UNITED
STATES
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
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For
the
Fiscal Year Ended May 27, 2007, or
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
Transition period for _________ to _________.
Commission
file number: 0-27446
LANDEC
CORPORATION
(Exact
name of registrant as specified in its charter)
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California
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94-3025618
|
|
(State
or other jurisdiction of
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(IRS
Employer
|
|
incorporation
or organization)
|
Identification
Number)
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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:
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Title
of each class
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Name
of each exchange on which registered
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|
Common
Stock
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The
NASDAQ Stock Market, Inc.
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Act 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 o
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. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and
large
accelerated filer” in Rule 12b-2 of the Act.
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Large
Accelerated Filer o
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Accelerated
Filer x
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Non
Accelerated Filer o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o
No
x
The
aggregate market value of voting stock held by non-affiliates of the Registrant
was approximately $209,754,000 as of November 26, 2006, the last business day
of
the registrant’s most recently completed second fiscal quarter,
based
upon the closing sales price on The NASDAQ Global Select Market reported for
such date. Shares of Common Stock held by each officer and director and by
each
person who owns 10% or more of the outstanding Common Stock have been excluded
from such 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
July
13,
2007,
there were 25,904,212 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to its October 2007
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.
-2-
LANDEC
CORPORATION
ANNUAL
REPORT ON FORM 10-K
TABLE
OF
CONTENTS
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Item
No.
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Description
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Page
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Part
I
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1.
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Business
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4
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1A.
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Risk
Factors
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15
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1B.
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Unresolved
Staff Comments
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21
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2.
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Properties
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22
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3.
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Legal
Proceedings
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22
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4.
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Submission
of Matters to a Vote of Security Holders
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22
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Part
II
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5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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23
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6.
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Selected
Financial Data
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24
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7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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26
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7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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39
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8.
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Financial
Statements and Supplementary Data
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39
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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39
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9A.
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Controls
and Procedures
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40
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9B.
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Other
Information
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41
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Part
III
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10.
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Directors
and Executive Officers of the Registrant
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42
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11.
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Executive
Compensation
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42
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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42
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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42
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14.
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Principal
Accountant Fees and Services
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42
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Part
IV
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15.
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Exhibits
and Financial Statement Schedules
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43
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-3-
PART
I
Item
1. Business
This
report contains forward-looking statements within the meaning of 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 assumptions made by our
management and 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 Item 1A. “Risk
Factors” and
the
factors discussed 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. The Company’s proprietary polymer technology is the foundation,
and a key differentiating advantage, upon which Landec has built its
business.
The
principal products and services offered by the Company in its two historical
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 2005, 2006 and 2007 is
summarized in Note 15 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 1999 when the Company acquired Apio, Inc. and
certain related entities (collectively “Apio”).
Landec’s
Agricultural Seed Technology business is operated through a subsidiary, Landec
Ag, Inc. (“Landec Ag”) which, prior to the sale of Fielder’s Choice Direct
(“FCD”) on December 1, 2006 to American Seeds, Inc. (ASI), a wholly owned
subsidiary of Monsanto Company (“Monsanto”), (see Note 2 to the Consolidated
Financial Statements), combined the Company’s proprietary Intellicoat® seed
coating technology with FCD’s unique direct marketing and sales
capabilities.
In
addition to its two historical core businesses, the Company also operates a
Technology Licensing business that licenses products to, and conducts joint
research and development with industry leaders outside of Landec’s core
businesses, such as Air Products and Chemicals, Inc. (“Air Products”). The
Company also engages in research and development activities and supplies
products based on its Intelimer® polymer technology to companies such as
Akzo-Nobel Chemicals B.V. (“Akzo-Nobel”) and L’Oreal of Paris (“L’Oreal”) (these
supply activities are included in the technology fields licensed to Air
Products). For segment disclosure purposes, the Technology Licensing business
is
included in Corporate and Other in Note 15 to the Consolidated Financial
Statements.
The
Company's core polymer products are based on its patented proprietary Intelimer
polymers, which differ from other polymers in that they can be customized to
abruptly change their physical characteristics when heated or cooled through
a
pre-set temperature switch. For instance, Intelimer polymers can change within
the range of one or two degrees Celsius from a non-adhesive state to a highly
tacky, adhesive state; from an impermeable state to a highly permeable state;
or
from a solid state to a viscous 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.
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 Global
Select Market under the symbol “LNDC”.
-4-
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 50 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°C
to
2°C.
These
changes can be designed to occur at relatively low temperatures (0°C
to
100°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.
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°C
to
100°C
by
varying the length of the side chains. The reversible transitions between
crystalline and amorphous states are illustrated in Figure 2
below.
-5-
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 coconut
and
palm oils that are highly purified and designed to be manufactured economically
through known synthetic 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
synthetic process. Intelimer materials can be made into many different forms,
including films, coatings, microcapsules and discrete forms.
Description
of Core Business
The
Company has historically participated in two core business segments- Food
Products Technology and Agricultural Seed Technology. In addition to these
two
core segments, Landec licenses technology and conducts ongoing research and
development and supplies materials through its Technology Licensing
business.
-6-
Food
Products Technology Business
The
Company began marketing its proprietary Intelimer-based BreatheWay® membranes in
1996 for use in the fresh-cut produce packaging market, one of the fastest
growing segments in the produce industry. Landec’s proprietary BreatheWay packaging
technology when combined with fresh-cut or whole produce results in packaged
produce with increased shelf life and reduced shrink (waste) without the need
for ice during the distribution cycle. The resulting products are referred
to as
“value-added” products. In 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 utilizes state-of-the-art fresh-cut produce processing
technology and year-round access to specialty packaged produce products which
Apio distributes to the top U.S. retail grocery chains, major club stores and
to
the foodservice industry. The Company’s proprietary BreatheWay packaging
business has been combined with Apio into a 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: Proprietary
BreatheWay Packaging Technology
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 proprietary BreatheWay
packaging technology extends 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. The total U.S. fresh produce market is estimated to be
between $100 to $120 billion. Of this, U.S. retail sales of fresh-cut produce
is
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 International Fresh-Cut
Produce Association, the fresh-cut produce market is one of the highest growth
areas in retail grocery stores.
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 fruit 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 fruit, 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 fruit 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 fruit such as broccoli,
cauliflower, asparagus, papayas, bananas and berries will require a more
versatile and sophisticated packaging solution for which the Company’s
BreatheWay
packaging technology
was
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, and 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
fresh-cut and whole produce — a challenge few current packaging films can
compensate for. The Company believes that its temperature-responsive
BreatheWay
packaging technology
is well suited to the challenges of the produce distribution
process.
-7-
Using
its
Intelimer polymer technology, Landec has developed packaging technology that
it
believes addresses 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:
|
·
|
High
Permeability.
Landec's BreatheWay
packaging technology
is
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.
|
|
·
|
Ability
to Adjust Oxygen and Carbon Dioxide Permeability. BreatheWay
packaging 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.
|
|
·
|
Temperature
Responsiveness.
Landec has developed breathable membranes that can be designed to
increase
or decrease 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 BreatheWay
packaging technology
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 club store, retail grocery chain and foodservice
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 BreatheWay
packaging
through
selected qualified contract manufacturers. In addition to using BreatheWay
packaging for its value-added produce business, the Company markets and sells
BreatheWay
packaging
directly
to food distributors.
The
Business: Apio, Inc.
Apio
had
revenues of approximately $206 million for the fiscal year ended May 27, 2007,
$195 million for the fiscal year ended May 28, 2006 and $179 million for the
fiscal year ended May 29, 2005.
Based
in
Guadalupe, California, Apio, when acquired in 1999, consisted of two major
businesses - first, the “fee-for-service” selling and marketing of whole produce
and second, the specialty packaged fresh-cut and whole value-added processed
products that are washed and packaged in our proprietary BreatheWay packaging.
The “fee-for-service” business historically included field harvesting and
packing, cooling and marketing of vegetables and fruit on a contract basis
for
growers in California’s Santa Maria, San Joaquin and Imperial Valleys as well as
in Arizona and Mexico. The Company exited this business and certain assets
associated with the business were sold in June 2003 to Beachside
Produce, LLC.
Beachside Produce is owned by a group of entities and persons that supply
produce to Apio, including Nicholas Tompkins, Apio’s President and Chief
Executive Officer. Under the terms of the sale, Beachside Produce purchased
certain equipment and carton inventory from Apio in exchange for approximately
$410,000. In connection with the sale, Beachside Produce has paid Apio royalty
fees per carton sold for the use of Apio’s brand names and Beachside Produce and
its owner growers entered into a long-term supply agreement with Apio to supply
produce to Apio for its fresh-cut value-added business. The
fresh-cut value-added processed products business markets a variety of fresh-cut
and whole vegetables to the top retail grocery chains, club stores and
foodservice suppliers. During the fiscal year ended May 27, 2007, Apio shipped
nearly seventeen million cartons of produce to leading supermarket retailers,
wholesalers, foodservice suppliers and club stores throughout the United States
and internationally, primarily in Asia.
