent to the end of the measurement period any adjustments to pre-acquisition contingency amounts will be reflected in the Company’s Consolidated Statements of Operations.

Preliminary Valuation Adjustments

Spectrum Brands performed a preliminary valuation of the assets and liabilities of the HHI Business, excluding TLM Taiwan, at December 17, 2012. Significant adjustments as a result of the valuation and the bases for their determination are summarized as follows:


•	Inventories - An adjustment of $31.0 was recorded to adjust inventory to fair value. Finished goods were valued at estimated selling prices less the sum of costs of disposal and a reasonable profit allowance for the selling effort.


•	Property, plant and equipment, net - An adjustment of $10.0 was recorded to adjust the net book value of property, plant and equipment to fair value giving consideration to the highest and best use of the assets. The valuation of the property, plant and equipment was based on the cost approach.


•	Certain indefinite-lived intangible assets were valued using a relief from royalty methodology. Customer relationships and certain definite-lived intangible assets were valued using a multi-period excess earnings method. The total fair value of indefinite and definite lived intangibles was $489.1. A summary of the significant key inputs is as follows:

•

Spectrum Brands valued customer relationships using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the customer relationships, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. Only expected sales from current customers were used, which included an expected growth rate of 2.5% - 15.5%. Spectrum Brands assumed a customer retention rate of approximately 95.0%, which was supported by historical retention rates. Income taxes were estimated at 17.0% - 35.0% and amounts were discounted using a rate of 12.0%. The customer relationships were valued at $90.0 under this approach and will be amortized over 20 years.

•

Spectrum Brands valued indefinite lived trade names and trademarks using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the HHI Business, related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. Royalty rates used in the determination of the fair values of trade names and trademarks ranged from 3.0% - 5.0% of expected net sales related to the respective trade names and trademarks. Spectrum Brands anticipates using the majority of the trade names and trademarks for an indefinite period as demonstrated by the sustained use of each subject trademark. In estimating the fair value of the trademarks and trade names, net sales for significant trade names and trademarks were estimated to grow at a rate of 2.5% - 5.0% annually with a terminal year growth rate of 2.5%. Income taxes were estimated at 35.0% and amounts were discounted using a rate of 12.0%. Trade name and trademarks were valued at $331.0 under this approach.

•

Spectrum Brands valued definite lived trade names using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the HHI Business, related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. The royalty rates used in the determination of the fair values of the trade names ranged from 1.0% - 3.5% of expected net sales related to the respective trade name. Spectrum Brands assumed an 8 year useful life of the trade name. In estimating the fair value of the trade name, net sales for the trade name were estimated to grow at a rate of 2.5% - 15.5% annually. Income taxes were estimated at 17.0% - 35.0% and amounts were discounted using a rate of 12.0%. The trade names were valued at $4.1 under this approach.

•

Spectrum Brands valued a trade name license agreement using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the HHI Business, related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. The royalty rate used in the determination of the fair value of the trade name license agreement was 4.0% of expected net sales related to the respective trade name. In estimating the fair value of the trade name license agreement, net sales were estimated to grow at a rate of 2.5% - 5.0% annually. Spectrum Brands assumed a 5 year useful life of the trade name license agreement. Income taxes were estimated at 35.0% and amounts were discounted using a rate of 12.0%. The trade name license agreement was valued at $13.0 under this approach.

•

Spectrum Brands valued technology using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the technology was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the HHI Business, related licensing agreements and the importance of the technology and profit levels, among other considerations. Royalty rates used in the determination of the fair values of technologies ranged from 4.0% - 5.0% of expected net sales related to the respective technology. Spectrum Brands anticipates using these technologies through the legal life of the underlying patent and therefore the expected life of these technologies was equal to the remaining legal life of the underlying patents which was 10 years. In estimating the fair value of the technologies, net sales were estimated to grow at a rate of 2.5% - 31.0% annually. Income taxes were estimated at 35.0% and amounts were discounted using the rate of 12.0%. The technology assets were valued at $51.0 under this approach.


•	Deferred tax liabilities, net - An adjustment of $123.6 was recorded to adjust deferred taxes for the preliminary fair value adjustments made in accounting for the purchase.

Shaser

On November 8, 2012, Spectrum Brands completed the cash acquisition of an approximately 56% interest in Shaser Biosciences, Inc. (“Shaser”). Shaser is a global technology leader in developing energy-based, aesthetic dermatological technology for home use devices. This acquisition was not significant individually.

