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 28, 2001, 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 5, 2001, there were 16,208,910 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.
LANDEC CORPORATION
FORM 10-Q For the Quarter Ended January 28, 2001
INDEX
Page
Facing sheet 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. a) Consolidated condensed balance sheets as of January 28, 2001 and October 29, 2000 3
b) Consolidated statements of operations for the three months ended January 28, 2001
and January 30, 2000 (restated) 4
c) Consolidated statements of cash flows for the three months ended January 28, 2001 and
January 30, 2000 (restated) 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
a) Exhibits 17
b) Reports on Form 8-K 17
Signature 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)
January 28, October 29,
2001 2000
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,508 $ 9,589
Accounts receivable, less allowance for doubtful accounts of $732
and $627 at January 28, 2001 and October 29, 2000 18,527 22,725
Inventory 18,964 14,501
Investment in farming activities 1,739 2,672
Notes and advances receivable 7,429 8,519
Notes receivable, related party 153 151
Prepaid expenses and other current assets 2,542 1,958
Assets held for sale 2,954 2,963
--------- ---------
Total Current Assets 58,816 63,078
Property and equipment, net 25,998 24,437
Intangible assets, net 42,588 43,386
Notes receivable 664 720
Other assets 1,556 1,631
--------- ---------
$ 129,622 $ 133,252
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 18,629 $ 19,374
Grower payables 5,292 13,651
Related party payables 146 262
Accrued compensation 1,604 2,470
Other accrued liabilities 9,147 9,522
Deferred revenue 9,743 2,265
Line of credit 14,376 9,609
Current maturities of long term debt 3,720 3,584
--------- ---------
Total Current Liabilities 62,657 60,737
Long term debt, less current maturities 15,302 16,631
Other liabilities 2,259 2,442
Minority interest 934 1,264
--------- ---------
Total Liabilities 81,152 81,074
Shareholders' Equity:
Preferred stock 9,149 9,149
Common stock 92,786 92,555
Accumulated deficit (53,465) (49,526)
--------- ---------
Total Shareholders' Equity 48,470 52,178
--------- ---------
$ 129,622 $ 133,252
========= =========
SEE ACCOMPANYING NOTES.
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LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
-------------------------------
January 28, January 30,
2001 2000 (restated)
----------- ---------------
Revenues:
Product sales $ 33,025 $ 22,062
Services revenue 14,457 11,046
Service revenue, related party 413 559
License fees 93 93
Research, development and royalty revenues 108 130
--------- --------
Total revenues 48,096 33,890
Cost of revenue:
Cost of product sales 28,879 18,834
Cost of services revenue 13,393 10,700
--------- --------
Total cost of revenue 42,272 29,534
Gross profit 5,824 4,356
Operating costs and expenses:
Research and development 1,114 1,051
Selling, general and administrative 8,161 5,753
--------- -------
Total operating costs and expenses 9,275 6,804
--------- --------
Operating loss (3,451) (2,448)
Interest income 141 142
Interest expense (665) (330)
Other income (expense) 36 (5)
--------- --------
Net loss before cumulative effect of change in
accounting principle (3,939) (2,641)
Cumulative effect of change in accounting principle -- (1,914)
--------- --------
Net loss $ (3,939) $ (4,555)
========= ========
Amounts per common share:
Net loss before cumulative effect of
change in accounting principle $ (0.24) $ (0.18)
Cumulative effect of change in
accounting principle -- (0.12)
--------- ---------
Basic and diluted net loss per share $ (0.24) $ (0.30)
========= ========
Shares used in per share computation 16,150 15,081
========= ========
SEE ACCOMPANYING NOTES.
