UNITED
STATES
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 February 25,
2007, or
o
|
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and
large
accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer o
|
Accelerated
Filer x
|
Non
Accelerated Filer o
|
Indicate
by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes o No x
|
As
of March 19,
2007, there were 25,587,377 shares of Common Stock
outstanding.
|
LANDEC
CORPORATION
FORM
10-Q
for the Fiscal Quarter Ended February 25,
2007
INDEX
|
|
Page
|
|
Facing
sheet
|
1
|
|
|
|
|
Index
|
2
|
|
|
|
Part
I.
|
Financial
Information
|
|
|
|
|
Item
1.
|
a)
Consolidated
Balance Sheets as of February 25,
2007 and May 28,
2006
|
3
|
|
|
|
|
b)
Consolidated
Statements of Operations for the Three Months and Nine Months Ended
February 25,
2007 and February 26,
2006
|
4
|
|
|
|
|
c)
Consolidated
Statements of Cash Flows for the Nine Months Ended February 25,
2007 and February 26,
2006
|
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
|
31
|
|
|
|
Item
4
|
Controls
and Procedures
|
31
|
|
|
|
Part
II.
|
Other
Information
|
32
|
|
|
|
Item
1.
|
Legal
Proceedings
|
32
|
|
|
|
Item
1A.
|
Risk
Factors
|
32
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
32
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
32
|
|
|
|
Item
5.
|
Other
Information
|
32
|
|
|
|
Item
6.
|
Exhibits
|
32
|
|
|
|
|
Signatures
|
33
|
PART
I. FINANCIAL INFORMATION
Item
1: Financial Statements
LANDEC
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
|
February
25,
2007
|
|
May
28,
2006
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
58,298
|
|
$
|
15,164
|
|
Accounts
receivable, less allowance for doubtful accounts of $242 and $245
at
February 25,
2007 and May 28,
2006
|
|
|
16,322
|
|
|
15,288
|
|
Accounts
receivable, related party
|
|
|
625
|
|
|
561
|
|
Inventories,
net
|
|
|
5,819
|
|
|
6,134
|
|
Notes
and advances receivable
|
|
|
763
|
|
|
376
|
|
Notes
receivable, related party
|
|
|
—
|
|
|
14
|
|
Prepaid
expenses and other current assets
|
|
|
1,645
|
|
|
1,237
|
|
Assets
held for sale (Note 2)
|
|
|
—
|
|
|
31,838
|
|
Total
Current Assets
|
|
|
83,472
|
|
|
70,612
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
20,164
|
|
|
16,882
|
|
Goodwill,
net
|
|
|
21,401
|
|
|
21,248
|
|
Trademarks,
net
|
|
|
8,228
|
|
|
8,228
|
|
Notes
receivable
|
|
|
391
|
|
|
631
|
|
Other
assets
|
|
|
2,035
|
|
|
1,424
|
|
Total
Assets
|
|
$
|
135,691
|
|
$
|
119,025
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
10,246
|
|
|
12,443
|
|
Related
party payables
|
|
|
118
|
|
|
533
|
|
Income
taxes payable
|
|
|
2,090
|
|
|
—
|
|
Accrued
compensation
|
|
|
2,920
|
|
|
2,764
|
|
Other
accrued liabilities
|
|
|
1,392
|
|
|
1,968
|
|
Deferred
revenue
|
|
|
4,034
|
|
|
811
|
|
Current
maturities of long term debt
|
|
|
34
|
|
|
2,018
|
|
Liabilities
assumed by buyer of FCD (Note 2)
|
|
|
—
|
|
|
11,668
|
|
Total
Current Liabilities
|
|
|
20,834
|
|
|
32,205
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
7,500
|
|
|
—
|
|
Minority
interest
|
|
|
1,638
|
|
|
1,771
|
|
Total
Liabilities
|
|
|
29,972
|
|
|
33,976
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock and additional paid in capital,
$0.001 par value; 50,000,000 shares authorized; 25,527,377 and 24,917,298
shares issued and outstanding at February 25,
2007 and May 28,
2006, respectively
|
|
|
129,474
|
|
|
126,288
|
|
Accumulated
deficit
|
|
|
(23,755
|
)
|
|
(41,239
|
)
|
Total
Shareholders’ Equity
|
|
|
105,719
|
|
|
85,049
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
135,691
|
|
$
|
119,025
|
|
See
accompanying notes.
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In
thousands, except per share amounts)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
February
25,
|
|
February
26,
|
|
February
25,
|
|
February
26,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
50,148
|
|
$
|
55,170
|
|
$
|
153,779
|
|
$
|
156,058
|
|
Services
revenue, related party
|
|
|
826
|
|
|
690
|
|
|
2,500
|
|
|
2,783
|
|
License
fees
|
|
|
1,550
|
|
|
1,321
|
|
|
2,431
|
|
|
1,616
|
|
Royalty
revenues, related party
|
|
|
69
|
|
|
54
|
|
|
190
|
|
|
187
|
|
Research,
development and royalty revenues
|
|
|
362
|
|
|
14
|
|
|
397
|
|
|
22
|
|
Total
revenues
|
|
|
52,955
|
|
|
57,249
|
|
|
159,297
|
|
|
160,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
43,017
|
|
|
44,697
|
|
|
131,862
|
|
|
130,404
|
|
Cost
of product sales, related party
|
|
|
200
|
|
|
714
|
|
|
2,422
|
|
|
3,543
|
|
Cost
of services revenue
|
|
|
648
|
|
|
422
|
|
|
2,090
|
|
|
1,624
|
|
Total
cost of revenue
|
|
|
43,865
|
|
|
45,833
|
|
|
136,374
|
|
|
135,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
9,090
|
|
|
11,416
|
|
|
22,923
|
|
|
25,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
663
|
|
|
701
|
|
|
2,287
|
|
|
2,280
|
|
Selling,
general and administrative
|
|
|
4,839
|
|
|
7,195
|
|
|
17,030
|
|
|
20,530
|
|
Income
from sale of FCD (Note 2)
|
|
|
(22,690
|
)
|
|
—
|
|
|
(22,690
|
)
|
|
—
|
|
Total
operating costs and expenses
|
|
|
(17,188
|
)
|
|
7,896
|
|
|
(3,373
|
)
|
|
22,810
|
|
Operating
income
|
|
|
26,278
|
|
|
3,520
|
|
|
26,296
|
|
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
662
|
|
|
145
|
|
|
1,075
|
|
|
395
|
|
Interest
expense
|
|
|
(57
|
)
|
|
(112
|
)
|
|
(248
|
)
|
|
(362
|
)
|
Minority
interest expense
|
|
|
(137
|
)
|
|
(80
|
)
|
|
(252
|
)
|
|
(397
|
)
|
Other
income (expense)
|
|
|
—
|
|
|
41
|
|
|
(2
|
)
|
|
36
|
|
Net
income before taxes
|
|
|
26,746
|
|
|
3,514
|
|
|
26,869
|
|
|
1,957
|
|
Income
tax expense (Note 2)
|
|
|
(2,101
|
)
|
|
—
|
|
|
(2,101
|
)
|
|
—
|
|
Net
income
|
|
$
|
24,645
|
|
$
|
3,514
|
|
$
|
24,768
|
|
$
|
1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.97
|
|
$
|
0.14
|
|
$
|
0.99
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share (Note 5)
|
|
$
|
0.92
|
|
$
|
0.13
|
|
$
|
0.92
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in per share computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,317
|
|
|
24,849
|
|
|
25,098
|
|
|
24,438
|
|
Diluted
|
|
|
26,627
|
|
|
25,719
|
|
|
26,433
|
|
|
25,315
|
|
See
accompanying notes.
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Nine
Months Ended
|
|
|
|
February
25,
|
|
February
26,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
24,768
|
|
$
|
1,957
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,542
|
|
|
2,336
|
|
Gain
on sale of FCD (Note 2)
|
|
|
(24,608
|
)
|
|
—
|
|
Stock-based
compensation expense
|
|
|
504
|
|
|
—
|
|
Loss
(gain) on sale of property and equipment
|
|
|
38
|
|
|
(129
|
)
|
Minority
interest
|
|
|
252
|
|
|
397
|
|
Investment
in unconsolidated business
|
|
|
(481
|
)
|
|
(900
|
)
|
Changes
in current assets and current liabilities, net of effects of acquisition
of assets of Heartland Hybrids, Inc.:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
972
|
|
|
2,976
|
|
Inventories,
net
|
|
|
(7,752
|
)
|
|
(10,064
|
)
|
Issuance
of notes and advances receivable
|
|
|
(1,995
|
)
|
|
(1,531
|
)
|
Collection
of notes and advances receivable
|
|
|
1,629
|
|
|
1,472
|
|
Prepaid
expenses and other current assets
|
|
|
(597
|
)
|
|
192
|
|
Accounts
payable
|
|
|
(6,884
|
)
|
|
(4,650
|
)
|
Related
party payables
|
|
|
(415
|
)
|
|
(699
|
)
|
Income
taxes payable
|
|
|
2,090
|
|
|
—
|
|
Accrued
compensation
|
|
|
(111
|
)
|
|
506
|
|
Other
accrued liabilities
|
|
|
(578
|
)
|
|
(93
|
)
|
Deferred
revenue
|
|
|
3,643
|
|
|
16,484
|
|
Net
cash (used in) provided by operating activities
|
|
|
(6,983
|
)
|
|
8,254
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(5,953
|
)
|
|
(2,359
|
)
|
Purchase
of marketable securities
|
|
|
—
|
|
|
(991
|
)
|
Proceeds
from maturities of marketable securities
|
|
|
—
|
|
|
2,959
|
|
Issuance
of notes and advances receivable
|
|
|
(29
|
)
|
|
(425
|
)
|
Collection
of notes and advances receivable
|
|
|
262
|
|
|
223
|
|
Proceeds
from sale of property and equipment
|
|
|
—
|
|
|
1,350
|
|
Net
proceeds from sale of FCD (Note 2)
|
|
|
49,462
|
|
|
—
|
|
Acquisition
of assets, net of cash acquired
|
|
|
(1,217
|
)
|
|
(3,630
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
42,525
|
|
|
(2,873
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
2,682
|
|
|
3,109
|
|
Repurchase
of subsidiary’s common stock and options
|
|
|
(7,371
|
)
|
|
—
|
|
(Increase)
decrease in other assets
|
|
|
(130
|
)
|
|
98
|
|
Borrowings
on lines of credit
|
|
|
9,338
|
|
|
14,904
|
|
Payments
on lines of credit
|
|
|
—
|
|
|
(14,904
|
)
|
Payments
on long term debt
|
|
|
(1,984
|
)
|
|
(1,050
|
)
|
Distributions
to minority interest
|
|
|
(298
|
)
|
|
(314
|
)
|
Net
cash provided by financing activities
|
|
|
2,237
|
|
|
1,843
|
|
Net
increase in cash and cash equivalents
|
|
|
37,779
|
|
|
7,224
|
|
Cash
and cash equivalents at beginning of period
|
|
|
20,519
|
|
|
12,871
|
|
Cash
and cash equivalents at end of period
|
|
$
|
58,298
|
|
$
|
20,095
|
|
Supplemental
schedule of noncash operating activities:
|
|
|
|
|
|
|
|
Preferred
stock received from investment in unconsolidated business
|
|
$
|
481 |
|
$
|
900 |
|
See
accompanying notes.
