Unassociated Document
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 August 26, 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
incorporation
or organization)
|
(IRS
Employer
Identification
Number)
|
3603
Haven Avenue
Menlo
Park, California 94025
(Address
of principal executive offices, including zip code)
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
September 14, 2007, there were 26,047,744 shares of Common Stock
outstanding.
LANDEC
CORPORATION
FORM
10-Q
For the Fiscal Quarter Ended August 26, 2007
INDEX
|
|
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Page
|
|
Facing
sheet |
1
|
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|
|
Index |
2
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|
|
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Part
I.
|
Financial
Information |
|
|
|
|
|
Item
1.
|
Financial
Statements |
|
|
|
|
|
|
a) |
Consolidated
Balance Sheets as of August 26, 2007 and May 27, 2007
|
3
|
|
|
|
|
|
b) |
Consolidated
Statements of Operations for the Three Months Ended August 26, 2007
and
August 27, 2006
|
4
|
|
|
|
|
|
c) |
Consolidated
Statements of Cash Flows for the Three Months Ended August 26, 2007
and
August 27, 2006
|
5
|
|
|
|
|
|
d) |
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations |
14
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk |
29
|
|
|
|
|
Item
4
|
Controls
and Procedures |
29
|
|
|
|
|
Part
II.
|
Other
Information |
30
|
|
|
|
|
Item
1.
|
Legal
Proceedings |
30
|
|
|
|
|
Item
1A.
|
Risk
Factors |
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds |
30
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities |
30
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders |
30
|
|
|
|
|
Item
5.
|
Other
Information |
30
|
|
|
|
|
Item
6.
|
Exhibits
|
30
|
|
|
|
|
|
Signatures |
31
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
LANDEC
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
|
August 26,
2007
|
|
May 27,
2007
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
46,250
|
|
$
|
62,556
|
|
Accounts
receivable, less allowance for doubtful accounts of $209 and $206
at
August
26, 2007
and May 27, 2007
|
|
|
17,643
|
|
|
17,631
|
|
Accounts
receivable, related party
|
|
|
618
|
|
|
554
|
|
Inventories,
net
|
|
|
7,800
|
|
|
6,800
|
|
Notes
and advances receivable
|
|
|
147
|
|
|
282
|
|
Prepaid
expenses and other current assets
|
|
|
1,558
|
|
|
1,316
|
|
Total
Current Assets
|
|
|
74,016
|
|
|
89,139
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
19,790
|
|
|
20,270
|
|
Goodwill,
net
|
|
|
22,506
|
|
|
21,402
|
|
Trademarks,
net
|
|
|
8,228
|
|
|
8,228
|
|
Notes
receivable
|
|
|
96
|
|
|
96
|
|
Other
assets
|
|
|
2,429
|
|
|
2,233
|
|
Total
Assets
|
|
$
|
127,065
|
|
$
|
141,368
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
16,259
|
|
$
|
13,705
|
|
Related
party accounts payable
|
|
|
466
|
|
|
175
|
|
Income
taxes payable
|
|
|
482
|
|
|
458
|
|
Accrued
compensation
|
|
|
1,224
|
|
|
3,126
|
|
Other
accrued liabilities
|
|
|
1,626
|
|
|
1,340
|
|
Related
party note payable
|
|
|
156
|
|
|
—
|
|
Deferred
revenue
|
|
|
2,698
|
|
|
3,491
|
|
Total
Current Liabilities
|
|
|
22,911
|
|
$
|
22,295
|
|
|
|
|
|
|
|
|
|
Related
party note payable
|
|
|
76
|
|
|
—
|
|
Deferred
revenue
|
|
|
6,500
|
|
|
7,000
|
|
Minority
interest
|
|
|
1,477
|
|
|
1,845
|
|
Total
Liabilities
|
|
|
30,964
|
|
|
31,140
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $0.001
par value; 50,000,000 shares authorized; 26,046,862 and 25,891,168
shares
issued and outstanding at August 26, 2007 and May 27, 2007,
respectively
|
|
|
130,455
|
|
|
129,560
|
|
Accumulated
deficit
|
|
|
(34,354
|
)
|
|
(19,332
|
)
|
Total
Shareholders’ Equity
|
|
|
96,101
|
|
|
110,228
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
127,065
|
|
$
|
141,368
|
|
See
accompanying notes.
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In
thousands, except per share amounts)
|
|
Three Months Ended
|
|
|
|
August 26,
|
|
August 27,
|
|
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
59,800
|
|
$
|
50,046
|
|
Services
revenue, related party
|
|
|
1,075
|
|
|
843
|
|
License
fees
|
|
|
1,581
|
|
|
200
|
|
Royalty
revenues, related party
|
|
|
32
|
|
|
50
|
|
Research,
development and royalty revenues
|
|
|
171
|
|
|
8
|
|
Total
revenues
|
|
|
62,659
|
|
|
51,147
|
|
|
|
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
51,592
|
|
|
43,288
|
|
Cost
of product sales, related party
|
|
|
1,212
|
|
|
1,549
|
|
Cost
of services revenue
|
|
|
881
|
|
|
754
|
|
Total
cost of revenue
|
|
|
53,685
|
|
|
45,591
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,974
|
|
|
5,556
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
Research
and development
|
|
|
822
|
|
|
784
|
|
Selling,
general and administrative
|
|
|
4,546
|
|
|
4,902
|
|
Total
operating costs and expenses
|
|
|
5,368
|
|
|
5,686
|
|
Operating
income (loss)
|
|
|
3,606
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
781
|
|
|
236
|
|
Interest
expense
|
|
|
(8
|
)
|
|
(70
|
)
|
Minority
interest expense
|
|
|
(120
|
)
|
|
(18
|
)
|
Other
expense
|
|
|
—
|
|
|
(4
|
)
|
Net
income before taxes
|
|
|
4,259
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(1,182
|
)
|
|
—
|
|
Net
income
|
|
$
|
3,077
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.12
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share (Note 4)
|
|
$
|
0.11
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Shares
used in per share computation
|
|
|
|
|
|
|
|
Basic
|
|
|
25,937
|
|
|
24,936
|
|
Diluted
|
|
|
26,911
|
|
|
24,936
|
|
See
accompanying notes.