-8-
There
are
five major distinguishing characteristics of Apio that provide competitive
advantages in the Food Products Technology market:
|
·
|
Value-Added
Supplier:
Apio has structured its business as a marketer and seller of fresh-cut
and
whole value-added produce. It is focused on selling products under
its Eat
Smart® brand and other brands for its fresh-cut and whole value-added
products. As retail grocery and club store chains consolidate, Apio
is
well positioned as a single source of a broad range of products.
|
|
·
|
Reduced
Farming Risks:
Apio reduces its farming risk by not taking ownership of farmland,
and
instead, contracts with growers for produce. The year-round sourcing
of
produce is a key component to the fresh-cut and whole value-added
processing business.
|
|
·
|
Lower
Cost Structure:
Apio has strategically invested in the rapidly growing fresh-cut
and whole
value-added business. Apio’s 96,000 square foot value-added processing
plant, which was recently expanded from 60,000 square feet, is automated
with state-of-the-art vegetable processing equipment. Virtually all
of
Apio’s value-added products utilize Apio’s proprietary BreatheWay
packaging technology.
Apio’s strategy is to operate one large central processing facility in
one
of California’s largest, lowest cost growing regions (Santa Maria Valley)
and use packaging technology to allow for the nationwide delivery
of fresh
produce products.
|
|
·
|
Export
Capability:
Apio is uniquely positioned to benefit from the growth in export
sales to
Asia and Europe over the next decade with its export business, Cal-Ex.
Through Cal-Ex, Apio is currently one of the largest U.S. exporters
of
broccoli to Asia and is selling its iceless products to Asia
using
proprietary BreatheWay packaging
technology.
|
|
·
|
Expanded
Product Line Using Technology:
Apio, through the use of its BreatheWay
packaging technology,
is introducing on average fifteen new value-added products each year.
These new product offerings range from various sizes of fresh-cut
bagged
products, to vegetable trays, to whole produce, to a meal line of
products. During fiscal year 2007, Apio introduced 15 new
products.
|
Apio
established its Apio Tech division in 2005 to advance the sales of BreatheWay
packaging technology for shelf-life sensitive vegetables and fruit, including
unique packaging solutions for produce in large packages including shipping
and
pallet-sized containers.
For
the
past eleven years, the Company has marketed its Eat Smart fresh-cut bagged
vegetables, trays and iceless products using its BreatheWay packaging technology
and has now expanded its technology to include packaging for bananas. In
September 2004, Apio entered into an agreement with Chiquita Brands
International, Inc. (“Chiquita”) whereby Apio supplies Chiquita with its
proprietary banana packaging technology on a worldwide basis for the ripening,
conservation and shelf-life extension of bananas in selective applications
on an
exclusive basis and for other applications on a non-exclusive basis. In
addition, Apio provides Chiquita with ongoing research and development and
process technology support for the BreatheWay membranes and bags, and technical
service support throughout the customer chain in order to assist in the
development and market acceptance of the technology.
For
its
part, Chiquita provides marketing, distribution and retail sales support for
Chiquita bananas sold worldwide in BreatheWay packaging. To maintain the
exclusive license, Chiquita must meet annual minimum purchase thresholds of
BreatheWay banana packages.
-9-
The
initial market focus for the BreatheWay banana packaging technology using
Chiquita® Brand bananas will be commercial outlets that normally do not sell
bananas because of their short shelf-life - outlets such as quick serve
restaurants, convenience stores, drug stores and coffee chain outlets. Chiquita
has recently started market testing the sale of bananas packaged with Landec’s
BreatheWay technology to retail grocery chains.
The
Company’s specialty packaging for case liner products reduces freight expense up
to 50% for certain commodities 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 as outlined above.
Product
enhancements in the fresh-cut vegetable line include fresh-cut vegetable trays
designed to look like they were freshly made in the retail grocery store or
at
home. The rectangular tray design is convenient for storage in consumers’
refrigerators and expands the Company’s wide-ranging vegetable tray line.
In
fiscal
year 2007, sales of the value-added retail vegetable tray line and the
value-added 12-ounce bag line each grew 18% compared to fiscal year
2006.
Apio
has
recently entered into an 18-month research and development agreement with Natick
Soldier Research, Development & Engineering Center, a branch of the U.S.
Military, to develop commercial uses for Landec’s BreatheWay packaging
technology within the U.S. Military by significantly increasing the shelf life
of produce for overseas shipments.
In
addition, the Company is in early commercialization for new lines of fresh
cut
vegetable side dishes, vegetable salads and vegetable snacks.
Agricultural
Seed Technology Business
Following
the sale of FCD, Landec Ag’s strategy is to work closely with Monsanto to
further develop its patented, functional polymer coating technology that can
be
broadly sold and/or licensed to the seed industry. In accordance with its
license, supply and R&D agreement with Monsanto, Landec Ag is currently
focused on commercializing products for the corn and soybean markets and then
plans to broaden its applications to other seed crops.
The
Technology and Market Opportunity: Intellicoat Seed Coatings
Landec
Ag's Intellicoat seed coating applications are designed to control seed
germination timing, increase crop yields, reduce risks and extend crop-planting
windows. These coatings are currently available on hybrid corn, soybeans and
male inbred corn used for seed production. In fiscal year 2000, Landec Ag
launched its first commercial product, Pollinator Plusâ
coatings, which is a coating application used by seed companies as a method
for
spreading pollination to increase yields and reduce risk in the production
of
hybrid seed corn. There are approximately 650,000 acres of seed production
in
the United States and in 2007 Pollinator Plus was used by 25 seed companies
on
approximately 15% of the seed corn production acres in the U.S.
In
2003,
Landec Ag commercialized Early Plantâ
corn by
selling the product directly to farmers through the Fielder's Choice
Directâ
brand.
This application allows farmers to plant into cold soils without the risk of
chilling injury, and enables farmers to plant as much as four weeks earlier
than
normal. With this capability, farmers are able to utilize labor and equipment
more efficiently, provide flexibility during the critical planting period and
avoid yield losses caused by late planting. In 2007, seven seed companies
offered Intellicoat on their hybrid seed corn offerings.
-10-
The
Business: Landec Ag
Landec
Ag
had revenues of approximately $2.8 million for the fiscal year ended May 27,
2007, $34.1 million for the fiscal year ended May 28, 2006 and $25.6 million
for
the fiscal year ended May 29, 2005. Revenues for fiscal year 2007 declined
significantly as a result of the sale of FCD on December 1, 2006.
On
December 1, 2006, Landec sold FCD, which included the Fielder’s Choice
Direct®
and
Heartland Hybrid®
brands,
to ASI. The acquisition price for FCD was $50 million in cash paid at the close.
In addition, the Company could have earned up to an additional $5 million based
on FCD results for the twelve months ended May 31, 2007. None of the earn-out
was earned. During the fiscal year 2007, Landec recorded income from the sale,
net of direct expenses and bonuses, of $22.7 million. The income that was
recorded is equal to the difference between the fair value of FCD of $40 million
and its net book value, less direct selling expenses and bonuses. In accordance
with generally accepted accounting principles, the portion of the $50 million
of
proceeds in excess of the fair value of FCD, or $10 million, will be allocated
to the technology license agreement described below and will be recognized
as
revenue ratably over the five year term of the technology license agreement
or
$2 million per year beginning December 1, 2006. The fair value was determined
by
management with the assistance of an independent appraiser.
On
December 1, 2006, Landec also entered into a five-year co-exclusive technology
license and polymer supply agreement (“the Agreement”) with Monsanto for the use
of Landec’s Intellicoat polymer
seed coating technology. Under the terms of the Agreement, Monsanto will pay
Landec $2.6 million per year in exchange for (1) a co-exclusive right to use
Landec’s Intellicoat temperature
activated seed coating technology worldwide during the license period, (2)
the
right to be the exclusive global sales and marketing agent for the Intellicoat
seed coating technology, and (3) the right to purchase the technology any time
during the five year term of the Agreement. Monsanto will also fund all
operating costs, including all Intellicoat research
and development, product development and non-replacement capital costs during
the five year agreement period. For the fiscal year ended May 27, 2007, Landec
recognized $2.7 million in revenues and income from the Agreement.
The
Agreement also provides for a fee payable to Landec of $4 million if Monsanto
elects to terminate the agreement or $8 million if Monsanto elects to buyout
the
technology. If the purchase option is exercised before the fifth anniversary
of
the Agreement, or if Monsanto elects to terminate the Agreement, all annual
license fees and supply payments that have not been paid to Landec will become
due upon the purchase. If Monsanto does not exercise its purchase option by
the
fifth anniversary of the Intellicoat agreement,
Landec will receive the termination fee and all rights to the
Intellicoat seed
coating technology will revert to Landec. Accordingly, Landec will receive
minimum guaranteed payments of $17 million for license fees and polymer supply
payments over five years or $21 million in maximum payments if Monsanto elects
to buyout the licensed technology. The minimum guaranteed payments and the
deferred gain of $2 million per year described above will result in Landec
recognizing revenue and operating income of $5.4 million per year for fiscal
years 2008 through 2011 and $2.7 million per year for fiscal years 2007 and
2012. If Monsanto elects to purchase the technology, an additional $4 million
of
license fee revenue will be recognized at the time of purchase. If Monsanto
exercises its purchase option, Landec and Monsanto will enter into a new
long-term supply agreement in which Landec will continue to be the exclusive
supplier of Intellicoat polymer materials to Monsanto.
