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Note 2 - Acquisition of Lifecore Biomedical, Inc.
 6 Months Ended
Nov. 27, 2011
Mergers, Acquisitions and Dispositions Disclosures [Text Block]
2.           Acquisition of Lifecore Biomedical, Inc.

On April 30, 2010 (the “Acquisition Date”), the Company acquired all of the common stock of Lifecore Biomedical, Inc. (“Lifecore”) under a Stock Purchase Agreement (“Purchase Agreement”) in order to expand its product offerings and enter into new markets.  Lifecore was a privately-held hyaluronan-based biomaterials company located in Chaska, Minnesota.  Lifecore is principally involved in the development and manufacture of products utilizing hyaluronan, a naturally occurring polysaccharide that is widely distributed in the extracellular matrix of connective tissues in both animals and humans.

Under the Purchase Agreement, the aggregate consideration payable by the Company to the former Lifecore stockholder at closing consisted of $40.0 million in cash, which included $6.6 million that is held in an escrow account to secure the Company’s rights with regards to indemnification, representations, warranties and covenants included in the Purchase Agreement.  The escrow account is in the name of the seller and Landec’s rights under the escrow agreement consist solely of its ability to file a claim against the escrow.  Half of the escrow, or $3.3 million, was released and paid to the former Lifecore shareholder in May 2011.  In addition, the Company may be required to pay up to an additional $10.0 million in earn out payments in the event that Lifecore achieves certain revenue targets in calendar years 2011 and 2012.

The acquisition date fair value of the total consideration transferred was $49.65 million, which consisted of the following (in thousands):

Cash
  $ 40,000  
Contingent consideration
    9,650  
   Total
  $ 49,650  

The assets and liabilities of Lifecore were recorded at their respective estimated fair values as of the date of the acquisition using generally accepted accounting principles for business combinations. The excess of the purchase price over the fair value of the net identifiable assets acquired has been allocated to goodwill. Goodwill represents a substantial portion of the acquisition proceeds because of the workforce in-place at acquisition and because of Lifecore's long history and future prospects. Management believes that there is further growth potential by extending Lifecore's product lines into new channels.

The following table summarizes the estimated fair values of Lifecore’s assets acquired and liabilities assumed and related deferred income taxes, effective April 30, 2010, the date the Company obtained control of Lifecore (in thousands).

       
Cash and cash equivalents
  $ 318  
Accounts receivable, net
    1,860  
Inventories, net
    9,009  
Property and equipment
    25,529  
Other tangible assets
    1,455  
Intangible assets
    7,900  
   Total identifiable assets acquired
    46,071  
Accounts payable and other liabilities
    (2,983 )
Long-term debt
    (4,157 )
Deferred taxes
    (3,162 )
   Total liabilities assumed
    (10,302 )
        Net identifiable assets acquired
    35,769  
Goodwill
    13,881  
        Net assets acquired
  $ 49,650  

The Company used a combination of the market and cost approaches to estimate the fair values of the Lifecore assets acquired and liabilities assumed.  During the measurement period (which is not to exceed one year from the acquisition date), the Company is required to retrospectively adjust the provisional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date.  The Company has finalized the fair values of the acquired assets and assumed liabilities and  completed the purchase price allocation as of April 30, 2011.

Inventory

A step-up in the value of inventory of $523,000 was recorded in the allocation of the purchase price based on valuation estimates.  During the three and six months ended November 28, 2010, $132,000 and $294,000, respectively, of this step-up was charged to cost of products sold as the inventory was sold.  The entire step up was charged to cost of product sold during fiscal years 2010 and 2011 and no step up remained in inventory as of May 29, 2011.

Intangible Assets

The Company identified two intangible assets in connection with the Lifecore acquisition: trade names valued at $4.2 million, which is considered to be an indefinite life asset and therefore will not be amortized; and customer base valued at $3.7 million with a twelve year useful life. The trade name intangible asset was valued using the relief from royalty valuation method and the customer relationship intangible asset was valued using the multi-period excess earnings method.

Goodwill

The excess of the consideration transferred over the fair values assigned to the assets acquired and liabilities assumed was $13.9 million.  The goodwill can be attributable to the work force in place at the time of the acquisition and to Lifecore’s long history and future prospects.  None of the goodwill is expected to be deductible for income tax purposes.  The Company will test goodwill for impairment on an annual basis or more frequently, if deemed necessary.

Liability for Contingent Consideration

In addition to the cash consideration paid to the former shareholder of Lifecore, the Company may be required to pay up to an additional $10.0 million in earn out payments based on Lifecore achieving certain revenue targets in calendar years 2011 and 2012.  The fair value of the liability for the contingent consideration recognized on the acquisition date was $9.93 million and $9.84 million, as of November 27, 2011 and May 29, 2011, respectively, and is classified in other accrued liabilities in the Consolidated Balance Sheets.  The Company projects that it will pay the entire $10 million earn out in late fiscal year 2012 or early fiscal year 2013.