This document consists of 26 pages, of which this is page number 1.
The index to Exhibits is on Page 25.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED JANUARY 30, 2000, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ________ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 HAVEN AVENUE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 306-1650
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for at least the past 90 days.
Yes X No
--- ---
As of March 6, 2000, there were 15,929,126 shares of Common Stock and
166,667 shares of Convertible Preferred Stock, convertible into ten shares
of Common Stock for each share of Preferred Stock, outstanding.
-1-
LANDEC CORPORATION
FORM 10-Q For the Quarter Ended January 30, 2000
INDEX
Page
Facing sheet 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. a) Consolidated condensed balance sheets as of January 30, 2000 and
October 31, 1999 3
b) Consolidated statements of operations for the three months ended
January 30, 2000 and January 31, 1999 4
c) Consolidated statements of cash flows for the three months ended
January 30, 2000 and January 31, 1999 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
a) Exhibits 23
b) Reports on Form 8-K 23
Signature 24
Index to Exhibits 25
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
JANUARY 30, OCTOBER 31,
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,376 $ 3,203
Accounts receivable, less allowance for
doubtful accounts of $1,307 and $45 at
January 30, 2000 and October 31, 1999 17,191 2,952
Inventory 17,083 7,641
Investment in farming activities 1,249 --
Notes and advances receivable 6,755 --
Notes receivable, related party 143 138
Prepaid expenses and other current assets 1,928 2,233
------------ ------------
Total Current Assets 52,725 16,167
Property and equipment, net 26,487 11,002
Intangible assets, net 38,367 13,506
Non-current portion of notes receivable 1,180 --
Other assets 1,564 33
------------ ------------
$ 120,323 $ 40,708
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 18,204 $ 1,687
Grower payables 5,886 --
Related party payables 231 --
Accrued compensation 1,808 1,036
Other accrued liabilities 6,930 1,327
Deferred revenue 7,487 2,135
Line of credit 5,000 --
Current maturities of long term debt 2,917 125
------------ ------------
Total Current Liabilities 48,463 6,310
Long term debt, less current maturities 18,774 2,637
Other non-current liabilities 1,152 --
Minority interest 1,134 --
------------ ------------
Total Liabilities 69,523 8,947
Shareholders' Equity:
Preferred stock 9,149 --
Common stock 89,913 77,289
Accumulated deficit (48,262) (45,528)
------------ ------------
Total Shareholders' Equity 50,800 31,761
------------ ------------
$ 120,323 $ 40,708
============ ============
SEE ACCOMPANYING NOTES.
-3-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
----------------------------
JANUARY 30, JANUARY 31,
2000 1999
------------ ------------
Revenues:
Product sales $ 22,062 $ 4,345
Services revenue 11,046 --
Services revenue, related party 559 --
Research and development revenues 130 194
License fees -- 750
------------ ------------
Total revenues 33,797 5,289
Cost of revenue:
Cost of product sales 18,776 3,013
Cost of product sales, related party 58 --
Cost of services revenue 10,700 --
------------ ------------
Total cost of revenue 29,534 3,013
Gross profit 4,263 2,276
Operating costs and expenses:
Research and development 1,051 1,456
Selling, general and administrative 5,758 2,544
------------ ------------
Total operating costs and expenses 6,809 4,000
------------ ------------
Operating loss (2,546) (1,724)
Interest income 142 141
Interest expense (330) (58)
------------ ------------
Net loss $ (2,734) $ (1,641)
============ ============
Basic and diluted net loss per share $ (.18) $ (.12)
============ ============
Shares used in computing basic and diluted net loss
per share 15,081 13,210
============ ============
SEE ACCOMPANYING NOTES.
-4-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
----------------------------
JANUARY 30, JANUARY 31,
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $ (2,734) $ (1,641)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,193 519
Amortization of deferred compensation -- 29
Changes in current assets and liabilities:
Accounts receivable 1,048 (22)
Inventory (4,969) (4,076)
Investment in crops 781 --
Prepaid expenses and other current assets 1,503 (493)
Accounts payable 2,365 (230)
Grower payables (835) --
Related party payables 231 --
Accrued compensation (364) (144)
Other accrued liabilities (2,265) (153)
Deferred revenue 5,352 5,340
------------ ------------
Total adjustments 4,040 770
------------ ------------
Net cash provided by (used in) operating activities 1,306 (871)
------------ ------------
Cash flows from investing activities:
Decrease in other assets and liabilities 221 --
Purchases of property and equipment (1,173) (801)
Increase in notes receivable and advances (2,609) --
Acquisition of Apio, Inc., net of cash received (5,813) --
Maturities of available-for-sale securities -- 989
------------ ------------
Net cash provided by (used in) investing activities: (9,374) 188
------------ ------------
Cash flows from financing activities:
Proceeds from sale of preferred stock 9,149 --
Proceeds from sale of common stock 211 199
Repayment of notes receivable from shareholders -- 291
Borrowings on line of credit 5,000 --
Repayment of long term debt (851) (4)
Distributions to minority interest (268) --
------------ ------------
Net cash provided by financing activities 13,241 486
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,173 (197)
Cash and cash equivalents at beginning of period 3,203 9,185
------------ ------------
Cash and cash equivalents at end of period $ 8,376 $ 8,988
============ ============
SEE ACCOMPANYING NOTES.
-5-
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Landec
Corporation ("Landec") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
to present fairly the financial position, results of operations, and cash flows
at January 30, 2000, and for all periods presented, have been made. Although
Landec believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information normally
included in financial statements and related footnotes prepared in accordance
with generally accepted accounting principles have been condensed or omitted per
the rules and regulations of the Securities and Exchange Commission. The
accompanying financial data should be reviewed in conjunction with the audited
financial statements and accompanying notes included in Landec's Annual Report
on Form 10-K for the fiscal year ended October 31, 1999.
The results of operations for the three month period ended January 30,
2000 are not necessarily indicative of the results that may be expected for the
fiscal year ended October 29, 2000. For instance, due to the cyclical nature of
the corn seed industry, a significant portion of Fielder's Choice Direct's
("Fielder's Choice") revenues and profits will be concentrated over a few months
during the spring planting season (generally during the Landec's second fiscal
quarter).
2. RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial
statements to conform to the current year presentation.
3. RESEARCH AND DEVELOPMENT EXPENSES
Costs related to both research contracts and Landec funded research is
included in research and development expenses as incurred. Costs to fulfill
research contracts generally approximate the corresponding revenue.
4. ACQUISITION
On December 2, 1999, Landec acquired Apio, Inc. and certain related
entities ("Apio"), located in Guadalupe, California, one of the nation's leading
marketers and packers of produce and specialty packaged fresh-cut vegetables.
Upon closing, Landec paid $21.0 million in cash and stock, before expenses, for
Apio, which will operate as a wholly owned subsidiary of Landec. In addition,
the agreement provides for future payments to the former owners of Apio of up to
$16.75 million. These payments consist of a) up to $10.0 million which will be
paid out over two years to one of the former owners and current CEO of Apio if
Apio exceeds certain earning targets in fiscal years 2000 and 2001, b) $5.3
million non-interest bearing obligation which will be paid in equal annual
installments over the next five years (recorded at $4.1 million on a discounted
basis), c) up to $1.25 million if Landec's common stock is trading at an average
price below $6.00 per share during the last twenty trading days of the nine
month period after the closing and d) up to $200,000, which has been recorded as
a liability, upon the collection of certain notes receivable, $100,000 of which
was determined on March 2, 2000 will not be paid. The transaction was accounted
for as a purchase. The purchase price has been allocated to the acquired assets
and liabilities based on their relative fair market values, subject to final
adjustments. These allocations are based on independent valuations and other
studies.
