Acquisitions

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

On December 17, 2012, Spectrum Brands completed the Hardware 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 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, 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.

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 acquisition accounting for the HHI Business has been finalized.

The 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
	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. The provisional measurements of fair value set forth above were finalized on September 30, 2013.

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. Further adjustments to pre-acquisition contingency amounts will be reflected in the Company’s results of operations.

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.

Compass (formerly the EXCO/HGI JV)

Compass 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, Compass 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. As at September 30, 2014 the ownership of the Partnership and General Partnership translates into an economic ownership of Compass of 74.4%. 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 Compass 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 Compass Credit Agreement.

On March 5, 2013, Compass 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 Compass represented an incremental working interest in certain properties previously owned by Compass. The acquisition was funded with borrowings from Compass Credit Agreement.

Compass accounted for the acquisitions in accordance with ASC Topic 805, Business Combinations (“ASC 850”). 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
	Compass			HGI's Proportionate Interest			Compass			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

Compass 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 Compass 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. Compass utilized NYMEX forward strip prices to value the reserves for a period of five years and then held prices flat thereafter. Compass 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 earnings before interest taxes depreciation and amortization (“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.

Supplemental Pro Forma Information

The following table reflects the Company’s unaudited pro forma results for Fiscal 2013 and 2012 as if the results of the Hardware Acquisition and the acquisition of the Company’s interest in Compass were completed on October 1, 2012 and the results of the HHI Business and Compass had been included for each of the full fiscal periods in 2013 and 2012.



	Fiscal
	2013			2012

Revenues:
Reported revenues	$	5,543.4		$	4,480.7
HHI adjustment	191.8			973.6
Compass adjustment	53.7			149.3
Pro forma revenues	$	5,788.9		$	5,603.6

Net (loss) income:
Reported net (loss) income	$	(69.0	)	$	110.7
HHI adjustment	4.9			76.1
Compass adjustment	(0.4		)	(6.8		)
Pro forma net (loss) income	$	(64.5	)	$	180.0

Basic net (loss) income per common share attributable to controlling interest:
Reported net (loss) income per common share	$	(0.67	)	$	0.15
HHI adjustment	0.04			0.55
Compass adjustment	—			(0.05		)
Pro forma net (loss) income per common share	$	(0.63	)	$	0.65

Diluted net (loss) income per common share attributable to controlling interest:
Reported diluted net (loss) income per common share	$	(0.67	)	$	0.15
HHI adjustment	0.04			0.54
Compass adjustment	—			(0.05		)
Pro forma diluted net (loss) income per common share	$	(0.63	)	$	0.64

Individually Insignificant Acquisitions

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 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 were 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.

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 consideration paid for Shaser:



	November 8, 2012
Negotiated sales price	$	50.0
Preliminary working capital adjustment	(0.4		)
Final working capital adjustment	0.1
Final 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 EBITDA for calendar year ended December 31, 2016.

The results of Shaser’s operations since November 8, 2012 were 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 were as follows:



	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 evaluated pre-acquisition contingencies relating to Shaser that existed as of the acquisition date. Based on the evaluation, Spectrum Brands determined that certain pre-acquisition contingencies were probable in nature and estimable as of the acquisition date. Accordingly, Spectrum Brands 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 $39.1 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.

Liquid Fence

On January 2, 2014, Spectrum Brands completed the $35.8 acquisition of Liquid Fence, a producer of animal repellents. This acquisition was not considered to be significant.

The following table summarizes the consideration paid by Spectrum Brands for Liquid Fence:



	January 2, 2014
Cash paid to seller at close	$	24.8
Promissory note due to seller	9.5
Contingent liability	1.5
Preliminary purchase price	$	35.8

The promissory note will be paid in four semi-annual installments over 24 months from the close of the transaction.

The results of Liquid Fence’s operations since January 2, 2014 were included in the Company’s Consolidated Statements of Operations.

Valuation of Assets and Liabilities

The assets acquired and liabilities assumed in the Liquid Fence acquisition have been measured at their fair values at January 2, 2014 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 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. The acquisition accounting for Liquid Fence has been finalized.