LANDEC
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
Landec
Corporation and its subsidiaries ("Landec" or the "Company") design, develop,
manufacture, and sell temperature-activated and other specialty polymer products
for a variety of food products, agricultural products, and licensed partner
applications. The Company sells Intellicoat® coated seed products through its
Landec Ag, Inc. (“Landec Ag”) subsidiary and specialty packaged fresh-cut
vegetables and whole produce to retailers and club stores, primarily in the
United States and Asia through its Apio, Inc. (“Apio”) subsidiary.
The
accompanying unaudited consolidated financial statements of Landec have been
prepared in accordance with accounting principles generally accepted in the
United States 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) have been made which
are
necessary to present fairly the financial position at February 25,
2007
and the
results of operations and cash flows for all periods presented. 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 U.S.
accounting principles generally accepted 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 May 28,
2006.
The
results of operations for the three and nine months ended February 25,
2007
are not
necessarily indicative of the results that may be expected for an entire fiscal
year. For instance, due to the cyclical nature of the corn seed industry,
Fielder’s Choice Direct (FCD), Landec’s former direct sales and marketing seed
company that was sold on December 1,
2006
(see Note 2) and which comprised over 95% of Landec Ag revenues, realized
virtually no revenues during the first six months of each fiscal year and
therefore recognized substantial losses during the first half of Landec’s fiscal
year. Landec Ag recorded non-recurring operating losses of $5.8 million from
the
beginning of fiscal year 2007 through the FCD sales date of December 1, 2006.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. accounting
principles generally accepted requires management to make certain estimates
and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ materially from those estimates.
For
instance, the carrying value of notes and advances receivable, are impacted
by
current market prices for the related crops, weather conditions and the fair
value of the underlying security obtained by the Company, such as, liens on
property and crops. The Company recognizes losses when it estimates that the
fair value of the related crops or security is insufficient to cover the advance
or note receivable.
Investments
Equity
investments in non-public companies with no readily available market value
are
carried on the balance sheet at cost and adjusted for impairment losses, if
any.
If reductions in the market value of the investments to an amount that is below
cost are deemed by management to be other than temporary, the reduction in
market value will be realized, with the resulting loss in market value reflected
on the income statement (see Note 3).
Goodwill
and Other Intangibles
The
Company is required under SFAS 142 to review goodwill and indefinite lived
intangible assets at least annually. During the nine months ended February
25,
2007, the Company completed its annual impairment review. The review is
performed by grouping the net book value of all long-lived assets for reporting
entities, including goodwill and other intangible assets, and comparing this
value to the related estimated fair value. The determination of fair value
is
based on estimated future discounted cash flows related to these long-lived
assets. The discount rate used was based on the risks associated with the
reporting entities. The fair value was determined by management with the
assistance of an independent appraiser. The review concluded that the fair
value
of the reporting entities exceeded the carrying value of their net assets and
thus no impairment charge was warranted as of February 25, 2007.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements. SFAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value measurements. SFAS 157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007.
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting
for Uncertainty in Income Taxes — an Interpretation of FASB Statement
No. 109 (“FIN
No. 48”), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes.
FIN
No. 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition and defines the criteria that must be met
for the benefits of a tax position to be recognized. The provisions of FIN
No. 48 will be effective for the Company commencing at the start of fiscal
2008, May 28, 2007. The Company is currently evaluating the impact of
adopting FIN No. 48 on its consolidated financial statements.
Reclassifications
Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation. For comparability purposes, the assets
of
FCD and the liabilities assumed by the buyer of FCD have been reclassed as
of
May 28, 2006 in the accompanying Consolidated Balance Sheets (see Note
2).
2.
Sale of Fielder’s Choice Direct and License Agreement
On
December 1, 2006, Landec sold its direct marketing and sales seed company FCD,
which included the Fielder’s Choice Direct®
and
Heartland Hybrid®
brands,
to American Seeds, Inc. (ASI), a wholly owned subsidiary of Monsanto Company.
The acquisition price for FCD was $50 million in cash paid at the close with
an
additional earn-out amount of up to $5 million based on FCD results for the
twelve months ended May 31, 2007. During the third fiscal quarter Landec
recorded income from the sale, net of direct expenses and bonuses, of $22.7
million. The income that was recorded is equal to the difference between the
fair value of FCD of $40 million and its net book value, less direct selling
expenses and bonuses. In accordance with generally accepted accounting
principles, the portion of the $50 million of proceeds in excess of the fair
value of FCD, or $10 million, will be allocated to the technology license
agreement described below and will be recognized as revenue ratably over the
five year term of the technology license agreement or $2 million per year
beginning December 1, 2006. The fair value was determined by management with
the
assistance of an independent appraiser.
The
following summarizes sales proceeds allocated to the technology license
agreement and the net income from sale of FCD (in thousands):
Cash
received at close
|
|
$
|
50,000
|
|
Fair
market value of FCD
|
|
|
40,000
|
|
Proceeds
allocated to technology license agreement (1)
|
|
$
|
10,000
|
|
|
|
|
|
|
Fair
market value of FCD
|
|
$
|
40,000
|
|
Less:
Cost basis of assets sold net of liabilities assumed
|
|
|
(14,856
|
)
|
Less:
Direct expenses of sale
|
|
|
(536
|
)
|
Net
gain from sale of FCD
|
|
|
24,608
|
|
Less:
Bonuses paid to employees as a result of the sale
|
|
|
(1,918
|
)
|
Income
from sale of FCD
|
|
$
|
22,690
|
|
(1)
Represents a deferred gain at the closing date which will be recognized as
revenue over 5 years as described below.
As
a
result of the sale of FCD, the Company currently estimates that it will record
an income tax expense of $2.4 million in fiscal year 2007, of which $2.1 million
was recorded in the third fiscal quarter for state income taxes and federal
AMT.
On
December 1, 2006, Landec also entered into a five-year co-exclusive technology
license and polymer supply agreement (“the Agreement”) with Monsanto Company for
the use of Landec’s Intellicoat polymer
seed coating technology. Under the terms of the Agreement, Monsanto will pay
Landec $2.6 million per year in exchange for (1) a co-exclusive right to use
Landec’s Intellicoat temperature
activated seed coating technology worldwide during the license period, (2)
the
right to be the exclusive global sales and marketing agent for the Intellicoat
seed coating technology, and (3) the right to purchase the technology any time
during the five year term of the Agreement. Monsanto will also fund all
operating costs, including all Intellicoat research
and development, product development and non-replacement capital costs during
the five year agreement period. For the three and nine months ended February
25,
2007, Landec recognized $1.35 million in revenues and income from the
Agreement.
The
Agreement also provides for a fee payable to Landec of $4 million if Monsanto
elects to terminate the agreement or $8 million if Monsanto elects to buyout
the
technology. If the purchase option is exercised before the fifth anniversary
of
the Agreement, or if Monsanto elects to terminate the Agreement, all annual
license fees and supply payments that have not been paid to Landec will become
due upon the purchase. If Monsanto does not exercise its purchase option by
the
fifth anniversary of the Intellicoat agreement,
Landec will receive the termination fee and all rights to the
Intellicoat seed
coating technology will revert to Landec. Accordingly, Landec will receive
minimum guaranteed payments of $17 million for license fees and polymer supply
payments over five years or $21 million in maximum payments if Monsanto elects
to buyout the licensed technology. The minimum guaranteed payments and the
deferred gain of $2 million per year described above will result in Landec
recognizing revenue and operating income of $5.4 million per year for fiscal
years 2008 through 2011 and $2.7 million per year for fiscal years 2007 and
2012.
If
Monsanto elects to purchase the technology, an additional $4 million of license
fee revenue will be recognized at the time of purchase. If Monsanto exercises
its purchase option, Landec and Monsanto will enter into a new long-term supply
agreement in which Landec will continue to be the exclusive supplier of
Intellicoat polymer materials to Monsanto.
In
conjunction with the sale of FCD, Landec purchased all of the outstanding common
stock and options of Landec Ag not owned by Landec at the fair market value
of
each share as if all options had been exercised as of December 1, 2006. The
fair
market value was $7.4 million which was funded with proceeds from the sale
of
FCD. After the purchase, Landec Ag became a wholly owned subsidiary of Landec.
In accordance with SFAS 123R, this purchase did not result in additional
compensation expense to the Company as all of the stock and options purchased
were fully vested at the time of the purchase and the consideration paid was
equal to the fair value on the date of the purchase. The purchase of Landec
Ag’s
outstanding common stock and options was recorded to retained
earnings.
Excluding
the $1.35 million in revenues from the Agreement, Landec Ag revenues for the
three months ended February 25, 2007 and February 26, 2006 were zero and $8.4
million, respectively and for the nine months ended February 25, 2007 and
February 26, 2006 revenues were $131,000 and $8.4 million, respectively. The
net
operating losses for Landec Ag, excluding the income from the sale of FCD and
the $1.35 million in license fees from the Agreement, for the three months
ended
February 25, 2007 and February 26, 2006 were $328,000 and $120,000, respectively
and for the nine months ended February 25, 2007 and February 26, 2006 were
$5.8
million and $4.9 million, respectively. Landec Ag had cash balances at May
28,
2006 of $5.4 million.
3.
Other License Agreement
In
December 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences Corporation. At that time Landec received cash and preferred
stock in Aesthetic Sciences. As part of the original agreement, Landec was
to
receive additional shares upon the completion of a specific milestone. On
November 22,
2006,
that milestone was met and as a result Landec received an additional 800,000
shares of preferred stock valued at $481,000. Landec currently has a 19.9%
ownership interest in Aesthetic Sciences. The $481,000 is included in other
assets in the accompanying Consolidated Balance Sheet and is recorded as
licensing revenue for the nine months ended February 25, 2007 in the
accompanying Consolidated Statements of Operations since Landec has no further
obligations under this agreement.
4.
Stock-Based Compensation
On
May 29, 2006, the Company adopted SFAS 123R, which is a revision of
SFAS No. 123 “Accounting for Stock-Based Compensation”
(“SFAS 123”), and supersedes APB No. 25, “Accounting for Stock Issued
to Employees” (“APB 25”). Among other items, SFAS 123R requires
companies to record compensation expense for stock-based awards issued to
employees and directors in exchange for services provided. The amount of the
compensation expense is based on the estimated fair value of the awards on
their
grant dates and is recognized over the required service periods. The Company’s
stock-based awards include stock option grants and restricted stock unit awards
(RSUs).
Prior
to
the adoption of SFAS 123R, the Company applied the intrinsic value method
set forth in APB 25 to calculate the compensation expense for stock-based
awards. The Company has historically set the exercise price for its stock
options equal to the market value on the grant date. As a result, the options
had no intrinsic value on their grant dates, and therefore the Company did
not
record any compensation expense unless the terms of the stock options were
subsequently modified. For RSUs, the calculation of compensation expense under
APB 25 and SFAS 123R is similar except for the accounting treatment
for forfeitures as discussed below.
The
Company adopted SFAS 123R using the modified prospective transition method,
which requires the application of the accounting standard to (i) all
stock-based awards issued on or after May 29, 2006 and (ii) any
outstanding stock-based awards that were issued but not vested as of
May 29, 2006. Accordingly, the Company’s condensed consolidated financial
statements as of February 26, 2006, and for the three and nine months
then-ended, were accounted for under the provisions of APB 25. In the three
and
nine months ended February 25, 2007, the Company recognized stock-based
compensation expense of $122,000 and $504,000, respectively, which included
$42,000 and $117,000 for restricted stock unit awards and $80,000 and $387,000
for stock option grants, respectively.