-6-
The following is a summary of the purchase price allocation (in
thousands); the final values may differ from those set forth below.
Net assets and liabilities $ 2,014
Customer base 1,821
Work force in place 1,395
Trademark 9,100
Goodwill 12,767
--------
$ 27,097
========
The acquisition by Landec of all the outstanding capital stock of Apio was
exchanged for the following:
(IN THOUSANDS)
--------------
Landec common stock $ 12,071
Contractual deferred obligations 4,092
Cash paid or set aside as a liability at closing 9,100
--------
Purchase price before acquisition costs 25,263
Estimated acquisition costs 1,834
--------
Total estimated purchase price $ 27,097
========
Cash consideration of $750,000 and 401,667 shares of the equity
consideration has been set aside in escrow to cover costs associated with
outstanding obligations of Apio as well as any potential breach of
representations and warranties made by the former owners of Apio in connection
with the acquisition.
To fund the transaction, Landec issued 2.5 million shares of common stock
to the prior owners of Apio. Apio replaced a portion of its existing bank debt
with a $11.25 million term note and entered into a new $12 million line of
credit agreement with a bank. Existing debt of $3.7 million was assumed in the
transaction. In a separate transaction, Landec sold $10 million ($9.1 million
net of issuance costs) of convertible preferred stock (convertible into
1,666,670 shares of Common Stock) to a private, long-term, investor at a $6.00
per share equivalent price. Under the terms of these transactions, Landec has
agreed to use reasonable efforts to effect the registration of approximately 2.5
million shares of Landec common stock by March 31, 2000.
The results of operations and cash flows for the three months ended
January 30, 2000 include the results of Apio from November 29, 1999 through
January 30, 2000.
The following pro forma summary of consolidated revenues, net loss and net
loss per share for the three months ended January 30, 2000 and January 31, 1999
assumes the acquisition occurred on November 1, 1998. These pro forma results
have been prepared for comparative purposes only and are not necessarily
indicative of Landec's financial results if the acquisition had taken place at
the beginning of fiscal year 1999 or of future results.
THREE MONTHS ENDED
-------------------------
JANUARY 30, JANUARY 31,
2000 1999
-------------------------
Revenue $ 48,075 $ 42,340
Net loss $ (2,829) $ (1,935)
Net loss per share $ (.18) $ (.12)
-7-
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market and consisted of the following:
JANUARY 30, JANUARY 31,
2000 1999
------------- -------------
Finished goods........... $ 15,614 $ 6,169
Raw material............. 989 1,015
Work in process.......... 480 457
------------- -------------
$ 17,083 $ 7,641
============= =============
6. INVESTMENT IN FARMING ACTIVITIES
Landec, through its Apio subsidiary, invests in certain farming
activities. The investments consist of cash advances to growers for expenses to
be incurred during the growing season, in exchange for a percentage ownership in
the crops. Net income or loss is generally recognized on these investments based
on Landec's percentage ownership of the net proceeds of the crops as fields are
closed. Additionally, certain farming agreements contain provisions wherein
Landec bears the risk of loss if the net proceeds from the crops are not
sufficient to cover the expense incurred. For the period ended January 30, 2000
net losses of $541,000 were recognized and included in the cost of product sales
in the consolidated statements of operations.
7. NOTES RECEIVABLE
Notes receivable and advances at January 30, 2000 consisted of the
following (in thousands):
Various notes receivable from growers, with principal and
interest ranging from the prime rate plus .5% to the prime
rate plus 3%, payments to be withheld from proceeds derived
from crops, due through December 2000, secured by crops $ 5,728
Various non interest bearing advances receivable from growers,
payment to be withheld from proceeds derived from crops, due
through December 2000, secured by crops 464
Various notes receivable from growers, with principal and
interest bearing 14%, payments to be withheld from proceeds
derived from crops, due through December 2000, secured by
crops 367
Unsecured grower note receivable with interest at a certain
bank's prime rate (8.50% at January 30, 2000) plus 2% 322
Note receivable due from grower in annual installments of
$60,714 plus interest at prime rate plus 1.0% with final
payment due November 1, 2004, secured by crops 303
Note receivable due from grower in annual installments of
$20,000 plus interest at prime rate plus 1.0%, with final
payment due February 2005, secured by crops 285
Various notes receivable from growers bearing no interest on
cartons in inventory. Payments to be withheld based on
cartons used, due through December 2000, secured by residual
inventories 167
Various unsecured notes receivable due from individuals and
companies, bearing interest from 8.50% to 9%, due December
2000 73
Other 869
--------
8,578
Less allowance for doubtful notes (643)
--------
7,935
Less current portion of notes receivable (6,755)
--------
Non-current portion of notes receivable $ 1,180
========
-8-
Landec is obligated to make additional loans to growers under certain of
these note receivable agreements. At January 30, 2000, Landec had outstanding
commitments to fund up to an additional $2.5 million to growers under these
existing note receivable agreements.
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JANUARY 30, OCTOBER 31,
2000 1999
------------ ------------
Land and buildings................................. $ 11,856 $ 3,945
Leasehold improvements............................. 1,487 1,372
Computer, machinery, equipment and autos........... 14,856 8,155
Furniture and fixtures............................. 1,683 592
Construction in process............................ 2,179 1,173
------------ ------------
32,061 15,237
Less accumulated depreciation and amortization..... (5,574) (4,235)
------------ ------------
$ 26,487 $ 11,002
============ ============
9. INTANGIBLES
Intangible assets consist of the following (in thousands):
JANUARY 30, OCTOBER 31,
2000 1999
------------ ------------
Developed technology.............................. $ 5,036 $ 5,036
Trademark......................................... 14,075 4,975
Customer base..................................... 4,217 2,396
Workforce in place................................ 2,305 910
Covenants not to compete.......................... 277 277
Goodwill.......................................... 15,616 2,509
------------ ------------
41,526 16,103
Less accumulated depreciation and amortization.... (3,159) (2,597)
------------ ------------
$ 38,367 $ 13,506
============ ============
The intangible assets are being amortized over five to twenty years based on
their individually estimated useful lives.
10. GROWER PAYABLE
Landec, through its Apio subsidiary, contracts with growers to harvest,
pack, cool and distribute their products. The grower payable is the net of the
market value of the products received from the growers and the corresponding
charges by Landec for services rendered on behalf of the growers.
-9-
11. DEBT
REVOLVING DEBT
Apio has a revolving note agreement with a bank which allows for
borrowings up to a maximum of $12.0 million. Outstanding amounts bear interest
at the greater of the prime rate set by the bank or the Federal fund rate (8.75%
at January 30, 2000) plus a margin based on Apio's leverage ratio as defined in
the revolving note agreement, currently plus .50%. The revolving note agreement
expires on May 1, 2002. At January 30, 2000, $5.0 million was outstanding under
the revolving note.