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Three months Ended
|
|
|
|
August 26,
|
|
August 27,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,077
|
|
$
|
14
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
716
|
|
|
886
|
|
Income
tax expense
|
|
|
1,132
|
|
|
—
|
|
Stock-based
compensation expense
|
|
|
325
|
|
|
246
|
|
Loss
on sale of property and equipment
|
|
|
—
|
|
|
4
|
|
Minority
interest
|
|
|
120
|
|
|
78
|
|
Changes
in current assets and current liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(12
|
)
|
|
2,483
|
|
Accounts
receivable, related party
|
|
|
(64
|
)
|
|
(64
|
)
|
Inventories,
net
|
|
|
(1,000
|
)
|
|
(2,039
|
)
|
Issuance
of notes and advances receivable
|
|
|
(2
|
)
|
|
—
|
|
Collection
of notes and advances receivable
|
|
|
141
|
|
|
168
|
|
Prepaid
expenses and other current assets
|
|
|
(242
|
)
|
|
(189
|
)
|
Accounts
payable
|
|
|
2,554
|
|
|
(1,000
|
)
|
Related
party accounts payable
|
|
|
291
|
|
|
(70
|
)
|
Income
taxes payable
|
|
|
24
|
|
|
—
|
|
Accrued
compensation
|
|
|
(1,902
|
)
|
|
(2,302
|
)
|
Other
accrued liabilities
|
|
|
291
|
|
|
10
|
|
Deferred
revenue
|
|
|
(1,293
|
)
|
|
(151
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
4,156
|
|
|
(1,926
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(236
|
)
|
|
(2,342
|
)
|
Issuance
of notes and advances receivable
|
|
|
(4
|
)
|
|
(15
|
)
|
Collection
of notes and advances receivable
|
|
|
—
|
|
|
14
|
|
Net
cash used in investing activities
|
|
|
(240
|
)
|
|
(2,343
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
570
|
|
|
373
|
|
Proceeds
from the exercise of subsidiary options
|
|
|
—
|
|
|
9
|
|
Repurchase
of subsidiary common stock and options (Note 6)
|
|
|
(20,596
|
)
|
|
—
|
|
(Increase)
decrease in other assets
|
|
|
(196
|
)
|
|
65
|
|
Issuance
of related party note payable (Note 9)
|
|
|
232
|
|
|
—
|
|
Payments
on long term debt
|
|
|
(5
|
)
|
|
(1,973
|
)
|
Payments
to minority interest holders
|
|
|
(227
|
)
|
|
(361
|
)
|
Net
cash used in financing activities
|
|
|
(20,222
|
)
|
|
(1,887
|
)
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(16,306
|
)
|
|
(6,156
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
62,556
|
|
|
20,519
|
|
Cash
and cash equivalents at end of period
|
|
$
|
46,250
|
|
$
|
14,363
|
|
Supplemental
schedule of noncash operating activities: |
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
1,132
|
|
$
|
—
|
|
Preferred
stock received from investment in unconsolidated
business
|
|
$
|
—
|
|
$
|
481
|
|
See
accompanying notes.
LANDEC
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 August
26, 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
accounting principles generally accepted in the United States 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
27, 2007.
The
results of operations for the three months ended August
26, 2007
are not
necessarily indicative of the results that may be expected for an entire fiscal
year due to some seasonality in Apio’s food business.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 as 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.
Recent
Accounting Pronouncements
Fair
Value Measurements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”, including an Amendment of FASB
Statement No. 115. SFAS No. 159 provides the option to measure, at fair value,
eligible financial instrument items using fair value, which are not otherwise
required to be measured at fair value. The irrevocable decision to measure
items
at fair value is made at specified election dates on an instrument-by-instrument
basis. Changes in that instrument's fair value must be recognized in current
earnings in subsequent reporting periods. If elected, the first measurement
to
fair value is reported as a cumulative-effect adjustment to the opening balance
of retained earning in the year of adoption. The Company is currently evaluating
the impact of the adoption of SFAS No. 159 on its consolidated financial
statements, if it elects to measure eligible financial instruments at fair
value. The standard is effective for the Company beginning in its fiscal year
2009.
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. The Company does not expect the adoption of SFAS 157 to
have
a material impact on its consolidated financial statements.
Reclassifications
Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation.
2.
|
License
Agreement with Monsanto
Company
|
On
December 1, 2006, Landec sold its direct marketing and sales seed company,
Fielder’s Choice Direct (“FCD”), which included the Fielder’s Choice
Direct®
and
Heartland Hybrid®
brands,
to American Seeds, Inc., a wholly owned subsidiary of Monsanto Company
(“Monsanto”). The acquisition price for FCD was $50 million in cash paid at the
close. During fiscal year 2007, 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.
