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 APRIL 29, 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 May 25, 2001, there were 16,348,138 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 April 29, 2001
INDEX
Page
Facing sheet 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. a) Consolidated condensed balance sheets as of April 29, 2001 and October 29, 2000 3
b) Consolidated statements of operations for the three months and six months ended
April 29, 2001 and April 30, 2000. 4
c) Consolidated statements of cash flows for the six months ended April 29, 2001 and
April 30, 2000. 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION 20
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
a) Exhibits 21
b) Reports on Form 8-K 21
Signature 22
Index to Exhibits 23
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
April 29, October 29,
2001 2000
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,937 $ 9,589
Accounts receivable, less allowance for doubtful accounts of
$587 and $627 at April 29, 2001 and October 29, 2000 19,469 22,725
Inventory 17,853 14,501
Investment in farming activities 288 2,672
Notes and advances receivable 6,901 8,519
Notes receivable, related party 156 151
Prepaid expenses and other current assets 1,861 1,958
Assets held for sale 3,014 2,963
--------- ---------
Total Current Assets 55,479 63,078
Property and equipment, net 27,021 24,437
Intangible assets, net 42,148 43,386
Notes receivable 689 720
Other assets 886 1,631
--------- ---------
$ 126,223 $ 133,252
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 22,012 $ 19,374
Grower payables 2,859 13,651
Related party payables 381 262
Accrued compensation 1,449 2,470
Other accrued liabilities 9,037 9,522
Deferred revenue 560 2,265
Lines of credit 16,666 9,609
Current maturities of long term debt 3,757 3,584
--------- ---------
Total Current Liabilities 56,721 60,737
Long term debt, less current maturities 14,597 16,631
Other liabilities 2,087 2,442
Minority interest 1,070 1,264
--------- ---------
Total Liabilities 74,475 81,074
Shareholders' Equity:
Preferred stock 9,149 9,149
Common stock 92,882 92,555
Accumulated deficit (50,283) (49,526)
--------- ---------
Total Shareholders' Equity 51,748 52,178
--------- ---------
$ 126,223 $ 133,252
========= =========
SEE ACCOMPANYING NOTES.
-3-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
------------------------ -------------------------
April 29, April 30, 2000 April 29, April 30, 2000
2001 (restated) 2001 (restated)
--------- --------- --------- ---------
Revenues:
Product sales $ 47,010 $ 43,481 $ 80,035 $ 65,543
Services revenue 14,422 16,943 28,879 27,989
Services revenue, related party 615 202 1,028 761
Research and development revenues 122 145 229 275
License fees 93 93 187 187
--------- --------- --------- ---------
Total revenues 62,262 60,864 110,358 94,755
Cost of revenue:
Cost of product sales 36,220 33,406 65,099 52,182
Cost of product sales, related party 93 80 107 138
Cost of services revenue 13,940 14,899 27,319 25,599
--------- --------- --------- ---------
Total cost of revenue 50,253 48,385 92,525 77,919
Gross profit 12,009 12,479 17,833 16,836
Operating costs and expenses:
Research and development 1,102 1,103 2,217 2,154
Selling, general and administrative 7,290 8,133 15,450 13,886
--------- --------- --------- ---------
Total operating costs and expenses 8,392 9,236 17,667 16,040
--------- --------- --------- ---------
Operating profit 3,617 3,243 166 796
Interest income 169 274 310 416
Interest expense (620) (709) (1,285) (1,039)
Other income 16 100 52 95
--------- --------- --------- ---------
Net income (loss) before the cumulative effect of
change in accounting principle 3,182 2,908 (757) 268
Cumulative effect of change in accounting principle -- -- -- (1,914)
--------- --------- --------- ---------
Net income (loss) $ 3,182 $ 2,908 $ (757) $ (1,646)
========= ========= ========= =========
Amounts per common share:
Net income (loss) before cumulative effect of
change in accounting principle $ 0.20 $ 0.18 $ (0.05) $ 0.01
Cumulative effect of change in accounting
principle -- -- -- (0.12)
--------- --------- --------- ---------
Basic net income (loss) per share $ 0.20 $ 0.18 $ (0.05) $ (0.11)
========= ========= ========= =========
Net income (loss) before cumulative effect of
change in accounting principle $ 0.15 $ 0.13 $ (0.05) $ 0.01
Cumulative effect of change in accounting
principle -- -- -- (0.12)
--------- --------- --------- ---------
Diluted net income (loss) per share $ 0.15 $ 0.13 $ (0.05) $ (0.11)
========= ========= ========= =========
Shares used in per share computation:
Basic 16,306 15,993 16,228 15,537
========= ========= ========= =========
Diluted 18,357 18,558 16,228 15,537
========= ========= ========= =========
SEE ACCOMPANYING NOTES.