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LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
------------------------------
January 28, January 30,
2001 2000 (restated)
-------------- ---------------
Cash flows from operating activities:
Net loss $ (3,939) $ (4,555)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,543 1,193
Cumulative effect of change in accounting principle -- 1,914
Disposal of property and equipment 13 --
Changes in current assets and liabilities:
Accounts receivable 4,198 1,048
Inventory (4,463) (4,969)
Investment in farming activities 933 781
Prepaid expenses and other current assets (584) 1,503
Accounts payable (745) 2,365
Grower payables (8,359) (835)
Related party payables (116) 231
Accrued compensation (866) (364)
Other accrued liabilities (375) (2,265)
Deferred revenue 7,478 5,352
---------- ----------
Total adjustments (1,343) 5,954
---------- ----------
Net cash (used in) provided by operating activities (5,282) 1,399
---------- ----------
Cash flows from investing activities:
Decrease (increase) in other assets and liabilities (108) 128
Purchases of property and equipment (2,310) (1,173)
Decrease (increase) in notes receivable and advances 1,144 (2,609)
Acquisition of Apio, Inc., net of cash received -- (5,813)
---------- ---------
Net cash used in investing activities (1,274) (9,467)
---------- ---------
Cash flows from financing activities:
Proceeds from sale of preferred stock -- 9,149
Proceeds from sale of common stock 231 211
Borrowings on line of credit 11,089 5,000
Payments on line of credit (6,322) --
Borrowings on long term debt 173 --
Repayment of long term debt (1,366) (851)
Decrease in minority interest liability (81) (23)
Distributions to minority interest (249) (245)
---------- ---------
Net cash provided by financing activities 3,475 13,241
---------- ---------
Net increase (decrease) in cash and cash equivalents (3,081) 5,173
Cash and cash equivalents at beginning of period 9,589 3,203
---------- ---------
Cash and cash equivalents at end of period $ 6,508 $ 8,376
========== =========
SEE ACCOMPANYING NOTES.
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LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Landec
Corporation ("Landec" or the "Company") 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 28, 2001, 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 29, 2000.
The results of operations for the three month period ended January 28, 2001
are not necessarily indicative of the results that may be expected for the
fiscal year ended October 28, 2001. For instance, due to the cyclical nature of
the corn seed industry, a significant portion of Landec Ag revenues and profits
will be concentrated over a few months during the spring planting season
(generally during Landec's second fiscal quarter).
2. RECENT PRONOUNCEMENTS
As of October 30, 2000, the Company adopted the Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 by Statement of
Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which requires companies
to recognize all derivatives as either assets or liabilities in the balance
sheet and measure such instruments at fair value. The adoption of these
statements did not have a material impact on the Company's consolidated
financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial
statements to conform to the current year presentation.
3. REVENUE RECOGNITION AND RESTATEMENT
The Company previously recognized noncancellable, nonrefundable license
fees as revenue when received and when all significant contractual obligations
of the Company relating to the fees had been met. On November 1, 1999, the
Company changed its method of accounting for noncancellable, nonrefundable
license fees to recognize such fees over the research and development period of
the agreement, as well as the term of any related supply agreement entered into
concurrently with the license when the risk associated with commercialization of
a product is non-substantive at the outset of the arrangement. The Company
believes the change in accounting principle is preferable based on guidance
provided in the Staff Accounting Bulletin ("SAB") No. 101 - REVENUE RECOGNITION
IN FINANCIAL STATEMENTS. The $1.9 million cumulative effect of the change in
accounting principle, calculated as of November 1, 1999, was originally reported
as a charge in the quarter ended October 29, 2000. SAB No. 101 was adopted in
accordance with APB No. 2 and accordingly the financial statements for the
quarter ended January 30, 2000 have been restated as if the provisions of SAB
No. 101 had been applied at the beginning of the year of adoption. The
cumulative effect was recorded as deferred revenue and is being recognized as
revenue over the research and development period or supply period commitment of
the agreement. During each of the quarters ended January 28, 2001 and January
30, 2000, $93,000 of the related deferred revenue was recognized as "recycled"
revenue.