Technology
Licensing/Research and Development Businesses
We
believe our technology has commercial potential in a wide range of industrial,
consumer and medical applications beyond those identified in our core
businesses. For example, our core patented technology, Intelimer materials,
can
be used to trigger catalysts, insecticides or fragrances just by changing the
temperature of the Intelimer materials or to activate adhesives through
controlled temperature change. In order to exploit these opportunities, we
have
entered into and will enter into licensing and collaborative corporate
agreements for product development and/or distribution in certain fields.
However, given the infrequency and unpredictability of when the Company may
enter into any such licensing and research and development arrangements, the
Company is unable to disclose its financial expectations in advance of entering
into such arrangements.
-11-
Industrial
Materials and Adhesives
Landec’s
industrial product development strategy is to focus on coatings, catalysts,
resins, additives 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. 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.
Intelimer
Polymer Systems
Landec
has developed latent catalysts useful in extending pot-life, extending shelf
life, reducing waste and improving thermoset cure methods. Some of these latent
catalysts are currently being distributed by Akzo-Nobel Chemicals B.V. through
a
licensing agreement with Air Products. The Company has also developed Intelimer
polymer materials useful in enhancing the formulating options for various
personal care products. The rights to develop and sell Landec’s latent catalysts
and personal care technologies were licensed to Air Products in March 2006.
Personal
Care and Cosmetic Applications
Landec’s
personal care and cosmetic applications strategy is focused on supplying
Intelimer materials to industry leaders for use in lotions and creams, and
potentially color cosmetics, lipsticks and hair care. The Company's partner,
Air
Products, is currently shipping products to L’Oreal for use in lotions and
creams. Sales of Landec materials used in L’Oreal products have not been
material to the Company’s financials.
Medical
Applications
On
December 23, 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences Corporation (“Aesthetic Sciences”). Aesthetic Sciences paid
Landec an upfront license fee of $250,000 for the exclusive rights to use
Landec's Intelimer materials technology for the development of dermal fillers
worldwide. Landec will also receive royalties on the sale of products
incorporating Landec’s technology. In addition, the Company has received shares
of preferred stock valued at $1.8 million which represents a 19.9% ownership
interest in Aesthetic Sciences. At
this
time, the Company is unable to predict the ultimate outcome of the collaboration
with Aesthetic Sciences and the timing or amount of future revenues, if
any.
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.
During
fiscal years 2007, 2006 and 2005, sales to the Company’s top five customers
accounted for approximately 50%, 46% and 42%, respectively, of its revenues,
with the top customer, Costco Wholesale Corp., accounting for approximately
21%,
16% and 15%, respectively, of the Company’s revenues.
Food
Products Technology Business
Apio
has
20 sales people, located in central California and throughout the U.S.,
supporting the export business and the specialty packaged value-added produce
business.
Seasonality
The
Company’s sales are moderately seasonal. Prior to the sale of FCD, Landec Ag
revenues and profits were concentrated over a few months during the spring
planting season (generally during the Company’s third and fourth quarters). In
addition, Apio can be heavily affected by seasonal weather factors which have
impacted quarterly results, such as high cost of sourcing product in June/July
2006 and January 2007 due to a shortage of essential value-added produce
items.
-12-
Manufacturing
and Processing
Food
Products Technology Business
The
manufacturing process for the Company's proprietary
BreatheWay packaging products
is comprised of polymer manufacturing, membrane manufacturing and label package
conversion. A third party toll manufacturer currently makes virtually all of
the
polymers for the BreatheWay
packaging.
Select
outside contractors currently manufacture the breathable membranes and Landec
has transitioned virtually all of the label package conversion to Apio’s
Guadalupe facility to meet the increasing product demand and to provide
additional developmental capabilities.
Apio
processes virtually 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 LP, a separate company
in which Apio has a 60% ownership interest and is the general
partner.
Agricultural
Seed Technology Business
The
Company performs its batch coating operations in a leased facility in Oxford,
Indiana. This facility is being used to coat other seed companies’ inbred seed
corn with the Company’s Pollinator Plus seed corn coatings.
The
Company has a pilot manufacturing facility in Indiana to support the
commercialization of Early Plant corn and for the Relay Cropping System for
wheat/coated soybean products. This facility utilizes a continuous coating
process that has increased seed coating capabilities by over tenfold compared
to
the previous system using batch coaters.
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 membranes. Upon
manufacturing scale-up of seed coating operations, 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,
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 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.
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 for the fiscal years ended May 27, 2007, May 28, 2006 and May 29,
2005 were $3.1 million, $3.0 million and $2.5 million, respectively. Research
and development expenditures funded by corporate partners were $661,000 for
the
fiscal year ended May 27, 2007, $100,000 for the fiscal year ended May 28,
2006
and $20,000 for the fiscal year ended May 29, 2005. 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 May 27, 2007, Landec had 22 employees
engaged in research and development with experience in polymer and analytical
chemistry, product application, product formulation, mechanical and chemical
engineering.
-13-
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 had 33 U.S. patents issued
of which 27 remain active as of May 27, 2007 with expiration dates ranging
from
2010 to 2022. 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 control.
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.
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.
-14-
Employees
As
of May
27, 2007, Landec had 107 full-time employees, of whom 52 were dedicated to
research, development, manufacturing, quality control and regulatory affairs
and
55 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.
Information contained on our website is not part of this Report.
Item
1A. Risk
Factors
Landec
desires to take advantage of the “Safe Harbor” provisions of the Private
Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under
the Securities Exchange Act of 1934. Specifically, Landec wishes to alert
readers that the following important factors, as well as other factors
including, without limitation, those described elsewhere in this report, could
in the future affect, and in the past have affected, Landec’s actual results and
could cause Landec’s results for future periods to differ materially from those
expressed in any forward-looking statements made by or on behalf of Landec.
Landec assumes no obligation to update such forward-looking
statements.
Our
Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock
Price
to Decline
In
the
past, our results of operations have fluctuated significantly from quarter
to
quarter and are expected to continue to fluctuate in the future. Historically,
Landec Ag has been the primary source of these fluctuations, as its revenues
and
profits have been concentrated over a few months during the spring planting
season (generally during our third and fourth fiscal quarters). In addition,
Apio can be heavily affected by seasonal and weather factors which have impacted
quarterly results, such as the high cost of sourcing product in June/July 2006
and January 2007 due to a shortage of essential value-added produce items.
Our
earnings may also fluctuate based on our ability to collect accounts receivables
from customers and note receivables from growers and on price fluctuations
in
the fresh vegetables and fruits markets. Other factors that affect our food
and/or agricultural operations include:
|
·
|
the
seasonality of our supplies;
|
|
·
|
our
ability to process produce during critical harvest
periods;
|
|
·
|
the
timing and effects of ripening;
|
|
·
|
the
degree of perishability;
|
|
·
|
the
effectiveness of worldwide distribution
systems;
|
|
·
|
total
worldwide industry volumes;
|
|
·
|
the
seasonality of consumer demand;
|
|
·
|
foreign
currency fluctuations; and
|
|
·
|
foreign
importation restrictions and foreign political
risks.
|
As
a
result of these and other factors, we expect to continue to experience
fluctuations in quarterly operating results.
-15-
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:
|
·
|
price;
|
|
·
|
safety;
|
|
·
|
efficacy;
|
|
·
|
reliability;
|
|
·
|
conversion
costs;
|
|
·
|
marketing
and sales efforts; and
|
|
·
|
general
economic conditions affecting purchasing
patterns.
|
We
may
not be able to develop and introduce new products and technologies in a timely
manner or new products and technologies may not gain market acceptance. We
are
in the early stage of product commercialization of certain Intelimer-based
specialty packaging, Intellicoat seed coatings and other Intelimer polymer
products and many of our potential products are in development. We believe
that
our future growth will depend in large part on our ability to develop and market
new products in our target markets and in new markets. In particular, we expect
that our ability to compete effectively with existing food products,
agricultural, industrial and medical companies will depend substantially on
successfully developing, commercializing, achieving market acceptance of and
reducing the cost of producing our products. In addition, commercial
applications of our temperature switch polymer technology are relatively new
and
evolving. Our failure to develop new products or the failure of our new products
to achieve market acceptance would have a material adverse effect on our
business, results of operations and financial condition.
We
Face Strong Competition in the Marketplace
Competitors
may succeed in developing alternative technologies and products that are more
effective, easier to use or less expensive than those which have been or are
being developed by us or that would render our technology and products obsolete
and non-competitive. We operate in highly competitive and rapidly evolving
fields, and new developments are expected to continue at a rapid pace.
Competition from large food products, agricultural, industrial and medical
companies is expected to be intense. In addition, the nature of our
collaborative arrangements may result in our corporate partners and licensees
becoming our competitors. Many of these competitors have substantially greater
financial and technical resources and production and marketing capabilities
than
we do, and may have substantially greater experience in conducting clinical
and
field trials, obtaining regulatory approvals and manufacturing and marketing
commercial products.
We
Have a Concentration of Manufacturing in One Location for Apio and May Have
to
Depend on Third Parties to Manufacture Our Products
Any
disruptions in our primary manufacturing operation at Apio’s facility in
Guadalupe, California would reduce our ability to sell our products and would
have a material adverse effect on our financial results. Additionally, we may
need to consider seeking collaborative arrangements with other companies to
manufacture our products. If we become dependent upon third parties for the
manufacture of our products, our profit margins and our ability to develop
and
deliver those products on a timely basis may be affected. Failures by third
parties may impair our ability to deliver products on a timely basis and impair
our competitive position. We may not be able to continue to successfully operate
our manufacturing operations at acceptable costs, with acceptable yields, and
retain adequately trained personnel.
