4. ACQUISITIONS

On July 21, 2012, we completed the acquisition of Lepage in two separate but concurrent transactions. Pursuant to the Acquisition Agreement dated May 31, 2012 (the “Acquisition Agreement”), by and among Flowers, Lobsterco I, LLC, a Maine single-member limited liability company and indirect wholly owned subsidiary of Flowers (“Lobsterco I”), Lepage, RAL, Inc., a Maine corporation (“RAL”), Bakeast Company, a Maine general partnership (“Bakeast Partnership”), Bakeast Holdings, Inc., a Delaware corporation (“Bakeast Holdings,” and collectively with Lepage, RAL and Bakeast Partnership, the “Acquired Entities”), and the equityholders of the Acquired Entities named in the Acquisition Agreement (collectively, the “Equityholders”), Lobsterco I purchased from the Equityholders all of the issued and outstanding shares of the Acquired Entities in exchange for approximately $318.4 million in cash and $17.7 million in deferred cash payments.

Pursuant to the Agreement and Plan of Merger dated May 31, 2012 (the “Merger Agreement”), by and among Flowers, Lobsterco II, LLC, a Maine single-member limited liability company and indirect wholly owned subsidiary of Flowers (“Lobsterco II”), Aarow Leasing, Inc., a Maine corporation (“Aarow”), The Everest Company, Incorporated, a Maine corporation (“Everest,” and together with Aarow, the “Acquired Companies”), and the Shareholders, the Acquired Companies merged with and into Lobsterco II (the “Merger”) and all of the issued and outstanding shares of common stock of the Acquired Companies were exchanged for 2,178,648 shares of Flowers common stock.

Lepage operates three bakeries, two in Lewiston, Maine, and one in Brattleboro, Vermont. Lepage serves customers in the New England and New York markets making fresh bakery products under the Country Kitchen and Barowsky’s brands. This acquisition provides a DSD platform to accelerate penetration of Nature’s Own and Tastykake brands in the Northeast. The Lepage acquisition will be accounted for as a business combination.

The preliminary aggregate purchase price was $382.1 million as described in the table below. We incurred $6.7 million in acquisition-related costs during 2012 for Lepage. These expenses were included in the selling, distribution and administrative line item in the company’s consolidated statement of income for the forty weeks ending on October 6, 2012. Acquisition-related costs were $5.1 million for the twelve weeks ending on October 6, 2012.

The following table summarizes the consideration transferred to acquire Lepage and the amounts of identified assets acquired and liabilities assumed based on the estimated fair value at the acquisition date (amounts in thousands):


Fair value of consideration transferred:

Cash	$	300,000
Cash paid for preliminary tax adjustment		18,426
Accrued working capital adjustment estimate		158
Deferred payment obligations		17,663
Flowers Foods, Inc. common stock		45,887

Total fair value of consideration transferred	$	382,134


Recognized amounts of identifiable assets acquired and liabilities assumed:
Financial assets	$	11,487
Inventories		4,537
Property, plant, and equipment		60,332
Assets Held for sale – Distributor routes		10,000
Identifiable intangible assets estimate		256,400
Deferred income taxes		(1,318)
Financial liabilities		(15,526)

Net recognized amounts of identifiable assets acquired	$	325,912

Goodwill	$	56,222

The $18.4 million cash payment for the preliminary tax adjustment is the amount paid to the Lepage equityholders at the closing of the acquisition in connection with certain incremental tax liabilities that will be incurred by those equityholders if the parties jointly make an election under Section 338(h)(10) of the Internal Revenue Code. In the event the parties decide not to make such an election, the payment will be returned to the company. There is an additional $2.1 million preliminary tax adjustment (recorded in the financial liabilities figure in the table above) the company will pay for entity level state taxes.

The $17.7 million obligation for the deferred payments represents the fair value of the fixed payments of $1,250,000 beginning on the first business day of each of the sixteen calendar quarters following the fourth anniversary of the closing of the Acquisition (A total of $20.0 million in gross payments). The first payment will be made by Flowers on October 1, 2016 and the final payment will be made on July 1, 2020. The difference between the fair value and the gross payments of $2.3 million is recorded as a reduction to the liability and will be amortized to expense over eight years.

We issued 2,178,648 shares of Flowers common stock to certain equityholders of Lepage with a fair value of $45.9 million. The number of shares issued was calculated by dividing $50.0 million by the average closing price of Flowers Foods, Inc. common stock for the twenty consecutive trading day period ending five trading days prior to the closing. The shares issued to the equityholders were separated into five categories with each category having a different holding period requirement. As a result, each holding period had a fair value assignment based on an implied fair value which was determined using the Black-Scholes call option formula for an option expiring on each restriction lapse date. The estimated exercise price is equal to the stock price on the last trading day before the closing on July 21, 2012 of $20.48. The table below outlines the determination of fair value and provides the assumptions used in the calculation. The fair value of the stock consideration is computed in the following table:


Restriction lapse year		2012			2013			2014			2015			2016			Total
Value of Flowers shares issued (thousands)	$		25,000	$		10,000	$		5,000	$		5,000	$		5,000	$		50,000

Implied Fair Value of Restricted shares (thousands)	$		23,626	$		9,154	$		4,447	$		4,363	$		4,297	$		45,887

Exercise price (per share)	$		20.48	$		20.48	$		20.48	$		20.48	$		20.48

Expected term (yrs)			0.37			1.00			2.00			3.00			4.00

Volatility (%)			25.0%			25.0%			25.0%			25.0%			25.0%

Risk-free rate (%)			0.1%			0.2%			0.2%			0.3%			0.4%

Dividend Yield (%)			3.0%			3.0%			3.0%			3.0%			3.0%

The following table presents the allocation of intangible assets subject to amortization (amounts in thousands, except amortization periods):


