SEC Company Response from LIFECORE BIOMEDICAL, INC. \DE\ (LFCR) (CIK 0001005286) (LFCR) — Mar 27, 2009
LIFECORE BIOMEDICAL, INC. \DE\ (LFCR) (CIK 0001005286)
Date: March 27, 2009 · CIK: 0001005286 · Accession: 0001144204-09-016678
AI Filing Summary & Sentiment
Reasoning
Referenced dates: February 27, 2009
Letter
VIA EDGAR Division of Corporation Finance United States Securities and Exchange Commission Landec Corporation Form 10-K for the fiscal year ended May 25, 2008 Forms 10-Q for Fiscal Quarters Ended August 31, 2008 and November 30, 2008 File No. 0-27446
Dear Mr. Decker:
On behalf of Landec Corporation (“Landec or the “Company”), we are responding to the staff’s letter dated February 27, 2009 relating to Landec’s Form 10-K for the fiscal year ended May 25, 2008 and Forms 10-Q for the fiscal quarters ended August 31, 2008 and November 30, 2008. For the staff’s convenience, we have repeated the staff’s comments below in bold face type before each of our responses.
FORM 10-K FOR THE YEAR ENDED MAY 25, 2008
General
1.
Comment: Where a comment below requests additional disclosures or other revisions to be made, please show us in your supplemental response what the revisions will look like. These revisions should be included in your future filings, including your interim filings.
Response: Where a comment requests additional disclosures or other revisions, the Company will show in its supplemental response what the revisions will look like in the Company’s future filings, including its interim filings.
Mr. Rufus Decker
March 27,
Page
Item 1A. Risk Factors, page 15
2.
Comment: In filings containing risk factor disclosure, please refrain from using qualifying or limiting statements in the introductory paragraph, such as references to other factors described elsewhere in this report or other risks that you do not currently deem material or of which you are currently unaware. In view of the requirements of Item 503(c) of Regulation S-K, such qualifications and limitations are inappropriate. Your risk factor disclosure should address all of the material risks that you face. If you do not deem risks material, you should not make reference to them.
Response: In future filings containing risk factor disclosure, the Company will delete qualifying or limiting statements in the introductory paragraph which refer to “other factors including, without limitation, those described elsewhere in this report” such that the introductory paragraph to the risk factors will read as follows:
“Landec desires to take advantage of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, Landec wishes to alert readers that the following important factors could, in the future affect, and in the past have affected, Landec’s actual results and could cause Landec’s results for future periods to differ materially from those expressed in any forward-looking statements made by or on behalf of Landec. Landec assumes no obligation to update such forward-looking statements.”
Item 7. Management’s Discussions and Analysis of Financial Condition and Results of Operations, page 25
Critical Accounting Policies – Goodwill and Other Intangible Assets, page 27
3.
Comment: In the interest of providing readers with a better insight into management’s judgments in accounting for goodwill and intangible assets, please disclose the following in future filings. In this regard, we note your expanded disclosures in Note 6 of your Form 10-Q for the quarter ended November 30, 2008 and request that you provide those disclosures as well as the following additional disclosures.
·
The reporting unit level at which you test goodwill for impairment and your basis for that determination;
·
You disclose in your Form 10-Q that you consider the results of both of the approaches set forth in SFAS 142 to estimate the fair value of each relevant reporting unit. Please expand your disclosures to include sufficient information to enable a reader to understand the assumed benefits of each approach;
Mr. Rufus Decker
March 27,
Page
·
How you weight each of the techniques used including the basis for that weighting;
·
A qualitative and quantitative description of the material assumptions used and a sensitivity analysis of those assumptions based upon reasonably likely changes; and
If applicable, how the assumptions and methodologies used for valuing goodwill in the current year have changed since the prior year highlighting the impact of any changes.
