2. ACQUISITION

On October 31, 2012, a subsidiary of the Company acquired the remaining 51.0% interest in KSJ held by Sanei. KSJ was a joint venture that was formed between Sanei and KATE SPADE in August 2009. KSJ operated the KATE SPADE, KATE SPADE SATURDAY and JACK SPADE businesses in Japan, and the Company continues to operate such businesses in Japan through its Japanese subsidiary.

The purchase price for KSJ, including post-closing adjustments was 3.308 billion yen or $41.4 million.

Prior to obtaining control on October 31, 2012, the Company accounted for the investment in KSJ under the equity method. Upon obtaining control, the transaction was accounted for as an “acquisition achieved in stages,” in accordance with US GAAP. Accordingly, the Company re-measured the previously held equity interest in KSJ and adjusted it to fair value utilizing an income approach based on expected future after tax cash flows of KSJ discounted to reflect risk associated with those cash flows and a market approach based on earnings and revenue multiples that other purchasers in the market would have paid for that business. The fair value of the Company’s equity interest at the acquisition date was $47.2 million. The difference between the fair value of the Company’s ownership in KSJ and the Company’s carrying value of its investment of $7.1 million resulted in the recognition of a gain of $40.1 million in the fourth quarter of 2012. The results of operations for KSJ have been included in the Company’s consolidated results since October 31, 2012. KSJ generated $72.4 million of net sales and $2.2 million of net loss for the nine months ended September 28, 2013 and $24.9 million of net sales and $0.7 million of net loss for the three months ended September 28, 2013. KSJ also generated $5.2 million and $3.0 million of incremental Adjusted EBITDA for the nine and three months ended September 28, 2013. Adjusted EBITDA is the Company’s measure of segment profitability, as discussed in Note 15 – Segment Reporting.

The allocation of the purchase price to the assets acquired and liabilities assumed was based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the net tangible and identifiable intangible assets is reflected as goodwill. Accordingly, the Company recorded $63.4 million of goodwill, which is reflected in the KATE SPADE reportable segment. None of the recorded goodwill is deductible for income tax purposes.

The following unaudited pro forma financial information for the nine and three months ended September 29, 2012 reflects the results of continuing operations of the Company as if the KSJ Buyout had been completed on January 1, 2012. Pro forma adjustments have been made for changes in depreciation and amortization expenses related to the valuation of the acquired tangible and intangible assets at fair value, the elimination of non-recurring items and the addition of incremental costs related to debt used to finance the acquisition.

	Nine Months Ended		Three Months Ended
In thousands, except per share amounts	September 29, 2012 (39 Weeks)		September 29, 2012 (13 Weeks)

Net sales	$ 1,084,329		$ 387,086
Gross profit	616,541		217,865
Operating (loss) income	(67,284	)	56
Loss before provision for income taxes	(112,723	)	(17,350	)
Loss from continuing operations	(119,016	)	(19,236	)
Diluted loss per share from continuing operations	(1.11	)	(0.17	)

The unaudited pro forma financial information is presented for information purposes only. It is not necessarily indicative of what the Company’s financial position or results of operations actually would have been if the Company completed the acquisition at the dates indicated, nor does it purport to project the Company’s future financial position or operating results.