Dock Resins Corporation ("Dock Resins"), a wholly-owned subsidiary of
Landec, has a revolving line of credit which allows for borrowings of up to
$1.25 million. The interest rate on the revolving line of credit is principally
charged at the one-month LIBOR rate plus 1.75%. The revolving line of credit
expires on February 28, 2002, and contains certain restrictive covenants, which,
among other things, require Dock Resins to maintain minimum levels of net
working capital and tangible net worth. No amounts were outstanding on the
revolving line of credit at January 30, 2000.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JANUARY 30, OCTOBER 31,
2000 1999
------------ ------------
Bank term loan for Apio; due in initial quarterly payment
of $500,000 beginning April 30, 2000 increasing to
$562,500 January 31, 2001 and to $625,000 on January 31,
2002 through October 31, 2004 with interest payable
monthly at 7.02% plus a margin based on Apio's leverage
ratio as defined in the loan agreement, currently plus 2.5% $ 11,250 $ --
Contractual obligation to former owners of Apio; due in
annual installments of $1,060,000 beginning January 2,
2001 through January 2, 2005 (see Note 4) 4,092 --
Bank term loan for Dock Resins; due in monthly installments
of $15,278 including interest at 8.19% beginning
February 1, 1999 through January, 2006 with the balance
due January 31, 2006 2,670 2,678
Note payable of Apio to a commercial finance company; due
in monthly installments of $13,366 including interest at
7.0% with final payment due December 2019 1,378 --
Note payable of Apio to a bank; due in monthly installments
of $8,008 including interest at 9.5% with final payment
due December 2015 875 --
Various notes payable with interest rates ranging from
7.54% to 10.82% 971 84
Capitalized lease obligations with interest rates ranging
from 9.15% to 12.99% 455 --
------------ ------------
21,691 2,762
Less current portion (2,917) (125)
------------ ------------
$ 18,774 $ 2,637
============ ============
-10-
Maturities of long-term debt, including obligations under capital lease
agreements, from February 1 to January 30 of each year presented are as follows
(in thousands):
FY 2000............................. $ 2,917
FY 2001............................. 2,925
FY 2002............................. 3,894
FY 2003............................. 3,622
FY 2004............................. 3,608
Thereafter.......................... 4,725
----------
$ 21,691
==========
The contractual obligation of $5.3 million to former shareholders of Apio
is non-interest bearing and accordingly has been discounted at Apio's
incremental borrowing rate of 9.5% over five years resulting in a discounted
value of $4,092,000.
Dock Resins' bank term loan limits dividend payments and contains various
financial covenants including minimum working capital levels, net worth and debt
service ratio.
Apio's bank term loan limits payments to Landec for dividends,
corporate service fees and tax sharing expenses until the principal is
reduced to an amount specified in the loan agreement. In addition, the term
loan and the revolving note contain various financial covenants including
minimum levels of EBITDA, minimum fixed coverage ration, minimum current
ratio, minimum adjusted net worth and maximum leverage ratios. These
requirements and ratios generally become more restrictive over time.
Landec has pledged substantially all of Apio's and Dock Resins' assets to
secure their debt.
12. MINORITY INTEREST
In connection with the acquisition of Apio, Landec acquired Apio's 60%
general partner interest in Apio Cooling, a California limited partnership. Apio
Cooling is included in the consolidated financial statements of Landec at
January 30, 2000. The minority interest balance at January 30, 2000 represents
the limited partners' interest in Apio Cooling.
13. STOCKHOLDERS EQUITY
To fund the acquisition of Apio, Landec issued 2.5 million shares of
Landec Common Stock to the former shareholders of Apio. The stock was valued at
the average closing price, as quoted by the Nasdaq National Market, for three
days before and after the date of the close. The resulting value was discounted
due to registration restrictions on the stock. The discount factors used were
based on independent valuations.
On November 19, 1999 Landec completed a financing that raised $9.1
million, net of issuance costs, through a private placement of 166,667 shares of
non-dividend paying convertible Preferred Stock (representing 1,666,670 shares
of Common Stock on a converted basis).
APIO STOCK PLAN. In connection with the acquisition of Apio, the Board of
Directors of Landec authorized the establishment of the 1999 Apio Stock Option
Plan. Under the 1999 Apio Stock Option Plan, the Board of Directors of Apio may
grant incentive stock options or non-statutory stock options to employees and
outside consultants. The exercise price of the incentive stock options and
non-statutory stock options may be no less than 100% and 85%, respectively, of
the fair market value of Apio's common stock as determined by Apio's Board of
Directors. Five million shares are authorized to be issued under this plan.
Options are exercisable upon vesting and generally vest ratably over four years
and are subject to repurchase if exercised before being vested. As of January
30, 2000, options for two million shares have been granted at an exercise price
of $2.10 per share.
-11-
14. BUSINESS SEGMENT REPORTING
The acquisition of Apio in December 1999 resulted in a redefinition of
operating segments by management. Prior period segment information has been
restated to conform to the current segment definitions. Landec operates in two
business segments: the Food Products Technology segment and the Agricultural
Seed Technology segment. The Food Products Technology segment markets and packs
produce and specialty packaged fresh-cut vegetables that incorporate the
Intellipac-TM- breathable membrane for the fresh-cut produce industry through
its Apio subsidiary. The amounts presented for the first quarter of fiscal year
2000 include the results of Apio from the effective close date of November 29,
1999 through January 30, 2000. The Food Products Technology segment for the
first quarter of fiscal year 1999 only includes the operations of the Intellipac
business. The Agricultural Seed Technology segment markets and distributes
hybrid seed corn to the farming industry and is developing seed coatings using
Landec's proprietary Intelimer(R) polymers. The Food Products Technology and
Agricultural Seed Technology segments include charges for corporate services
allocated from the Corporate and Other segment. Corporate and other amounts
include non-core operating activities, corporate operating costs and net
interest expense. Assets classified as corporate and other amounts consist
primarily of Dock Resin assets.
Operations by Business Segment (in thousands):
AGRICULTURAL
FOOD PRODUCTS SEED CORPORATE
QUARTER ENDED JANUARY 30, 2000 TECHNOLOGY TECHNOLOGY AND OTHER TOTAL
- --------------------------------------------- ------------- ------------ ------------ ------------
Net sales ................................... $ 30,233 $ 255 $ 3,309 $ 33,797
Income (loss) from continuing operations .... $ (250) $ (2,446) $ (38) $ (2,734)
Identifiable assets ......................... $ 80,866 $ 21,136 $ 18,321 $ 120,323
Depreciation and amortization ............... $ 645 $ 250 $ 298 $ 1,193
Capital expenditures ........................ $ 612 $ 57 $ 504 $ 1,173
Interest income ............................. $ 95 $ 17 $ 30 $ 142
Interest expense ............................ $ 292 $ -- $ 38 $ 330
QUARTER ENDED JANUARY 31, 1999
- ---------------------------------------------
Net sales ................................... $ 1,032 $ (3) $ 4,260 $ 5,289
Income (loss) from continuing operations .... $ 1 $ (1,726) $ 84 $ (1,641)
Identifiable assets ......................... $ 1,731 $ 21,801 $ 22,508 $ 46,040
Depreciation and amortization ............... $ 32 $ 249 $ 238 $ 519
Capital expenditures ........................ $ 37 $ 95 $ 669 $ 801
Interest income ............................. $ -- $ 5 $ 136 $ 141
Interest expense ............................ $ -- $ -- $ 58 $ 58
15. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Landec leases facilities and equipment under operating lease agreements
with various terms and conditions, which expire at various dates through
December 2002. The approximate future minimum lease payments under these
operating leases, excluding farmland leases, at January 30, 2000 are as
follows (in thousands):
AMOUNT
----------
FY 2000................................ $ 712
FY 2001................................ 859
FY 2002................................ 350
FY 2003................................ 33
----------
$1,954
==========
-12-
Rent expense for operating leases, including month to month arrangements
was $237,000 for the three months ended January 30, 2000.
