SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended October 27, 2002, or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 Haven Avenue
Menlo Park, California 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 306-1650
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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 the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No |X|
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $65,297,000 as of April 28, 2002, based upon the
closing sales price on the NASDAQ National Market reported for such date. The
aggregate market value of voting stock held by non-affiliates of the Registrant
was approximately $46,955,000 as of January 10, 2003, based upon the closing
sales price on the NASDAQ National Market reported for such date. Shares of
Common Stock and Convertible Preferred Stock held by each officer and director
and by each person who owns 10% or more of the outstanding Common Stock and
Convertible Preferred Stock have been excluded from such
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calculation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of January 10, 2003, there were 21,103,480 shares of Common Stock and
154,633 shares of Convertible Preferred Stock, convertible into ten shares of
Common Stock for each share of Preferred Stock, par value $0.001 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its
2003 Annual Meeting of Shareholders, which statement will be filed not later
than 120 days after the end of the fiscal year covered by this report, are
incorporated by reference in Part III hereof.
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LANDEC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Description Page
- ------- ----
Part I
1. Business.......................................................................... 4
2. Properties........................................................................ 18
3. Legal Proceedings................................................................. 18
4. Submission of Matters to a Vote of Security Holders............................... 18
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters............. 19
6. Selected Financial Data........................................................... 20
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 22
7A. Quantitative and Qualitative Disclosures about Market Risk........................ 37
8. Financial Statements and Supplementary Data....................................... 37
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 37
Part III
10. Directors and Executive Officers of the Registrant................................ 38
11. Executive Compensation............................................................ 38
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters............................................................... 38
13. Certain Relationships and Related Transactions.................................... 38
14. Controls and Procedures........................................................... 38
Part IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 39
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PART I
Item 1. Business
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Words such as "projected," "expects," "believes,"
"intends" and "assumes" and similar expressions are used to identify
forward-looking statements. These statements are made based upon current
expectations and projections about our business and the semiconductor industry
and assumptions made by our management are not guarantees of future performance,
nor do we assume any obligation to update such forward-looking statements after
the date this report is filed. Our actual results could differ materially from
those projected in the forward-looking statements for many reasons, including
the risk factors listed in Part II, Item 7 "Management's Discussion & Analysis
of Financial Conditions and Results of Operations -- Additional Factors That May
Affect Future Results" and the risk factors contained in Item 1 below.
General
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 the Company has
built its business.
The principal products and services offered by the Company in its two core
businesses - Food Products Technology and Agricultural Seed Technology - and in
the Technology Licensing/Research and Development business are described below.
Financial information concerning the industry segments for which the Company
reported its operations during fiscal years 2000 through 2002 is summarized in
Note 13 to the Consolidated Financial Statements.
Landec's Food Products Technology business, operated through its
subsidiary Apio Inc., combines Landec's proprietary food packaging technology
with the capabilities of a large national food supplier and value-added produce
processor. This combination was consummated in December 1999 when the Company
acquired Apio, Inc. and certain related entities (collectively "Apio").
Landec's Agricultural Seed Technology business, operated through its
subsidiary Landec Ag, Inc. ("Landec Ag"), combines Landec's proprietary
Intellicoat(R) seed coating technology with its unique eDC(TM) --e-commerce,
direct marketing and consultative selling - capabilities which it obtained with
its acquisition of Fielder's Choice Direct ("Fielder's Choice"), a direct
marketer of hybrid seed corn, in September 1997.
In addition to its two core businesses, the Company also operates a
Technology Licensing/Research and Development business that licenses products
outside of Landec's core businesses to industry leaders such as Alcon, Inc.
("Alcon") and UCB Chemicals, a subsidiary of UCB S.A. of Belgium ("UCB"). The
Company also engages in research and development activities with companies. For
segment disclosure purposes, the Technology Licensing/Research and Development
business is included in Corporate and Other (in Note 13 to the Consolidated
Financial Statements).
To remain focused on its core businesses, in October 2002 the Company sold
Dock Resins Corporation ("Dock Resins"), its specialty chemical subsidiary. The
Company made the decision to sell Dock Resins in order to strengthen its balance
sheet by reducing debt and other liabilities. As a result of the sale of Dock
Resins, the financial results of Dock Resins have been reclassified to
discontinued operations for all years presented. Unless otherwise specified, the
information and descriptions provided in this report relate only to the
continuing operations of the Company.
The Company's core polymer products are based on its patented proprietary
Intelimer(R) polymers, which differ from other polymers in that they can be
customized to abruptly change their physical characteristics when heated or
cooled through a pre-set temperature switch. For instance, Intelimer polymers
can change within the 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 liquid state. These abrupt
changes are repeatedly reversible and can be tailored by Landec to occur at
specific temperatures, thereby offering substantial competitive advantages in
the Company's target markets.
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The Company was incorporated in California on October 31, 1986. The
Company completed its initial public offering in 1996 and is listed on the
Nasdaq National Market under the symbol "LNDC."
Technology Overview
Polymers are important and versatile materials found in many of the
products of modern life. Certain polymers, such as cellulose and natural rubber,
occur in nature. Man-made polymers include nylon fibers used in carpeting and
clothing, coatings used in paints and finishes, plastics such as polyethylene,
and elastomers used in automobile tires and latex gloves. Historically,
synthetic polymers have been designed and developed primarily for improved
mechanical and thermal properties, such as strength and the ability to withstand
high temperatures. Improvements in these and other properties and the ease of
manufacturing of synthetic polymers have allowed these materials to replace
wood, metal and natural fibers in many applications over the last 40 years. More
recently, scientists have focused their efforts on identifying and developing
sophisticated polymers with novel properties for a variety of commercial
applications.
Landec's Intelimer polymers are a proprietary class of synthetic polymeric
materials that respond to temperature changes in a controllable, predictable
way. Typically, polymers gradually change in adhesion, permeability and
viscosity over broad temperature ranges. Landec's Intelimer materials, in
contrast, can be designed to exhibit abrupt changes in permeability, adhesion
and/or viscosity over temperature ranges as narrow as 1(Degree)C to 2(Degree)C.
These changes can be designed to occur at relatively low temperatures
(0(Degree)C to 100(Degree)C) that are relatively easy to maintain in industrial
and commercial environments. Figure 1 illustrates the effect of temperature on
Intelimer materials as compared to typical polymers.
[GRAPHIC OMITTED]
Landec's proprietary polymer technology is based on the structure and
phase behavior of Intelimer materials. The abrupt thermal transitions of
specific Intelimer materials are achieved through the controlled use of
hydrocarbon side chains that are attached to a polymer backbone. Below a
pre-determined switch temperature, the polymer's side chains align through weak
hydrophobic interactions resulting in a crystalline structure. When this side
chain crystallizable polymer is heated to, or above, this switch temperature,
these interactions are disrupted and the polymer is transformed into an
amorphous, viscous state. Because this transformation involves a physical and
not a chemical change, this process is repeatedly reversible. Landec can set the
polymer switch temperature anywhere between 0(Degree)C to 100(Degree)C by
varying the length of the side chains. The reversible transitions between
crystalline and amorphous states are illustrated in Figure 2 on the next page.
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[GRAPHIC OMITTED]
Side chain crystallizable polymers were first discovered by academic
researchers in the mid-1950's. These polymers were initially considered to be
merely of scientific curiosity from a polymer physics perspective, and, to the
Company's knowledge, no significant commercial applications were pursued. In the
mid-1980's, Dr. Ray Stewart, the Company's founder, became interested in the
idea of using the temperature-activated permeability properties of these
polymers to deliver various materials such as drugs and pesticides. After
forming Landec in 1986, Dr. Stewart subsequently discovered broader utility for
these polymers. After several years of basic research, commercial development
efforts began in the early 1990's, resulting in initial products in mid-1994.
Landec's Intelimer materials are generally synthesized from long
side-chain acrylic monomers that are derived primarily from natural materials
such as soybean and palm oils, that are highly purified and designed to be
manufactured economically through known synthesis processes. These
acrylic-monomer raw materials are then polymerized by Landec leading to many
different side-chain crystallizable polymers whose properties vary depending
upon the initial materials and the synthesis process. Intelimer materials can be
made into many different forms, including films, coatings, microcapsules and
discrete forms.
Description of Core Business
The Company participates in two core business segments- Food Products
Technology and Agricultural Seed Technology. In addition to these two core
segments, Landec will license technology and conduct ongoing research and
development through its Technology Licensing/Research and Development Business.
------------------
Landec Corporation
------------------
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Intelimer(R) Technology
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Food Products Agricultural Seed Technology Licensing/
Technology Technology R&D
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o Intellipac(TM) Packaging o Intellicoat(R) Seed Coatings o R&D Collaborations
o Apio, Inc. o Fielder's Choice Direct(R) Products o Licensing Partners
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Food Products Technology Business
The Company began marketing in early fiscal year 1996 its proprietary
Intelimer-based breathable membranes for use in the fresh-cut produce packaging
market, one of the fastest growing segments in the produce industry. Landec's
proprietary Intellipac 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. This is referred to as "value-added"
products. In December 1999, the Company acquired Apio, its then largest customer
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 to the top U.S. retail grocery
chains and major club stores and has recently begun expanding its product
offerings to the foodservice industry. The Company's proprietary Intelimer-based
packaging business has been combined with Apio into a wholly owned subsidiary
that retains the Apio, Inc. name. This vertical integration within the Food
Products Technology business gives Landec direct access to the large and growing
fresh-cut and whole produce market.
The Technology and Market Opportunity: Intellipac Breathable Membranes
Certain types of fresh-cut and whole produce can spoil or discolor rapidly
when packaged in conventional packaging materials and are therefore limited in
their ability to be distributed broadly to markets. The Company's Intellipac
breathable membranes extend the shelf life and quality of fresh-cut and whole
produce.
Fresh-cut produce is pre-washed, cut and packaged in a form that is ready
to use by the consumer and is thus typically sold at premium price levels
compared to unpackaged produce. According to the International Fresh-Cut Produce
Association ("IFPA"), in 2001, the total U.S. fresh produce market was estimated
to be between $100 to $120 billion. Of this, U.S. retail sales of fresh-cut
produce were estimated to comprise 10% of the fresh produce market. The Company
believes that the growth of this market has been driven by consumer demand and
the willingness to pay for convenience, freshness, uniform quality, safety and
nutritious produce delivered to the point of sale. According to the IFPA, the
fresh-cut produce market is one of the highest growth areas in retail grocery
stores. And according to the Produce Marketing Association the fresh-cut produce
category is growing at double digit rates while total produce is only growing at
2% to 3% per year.
Although fresh-cut produce companies have had success in the salad market,
the industry has been slow to diversify into other fresh-cut vegetables or
fruits due primarily to limitations in film and plastic tray materials used to
package fresh-cut produce. After harvesting, vegetables and fruits continue to
respire, consuming oxygen and releasing carbon dioxide. Too much or too little
oxygen can result in premature spoilage and decay and, in some cases, promote
the growth of microorganisms that jeopardize inherent food safety. Conventional
packaging films used today, such as polyethylene and polypropylene, can be made
with modest permeability to oxygen and carbon dioxide, but often do not provide
the optimal atmosphere for the produce packaged. Shortcomings of conventional
packaging materials have not significantly hindered the growth in the fresh-cut
salad market because lettuce, unlike many vegetables and fruits, has low
respiration requirements.
The respiration rate of produce varies from vegetable-to-vegetable and
from fruit-to-fruit. The challenge facing the industry is to develop packaging
for the high respiring, high value and shelf life sensitive vegetable and fruit
markets. The Company believes that today's conventional packaging films face
numerous challenges in adapting to meet the diversification of pre-cut
vegetables and fruits evolving in the industry without compromising shelf life
and produce quality. To mirror the growth experienced in the fresh-cut salad
market, the markets for high respiring vegetables and fruits such as broccoli,
cauliflower, green onions, asparagus, papayas, bananas and berries will require
a more versatile and sophisticated packaging solution for which the Company's
Intellipac breathable membranes were developed.
The respiration rate of produce also varies with temperature. As
temperature increases, produce generally respires at a higher rate, which speeds
up the aging process, resulting in shortened shelf life and increased potential
for decay, spoilage, loss of texture and dehydration. As produce is transported
from the processing plant through the refrigerated distribution chain to
foodservice locations, retail grocery stores and club stores, and finally to the
ultimate consumer, temperatures can fluctuate significantly. Therefore,
temperature control is a constant challenge in preserving the quality of
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fresh-cut and whole produce -- a challenge few current packaging films can
fulfill. The Company believes that its temperature-responsive Intellipac
technology is well suited to the challenges of the produce distribution process.
Using its Intelimer polymer technology, Landec has developed Intellipac
breathable membranes that it believes address many of the shortcomings of
conventional packaging materials. A membrane is applied over a small cutout
section or an aperture of a flexible film bag or plastic tray. This highly
permeable "window" acts as the mechanism to provide the majority of the gas
transmission requirements for the entire package. These membranes are designed
to provide three principal benefits:
o High Permeability. Landec's Intellipac breathable membranes are designed
to permit transmission of oxygen and carbon dioxide at 300 times the rate
of conventional packaging films. The Company believes that these higher
permeability levels will facilitate the packaging diversity required to
market many types of fresh-cut and whole produce.
o Ability to Adjust Oxygen and Carbon Dioxide Permeability. Conventional
packaging films diffuse gas transfer in and out of packages at an equal
rate or fixed ratio of 1.0. Intellipac packages can be tailored with
carbon dioxide to oxygen transfer ratios ranging from 1.0 to 12.0 and
selectively transmit oxygen and carbon dioxide at optimum rates to sustain
the quality and shelf life of packaged produce.
o Temperature Responsiveness. Landec has developed breathable membranes that
can be designed to increase or decrease in permeability in response to
environmental temperature changes. The Company has developed packaging
that responds to higher oxygen requirements at elevated temperatures but
is also reversible, and returns to its original state as temperatures
decline. The temperature responsiveness of these membranes allows ice to
be removed from the distribution system which results in numerous
benefits. These benefits include (1) a substantial decrease in freight
cost, (2) reduced risk of contaminated produce because ice can be a
carrier of micro organisms, (3) the elimination of expensive waxed cartons
that cannot be recycled, and (4) the potential decrease in work related
accidents due to melted ice.
Landec believes that growth of the overall produce market will be driven
by the increasing demand for the convenience of fresh-cut produce. This demand
will in turn require packaging that facilitates the quality and shelf life of
produce transported to fresh-cut distributors in bulk and pallet quantities. The
Company believes that in the future its Intellipac breathable membranes will be
useful for packaging a diverse variety of fresh-cut and whole produce products.
Potential opportunities for using Landec's technology outside of the produce
market exist in cut flowers and in other food products.
Landec is working with leaders in the foodservice, club store and retail
grocery markets. The Company believes it will have growth opportunities for the
next several years through new customers and products in the United States,
expansion of its existing customer relationships, and through export and
shipments of specialty packaged produce.
Landec manufactures its Intellipac breathable membrane packaging both
internally and through selected qualified contract manufacturers and markets and
sells Intellipac breathable membrane packaging directly to food distributors.
The Business: Apio, Inc.
In December 1999, Landec completed the acquisition of Apio and certain
related entities. Landec paid $21.0 million in cash and Landec Common Stock,
before expenses, at close, $1.1 million in January 2001, $1.2 million in the
first quarter of fiscal year 2002 and $579,000 in March 2002, with another $1.2
million to be paid in the first quarter of fiscal year 2003. An additional $2.5
million in future payments is scheduled to be paid in fiscal years 2004 and
2005. In addition, $4.4 million, which includes $279,000 of accrued interest, is
due in periodic scheduled payments through February 2004. Apio had revenues of
approximately $161 million in fiscal year 2002, $174 million in fiscal year 2001
and $179 million in the eleven-month period ended October 29, 2000.
Based in Guadalupe, California, Apio, when acquired in December 1999,
consisted of two major businesses - first, the "fee-for-service" selling and
marketing of whole produce and second, the specialty packaged fresh-cut and
whole value-added processed products that are washed and packaged in our
Intellipac packaging. The "fee-for-service" business historically included field
harvesting and packing, cooling and marketing of vegetables and fruits on a
contract
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basis for growers in California's Santa Maria, San Joaquin and Imperial Valleys
as well as in Arizona and Mexico. Apio currently has approximately 12,600 acres
under contract, consisting of approximately 17 percent of the farmable land in
the Santa Maria Valley. The fresh-cut value-added processing products business,
developed within the last seven years, markets a variety of fresh-cut and whole
vegetables to the top retail grocery chains representing over 8,700 retail and
club stores. During the fiscal year ended October 27, 2002, Apio shipped more
than 19 million cartons of produce to some 700 customers including leading
supermarket retailers, wholesalers, foodservice suppliers and club stores
throughout the United States and internationally, primarily in Asia.
During the third quarter of fiscal year 2001, the Company announced that
Apio was discontinuing its field harvesting and packing operations in order to
focus on its specialty packaging technology products, and the marketing and
sales of whole produce products. Exiting the labor and equipment-intensive field
harvesting and packing portion of the "fee-for-service" business and focusing on
selling and marketing of whole produce resulted in gross margins increasing in
the "fee-for-service" business from 16% in fiscal year 2001 to 24% in fiscal
year 2002. As a result of the transition of Apio's "fee-for-service" business,
service revenues decreased to $26.8 million in fiscal year 2002 as compared to
$48.4 million in fiscal year 2001.
In September 2000, the Company discontinued its processing of fruit at its
Reedley facility. In June 2002, the Company sold the fruit processing facility
for $2.2 million in cash and recorded a gain of $436,000 on the sale. A portion
of the fruit processing equipment in the facility and rights to the Company's
Great Whites(TM) trademark were sold in December 2002 to the purchaser of the
facility, for $707,000 resulting in a net gain of $39,000. The assets sold in
December 2002 will be paid for in equal annual installments over the next seven
years. In addition, the Company entered into a supply agreement with the
purchaser to supply fruit to the Company's export business for the next three
years with an option for year four.
There are five major distinguishing characteristics of Apio that provide
competitive advantages in the Food Products Technology market:
o Full Service Supplier: Apio has structured its business as a full service
marketer and seller of vegetables, fruits, and fresh-cut and whole
value-added produce. It is focused on developing its Eat Smart(R) brand
name for all of 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.
o Reduced Farming Risks: Apio reduces its farming risk by not taking
ownership of farmland, and instead, contracts with growers for produce and
charges for services that include cooling, shipping and marketing. The
year-round sourcing of produce is a key component to both the traditional
produce business as well as the fresh-cut and whole value-added processing
business.
o Lower Cost Structure: Apio has strategically invested in the rapidly
growing fresh-cut and whole value-added business. Apio's 49,000 square
foot value-added processing plant is automated with state-of-the-art
vegetable processing equipment. Virtually all of Apio's value-added
products utilize Landec's proprietary Intellipac membrane technology. Our
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.
o 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 has recently launched its iceless
products to Asia using Intellipac packaging technology.
o Expanded Product Line Using Technology: Apio, through the use of Landec's
Intellipac membrane technology, is in the early stages of introducing its
technology in the whole produce business. Its introduction of iceless
packaging for broccoli crowns in November 2000 was the beginning of a
conversion from the traditional packing and shipping of whole produce,
which relied heavily on ice, to iceless products utilizing the Intellipac
technology. New iceless packaging is available for various broccoli
products and green onions.
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For the past seven years, the Company has marketed its Eat Smart fresh-cut
vegetables, party trays and iceless products using Intellipac specialty
packaging and has now expanded its technology to include packaging for bananas.
The Company has been conducting laboratory, shipping, ripening room and retail
grocery store trials on its own and with select banana companies. In addition,
the Company is in the process of qualifying banana sourcing in the several
primary banana growing countries in Central and South America. Bananas are a $4
to $4.5 billion annual worldwide market for distributors, which in turn, is a $9
to $10 billion annual worldwide market for retailers. Bananas are the nation's
leading produce item, contributing approximately nine to ten percent of produce
department sales in the United States.
Trials have shown that Intellipac breathable membrane packaging can
significantly extend the shelf life of bananas at the prime color stage for
consumers and retailers. By extending the shelf life of the number one item in
the produce department, retailers can reduce shrink (waste) and increase sales
by displaying bananas at the optimum ripeness.
The Company has commercially launched the banana packaging technology for
use in the food service industry. The Company intends to significantly expand
its sales of bananas to the food service industry during fiscal year 2003 while
optimizing its Intellipac specialty packaging for retail banana customers.
In addition to the introduction of specialty packaging for bananas, the
Company has rapidly extended its commercialization of Intellipac technology for
case liner packaging for bunch and crown broccoli, eighteen pound cases of loose
broccoli florets, Asian cut broccoli crowns, export cut broccoli crowns, and
green onions.
The Company's specialty packaging for case liner products reduces freight
expense up to 50% by eliminating the weight and space consumed by ice. In
addition to reducing the cost of freight, the removal of ice from the
distribution system offers additional benefits. The Company's new packaging
system can decrease the potential for work-related accidents due to melted ice,
eliminate the risk of ice as a carrier of microorganisms that could potentially
contaminate produce and eliminate the need for expensive waxed cartons that
cannot be recycled.
During the third quarter of fiscal year 2002, the Company started
commercially shipping a re-sealable package utilizing the Intellipac technology
on its larger-sized fresh-cut vegetable packages. The Company expects the
re-sealable package to facilitate the introduction of new retail products.
Product enhancements in the fresh-cut vegetable line include a new
fresh-cut vegetable party tray designed to look like it was freshly made in the
retail grocery store which was launched in October 2002. The rectangular tray
design is convenient for storage in consumers' refrigerators and expands the
Company's wide-ranging party tray line.
Additionally, the Company commercially launched in October 2002, smaller
ready-to-eat vegetable snack trays under the Eat Smart Snak Pak(R) line. The
launch of the Snak Pak line is in response to the recent trend toward healthier
food alternatives for consumers.
Agricultural Seed Technology Business
Landec formed its Landec Ag (formerly Intellicoat Corporation) subsidiary
in 1995. Landec Ag's strategy is to build a vertically integrated seed
technology company based on the proprietary Intellicoat seed coating technology
and its eDC--e-commerce, direct marketing and consultative selling capabilities.
The Technology and Market Opportunity: Intellicoat Seed Coatings
Landec has developed and, through Landec Ag, is commercially selling its
Intellicoat seed coatings, an Intelimer-based agricultural material designed to
control seed germination timing, increase crop yields and extend crop planting
windows. These coatings are being applied to corn and soybean seeds. According
to the U.S. Agricultural Statistics Board, the total planted acreage in 2002 in
the United States for corn and soybean seed exceeded 78.9 million and 73.0
million, respectively.
In fiscal year 2000, the Company successfully launched its first
commercial product, Pollinator Plus(R) coatings for inbred corn seed. As a
result of the success realized in fiscal year 2001, the Company expanded its
sales of inbred corn seed coating products in fiscal year 2002 to regional and
national seed companies in the United States. This application is targeted to
approximately 640,000 acres in ten states and is now being used by 30 seed
companies in the
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United States. In addition, based on the successful field trial results during
2001 for its Early Plant(TM) hybrid coated seed corn, the Company expanded its
sales in 2002. The Company's Relay(TM) Intercropping System of wheat and
Intellicoat coated soybean will allow farmers to plant and harvest two crops
during the same year on the same land, providing financial benefit for the
farmer. Early Plant hybrid seed corn, perhaps Landec Ag's largest seed coating
opportunity, allows the farmer to plant corn seed 3 to 4 weeks earlier than
typically possible due to cold soil temperatures. By allowing the farmer to
plant earlier than normal, Early Plant hybrid seed corn will enable farmers to
utilize staff and equipment more efficiently and provide flexibility during the
critical planting period. Recent market research with farmers in seven corn
growing states verified that farmers would pay a significant premium for Landec
Ag's Early Plant hybrid seed corn product if they were able to plant a portion
of their acreage up to one month early. The Company estimates that 1 of every 7
corn acres could be converted to Intellicoat coated seed within 3 years of
industry-wide commercialization.
Currently, farmers must work within a narrow window of time to plant
seeds. If the seeds are planted too early, they may rot or suffer chilling
injury due to the absorption of water at cold soil temperatures below which
germination occurs. If they are planted too late, the growing season may end
prior to the crop reaching full maturity. In either case, the resulting crop
yields are sub-optimal. Moreover, the planting window can be fairly brief,
requiring the farmer to focus almost exclusively on planting during this time.
Seeds also germinate at different times due to variations in absorption of
water, thus providing for variations in the growth rate of the crops.
The Company's Intellicoat seed coating prevents planted seeds from
absorbing water when the ground temperature is below the coating's pre-set
temperature switch. Intellicoat seed coatings are designed to enable coated
seeds to be planted early without risk of chilling damage caused by the
absorption of water at cold soil temperatures. As spring advances and soil
temperatures rise to the pre-determined switch temperature close to where seed
germination normally occurs, the polymer's permeability increases and the coated
seeds absorb water and begin to germinate. The Company believes that Intellicoat
seed coatings provide the following advantages: a longer planting window,
avoidance of chilling injury, more uniform germination and better utilization of
equipment and labor. As a result, the Company believes that Intellicoat seed
coatings offer the potential for improvements in crop yields and net income to
the farmer.
The Business: Landec Ag
In September 1997, Landec Ag completed the acquisition of Fielder's
Choice, a direct marketer of hybrid seed corn to farmers. Landec paid
approximately $3.6 million in cash and direct acquisition costs and $5.2 million
in Landec Common Stock for Fielder's Choice. Terms of the agreement include a
cash earn-out of $2.4 million based on future sales of Fielder's Choice
Direct(R) hybrid seed corn. As of October 27, 2002, $2.0 million of the earn-out
had been earned and paid. Fielder's Choice had sales of approximately $19.4
million for the twelve months ended October 27, 2002, $16.2 million for the
twelve months ended October 28, 2001 and $17.2 million for the twelve months
ended October 29, 2000.
Based in Monticello, Indiana, Fielder's Choice offers a comprehensive line
of hybrid seed corn to more than 14,000 farmers in over forty states through
direct marketing programs. The success of Fielder's Choice comes, in part, from
its expertise in selling directly to the farmer, bypassing the traditional and
costly farmer-dealer system. The Company believes that this direct channel of
distribution provides a 35% cost advantage to its customers.
