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Accounting
Branch Chief
Division
of Corporation Finance
United
States Securities and Exchange Commission
100
F Street, N.E.
Washington,
D.C. 20549
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Re:
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Landec
Corporation
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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
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FORM 10-K FOR THE YEAR ENDED
MAY 25, 2008
General
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1.
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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.
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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
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2.
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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.
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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
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3.
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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.
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·
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The
reporting unit level at which you test goodwill for impairment and your
basis for that determination;
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·
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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;
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Mr. Rufus
Decker
March 27,
2009
Page
3
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·
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How
you weight each of the techniques used including the basis for that
weighting;
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·
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A
qualitative and quantitative description of the material assumptions used
and a sensitivity analysis of those assumptions based upon reasonably
likely changes; and
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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
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4.
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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.
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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
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5.
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Comment: You
indicate that Monsanto has a variable interest in Landec Ag and therefore
Landec Ag has been determined to be a VIE. You also determined
that you are the primary beneficiary of Landec Ag and therefore the
accounts of Landec Ag are consolidated in your financial
statements. Please disclose how you determined that Landec Ag
is a variable interest entity pursuant to paragraphs 4 and 5 through 7 of
FIN 46R. If based on this analysis, Landec is a VIE, please
also disclose how you determined you were the primary beneficiary of this
entity as well as provide the other disclosures required by paragraph 23
of FIN 46(R).
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Response: Before
directly addressing your specific questions regarding the Company’s transactions
with Monsanto, we wish to supplementally provide a brief description of the
transaction with Monsanto to provide additional context for the Company's
answers to your specific questions. Please refer to the following
background when reviewing the response to this Comment, as well as the responses
to Comments 9 and 12.
Mr. Rufus
Decker
March 27,
2009
Page
7
Background:
On
December 1, 2006, Landec sold its direct marketing and sales seed company,
Fielder’s Choice Direct (“FCD”), which included the FCD and Heartland Hybrid
brands to American Seeds, Inc. (“ASI”), a wholly owned subsidiary of Monsanto
Company. FCD comprised the majority of Landec Ag’s operations;
however, Landec, the parent corporation of Landec Ag, retained its proprietary
polymer technology. In conjunction with the sale of FCD to Monsanto,
the Company entered into a five year co-exclusive technology license agreement
with Monsanto for the use of Landec's Intellicoat® polymer seed coating
technology (such sale of FCD is referred to herein as the “Monsanto
Transaction”).
The
following is a summary of the terms of the Monsanto Transaction:
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The
Company sold 100% of its wholly owned subsidiary, FCD, to ASI for $50
million, before transaction
expenses.
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The
Company entered into a five-year co-exclusive worldwide license, supply
and R&D agreement (the “License Agreement”) which requires Monsanto to
make minimum payments of $2.6 million per year, or $13 million in total,
for the supply of polymer and/or formulation, the patent and know-how
license, the formulation license, and the trademark license for use in the
Field (meaning the treatment and coating of seeds, including without
limitation, the seeds of corn, soybean, cotton, canola, and vegetables and
the use of such coated seeds) during the term of the License
Agreement. The License Agreement also requires Landec to
provide R&D support and polymer/formulation production support over
the term of the License Agreement. In addition, the License
Agreement requires Monsanto to pay all operating services costs (which are
comprised of R&D expenses, labor costs, SG&A expenses and
production expenses) of Landec Ag over the term of the License Agreement
and to purchase Intellicoat polymer and/or formulations made by Landec Ag
for 120% (the negotiated price) of Landec Ag’s direct cost basis
(excluding any operating services
costs).
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·
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Monsanto
received an option to purchase all of the outstanding shares of Landec Ag
during the five-year term of the License Agreement for a total of $8
million (the “Buy-Out Option”). If Monsanto were to exercise
the Buy-Out Option, it would own all the shares of Landec Ag and the right
to the Intellicoat coating technology for specific fields of
use.
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·
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Monsanto
is required to pay a $4 million termination fee at the end of the
five-year term if it does not purchase all of the outstanding shares of
Landec Ag, in which case the License Agreement will be terminated and all
of the rights under the License Agreement will revert back to
Landec.
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Mr. Rufus
Decker
March 27,
2009
Page
8
Accordingly,
under the Monsanto Transaction, Landec will receive minimum guaranteed payments
of $67 million, assuming Monsanto does not elect to purchase Landec Ag, or $71
million in maximum payments, if Monsanto does elect to purchase Landec Ag, plus
reimbursement for costs.
Response to Comment
5:
Under the
terms of the License Agreement, Monsanto received an option to purchase 100% of
the outstanding shares of Landec Ag. The Company concluded that
Monsanto’s option qualified as a variable interest in Landec Ag.
Paragraph
5.b.(3) of FIN 46R concludes that stockholders do not have the right to residual
returns if their return is capped by the entity’s governing documents or
arrangements with other variable interest holders or the
entity. Monsanto’s call option is a separate instrument that limits
the returns of the current group of at-risk stockholders. Thus, by
design, those stockholders do not have the characteristics of a controlling
financial interest. Additionally, Landec Ag does not qualify for any
of the exceptions outlined in paragraph 4 of FIN 46R. As a result, the Company
concluded that Landec Ag is a VIE.
In
determining whether or not Landec is the primary beneficiary, the Company
considered FIN 46R paragraph 16(d)(1) to determine whether the relationship
between Landec Ag and Monsanto would designate them as related
parties. The Company considered clause 3.6 of the License Agreement
whereby Monsanto is “locking-up” Landec for a period of 5 years and prohibiting
management from making decisions that a “typical” equity investor would make, to
determine if this results in a de facto agency relationship.
