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Salsa Lisa Business Acquisition (Calavo Salsa Lisa, LLC)
 12 Months Ended
Oct. 31, 2011
Calavo Salsa Lisa, LLC
  
Business Acquisition [Line Items]  
Salsa Lisa Business Acquisition and RFG Business Acquisition

16. Salsa Lisa Business Acquisition

On February 8, 2010, Calavo Growers, Inc. (Calavo), Calavo Salsa Lisa, LLC (CSL), Lisa’s Salsa Company (LSC) and Elizabeth Nicholson and Eric Nicholson, entered into an Asset Purchase and Contribution Agreement, dated February 8, 2010 (the Acquisition Agreement), which sets forth the terms and conditions pursuant to which Calavo acquired a 65 percent ownership interest in CSL. which acquired substantially all of the assets of LSC. Elizabeth Nicholson and Eric Nicholson, through LSC, hold the remaining 35 percent ownership of CSL. LSC is a regional producer in the upper Midwest United States of Salsa Lisa refrigerated salsas.

The Acquisition Agreement provided that, among other things, Calavo make a payment totaling $100,000 for the 65 percent interest, as well a $300,000 payment representing a loan to be repaid from CSL to Calavo. Calavo made these initial payments on February 8, 2010.

The purchase price can increase, subject to earn-out payments. These earn-out payments are based on net annual sales (as defined) achievements, through fiscal year October 31, 2016, which are as follows:

 

         

Net Sales of:

   Then Earn-out
Payment shall be:		  

$30,000,000

   $ 1,000,000  

$40,000,000

   $ 1,000,000  

$50,000,000

   $ 1,000,000  
   

 

 

  

Maximum earn-out payment possible

   $ 3,000,000  

More than one of the earn-out payments may be earned in a particular fiscal year through October 31, 2016, but in no event shall more than an aggregate of $3,000,000 in earn-out payments be made.

Concurrently with the execution of the Acquisition Agreement, Calavo, CSL, LSC and Elizabeth Nicholson and Eric Nicholson entered into an Amended and Restated Limited Liability Company Agreement. Among other things, such agreement calls for the establishment and maintenance of capital accounts, how profits and losses are to be allocated, as well as a buy-out option for Calavo.

Such buy-out option grants Calavo the right to cause LSC to transfer to Calavo all of LSC’s membership interest for an amount equal to $5 million at any time until October 31, 2016. If the buy-out option has not been exercised by Calavo as of October 31, 2016, however, then Calavo is required to deliver a binding offer to LSC to purchase LSC’s membership interest for a price no less than an amount equal to (A) LSC’s percentage interest, multiplied by (B) the EBTDA multiple of 8.0, multiplied by (C) CSL’s earnings before taxes, depreciation, and amortization (EBTDA) for the year ending October 31, 2016. LSC may then elect to either accept such offer or reject such offer and submit a counter offer to purchase Calavo’s membership interest for a price no less than an amount equal to (A) Calavo’s membership interest, multiplied by (B) the EBTDA multiple of 8.0, plus 0.5, or 8.5, multiplied by (C) the Company EBTDA for the year ending October 31, 2016. LSC may not reject the buy-out offer without making a counter offer.

 

If LSC makes a counter offer to Calavo, Calavo may either accept such offer or reject such offer and submit a counter offer to purchase LSC’s membership interest for a price no less than an amount equal to (A) LSC’s membership interest, multiplied by (B) the EBTDA multiple of 8.0, plus 0.5, plus an additional 0.5, or 9.0 total, multiplied by (C) the Company EBTDA for the year ending October 31, 2016. The process cited above shall continue, with the EBTDA multiple increasing 0.5% at each counter offer, until either LSC or Calavo accepts the counter offer made to them.

Based on the buy-out option, as well as the initial binding offer to be made to LSC, we recorded the noncontrolling interest outside of permanent equity to highlight the potential future cash obligation related to this instrument.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands). We obtained third-party valuations for the long-term assets acquired and incurred approximately $0.2 million in acquisition costs, which have been expensed in selling, general and administrative expenses in the period incurred.

At February 8, 2010

 

         

Current assets

   $ 263  

Property, plant, and equipment

     321  

Goodwill

     88  

Intangible assets

     1,950  
   

 

 

  

Total assets acquired

     2,622  

Current liabilities

     (55 ) 

Noncontrolling interest

     (699 ) 

Contingent consideration

     (1,468 ) 
   

 

 

  

Net cash paid as of February 8, 2010

   $ 400  
   

 

 

  

Of the $1,950,000 of intangible assets, $240,000 was assigned to customer relationships with a life of 7 years, $360,000 to trademarks and trade names with a life of 10 years, and $1,350,000 to trade secrets with a life of 13 years. We determined the fair value of the non-controlling interest in CSL taking into consideration discounts for lack of control and lack of marketability. The fair value of the $5.0 million purchase option was determined using a Black-Scholes option pricing model. Significant inputs include the risk free rate, volatility factor, time to expiration, underlying stock price, and exercise price. As discussed above, we will be required to pay up to an additional $3.0 million if CSL achieves specified revenue targets during the first seven years, post transaction. The fair value of this contingent consideration was determined based on a probability weighted method, which incorporates management’s forecasted revenue, the likelihood of the $5.0 million purchase option being exercised, and the likelihood of the revenue targets being achieved.

In October 2011, based on forecast projection analysis from a third party consulting firm, we decreased the contingent consideration liability related to the acquisition of CSL by approximately $0.6 million.

The following table reconciles shareholders’ equity attributable to noncontrolling interest (in thousands):

 

                 
    Year ended
October 31, 2011		     Year ended
October 31, 2010		  

Noncontrolling interest, beginning

   $ 575     $ —    

Capital contributions

     —         699  

Net loss attributable to noncontrolling interest

     (114 )      (124 ) 
   

 

 

    

 

 

  

Noncontrolling interest, ending

   $ 461     $ 575