-16-
Our
Dependence on Single-Source Suppliers and Service Providers May Cause Disruption
in Our Operations Should Any Supplier Fail to Deliver
Materials
We
may
experience difficulty acquiring materials or services for the manufacture of
our
products or we may not be able to obtain substitute vendors. We may not be
able
to procure comparable materials at similar prices and terms within a reasonable
time. Several services that are provided to Apio are obtained from a single
provider. Several of the raw materials we use to manufacture our products are
currently purchased from a single source, including some monomers used to
synthesize Intelimer polymers and substrate materials for our breathable
membrane products. Any interruption of our relationship with single-source
suppliers or service providers could delay product shipments and materially
harm
our business.
We
May Be Unable to Adequately Protect Our Intellectual Property
Rights
We
may
receive notices from third parties, including some of our competitors, claiming
infringement by our products of patent and other proprietary rights. Regardless
of their merit, responding to any such claim could be time-consuming, result
in
costly litigation and require us to enter royalty and licensing agreements
which
may not be offered or available on terms acceptable to us. If a successful
claim
is made against us and we fail to develop or license a substitute technology,
we
could be required to alter our products or processes and our business, results
of operations or financial position could be materially adversely affected.
Our
success depends in large part on our ability to obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights
of
third parties. Any pending patent applications we file may not be approved
and
we may not be able to develop additional proprietary products that are
patentable. Any patents issued to us may not provide us with competitive
advantages or may be challenged by third parties. Patents held by others may
prevent the commercialization of products incorporating our technology.
Furthermore, others may independently develop similar products, duplicate our
products or design around our patents.
Our
Operations Are Subject to Regulations that Directly Impact Our
Business
Our
food
packaging products are subject to regulation under the Food, Drug and Cosmetic
Act (the “FDC Act”). Under the FDC Act, any substance that when used as intended
may reasonably be expected to become, directly or indirectly, a component or
otherwise affect the characteristics of any food may be regulated as a food
additive unless the substance is generally recognized as safe. We believe that
food packaging materials are generally not considered food additives by the
FDA
because these products are not expected to become components of food under
their
expected conditions of use. We consider our breathable membrane product to
be a
food packaging material not subject to regulation or approval by the FDA. We
have not received any communication from the FDA concerning our breathable
membrane product. If the FDA were to determine that our breathable membrane
products are food additives, we may be required to submit a food additive
petition for approval by the FDA. The food additive petition process is lengthy,
expensive and uncertain. A determination by the FDA that a food additive
petition is necessary would have a material adverse effect on our business,
operating results and financial condition.
Federal,
state and local regulations impose various environmental controls on the use,
storage, discharge or disposal of toxic, volatile or otherwise hazardous
chemicals and gases used in some of the manufacturing processes. Our failure
to
control the use of, or to restrict adequately the discharge of, hazardous
substances under present or future regulations could subject us to substantial
liability or could cause our manufacturing operations to be suspended and
changes in environmental regulations may impose the need for additional capital
equipment or other requirements.
Our
agricultural operations are subject to a variety of environmental laws
including, the Food Quality Protection Act of 1966, the Clean Air Act, the
Clean
Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide,
Fungicide and Rodenticide Act, and the Comprehensive Environmental Response,
Compensation and Liability Act. Compliance with these laws and related
regulations is an ongoing process. Environmental concerns are, however, inherent
in most agricultural operations, including those we conduct. Moreover, it is
possible that future developments, such as increasingly strict environmental
laws and enforcement policies could result in increased compliance
costs.
-17-
The
Company is subject to the Perishable Agricultural Commodities Act (“PACA”) law.
PACA regulates fair trade standards in the fresh produce industry and governs
all the products sold by Apio. Our failure to comply with the PACA requirements
could among other things, result in civil penalties, suspension or revocation
of
a license to sell produce, and in the most egregious cases, criminal
prosecution, which could have a material adverse effect on our
business.
Adverse
Weather Conditions and Other Acts of God May Cause Substantial Decreases in
Our
Sales and/or Increases in Our Costs
Our
Food
Products business is subject to weather conditions that affect commodity prices,
crop yields, and decisions by growers regarding crops to be planted. Crop
diseases and severe conditions, particularly weather conditions such as floods,
droughts, frosts, windstorms, earthquakes and hurricanes, may adversely affect
the supply of vegetables and fruits used in our business, which could reduce
the
sales volumes and/or increase the unit production costs. Because a significant
portion of the costs are fixed and contracted in advance of each operating
year,
volume declines due to production interruptions or other factors could result
in
increases in unit production costs which could result in substantial losses
and
weaken our financial condition.
We
Depend on Strategic Partners and Licenses for Future
Development
Our
strategy for development, clinical and field testing, manufacture,
commercialization and marketing for some of our current and future products
includes entering into various collaborations with corporate partners, licensees
and others. We are dependent on our corporate partners to develop, test,
manufacture and/or market some of our products. Although we believe that our
partners in these collaborations have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within our control. Our
partners may not perform their obligations as expected or we may not derive
any
additional revenue from the arrangements. Our partners may not pay any
additional option or license fees to us or may not develop, market or pay any
royalty fees related to products under the agreements. Moreover, some of the
collaborative agreements provide that they may be terminated at the discretion
of the corporate partner, and some of the collaborative agreements provide
for
termination under other circumstances. Our partners may pursue existing or
alternative technologies in preference to our technology. Furthermore, we may
not be able to negotiate additional collaborative arrangements in the future
on
acceptable terms, if at all, and our collaborative arrangements may not be
successful.
Both
Domestic and Foreign Government Regulations Can Have an Adverse Effect on Our
Business Operations
Our
products and operations are subject to governmental regulation in the United
States and foreign countries. The manufacture of our products is subject to
periodic inspection by regulatory authorities. We may not be able to obtain
necessary regulatory approvals on a timely basis or at all. Delays in receipt
of
or failure to receive approvals or loss of previously received approvals would
have a material adverse effect on our business, financial condition and results
of operations. Although we have no reason to believe that we will not be able
to
comply with all applicable regulations regarding the manufacture and sale of
our
products and polymer materials, regulations are always subject to change and
depend heavily on administrative interpretations and the country in which the
products are sold. Future changes in regulations or interpretations relating
to
matters such as safe working conditions, laboratory and manufacturing practices,
environmental controls, and disposal of hazardous or potentially hazardous
substances may adversely affect our business.
We
are
subject to USDA rules and regulations concerning the safety of the food products
handled and sold by Apio, and the facilities in which they are packed and
processed. Failure to comply with the applicable regulatory requirements can,
among other things, result in:
| · |
fines,
injunctions, civil penalties, and
suspensions,
|
| · |
withdrawal
of regulatory approvals,
|
| · |
product
recalls and product seizures, including cessation of manufacturing
and
sales,
|
| · |
operating
restrictions, and
|
-18-
| · |
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
the
fiscal
year ended May 27,
2007,
approximately 22% of our total revenues were derived from product sales to
international customers. A number of risks are inherent in international
transactions. International sales and operations may be limited or disrupted
by
any of the following:
|
·
|
regulatory
approval process,
|
|
·
|
government
controls,
|
|
·
|
export
license requirements,
|
|
·
|
political
instability,
|
|
·
|
price
controls,
|
|
·
|
trade
restrictions,
|
|
·
|
changes
in tariffs, or
|
|
·
|
difficulties
in staffing and managing international operations.
|
Foreign
regulatory agencies have or may establish product standards different from
those
in the United States, and any inability to obtain foreign regulatory approvals
on a timely basis could have a material adverse effect on 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 2007, sales to our top five customers accounted for approximately
50% of our revenues, with our largest customer, Costco Wholesale Corp.
accounting for approximately 21% of our revenues. We expect that, for the
foreseeable future, a limited number of customers may continue to account for
a
substantial portion of our net revenues. We may experience changes in the
composition of our customer base as we have experienced in the past. We do
not
have long-term purchase agreements with any of our customers. The reduction,
delay or cancellation of orders from one or more major customers for any reason
or the loss of one or more of our major customers could materially and adversely
affect our business, operating results and financial condition. In addition,
since some of the products processed by Apio at its Guadalupe, California
facility are sole sourced to its customers, our operating results could be
adversely affected if one or more of our major customers were to develop other
sources of supply. Our current customers may not continue to place orders,
orders by existing customers may be canceled or may not continue at the levels
of previous periods or we may not be able to obtain orders from new
customers.
Our
Sale of Some Products May Increase Our Exposure to Product Liability
Claims
The
testing, manufacturing, marketing, and sale of the products we develop involve
an inherent risk of allegations of product liability. If any of our products
were determined or alleged to be contaminated or defective or to have caused
a
harmful accident to an end-customer, we could incur substantial costs in
responding to complaints or litigation regarding our products and our product
brand image could be materially damaged. Either event may have a material
adverse effect on our business, operating results and financial condition.