LAND LEASES
Landec, through its Apio subsidiary, also leases farmland under various
non-cancelable leases expiring through October 2004. Landec subleases
substantially all of the farmland to growers who, in turn, agree to market their
crops through Landec. The subleases are generally non-cancelable and expire
through October 2004. The approximate future minimum leases and sublease amounts
receivable under farmland leases at January 30, 2000 are as follows (in
thousands):
MINIMUM SUBLEASE
LEASE RENTS
PAYMENTS RECEIVABLE NET
----------------------------------
2000................................ $ 611 $ 358 $ 253
2001................................ 940 563 377
2002................................ 737 477 260
2003................................ 476 234 242
2004................................ 446 159 287
Thereafter.......................... 360 168 192
---------------------------------
$3,570 $1,959 $1,611
========== ========== ==========
The net lease expense incurred for farmland leases for the period ended
January 30, 2000 was $141,000 and is included in the cost of service revenues in
the accompanying statements of operations.
EMPLOYMENT AGREEMENTS
Landec has entered into employment agreements with certain key employees.
These agreements provide for these employees to receive incentive bonuses
based on the financial performance of certain divisions in addition to their
annual base salaries. Certain key employees also receive minimum bonuses. The
accrued incentive bonuses amounted to $125,000 at January 30, 2000.
16. RELATED PARTY TRANSACTIONS
Apio provides harvesting, packing, cooling and distributing services for a
member of management and purchases produce from that individual. Revenues, cost
of product sales and the resulting payable are shown separately in the
accompanying financial statements as of January 30, 2000 and for the period then
ended.
On November 1, 1998, Landec loaned an officer of Intellicoat Corporation
$500,000 in cash in exchange for a promissory note. Interest accrued at 7.5% per
annum. On July 31, 1999 the balance of principal and accrued interest were
offset by an earn-out provision related to the acquisition of Fielder's Choice
by Landec. The resulting principal balance and accrued interest at January 30,
2000 of $143,000, is due and payable on July 31, 2000.
-13-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and accompanying notes included in Part
I--Item 1 of this Form 10-Q and the audited consolidated financial statements
and accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Landec's Annual Report on Form
10-K for the fiscal year ended October 31, 1999.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934. These forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements.
Potential risks and uncertainties include, without limitation, those mentioned
in this report and, in particular the factors described below under "Additional
Factors That May Affect Future Results," and those mentioned in the Landec's
Annual Report on Form 10-K for the fiscal year ended October 31, 1999. Landec
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
OVERVIEW
Landec Corporation and its subsidiaries ("Landec") design, develop,
manufacture and sell temperature-activated and other polymer products for a
variety of food products, agricultural products, specialty industrial and
medical applications. This proprietary polymer technology is the foundation, and
key differentiating advantage, upon which Landec has built its business.
Landec's Food Products Technology business, operated through its wholly
owned subsidiary Apio, combines Landec's proprietary food packaging technology
with the capabilities of a large national food supplier and value-added produce
processor. This combination was consummated in December 1999 when Landec
acquired Apio, Inc. and certain related entities (collectively "Apio").
Landec's Agricultural Seed Technology business, operated through its
wholly owned subsidiary Intellicoat Corporation ("Intellicoat"), combines
Landec's proprietary seed coating technology with a unique Fielder's Choice
Direct ("Fielder's Choice") system of selling called eDC - e-commerce, direct
marketing and consultative sales. In September 1997, Intellicoat acquired
Fielder's Choice, a direct marketer of hybrid corn seed.
In addition to its core businesses, Landec also operates a Technology
Licensing/Research and Development Business which licenses products outside of
Landec's core businesses to industry leaders such as Alcon Laboratories, Inc.
and Hitachi Chemicals. It also engages in research and development activities
with companies such as ConvaTec, a division of Bristol Myers Squibb.
To support the polymer manufacturing needs of the core businesses, Landec
has developed and acquired lab scale and pilot plant capabilities in Menlo Park,
California and scale-up and commercial manufacturing capabilities at its Dock
Resins Corporation subsidiary ("Dock Resins") in Linden, New Jersey. In April
1997, Landec acquired Dock Resins, a manufacturer and marketer of specialty
acrylic and other polymers. In addition to providing manufacturing capabilities,
Dock Resins sells industrial specialty products under the Doresco-TM-
trademark which are used by more than 300 customers throughout the United States
in coatings, printing inks, laminating and adhesives markets.
Landec's core polymer manufacturing products are based on its patented
proprietary Intelimer polymers, which differ form other polymers in that they
can be customized to abruptly change their physical characteristics when
heated or cooled through a pre-set temperature switch. For instance,
Intelimer polymers can change within the space of one or two degrees Celsius
from a slick, non-adhesive state to a highly tacky, adhesive state; from an
impermeable state to a highly permeable state; or from a solid state to a
viscous state. These abrupt changes are repeatedly reversible and can be
tailored by Landec to occur at specific temperatures, thereby offering
substantial competitive advantages in Landec's target markets.
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Based on this core technology, Landec has launched to date four product
lines - QuickCast splints and casts in April 1994, which was subsequently sold
to Bissell Healthcare Corporation in August 1997; Intellipac breathable
membranes for the fresh-cut produce packaging market in September 1995;
Intelimer polymer systems for the industrial specialties market in June 1997;
and Intellicoat coatings for inbred corn seed in October 1999.
Landec has been unprofitable during each fiscal year since its inception
and may incur additional losses in the future. The amount of future net profits,
if any, is highly uncertain and there can be no assurance that Landec will be
able to reach or sustain profitability for an entire fiscal year. From inception
through January 30, 2000, Landec's accumulated deficit was $48.3 million.
RESULTS OF OPERATIONS
Total revenues were $33.8 million for the first quarter of fiscal year
2000 compared to $5.3 million for the first quarter of fiscal year 1999.
Revenues from product sales and services increased to $33.7 million in the first
quarter of fiscal year 2000 from $4.3 million in the first quarter of fiscal
year 1999. The increase in product sales and service revenues was primarily due
to $28.7 million in Apio revenues from the close date of December 2, 1999
through January 30, 2000. Revenues from license fees were zero for the first
quarter of fiscal year 2000 compared to $750,000 in the first quarter of fiscal
year 1999. The decrease in license fees revenue was due to a milestone payment
from Alcon related to the PORT ophthalmic devices during the first quarter of
fiscal year 1999. Revenues from research and development funding were $130,000
for the first quarter of fiscal year 2000 compared to $194,000 for the first
quarter of fiscal year 1999. The decrease in research and development revenues
was primarily due to the expiration of the research and development agreement
with Alcon Laboratories, Inc. surrounding the PORT device, partially offset by a
new research and development contract with ConvaTec, a division of Bristol Myers
Squibb, in the area of medical adhesives.
Cost of product sales and services consists of material, labor and
overhead. Cost of product sales and services was $29.5 million for the first
quarter of fiscal year 2000 compared to $3.0 million for the first quarter of
fiscal year 1999. Gross profit from product sales and services as a percentage
of revenue from product sales and services decreased from 31% in the first
quarter of fiscal year 1999 to 12% in the first quarter of fiscal year 2000.
