<PAGE>
This document consists of 29 pages, of which this is page number 1.
The Index to Exhibits is on Page 28.
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 JULY 30, 2000, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 HAVEN AVENUE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 306-1650
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for at least the past 90 days.
Yes X No
----- ------
As of September 8, 2000, there were 16,040,607 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.
<PAGE>
LANDEC CORPORATION
FORM 10-Q For the Quarter Ended July 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Facing sheet 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. a) Consolidated condensed balance sheets as of July 30, 2000 and October 31, 1999 3
b) Consolidated statements of operations for the three months and nine months ended
July 30, 2000 and July 31, 1999 4
c) Consolidated statements of cash flows for the nine months ended July 30, 2000 and
July 31, 1999 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II. OTHER INFORMATION 26
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
a) Exhibits 26
b) Reports on Form 8-K 26
Signature 27
Index to Exhibits 28
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
July 30, October 31,
2000 1999
---------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,878 $ 3,203
Accounts receivable, less allowance for doubtful accounts of $903
and $45 at July 30, 2000 and October 31, 1999 24,792 2,952
Inventory 15,249 7,641
Investment in farming activities 833 --
Notes and advances receivable 9,224 --
Notes receivable, related party 186 138
Prepaid expenses and other current assets 2,251 2,233
------------- -------------
Total Current Assets 63,413 16,167
Property and equipment, net 26,485 11,002
Intangible assets, net 39,541 13,506
Non-current portion of notes receivable 166 --
Other assets 1,540 33
------------- -------------
$ 131,145 $ 40,708
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 21,741 $ 1,687
Grower payables 11,097 --
Related party payables 324 --
Accrued compensation 2,396 1,036
Other accrued liabilities 5,322 1,327
Deferred revenue 603 2,135
Lines of credit 11,313 --
Current maturities of long term debt 3,511 125
------------- -------------
Total Current Liabilities 56,307 6,310
Long term debt, less current maturities 17,360 2,637
Other non-current liabilities 980 --
Minority interest 1,281 --
------------- -------------
Total Liabilities 75,928 8,947
Shareholders' Equity:
Preferred stock 9,149 --
Common stock 92,177 77,289
Accumulated deficit (46,109) (45,528)
------------- -------------
Total Shareholders' Equity 55,217 31,761
------------- -------------
$ 131,145 $ 40,708
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
-3-
<PAGE>
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -----------------------------
July 30, July 31, July 30, July 31,
2000 1999 2000 1999
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $35,279 $ 5,409 $ 100,822 $ 28,713
Services revenue 25,443 -- 53,432 --
Services revenue, related party 563 -- 1,324 --
Research and development revenues 116 121 391 482
License fees -- -- -- 750
----------- ------------ ------------ -------------
Total revenues 61,401 5,530 155,969 29,945
Cost of revenue:
Cost of product sales 30,814 3,588 82,995 17,673
Cost of product sales, related party 105 -- 243 --
Cost of services revenue 21,978 -- 47,577 --
----------- ------------ ------------ -------------
Total cost of revenue 52,897 3,588 130,815 17,673
Gross profit 8,504 1,942 25,154 12,272
Operating costs and expenses:
Research and development 1,172 1,433 3,326 4,359
Selling, general and administrative 7,481 2,525 21,367 8,249
----------- ------------ ------------ -------------
Total operating costs and expenses 8,653 3,958 24,693 12,608
----------- ------------ ------------ -------------
Operating profit (loss) (149) (2,016) 461 (336)
Interest income 265 69 681 322
Interest expense (613) (64) (1,652) (183)
Other expense (165) (16) (71) (20)
----------- ------------ ------------ -------------
Net loss $ (662) $ (2,027) $ (581) $ (217)
======= ======== ========== ===========
Basic and diluted loss per share $ (0.04) $ (0.15) $ (0.04) $ (0.02)
======= ======== ========== ===========
Shares used in computing basic and diluted
per share net loss 16,006 13,294 15,693 13,252
======= ======== ========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
-4-
<PAGE>
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
July 30, July 31,
2000 1999
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (581) $ (217)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,253 1,562
Amortization of deferred compensation -- 86
Loss on sale of equipment -- 60
Changes in current assets and liabilities:
Accounts receivable (6,553) 26
Inventory (3,135) (2,961)
Investment in crops 1,197 --
Prepaid expenses and other current assets 1,180 163
Accounts payable 5,902 (112)
Grower payables 4,376 --
Related party payables 324 --
Accrued compensation 224 15
Other accrued liabilities (3,873) 187
Deferred revenue (1,532) (2,483)
------------- ---------------
Total adjustments 2,363 (3,457)
------------- ---------------
Net cash provided by (used in) operating activities 1,782 (3,674)
------------- ---------------
Cash flows from investing activities:
Decrease in other assets and liabilities 477 --
Purchases of property and equipment (3,260) (2,458)
Proceeds from sale of equipment -- 15
Increase in notes receivable and advances (4,107) --
Acquisition costs related to earn-out provisions (403) (393)
Acquisition of Apio, Inc., net of cash received (5,813) --
Maturities of available-for-sale securities -- 989
------------- ---------------
Net cash provided by (used in) investing activities: (13,106) (1,847)
------------- ---------------
Cash flows from financing activities:
Proceeds from sale of preferred stock 9,149 --
Proceeds from sale of common stock 329 364
Repayment of notes receivable from shareholders -- 291
Borrowings on lines of credit 11,313 --
Repayment of long term debt (1,671) (63)
Decrease in minority interest (121) --
------------- ---------------
Net cash provided by financing activities 18,999 592
------------- ---------------
Net increase (decrease) in cash and cash equivalents 7,675 (4,929)
Cash and cash equivalents at beginning of period 3,203 9,185
------------- ---------------
Cash and cash equivalents at end of period $ 10,878 $ 4,256
============= ===============
</TABLE>
SEE ACCOMPANYING NOTES.