The following table summarizes the preliminary consideration paid for Shaser:



	November 8, 2012
Negotiated sales price	$	50.0
Preliminary working capital adjustment	(0.4		)
Final working capital adjustment	0.1
Preliminary purchase price	$	49.7

The purchase agreement provides Spectrum Brands with an option, exercisable solely at Spectrum Brands’ discretion, to acquire the remaining 44% interest of Shaser (the “Call Option”). The Call Option is exercisable any time between January 1, 2017 and March 31, 2017 at a price equal to the higher of 1.0x trailing revenues or 7.0x adjusted trailing earnings before interest taxes depreciation and amortization (“EBITDA”), as defined, for calendar year ended December 31, 2016.

The results of Shaser’s operations since November 8, 2012 are included in the Company’s Consolidated Statements of Operations.

Valuation of Assets and Liabilities

The assets acquired and liabilities assumed in the Shaser acquisition have been measured at their fair values at November 8, 2012 as set forth below. The excess of the purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce including an experienced research team, and is not expected to be deductible for income tax purposes. The fair values recorded were determined based upon a valuation and the estimates and assumptions used in such valuation are final and the measurement period has closed.

The fair values recorded for the assets acquired and liabilities assumed for Shaser, including a reconciliation to the preliminary valuation reported as of December 30, 2012 are as follows:



	Preliminary Valuation						Preliminary Valuation
	December 30, 2012			Adjustments/reclassifications			September 30, 2013
Cash	$	0.9		$	—		$	0.9
Intangible asset	35.5			(6.2		)	29.3
Other assets	2.7			(2.5		)	0.2
Total assets acquired	39.1			(8.7		)	30.4
Total liabilities assumed	14.4			(5.6		)	8.8
Total identifiable net assets	24.7			(3.1		)	21.6
Non-controlling interest	(39.0		)	(0.1		)	(39.1		)
Goodwill	63.9			3.3			67.2
Total identifiable net assets	$	49.6		$	0.1		$	49.7

Subsequent to the preliminary purchase accounting, Spectrum Brands recorded adjustments to the preliminary valuation of assets and liabilities resulting in a net increase to goodwill of $3.3. Goodwill increased as a result of further information to support a key valuation factor that impacted the valuation of the technology asset acquired, and the resulting changes to the deferred tax asset and liabilities. This revised information was provided by Shaser during the period.

Pre-Acquisition Contingencies Assumed

Spectrum Brands has evaluated pre-acquisition contingencies relating to Shaser that existed as of the acquisition date. Based on the evaluation, Spectrum Brands has determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, Spectrum Brands has recorded its best estimates for these contingencies as part of the purchase accounting for Shaser.

Valuation Adjustments

Spectrum Brands performed a valuation of the acquired proprietary technology assets, the non-controlling interest and the Call Option related to Shaser at November 8, 2012. A summary of the significant key inputs is as follows:

•

Spectrum Brands valued the technology assets using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the technology was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of Shaser, related licensing agreements and the importance of the technology and profit levels, among other considerations. The royalty rate used in the determination of the fair value of the technology asset was 10.5% of expected net sales related to the technology. Spectrum Brands anticipates using the technology through the legal life of the underlying patent and therefore the expected life of the technology was equal to the remaining legal life of the underlying patent which was 13 years. In estimating the fair value of the technology, net sales were estimated to grow at a long-term rate of 3.0% annually. Income taxes were estimated at 35.0% and amounts were discounted using the rate of 11.0%. The technology asset was valued at approximately $29.3 under this approach.

•

Spectrum Brands valued the non-controlling interest in Shaser, a private company, by applying both income and market approaches. Under these methods, the non-controlling value was determined by using a discounted cash flow method, a guideline companies method, and a recent transaction approach. In estimating the fair value of the non-controlling interest, key assumptions include (i) cash flow projections based on market participant data and estimates by Spectrum Brands management, with net sales estimated to grow at a terminal growth rate of 3.0% annually, income taxes estimated at 35.0%, and amounts discounted using a rate of 17.0%, (ii) financial multiples of companies deemed to be similar to Shaser, and (iii) adjustments because of lack of control or lack of marketability that market participants would consider when estimating the fair value of the non-controlling interest in Shaser. The non-controlling interest was valued at $39.0 under this approach.

