13—ACQUISITION

On March 4, 2014, Penford Products Co. (“Purchaser”), a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement with Gum Technology, an Arizona close corporation, (“Gum Technology” or “Seller”), and Allen J Freed and Sheryl I. Freed, the owners of Seller. On March 25, 2014, the Company acquired substantially all of the assets of Seller and assumed certain liabilities for a purchase price of $9.9 million, subject to working capital and certain other adjustments.

Gum Technology, based in Tucson, Arizona, distributes and blends gums and hydrocolloids, serving primarily the food and beverage industries in North America and Asia. Gum Technology specializes in developing and producing customized stabilizers to meet customers’ product formulation needs. This acquisition will broaden the Company’s food ingredients portfolio of functional and specialty ingredient systems within the Food Ingredients segment.

The funding of the purchase price was provided by borrowings under the Company’s credit facility (the 2012 Agreement described in Note 4). In connection with the acquisition, $750,000 of the purchase price (“Holdback”), included in the $9.9 million total purchase price, has been retained by the Company as a fund to satisfy certain of the Seller’s post-closing obligations. The Holdback is payable to the Seller, net of amounts applied to satisfy the obligations of the Seller, in two installments at six and twelve months after the date of the acquisition. The Company incurred approximately $86,000 of acquisition costs, which were recorded as operating expenses in the Condensed Statements of Operations.

At May 31, 2014, the acquisition was reflected in the condensed consolidated financial statements as follows:

 

(In thousands)
Cash paid at closing		$	9,086
Accrued liabilities:
Working capital adjustment			72
Holdback			750
Total purchase price		$	9,908

The acquisition of the net assets of Gum Technology was accounted for as a business combination under the acquisition method. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values as of March 25, 2014, is presented below. As of the date of issuance of these financial statements, the Company has not completed its valuation analysis and calculations in sufficient detail necessary to finalize its estimates, which principally may impact the reported amounts of amortizable intangibles and goodwill. The final fair value determinations may be different than those reflected in the condensed consolidated financial statements at May 31, 2014.

 

Goodwill represents the amount by which the purchase price exceeds the fair value of the net assets acquired and has been allocated to the Food Ingredients segment. It is estimated that all of the goodwill associated with this acquisition is deductible for tax purposes. Pro forma results of operations have not been included as the pro forma revenues and earnings were not significant to the historical periods. Sales of $2.1 million related to the acquired Gum Technology business were included in the Food Ingredients results of operations for the three and nine months ended May 31, 2014. Due to the integration of Gum Technology into the Food Ingredients segment, it is not practicable to determine the net earnings of Gum Technology included in the Condensed Consolidated Statements of Operations since the acquisition.

 

(In thousands)
Working capital		$	2,133
Non-competition agreement			490
Customer relationships			2,600
Trade name portfolio			2,700
Goodwill			1,934
Other assets			51
Total purchase price		$	9,908

The Company entered into compensatory stock option agreements outside of the Company’s 2006 Incentive Plan with three key former employees of the Seller. Pursuant to these agreements, the Company granted options to purchase an aggregate of 45,000 shares of the Company’s common stock at an exercise price equal to the closing price as of the close of business on March 25, 2014. These options have a term of seven years and vest ratably over a three-year period. Stock-based compensation for these options recognized in operating income for the three months ended May 31, 2014 was not material.

The Company entered into a five-year non-competition agreement with Gum Technology and the former owners of Gum Technology. The fair value of the agreement is being amortized on a straight-line basis over the term of the agreement. Other intangible assets identified were customer relationships, which are being amortized on a straight-line basis over 13 years, and a trade name portfolio, which is an indefinite-lived asset. The trade name portfolio for gums products is well recognized, and the Company plans to use the portfolio of names indefinitely. The fair values of these intangible assets were calculated utilizing Level 3 inputs to discounted cash flow models.