-5-
<PAGE>
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Landec
Corporation ("Landec") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
to present fairly the financial position, results of operations, and cash flows
at July 30, 2000, and for all periods presented, have been made. Although Landec
believes that the disclosures in these financial statements are adequate to make
the information presented not misleading, certain information normally included
in financial statements and related footnotes prepared in accordance with
generally accepted accounting principles have been condensed or omitted per the
rules and regulations of the Securities and Exchange Commission. The
accompanying financial data should be reviewed in conjunction with the audited
financial statements and accompanying notes included in Landec's Annual Report
on Form 10-K for the fiscal year ended October 31, 1999.
The results of operations for the nine month period ended July 30, 2000
are not necessarily indicative of the results that may be expected for the
fiscal year ended October 29, 2000. For instance, due to the cyclical nature of
the corn seed industry, a significant portion of revenues and profits for
Intellicoat Corporation ("Intellicoat"), a wholly-owned subsidiary of Landec
which distributes its products under the Fielder's Choice Direct name, will be
concentrated over a few months during the spring planting season (generally
during Landec's second fiscal quarter).
2. NEW PRONOUNCEMENTS
SAB 101 requires that non-refundable, up-front license fees be deferred
and recognized generally over the term of the license agreement, unless the
agreements and facts and circumstances of the transaction clearly reflect the
completion of the earnings process as defined, regardless of the fact that they
are non-refundable. In accordance with SAB No. 101, Landec will revise certain
revenue recognition policies regarding the recognition of non-cancelable,
non-refundable license fees. SAB No. 101 will be adopted by Landec at the
beginning of fiscal year 2001, which Landec estimates will result in the
recording of a non-cash charge of approximately $1 million to account for the
cumulative effect of the accounting change. This amount will be recorded as
deferred income and recognized as revenues over the remaining term of the
license agreement.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, AN INTERPRETATION OF APB OPINION 25. Landec is required to adopt
the Interpretation on July 1, 2000. The impact of adopting the Interpretation is
not expected to be material.
3. RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial
statements to conform to the current year presentation.
-6-
<PAGE>
4. RESEARCH AND DEVELOPMENT EXPENSES
Costs related to both research contracts and Landec funded research is
included in research and development expenses as incurred. Costs to fulfill
research contracts generally approximate the corresponding revenue.
5. ACQUISITION
On December 2, 1999, Landec acquired Apio, Inc. and certain
related entities ("Apio"), located in Guadalupe, California, one of the nation's
leading marketers and packers of produce and specialty packaged fresh-cut
vegetables. Upon closing, Landec paid $21.0 million in cash and stock, before
expenses, for Apio, which will operate as a wholly owned subsidiary of Landec.
In addition, the agreement provides for future payments to the former owners of
Apio of up to $16.75 million. These payments consist of a) up to $10.0 million
which will be paid out over two years to one of the former owners and current
CEO of Apio if Apio exceeds certain earning targets in fiscal years 2000 and
2001, b) $5.3 million non-interest bearing obligation which will be paid in
equal annual installments over the next five years (recorded at $4.1 million on
a discounted basis), c) up to $1.25 million if Landec's common stock is trading
at an average price below $6.00 per share during the last twenty trading days of
the nine month period after the closing (see update below) and d) up to
$200,000, which has been recorded as a liability, upon the collection of certain
notes receivable, $100,000 of which was determined on March 2, 2000 will not be
paid. The transaction was accounted for as a purchase. The purchase price has
been allocated to the acquired assets and liabilities based on their relative
fair market values, subject to final adjustments. These allocations are based on
independent valuations and other studies.
The amount to be paid under clause (c) above was modified by agreement
in September 2000, such that the twenty tracking day period for which the
average price is calculated will be extended to June 2001 and the average price
may be adjusted from $6.00 to an amount to be determined based on certain future
events, with the maximum future payment not to exceed $1.25 million.
The following is a summary of the purchase price allocation (in
thousands); the final values may differ from those set forth below.
<TABLE>
<S> <C>
Net assets and liabilities $ 2,014
Customer base 1,821
Work force in place 1,395
Trademark 9,100
Goodwill 14,913
------------
$ 29,243
============
</TABLE>
The acquisition by Landec of all the outstanding capital stock of Apio
was exchanged for the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------
<S> <C>
Landec common stock $ 14,217
Contractual deferred obligations 4,092
Cash paid or set aside as a liability at closing 9,100
------------
Purchase price before acquisition costs 27,409
Estimated acquisition costs 1,834
------------
Total estimated purchase price $ 29,243
============
</TABLE>
During the second fiscal quarter, the goodwill portion of the purchase
price was increased by $2.1 million to reflect a change in the estimated value
of Landec common stock issued at close.
-7-
<PAGE>
To fund the transaction, Landec issued 2.5 million shares of common
stock to the prior owners of Apio. Apio replaced a portion of its existing bank
debt with a $11.25 million term note and entered into a new $12 million line of
credit agreement with a bank. Existing debt of $3.7 million was assumed in the
transaction. In a separate transaction, Landec sold $10 million ($9.1 million
net of issuance costs) of convertible preferred stock (convertible into
1,666,670 shares of Common Stock) to a private, long-term, investor at a $6.00
per share equivalent price. Under the terms of these transactions, Landec has
registered with the Securities and Exchange Commission approximately 2.6 million
shares of Landec common stock on Form S-3 effective May 17, 2000.
The results of operations and cash flows for the nine months ended
July 30, 2000 include the results of Apio from November 29, 1999 through July
30, 2000.
The following pro forma summary of consolidated revenues, net
income/(loss) and net income/(loss) per share for the nine months ended July 30,
2000 and July 31, 1999 assumes the acquisition occurred on November 1, 1998.
These pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of Landec's financial results if the acquisition had
taken place at the beginning of fiscal year 1999 or of future results (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
July 30, July 31,
2000 1999
-------------------------------------
<S> <C> <C>
Revenue $ 171,026 $ 145,140
Net loss $ (676) $ (1,389)
Net loss per share $ (0.04) $ (0.09)
</TABLE>
6. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market and consisted of the following (in thousands):
<TABLE>
<CAPTION>
July 30, October 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Raw material.......................... $ 8,421 $ 1,015
Finished goods........................ 6,240 6,169
Work in process....................... 588 457
----------------- ---------------
$ 15,249 $ 7,641
================= ===============
</TABLE>
7. INVESTMENT IN FARMING ACTIVITIES
Landec, through its Apio subsidiary, invests in certain farming
activities. The investments consist of cash advances to growers for expenses to
be incurred during the growing season, in exchange for a percentage ownership in
the crops. Net income or loss is generally recognized on these investments based
on Landec's percentage ownership of the net proceeds of the crops as fields are
harvested and settled. Additionally, certain farming agreements contain
provisions wherein Landec bears the risk of loss if the net proceeds from the
crops are not sufficient to cover the expense incurred. For the nine months
ended July 30, 2000 net losses of approximately $1.2 million were recognized and
included in the cost of product sales in the consolidated statements of
operations.
-8-
<PAGE>
9. NOTES RECEIVABLE
Notes receivable and advances at July 30, 2000 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Various notes receivable from growers, with principal and interest
ranging from the prime rate plus .5% to the prime rate plus 3%,
payments to be withheld from proceeds derived from crop sales, due
through December 2000, secured by crops $ 8,749
Unsecured grower note receivable with interest at prime rate (9.5% at July 30, 2000)
plus 2% 499
Various notes receivable from growers bearing no interest on cartons in inventory. 320
Payments to be withheld based on cartons used, due through December 2000, secured
by residual inventories
Note receivable due from grower in annual installments of $60,714 plus interest at
prime rate plus 1.0% with final payment due November 1, 2004, secured by crops 304
Unsecured note receivable due from a related party with interest at 7.5%, due
July 31, 2001 148
Note receivable due from a related party with interest at prime plus 1.0%, payments to
be withheld from proceeds derived from crop sales, secured by crops 38
Other 599
-------
10,657
Less allowance for doubtful notes (1,081)
-------
9,576
Less current portion of notes receivable (9,410)
-------
Non-current portion of notes receivable $ 166
=======
</TABLE>
Landec is obligated to make additional loans to growers under certain
of these note receivable agreements. At July 30, 2000, Landec had outstanding
commitments to fund up to an additional $79,000 to growers under these existing
note receivable agreements.
10. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
July 30, October 31,
2000 1999
------------- --------------
<S> <C> <C>
Land and buildings........................................$ 12,264 $ 3,945
Leasehold improvements.................................... 1,570 1,372
Computer, machinery, equipment and autos.................. 16,621 8,155
Furniture and fixtures.................................... 1,897 592
Construction in process................................... 1,392 1,173
------------ -------------
33,744 15,237
Less accumulated depreciation and amortization............ (7,259) (4,235)
------------ -------------
$ 26,485 $ 11,002
============ =============
</TABLE>
-9-
<PAGE>
11. INTANGIBLES
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
July 30, October 31,
2000 1999
------------- --------------
<S> <C> <C>
Developed technology......................................$ 5,036 $ 5,036
Trademark................................................. 14,075 4,975
Customer base............................................. 4,217 2,396
Workforce in place........................................ 2,305 910
Covenants not to compete.................................. 277 277
Goodwill.................................................. 18,230 2,509
------------ -------------
44,140 16,103
Less accumulated amortization............................. (4,599) (2,597)
------------ -------------
$ 39,541 $ 13,506
============ =============
</TABLE>
The intangible assets are being amortized over five to twenty years based
on their individually estimated useful lives.
12. GROWER PAYABLE
Landec, through its Apio subsidiary, contracts with growers to harvest,
pack, cool and distribute their products. The grower payable is the net of the
market value of the products received from the growers and the corresponding
charges by Landec for services rendered on behalf of the growers.
13. DEBT
REVOLVING DEBT
Apio has a revolving line of credit with a bank which allows for
borrowings up to a maximum of $12.0 million. Outstanding amounts bear interest
at the greater of the prime rate set by the bank or the Federal fund rate (9.5%
at July 30, 2000) plus a margin based on Apio's leverage ratio as defined in the
revolving note agreement, currently plus .50%. The revolving note agreement
expires on May 1, 2002. At July 30, 2000, $10.0 million was outstanding under
the revolving line of credit.
Dock Resins Corporation ("Dock Resins"), a wholly-owned subsidiary of
Landec, has a revolving line of credit which allows for borrowings of up to
$1.25 million. The interest rate on the revolving line of credit is principally
charged at the one-month LIBOR rate plus 1.75%. The revolving line of credit
expires on February 28, 2002, and contains certain restrictive covenants, which,
among other things, require Dock Resins to maintain minimum levels of net
working capital and tangible net worth. At July 30, 2000, $900,000 was
outstanding under the revolving line of credit.
-10-
<PAGE>
Intellicoat has a revolving line of credit, for which the amount of
potential borrowings is based on Intellicoat's inventory levels, which allows
for borrowings of up to $3 million, and a capital expenditure line of credit
which allows for borrowings up to $1 million. The interest rate on the revolving
line of credit is charged at the prime rate plus 0.75%, and on the capital
expenditure line of credit at the five year Treasury bill rate plus 4.75%. These
lines of credit contain certain restrictive covenants, which, among other
things, affect the ability of Landec to receive payments on debt owed by
Intellicoat to Landec. Landec has pledged substantially all of the assets of
Intellicoat to secure the lines of credit. At July 30, 2000, $200,000 was
outstanding under the revolving line of credit and $215,000 was outstanding
under the capital expenditure line of credit.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JULY 30, 2000 OCTOBER 31, 1999
------------- ----------------
<S> <C> <C>
Bank term loan for Apio; due in initial quarterly payment of
$500,000 beginning April 30, 2000 increasing to $562,500
January 31, 2001 and to $625,000 on January 31, 2002
through October 31, 2004 with interest payable monthly at
7.02% plus a margin based on Apio's leverage ratio as
defined in the loan agreement, currently plus 2.5% $ 10,750 $ --
Contractual obligation to former owners of Apio; due in
annual installments of $1,060,000 beginning January 2,
2001 through January 2, 2005 (see Note 6) 4,092 --
Bank term loan for Dock Resins; due in monthly installments
of $15,278 including interest at 8.19% beginning
February 1, 1999 through January, 2006 with the balance
due January 31, 2006 2,604 2,678
Note payable of Apio to a commercial finance company; due in
monthly installments of $13,366 including interest at
7.0% with final payment due December 2019 1,702 --
Note payable of Apio to a bank; due in monthly installments
of $8,008 including interest at 9.5% with final payment
due December 2015 863 --
Various notes payable with interest rates ranging from 7.54%
to 10.82% 540 84
Capitalized lease obligations with interest rates ranging
from 9.15% to 12.99% 320 --
------------- ----------------
20,871 2,762
------------- ----------------
Less current portion (3,511) (125)
------------- ----------------
$ 17,360 $ 2,637
============= ================
</TABLE>
Maturities of long-term debt, including obligations under capital lease
agreements, for each year presented are as follows (in thousands):
<TABLE>
<S> <C>
FY 2000 (period July 31 through October 29, 2000)... $ 1,305
FY 2001.............................................. 3,590
FY 2002.............................................. 3,619
FY 2003.............................................. 3,535
FY 2004.............................................. 3,615
Thereafter........................................... 5,207
------------
$ 20,871
============
</TABLE>
-11-
<PAGE>
The contractual obligation of $5.3 million to former shareholders of
Apio is non-interest bearing and accordingly has been discounted at Apio's
incremental borrowing rate of 9.5% over five years resulting in a discounted
value of $4,092,000.