This decrease in the gross profit percentage from the first quarter of fiscal
year 1999 to the first quarter of fiscal year 2000 is a result of Apio's mix of
products having a lower margin percentage than Landec's other businesses and
Apio's higher costs associated with sourcing crops during the winter months. In
addition, during the first quarter of fiscal year 2000, Landec incurred startup
costs associated with Apio's new 35,000 square foot value-added food processing
plant and establishing a new manufacturing facility in Menlo Park for Intellipac
breathable membrane products. Overall gross profit increased from $2.3 million
in the first quarter of fiscal year 1999 to $4.3 million in the first quarter of
fiscal year 2000, an increase of 87% due to gross profit from Apio of $3.6
million during the first quarter of 2000, offset by no license fee gross profits
in the first quarter of fiscal year 2000 compared to $750,000 for the same
period of fiscal year 1999.
Research and development expenses were $1.1 million for the first quarter
of fiscal year 2000 compared to $1.5 million for the first quarter of fiscal
year 1999, a decrease of 28%. Landec's research and development expenses consist
primarily of expenses involved in the development of, process scale-up of, and
efforts to protect intellectual property content of Landec's enabling side chain
crystallizable polymer technology and research and development expenses related
to Dock Resins' products. The decrease in research and development expenses in
the first quarter of fiscal year 2000 compared to the first quarter of fiscal
year 1999 was primarily due to the expiration of the PORT research and
development activities and the emphasis in Intellicoat seed coating being on
production rather than research and development during the first quarter of
fiscal year 2000.
Selling, general and administrative expenses were $5.8 million for the
first quarter of fiscal year 2000 compared to $2.5 million for the first
quarter of fiscal year 1999, an increase of 126%. Selling, general and
administrative expenses consist primarily of sales and marketing expenses
associated with Landec's product sales and services, business development
expenses, and staff and administrative expenses. Selling, general and
administrative expenses increased primarily as a result of expenses from Apio
of $2.6 million and increased sales and marketing expenses associated with
marketing efforts at Fielder's Choice. Specifically, sales and marketing
expenses increased to $2.9 million for the first quarter of fiscal year 2000
from $1.5 million for the first quarter of fiscal year 1999. Landec expects
that total selling, general and administrative spending for existing and
newly acquired products will continue to increase in absolute dollars in
future periods, although it may vary as a percentage of total revenues.
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Interest income was virtually the same at $142,000 for the first quarter
of fiscal year 2000 compared to $141,000 for the first quarter of fiscal year
1999. Interest expense increased from $58,000 in the first quarter of fiscal
year 1999 to $330,000 in the first quarter of fiscal year 2000 due to the
increase in debt from the acquisition of Apio on December 2, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of January 30, 2000 Landec had cash, cash equivalents and short-term
investments of $8.4 million, a net increase of $5.2 million from $3.2 million
as of October 31, 1999. This increase was primarily due to: a) cash from
operations of $1.3 million; b) borrowing under Apio's line of credit of $5.0
million; c) cash acquired in the acquisition of Apio of $3.3 million,
partially offset by d) the purchase of $1.2 million of property, plant and
equipment; e) advances to growers of $2.6 million; and f) payment on long
term debt and to minority interests of $1.1 million. The cash from operations
was primarily comprised of farmer deposits for corn seed to be delivered
during the second quarter of fiscal year 2000 and the collection of
receivables partially offset by the loss for the quarter and an increase in
inventory from the purchase of corn seed by Fielder's Choice.
During the first quarter of fiscal year 2000, Landec purchased equipment
to support the development of Intellipac and Intellicoat products, and incurred
building improvement and equipment upgrade expenditures at Dock Resins and Apio
to expand capacity. These expenditures represented the majority of the $1.2
million of property and equipment purchased during the first quarter of fiscal
year 2000.
Landec is currently in negotiations with a bank to establish a credit
facility to be used to fund the expansion of the manufacturing capabilities of
Intellicoat seed coating products. Landec believes that this new facility, along
with existing cash, cash equivalents and exist borrowing capacities will be
sufficient to finance its operational and capital requirements through at least
the next twelve months. Landec's future capital requirements, however, will
depend on numerous factors, including the progress of its research and
development programs; the development of commercial scale manufacturing
capabilities; the development of marketing, sales and distribution capabilities;
the ability of Landec to establish and maintain new collaborative and licensing
arrangements; the continued assimilation and integration of Apio into Landec;
any decision to pursue additional acquisition opportunities; the timing and
amount, if any, of payments received under licensing and research and
development agreements; the costs involved in preparing, filing, prosecuting,
defending and enforcing intellectual property rights; the ability to comply with
regulatory requirements; the emergence of competitive technology and market
forces; the effectiveness of product commercialization activities and
arrangements; and other factors. If Landec's currently available funds, together
with the internally generated cash flow from operations are not sufficient to
satisfy its financing needs, Landec would be required to seek additional funding
through other arrangements with collaborative partners, additional bank
borrowings and public or private sales of its securities. There can be no
assurance that additional funds, if required, will be available to Landec on
favorable terms if at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
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, as well as other factors
including, without limitation, those described elsewhere in this report, 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.
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE
Landec has incurred net losses in each fiscal year since its inception,
including a net loss of $2.7 million for the three months ended January 30,
2000. Landec's accumulated deficit as of January 30, 2000 totaled $48.3
million. Landec may incur additional losses in the future. The amount of
future net profits, if any, is highly uncertain and there can be no assurance
that Landec will be able to reach or sustain profitability for an entire
fiscal year.
-16-
OUR SUBSTANTIAL INDEBTEDNESS COULD LIMIT OUR FINANCIAL AND OPERATING
FLEXIBILITY
At January 30, 2000, Landec's total debt, including current maturities and
capital lease obligations, was approximately $26.7 million and the total debt to
equity ratio was approximately 53%. This level of indebtedness could have
significant consequences because:
- a substantial portion of Landec's net cash flow from operations must be
dedicated to debt service and will not be available for other purposes;
- Landec's ability to obtain additional debt financing in the future for
working capital, capital expenditures or acquisitions may be limited; and
- Landec's level of indebtedness may limit its flexibility in reacting to
changes in the industry and economic conditions generally.
In connection with the Apio acquisition, Landec may be obligated to make
future payments to the former stockholders of Apio of up to $16.75 million.
Landec's ability to service its indebtedness will depend on its future
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, some of which are beyond Landec's
control. If Landec were unable to service its debt, it would be forced to pursue
one or more alternative strategies such as selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital, which might
not be successful and which could substantially dilute the ownership interest of
existing shareholders.
In addition, Apio is subject to various financial and operating covenants
under its term debt and line of credit facilities, including minimum levels of
EBITDA, minimum fixed charge coverage ratio, minimum current ratio, minimum
adjusted net worth and maximum leverage ratios. These requirements and ratios
generally become more restrictive over time. The loan agreement limits the
ability of Apio to make cash payments to Landec until the outstanding balance is
reduced to an amount specified in the loan agreement. Landec has pledged
substantially all of Apio's assets to secure its bank debt. Landec's failure to
comply with the obligations under the loan agreement, including maintenance of
financial ratios, could result in an event of default, which, if not cured or
waived, would permit acceleration of the indebtedness due under the loan
agreement.
OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE WHICH MAY CAUSE OUR
STOCK PRICE TO DECLINE
In the past, Landec's results of operations have fluctuated significantly
from quarter to quarter and are expected to continue in the future.