•

Spectrum Brands, in connection with valuing the non-controlling interest in Shaser, also valued the Call Option. In addition to the valuation methods and key assumptions discussed above, Spectrum Brands compared the forecasted revenue and EBITDA multiples, as defined, associated with the Call Option to current guideline companies. The Call Option was determined to have an immaterial value under this approach.

EXCO/HGI JV

The EXCO/HGI JV was formed on February 14, 2013 through transactions between subsidiaries of EXCO and HGI, resulting in the formation of the General Partner and the Partnership. Under the terms of the respective agreements, the EXCO/HGI JV acquired certain oil and natural gas assets from EXCO for $725.0 of total consideration, subject to certain customary closing adjustments of $30.5, or a net purchase price of $694.5. Immediately after the closing and the consummation of the transactions, the ownership in the Partnership was 73.5% by HGI and 24.5% by EXCO and 2.0% by the General Partner. In addition, HGI and EXCO each own a 50.0% member interest in the General Partner and each have equal representation on the General Partner’s board of directors. The ownership of the Partnership and General Partnership translates into an economic ownership of the EXCO/HGI JV of 74.5%. At the closing, HGI contributed approximately $349.8 in cash (reflecting the effect of closing adjustments and the economic benefits related to the July 1, 2012 effective date) to the EXCO/HGI JV and EXCO contributed $694.5 of net assets in exchange for cash of $574.8, and retained an interest in the joint venture of $119.1. The payment to EXCO was funded through a combination of cash from HGI’s contribution, and borrowings under the EXCO/HGI JV Credit Agreement.

On March 5, 2013, the EXCO/HGI JV acquired all of the shallow Cotton Valley assets from an affiliate of BG Group for $130.7, after final purchase price adjustments. This acquisition included oil and natural gas assets in the Danville, Waskom and Holly fields in East Texas and North Louisiana. The assets acquired by the EXCO/HGI JV represented an incremental working interest in certain properties previously owned by the EXCO/HGI JV. The acquisition was funded with borrowings from the EXCO/HGI JV Credit Agreement.

The EXCO/HGI JV accounted for the acquisitions in accordance with ASC 805-10, Business Combinations. The following table presents a summary of the fair value of assets acquired and liabilities assumed as part of the acquisition:



	EXCO's Contributed Assets February 14, 2013						BG Cotton Valley Assets March 5, 2013
	EXCO/HGI JV			HGI's Proportionate Interest			EXCO/HGI JV			HGI's Proportionate Interest
Assets acquired:
Cash	$	0.1		$	0.1		$	—		$	—
Oil and natural gas properties
Unproved oil and natural gas properties	65.1			48.5			7.2			5.4
Proved developed and undeveloped oil and natural gas properties	632.2			471.0			130.9			97.5
Total oil and natural gas properties	697.3			519.5			138.1			102.9
Gas Gathering and other assets	32.7			24.5			—			—
Liabilities assumed:
Accounts payable and other current liabilities	(10.8		)	(8.0		)	—			—
Other liabilities	(24.8		)	(18.5		)	(7.4		)	(5.5		)
Total purchase price	$	694.5		$	517.6		$	130.7		$	97.4

The EXCO/HGI JV performed a valuation of the assets acquired and liabilities assumed at February 14, 2013 and March 5, 2013. A summary of the key inputs are as follows:

Oil and Natural Gas Properties - HGI’s proportionate share of the fair value allocated to oil and natural gas properties was $519.5 and $102.9, for the EXCO/HGI JV and the BG Cotton Valley acquisitions, respectively. The fair value of oil and natural gas properties was determined based on a discounted cash flow model of the estimated reserves. The estimated quantities of reserves utilized assumptions based on the partnership’s internal geological, engineering data and financial data. The EXCO/HGI JV utilized NYMEX forward strip prices to value the reserves for a period of five years and then held prices flat thereafter. The EXCO/HGI JV then applied various discount rates depending on the classification of reserves and other risk characteristics.

Gas Gathering Assets - HGI’s proportionate share of the fair value allocated to gas gathering assets was $21.5. The fair value of these assets was determined based on a market approach using other recent transactions involving gathering and processing assets. The EBITDA multiple based on these market transactions was applied to the projected EBITDA of the gas gathering assets in order to calculate the fair value.

