Notes to Consolidated Financial Statements
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for income taxes when it is uncertain how an income or expense item should be treated on an income tax return. FIN 48 describes when an uncertain tax item should be recorded in the financial statements and for how much, provides guidance on recording interest and penalties and accounting and reporting for income taxes in interim periods. FIN 48 is effective for our year ended November 30, 2008. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations.” We adopted FIN 47 in 2006 and there was no material effect upon adoption.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which was adopted in the first quarter of our 2006 fiscal year. There was no material effect upon adoption of this statement.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current year presentation. In 2005 and 2004, the net book value of in-store displays of $18.9 million and $21.5 million, respectively, have been reclassified from property, plant and equipment to other assets to conform to the current year presentation. In 2005 and 2004, $7.0 million and $7.1 million, respectively, of expenditures for in-store displays were reclassified from investing activities to operating activities in the cash flow statement to conform to current year presentation. The effect of these reclassifications is not material to the consolidated financial statements.
2. ACQUISITIONS
On June 27, 2006, we purchased the assets of Epicurean International (Simply Asia Foods) for $97.6 million in cash. This business operates in North America and is included in our consumer segment from the date of acquisition. Simply Asia Foods develops, imports and markets a line of authentic, easy-to-prepare Asian products under the Thai Kitchen® and Simply Asia® brands and has annual sales of approximately $50 million. Its primary products include noodle and soup bowls, meal kits, coconut milk, and various sauces and pastes. Acquisitions such as Simply Asia Foods are a part of our growth strategy to improve margins and increase sales and profits.
The excess purchase price over the estimated fair value of the net tangible assets purchased was $91.0 million. The allocation of the purchase price included in our financial statements is based on preliminary estimates, subject to revision after appraisals have been finalized. Revisions to the allocation, which may be significant, will be reported as changes to various assets and liabilities, including goodwill and other intangible assets. As of November 30, 2006, $26.3 million was allocated to other intangible assets and $64.7 million remained in goodwill. We expect the final valuation to result in a value for brands and other intangible assets, a portion of which will be amortizable and a portion of which will be non-amortizable. Based on preliminary estimates, we have included amortization expense in our income statement. In conjunction with the purchase of Simply Asia Foods, we entered into an operating lease for the office building and warehouse, which are owned by an employee. The lease is at a fair market value rate and not material to the financial statements.
The $97.6 million purchase price was initially funded with commercial paper. In July 2006, we issued $100 million of 5.80% senior notes due 2011 to pay down this commercial paper debt (see note 7 of the financial statements).
On August 1, 2006, we invested $5.0 million in an industrial joint venture in South Africa.
On November 1, 2004, we purchased C.M. van Sillevoldt B.V. (Silvo), the market leader in the Dutch spices and herbs consumer market, for 58 million in cash (equivalent to $74.5 million) funded with cash from operations and current credit facilities. Silvo sells spices, herbs and seasonings under the Silvo® brand in The Netherlands and the India® brand as well as private label store brands in Belgium. The brand has a strong heritage, high recognition among consumers and is the leading brand of herbs and spices in The Netherlands. Silvo is included in our consumer segment and the results of operations have been included in our consolidated results from the date of acquisition. A detailed analysis of the intangible assets of this acquisition resulted in our conclusion that the excess purchase price should be accounted for as the value of the acquired brand and goodwill. No other intangible assets were identified as a result of this analysis. We concluded that a large portion of the value of the excess purchase price resides in the Dutch consumers’ cultural connections with the Silvo brand name. Based on an analysis of the premium value that is derived from consumer loyalty and trust in the Silvo brand’s quality, we assigned $35.0 million of the excess purchase price to this non-amortizable brand. Given Silvo’s strong brand name recognition in the marketplace, we intend to use and support the brand name indefinitely. The remaining $25.6 million of excess purchase price remained as goodwill in the consumer segment.