Dock Resins' bank term loan limits dividend payments and contains
various financial covenants including minimum working capital levels, net worth
and debt service ratio.
Apio's bank term loan limits payments to Landec for dividends,
corporate service fees and tax sharing expenses until the principal is reduced
to an amount specified in the loan agreement. In addition, the term loan and the
revolving note contain various financial covenants including minimum levels of
EBITDA, minimum fixed coverage ratio, minimum current ratio, minimum adjusted
net worth and maximum leverage ratios. These requirements and ratios generally
become more restrictive over time.
Landec has pledged substantially all of Apio's and Dock Resins' assets
to secure their debt.
14. MINORITY INTEREST
In connection with the acquisition of Apio, Landec acquired Apio's 60%
general partner interest in Apio Cooling, a California limited partnership. Apio
Cooling is included in the consolidated financial statements of Landec at July
30, 2000. The minority interest balance at July 30, 2000 represents the limited
partners' interest in Apio Cooling.
15. STOCKHOLDERS EQUITY
To fund the acquisition of Apio, Landec issued 2.5 million shares of
Landec Common Stock to the former shareholders of Apio. The stock was valued
at the average closing price, as quoted by the Nasdaq National Market, for
three days before and after the date of the close. The resulting value was
discounted due to registration restrictions on the stock.
On November 19, 1999 Landec completed a financing that raised $9.1
million, net of issuance costs, through a private placement of 166,667 shares of
non-dividend paying convertible Preferred Stock (representing 1,666,670 shares
of Common Stock on a converted basis).
APIO STOCK PLAN. In connection with the acquisition of Apio, the Board
of Directors of Landec authorized the establishment of the 1999 Apio Stock
Option Plan ("1999 Plan"). Under the 1999 Plan, the Board of Directors of Apio
may grant incentive stock options or non-statutory stock options to employees
and outside consultants. The exercise price of the incentive stock options and
non-statutory stock options may be no less than 100% and 85%, respectively, of
the fair market value of Apio's common stock as determined by Apio's Board of
Directors. Five million shares are authorized to be issued under this plan.
Options are exercisable upon vesting and generally vest ratably over four years
and are subject to repurchase if exercised before being vested. As of July 30,
2000, options for two million shares have been granted at an exercise price of
$2.10 per share.
In May 2000, the 1999 Plan was terminated. All existing grants remain
outstanding, and no future grants will be made from the plan. Concurrently, the
2000 Apio Stock Option Plan ("2000 Plan") was authorized by
-12-
<PAGE>
Apio's Board of Directors, which authorized the issuance of two million shares
under the same terms and conditions as the 1999 Plan. As of July 30, 2000,
options for 869,000 shares have been granted under the 2000 Plan at an exercise
price of $2.10 per share.
16. BUSINESS SEGMENT REPORTING
The acquisition of Apio in December 1999 resulted in a redefinition
of operating segments by management. Prior period segment information has
been restated to conform to the current segment definitions. Landec operates
in two business segments: the Food Products Technology segment and the
Agricultural Seed Technology segment. The Food Products Technology segment
markets and packs produce and specialty packaged fresh-cut vegetables that
incorporate the Intellipac-TM- breathable membrane for the fresh-cut produce
industry through its Apio subsidiary. The amounts presented for fiscal year
2000 include the results of Apio from the effective close date of November 29,
1999 through July 30, 2000. The Food Products Technology segment for the
three months and nine months ended July 31, 1999 only includes the operations
of the Intellipac business. The Agricultural Seed Technology segment markets
and distributes hybrid seed corn to the farming industry and is developing
seed coatings using Landec's proprietary Intelimer-R- polymers through
Intellicoat. The Food Products Technology and Agricultural Seed Technology
segments include charges for corporate services allocated from the Corporate
and Other segment. Corporate and Other amounts include non-core operating
activities, corporate operating costs and net interest expense. Assets
classified as Corporate and Other consist primarily of assets of Dock Resins.