Historically, Landec's direct marketer of hybrid corn seed, Fielder's Choice,
has been the primary source of these fluctuations, as its revenues and profits
are concentrated over a few months during the spring planting season (generally
during Landec's second quarter). In addition, Apio can be heavily affected by
seasonal and weather factors which could impact quarterly results. Landec's
earnings in its Food Products Technology business will be sensitive to price
fluctuations in the fresh vegetables and fruits markets. Excess supplies can
cause intense price competition. Other factors affecting Landec's food and/or
agricultural operations include the seasonality of its supplies, the ability to
process produce during critical harvest periods, the timing and effects of
ripening, the degree of perishability, the effectiveness of worldwide
distribution systems, the terms of various federal and state marketing orders,
total worldwide industry volumes, the seasonality of consumer demand, foreign
currency fluctuations, foreign importation restrictions and foreign political
risks. As a result of these and other factors, Landec expects to continue to
experience fluctuations in quarterly operating results, and there can be no
assurance that Landec will be able to reach or sustain profitability for an
entire fiscal year.
WE EXPECT DIFFICULTIES IN INTEGRATING APIO AND OTHER NEW BUSINESS ACQUISITIONS
Landec's acquisition of Apio involves the integration of Apio's
operations into Landec. The integration will require the dedication of
management resources in order to achieve the anticipated operating
efficiencies of the acquisition. No assurance can be given that difficulties
encountered in integrating the operations of Apio into Landec will be
overcome or that the benefits expected from integration will be realized. The
difficulties in combining Apio and Landec's operations are exacerbated by the
necessity of coordinating geographically separate organizations, integrating
personnel with disparate business backgrounds and combining different
corporate cultures. The process of integrating operations could cause an
interruption of, or loss of momentum in, the activities of the combined
company's business.
-17-
The successful integration of other new business acquisitions may require
substantial effort from Landec's management. The diversion of the attention of
management and any difficulties encountered in the transition process could have
a material adverse effect on Landec's ability to realize the anticipated
benefits of the acquisitions. The successful combination of new businesses also
requires coordination of research and development activities, manufacturing, and
sales and marketing efforts. In addition, the process of combining organizations
could cause the interruption of, or a loss of momentum in, Landec's activities.
There can be no assurance that Landec will be able to retain key management,
technical, sales and customer support personnel, or that Landec will realize the
anticipated benefits of the acquisitions.
WE MAY NOT BE ABLE TO ACHIEVE ACCEPTANCE OF OUR NEW PRODUCTS IN THE MARKETPLACE
The success of Landec in generating significant sales of its products will
depend in part on the ability of Landec and its partners and licensees to
achieve market acceptance of Landec's new products and technology. The extent to
which, and rate at which, market acceptance and penetration are achieved by
Landec's current and future products are a function of many variables including,
but not limited to, price, safety, efficacy, reliability, conversion costs and
marketing and sales efforts, as well as general economic conditions affecting
purchasing patterns. There can be no assurance that markets for Landec's new
products will develop or that Landec's new products and technology will be
accepted and adopted. The failure of Landec's new products to achieve market
acceptance would have a material adverse effect on Landec's business, results of
operations and financial condition.
There can be no assurance that Landec will be able to successfully
develop, commercialize, achieve market acceptance of or reduce the costs of
producing Landec's new products, or that Landec's competitors will not develop
competing technologies that are less expensive or otherwise superior to those of
Landec. There can be no assurance that Landec will be able to develop and
introduce new products and technologies in a timely manner or that new products
and technologies will gain market acceptance. Landec is in the early stage of
product commercialization of Intellipac breathable membrane, Intellicoat-TM-
seed coating and Intelimer polymer systems products and many of its potential
products are in development. Landec believes that its future growth will depend
in large part on its ability to develop and market new products in its target
markets and in new markets. In particular, Landec expects that its ability to
compete effectively with existing food products, agricultural, industrial and
medical companies will depend substantially on successfully developing,
commercializing, achieving market acceptance of and reducing the cost of
producing Landec's products. In addition, commercial applications of Landec's
temperature switch polymer technology are relatively new and evolving.
WE FACE STRONG COMPETITION WHICH MAY CONTRIBUTE TO THE FAILURE OF OUR PRODUCTS
IN THE MARKETPLACE
Competitors may succeed in developing alternative technologies and
products that are more effective, easier to use or less expensive than those
which have been or are being developed by Landec or that would render Landec's
technology and products obsolete and non-competitive. Landec operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food products, agricultural,
industrial and medical companies is expected to be intense. In addition, the
nature of Landec's collaborative arrangements may result in its corporate
partners and licensees becoming competitors of Landec. Many of these competitors
have substantially greater financial and technical resources and production and
marketing capabilities than Landec, and may have substantially greater
experience in conducting clinical and field trials, obtaining regulatory
approvals and manufacturing and marketing commercial products.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY HAVE TO DEPEND ON THIRD PARTIES
TO MANUFACTURE OUR PRODUCTS
Landec may need to consider seeking collaborative arrangements with
other companies to manufacture some of its products. If Landec becomes
dependent upon third parties for the manufacture of its products, then
Landec's profit margins and its ability to develop and deliver those products
on a timely basis may be affected. Failures by third parties may impair
Landec's ability to deliver products on a timely basis, impair Landec's
competitive position, or may delay the submission of products for regulatory
approval. In late fiscal 1999, in an effort to reduce reliance on third party
manufacturers, Landec began the set up of a manufacturing operation at its
facility in Menlo Park, California, for the production of Intellipac
breathable membrane products. There can be no assurance that Landec can
successfully operate a manufacturing operation at acceptable costs, with
acceptable yields, and retain adequately trained personnel.
-18-
Although Landec believes Dock Resins will provide Landec with practical
knowledge in the scale-up of Intelimer polymer products, production in
commercial-scale quantities may involve technical challenges for Landec. Landec
anticipates that a portion of its products will be manufactured in the Linden,
New Jersey facility acquired in the purchase of Dock Resins. Landec's reliance
on this facility involves a number of potential risks, including the
unavailability of, or interruption in access to, some process technologies and
reduced control over delivery schedules, and low manufacturing yields and high
manufacturing costs.
OUR DEPENDENCE ON SINGLE SUPPLIERS MAY CAUSE DISRUPTION IN OUR OPERATIONS SHOULD
OUR SUPPLIER FAIL TO DELIVER MATERIALS
No assurance can be given that Landec will not experience difficulty is
acquiring materials for the manufacture of its products or that Landec will be
able to obtain substitute vendors, or that Landec will be able to procure
comparable materials or hybrid corn varieties at similar prices and terms within
a reasonable time. Many of the raw materials used in manufacturing Landec's
products are currently purchased from a single source, including some monomers
used to synthesize Intelimer polymers and substrate materials for Landec's
breathable membrane products. In addition, virtually all of the hybrid corn
varieties sold by Fielder's Choice are purchased from a single source. Any
interruption of supply could delay product shipments and materially harm our
business.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
Landec has received, and may in the future receive, from third parties,
including some of its competitors, notices claiming that it is infringing third
party patents or other proprietary rights. If Landec were determined to be
infringing any third-party patent, Landec could be required to pay damages,
alter its products or processes, obtain licenses or cease the infringing
activities. If Landec is required to obtain any licenses, there can be no
assurance that Landec will be able to do so on commercially favorable terms, if
at all. Litigation, which could result in substantial costs to and diversion of
effort by Landec, may also be necessary to enforce any patents issued or
licensed to Landec or to determine the scope and validity of third-party
proprietary rights. Any litigation or interference proceeding, regardless of
outcome, could be expensive and time consuming and could subject Landec to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require Landec to cease using that technology. Landec's
success depends in large part on its ability to obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties. There can be no assurance that any pending patent applications
will be approved, that Landec will develop additional proprietary products that
are patentable, that any patents issued to Landec will provide Landec with
competitive advantages or will not be challenged by any third parties or that
the patents of others will not prevent the commercialization of products
incorporating Landec's technology. Furthermore, there can be no assurance that
others will not independently develop similar products, duplicate any of
Landec's products or design around Landec's patents.