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4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consisted of the following:
January 28, October 29,
2001 2000
------------ -----------
Finished goods........................ $ 9,799 $ 5,889
Raw material.......................... 8,021 7,661
Work in process....................... 1,144 951
------------ ----------
$ 18,964 $ 14,501
============ ==========
6. REVOLVING DEBT AND AMENDMENT TO CREDIT AGREEMENT
The $4.8 million increase in the Company's lines of credit during the first
quarter of fiscal year 2001 was due to seasonal needs at Landec Ag for seed corn
purchases that will be sold during the Company's second fiscal quarter and for
winter sourcing of produce at Apio, Inc. ("Apio") which requires up-front
investments of cash.
In February 2001, the Apio revolving line of credit was amended. The
amendment reduces the maximum borrowings from $12.0 million to $10.0 million but
increases the computed amount available under the line, determined as a
percentage of certain eligible assets (primarily receivables) by $4.0 million
through March 31, 2001 and $2.0 million from April 1, 2001 through July 31,
2001. The amendment also precludes the payment of earn-outs due under the Apio
purchase agreement until August 2001.
7. BUSINESS SEGMENT REPORTING
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 whole and
fresh-cut vegetables that incorporate the Intellipac(TM) breathable membrane for
the retail grocery, club store and food services 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 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.
Operations by Business Segment (in thousands):
Agricultural
Food Products Seed Corporate
Quarter ended January 28, 2001 Technology Technology and Other TOTAL
- ------------------------------ -------------- ------------ ---------- ---------
Net sales.................................. $ 44,920 $ 52 $ 3,124 $ 48,096
Net loss.................................. $ (821) $ (2,587) $ (531) $ (3,939)
Quarter ended January 30, 2000
- ------------------------------
Net sales.................................. $ 30,233 $ 255 $ 3,402 $ 33,890
Net loss before cumulative effect of change
in accounting principle....................... $ (18) $ (2,446) $ (177) $ (2,641)
-7-
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 29, 2000.
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 Landec's Annual
Report on Form 10-K for the fiscal year ended October 29, 2000. 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" or the "Company") design,
develop, manufacture and sell temperature-activated and other polymer products
for a variety of food products, agricultural products, and licensed partner
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 Landec Ag, combines Landec's proprietary seed coating
technology with a unique Fielder's Choice Direct system of selling called
eDC(TM) - e-commerce, direct marketing and consultative sales.
In addition to its core businesses, Landec also operates a Technology
Licensing/Research and Development Business which licenses products 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, CelPril, a subsidiary of Aventis CropScience
and UCB Chemicals Corporation.
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 addition
to providing manufacturing capabilities, Dock Resins sells industrial specialty
products under the Doresco(R) 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(R) polymers, which differ from 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.
-8-
Based on this core technology, Landec has launched to date four broad
product lines - QuickCast(TM) splints and casts in April 1994, which was
subsequently sold to Bissell Healthcare Corporation in August 1997;
Intellipac(TM) breathable membranes for the fresh-cut produce packaging market
beginning in September 1995; Intelimer polymer systems for the industrial
specialties market beginning in June 1997; and Intellicoat(R) coatings for
inbred corn seed beginning 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 28, 2001, Landec's accumulated deficit was $53.5 million.
RESULTS OF OPERATIONS
Total revenues were $48.1 million for the first quarter of fiscal year 2001
compared to $33.9 million for the first quarter of fiscal year 2000. Revenues
from product sales and services increased to $47.9 million in the first quarter
of fiscal year 2001 from $33.7 million in the first quarter of fiscal year 2000.
The increase in product sales and service revenues was primarily due to
including the results of Apio for a full quarter in fiscal year 2001 versus only
two months in fiscal year 2000. Revenues from license fees remained unchanged at
$93,000 for the first quarter of fiscal year 2001 and the first quarter of
fiscal year 2000. Revenues from research and development funding were $108,000
for the first quarter of fiscal year 2001 compared to $130,000 for the first
quarter of fiscal year 2000.