Operations by Business Segment (in thousands):
<TABLE>
<CAPTION>
Agricultural
Food Products Seed Corporate and
Technology Technology Other TOTAL
------------------------------------------------ -------------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
Quarter ended July 30, 2000
------------------------------------------------
Net sales.................................. $ 57,363 $ 483 $ 3,555 $ 61,401
Income (loss) from continuing operations... $ 1,355 $ (2,196) $ 179 $ (662)
Identifiable assets........................ $ 98,351 $ 15,932 $ 16,862 $ 131,145
Depreciation and amortization.............. $ 1,042 $ 266 $ 244 $ 1,552
Capital expenditures....................... $ 839 $ 306 $ 388 $ 1,533
Interest income............................ $ 227 $ 18 $ 20 $ 265
Interest expense........................... $ 569 $ -- $ 44 $ 613
Quarter ended July 31, 1999
------------------------------------------------
Net sales.................................. $ 1,136 $ 483 $ 3,911 $ 5,530
Income (loss) from continuing operations... $ 47 $ (1,337) $ (737) $ (2,027)
Identifiable assets........................ $ 2,052 $ 17,327 $ 21,042 $ 40,421
Depreciation and amortization.............. $ 54 $ 178 $ 298 $ 530
Capital expenditures....................... $ 24 $ (46) $ 919 $ 897
Interest income............................ $ -- $ 32 $ 37 $ 69
Interest expense........................... $ -- $ -- $ 64 $ 64
Nine months ended July 30, 2000
------------------------------------------------
Net sales.................................. $ 128,491 $ 17,138 $ 10,340 $ 155,969
Income (loss) from continuing operations... $ (485) $ (173) $ 77 $ (581)
Identifiable assets........................ $ 98,351 $ 15,932 $ 16,862 $ 131,145
Depreciation and amortization.............. $ 2,708 $ 774 $ 771 $ 4,253
Capital expenditures....................... $ 1,705 $ 468 $ 1,087 $ 3,260
Interest income............................ $ 533 $ 81 $ 67 $ 681
Interest expense........................... $ 1,500 $ -- $ 152 $ 1,652
Nine months ended July 31, 1999
----------------------------------------------
Net sales.................................. $ 3,116 $ 15,201 $ 11,628 $ 29,945
Income (loss) from continuing operations... $ -- $ (114) $ (103) $ (217)
Identifiable assets........................ $ 2,052 $ 17,327 $ 21,042 $ 40,421
Depreciation and amortization.............. $ 119 $ 669 $ 774 $ 1,562
Capital expenditures....................... $ 167 $ 109 $ 2,182 $ 2,458
Interest income............................ $ -- $ 96 $ 226 $ 322
Interest expense........................... $ -- $ -- $ 183 $ 183
</TABLE>
-13-
<PAGE>
17. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Landec leases facilities and equipment under operating lease agreements
with various terms and conditions, which expire at various dates through
December 2002. The approximate future minimum lease payments under these
operating leases, excluding farmland leases, at July 30, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
FY2000..............................................$ 265
FY2001.............................................. 885
FY2002.............................................. 425
FY2003.............................................. 178
-----------
$ 1,753
===========
</TABLE>
Rent expense for operating leases, including month to month
arrangements was $962,000 for the nine months ended July 30, 2000.
LAND LEASES
Landec, through its Apio subsidiary, also leases farmland under various
non-cancelable leases expiring through October 2004. Landec subleases
substantially all of the farmland to growers who, in turn, agree to market their
crops through Landec. The subleases are generally non-cancelable and expire
through October 2004. The approximate future minimum leases and sublease amounts
receivable under farmland leases at July 30, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
Minimum Sublease
Lease Rents
Payments Receivable Net
----------- ----------- ---------
<S> <C> <C> <C>
2000...................................................$ 366 $ 239 $ 127
2001................................................... 1,339 486 853
2002................................................... 1,183 313 870
2003................................................... 560 150 410
2004................................................... 414 150 264
--------- -------- ---------
$ 3,862 $ 1,338 $ 2,524
========= ======== =========
</TABLE>
The net lease expense incurred for farmland leases for the nine month period
ended July 30, 2000 was $189,000 and is included in the cost of service revenues
in the accompanying statements of operations.
-14-
<PAGE>
EMPLOYMENT AGREEMENTS
Landec has entered into employment agreements with certain key
employees. These agreements provide for these employees to receive incentive
bonuses based on the financial performance of certain divisions in addition to
their annual base salaries. Certain key employees also receive minimum bonuses
for their second year assuming continued employment. The accrued incentive
bonuses amounted to $146,000 at July 30, 2000.
RELATED PARTY TRANSACTIONS
Apio provides harvesting, packing, cooling and distributing services
for a member of management and purchases produce from that individual. Revenues,
cost of product sales and the resulting payable are shown separately in the
accompanying financial statements as of July 30, 2000 and for the period then
ended.
On November 1, 1998, Landec loaned an officer of Intellicoat
Corporation $500,000 in cash in exchange for a promissory note. Interest accrued
at 7.5% per annum. On July 31, 1999 the balance of principal and accrued
interest were offset by an earn-out provision related to the acquisition of
Fielder's Choice Direct by Intellicoat. The resulting principal balance and
accrued interest at July 30, 2000 of $148,000, is due and payable on July 31,
2001.
-15-
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and accompanying notes included in
Part I--Item 1 of this Form 10-Q and the audited consolidated financial
statements and accompanying notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Landec's Annual Report
on Form 10-K for the fiscal year ended October 31, 1999.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934. These forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements.
Potential risks and uncertainties include, without limitation, those mentioned
in this report and, in particular the factors described below under "Additional
Factors That May Affect Future Results," and those mentioned in Landec's Annual
Report on Form 10-K for the fiscal year ended October 31, 1999. Landec
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
OVERVIEW
Landec Corporation and its subsidiaries ("Landec") design, develop,
manufacture and sell temperature-activated and other polymer products for a
variety of food products, agricultural products, and partner licensing
applications. This proprietary polymer technology is the foundation, and key
differentiating advantage, upon which Landec has built its business.
Landec's Food Products Technology business, operated through its wholly
owned subsidiary Apio, combines Landec's proprietary food packaging technology
with the capabilities of a large national food supplier and value-added produce
processor. This combination was consummated in December 1999 when Landec
acquired Apio, Inc. and certain related entities (collectively "Apio").
Landec's Agricultural Seed Technology business, operated through its
wholly owned subsidiary Intellicoat Corporation ("Intellicoat"), combines
Landec's proprietary seed coating technology with a unique Fielder's Choice
Direct ("Fielder's Choice") system of selling called eDC-TM- - e-commerce,
direct marketing and consultative sales.
In addition to its core business, 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.
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-TM- trademark which are used by more than
300 customers throughout the United States in coatings, printing inks,
laminating and adhesives markets.
Landec's core polymer manufacturing products are based on its patented
proprietary Intelimer-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
-16-
<PAGE>
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.