-4-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
April 29, April 30, 2000
2001 (restated)
------- -------
Cash flows from operating activities:
Net income (loss) $ (757) $ 268
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 3,139 2,701
Cumulative effect of change in accounting principle -- 1,914
Disposal of property and equipment 486 --
Changes in current assets and liabilities:
Accounts receivable 3,256 (4,013)
Inventory (3,352) (2,330)
Investment in farming activities 2,384 1,467
Prepaid expenses and other current assets 97 1,069
Accounts payable 2,638 7,681
Grower payables (10,792) (197)
Related party payables 119 157
Accrued compensation (1,021) (344)
Other accrued liabilities (485) (3,654)
Deferred revenue (1,705) (4,125)
------- -------
Total adjustments (5,236) 326
------- -------
Net cash (used in) provided by operating activities (5,993) 594
------- -------
Cash flows from investing activities:
Decrease in other assets and liabilities 390 500
Purchases of property and equipment (4,657) (1,727)
Decrease (increase) in notes receivable and advances 1,644 (4,621)
Acquisition costs related to earn-out provisions (363) (407)
Acquisition of Apio, Inc., net of cash received -- (5,813)
------- -------
Net cash used in investing activities (2,986) (12,068)
Cash flows from financing activities:
Proceeds from sale of preferred stock -- 9,149
Proceeds from sale of common stock 327 308
Borrowings on lines of credit 21,459 6,177
Payments on lines of credit (14,402) --
Borrowing of long term debt 250 --
Repayment of long term debt (2,113) (647)
Increase (decrease) in minority interest liability 19 (18)
Distributions to minority interest (213) (245)
------- -------
Net cash provided by financing activities 5,327 14,724
Net increase (decrease) in cash and cash equivalents (3,652) 3,250
Cash and cash equivalents at beginning of period 9,589 3,203
------- -------
Cash and cash equivalents at end of period 5,937 $ 6,453
======= =======
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" 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 April 29, 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 six month period ended April 29, 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 revenues and profits for Landec Ag,
Landec's agricultural technology subsidiary, is 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.
3. RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial
statements to conform to the current year presentation.
-6-
4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income for the periods with net income (in thousands except per share amounts):
Three Months Three Months
Ended Ended
April 29, 2001 April 30, 2000
-------------- --------------
Numerator:
Net income for basic net income per share $ 3,182 $ 2,908
Less: Minority interest in income of subsidiary (458) (551)
-------- --------
Net income for diluted net income per share $ 2,724 $ 2,357
Denominator:
Weighted average shares for basic net income per share 16,306 15,993
Effect of dilutive securities:
Stock Options 384 898
Convertible preferred stock 1,667 1,667
-------- --------
Total dilutive common shares 2,051 2,565
Weighted average shares for diluted net income per share 18,357 18,558
Basic net income per share $ 0.20 $ 0.18
Diluted net income per share $ 0.15 $ 0.13
5. 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 six
months ended April 29, 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. For the three months and six months ended April 29, 2001 and April
30, 2000, $93,000 and $187,000, respectively, of the related deferred revenue
was recognized as "recycled" revenue.
-7-
6. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consisted of the following (in thousands):
April 29, October 29,
2001 2000
------- -------
Finished goods..................... $ 9,167 $ 5,889
Raw material....................... 7,745 7,661
Work in process.................... 941 951
------- -------
$17,853 $14,501
======= =======
7. REVOLVING DEBT AND AMENDMENT TO CREDIT AGREEMENT
The $7.1 million increase in the Company's lines of credit during the first
six months of fiscal year 2001 was due to seasonal needs at Landec Ag for seed
corn purchases that will be carried over and sold in fiscal year 2002 and for
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.