In order to support its direct marketing programs, Fielder's Choice has
developed a proprietary e-commerce direct marketing, and consultative selling
information technology, called "eDC", that enables state-of-the-art methods for
communicating with a broad array of farmers. This proprietary direct marketing
information technology includes a current database of over 95,000 farmers. In
August 1999, the Company launched the seed industry's first comprehensive
e-commerce website. This website furthers the Company's ability to provide a
high level of consultation to Fielder's Choice customers, backed by a six day a
week call center capability that enables the Company to use the internet as a
natural extension of its direct marketing strategy.
The acquisition of Fielder's Choice was strategic in providing a
cost-effective vehicle for marketing Intellicoat seed coating products. The
Company believes that the combination of coating technology and a direct channel
of distribution, telephonic and electronic commerce capabilities will enable
Landec Ag to more quickly achieve meaningful market penetration.
-11-
Technology Licensing/Research and Development Businesses
The Company believes its technology has commercial potential in a wide
range of industrial, consumer and medical applications beyond those identified
in its core businesses. For example, Landec's core patented technology Intelimer
materials, can be used to trigger 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, the Company has entered into or will enter
into licensing and collaborative corporate agreements for product development
and/or distribution in certain fields.
Industrial Materials and Adhesives
Landec's industrial products development strategy is to focus on
catalysts, resins, and adhesives in the polymer materials market. During the
product development stage, the Company identifies corporate partners to support
the ongoing development and testing of these products, with the ultimate goal of
licensing the applications at the appropriate time.
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. and The Norac Company. The Company has also developed
Intelimer polymer materials useful in enhancing the formulating options for
various personal care products. Landec's pressure sensitive adhesives ("PSA")
technology is currently being evaluated in a variety of industrial and medical
applications where strong adhesion to a substrate (i.e. steel, glass, silicon,
skin, etc.) is desired for a defined time period and upon thermal triggering,
results in a significant peel strength reduction. For example, select PSA
systems exhibit greater than 90% reduction in peel strength upon warming, making
them ideal for applications on fragile substrates.
Nitta Corporation. On March 14, 1995, the Company entered into a license
agreement with Nitta Corporation ("Nitta") in the industrial adhesives area. The
agreement provides Nitta with a co-exclusive license to manufacture and sell
products using Landec's Intelimer materials in certain Asian countries. Landec
received up-front license fees upon signing the agreement and is entitled to
future royalties based on net sales by Nitta of the licensed products. Any fees
paid to the Company are non-refundable. This agreement is terminable at Nitta's
option. Nitta and the Company entered into an additional exclusive license
arrangement in February 1996 covering Landec's medical adhesives technology for
use in Asia. The Company received up-front license fees upon execution of the
agreement and research and development payments and is entitled to receive
future royalties under this agreement. Any fees paid to the Company are
non-refundable. Nitta and the Company also entered into another worldwide
exclusive agreement on January 1, 1998 in the area of industrial adhesives
specific to one field of electronic polishing adhesives. The Company received
research and development payments as a part of this agreement. As of January
1999, the Company had no future obligations under any of the aforementioned
agreements with Nitta.
UCB Chemicals Corporation. On April 10, 2000, the Company entered into a
research and development agreement with UCB Chemicals Corporation ("UCB"), an
operating entity of UCB S.A., a major pharmaceutical and chemical company
located in Belgium. UCB's chemical business is a major supplier of radiation
curing and powder coating resins. Under this agreement, the Company explored
polymer systems for evaluation in several industrial product applications. Based
on the success of this initial research and development collaboration, in
December 2001, the Company entered into a $2.5 million license and research and
development agreement with UCB. This agreement has a term of one year through
December 2002 and is for the exclusive rights to use the Company's Intelimer
materials technology in the fields of powder coatings worldwide and pressure
sensitive adhesives worldwide, except Asia.
Medical Applications
PORT(TM) Ophthalmic Devices. Landec developed the PORT (Punctal Occluder
for the Retention of Tears) ophthalmic device initially to address a common, yet
poorly diagnosed condition known as dry eye that is estimated to affect 30
million Americans annually. The device consists of a physician-applied
applicator containing solid Intelimer material that transforms into a flowable,
viscous state when heated slightly above body temperature. After inserting the
Intelimer material into the lacrimal drainage duct, it quickly solidifies into a
form-fitting, solid plug. Occlusion of the lacrimal drainage duct allows the
patient to retain tear fluid and thereby provides relief and therapy to the dry
eye patient.
-12-
The PORT product is currently in human clinical trials. Landec and its
partner Alcon, believe that PORT plugs will have additional ophthalmic
applications beyond the dry eye market. This would include applications for
people who cannot wear contact lenses due to limited tear fluid retention and
patients receiving therapeutic drugs via eye drops that require longer retention
in the eye.
In December 1997, Landec licensed the rights to worldwide manufacturing,
marketing and distribution of its PORT ophthalmic device to Alcon. Under the
terms of the transaction, Landec received an up-front cash payment of $500,000,
a $750,000 milestone payment in November 1998, research and development funding
and will receive ongoing royalties of 11.5% on product sales of each PORT device
through 2012. Any fees paid to the Company are non-refundable. Landec will
continue to provide development support on a contract basis through the FDA
approval process and product launch. Landec also provides the Intelimer polymer
to Alcon which is used in the PORT device.
Medical Device. On April 18, 2002, Landec entered into an exclusive
licensing and one year research and development collaboration with a large
medical device company. Upfront payments totaled $420,000 with total potential
payments, which are based on certain milestones being met, of $1.35 million. In
addition, royalties of 8% will be paid on future product sales.
Discontinued Operations
Dock Resins. In April 1997, the Company acquired Dock Resins, a
privately-held manufacturer and marketer of specialty acrylic and other polymers
based in Linden, New Jersey. Dock Resins sells products under the Doresco(R)
trademark which are used by more than 300 customers throughout the United States
and other countries in the coatings, printing inks, laminating and adhesives
markets. Dock Resins is a supplier of proprietary polymers including acrylic,
methacrylic, alkyd, polyester, urethane and polyamide polymers to film
converters engaged in hot stamping, decorative wood grain, automotive interiors,
holograms, and metal foil applications. Dock Resins also supplies products to a
number of other markets, such as, graphic arts, automotive refinishing,
construction, pressure-sensitive adhesives, paper coatings, caulks, concrete
curing compounds and sealers.
In October 2002, the Company sold Dock Resins for $14.5 million ($10.2
million net of debt not assumed and before expenses) in order to strengthen its
balance sheet and focus management's attention on our core food and agricultural
technology businesses. In accordance with the Stock Purchase Agreement, $1.35
million of the sales price was placed into an escrow fund to satisfy any
breaches of representations and warranties made on behalf of the Company. The
escrow funds will be released on January 31, 2004.
The Company recorded a loss on the sale of $4.2 million, of which $2.5
million was recorded in fiscal year 2001 and $1.7 million was recorded in the
fourth quarter of fiscal year 2002 upon the close of the sale. The loss was
comprised of a loss on the disposal of Dock Resins of $3.3 million, transaction
costs and certain costs directly related to the sale, including consulting fees
and professional fees, of $1.2 million less $300,000 of operating income from
the measurement date of October 18, 2001 to the disposal date of October 24,
2002.
As a result of the sale of Dock Resins, the financial results of Dock
Resins have been reclassed to discontinued operations for all periods presented.
Unless otherwise specified, the information and descriptions provided in this
report relate only to the continuing operations of the Company.
Sales and Marketing
Each of the Company's core businesses are supported by dedicated sales and
marketing resources. The Company intends to develop its internal sales capacity
as more products progress toward commercialization and as business volume
expands geographically.
Food Products Technology Business
Apio has 19 sales people, located in central California and throughout the
U.S., supporting both the traditional produce marketing business and the
specialty packaged value-added produce business.
-13-
Agricultural Seed Technology Business
Landec Ag utilizes 34 direct seed sales consultants and associates located
in Monticello, Indiana for its direct marketing of Fielders Choice Direct seed
corn and Intellicoat coated products. Customer contacts are made based on direct
responses and inquiries from customers.
Manufacturing and Processing
Landec intends to control the manufacturing of its own products whenever
possible, as it believes that there is considerable manufacturing margin
opportunity in its products. In addition, the Company believes that know-how and
trade secrets can be better maintained by Landec retaining manufacturing
capability in-house.
Food Products Technology Business
The manufacturing process for the Company's Intellipac breathable membrane
products is comprised of polymer manufacturing, membrane manufacturing and label
package conversion. Dock Resins currently manufactures virtually all of the
polymers for the Intellipac breathable membranes and the Company anticipates
that it will continue to do so in the foreseeable future. Select outside
contractors currently manufacture the breathable membranes and Landec has
recently transitioned most of the label package conversion to Apio's Guadalupe
facility to meet the increasing product demand and to provide additional
developmental capabilities.
Apio processes all of its fresh-cut value-added products in its
state-of-the-art processing facility located in Guadalupe, California. Cooling
of produce is done through third parties and Apio Cooling, a separate company in
which Apio has a 60% ownership interest and is the general partner.
Agricultural Seed Technology Business
During fiscal year 2001, the Company moved its batch coating capabilities
from Menlo Park, California to a new leased facility in Oxford, Indiana. This
facility is being used to coat other seed companies' inbred seed corn using the
Company's Pollinator Plus corn seed coatings.
During fiscal year 2000, the Company completed construction of a pilot and
semi-works manufacturing facility in Indiana to support the commercialization of
its Early Plant hybrid seed corn and for its Relay Intercropping System for
wheat/coated soybean products. The new facility utilizes a new continuous
coating process that has increased seed coating capabilities by tenfold compared
to the previous system using batch coaters. Landec Ag contracts for production
of its hybrid seed corn from established seed producers.
General
Many of the raw materials used in manufacturing certain of the Company's
products are currently purchased from a single source, including certain
monomers used to synthesize Intelimer polymers and substrate materials for the
Company's breathable membrane products. In addition, a large majority of the
hybrid corn varieties sold by Fielder's Choice are sourced from a single seed
producer. Upon manufacturing scale-up of seed coating operations and as hybrid
corn sales increase, the Company may enter into alternative supply arrangements.
Although to date the Company has not experienced difficulty acquiring materials
for the manufacture of its products nor has Fielder's Choice experienced
difficulty in acquiring hybrid corn varieties, no assurance can be given that
interruptions in supplies will not occur in the future, that the Company will be
able to obtain substitute vendors, or that the Company will be able to procure
comparable materials or hybrid corn varieties at similar prices and terms within
a reasonable time. Any such interruption of supply could have a material adverse
effect on the Company's ability to manufacture and distribute its products and,
consequently, could materially and adversely affect the Company's business,
operating results and financial condition.
The Company desires to maintain an externally audited quality system and
achieved ISO 9001 registration for the Menlo Park research and development site
in fiscal year 1999 and for both the Menlo Park research and development and
-14-
manufacturing sites in fiscal year 2000. Such registration is required in order
for the Company to sell product to certain potential customers, primarily in
Europe.
Research and Development
Landec is focusing its research and development resources on both existing
and new applications of its Intelimer technology. Expenditures for research and
development in fiscal year 2002 were $3.7 million, compared with $3.3 million in
fiscal year 2001 and $3.4 million in fiscal year 2000. In fiscal year 2002,
research and development expenditures funded by corporate partners were $975,000
compared with $473,000 in fiscal year 2001 and $539,000 in fiscal year 2000. The
Company may continue to seek funds for applied materials research programs from
U.S. government agencies as well as from commercial entities. The Company
anticipates that it will continue to have significant research and development
expenditures in order to maintain its competitive position with a continuing
flow of innovative, high-quality products and services. As of October 27, 2002,
Landec had 28 employees, including 5 with Ph.D.'s, engaged in research and
development with experience in polymer and analytical chemistry, product
application, product formulation, mechanical and chemical engineering.
Competition
The Company operates in highly competitive and rapidly evolving fields,
and new developments are expected to continue at a rapid pace. Competition from
large food packaging and agricultural companies is intense. In addition, the
nature of the Company's collaborative arrangements and its technology licensing
business may result in its corporate partners and licensees becoming competitors
of the Company. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than the
Company, and many have substantially greater experience in conducting field
trials, obtaining regulatory approvals and manufacturing and marketing
commercial products. There can be no assurance that these competitors will not
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 the Company or that would render the Company's technology and
products obsolete and non-competitive.
Patents and Proprietary Rights
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has been granted twenty-two
U.S. patents with expiration dates ranging from 2006 to 2018 and has filed
applications for additional U.S. patents, as well as certain corresponding
patent applications outside the United States, relating to the Company's
technology. The Company's issued patents include claims relating to
compositions, devices and use of a class of temperature sensitive polymers that
exhibit distinctive properties of permeability, adhesion and viscosity. There
can be no assurance that any of the pending patent applications will be
approved, that the Company will develop additional proprietary products that are
patentable, that any patents issued to the Company will provide the Company with
competitive advantages or will not be challenged by any third parties or that
the patents of others will not prevent the commercialization of products
incorporating the Company's technology. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products or design around the Company's patents. Any of the
foregoing results could have a material adverse effect on the Company's
business, operating results and financial condition.
The commercial success of the Company will also depend, in part, on its
ability to avoid infringing patents issued to others. The Company has received,
and may in the future receive, from third parties, including some of its
competitors, notices claiming that it is infringing third party patents or other
proprietary rights. If the Company were determined to be infringing any
third-party patent, the Company could be required to pay damages, alter its
products or processes, obtain licenses or cease certain activities. In addition,
if patents are issued to others which contain claims that compete or conflict
with those of the Company and such competing or conflicting claims are
ultimately determined to be valid, the Company may be required to pay damages,
to obtain licenses to these patents, to develop or obtain alternative technology
or to cease using such technology. If the Company is required to obtain any
licenses, there can be no assurance that the Company will be able to do so on
commercially favorable terms, if at all. The Company's failure to obtain a
license to any technology that it may require to commercialize its products
could have a material adverse impact on the Company's business, operating
results and financial condition.
-15-
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to and diversion of effort by the Company, even if the eventual
outcome is favorable to the Company. Any such litigation or interference
proceeding, regardless of outcome, could be expensive and time consuming and
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology and consequently, could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which the Company seeks
to protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets and proprietary know-how will not otherwise
become known or be independently discovered by others.
Government Regulations
The Company's products and operations are subject to regulation in the
United States and foreign countries.
Food Products Technology Business
The Company's food packaging products are subject to regulation under the
Food, Drug and Cosmetic Act ("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. Food additives may be substances added directly to food, such as
preservatives, or substances that could indirectly become a component of food,
such as waxes, adhesives and packaging materials.
A food additive, whether direct or indirect, must be covered by a specific
food additive regulation issued by the FDA. The Company believes its Intellipac
breathable membrane products are not subject to regulation as food additives
because these products are not expected to become a component of food under
their expected conditions of use. If the FDA were to determine that the
Company's Intellipac breathable membrane products are food additives, the
Company may be required to submit a food additive petition. 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 the Company's business, operating results and financial condition.
The Company's agricultural operations are subject to a variety of
environmental laws including the Food Quality Protection Act of 1966, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive
Environmental Response, Compensation and Liability Act. Compliance with these
laws and related regulations is an ongoing process. Environmental concerns are,
however, inherent in most agricultural operations, including those conducted by
the Company, and there can be no assurance that the cost of compliance with
environmental laws and regulations will not be material. Moreover, it is
possible that future developments, such as increasingly strict environmental
laws and enforcement policies thereunder, and further restrictions on the use of
manufacturing chemicals could result in increased compliance costs.
The Company is subject to the United States Department of Agriculture
("USDA") rules and regulations concerning the safety of the food products
handled and sold by Apio, and the facilities in which they are packed and
processed. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, injunctions, civil penalties, suspensions
or withdrawal of regulatory approvals, product recalls, product seizures,
including cessation of manufacturing and sales, operating restrictions and
criminal prosecution.
Agricultural Seed Technology Business
The Company's agricultural products are subject to regulations of the USDA
and the EPA. The Company believes its current Intellicoat seed coatings are not
pesticides as defined in the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA") and are not subject to pesticide regulation requirements. The process
of meeting pesticide registration
-16-
requirements is lengthy, expensive and uncertain, and may require additional
studies by the Company. There can be no assurance that future products will not
be regulated as pesticides. In addition, the Company believes that its
Intellicoat seed coatings will not become a component of the agricultural
products which are produced from the seeds to which the coatings are applied and
therefore are not subject to regulation by the FDA as a food additive. While the
Company believes that it will be able to obtain approval from such agencies to
distribute its products, there can be no assurance that the Company will obtain
necessary approvals without substantial expense or delay, if at all.
Polymer Manufacture
The Company's manufacture of polymers is subject to regulation by the EPA
under the Toxic Substances Control Act ("TSCA"). Pursuant to TSCA, manufacturers
of new chemical substances are required to provide a Pre-Manufacturing Notice
("PMN") prior to manufacturing the new chemical substance. After review of the
PMN, the EPA may require more extensive testing to establish the safety of the
chemical, or limit or prohibit the manufacture or use of the chemical. To date,
PMNs submitted by the Company have been approved by the EPA without any
additional testing requirements or limitation on manufacturing or use. No
assurance can be given that the EPA will grant similar approval for future PMNs
submitted by the Company.
Other
The Company and its products under development may also be subject to
other federal, state and local laws, regulations and recommendations. Although
Landec believes that it will be able to comply with all applicable regulations
regarding the manufacture and sale of its products and polymer materials, such
regulations are always subject to change and depend heavily on administrative
interpretations and the country in which the products are sold. There can be no
assurance that future changes in regulations or interpretations made by the FDA,
EPA or other regulatory bodies, with possible retroactive effect, relating to
such matters as safe working conditions, laboratory and manufacturing practices,
environmental controls, fire hazard control, and disposal of hazardous or
potentially hazardous substances will not adversely affect the Company's
business. There can also be no assurance that the Company will not be required
to incur significant costs to comply with such laws and regulations in the
future, or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business. Furthermore, the introduction of the
Company's products in foreign markets may require obtaining foreign regulatory
clearances. There can be no assurance that the Company will be able to obtain
regulatory clearances for its products in such foreign markets.
Employees
As of October 27, 2002, Landec had 215 full-time employees, of whom 53
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 162 were dedicated to sales, marketing and administrative
activities. Landec intends to recruit additional personnel in connection with
the development, manufacturing and marketing of its products. None of Landec's
employees is represented by a union, and Landec believes relationships with its
employees are good.
Available Information
Landec's Web site is http://www.landec.com. Landec makes available free of
charge its annual, quarterly and current reports, and any amendments to those
reports, as soon as reasonably practicable after electronically filing such
reports with the SEC.
-17-
Item 2. Properties
The Company has offices in Menlo Park and Guadalupe, California, and
Monticello, Indiana.
These properties are described below:
Acres
Business of Lease
Location Segment Ownership Facilities Land Expiration
- --------------------- -------------- ------------ -------------------------------- ------ ----------
Menlo Park, CA All Leased 21,000 square feet of office and -- 12/31/03
laboratory space
Monticello, IN Agricultural Owned 19,400 square feet of office 0.5 --
Seed space
Technology
West Lebanon, IN Agricultural Owned 4,000 square feet of warehouse -- --
Seed and manufacturing space
Technology
Oxford, IN Agricultural Leased 13,400 square feet of laboratory -- 6/30/05
Seed and manufacturing space
Technology
Guadalupe, CA Food Products Owned 94,000 square feet of office 11.6 --
Technology space, manufacturing and cold
storage
Item 3. Legal Proceedings
The Company is currently not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ending October 27, 2002.
-18-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is traded on the Nasdaq National Market under the symbol
"LNDC". The following table sets forth for each period indicated the high and
low sales prices for the Common Stock as reported on the Nasdaq National Market.
Fiscal Year 2002 High Low
- ---------------- ---- ---
4th Quarter ending October 27, 2002 ...... $3.64 $1.51
3rd Quarter ending July 28, 2002 ......... $4.40 $3.00
2nd Quarter ending April 28, 2002 ........ $4.24 $3.30
1st Quarter ending January 27, 2002 ...... $5.70 $2.81
Fiscal Year 2001 High Low
- ---------------- ---- ---
4th Quarter ending October 28, 2001 ...... $5.25 $3.22
3rd Quarter ending July 29, 2001 ......... $5.27 $3.02
2nd Quarter ending April 29, 2001 ........ $4.50 $3.31
1st Quarter ending January 28, 2001 ...... $4.59 $2.50
There were approximately 123 holders of record of 21,103,480 shares of
outstanding Common Stock as of January 10, 2003. Since holders are listed under
their brokerage firm's names, the actual number of shareholders is higher. The
Company has not paid any dividends on the Common Stock since its inception. The
Company presently intends to retain all future earnings, if any, for its
business and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future.
Pursuant to a Series A Preferred Stock Purchase Agreement dated November
19, 1999, by and among the Company and Frederick Frank, the Company completed a
financing that raised approximately $10.0 million through a private placement of
its Series A-1 Preferred Stock and Series A-2 Preferred Stock (the "Series A
Preferred Stock"). Pursuant to this agreement, the Company issued 166,667 shares
of Series A Preferred Stock of the Company at $60.00 per share (representing
1,666,670 shares of Common Stock on a converted basis). Frederick Frank was
elected as a director of the Company in December 1999. The shares were converted
to Common Stock on November 19, 2002.
In connection with the Company's acquisition of Apio, Inc. on December 2,
1999, the prior owners of Apio received 2.5 million shares of Common Stock. As
compensation for services rendered by Lehman Brothers Inc. in connection with
the closing of the Apio acquisition, the Company issued 62,500 shares of Common
Stock to Lehman Brothers, Inc. at $6.00 per share.
Pursuant to a Series B Preferred Stock Purchase Agreement dated October
24, 2001, by and among the Company and the Seahawk Ranch Irrevocable Trust, the
Company completed a financing that raised approximately $5.0 million through a
private placement of its Series B Preferred Stock (the "Series B Preferred
Stock"). Pursuant to this agreement, the Company issued 142,857 shares of Series
B Preferred Stock of the Company at $35.00 per share (representing 1,428,570
shares of Common Stock on a converted basis). Ken Jones, a director of the
Company, is a trustee of the Seahawk Ranch Irrevocable Trust. During fiscal year
2002, 11,776 shares of Series B Preferred Stock were issued as dividends to the
Seahawk Ranch Irrevocable Trust.
Pursuant to Subscription Agreements dated March 26, 2002 (the
"Subscription Agreements"), the Company sold 2,580,663 shares of Common Stock to
certain accredited, institutional investors at $3.10 per share resulting in
aggregate proceeds of $8,000,000. Roth Capital Partners, LLC ("Roth") served as
placement agent in connection with
-19-
the private placement and received a placement fee of $640,000. The Company has
filed a registration statement with the SEC for the resale of the stock.
The issuance of securities in this Item 5 was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance on Section 4(2) of the Act as a transaction by an issuer not involving
any public offering. The recipients of the securities in such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transaction.
The recipients were given adequate access to information about the Company.
Item 6. Selected Financial Data
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in Item 8 of
this report.
-20-
Year Ended Year Ended Year Ended Year Ended
October 27, October 28, October 29, October 31,
----------- ----------- ----------- ----------------------
Statement of Operations Data: 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
Revenues:
Product sales ........................................... $152,958 $141,314 $129,457 $ 19,926 $ 16,244
Services revenue ........................................ 23,312 43,346 64,911 -- --
Services revenue, related party ......................... 3,515 5,083 1,898 -- --
License fees ............................................ 2,330 374 374 750 500
Research, development and royalty revenues .............. 1,040 529 586 770 1,352
-------- -------- -------- -------- --------
Total revenues ....................................... 183,155 190,646 197,226 21,446 18,096
Cost of revenue:
Cost of product sales ................................... 131,352 122,081 110,594 12,016 10,119
Cost of services revenue ................................ 20,463 40,751 56,621 -- --
-------- -------- -------- -------- --------
Total cost of revenue ...................................... 151,815 162,832 167,215 12,016 10,119
-------- -------- -------- -------- --------
Gross profit ............................................... 31,340 27,814 30,011 9,430 7,977
Operating costs and expenses:
Research and development ................................ 3,664 3,270 3,444 4,653 4,643
Selling, general and administrative ..................... 26,418 27,398 26,927 8,523 8,260
Exit of fruit processing ................................ -- -- 525 -- --
-------- -------- -------- -------- --------
Total operating costs and expenses ................... 30,082 30,668 30,896 13,176 12,903
======== ======== ======== ======== ========
Operating profit/(loss) .................................... 1,258 (2,854) (885) (3,746) (4,926)
Interest income ............................................ 247 617 873 290 705
Interest expense ........................................... (1,551) (2,789) (2,083) -- (79)
Other income, net .......................................... 247 188 25 -- --
-------- -------- -------- -------- --------
Income/(loss) from continuing operations ................... 201 (4,838) (2,070) (3,456) (4,300)
Discontinued Operations:
(Loss)/ income from discontinued operations ............. -- (537) (14) 687 1,410
Loss on disposal of operations .......................... (1,688) (2,500) -- -- --
-------- -------- -------- -------- --------
(Loss)/income from discontinued operations ................. (1,688) (3,037) (14) 687 1,410
-------- -------- -------- -------- --------
Net loss before cumulative effect of change in accounting .. (1,487) (7,875) (2,084) (2,769) (2,890)
Cumulative effect of change in accounting for upfront
license fee revenue ..................................... -- -- (1,914) -- --
-------- -------- -------- -------- --------
Net loss ................................................... $ (1,487) $ (7,875) $ (3,998) $ (2,769) $ (2,890)
======== ======== ======== ======== ========
Net loss ................................................... $ (1,487) $ (7,875) $ (3,998) $ (2,769) $ (2,890)
Dividends on Series B preferred stock ...................... (412) -- -- -- --
-------- -------- -------- -------- --------
Net loss applicable to common shareholders ................. $ (1,899) $ (7,875) $ (3,998) $ (2,769) $ (2,890)
======== ======== ======== ======== ========
-21-
Year Ended Year Ended Year Ended Year Ended
October 27, October 28, October 29, October 31,
----------- ----------- ----------- --------------------
Statement of Operations Data: 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(in thousands, except per share data)
Basic and diluted net income (loss) per share:
Continuing operations ................................ $ (.01) $ (.29) $ (.13) $ (.26) $ (.34)
Discontinued operations .............................. (.09) (.19) -- .05 .11
Cumulative effect of change in accounting ............ -- -- (.12) -- --
------- ------- ------- ------- -------
Basic and diluted net loss per share .................... $ (.10) $ (.48) $ (.25) $ (.21) $ (.23)
======= ======= ======= ======= =======
Pro forma amounts assuming the change in accounting is
applied retroactively:
Net loss applicable to common shareholders ........... $(1,899) $(7,875) $(2,084) $(3,145) $(3,070)
======= ======= ======= ======= =======
Net loss per share ................................... $ (.10) $ (.48) $ (.13) $ (.24) $ (.24)
======= ======= ======= ======= =======
Shares used in computing basic and diluted net loss
per share ............................................ 18,172 16,371 15,796 13,273 12,773
======= ======= ======= ======= =======
Year Ended Year Ended Year Ended Year Ended
October 27, October 28, October 29, October 31,
----------- ----------- ----------- ------------------------
Balance Sheet Data: 2002 2001 2000 1999 1998
----------- ----------- ----------- --------- ---------
(in thousands, except per share data)
Cash and cash equivalents .... $ 7,849 $ 8,695 $ 8,636 $ 2,399 $ 5,377
Total assets ................. 107,803 120,122 128,165 36,097 38,075
Debt ......................... 17,543 33,416 26,350 -- --
Convertible preferred stock .. 14,461 14,049 9,149 -- --
Accumulated deficit .......... (59,300) (57,401) (49,526) (45,528) (42,756)
Total shareholders' equity ... 55,963 49,839 52,178 31,761 33,688
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements contained in Item 8 of this report. Except for
the historical information contained herein, the matters discussed in this
report are forward-looking statements within the meaning of Section 21E of the
Securities and Exchange Act of 1934. These forward-looking statements involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Potential risks and
uncertainties include, without limitation, those mentioned in this report and,
in particular, the factors described below under "Additional Factors That May
Affect Future Results." Landec undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
Overview
Since its inception in October 1986, the Company has been engaged in the
research and development of its Intelimer technology and related products. The
Company has launched four product lines from this core development -
QuickCast(TM) splints and casts, in April 1994, which was subsequently sold to
Bissell Healthcare Corporation in August 1997; Intellipac breathable membranes
for the fresh-cut and whole produce packaging market, in September 1995;
Intelimer Polymer Systems for the industrial specialties market in June 1997;
and Intellicoat coated inbred corn seeds in the Fall of 1999.