Although we have taken and intend to continue to take what we believe are
appropriate precautions to minimize exposure to product liability claims, we
may
not be able to avoid significant liability. We currently maintain product
liability insurance. While we believe the coverage and limits are consistent
with industry standards, our coverage may not be adequate or may not continue
to
be available at an acceptable cost, if at all. A product liability claim,
product recall or other claim with respect to uninsured liabilities or in excess
of insured liabilities could have a material adverse effect on our business,
operating results and financial condition.
-19-
Our
Stock Price May Fluctuate in Accordance with Market
Conditions
The
following events may cause the market price of our common stock to fluctuate
significantly:
|
·
|
technological
innovations applicable to our
products,
|
|
·
|
our
attainment of (or failure to attain) milestones in the commercialization
of our technology,
|
|
·
|
our
development of new products or the development of new products by
our
competitors,
|
|
·
|
new
patents or changes in existing patents applicable to our products,
|
|
·
|
our
acquisition of new businesses or the sale or disposal of a part of
our
businesses,
|
|
·
|
development
of new collaborative arrangements by us, our competitors or other
parties,
|
|
·
|
changes
in government regulations applicable to our business,
|
|
·
|
changes
in investor perception of our business,
|
|
·
|
fluctuations
in our operating results and
|
|
·
|
changes
in the general market conditions in our industry.
|
These
broad fluctuations may adversely affect the market price of our common
stock.
Since
We Order Cartons and Film for Our Products from Suppliers in Advance of Receipt
of Customer Orders for Such Products, We Could Face a Material Inventory
Risk
As
part
of our inventory planning, we enter into negotiated orders with vendors of
cartons and film used for packing our products in advance of receiving customer
orders for such products. Accordingly, we face the risk of ordering too many
cartons and film since orders are generally based on forecasts of customer
orders rather than actual orders. If we cannot change or be released from the
orders, we may incur costs as a result of inadequately predicting cartons and
film orders in advance of customer orders. Because of this, we may have an
oversupply of cartons and film and face the risk of not being able to sell
such
inventory and our anticipated reserves for losses may be inadequate if we have
misjudged the demand for our products. Our business and operating results could
be adversely affected as a result of these increased costs.
Recently
Enacted Changes in Securities Laws and Regulations Have and Will Continue to
Increase Our Costs
The
Sarbanes-Oxley Act of 2002 (the “Act”) that became law in July 2002 required
changes in some of our corporate governance, public disclosure and compliance
practices. In addition, NASDAQ has imposed additional requirements for
companies, such as Landec, that are listed on The NASDAQ Global Select Market.
These developments have increased our legal and financial compliance costs.
These changes could make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
developments could make it more difficult for us to attract and retain qualified
members for our board of directors and to serve on our audit committee.
Our
Controlling Shareholders Exert Significant Influence over Corporate Events
that
May Conflict with the Interests of Other Shareholders
Our
executive officers and directors and their affiliates own or control
approximately 17% of our common stock (including options exercisable within
60
days). Accordingly, these officers, directors and shareholders may have the
ability to exert significant influence over the election of our Board of
Directors, the approval of amendments to our articles and bylaws and the
approval of mergers or other business combination transactions requiring
shareholder approval. This concentration of ownership may have the effect of
delaying or preventing a merger or other business combination transaction,
even
if the transaction or amendments would be beneficial to our other shareholders.
In addition, our controlling shareholders may approve amendments to our articles
or bylaws to implement anti-takeover or management friendly provisions that
may
not be beneficial to our other shareholders.
-20-
We
May Be Exposed to Employment Related Claims and Costs that Could Materially
Adversely Affect Our Business
We
have
been subject in the past, and may be in the future, to claims by employees
based
on allegations of discrimination, negligence, harassment and inadvertent
employment of illegal aliens or unlicensed personnel, and we may be subject
to
payment of workers' compensation claims and other similar claims. We could
incur
substantial costs and our management could spend a significant amount of time
responding to such complaints or litigation regarding employee claims, which
may
have a material adverse effect on our business, operating results and financial
condition.
We
Are Dependent on Our Key Employees and if One or More of Them Were to Leave,
We
Could Experience Difficulties in Replacing Them and Our Operating Results Could
Suffer
The
success of our business depends to a significant extent upon the continued
service and performance of a relatively small number of key senior management,
technical, sales, and marketing personnel. The loss of any of our key personnel
would likely harm our business. In addition, competition for senior level
personnel with knowledge and experience in our different lines of business
is
intense. If any of our key personnel were to leave, we would need to devote
substantial resources and management attention to replace them. As a result,
management attention may be diverted from managing our business, and we may
need
to pay higher compensation to replace these employees.
We
May Issue Preferred Stock with Preferential Rights that Could Affect Your
Rights
Our
Board
of Directors has the authority, without further approval of our shareholders,
to
fix the rights and preferences, and to issue shares, of preferred stock. In
November 1999, we issued and sold shares of Series A Convertible Preferred
Stock
and in October 2001 we issued and sold shares of Series B Convertible Preferred
Stock. The Series A Convertible Preferred Stock was converted into 1,666,670
shares of Common Stock on November 19, 2002 and the Series B Convertible
Preferred Stock was converted into 1,744,102 shares of Common Stock on May
7,
2004.
The
issuance of new shares of preferred stock could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding stock,
and the holders of such preferred stock could have voting, dividend, liquidation
and other rights superior to those of holders of our Common Stock.
We
Have Never Paid any Dividends on Our Common Stock
We
have
not paid any cash dividends on our Common Stock since inception and do not
expect to do so in the foreseeable future. Any dividends may be subject to
preferential dividends payable on any preferred stock we may issue.
Our
Profitability Could Be Materially and Adversely Affected if it Is Determined
that the Book Value of Goodwill is Higher than Fair
Value
Our
balance sheet includes an amount designated as “goodwill” that represents a
portion of our assets and our shareholders’ equity. Goodwill arises when an
acquirer pays more for a business than the fair value of the tangible and
separately measurable intangible net assets. Under Statement of Financial
Accounting Standards No. 142 “Goodwill and Other Intangible Assets”, beginning
in fiscal year 2002, the amortization of goodwill has been replaced with an
“impairment test” which requires that we compare the fair value of goodwill to
its book value at least annually and more frequently if circumstances indicate
a
possible impairment. If we determine at any time in the future that the book
value of goodwill is higher than fair value then the difference must be
written-off, which could materially and adversely affect our
profitability.
1B.
Unresolved Staff Comments
None.
-21-
Item
2. Properties
As
of May
27, 2007, the Company owned or leased properties in Menlo Park, Arroyo Grande
and Guadalupe, California; West Lebanon and Oxford Indiana.
These
properties are described below:
|
Location
|
Business
Segment
|
Ownership
|
Facilities
|
Acres
of Land
|
Lease
Expiration
|
|||||
|
Menlo
Park, CA
|
Other
|
Leased
|
10,400
square feet of office and laboratory space
|
—
|
12/31/09
|
|||||
|
West
Lebanon, IN
|
Agricultural
Seed Technology
|
Owned
|
4,000
square feet of warehouse and manufacturing space
|
—
|
—
|
|||||
|
Oxford,
IN
|
Agricultural
Seed Technology
|
Leased
|
13,400
square feet of laboratory and manufacturing space
|
—
|
6/30/08
|
|||||
|
Guadalupe,
CA
|
Food
Products Technology
|
Owned
|
142,000
square feet of office space, manufacturing and cold
storage
|
17.7
|
—
|
|||||
|
Arroyo
Grande, CA
|
Food
Products Technology
|
Leased
|
1,100
square feet of office space
|
—
|
6/30/08
|
There
are
no bank liens encumbering any of the Company’s owned land and
buildings.
Item
3. Legal
Proceedings
The
Company is involved in litigation arising in the normal course of business.
The
Company is not a party to any legal proceedings which would result in the
payment of any amounts that would be material to the business or financial
condition of the Company.
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 ended May 27, 2007.
-22-
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market
Information
The
Common Stock is traded on The NASDAQ Global Select Market under the symbol
“LNDC”. The following table sets forth for each period indicated the high and
low sales prices for the Common Stock.
|
Fiscal
Year Ended May 27, 2007
|
High
|
Low
|
|||||
|
4th
Quarter ending May 27, 2007
|
$
|
15.13
|
$
|
12.01
|
|||
|
|
|||||||
|
3rd
Quarter ending February 25, 2007
|
$
|
13.80
|
$
|
9.49
|
|||
|
2nd
Quarter ending November 26, 2006
|
$
|
11.32
|
$
|
9.03
|
|||
|
1st
Quarter ending August 27, 2006
|
$
|
11.11
|
$
|
7.96
|
|||
|
Fiscal
Year Ended May 28, 2006
|
High
|
Low
|
|||||
|
4th
Quarter ending May 28, 2006
|
$
|
9.65
|
$
|
6.71
|
|||
|
|
|||||||
|
3rd
Quarter ending February 26, 2006
|
$
|
7.84
|
$
|
6.23
|
|||
|
|
|||||||
|
2nd
Quarter ending November 27, 2005
|
$
|
8.01
|
$
|
6.32
|
|||
|
|
|||||||
|
1st
Quarter ending August 28, 2005
|
$
|
6.98
|
$
|
6.66
|
|||
Holders
There
were approximately 80 holders of record of 25,904,212
shares
of
outstanding Common Stock as of July 13, 2007. Since certain holders are listed
under their brokerage firm’s names, the actual number of shareholders is higher.