In April 2001, the Apio revolving line of credit was further amended. The
amendment increases the maximum borrowings to $12.0 million from $10.0 million
until July 31, 2001 and increased the interest rate margin by 75 basis points
from prime plus .50% to prime plus 1.25%. In addition, the computed amount
available under the line as determined as a percentage of certain eligible
assets (primarily receivables) was increased by $4.0 million through July 31,
2001 and capital expenditure limits for fiscal year 2001 were increased from
$3.3 million up to $5.7 million based on the additional $2.4 million being
financed by a third party lender.
In May 2001, Apio entered into a lease agreement to fund the purchase of an
ERP business system. Terms of the agreement are 36 months at an average annual
interest rate of 11% with a fair market value buyout at the end of the term.
Security for the lease is the hardware portion plus a Letter of Credit ("LOC")
equal to 50% of the non-hardware portion of the lease. As of June 12, 2001 the
LOC balance was $740,000.
8. 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 six months of fiscal year 2000
include the results of Apio from the effective close date of November 29, 1999
through April 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.
-8-
Operations by Business Segment (in thousands):
Agricultural
Food Products Seed Corporate
Quarter ended April 29, 2001 Technology Technology and Other TOTAL
- ------------------------------------------- -------------- -------------- -------------- ---------
Net sales.................................. $ 43,379 $ 15,685 $ 3,198 $ 62,262
Net income (loss).......................... $ (462) $ 4,049 $ (405) $ 3,182
Quarter ended April 30, 2000
- -------------------------------------------
Net sales.................................. $ 40,896 $ 16,399 $ 3,569 $ 60,864
Net income (loss).......................... $ (1,588) $ 4,468 $ 28 $ 2,908
Six months ended April 29, 2001
- -------------------------------------------
Net sales.................................. $ 88,299 $ 15,737 $ 6,322 $ 110,358
Net income (loss).......................... $ (1,283) $ 1,462 $ (936) $ (757)
Six months ended April 30, 2000
- -------------------------------------------
Net sales.................................. $ 71,129 $ 16,654 $ 6,972 $ 94,755
Net income (loss) before cumulative effect of
change in accounting principle.......... $ (1,834) $ 2,022 $ 80 $ 268
-9-
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., Nitta Corporation and Hitachi
Chemicals. It also engages in research and development activities with companies
such as ConvaTec, a division of Bristol-Myers Squibb, 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.
-10-
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 April 29, 2001, Landec's accumulated deficit was $50.3 million.
RESULTS OF OPERATIONS
Total revenues were $62.3 million for the second quarter of fiscal year
2001, compared to $60.9 million for the second quarter of fiscal year 2000.
Revenues from product sales and services increased to $62.0 million in the
second quarter of fiscal year 2001 from $60.6 million in the second quarter
of fiscal year 2000. The increase in product sales and service revenues was
primarily due to increased revenues for Apio's value added fresh-cut
vegetable business which increased from $13.3 million in the second quarter
of fiscal year 2000 to $16.0 million during the same period of fiscal year
2001, partially offset by a reduction in sales for Landec Ag to $15.7 million
in the second quarter of fiscal year 2001 from $16.4 million in the second
quarter of fiscal year 2000. The decrease in Landec Ag revenues was due to a
decrease in the sales volume of uncoated hybrid corn seed. Revenues from
research and development funding were $122,000 for second quarter of fiscal
year 2001 compared to $145,000 for the second quarter of fiscal year 2000.
Revenues from license fees remained unchanged at $93,000 for the second
quarter of fiscal years 2001 and 2000. For the first six months of fiscal
year 2001 total revenues were $110.4 million compared to $94.8 million during
the same period in 2000. Revenues from product sales and services for the
first six months of fiscal year 2001 increased to $109.9 million from $94.3
million during the same period of fiscal year 2000 due primarily to including
the results of Apio for a full six months in fiscal year 2001 versus only
five months in fiscal year 2000. Revenues from research and development
funding for the first six months of fiscal year 2001 decreased to $229,000
from $275,000 during the same period of fiscal year 2000. Revenues from
licensing fees remained unchanged at $187,000 for the six month period of
fiscal years 2001 and 2000.