Based on this core technology, Landec has launched to date four 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 in September 1995;
Intelimer polymer systems for the industrial specialties market in June 1997;
and Intellicoat-R- coatings for inbred corn seed in October 1999.
Landec has been unprofitable during each fiscal year since its
inception and may incur additional losses in the future. The amount of future
net profits, if any, is highly uncertain and there can be no assurance that
Landec will be able to reach or sustain profitability for an entire fiscal year.
From inception through July 30, 2000, Landec's accumulated deficit was $46.1
million.
RESULTS OF OPERATIONS
Total revenues were $61.4 million for the third quarter of fiscal year
2000, compared to $5.5 million for the third quarter of fiscal year 1999.
Revenues from product sales and services increased to $61.3 million in the third
quarter of fiscal year 2000 from $5.4 million in the third quarter of fiscal
year 1999. The increase in product sales and service revenues was primarily due
to $57.1 million in revenues from Apio which was acquired effective November 29,
1999. For the first nine months of fiscal year 2000 total revenues were $156.0
million compared to $29.9 million during the same period in 1999. Revenue from
product sales and services for the first nine months of fiscal year 2000
increased to $155.6 million from $28.7 million during the same period of 1999
due to $127.0 million in Apio revenues from the November 29, 1999 effective
close date through July 30, 2000 and from increased product sales from
Intellicoat. Intellicoat product sales increased to $17.1 million in the first
nine months of fiscal year 2000 from $15.2 million during the same period of
fiscal year 1999 due to an increase in the volume of hybrid corn seed sold.
Revenues from research and development funding decreased to $116,000 for third
quarter of fiscal year 2000 from $121,000 for the third quarter of fiscal year
1999 and decreased for the first nine months of fiscal year 2000 to $391,000
from $482,000 during the same period of fiscal year 1999. The decrease in
research and development revenues was primarily due to the expiration of the
research and development agreement with Alcon Laboratories, Inc. ("Alcon")
related to the PORT-TM- ophthalmic devices, partially offset by new research and
development contracts with ConvaTec, a division of Bristol Myers Squibb, in the
area of medical adhesives, and UCB Chemicals Corporation in the area of
industrial applications. There were no revenues from licensing fees for the
first nine months of fiscal year 2000 compared to $750,000 during the same
period in fiscal year 1999, which was due to a milestone payment from Alcon
related to the PORT ophthalmic devices during the first quarter.
Cost of revenue consists of material, labor and overhead. Cost of
revenue was $52.9 million for the third quarter of fiscal year 2000 compared to
$3.6 million for the third quarter of fiscal year 1999. Gross profit from
product sales and services as a percentage of revenue from product sales and
services decreased from 36% in the third quarter of fiscal year 1999 to 14% in
the third quarter of fiscal year 2000. Cost of product sales and services for
the first nine months of fiscal year 2000 was $130.8 million compared to $17.7
million during the same period in fiscal year 1999, and gross profit from
product sales and services as a percentage of revenue from that source decreased
from 38% to 16% during the same period of fiscal year 1999. The decreases in
gross profit percentages were primarily the result of Apio's mix of products
having a lower profit margin than Landec's other businesses coupled with
disappointing results in Apio's stone fruit business during the third quarter
2000, and Apio's higher costs associated with sourcing crops during the winter
months. In addition, during the three and nine month periods ended July 30,
2000, Landec incurred startup costs associated with Apio's new value-added food
processing plant and establishing a new manufacturing facility in Menlo Park for
Intellipac breathable membrane products. Overall gross profit increased from
$1.9 million and $12.3 million for the three and nine month periods ended July
31, 1999, respectively, to $8.5 million and $25.1 million for the same periods
of fiscal year 2000, an increase of 105% for the first nine months of fiscal
year 2000 compared to the same period in fiscal year 1999. This increase is
-17-
<PAGE>
primarily due to gross profit from Apio of $13.4 million partially offset by no
license fee gross profits in fiscal year 2000 compared to $750,000 for the same
period of fiscal year 1999.
Research and development expenses were $1.2 million for the third
quarter of fiscal year 2000 compared to $1.4 million for the third quarter of
fiscal year 1999, a decrease of 18%. For the first nine months of fiscal year
2000 research and development expenses were $3.3 million compared to $4.4
million during the same period in fiscal year 1999, a decrease of 24%. 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 decreases in research and development expenses during the three
and nine month periods ended July 30, 2000 compared to the same periods of
fiscal year 1999 were primarily due to substantially reduced PORT research and
development activities and the shift in Intellicoat seed coating to less
research and development and greater production efforts.
Selling, general and administrative expenses were $7.5 million for the
third quarter of fiscal year 2000 compared to $2.5 million for the third quarter
of fiscal year 1999, an increase of 196%. For the first nine months of fiscal
year 2000 selling, general and administrative expenses were $21.4 million
compared to $8.2 million during the same period in fiscal year 1999, an increase
of 159%. 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 during the three and nine month
periods ended July 30, 2000 as compared to the same periods of fiscal year 1999
primarily as a result of expenses from Apio of $4.2 million and $10.7 million,
respectively, and increased sales and marketing expenses associated with
marketing efforts at Intellicoat. Specifically, sales and marketing expenses
increased to $3.2 million for the third quarter of fiscal year 2000 from $1.3
million for the third quarter of fiscal year 1999. For the first nine months of
fiscal year 2000 sales and marketing expenses increased to $9.7 million from
$4.5 million during the same period of fiscal year 1999. Landec expects that
total selling, general and administrative spending for existing and newly
acquired products will continue to increase in absolute dollars in future
periods, although it may vary as a percentage of total revenues.
Interest income for the three and nine month periods ended July 30,
2000 was $265,000 and $681,000, respectively, compared to $69,000 and $322,000
for the same periods of fiscal year 1999. These increases in interest income
were due principally to interest earned on Apio's notes receivable. Interest
expense for the three and nine months periods ended July 30, 2000 was $613,000
and $1.7 million, respectively, compared to $64,000 and $183,000 for the same
periods of fiscal year 1999. These increases are primarily due to the increase
in debt from the acquisition of Apio.