	Amount		Weighted average Amortization years
Customer relationships		69,000		25.0
Non-compete agreements		2,400		4.0

	$	71,400		24.3

In addition to the amortizable intangible assets, there is an additional $185.0 million in indefinite-lived trademark intangible assets. Goodwill of $56.2 million is allocated to the DSD segment. Approximately $14.4 million of goodwill is deductible for income tax purposes. The primary reasons for the acquisition are to expand the company’s footprint into the northeastern United States, to distribute Country Kitchen and Borowsky’s products throughout our distribution network and to distribute Nature’s Own and Tastykake products throughout the Lepage markets.

The fair value of trade receivables is $7.4 million. The gross amount receivable is $7.5 million of which $0.1 million is determined to be uncollectible. We did not acquire any other class of receivables as a result of the acquisition.

On May 20, 2011, a wholly owned subsidiary of the company acquired Tasty Baking Company (“Tasty”). Tasty operates two bakeries in Pennsylvania and serves customers primarily in the northeastern United States with an extensive line of Tastykake branded snacks. The results of Tasty’s operations are included in the company’s consolidated financial statements as of May 20, 2011 and are included in the company’s DSD segment. The acquisition facilitated our expansion into new geographic markets and increased our manufacturing capacity. In addition, the Tastykake brand increased our position in the branded snack cake category.

The aggregate purchase price was $172.1 million, including the payoff of certain indebtedness, Tasty transaction expenses and change in control payments. The change in control payments were accrued because they were not paid at closing. During the forty weeks ended October 6, 2012, the company paid a portion of the accrued change in control payments. The acquisition was completed through a short-form merger following the company’s tender offer through a wholly owned subsidiary for all of the outstanding shares of common stock of Tasty for $4.00 per share in cash, without interest and less any applicable withholding tax. Each share of Tasty not accepted for payment in the tender offer was converted into the right to receive $4.00 per share in cash as consideration, without interest and less any applicable withholding taxes.

The company incurred $6.2 million of acquisition-related costs during 2011 related to Tasty. These expenses were included in the selling, distribution and administrative expense line item in the company’s consolidated statement of income for the 52 weeks ended December 31, 2011.

The following table summarizes the consideration transferred to acquire Tasty and the amounts of identified assets acquired and liabilities assumed based on the estimated fair value at the merger date (amounts in thousands):


Fair value of consideration transferred:
Total tender, merger consideration, debt cash payments and change in control payments	$	172,109

Recognized amounts of identifiable assets acquired and liabilities assumed:
Financial assets	$	44,153
Inventories		7,789
Property, plant, and equipment		99,796
Identifiable intangible assets		51,419
Deferred income taxes		15,516
Financial liabilities		(66,359)

Net recognized amounts of identifiable assets acquired	$	152,314

Goodwill	$	19,795

The following table presents the allocation of the intangible assets subject to amortization (amounts in thousands, except for amortization periods):


	Amount		Weighted average Amortization years
Trademarks	$	36,409	40.0
Customer relationships		13,487	25.0
Distributor relationships		1,523	15.0

	$	51,419	35.3

Goodwill of $19.8 million is allocated to the DSD segment. The primary reasons for the acquisition are to expand the company’s footprint into the northeastern United States, distribute TastyKake products throughout our distribution network and to distribute Nature’s Own products throughout the legacy Tasty distribution network. None of the intangible assets, including goodwill, are deductible for tax purposes. Goodwill increased by $0.2 million during the twelve weeks ended July 14, 2012.

The fair value of the assets acquired includes trade receivables of $17.3 million. The gross amount receivable is $20.2 million, of which $2.9 million is expected to be uncollectible. The company did not acquire any other class of receivable as a result of the merger with Tasty.

Acquisitions Pro Forma

We recognized revenues for Lepage during the quarter ended October 6, 2012 of $39.2 million. Income from operations for Lepage for the quarter ended October 6, 2012 was $6.7 million. We recorded Lepage’s activity at the beginning of our third quarter. Therefore, there are no pro forma disclosures for the quarter in the table below.

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions of Lepage and Tasty occurred at the beginning of fiscal 2011 (amounts in thousands, except per share data):


	For the Twelve Weeks Ended October 8, 2011		For the Forty Weeks Ended October 8, 2011		For the Forty Weeks Ended October 6, 2012
Sales:
As reported	$	675,369	$	2,119,790	$	2,297,049
Pro forma	$	718,891	$	2,341,667	$	2,396,569
Net income:
As reported	$	31,019	$	100,390	$	97,554
Pro forma	$	35,545	$	104,984	$	97,503
Basic net income per common share:
As reported	$	0.23	$	0.74	$	0.72
Pro forma	$	0.26	$	0.76	$	0.71
Diluted net income per common share:
As reported	$	0.23	$	0.73	$	0.71
Pro forma	$	0.26	$	0.76	$	0.70

These amounts have been calculated after applying the company’s accounting policies and adjusting the results to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and amortizable intangible assets had been applied. In addition, pro forma adjustments have been made for the interest incurred for financing the acquisitions with either the credit facility or the senior notes and to conform Tasty’s revenue recognition policies to ours. Lepage’s revenue recognition policy was consistent with ours and adjustments are not required. Taxes have also been adjusted for the effect of the items discussed. These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future.