Asset Retirement Obligations - HGI’s proportionate share of the fair value allocated to asset retirement obligations was $18.5 and $5.5, respectively. These asset retirement obligations represent the present value of the estimated amount to be incurred to plug, abandon and remediate proved producing properties at the end of their productive lives, in accordance with applicable state laws. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate, and timing associated with the incurrence of these costs. The asset retirement obligations are primarily included in “Other liabilities” in the Consolidated Balance Sheets.

Acquisitions Completed in Fiscal 2011

FGL Acquisition

On April 6, 2011, the Company acquired all of the outstanding shares of capital stock of FGH and certain intercompany loan agreements between the seller, as lender, and FGH, as borrower, for cash consideration of $350.0 (including $5.0 re-characterized as an expense), which amount could be reduced by up to $50.0 post closing (as discussed further below). The Company incurred approximately $22.7 of expenses related to the FGL Acquisition, including $5.0 of the $350.0 cash purchase price which has been re-characterized as an expense since the seller made a $5.0 expense reimbursement to the Master Fund upon closing of the FGL Acquisition. Such expenses are included in “Selling, acquisition, operating and general expenses” in the Consolidated Statements of Operations for the year ended September 30, 2011. The FGL Acquisition continued HGI’s strategy of obtaining controlling equity stakes in subsidiaries that operate across a diversified set of industries.

Net Assets Acquired

The acquisition of FGH has been accounted for under the acquisition method of accounting which requires the total purchase price to be allocated to the assets acquired and liabilities assumed based on their estimated fair values. The fair values assigned to the assets acquired and liabilities assumed are based on valuations using management’s best estimates and assumptions and were preliminary pending the completion of the valuation analysis of selected assets and liabilities. During the measurement period (which is not to exceed one year from the acquisition date), the Company is required to retrospectively adjust the provisional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. Effective April 1, 2012, the Company finalized such provisional amounts which were previously disclosed as of September 30, 2011.

The following table summarizes the provisional and final amounts recognized at fair value for each major class of assets acquired and liabilities assumed as of the FGL Acquisition Date:



	Provisional Amounts		Fiscal 2012 Measurement Period Adjustments			Final Amounts
Investments, cash and accrued investment income, including cash acquired of $1,040.5	$	17,705.4	$	—		$	17,705.4
Reinsurance recoverable	929.8		15.2			945.0
Intangible assets (VOBA)	577.2		—			577.2
Deferred tax assets	256.6		(3.9		)	252.7
Other assets	72.8		—			72.8
Total assets acquired	19,541.8		11.3			19,553.1
Contractholder funds and future policy benefits	18,415.0		—			18,415.0
Liability for policy and contract claims	60.4		—			60.4
Note payable	95.0		—			95.0
Other liabilities	475.3		4.1			479.4
Total liabilities assumed	19,045.7		4.1			19,049.8
Net assets acquired	496.1		7.2			503.3
Cash consideration, net of $5.0 re-characterized as expense	345.0		—			345.0
Bargain purchase gain	$	151.1	$	7.2		$	158.3

The application of acquisition accounting resulted in a bargain purchase gain of $158.3, which is reflected in the Consolidated Statements of Operations for the year ended September 30, 2011. The amount of the bargain purchase gain is equal to the amount by which the fair value of net assets acquired exceeded the consideration transferred. The Company believes that the resulting bargain purchase gain is reasonable based on the following circumstances: (a) the seller was highly motivated to sell FGH, as it had publicly announced its intention to do so approximately a year prior to the sale, (b) the fair value of FGH’s investments and statutory capital increased between the date that the purchase price was initially negotiated and the FGL Acquisition Date, (c) as a further inducement to consummate the sale, the seller waived, among other requirements, any potential upward adjustment of the purchase price for an improvement in FGH’s statutory capital between the date of the initially negotiated purchase price and the FGL Acquisition Date and (d) an independent appraisal of FGH’s business indicated that its fair value was in excess of the purchase price.