Cost of product sales and services consists of material, labor and
overhead. Cost of product sales and services was $50.3 million for the second
quarter of fiscal year 2001 compared to $48.4 million for the second quarter
of fiscal year 2000. Gross profit from product sales and services as a
percentage of revenue from product sales and services decreased from 20% in
the second quarter of fiscal year 2000 to 19% in the second quarter of fiscal
year 2001. Cost of product sales and services for the first six months of
fiscal year 2001 was $92.5 million compared to $77.9 million during the same
period in fiscal year 2000. Gross profit from product sales and services as a
percentage of revenue from product sales and services decreased to 16% for
the first six months of fiscal year 2001 from 17% during the same period of
fiscal year 2000. The decreases in gross profit percentages were primarily
the result of Apio's higher costs during fiscal year 2001 associated with
sourcing crops during the winter months. Overall gross profit decreased from
$12.5 million for the three month period ended April 30, 2000 to $12.0
million for the same period of fiscal year 2001. This decrease was due
primarily to lower margins on lower Landec Ag revenues during the second
quarter of fiscal year 2001 as compared to the year ago second quarter. For
the six month period ended April 30, 2000 gross profits increased from $16.8
million in fiscal year 2000 to $17.8 million for the same period in fiscal
year 2001, an increase of 6% for the first six months of fiscal year 2001
compared to the same period in fiscal year 2000. This increase is primarily
due to gross profit from Apio value added fresh-cut business partially offset
by lower margins on decreased sales at Landec Ag and Apio's increased farming
losses from winter season produce sourcing in the desert.
Research and development expenses remained the same at $1.1 million for
the second quarter of fiscal years 2001 and 2000. Research and development
expenses also remained flat at $2.2 million for the first six months 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
-11-
Landec's enabling side chain crystallizable polymer technology and research and
development expenses related to Dock Resins' products.
Selling, general and administrative expenses were $7.3 million for the
second quarter of fiscal year 2001 compared to $8.1 million for the second
quarter of fiscal year 2000, a decrease of 10%. For the first six months of
fiscal year 2001 selling, general and administrative expenses were $15.5 million
compared to $13.9 million during the same period in fiscal year 2000, an
increase of 11%. 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 decreased during the three month
period ended April 29, 2001 as compared to the same period of fiscal year 2000
primarily as a result of decreased expenses at Landec Ag after a February 2001
reduction in force. The increase in selling, general and administrative expense
during the six month period ended April 29, 2001 as compared to the same period
of fiscal year 2000 results from including Apio for a full six months in fiscal
year 2001 compared to only five months in fiscal year 2000. Sales and marketing
expenses decreased to $3.0 million for the second quarter of fiscal year 2001
from $3.5 million for the second quarter of fiscal year 2000. For the first six
months of fiscal year 2001 sales and marketing expenses decreased to $6.2
million from $6.4 million during the same period of fiscal year 2000.
Interest income for the three and six month periods ended April 29, 2001
were $169,000 and $310,000, respectively, compared to $274,000 and $416,000 for
the same periods of fiscal year 2000. These decreases in interest income were
due principally to less cash available for investing. Interest expense for the
three and six months periods ended April 29, 2001 were $620,000 and $1.3
million, respectively, compared to $709,000 and $1.0 million for the same
periods of fiscal year 2000. The decrease in interest expense for the second
quarter of fiscal year 2001 as compared to the same period in fiscal year 2000
is due to the capitalization of interest incurred to finance Apio's new business
system and Dock Resins' new laboratory and office building. For the six month
period interest expense was higher in fiscal year 2001 as compared to fiscal
year 2000 due to having Apio debt for a full six months in fiscal year 2001
versus only five months in fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of April 29, 2001, Landec had cash and cash equivalents of $5.9 million,
a net decrease of $3.7 million from $9.6 million as of October 29, 2000. This
decrease was primarily due to the net of: a) cash used in operations of $6.0
million; b) the purchase of $4.7 million of property, plant and equipment; c)
payment on long term debt and to minority interests of $2.4 million, partially
offset by; d) net borrowings of $7.3 million and; e) collections of notes
receivable and advances of $1.6 million.
