NOTE 5. INVESTMENTS AND NONCONTROLLING INTERESTS

On July 2, 2013, the Company, through a subsidiary (the "EA USC Subsidiary"), invested $6.0 million in US Cosmeceutechs, LLC ("USC"), a skin care company that develops and sells skin care products into the professional dermatology and spa channels. The investment, which is in the form of a collateralized convertible note that bears interest at 1.5%, is convertible into 50% of the fully diluted equity interest of USC at any time at the option of the EA USC Subsidiary and also converts automatically upon the satisfaction of certain conditions. As of September 30, 2013, the note had not been converted.

Under the terms of the operating agreement of USC, the EA USC Subsidiary has control of the board of managers of USC and the power to direct activities that could have a substantial impact on the economic performance of USC, including those that could result in the obligation to absorb losses or the right to receive benefits that could potentially be significant to USC. Based on the investment in USC and EA USC Subsidiary's controlling rights under the operating agreement, the Company has determined that USC is a VIE, of which the Company is the primary beneficiary, requiring consolidation of USC's financial statements in accordance with Topic 810, Consolidation.

On July 11, 2013, the EA USC Subsidiary purchased a 30% equity interest in USC from the sole equity member (the "Member") for $3.6 million under the terms of a put-call agreement with the USC Member. Under the terms of the put-call agreement, the EA USC Subsidiary has an option to purchase the Member's remaining 20% equity interest in USC at specified prices under certain circumstances based on USC's performance, and similarly the Member has the ability to put its interest in USC to the Company at specified prices under certain circumstances based on USC's performance. Based on the terms of the put-call agreement, it is likely that the EA USC Subsidiary would exercise its call option prior to the Member exercising his put option. In accordance with Topic 480, Distinguishing Liabilities from Equity, the Company is required to classify the noncontrolling interest in USC as a "redeemable noncontrolling interest" in the mezzanine section of the Company's consolidated balance sheet.

As a result of the agreements with USC and the Member and the requirement to consolidate the financial statements of USC, the Company recorded the following amounts on its consolidated balance sheet on the July 2, 2013 closing date:


(Amounts in thousands)		Amount
Inventory	$	2,541
Other assets		1,577
Intangible assets ⁽¹⁾		2,873
Goodwill		10,553
Current liabilities		(3,698	)
Long-term liabilities		(1,846	)
Redeemable noncontrolling interest liability		(12,000	)

(1) The intangible assets relate to trademarks and other intangibles and are being amortized over an average useful life of approximately 15 years and 10 years, respectively.

The fair value of USC on the closing date was $12 million. With the exception of the intangible assets and goodwill, the values assigned to the assets and liabilities above were based on their carrying values on the date of investment, which approximated their fair value. In determining the value of the intangible assets and goodwill, the Company considered, among other factors, the intention for future use of any existing intellectual property and any intellectual property currently being developed, as well as the value of the current workforce and its potential to develop future intellectual property to be used in the business. As of the date of investment, there were no significant research and development activities for new intellectual property in progress for use outside of the current portfolio of products. It is expected that certain technology and formulas used in current USC products will be integrated into certain select Elizabeth Arden skin care products in the future. As a result, based on the Company's valuation, the primary value was determined to be related to the current workforce and its potential to develop new intellectual property in the future, which is represented in the goodwill amount above. The goodwill recorded relates to the Company's North America segment and is not deductible for tax purposes. The fair values of the intangible assets and goodwill were calculated primarily using (i) an income approach, and (ii) discount rates which reflect the risk associated with receiving future cash flows.

The following provides an analysis of the change in the redeemable noncontrolling interest liability for the period ended September 30, 2013:


(Amounts in thousands)		Amount
Beginning as of June 30, 2013	$	-
Amount recorded on closing date		12,000
Payment to Member for 30% equity interest		(3,600	)
Payments to noncontrolling interests		(1,379	)
Net loss attributable to noncontrolling interests		(109	)
Balance at September 30, 2013	$	6,912

On July 12, 2013, the Company invested $3 million for a 20% equity interest in a company that is developing a beauty device (the "Device Company"). Under the terms of the equity interest purchase agreement, the Company has an obligation to purchase an additional 20% equity interest at a cost of $6 million upon the achievement of certain milestones related to the development and shipment to customers of a beauty device. In conjunction with the purchase of the equity interest, the Company entered into a license with the Device Company to become the exclusive worldwide manufacturer, marketer and distributor of the beauty device. In addition, the Company also has an option to purchase the remaining 60% equity interest in the Device Company at a specified price under certain circumstances based on the sales performance of the device. The investment has been accounted for using the equity method and at September 30, 2013, is included in other assets on the consolidated balance sheet.