Response: To clarify its accounting policy with regard to goodwill and other intangible assets with indefinite lives, the Company will modify its critical accounting policy disclosure for future filings, beginning with its filing of the Form 10-Q for the third fiscal quarter ended March 1, 2009, to read as set forth below:
“The Company’s intangible assets are comprised primarily of goodwill and other intangible assets with indefinite lives (collectively, “intangible assets”), which the Company recognized in accordance with the guidelines in SFAS No. 141, “Business Combinations” (“SFAS 141”) (i) upon the acquisition, in December 1999, of all the assets of Apio, Inc. (“Apio”), which consists of the Food Products Technology and Commodity Trading reporting units and (ii) from the repurchase of all minority interests in the common stock of Landec Ag, Inc. (“Landec Ag”), a subsidiary of the Company, in December 2006. SFAS 141 defines goodwill as “the excess of the cost of an acquired entity over the net of the estimated fair values of the assets acquired and the liabilities assumed at date of acquisition.” All intangible assets, including goodwill, associated with the Apio acquisition were allocated to the Food Products Technology reporting unit pursuant to SFAS 141 based upon the allocation of assets and liabilities acquired and consideration paid for the Food Products Technology reporting unit. The consideration paid for the Commodity Trading reporting unit approximated its fair market value at the time of acquisition, and therefore no intangible assets were recorded in connection with the Company’s acquisition of this reporting unit. Goodwill associated with the Technology Licensing reporting unit consists entirely of goodwill resulting from the repurchase of the Landec Ag minority interests.
The Company tests its intangible assets for impairment at least annually, in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). When evaluating indefinite-lived intangible assets for impairment, SFAS 142 requires the Company to compare the fair value of the asset to its carrying value to determine if there is an impairment loss. SFAS 142 requires the Company to evaluate goodwill for impairment by first comparing the fair value of the reporting unit to its carrying value to determine if there is an impairment loss. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired; thus application of the second step of the two-step approach in SFAS 142 is not required. Application of the intangible assets impairment tests requires significant judgment by management, including identification of reporting units, assignment of assets and liabilities to reporting units, assignment of intangible assets to reporting units, and the determination of the fair value of each indefinite-lived intangible asset and reporting unit based upon projections of future net cash flows, discount rates and market multiples, which judgments and projections are inherently uncertain.
Mr. Rufus Decker
March 27,
Page
The Company tested its intangible assets for impairment as of July 20, 2008 and determined that no adjustments to the carrying values of the intangible assets were necessary as of that date. On a quarterly basis, the Company considers the need to update its most recent annual tests for possible impairment of its intangible assets, based on management’s assessment of changes in its business and other economic factors since the most recent annual evaluation. Such changes, if significant or material, could indicate a need to update the most recent annual tests for impairment of the intangible assets during the current period. The results of these tests could lead to write-downs of the carrying values of the intangible assets in the current period.
The Company uses the discounted cash flow (“DCF”) approach to develop an estimate of fair value. The DCF approach recognizes that current value is premised on the expected receipt of future economic benefits. Indications of value are developed by discounting projected future net cash flows to their present value at a rate that reflects both the current return requirements of the market and the risks inherent in the specific investment. The market approach was not used to value the Food Products Technology and Technology Licensing reporting units (the “Reporting Units”) because insufficient market comparables exist to enable the Company to develop a reasonable fair value of its intangible assets due to the unique nature of each of the Company’s Reporting Units.
The DCF approach requires the Company to exercise judgment in determining future business and financial forecasts and the related estimates of future net cash flows. Future net cash flows depend primarily on future product sales, which are inherently difficult to predict. These net cash flows are discounted at a rate that reflects both the current return requirements of the market and the risks inherent in the specific investment.
The DCF associated with the Technology Licensing reporting unit is based on the Company’s current license agreement with Monsanto (the “License Agreement”). Under the License Agreement, Landec Ag receives a license fee of $2.6 million in cash per year for five years beginning in December 2006, and a fee payable to Landec of $4.0 million if Monsanto elects to terminate the License Agreement, or $8.0 million if Monsanto elects to purchase all of the outstanding stock of Landec Ag. If the purchase option is exercised before the fifth anniversary of the License Agreement, or if Monsanto elects to terminate the License Agreement, all annual license fees that have not been paid to Landec Ag will become due upon the purchase or termination. As of May 25, 2008, the fair value of the Technology Licensing reporting unit, as determined by the DCF approach, is more than double its book value, and therefore, no intangible asset impairment was deemed to exist. The discount rate utilized of 4.5% approximates the risk free interest rate as the cash flow stream is guaranteed under the terms of the License Agreement. A 1% increase in the discount rate would result in approximately a 2% decline in the fair value of the reporting unit.