The
following table summarizes the stock-based compensation by income statement
line
item:
|
|
Three
Months
Ended
February
25, 2007
|
|
Nine
Months
Ended
February
25, 2007
|
|
Research
and development
|
|
$
|
20,000
|
|
$
|
62,000
|
|
Sales,
general and administrative
|
|
$
|
102,000
|
|
$
|
442,000
|
|
Total
stock-based compensation expense
|
|
$
|
122,000
|
|
$
|
504,000
|
|
The
estimated fair value for stock options, which determines the Company’s
calculation of compensation expense, is based on the Black-Scholes pricing
model. Upon the adoption of SFAS 123R, the Company changed its method of
calculating and recognizing the fair value of stock-based compensation
arrangements to the straight-line, single-option method. Compensation expense
for all stock option and restricted stock awards granted prior to May 29,
2006 will continue to be recognized using the straight-line, multiple-option
method. In addition, SFAS 123R requires the estimation of the expected
forfeitures of stock-based awards at the time of grant. As a result, the Company
uses historical data to estimate pre-vesting forfeitures and records stock-based
compensation expense only for those awards that are expected to vest and revises
those estimates in subsequent periods if the actual forfeitures differ from
the
prior estimates. In the pro-forma information required under SFAS 123R for
periods prior to May 29, 2006, the Company accounted for forfeitures as
they occurred.
As
of
February 25, 2007 and February 26, 2006, the fair value of stock
option grants was estimated using the Black-Scholes option pricing model. The
following weighted average assumptions were used:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
February
25,
|
|
February
26,
|
|
February
25,
|
|
February
26,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Stock
Option plan:
|
|
|
|
|
|
|
|
|
|
Risk-Free
interest rate
|
|
|
—
|
|
|
4.52
|
%
|
|
5.08
|
%
|
|
4.21
|
%
|
Dividend
Yield
|
|
|
—
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Volatility
|
|
|
—
|
|
|
53
|
%
|
|
51
|
%
|
|
53
|
%
|
Expected
term in years
|
|
|
—
|
|
|
4.82
|
|
|
4.27
|
|
|
4.82
|
|
For
purposes of pro forma disclosures, the estimated fair value of the options
is
amortized to expense over the service period of the options using the
straight-line method. The Company’s pro forma information follows (in thousands
except for per share data):
|
|
Three
Months
Ended
February
26,
2006
|
|
Nine
Months
Ended
February
26,
2006
|
|
Net
income
|
|
$
|
3,514
|
|
$
|
1,957
|
|
Deduct:
|
|
|
|
|
|
|
|
Stock-based
employee expense determined under SFAS 123
|
|
|
(230
|
)
|
|
(894
|
)
|
Pro
forma net loss
|
|
$
|
3,284
|
|
$
|
1,063
|
|
|
|
|
|
|
|
|
|
Basic
net income per share - as reported
|
|
$
|
0.14
|
|
$
|
0.08
|
|
Diluted
net income per share - as reported
|
|
$
|
0.13
|
|
$
|
0.06
|
|
Basic
pro forma net income per share
|
|
$
|
0.13
|
|
$
|
0.04
|
|
Diluted
pro forma net income per share
|
|
$
|
0.12
|
|
$
|
0.03
|
|
Stock-Based
Compensation Activity
|
|
Restricted Stock Outstanding
|
|
Stock Options Outstanding
|
|
|
|
RSUs
and
Options
Available
for Grant
|
|
Number of
Restricted
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Stock Options
|
|
Weighted
Average
Exercise Price
|
|
Balance
at May 28, 2006
|
|
|
857,705
|
|
|
833
|
|
|
|
|
$
|
7.53
|
|
|
3,117,516
|
|
|
|
|
$
|
4.85
|
|
Granted
|
|
|
(153,335
|
)
|
|
38,335
|
|
|
|
|
$
|
8.86
|
|
|
115,000
|
|
|
|
|
$
|
8.86
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
(594,734
|
)
|
|
|
|
$
|
4.41
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
(5,417
|
)
|
|
|
|
$
|
4.80
|
|
Balance
at February 25, 2007
|
|
|
704,370
|
|
|
39,168
|
|
|
|
|
$
|
8.83
|
|
|
2,632,365
|
|
|
|
|
$
|
5.12
|
|
The
following table summarizes information concerning stock options outstanding
and
exercisable at February 25, 2007:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of
Exercise
Prices
|
|
Number of Shares
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Number of
Shares
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in years)
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.660 -
$3.180
|
1
|
1
|
307,043
|
|
|
|
|
5.34
|
|
|
|
$2.82
|
|
|
|
$
3,365,191
|
|
|
304,542
|
|
|
|
|
|
$2.81
|
|
|
|
|
$
3,340,826
|
|
|
$ 3.250
- $3.375
|
|
|
286,350
|
|
|
|
|
3.86
|
|
|
$3.37
|
|
|
$
2,980,904
|
|
|
284,787
|
|
|
|
|
$3.37
|
|
|
|
$
2,964,633
|
|
|
$ 3.400 -
$3.800
|
|
|
282,885
|
|
|
|
|
3.92
|
|
|
$3.56
|
|
|
$
2,891,085
|
|
|
281,634
|
|
|
|
|
$3.56
|
|
|
|
$
2,878,300
|
|
|
$ 4.094 -
$4.938
|
|
|
179,500
|
|
|
|
|
2.83
|
|
|
$4.86
|
|
|
$
1,601,140
|
|
|
179,500
|
|
|
|
|
$4.86
|
|
|
|
$
1,601,140
|
|
|
$
5.000 - $5.000
|
|
|
528,128
|
|
|
|
|
0.86
|
|
|
$5.00
|
|
|
$
4,636,964
|
|
|
528,128
|
|
|
|
|
$5.00
|
|
|
|
$
4,636,964
|
|
|
$
5.340 - $6.130
|
|
|
361,459
|
|
|
|
|
4.78
|
|
|
$6.09
|
|
|
$
2,779,620
|
|
|
270,209
|
|
|
|
|
$6.08
|
|
|
|
$
2,080,609
|
|
|
$
6.450 - $6.750
|
|
|
352,500
|
|
|
|
|
4.81
|
|
|
$6.67
|
|
|
$
2,506,275
|
|
|
352,500
|
|
|
|
|
$6.67
|
|
|
|
$
2,506,275
|
|
|
$
6.790 - $8.860
|
|
|
334,500
|
|
|
|
|
7.21
|
|
|
$7.73
|
|
|
$
2,023,725
|
|
|
266,859
|
|
|
|
|
$7.45
|
|
|
|
$
1,689,218
|
|
|
$
1.660 - $8.860
|
|
|
2,632,365
|
|
|
|
|
4.05
|
|
|
$5.12
|
|
|
$22,784,904
|
|
|
2,468,159
|
|
|
|
|
$4.99
|
|
|
|
$21,697,965
|
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $13.78 on
February 23, 2007, which would have been received by holders of stock
options had all holders of stock options exercised their stock options that
were
in-the-money as of that date. The total number of in-the-money stock options
exercisable as of February 25, 2007, was approximately 2.5 million shares.
The aggregate intrinsic value of stock options exercised during the three and
nine months ended February 25, 2007, was $2.8 million and $3.9 million,
respectively.
The
following table summarizes the activity relating to unvested stock option grants
and RSUs during the nine month period ended February 25, 2007:
|
|
Stock Options
|
|
Restricted Stock
|
|
|
|
Shares
|
|
Weighted
Average Fair
Value
|
|
Shares
|
|
Weighted
Average Fair
Value
|
|
Unvested
at May 28, 2006
|
|
182,586
|
|
|
$
|
2.43
|
|
|
833
|
|
|
$
|
7.53
|
|
|
Granted
|
|
115,000
|
|
|
$
4.05
|
|
|
38,335
|
|
|
$
8.32
|
|
|
Vested/Awarded
|
|
(127,963)
|
|
|
$
3.00
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
(5,417)
|
|
|
$
4.80
|
|
|
—
|
|
|
—
|
|
|
Unvested
at February 25, 2007
|
|
164,206
|
|
|
$
|
3.04
|
|
|
39,168
|
|
|
$
|
8.30
|
|
|
As
of
February 25, 2007, there was $818,000 of total unrecognized compensation
expense related to unvested equity compensation awards granted under the
Company’s incentive stock plans. Total expense is expected to be recognized over
the weighted-average period of 1.39 years.
5.
Net Income Per Diluted Share
The
following table sets forth the computation of diluted net income (in thousands,
except per share amounts):
|
|
Three
Months
Ended
February
25,
2007
|
|
Three
Months
Ended
February
26,
2006
|
|
Nine
Months
Ended
February
25,
2007
|
|
Nine
Months
Ended
February
26,
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
24,645
|
|
$
|
3,514
|
|
$
|
24,768
|
|
$
|
1,957
|
|
Less:
Minority interest in income of subsidiary
|
|
|
(235
|
)
|
|
(165
|
)
|
|
(575
|
)
|
|
(390
|
)
|
Net
income for diluted net income per share
|
|
$
|
24,410
|
|
$
|
3,349
|
|
$
|
24,193
|
|
$
|
1,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares for basic net income per share
|
|
|
25,317
|
|
|
24,849
|
|
|
25,098
|
|
|
24,438
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
1,310
|
|
|
870
|
|
|
1,335
|
|
|
877
|
|
Weighted
average shares for diluted net income per share
|
|
|
26,627
|
|
|
25,719
|
|
|
26,433
|
|
|
25,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.92
|
|
$
|
0.13
|
|
$
|
0.92
|
|
$
|
0.06
|
|
For
the
three months ended February 25,
2007
and February 26,
2006,
the computation of the diluted net income per share excludes the impact of
options to purchase 89,177 shares and 442,962 shares of Common Stock,
respectively, as such impacts would be antidilutive for these
periods.
For
the
nine months ended February 25,
2007
and February 26,
2006,
the computation of the diluted net loss per share excludes the impact of options
to purchase 97,277 shares and 480,709 shares of Common Stock, respectively,
as
such impacts would be antidilutive for these periods.
6.
Income Taxes
The
Company has recorded a tax provision for state and federal AMT of $2.1 million
for the three and nine months ended February 25, 2007 related to sale of FCD
on
December 1, 2006. The Company currently estimates that it will have
approximately $8.0 million in federal net operating losses and $2.5 million
in
federal and state credits at fiscal year end 2007 which have been fully
reserved.
7.
Debt
On
August
29, 2006, Landec Ag amended and restated its revolving line of credit with
Old
National Bank which increased the line from $7.5 million to $10 million. In
conjunction with the sale of FCD to ASI on December 1, 2006 (see Note 2) Landec
Ag’s line of credit was paid in full and subsequently terminated.
8.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or market and
consisted of the following (in thousands):
|
|
February 25,
2007
|
|
May 28,
2006
|
|
Finished
goods
|
|
$
|
4,817
|
|
$
|
2,193
|
|
Raw
materials
|
|
|
1,002
|
|
|
3,764
|
|
Work
in process
|
|
|
—
|
|
|
177
|
|
Total
|
|
$
|
5,819
|
|
$
|
6,134
|
|
9.