In
considering paragraph 16(d)(1) of FIN 46R, it appears that Monsanto is a related
party for purposes of FIN 46R. Further, the Company considered
paragraph 17 of FIN 46R to determine whether Landec or Monsanto is “most closely
associated” with Landec Ag. Specifically, paragraph 17(a) provides that a
principal-agency relationship exists if one member of a group (agent) is acting
on behalf of another member (the principal).
While
Landec Ag performs certain functions, including R&D, that could ultimately
accrue to the benefit of Monsanto if it decides to exercise its option to
purchase all of the outstanding stock of Landec Ag, the employees performing
those functions are employees of Landec Ag and report to the Chief Operating
Officer of Landec. Monsanto does not direct the employees of Landec
Ag.
The
Company also considered “other” qualitative factors that indicate that Landec is
the primary beneficiary, including the following:
Mr. Rufus
Decker
March 27,
2009
Page
9
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1)
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The
License Agreement was structured as a co-exclusive agreement, not an
exclusive agreement, as the Company believed it needed to protect its
rights to be able to sell Intellicoat coated products to customers, in
crops that Monsanto elects not to pursue, or to third parties that insist
that Landec Ag be the supplier, rather than Monsanto (e.g. Monsanto
competitors). Any sales by Landec Ag under this co-exclusive
arrangement will be the revenues and profits or losses of Landec
Ag.
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2)
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Landec
Ag is obligated to pay a royalty to Monsanto of 35% of the gross profit
received on Landec Ag direct sales. Landec Ag was willing to
pay such a high royalty in order to be able to sell this technology
without Monsanto’s assistance during the term of the License Agreement.
Additionally, if Landec Ag’s sales exceeded 25% of the total sales of
Intellicoat based products sold by Monsanto and Landec Ag, Landec Ag is
required to renegotiate the percentage of Landec Ag’s operating expenses
paid by Monsanto to Landec Ag, which would result in additional expenses
being incurred by Landec Ag.
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3)
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If
Monsanto ultimately rejects the Intellicoat technology and terminates the
License Agreement, this could very well be perceived as a failure of the
Intellicoat technology in the marketplace. If this occurs,
Landec Ag will once again be forced to develop this business on its
own. It will be very costly if Landec Ag has to re-establish a
marketing program for the Intellicoat application and overcome the
perception that the technology has
failed.
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4)
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Monsanto
is responsible for up to $10,000 of the annual patent costs associated
with the licensed technology. Landec is responsible for all
patent costs exceeding $10,000. As the focus on the Intellicoat
technology changes to new, yet to be patented applications, such as
controlled and modulated release of actives from seed coatings using
Landec Ag’s seed coating technology, then the cost associated with
securing proprietary positions will go up
substantially. Landec may easily incur annual patent
costs well in excess of $100,000 to protect and defend its current patents
and to apply for and obtain new patents for the use of its polymer
technology.
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5)
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Although
Monsanto bears the financial responsibility for the operating costs of
Landec Ag and provides input to the annual budget and work plan for Landec
Ag, Landec, through its control of Landec Ag, controls the ultimate amount
of these costs and how these funds are applied at Landec
Ag. The Chief Operating Officer of Landec has the management
responsibility for Landec Ag business operations. The General Manager of
Landec Ag reviews all activities of the Landec Ag business included in the
work plan and annual budget with the Landec Chief Operating Officer,
before communicating with Monsanto. This includes specific work
objectives, R&D objectives, operating budgets, sales strategies for
products sold by Landec Ag, sales revenue objectives and manufacturing
costs. All decisions regarding staffing and salary are determined and
approved by Landec before being discussed with Monsanto. All intellectual
property issues, capital expenses and General Manager expense accounts are
reviewed and approved by the Chief Operating Officer of
Landec.
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Mr. Rufus
Decker
March 27,
2009
Page
10
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6)
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Landec
has entered into a number of R&D and license agreements in its history
that have resulted in significant R&D monies being paid to
Landec. The risk of failure for such programs has been high
since many of these programs failed to achieve the partnership objectives
due to either technical or market reasons, or because of a change in
direction or program leadership at the partner company. In each
case, long term royalties and/or supply payments to Landec from these
license and R&D agreements were projected to provide a significant
revenue source to Landec in addition to the initial R&D support or
license fees. The majority of Landec’s license agreements have
not fulfilled their overall objectives, further supporting the argument
that there are risks to Landec under the License Agreement and it is far
from certain that Monsanto will exercise its buy-out
option.
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Based on
the qualitative factors listed above, the Company believes that Landec is the
primary beneficiary of Landec Ag, and therefore Landec Ag should be consolidated
with Landec for financial reporting purposes. The Company
supplementally advises that the amounts included in the consolidation as a
result of including Landec Ag are not significant to the consolidated financial
statements of Landec:
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Net
assets constituted less than ½ of 1% of consolidated Landec
assets;
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Revenues
recognized from the License Agreement for fiscal years 2007 and 2008
represented approximately 1.3% and 2.3%, respectively, of Landec’s
consolidated revenues for those years;
and
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While
revenues would be presented separately if Landec Ag were not consolidated,
there would be no change to net income or cash
flows.