Mr. Rufus Decker
March 27,
Page
The DCF associated with the Food Products Technology reporting unit is based on management’s five-year projection of revenues, gross profits and operating profits by fiscal year and assumes a 40% effective tax rate for each year. Management takes into account the historical trends of Apio and the industry categories in which Apio operates along with inflationary factors, current economic conditions, new product introductions, cost of sales, operating expenses, capital requirements and other relevant data when developing its projection. As of May 25, 2008, the fair value of the Food Products Technology reporting unit, as determined by the DCF approach, was more than triple its carrying value, and therefore, no intangible asset impairment was deemed to exist. A 1% increase in the discount rate would result in approximately a 4% decline in the fair value of the reporting unit. Therefore, even significant negative changes in the Company’s revenue and margin projections for the Food Products Technology business or discount rate utilized would be unlikely to result in the impairment of the intangible assets of the Food Products Technology reporting unit as of May 25, 2008.”
Liquidity and Capital Resources – Cash Flows from Operations, page 37
4.
Comment: Please enhance your disclosure to discuss all material changes in your operating activities as depicted in your statement of cash flows. For example, you should expand upon your disclosure to discuss in greater detail that “the primary sources of cash from operating activities during fiscal year 2008 were from net income of $13.5 million and non-cash expenses of $3.1 million...” Specifically, you should discuss changes in your working capital accounts such as accounts receivable, accounts payable, etc. and the reasons for those changes.
Response: The Company will include expanded disclosure similar to the following in its future filings, updated, as applicable, for the relevant reporting periods:
“Landec generated $17.5 million of cash flow from operating activities during the fiscal year ended May 25, 2008 compared to using $2.5 million for operating activities during the fiscal year ended May 27, 2007. The primary sources of cash from operating activities during fiscal year 2008 were from net income of $13.5 million, non-cash related expenses of $3.1 million, such as depreciation and stock based compensation and a net change of $837,000 in working capital. The primary changes in working capital were (1) a $1.8 million increase in accounts receivable due to the increase in revenues in fiscal year 2008 compared to fiscal year 2007, (2) a $4.8 million increase in accounts payable due to the timing of payments and the increase in cost of sales in fiscal year 2008 compared to fiscal year 2007, (3) a $929,000 decrease in accrued compensation primarily due to no bonuses being earned at the Corporate level in fiscal year 2008 compared to $916,000 in bonuses being earned at the Corporate level in fiscal year 2007, (4) a $1.6 million increase in other accrued liabilities primarily attributable to: (a ) a $900,000 increase in the accrual for auditing and tax fees as a result of a change in accountants at fiscal year end and tax fees related to several tax projects, (b) a $250,000 increase for legal and consulting fees (c) a $250,000 increase in the accrual for utility expenses due to the timing of billings and (d) a $100,000 net increase in numerous miscellaneous accruals and (5) a $1.9 million decrease in deferred revenue primarily due to the recognition of $4.6 million of revenue associated with deferred revenue from the Monsanto licensing agreement partially offset by the receipt of the annual cash payment of $2.6 million from Monsanto during fiscal year 2008.”
Mr. Rufus Decker
March 27,
Page
Financial Statements
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies, page
Basis of Consolidation, page
5.
Comment: You indicate that Monsanto has a v
Show Raw Text
CORRESP
1
filename1.htm
Unassociated Document
March 27, 2009
Geoffrey
P. Leonard
415-315-6364
415-315-4833 fax
geoffrey.leonard@ropesgray.com
VIA
EDGAR
Mr. Rufus Decker
Accounting
Branch Chief
Division
of Corporation Finance
United
States Securities and Exchange Commission
100
F Street, N.E.