Related Party
Apio
provides cooling and distributing services for farms
in
which the
Chief
Executive Officer of Apio (the “Apio CEO”)
has a
financial interest and
purchases produce from those farms. Apio also purchases produce from Beachside
Produce LLC (formerly known as Apio Fresh) for sale to third parties. Beachside
Produce is owned by a group of entities and persons that supply produce to
Apio.
One of the owners of Beachside Produce is the Apio CEO. Revenues, cost of
product sales and the resulting payable, and the note receivable from advances
for ground lease payments, and crop and harvesting costs are classified as
related party in the accompanying financial statements as of
February 25,
2007
and May 28,
2006
and for
the three and nine months ended February 25,
2007
and February 26,
2006.
Apio
leases, for approximately $504,000 on an annual basis, agricultural land that
is
either owned, controlled or leased by the Apio CEO. Apio, in turn, subleases
that land at cost to growers who are obligated to deliver product from that
land
to Apio for value added products. There is generally no net statement of
operations impact to Apio as a result of these leasing activities but Apio
creates a guaranteed source of supply for the value added business. Apio has
loss exposure on the leasing activity to the extent that it is unable to
sublease the land. For the three and nine months ended February 25,
2007
the Company subleased all of the land leased from the Apio CEO and received
sublease income of $134,000 and $366,000, respectively, which is equal to the
amount the Company paid to lease that land for the period.
Apio's
domestic commodity vegetable business was sold to Beachside
Produce,
effective June 30, 2003. The Apio CEO has a 12.5% ownership in Beachside
Produce. During the three and nine months ended February 25,
2007,
the Company recognized revenues of $49,000 and $70,000, respectively, from
the
sale of products to Beachside Produce and royalty revenue of $69,000 and
$190,000, respectively, from the use by Beachside Produce of Apio’s trademarks.
The related accounts receivable from Beachside Produce are classified as related
party in the accompanying financial statements as of February 25,
2007
and May 28,
2006.
In
addition, the Apio CEO has a 6% ownership interest in Apio Cooling LP, a limited
partnership in which Apio is the general partner with a 60% ownership interest.
Included in the minority interest liability as of February 25,
2007
and May 28,
2006
is
$216,000 and $237,000, respectively, owed to the Apio CEO.
All
related party transactions are monitored quarterly by the Company and approved
by the Audit Committee of the Board of Directors.
10.
Insurance Settlement
On
August
25, 2006 the Company received a cash payment of $1.6 million from the settlement
of insurance claims associated with a fire that occurred at its Dock Resins
facility in February 2000. The settlement resulted in the Company recording
a
reduction to selling, general and administrative expenses of $1.3 million,
net
of expenses, during the Company’s first quarter of fiscal year 2007. In
addition, $381,000 had been placed in escrow pending the outcome of certain
disputed professional fees. In September 2006, the Company resolved the fee
dispute and paid professional fees of $227,000 from the escrow and received
the
balance of $154,000 which the Company recorded as a reduction to selling,
general and administrative expenses during the three months ended November
26,
2006.
11.
Comprehensive Income
The
comprehensive net income of Landec is the same as the net income.
12.
Shareholders’ Equity
During
the three and nine months ended February 25,
2007,
386,213
and 610,079 shares of Common Stock, respectively, were issued upon the exercise
of options under the Company’s stock option plans and
the
Company’s former Employee Stock Purchase Plan.
13.
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 specialty packaged whole and fresh-cut vegetables that
incorporate the BreatheWay® specialty packaging for the retail grocery, club
store and food services industry. Prior to the sale of FCD on December 1, 2006
the Agricultural Seed Technology segment marketed and distributed hybrid seed
corn and seed coatings using Landec’s patented Intellicoat® seed coatings to the
farming industry. 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
and corporate operating costs. All of the assets of the Company are located
within the United States of America.
Operations
by Business Segment (in thousands):
Three
months ended February 25,
2007
|
|
Food
Products Technology
|
|
Agricultural
Seed
Technology
|
|
Corporate
and
Other
|
|
Total
|
|
Net
revenues
|
|
$
|
51,343
|
|
$
|
1,350
|
|
$
|
262
|
|
$
|
52,955
|
|
International
sales
|
|
$
|
6,881
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,881
|
|
Gross
profit
|
|
$
|
7,453
|
|
$
|
1,375
|
|
$
|
262
|
|
$
|
9,090
|
|
Net
income (loss)
|
|
$
|
3,284
|
|
$
|
21,636
|
|
$
|
(275
|
)
|
$
|
24,645
|
|
Interest
expense
|
|
$
|
3
|
|
$
|
54
|
|
$
|
—
|
|
$
|
57
|
|
Interest
income
|
|
$
|
158
|
|
$
|
—
|
|
$
|
504
|
|
$
|
662
|
|
Depreciation
and amortization
|
|
$
|
696
|
|
$
|
55
|
|
$
|
25
|
|
$
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended February 26,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
47,435
|
|
$
|
8,353
|
|
$
|
1,461
|
|
$
|
57,249
|
|
International
sales
|
|
$
|
6,272
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,272
|
|
Gross
profit
|
|
$
|
7,391
|
|
$
|
2,621
|
|
$
|
1,404
|
|
$
|
11,416
|
|
Net
income (loss)
|
|
$
|
3,154
|
|
$
|
(751
|
)
|
$
|
1,111
|
|
$
|
3,514
|
|
Interest
expense
|
|
$
|
79
|
|
$
|
33
|
|
$
|
—
|
|
$
|
112
|
|
Interest
income
|
|
$
|
126
|
|
$
|
1
|
|
$
|
18
|
|
$
|
145
|
|
Depreciation
and amortization
|
|
$
|
717
|
|
$
|
65
|
|
$
|
28
|
|
$
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended February 25,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
156,638
|
|
$
|
1,481
|
|
$
|
1,178
|
|
$
|
159,297
|
|
International
sales
|
|
$
|
38,655
|
|
$
|
—
|
|
$
|
—
|
|
$
|
38,655
|
|
Gross
profit
|
|
$
|
20,448
|
|
$
|
1,297
|
|
$
|
1,178
|
|
$
|
22,923
|
|
Net
income (loss)
|
|
$
|
8,335
|
|
$
|
15,190
|
|
$
|
1,243
|
|
$
|
24,768
|
|
Interest
expense
|
|
$
|
77
|
|
$
|
171
|
|
$
|
—
|
|
$
|
248
|
|
Interest
income
|
|
$
|
503
|
|
$
|
45
|
|
$
|
527
|
|
$
|
1,075
|
|
Depreciation
and amortization
|
|
$
|
2,028
|
|
$
|
438
|
|
$
|
76
|
|
$
|
2,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended February 26,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
150,336
|
|
$
|
8,373
|
|
$
|
1,957
|
|
$
|
160,666
|
|
International
sales
|
|
$
|
42,914
|
|
$
|
—
|
|
$
|
—
|
|
$
|
42,914
|
|
Gross
profit
|
|
$
|
20,720
|
|
$
|
2,640
|
|
$
|
1,735
|
|
$
|
25,095
|
|
Net
income (loss)
|
|
$
|
7,436
|
|
$
|
(6,063
|
)
|
$
|
584
|
|
$
|
1,957
|
|
Interest
expense
|
|
$
|
227
|
|
$
|
134
|
|
$
|
1
|
|
$
|
362
|
|
Interest
income
|
|
$
|
324
|
|
$
|
27
|
|
$
|
44
|
|
$
|
395
|
|
Depreciation
and amortization
|
|
$
|
1,917
|
|
$
|
344
|
|
$
|
75
|
|
$
|
2,336
|
|
During
the nine months ended February 25,
2007
and February 26,
2006,
sales to the Company’s top five customers accounted for approximately 50% and
45%, respectively, of revenues, with the Company’s top customers from the Food
Products Technology segment, Costco Wholesale Corp., accounting for
approximately 20% and 16%, respectively, and Pomina Enterprise Co. LTD,
accounting for approximately 7% and 10%, respectively of revenues. The Company
expects that, for the foreseeable future, a limited number of customers may
continue to account for a significant portion of its net revenues. Virtually
all
of the Company’s international sales are to Asia.
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 May 28, 2006.
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 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 May 28, 2006. Landec undertakes no obligation
to
update or revise any forward-looking statements in order to reflect events
or
circumstances that may arise after the date of this report.
Critical
Accounting Policies and Use of Estimates
There
have been no material changes to the Company's critical accounting policies
which are included and described in the Form 10-K for the fiscal year ended
May
28, 2006 filed with the Securities and Exchange Commission on July 27, 2006
with
the exception of the adoption of SFAS No. 123(R).
Accounting
for Stock-Based Compensation
Effective
May 29, 2006, we measure compensation expense for our stock-based compensation
plans using the fair value method as defined in SFAS No. 123(R). Under SFAS
123R, stock-based compensation expense is calculated based on the value of
the
award on the date of grant and is recognized as expense on a straight line
basis
over the vesting period. Determining the fair value of stock-based awards on
the
grant date requires judgment, including estimating the variables necessary
to
determine the fair value of awards granted. To the extent actual results or
updated estimates differ from our prior estimates, such amounts will be recorded
as a cumulative adjustment in the period that any such estimates are revised.
If
actual results differ significantly from what we previously estimated, our
stock-based compensation expense and our results of operations could be
materially impacted. See Note 4 of Notes to Consolidated Financial Statements
for additional information regarding our stock-based compensation
plans.
The
Company
Landec
Corporation and its subsidiaries (“Landec” or the “Company”) design, develop,
manufacture and sell temperature-activated and other specialty polymer products
for a variety of food products, agricultural products, and licensed partner
applications. This proprietary polymer technology is the foundation, and a
key
differentiating advantage, upon which Landec has built its
business.
Landec’s
core polymer products are based on its patented proprietary
Intelimerâ
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 range of one or two degrees Celsius from a 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.
Landec
has historically had two core businesses - Food Products Technology and
Agricultural Seed Technology, in addition to our Technology Licensing/Research
and Development business which is included in Corporate and Other for segment
disclosure purposes (see Note 13 of Notes to Consolidated Financial
Statements).
Our
Food
Products Technology business is operated through a subsidiary, Apio, Inc.,
and
combines our proprietary food packaging technology with the capabilities of
a
large national food supplier and value-added produce processor. Value-added
processing incorporates Landec's proprietary packaging technology with produce
that is processed by washing, and in some cases cutting and mixing, resulting
in
packaged produce to achieve increased shelf life and reduced shrink (waste)
and
to eliminate the need for ice during the distribution cycle.
This
combination was consummated in 1999 when the Company acquired Apio, Inc. and
certain related entities (collectively, “Apio”).
Our
Agricultural Seed Technology business is operated through a subsidiary, Landec
Ag, Inc. (“Landec Ag”) which, prior to the sale of Fielder’s Choice Direct
(“FCD”) on December 1, 2006 to American Seeds,
Inc. (ASI), a wholly owned subsidiary of Monsanto Corporation, (see Note 2
of
Notes to Consolidated Financial Statements), combined our proprietary
Intellicoat® seed coating technology with our unique e-commerce, direct
marketing and consultative selling capabilities.
