Note 18 - Business Combination

12 Months Ended

Dec. 31, 2012

NOTE 18: BUSINESS COMBINATION

On December 27, 2011, through our wholly owned subsidiary MGPI-I, the Company completed its acquisition of substantially all of the assets used by LDI in its beverage alcohol distillery and warehousing operations. The Company also assumed certain specified liabilities, primarily consisting of trade payables and customer and contractual obligations. The purchase price totaled $11,041 for these net assets, which was provided through borrowings under the Company’s revolving line of credit. The purchase price paid was equal to the current assets minus current liabilities as of December 27, 2011 and is subject to working capital true-ups. The Company did not purchase LDI’s assets or assume liabilities related to packaging and bottling of alcoholic beverages, which was purchased by a third party. This acquisition meets the definition of a business and has been accounted for using the acquisition method in accordance with ASC 805.

The seller purchased this operation in 2007 and the operation purchased had not been profitable four out of the past five years. This entity experienced financial difficulties and the owner was required to sell this operation by its lender. Results of a bidding process initiated by the seller and its lender were initially unsuccessful. The Company and the seller and its lender eventually agreed to a purchase price equal to the net working capital of the beverage alcohol distillery, warehouses and a grain elevator. The seller’s financially distressed situation permitted the Company to purchase this operation for an amount less than the fair value of net assets acquired and the Company recorded a bargain purchase gain of $13,048 (net of taxes of $8,336).

During the six month transition period ended December 31, 2011, the Company incurred $517 of acquisition related costs, which are included in selling, general and administrative expenses in the Company’s Consolidated Statement of Operations.

The following table summarizes the consideration transferred by the Company and the amounts of the assets acquired, liabilities assumed and bargain purchase gain recognized at the acquisition date.

Components of purchase price
Cash consideration paid to seller at closing	$	10,901
Accrued consideration		140
Total purchase price	$	11,041

Recognized Fair Value Amounts of Identifiable Assets Acquired and Liabilities Assumed
Receivables	$	4,328
Inventory		9,921
Land, buildings and improvements		6,549
Machinery and equipment		11,404
Assets held for sale (See Note 10)		2,300
Customer relationships		1,496
Accounts payable and accrued expenses		(3,208	)
Other non current liabilities		(365	)
Deferred tax liability on bargain purchase gain		(8,336	)
Total identifiable net assets		24,089

Bargain Purchase Gain, net of tax	$	13,048

Management used third party appraisers to assist in estimating fair values, including (a) the business enterprise value, which is based on estimated future cash flows (including timing) which are estimated using the income approach and discount rates reflecting the risk inherent in the future cash flows, and (b) the values of land, buildings and improvements and machinery and equipment, which are estimated using the cost and market approaches. The estimated fair values recorded were based on unobservable inputs, which are material and represent Level 3 measures in the fair value hierarchy discussed in Note 14. Derivative Instruments and Fair Value Measurements.

Customer relationships have a weighted average life of ten years and are included in Other Assets on the accompanying Consolidated Balance Sheet. Estimated amortization expense for each of the next five years approximates $299.

Accounting standards require that when the fair value of the net assets acquired exceeds the purchase price, resulting in a bargain purchase gain, the acquirer must reassess the reasonableness of the values assigned to all of the assets acquired, liabilities assumed and consideration transferred. The Company has performed such a reassessment and has concluded that the values assigned for the LDI acquisition are reasonable. Consequently, the Company recorded a $13,048 bargain purchase gain (net of taxes of $8,336) on the acquisition of LDI’s Distillery Business, which the Company determined to be reasonable because (a) the seller was financially distressed, (b) LDI’s Distillery Business was not widely marketed for sale – an investment bank was hired; however, efforts were initially unsuccessful, (c) the machinery and equipment are highly specialized for the industry, resulting in limited alternative uses for the property, and (d) independent property appraisals and business valuations indicated that its fair value was in excess of the purchase price. This gain is classified as Bargain purchase gain on the Consolidated Statement of Operations.

The acquired business contributed de minimus revenues and a net loss of $102 to the Company for the period from December 27, 2011 to December 31, 2011.

During April 2012, management and the seller completed working capital true-ups. The result of the true-ups was not material to the Company’s financial results.

Unaudited Pro Forma Financial Information

The following selected unaudited pro forma summary presents consolidated information of the Company, assuming the acquisition occurred as of July 1, 2010:

	Six Months Ended December 31, 2011			Year Ended June 30, 2011
Net sales	$	169,469		$	290,825
Net income (loss)	$	(15,288	)	$	16,255
Pro forma earnings (loss) per share
Basic	$	(0.91	)	$	0.91
Diluted	$	(0.91	)	$	0.91

The pro forma financial information above includes, where applicable, adjustments for: (i) the depreciation of acquired property and equipment, (ii) the amortization of acquired intangible assets, and (iii) additional interest expense on acquisition related borrowings. These combined adjustments totaled $359 and $885 for the six month transition period ended December 31, 2011 and the year ended June 30, 2011, respectively.

The pro forma earnings (loss) were adjusted to exclude $517 of acquisition-related costs incurred during the six month transition period ended December 31, 2011. This item was included in the pro forma earnings for the year ended June 30, 2011. The impact of the bargain purchase gain and associated tax effect included in the year ended June 30, 2011 increased pro form income by $21,384.

The Company completed no acquisitions during the year ended June 30, 2011.