Note 3 – Acquisition of Squirrel Brand L.P.

On November 30, 2017, we acquired certain assets and assumed certain liabilities (the “Acquisition”) of Squirrel Brand L.P. (“Squirrel Brand”) for a purchase price of $31,500, subject to a working capital adjustment. After giving effect to the initial and final working capital adjustments, the purchase price was $33,227, of which a net cash payment of $21,727 was made and $11,500 was financed by the seller through a three-year unsecured promissory note (the “Promissory Note”). The cash portion of the acquisition price was funded from our Credit Facility. The Promissory Note bears interest at 5.5% per annum and is payable in equal monthly principal payments of $319, plus interest, which began in January 2018. The Promissory Note can be prepaid without penalty.

The Squirrel Brand business is one of the nation’s leading suppliers of indulgent and premium roasted nuts and snack mixes under its Squirrel Brand and Southern Style Nuts brands. Prior to the Acquisition, Squirrel Brand was a customer in our Contract Packaging sales channel for fourteen years. The Acquisition has been accounted for as a business combination in accordance with ASC Topic 805, “Business Combinations”. As a result of the Acquisition, we expanded our customer base and branded product portfolio, as well as increased our customer reach, especially into alternative distribution channels.

The total purchase price of $33,227 has been allocated on a preliminary basis to the fair values of the assets acquired and liabilities assumed as follows:


Accounts receivable	$	2,362
Inventories		1,957
Other assets		63
Identifiable intangible assets:
Customer relationships		10,500
Brand names		8,900
Non-compete agreement		270
Goodwill		9,650
Accounts payable and accrued expenses		(475	)

Total Purchase Price	$	33,227

The customer relationship assets represent the value of the long-term strategic relationship the Squirrel Brand business has with its significant customers, which we are amortizing over a weighted-average life of 7.5 years. The assets were valued using an income approach, specifically the “multi-period excess earnings” method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value is considered a level 3 measurement under the GAAP fair value hierarchy.

The brand name assets represent the value of the established Squirrel Brand and Southern Style Nuts names. We applied the income approach through a relief from royalty method analysis to determine the preliminary fair value of the brand name assets. We are amortizing the brand name assets over a weighted-average life of 13.8 years.

Goodwill, which is expected to be deductible for income tax purposes, arises from intangible assets that do not qualify for separate recognition and expected synergies from combining the operations of Squirrel Brand with the Company. There were no material contingencies recognized or unrecognized associated with the acquired business.

The purchase price allocation, especially amounts allocated to goodwill and identifiable intangible assets are based on preliminary valuations and are subject to final adjustments.

The following reflects the unaudited pro forma results of operations of the Company as if the Acquisition had taken place at the beginning of fiscal 2017. This pro forma information does not purport to represent what the Company’s actual results would have been if the Acquisition had occurred as of the date indicated or what such results would be for any future periods.


	Year-Ended June 29, 2017		Thirty-Nine weeks ended March 29, 2018
Pro forma net sales	$	863,267	$	682,235
Pro forma net income		36,723		27,393
Pro forma diluted earnings per share	$	3.22	$	2.39

These unaudited pro forma results have been calculated after applying our accounting policies and adjusting the results of the Squirrel Brand business to reflect elimination of transaction costs and to record additional amortization and interest expense that would have been charged, assuming the fair value adjustment to intangible assets since July 1, 2016, net of related income taxes in respect of pro forma net income and diluted earnings per share performance. Transaction costs of $500, already recorded in Administrative expenses, are excluded from the pro forma net income for the thirty-nine weeks ended March 29, 2018 stated above.

Net sales of approximately $15,065 since the Acquisition closed on November 30, 2017 are included in our consolidated financial results as of March 29, 2018.

Since the Acquisition, we continue to operate in a single reportable operating segment that consists of selling various nut and nut-related products through three sales distribution channels.