Reinsurance Transactions

As discussed in Note 21, pursuant to the F&G Stock Purchase Agreement on April 7, 2011, FGH recaptured all of the life business ceded to OM Re. OM Re transferred assets with a fair value of $653.7 to FGH in settlement of all of OM Re’s obligations under these reinsurance agreements. Such amounts are reflected in FGH’s purchase price allocation. Further, on April 7, 2011, FGH ceded on a coinsurance basis a significant portion of this business to Raven Re. Certain transactions related to Raven Re such as the surplus note issued to OMGUK in the principal amount of $95.0, which was used to partially capitalize Raven Re and the Structuring Fee of $13.8 are also reflected in FGH’s purchase price allocation. Pursuant to the terms of the Raven Springing Amendment, the amount payable to Wilton at the closing of such amendment was adjusted to reflect the economic performance for the Raven Block from January 1, 2011 until the effective time of the closing of the Raven Springing Amendment. The estimated economic performance for the period from January 1, 2011 to April 6, 2011 was considered in the FGH’s opening balance sheet and purchase price allocation. Of the ongoing settlement adjustments resolved with Wilton Re, as discussed in Note 21, it was determined that $11.2, less $3.9 of deferred income taxes, related to the pre-acquisition period, and were reflected as measurement period adjustments to the initial purchase price allocation. Such adjustments have been retrospectively reflected in the accompanying consolidated financial statements as of and for the year ended September 30, 2011.

Contingent Purchase Price Reduction

As contemplated by the terms of the F&G Stock Purchase Agreement, Front Street Re, Ltd. (“Front Street”), a then recently formed Bermuda-based reinsurer and wholly-owned subsidiary of the Company sought to enter into a reinsurance agreement (the “Front Street Reinsurance Transaction”) with FGH whereby Front Street would reinsure up to $3,000.0 of insurance obligations under annuity contracts of FGH, and Harbinger Capital Partners II LP (“HCP II”), an affiliate of the HCP Stockholders, would be appointed the investment manager of up to $1,000.0 of assets securing Front Street’s reinsurance obligations under the reinsurance agreement. These assets would be deposited in a reinsurance trust account for the benefit of FGH.

The Front Street Reinsurance Transaction required the approval of the Maryland Insurance Administration (the “MIA”). The F&G Stock Purchase Agreement provides that, the seller may be required to pay up to $50.0 as a post-closing reduction in purchase price if, among other things, the Front Street Reinsurance Transaction is not approved by the MIA or is approved subject to certain restrictions or conditions. FGH received written notice, dated January 10, 2012, from the MIA, rejecting the Front Street Reinsurance Transaction, as proposed by the respective parties. HGI notified the seller of the failure of the MIA to approve the Front Street Reinsurance Transaction and sought the purchase price reduction.The seller refused, and HGI is pursuing all available options to recover the full purchase price reduction, including the commencement of litigation against the seller; however, the outcome of any such action is subject to risk and uncertainty and there can be no assurance that any or all of the $50.0 purchase price reduction will be obtained by HGI.

Prior to the receipt of the written rejection notice from the MIA, management believed, based on the facts and circumstances at that time, that the likelihood was remote that the purchase price would be required to be reduced. Therefore a fair value of zero had been assigned to the contingent purchase price reduction as of the FGL Acquisition date and at each subsequent quarterly remeasurement date through January 1, 2012. Management now believes that it is near certain that the purchase price will be required to be reduced by the full $50.0 amount and has estimated a fair value of $41.0 for the contingent receivable as of September 30, 2013 (essentially unchanged from September 30, 2012), reflecting appropriate discounts for potential litigation and regulatory action, length of time until expected payment is received and a credit insurance risk premium. Such $41.0 estimated fair value of the contingent receivable has been reflected in “Receivables, net” in the Consolidated Balance Sheets as of September 30, 2013. A corresponding credit to “Gain on contingent purchase price reduction” was recorded in earnings during Fiscal 2012. Changes in the estimated fair value of the contingent consideration resulting from events after the acquisition date are accounted for in earnings upon each remeasurement date, until such time as the contingency is resolved.

Intangible Assets

VOBA represents the estimated fair value of the right to receive future net cash flows from in-force contracts in a life insurance company acquisition at the acquisition date. VOBA is being amortized over the expected life of the contracts in proportion to either gross premiums or gross profits, depending on the type of contract. Total gross profits include both actual experience as it arises and estimates of gross profits for future periods. FGH will regularly evaluate and adjust the VOBA balance with a corresponding charge or credit to earnings for the effects of actual gross profits and changes in assumptions regarding estimated future gross profits. The amortization of VOBA is reported in “Amortization of intangibles” in the Consolidated Statements of Operations. The proportion of the VOBA balance attributable to each of the product groups associated with this acquisition as of the FGL Acquisition Date is as follows: 80.4% related to FIA’s, and 19.6% related to deferred annuities.

Refer to Note 13 for FGH’s historical and estimated future amortization of VOBA, net of interest.