In
addition to our two core businesses, the Company also operates a Technology
Licensing/Research and Development business that licenses and/or supplies
products outside of our core businesses to industry leaders such as Air Products
and Chemicals, Inc.
Landec
was incorporated in California on October 31, 1986. We completed our initial
public offering in 1996 and our Common Stock is listed on the Nasdaq National
Market under the symbol “LNDC.” Our principal executive offices are located at
3603 Haven Avenue, Menlo Park, California 94025 and our telephone number is
(650) 306-1650.
Description
of Core Business
Landec
has historically participated in two core business segments- Food Products
Technology and Agricultural Seed Technology. In addition to these two core
segments, we license technology and conduct ongoing research and development
through our Technology Licensing/Research and Development Business.
Food
Products Technology Business
The
Company began marketing in early 1996 our proprietary Intelimer-based specialty
packaging for use in the fresh-cut produce market, one of the fastest growing
segments in the produce industry. Our proprietary packaging technology, when
combined with produce that is processed by washing, and in some cases cut and
mixed, results in packaged produce with increased shelf life, reduced shrink
(waste) and without the need for ice during the distribution cycle, which we
refer to as our “value-added” products. In 1999, we acquired Apio, our largest
customer at that time in the Food Products Technology business and one of the
nation’s leading marketers and packers of produce and specialty packaged
fresh-cut vegetables. Apio provides year-round access to produce, utilizes
state-of-the-art fresh-cut produce processing technology, and distributes
products to the top U.S. retail grocery chains, major club stores and the
foodservice industry. Our proprietary Intelimer-based packaging business has
been combined with Apio. This vertical integration within the Food Products
Technology business gives Landec direct access to the large and growing
fresh-cut produce market.
Based
in
Guadalupe, California, Apio, when acquired in 1999, consisted of two major
businesses - first, the “fee-for-service” selling and marketing of whole produce
and second, the specialty packaged fresh-cut and whole value-added processed
products that are washed and packaged in our proprietary BreatheWay® packaging.
The “fee-for-service” business historically included field harvesting and
packing, cooling and marketing of vegetables and fruit on a contract basis
for
growers in California’s Santa Maria, San Joaquin and Imperial Valleys as well as
in Arizona and Mexico. The Company exited this business and certain assets
associated with the business were sold in June 2003 to Beachside Produce LLC
(formerly known as Apio Fresh) (“Beachside”). Beachside is owned by a group of
entities and persons that supply produce to Apio, including Nicholas Tompkins,
Apio’s President and Chief Executive Officer. Under the terms of the sale,
Beachside purchased certain equipment and carton inventory from Apio in exchange
for approximately $410,000. In connection with the sale, Beachside pays Apio
an
on-going royalty fee per carton sold for the use of Apio’s brand names and
Beachside and its growers entered into a supply agreement with Apio to supply
produce to Apio for its fresh-cut value-added products. The fresh-cut
value-added processed products business markets a variety of fresh-cut and
whole
vegetables to the top retail grocery chains and club stores. During the fiscal
year ended May 28, 2006, Apio shipped more than seventeen million cartons of
produce to leading supermarket retailers, wholesalers, foodservice suppliers
and
club stores throughout the United States and internationally, primarily in
Asia.
There
are
five major distinguishing characteristics of Apio that provide competitive
advantages in the Food Products Technology market:
|
· |
Value-Added
Supplier:
Apio has structured its business as a marketer and seller of fresh-cut
and
whole value-added produce. It is focused on selling products under
its Eat
Smart® brand and other brands for its fresh-cut and whole value-added
products. As retail grocery and club store chains consolidate, Apio
is
well positioned as a single source of a broad range of products.
|
|
· |
Reduced
Farming Risks:
Apio reduces its farming risk by not taking ownership of farmland,
and
instead, contracts with growers for produce. The year-round sourcing
of
produce is a key component to the fresh-cut and whole value-added
processing business.
|
|
· |
Lower
Cost Structure:
Apio has strategically invested in the rapidly growing fresh-cut
and whole
value-added business. Apio’s 96,000 square foot value-added processing
plant, which was recently expanded from 60,000 square feet, is automated
with state-of-the-art vegetable processing equipment. Virtually all
of
Apio’s value-added products utilize Apio’s proprietary BreatheWay
packaging technology.
Apio’s strategy is to operate one large central processing facility in
one
of California’s largest, lowest cost growing regions (Santa Maria Valley)
and use packaging technology to allow for the nationwide delivery
of fresh
produce products.
|
|
· |
Export
Capability:
Apio is uniquely positioned to benefit from the growth in export
sales to
Asia and Europe over the next decade with its export business, CalEx.
Through CalEx, Apio is currently one of the largest U.S. exporters
of
broccoli to Asia and is selling its iceless products to Asia
using
proprietary BreatheWay packaging
technology.
|
|
· |
Expanded
Product Line Using Technology:
Apio, through the use of its BreatheWay
packaging technology,
is introducing on average fifteen new value-added products each year.
These new product offerings range from various sizes of fresh-cut
bagged
products, to vegetable trays, to whole produce, to a meal line of
products. During the last twelve months, Apio has introduced 24 new
products.
|
Agricultural
Seed Technology Business
Following
the sale of FCD, Landec Ag’s strategy is to work closely with Monsanto to
further develop its patented, functional polymer coating technology that can
be
broadly sold and/or licensed to the seed industry. In accordance with its
license, supply and R&D agreement with Monsanto, Landec Ag is currently
focused on commercializing products for the corn and soybean markets and then
plans to broaden its applications to other seed crops.
Landec
Ag's Intellicoat seed coating applications are designed to control seed
germination timing, increase crop yields, reduce risks and extend crop-planting
windows. These coatings are currently available on hybrid corn, soybeans and
male inbred corn used for seed production. In fiscal year 2000, Landec Ag
launched its first commercial product, Pollinator Plusâ
coatings, which is a coating application used by seed companies as a method
for
spreading pollination to increase yields and reduce risk in the production
of
hybrid seed corn. There are approximately 650,000 acres of seed production
in
the United States and in 2006 Pollinator Plus was used by 35 seed companies
on
approximately 15% of the seed production acres in the U.S.
In
2003,
Landec Ag commercialized Early Plantâ
corn by
selling the product directly to farmers through the Fielder's Choice
Directâ
brand.
This application allows farmers to plant into cold soils without the risk of
chilling injury, and enables farmers to plant as much as four weeks earlier
than
normal. With this capability, farmers are able to utilize labor and equipment
more efficiently, provide flexibility during the critical planting period and
avoid yield losses caused by late planting. In 2006, nine seed companies offered
Intellicoat on their hybrid seed corn offerings.
The
third
commercial application is the RelayÔ
Cropping
system of wheat and Intellicoat coated soybeans, which allows farmers to plant
and harvest two crops in the same year on the same ground in geographic areas
where double cropping is not possible. This provides significant financial
benefit especially to farmers in the Corn Belt who grow wheat as a single
crop.
Technology
Licensing/Research and Development Businesses
We
believe our technology has commercial potential in a wide range of industrial,
consumer and medical applications beyond those identified in our core
businesses. For example, our core patented technology, Intelimer materials,
can
be used to trigger the release of small molecule drugs, catalysts, pesticides
or
fragrances just by changing the temperature of the Intelimer materials or to
activate adhesives through controlled temperature change. In order to exploit
these opportunities, we have entered into and will enter into licensing and
collaborative corporate agreements for product development and/or distribution
in certain fields. However, given the infrequency and unpredictability of when
the Company may enter into any such licensing and research and development
arrangements, the Company is unable to disclose its financial expectations
in
advance of entering into such arrangements.
Results
of Operations
Revenues
(in
thousands):
|
|
Three
months
ended
02/25/07
|
|
Three
months
ended
02/26/06
|
|
Change
|
|
|
Nine
months
ended
02/25/07
|
|
Nine
months
ended
02/26/06
|
|
Change
|
|
Apio
Value Added
|
|
$
|
43,055
|
|
$
|
39,517
|
|
|
9
|
%
|
|
$
|
113,897
|
|
$
|
99,653
|
|
|
14
|
%
|
Apio
Tech
|
|
|
1,298
|
|
|
503
|
|
|
158
|
%
|
|
|
1,352
|
|
|
590
|
|
|
129
|
%
|
Technology
Subtotal
|
|
|
44,353
|
|
|
40,020
|
|
|
11
|
%
|
|
|
115,249
|
|
|
100,243
|
|
|
15
|
%
|
Apio
Trading
|
|
|
6,990
|
|
|
7,415
|
|
|
(6
|
%)
|
|
|
41,389
|
|
|
50,093
|
|
|
(17
|
%)
|
Total
Apio
|
|
|
51,343
|
|
|
47,435
|
|
|
8
|
%
|
|
|
156,638
|
|
|
150,336
|
|
|
4
|
%
|
Landec
Ag
|
|
|
1,350
|
|
|
8,353
|
|
|
(84
|
%)
|
|
|
1,481
|
|
|
8,373
|
|
|
(82
|
%)
|
Corporate
|
|
|
262
|
|
|
1,461
|
|
|
(82
|
%)
|
|
|
1,178
|
|
|
1,957
|
|
|
(40
|
%)
|
Total
Revenues
|
|
$
|
52,955
|
|
$
|
57,249
|
|
|
(8
|
%)
|
|
$
|
159,297
|
|
$
|
160,666
|
|
|
(1
|
%)
|
Apio
Value Added
Apio’s
value-added revenues consist of revenues generated from the sale of specialty
packaged
fresh-cut and whole value-added processed vegetable products that are washed
and
packaged in our proprietary packaging and sold under Apio’s Eat Smart® brand and
various private labels. In addition, value-added revenues include the
revenues
generated from Apio Cooling, LP, a vegetable cooling operation in which Apio
is
the general partner with a 60% ownership position.
The
increase in Apio’s value-added revenues for the three and nine months ended
February 25,
2007
compared
to the same periods last year is due to increased product offerings, increased
sales to existing customers, and the addition of new customers. Specifically,
sales of Apio’s value-added 12-ounce specialty packaged retail product line grew
12% and 17%, respectively, during the three and nine months ended February 25,
2007
compared
to the same periods last year. In addition, sales of Apio’s value-added
vegetable tray products grew 16% and 20%, respectively, during the three and
nine months ended February 25,
2007
compared
to the same periods last year. Overall value-added unit sales volume increased
10% during the third quarter of fiscal year 2007 compared to the same period
last year and 14% for the nine months ended February 25,
2007
compared
to the same period of the prior year.
Apio
Tech
Apio
Tech
consists of Apio’s packaging technology business using its BreatheWay membrane
technology. The
first
commercial application included in Apio Tech is our banana packaging
technology.
A large
majority of the revenues currently generated from Apio Tech are revenues derived
from our banana packaging program with Chiquita Brands International,
Inc.
The
increase in revenues at Apio Tech during the three and nine months ended
February 25,
2007
compared
to the same periods last year was due primarily to revenues received from our
banana packaging agreement with Chiquita.
Apio
Trading
Apio
trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex and from the purchase and sale of whole commodity fruit
and vegetable products domestically. The export portion of trading revenues
for
the three and nine months ended February 25,
2007
were
$6.9
million and $38.7 million, or 98% and 93%, respectively, of total trading
revenues.