With the acquisition of Landec Ag in September 1997 and Apio in December
1999, the Company is focused on two core businesses - Food Products Technology
and Agricultural Seed Technology. The Food Products Technology segment combines
the Company's Intellipac breathable membrane technology with Apio's fresh-cut
produce business.
-22-
The Agricultural Seed Technology segment integrates the Intellicoat seed coating
technology with Fielder's Choice's direct marketing, telephone sales and
e-commerce distribution capabilities. The Company also operates a Technology
Licensing/Research and Development business which develops products to be
licensed outside of the Company's core businesses. See "Business - Description
of Core Business".
The Company has been unprofitable during each fiscal year since its
inception. From inception through October 27, 2002, the Company's accumulated
deficit was $59.3 million. The Company may incur additional losses in the
future. The amount of future net profits, if any, is highly uncertain and there
can be no assurance that the Company will be able to reach or sustain
profitability for an entire fiscal year.
Critical Accounting Policies and Use of Estimates
Use of Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
materially from those estimates. The judgements and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances.
Notes and Advances Receivables
Apio has made advances to fruit growers for the development of orchards,
and to produce growers for crop and harvesting costs. Typically, except for
development advances, these advances are paid off within the growing season
(less than one year) from harvested crops. Development advances and advances not
fully paid during the current growing season are converted to interest bearing
obligations, evidenced by contracts and notes receivable. These notes receivable
and advances are secured by perfected liens on land and/or crops and have terms
that range from twelve to sixty months. Notes receivable are periodically
reviewed (at least quarterly) for collectibility. A reserve is established for
any note or advance deemed to not be fully collectible based upon an estimate of
the crop value or the fair value of the security for the note or advance. If
crop prices or the fair value of the underlying security declines the Company
may be unable to fully recoup its investment and the estimated losses would rise
in the current period, potentially to the extent of the total investment.
Investments in Farming Activities
Investments in farming activities consist of cash advances to growers for
expenses to be incurred during the growing season, in exchange for a percentage
ownership in the proceeds of the crops. Net income or loss is generally
recognized on these investments based on the Company's percentage ownership of
the net proceeds of the crops as fields are harvested and proceeds are settled.
These investments are periodically reviewed for impairment (at least quarterly).
Additionally, certain farming agreements contain provisions wherein the Company
bears the risk of loss if the net proceeds from the crops are not sufficient to
cover the expense incurred. If crop prices decline the Company may be unable to
fully recoup its investment and the estimated losses would rise in the current
period, potentially to the extent of the total investment.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The allowance for doubtful accounts is based on review of the overall condition
of accounts receivable balances and review of significant past due accounts. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Bad debt losses are partially mitigated due to low
risks related to the fact that the Company's customers are predominantly large
financially sound national and regional retailers and because the Company
carries foreign credit insurance to cover a portion of its foreign receivables
exposure.
-23-
Inventories
Inventories are stated at the lower of cost or market. If the cost of the
inventories exceeds their expected market value, provisions are recorded
currently for the difference between the cost and the market value. These
provisions are determined based on specific identification for unuseable
inventory and a general reserve, based on historical losses, for inventory
considered to be useable.
Revenue Recognition
Revenue from product sales is recognized when there is persuasive evidence
that an arrangement exists, delivery has occurred, the price is fixed and
determinable, and collectibility is reasonably assured. Allowances are
established for estimated uncollectible amounts, product returns, and discounts.
If actual future returns and allowances differ from past experience, additional
allowances may be required.
Licensing revenue is recognized in accordance with Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. Initial
license fees are deferred and amortized over the period of the agreement to
revenue when a contract exists, the fee is fixed and determinable, and
collectibility is reasonably assured. Noncancellable, nonrefundable license fees
are recognized over the research and development period of the agreement, as
well as the term of any related supply agreement entered into concurrently with
the license when the risk associated with commercialization of a product is
non-substantive at the outset of the arrangement.
Prior to November 1, 1999, the Company recognized noncancellable,
nonrefundable license fees as revenue when received and when all significant
contractual obligations of the Company relating to the fees had been met.
Effective November 1, 1999, the Company changed its method of accounting for
noncancellable, nonrefundable license fees to recognize such fees over the
research and development period of the agreement, as well as the term of any
related supply agreement entered into concurrently with the license when the
risk associated with commercialization of a product is non-substantive at the
outset of the arrangement. The Company believes the change in accounting
principle is preferable based on guidance provided in SEC Staff Accounting
Bulletin No. 101 - Revenue Recognition in Financial Statements. The $1.9 million
cumulative effect of the change in accounting principle, calculated as of
November 1, 1999, was reported as a charge in the year ended October 29, 2000.
The cumulative effect was initially recorded as deferred revenue and is being
recognized as revenue over the research and development period or supply period
commitment of the agreement. During the year ended October 29, 2000 the impact
of the change in accounting was to increase net loss by approximately $1.5
million, or $0.10 per share, comprised of the $1.9 million cumulative effect of
the change as described above ($0.12 per share), net of $374,000 of the related
deferred revenue which was recognized as "recycled" revenue during 2000 ($0.02
per share). During fiscal years 2002 and 2001, $302,000 and $374,000,
respectively, of the related deferred revenue was recognized as "recycled"
revenue. The remainder of the related deferred revenue will be recognized as
revenue per fiscal year as follows: $88,000 in 2003 - 2011, and $72,000 in 2012.
The pro forma amounts presented in the consolidated statement of operations were
calculated assuming the accounting change was made retroactive to prior periods.
Contract revenue for research and development (R&D) is recorded as earned,
based on the performance requirements of the contract. Non-refundable contract
fees for which no further performance obligations exist, and there is no
continuing involvement by the Company, are recognized on the earlier of when the
payments are received or when collection is assured.
-24-
Goodwill and Other Intangible Asset Impairment
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, effective October 29, 2001 and
will be required to evaluate its goodwill and indefinite lived intangible assets
for impairment annually. This evaluation incorporates a variety of estimates
including the fair value of the Company's operating segments. If the carrying
value of an operating segment's assets exceeds the estimated fair value, the
Company would likely be required to record an impairment loss, possibly for the
entire carrying balance of goodwill and intangible assets. To date no impairment
losses have been incurred.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 (SFAS143), Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. The Company is in the process of assessing the
effect of adopting SFAS 143, which will be effective for the Company's fiscal
year ending October 26, 2003.
Results of Operations
The Company's results of operations reflect only the continuing operations
of the Company and do not include the results of the discontinued Dock Resins
operation.
Fiscal Year Ended October 27, 2002 Compared to Fiscal Year Ended October
28, 2001
Total revenues were $183.2 million for fiscal year 2002, compared to
$190.6 million for fiscal year 2001. Revenues from product sales and services
decreased to $179.8 million in fiscal year 2002 from $189.7 million in fiscal
year 2001. The decrease in product sales and service revenues was primarily due
to decreased revenues from Apio's "fee for service" whole produce business,
which decreased from $48.4 million in fiscal year 2001 to $26.8 million during
fiscal year 2002. The decrease in the "fee-for-service" whole produce business
is primarily due to the Company's decision during the third quarter of fiscal
year 2001 to exit the cash, labor and equipment-intensive field harvesting and
packing operations of its "fee-for-service" business, which resulted in
decreased volumes during fiscal year 2002 as compared to fiscal year 2001.
Volumes in the "fee-for-service" business are expected to be relatively flat in
the foreseeable future as the Company focuses on higher margin, less cash
intensive aspects of its businesses. The decrease in Apio's "fee-for-service"
revenue was partially offset by an increase in revenues from Apio's value-added
specialty packaging business which increased to $84.0 million in fiscal year
2002 from $70.4 million in fiscal year 2001. In addition, revenues from Landec
Ag increased to $19.4 million in fiscal year 2002 from $16.2 million in fiscal
year 2001. The increase in Landec Ag revenues was due to an increase in sales
volume and a higher average selling price per unit. Revenues from research,
development and royalties increased to $1.0 million in fiscal year 2002 compared
to $529,000 for fiscal year 2001. Revenues from license fees increased to $2.3
million in fiscal year 2002 compared to $374,000 for fiscal year 2001. The
increases in research, development, royalties and license fee revenues were due
to the Company entering into new collaborations with UCB in December 2001 and
with a major medical device company in April 2002.
Cost of product sales and services consists of material, labor and
overhead. Cost of product sales and services was $151.8 million for fiscal year
2002 compared to $162.8 million for fiscal year 2001. Gross profit from product
sales and services as a percentage of revenue from product sales and services
increased to 16% in fiscal year 2002 compared to 14% in fiscal year 2001.
Overall gross profit increased to $31.3 million in fiscal year 2002 from $27.8
million in fiscal year 2001. This increase was primarily due to a $1.4 million
gross profit increase at Landec Ag which increased its gross profit to $8.0
million in fiscal year 2002 from $6.6 million in fiscal year 2001. In addition,
gross profit from Landec's licensing business increased $2.4 million to $3.1
million in fiscal year 2002 from $697,000 in fiscal year 2001. Apio's gross
profit decreased slightly to $20.2 million in fiscal year 2002 from $20.5
million in fiscal year 2001. This decrease was due to several offsetting
reasons; 1) in fiscal year 2002 Apio realized income from farming of $1.1
million compared to a loss of $2.0 million in fiscal year 2001, 2) higher crop
sourcing costs of approximately $2.5 million during fiscal year 2002 as compared
to fiscal year 2001 due to the unusually cold winter in the desert areas of
California and Arizona, 3) lower volumes in the "fee-for-service" business
during fiscal year 2002 as compared to fiscal year 2001 as a result of
discontinuing the field harvesting and packing operations of the business in the
third quarter of fiscal year
-25-
2001 resulting in a $1.3 million decrease in gross profit, and 4) losses of
$400,000 from the initial launch of the banana packaging technology.
Research and development expenses increased to $3.7 million in fiscal year
2002 from $3.3 million in fiscal year 2001. Landec's research and development
expenses consist primarily of expenses related to new product development,
process scale-up work, and investments in patents to protect the intellectual
property content of Landec's enabling side chain crystallizable polymers. The
increase in research and development expenses was due to increased development
costs associated with the Company's banana program.
Selling, general and administrative expenses were $26.4 million for fiscal
year 2002 compared to $27.4 million for fiscal year 2001, a decrease of 4%.
Selling, general and administrative expenses consist primarily of sales and
marketing expenses associated with Landec's product sales and services, business
development expenses, and staff and administrative expenses. Selling, general
and administrative expenses decreased during fiscal year 2002 as compared to
fiscal year 2001 primarily due to intangible amortization expenses decreasing
$2.6 million as a result of the adoption of SFAS 142. This decrease was
partially offset by increased selling, general and administrative expenses at
Apio as a result of expenses related to Apio's new ERP business operating
system. Specifically, sales and marketing expenses decreased to $10.3 million
for fiscal year 2002 from $10.9 million for fiscal year 2001.
Interest income for fiscal year 2002 was $247,000 compared to $617,000 for
fiscal year 2001. This decrease in interest income was due principally to lower
market interest rates and a lower interest-bearing notes receivable balance.
Interest expense for fiscal year 2002 was $1.6 million compared to $2.8 million
for fiscal year 2001. The decrease in interest expense was primarily due to
having a lower average debt balance outstanding during fiscal year 2002 due to
paying down debt by nearly $16.0 million during fiscal year 2002.
Fiscal Year Ended October 28, 2001 Compared to Fiscal Year Ended October
29, 2000
Total revenues were $190.6 million for fiscal year 2001, compared to
$197.2 million for fiscal year 2000. Revenues from product sales and services
decreased to $189.7 million in fiscal year 2001 from $196.3 million in fiscal
year 2000. The decrease in product sales and service revenues was primarily due
to decreased revenues from Apio's "fee for service" whole produce business,
which decreased from $66.8 million in fiscal year 2000 to $48.4 million during
fiscal year 2001. The decrease in the "fee-for-service" whole produce business
is primarily due to the Company's decision during the third quarter of fiscal
year 2001 to exit the cash, labor and equipment-intensive field harvesting and
packing operations of its "fee-for-service" business, which resulted in
decreased volumes during fiscal year 2001. The decrease in Apio's
"fee-for-service" revenue was partially offset by an increase in revenues from
Apio's value-added specialty packaging business which increased to $70.4 million
in fiscal year 2001 from $56.1 million in fiscal year 2000 and the fact that
Apio was included for a full year in fiscal year 2001 compared to only eleven
months in fiscal year 2000. Revenues from research, development and royalties
were $529,000 for fiscal year 2001 compared to $586,000 for fiscal year 2000.
Revenues from license fees remained unchanged at $374,000 for fiscal years 2001
and 2000.
Cost of product sales and services was $162.8 million for fiscal year 2001
compared to $167.2 million for fiscal year 2000. Gross profit from product sales
and services as a percentage of revenue from product sales and services remained
unchanged at 14% in fiscal years 2000 and 2001. Overall gross profit decreased
to $27.8 million in fiscal year 2001 from $30.0 million in fiscal year 2000.
This decrease was primarily due to gross profit from Apio's "fee-for-service"
business which decreased $2.5 million to $7.7 million in fiscal year 2001
compared to $10.2 million in fiscal year 2000. The decrease in Apio's gross
profit was primarily due to 1) farming losses from the winter season produce
sourcing, which increased to $2.0 million in fiscal year 2001 from $944,000 in
fiscal year 2000; 2) higher crop sourcing costs during the first half of fiscal
year 2001 as compared to fiscal year 2000 and; 3) lower volumes during the
second half of fiscal year 2001 as compared to fiscal year 2000 as a result of
discontinuing the field harvesting and packing operations of the business. Gross
profit also decreased $565,000 at Landec Ag due to lower product sales in fiscal
year 2001 compared to fiscal year 2000. These decreases in gross profit were
partially offset by increased gross profit from Apio's value-added specialty
packaging business which increased $2.8 million in fiscal year 2001 to $12.2
million as compared to $9.4 million in fiscal year 2000.
Research and development expenses remained virtually the same at $3.3
million in fiscal year 2001 and $3.4 million in fiscal year 2000.
-26-
Selling, general and administrative expenses were $27.4 million for fiscal
year 2001 compared to $26.9 million for fiscal year 2000, an increase of 2%.
Selling, general and administrative expenses increased during fiscal year 2001
as compared to fiscal year 2000 primarily as a result of increased expenses at
Apio for general and administrative expenses due to including Apio for a full
year in fiscal year 2001 compared to only eleven months in fiscal year 2000.
This increase was offset by decreased sales and marketing expenses at Landec Ag
from a February 2001 reduction in force. Specifically, sales and marketing
expenses decreased to $10.9 million for fiscal year 2001 from $12.6 million for
fiscal year 2000.
Interest income for fiscal year 2001 was $617,000 compared to $873,000 for
fiscal year 2000. This decrease in interest income was due principally to less
cash available for investing and lower market interest rates. Interest expense
for fiscal year 2001 was $2.8 million compared to $2.1 million for fiscal year
2000. The increase in interest expense was primarily due to having a higher
average debt balance outstanding during fiscal year 2001.
Liquidity and Capital Resources
As of October 27, 2002, Landec had cash and cash equivalents of $7.8
million, a net decrease of $846,000 from $8.7 million as of October 28, 2001.
This decrease was primarily due to: a) the reduction of net borrowings under
Landec's lines of credit of $5.5 million; b) the reduction of long-term debt of
$10.4 million; c) the purchase of $2.5 million of property and equipment;
partially offset by; d) net proceeds from the sale of Dock Resins of $9.4
million; and (e) proceeds from the sale of Common Stock of $7.6 million.
During fiscal year 2002, Landec purchased equipment to support the
development of Apio's value added products, and incurred building and laboratory
improvement costs at Apio. These expenditures represented the majority of the
$2.5 million of property and equipment purchased during fiscal year 2002.
In December 1999, in conjunction with the acquisition of Apio, the Company
secured $11.25 million of term debt and a $12 million line of credit with Bank
of America. The term debt and line of credit agreements, as amended ("Loan
Agreement") contain restrictive covenants that require Apio to meet certain
financial tests, including minimum fixed charge coverage ratio, minimum current
ratio, minimum adjusted net worth and maximum leverage ratios. As of October 27,
2002, Apio was in compliance with all of its financial covenants. The Loan
Agreement, through restricted payment covenants and amendments, limits the
ability of Apio to make cash payments to Landec. Landec has pledged
substantially all of the assets of Apio to Bank of America pursuant to the Loan
Agreement. At October 27, 2002, $7.6 million was outstanding under Apio's line
of credit at an annual interest rate of 6.0%. The total principal amount plus
accrued interest outstanding under the line of credit is due and payable in full
on January 31, 2003. Landec intends to enter into a $12 million replacement line
of credit to cover the outstanding amount of the current facility and for future
financing. The term loan was paid off on October 25, 2002.
In May 2001, Apio entered into a capital lease agreement to fund the
majority of the costs of a new ERP business system. As of October 27, 2002, $1.1
million was outstanding under this lease agreement.
Landec Ag has a revolving line of credit which allows for borrowings of up
to $3 million, based on Landec Ag's inventory levels. The interest rate on the
revolving line of credit is the prime rate plus 0.75. The line of credit
contains certain restrictive covenants, which, among other things, affect the
ability of Landec Ag to make payments on debt owed by Landec Ag to Landec.
Landec has pledged substantially all of the assets of Landec Ag to secure the
line of credit. In December 2002, Landec Ag increased its line of credit by $2.0
million to $5.0 million through January 2003. At October 27, 2002, $2.5 million
was outstanding under the revolving line of credit. In addition, $419,000 was
outstanding on Landec Ag's four-year, 8% per annum, term note and is due and
payable in full in June 2005.
In March 2002, the Company raised $7.3 million, net of $700,000 of
expenses, through a private placement of 2.6 million shares of Common Stock.
In June 2002, the Company sold its Reedley, CA fruit processing facility
for net proceeds of $2.2 million, resulting in a gain of $436,000.
In October 2002, the Company sold its wholly owned subsidiary Dock Resins
and received $9.4 million of cash, net of the repayment of $4.3 million of Dock
Resin's debt. In January 2003, an additional $1.0 million in cash was
-27-
received by Landec because of an increase in Dock Resins working capital as
specified in the Stock Purchase Agreement.
At October 27, 2002, Landec's total debt, including current maturities
and capital lease obligations, was approximately $17.5 million and the total
debt to equity ratio was approximately 31% as compared to 67% at October 28,
2001. Of this debt, approximately $10.1 million is comprised of revolving lines
of credit and approximately $7.4 million is comprised of term debt and capital
lease obligations, $2.4 million of which is mortgage debt on Apio's
manufacturing facilities. The amount of debt outstanding on Landec's revolving
lines of credit fluctuates over time, and the agreements contain financial and
other limiting covenants. Borrowings on Landec's lines of credit are expected to
vary with seasonal requirements of the Company's businesses. In addition, in
connection with Landec's acquisition of Apio, Landec is obligated to pay the
former owners of Apio $1.2 million in the first quarter of fiscal year 2003,
$2.5 million in fiscal years 2004 and 2005, and an additional $4.4 million in
periodic scheduled payments through February 2004. The Company's material
contractual obligations for the next five years and thereafter as of October 27,
2002 are as follows (in thousands):
Due in Fiscal Year
---------------------------------------------------------------------------------
Obligation Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Lines of Credit $10,098 $10,098 $ -- $ -- $ -- $ -- $ --
Long-term Debt 6,013 1,298 1,318 1,356 121 128 1,792
Capital Leases 1,432 895 525 9 3 -- --
Operating Leases 1,193 851 268 68 6 -- --
Land Leases 238 191 47 -- -- -- --
Earn-Out Liability 4,371 3,771 600 -- -- -- --
Licensing Obligation 1,750 150 200 200 200 200 800
------- ------- ------- ------- ------- ------- -------
Total $25,095 $17,254 $ 2,958 $ 1,633 $ 330 $ 328 $ 2,592
======= ======= ======= ======= ======= ======= =======
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 through at least
the next twelve months.
Landec's future capital requirements will depend on numerous factors,
including the progress of its research and development programs; the development
of commercial scale manufacturing capabilities; the development of marketing,
sales and distribution capabilities; the ability of Landec to establish and
maintain new collaborative and licensing arrangements; 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.
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.
-28-
We Have a History of Losses Which May Continue
We have incurred net losses in each fiscal year since our inception. Our
accumulated deficit as of October 27, 2002 totaled $59.3 million. We may incur
additional losses in the future. The amount of future net profits, if any, is
highly uncertain and we may never generate significant revenues or achieve
profitability.
Our Substantial Indebtedness Could Limit Our Financial and Operating Flexibility
At October 27, 2002, our total debt, including current maturities and capital
lease obligations, was approximately $17.5 million and the total debt to equity
ratio was approximately 31%. Of this debt, approximately $10.1 million is
comprised of revolving lines of credit and approximately $7.4 million is
comprised of term debt and capital lease obligations. The amount of debt
outstanding on our revolving lines of credit fluctuates over time, and the
agreements contain financial and other limiting covenants. All $10.1 million
outstanding under the revolving lines of credit is due in fiscal year 2003. Of
our term debt and capital lease obligations, approximately $2.2 million, $1.8
million and $1.4 million become due over each of the next three fiscal years,
respectively. This level of indebtedness limits our financial and operating
flexibility in the following ways:
o a substantial portion of net cash flow from operations must be
dedicated to debt service and will not be available for other
purposes;
o our ability to obtain additional debt financing in the future for
working capital is reduced;
o our ability to fund capital expenditures or acquisitions may be
limited;
o our ability to react to changes in the industry and economic
conditions generally may be limited.
In connection with the Apio acquisition, we may be obligated to make future
payments to the former shareholders of Apio of up to $7.8 million, plus an
additional $279,000 of accrued interest, for a performance based earn out and
future supply of produce. Of this amount, $4.1 million relates to the earn out
from fiscal year 2000 that is due to be paid in periodic scheduled payments
through February 2004 and $3.7 million relates to payments to be made in January
2003, 2004 and 2005.
Our ability to service this indebtedness and these future payments will depend
on our future performance, which will be affected by prevailing economic
conditions and financial, business and other factors, some of which are beyond
our control. If we are unable to service this debt, we would be forced to pursue
one or more alternative strategies such as selling assets, restructuring or
refinancing our indebtedness or seeking additional equity capital, which might
not be successful and which could substantially dilute the ownership interest of
existing shareholders.
We Have Violated Restrictions in Our Loan Agreements and May Have to Pursue New
Financings if We are Unable to Comply with These Provisions in the Future
Apio is subject to various financial and operating covenants under its term debt
and line of credit facilities (the "Loan Agreement"), including minimum fixed
charge coverage ratio, minimum current ratio, minimum adjusted net worth and
maximum leverage ratios. On January 27, 2002, Apio was in technical violation of
the minimum fixed charge ratio. On February 12, 2002, this violation was cured
through a subordinated contribution to Apio from Landec, retroactive to January
27, 2002. The Loan Agreement limits the ability of Apio to make cash payments to
Landec until the outstanding balance is reduced to an amount specified in the
Loan Agreement. Landec Ag is subject to certain restrictive covenants in its
loan agreements which limit the ability of Landec Ag to make payments on debt
owed to Landec. We have pledged substantially all of Apio's and Landec Ag's
assets to secure their bank debt. We currently are not in violation of any of
the provisions of the Loan Agreement but if we violate any obligations in the
future we could trigger an event of default, which, if not cured or waived,
would permit acceleration of our obligation to repay the indebtedness due under
the Loan Agreement. If the indebtedness due under the Loan Agreement were
accelerated, we would be forced to pursue one or more alternative strategies
such as selling assets, seeking new debt financing from another lender or
seeking additional equity capital, which might not be achievable or available on
attractive terms, if at all, and which could substantially dilute the ownership
interest of existing shareholders.
Our Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock
Price to Decline
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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, our direct marketer of hybrid corn seed, Landec Ag, has been the
primary source of these fluctuations, as its revenues and profits are
concentrated over a few months during the spring planting season (generally
during our second quarter). 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 during the first quarter of fiscal year 2002 due
to a shortage of essential value-added produce items which had to be purchased
at inflated prices on the open market in December 2001 and January 2002. Our
earnings may also fluctuate based on our ability to collect accounts receivables
from customers and note receivables from growers. Our earnings from our Food
Products Technology business are sensitive to price fluctuations in the fresh
vegetables and fruits markets. Excess supplies can cause intense price
competition. Other factors that affect our food and/or agricultural operations
include:
o the seasonality of our supplies;
o our ability to process produce during critical harvest periods;
o the timing and effects of ripening;
o the degree of perishability;
o the effectiveness of worldwide distribution systems;
o total worldwide industry volumes;
o the seasonality of consumer demand;
o foreign currency fluctuations; and
o 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, and we may never reach or sustain
profitability for an entire fiscal year.