LIQUIDITY AND CAPITAL RESOURCES
As of July 30, 2000, Landec had cash and cash equivalents of $10.9
million, a net increase of $7.7 million from $3.2 million as of October 31,
1999. This increase was primarily due to: a) borrowing under Landec's lines of
credit of $11.3 million; b) cash acquired in the acquisition of Apio of $3.3
million, c) cash from operations of $1.8 million; partially offset by d) the
purchase of $3.3 million of property, plant and equipment; e) advances to
growers of $4.1 million; and f) payment on long term debt of $1.7 million.
During the first nine months of fiscal year 2000, Landec purchased
equipment to support the development of Intellipac and Intellicoat products,
incurred building improvement and equipment upgrade expenditures at Dock Resins
and Apio to expand capacity, and began construction of a new seed coating
facility for Intellicoat in Indiana. These expenditures represented the majority
of the $3.3 million of property and equipment purchased during the first nine
months of fiscal year 2000.
In June, 2000 Landec established new bank lines of credit for working
capital needs and equipment to be used to fund the expansion of the
manufacturing capabilities of Intellicoat seed coating products. Landec believes
that this new facility, along with existing cash, cash equivalents and existing
borrowing capacities will be sufficient
-18-
<PAGE>
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. Landec's future capital
requirements, however, will depend on numerous factors, including the progress
of its research and development programs; the development of commercial scale
manufacturing capabilities; the development of marketing, sales and distribution
capabilities; the ability of Landec to establish and maintain new collaborative
and licensing arrangements; the continued assimilation and integration of Apio
into Landec; any decision to pursue additional acquisition opportunities; the
timing and amount, if any, of payments received under licensing and research and
development agreements; the costs involved in preparing, filing, prosecuting,
defending and enforcing intellectual property rights; the ability to comply with
regulatory requirements; the emergence of competitive technology and market
forces; the effectiveness of product commercialization activities and
arrangements; and other factors. If Landec's currently available funds, together
with the internally generated cash flow from operations are not sufficient to
satisfy its financing needs, Landec would be required to seek additional funding
through other arrangements with collaborative partners, additional bank
borrowings and public or private sales of its securities. There can be no
assurance that additional funds, if required, will be available to Landec on
favorable terms if at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Landec desires to take advantage of the "Safe Harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule
3b-6 under the Securities Exchange Act of 1934. Specifically, Landec wishes to
alert readers that the following important factors, as well as other factors
including, without limitation, those described elsewhere in this report, could
in the future affect, and in the past have affected, Landec's actual results and
could cause Landec's results for future periods to differ materially from those
expressed in any forward-looking statements made by or on behalf of Landec.
Landec assumes no obligation to update such forward-looking statements.
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE
Landec has incurred net losses in each fiscal year since its inception.
Landec's accumulated deficit as of July 30, 2000 totaled $46.1 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 July 30, 2000, Landec's total debt, including current maturities and capital
lease obligations, was approximately $32.2 million and the total debt to equity
ratio was approximately 58%. This level of indebtedness could have significant
consequences because a substantial portion of Landec's net cash flow from
operations must be dedicated to debt service and will not be available for other
purposes, Landec's ability to obtain additional debt financing in the future for
working capital, capital expenditures or acquisitions may be limited, and
Landec's level of indebtedness may limit its flexibility in reacting to changes
in the industry and economic conditions generally.
In connection with the Apio acquisition, Landec may be obligated to
make future payments to the former stockholders of Apio of up to $16.65 million.
Landec's ability to service its indebtedness will depend on its future
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, some of which are beyond Landec's
control. If Landec were unable to service its debt, it would be forced to pursue
one or more alternative strategies such as selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital, which might
not be successful and which could substantially dilute the ownership interest of
existing shareholders.
In addition, Apio is subject to various financial and operating
covenants under its term debt and line of credit facilities, including minimum
levels of EBITDA, minimum fixed charge coverage ratio, minimum current ratio,
minimum adjusted net worth and maximum leverage ratios. These requirements and
ratios generally become more
-19-
<PAGE>
restrictive over time. The loan agreement limits the ability of Apio to make
cash payments to Landec until the outstanding balance is reduced to an amount
specified in the loan agreement. Landec has pledged substantially all of Apio's
assets to secure its bank debt. Landec's failure to comply with the obligations
under the loan agreement, including maintenance of financial ratios, could
result in an event of default, which, if not cured or waived, would permit
acceleration of the indebtedness due under the loan agreement.
OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE WHICH MAY CAUSE OUR STOCK
PRICE TO DECLINE
In the past, Landec's results of operations have fluctuated
significantly from quarter to quarter and are expected to continue in the
future. Historically, Landec's direct marketer of hybrid corn seed, Intellicoat,
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
lower than expected volumes and poor yields experienced in the stone fruit
business during the third quarter of fiscal year 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 EXPERIENCE DIFFICULTIES IN INTEGRATING APIO AND OTHER NEW BUSINESS
ACQUISITIONS
Landec's acquisition of Apio involves the integration of Apio's
operations into Landec. The integration will require the dedication of
management resources in order to achieve the anticipated operating efficiencies
of the acquisition. No assurance can be given that difficulties encountered in
integrating the operations of Apio into Landec will be overcome or that the
benefits expected from integration will be realized. The difficulties in
combining Apio and Landec's operations are exacerbated by the necessity of
coordinating geographically separate organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. The
process of integrating operations could cause an interruption of, or loss of
momentum in, the activities of the combined companies' business.
The successful integration of other new business acquisitions may
require substantial effort from Landec's management. The diversion of the
attention of management and any difficulties encountered in the transition
process could have a material adverse effect on Landec's ability to realize the
anticipated benefits of the acquisitions. The successful combination of new
businesses also requires coordination of research and development activities,
manufacturing, and sales and marketing efforts. In addition, the process of
combining organizations could cause the interruption of, or a loss of momentum
in, Landec's activities. There can be no assurance that Landec will be able to
retain key management, technical, sales and customer support personnel, or that
Landec will realize the anticipated benefits of the acquisitions.