Deferred Taxes

The future tax effects of temporary differences between financial reporting and tax bases of assets and liabilities are measured at the balance sheet date and are recorded as deferred income tax assets and liabilities. The acquisition of FGH is considered a non-taxable acquisition under tax accounting criteria, therefore, the tax basis of assets and liabilities reflect an historical (carryover) basis at the FGL Acquisition Date. However, since assets and liabilities reported under US GAAP are adjusted to fair value as of the FGL Acquisition Date, the deferred tax assets and liabilities are also adjusted to reflect the effects of those fair value adjustments. This resulted in shifting FGH into a significant net deferred tax asset position at the FGL Acquisition Date, principally due to the write-off of DAC and the establishment of a significantly lesser amount of VOBA which resulted in reducing the associated deferred tax liabilities and thereby shifting FGH’s net deferred tax position. This shift, coupled with the application of certain tax limitation provisions that apply in the context of a change in ownership transaction, most notably Section 382 of the IRC, relating to “Limitation in Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change,” as well as other applicable provisions under Sections 381-384 of the IRC, require FGH to reconsider the realization of FGH’s gross deferred tax asset position and the need to establish a valuation allowance against it. Management determined that a valuation allowance against a portion of the gross deferred tax asset (“DTA”) was required as of FGL Acquisition Date.

The components of the net deferred tax assets as of the FGL Acquisition Date (updated for measurement period adjustments) are as follows:



Deferred tax assets:
DAC	$	96.8
Insurance reserves and claim related adjustments	401.7
Net operating losses	128.4
Capital losses (carryovers and deferred)	267.5
Tax credits	75.2
Other deferred tax assets	24.1
Total deferred tax assets	993.7
Valuation allowance	(405.4		)
Deferred tax assets, net of valuation allowance	588.3
Deferred tax liabilities:
VOBA	202.0
Investments	121.2
Other deferred tax liabilities	12.4
Total deferred tax liabilities	335.6
Net deferred tax assets	$	252.7

Supplemental Pro Forma Information

The following table reflects the Company’s unaudited pro forma results for Fiscal 2013, 2012 and 2011 had the results of the Hardware Acquisition, the acquisition of the Company’s interest in the EXCO/HGI JV and FGH been included for each of the full year periods, as if the respective acquisitions were completed on October 1, 2010.



	September 30,
	2013			2012			2011 (a)

Revenues:
Reported revenues	$	5,543.4		$	4,480.7		$	3,477.7
FGH adjustment (b)	—			—			685.8
HHI adjustment	191.8			973.6			975.1
EXCO/HGI JV adjustment	53.7			149.3			213.8
Pro forma revenues	$	5,788.9		$	5,603.6		$	5,352.4

Net (loss) income:
Reported net (loss) income	$	(69.0	)	$	110.7		$	7.3
FGH adjustment (b)	—			—			84.9
HHI adjustment	4.9			76.1			77.0
EXCO/HGI JV adjustment	(0.4		)	(6.8		)	49.4
Pro forma net (loss) income	$	(64.5	)	$	180.0		$	218.6

Basic net (loss) income per common share attributable to controlling interest:
Reported net (loss) income per common share	$	(0.67	)	$	0.15		$	0.11
FGH adjustment	—			—			0.61
HHI adjustment	0.04			0.55			0.55
EXCO/HGI JV adjustment	—			(0.05		)	0.35
Pro forma net (loss) income per common share	$	(0.63	)	$	0.65		$	1.62

Diluted net (loss) income per common share attributable to controlling interest:
Reported diluted net (loss) income per common share	$	(0.67	)	$	0.15		$	0.09
FGH adjustment	—			—			0.54
HHI adjustment	0.04			0.54			0.49
EXCO/HGI JV adjustment	—			(0.05		)	0.31
Pro forma diluted net (loss) income per common share	$	(0.63	)	$	0.64		$	1.43


(a)	Reported revenues and net income for Fiscal 2011 include the actual reported results of FGH for the approximate six month period subsequent to April 6, 2011. Reported net income also includes the $158.3 non-recurring bargain purchase gain which was recorded as of the FGL Acquisition Date, and reflects the retrospective measurement period adjustments disclosed above.