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATIONS THAT DIRECTLY IMPACT OUR
BUSINESS
Federal, state and local regulations impose various environmental
controls on the use, storage, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals and gases used in some of the manufacturing
processes, including those utilized by Dock Resins. As a result of historic
off-site disposal practices, Dock Resins was recently involved in two actions
seeking to compel the generators of hazardous waste to remediate hazardous
waste sites. Dock Resins has been informed by its counsel that it was a DE
MINIMIS generator to these sites, and these actions have been settled without
the payment of any material amount by Landec. In addition, the New Jersey
Industrial Site Recovery Act ("ISRA") requires an investigation and
remediation of any industrial establishment, like Dock Resins, which changes
ownership. This statute was activated by Landec's acquisition of Dock Resins.
Dock Resins has completed its investigation of the site, delineated the
limited areas of concern on the site, and completed the bulk of the active
remediation required under the statute. The costs associated with this effort
are being borne by the former owner of Dock Resins, and counsel has advised
Dock Resins and Landec that funds of the former owner required by ISRA to be
set aside for this effort are sufficient to pay for the successful completion
of remedial activities at the site. In most cases, Landec believes its
liability will be limited to sharing clean-up or other remedial costs with
other potentially responsible parties. Any failure by Landec to control the
use of, or to restrict adequately the discharge of, hazardous substances
under present or future regulations could subject it to substantial liability
or could cause its manufacturing operations to be suspended and changes in
environmental regulations may impose the need for additional capital
equipment or other requirements.
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Landec's agricultural operations are subject to a variety of environmental
laws including the Food Quality Protection Act of 1966, the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act, the Federal
Insecticide, Fungicide and Rodenticide Act and the Comprehensive Environmental
Response, Compensation and Liability Act. Compliance with these laws and related
regulations is an ongoing process. Environmental concerns are, however, inherent
in most agricultural operations, including those conducted by Landec, and there
can be no assurance that the cost of compliance with environmental laws and
regulations will not be material. Moreover, it is possible that future
developments, such as increasingly strict environmental laws and enforcement
policies and further restrictions on the use of manufacturing chemicals could
result in increased compliance costs.
ADVERSE WEATHER CONDITIONS CAN CAUSE SUBSTANTIAL DECREASES IN OUR SALES
Landec's Food Products and Agricultural Seed Technology businesses are
subject to weather conditions that affect commodity prices, crop yields, and
decisions by growers regarding crops to be planted. Crop diseases and severe
conditions, particularly weather conditions such as floods, droughts, frosts,
windstorms and hurricanes may adversely affect the supply of vegetables and
fruits used in Landec's business, reduce the sales volumes and increase the unit
production costs. Because a significant portion of the costs are fixed and
contracted in advance of each operating year, volume declines due to production
interruptions or other factors could result in increases in unit production
costs which could result in substantial losses and weaken Landec's financial
condition.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE WITH OUR INTELIMER POLYMER
PRODUCTS
Landec has only limited experience marketing and selling its Intelimer
polymer products. While Dock Resins will provide consultation and in some cases
direct marketing support for Landec's Intelimer polymer products, establishing
sufficient marketing and sales capability will require significant resources.
Landec intends to distribute some of its products through its corporate partners
and other distributors and to sell other products through a direct sales force.
There can be no assurance that Landec will be able to recruit and retain skilled
sales management, direct salespersons or distributors, or that Landec's sales
and marketing efforts will be successful. To the extent that Landec has entered
into or will enter into distribution or other collaborative arrangements for the
sale of its products, Landec will be dependent on the efforts of third parties.
WE DEPEND ON STRATEGIC PARTNERS AND LICENSES FOR FUTURE DEVELOPMENT
For some of its current and future products, Landec's strategy for
development, clinical and field testing, manufacture, commercialization and
marketing includes entering into various collaborations with corporate partners,
licensees and others. Landec is dependent on its corporate partners to develop,
test, manufacture and/or market some of its products. Although Landec believes
that its partners in these collaborations have an economic motivation to succeed
in performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within the control of
Landec. There can be no assurance that those partners will perform their
obligations as expected or that Landec will derive any additional revenue from
the arrangements. There can be no assurance that Landec's partners will pay any
additional option or license fees to Landec or that they will develop, market or
pay any royalty fees related to products under the agreements. Moreover, some of
the collaborative agreements provide that they may be terminated at the
discretion of the corporate partner, and some of the collaborative agreements
provide for termination under other circumstances. In addition, there can be no
assurance as to the amount of royalties, if any, on future sales of QuickCast
and PORT-TM- products as Landec no longer has control over the sales of those
products since the sale of QuickCast and the license of the PORT product lines.
There can be no assurance that Landec's partners will not pursue existing or
alternative technologies in preference to Landec's technology. Furthermore,
there can be no assurance that Landec will be able to negotiate additional
collaborative arrangements in the future on acceptable terms, if at all, or that
the collaborative arrangements will be successful.
BOTH DOMESTIC AND FOREIGN GOVERNMENT REGULATIONS CAN HAVE AN ADVERSE EFFECT ON
OUR BUSINESS OPERATIONS
Landec's products and operations are subject to governmental regulation in
the United States and foreign countries. The manufacture of Landec's products is
subject to periodic inspection by regulatory authorities. There can be no
assurance that Landec will be able to obtain necessary regulatory approvals on a
timely basis or at all. Delays in receipt of or failure to receive approvals or
loss of previously received approvals would have a material adverse effect on
Landec's business, financial condition and results of operations. Although
Landec has no reason to believe that it will not be able to comply with all
applicable regulations regarding the manufacture and sale of its products and
-20-
polymer materials, regulations are always subject to change and depend heavily
on administrative interpretations and the country in which the products are
sold. There can be no assurance that future changes in regulations or
interpretations relating to matters such as safe working conditions, laboratory
and manufacturing practices, environmental controls, and disposal of hazardous
or potentially hazardous substances will not adversely affect Landec's business.
There can be no assurance that Landec will not be required to incur significant
costs to comply with the laws and regulations in the future, or that the laws or
regulations will not have a material adverse effect on Landec's business,
operating results and financial condition. As a result of the Apio acquisition,
Landec is subject to USDA rules and regulations concerning the safety of the
food products handled and sold by Apio, and the facilities in which they are
packed and processed. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, injunctions, civil
penalties, suspensions or withdrawal of regulatory approvals, product recalls,
product seizures, including cessation of manufacturing and sales, operating
restrictions and criminal prosecution.
OUR INTERNATIONAL OPERATIONS AND SALES EXPOSE OUR BUSINESS TO ADDITIONAL RISKS
During the first quarter of fiscal year 2000, approximately 8% of Landec's
total revenues were derived from product sales to and collaborative agreements
with international customers. Landec expects that with the acquisition of Apio
and its export business, international revenues will become an important
component of its total revenues. A number of risks are inherent in international
transactions. International sales and operations may be limited or disrupted by
the regulatory approval process, government controls, export license
requirements, political instability, price controls, trade restrictions, changes
in tariffs or difficulties in staffing and managing international operations.