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Below we
present the financial effect of consolidating Landec Ag into the Landec
consolidated financial statements for the respective years (in thousands):
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Fiscal
Year Ended 5/27/07
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Fiscal
Year Ended 5/25/08
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Statement
of Income Data:
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Revenues,
excluding Landec Ag
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$ | 207,798 | $ | 233,127 | ||||
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Landec
Ag revenues
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2,700 | 5,400 | ||||||
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Consolidated
revenues
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$ | 210,498 | $ | 238,527 | ||||
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Balance
Sheet Data:
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Assets,
excluding Landec Ag
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$ | 140,739 | $ | 132,724 | ||||
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Landec
Ag assets
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629 | 514 | ||||||
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Consolidated
assets
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$ | 141,368 | $ | 133,238 | ||||
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Shareholders’
Equity, excluding Landec Ag
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$ | 110,228 | $ | 114,426 | ||||
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Landec
Ag shareholders’ equity
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— | — | ||||||
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Consolidated
shareholders’ equity
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$ | 110,228 | $ | 114,426 | ||||
Mr. Rufus
Decker
March 27,
2009
Page
11
In future
filings, the Company will supplement its FIN 46(R) disclosure to reflect the
requirements of paragraph 23 of FIN 46(R) as follows:
“Landec Ag exists solely to administer
the license and supply agreement between Landec and Monsanto Company. At May 25,
2008 and May 27, 2007, Landec Ag had total assets of approximately $500,000 and
$600,000, respectively.”
None of Landec’s assets serve as
collateral for the obligations of Landec Ag, and there is no restriction on the
recourse of creditors or beneficial interest holders of Landec Ag to the general
credit of Landec. As such, we have concluded that the required disclosures
related to paragraph 23 b. and c. of FIN 46(R) are not
applicable.
Revenue Recognition, page
51
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6.
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Comment: We
note that you recognize revenue when, in part, title has
passed. Please revise to clarify, if true, that delivery occurs
when title passes. Otherwise, provide us with additional
information for us to understand the appropriateness of your revenue
recognition policy. Refer to SAB Topic
13.
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Response: In future
filings the Company will modify its revenue recognition disclosure to reflect
that delivery occurs when title passes as follows:
“Revenue
from product sales is recognized when there is persuasive evidence that an
arrangement exists, delivery has occurred, title has transferred, the price is
fixed and determinable and collectibility is reasonably
assured. Allowances are established for estimated uncollectible
amounts, product returns and discounts.”
Mr. Rufus
Decker
March 27,
2009
Page
12
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7.
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Comment: We
note, as indicated on page 30 and elsewhere in your filing, that
$60,414,000 and $49,706,000 of your product sales in fiscal years 2008 and
2007 relate to trading revenues. We also note that $167,817,000
and $154,744,000 of your product sales in fiscal years 2008 and 2007
relate to the sale of specialty packaged fresh-cut and whole vegetable
products that are washed and packaged in your propriety
packaging. We further note that you have relatively immaterial
inventory and accounts receivable balances as of May 25, 2008 and May 27,
2007 relative to the revenues you generated in those fiscal
years. Please clarify whether you take title to the produce you
trade and/or the produce you package and with reference to EITF 99-19
Reporting Revenue Gross as a Principal versus Net as an Agent, please
address the indicators of gross and net revenue reporting to support your
accounting. Consider addressing these indicators in your
critical accounting policy
disclosures.
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Response:
Relationship of inventory
and accounts receivable balances to revenues
The Food
Products Technology segment markets and packs specialty packaged whole and
fresh-cut vegetables that incorporate the BreatheWay specialty packaging for the
retail grocery, club store and food services industry. In addition,
the Food Products Technology segment sells BreatheWay packaging to partners for
non-vegetable products. The Commodity Trading segment consists of
revenues generated from the purchase and sale of primarily whole commodity fruit
and vegetable products to Asia and domestically to Wal-Mart. In both
segments, the Company takes title to the produce it trades and/or
packages.
Both the
Food Products Technology and Commodity Trading segments operate in the fresh
produce business where product lives are extremely short, measured in days, and
where the normal accepted business practice across the industry is to liquidate
both receivables and payables promptly, generally in 21 to 30
days. This business practice developed within the produce industry as
a result of several unique factors including the short shelf-life of the fresh
produce and the impracticability of returning such produce, as well as certain
statutory requirements regarding standard payment terms in the absence of a
contract.
Within
the Food Products Technology segment, the Company maintains inventories of both
raw vegetable product inputs and packaging materials inputs. Raw
vegetable product inputs on hand represent less than 5 days of production, again
due to the highly perishable nature of the product. Raw vegetable
product costs represent approximately 60% of the total cost inputs for finished
goods. Packaging materials inputs on hand represent approximately 20%
of the total cost of inputs for finished goods and carrying levels are typically
between 30 to 60 days of usage for such materials. Within the
Commodity Trading segment, the Company maintains inventories for goods in
transit which represent approximately 20 days of trading revenues.
Mr. Rufus
Decker
March 27,
2009
Page
13
In future
filings, the Company will add language similar to the following to its
discussion of critical accounting policies to clarify that the Company takes
title to all produce it trades and produces:
“The
Company takes title to all produce it trades and/or packages, and therefore,
records the inventory at the time title passes to the Company.”
Taking title to inventory
with reference to indicators of gross and net revenue identified in EITF
99-19
As noted
above, in both segments, the Company takes title to the produce it trades and/or
packages. The following paragraphs further address your query regarding our
consideration of gross and net revenue reporting with reference to the
applicable paragraphs of EITF 99-19.
Indicators of Gross Revenue
Reporting
Paragraph 7 - The Company is primary
obligor in the arrangement.
In both
the Food Products Technology and Commodity Trading segments, the Company is
responsible for all aspects of sales order fulfillment, including entering into
purchase contracts and commitments for raw materials, inspection and acceptance
of such materials at the manufacturing and shipping locations, conversion
through the manufacturing process of such raw product inputs into finished goods
inventory and the staging and shipping of the finished goods to the end
customer.