Cost of product sales and services consists of material, labor and
overhead. Cost of product sales and services was $42.3 million for the first
quarter of fiscal year 2001 compared to $29.5 million for the first quarter of
fiscal year 2000. Gross profit from product sales and services as a percentage
of revenue from product sales and services remained unchanged at 12% in the
first quarter of fiscal year 2001 and the first quarter of fiscal year 2000.
Although the gross profit percentage remained the same, the underlying basis has
changed. In the first quarter of fiscal year 2000, the Company 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 and had high costs associated with sourcing crops
during the winter months. During the first quarter of fiscal year 2001, the
Company incurred no start-up costs but realized much higher crop sourcing costs
as compared to the first quarter of fiscal year 2000. The increase in crop
sourcing costs was due to an industry shortage of essential value-added produce
items which had to be purchased at inflated prices on the open market in
November and early December during the critical holiday season and losses
incurred on the Company's investment in farming activities in the desert due to
an oversupply of commodity products in late December and January. Overall gross
profit increased from $4.4 million in the first quarter of fiscal year 2000 to
$5.8 million in the first quarter of fiscal year 2001, an increase of 34%,
primarily due to gross profit from Apio of $4.7 million in the first quarter of
fiscal year 2001 compared to $3.6 million during the first quarter of 2000.
Research and development expenses remained flat at $1.1 million for the
first quarter of fiscal years 2001 and 2000. 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 Company expects that
total research and development spending in fiscal year 2001 will remain
comparable to the prior year in absolute dollars but will decrease as a percent
of revenue as more products transition from research and development stages to
commercialization.
Selling, general and administrative expenses were $8.2 million for the
first quarter of fiscal year 2001 compared to $5.8 million for the first quarter
of fiscal year 2000, an increase of 42%. 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 $4.8 million in the
first quarter of fiscal year 2001 compared to $2.9 million in the same period
last year. This increase is due to including the results from Apio for a full
quarter in fiscal year 2001 versus only two months in fiscal year 2000.
Specifically, sales and marketing expenses increased to $3.3 million for the
first quarter of fiscal year 2001 from $2.9 million for the first quarter of
fiscal year 2000. Landec expects that total selling, general and administrative
spending for existing and
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newly acquired products will continue to increase in absolute dollars in future
periods, although it may vary as a percentage of total revenues.
Interest income was virtually the same at $141,000 for the first quarter of
fiscal year 2001 compared to $142,000 for the first quarter of fiscal year 2000.
Interest expense increased from $330,000 in the first quarter of fiscal year
2000 to $665,000 in the first quarter of fiscal year 2001 primarily due to the
increase in debt from the acquisition of Apio on December 2, 1999 and line of
credit borrowings at Landec Ag.
LIQUIDITY AND CAPITAL RESOURCES
As of January 28, 2001, the Company had cash and cash equivalents of
$6.5 million, or a net decrease of $3.1 million from $9.6 million at October
29, 2000. This decrease was primarily due to: (a) cash used in operations of
$5.3 million; and (b) the purchase of $2.3 million of property, plant and
equipment; partially offset by net borrowings under the Company's lines of
credit of $4.8 million.
During the first quarter of fiscal year 2001, Landec purchased equipment to
support the development of Apio's value-added products, and incurred building
and laboratory improvement and equipment upgrade expenditures at Dock Resins and
initiated implementation of a new ERP business system at Apio. These
expenditures represented the majority of the $2.3 million of property and
equipment purchased during the first quarter of fiscal year 2001.