On
December 1, 2006, Landec also entered into a five-year co-exclusive technology
license and polymer supply agreement (the “Agreement”) with Monsanto 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 months ended August 26, 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 purchase
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 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, or $3.4 million per year, for
license fees and polymer supply payments over five years or $21 million in
maximum payments if Monsanto elects to purchase the licensed technology. 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.
Landec
Ag
revenues and operating losses for the three months ended August 27, 2006, prior
to the sale of FCD, were $114,000 and $2.5 million or $0.10 per diluted share,
respectively.
3.
|
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. In the three months ended August 26, 2007, the Company
recognized stock-based compensation expense of $324,668 or $0.01 per basic
and
diluted share, which included $62,964 for restricted stock unit awards and
$261,704 for stock option grants.
The
following table summarizes the stock-based compensation by income statement
line
item:
|
|
Three Months Ended August 26, 2007
|
|
Three Months Ended August 27, 2006
|
|
Research
and development
|
|
$
|
31,583
|
|
$
|
19,070
|
|
Sales,
general and administrative
|
|
$
|
293,085
|
|
$
|
226,842
|
|
Total
stock-based compensation
|
|
$
|
324,668
|
|
$
|
245,912
|
|
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 grants 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
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 prior estimates.
Valuation
Assumptions
As
of
August 26, 2007 and August 27, 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
|
|
|
|
August
26,
|
|
August
27,
|
|
|
|
2007
|
|
2006
|
|
Stock
option plan:
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
5.02
|
%
|
|
5.08
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
Volatility
|
|
|
46
|
%
|
|
51
|
%
|
Expected
term in years
|
|
|
4.40
|
|
|
4.27
|
|
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 27, 2007
|
|
|
706,731
|
|
|
38,335
|
|
$
|
8.86
|
|
|
2,061,337
|
|
$
|
5.14
|
|
Granted
|
|
|
(139,335
|
)
|
|
34,835
|
|
$
|
13.32
|
|
|
104,500
|
|
$
|
13.32
|
|
Awarded/Exercised
|
|
|
—
|
|
|
(10,002
|
)
|
$
|
8.86
|
|
|
(145,692
|
)
|
$
|
3.90
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Balance
at August 26, 2007
|
|
|
567,396
|
|
|
6363,168
|
|
$
|
11.32
|
|
|
2,020,145
|
|
$
|
5.66
|
|
The
following table summarizes information concerning stock options outstanding
and
exercisable at August 26, 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)
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.660 -
$3.250 1
|
|
|
1244,363
|
|
|
4.87
|
|
$
|
2.91
|
|
$
|
2,683,106
|
|
|
244,363
|
|
$
|
2.91
|
|
$
|
2,683,106
|
|
$ 3.375
- $3.375
|
|
|
258,247
|
|
|
3.28
|
|
$
|
3.38
|
|
$
|
2,714,176
|
|
|
258,247
|
|
$
|
3.38
|
|
$
|
2,714,176
|
|
$ 3.400 -
$3.700
|
|
|
206,146
|
|
|
2.95
|
|
$
|
3.47
|
|
$
|
2,148,041
|
|
|
206,146
|
|
$
|
3.47
|
|
$
|
2,148,041
|
|
$ 3.375 -
$6.125
|
|
|
303,617
|
|
|
2.75
|
|
$
|
5.02
|
|
$
|
2,693,083
|
|
|
298,617
|
|
$
|
5.01
|
|
$
|
2,651,719
|
|
$
6.130 - $6.130
|
|
|
262,000
|
|
|
4.73
|
|
$
|
6.13
|
|
$
|
2,033,120
|
|
|
196,375
|
|
$
|
6.13
|
|
$
|
1,523,870
|
|
$
6.450 - $6.750
|
|
|
338,300
|
|
|
4.25
|
|
$
|
6.68
|
|
$
|
2,439,143
|
|
|
338,300
|
|
$
|
6.68
|
|
$
|
2,439,143
|
|
$
6.790 - $8.860
|
|
|
302,972
|
|
|
6.67
|
|
$
|
7.75
|
|
$
|
1,860,248
|
|
|
251,020
|
|
$
|
7.52
|
|
$
|
1,598,997
|
|
$
13.32 - $13.32
|
|
|
104,500
|
|
|
6.84
|
|
$
|
13.32
|
|
$
|
59,565
|
|
|
30,968
|
|
$
|
13.32
|
|
$
|
17,652
|
|
$
1.660 - $13.32
|
|
|
2,020,145
|
|
|
4.40
|
|
$
|
5.66
|
|
$
|
16,630,482
|
|
|
1,824,036
|
|
$
|
5.24
|
|
$
|
15,776,704
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $13.89 on
August 24, 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 August 26, 2007, was approximately 1.8 million shares.
The aggregate intrinsic value of stock options exercised during the three month
period ended August 26, 2007, was $1.0 million.
Shares
Subject to Vesting
The
following table summarizes the activity relating to unvested stock option grants
and RSUs during the three month period ended August 26, 2007:
|
|
Stock Options
|
|
Restricted Stock
|
|
|
|
Shares
|
|
Weighted Average Fair Value
|
|
Shares
|
|
Weighted Average Fair Value
|
|
Unvested
at May 27, 2007
|
|
|
140,913
|
|
$
|
3.70
|
|
|
38,335
|
|
$
|
8.32
|
|
Granted
|
|
|
104,500
|
|
$
|
5.57
|
|
|
34,835
|
|
$
|
12.49
|
|
Vested/Awarded
|
|
|
(49,304
|
)
|
$
|
5.31
|
|
|
(10,002
|
)
|
$
|
6.30
|
|
Forfeited
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Unvested
at August 26, 2007
|
|
|
196,109
|
|
$
|
4.29
|
|
|
63,168
|
|
$
|
8.57
|
|
As
of
August 26, 2007, there was $1.4 million of total unrecognized compensation
expense related to unvested equity compensation awards granted under the
Company’s incentive stock plan. Total expense is expected to be recognized over
the weighted-average period of 1.63 years.