Paragraph 8 - The Company has general
inventory risk.
In both
the Food Products Technology and Commodity Trading segments, the Company is
responsible for all aspects of general inventory risk and experiences routine
shrinkage associated with such inventory management responsibilities for both
raw materials inputs and for finished goods until title for such goods is
transferred to the customer.
Paragraph 9 - The Company has latitude
in establishing price.
In both
the Food Products Technology and Commodity Trading segments, the Company is
responsible for negotiating pricing with its customers in the context of a
competitive market place.
Mr. Rufus
Decker
March 27,
2009
Page
14
Paragraph
10 - The Company changes the product or performs part of the
service.
In the
Food Products Technology segment, the Company converts raw product inputs
through the manufacturing process into finished goods inventory, which is then
sold to the customer.
In the
Commodity Trading segment, the Company procures the product through
relationships with suppliers, coordinates delivery of such product to an agreed
upon shipping point, and in some cases arranges for delivery of the product to
the customer through various methods including truck and ocean freight
carriers.
Paragraph 11 - The Company has
discretion in supplier selection.
In both
the Food Products Technology and Commodity Trading segments, the Company is
responsible for all supplier selection decisions including quality, price and
delivery terms. The Company has multiple suppliers for each raw
material item and purchases from each based on the best available terms and
availability of such raw materials.
Paragraph
12 - The Company is involved in the determination of product or service
specifications
In both
the Food Products Technology and Commodity Trading segments, the Company is
responsible, in coordination with its customers, for developing product
specifications with regard to product quality.
Paragraph 13 - The Company has physical
loss of inventory risk.
In both
the Food Products Technology and Commodity Trading segments, the Company has a
risk of physical loss of inventory and routinely experiences such losses,
primarily with regard to raw materials accepted and on hand which are subject to
spoilage or obsolescence.
Paragraph 14 - The Company has credit
risk.
In both
the Food Products Technology and Commodity Trading segments, the Company has
credit risk for all receivables and routinely evaluates its accounts receivable
for the probability of such loss. The Company is responsible for all
collection follow up and employs individuals whose responsibility it is to
effect collection of past due receivables.
The above
analysis regarding gross revenue eliminates the need for any additional
discussion regarding net revenue as it makes clear the Company’s position on
reporting gross revenue as a principal versus net revenue as an
agent.
Mr. Rufus
Decker
March 27,
2009
Page
15
Recent Accounting
Pronouncements, page 58
|
|
8.
|
Comment: We
note that you adopted of EITF 06-3 and that you record the expenses for
sales and use taxes to general and administrative expenses. The
Task Force reached a consensus that the presentation of taxes on either a
gross basis or a net basis is an accounting policy decision that should be
disclosed pursuant to Opinion 22. In addition, for any such
taxes that are reported on a gross basis, an entity should disclose the
amounts of those taxes in interim and annual financial statements for each
period for which an income statement is presented if those amounts are
significant. If necessary, please quantify these amounts as
required by EITF 06-3.
|
Response: The
Company is exempt from collection of sales and use taxes because all of its
revenue is derived from either the sale of produce items, which are exempt from
such taxes, or from licensing and royalty fees or from the supply of products to
customers who use those products to produce products for resale, which are also
exempt from such taxes. As EITF 06-3 does not appear to apply to the
Company, the Company plans to exclude any reference to this pronouncement in its
future filings.
2. Sale of
Fielder’s Choice Direct and License Agreement, page 59
|
|
9.
|
Comment: We
note that on December 31, 2006, you sold FCD to ASI, a wholly owned
subsidiary of Monsanto. On that same day you entered into a
five-year co- exclusive technology and polymer supply agreement with
Monsanto for the use of your Intellicoat polymer seed coating
technology. As a result of these transactions, you recorded
income from the sale of FCD, net of direct expenses and bonuses, of $22.7
million. We also note that you recorded a deferred gain of $10
million which will be recognized as revenue over five
years. Please provide the
following:
|
|
·
|
Tell
us the fair value of the technology licensing agreement and how such fair
value was determined.
|
|
·
|
Tell
us why you did not use the technology licensing agreement’s fair value to
allocate a portion of the $50 million FCD acquisition price to the license
agreement (e.g. based on the relative fair values of FCD and the licensing
agreement) rather than simply allocating the residual value to the
licensing agreement.
|
Response: Please
refer to the background regarding the Monsanto Transaction provided in the
beginning of the response to Comment 5.
Mr. Rufus
Decker
March 27,
2009
Page
16
(a) Additional
Background
The
assets of FCD comprised 97% of the assets of Landec Ag at the time of the sale
of FCD to Monsanto. After the sale of FCD, Landec Ag (which was
comprised only of the Intellicoat seed coating business) had $1.1 million of
assets which was primarily comprised of inventory of $480,000, which is being
sold to Monsanto at cost as it is used, and net PP&E of
$508,000. Concurrently, the Company entered into a license, supply
and R&D agreement (the “License Agreement”) with Monsanto under which the
Company licenses and supports its Intellicoat seed coating technology
(collectively the “Monsanto Transaction”).