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:
o price;
o safety;
o efficacy;
o reliability;
o conversion costs;
o marketing and sales efforts; and
o 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 Intellipac
breathable membrane, Intellicoat seed coating 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.
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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 Limited Manufacturing Experience and a Concentration of Capacity in One
Location for Apio and May Have to Depend on Third Parties to Manufacture Our
Products
Any disruptions in our primary manufacturing operation 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 or hybrid corn varieties 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. In addition, virtually all of the hybrid corn
varieties sold by Landec Ag are sourced from a single seed producer. 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 have received, and may in the future receive, from third parties, including
some of our competitors, notices claiming that we are infringing their patents
or other proprietary rights. If we were determined to be infringing any
third-party patent, we could be required to pay damages, alter our products or
processes, obtain licenses or cease the infringing activities. If we are
required to obtain any licenses, we may not be able to do so on commercially
favorable terms, if at all. Litigation, which could result in substantial costs
to and diversion of our efforts, may also be necessary to enforce any patents
issued or licensed to us or to determine the scope and validity of third-party
proprietary rights. Any litigation or interference proceeding, regardless of
outcome, could be expensive and time consuming and could subject us to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require us to cease using that technology. 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 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 Intellipac breathable
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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 Intellipac breathable membrane product. If the FDA were to
determine that our Intellipac 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. In
most cases, we believe our liability will be limited to sharing clean-up or
other remedial costs with other potentially responsible parties. 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 product 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 affect 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 and Agricultural Seed Technology businesses are subject to
weather conditions that affect commodity prices, crop yields, and decisions by
growers regarding crops to be planted. Crop diseases and severe conditions,
particularly weather conditions such as floods, droughts, frosts, windstorms and
hurricanes, may adversely affect the supply of vegetables and fruits used in 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. In addition, we may not receive any
royalties on future sales of QuickCast(TM) and PORT(TM) products because we no
longer have control over the sales of those products. 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.
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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:
o fines, injunctions, civil penalties, and suspensions,
o withdrawal of regulatory approvals,
o product recalls and product seizures, including cessation of
manufacturing and sales,
o operating restrictions, and
o criminal prosecution.
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 fiscal year 2002, approximately 20% 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:
o regulatory approval process,
o government controls,
o export license requirements,
o political instability,
o price controls,
o trade restrictions,
o changes in tariffs, or
o 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 fiscal year 2002, sales to our top five customers accounted for
approximately 32% of our revenues, with our top customers, Wal-Mart Stores Inc.,
accounting for approximately 14% and Costco Wholesale Corp., accounting for
approximately 11% 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
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base, as Apio and Landec Ag 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
often 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
involves 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 with limits in the amount of $41.0 million per occurrence
and $42.0 million in the annual aggregate. 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 stock market in general has recently experienced extreme price and volume
fluctuations. The following events may cause the market price of our common
stock to fluctuate significantly:
o technological innovations applicable to our products,
o our attainment of (or failure to attain) milestones in the
commercialization of our technology,
o our development of new products or the development of new products
by our competitors,
o new patents or changes in existing patents applicable to our
products,
o our acquisition of new businesses or the sale or disposal of a part
of our businesses,
o development of new collaborative arrangements by us, our competitors
or other parties,
o changes in government regulations applicable to our business,
o changes in investor perception of our business,
o fluctuations in our operating results and
o changes in the general market conditions in our industry.
These broad fluctuations may adversely affect the market price of our
common stock.
We Are Continuing to Implement a New Information System at Apio, and Problems
with the Design or Implementation of this New System Could Interfere with Our
Operations
We are in the process of implementing a new management information and
accounting system at Apio to replace the old system, which was largely based on
legacy systems that were created prior to our acquisition of Apio in 1999. As a
part of this effort, we are implementing new enterprise resource planning
software and other software applications to manage our business operations. We
may not be successful in implementing these new systems and transitioning data.
Although we believe that we have identified, to a large extent, the problems
associated with the implementation and that the system is stable, problems could
arise that we have not foreseen. During 2003, we expect to complete the
implementation of the new system. If disruptions occur in the implementation and
functionality in 2003, our operations could be interrupted. Such disruptions
could adversely impact Apio's ability to do the following in a timely manner:
provide quotes, take customer orders, ship products, provide services and
support to our customers, bill
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and track our customers, fulfill contractual obligations and otherwise run
Apio's business. In addition, the disruption caused by the implementation of
such a system could prevent Apio from accumulating, recording, summarizing,
processing and reporting the information to be disclosed by Landec in its
periodic reports with the Securities and Exchange Commission in a timely manner.
As a result, our financial position, results of operations, cash flows and stock
price could be adversely affected.
Since We Order Cartons for Our Products from Suppliers in Advance of Receipt of
Customer Orders for Such Products, We Could Face a Material Inventory Risk
As part of our inventory planning, we enter into negotiated orders with vendors
of cartons used for packing our products in advance of receiving customer orders
for such products. Accordingly, we face the risk of ordering too many cartons
since orders are generally based on forecasts of customer orders rather than
actual orders. If we cannot change or be released from the orders, we may incur
costs as a result of inadequately predicting cartons orders in advance of
customer orders. Because of this we may currently have an oversupply of cartons
and face the risk of not being able to sell such inventory and our anticipated
reserves for losses may be adequate if we have misjudged the demand for our
products. Our business and operating results could be adversely affected as a
result of these increased costs.
Our Seed Products May Fail to Germinate Properly and We May Be Subject to Claims
for Reimbursement or Damages for Losses from Customers Who Use Such Products
Farmers plant seed products sold by Landec Ag with the expectation that they
will germinate under normal growing conditions. If our seed products do not
germinate at the appropriate time or fail to germinate at all, our customers may
incur significant crop losses and seek reimbursement or bring claims against us
for such damages. Although insurance is generally available to cover such
claims, the costs for premiums of such policies are prohibitively expensive and
we currently do not maintain such insurance. Any claims brought for failure of
our seed products to properly germinate could materially and adversely effect
our operating and financial results.
Recently Enacted and Proposed Changes in Securities Laws and Regulations Are
Likely to Increase Our Costs
The Sarbanes-Oxley Act of 2002 (the "Act") that became law in July 2002 requires
changes in some of our corporate governance, public disclosure and compliance
practices. The Act also requires the SEC to promulgate new rules on a variety of
subjects. In addition to final rules and rules already made, Nasdaq has proposed
revisions to its requirements for companies, such as Landec, that are listed on
the NASDAQ. We expect these developments to increase our legal and financial
compliance costs. We expect these changes to make it more difficult and more
expensive for us to obtain director and officer liability insurance, and we may
be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These developments could make it more difficult for us to
attract and retain qualified members for our board of directors, particularly to
serve on our audit committee. We are presently evaluating and monitoring
regulatory developments and cannot estimate the timing or magnitude of
additional costs we may incur as a result of the Act.
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 30% of our common stock (assuming conversion of outstanding
preferred stock and 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.
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Terrorist Attacks and Risk of Contamination May Negatively Impact All Aspects of
Our Operations, Revenues, Costs and Stock Price.
The September 2001 terrorist attacks in the United States, as well as future
events occurring in response or connection to them, including, future terrorist
attacks against United States targets, rumors or threats of war, actual
conflicts involving the United States or its allies, or trade disruptions
impacting our domestic suppliers or our customers, may impact our operations and
may, among other things, cause decreased sales of our products. More generally,
these events have affected, and are expected to continue to affect, the general
economy and customer demand for our products. While we do not believe that our
employees, facilities, or products are a target for terrorists, there is a
remote risk that terrorist activities could result in contamination or
adulteration of our products. Although we have systems and procedures in place
that are designed to prevent contamination and adulteration of our products, a
disgruntled employee or third party could introduce an infectious substance into
packages of our products, either at our manufacturing plants or during shipment
of our products. Were our products to be tampered with, we could experience a
material adverse effect in our business, operations and financial condition.
Our Operating Results and Financial Condition Could Be Harmed if the Current
Economic Downturn Continues
Any further decline in general economic conditions could result in a reduction
in demand for our products. Such decline could harm our financial position,
results of operations, cash flows and stock price, and could limit our ability
to reach our goals for achieving profitability. Also, in such an environment,
pricing pressures could continue, and if we are unable to respond quickly enough
this could negatively impact our gross margins.
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. Each
share of Series B Convertible Preferred Stock is convertible into shares of
common stock in accordance with the conversion formula provided in our articles
of incorporation (currently a 10:1 ratio) and is entitled to the number of votes
equal to the number of shares of Common Stock into which such shares could be
converted.
Holders of Series B Convertible Preferred Stock have the following
preferential rights over holders of common stock:
o Dividend Preference: Holders of Series B Convertible Preferred Stock are
entitled to cumulative dividends payable in additional shares of Series B
Convertible Preferred Stock at an annual rate of eight percent (8%) for
the first two years,
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ten percent (10%) for the third year and twelve percent (12%) thereafter,
following the initial sale on October 25, 2001 of shares of Series B
Convertible Preferred Stock.
o Liquidation Preference: Upon liquidation of the Company, holders of Series
B Convertible Preferred Stock are entitled to receive, in preference to
the holders of common stock, an amount equal to the original issue price
of their shares plus any declared or accrued but unpaid dividends.
The issuance of additional 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 will be
subject to the preferential dividends payable on our outstanding Series B
Preferred Stock and dividends payable on any other preferred stock we may issue.
The Reporting Of 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 stockholders' 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 a newly issued accounting
pronouncement, 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 7A. Quantitative and Qualitative Disclosures about Market Risk
The following table presents information about the Company's debt
obligations and derivative financial instruments that are sensitive to changes
in interest rates. The table presents principal amounts and related weighted
average interest rates by year of expected maturity for the Company's debt
obligations.
Fair
2003 2004 2005 2006 2007 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Liabilities (in 000's)
Lines of Credit 10,098 10,098 10,098
Avg. Int. Rate 5.46% 5.46%
Long term debt, including current
portion
Fixed Rate 2,193 1,843 1,365 124 128 1,792 7,445 7,445
Avg. Int. Rate 9.38% 9.38% 9.38% 9.38% 9.38% 9.38% 9.38% 9.38%
Item 8. Financial Statements and Supplementary Data
See Item 15 of Part IV of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
-37-
PART III
Item 10. Directors and Executive Officers of the Registrant
This information required by this item is contained in the Registrant's
definitive proxy statement which the Registrant will file with the
Commission no later than February 24, 2003 (120 days after the
Registrant's fiscal year end covered by this Report) and is incorporated
herein by reference.
Item 11. Executive Compensation
This information required by this item is contained in the Registrant's
definitive proxy statement which the Registrant will file with the
Commission no later than February 24, 2003 (120 days after the
Registrant's fiscal year end covered by this Report) and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders Matters
This information required by this item is contained in the Registrant's
definitive proxy statement which the Registrant will file with the
Commission no later than February 24, 2003 (120 days after the
Registrant's fiscal year end covered by this Report) and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
This information required by this item is contained in the Registrant's
definitive proxy statement which the Registrant will file with the
Commission no later than February 24, 2003 (120 days after the
Registrant's fiscal year end covered by this Report) and is incorporated
herein by reference.
PART IV
Item 14. Controls and Procedures
(a) Based on their evaluation as of a date within 90 days of the
filing date of this Annual Report on Form 10-K (the "Evaluation Date"),
Landec's principal executive officer and principal financial officer
concluded that, as of the Evaluation Date, Landec's disclosure controls
and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") were
effective such that the material information required to be disclosed by
Landec in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) Since the Evaluation Date, there have not been any significant
changes in Landec's internal controls or in other factors that could
significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
-38-
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) 1. Consolidated Financial Statements of Landec Corporation
Page
----
Report of Ernst & Young LLP, Independent Auditors................ 40
Consolidated Balance Sheets at October 27, 2002 and October
28, 2001......................................................... 41
Consolidated Statement of Operations for the Years Ended
October 27, 2002, October 28, 2001 and October 29, 2000.......... 42
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended October 27, 2002, October 28, 2001 and
October 29, 2000................................................. 43
Consolidated Statement of Cash Flows for the Years Ended
October 27, 2002, October 28, 2001 and October 29, 2000.......... 44
Notes to Consolidated Financial Statements....................... 45
2. Schedule I: Condensed Financial Information of Registrant at
October 27, 2002 and October 28, 2001 and for the Three Years
Ended October 27, 2002........................................... 69
Schedule II: Valuation and Qualifying Accounts for the Years
Ended October 27, 2002, October 28, 2001 and October 29, 2000.... 71
All other schedules provided for in the applicable accounting
regulation of the Securities and Exchange Commission pertain to
items which do not appear in the financial statements of Landec
Corporation and its subsidiaries or to items which are not
significant or to items as to which the required disclosures have
been made elsewhere in the financial statements and supplementary
notes and such schedules have therefore been omitted.
(b) Reports on Form 8-K.............................................. 72
(c) Index of Exhibits................................................ 72
The exhibits listed in the accompanying index to exhibits are filed
or incorporated by reference as part of this report.
-39-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Landec Corporation
We have audited the accompanying consolidated balance sheets of Landec
Corporation as of October 27, 2002 and October 28, 2001, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended October 27, 2002. Our
audits also included the financial statement schedules listed in the Index at
Item 15(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Landec
Corporation at October 27, 2002 and October 28, 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 27, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its accounting for goodwill and intangible assets in 2002.
ERNST & YOUNG LLP
San Jose, California
December 17, 2002
-40-
LANDEC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
October 27, 2002 October 28, 2001
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 7,849 $ 8,695
Restricted cash .................................................................. 1,032 932
Accounts receivable, less allowance for doubtful accounts of
$1,022 and $880 at October 27, 2002 and October 28, 2001,
respectively .................................................................. 19,040 14,161
Inventory ........................................................................ 10,121 14,639
Investment in farming activities ................................................. 1,591 1,285
Notes and advances receivable .................................................... 3,645 3,918
Notes receivable, related party .................................................. 751 475
Prepaid expenses and other current assets ........................................ 2,456 1,847
Assets held for sale ............................................................. -- 13,988
--------- ---------
Total current assets ......................................................... 46,485 59,940
Property and equipment, net ......................................................... 19,902 19,999
Goodwill, net ....................................................................... 25,733 22,002
Trademarks, net ..................................................................... 11,570 11,570
Other intangibles, net .............................................................. 177 3,533
Notes receivable .................................................................... 1,132 1,606
Restricted cash, non-current ........................................................ 1,350 --
Other assets ........................................................................ 1,454 1,472
--------- ---------
$ 107,803 $ 120,122
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 11,512 $ 17,241
Grower payables .................................................................. 6,460 2,845
Related party payables ........................................................... 450 508
Accrued compensation ............................................................. 1,518 1,646
Other accrued liabilities ........................................................ 7,771 9,125
Deferred revenue ................................................................. 3,215 2,622
Lines of credit .................................................................. 10,098 15,612
Current maturities of long term debt ............................................. 2,193 4,969
--------- ---------
Total current liabilities ...................................................... 43,217 54,568
Long term debt, less current maturities ............................................. 5,252 12,835
Other liabilities ................................................................... 1,791 1,845
Minority interest ................................................................... 1,580 1,035
--------- ---------
Total liabilities .............................................................. 51,840 70,283
Shareholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
321,300 and 309,524 shares issued and outstanding at October
27, 2002 and October 28, 2001, respectively; aggregate
liquidation preference of $15 million ......................................... 14,461 14,049
Common stock, $0.001 par value; 50,000,000 shares authorized;
19,329,546 and 16,562,845 shares issued and outstanding at
October 27, 2002 and October 28, 2001, respectively ........................... 100,802 93,191
Accumulated deficit .............................................................. (59,300) (57,401)
--------- ---------
Total shareholders' equity ..................................................... 55,963 49,839
--------- ---------
$ 107,803 $ 120,122
========= =========
See accompanying notes
-41-
LANDEC CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Year Ended Year Ended Year Ended
October 27, October 28, October 29,
2002 2001 2000
----------- ----------- -----------
Statement of Operations Data:
Revenues:
Product sales .............................................. $ 152,958 $ 141,314 $ 129,457
Services revenue ........................................... 23,312 43,346 64,911
Services revenue, related party ............................ 3,515 5,083 1,898
License fees ............................................... 2,330 374 374
Research, development and royalty revenues ................. 1,040 529 586
--------- --------- ---------
Total revenues .......................................... 183,155 190,646 197,226
Cost of revenue:
Cost of product sales ...................................... 128,684 121,321 110,246
Cost of product sales, related party ....................... 2,668 760 348
Cost of services revenue ................................... 20,463 40,751 56,621
--------- --------- ---------
Total cost of revenue ......................................... 151,815 162,832 167,215
--------- --------- ---------
Gross profit .................................................. 31,340 27,814 30,011
Operating costs and expenses:
Research and development ................................... 3,664 3,270 3,444
Selling, general and administrative ........................ 26,418 27,398 26,927
Exit of fruit processing ................................... -- -- 525
--------- --------- ---------
Total operating costs and expenses ...................... 30,082 30,668 30,896
--------- --------- ---------
Operating income/(loss) from continuing operations ............ 1,258 (2,854) (885)
Interest income ............................................... 247 617 873
Interest expense .............................................. (1,551) (2,789) (2,083)
Other income, net ............................................. 247 188 25
--------- --------- ---------
Income/(loss) from continuing operations ...................... 201 (4,838) (2,070)
Discontinued operations:
Loss from discontinued operations .......................... -- (537) (14)
Loss on disposal of operations ............................. (1,688) (2,500) --
--------- --------- ---------
Loss from discontinued operations ............................. (1,688) (3,037) (14)
--------- --------- ---------
Net loss before cumulative effect of change in accounting ..... (1,487) (7,875) (2,084)
Cumulative effect of change in accounting for upfront
license fee revenue ........................................... -- -- (1,914)
--------- --------- ---------
Net loss ...................................................... $ (1,487) $ (7,875) $ (3,998)
========= ========= =========
Net loss ...................................................... $ (1,487) $ (7,875) $ (3,998)
Dividends on Series B preferred stock ......................... (412) -- --
--------- --------- ---------
Net loss applicable to common shareholders .................... $ (1,899) $ (7,875) $ (3,998)
========= ========= =========
Basic and diluted net loss per share:
Continuing operations ...................................... $ (.01) $ (.29) $ (.13)
Discontinued operations .................................... (.09) (.19) --
Cumulative effect of change in accounting .................. -- -- (.12)
--------- --------- ---------
Basic and diluted net loss per share ......................... $ (.10) $ (.48) $ (.25)
========= ========= =========
Proforma amounts assuming the change
in accounting is applied retroactively:
Net loss ................................................... $ (1,899) $ (7,875) $ (2,084)
========= ========= =========
Net loss per share ......................................... $ (.10) $ (.48) $ (.13)
========= ========= =========
Shares used in computing basic and diluted net loss
per share ................................................. 18,172 16,371 15,796
========= ========= =========
See accompanying notes.
-42-
LANDEC CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
Shareholders' Equity
----------------------------------------------------------------------------
Preferred Stock Common Stock Total
-------------------- ----------------------- Accumulated Shareholders'
Shares Amount Shares Amount Deficit Equity
-------- ---------- ---------- ---------- ---------- -------------
Balance at October 31, 1999 ....................... -- $ -- 13,353,352 $ 77,289 $ (45,528) $ 31,761
Issuance of preferred stock .................... 166,667 9,149 -- -- -- 9,149
Issuance of common stock for acquired
businesses.................................... -- -- 2,562,500 14,559 -- 14,559
Issuance of common stock at $0.58 to
$7.00 per share............................... -- -- 202,039 707 -- 707
Net loss ....................................... -- -- -- -- (3,998) (3,998)
------- ---------- ---------- ---------- ---------- ----------
Balance at October 29, 2000 ....................... 166,667 9,149 16,117,891 92,555 (49,526) 52,178
Issuance of preferred stock .................... 142,857 4,900 -- -- -- 4,900
Issuance of common stock at $0.58 to
$3.63 per share............................... -- -- 444,954 636 -- 636
Net loss ....................................... -- -- -- -- (7,875) (7,875)
------- ---------- ---------- ---------- ---------- ----------
Balance at October 28, 2001 ....................... 309,524 14,049 16,562,845 93,191 (57,401) 49,839
Dividends on Series B preferred stock .......... 11,776 412 -- -- (412) --
Issuance of common stock at $0.58 to
$3.10 per shares.............................. -- -- 2,766,701 7,611 -- 7,611
Net loss ....................................... -- -- -- -- (1,487) (1,487)
------- ---------- ---------- ---------- ---------- ----------
Balance at October 27, 2002 .................... 321,300 $ 14,461 19,329,546 $ 100,802 $ (59,300) $ 55,963
======= ========== ========== ========== ========== ==========
See accompanying note
-43-
LANDEC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended
-------------------------------------
October 27, October 28, October 29,
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net loss ............................................................................. $ (1,487) $ (7,875) $ (3,998)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization .................................................... 3,500 5,430 5,114
Loss from discontinued operations ................................................ 1,688 3,037 14
Cumulative effect of change in accounting ........................................ -- -- 1,914
Net (gain) loss on disposal of property and equipment ............................ (62) (339) 183
Increase in minority interest liability .......................................... 545 20 105
Exit of fruit processing ......................................................... -- -- 525
Changes in assets and liabilities, net of effects from acquisitions
and discontinued operations:
Accounts receivable, net ....................................................... (4,879) 7,104 (5,271)
Inventory ...................................................................... 4,518 (1,858) (2,266)
Investment in farming activities ............................................... (306) 1,387 (642)
Prepaid expenses and other current assets ...................................... 589 (441) 1,548
Assets held for sale ........................................................... -- (17) 558
Accounts payable ............................................................... (5,729) (1,260) 3,690
Grower payables ................................................................ 3,615 (10,806) 6,930
Related party payables ......................................................... (58) 246 262
Accrued compensation ........................................................... (128) (586) 360
Other accrued liabilities ...................................................... (2,500) (1,903) (3,998)
Deferred revenue ............................................................... 593 357 (617)
-------- -------- --------
Net cash provided by (used in) operating activities .................................... (101) (7,504) 4,411
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment .................................................. (2,546) (6,961) (3,787)
(Increase) decrease in other assets and liabilities .................................. (65) (168) 7
Decrease (increase) in notes receivable and advances ................................. 471 3,391 (3,784)
Acquisition of businesses, net of cash acquired ...................................... (491) (257) (6,793)
Increase in restricted cash .......................................................... (1,450) (932) --
Proceeds from the sale of property and equipment ..................................... 2,192 887 --
Net proceeds from the sale of Dock Resins ............................................ 9,406 -- --
-------- -------- --------
Net cash provided by (used in) investing activities .................................... 7,517 (4,040) (14,357)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of preferred stock, net of issuance costs ......................... -- 4,900 9,149
Proceeds from sale of common stock, net of repurchases ............................... 7,611 636 707
Borrowings on lines of credit ........................................................ 25,272 25,966 18,944
Payments on lines of credit .......................................................... (30,786) (19,096) (10,203)
Payments on long term debt ........................................................... (10,419) (3,916) (2,172)
Proceeds from issuance of long term debt ............................................. 60 3,361 --
Payments to minority interest ........................................................ -- (248) (242)
-------- -------- --------
Net cash (used in) provided by financing activities .................................... (8,262) 11,603 16,183
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................................... (846) 59 6,237
Cash and cash equivalents at beginning of year ......................................... 8,695 8,636 2,399
-------- -------- --------
Cash and cash equivalents at end of year ............................................... 7,849 $ 8,695 $ 8,636
======== ======== ========
Supplemental disclosure of cash flows information:
Cash paid during the period for interest ............................................. $ 1,554 $ 2,929 $ 1,424
======== ======== ========
Cash paid during the period for income taxes ......................................... $ -- $ -- $ --
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Common stock issued in the acquisition of businesses ................................. $ -- $ -- $ 14,559
======== ======== ========
Issuance of Series B preferred stock as dividends to Series B preferred stockholders . $ 412 $ -- $ --
======== ======== ========
See accompanying notes.
-44-
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
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. In addition, the Company markets and distributes
hybrid corn seed to farmers through its Landec Ag, Inc. ("Landec Ag") subsidiary
and specialty packaged fresh-cut and whole produce to retailers and foodservice
companies primarily, in the United States and Canada through its Apio, Inc.
("Apio") subsidiary.
Basis of Consolidation
The consolidated financial statements comprise the accounts of Landec
Corporation and its subsidiaries, Apio and Landec Ag. All material inter-company
transactions and balances have been eliminated. Effective fiscal year 2000, the
Company changed its fiscal year end from October 31 to a fiscal year that
includes 52 or 53 weeks ending on the last Sunday in October.
The income statement accounts of Dock Resins Corporation, ("Dock Resins"),
the Company's former specialty chemicals subsidiary that was sold on October 24,
2002, have been reclassified to discontinued operations in accordance with
Accounting Principles Board Opinion 30 "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" ("APB No. 30").
Concentrations of Risk
Cash and cash equivalents, trade accounts receivable, grower advances and
notes receivable are financial instruments that potentially subject the Company
to concentrations of credit risk. Corporate policy limits, among other things,
the amount of credit exposure to any one issuer and to any one type of
investment, other than securities issued or guaranteed by the U.S. government.
The Company routinely assesses the financial strength of customers and growers
and, as a consequence, believes that trade receivables, grower advances and
notes receivable credit risk exposure is limited. Credit losses for bad debt are
provided for in the consolidated financial statements through a charge to
operations. A valuation allowance is provided for known and anticipated credit
losses.
Several of the raw materials used to manufacture the Company's products
are currently purchased from a single source, including some monomers used to
synthesize Intelimer(R) polymers and substrate materials for the production of
Intellipac(TM) breathable membranes used on a multitude of Apio value-added
products. In addition, virtually all of the hybrid corn varieties sold by Landec
Ag are sourced from a single seed producer.
During fiscal year 2002, sales to the Company's top five customers
accounted for approximately 32% of total revenue, with the top customers,
Wal-Mart Stores, Inc. and Costco Wholesale Corporation from the Food Products
Technology segment, accounting for approximately 14% and 11%, respectively, of
total revenues. In addition, approximately 20% of the Company's total revenues
were derived from product sales to international customers, none of who
individually accounted for more than 3% of total revenues.