As
of
August 26, 2007 the Company has reserved 2.7 million shares of common stock
for
future issuance under its current and former stock plans.
The
estimated annual effective tax rate for fiscal 2008 is expected to be
approximately 28%. The primary difference between the estimated annual effective
tax rate of 28% and the federal statutory tax rate relates to the projected
utilization of net operating loss and credit carryforwards. The provision for
income taxes for the three months ended August 26, 2007 was approximately $1.2
million.
In
June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”).
This interpretation 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 48 also provides guidance on
derecognition of tax benefits, classification on the balance sheet, interest
and
penalties, accounting in interim periods, disclosure, and transition.
The
Company adopted FIN 48 effective May 28, 2007. As a result of the implementation
of FIN 48, the Company did not recognize a cumulative adjustment to the May
28,
2007 balance of retained earnings as the amount was deemed
immaterial.
As
of May
28, 2007, the Company had unrecognized tax benefits of approximately $277,000.
Included in the balance of unrecognized tax benefits as of May 28, 2007 is
approximately $259,000 of tax benefits that, if recognized, would result in
an
adjustment to the Company’s effective tax rate.
In
accordance with FIN 48, paragraph 19, the Company has decided to classify
interest and penalties related to uncertain tax positions as a component of
its
provision for income taxes. Due to the Company’s historical taxable loss
position, the Company did not accrue interest and penalties relating
to the income tax on the unrecognized tax benefits as of May 27, 2007 and August
26, 2007 as the amounts were immaterial. Accordingly, the amount of interest
and
penalties included as a component of provision for income taxes in
the
quarter ended August 26, 2007 is immaterial.
Due
to
tax attribute carryforwards, the Company is subject to examination for tax
years
1991 forward for U.S. tax purposes. The Company was also subject to examination
in various state jurisdictions for tax years 1996 forward, none of which were
individually material.
The
Company does not expect that the amounts of unrecognized tax benefits will
change significantly within the next twelve months.
5. |
Net
Income Per Diluted Share
|
The
following table sets forth the computation of diluted net income for the periods
with net income (in thousands, except per share amounts):
|
|
Three Months Ended
August 26, 2007
|
|
Three Months Ended August 27, 2006
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,077
|
|
$
|
14
|
|
Less:
Minority interest income of subsidiary
|
|
|
(89
|
)
|
|
(114
|
)
|
Net
income (loss) for diluted net income (loss) per share
|
|
$
|
2,988
|
|
$
|
(100
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted
average shares for basic net income per share
|
|
|
25,937
|
|
|
24,936
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
974
|
|
|
—
|
|
Weighted
average shares for diluted net income per share
|
|
|
26,911
|
|
|
24,936
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.11
|
|
$
|
(0.00
|
)
|
For
the
three months ended August 26, 2007 and August 27, 2006, the computation of
the
diluted net income (loss) per share excludes the impact of options to purchase
68,901 shares and 1,367,667 shares of Common Stock, respectively, as such
impacts would be antidilutive for these periods.
6. |
Repurchase
of Subsidiary Common Stock and
Options
|
On
August
7, 2007, Landec repurchased all of the outstanding common stock and options
of
Apio not owned by Landec at the fair market value of each share as if all
options had been exercised on that date. The fair market value repurchase price
for all of Apio’s common stock and options not owned by Landec was $20.6
million. After the repurchase, Apio became a wholly owned subsidiary of Landec.
In accordance with SFAS 123R, this repurchase did not result in additional
compensation expense to the Company as all of the common stock and options
repurchased were fully vested at the time of the repurchase and the
consideration paid was equal to the fair value on the date of the repurchase.
The repurchase of Apio’s outstanding common stock for $1.1 million was recorded
to goodwill. The repurchase of Apio’s options for $19.5 million was recorded as
a reduction to retained earnings. In addition, the repurchase resulted in a
tax
deduction of $19.7 million during the first quarter of fiscal year
2008.
7. |
Goodwill
and Other Intangibles
|
The
Company is required under SFAS 142 to review goodwill and indefinite lived
intangible assets at least annually. During the three months ended August 26,
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 determination of fair value was performed by management.
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 August 26, 2007. As a result of the repurchase of Apio’s outstanding
common stock (see Note 6), goodwill increased $1.1 million during the first
quarter of fiscal year 2008.
Inventories
are stated at the lower of cost (first-in, first-out method) or market and
consisted of the following (in thousands):
|
|
August 26,
2007
|
|
May 27,
2007
|
|
Finished
goods
|
|
$
|
4,012
|
|
$
|
2,273
|
|
Raw
material
|
|
|
3,788
|
|
|
4,527
|
|
Total
|
|
$
|
7,800
|
|
$
|
6,800
|
|
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 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 August
26, 2007
and
May
27,
2007
and for
the three months ended August
26, 2007
and
August 27, 2006.
Apio
leases, for approximately $289,000 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 months ended August 26, 2007, the Company
subleased all of the land leased from the Apio CEO and received sublease income
of $112,000 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 is a 12.5% owner in Beachside Produce. During the
three months ended August 26, 2007, the Company recognized revenues of $371,000
from the sale of products to Beachside Produce and royalty revenue of $32,000
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 August
26, 2007
and May
27, 2007.