The
following summarizes revenues and expenses associated with the License Agreement
(in
thousands):
|
Fiscal
Year Ended 5/27/07
|
Fiscal
Year Ended 5/25/08
|
|||||||
|
Revenues
from sale of inventories
|
$ | 131 | $ | 0 | ||||
|
Cost
of Sales on inventory sold
|
$ | 184 | $ | 0 | ||||
|
R&D
costs reimbursed by Monsanto
|
$ | 1,065 | $ | 1,496 | ||||
|
License
revenue
|
$ | 2,700 | $ | 5,400 | ||||
(b) Accounting Conclusion and
Basis for Conclusion
The
Company determined that there were multiple components included in the Monsanto
Transaction, comprised of (1) the disposition of a business (the sale of FCD),
(2) the issuance of a financial instrument (the Buy-Out Option) and (3) revenue
generating components associated with activities to be performed pursuant to the
License Agreement. The Company notes that there is no authoritative
accounting literature that specifies how the proceeds received or to be received
from a counterparty should be allocated to the various components of a
transaction that includes the disposition of a business, and components outside
of normal revenue recognition. The Company noted, however, that Mr. Joseph
McGrath of the Office of the Chief Accountant made certain remarks relating to
the accounting for multiple-element arrangements outside the area of revenue
recognition in a speech given at the 2006 AICPA National Conference on Current
SEC and PCAOB Developments. The Company considered available guidance
and determined that the proceeds of the Monsanto Transaction should be allocated
to the various elements described above to the extent practical based on fair
value evidence, and not based on contractually specified amounts.
Mr. Rufus
Decker
March 27,
2009
Page
17
Accordingly,
the Company obtained appraisals, for which management gained sufficient
understanding of the findings and results to take responsibility for the results
as used for accounting and reporting purposes, for the non-ongoing
(non-revenue) components of the transaction (i.e., the FCD disposition and
the Buy-Out Option) to determine their relative fair market
values. The values assigned to these components were objectively
determinable as comparative business information was readily available in order
to perform the appraisals. The fair market value of the FCD business
of $40 million was determined based upon the discounted cash flow method and by
using the market approach, which involved looking at the then available market
data (including market values, reported sales prices, revenue multiples and the
like) of other similarly situated, publicly traded companies in FCD’s line of
business. The fair value of the Buy-Out Option, which was ultimately determined
to be nominal, was determined utilizing market participant considerations. Its
nominal value was largely driven by the significant additional capital
investment that would be required by a market participant to operate Landec Ag
at anticipated seed coating volumes to reach long-term economic
viability.
For the
ongoing components of the transaction relating to the License Agreement, the
Company evaluated whether objective fair value evidence was available for
that element. The Company concluded that fair value of the License
Agreement was not readily available as provided by paragraph 16 of EITF
00-21. Paragraph 16 states that:
“the best evidence of fair value is the
price of a deliverable when it is regularly sold on a standalone basis. Fair
value evidence often consists of entity-specific or vendor-specific objective
evidence (VSOE) of fair value. As discussed in paragraph 10 of SOP 97-2, VSOE of
fair value is limited to (a) the price charged for a deliverable when it is sold
separately or (b) for a deliverable not yet being sold separately, the price
established by management having the relevant authority (it must be probable
that the price, once established, will not change before the separate
introduction of the deliverable into the marketplace). The use of VSOE of fair
value is preferable in all circumstances in which it is available. Third-party
evidence of fair value (for example, prices of the vendor’s or any competitor’s largely interchangeable products or
services in sales to similarly situated customers) is acceptable if VSOE of fair
value is not available.”
Given the proprietary and unique nature of the License Agreement, the
Company concluded that neither VSOE of fair value nor third-party evidence was
available to establish the fair value of the License Agreement with any degree of precision using
traditional valuation techniques for the following
reasons:
Mr. Rufus
Decker
March 27,
2009
Page
18
|
1)
|
The
licensed technology is proprietary to Landec and there is no other
technology remotely similar to Landec’s Intellicoat technology on the
market so there are no comparable transactions to refer to when attempting
to determine fair value.
|
|
2)
|
This
was Landec’s first ever
third-party license of its Intellicoat
technology.
|
|
3)
|
The
Company’s previous or existing arrangements have related to technologies
that have not reached commercial production prior to the execution of a
license arrangement. As a result, the Company did not have other license
and supply arrangements that represented a reasonable proxy for fair value
using traditional valuation
methodologies.
|
While the
Company concluded that a reasonable objective estimate of the fair value of
the License Agreement or its elements could not be determined using traditional
fair value methodologies, the Company considered the following
qualitative factors in concluding that the value allocated to the License
Agreement was a reasonable approximation of fair value:
|
1)
|
Monsanto’s
initial interest in entering into the transaction was the acquisition
of the direct marketing business platform associated with FCD. The direct
marketing concept was unique in the industry and represented a significant
opportunity for Monsanto to pursue alternate routes to market and sell its
own seed. As a result, the Company believed, based on their undersatnding
of what the buyer was interested in buying, that it was reasonable
that the majority of the transaction value was allocated to the sale of
the business.
|
|
2)
|
The
Company also considered its history of licensing technology and its
current and historical supply arrangements with other third parties,
noting that none involved proven technologies similar to the License
Agreement with Monsanto. While those arrangements typically involved
smaller amounts of license revenues and/or royalties, the Company
concluded that the value of the License Agreement was not unreasonable
given the proven viability of the Intellicoat technology and the market
share of Monsanto.
|
|
3)
|
The
Company felt that there was potential for large scale market acceptance of
the seed coating technology through its collaboration with Monsanto, one
of the countries largest seed producers, and as a result, believed that
there was substantial value in the License Agreement with this strategic
partner. The following factors were considered, however, in concluding
that the majority of the transaction value was attributable to the sale of
the business portion of the transaction as opposed to the License
Agreement:
|
|
i.