Financial Instruments
The Company's financial instruments are primarily composed of short-term
trade and grower advances, notes receivable and lines of credit, as well as
long-term notes receivables and debt instruments. For short-term instruments,
the historical carrying amount is a reasonable estimate of fair value. Fair
values for long-term financial instruments not readily marketable are estimated
based upon discounted future cash flows at prevailing market interest rates.
Based on these assumptions, management believes the fair market values of the
Company's financial instruments are not materially different from their recorded
amounts as October 27, 2002.
-45-
1. Organization and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company records all highly liquid securities with three months or less
from date of purchase to maturity as cash equivalents.
Restricted Cash
In April 2001, the Company established an Irrevocable Letter of Credit
("ILOC") and created a Certificate of Deposit as collateral for the non-hardware
portion of Apio's business system capital lease. As of October 27, 2002 and
October 28, 2001, the ILOC balance was $932,000 and is classified as restricted
cash in the consolidated balance sheets.
In October 2002, in accordance with the terms of the sale of Dock Resins,
the Company established escrow accounts to cover potential breaches of
representations and warranties outlined in the Stock Purchase Agreement. As of
October 27, 2002 the balance in these escrow accounts was $1,450,000 and is
classified as restricted cash in the consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market. As of October 27, 2002 and October 28, 2001 inventories
consisted of (in thousands):
October 27, October 28,
2002 2001
----------- -----------
Finished goods ......................... $ 5,119 $ 9,030
Raw materials .......................... 3,830 4,885
Work in process ........................ 1,450 1,355
-------- --------
Gross inventory ..................... 10,399 15,270
Less reserves .......................... (278) (631)
-------- --------
Net inventory ....................... $ 10,121 $ 14,639
======== ========
Inventory reserves are based on estimates of current market conditions and
changes in market conditions will result in adjustments to the inventory
reserves.
Advertising Expense
The Company defers certain costs related to direct-response advertising of
Landec Ag's hybrid corn seeds. Such costs are amortized over periods (less than
one year) that correspond to the estimated revenue stream of the advertising
activity. Advertising expenditures for Landec Ag and Apio that are not
direct-response advertisements are expensed as incurred. The advertising expense
for the Company for fiscal years 2002, 2001 and 2000 was $1.9 million, $1.3
million and $1.4 million, respectively. The amount of deferred advertising
included in prepaid expenses and other current assets at October 27, 2002 and
October 28, 2001 was $663,000 and $1.0 million, respectively.
Notes and Advances Receivable
Apio has made advances to fruit growers for the development of orchards,
and to produce growers for crop and harvesting costs. Typically, except for
development advances, these advances are paid off within the growing season
(less than one year) from harvested crops. Development advances and advances not
fully paid during the current growing season are converted to interest bearing
obligations, evidenced by contracts and notes receivable. These notes and
advances receivable are secured by perfected liens on land and/or crops and have
terms that range from twelve to sixty months. Notes receivable are periodically
reviewed (at least quarterly) for collectibility. A reserve is established for
any note or advance deemed to not be fully collectible based upon an estimate of
the crop value or the fair value of the security for the note or advance.
-46-
1. Organization and Summary of Significant Accounting Policies (continued)
Related Party Transactions
Apio provides harvesting, packing, cooling and distributing services for
the Chief Executive Officer of Apio (the "Apio CEO") and purchases produce from
that individual. Revenues, cost of product sales and the resulting payable and
the note receivable from advances for ground lease payments, crop and harvesting
costs (see Note 5), are shown separately in the accompanying financial
statements as of October 27, 2002 and October 28, 2001 and for the three years
ended October 27, 2002.
In May 2002, Apio advanced to a farm wholly-owned by the Apio CEO $1.1
million for ground lease payments and crop financing expenses in order to
maintain current levels of produce sourcing from his farm. The advance accrues
interest at the Bank of America prime rate. $400,000 of the $1.1 million was
repaid on June 30, 2002, with the remainder to be offset against the earnout
liability in 2003. This advance is secured by crops of the farm and an earnout
payment of $4.1 million due October 28, 2002 to the Apio CEO arising from the
acquisition of Apio by Landec.
Investment in farming activities
Landec, through its Apio subsidiary, invests in certain farming
activities. The investments consist of cash advances to growers for expenses to
be incurred during the growing season, in exchange for a percentage ownership in
the proceeds of the crops. Net income or loss is generally recognized on these
investments based on Landec's percentage ownership of the net proceeds of the
crops as fields are harvested and proceeds are settled. Additionally, certain
farming agreements contain provisions wherein Landec bears the risk of loss if
the net proceeds from the crops are not sufficient to cover the expense
incurred. These investments are periodically reviewed for impairment. For fiscal
year 2002 a net gain of approximately $1.1 million was recognized and in fiscal
years 2001 and 2000, net losses of approximately $2.0 million and $944,000,
respectively, were recognized and included in the cost of product sales in the
consolidated statement of operations.
Property and Equipment
Property and equipment are stated at cost. Expenditures for major
improvements are capitalized while repairs and maintenance are charged to
expense. Depreciation is expensed on a straight-line basis over the estimated
useful lives of the respective assets, generally twenty to thirty-one years for
buildings and improvements and three to ten years for furniture, computers,
machinery and equipment. Leasehold improvements are amortized over the lesser of
the economic life of the improvement or the life of the lease on a straight-line
basis.
The Company capitalizes software development costs for internal use in
accordance with Statement of Position 98-1 "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). Capitalization of
software development costs begins in the application development stage and ends
when the asset is placed into service. The Company amortizes such costs using
the straight-line basis over estimated useful lives. Under SOP 98-1, the Company
capitalized $384,000 and $2.7 million of software development costs in fiscal
years 2002 and 2001, respectively, related to Apio's new ERP business systems.
Intangible Assets
Intangible assets represent the excess of acquisition costs over the
estimated fair value of net assets acquired and consist of covenants not to
compete, customer bases, work forces in place, trademarks and goodwill.
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
-47-
1. Organization and Summary of Significant Accounting Policies (continued)
The Company has applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002.
Application of the nonamortization provisions of the Statement resulted in an
increase in net income of approximately $2.6 million for fiscal year 2002.
Under SFAS 142 the Company is required to review goodwill and indefinite
lived intangible assets at least annually. In May 2002, the Company completed
its initial impairment review and in October 2002 completed a follow-up review,
by grouping the net book value of all long-lived assets for acquired businesses,
including goodwill and other intangible assets, and compared this value to the
estimated future discounted cash flows related to these long-lived assets. The
discount rate used was based on the risks associated with the acquired
businesses ("reporting entities"). These impairment reviews were performed by an
independent appraiser. The reviews concluded that the fair market value of the
reporting entities exceeded the carrying value of their net assets and thus no
impairment charge was warranted as of either May 2002 or October 27, 2002.
Grower Payable
Landec, through its Apio subsidiary, contracts with growers to cool and
distribute their products. The grower payable is the net of the market value of
the products received from the growers and the corresponding charges by Landec
for services rendered on behalf of the growers.
Deferred Revenue
Cash received in advance of services performed (principally revenues
related to upfront license fees) or shipment of products (primarily hybrid corn
seed) are recognized as a liability and recorded as deferred revenue. At October
27, 2002, approximately $2.1 million has been recognized as a liability for
advances on future hybrid corn seed shipments, $1.3 million as a liability for
deferred license fee revenues and $606,000 for advances on ground lease
payments. Of the deferred license fee amount, approximately $777,000 will be
recognized subsequent to fiscal 2003 and has been included in other liabilities.
Minority Interest
In connection with the acquisition of Apio, Landec acquired Apio's 60%
general partner interest in Apio Cooling, a California limited partnership. Apio
Cooling is included in the consolidated financial statements of Landec for all
periods presented. The minority interest balance, of $1.6 million at October 27,
2002 and $1.0 million at October 28, 2001 represents the limited partners'
interest in Apio Cooling.
Per Share Information
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Due to the Company's net loss in all periods presented, net
loss per share includes only weighted average shares outstanding. All earnings
per share amounts for all periods have been presented in accordance with SFAS
No. 128 requirements.
The computation of diluted net loss per share for fiscal year 2002
excludes the impact of options to purchase 164,371 shares of common stock and
the conversion of the Convertible Preferred Stock which is convertible into 3.2
million shares of common stock at October 27, 2002, as such impact would be
antidilutive for this period.
The computation of diluted net loss per share for fiscal year 2001
excludes the impact of options to purchase 338,997 shares of common stock and
the conversion of the Convertible Preferred Stock which was convertible into 3.1
million shares of common stock at October 28, 2001, as such impact would be
antidilutive for this period.
-48-
1. Organization and Summary of Significant Accounting Policies (continued)
The computation of diluted net loss per share for fiscal year 2000
excludes the impact of options to purchase 648,043 shares of common stock, and
the conversion of the Convertible Preferred Stock, which was convertible into
1.7 million shares of common stock, at October 29, 2000, as such impact would be
antidilutive for this period.
Revenue Recognition
Revenues related to research contracts are recognized ratably over the
related funding periods for each contract, which is generally as research is
performed. Product sales are recognized upon shipment except for shipments sent
FOB destination in which revenue is recognized upon receipt by the customer.
Services revenue is recognized when the service is rendered.
Prior to November 1, 1999, the Company recognized noncancellable,
nonrefundable license fees as revenue when received and when all significant
contractual obligations of the Company relating to the fees had been met.
Effective November 1, 1999, the Company changed its method of accounting for
noncancellable, nonrefundable license fees to recognize such fees over the
research and development period of the agreement, as well as the term of any
related supply agreement entered into concurrently with the license when the
risk associated with commercialization of a product is non-substantive at the
outset of the arrangement. The Company believes the change in accounting
principle is preferable based on guidance provided in SEC Staff Accounting
Bulletin No. 101 - Revenue Recognition in Financial Statements. The $1.9 million
cumulative effect of the change in accounting principle, calculated as of
November 1, 1999, was reported as a charge in the year ended October 29, 2000.
The cumulative effect was initially recorded as deferred revenue and is being
recognized as revenue over the research and development period or supply period
commitment of the agreement. During the year ended October 29, 2000 the impact
of the change in accounting was to increase net loss by approximately $1.5
million, or $0.10 per share, comprised of the $1.9 million cumulative effect of
the change as described above ($0.12 per share), net of $374,000 of the related
deferred revenue which was recognized as "recycled" revenue during 2000 ($0.02
per share). During fiscal years 2002 and 2001, $302,000 and $374,000,
respectively, of the related deferred revenue was recognized as "recycled"
revenue. The remainder of the related deferred revenue will be recognized as
revenue per fiscal year as follows: $88,000 in 2003 - 2011, and $72,000 in 2012.
The pro forma amounts presented in the consolidated statement of operations were
calculated assuming the accounting change was made retroactive to prior periods.
Amounts received in advance are recorded as deferred revenue until the
related revenue is recognized.
Shipping Costs
The Company's shipping and handling costs are included in cost of sales
for all periods presented.
Research and Development Expenses
Costs related to both research contracts and Company-funded research is
included in research and development expenses. Costs to fulfill research
contracts generally approximate the corresponding revenue. Research and
development costs are primarily comprised of salaries and related benefits,
supplies, travel expenses and corporate allocations.
Accounting for Stock-Based Compensation
The Company accounts for its stock option plans and its employee stock
purchase plans in accordance with the provisions of the Accounting Principles
Board Opinion No. 25 (APB 25) "Accounting for Stock Issued to Employees."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. For
instance, the carrying value of notes and advances receivable, as well as
investments in farming activities, 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, note receivable or investment.
-49-
1. Organization and Summary of Significant Accounting Policies (continued)
Impairment of Long Lived Assets
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Impairment of long-lived Assets
("SFAS No. 144"). SFAS No. 144 supercedes Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of long-lived Assets and for
long-lived Assets to be disposed of ("SFAS No. 121"). SFAS No. 144 retains the
requirements of SFAS No. 121 to (a) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and (b) measure an impairment loss as the difference between the
carrying amount and the fair value of the asset. SFAS No. 144 removes goodwill
from its scope. SFAS No. 144 is applicable to financial statements issued for
fiscal years beginning after December 15, 2001 or for the Company's fiscal year
ended October 26, 2003. The early adoption of SFAS No. 144 at the beginning of
fiscal year 2002 did not have any material adverse impact on the Company's
financial position or results of its operations.
Adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations"
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 (SFAS143), "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. The Company is in the process of assessing the
effect of adopting SFAS 143, which will be effective for the Company's fiscal
year ending October 26, 2003.
Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform to the current year presentation.
2. Discontinued Operations
In October 2002, the Company sold Dock Resins for $14.5 million ($10.2
million net of debt not assumed and before expenses). As a result of this sale,
the financial results of Dock Resins have been included in the consolidated
statement of operations as a discontinued operation for all years presented.
The Company recorded a loss of $4.2 million on the sale of Dock Resins of
which $2.5 million, was recorded in fiscal year 2001 and $1.7 million was
recorded in the fourth quarter of fiscal year 2002 upon the close of the sale.
The loss was comprised of a loss on the disposal of Dock Resins of $3.3 million;
transaction costs and certain costs directly related to the sale, including
consulting fees and professional fees of $1.2 million less $300,000 of operating
income from the measurement date of October 18, 2001 to the disposal date of
October 24, 2002. Included in non-current restricted cash is $1.35 million in
escrow related to the sale of Dock Resins. To the extent breaches in
representation and warranties arise before January 31, 2004, the loss could
increase to the extent of the $1.35 million escrow.
The condensed components of the net assets of Dock Resins included in
assets held for sale in the accompanying consolidated balance sheets as of
October 28, 2001 are as follows (in thousands):
October 28, 2001
----------------
Cash $ 11
Accounts receivable, net 1,593
Inventory 2,038
Other current assets 312
--------
Total current assets 3,954
Property and equipment, net 9,860
Intangibles, net 4,634
--------
Total assets 18,448
Total current liabilities (3,433)
Long-term debt (2,368)
Other liabilities (105)
--------
Net assets of Dock Resins before loss on disposal 12,542
Loss on disposal (1,342)
--------
Net assets of Dock Resins $ 11,200
========
-50-
2. Discontinued Operations (continued)
The condensed statements of operations of Dock Resins for fiscal years
2001 and 2000 classified as loss from discontinued operations in the
accompanying consolidated statement of operations are as follows:
2001 2000
-------- --------
Product sales $ 11,735 $ 12,386
Cost of product sales 8,132 8,617
-------- --------
Gross Profit 3,603 3,769
Operating expenses 3,931 3,682
-------- --------
Operating (loss)/profit (328) 87
Other expense (209) (101)
-------- --------
Net (loss)/ income from
discontinued operations $ (537) $ (14)
======== ========
3. Business Acquisitions
On December 2, 1999, Landec acquired Apio, Inc. and certain related
entities ("Apio"), located in Guadalupe, California, a marketer and packer of
produce and specialty packaged fresh-cut vegetables. Upon closing, Landec paid
$21.0 million in cash and stock, before expenses, for Apio, which will operate
as a wholly owned subsidiary of Landec. In addition, the agreement provides for
future payments to the former owners of Apio of up to $7.8 million (excluding
accrued interest of $279,000) at October 27, 2002. These payments consist of a)
$4.4 million in earn-out payments, including interest, to a former owner and
current CEO of Apio is due in periodic scheduled payments through February 2004
and is recorded in other accrued liabilities in the consolidated balance sheets,
a previous payment related to the earnout for $579,000 was made in March 2002,
and b) $3.7 million non-interest bearing notes to the sellers which will be paid
in equal annual installments over the next three years (recorded at $3.1 million
on a discounted basis in long-term debt, both current and non-current, in the
consolidated balance sheets), two payments of $1.1 million each had previously
been made in January 2001 and January 2002. The transaction was accounted for as
a purchase. The purchase price has been allocated to the acquired assets and
liabilities based on their relative fair market values, subject to final
adjustments. These allocations are based on independent valuations and other
studies. Certain adjustments have been made to the purchase price allocation
originally reported by the Company, including the addition of $4.7 million due
to the earn-out previously discussed, as well as the recording of an additional
$500,000 of transaction related costs. In addition, the purchase price was
increased in the second quarter of fiscal year 2000 by $2.1 million to reflect a
change in the estimated value of Landec Common Stock issued at close and in the
third quarter of fiscal year 2001 by $591,000, on a discounted basis, to adjust
the notes payable to the sellers as a result of Landec's Common Stock having an
average closing price in June 2001 below $6.00 per share.
The following is a summary of the purchase price allocation (in
thousands):
Net assets and liabilities $ 2,014
Customer base 1,821
Work force in place 1,395
Trademark 9,100
Goodwill 20,688
-------
$35,018
=======
The acquisition by Landec of all the outstanding capital stock of Apio was
exchanged for the following:
Landec common stock $14,217
Contractual deferred obligations 4,683
Cash paid or set aside as a liability 13,771
-------
Purchase price before acquisition costs 32,671
Acquisition costs 2,347
-------
Total purchase price $35,018
=======
-51-
3. Business Acquisitions (continued)
To fund the transaction, Landec issued 2.5 million shares of common stock
to the prior owners of Apio. Apio replaced a portion of its existing bank debt
with a $11.25 million term note and entered into a new $12 million line of
credit agreement with a bank. Existing debt of $3.7 million was assumed in the
transaction. In a separate transaction, Landec sold $10 million ($9.1 million
net of issuance costs) of convertible preferred stock (converted into 1,666,670
shares of Common Stock on November 19, 2002) to a private, long-term, investor
at a $6.00 per share equivalent price.
The results of operations and cash flows for fiscal year 2000 include the
results of Apio from November 29, 1999 through October 29, 2000.
The following pro forma summary of consolidated revenues, net loss and net
loss per share for fiscal years 2000 assumes the acquisition occurred on
November 1, 1999. These pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of Landec's financial results
if the acquisition had taken place at the beginning of fiscal year 2000 or of
future results, and do not include the cumulative effect of the change in
accounting principle (Note 1) (in thousands, except per share amounts).
Fiscal Year
2000
-----------
Revenue $ 224,671
Net loss $ (2,179)
Net loss per share $ (0.14)
4. Exit of Fruit Processing
In September 2000, management of Landec decided to discontinue processing
fruit at its Reedley facility, part of the Food Products Technology segment. At
that time, Landec's management determined that all fruit processing personnel
and the majority of the administrative staff at the facility would be
terminated. The plan, including termination benefits, was approved by management
and communicated to the affected employees during fiscal year 2000, and the
facility was shut down in January 2001.
The Company recorded a charge of $525,000 in fiscal year 2000, primarily
for severance and payroll related costs, in the accompanying consolidated
statement of operations. This amount was fully paid in fiscal year 2001. In June
2002, the Company sold the fruit processing facility for $2.2 million and
recorded a gain on the sale of $436,000 which is included in other income for
fiscal year 2002 in the consolidated statement of operations. In December 2002,
subsequent to fiscal year end 2002, the Company sold a portion of the fruit
processing equipment and the rights to the Company's Great Whites(TM) trademark
to the purchaser of the facility for $707,000 resulting in a net gain of
$39,000. The portion of the fruit equipment that was not sold is being used in
Apio's value-added vegetable business. Included in the assets held for sale
amount in the accompanying consolidated balance sheets as of October 28, 2001
was $2.8 million related to the fruit processing facility and equipment.
-52-
5. Notes and Advances Receivable
October 27, October 28,
2002 2001
---------- ----------
Notes and advances receivable at October 27, 2002 and October 28, 2001
consisted of the following (in thousands):
Various notes receivable from growers, with principal and interest ranging
from the prime rate to the prime rate plus 3% to a maximum of 10%,
payments to be withheld from proceeds derived from crop sales, due through
December 2002, secured by crops and /or deeds of trust $ 2,731 $ 3,902
Notes receivable due from grower in monthly installments of $33,333 plus
interest at prime rate plus 1.0%, with final payment due on October 31,
2004, secured
by deed of trust 801 --
Various notes receivable from growers bearing no interest on cartons in
inventory, payments to be withheld based on carton usage, due through
December 2002, secured by carton inventory 318 --
Notes receivable due from grower, with principal and interest at prime rate plus
2.0%, secured by their respective partnership interest in Apio Cooling 280 --
Notereceivable due from grower in annual installments of $60,714 plus
interest at prime rate plus 1.0% with final payment due November 1, 2004,
secured by
crops 249 243
Notereceivable due from grower in annual installments of $20,000 plus
interest at prime rate plus 1.0% with final payment due January 31, 2005,
secured by
crops 619 674
Notereceivable due from a related party with interest at the prime rate,
payments to be withheld from proceeds derived from crop sales due December
31, 2002, secured by crops and deeds of trust 751 475
Short term advances and other 3 930
---------- ----------
Gross notes and advances receivable 5,752 6,224
Less allowance for doubtful notes (224) (225)
---------- ----------
Net notes and advances receivable 5,528 5,999
Less current portion of notes and advances receivable, including related party
note (4,396) (4,393)
---------- ----------
Non-current portion of notes and advances receivable $ 1,132 $ 1,606
========== ==========
Landec is obligated to make additional loans to growers under certain of
these note receivable agreements. At October 27, 2002, Landec had outstanding
commitments to fund up to an additional $106,000 to growers under these existing
note receivable agreements.
6. Property and Equipment
Property and equipment consists of the following (in thousands):
October 27, October 28,
2002 2001
---------- ----------
Land and buildings ....................................................... $ 10,319 $ 10,196
Leasehold improvements ................................................... 1,479 1,722
Computer, capitalized software, machinery, equipment and
autos ................................................................. 19,666 12,041
Furniture and fixtures ................................................... 534 1,730
Construction in process .................................................. 230 3,675
---------- ----------
32,228 29,364
Less accumulated depreciation and amortization ........................... (12,326) (9,365)
---------- ----------
$ 19,902 $ 19,999
========== ==========
-53-
6. Property and Equipment (continued)
Depreciation expense for fiscal years 2002, 2001 and 2000 was $3.3
million, $2.7 million, and $2.9 million, respectively. Equipment under capital
leases, which totals approximately $4.5 million at October 27, 2002, is security
for the related lease obligations. The related accumulated amortization is
$643,000. Included in construction in process at October 28, 2001 is $2.9
million for an ERP system under a capital lease.
7. Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. The Company has applied the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
year 2002. The following table shows what net loss would have been had the
provision been applied at the beginning of fiscal year 2000 (in thousands,
except per share amounts):
Year Ended Year Ended
October 28, October 29,
2001 2000
---------- ----------
Net loss as reported ............................. $ (7,875) $ (3,998)
Goodwill and other intangible amortization ....... 2,675 2,055
---------- ----------
Adjusted net loss ................................ $ (5,200) $ (1,943)
========== ==========
Loss per share as reported ....................... $ (0.48) $ (0.25)
Goodwill and other intangible amortization ....... 0.16 0.13
---------- ----------
Adjusted loss per share .......................... $ (0.32) $ (0.12)
========== ==========
Changes in the carrying amount of goodwill for the fiscal years ended October
27, 2002 and October 28, 2001 by reportable segment, are as follows (in
thousands):
Food Agricultural
Products Seed
Technology Technology Total
---------- ---------- -----
Balance as of October 28, 2000 19,107 2,604 21,711
Goodwill acquired during the period 1,170 416 1,586
Goodwill amortized during the period (1,102) (193) (1,295)
-------- -------- --------
Balance as of October 28, 2001 19,175 2,827 22,002
Goodwill acquired during the period -- 482 482
Transfer of customer base and workforce in
place to goodwill 2,187 1,062 3,249
-------- -------- --------
Balance as of October 27, 2002 $ 21,362 4,371 25,733
======== ======== ========
Information regarding Landec's other intangible assets is as follows (in
thousands):
2002 2001
-------------------------------------------- ---------------------------------------------
Unamortized Gross Carrying Accumulated Gross Carrying Accumulated
Intangible Assets Amount Amortization Net Amount Amortization Net
-------------- ------------ -------- -------------- ------------ --------
Trademark $ 13,300 $ (1,730) $ 11,570 $ 13,300 $ (1,730) $ 11,570
Amortized
Intangible Assets
Other 579 (402) 177 5,536 (2,003) 3,533
-------- -------- -------- -------- -------- --------
$ 13,879 $ (2,132) $ 11,747 $ 18,836 $ (3,733) $ 15,103
======== ======== ======== ======== ======== ========
-54-
7. Intangible Assets (continued)
Annual amortization expense for fiscal year end 2002 was $130,000 and
$69,000 for Food Products Technology and Agricultural Seed Technology,
respectively. Amortization expense, including amortization of other assets, was
$199,000, $2.7 million and $2.2 million for fiscal years ended 2002, 2001 and
2000, respectively.
8. Shareholders' Equity
Convertible Preferred Stock
The Company has authorized two million shares of preferred stock, and as
of October 27, 2002 has issued or declared to be issued 50,000 shares in Series
A-1, 116,667 shares in Series A-2 and 154,633 in Series B preferred stock.
Pursuant to a Series B Convertible Preferred Stock Purchase Agreement
dated October 24, 2001, by and among the Company and the Seahawk Ranch
Irrevocable Trust, the Company completed a financing that raised approximately
$5.0 million through a private placement of its Series B Convertible Preferred
Stock (the "Series B Preferred Stock"). Pursuant to this agreement, the Company
issued 142,857 shares of Series B Preferred Stock of the Company at $35.00 per
share (representing 1,428,570 shares of Common Stock on a converted basis). A
director of the Company is a trustee of the Seahawk Ranch Irrevocable Trust.
During fiscal year 2002, 11,776 shares of Series B Preferred Stock were issued
or declared to be issued as dividends to the Seahawk Ranch Irrevocable Trust.
Each share of the Series A and B convertible preferred stock is, at the
option of the holder, convertible into shares of Common Stock, subject to
certain antidilution adjustments, in accordance with the conversion formula
provided in the Company's Articles of Incorporation (currently a 10:1 ratio).
Outstanding Series A preferred shares were converted into Common Stock on
November 19, 2002. One half of the outstanding Series B Preferred Stock was
convertible in Common Stock at the holder's discretion after April 24, 2002 and
all of the Series B Preferred Stock is convertable into Common Stock as of
October 24, 2002.
Each share of convertible preferred stock is entitled to the number of
votes equal to the number of shares of common stock into which such shares could
be converted and have the voting rights and powers of the common stock, voting
together as a single class.