Dividends
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.
Issuer
Purchases of Equity Securities
There
were no shares repurchased by the Company during the quarter ending on May
27,
2007.
-23-
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.
|
Year
Ended May 27, 2007
|
Year
Ended May 28, 2006
|
Year
Ended May 29, 2005
|
Year
Ended May 30, 2004
|
Seven
Months Ended
May
25, 2003
|
Seven
Months Ended
June
2, 2002 (unaudited)
|
Year
Ended October 27, 2002
|
||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||
|
Product
sales
|
$
|
201,892
|
$
|
225,404
|
$
|
201,020
|
$
|
185,664
|
$
|
98,689
|
$
|
96,513
|
$
|
152,958
|
||||||||
|
Service
revenues
|
3,539
|
3,725
|
3,704
|
5,791
|
12,784
|
15,882
|
26,827
|
|||||||||||||||
|
License
fees
|
4,013
|
2,398
|
88
|
88
|
357
|
1,274
|
2,330
|
|||||||||||||||
|
R&D
and royalty revenues
|
1,054
|
426
|
418
|
549
|
429
|
402
|
1,040
|
|||||||||||||||
|
Total
revenues
|
210,498
|
231,953
|
205,230
|
192,092
|
112,259
|
114,071
|
183,155
|
|||||||||||||||
|
Cost
of revenue:
|
||||||||||||||||||||||
|
Cost
of product sales
|
175,252
|
188,904
|
170,359
|
158,911
|
82,339
|
80,680
|
131,352
|
|||||||||||||||
|
Cost
of service revenue
|
2,860
|
3,005
|
2,899
|
3,390
|
9,216
|
12,505
|
20,463
|
|||||||||||||||
|
Total
cost of revenue
|
178,112
|
191,909
|
173,258
|
162,301
|
91,555
|
93,185
|
151,815
|
|||||||||||||||
|
Gross
profit
|
32,386
|
40,044
|
31,972
|
29,791
|
20,704
|
20,886
|
31,340
|
|||||||||||||||
|
Operating
costs and expenses:
|
||||||||||||||||||||||
|
Research
and development
|
3,074
|
3,042
|
2,543
|
3,452
|
2,118
|
2,018
|
3,532
|
|||||||||||||||
|
Selling,
general and administrative
|
21,616
|
27,979
|
23,412
|
22,284
|
15,185
|
16,293
|
26,114
|
|||||||||||||||
|
Income
from sale of FCD
|
(22,669
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Exit
domestic commodity vegetable business
|
—
|
—
|
—
|
—
|
1,095
|
—
|
—
|
|||||||||||||||
|
Total
operating costs and expenses
|
2,021
|
31,021
|
25,955
|
25,736
|
18,398
|
18,311
|
29,646
|
|||||||||||||||
|
Operating
profit
|
30,365
|
9,023
|
6,017
|
4,055
|
2,306
|
2,575
|
1,694
|
|||||||||||||||
|
Interest
income
|
1,945
|
633
|
214
|
164
|
144
|
177
|
247
|
|||||||||||||||
|
Interest
expense
|
(251
|
)
|
(452
|
)
|
(414
|
)
|
(811
|
)
|
(642
|
)
|
(1,097
|
)
|
(1,551
|
)
|
||||||||
|
Minority
interest expense
|
(412
|
)
|
(529
|
)
|
(411
|
)
|
(537
|
)
|
(235
|
)
|
(224
|
)
|
(525
|
)
|
||||||||
|
Other
(expense)/income, net
|
(2
|
)
|
(24
|
)
|
(4
|
)
|
29
|
218
|
71
|
336
|
||||||||||||
|
Income
from continuing operations before taxes
|
31,645
|
8,651
|
5,402
|
2,900
|
1,791
|
1,502
|
201
|
|||||||||||||||
|
Income
tax expense
|
(2,456
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Income
from continuing operations
|
29,189
|
8,651
|
5,402
|
2,900
|
1,791
|
1,502
|
201
|
|||||||||||||||
|
Discontinued
operations:
|
||||||||||||||||||||||
|
Loss
from discontinued operations
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Loss
on disposal of operations
|
—
|
—
|
—
|
—
|
—
|
—
|
(1,688
|
)
|
||||||||||||||
|
Loss
from discontinued operations
|
—
|
—
|
—
|
—
|
—
|
—
|
(1,688
|
)
|
||||||||||||||
|
Net
income (loss)
|
$
|
29,189
|
$
|
8,651
|
$
|
5,402
|
$
|
2,900
|
$
|
1,791
|
$
|
1,502
|
$
|
(1,487
|
)
|
|||||||
|
Net
income (loss)
|
$
|
29,189
|
$
|
8,651
|
$
|
5,402
|
$
|
2,900
|
$
|
1,791
|
$
|
1,502
|
$
|
(1,487
|
)
|
|||||||
|
Dividends
on preferred stock
|
—
|
—
|
—
|
(464
|
)
|
(219
|
)
|
(202
|
)
|
(412
|
)
|
|||||||||||
|
Net
income (loss) applicable to common shareholders
|
$
|
29,189
|
$
|
8,651
|
$
|
5,402
|
$
|
2,436
|
$
|
1,572
|
$
|
1,300
|
$
|
(1,899
|
)
|
|||||||
-24-
|
Year
Ended
May
27,
|
Year
Ended May
28,
|
Year
Ended
May
29,
|
Year
Ended
May
30,
|
Seven
Months Ended
May
25,
|
Seven
Months
Ended
June
2,
2002
|
Year
Ended
October
27,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
(Unaudited)
|
2002
|
||||||||||||||||
|
Statements
of Operations Data:
|
||||||||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||||
|
Basic
net income (loss) per share:
|
||||||||||||||||||||||
|
Continuing
operations
|
$
|
1.16
|
$
|
0.35
|
$
|
0.23
|
$
|
0.11
|
$
|
0.08
|
$
|
0.07
|
$
|
(0.01
|
)
|
|||||||
|
Discontinued
operations
|
—
|
—
|
—
|
—
|
—
|
—
|
(0.09
|
)
|
||||||||||||||
|
Basic
net income (loss) per share
|
$
|
1.16
|
$
|
0.35
|
$
|
0.23
|
$
|
0.11
|
$
|
0.08
|
$
|
0.07
|
$
|
(0.10
|
)
|
|||||||
|
Diluted
net income (loss) per share:
|
||||||||||||||||||||||
|
Continuing
operations
|
$
|
1.07
|
$
|
0.32
|
$
|
0.21
|
$
|
0.12
|
$
|
0.07
|
$
|
0.06
|
$
|
(0.01
|
)
|
|||||||
|
Discontinued
operations
|
—
|
—
|
—
|
—
|
—
|
—
|
(0.09
|
)
|
||||||||||||||
|
Diluted
net income (loss) per share
|
$
|
1.07
|
$
|
0.32
|
$
|
0.21
|
$
|
0.12
|
$
|
0.07
|
$
|
0.06
|
$
|
(0.10
|
)
|
|||||||
|
Shares
used in per share computation:
|
||||||||||||||||||||||
|
Basic
|
25,260
|
24,553
|
23,705
|
21,396
|
20,948
|
17,777
|
18,172
|
|||||||||||||||
|
Diluted
|
26,558
|
25,657
|
24,614
|
23,556
|
22,626
|
21,082
|
18,172
|
|||||||||||||||
|
|
May
27,
2007 |
May
28,
2006
|
May
29,
2005 |
May
30,
2004 |
May
25,
2003 |
October
27,
2002
|
|||||||||||||
|
Balance
Sheet Data:
(in
thousands)
|
|||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
62,556
|
$
|
15,164
|
$
|
7,426
|
$
|
4,966
|
$
|
3,610
|
$
|
7,813
|
|||||||
|
Total
assets
|
141,368
|
119,025
|
100,075
|
93,007
|
96,887
|
107,803
|
|||||||||||||
|
Debt
|
28
|
2,018
|
3,088
|
8,996
|
13,494
|
17,543
|
|||||||||||||
|
Convertible
preferred stock
|
—
|
—
|
—
|
—
|
5,531
|
14,461
|
|||||||||||||
|
Accumulated
deficit
|
(19,332
|
)
|
(41,239
|
)
|
(49,890
|
)
|
(55,292
|
)
|
(57,728
|
)
|
(59,300
|
)
|
|||||||
|
Total
shareholders' equity
|
$
|
110,228
|
$
|
85,049
|
$
|
72,060
|
$
|
61,549
|
$
|
57,903
|
$
|
55,963
|
|||||||
-25-
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 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 in Item 1A. "Risk Factors.” 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™
splints
and casts, in April 1994, which was subsequently sold to Bissell Healthcare
Corporation in August 1997;
Intelimer packaging technology
for the
fresh-cut and whole produce packaging market, in September 1995; Intelimer
Polymer Systems in June 1997 that includes polymer materials for various
industrial applications and beginning in November 2003 for personal care
applications; and Intellicoat coated corn seeds in the Fall of 1999.
With
the
acquisition of Apio in 1999 and Landec Ag in 1997, the Company has focused
on
two core businesses - Food Products Technology and Agricultural Seed Technology.
