ACQUISITIONS

Equity Investment in TSL- In fiscal 2014, we acquired a 49.2% interest in TSL for $75.1 million CAD ($68.9 million USD), which included an unsecured subordinated note from TSL that earned payment-in-kind interest at 12%. Our ownership stake provided 50% voting control and board representation equal to the co-investor. The co-investor held a put option to sell the remaining interest in TSL to us and we held a call option to purchase the remaining interest in TSL.

Step Acquisition of TSL- On May 10, 2018, we acquired the remaining interest in TSL for $36.2 million CAD ($28.2 million USD), net of acquired cash of $8.5 million CAD ($6.6 million USD), by exercising our call option. This was accounted for as a step acquisition whereby we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL, and included these assets in the determination of the purchase price. During the second quarter of fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to non-operating expenses, net, in the consolidated statements of operations. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation adjustments related to the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.

The preliminary purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired consisted of the following:



(in USD and in thousands)	Preliminary Purchase Price and Allocation as of May 10, 2018			Adjustments			Preliminary Purchase Price and Allocation as of November 3, 2018
Purchase price:
Cash consideration, net of cash acquired	$	28,152		$	—		$	28,152
Replacement stock-based awards attributable to pre-acquisition services	196			—			196
Fair value of previously held assets	92,242			—			92,242
	$	120,590		$	—		$	120,590
Fair value of assets and liabilities acquired:
Inventories	$	58,822		$	7,250		$	66,072
Other current assets	3,608			79			3,687
Property and equipment	41,601			(144		)	41,457
Goodwill	37,044			(7,237		)	29,807
Intangible assets	20,689			—			20,689
Accounts payable and accrued expenses	(33,248		)	52			(33,196		)
Non-current liabilities	(7,926		)	—			(7,926		)
	$	120,590		$	—		$	120,590

The fair value of previously held assets was determined immediately before the business combination, primarily by considering the income valuation approach (discounted cash flow) and the market valuation approach (precedent comparable transactions). Additionally, other information such as current market, industry and macroeconomic conditions were utilized to assist in developing these fair value measurements. The fair value of intangible assets includes $15.7 million for tradenames, $3.6 million for favorable leasehold interests, and $1.4 million for customer relationships associated with TSL's loyalty program. The fair value of unfavorable leasehold interests, included in non-current liabilities, was $7.6 million. The fair value for tradenames was determined using the relief from royalty method of the income approach, the fair value for leasehold interests was determined based on the market valuation approach, and the fair value for customer relationships related to the loyalty program was determined using the replacement cost method. The fair values for property and equipment were determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs, which was updated during the three months ended November 3, 2018 to reflect changes to assumptions regarding sell through of certain identified aged inventory. The categorization of the fair value framework used for these methods are considered Level 3 due to the subjective nature of the unobservable inputs used to determine the fair value.

The goodwill represents the excess of the purchase price over the fair value of the net assets acquired. With this being a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the nine months ended November 3, 2018, we recorded a goodwill impairment charge, net of adjustments as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of TSL’s goodwill. A portion of the goodwill is not expected to be deductible for income tax purposes.

We are continuing to evaluate the fair value assumptions of the purchase price allocations, including inventories and deferred tax assets and liabilities, and these preliminary estimates could change. During the three months ended November 3, 2018, since all of the goodwill associated with TSL was written off during the second quarter of fiscal 2018, the $7.2 million change to the purchase price allocation of goodwill resulted in an adjustment to the impairment charge. Any additional changes to the purchase price allocation may result in further adjustments to the impairment charge.

We incurred $3.1 million of acquisition-related costs as a result of the step acquisition, which were included in operating expenses in the consolidated statements of operations.

The following table provides the supplemental unaudited pro forma total revenue and net income of the combined entity had the acquisition date of TSL been the first day of our fiscal 2017:



	Three months ended				Nine months ended
(in thousands)	November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Total revenue	$	833,003	$	789,520	$	2,396,987	$	2,284,441
Net income	$	34,144	$	6,195	$	101,637	$	55,318
Basic and diluted earnings per share:
Basic earnings per share	$	0.43	$	0.08	$	1.27	$	0.69
Diluted earnings per share	$	0.41	$	0.08	$	1.24	$	0.69

The amounts in the supplemental pro forma results apply our accounting policies and reflect adjustments for additional depreciation and amortization that would have been charged assuming the same fair value adjustments to property and equipment and acquired intangibles had been applied on the first day of our fiscal 2017. The supplemental pro forma results also exclude the loss related to the remeasurement of previously held assets, the net loss of foreign currency translation related to the previously held balances from accumulated other comprehensive loss, the goodwill impairment charge, and transaction costs. Accordingly, these pro forma results have been prepared for comparative purposes only and are not intended to be indicative of results of operations that would have occurred had the acquisition actually occurred in the prior year period or indicative of the results of operations for any future period.

During the three months ended November 3, 2018, our consolidated statements of operations included sales and net losses for TSL of $80.1 million and $0.6 million, respectively, which includes the goodwill impairment adjustment of $7.2 million. During the nine months ended November 3, 2018, our consolidated statements of operations included sales and net losses for TSL of $152.6 million and $39.1 million, respectively, which includes the goodwill impairment charge of $29.1 million.

Acquisition of Camuto Group- On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group for $170.8 million, net of acquired cash of $10.2 million. The purchase price of the acquisition, along with the acquired equity investment in ABG-Camuto (discussed below), was funded with available cash and borrowings on the revolving line of credit of $160.0 million. The purchase price is subject to adjustment primarily based upon a working capital provision as provided by the purchase agreement. We will account for the acquisition and we will include Camuto Group as a consolidated wholly-owned subsidiary beginning with our fourth quarter of fiscal 2018. Given the acquisition date, we are in the process of developing our fair value assumptions for the assets and liabilities acquired.

Equity Investment in ABG-Camuto- On November 5, 2018, we acquired a 40% interest in the newly formed ABG-Camuto joint venture for $56.8 million in partnership with Authentic Brands Group LLC. Also on November 5, 2018, ABG-Camuto acquired several intellectual property rights from the Sellers and entered into a licensing agreement with us, which will earn royalties from the net sales of Camuto Group under the brands acquired. We will account for our investment in ABG-Camuto beginning with our fourth quarter of fiscal 2018.