Holders of Series B Preferred Stock are entitled to cumulative dividends
payable in additional shares of Series B Preferred Stock at an annual rate of
eight percent (8%) for the first two years, ten percent (10%) for the third year
and twelve percent (12%) thereafter, following the initial sale on October 25,
2001 of shares of Series B Preferred Stock. Series B preferred stockholders were
issued or declared to be issued 11,776 shares of Series B Preferred Stock as
accrued stock dividends during fiscal year 2002. Dividends for Series B
Preferred Stock are cumulative and were declared by the Company's Board of
Directors and issued at a price of $35 per share as per the agreement. The
Series B Preferred Stock is redeemable, solely at the option of the Company, at
principal plus accrued dividends, which accrue when declared at a rate of $2.80
per share annually.
Upon liquidation, Series B preferred stockholders shall receive in
preference to the holders of Common Stock a return equal to the original issue
price of the shares plus any accrued but unpaid dividends.
Common Stock, Stock Purchase Plans and Stock Option Plans
In March 2002, the Company raised $7.3 million, net of $700,000 of
expenses, through a private placement of 2,580,663 shares of Common Stock. The
Company has filed a registration statement with the SEC for the resale of the
stock.
At October 27, 2002, the Company had 8,914,783 common shares reserved for
future issuance under Landec Corporation stock option plans (5,257,700) and
employee stock purchase plans (444,083) and for conversion of outstanding
preferred stock (3,213,000).
The 1995 Directors' Stock Option Plan (the "Directors' Plan") provides
that each person who becomes a nonemployee director of the Company, who has not
received a previous grant, shall be granted a nonstatutory stock option to
purchase 20,000 shares of Common Stock on the date on which the optionee first
becomes a nonemployee director of the Company. Thereafter, on the date of each
annual meeting of the shareholders each non-employee director shall be granted
an
- 56 -
8. Shareholders' Equity (continued)
additional option to purchase 10,000 shares of Common Stock if, on such date, he
or she shall have served on the Company's Board of Directors for at least six
months prior to the date of such annual meeting. The exercise price of the
options is the fair market value of the Company's Common Stock on the date the
options are granted. The Directors' Plan, as amended in 1998, authorizes the
issuance of 400,000 shares under the plan. Options granted under this plan are
exercisable and vest upon grant. All directors' stock option grants outstanding
on December 4, 1997 with an exercise price greater than $6.75, were repriced to
$6.75 per share, the fair market value of the Company's common stock on April
15, 1998, the date of the annual shareholders' meeting.
The 1996 Non-Executive Stock Option Plan authorizes the Board of Directors
to grant non-qualified stock options to employees, including executive officers,
and outside consultants of the Company. The exercise price of the options will
be equal to the fair market value of the Company's Common Stock on the date the
options are granted. As amended in 1999, 1,500,000 shares are authorized to be
issued under this plan. Options are generally exercisable upon vesting and
generally vest ratably over four years and are subject to repurchase if
exercised before being vested.
In November 1996, the Company's Board of Directors approved the 1996 Stock
Option Plan. Under this plan, the Board of Directors of Landec may grant stock
purchase rights, incentive stock options or non-statutory stock options to
Landec executives. The exercise price of the stock purchase rights, incentive
stock options and non-statutory stock options may be no less than 100% of the
fair market value of Landec's Common Stock on the date the options are granted.
The plan, as amended, authorizes the issuance of 2,000,000 shares of Landec
Common Stock under the plan. Options generally are exercisable upon vesting,
generally vest ratably over four years and are subject to repurchase if
exercised before being vested.
In November 1999, the Company's Board of Directors granted to the CEO of
Apio a non-statutory stock option to purchase 790,000 shares of Landec's common
stock. The exercise price of the grant was the fair market value of Landec's
common stock on the date of grant. The option vests over two years.
In December 1999, the Company granted an option to purchase 200,000 shares
of Common Stock to the CEO of Landec under the 1996 Stock Option Plan. The
option had an exercise price of $6.25 per share, and vested in three equal
amounts if the stock price reaches an average of $10, $20, and $30,
respectively, for a twenty consecutive day trading period prior to December
2003. In September 2001, the option holder agreed to cancel this option in
exchange for $60,000, based upon an independent appraisal of the fair value of
the option, in deferred compensation. On April 12, 2002, the Company paid the
$60,000 to the option holder.
In October 2000, the Company's Board of Directors approved the New
Executive Stock Option Plan. Under this plan, the Board of Directors may grant
non-statutory stock options to officers of Landec or officers of Apio or Landec
Ag whose employment with each of those companies began after October 24, 2000.
The exercise price of the non-statutory stock options may be no less than 100%
and 85%, for named executives and non-named executives, respectively, of the
fair market value of Landec's common stock on the date the options are granted.
Options generally are exercisable upon vesting, generally vest ratably over four
years and are subject to repurchase if exercised before being vested. 210,000
shares are authorized to be issued under this plan.
- 57 -
8. Shareholders' Equity (continued)
The various repricings effected by the Company do not result in variable
accounting under FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation," since they were effected prior to
December 15, 1998.
Activity under all Landec Stock Option Plans is as follows:
Outstanding Options
----------------------------
Options Weighted
Available Number Average
for Grant of Shares Exercise Price
--------- --------- --------------
Balance at October 31, 1999 1,447,284 2,935,720 $4.14
Additional shares reserved 1,000,000 -- --
Options granted (1,614,150) 1,614,150 $6.27
Options exercised -- (94,002) $3.42
Options forfeited 141,029 (141,029) $5.19
Expired in 1988 Plan (4,078) -- --
--------- ---------
Balance at October 29, 2000 970,085 4,314,839 $4.92
Additional shares reserved 500,000 -- --
Options granted (606,800) 606,800 $3.44
Options exercised -- (311,609) $0.72
Options forfeited 599,264 (599,264) $5.45
Expired in 1988 Plan (58,281) -- --
--------- ---------
Balance at October 28, 2001 1,404,268 4,010,766 $4.93
Options granted (430,739) 430,739 $3.44
Options exercised -- (71,574) $0.86
Options forfeited 334,581 (334,581) $4.91
Expired in 1988 Plan (85,760) -- --
--------- ---------
Balance at October 27, 2002 1,222,350 4,035,350 $4.85
========= =========
- 58 -
8. Shareholders' Equity (continued)
At October 27, 2002, October 28, 2001 and October 29, 2000, options to
purchase 3,249,878, 2,901,861 and 1,974,146 of Landec's common stock were
vested, respectively. No options have been exercised prior to being vested.
No deferred compensation expense was recognized in the Company's financial
statements for stock-option awards under APB 25 for fiscal years 2002, 2001 and
2000.
The following tables summarize information about Landec options outstanding and
exercisable at October 27, 2002.
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------
Weighted
Average Weighted
Contractual Average
Range of Number Life Exercise
Exercise Prices of Shares (in years) Price
- ------------------------- --------------- ---------------- -------------
$0.5800 - $3.1800 449,173 5.58 $2.07
$3.3750 - $3.4000 463,250 8.37 $3.38
$3.5000 - $4.9380 672,128 7.53 $4.36
$5.0000 - $5.0000 968,833 5.17 $5.00
$5.0630 - $6.1250 234,721 6.06 $5.53
$6.2500 - $6.2500 872,062 3.13 $6.25
$6.5000 - $7.6250 375,183 5.75 $6.89
---------
$0.5800 - $7.6250 4,035,350 5.72 $4.85
OPTIONS EXERCISEABLE
- -------------------------------------------------------------------
Weighted
Range of Number Average
Exercise Prices of Shares Exercise Price
- ---------------------------- ----------------- --------------------
$0.5800 - $3.1800 388,384 $1.94
$3.3750 - $3.4000 195,804 $3.39
$3.5000 - $4.9380 522,523 $4.46
$5.0000 - $5.0000 743,833 $5.00
$5.0630 - $6.1250 213,385 $5.48
$6.2500 - $6.2500 872,062 $6.25
$6.5000 - 7.6250 313,887 $6.89
---------
$0.5800 - $7.6250 3,249,878 $4.99
Employee Stock Purchase Plan. The Company has an employee stock purchase
plan which permits eligible employees to purchase Common Stock, which may not
exceed 10% of an employee's compensation, at a price equal to the lower of 85%
of the fair market value of the Company's Common Stock at the beginning of the
offering period or on the purchase date. As of October 27, 2002, 530,917 shares
have been issued under the Purchase Plan.
Landec Ag Stock Plan. Under the 1996 Landec Ag Stock Plan, the Board of
Directors of Landec Ag may grant stock purchase rights, incentive stock options
or non-statutory stock options to employees and outside consultants. The
exercise price of the stock purchase rights, incentive stock options and
non-statutory stock options may be no less than 85%, 100% and 85%, respectively,
of the fair market value of Landec Ag's common stock as determined by Landec
Ag's Board of Directors. 2,000,000 shares are authorized to be issued under this
plan. Options generally are exercisable upon vesting and generally vest ratably
over four years and are subject to repurchase if exercised before being vested.
- 59 -
8. Shareholders' Equity (continued)
The following table summarizes activity under the Landec Ag Stock Option
Plan.
Outstanding Options
--------------------------------------
Options Weighted Average
Available Number of Shares Exercise Price
--------- ---------------- --------------
Balance at October 31, 1999 476,691 1,522,775 $0.24
Options granted (211,900) 211,900 $1.00
Options exercised -- (18,215) $0.21
Options forfeited 10,360 (10,360) $0.37
------- ---------
Balance at October 29, 2000 275,151 1,706,100 $0.33
Options granted (23,200) 23,200 $1.00
Options exercised -- (107,333) $0.11
Options forfeited 41,667 (41,667) $0.70
------- ---------
Balance at October 28, 2001 293,618 1,580,300 $0.35
Options granted (20,000) 20,000 $1.00
Options exercised -- (200,000) $0.10
Options forfeited 10,530 (10,530) $0.42
------- ---------
Balance at October 27, 2002 284,148 1,389,770 $0.39
At October 27, 2002, options to purchase 1,259,649 shares with an average
exercise price of $0.33 per share of Landec Ag's common stock were vested. For
the options outstanding at October 27, 2002, 725,000 options were granted with
an exercise price of $0.10, 241,800 options were granted with an exercise price
of $0.20 and 422,970 were granted with an exercise price of $1.00. As of October
27, 2002, the Company has 1,673,918 common shares reserved for future issuance
under the Landec Ag stock option plan.
Apio Stock Plan. In connection with the acquisition of Apio, the Board of
Directors of Landec authorized the establishment of the 1999 Apio Stock Option
Plan ("1999 Plan"). Under the 1999 Plan, the Board of Directors of Apio may
grant incentive stock options or non-statutory stock options to employees and
outside consultants. The exercise price of the incentive stock options and
non-statutory stock options may be no less than 100% and 85%, respectively, of
the fair market value of Apio's common stock as determined by Apio's Board of
Directors. Five million shares were authorized to be issued under this plan.
Options were exercisable upon vesting and generally vested ratably over four
years and were subject to repurchase if exercised before being vested. As of
October 27, 2002, options for two million shares had been granted at an exercise
price of $2.10 per share.
In May 2000, the 1999 Plan was terminated. All existing grants remain
outstanding, and no future grants will be made from the plan. Concurrently, the
2000 Apio Stock Option Plan ("2000 Plan") was authorized by Apio's Board of
Directors, which authorized the issuance of two million shares under the same
terms and conditions as the 1999 Plan. As of October 27, 2002, options for
788,644 shares are outstanding under the 2000 Plan at an exercise price of $2.10
per share.
- 60 -
8. Shareholders' Equity (continued)
The following table summarizes activity under the Apio Stock Option Plan.
Outstanding Options
---------------------------------------
Options Weighted Average
Available Number of Shares Exercise Price
--------- ---------------- --------------
Balance at December 2, 1999 4,000,000 -- --
Options granted (2,814,000) 2,814,000 $2.10
Options exercised -- --
Options forfeited 57,000 (57,000) $2.10
---------- ---------
Balance at October 29, 2000
1,243,000 2,757,000 $2.10
Options granted (134,500) 134,500 $2.10
Options exercised -- (583) $2.10
Options forfeited 104,022 (104,022) $2.10
---------- ---------
Balance at October 28, 2001 1,212,522 2,786,895 $2.10
Options granted (145,000) 145,000 $2.10
Options exercised -- -- $2.10
Options forfeited 143,251 (143,251) $2.10
---------- ---------
Balance at October 27, 2002 1,210,773 2,788,644
At October 27, 2002, options to purchase 2,440,738 shares of Apio common
stock were vested. As of October 27, 2002, the Company has 3,999,417 common
shares reserved for future issuance under the Apio stock option plans.
Pro Forma Information. The Company has elected to follow APB 25 in
accounting for its employee stock option because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123 (SFAS No. 123) "Accounting for Stock-Based
Compensation", required the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, no
compensation expense is recognized in the Company's financial statements unless
the exercise price of the Company's employee stock options is less than the
market price of the underlying stock on the date of grant.
Pro forma information regarding net loss and net loss per share has been
determined as if the Company had accounted for the Landec stock option plans
under the fair value method and the Landec Ag stock plan and Apio stock plans
under the minimum value method prescribed by SFAS No. 123. The fair value of
options granted in fiscal years 2002, 2001 and 2000 reported below has been
estimated at the date of grant using a Black-Scholes options pricing model with
the following weighted average assumptions:
Landec
Employee Stock Options
- ----------------------------------------------------------------------------------
Years ended October 27, October 28, October 29,
2002 2001 2000
---- ---- ----
Expected life (in years) 5.43 5.95 4.47
Risk-free interest rate 4.00% 4.90% 6.26%
Volatility .84 .83 .85
Dividend yield 0% 0% 0%
The assumptions used for the Landec stock options for the expected life,
the risk-free interest rate and the dividend yield are the same assumptions used
to determine the fair value of the Landec Ag and Apio options granted in fiscal
years 2002, 2001 and 2000. The fair value for Landec Ag and Apio options was
estimated using the minimum value method since the stock of these subsidiaries
is not publicly traded.
- 61 -
8. Shareholders' Equity (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The change in the volatility in fiscal years 2002, 2001 and 2000 is
a result of basing the volatility on Landec's stock price.
Because the Company's options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options.
The weighted average estimated fair value of Landec employee stock options
granted at grant date market prices during fiscal years 2002, 2001 and 2000 was
$2.48, $2.47 and $4.19 per share, respectively. No stock options were granted
above grant date market prices during fiscal years 2002, 2001, and 2000. The
weighted average estimated fair value of shares granted under the Landec
Employee Stock Purchase Plan during fiscal years 2002, 2001 and 2000 was $1.44,
$1.71and $1.87 per share, respectively. The weighted average estimated fair
value of shares granted under the Landec Ag Stock Plan during fiscal years 2002,
2001, and 2000 was $0.30, $0.21 and $0.23 per share, respectively. The weighted
average estimated fair value of shares granted under Apio Stock Plan during
fiscal year 2002, 2001 and 2000 was $0.72, $0.52 and $0.73 per share,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per share amounts):
October 27, October 28, October 29,
Years ended 2002 2001 2000
----------- ----------- -----------
Pro forma net loss $(3,374) $(10,384) $(8,429)
Pro forma net loss per share $(0.19) $(0.63) $(0.53)
The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of future
years.
9. Debt
Revolving debt
Apio has a revolving line of credit with a bank which allows for
borrowings up to a maximum of $12.0 million. Outstanding amounts bear interest
at the greater of the prime rate set by the bank or the Federal fund rate plus a
margin of 1.75%, as amended in Amendment No. 9 to the loan agreement (6.0% at
October 27, 2002). The revolving note agreement expires on January 31, 2003. At
October 27, 2002 and October 28, 2001, $7.6 million and $11.0 million,
respectively, were outstanding under the revolving line of credit.
In February 2001, the Apio revolving line of credit was amended. The
amendment reduced the maximum borrowings from $12.0 million to $10.0 million but
increased the computed amount available under the line, determined as a
percentage of certain eligible assets (primarily receivables) by $4.0 million
through March 31, 2001 and $2.0 million from April 1, 2001 through July 31,
2001. The amendment also precluded the payment of earn-outs due under the Apio
purchase agreement until August 2001.
In April 2001, the Apio revolving line of credit was further amended. The
amendment increased the maximum borrowings to $12.0 million from $10.0 million
until July 31, 2001 and increased the interest rate margin by 75 basis points
from prime plus .50% to prime plus 1.25%. In addition, the computed amount
available under the line as determined as a percentage of certain eligible
assets (primarily receivables) was increased by $4.0 million through July 31,
2001 and capital expenditure limits for fiscal year 2001 were increased from
$3.3 million up to $5.7 million based on the additional $2.4 million being
financed by a third party lender. In September 2001, Apio's revolving line of
credit was amended again. The amendment permanently increases the maximum
borrowings to $12.0 million. The computed amount available under the line as
determined as a percentage of certain eligible assets (primarily receivables)
was increased by $3.0 million through October 1, 2001, by $2.0 million through
November 1, 2001, by $1 million through December 1, 2001 and eliminated entirely
by December 2, 2001. In October 2001, certain financial covenants were amended
in Apio's loan agreement to make them less
- 62 -
9. Debt (continued)
restrictive. The amendment also precludes the payment of earn-outs due under the
Apio purchase agreement until December 2001.
In April 2002, the Apio loan agreement with Bank of America was amended.
The amendment increased the computed amount available under the revolving line
of credit as determined as a percentage of certain eligible assets (primarily
receivables) by $2.5 million for the period February 28, 2002 to March 31, 2002
and the Company agreed to subordinate to the bank $5.9 million of contributions
made to Apio.
On May 1, 2002, Apio's loan agreement with Bank of America was amended
again to extend the revolving line of credit through July 31, 2002 and to
increase the interest rate for the period from May 1, 2002 through July 31, 2002
to prime plus 3% or 7.75% on an annual basis.
On August 1, 2002, Apio's loan agreement with Bank of America was amended
again to extend the revolving line of credit through October 31, 2002 and to
decrease the interest rate for the period from August 1, 2002 through October
31, 2002 to prime plus 2% or 6.75% on an annual basis. In addition, the Company
agreed to use proceeds from the sale of Dock Resins to pay off its term loan
with Bank of America.
On October 31, 2002, Apio's loan agreement with Bank of America was
amended again to extend the revolving line of credit through January 31, 2003
and to decrease the interest rate for the period from November 1, 2002 through
January 31, 2003 to prime plus 1.75% or 6.00 % on an annual basis.
Landec Ag has a revolving line of credit which allows for borrowings of up
to $3 million, based on Landec Ag's inventory levels. The interest rate on the
revolving line of credit is the prime rate plus 0.75 or 5.00% on an annual
basis. The line of credit contains certain restrictive covenants, which, among
other things, affect the ability of Landec Ag to make payments on debt owed by
Landec Ag to Landec. Landec has pledged substantially all of the assets of
Landec Ag to secure the line of credit. In June 2001, Landec Ag increased its
line of credit by $2.4 million to $5.4 million through February 2002. In
December 2002, Landec Ag increased its line of credit by $2.0 million to $5.0
million through January 2003. At October 27, 2002, $2.5 million was outstanding
under the revolving line of credit.
In addition, under the $1.0 million equipment line, $600,000 of equipment
was purchased and in June 2001, that $600,000 was converted into a four-year, 8%
per annum term note. As of October 27, 2002, $419,000 was outstanding under this
term note.
The Company had entered into an interest rate swap agreement with Bank of
America to limit interest rates on a portion of its long-term debt to a maximum
effective rate of 9.52% from February 2, 2000 until October 30, 2002 when the
agreement expires. The notional amount covered by the agreement was $5,250,000.
The differential to be paid or received is accrued as interest rate charges and
recognized as an adjustment to interest expense related to the debt. The swap
agreement was terminated upon the Company paying off its long-term debt
obligations to Bank of America on October 25, 2002.
The Company has subordinated to Bank of America $20.1 million of
contributions made from Landec to Apio from the acquistion date of December 2,
1999 through October 27, 2002.
- 63 -
9. Debt (continued)
Long-Term Debt
Long-term debt consists of the following (in thousands):
October 27, October 28,
2002 2001
----------- -----------
Bank term loan for Apio $ -- $ 8,250
Contractual obligation to former owners of Apio; due in annual
installments of $1,235,000 from January 2, 2003 through January
2, 2005 (see Note 3) 3,122 4,023
Note payable of Apio to a commercial finance company; due in monthly
installments of $10,500 including interest at 7.0% with final
payment due December 2019 1,580 1,645
Capital lease obligation due in monthly installments of $65,900,
including interest at 10.72% with final payment due April 2004,
secured by computer hardware and a letter of credit 1,147 1,663
Note payable of Apio to a bank; due in monthly installments of
$8,000 including interest at 7.75% with final payment due
December 2015 789 822
Various notes payable with interest rates ranging from 3.90% to 8.5% 522 843
Capitalized lease obligations with interest rates ranging from 6.87%
to 13.90% 285 558
-------- --------
7,445 17,804
Less current portion (2,193) (4,969)
-------- --------
$ 5,252 $ 12,835
======== ========
Maturities of long-term debt, including obligations under capital lease
agreements, for each year presented are as follows (in thousands):
FY 2003 ............................................................. $2,193
FY 2004 ............................................................. 1,843
FY 2005 ............................................................. 1,365
FY 2006 ............................................................. 124
FY 2007 ............................................................. 128
Thereafter .......................................................... 1,792
------
$7,445
======
In May 2001, Apio entered into a capital lease agreement to fund the
majority of the costs of a new ERP business system. As of October 27, 2002, $1.1
million was outstanding under this capital lease.
The contractual obligation of $3.7 million ($1.235 million a year for
three years) to former shareholders of Apio is non-interest bearing and
accordingly has been discounted at Apio's incremental borrowing rate resulting
in a discounted value of $3.1 million at October 27, 2002. In June 2001, under
provisions of the acquisition agreement, because Landec's closing stock price
was below $6.00 on average during June 2001, the Company increased its
obligation to the former owners of Apio by $700,000 ($591,000 on a discounted
basis), $525,000 of which was outstanding at October 27, 2002 and is included in
the $3.7 million referenced above.
The term debt and revolving note agreements contains various financial
covenants including minimum fixed coverage ratio, minimum current ratio, minimum
adjusted net worth and maximum leverage ratios. The loan agreements, through
restricted payment covenants and amendments, limits the ability of Apio and
Landec Ag to make cash payments to Landec.
The weighted average interest rate on the Company's lines of credit was
5.46% and 6.54% for fiscal years 2002 and 2001, respectively.
Landec has pledged substantially all of Apio's and Landec Ag's assets to
secure their term debt.
- 64 -
10. Income Taxes
The Company has recorded no provision for income taxes for the years ended
October 27, 2002, October 28, 2001, and October 29, 2000, respectively.
As of October 27, 2002, the Company had federal and state net operating
loss carryforwards of approximately $45.6 million and $9.1 million,
respectively. The Company also had federal and state research and development
tax credit carryforwards of approximately $1.2 million and $900,000,
respectively. The net operating loss and credit carryforwards will expire at
various dates beginning in 2003 through 2022, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
Deferred tax assets: October 27, October 28,
2002 2001
----------- -----------
Net operating loss carryforwards ............ $ 16,000 $ 13,200
Research credit carryforwards ............... 1,800 1,800
Capitalized research and development ........ 200 300
In-process research and development ......... -- 800
Discontinued operation - Dock
Resins ...................................... -- 1,000
Other - net ................................. (500) --
-------- --------
Net deferred tax assets ........................ 17,500 17,100
Valuation allowance ............................ (17,500) (17,100)
-------- --------
Net deferred tax assets ........................ $ -- $ --
======== ========
Due to the Company's absence of earnings history, the net deferred tax
asset has been fully offset by a valuation allowance, which has increased by
$400,000 in the current year.
Approximately $152,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.
11. Commitments and Contingencies
Operating Leases
Landec leases facilities and equipment under operating lease agreements
with various terms and conditions, which expire at various dates through
December 2005. The approximate future minimum lease payments under these
operating leases, excluding farmland leases, at October 27, 2002 are as follows
(in thousands):
Amount
------
FY2003............................................. $ 851
FY2004............................................. 268
FY2005............................................. 68
FY2006............................................. 6
------
$1,193
======
Rent expense for operating leases, including month to month arrangements
was $1.3 million for fiscal year 2002, $921,000 for fiscal year 2001 and $1.1
million for fiscal year 2000.
- 65 -
11. Commitments and Contingencies (continued)
Land Leases
Landec, through its Apio subsidiary, also leases farmland under various
non-cancelable leases expiring through October 2005. Landec subleases
substantially all of the farmland to growers who, in turn, agree to market their
crops through Landec. The subleases are generally non-cancelable and expire
through October 2005. The approximate future minimum leases and sublease amounts
receivable under farmland leases at October 27, 2002 are as follows (in
thousands):
Minimum Sublease
Lease Rents
Payments Receivable Net
-------- ---------- ---
2003 ........................... $1,530 $1,339 $191
2004 ........................... 1,100 1,053 47
2005 ........................... 273 273 --
------ ------ ----
$2,903 $2,665 $238
====== ====== ====
Rent expense for land leases net of sublease rents, including month to
month arrangements was $378,000 for fiscal year 2002, $131,000 for fiscal year
2001 and $248,000 for fiscal year 2000.
Employment Agreements
Landec has entered into employment agreements with certain key employees.
These agreements provide for these employees to receive incentive bonuses based
on the financial performance of certain divisions in addition to their annual
base salaries. Certain key employees also receive minimum bonuses for their
second year assuming continued employment. The accrued incentive bonuses
amounted to $278,000 at October 27, 2002 and $502,000 at October 28, 2001.
Licensing Agreement
In fiscal year 2001, the Company entered into an agreement for the
exclusive worldwide rights to market grapes under certain brand names. Under the
terms of the agreement, the Company is obligated to pay nine annual
installments, $150,000 for 2003 and $200,000 for each remaining year through
2011.
12. Employee Savings and Investment Plans
The Company sponsors two 401(k) plans which are available to substantially
all of the Company's employees.
Landec's Corporate Plan, which is available to Landec Corporate and Landec
Ag employees, allows participants to contribute from 1% to 20% of their
salaries, up to the Internal Revenue Service (IRS) limitation into designated
investment funds. Beginning in fiscal year 2001, the Company amended the plan so
that it contributes an amount equal to 50% of the participants' contribution up
to 3% of the participants' salary. Participants are at all times fully vested in
their contributions. The Company's contribution vests over a four-year period at
a rate of 25% per year. The Company retains the right, by action of the Board of
Directors, to amend, modify, or terminate the plan. In fiscal years 2002 and
2001, the Company contributed $126,000 and $96,000, respectively, to the
Corporate Plan.