The Food Products Technology segment combines the Company’s Intelimer
packaging
technology with Apio’s fresh-cut and whole produce business. Prior to the sale
of FCD on
December 1, 2006 to ASI,
the
Agricultural Seed Technology segment integrated the Intellicoat seed coating
technology with FCD’s direct marketing, telephone sales and 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".
From
inception through May 27, 2007, the Company’s accumulated deficit was $19.3
million. The Company may incur additional losses in the future. The amount
of
future net profits, if any, is uncertain and there can be no assurance that
the
Company will be able to sustain profitability in future years.
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 judgments 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 produce growers for crop and harvesting costs. Typically these
advances are paid off within the growing season (less than one year) from
harvested crops. 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 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
note
or advance receivable and the estimated losses would rise in the current period,
potentially to the extent of the total note or advance receivable.
-26-
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.
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 unusable inventory and an
additional reserve, based on historical losses, for inventory currently
considered to be useable.
Revenue
Recognition
Revenue
from product sales is recognized when there is persuasive evidence that an
arrangement exists, title has transferred, 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 No. 104,
Revenue
Recognition (a replacement of SAB 101),
(SAB
104). Initial license fees are deferred and amortized to revenue over the period
of the agreement 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 SAB 104.
In
the
fiscal year ended October 29, 2000, the Company recorded a charge of $1.9
million related to the cumulative effect of the change in accounting principle.
The cumulative effect was initially recorded as deferred revenue and has been
recognized as recycled revenue over the research and development period or
supply period commitment of the agreement. “Recycled” revenue refers to revenue
that had previously been recognized as licensing revenue in the Company’s
financial statements, but as a result of the Company’s adoption of SAB 104, was
reversed through a cumulative effect of a change in accounting in fiscal year
2000 and has been recognized as revenue over the research and development period
and/or the supply period commitment of the agreement, whichever is longer.
In
July
2005, the Company amended its supply agreement with Alcon, Inc. (“Alcon”) to
change the expiration date of the agreement from November 1, 2012 to May 28,
2006. In accordance with SAB 104, the entire amount of the deferred revenue
of
$638,000 as of May 29, 2005, was recognized as “recycled” revenue during fiscal
year 2006.
During
the fiscal years ended May 27, 2007, May 28, 2006 and May 29, 2005 $0, $638,000,
and $88,000, respectively, of the related deferred revenue was recognized as
“recycled” revenue. As of May 27, 2007 and May 28, 2006, deferred revenue
associated with the change in accounting principles described above is
zero.
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.
-27-
Goodwill
and Other Intangible Asset Impairment
The
Company is 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.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting
for Income Taxes,”
which
requires that deferred tax assets and liabilities be recognized using enacted
tax rates for the effect of temporary differences between the book and tax
bases
of recorded assets and liabilities. SFAS No. 109 also requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some or all of the deferred tax assets will not be realized.
The
Company evaluates quarterly the realizability of its deferred tax assets by
assessing the valuation allowance and, if necessary, adjusts the amount of
such
allowance. The factors used to assess the likelihood of realization include
the
Company’s forecast of future taxable income and available tax planning
strategies that could be implemented to realize the net deferred tax assets.
Due
to the Company’s limited tax basis earnings history, the net deferred tax asset
at May 27, 2007 has been fully offset by a valuation allowance.
Stock-Based
Compensation
On
May 29, 2006, the Company adopted SFAS 123R, which is a revision of
SFAS No. 123 “Accounting for Stock-Based Compensation”, and supersedes
APB No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).
Among other items, SFAS 123R requires companies to record compensation
expense for stock-based awards issued to employees and directors in exchange
for
services provided. The amount of the compensation expense is based on the
estimated fair value of the awards on their grant dates and is recognized over
the required service periods. The Company’s stock-based awards include stock
option grants and restricted stock unit awards (RSUs).
Prior
to
the adoption of SFAS 123R, the Company applied the intrinsic value method
set forth in APB 25 to calculate the compensation expense for stock-based
awards. The Company has historically set the exercise price for its stock
options equal to the market value on the grant date. As a result, the options
had no intrinsic value on their grant dates, and therefore the Company did
not
record any compensation expense unless the terms of the stock options were
subsequently modified. For RSUs, the calculation of compensation expense under
APB 25 and SFAS 123R is similar except for the accounting treatment
for forfeitures as discussed below.
The
Company adopted SFAS 123R using the modified prospective transition method,
which requires the application of the accounting standard to (i) all
stock-based awards issued on or after May 29, 2006 and (ii) any
outstanding stock-based awards that were issued but not vested as of
May 29, 2006. Accordingly, the Company’s consolidated financial statements
as of May 28, 2006 and May 29, 2005, and for the fiscal years then-ended,
were accounted for under the provisions of APB 25.
The
estimated fair value for stock options, which determines the Company’s
calculation of compensation expense, is based on the Black-Scholes pricing
model. Upon the adoption of SFAS 123R, the Company changed its method of
calculating and recognizing the fair value of stock-based compensation
arrangements to the straight-line, single-option method. Compensation expense
for all stock option and restricted stock awards granted prior to May 29,
2006 will continue to be recognized using the straight-line, multiple-option
method. In addition, SFAS 123R requires the estimation of the expected
forfeitures of stock-based awards at the time of grant. As a result, the Company
uses historical data to estimate
pre-vesting forfeitures and records stock-based compensation expense only for
those awards that are expected to vest and revises those estimates in subsequent
periods if the actual forfeitures differ from the prior estimates. In the
pro-forma information required under SFAS 123R for periods prior to
May 29, 2006, the Company accounted for forfeitures as they occurred.
-28-
Recent
Accounting Pronouncements
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements. SFAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value measurements. SFAS 157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company has not determined the impact of the adoption
of
SFAS 157 on its consolidated financial statements.
Accounting
for Uncertainty in Income Taxes
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting
for Uncertainty in Income Taxes — an Interpretation of FASB Statement
No. 109 (“FIN
No. 48”), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes.
FIN
No. 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition and defines the criteria that must be met
for the benefits of a tax position to be recognized. The provisions of FIN
No. 48 will be effective for the Company commencing at the start of fiscal
2008, May 28, 2007. The Company is currently evaluating the impact of
adopting FIN No. 48 on its consolidated financial statements, however, the
Company does not expect the adoption of FIN No. 48 to have a material impact
on
the Company’s consolidated financial statements.
Results
of Operations
Fiscal
Year Ended May 27, 2007 Compared to Fiscal Year Ended May 28,
2006
Revenues
(in
thousands):
|
Fiscal
Year ended May 27, 2007
|
Fiscal
Year ended May 28, 2006
|
Change
|
||||||||
|
Apio
Value Added
|
$
|
154,744
|
$
|
136,141
|
14
|
%
|
||||
|
Apio
Tech
|
1,730
|
685
|
153
|
%
|
||||||
|
Technology
Subtotal
|
156,474
|
136,826
|
14
|
%
|
||||||
|
Apio
Trading
|
49,706
|
57,990
|
(14
|
%)
|
||||||
|
Total
Apio
|
206,180
|
194,816
|
6
|
%
|
||||||
|
Landec
Ag
|
2,831
|
34,096
|
(92
|
%)
|
||||||
|
Corporate
|
1,487
|
3,041
|
(51
|
%)
|
||||||
|
Total
Revenues
|
$
|
210,498
|
$
|
231,953
|
(9
|
%)
|
||||
Apio
Value Added
Apio’s
value-added revenues consist of revenues generated from the sale of specialty
packaged
fresh-cut and whole value-added processed vegetable products that are washed
and
packaged in our proprietary packaging and sold under Apio’s Eat Smart brand and
various private labels and from service revenues from Apio Cooling LP which
is
now combined with value-added.
The
increase in Apio’s value-added revenues for the fiscal year ended May 27, 2007
compared to the same period last year is due to increased product offerings,
increased sales to existing customers and the addition of new customers.
Specifically, sales of Apio’s value-added 12-ounce specialty packaged retail
product line grew 18% and sales of Apio’s value-added vegetable tray products
also grew 18% during the fiscal year ended May 27, 2007 compared to the same
period last year. Overall value-added sales volume increased 15% during the
fiscal year ended May 27, 2007 compared to the same period last
year.
-29-
Apio
Tech
Apio
Tech
consists of Apio’s packaging technology business using its BreatheWay membrane
technology. The
first
commercial application included in Apio Tech is the banana packaging
technology.
A large
majority of the revenues currently generated by Apio Tech are revenues derived
from our banana packaging program with Chiquita.
The
increase in Apio Tech revenues for the fiscal year ended May 27, 2007 compared
to the same period last year was not material to consolidated Landec
revenues.
Apio
Trading
Apio
trading revenues consist of revenues generated primarily from the purchase
and
sale of whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex and from the purchase and sale of whole commodity fruit
and vegetable products domestically. The export portion of trading revenues
for
fiscal year 2007 was $46.4 million or 93% of total trading
revenues.
The
decrease in revenues in Apio's trading business for the fiscal year ended May
27, 2007 compared to the same period last year was primarily due to planned
decreases in the domestic buy/sell commodity sales of 57%. Overall trading
sales
volumes were lower by 27% for the fiscal year ended May 27, 2007 compared to
the
prior year. In addition, export revenues decreased 8% due to lower sales
volumes. The decrease in sales volumes was partially offset by higher average
sales prices due to the scarcity of product during certain months of the
year.