(b)	The pro forma information primarily reflects the following pro forma adjustments applied to FGH’s historical results:


•	Reduction in net investment income to reflect amortization of the premium on fixed maturity securities — available-for-sale resulting from the fair value adjustment of these assets;


•	Reversal of amortization associated with the elimination of FGH’s historical DAC;


•	Amortization of VOBA associated with the establishment of VOBA arising from the acquisition;


•	Adjustments to reflect the impacts of the recapture of the life business from OM Re and the retrocession of the majority of the recaptured business and the reinsurance of certain life business previously not reinsured to an unaffiliated third party reinsurer, including the amortization of the related $13.8 Structuring Fee;


•	Adjustments to eliminate interest expense on notes payable to seller and add interest expense on the new $95.0 surplus note payable (which was subsequently settled in October 2011);


•	Adjustments to reflect the full-period effect of interest expense on the initial $350.0 of 10.625% Notes issued on November 15, 2010, the proceeds of which were used to fund the FGL Acquisition; and


•	Reversal of the change in the deferred tax valuation allowance included in the income tax provision.

Other Acquisitions

During the years ended September 30, 2012 and 2011, Spectrum Brands completed the following acquisitions which were not considered significant individually or collectively:

Black Flag

On October 31, 2011, Spectrum Brands completed the $43.8 cash acquisition of the Black Flag and TAT trade names (“Black Flag”) from The Homax Group, Inc., a portfolio company of Olympus Partners. The Black Flag and TAT product lines consist of liquids, aerosols, baits and traps that control ants, spiders, wasps, bedbugs, fleas, flies, roaches, yellow jackets and other insects. In accordance with ASC Topic 805, Business Combinations (“ASC 805”), Spectrum Brands accounted for the acquisition by applying the acquisition method of accounting.

The results of Black Flag’s operations since October 31, 2011 are included in the accompanying Consolidated Statements of Operations. The purchase price of $43.8 has been allocated to the acquired net assets, including $25.0 of identifiable intangible assets, $15.9 of goodwill, $2.5 of inventories, and $0.4 of properties and other assets.

FURminator

On December 22, 2011, Spectrum Brands completed the $141.8 cash acquisition of FURminator, Inc. (“FURminator”) from HKW Capital Partners III, L.P. FURminator is a leading worldwide provider of branded and patented pet deshedding products. In accordance with ASC 805, Spectrum Brands accounted for the acquisition by applying the acquisition method of accounting.

The results of FURminator operations since December 22, 2011 are included in the accompanying Consolidated Statements of Operations. The purchase price of $141.8 has been allocated to the acquired net assets, including $79.0 of identifiable intangible assets, $68.5 of goodwill, $9.2 of current assets, $0.7 of properties and $15.7 of current and long-term liabilities.

Seed Resources

During Fiscal 2011, Spectrum Brands completed several business acquisitions which were not significant individually or collectively. The largest of these was the $10.5 cash acquisition of Seed Resources, LLC (“Seed Resources”) on December 3, 2010. Seed Resources is a wild seed cake producer through its Birdola premium brand seed cakes. The acquisition was accounted for under the acquisition method of accounting. The results of Seed Resources’ operations since December 3, 2010 are included in the accompanying Consolidated Statements of Operations. The purchase price of $12.5 (representing cash paid of $10.5 and contingent consideration accrued of $2.0) included $1.1 of trade name intangible assets and $10.0 of goodwill.

Acquisition and Integration Related Charges

Acquisition and integration related charges reflected in “Selling, acquisition, operating and general expenses” in the accompanying Consolidated Statements of Operations include, but are not limited to transaction costs such as banking, legal and accounting professional fees directly related to an acquisition or potential acquisition, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses.

The following table summarizes acquisition and integration related charges incurred by the Company for the years ended September 30, 2013, 2012 and 2011:



	September 30,
	2013		2012		2011
SB/RH Merger
Integration costs	$	3.5	$	10.2	$	23.1
Employee termination charges	0.2		3.9		8.1
Legal and professional fees	—		1.5		4.9
	3.7		15.6		36.1
HHI Business
Legal and professional fees	27.7		—		—
Integration costs	8.9		—		—
Employee termination charges	0.3		—		—
	36.9		—		—

FGL	—		—		22.7
Spectrum Brands	—		—		1.1
EXCO/HGI JV	9.2		—		—
FURminator	2.3		7.9		—
BlackFlag	0.2		3.4		—
Shaser	4.8		—		—
Other	5.3		7.9		3.7
Total acquisition and integration related charges	$	62.4	$	34.8	$	63.6