The Company also sponsors a 401(k) plan available to substantially all of
Apio's salaried employees. The plan's participants can contribute from 1% to 5%
of their salary, up to the IRS limitation into designated investment funds.
Apio, in turn, contributes an amount, as required by the plan, which is equal to
the participant's contributions. Participants are at all times fully vested in
their contributions. Apio's contribution vests over a seven-year period
beginning in year three at a rate of 20% per year. Apio retains the right, by
action of the Board of Directors, to amend, modify or terminate the plan. In
fiscal years 2002, 2001 and 2000, Apio contributed $320,000, $208,000, and
$282,000, respectively, to the foregoing plan.
13. Business Segment Reporting
Landec operates in two business segments: the Food Products Technology
segment and the Agricultural Seed Technology segment. The Food Products
Technology segment markets and packs produce and specialty packaged fresh-cut
vegetables that incorporate the Intellipac(TM) breathable membrane for the
fresh-cut and whole produce industry through its Apio subsidiary. The amounts
presented for fiscal year 2000 include the results of Apio from the effective
close date of
- 66 -
13. Business Segment Reporting (continued)
November 29, 1999 through October 29, 2000. The Agricultural Seed Technology
segment markets and distributes hybrid seed corn to the farming industry and is
developing seed coatings using Landec's proprietary Intelimer(R) polymers
through Landec Ag. The Corporate and Other segment includes the operations from
the Company's Technology Licensing/Research and Development business and
corporate operating expenses. The Food Products Technology and Agricultural Seed
Technology segments include charges for corporate services allocated from the
Corporate and Other segment. Corporate and Other amounts include non-core
operating activities, corporate operating costs and net interest expense.
Operations by Business Segment consisted of the following (in thousands):
Agricultural
Food Products Seed Corporate
2002 Technology Technology and Other TOTAL
- -------------------------------------------- --------- ------------ --------- ---------
Net sales .................................. $ 160,596 $ 19,439 $ 3,120 $ 183,155
International Sales ........................ $ 36,273 $ -- $ -- $ 36,273
Gross profit ............................... $ 20,183 $ 8,037 $ 3,120 $ 31,340
Net income (loss) from continuing operations $ (2,134) $ (714) $ 3,049 $ 201
Identifiable assets ........................ $ 65,489 $ 15,405 $ 26,909 $ 107,803
Depreciation and amortization .............. $ 2,822 $ 507 $ 171 $ 3,500
Capital expenditures ....................... $ 1,774 $ 634 $ 138 $ 2,546
Interest income ............................ $ 184 $ 46 $ 17 $ 247
Interest expense ........................... $ 1,440 $ 109 $ 2 $ 1,551
Income tax expense (benefit) ............... $ -- $ -- $ -- $ --
- --------------------------------------------
2001
- --------------------------------------------
Net sales .................................. $ 173,609 $ 16,211 $ 826 $ 190,646
International Sales ........................ $ 33,139 $ -- $ -- $ 33,139
Gross profit ............................... $ 20,458 $ 6,659 $ 697 $ 27,814
Net income (loss) from continuing operations $ (2,632) $ (2,761) $ 555 $ (4,838)
Identifiable assets ........................ $ 81,399 $ 17,842 $ 20,881 $ 120,122
Depreciation and amortization .............. $ 3,918 $ 1,120 $ 392 $ 5,430
Capital expenditures ....................... $ 6,108 $ 462 $ 391 $ 6,961
Interest income ............................ $ 601 $ 4 $ 12 $ 617
Interest expense ........................... $ 2,536 $ 253 $ -- $ 2,789
Income tax expense (benefit) ............... $ -- $ -- $ -- $ --
- --------------------------------------------
2000
- --------------------------------------------
Net sales .................................. $ 178,871 $ 17,212 $ 1,143 $ 197,226
International Sales ........................ $ 34,607 $ -- $ -- $ 34,607
Gross profit ............................... $ 21,958 $ 7,224 $ 829 $ 30,011
Net income (loss) from continuing operations $ 249 $ (2,914) $ 595 $ (2,070)
Identifiable assets ........................ $ 95,267 $ 15,775 $ 17,123 $ 128,165
Depreciation and amortization .............. $ 3,668 $ 1,055 $ 391 $ 5,114
Capital expenditures ....................... $ 2,839 $ 763 $ 185 $ 3,787
Interest income ............................ $ 723 $ 82 $ 68 $ 873
Interest expense ........................... $ 2,060 $ 23 $ -- $ 2,083
Income tax expense ......................... $ 588 $ -- $ (588) $ --
- 67 -
14. Quarterly Consolidated Financial Information (unaudited)
The following is a summary of the unaudited quarterly results of
operations for fiscal years 2002 and 2001 (in thousands, except for per share
amounts):
FY 2002 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter FY 2002
- ------------------------------------------- ----------- ----------- ----------- ----------- -----------
Revenues $ 40,346 $ 57,118 $ 44,469 $ 41,222 $ 183,155
Gross profit 4,687 13,800 6,514 6,339 31,340
Income (loss) from continuing operations (3,520) 5,423 (482) (1,220) 201
Income (loss) from discontinued operations -- -- -- (1,688) (1,688)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (3,520) $ 5,423 $ (482) $ (2,908) $ (1,487)
=========== =========== =========== =========== ===========
Basic amounts per common share:
Continuing operations $ (.22) $ .30 $ (.03) $ (.07) $ (.01)
Discontinued operations -- -- -- (.09) (.09)
----------- ----------- ----------- ----------- -----------
Net income/(loss) per basic share $ (.22) $ .30 $ (.03) $ (.16) $ (.10)
=========== =========== =========== =========== ===========
Dilutive amounts per common share:
Continuing operations $ (.22) $ .24 $ (.03) $ (.07) $ (.01)
Discontinued operations -- -- -- (.09) (.09)
----------- ----------- ----------- ----------- -----------
Net income/(loss) per dilutive share $ (.22) $ .24 $ (.03) $ (.16) $ (.10)
=========== =========== =========== =========== ===========
FY 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter FY 2001
- ------------------------------------------- ----------- ----------- ----------- ----------- -----------
Revenues $ 44,735 $ 59,807 $ 47,050 $ 39,054 $ 190,646
Gross profit 4,832 11,236 6,024 5,722 27,814
Income (loss) from continuing operations (3,924) 3,525 (1,553) (2,886) (4,838)
Income (loss) from discontinued operations (15) (343) 209 (2,888) (3,037)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (3,939) $ 3,182 $ (1,344) $ (5,774) $ (7,875)
=========== =========== =========== =========== ===========
Basic amounts per common share:
Continuing operations $ (.24) .22 $ (.09) $ (.17) $ (.29)
Discontinued operations -- (.02) .01 (.18) (.19)
----------- ----------- ----------- ----------- -----------
Net income/(loss) per basic share $ (.24) .20 $ (.08) $ (.35) $ (.48)
=========== =========== =========== =========== ===========
Dilutive amounts per common share:
Continuing operations $ (.24) $ .19 $ (.09) $ (.17) $ (.29)
Discontinued operations -- (.02) .01 (.18) (.19)
----------- ----------- ----------- ----------- -----------
Net income/(loss) per dilutive share $ (.24) $ .17 $ (.08) $ (.35) $ (.48)
=========== =========== =========== =========== ===========
- 68 -
LANDEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE I
Condensed Balance Sheets
October 27, 2002 October 28, 2001
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,778 $ 12
Accounts receivable, 111 82
Inventory 68 47
Prepaid expenses and other current assets 1,342 47
--------- --------
Total current assets 5,299 188
Property, plant and equipment 3,543 3,535
Less accumulated depreciation (3,162) (3,105)
--------- --------
381 430
Other assets (principally investment in and
amounts due from wholly owned subsidiaries) 53,840 52,657
--------- --------
$ 59,520 $ 53,275
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 2,745 $ 2,536
Other liabilities 812 900
Shareholders' equity:
Preferred stock 14,461 14,049
Common stock 100,802 93,191
Accumulated Deficit (59,300) (57,401)
--------- --------
Total shareholders' equity 55,963 49,839
--------- --------
$ 59,520 $ 53,275
========= ========
- 69 -
CONDENSED STATEMENTS OF INCOME
Year Ended
--------------------------------------
October 27, October 28, October 29,
2002 2001 2000
------- ------- -------
Revenues:
Net sales and gross revenue $ 3,121 $ 825 $ 1,142
Management fees and interest income from
wholly-owned subsidiaries 3,383 3,376 3,407
------- ------- -------
6,504 4,201 4,549
Cost and expenses:
Cost of products sold -- 127 222
Research and development 1,075 712 887
Selling, general and administrative expenses 2,359 2,807 3,309
Other, net -- -- 148
------- ------- -------
3,434 3,646 4,566
------- ------- -------
Income (loss) before equity in net loss of subsidiaries 3,070 555 (17)
Equity in net loss of subsidiaries:
Equity in net loss from continuing operations
of subsidiaries (2,869) (5,393) (2,053)
Equity in net loss from discontinued of subsidiaries
Loss from discontinued operations -- (537) (14)
Loss on disposal of discontinued operations (1,688) (2,500) --
------- ------- -------
(1,686) (3,037) (14)
------- ------- -------
Equity in net loss of subsidiaries (4,557) (8,430) (2,067)
------- ------- -------
Net loss before cumulative effect of change
in accounting (1,487) (7,875) (2,084)
Cumulative effect of change in accounting
for upfront license fee revenue -- -- (1,914)
------- ------- -------
Net loss $(1,487) $(7,875) $(3,998)
======= ====== ======
Net loss $(1,487) $(7,875) $(3,998)
Dividends on series B preferred stock (412) -- --
------- ------- -------
Net loss applicable to common shareholders $(1,899) $(7,875) $(3,998)
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended
-------------------------------------
October 27, October 28, October 29,
2002 2001 2000
----------- ----------- -----------
Cash used in operating activities $(13,155) $(5,692) $(4,240)
Investing activities:
Acquisition of Apio, Inc. -- -- (6,793)
Purchases of property, plant and equipment (8) (85) (138)
Proceeds from sale of Dock Resins 9,406 -- --
Other (88) (87) 961
------- ------- -------
9,310 (172) (5,970)
Financing activities:
Proceeds from sale of common stock 7,611 636 707
Proceeds from sale of preferred stock -- 4,900 9,149
------- ------- -------
7,611 5,536 9,856
------- ------- -------
Increase (decrease) in cash $ 3,766 $ (328) $ (354)
======= ======= =======
Notes to Condensed Financial Statements
Note A - Basis of Presentation
In the parent-company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings (losses) of
subsidiaries since the date of acquisition. The Company's share of net loss of
its unconsolidated subsidiaries is included in consolidated loss using the
equity method. The parent-company-only financial statements should be read in
conjunction with the Company's consolidated financial statements.
- 70 -
LANDEC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
SCHEDULE II
Additions
Balance at charged to
beginning costs and Balance at
of period expenses Deductions end of period
--------- -------- ---------- -------------
Year ended October 29, 2000
Allowance for doubtful accounts .... $ 45 $2,885 $(1,296) $1,634
Year ended October 28, 2001
Allowance for doubtful accounts .... $1,634 $1,958 $(2,487) $1,105
Year ended October 27, 2002
Allowance for doubtful accounts .... $1,105 $1,313 $(1,172) $1,246
- 71 -
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the period July
28, 2002 to October 27, 2002. Subsequent to October 27, 2002, a report
on Form 8-K filed on November 7, 2002 reported the sale of the stock of
Dock Resins Corporation on October 24, 2002.
(c) Index of Exhibits.
2.1(6) Stock Purchase Agreement by and among the Registrant, Dock Resins
Corporation and A. Wayne Tamarelli dated as of April 18, 1997.
2.2(7) Agreement and Plan of Reorganization by and among the Registrant,
Intellicoat Corporation, Williams & Sun, Inc. (d/b/a Fielder's
Choice Hybrids) and Michael L. Williams dated as of August 20, 1997.
2.3(10) Form of Agreement and Plan Merger and Purchase Agreement by and
among the Registrant, Apio, Inc. and related companies and each of
the respective shareholders dated as of November 29, 1999.
2.4(17) Stock Purchase Agreement between Lubrizol Corporation and the
Registrant dated as of October 24, 2002.
3.1(1) Amended and Restated Bylaws of Registrant.
3.2(2) Ninth Amended and Restated Articles of Incorporation of Registrant.
3.3(12) Certificate of Determination of Series A Preferred Stock
3.4+ Certificate of Determination of Series B Preferred Stock
4.1(11) Series A Preferred Stock Purchase Agreement between the Registrant
and Frederick Frank, dated as of November 19, 1999.
4.2+ Series B Preferred Stock Purchase Agreement between the Registrant
and the Seahawk Ranch Irrevocable Trust, dated as of October 24,
2001.
10.1(3) Form of Indemnification Agreement.
10.3(4)* 1995 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.4(4)* 1995 Directors' Stock Option Plan, as amended, and form of Option
Agreement.
10.6(3) Industrial Real Estate Lease dated March 1, 1993 between the
Registrant and Wayne R. Brown & Bibbits Brown, Trustees of the Wayne
R. Brown & Bibbits Brown Living Trust dated December 30, 1987.
10.15(4)* 1996 Landec Ag Stock Option Plan and form of Option Agreements.
10.16(4)* Form of Option Agreements for the 1996 Non-Executive Stock Option
Plan, as amended.
10.17(5)* 1996 Stock Option Plan and Form of Option Agreement.
10.19(8) Technology License Agreement between Bissell Healthcare Corporation
and the Registrant, dated as of August 28, 1997.
10.22(9)* Form of Common Stock Purchase Agreement for certain officers and
directors for restricted stock purchase.
10.24(12)* Employment agreement between the Registrant and Nicholas Tompkins
dated as of November 29, 1999.
10.25(12)* Stock Option Agreement between the Registrant and Nicholas Tompkins
dated as of November 29, 1999.
10.26(12)* 1999 Apio, Inc. Stock Option Plan and form of Option Agreement.
10.27(12) Loan agreement between Apio, Inc. and the Bank of America dated as
of November 29, 1999.
10.28(13)* 2000 Apio, Inc. Stock Option Plan and form of Option Agreement
10.29(13) Loan Agreement between Landec Ag, Inc. and Old National Bank dated
as of June 5, 2000, as amended.
10.30(13)* New Executive Stock Option Plan.
10.31(5) Amendment No. 2 to the Loan Agreement between Apio, Inc. and the
Bank of America dated as of February 28, 2001.
10.32(4) Amendment No. 3 to the Loan Agreement between Apio, Inc. and the
Bank of America dated as of April 26, 2001.
10.33(14) Amendment No. 4 to the Loan Agreement between Apio, Inc. and the
Bank of America dated as of September 11, 2001.
10.34(14) Amendment No. 5 to the Loan Agreement between Apio, Inc. and the
Bank of America dated as of October 26, 2001.
10.35(14)* 1996 Non-Executive Stock Option Plan, as amended.
10.36(15) Amendement No. 6 to Loan Agreement between Apio, Inc. and the Bank
of America dated as of April 1, 2002.
10.37(16) Amendment No. 7 to Loan Agreement between Apio, Inc. and the Bank of
America dated as of May 1, 2002.
10.38+ Amendment No. 8 to Loan Agreement between Apio, Inc. and the Bank of
America dated as of August 1, 2002.
10.39+ Amendment No. 9 to Loan Agreement between Apio, Inc. and the Bank of
America dated as of October 31, 2002.
10.40+ Amendment No. 2 to the Purchase Agreement between the Registrant and
Apio, Inc. dated December 17, 2002.
21.1 Subsidiaries of the Registrant.
Subsidiary State of Incorporation
---------- ----------------------
Landec Ag (formerly Intellicoat Corporation) Delaware
Apio, Inc. Delaware
23.1+ Consent of Independent Auditors.
24.1+ Power of Attorney. See page 70.
99.1+ CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
99.2+ CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
- ----------
- 72 -
(1) Incorporated by reference to identically numbered exhibits filed with Form
10-Q for the quarter ended April 29, 2001.
(2) Incorporated by reference to Exhibit 3.5 filed with Registrant's
Registration Statement on Form S-1 (File No. 33-80723) declared effective
on February 12, 1996.
(3) Incorporated by reference to the identically numbered exhibits filed with
the Registrant's Registration Statement on Form S-1 (File No. 33-80723)
declared effective on February 12, 1996.
(4) Incorporated by reference to the identically numbered exhibits filed with
the Registrant's Form 10-K filed for the years ended October 31, 1996.
(5) Incorporated by reference to the identically numbered exhibits filed with
the Registrant's Form 10-Q filed for the quarter ended April 29, 2001.
(6) Incorporated by reference to Exhibit 2.1 filed with the Registrant's Form
8-K dated April 18, 1997.
(7) Incorporated by reference to Exhibit 2.1 filed with the Registrant's Form
10-Q for the quarter ended July 31, 1997.
(8) Incorporated by reference to the identically numbered exhibits filed with
the Registrant's Form 8-K dated August 28, 1997.
(9) Incorporated by reference to identically number exhibits filed with the
Registrant's Form 10-K filed for the year ended October 10, 1998.
(10) Incorporated by reference to the Exhibit 2.1 filed with the Registrant's
Form 8-K dated December 2, 1999.
(11) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Form 8-K dated December 2, 1999.
(12) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Form 10-K filed for the year ended October 31, 1999.
(13) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Form 10-K filed for the year ended October 29, 2000.
(14) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Form 10-K filed for the year ended October 28, 2001.
(15) Incorporated by reference to identically numbered exhibit filed with the
Registrant's Form 10-Q for the quarter ended April 28, 2002.
(16) Incorporated by reference to identically numbered exhibit filed with the
Registrant's Form 10-Q for the quarter ended July 28, 2002.
(17) Incorporated by reference to the Exhibit 2.1 filed with the Registrant's
Form 8-K dated October 24, 2002.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to item 15(c) of Form 10-K.
+ Filed herewith.
- 73 -
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Menlo Park, State of California, on January 24, 2003.
LANDEC CORPORATION
By: /s/ Gregory S. Skinner
-------------------------------------
Gregory S. Skinner
Vice President of Finance and
Administration and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Gary T. Steele and Gregory S.
Skinner, and each of them, as his attorney-in-fact, with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorney to any and all amendments to said Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons in the capacities
and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Gary T. Steele
- -----------------------------
Gary T. Steele President and Chief Executive Officer and Director January 24, 2003
(Principal Executive Officer)
/s/ Gregory S. Skinner
- -----------------------------
Gregory S. Skinner Vice President of Finance and Administration and January 24, 2003
Chief Financial Officer (Principal Financial and
Accounting Officer)
/s/ Kirby L. Cramer
- -----------------------------
Kirby L. Cramer Director January 24, 2003
/s/ Richard Dulude
- -----------------------------
Richard Dulude Director January 24, 2003
/s/ Stephen E. Halprin
- -----------------------------
Stephen E. Halprin Director January 24, 2003
/s/ Richard S. Schneider
- -----------------------------
Richard S. Schneider Director January 24, 2003
/s/ Kenneth E. Jones
- -----------------------------
Kenneth E. Jones Director January 24, 2003
- 74 -
CERTIFICATIONS
I, Gary T. Steele, certify that:
1. I have reviewed this annual report on Form 10-K of Landec Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 24, 2003
/s/ Gary T. Steele
---------------------------------------
Gary T. Steele
President and Chief Executive Officer
- 75 -
I, Gregory S. Skinner, certify that:
1. I have reviewed this annual report on Form 10-K of Landec Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 24, 2003
/s/ Gregory S. Skinner
----------------------------------------
Gregory S. Skinner
Vice President of Finance and
Administration and
Chief Financial Officer
- 76 -
EXHIBIT INDEX
Exhibit
Number Exhibit Title
------ -------------
10.38 Amendment No. 8 to Loan Agreement between Apio, Inc. and the Bank of
America dated as of August 1, 2002.
10.39 Amendment No. 9 to Loan Agreement between Apio, Inc. and the Bank of
America dated as of October 31, 2002.
10.40 Amendment No. 2 to the Purchase Agreement between the Registrant and Apio,
Inc. dated December 17, 2002
23.1 Consent of Independent Auditors
24.1 Power of Attorney. See page 70.
99.1 CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002
99.2 CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002
- 77 -
AMENDMENT NO. 8 TO
LOAN AGREEMENT
This Amendment No. 8 to Loan Agreement (this "Amendment"), dated as of
August 1, 2002, is entered into with reference to the Loan Agreement (as
amended, supplemented or otherwise modified from time to time, the "Loan
Agreement") dated as of November 29, 1999 currently among Apio, Inc., a Delaware
corporation (successor by merger and name change to Bush Acquisition
Corporation, a Delaware corporation) ("Borrower"), each lender from time to time
a party thereto (each a "Lender" and collectively, the "Lenders"), Bank of
America, N.A., as Issuing Lender, and Bank of America, N.A., as Administrative
Agent (in such capacity, the "Administrative Agent"). Capitalized terms not
otherwise defined herein shall have the meanings set forth in the Loan
Agreement. Section references herein relate to the Loan Agreement unless
otherwise stated.
The parties hereto hereby agree as follows:
1. Section 1.1 - Definition of "Revolver Termination Date". The definition
of "Revolver Termination Date" contained in Section 1.1 is hereby amended in
full to read as follows:
"Revolver Termination Date" means November 1, 2002, or such later
anniversary of such date as may be established pursuant to Section 2.6.
2. Landec Equity Contributions. Borrower hereby represents, warrants and
covenants that: (a) upon completion of the sale of Dock Resins Corporation, a
wholly owned subsidiary of Landec, which sale is anticipated to close on or
prior to October 27, 2002, Landec will make a subordinated loan to Borrower (the
"Dock Resins Subordinated Loan") in an amount sufficient to repay the
outstanding principal amount of the Term Loan plus any accrued and unpaid
interest, fees or other costs associated therewith due and owing to the Lenders
(collectively, the "Term Loan Outstandings"), which subordinated loan shall be
evidenced by a Subordinated Promissory Note (or other similar documentation) in
form and substance satisfactory to the Administrative Agent, and (b) one hundred
percent (100%) of the proceeds of the Dock Resins Subordinated Loan will be used
to repay the Term Loan Outstandings. Each of the parties hereto hereby agrees
that the Dock Resins Subordinated Loan shall (a) constitute a "Subordinated
Obligation" under the Loan Agreement and the Landec Subordination Agreement, (b)
constitute a Permitted Contribution made on the date of this Amendment for a
purpose that is hereby consented to by the Lenders and (c) for purposes of
Section 2.7(e) of the Loan Agreement, not constitute a Landec Equity
Contribution. Each of the parties hereto further agrees that the Subordinated
Promissory Note referred to above (a) constitutes a "Subordinated Obligation
Document" under the Landec Subordination Agreement and (b) that (i) the failure
of Landec to make the Dock Resins Subordinated Loan or (ii) the failure of
Borrower to repay the Term Loan Outstandings within two (2) days following the
closing of the Dock Resins Subordinated Loan, shall constitute an Event of
Default under the Loan Agreement.
-1-
3. Base Rate Margin. Effective upon satisfaction of the conditions set
forth in Section 4 of this Amendment, notwithstanding any applicable Pricing
Level with respect to any Pricing Period, the Base Rate Margin with respect to
all Revolving Loans shall be 2%.
4. Effectiveness. This Amendment shall become effective on such date (the
"Effective Date") as the Administrative Agent shall have received, in form and
substance satisfactory to the Administrative Agent and the Lenders, (a) duly
executed counterparts of this Amendment and (b) a Certificate of a Responsible
Official of Borrower certifying as to the incumbency of the Responsible Official
executing this Amendment.
5. Post-Closing Condition. Borrower hereby covenants and agrees that it
shall cause Landec and Cal Ex Trading Company to duly execute and deliver to the
Administrative Agent not later than September 9, 2002, counterparts of Annex I
attached hereto, signed by each Party thereto. Borrower further agrees that the
failure to satisfy this condition shall constitute an Event of Default under the
Loan Agreement.
6. Representations and Warranties. Except (i) for representations and
warranties which expressly relate to a particular date or which are no longer
true and correct as a result of a change permitted by the Loan Agreement or the
other Loan Documents or (ii) as disclosed by Borrower and approved in writing by
the Requisite Lenders, the Borrower hereby represents and warrants that each
representation and warranty made by Borrower in Article 4 of the Loan Agreement
(other than Sections 4.6 (first sentence), 4.11, and 4.18) are true and correct
as of the date hereof as though such representations and warranties were made on
and as of the date hereof. Without in any way limiting the foregoing, Borrower
represents and warrants to the Administrative Agent and the Lenders that no
Default or Event of Default has occurred and remains continuing or will result
from the consents, waivers, amendments or transactions set forth herein or
contemplated hereby.
7. Fees and Expenses. Borrower hereby agrees to reimburse the
Administrative Agent and the Lenders for the Administrative Agents and Lenders'
reasonable costs and expenses (including reasonable attorney's fees and
expenses) incurred in connection with the negotiation and drafting of this
Amendment and the transaction contemplated hereby together with any and all
other fees and expenses currently due and owing to the Administrative Agent
and/or the Lenders. Borrower further agrees that, commencing on the date hereof,
it shall satisfy its obligations under Section 11.3 of the Loan Agreement not
later than five (5) days after receipt of an invoice with respect thereto from
the Administrative Agent. Each of the parties hereto hereby agrees that the
failure to satisfy the requirements of this Section 8 shall constitute an Event
of Default under the Loan Agreement.
8. Amendment Fee. On the Effective Date, or as soon thereafter as may be
agreed upon by the Lenders, the Borrower shall pay to the Administrative Agent,
for the ratable accounts of the Lenders, an amendment fee of $20,000.
-2-
9. Confirmation. In all respects, the terms of the Loan Agreement and the
other Loan Documents, in each case as amended hereby or by the documents
referenced herein, are hereby confirmed.
IN WITNESS WHEREOF, Borrower, the Administrative Agent and the Lenders
have executed this Agreement as of the date first set forth above by their duly
authorized representatives.
