J CREW GROUP INC | 2012 | FY | 3


3. Purchase Accounting

The Acquisition was accounted for as a purchase business combination in accordance with ASC 805, Business Combinations, whereby the purchase price paid to effect the Acquisition was allocated to recognize the acquired assets and liabilities at fair value. The sources and uses of funds in connection with the Transactions are summarized below:

 

Sources:

  

Proceeds from Term Loan

   $ 1,200,000   

Proceeds from Notes

     400,000   

Proceeds from equity contributions

     1,225,911   

Cash on hand

     307,150   
  

 

 

 

Total sources

   $ 3,133,061   
  

 

 

 

Uses:

  

Equity purchase price

   $ 2,981,415   

Transaction costs

     151,646   
  

 

 

 

Total uses

   $ 3,133,061   
  

 

 

 

In connection with the purchase price allocation, fair values of long-lived and intangible assets were determined based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases, valuation results from independent valuation specialists. The allocation of purchase price is as follows:

 

Purchase price

   $ 2,981,415   

Less: net assets acquired

     (571,644

Less: after tax cost of post-combination share-based awards.

     (21,425
  

 

 

 

Excess of purchase price over book value of net assets acquired

   $ 2,388,346   
  

 

 

 

Write up of tangible assets:

  

Property and equipment

   $ 35,334   

Merchandise inventories

     32,500   

Fair market value of favorable leases

     61,010   

Acquisition-related intangible assets:

  

J.Crew brand name (indefinite lived)

     885,300   

Madewell brand name (20 year life)

     82,000   

Loyalty program and customer lists (5 year life)

     27,010   

Less: historical intangible assets

     (4,351
  

 

 

 

Acquisition-related intangibles

     989,959   
  

 

 

 

Write down/(up) of liabilities:

  

Gift card liability revaluation

     7,737   

Deferred rent and lease incentive revaluation

     66,880   

Fair market value of unfavorable leases

     (40,920

Deferred income taxes:

  

Long-term deferred tax asset

     (20,171

Short-term deferred tax liability

     (5,678

Long-term deferred tax liability

     (425,220

Residual goodwill(1)

     1,686,915   
  

 

 

 

Total allocated excess purchase price

   $ 2,388,346   
  

 

 

 

 

(1) Residual goodwill consists primarily of intangible assets related to the knowhow, design and merchandising of the Company’s brands that do not qualify for separate recognition in accordance with ASC 805.

 

Pro forma financial information

The following unaudited pro forma results of operations gives effect to the Transactions as if they had occurred on the first day of fiscal 2011 (January 30, 2011). The pro forma results of operations reflects adjustments (i) to record amortization and depreciation resulting from purchase accounting, (ii) to record Sponsor monitoring fees, and (iii) to eliminate non-recurring charges that were incurred in connection with the Transactions, including acquisition-related share-based compensation, transaction costs, transaction-related litigation costs and recoveries, and amortization of the step-up in the carrying value of inventories. This unaudited pro forma financial information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Transactions had actually occurred on that date, nor the results of operations in the future.

 

(Dollars in millions)

   For the Period
January 30, 2011 to
January 28, 2012
 
   As reported     Pro forma  

Total revenues

   $ 1,854,988      $ 1,854,988   
  

 

 

   

 

 

 

Net income (loss)

   $ (3,741   $ 51,514   
  

 

 

   

 

 

 

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