The
decrease in revenues in Apio’s trading business for the three and nine months
ended February 25,
2007
compared
to the same periods last year was primarily due to planned decreases of 90%
and
62%, respectively, in domestic buy/sell commodity sales. In addition, export
revenues increased 10% and decreased 10%, for the three and nine months ended
February 25,
2007,
due to
unit volume variances.
Landec
Ag
Landec
Ag
revenues have historically consisted of revenues generated from the sale of
hybrid seed corn to farmers under the Fielder’s Choice Direct brand and from the
sale of hybrid seed corn and soybeans under the Heartland Hybrids® brand (these
brands and the related assets were sold to ASI on December 1, 2006, see Note
2
of Notes to Consolidated Financial Statements) and from the sale of Intellicoat
coated corn and soybean seeds to farmers and seed companies. Prior to the sale,
virtually all of Landec Ag’s revenues were generated during the Company’s third
and fourth quarters. As a result of the technology licensing agreement with
Monsanto, Landec Ag license fee revenues will be recognized evenly each quarter
for a period of five years.
Corporate
Corporate
revenues consist of revenues generated from partnering with others under
research and development agreements and supply agreements and from fees for
licensing our proprietary Intelimer technology to others and from the
corresponding royalties from these license agreements.
The
decrease in Corporate revenues for the three and nine months ended February 25,
2007
compared
to the same periods of the prior year resulted from certain nonrecurring
licensing revenues recorded in the prior year.
Gross
Profit (in
thousands):
|
|
Three
months
ended
02/25/07
|
|
Three
months
ended
02/26/06
|
|
Change
|
|
|
Nine
months
ended
02/25/07
|
|
Nine
months
ended
02/26/06
|
|
Change
|
|
Apio
Value Added
|
|
$
|
5,654
|
|
$
|
6,435
|
|
|
(12
|
%)
|
|
$
|
16,597
|
|
$
|
17,436
|
|
|
(5
|
%)
|
Apio
Tech
|
|
|
1,261
|
|
|
501
|
|
|
152
|
%
|
|
|
1,281
|
|
|
563
|
|
|
128
|
%
|
Technology
Subtotal
|
|
|
6,915
|
|
|
6,936
|
|
|
0
|
%
|
|
|
17,878
|
|
|
17,999
|
|
|
(1
|
%)
|
Apio
Trading
|
|
|
538
|
|
|
455
|
|
|
18
|
%
|
|
|
2,570
|
|
|
2,721
|
|
|
(6
|
%)
|
Total
Apio
|
|
|
7,453
|
|
|
7,391
|
|
|
1
|
%
|
|
|
20,448
|
|
|
20,720
|
|
|
(1
|
%)
|
Landec
Ag
|
|
|
1,375
|
|
|
2,621
|
|
|
(48
|
%)
|
|
|
1,297
|
|
|
2,640
|
|
|
(51
|
%)
|
Corporate
|
|
|
262
|
|
|
1,404
|
|
|
(81
|
%)
|
|
|
1,178
|
|
|
1,735
|
|
|
(32
|
%)
|
Total
Gross Profit
|
|
$
|
9,090
|
|
$
|
11,416
|
|
|
(20
|
%)
|
|
$
|
22,923
|
|
$
|
25,095
|
|
|
(9
|
%)
|
General
There
are
numerous factors that can influence gross profits including product mix,
customer mix, manufacturing costs, volume, sale discounts and charges for excess
or obsolete inventory, to name a few. Many of these factors influence or are
interrelated with other factors. Therefore, it is difficult to precisely
quantify the impact of each item individually. The Company includes in cost
of
sales all the costs related to the sale of products in accordance with U.S.
accounting principles generally accepted. These costs include the following:
raw
materials (including produce, seeds and packaging), direct labor, overhead
(including indirect labor, depreciation, and facility related costs) and
shipping and shipping related costs. The following discussion surrounding gross
profits includes management’s best estimates of the reasons for the changes for
the three and nine months ended February 25,
2007,
compared to the same periods last year as outlined in the table
above.
Apio
Value-Added
The
decrease in gross profits for Apio’s value-added specialty packaged vegetable
business for the three and nine months ended February 25,
2007
compared
to the same period last year was due to weather related shortages of contracted
product during several periods of the first nine months of fiscal 2007. These
shortages required Apio to procure supplemental product on the open market
at
costs significantly above contracted prices and resulted in sales volume
decreases and labor cost increases in the third fiscal quarter due to extremely
cold temperatures in California. The increases in produce sourcing and labor
costs and decreases in sales volume were substantially mitigated by a more
profitable mix of products sold and improved operational
efficiencies.
Apio
Trading
Apio’s
trading business is a buy/sell business that realizes a commission-based margin
in the 4-6% range. The increase in gross profits during the three months ended
February 25,
2007
compared
to the same periods last year was primarily due to a shift to higher margin
export products from lower margin domestic commodity products. The decrease
in
gross profits during the and nine months ended February 25,
2007
compared
to the same periods last year was primarily due to decreased trading revenues
of
17% partially offset by a shift to higher margin export products from lower
margin domestic commodity products.
Apio
Tech
The
change in gross profits for Apio Tech for the three and nine months ended
February 25,
2007
compared
to the same periods last year was due primarily to revenues received from our
banana packaging agreement with Chiquita.
Landec
Ag
The
decrease in gross profits for Landec Ag for the three and nine months ended
February 25,
2007
compared
to the same periods last year was due to the sale of FCD to Monsanto and the
consequent loss of product sales normally recorded in the third quarter (see
Note 2 of Notes to Consolidated Financial Statements).
Corporate
The
decrease in gross profits for Corporate for the three and nine months ended
February 25,
2007
compared
to the same periods last year was primarily due to the Aesthetic Sciences’
licensing revenues recorded in the prior year.
Operating
Expenses (in
thousands):
|
|
Three
months
ended
02/25/07
|
|
Three
months
ended
02/26/06
|
|
Change
|
|
|
Nine
months
ended
02/25/07
|
|
Nine
months
ended
02/26/06
|
|
Change
|
|
Research
and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
Apio
|
|
$
|
244
|
|
$
|
193
|
|
|
26
|
%
|
|
$
|
808
|
|
$
|
733
|
|
|
10
|
%
|
Landec
Ag
|
|
|
0
|
|
|
163
|
|
|
N/M
|
|
|
|
265
|
|
|
470
|
|
|
(44
|
%)
|
Corporate
|
|
|
419
|
|
|
345
|
|
|
21
|
%
|
|
|
1,214
|
|
|
1,077
|
|
|
13
|
%
|
Total
R&D
|
|
$
|
663
|
|
$
|
701
|
|
|
(5
|
%)
|
|
$
|
2,287
|
|
$
|
2,280
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apio
|
|
$
|
3,228
|
|
$
|
3,406
|
|
|
(5
|
%)
|
|
$
|
9,362
|
|
$
|
10,324
|
|
|
(9
|
%)
|
Landec
Ag
|
|
|
274
|
|
|
2,704
|
|
|
(90
|
%)
|
|
|
5,369
|
|
|
6,920
|
|
|
(22
|
%)
|
Corporate
|
|
|
1,337
|
|
|
1,085
|
|
|
23
|
%
|
|
|
2,299
|
|
|
3,286
|
|
|
(30
|
%)
|
Total
S,G&A
|
|
$
|
4,839
|
|
$
|
7,195
|
|
|
(33
|
%)
|
|
$
|
17,030
|
|
$
|
20,530
|
|
|
(17
|
%)
|
Research
and Development
Landec’s
research and development expenses consist primarily of expenses involved in
the
development and process scale-up initiatives. Research and development efforts
at Apio are focused on the Company’s proprietary BreatheWay membranes used for
packaging produce, with recent focus on extending the shelf life of bananas
and
other shelf-life sensitive vegetables and fruit. At Landec Ag, the research
and
development efforts are focused on the Company’s proprietary Intellicoat
coatings for seeds, primarily corn seed and are being funded by Monsanto in
accordance with the technology licensing agreement entered into on December
1,
2006 (see Note 2 of Notes to Consolidated Financial Statements). At Corporate,
the research and development efforts are focused on uses for the proprietary
Intelimer polymers outside of food and agriculture.
The
decrease in research and development expenses for the three months ended
February 25,
2007,
and the increase in research and development expenses for the nine months ended
February 25,
2007,
compared
to the same periods last year, was not material.
Selling,
General and Administrative
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.
The
decrease in selling, general and administrative expenses for the three months
ended February 25,
2007
compared
to the same period last year was due to a decrease in selling, general and
administrative expenses at Landec Ag due to the sale of FCD to Monsanto (see
Note 2 of Notes to Consolidated Financial Statements), and partially offset
by
an increase in stock option expenses of $122,000 (see Note 4 of Notes to
Consolidated Financial Statements). The decrease in selling, general and
administrative expenses for the nine months ended February 25,
2007
compared
to the same period last year was primarily due to (1) the sale of FCD to
Monsanto, (2) new packaging design and marketing related costs that were
incurred at Apio during the first quarter of fiscal year 2006 and (3) the
recording of the net proceeds of $1.5 million from the insurance settlement
(see
Note 10 of Notes to Consolidated Financial Statements) to Corporate selling,
general and administrative expenses during the first six months of fiscal year
2007.
Other
(in
thousands):
|
|
Three
months
ended
02/25/07
|
|
Three
months
ended
02/26/06
|
|
Change
|
|
|
Nine
months
ended
02/25/07
|
|
Nine
months
ended
02/26/06
|
|
Change
|
|
Interest
Income
|
|
$
|
662
|
|
$
|
145
|
|
|
357
|
%
|
|
$
|
1,075
|
|
$
|
395
|
|
|
172
|
%
|
Interest
Expense
|
|
|
(57
|
)
|
|
(112
|
)
|
|
(49
|
%)
|
|
|
(248
|
)
|
|
(362
|
)
|
|
(31
|
%)
|
Minority
Int. Exp.
|
|
|
(137
|
)
|
|
(80
|
)
|
|
71
|
%
|
|
|
(252
|
)
|
|
(397
|
)
|
|
(37
|
%)
|
Other
Income (Exp.)
|
|
|
0
|
|
|
41
|
|
|
N/M
|
|
|
|
(2
|
)
|
|
36
|
|
|
(106
|
%)
|
Total
Other
|
|
$
|
468
|
|
$
|
(6
|
)
|
|
N/M
|
|
|
$
|
573
|
|
$
|
(328
|
)
|
|
275
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes |
|
$
|
2,101 |
|
$
|
— |
|
|
N/M |
|
|
$
|
2,101 |
|
$
|
— |
|
|
N/M |
|
Interest
Income
The
increase in interest income for the three and nine months ended February 25,
2007
compared
to the same periods last year was due to the increase in cash available for
investing and higher interest rates on the cash invested.
.
Interest
Expense
The
decrease in interest expense during the three and nine months ended February 25,
2007
compared
to the same periods last year was due to the Company’s reduction of
debt.
Minority
Interest Expense
The
minority interest expense consists of the minority interest associated with
the
limited partners’ equity interest in the net income of Apio Cooling, LP.
The
increase in the minority interest for the three months ended February 25,
2007
compared
to the same period of last year was not material. The decrease in the minority
interest for the nine months ended February 25,
2007
was due
to non-recurring gains for Apio Cooling during the first quarter of fiscal
year
2006.
Other
Expense
Other
consists of non-operating income and expenses.