At
May
27, 2007, the Apio CEO held a 6% ownership interest in Apio Cooling LP (“Apio
Cooling”), a limited partnership in which Apio is the general partner and
majority owner with a 60% ownership interest. During the first quarter of fiscal
year 2008, the Apio CEO withdrew from Apio Cooling. In accordance with the
partnership agreement, the Apio CEO’s minority interest will be paid in three
annual installments with the first payment made in the second quarter of fiscal
year 2008. The amounts due are classified as a related party note payable as
of
August 26, 2007 in the accompanying financial statements. As of May 27, 2007,
the $227,000 owed to the Apio CEO was included in the minority interest
liability as the Apio CEO did not withdraw from Apio Cooling until the first
quarter of fiscal year 2008.
All
related party transactions are monitored quarterly by the Company and approved
by the Audit Committee of the Board of Directors.
The
comprehensive income of Landec is the same as net income.
During
the three months ended August 26, 2007, 155,694 shares of Common Stock were
issued upon the vesting of RSUs and upon the exercise of options under the
Company’s stock option plans.
12. |
Business
Segment Reporting
|
Landec
operates in two business segments: the Food Products Technology segment and
the
Technology Licensing 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. In addition, the Food Products Technology segment sells
BreatheWay packaging to partners for non-vegetable products. The Technology
Licensing segment consists of licensing agreements for seed coatings using
Landec’s patented Intellicoat seed coatings to the farming industry and for the
use of the Company’s Intelimer® polymers for personal care products and other
industrial products. Corporate includes corporate general and administrative
expenses, non Food Products Technology interest income and Company-wide income
tax expenses. All of the assets of the Company are located within the United
States of America. Prior to fiscal year 2008, Landec’s operating segments were
Food Products Technology, which has not changed, and Agricultural Seed
Technology. As a result of the sale of FCD to Monsanto (see Note 2), the Company
has eliminated the Agricultural Seed Technology segment and has established
the
Technology Licensing segment. As a result, the segment information for the
first
quarter of fiscal year 2007 has been reclassified to conform with the current
year classification. Included in the Technology Licensing segment for the first
quarter of fiscal year 2007 are the results of Landec Ag which includes FCD.
In
addition, the licensing activity for non food and Ag collaborations is included
in the Technology Licensing segment whereas in periods prior to fiscal year
2008
it was included in the Corporate.
Operations
by Business Segment (in thousands):
Three
months ended August 26, 2007
|
|
Food Products
Technology
|
|
Technology
Licensing
|
|
Corporate
|
|
TOTAL
|
|
Net
revenues
|
|
$
|
60,998
|
|
$
|
1,661
|
|
$
|
—
|
|
$
|
62,659
|
|
International
sales
|
|
$
|
19,250
|
|
$
|
¾
|
|
$
|
¾
|
|
$
|
19,250
|
|
Gross
profit
|
|
$
|
7,313
|
|
$
|
1,661
|
|
$
|
—
|
|
$
|
8,974
|
|
Net
income (loss)
|
|
$
|
3,676
|
|
$
|
1,209
|
|
$
|
(1,808
|
)
|
$
|
3,077
|
|
Interest
expense
|
|
$
|
8
|
|
$
|
¾
|
|
$
|
¾
|
|
$
|
8
|
|
Interest
income
|
|
$
|
223
|
|
$
|
—
|
|
$
|
558
|
|
$
|
781
|
|
Depreciation
and amortization
|
|
$
|
659
|
|
$
|
57
|
|
$
|
—
|
|
$
|
716
|
|
Income
tax expense
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,182
|
|
$
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended August
27, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
50,825
|
|
$
|
322
|
|
$
|
—
|
|
$
|
51,147
|
|
International
sales
|
|
$
|
13,810
|
|
$
|
¾
|
|
$
|
¾
|
|
$
|
13,810
|
|
Gross
profit
|
|
$
|
5,354
|
|
$
|
202
|
|
$
|
—
|
|
$
|
5,556
|
|
Net
income (loss)
|
|
$
|
2,426
|
|
$
|
(2,667
|
)
|
$
|
255
|
|
$
|
14
|
|
Interest
expense
|
|
$
|
70
|
|
$
|
¾
|
|
$
|
¾
|
|
$
|
70
|
|
Interest
income
|
|
$
|
192
|
|
$
|
—
|
|
$
|
44
|
|
$
|
236
|
|
Depreciation
and amortization
|
|
$
|
672
|
|
$
|
214
|
|
$
|
—
|
|
$
|
886
|
|
Income
tax expense
|
|
$
|
—
|
|
$
|
¾
|
|
$
|
¾
|
|
$
|
—
|
|
During
the three months ended August 26, 2007 and August 27, 2006, sales to the
Company’s top five customers accounted for 49%
and
51%, respectively, of revenues with the Company’s top customer from the Food
Products Technology segment, Costco Wholesale Corp., accounting for 20% for
the
three months ended August 26, 2007 and 21% for the three months ended August
27,
2006. 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.
On
September 24,
2007,
the Company amended its licensing and supply agreement with Chiquita Brands
International, Inc. (“Chiquita”). Under the terms of the amendment, the license
for bananas has been expanded to include additional exclusive fields using
Landec’s BreatheWay packaging technology and, a new exclusive license has been
added for the sale and marketing of avocados using Landec’s BreatheWay packaging
technology. In exchange for expanding the exclusive fields for bananas and
adding a new exclusive field for avocados, the minimum gross profits to be
received by Landec from the sale of BreatheWay packaging to Chiquita for bananas
and avocados will increase to $2.9 million in fiscal year 2008 and to $2.2
million in fiscal year 2009. In addition, the minimum gross profits to be
received will be divided evenly over each calendar quarter and thus will be
due
at the end of March, June, September and December of each year.