APIO, INC., a Delaware corporation
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
BANK OF AMERICA, N.A., as Administrative
Agent, Issuing Lender and sole Lender
By:
-------------------------------------
Carol Clements, Senior Vice President
-3-
ANNEX I TO AMENDMENT NO. 8
CONSENT AND REAFFIRMATION OF GUARANTOR AND PLEDGOR
Each of the undersigned guarantors and pledgors hereby consents to the
execution, delivery and performance by Borrower and the Administrative Agent of
the foregoing Amendment No. 8 to Loan Agreement ("Amendment No. 7"). In
connection therewith, each of the undersigned expressly and knowingly reaffirms
its liability under each of the Loan Documents to which it is a Party and
expressly agrees (a) to be and remain liable under the terms of each such Loan
Document, and (b) that it has no defense, offset or counterclaim whatsoever
against the Administrative Agent or the Lenders with respect to any such Loan
Document.
Each of the undersigned further agrees that each Loan Document to which it
is a Party shall remain in full force and effect and is hereby ratified and
confirmed.
Each of the undersigned further agrees that the execution of this Consent
and Reaffirmation of Guarantor and Pledgor is not necessary for the continued
validity and enforceability of any Loan Document to which it is a Party, but is
executed to induce the Administrative Agent and the Lenders to approve of and
otherwise enter into the Amendment No. 8.
Landec hereby represents, warrants and covenants that: (a) upon completion
of the sale of Dock Resins Corporation, a wholly owned subsidiary of Landec,
which sale is anticipated to close on or prior to October 27, 2002, Landec will
make a subordinated loan to Borrower (the "Dock Resins Subordinated Loan") in an
amount sufficient to repay the outstanding principal amount of the Term Loan
plus any accrued and unpaid interest, fees or other costs associated therewith
due and owing to the Lenders (collectively, the "Term Loan Outstandings"), which
subordinated loan shall be evidenced by a Subordinated Promissory Note (or
similar documentation) in form and substance satisfactory to the Administrative
Agent, and (b) Landec will cause Borrower to use one hundred percent (100%) of
the proceeds of the Dock Resins Subordinated Loan to repay the Term Loan
Outstandings. Landec hereby agrees that the Dock Resins Subordinated Loan shall
(a) constitute a "Subordinated Obligation" under the Loan Agreement and the
Landec Subordination Agreement, (b) constitute a Permitted Contribution made on
the date of this Amendment for a purpose that is hereby consented to by the
Lenders and (c) for purposes of Section 2.7(e) of the Loan Agreement, not
constitute a Landec Equity Contribution. Landec further agrees that the
Subordinated Promissory Note referred to above (a) constitutes a "Subordinated
Obligation Document" under the Landec Subordination Agreement and (b) that (i)
the failure of Landec to make the Dock Resins Subordinated Loan or (ii) the
failure of Borrower to repay the Term Loan Outstandings within two (2) days
following the closing of the Dock Resins Subordinated Loan, shall constitute an
Event of Default under the Loan Agreement and the Loan Documents.
I - 1
IN WITNESS WHEREOF, each of the undersigned, intending to be legally bound
hereby, has caused this Consent and Reaffirmation of Guarantor and Pledgor to be
executed as of September __, 2002.
LANDEC CORPORATION,
a California corporation
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
CAL EX TRADING COMPANY,
a California corporation
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
I - 2
AMENDMENT NO. 9 TO
LOAN AGREEMENT
This Amendment No. 9 to Loan Agreement (this "Amendment"), dated as of
October 31, 2002, is entered into with reference to the Loan Agreement (as
amended, supplemented or otherwise modified from time to time, the "Loan
Agreement") dated as of November 29, 1999 currently among Apio, Inc., a Delaware
corporation (successor by merger and name change to Bush Acquisition
Corporation, a Delaware corporation) ("Borrower"), each lender from time to time
a party thereto (each a "Lender" and collectively, the "Lenders"), Bank of
America, N.A., as Issuing Lender, and Bank of America, N.A., as Administrative
Agent (in such capacity, the "Administrative Agent"). Capitalized terms not
otherwise defined herein shall have the meanings set forth in the Loan
Agreement. Section references herein relate to the Loan Agreement unless
otherwise stated.
The parties hereto hereby agree as follows:
1. Section 1.1 - Definition of "Revolver Termination Date". The definition
of "Revolver Termination Date" contained in Section 1.1 is hereby amended in
full to read as follows:
"Revolver Termination Date" means February 1, 2003, or such later
anniversary of such date as may be established pursuant to Section 2.6.
2. Base Rate Margin. As of the Effective Date, notwithstanding the
applicable Pricing Level with respect to any Pricing Period, the Base Rate
Margin with respect to all Revolving Loans shall be 1.75%.
3. Effectiveness. This Amendment shall become effective on such date (the
"Effective Date") as the Administrative Agent shall have received, in form and
substance satisfactory to the Administrative Agent and the Lenders, (a) duly
executed counterparts of this Amendment, (b) a duly executed counterparts of
Annex I attached hereto, signed by each Party thereto, and (c) an Incumbency
Certificate of Borrower together with such authorizing resolutions of Borrower
as the Administrative Agent shall reasonably request, each in form and substance
satisfactory to the Administrative Agent.
4. Representations and Warranties. Except (i) for representations and
warranties which expressly relate to a particular date or which are no longer
true and correct as a result of a change permitted by the Loan Agreement or the
other Loan Documents or (ii) as disclosed by Borrower and approved in writing by
the Requisite Lenders, the Borrower hereby represents and warrants that each
representation and warranty made by Borrower in Article 4 of the Loan Agreement
(other than Sections 4.6 (first sentence), 4.11, and 4.18) are true and correct
as of the date hereof as though such representations and warranties were made on
and as of the date hereof. Without in any way limiting the foregoing, Borrower
represents and warrants to the Administrative Agent and the Lenders that no
Default or Event
-1-
of Default has occurred and remains continuing or will result from the consents,
waivers, amendments or transactions set forth herein or contemplated hereby.
5. Fees and Expenses. Borrower hereby agrees to reimburse the
Administrative Agent and the Lenders for the Administrative Agents and Lenders'
reasonable costs and expenses (including reasonable attorney's fees and
expenses) incurred in connection with the negotiation and drafting of this
Amendment and the transaction contemplated hereby together with any and all
other fees and expenses currently due and owing to the Administrative Agent
and/or the Lenders. Borrower further agrees that, commencing on the date hereof,
it shall satisfy its obligations under Section 11.3 of the Loan Agreement not
later than five (5) days after receipt of an invoice with respect thereto from
the Administrative Agent. Each of the parties hereto hereby agrees that the
failure to satisfy the requirements of this Section 8 shall constitute an Event
of Default under the Loan Agreement.
6. Confirmation. In all respects, the terms of the Loan Agreement and the
other Loan Documents, in each case as amended hereby or by the documents
referenced herein, are hereby confirmed.
[THIS SPACE INTENTIONALLY LEFT BLANK -
SIGNATURE PAGE TO FOLLOW]
-2-
IN WITNESS WHEREOF, Borrower, the Administrative Agent and the Lenders
have executed this Agreement as of the date first set forth above by their duly
authorized representatives.
APIO, INC., a Delaware corporation
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
BANK OF AMERICA, N.A., as Administrative Agent,
Issuing Lender and sole Lender
By:
-------------------------------------
Carol Clements, Senior Vice President
S - 1
ANNEX I TO AMENDMENT NO. 9
CONSENT AND REAFFIRMATION OF GUARANTOR AND PLEDGOR
Each of the undersigned guarantors and pledgors hereby consents to the
execution, delivery and performance by Borrower and the Administrative Agent of
the foregoing Amendment No. 9 to Loan Agreement ("Amendment No. 9"). In
connection therewith, each of the undersigned expressly and knowingly reaffirms
its liability under each of the Loan Documents to which it is a Party and
expressly agrees (a) to be and remain liable under the terms of each such Loan
Document, and (b) that it has no defense, offset or counterclaim whatsoever
against the Administrative Agent or the Lenders with respect to any such Loan
Document.
Each of the undersigned further agrees that each Loan Document to which it
is a Party shall remain in full force and effect and is hereby ratified and
confirmed.
Each of the undersigned further agrees that the execution of this Consent
and Reaffirmation of Guarantor and Pledgor is not necessary for the continued
validity and enforceability of any Loan Document to which it is a Party, but is
executed to induce the Administrative Agent and the Lenders to approve of and
otherwise enter into the Amendment No. 9.
IN WITNESS WHEREOF, each of the undersigned, intending to be legally bound
hereby, has caused this Consent and Reaffirmation of Guarantor and Pledgor to be
executed as of October 31, 2002.
LANDEC CORPORATION,
a California corporation
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
CAL EX TRADING COMPANY,
a California corporation
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
I - 1
SECOND AMENDMENT AND WAIVER
This Second Amendment and Waiver (the "Second Amendment") is entered into
as of December 17, 2002, between Landec Corporation (the "Company"), Apio, Inc.
("Apio"), the Target Companies' Representative (as defined in the Agreement) and
Nicholas Tompkins and Kathleen Tompkins (collectively, the "Tompkins").
RECITALS
A. The parties hereto are each party to that certain Agreement and Plan of
Merger and Purchase Agreement, dated November 29, 1999, as amended (the
"Agreement");
B. On October 26, 2001, the parties hereto entered into an Amendment and
Waiver deferring the payment of the Earn-Out Amount (as defined below) to the
Tompkins to October 28, 2002 (the "First Amendment");
C. As of October 28, 2002, pursuant to Sections 2.5(e) and 13.11 of the
Agreement and Section 4 of the First Amendment, Apio and the Company were
obligated to pay the Tompkins the principal amount of $4,091,762 plus accrued
interest in the amount of $279,287 in Earn-Out Consideration for the First
Earn-Out Period (collectively, the "Earn-Out Amount");
D. As of the date hereof, neither Apio nor the Company have paid the
Tompkins the Earn-Out Amount;
E. Prior to the date hereof, Nicholas Tompkins issued a promissory note
(the "Tompkins Note") for the benefit of Apio due in full on December 31, 2002.
As of December 31, 2002, the total principal amount plus interest due under the
Tompkins Note will be $749,114 (the "Tompkins Note Amount"); and
F. The parties hereto desire to (i) pursuant to Section 13.1 of the
Agreement, amend the Agreement to offset the amounts owed to each other pursuant
to the Tompkins Note Amount and the Earn-Out Amount, (ii) provide for the
payment by Apio and the Company to the Tompkins of the net amount of such
payments pursuant to the terms herein, and (iii) cancel the Tompkins Note.
AGREEMENT
In consideration of the foregoing and of the mutual consideration
contained herein, the parties hereby agree as follows:
1. Initial Payment. Immediately upon the execution of this Second
Amendment by all of the parties hereto, the Company shall transfer $1,000,000 to
the Tompkins via wire transfer.
2. Offset.
(a) The Company, Apio and the Tompkins each hereby agree to set off
the amounts owed to each other pursuant to the Tompkins Note Amount and the
Earn-Out Amount
effective as of January 2, 2003, and that as a result of such set off the
Tompkins shall have no further payment obligations to Apio under the Tompkins
Note and the sole remaining payment obligation of Apio and the Company under the
Earn-Out Amount to the Tompkins shall initially be reduced to $2,621,935 (the
"Amount Due") and subject to further reduction as set forth in Section 2(b)
below.
(b) In the event that at any time after the date hereof, Apio or the
Company make any voluntary payments not otherwise required under Section 3 to
the Tompkins, the Amount Due shall automatically be reduced by the amount of
such payment amount (each a "Payment Credit") and such Payment Credit shall be
applied to satisfy the next payment(s) due by Apio or the Company pursuant to
the Payment Schedule, after the date of such payment creating the Payment
Credit.
3. Additional Payments to the Tompkins. The Company and Apio hereby agree
to pay the Tompkins the Amount Due (plus any accrued interest required to be
paid pursuant to Section 4 herein and less any Payment Credit applied pursuant
to Section 2(b) above) in accordance with the following payment schedule (the
"Payment Schedule"):
(a) Balance Sheet Adjustment Payment. Within three (3) business days of
the Company receiving amounts owed to it by The Lubrizol Corporation
("Lubrizol") pursuant to Section 1.3(d) of the Stock Purchase
Agreement, dated as of October 24, 2002, by and between the Company
and Lubrizol (the "Balance Sheet Adjustment Funds"), the Company
shall transfer all of the Balance Sheet Adjustment Funds to the
Tompkins via wire transfer.
(b) Remediation Trust Fund Payment. Within three (3) business days of
the Company's receipt, pursuant to Article II, Section 11 of the
Remediation Agreement (as defined below), of all amounts remaining
in the remediation trust fund (the "Remediation Funds") established
pursuant to the Remediation Agreement, dated as of October 18, 2002,
by and among the Company, Dock Resins Corporation and the New Jersey
Department of Environmental Protection (the "Remediation Agreement")
and the Remediation Trust Fund Agreement, dated as of October 18,
2002, by and between the Company and Wells Fargo Bank Minnesota,
N.A., the Company shall transfer all Remediation Funds to the
Tompkins via wire transfer.
(c) General Payments. Apio shall pay $150,000 to the Tompkins on the
first day of each month during the period beginning May 1, 2003 and
ending on February 1, 2004. For the avoidance of doubt, ten (10)
payments shall be made to the Tompkins under this Section 3(c) in
the aggregate amount of $1,500,000. Notwithstanding anything to the
contrary set forth herein, in no event shall the total amounts paid
by the Company and Apio to the Tompkins pursuant to this Section 3
exceed the total Amount Due less the amount of any Payment Credit.
2
(d) Remaining Payment. In the event that any Amount Due plus interest is
still outstanding on February 27, 2004, the Company and/or Apio
shall transfer such amount on such date to the Tompkins via wire
transfer.
4. Interest. In the event that all payments required in Section 3(c)
hereof are made by Apio in accordance with the Payment Schedule, the Tompkins
shall accrue simple interest on the Amount Due still outstanding at the rate of
eight percent (8%) per annum from January 15, 2003 to the date that the Amount
Due is paid in full; provided however, in the event that any payment required
pursuant Section 3(c) hereof is not made in accordance with the Payment
Schedule, the Tompkins shall accrue interest on the Amount Due still outstanding
at the rate of ten percent (10%) per annum from such date until such time as
such payment is paid in full, and provided further, that in the event that Apio
fails to make three (3) or more consecutive payments to the Tompkins as required
in Section 3(c) hereof, the Tompkins shall accrue interest on the Amount Due
still outstanding at the rate of twelve percent (12%) per annum from the date
such third payment was due until such time as all of such overdue payments have
been paid in full.
5. Deferred Payment and Interest. During the period beginning on October
29, 2002 and ending on the date preceding the date hereof, the Tompkins hereby
waive (a) any obligation of Apio or the Company to pay them the Amount Due, and
(b) any right to receive or accrue any interest on the outstanding Amount Due.
6. Cancellation of Tompkins Note. The Tompkins Note shall be cancelled in
its entirety on January 2, 2002 after application of the offset referenced in
Section 2(a). Apio shall at such time mark the Tompkins Note "Cancelled" and
promptly return it to the Tompkins.
7. Acceleration of Amount Due.
(a) The Amount Due shall be automatically accelerated and payable in
full if either the Company or Apio shall file, have filed against it
or consent to the filing of any case, petition or proceeding under
any bankruptcy, insolvency or reorganization statute or law or make
any assignment for the benefit of all or any substantial portion of
its creditors.
(b) The Amount Due shall, at the option of the Tompkins upon notice to
Apio, be accelerated and payable in full in the event that (i) Apio
or the Company sell all or substantially all of their assets or
merge with or into any other entity, (ii) more than 50% of the
outstanding stock of Apio becomes owned by any person or entity
other than the Company, or (iii) any person or entity acquires more
than 50% of the outstanding stock of the Company.
8. No Liens. Except as set forth below, until the Amount Due is paid in
full, neither the Company nor Apio shall affirmatively grant to any person or
entity any security interest, mortgage, deed of trust, pledge or other lien
(collectively, "Lien") on any of Apio's properties or assets. Notwithstanding
the foregoing, the Company or Apio may grant Liens on any of Apio's properties
or assets in connection with the incurrence of any of the following:
3
(a) any existing debt obligation, capital lease obligation, equipment
line or other credit facility ("Existing Facilities") of Apio;
(b) any replacement of an Existing Facility of Apio;
(c) any new equipment line for Apio; or
(d) up to $3,000,000 in new debt obligations, capital lease obligations
or other credit facilities of Apio.
9. Effect of First Amendment. The First Amendment is hereby superseded by
this Second Amendment.
[Signature Page Follows]
4
This Second Amendment and Waiver has been duly executed and delivered by
the duly authorized officers of the Target Companies' Representative, the
Company and Apio as of the date written below.
Dated :____________________
LANDEC CORPORATION
----------------------------------------
Gary T. Steele, President & CEO
APIO, INC.
----------------------------------------
John Jackson, Chief Financial Officer
TARGET COMPANIES'
REPRESENTATIVE:
----------------------------------------
Nicholas Tompkins
TOMPKINS:
----------------------------------------
Nicholas Tompkins
----------------------------------------
Kathleen Tompkins
Exhibits
1. First Amendment
2. Tompkins Note
Exhibit
First Amendment
AMENDMENT AND WAIVER
This Amendment and Waiver (the "Waiver") was entered into on the date set
forth below, between Landec Corporation (the "Company"), Apio, Inc. ("Apio"),
the Target Companies' Representative (as defined in the Agreement) and Nicholas
Tompkins and Kathleen Tompkins (the "Tompkins").
RECITALS
A. The parties hereto are each party to that certain Agreement and Plan of
Merger and Purchase Agreement, dated November 29, 1999, as amended (the
"Agreement");
B. On March 1, 2001, pursuant to Section 2.5(e) of the Agreement, Apio was
obligated to pay the Tompkins $4,091,762 in Earn-Out Consideration for the First
Earn-Out Period (the "Earn-Out Amount");
C. As of the date hereof, Apio has not paid the Tompkins the Earn-Out
Amount;
D. Pursuant to Section 13.1 of the Agreement, the parties hereto desire to
amend the Agreement to provide for the payment of the Earn-Out Amount to the
Tompkins as set forth herein.
AGREEMENT
In consideration of the foregoing and of the mutual consideration
contained herein, the parties hereby agree as follows:
1. Definitions. Terms not otherwise defined herein, shall have the meaning
set forth in the Agreement.
2. Earned Interest. In consideration of the delay in payment of the
Earn-Out Amount during the period beginning on March 1, 2001 and ending on
October 28, 2001, the Tompkins shall have earned accrued interest on the
Earn-Out Amount at a rate of 10% per annum, equal in the aggregate to $279,287
("Earned Interest Amount"). The Earned Interest Amount plus the Earn-Out Amount,
equal to $4,371,049, shall be referred to herein as the ("Amount Due").
3. Deferred Payment and Interest. During the period beginning on October
29, 2001 and ending on October 27, 2002 (the "Waiver Period"), the Tompkins
hereby waive (i) any obligation of Apio to pay them the Amount Due, and (ii) any
right to receive or accrue any interest on the outstanding Amount Due.
4. Post-Waiver Period. Apio shall pay the Tompkins the Amount Due on or
before October 28, 2002; provided, however, that if Apio does not pay the full
Amount Due by such
date, the Tompkins shall accrue interest on any of the Amount Due still
outstanding at the rate of 10% per annum from such date until payment thereof.
This Waiver has been duly executed and delivered by the duly authorized
officers of the Target Companies' Representative, the Company and Apio as of the
date written below.
Dated :____________________
LANDEC CORPORATION
----------------------------------------
Gary T. Steele, President & CEO
APIO, INC.
----------------------------------------
Nicholas Tompkins, President
TARGET COMPANIES'
REPRESENTATIVE:
----------------------------------------
Nicholas Tompkins
----------------------------------------
Nicholas Tompkins
----------------------------------------
Kathleen Tompkins
Exhibit
Tompkins Note
SECURED PROMISSORY NOTE
Date: May 1, 2002
For value received, the borrower described below (the "BORROWER"),
promises to pay to the order of APIO, INC. (the "LENDER"), the principal amount
of all advances (the "ADVANCES") made by the LENDER to the BORROWER on the crops
(the "CROPS") to be delivered by the BORROWER to the LENDER pursuant to the
FARMER AGREEMENT referred to below, together with interest on the aggregate
unpaid principal amount of the ADVANCES at the Reference Rate of Bank of America
or the maximum rate permitted by law, whichever is less, from the date the
ADVANCES are made until the date the ADVANCES are paid. Payments of principal
and interest shall be made as provided herein, but in any event, all principal
and interest due hereunder shall be paid no later than December 31, 2002, and
shall be paid in lawful money of the United States in immediately available
funds at the LENDER's office at 4575 W. Main Street, P.O. Box 627, Guadalupe, CA
93434, or at such other address as the LENDER may notify the BORROWER in
writing.
The ADVANCES on the CROPS shall be made by the LENDER to the
BORROWER in accordance with the Projected Schedule of Advances attached hereto
as Exhibit "A", or as Exhibit "A" may be amended from time to time by written
amendment attached hereto. The LENDER shall at all times keep an account of the
date and amount of all ADVANCES made to the BORROWER, which in no event shall
exceed the total amount of Seven hundred thirty one thousand dollars
($731,000.00). Under no circumstances shall Lender be required to make any of
the advances described in Exhibit "A" if Borrower is in default or has otherwise
failed to perform, under the terms of the Farmer Agreement, dated the date
hereof, between the Lender and Borrower.
The LENDER shall subtract and retain the amounts agreed to be paid
by the BORROWER to the LENDER, or any part of those sums, from the proceeds (the
"PROCEEDS") due the BORROWER from the LENDER under the terms of that certain
Farmer Agreement and/or Harvesting and Farmer Agreement, dated the date hereof,
by and between the LENDER and the BORROWER, as the same may be extended,
amended, or replaced by any successor agreement from time to time (collectively,
the "FARMER AGREEMENT"), as provided below. PROVIDED, HOWEVER, if the LENDER
shall determine, in its sole discretion, that such deductions from the PROCEEDS
will be insufficient to return to the LENDER the total principal and interest
due hereunder by October 25, 2002 the LENDER may, but shall not be obligated to,
deduct additional amounts from the PROCEEDS until all principal and interest due
hereunder has been paid.
Each payment made by the BORROWER, or deducted from the PROCEEDS due
to the BORROWER under the FARMER AGREEMENT, shall be credited first on interest
then due and the remainder on principal; and interest shall thereupon cease upon
the principal credited. Should interest not be paid when due, it shall
thereafter bear like interest as the principal, but such unpaid interest so
compounded shall not exceed an amount equal to simple interest on the unpaid
principal at the maximum rate permitted by law.
The BORROWER may at its election prepay without penalty all or any
part of the principal hereof at any time or from time to time.
All agreements, covenants, conditions, and provisions of this
Secured Promissory Note shall be binding upon and inure to the benefit of the
successors and assigns of each of the parties hereto.
The BORROWER hereby waives diligence, presentment, protest, and
demand, notice of protest, dishonor, and nonpayment of this Secured Promissory
Note, and expressly agrees that, without in any way affecting the liability of
the BORROWER hereunder, LENDER or any holder hereof may extend the time for
payment, accept additional security, release any payment due hereunder, release
any party liable hereunder, and release any security hereafter securing this
Secured Promissory Note. The BORROWER further waives, to the full extent
permitted by law, the right to plead any and all statutes of limitation as a
defense to any demand on this Secured Promissory Note.
This Secured Promissory Note is entitled to the benefit of the
Security Agreement between the LENDER and the BORROWER. Reference is made to the
Security Agreement for provisions regarding the acceleration of the maturity of
this Secured Promissory Note.
The BORROWER agrees that the ADVANCES made by the LENDER to BORROWER
shall only be used for purposes relating to the CROPS to be delivered to LENDER
pursuant to the Farmer Agreement and shall not be used for personal, family, or
household purposes.
Each and every right, remedy, and power hereby granted to the LENDER
or allowed the LENDER by law or other agreement shall be cumulative and not
exclusive the one over the other, and may be exercised by the LENDER from time
to time.
The LENDER shall not be deemed to have waived any of its rights
hereunder or under any other agreement, instrument, or document signed by the
BORROWER or any endorser, unless such waiver is in writing and signed by the
LENDER.
This Secured Promissory Note can be modified or rescinded only by a
writing expressly referring to the Secured Promissory Note and signed by the
parties hereto.
No provision of this Secured Promissory Note or any other agreement
between LENDER and BORROWER shall alter or impair the obligation of BORROWER,
which is absolute and unconditional, to pay the principal of and interest on
this Secured Promissory Note, at the place, at the respective times, and in the
currency herein prescribed.
Every provision of this Secured Promissory Note is intended to be
severable. In the event any term or provision hereof is declared to be illegal
or invalid for any reason whatsoever by a court of competent jurisdiction, such
illegality or invalidity shall not affect the balance of the terms and
provisions hereof, which terms and provisions shall remain binding and
enforceable.
If an action is instituted on this Secured Promissory Note, the
BORROWER promises to pay all costs of enforcement and collection, including, but
not limited to, reasonable attorney's fees, as well as all other costs and
expenses incurred by the holder in the enforcement of its rights under this
Secured Promissory Note, whether such enforcement and collection includes the
filing of a lawsuit.
This Secured Promissory Note shall be construed and enforced in
accordance with, and governed by, the laws of the State of California.
"BORROWER" Nick Tompkins Farms
- -----------------------------------
Title:_____________________________
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Nos. 333-89368, 333-62866, 333-06163, 333-29103, 333-80313, 333-52339 and
Form S3 Nos. 333-95531 and 333-86736) pertaining to the Non-Plan Stock Option,
1996 Stock Option Plan, New Executive Stock Option Plan, 1995 Employee Stock
Purchase Plan, 1995 Directors' Stock Option Plan, 1996 Stock Option Plan, 1996
Non-Executive Stock Option Plan, 1988 Incentive Stock Option Plan and pertaining
to shares of common stock issued to selling shareholders of Apio, Inc., an
individual investor and private placement of common stock, of our report dated
December 17, 2002, with respect to the consolidated financial statements and
schedules of Landec Corporation included in the Annual Report (Form 10-K) for
the year ended October 27, 2002.
/s/ Ernst & Young LLP
San Jose, California
January 20, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Landec Corporation (the "Company")
on Form 10-K for the period ending October 27, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Gary T. Steele,
Chief Executive Officer and President of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: January 24, 2003
/s/ Gary T. Steele
----------------------------------------
Gary T. Steele
Chief Executive Officer and President
(Principal Executive Officer)
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Landec Corporation (the "Company")
on Form 10-K for the period ending October 27, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Gregory S.
Skinner, Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: January 24, 2003
/s/ Gregory S. Skinner
----------------------------------------
Gregory S. Skinner
Vice President and
Chief Financial Officer
(Principal Accounting Officer)