|
The Intellicoat technology
was still relatively new, and the broad adoption of the technology
in the market was
uncertain. As a result, its potential commercial success,
if any, was difficult
to determine. During fiscal year
2006, the last fiscal year prior to the sale of FCD, the sale of
Intellicoat coated seed products represented 3% of total Landec Ag
revenues. Revenues generated from the sale of Intellicoat
coated seed products for fiscal years 2006, 2005 and 2004 were $1.2
million, $1.2 million and $1.0 million,
respectively.
|
Mr. Rufus
Decker
March 27,
2009
Page
19
|
ii.
|
Monsanto had never tested the
Intellicoat technology prior to entering into the License Agreement and in
fact was skeptical that it had broad-based
commercialization potential based on the two then developed product
uses.
|
Accordingly,
the Company allocated amounts equaling the appraised fair value of the FCD
business to that element of the arrangement. Because the estimated
fair value of the Buy-Out Option was nominal, the Company allocated no
arrangement consideration to it, however, the $4 million of incremental proceeds
to be received in the event the Buy-Out Option is exercised, was deferred due to
its contingent nature. The remainder of the consideration received or
to be received from Monsanto was allocated to the License Agreement. The Company
believes that there is a market precision in valuing the business and that the
deferral amount related to the License Agreement is reasonable in the context of
the overall transaction and in consideration of the factors noted
above.
Under the Company’s approach, $22.7
million is reported as a gain, i.e. other income as opposed to revenue and gross
margin. Any other allocation method would result in an increase in revenue and
gross margin. The
Company’s allocation methodology also results in all of the discount in the
arrangement (if in fact there is any), being allocated to the future
revenue-generating activities, thus resulting in all future revenues being recognized
net of the discount in the Company’s reported revenue and gross profit in
future reporting periods.
Although the Monsanto Transaction
occurred in December 2006 and the Company’s decision as to the accounting for the
transaction was determined concurrently, management subsequently also considered the remarks made by Mr.
Eric West of the Office of the Chief Accountant at the 2007 AICPA
National Conference on Current SEC and PCAOB Developments, at which he
discussed analogizing to the
provisions of EITF 00-21 for accounting for litigation settlements, another situation where components
exist and are not revenue arrangements.
In his remarks, Mr. West stated (references
omitted):
“An
additional challenge that may arise when accounting for a litigation settlement
is determining the proper allocation of consideration among the recognizable
elements. While EITF 00-21 was written for multiple element revenue
arrangements, we believe that its allocation guidance is also useful to
determine how to allocate consideration paid in a multiple element legal
settlement. In this regard, we believe that it would be acceptable to value each
element of the arrangement and allocate the consideration paid to each element
using relative fair values. To the extent that one of the elements of
the arrangement just can’t be valued, we believe that a residual approach may be
a reasonable solution. In fact, we have found that many companies are
not able to reliably estimate the fair value of the litigation component of any
settlement and have not objected to judgments made when registrants have
measured this component as a residual. In a few circumstances
companies have directly measured the value of the litigation settlement
component. In the fact pattern that I just described, the company may
be able to calculate the value of the settlement by applying a royalty rate to
the revenues derived from the products sold using the patented technology during
the infringement period. Admittedly, this approach requires judgment
and we are willing to consider reasonable judgments.”
Mr. Rufus
Decker
March 27,
2009
Page
20
The Company believes that the method followed of allocating value to the
components is appropriate and reasonable based on its specific
facts, and consistent with the limited existing authoritative guidance applicable to
such a transaction, including SEC stated views.
|
|
10.
|
Comment: We
note that in conjunction with the sale of FCD, you purchased all of the
outstanding common stock and options of Landec Ag not owned by you at the
fair market value of each share as if all options had been exercised as of
December 1, 2006 of $7.4 million. You indicate that the
repurchase of Landec Ag’s outstanding common stock and options was
recorded to retained earnings as the repurchase occurred after the sale of
FCD to Monsanto. Clarify why the sale of FCD to Monsanto
impacted your accounting for the acquisition of Landec Ag common stock and
options. Please clarify herein and Note 9 Stockholders’ Equity
- Shares Subject to Vesting whether the subsequent reclassification of
$4.8 million from retained earnings to goodwill is a correction of an
error. If so, please fully address the guidance in SAB Topic 1M
and SFAS 154.
|
Response: In
conjunction with and immediately following the sale of FCD to Monsanto, the
Company repurchased all of the fully vested outstanding options (477,700) and
common stock (850,528) of Landec Ag at the fair market value of each share as
determined by management. The options were repurchased net of the
exercise price for a total purchase price of $2,549,000. After the
repurchase, Landec Ag became a wholly owned subsidiary of Landec.
Though
the repurchase of the Landec Ag common stock and options occurred at the same
time as the sale of FCD to Monsanto, the sale of FCD to Monsanto did not have an
impact on the accounting for the repurchase of the Landec Ag common stock and
options.
Mr. Rufus
Decker
March 27,
2009
Page
21
The
Company’s reclassification of $4.8 million from retained earnings to goodwill
was a correction of an error. The error was a result of applying FAS 123R to the
repurchase of Landec Ag’s common stock rather than applying FAS 141. Upon
identification of the error, the Company recorded the reclassification and
disclosed it in the footnotes to the Company’s financial
statements.
In
connection with the reclassification, management considered both the
quantitative and qualitative impact of the error in accordance with SAB Topic 1M
as follows:
Quantitative
Considerations
The
increase in goodwill of $4.8 million is not considered significant to the
overall understanding of the Company’s financial position or results of
operations as the effect on current assets, total assets, and shareholders’
equity of less than 5% is not considered to be significant. Further,
there is no impact on the Company’s Statement of Income.