On
September 1, 2007, Apio amended its revolving line of credit with Wells Fargo
Bank N.A. extending the term of the line to August 31, 2009. In addition, the
interest rate on the revolving line of credit was reduced from either prime
less
0.50% or the LIBOR adjusted rate plus 1.50%. The
revolving line of credit with Wells Fargo 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 August 26,
2007,
no
amounts were outstanding under the revolving line of credit. Apio has been
in
compliance or obtained waivers for all loan covenants since the inception of
this loan.
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 27, 2007.
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 27, 2007. 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
27, 2007 filed with the Securities and Exchange Commission on July 27,
2007.
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 Intelimer 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.
Subsequent
to the sale of Landec’s former direct marketing and sales seed corn company,
Fielder’s Choice Direct (“FCD”), to Monsanto in fiscal year 2007, Landec now has
two core businesses – Food Products
Technology and Technology Licensing (see note 12).
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
Technology Licensing business includes our proprietary Intellicoat seed coating
technology which we have licensed to Monsanto and our Intelimer polymer business
that licenses and/or supplies products outside of our Food Products Technology
business to companies such as Air Products and Chemicals, Inc. (“Air Products”)
and Nitta Corporation (“Nitta”).
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 Global
Select 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
participates in two core business segments- Food Products Technology and
Technology Licensing.
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 BreatheWay 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 to the foodservice industry. The vertical integration of Landec’s BreatheWay
technology and Apio’s packaging and sales capabilities within the Food Products
Technology business gives Landec direct access to the large and growing
fresh-cut produce market. The
value-added 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
27,
2007, 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 expanded in fiscal year 2007 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 vegetable salads
and
snack packs. During the last twelve months, Apio has introduced 15
new
products.
|
Apio
established its Apio Packaging division (formerly know as Apio Tech) in 2005
to
advance the sales of BreatheWay packaging technology for shelf-life sensitive
vegetables and fruit. The technology also includes unique packaging solutions
for produce in large packages including shipping and pallet-sized containers.
Apio
Packaging’s first program has been concentrated on bananas which was formally
consummated when Apio entered into an agreement with Chiquita Brands
International, Inc. (“Chiquita”) whereby Apio supplies Chiquita with its
proprietary banana packaging technology on a worldwide basis for the ripening,
conservation and shelf-life extension of bananas in selective applications
on an
exclusive basis and for other applications on a non-exclusive basis. In
addition, Apio provides Chiquita with ongoing research and development and
process technology support for the BreatheWay membranes and bags, and technical
service support throughout the customer chain in order to assist in the
development and market acceptance of the technology. To
maintain the exclusive license, Chiquita must meet annual minimum purchase
thresholds of BreatheWay banana packages.
The
initial market focus for the BreatheWay banana packaging technology using
Chiquita® Brand bananas has been commercial outlets that normally do not sell
bananas because of their short shelf-life - outlets such as quick serve
restaurants, convenience stores and coffee chain outlets. Chiquita is currently
market testing the sale of bananas packaged with Landec’s BreatheWay technology
to retail grocery chains.
The
Company recently expanded the use of its BreatheWay technology to avocados
under
an expanded licensing agreement with Chiquita. Market test are expected to
start
within the next twelve months.
Technology
Licensing Businesses
The
Technology and Market Opportunity: Intellicoat Seed
Coatings
Following
the sale of FCD, our strategy is to work closely with Monsanto to further
develop our patented, functional polymer coating technology that can be broadly
sold and/or licensed to the seed industry. In accordance with our license,
supply and R&D agreement with Monsanto, we are currently focused on
commercializing products for the seed corn market and then plan to broaden
the
technology to other seed crop applications.
Landec'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 2007 Pollinator Plus was used by 25 seed companies
on
approximately 15% of the seed corn production acres in the U.S.
In
2003,
Landec 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 2007, seven seed companies
offered Intellicoat on their hybrid seed corn offerings.
The
Technology and Market Opportunity: Intelimer Polymer
Applications
We
believe our technology has commercial potential in a wide range of industrial,
consumer and medical applications. 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 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.
Personal
Care and Cosmetic Applications
Landec’s
personal care and cosmetic applications strategy is focused on supplying
Intelimer materials to industry leaders for use in lotions and creams, and
potentially hair care products, color cosmetics and lipsticks. The Company's
partner, Air Products, is currently shipping products to L’Oreal for use in
lotions and creams.
Intelimer
Polymer Systems
Landec
has developed latent catalysts useful in extending pot-life, extending shelf
life, reducing waste and improving thermoset cure methods. Some of these latent
catalysts are currently being distributed by Akzo-Nobel Chemicals B.V. through
our licensing agreement with Air Products. The rights to develop and sell
Landec’s latent catalysts and personal care technologies were licensed to Air
Products in March 2006.
Medical
Applications
On
December 23, 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences Corporation (“Aesthetic Sciences”) for the exclusive rights
to use Landec's Intelimer materials technology for the development of dermal
fillers worldwide. Landec will receive royalties on the sale of products
incorporating Landec’s technology. In addition, the Company has received shares
of preferred stock valued at $1.8 million which represents a 19.9% ownership
interest in Aesthetic Sciences. At
this
time, the Company is unable to predict the ultimate outcome of the collaboration
with Aesthetic Sciences and the timing or amount of future revenues, if
any.