The fair values recorded for the assets acquired and liabilities assumed for Liquid Fence were as follows:



	January 2, 2014
Cash	$	—
Accounts receivable	1.2
Inventories	2.2
Property, plant and equipment, net	0.1
Intangible assets	26.9
Total assets acquired	30.4
Total liabilities assumed	1.6
Total identifiable net assets less goodwill	28.8
Goodwill	7.0
Total identifiable net assets	$	35.8

Pre-Acquisition Contingencies Assumed

Spectrum Brands has evaluated and continues to evaluate pre-acquisition contingencies relating to Liquid Fence that existed as of the acquisition date. Based on the evaluation to date, Spectrum Brands determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, Spectrum Brands recorded its best estimates for these contingencies as part of the purchase accounting for Liquid Fence. Further adjustments to pre-acquisition contingency amounts will be reflected in the Company’s results of operations.

Valuation Adjustments

Spectrum Brands performed a valuation of the acquired trade names, proprietary technology assets, customer relationships and a contingent earn-out liability at January 2, 2014.

A summary of the significant key inputs is as follows:

•

Spectrum Brands valued the technology assets related to formulas and processes, using the income approach, specifically the excess earnings method. Under this method, the asset value was determined by estimating the earnings attributable to the technology assets, adjusted for contributory asset charges. In estimating the fair value of the technology, net sales and associated earnings were forecasted and adjusted for a technical obsolescence factor to isolate the forecasted sales and earnings attributable to the acquired technology assets. The forecasted technology earnings were discounted to present value to arrive at the concluded fair value. Spectrum Brands anticipates using the technology asset over a useful life of 17 years which is generally determined by assessing the time period in which substantially all of the discounted cash flows are expected to be generated. The technology asset was valued at approximately $20.5 under this approach.

•

Spectrum Brands valued an indefinite-lived trade name 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 Liquid Fence, 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. Trade name and trademarks were valued at $5.1 under this approach.

•

Spectrum Brands valued customer relationships using the distributor approach. Under this method, the asset value was determined by estimating the hypothetical earnings before interest and taxes ("EBIT") that a comparable distributor would earn, further adjusted for contributory asset charges. In determining the fair value of the customer relationships, the distributor approach values the intangible asset at the present value of the incremental after-tax cash flows. The customer relationships were valued at $1.3 under this approach and will be amortized over 15 years.

•

Spectrum Brands valued a contingent liability related to additional payments that may be made to the selling company. This liability was calculated based on the probability weighted present value of expected payments. This contingent liability is based on the achievement of specific revenue milestones through both January 31, 2015 and January 31, 2016. The contingent liability was valued at $1.5 under this approach.

Frederick’s of Hollywood

On May 30, 2014, HGI, through its wholly owned subsidiary HGI Funding, completed the acquisition of a 62.0% interest in FOH, a retailer of women's apparel and related products.

The following table summarizes the consideration paid for FOH by the Company:



	May 30, 2014
Fair value of previously held equity interest (Series B preferred stock)	$	12.0
Series A preferred stock purchase	1.5
Preliminary purchase price	$	13.5

Prior to the transaction, FOH was a publicly listed company and HGI Funding owned all of FOH’s series B preferred stock. In May 2014, HGI Funding acquired part of FOH's Series A preferred stock for $1.5. At that point HGI Funding and certain of the FOH’s other common and preferred shareholders (together, the “Consortium”) beneficially owned 88.6% of FOH’s common stock. Shares of FOH’s shareholders who were not members of the Consortium were repurchased by FOH for $0.27 per share in cash, funded from additional debt incurred by FOH as part of the going-private transaction. Following the completion of the going-private transaction, FOH’s common stock ceased being quoted on the Over-the-Counter Bulletin Board Quarterly Trade (“OTCQB”), and FOH became a privately-held Company owned by the Consortium. The acquisition was accomplished through FOHG, an entity controlled by the Consortium that was formed for the purpose of the transaction. In exchange for their respective holdings in FOH, members of the Consortium received membership units in FOHG proportionate to their prior beneficial interests in FOH. Upon completion of the exchange, FOH became a wholly owned subsidiary of FOHG. HGI Funding exchanged its FOH series A and series B preferred shares for an 62.0% equity interest in FOHG. Immediately following the acquisition described above, the Company assigned and transferred its ownership of interest in FOHG to HGI Global Holdings, LLC, a wholly-owned subsidiary of HGI.