Qualitative
Considerations
SAB 99
and SAB Topic 1M provide a list of factors that should be considered in
determining whether a qualitative factor renders a misstatement
material. The Company has addressed each of these factors below, as
it relates to the reclassification.
Does
the misstatement arise from an item capable of precise measurement or does it
arise from an estimate and if so, the degree of imprecision inherent in the
estimate?
The error
is capable of precise measurement and does not involve judgments or extensive
estimates.
Does
the misstatement mask a change in earnings or other trends and does the
misstatement change a loss into income or vice versa?
No. There
is no impact to earnings of the reclassification of $4.8 million from retained
earnings to goodwill. As such, the error does not mask any trends in
results.
Does
the misstatement hide a failure to meet analysts’ consensus expectations for the
enterprise?
Mr. Rufus
Decker
March 27,
2009
Page
22
No. There
is no impact to earnings resulting from the reclassification of $4.8 million
from retained earnings to goodwill. As such, the error does not impact measures
relevant in establishing analysts’ consensus expectations.
Does
the misstatement concern a segment or other portion of the registrant’s business
that has been identified as playing a significant role in the registrant’s
operations or profitability?
Yes, the
misstatement does relate to an identifiable segment, however, it does not impact
the segment’s operations or profitability.
Does
the misstatement affect the registrant’s compliance with loan covenants or other
contractual requirements?
No. The
Company recalculated the covenants for FY08 and FY07 after taking the
reclassification into account and the Company remains in compliance with its
debt covenants.
Does
the misstatement have the effect of increasing management’s compensation – for
example, by satisfying requirements for the award of bonuses or other forms of
incentive compensation?
No. The
misstatement had no effect on management’s compensation.
Does
the misstatement involve concealment of an unlawful transaction?
No. There
is no indication of any of the errors involving the concealment of an unlawful
transaction.
Does
management expect a significant positive or negative market reaction to the
disclosure of this misstatement?
No. As
management has determined the errors not to be significant in all years
affected, it did not believe there would be a reaction from the market to this
reclassification as it affected the Company’s balance sheet only, with no change
to operations. Further, the repurchase of the minority interest in Landec Ag was
extensively disclosed and discussed with investors, analysts and ratings
agencies at the time of the repurchase, and therefore, the reclassification of
amounts related to goodwill out of accumulated deficit were not expected to
impact the market’s reaction or its perception of the related transaction or the
impact of the reclassification on Company operations.
|
|
11.
|
Comment: You
made references on pages 11 and 59 to the use of an independent appraiser
in determining the fair value of FCD. Please tell us the nature
and extent of the appraiser’s involvement and tell us whether you believe
they were acting as an expert as defined in the Securities Act of
1933. If these actuaries are experts, you must delete your
reference to them or name the
parties.
|
Mr. Rufus
Decker
March 27,
2009
Page
23
Response: The
Company does not believe that the independent appraiser was acting as an expert
for purposes of the Securities Act of 1933. The independent appraiser
was engaged by the Company to determine the fair value of
FCD. Management, however, gained a sufficient understanding of the
findings and results of the independent appraiser to take responsibility for the
results as used for accounting and reporting purposes. As such, the Company will
remove any reference to the independent appraiser in all future
filings.
Recent Accounting
Pronouncements, page 58
|
|
12.
|
Comment: You
indicate that if Monsanto elects to purchase the stock of Landec Ag, a
gain or loss on the sale of the stock of Landec Ag will be recognized at
the time of purchase. Based on the fair value of Landec Ag as
of the latest balance sheet presented, disclose the estimated gain or loss
that would be recognized.
|
Response: Please
refer to the background regarding the Monsanto Transaction provided in the
beginning of the response to Comment 5.
Based on
the terms of the License Agreement and the fact that Monsanto (1) may elect to
accelerate the purchase of Landec Ag or (2) may elect to terminate the agreement
before the end of the term of the License Agreement or (3) may or may not elect
to purchase Landec Ag at the end of the term, results in significant uncertainty
as to the final outcome of the License Agreement. As such, the
Company does not believe it would be appropriate to provide disclosure at this
point of the estimated gain or loss on the potential sale of Landec
Ag.
License Agreements, page
61
|
|
13.
|
Comment: You
indicate that on November 22, 2006 you received an additional 800,000
shares of preferred stock of Aesthetic Sciences. Clarify why,
as you indicate, the receipt of those additional shares did not change
your 19.9% ownership interest in Aesthetic
Sciences.
|
Response: In
accordance with the Series A Preferred Stock Purchase Agreement among Aesthetic
Sciences and the investors which were signatories to that agreement (including
Landec), Aesthetic Sciences agreed that if a specific milestone were met, (a)
the investors would be required to purchase additional shares of Series A
Preferred Stock of Aesthetic Sciences and (b) Landec would be entitled to
anti-dilution protection and would receive additional shares of Series A
Preferred Stock to maintain Landec’s 19.9% ownership of Aesthetic
Sciences. The milestone was met and on November 22, 2006, the
investors purchased an additional 3,230,000 shares of Series A Preferred Stock
and Landec received approximately 800,000 shares of Series A Preferred Stock so
that it would continue to have a 19.9% ownership interest in Aesthetic
Sciences.
Mr. Rufus
Decker
March 27,
2009
Page
24
|
|
14.
|
Comment: You
indicate that on May 14, 2006, you entered into an exclusive license and
research and development agreement with Air Products and Chemicals,
Inc. You also indicate that in 2008 an amendment was entered
into whereby certain technology applications were re-acquired as well as
the elimination of an existing claim in order to refine the existing
relationship. As a result, you recorded a $600,000 expense to
selling, general and administrative expense during the year ended May 25,
2008. Please disclose the nature of the certain technology
applications you required and the existing claim as well as the facts and
circumstances that resulted in a $600,000 expense. Please cite
the accounting literature used to support our
conclusions.
|
Response: On March
14, 2006, the Company entered into an exclusive License and Research and
Development Agreement (the “Original Agreement”) with Air Products and
Chemicals, Inc. (“APD”).