Results
of Operations
Revenues
(in
thousands):
|
|
Three months ended 8/26/07
|
|
Three months
ended 8/27/06
|
|
Change
|
|
Apio
Value Added
|
|
$
|
39,394
|
|
$
|
35,030
|
|
|
12
|
%
|
Apio
Packaging
|
|
|
153
|
|
|
13
|
|
|
1077
|
%
|
Apio
Tech. Subtotal
|
|
|
39,547
|
|
|
35,043
|
|
|
13
|
%
|
Apio
Trading
|
|
|
21,451
|
|
|
15,782
|
|
|
36
|
%
|
Total
Apio
|
|
|
60,998
|
|
|
50,825
|
|
|
20
|
%
|
Tech.
Licensing
|
|
|
1,661
|
|
|
322
|
|
|
416
|
%
|
Total
Revenues
|
|
$
|
62,659
|
|
$
|
51,147
|
|
|
23
|
%
|
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 months ended August 26,
2007 compared to the same period last year is due to increased sales to existing
customers and the addition of new customers. Overall value-added sales volume
increased 20% during the first quarter of fiscal year 2008 compared to the
same
period last year. The increase in value-added sales volumes was higher than
the
increase in revenues due primarily to the introduction of several new
value-added products that have average sales prices that are lower than the
average sales prices for other value-added products.
Apio
Packaging
Apio
Packaging consists of Apio’s packaging technology business using its BreatheWay
membrane technology. The
first
commercial application included in Apio Packaging is our banana packaging
technology.
A large
majority of the revenues currently generated from Apio Packaging are revenues
derived from our banana packaging program with Chiquita.
The
increase in revenues at Apio Packaging during the three months ended August
26,
2007 compared to the same period last year was not material to consolidated
Landec revenues.
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 to Wal-Mart. The export portion of trading
revenues for the first quarter of fiscal year 2008 was $19.3 million or 90%
of
total trading revenues.
The
increase in revenues in Apio’s trading business for the three months ended
August 26, 2007 compared to the same period last year was due to a 40% increase
in export sales volumes as a result of an increased supply of produce to
export.
Technology
Licensing
Technology
licensing revenues consist of revenues generated from the licensing agreements
with Monsanto, Air Products and Nitta.
The
increase in Technology Licensing revenues for the three months ended August
26,
2007 compared to the same period of the prior year was primarily due to the
licensing revenues from the Monsanto licensing agreement entered into on
December 1, 2006.
Gross
Profit (in
thousands):
|
|
Three months ended 8/26/07
|
|
Three months ended 8/27/06
|
|
Change
|
|
Apio
Value Added
|
|
$
|
6,103
|
|
$
|
4,523
|
|
|
35
|
%
|
Apio
Packaging
|
|
|
119
|
|
|
4
|
|
|
2875
|
%
|
Apio
Tech. Subtotal
|
|
|
6,222
|
|
|
4,527
|
|
|
37
|
%
|
Apio
Trading
|
|
|
1,091
|
|
|
827
|
|
|
32
|
%
|
Total
Apio
|
|
|
7,313
|
|
|
5,354
|
|
|
37
|
%
|
Tech.
Licensing
|
|
|
1,661
|
|
|
202
|
|
|
722
|
%
|
Total
Gross Profit
|
|
$
|
8,974
|
|
$
|
5,556
|
|
|
62
|
%
|
General
There
are
numerous factors that can influence gross profit 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 generally
accepted accounting principles. These costs include the following: raw materials
(including produce and packaging), direct labor, overhead (including indirect
labor, depreciation, and facility related costs) and shipping and shipping
related costs. The following discussion surrounding gross profit includes
management’s best estimates of the reasons for the changes for the first quarter
of fiscal year 2008 compared to the same period last year as outlined in the
table above.
Apio
Value-Added
The
increase in gross profit for Apio’s value-added specialty packaged vegetable
business for the three months ended August 26, 2007 compared to the same period
last year was primarily due to the decreased costs for raw materials in the
first quarter of fiscal year 2008 compared to the first quarter of last year
.
Increased raw material costs in prior periods were primarily attributable to
weather related shortages of contracted product during the first quarter of
fiscal year 2007 which required Apio to procure supplemental product on the
open
market at costs significantly above contracted prices. The increase in gross
profits was also due in part to the increase in revenues of 12% during the
first
quarter of fiscal year 2008 compared to the first quarter of last year.
Apio
Packaging
The
increase in gross profit for Apio Packaging for the three months ended August
26, 2007 compared to the same period last year was not material to consolidated
Landec gross profit.
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 profit for Apio’s trading business
during the three months ended August 26, 2007 compared to the same period last
year was primarily due to a 36% increase in revenues.
Technology
Licensing
The
increase in Technology Licensing gross profit for the three months ended August
26, 2007 compared to the same period of the prior year was primarily due to
the
licensing income from the Monsanto licensing agreement entered into on December
1, 2006.
Operating
Expenses (in
thousands):
|
|
Three months ended 8/26/07
|
|
Three months ended 8/27/06
|
|
Change
|
|
Research
and Development:
|
|
|
|
|
|
|
|
Apio
|
|
$
|
370
|
|
$
|
241
|
|
|
54
|
%
|
Tech.
Licensing
|
|
|
452
|
|
|
543
|
|
|
(17
|
%)
|
Total
R&D
|
|
$
|
822
|
|
$
|
784
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative:
|
|
|
|
|
|
|
|
|
|
|
Apio
|
|
$
|
3,361
|
|
$
|
2,791
|
|
|
20
|
%
|
Corporate
|
|
|
1,185
|
|
|
2,111
|
|
|
(44
|
%)
|
Total
S,G&A
|
|
$
|
4,546
|
|
$
|
4,902
|
|
|
(7
|
%)
|
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. In the Technology Licensing
business, the research and development efforts are focused on the Company’s
proprietary Intellicoat coatings for seeds, primarily corn seed and on uses
for
our proprietary Intelimer polymers outside of food and agriculture.