Income
Taxes
The
increase in the income tax expense is due to the income realized from the sale
of FCD which resulted in the Company recording a tax provision of $2.1 million
for state income taxes and federal AMT.
Liquidity
and Capital Resources
As
of
February 25,
2007,
the Company had cash and cash equivalents of $58.3 million, a net increase
of
$37.8 million from $20.5 million at May 28, 2006.
Cash
Flow from Operating Activities
Landec
used $7.0 million of cash flow in operating activities during the nine months
ended February 25,
2007
compared to generating $8.3 million from operating activities for the nine
months ended February 26,
2006.
The primary source of cash during the nine months ended February 25,
2007
was an increase in deferred revenue of $3.6 million primarily due to receiving
the first annual license payment from Monsanto (see Note 2 of Notes to
Consolidated Financial Statements). The primary uses of cash in operating
activities were from the purchase of seed corn inventory by Landec Ag of $7.9
million prior to the sale on December 1, 2006 and a decrease in accounts payable
at Landec Ag of $4.8 million primarily related to the receipt of royalty
payments from fiscal year 2006 sales prior to the sale of FCD.
Cash
Flow from Investing Activities
Net
cash
provided by investing activities for the nine months ended February 25,
2007
was $42.5 million compared to the use of $2.9 million for the same period last
year. The primary source of cash from investing activities during the first
nine
months of fiscal year 2007 was from $49.5 million of net proceeds from the
sale
of FCD. The primary uses of cash from investing activities during the first
nine
months of fiscal year 2007 were from the purchase of $6.0 million of property,
plant and equipment primarily for the further expansion and automation of Apio’s
value-added facility.
Cash
Flow from Financing Activities
Net
cash
provided by financing activities for the nine
months ended February 25,
2007 was
$2.2
million compared to $1.8 million for the same period last year. The cash
provided by financing activities during the first nine months of fiscal year
2007 was primarily due to net borrowings under Landec Ag’s line of credit of
$9.3 million primarily for the purchase of seed corn (the line of credit was
assumed by Monsanto in the sale of FCD and was immediately paid in full) and
$2.7 million of cash received from employees exercising their stock options.
The
cash used from financing activities during the first nine months of fiscal
year
2007 was primarily used to buy back Landec Ag’s subsidiary options and stock for
$7.4 million and to pay off all of Apio’s long-term bank debt totaling $2.0
million.
Capital
Expenditures
During
the nine months ended February 25,
2007,
Landec expanded Apio’s value added processing facility and purchased vegetable
processing equipment to support the further automation of Apio’s value added
processing facility. These expenditures represented the majority of the $6.0
million of capital expenditures.
Debt
On
November 1, 2005, Apio amended its revolving line of credit with Wells Fargo
Bank N.A. that was scheduled to expire on August 31, 2006. The line was reduced
from $10.0 million to $7.0 million and outstanding amounts under the line of
credit now bear interest at either the prime rate less 0.25% or the LIBOR
adjustable rate plus 1.75% (7.11% at February 25, 2007). The revolving line
of
credit with Wells Fargo (collectively, the “Loan Agreement”) contains certain
restrictive covenants, which require Apio to meet certain financial tests,
including minimum levels of net income, maximum leverage ratio, minimum net
worth and maximum capital expenditures. Landec has pledged substantially all
of
the assets of Apio to secure the line of credit with Wells Fargo. At
February 25,
2007,
no
amounts were outstanding under the revolving line of credit. Apio has been
in
compliance with all loan covenants in the Loan Agreement since the inception
of
this loan.
On
August
29, 2006, Landec Ag amended and restated its revolving line of credit with
Old
National Bank which increased the line from $7.5 million to $10 million. In
conjunction with the sale of FCD to ASI on December 1, 2006 (see Note 2 of
Notes
to Consolidated Financial Statements), Landec Ag’s line of credit was paid in
full and subsequently terminated.
Landec
is
not a party to any agreements with, or commitments to, any special purpose
entities that would constitute material off-balance sheet financing other than
the operating lease commitments listed above.
Landec’s
future capital requirements will depend on numerous factors, including the
progress of its research and development programs; the continued development
of
marketing, sales and distribution capabilities; the ability of Landec to
establish and maintain new collaborative and licensing arrangements; any
decision to pursue additional acquisition opportunities; 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; and
other factors. If Landec’s currently available funds, together with the
internally generated cash flow from operations are not sufficient to satisfy
its
capital 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.
Landec
believes
that its debt facilities, cash from operations, along with existing cash, cash
equivalents and existing borrowing capacities will be sufficient to finance
its
operational and capital requirements for the foreseeable future.
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.
Our
Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock
Price
to Decline
In
the
past, our results of operations have fluctuated significantly from quarter
to
quarter and are expected to continue to fluctuate in the future. Historically,
Landec Ag has been the primary source of these fluctuations, as its revenues
and
profits have been concentrated over a few months during the spring planting
season (generally during our third and fourth fiscal quarters). In addition,
Apio can be heavily affected by seasonal and weather factors which have impacted
quarterly results, such as the high cost of sourcing product in June/July
2006 and January 2007 due to a shortage of essential value-added produce items.
Our earnings may also fluctuate based on our ability to collect accounts
receivables from customers and note receivables from growers and on price
fluctuations in the fresh vegetables and fruits markets. Other factors that
affect our food and/or agricultural operations include:
|
· |
the
seasonality of our supplies;
|
|
· |
our
ability to process produce during critical harvest
periods;
|
|
· |
the
timing and effects of ripening;
|
|
· |
the
degree of perishability;
|
|
· |
the
effectiveness of worldwide distribution
systems;
|
|
· |
total
worldwide industry volumes;
|
|
· |
the
seasonality of consumer demand;
|
|
· |
foreign
currency fluctuations; and
|
|
· |
foreign
importation restrictions and foreign political
risks.
|
As
a
result of these and other factors, we expect to continue to experience
fluctuations in quarterly operating results.
We
May Not Be Able to Achieve Acceptance of Our New Products in the
Marketplace
Our
success in generating significant sales of our products will depend in part
on
the ability of us and our partners and licensees to achieve market acceptance
of
our new products and technology. The extent to which, and rate at which, we
achieve market acceptance and penetration of our current and future products
is
a function of many variables including, but not limited to:
|
· |
marketing
and sales efforts; and
|
|
· |
general
economic conditions affecting purchasing
patterns.
|
We
may
not be able to develop and introduce new products and technologies in a timely
manner or new products and technologies may not gain market acceptance. We
are
in the early stage of product commercialization of certain Intelimer-based
specialty packaging, Intellicoat seed coatings and other Intelimer polymer
products and many of our potential products are in development. We believe
that
our future growth will depend in large part on our ability to develop and market
new products in our target markets and in new markets. In particular, we expect
that our 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 our products. In addition, commercial
applications of our temperature switch polymer technology are relatively new
and
evolving. Our failure to develop new products or the failure of our new products
to achieve market acceptance would have a material adverse effect on our
business, results of operations and financial condition.
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 us or that would render our technology and products obsolete
and non-competitive. We operate 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 our
collaborative arrangements may result in our corporate partners and licensees
becoming our competitors. Many of these competitors have substantially greater
financial and technical resources and production and marketing capabilities
than
we do, and may have substantially greater experience in conducting clinical
and
field trials, obtaining regulatory approvals and manufacturing and marketing
commercial products.
We
Have a Concentration of Manufacturing in One Location for Apio and May Have
to
Depend on Third Parties to Manufacture Our Products
Any
disruptions in our primary manufacturing operation at Apio’s facility in
Guadalupe, California would reduce our ability to sell our products and would
have a material adverse effect on our financial results. Additionally, we may
need to consider seeking collaborative arrangements with other companies to
manufacture our products. If we become dependent upon third parties for the
manufacture of our products, our profit margins and our ability to develop
and
deliver those products on a timely basis may be affected. Failures by third
parties may impair our ability to deliver products on a timely basis and impair
our competitive position. We may not be able to continue to successfully operate
our manufacturing operations at acceptable costs, with acceptable yields, and
retain adequately trained personnel.
Our
Dependence on Single-Source Suppliers and Service Providers May Cause Disruption
in Our Operations Should Any Supplier Fail to Deliver
Materials
We
may
experience difficulty acquiring materials or services for the manufacture of
our
products or we may not be able to obtain substitute vendors. We may not be
able
to procure comparable materials at similar prices and terms within a reasonable
time. Several services that are provided to Apio are obtained from a single
provider. Several of the raw materials we use to manufacture our products are
currently purchased from a single source, including some monomers used to
synthesize Intelimer polymers and substrate materials for our breathable
membrane products. Any interruption of our relationship with single-source
suppliers or service providers could delay product shipments and materially
harm
our business.
We
May Be Unable to Adequately Protect Our Intellectual Property
Rights
We
may
receive notices from third parties, including some of our competitors, claiming
infringement by our products of patent and other proprietary rights. Regardless
of their merit, responding to any such claim could be time-consuming, result
in
costly litigation and require us to enter royalty and licensing agreements
which
may not be offered or available on terms acceptable to us. If a successful
claim
is made against us and we fail to develop or license a substitute technology,
we
could be required to alter our products or processes and our business, results
of operations or financial position could be materially adversely affected.
Our
success depends in large part on our ability to obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights
of
third parties. Any pending patent applications we file may not be approved
and
we may not be able to develop additional proprietary products that are
patentable. Any patents issued to us may not provide us with competitive
advantages or may be challenged by third parties. Patents held by others may
prevent the commercialization of products incorporating our technology.
Furthermore, others may independently develop similar products, duplicate our
products or design around our patents.
Our
Operations Are Subject to Regulations that Directly Impact Our
Business
Our
food
packaging products are subject to regulation under the Food, Drug and Cosmetic
Act (the “FDC Act”). Under the FDC Act, any substance that when used as intended
may reasonably be expected to become, directly or indirectly, a component or
otherwise affect the characteristics of any food may be regulated as a food
additive unless the substance is generally recognized as safe. We believe that
food packaging materials are generally not considered food additives by the
FDA
because these products are not expected to become components of food under
their
expected conditions of use. We consider our breathable membrane product to
be a
food packaging material not subject to regulation or approval by the FDA. We
have not received any communication from the FDA concerning our breathable
membrane product. If the FDA were to determine that our breathable membrane
products are food additives, we may be required to submit a food additive
petition for approval by the FDA. The food additive petition process is lengthy,
expensive and uncertain. A determination by the FDA that a food additive
petition is necessary would have a material adverse effect on our business,
operating results and financial condition.
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. Our failure
to
control the use of, or to restrict adequately the discharge of, hazardous
substances under present or future regulations could subject us to substantial
liability or could cause our manufacturing operations to be suspended and
changes in environmental regulations may impose the need for additional capital
equipment or other requirements.
Our
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 we conduct. Moreover, it is
possible that future developments, such as increasingly strict environmental
laws and enforcement policies could result in increased compliance
costs.
The
Company is subject to the Perishable Agricultural Commodities Act (“PACA”) law.
PACA regulates fair trade standards in the fresh produce industry and governs
all the products sold by Apio. Our failure to comply with the PACA requirements
could among other things, result in civil penalties, suspension or revocation
of
a license to sell produce, and in the most egregious cases, criminal
prosecution, which could have a material adverse effect on our
business.