As part
of the Original Agreement, the parties agreed to an “impairment clause” for the
first 3 years cumulatively (i.e. the period from inception through March 2009).
The clause stated that if APD projected revenues were less than what was
originally forecast, APD was allowed to recover the gross profit impact of the
revenue shortfall from Landec. The Original Agreement provided for recovery of
the amounts through a net settlement against amounts due to Landec under the
terms of the agreement. The method of satisfying amounts due to APD under the
impairment clause was negotiated as a matter of convenience (i.e. to avoid the
exchange of payments and instead allow for net settlement) given that profit
sharing payments were expected to exceed the maximum impairment that could exist
under the terms of the arrangement.
On May
23, 2008, the parties agreed to amend certain of the terms in the Original
Agreement (the “Amended Agreement”). In addition to other minor
modifications, the Amended Agreement included the following:
|
1.
|
APD
agreed to return to Landec all rights APD had to two formerly licensed
fields (i.e. applications of polymer technologies) – coatings and
electronic material applications, so that Landec could pursue other
opportunities relating to those
fields.
|
|
2.
|
The
parties agreed to eliminate the impairment
clause.
|
Mr. Rufus
Decker
March 27,
2009
Page
25
The
fields that Landec regained control over as a result of the amendment to the
Original Agreement were fields that APD had exclusive rights to under the
Original Agreement. However, APD had not developed any applications
of polymer technologies for those fields, was not selling or licensing any
products related to the licensed materials in those fields and did not have any
concrete plans to focus on the development of any such products or
applications. Landec repurchased the rights to these technologies
because it was believed that licensing opportunities existed with other entities
that could result in the opportunity to pursue alternate methods of deriving
revenues from those fields.
In
addition, it was decided that the impairment clause which the parties eliminated
from the Original Agreement was not providing the appropriate incentive to APD
to exceed forecasts. There were concerns that the impairment clause could result
in tensions between the parties regarding revenues falling short of forecasts,
causing deterioration in the overall relationship between Landec and
APD. As a result, APD and Landec decided to eliminate the clause to
improve their working relationship and foster a more collaborative
environment.
The
parties agreed that the value of the amendments to the Original Agreement was
approximately $600,000, which was paid by Landec to APD. Landec believed that
the value was largely attributable to regaining control over the licensed fields
to pursue alternate methods of deriving licensing revenue, and was based upon
Landec’s history of generating revenue through license arrangements well in
excess of $600,000, even in situations where long-term product development had
not prevailed. The payment was not considered a reduction in revenue associated
with the ongoing arrangement with APD under the provisions of EITF 01-09. Landec
considered whether a portion of the value should be attributed to the
elimination of the impairment clause, and therefore be recorded as a reduction
to revenue, but concluded that the amount would be minor based upon the value
expected from the reacquired control over the licensed fields.
Definitive Proxy Statement
filed on September 2, 2008
Executive Compensation and
Related Information, page 29
Compensation Discussion and
Analysis, page 29
Base Salaries, page
30
|
|
15.
|
Comment: Please
tell us, with a view toward future disclosure, how you reconcile your
statement that “the Committee expects that the base salaries should be in
the mid to upper quartile of the range of base salaries for comparable
positions” with your “goal . . . to target base pay at the
median level (that is, the 50th percentile),” as disclosed in the first
full paragraph on page 30.
|
Mr. Rufus
Decker
March 27,
2009
Page
26
Response: The
Company’s goal is to target base pay at the median level or the 50th percentile
of its peer group. However, as indicated in the proxy statement, the
Company, in determining base salary, also considers factors such as external
pressures to attract and retain talent and market conditions generally, which
may result in the need to pay higher base salaries. Accordingly, to
attract and retain the level of talent necessary for the Company to succeed, it
expects that it will need to pay base salaries at or above the 50th
percentile of the range of base salaries for comparable positions.
The
Company will make clarifying changes in its future filings to address this
comment.
FORM 1O-Q FOR THE QUARTERLY
PERIOD ENDED NOVEMBER 30, 2008
General
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16.
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Comment: Please
address the above comments in your interim filings as
well.
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Response: To the
extent applicable, the Company will reflect its responses to your comments in
its future interim filings.
* * *
Mr. Rufus
Decker
March 27,
2009
Page
27
Attached
to this response please find a statement from the Company acknowledging those
items set forth in your letter.
Please
call the undersigned at (415) 315-6364 if you have any questions.
/s/
Geoffrey P. Leonard
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Gary
T. Steele
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Gregory
S. Skinner
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ACKNOWLEDGEMENT
The
undersigned, Gregory Skinner, hereby acknowledges on behalf of Landec
Corporation, a Delaware corporation (the “Company”), that in connection with
responding to the comments of the Securities and Exchange Commission (the “SEC”)
dated February 27, 2009:
1. The
Company is responsible for the adequacy and accuracy of the disclosure in its
filings with the SEC;
2. Staff
comments or changes to disclosure in response to staff comments do not foreclose
the SEC from taking any action with respect to the filing; and
3. The
Company may not assert staff comments as a defense in any proceeding initiated
by the SEC or any person under the federal securities laws of the United
States.
| LANDEC CORPORATION | |||
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/s/ Gregory Skinner | |
| Gregory Skinner, Chief Financial Officer | |||