Foreign regulatory agencies have or may establish product standards different
from those in the United States, and any inability to obtain foreign regulatory
approvals on a timely basis could have a material adverse effect on Landec's
international business and its financial condition and results of operations.
While Landec's foreign sales are currently priced in dollars, fluctuations in
currency exchange rates, such as those recently experienced in many Asian
countries, may reduce the demand for Landec's products by increasing the price
of Landec's products in the currency of the countries to which the products are
sold. There can be no assurance that regulatory, geopolitical and other factors
will not adversely impact Landec's operations in the future or require Landec to
modify its current business practices.
CANCELLATIONS OR DELAYS OF ORDERS BY OUR CUSTOMERS MAY ADVERSELY AFFECT OUR
BUSINESS
During the first quarter of fiscal year 2000, sales to Landec's top five
customers accounted for approximately 42% of Landec's revenues with the top
customer accounting for 16% of Landec's revenues. Landec expects that for the
foreseeable future a limited number of customers may continue to account for a
substantial portion of its net revenues. Landec may experience changes in the
composition of its customer base, as Apio, Dock Resins and Fielder's Choice have
experienced in the past. Landec does not have long-term purchase agreements with
any of its customers. The reduction, delay or cancellation of orders from one or
more major customers for any reason or the loss of one or more of the major
customers could materially and adversely affect Landec's business, operating
results and financial condition. In addition, since some of the products
manufactured in the Linden, New Jersey facility or processed by Apio at its
Guadalupe, California facility are often sole sourced to its customers, Landec's
operating results could be adversely affected if one or more of its major
customers were to develop other sources of supply. There can be no assurance
that Landec's current customers will continue to place orders, that orders by
existing customers will not be canceled or will continue at the levels of
previous periods or that Landec will be able to obtain orders from new
customers.
OUR SALE OF SOME PRODUCTS MAY INCREASE OUR EXPOSURE TO PRODUCT LIABILITY CLAIMS
The testing, manufacturing, marketing, and sale of the products being
developed by Landec involve an inherent risk of allegations of product
liability. While no product liability claims have been made against Landec to
date, if any product liability claims were made and adverse judgments obtained,
they could have a material adverse effect on Landec's business, operating
results and financial condition. Although Landec has taken and intends to
continue to take what it believes are appropriate precautions to minimize
exposure to product liability claims, there can be no assurance that it will
avoid significant liability. Landec currently maintains medical and non-medical
product liability insurance with limits in the amount of $4.0 million per
occurrence and $5.0 million in the annual aggregate. In addition, Apio has
product liability insurance with limits in the amount of $41.0 million per
occurrence and $42.0 million in the annual aggregate. There can be no assurance
that the coverage is adequate or will continue to be available at an acceptable
cost, if at all. A product liability claim, product recall or other claim with
respect to
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uninsured liabilities or in excess of insured liabilities could have a
material adverse effect on Landec's business, operating results and financial
condition.
WE EXPECT OUR STOCK PRICE TO FLUCTUATE IN ACCORDANCE WITH MARKET CONDITIONS
Factors such as announcements of technological innovations, the attainment
of (or failure to attain) milestones in the commercialization of Landec's
technology, new products, new patents or changes in existing patents, the
acquisition of new businesses or the sale or disposal of a part of Landec's
businesses, or development of new collaborative arrangements by Landec, its
competitors or other parties, as well as government regulations, investor
perception of Landec, fluctuations in Landec's operating results and general
market conditions in the industry may cause the market price of Landec's common
stock to fluctuate significantly. In addition, the stock market in general has
recently experienced extreme price and volume fluctuations, which have
particularly affected the market prices of technology companies and which have
been unrelated to the operating performance of technology companies. These broad
fluctuations may adversely affect the market price of Landec's common stock.
THE IMPLEMENTATION OF FINANCIAL AND ACCOUNTING CHANGES MAY CAUSE AN INCREASE IN
COSTS AND DELAYS
In order to address deficiencies in Apio's management information systems
and accounting systems, Apio has restructured its financial and accounting
department, including hiring a chief financial officer and a new controller, and
retained consultants who have worked with Apio to improve accounting processes
and procedures. Apio management believes that those changes will improve its
managing of operations, including delivering complete and accurate financial
statements to Landec's corporate offices in a more timely manner. However,
Landec can give no assurances that it will be able to effect those changes in
the management information systems and accounting systems in a timely manner
or sustain the process improvements over time.
THE EURO CURRENCY MAY CAUSE SOME DISRUPTIONS IN BUSINESS
On January 1, 1999, some member states of the European Economic Community
fixed their respective currencies to a new currency, commonly known as the
"Euro". During the three years beginning on January 1, 1999, business in these
countries will be conducted both in the existing national currency, as well as
the Euro. Companies operating in or conducting business in these countries will
need to ensure that their financial and other software systems are capable of
processing transactions and properly handling the existing currencies and the
Euro. Based on the current level of direct European business conducted by
Landec, and also because Landec expects that any transactions in Europe in the
near future will be priced in U.S. dollars, Landec does not expect that
introduction and use of the Euro will materially affect Landec's business.
Landec will continue to evaluate the impact over time of the introduction of the
Euro. However, if Landec encounters unexpected opportunities or difficulties in
Europe, Landec's business could be adversely affected, including the inability
to bill customers and to pay suppliers for transactions denominated in the Euro
and the inability to properly record transactions denominated in the Euro in
Landec's financial statements.
IF OUR OPERATIONS AND PRODUCTS DO NOT FUNCTION PROPERLY IN THE YEAR 2000, OUR
BUSINESS OPERATIONS COULD BE DISRUPTED
The Year 2000 issue concerns the potential inability of computer
applications, other information technology systems, and software-based
"embedded" control systems to recognize and process properly, date-sensitive
information in the Year 2000 and beyond. Landec could suffer material adverse
impacts on its operations and financial results if the applications and systems
used by Landec, or by third parties with whom Landec does business, do not
accurately or adequately process or manage dates or other information as a
result of the Year 2000 issue.
Landec has key relationships with some of its customers, vendors and
outside service providers. Landec is primarily relying upon the voluntary
disclosures from third parties for this review of their Year 2000 readiness.
Failure by Landec's key customers, vendors and outside service providers to
adequately address the Year 2000 issue could have a material adverse impact on
Landec's operations and financial results.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the acquisition of Apio on December 2, 1999, Landec
acquired all of the outstanding capital stock of Apio and its related entities
from the seven stockholders of Apio in exchange for 2.5 million shares of Landec
common stock and $9.1 million in cash, a contractual obligation for $5.3 million
and direct acquisition costs.
In a separate transaction, on November 19, 1999 Landec sold $10 million
($9.1 million net of issuance costs) of convertible preferred stock (convertible
into 1,666,670 shares of Common Stock) to Frederick Frank at a $6.00 per share
equivalent price.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, as transactions by an
issuer not involving a public offering. The recipients of securities in each
such transaction represented that they were "accredited investors" and also
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof
and appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with Landec, to information about Landec.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1. On December 17, 1999, Landec filed a Form 8-K reporting
the acquisition of Apio.
2. On February 15, 2000 Landec filed a Form 8-K/A reporting
the acquisition of Apio.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANDEC CORPORATION
By: /s/ Gregory S. Skinner
-----------------------------------------
Gregory S. Skinner
Vice President, Finance and Chief
Financial Officer
(Duly Authorized and Principal Financial
and Accounting Officer)
Date: March 15, 2000
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LANDEC CORPORATION
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------- ------- -------------
27.1 Financial Data Schedule 26
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