The
increase in research and development expenses for the three months ended August
26, 2007 compared to the same period 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 August 26, 2007 compared to the same period last year was primarily due
to
the fact that included in selling, general and administrative expenses for
Corporate in the first quarter of fiscal year 2007 was $2.3 million in expenses
from Landec’s former direct marketing and sales seed business which was sold to
Monsanto in December 2006. These seed related expenses in the first quarter
of
fiscal year 2007 were partially offset by the recording of net proceeds of
$1.3
million from an insurance settlement. This decrease was partially offset by
an
increase in selling and marketing expenses at Apio during the first quarter
of
fiscal year 2008 compared to the same period last year.
Other
(in
thousands):
|
|
Three months ended 8/26/07
|
|
Three months ended 8/27/06
|
|
Change
|
|
Interest
Income
|
|
$
|
781
|
|
$
|
236
|
|
|
231
|
%
|
Interest
Expense
|
|
|
(8
|
)
|
|
(70
|
)
|
|
(89
|
%)
|
Minority
Interest Exp.
|
|
|
(120
|
)
|
|
(18
|
)
|
|
567
|
%
|
Other
Expense
|
|
|
—
|
|
|
(4
|
)
|
|
N/M
|
|
|
|
$
|
653
|
|
$
|
144
|
|
|
353
|
%
|
Income
Taxes
|
|
$
|
1,182
|
|
$
|
—
|
|
|
N/M
|
|
Interest
Income
The
increase in interest income for the three months ended August 26, 2007 compared
to the same period last year was primarily due to the increase in cash available
for investing.
Interest
Expense
The
decrease in interest expense during the three months ended August 26, 2007
compared to the same period 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 August 26, 2007
compared to the first quarter of last year was not material to consolidated
Landec net income.
Other
Other
consists of non-operating income and expenses.
Income
Taxes
The
increase in the income tax expense is due to the Company utilizing all of its
net operating loss carryforwards and tax credits during fiscal year 2008 for
income tax expense purposes which resulted in an estimated effective tax rate
for fiscal year 2008 of approximately 28% and therefore the Company recording
a
tax provision of $1.2 million during the first quarter of fiscal year 2008
for
federal and state income taxes.
Liquidity
and Capital Resources
As
of
August
26, 2007,
the
Company had cash and cash equivalents of $46.3 million, a net decrease of $16.3
million from $62.6 million at May 27, 2007.
Cash
Flow from Operating Activities
Landec
generated $4.2 million of cash flow from operating activities during the three
months ended August 26, 2007 compared to using $1.9 million in operating
activities for the three months ended August 27, 2006. The primary sources
of
cash from operating activities were from generating $3.1 million of net income
and from non-cash related expenses of $2.3 million, such as depreciation, income
tax expenses not payable and stock based compensation. The sources of cash
were
partially offset by a decrease in current assets net of current liabilities
of
$1.2 million. The primary components of this decrease in current assets net
of
current liabilities was an increase in inventories and correspondingly an
increase in accounts payables at Apio due to an increase in operating
activities, a decrease in accrued compensation as a result of bonus payments
earned in fiscal year 2007 and a decrease in deferred revenue from recognizing
revenues associated with the Monsanto purchase of FCD and the Intellicoat
license agreement with Monsanto (see Note 2).
Cash
Flow from Investing Activities
Net
cash
used in investing activities for the three months ended August 26, 2007 was
$240,000 compared to $2.3 million for the same period last year. The primary
uses of cash from investing activities during the first quarter of fiscal year
2008 were for the purchase of $236,000 of property and equipment primarily
for
the further automation of Apio’s value-added facility.
Cash
Flow from Financing Activities
Net
cash
used in financing activities for the three months ended August 26, 2007 was
$20.2 million compared to $1.9 million for the same period last year. The
primary uses of cash from financing activities during the first quarter of
fiscal year 2008 were for the repurchase of all of the outstanding common stock
and options of Apio not owned by Landec for $20.6 million (see Note 6).
Capital
Expenditures
During
the three months ended August 26, 2007, Landec purchased vegetable processing
equipment to support the further automation of Apio’s value added processing
facility. These expenditures represented the majority of the $236,000 of capital
expenditures.
Debt
Apio
has
a $7.0 million revolving line of credit with Wells Fargo Bank N.A. outstanding
amounts under the line of credit bear interest at either the prime rate less
0.25% or the LIBOR adjustable rate plus 1.75%. 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 lines with Wells Fargo. At August 26, 2007, no amounts were
outstanding under the revolving line of credit. Apio has been in compliance
or
received waivers for all loan covenants since the inception of this
loan.
On
September 1, 2007, Apio amended its revolving line of credit with Wells Fargo
Bank N.A. extending the term of the line to August 31, 2009. In addition, the
interest rate on the revolving line of credit was reduced to either prime less
0.50% or the LIBOR adjusted rate plus 1.50%.
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 were 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
three
months ended August 26,
2007,
approximately 31% 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 three months ended August 26,
2007,
sales to our top five customers accounted for approximately 49% 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.
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 17%
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
None.
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 August 26, 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.
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.
|
Exhibit Number |
Exhibit
Title:
|
|
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.
|
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: September
28, 2007
|
|
|