During the first six months 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 $4.7 million of property and
equipment purchased during the first six months 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 and April 2001, the
Apio revolving line of credit was amended. The amendments reduce the maximum
borrowings from $12.0 million to $10.0 million effective July 31, 2001 and
increase the computed amount available under the line, determined as a
percentage of certain eligible assets (primarily receivables) by $4.0 million
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
-12-
the borrowing capacity on July 31, 2001, adversely impacts liquidity as the
Company has generally not needed to borrow in excess of $10.0 million on the
line with the exception of the current year due to excess costs incurred in
sourcing produce this winter. In May 2001, Apio entered into a lease agreement
to fund the purchase of a new ERP business system. As of June 2001, $1.6 million
of the estimated $2.3 million in total costs had been financed. In June 2000,
Landec Ag established a $3.0 million bank line of credit for working capital
needs based on inventory values 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
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 April 29, 2001 totaled $50.3 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.
OUR SUBSTANTIAL INDEBTEDNESS COULD LIMIT OUR FINANCIAL AND OPERATING FLEXIBILITY
At April 29, 2001, Landec's total debt, including current maturities and
capital lease obligations, was approximately $35.0 million and the total debt to
equity ratio was approximately 68%. 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.
-13-
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 agreements, 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
agreements.
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, Landec Ag, 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, such as the
high cost of sourcing product during the first quarter of fiscal year 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
-14-
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 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. The
laboratory has been rebuilt and became fully operational in June 2001.
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 Landec Ag 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
-15-
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. 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.
-16-
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 six months 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.
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.
-17-
OUR INTERNATIONAL OPERATIONS AND SALES MAY EXPOSE OUR BUSINESS TO ADDITIONAL
RISKS
For the first six months 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 six months ended April 29, 2001, sales to Landec's top five
customers accounted for approximately 44% of Landec's revenues, with the top
customer accounting for 14% 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 Landec Ag 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 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
-18-
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.
-19-
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
At the Company's Annual Meeting of Shareholders held on March 29, 2001
the following proposals were adopted by the margins indicated:
Number of Shares
----------------
Voted For Withheld
--------- --------
1. Three Class I directors were elected by the margins indicated to serve
until the next odd-numbered year Annual Meeting (2003) during which their
successors will be elected and qualified:
Frederick Frank 12,897,801 1,070,630
Stephen E. Halprin 12,898,301 1,070,130
Richard S. Schneider, PH.D. 12,898,301 1,070,130
The three Class II directors were not up for election at the
Annual Meeting. These three Class II directors, Gary T. Steele,
Kirby. L. Cramer and Richard Dulude, will serve as Class II
directors until the next even-numbered Annual Meeting (2002),
when their successors will be elected and qualified.
Voted Voted Broker
For Against Abstain Non-Votes
---------- ------------- ------- ----------
2. To approve an amendment to the Company's 1996 Stock 12,030,079 1,909,808 28,544 0
Option Plan to increase the number of shares of
Common Stock reserved for issuance thereunder by
500,000 shares to an aggregate total of 2,000,000
shares.
Voted Voted Broker
For Against Abstain Non-Votes
---------- ------------- ------- ----------
3. To ratify the appointment of Ernst & Young LLP as 13,952,302 15,680 449 0
independent public accountants of the Company for
the fiscal year ending October 28, 2001.
-20-
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1+ Amended and Restated Bylaws of Registrant
10.17+ 1996 Stock Option Plan, as amended
10.31+ Amendment No. 2 to the Loan Agreement between Apio, Inc. and the Bank of America
dated as of February 28, 2001.
10.32+ Amendment No. 3 to the Loan Agreement between Apio, Inc. and the Bank of America
dated as of April 26, 2001.
(b) Reports on Form 8-K
None
- -----------------------
+ Filed herewith.
-21-
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: June 13, 2001
-22-
LANDEC CORPORATION
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1 Amended and Restated Bylaws of Registrant
10.17 1996 Stock Option Plan, as amended
10.31 Amendment No. 2 to the Loan Agreement between Apio, Inc. and
the Bank of America dated as of February 28, 2001.
10.32 Amendment No. 3 to the Loan Agreement between Apio, Inc. and
the Bank of America dated as of April 26, 2001.
-23-