Adverse
Weather Conditions and Other Acts of God May Cause Substantial Decreases in
Our
Sales and/or Increases in Our Costs
Our
Food
Products business is 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, earthquakes and hurricanes, may adversely affect
the supply of vegetables and fruits used in our business, which could reduce
the
sales volumes and/or 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 our financial condition.
We
Depend on Strategic Partners and Licenses for Future
Development
Our
strategy for development, clinical and field testing, manufacture,
commercialization and marketing for some of our current and future products
includes entering into various collaborations with corporate partners, licensees
and others. We are dependent on our corporate partners to develop, test,
manufacture and/or market some of our products. Although we believe that our
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 our control. Our
partners may not perform their obligations as expected or we may not derive
any
additional revenue from the arrangements. Our partners may not pay any
additional option or license fees to us or may not 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. Our partners may pursue existing or
alternative technologies in preference to our technology. Furthermore, we may
not be able to negotiate additional collaborative arrangements in the future
on
acceptable terms, if at all, and our collaborative arrangements may not be
successful.
Both
Domestic and Foreign Government Regulations Can Have an Adverse Effect on Our
Business Operations
Our
products and operations are subject to governmental regulation in the United
States and foreign countries. The manufacture of our products is subject to
periodic inspection by regulatory authorities. We may not 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 our business, financial condition and results
of operations. Although we have no reason to believe that we will not be able
to
comply with all applicable regulations regarding the manufacture and sale of
our
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. 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 may adversely affect our business.
We
are
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, and
suspensions,
|
|
· |
withdrawal
of regulatory approvals,
|
|
· |
product
recalls and product seizures, including cessation of manufacturing
and
sales,
|
|
· |
operating
restrictions, and
|
We
may be
required to incur significant costs to comply with the laws and regulations
in
the future which may have a material adverse effect on our business, operating
results and financial condition.
Our
International Operations and Sales May Expose Our Business to Additional
Risks
For
the
nine
months ended February 25,
2007,
approximately 24% of our total revenues were derived from product sales to
international customers. A number of risks are inherent in international
transactions. International sales and operations may be limited or disrupted
by
any of the following:
|
· |
regulatory
approval process,
|
|
· |
export
license requirements,
|
|
· |
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 our international
business, and our financial condition and results of operations. While our
foreign sales are currently priced in dollars, fluctuations in currency exchange
rates may reduce the demand for our products by increasing the price of our
products in the currency of the countries to which the products are sold.
Regulatory, geopolitical and other factors may adversely impact our operations
in the future or require us to modify our current business
practices.
Cancellations
or Delays of Orders by Our Customers May Adversely Affect Our
Business
During
the first nine months of fiscal year 2007, sales to our top five customers
accounted for approximately 50% of our revenues, with our largest customer,
Costco Wholesale Corp. accounting for approximately 20% of our revenues. We
expect that, for the foreseeable future, a limited number of customers may
continue to account for a substantial portion of our net revenues. We may
experience changes in the composition of our customer base as we have
experienced in the past. We do not have long-term purchase agreements with
any
of our 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 our major
customers could materially and adversely affect our business, operating results
and financial condition. In addition, since some of the products processed
by
Apio at its Guadalupe, California facility are sole sourced to its customers,
our operating results could be adversely affected if one or more of our major
customers were to develop other sources of supply. Our current customers may
not
continue to place orders, orders by existing customers may be canceled or may
not continue at the levels of previous periods or we may not 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 we develop involve
an inherent risk of allegations of product liability. If any of our products
were determined or alleged to be contaminated or defective or to have caused
a
harmful accident to an end-customer, we could incur substantial costs in
responding to complaints or litigation regarding our products and our product
brand image could be materially damaged. Either event may have a material
adverse effect on our business, operating results and financial condition.
Although we have taken and intend to continue to take what we believe are
appropriate precautions to minimize exposure to product liability claims, we
may
not be able to avoid significant liability. We currently maintain product
liability insurance. While we believe the coverage and limits are consistent
with industry standards, our coverage may not be adequate or may not 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 our business,
operating results and financial condition.
Our
Stock Price May Fluctuate in Accordance with Market
Conditions
The
following events may cause the market price of our common stock to fluctuate
significantly:
|
· |
technological
innovations applicable to our
products,
|
|
· |
our
attainment of (or failure to attain) milestones in the commercialization
of our technology,
|
|
· |
our
development of new products or the development of new products by
our
competitors,
|
|
· |
new
patents or changes in existing patents applicable to our products,
|
|
· |
our
acquisition of new businesses or the sale or disposal of a part of
our
businesses,
|
|
· |
development
of new collaborative arrangements by us, our competitors or other
parties,
|
|
· |
changes
in government regulations applicable to our business,
|
|
· |
changes
in investor perception of our business,
|
|
· |
fluctuations
in our operating results and
|
|
· |
changes
in the general market conditions in our industry.
|
These
broad fluctuations may adversely affect the market price of our common
stock.
Since
We Order Cartons and Film for Our Products from Suppliers in Advance of Receipt
of Customer Orders for Such Products, We Could Face a Material Inventory
Risk
As
part
of our inventory planning, we enter into negotiated orders with vendors of
cartons and film used for packing our products in advance of receiving customer
orders for such products. Accordingly, we face the risk of ordering too many
cartons and film since orders are generally based on forecasts of customer
orders rather than actual orders. If we cannot change or be released from the
orders, we may incur costs as a result of inadequately predicting cartons and
film orders in advance of customer orders. Because of this, we may have an
oversupply of cartons and film and face the risk of not being able to sell
such
inventory and our anticipated reserves for losses may be inadequate if we have
misjudged the demand for our products. Our business and operating results could
be adversely affected as a result of these increased costs.
Recently
Enacted Changes in Securities Laws and Regulations Have and Will Continue to
Increase Our Costs
The
Sarbanes-Oxley Act of 2002 (the “Act”) that became law in July 2002 required
changes in some of our corporate governance, public disclosure and compliance
practices. In addition, NASDAQ has made revisions to its requirements for
companies, such as Landec, that are listed on The NASDAQ Global Market. These
developments have increased our legal and financial compliance costs. These
changes could make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
developments could make it more difficult for us to attract and retain qualified
members for our board of directors, particularly to serve on our audit
committee.
Our
Controlling Shareholders Exert Significant Influence over Corporate Events
that
May Conflict with the Interests of Other Shareholders
Our
executive officers and directors and their affiliates own or control
approximately 18%
of our
common stock (including options exercisable within 60 days). Accordingly, these
officers, directors and shareholders may have the ability to exert significant
influence over the election of our Board of Directors, the approval of
amendments to our articles and bylaws and the approval of mergers or other
business combination transactions requiring shareholder approval. This
concentration of ownership may have the effect of delaying or preventing a
merger or other business combination transaction, even if the transaction or
amendments would be beneficial to our other shareholders. In addition, our
controlling shareholders may approve amendments to our articles or bylaws to
implement anti-takeover or management friendly provisions that may not be
beneficial to our other shareholders.
We
May Be Exposed to Employment Related Claims and Costs that Could Materially
Adversely Affect Our Business
We
have
been subject in the past, and may be in the future, to claims by employees
based
on allegations of discrimination, negligence, harassment and inadvertent
employment of illegal aliens or unlicensed personnel, and we may be subject
to
payment of workers' compensation claims and other similar claims. We could
incur
substantial costs and our management could spend a significant amount of time
responding to such complaints or litigation regarding employee claims, which
may
have a material adverse effect on our business, operating results and financial
condition.
We
Are Dependent on Our Key Employees and if One or More of Them Were to Leave,
We
Could Experience Difficulties in Replacing Them and Our Operating Results Could
Suffer
The
success of our business depends to a significant extent upon the continued
service and performance of a relatively small number of key senior management,
technical, sales, and marketing personnel. The loss of any of our key personnel
would likely harm our business. In addition, competition for senior level
personnel with knowledge and experience in our different lines of business
is
intense. If any of our key personnel were to leave, we would need to devote
substantial resources and management attention to replace them. As a result,
management attention may be diverted from managing our business, and we may
need
to pay higher compensation to replace these employees.
We
May Issue Preferred Stock with Preferential Rights that Could Affect Your
Rights
Our
Board
of Directors has the authority, without further approval of our shareholders,
to
fix the rights and preferences, and to issue shares, of preferred stock. In
November 1999, we issued and sold shares of Series A Convertible Preferred
Stock
and in October 2001 we issued and sold shares of Series B Convertible Preferred
Stock. The Series A Convertible Preferred Stock was converted into 1,666,670
shares of Common Stock on November 19, 2002 and the Series B Convertible
Preferred Stock was converted into 1,744,102 shares of Common Stock on May
7,
2004.
The
issuance of new shares of preferred stock could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding stock,
and the holders of such preferred stock could have voting, dividend, liquidation
and other rights superior to those of holders of our Common Stock.
We
Have Never Paid any Dividends on Our Common Stock
We
have
not paid any cash dividends on our Common Stock since inception and do not
expect to do so in the foreseeable future. Any dividends may be subject to
preferential dividends payable on any preferred stock we may issue.
Our
Profitability Could Be Materially And Adversely Affected if it Is Determined
that the Book Value of Goodwill is Higher than Fair
Value
Our
balance sheet includes an amount designated as “goodwill” that represents a
portion of our assets and our shareholders’ equity. Goodwill arises when an
acquirer pays more for a business than the fair value of the tangible and
separately measurable intangible net assets. Under Statement of Financial
Accounting Standards No. 142 “Goodwill and Other Intangible Assets”, beginning
in fiscal year 2002, the amortization of goodwill has been replaced with an
“impairment test” which requires that we compare the fair value of goodwill to
its book value at least annually and more frequently if circumstances indicate
a
possible impairment. If we determine at any time in the future that the book
value of goodwill is higher than fair value then the difference must be
written-off, which could materially and adversely affect our
profitability.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
The
following table presents information about the Company’s debt obligations and
derivative financial instruments that are sensitive to changes in interest
rates. The table presents principal amounts and related weighted average
interest rates by year of expected maturity for the Company’s debt obligations.
The carrying value of the Company’s debt obligations approximates the fair value
of the debt obligations as of February 25,
2007.
|
|
Remainder
of
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
There-after
|
|
Total
|
|
Liabilities
(in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term debt, including current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
$
|
7
|
|
$
|
27
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
34
|
|
Avg.
Int. Rate
|
|
|
5.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.90
|
%
|
Item
4: Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management evaluated, with participation of our Chief Executive Officer and
our
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on
Form
10-Q. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures
are
effective in ensuring that information required to be disclosed in reports
filed
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission, and to
provide reasonable assurance that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal controls over financial reporting during the
quarter ended February 25,
2007
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal
Proceedings
The
Company is involved in litigation arising in the normal course of business.
The
Company is currently not a party to any legal proceedings which management
believes could result in the payment of any amounts that would be material
to
the business or financial condition of the Company.
Item
1A. Risk Factors
Not
applicable.
Item
2. Unregistered
Sales of Equity 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
Exhibit
|
31.1+
|
CEO
Certification pursuant to section 302
of
the Sarbanes-Oxley Act of 2002.
|
|
31.2+
|
CFO
Certification pursuant to section 302
of
the Sarbanes-Oxley Act of 2002.
|
|
32.1+
|
CEO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2+
|
CFO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
|
__________________
+
Filed
herewith.
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 |
|
(Principal
Financial and Accounting Officer) |
Date: March
30,
2007