The results of FOH’s operations since May 30, 2014 are included in HGI’s Consolidated Statements of Operations, and are included within the “Corporate and Other” category in HGI’s segment presentation.

Preliminary Valuation of Assets and Liabilities

The assets acquired and liabilities assumed in the FOH acquisition have been measured at their fair values at May 30, 2014 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 retail team, and is not expected to be deductible for income tax purposes. The preliminary fair values recorded were determined based upon a valuation and the estimates and assumptions used in such valuation are subject to change within the measurement period (up to one year from the acquisition date). Any such change could be significant. The primary areas of acquisition accounting that are not yet finalized relate to amounts for intangible assets and residual goodwill.

The preliminary fair values recorded for the assets acquired and liabilities assumed for FOH are as follows:



	Preliminary Valuation
	May 30, 2014
Cash	$	0.8
Accounts receivable	0.7
Inventories	12.4
Property, plant and equipment, net	1.2
Intangible assets	41.7
Other Assets	2.8
Total assets acquired	59.6
Total liabilities assumed	81.7
Total identifiable net assets	(22.1		)
Non-controlling interest	(8.3		)
Goodwill	43.9
Total identifiable net assets	$	13.5

Preliminary Valuation Adjustments

The Company performed a preliminary valuation of the assets and liabilities of FOH at May 30, 2014. The significant adjustments as a result of the valuation and the bases for their determination are summarized as follows:

•

The Company 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 FOH 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 0.25% - 8.00% of expected net sales related to the respective trade names and trademarks. The Company anticipates using the majority of the trade names and trademarks for an indefinite period as demonstrated by the sustained use of the 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 residual growth rate of 3.0%. Income taxes were estimated at 39.3% and amounts were discounted using a rate of 16.0%. Trade name and trademarks were valued at $41.7 under this approach.


•	An adjustment of $8.0 was recorded to deferred taxes for the preliminary fair value adjustments made in accounting for the purchase.


•	The Company recorded a liability associated with unfavorable leases of $1.3 and an asset associated with favorable leases for $0.4 based on lease market rates at the time of the acquisition. Favorable and unfavorable lease assets and liabilities will be amortized over their expected lives which approximates the period of time that the favorable or unfavorable lease terms will be in effect.

CorAmerica

In May 2014, FIAM entered into an agreement to acquire a controlling interest in CorAmerica, a commercial real estate investment firm. As part of the transaction, FIAM has acquired a 17.0% member interest and the right to appoint 3 of 5 members of CorAmerica's Board of Directors. Pursuant to the terms of the agreement, and subject to certain repurchase covenants which would give the CorAmerica founders the right to repurchase their interests, FIAM is required to acquire an additional 34.0% in May 2015. At the time of the agreement, the Company concluded that FIAM has the ability to control the operations of CorAmerica for its own benefit, and to consolidate CorAmerica's results of operations and financial position.

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 Fiscal 2014, 2013 and 2012:



	Fiscal
	2014		2013		2012
SB/RH Merger
Integration costs	$	2.4	$	3.5	$	10.2
Employee termination charges	—		0.2		3.9
Legal and professional fees	—		—		1.5
	2.4		3.7		15.6
HHI Business
Legal and professional fees	2.2		27.7		—
Integration costs	8.7		8.9		—
Employee termination charges	0.2		0.3		—
	11.1		36.9		—

Compass	0.8		9.2		—
CorAmerica	1.1		—		—
Frederick's of Hollywood	0.1		—		—
Liquid Fence	3.5		—		—
FURminator	0.1		2.3		7.9
BlackFlag	—		0.2		3.4
Shaser	0.9		4.8		—
Other	4.4		5.3		7.9
Total acquisition and integration related charges	$	24.4	$	62.4	$	34.8