Washington,
D.C. 20549
Re:
Landec
Corporation
Form 10-K for the fiscal year ended May
25, 2008
Forms 10-Q for Fiscal Quarters Ended
August 31, 2008 and November 30, 2008
File No. 0-27446
Dear Mr. Decker:
On
behalf of Landec Corporation (“Landec or the “Company”), we are responding to
the staff’s letter dated February 27, 2009 relating to Landec’s Form 10-K for
the fiscal year ended May 25, 2008 and Forms 10-Q for the fiscal quarters ended
August 31, 2008 and November 30, 2008. For the staff’s convenience,
we have repeated the staff’s comments below in bold face type before each of our
responses.
FORM 10-K FOR THE YEAR ENDED
MAY 25, 2008
General
1.
Comment: Where
a comment below requests additional disclosures or other revisions to be
made, please show us in your supplemental response what the revisions will
look like. These revisions should be included in your future
filings, including your interim
filings.
Response: Where a
comment requests additional disclosures or other revisions, the Company will
show in its supplemental response what the revisions will look like in the
Company’s future filings, including its interim filings.
Mr. Rufus
Decker
March 27,
2009
Page
2
Item 1A. Risk
Factors, page 15
2.
Comment: In
filings containing risk factor disclosure, please refrain from using
qualifying or limiting statements in the introductory paragraph, such as
references to other factors described elsewhere in this report or other
risks that you do not currently deem material or of which you are
currently unaware. In view of the requirements of Item 503(c)
of Regulation S-K, such qualifications and limitations are
inappropriate. Your risk factor disclosure should address all
of the material risks that you face. If you do not deem risks
material, you should not make reference to
them.
Response: In future
filings containing risk factor disclosure, the Company will delete qualifying or
limiting statements in the introductory paragraph which refer to “other factors
including, without limitation, those described elsewhere in this report” such
that the introductory paragraph to the risk factors will read as
follows:
“Landec
desires to take advantage of the “Safe Harbor” provisions of the Private
Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under
the Securities Exchange Act of 1934. Specifically, Landec wishes to
alert readers that the following important factors could, in the future affect,
and in the past have affected, Landec’s actual results and could cause Landec’s
results for future periods to differ materially from those expressed in any
forward-looking statements made by or on behalf of Landec. Landec
assumes no obligation to update such forward-looking statements.”
Item
7. Management’s Discussions and Analysis of Financial Condition and
Results of Operations, page 25
Critical Accounting Policies
– Goodwill and Other Intangible Assets, page 27
3.
Comment: In
the interest of providing readers with a better insight into management’s
judgments in accounting for goodwill and intangible assets, please
disclose the following in future filings. In this regard, we
note your expanded disclosures in Note 6 of your Form 10-Q for the quarter
ended November 30, 2008 and request that you provide those disclosures as
well as the following additional
disclosures.
·
The
reporting unit level at which you test goodwill for impairment and your
basis for that determination;
·
You
disclose in your Form 10-Q that you consider the results of both of the
approaches set forth in SFAS 142 to estimate the fair value of each
relevant reporting unit. Please expand your disclosures to
include sufficient information to enable a reader to understand the
assumed benefits of each approach;
Mr. Rufus
Decker
March 27,
2009
Page
3
·
How
you weight each of the techniques used including the basis for that
weighting;
·
A
qualitative and quantitative description of the material assumptions used
and a sensitivity analysis of those assumptions based upon reasonably
likely changes; and
If
applicable, how the assumptions and methodologies used for valuing goodwill in
the current year have changed since the prior year highlighting the impact of
any changes.