In November 1999 the Company raised $10 million upon the sale of Preferred
Stock ($9.1 million net of issuance costs). In December 1999, in conjunction
with the acquisition of Apio, the Company secured $11.25 million of term debt
and a $12 million line of credit with Bank of America. The term debt and line of
credit agreements ("Loan Agreement") contain restrictive covenants that require
Apio to meet certain financial tests, including minimum levels of EBITDA (as
defined in the Loan Agreement), 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, through restricted payment covenants, 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. In February 2001, the Apio revolving
line of credit was amended. The amendment reduces the maximum borrowings from
$12.0 million to $10.0 million but increases the computed amount available under
the line, determined as a percentage of certain eligible assets (primarily
receivables) by $4.0 million through March 31, 2001 and $2.0 million from April
1, 2001 through July 31, 2001. The amendment also precludes the payment of
earn-outs due under the Apio purchase agreement until August 2001. Management
does not believe that the reduction of the borrowing capacity adversely impacts
liquidity as the Company has generally not needed to borrow in excess of $10.0
million on the line. In June 2000, Landec Ag established a $3.0 million bank
line of credit for working capital needs and a $1.0 million equipment line of
credit to be used to fund the expansion of the manufacturing capabilities of
Intellicoat seed coating products. In February 2001, Dock Resins increased its
equipment line of credit by $1.0 million to pay for building and lab
improvements. Landec believes that these facilities, the sale of the Reedley
facility and related fruit processing equipment, along with existing cash, cash
equivalents and existing borrowing capacities will be sufficient to finance its
operational and capital requirements through at least the next twelve months.
Borrowings on Landec's lines of credit are expected to vary with seasonal
requirements of the Company's businesses. The Company may, however, raise
additional funds during the next twelve months through another debt financing or
an equity financing. If an equity financing occurs it will have a dilutive
effect on current shareholders. 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; adverse weather
conditions that can affect the supply and price of produce, 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; the amount of future earn-out payments; 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
-10-
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.
Landec's accumulated deficit as of January 28, 2001 totaled $53.5 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.
OUR SUBSTANTIAL INDEBTEDNESS COULD LIMIT OUR FINANCIAL AND OPERATING FLEXIBILITY
At January 28, 2001, Landec's total debt, including current maturities and
capital lease obligations, was approximately $33.4 million and the total debt to
equity ratio was approximately 69%. 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 $15.5 million for a
performance based earnout and future supply of produce. Of this amount, $4.1
million is due to be paid in August 2001.
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.
Apio is subject to various financial and operating covenants under its
term debt and line of credit facilities, including minimum levels of EBITDA
(as defined in the Loan Agreement), 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 Ag and Dock Resins are subject to certain restrictive
covenants in their Loan Agreements which limit the ability of Landec Ag and
Dock Resins to make payments on debt owed to Landec. Landec has pledged
substantially all of Apio's, Landec Ag's and Dock Resins' assets to secure
their 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, Intellicoat, has
been the primary
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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, such as the high cost of sourcing
product during the first quarter of 2001 as a result of weather related freezes
in November and early December of 2000. 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 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 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 COMPETITION 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
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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 packaging 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.
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. In February 2000, Dock Resins had a fire in its research
and development laboratory in Linden, New Jersey which hindered its ability to
develop new products and samples for potential and existing customers.
OUR DEPENDENCE ON SINGLE SUPPLIERS MAY CAUSE DISRUPTION IN OUR OPERATIONS SHOULD
ANY 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 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.
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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.
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 AND/OR
INCREASES IN OUR COSTS
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, which could reduce the sales volumes and/or
increase the unit production costs. During the first quarter of fiscal year
2001, optimal weather conditions after the November/December freezes resulted in
an over supply of certain crops in which the Company had an invested interest.
The over supply resulted in reduced prices for these crops which caused the
Company to report a loss on its investment during the first quarter of fiscal
year 2001. 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 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 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.
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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
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 MAY EXPOSE OUR BUSINESS TO ADDITIONAL
RISKS
During the first quarter of fiscal year 2001, approximately 13% 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 2001, sales to Landec's top five
customers accounted for approximately 50% of Landec's revenues, with the top
customer accounting for 20% 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 Intellicoat 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
-15-
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 uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on Landec's business, operating results and financial condition.
OUR STOCK PRICE MAY 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's reported market risks since
the end of fiscal year 2000.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
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.
None
(b) Reports on Form 8-K
None
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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 13, 2001
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