WE MAY NOT BE ABLE TO ACHIEVE ACCEPTANCE OF OUR NEW PRODUCTS IN THE MARKETPLACE
The success of Landec in generating significant sales of its products
will depend in part on the ability of Landec and its partners and licensees to
achieve market acceptance of Landec's new products and technology. The extent to
which, and rate at which, market acceptance and penetration are achieved by
Landec's current and future products are a function of many variables including,
but not limited to, price, safety, efficacy, reliability, conversion costs and
marketing and sales efforts, as well as general economic conditions affecting
purchasing patterns. There can be no assurance that markets for Landec's new
products will develop or that Landec's new products and technology will be
accepted and adopted. The failure of Landec's new products to achieve market
acceptance would have a material adverse effect on Landec's business, results of
operations and financial condition.
-20-
<PAGE>
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 STRONG 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 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.
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.
-21-
<PAGE>
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. 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.
-22
<PAGE>
ADVERSE WEATHER CONDITIONS CAN CAUSE SUBSTANTIAL DECREASES IN OUR SALES
Landec's Food Products and Agricultural Seed Technology businesses are
subject to weather conditions that affect commodity prices, crop yields, and
decisions by growers regarding crops to be planted. Crop diseases and severe
conditions, particularly weather conditions such as floods, droughts, frosts,
windstorms and hurricanes may adversely affect the supply of vegetables and
fruits used in Landec's business, reduce the sales volumes and increase the unit
production costs. Because a significant portion of the costs are fixed and
contracted in advance of each operating year, volume declines due to production
interruptions or other factors could result in increases in unit production
costs which could result in substantial losses and weaken Landec's financial
condition.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE WITH OUR INTELIMER POLYMER
PRODUCTS
Landec has only limited experience marketing and selling its Intelimer
polymer products. While Dock Resins will provide consultation and in some cases
direct marketing support for Landec's Intelimer polymer products, establishing
sufficient marketing and sales capability will require significant resources.
Landec intends to distribute some of its products through its corporate partners
and other distributors and to sell other products through a direct sales force.
There can be no assurance that Landec will be able to recruit and retain skilled
sales management, direct salespersons or distributors, or that Landec's sales
and marketing efforts will be successful. To the extent that Landec has entered
into or will enter into distribution or other collaborative arrangements for the
sale of its products, Landec will be dependent on the efforts of third parties.
WE DEPEND ON STRATEGIC PARTNERS AND LICENSES FOR FUTURE DEVELOPMENT
For some of its current and future products, Landec's strategy for
development, clinical and field testing, manufacture, commercialization and
marketing includes entering into various collaborations with corporate partners,
licensees and others. Landec is dependent on its corporate partners to develop,
test, manufacture and/or market some of its products. Although Landec believes
that its partners in these collaborations have an economic motivation to succeed
in performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within the control of
Landec. There can be no assurance that those partners will perform their
obligations as expected or that Landec will derive any additional revenue from
the arrangements. There can be no assurance that Landec's partners will pay any
additional option or license fees to Landec or that they will develop, market or
pay any royalty fees related to products under the agreements. Moreover, some of
the collaborative agreements provide that they may be terminated at the
discretion of the corporate partner, and some of the collaborative agreements
provide for termination under other circumstances. In addition, there can be no
assurance as to the amount of royalties, if any, on future sales of QuickCast
and PORT 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
-23-
<PAGE>
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
For the first nine months of fiscal year 2000, 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 nine months ended July 30, 2000, sales to Landec's top five
customers accounted for approximately 39% of Landec's revenues with the top
customer accounting for 16% of Landec's revenues. Landec expects that for the
foreseeable future a limited number of customers may continue to account for a
substantial portion of its net revenues. Landec may experience changes in the
composition of its customer base, as Apio, Dock Resins and 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 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.
-24-
<PAGE>
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.
THE EURO CURRENCY MAY CAUSE SOME DISRUPTIONS IN BUSINESS
On January 1, 1999, some member states of the European Economic
Community fixed their respective currencies to a new currency, commonly known as
the "Euro". During the three years beginning on January 1, 1999, business in
these countries will be conducted both in the existing national currency, as
well as the Euro. Companies operating in or conducting business in these
countries will need to ensure that their financial and other software systems
are capable of processing transactions and properly handling the existing
currencies and the Euro. Based on the current level of direct European business
conducted by Landec, and also because Landec expects that any transactions in
Europe in the near future will be priced in U.S. dollars, Landec does not expect
that introduction and use of the Euro will materially affect Landec's business.
Landec will continue to evaluate the impact over time of the introduction of the
Euro. However, if Landec encounters unexpected opportunities or difficulties in
Europe, Landec's business could be adversely affected, including the inability
to bill customers and to pay suppliers for transactions denominated in the Euro
and the inability to properly record transactions denominated in the Euro in
Landec's financial statements.
IF OUR OPERATIONS AND PRODUCTS DO NOT FUNCTION PROPERLY IN THE YEAR 2000, OUR
BUSINESS OPERATIONS COULD BE DISRUPTED
The Year 2000 issue concerns the potential inability of computer
applications, other information technology systems, and software-based
"embedded" control systems to recognize and process properly, date-sensitive
information in the Year 2000 and beyond. Landec could suffer material adverse
impacts on its operations and financial results if the applications and systems
used by Landec, or by third parties with whom Landec does business, do not
accurately or adequately process or manage dates or other information as a
result of the Year 2000 issue.
Landec has key relationships with some of its customers, vendors and
outside service providers. Landec is primarily relying upon the voluntary
disclosures from third parties for this review of their Year 2000 readiness.
Failure by Landec's key customers, vendors and outside service providers to
adequately address the Year 2000 issue could have a material adverse impact on
Landec's operations and financial results.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-25-
<PAGE>
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.
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the
quarter ended July 30, 2000.
-26-
<PAGE>
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: September 13, 2000
-27-
<PAGE>
LANDEC CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY NUMBERED
NUMBER EXHIBIT PAGE
------- --------- ---------------------
<S> <C> <C>
27.1 Financial Data Schedule 29
</TABLE>
-28-