Response: To clarify its
accounting policy with regard to goodwill and other intangible assets with
indefinite lives, the Company will modify its critical accounting policy
disclosure for future filings, beginning with its filing of the Form 10-Q for
the third fiscal quarter ended March 1, 2009, to read as set forth
below:
“The
Company’s intangible assets are comprised primarily of goodwill and other
intangible assets with indefinite lives (collectively, “intangible assets”),
which the Company recognized in accordance with the guidelines in SFAS
No. 141, “Business
Combinations” (“SFAS 141”) (i) upon the acquisition, in December 1999, of
all the assets of Apio, Inc. (“Apio”), which consists of the Food Products
Technology and Commodity Trading reporting units and (ii) from the repurchase of
all minority interests in the common stock of Landec Ag, Inc. (“Landec Ag”), a
subsidiary of the Company, in December 2006. SFAS 141 defines goodwill as “the
excess of the cost of an acquired entity over the net of the estimated fair
values of the assets acquired and the liabilities assumed at date of
acquisition.” All intangible assets, including goodwill, associated with the
Apio acquisition were allocated to the Food Products Technology reporting unit
pursuant to SFAS 141 based upon the allocation of assets and liabilities
acquired and consideration paid for the Food Products Technology reporting
unit. The consideration paid for the Commodity Trading reporting unit
approximated its fair market value at the time of acquisition, and therefore no
intangible assets were recorded in connection with the Company’s acquisition of
this reporting unit. Goodwill associated with the Technology
Licensing reporting unit consists entirely of goodwill resulting from the
repurchase of the Landec Ag minority interests.
The
Company tests its intangible assets for impairment at least annually, in
accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”). When evaluating indefinite-lived
intangible assets for impairment, SFAS 142 requires the Company to compare the
fair value of the asset to its carrying value to determine if there is an
impairment loss. SFAS 142 requires the Company to evaluate goodwill for
impairment by first comparing the fair value of the reporting unit to its
carrying value to determine if there is an impairment loss. If the
fair value of the reporting unit exceeds its carrying value, goodwill is not
considered impaired; thus application of the second step of the two-step
approach in SFAS 142 is not required. Application of the intangible
assets impairment tests requires significant judgment by management, including
identification of reporting units, assignment of assets and liabilities to
reporting units, assignment of intangible assets to reporting units, and the
determination of the fair value of each indefinite-lived intangible asset and
reporting unit based upon projections of future net cash flows, discount rates
and market multiples, which judgments and projections are inherently
uncertain.
Mr. Rufus
Decker
March 27,
2009
Page
4
The
Company tested its intangible assets for impairment as of July 20, 2008 and
determined that no adjustments to the carrying values of the intangible assets
were necessary as of that date. On a quarterly basis, the Company
considers the need to update its most recent annual tests for possible
impairment of its intangible assets, based on management’s assessment of changes
in its business and other economic factors since the most recent annual
evaluation. Such changes, if significant or material, could indicate
a need to update the most recent annual tests for impairment of the intangible
assets during the current period. The results of these tests could
lead to write-downs of the carrying values of the intangible assets in the
current period.
The
Company uses the discounted cash flow (“DCF”) approach to develop an estimate of
fair value. The DCF approach recognizes that current value is
premised on the expected receipt of future economic
benefits. Indications of value are developed by discounting projected
future net cash flows to their present value at a rate that reflects both the
current return requirements of the market and the risks inherent in the specific
investment. The market approach was not used to value the Food
Products Technology and Technology Licensing reporting units (the “Reporting
Units”) because insufficient market comparables exist to enable the Company to
develop a reasonable fair value of its intangible assets due to the unique
nature of each of the Company’s Reporting Units.
The DCF
approach requires the Company to exercise judgment in determining future
business and financial forecasts and the related estimates of future net cash
flows. Future net cash flows depend primarily on future product sales, which are
inherently difficult to predict. These net cash flows are discounted at a rate
that reflects both the current return requirements of the market and the risks
inherent in the specific investment.
The DCF
associated with the Technology Licensing reporting unit is based on the
Company’s current license agreement with Monsanto (the “License
Agreement”). Under the License Agreement, Landec Ag receives a
license fee of $2.6 million in cash per year for five years beginning in
December 2006, and a fee payable to Landec of $4.0 million if Monsanto elects to
terminate the License Agreement, or $8.0 million if Monsanto elects to purchase
all of the outstanding stock of Landec Ag. If the purchase option is
exercised before the fifth anniversary of the License Agreement, or if Monsanto
elects to terminate the License Agreement, all annual license fees that have not
been paid to Landec Ag will become due upon the purchase or
termination. As of May 25, 2008, the fair value of the Technology
Licensing reporting unit, as determined by the DCF approach, is more than double
its book value, and therefore, no intangible asset impairment was deemed to
exist. The discount rate utilized of 4.5% approximates the risk free
interest rate as the cash flow stream is guaranteed under the terms of the
License Agreement. A 1% increase in the discount rate would result in
approximately a 2% decline in the fair value of the reporting unit.
Mr. Rufus
Decker
March 27,
2009
Page
5
The DCF
associated with the Food Products Technology reporting unit is based on
management’s five-year projection of revenues, gross profits and operating
profits by fiscal year and assumes a 40% effective tax rate for each
year. Management takes into account the historical trends of Apio and
the industry categories in which Apio operates along with inflationary factors,
current economic conditions, new product introductions, cost of sales, operating
expenses, capital requirements and other relevant data when developing its
projection. As of May 25, 2008, the fair value of the Food Products
Technology reporting unit, as determined by the DCF approach, was more than
triple its carrying value, and therefore, no intangible asset impairment was
deemed to exist. A 1% increase in the discount rate would result in
approximately a 4% decline in the fair value of the reporting unit. Therefore,
even significant negative changes in the Company’s revenue and margin
projections for the Food Products Technology business or discount rate utilized
would be unlikely to result in the impairment of the intangible assets of the
Food Products Technology reporting unit as of May 25, 2008.”
Liquidity and Capital
Resources – Cash Flows from Operations, page 37
4.
Comment: Please
enhance your disclosure to discuss all material changes in your operating
activities as depicted in your statement of cash flows. For
example, you should expand upon your disclosure to discuss in greater
detail that “the primary sources of cash from operating activities during
fiscal year 2008 were from net income of $13.5 million and non-cash
expenses of $3.1 million...” Specifically, you should discuss
changes in your working capital accounts such as accounts receivable,
accounts payable, etc. and the reasons for those
changes.
Response: The
Company will include expanded disclosure similar to the following in its future
filings, updated, as applicable, for the relevant reporting
periods:
“Landec
generated $17.5 million of cash flow from operating activities during the fiscal
year ended May 25,
2008 compared to using $2.5 million for operating activities during the fiscal
year ended May 27,
2007. The primary sources of cash from operating activities during
fiscal year 2008 were from net income of $13.5 million, non-cash related
expenses of $3.1 million, such as depreciation and stock based compensation and
a net change of $837,000 in working capital. The primary changes in
working capital were (1) a $1.8 million increase in accounts receivable due to
the increase in revenues in fiscal year 2008 compared to fiscal year 2007, (2) a
$4.8 million increase in accounts payable due to the timing of payments and the
increase in cost of sales in fiscal year 2008 compared to fiscal year 2007, (3)
a $929,000 decrease in accrued compensation primarily due to no bonuses being
earned at the Corporate level in fiscal year 2008 compared to $916,000 in
bonuses being earned at the Corporate level in fiscal year 2007, (4) a $1.6
million increase in other accrued liabilities primarily attributable to: (a ) a
$900,000 increase in the accrual for auditing and tax fees as a result of a
change in accountants at fiscal year end and tax fees related to several tax
projects, (b) a $250,000 increase for legal and consulting fees (c) a $250,000
increase in the accrual for utility expenses due to the timing of billings and
(d) a $100,000 net increase in numerous miscellaneous accruals and (5) a $1.9
million decrease in deferred revenue primarily due to the recognition of $4.6
million of revenue associated with deferred revenue from the Monsanto licensing
agreement partially offset by the receipt of the annual cash payment of $2.6
million from Monsanto during fiscal year 2008.”
Mr. Rufus
Decker
March 27,
2009
Page
6
Financial
Statements
1. Organization,
Basis of Presentation, and Summary of Significant Accounting Policies, page
49
Basis of Consolidation, page
49
5.
Comment: You
indicate that Monsanto has a v