Landec
Ag
Landec
Ag
revenues have historically consisted of revenues generated from the sale of
hybrid seed corn to farmers under the Fielder’s Choice Direct brand and from the
sale of hybrid seed corn and soybeans under the Heartland Hybrids® brand (these
brands, collectively FCD, and the related assets were sold to ASI on December
1,
2006, see Note 2 of Notes to Consolidated Financial Statements) and from the
sale of Intellicoat coated corn and soybean seeds to farmers and seed companies.
Prior to the sale of FCD, virtually all of Landec Ag’s revenues were generated
during the Company’s third and fourth quarters. As a result of the technology
licensing agreement with Monsanto, Landec Ag license fee revenues will be
recognized evenly each quarter for a period of five years.
The
decrease in revenues at Landec Ag during the fiscal year ended May 27, 2007
compared to the same period last year was primarily due to the sale of FCD
to
ASI, partially offset by $2.7 million in license fee revenues from the
Intellicoat license agreement with Monsanto.
Corporate
Corporate
revenues consist of revenues generated from partnering with others under
research and development agreements and supply agreements and from fees for
licensing our proprietary Intelimer technology to others and from the
corresponding royalties from these license agreements.
The
decrease in Corporate revenues for the fiscal year ended May 27,
2007
compared
to the same period of the prior year resulted from certain nonrecurring
licensing revenues recorded in the prior year and was not material to
consolidated Landec revenues.
-30-
Gross
Profit (in
thousands):
|
Fiscal
Year ended May 27, 2007
|
|
Fiscal
Year ended May 28, 2006
|
Change
|
|||||||
|
Apio
Value Added
|
$
|
23,426
|
$
|
23,022
|
2
|
%
|
||||
|
Apio
Tech
|
1,639
|
619
|
165
|
%
|
||||||
|
Technology
Subtotal
|
25,065
|
23,641
|
6
|
%
|
||||||
|
Apio
Trading
|
3,187
|
3,212
|
(1
|
%)
|
||||||
|
Total
Apio
|
28,252
|
26,853
|
5
|
%
|
||||||
|
Landec
Ag
|
2,647
|
10,439
|
(75
|
%)
|
||||||
|
Corporate
|
1,487
|
2,752
|
(46
|
%)
|
||||||
|
Total
Gross Profit
|
$
|
32,386
|
$
|
40,044
|
(19
|
%)
|
||||
General
There
are
numerous factors that can influence gross profit including product mix, customer
mix, manufacturing costs, volume, sale discounts and charges for excess or
obsolete inventory, to name a few. Many of these factors influence or are
interrelated with other factors. Therefore, it is difficult to precisely
quantify the impact of each item individually. The Company includes in cost
of
sales all of the costs related to the sale of products in accordance with U.S.
generally accepted accounting principles. These costs include the following:
raw
materials (including produce, seeds and packaging), direct labor, overhead
(including indirect labor, depreciation, and facility related costs) and
shipping and shipping related costs. The following discussion surrounding gross
profit includes management’s best estimates of the reasons for the changes for
the fiscal year ended May 27, 2007 compared to the same period last year as
outlined in the table above.
Apio
Value-Added
The
increase in gross profit for Apio’s value-added specialty packaged vegetable
business for the fiscal year ended May 27,
2007
compared
to the same period last year was due to increased revenues, a more profitable
mix of products sold and improved operational efficiencies. The more profitable
mix of products sold and improved operational efficiencies were almost
completely offset by the increased costs associated with weather related
shortages of contracted product during several periods of fiscal 2007. These
shortages required Apio to procure supplemental product on the open market
at
costs significantly above contracted prices and resulted in sales volume
decreases and labor cost increases.
Apio
Tech
The
increase in gross profit for Apio Tech for the fiscal year ended May 27, 2007
compared to the same period last year was primarily due to the revenues received
from our licensing agreement with Chiquita and from research and development
contracts with other third parties.
Apio
Trading
Apio’s
trading business is a buy/sell business that realizes a commission-based margin
in the 4-6% range. The decrease in gross profit during the fiscal year ended
May
27, 2007 compared to the prior fiscal year was primarily due to the reduction
in
revenues which was almost completely offset by a shift to higher margin export
products from lower margin domestic commodity products.
Landec
Ag
The
decrease in gross profit for Landec Ag for the fiscal year ended May 27,
2007
compared
to the same periods last year was due to the sale of FCD to ASI and the
consequent loss of product sales and gross profit normally recorded during
the
second half of our fiscal year (see Note 2 of Notes to Consolidated Financial
Statements). The decrease in Landec Ag gross profit was partially offset by
$2.7
million of gross profit from the Intellicoat license agreement with
Monsanto.
-31-
Corporate
The
decrease in gross profit for Corporate for the fiscal year ended May 27,
2007
compared
to the prior year was primarily due to the Aesthetic Sciences’ licensing
revenues and gross profit recorded in the prior year.
Operating
Expenses (in
thousands):
|
Fiscal
Year ended May 27, 2007
|
Fiscal
Year ended May 28, 2006
|
Change
|
||||||||
|
Research
and Development:
|
||||||||||
|
Apio
|
$
|
1,169
|
$
|
1,108
|
6
|
%
|
||||
|
Landec
Ag
|
266
|
470
|
(43
|
%)
|
||||||
|
Corporate
|
1,639
|
1,464
|
(12
|
%)
|
||||||
|
Total
R&D
|
$
|
3,074
|
$
|
3,042
|
1
|
%
|
||||
|
|
||||||||||
|
Selling,
General and Administrative:
|
||||||||||
|
Apio
|
$
|
12,667
|
$
|
13,633
|
(7
|
%)
|
||||
|
Landec
Ag
|
(17,302
|
)
|
9,616
|
(280
|
%)
|
|||||
|
Corporate
|
3,582
|
4,730
|
(24
|
%)
|
||||||
|
Total
S,G&A
|
$
|
(1,053
|
)
|
$
|
27,979
|
(104
|
%)
|
|||
Research
and Development
Landec’s
research and development expenses consist primarily of expenses involved in
product development and commercialization initiatives. Research and development
efforts at Apio are focused on the Company’s proprietary BreatheWay membranes
used for packaging produce, with recent focus on extending the shelf life of
bananas and other shelf-life sensitive vegetables and fruit. At Landec Ag,
the
research and development efforts are focused on the Company’s proprietary
Intellicoat coatings for seeds, primarily corn seed. Beginning December 1,
2006,
all of the operating costs and expense of Landec Ag are being paid for by
Monsanto in accordance with the technology license and supply agreement (see
Note 2 of Notes to Consolidated Financial Statements). At Corporate, the
research and development efforts are primarily focused on uses for the
proprietary Intelimer polymers outside of food and agriculture.
The
increase in research and development expenses for the fiscal year ended May
27,
2007 compared to the same period last year was not material.
Selling,
General and Administrative
Selling,
general and administrative expenses consist primarily of sales and marketing
expenses associated with Landec’s product sales and services, business
development expenses and staff and administrative expenses.
The
decrease in selling, general and administrative expenses for the fiscal year
ended May 27,
2007
compared
to the same period last year was due to (1) the income realized from the sale
of
FCD to ASI (see Note 2 of Notes to Consolidated Financial Statements), (2)
one-time new packaging design and marketing related costs that were incurred
at
Apio during the first quarter of fiscal year 2006 and (3) the recording of
the
net proceeds of $1.5 million from an insurance settlement (see Note 6 of Notes
to Consolidated Financial Statements) to Corporate selling, general and
administrative expenses during the first six months of fiscal year 2007.
-32-
Other
(in
thousands):
|
Fiscal
Year ended May 27, 2007
|
Fiscal
Year ended May 28, 2006
|
Change
|
||||||||
|
Interest
Income
|
$
|
1,945
|
$
|
633
|
207
|
%
|
||||
|
Interest
Expense
|
(251
|
)
|
(452
|
)
|
(44
|
%)
|
||||
|
Minority
Interest Expense
|
(412
|
)
|
(529
|
)
|
(22
|
%)
|
||||
|
Other
Expenses
|
(2
|
)
|
(24
|
)
|
(92
|
%)
|
||||
|
Total
Other Income (Exp.)
|
$
|
1,280
|
$
|
(372
|
)
|
444
|
%
|
|||
|
|
||||||||||
|
Income
taxes
|
$ | (2,456 | ) | $ | 0 | N/M | ||||
Interest
Income
The
increase in interest income for the fiscal year ended May 27, 2007 compared
to
the prior year was primarily due to the increase in cash available for
investing and
higher average interest rates on those investments.
Interest
Expense
The
decrease in interest expense during the fiscal year ended May 27, 2007 compared
to the prior year was due to the Company’s reduction of debt.
Minority
Interest Expense
The
minority interest expense consists of the minority interest associated with
the
limited partners’ equity interest in the net income of Apio Cooling, LP.
The
decrease in the minority interest expense in fiscal year 2007 compared to fiscal
year 2006 was due to non-recurring gains for Apio Cooling during the first
quarter of fiscal year 2006.
Other
Expenses
Other
consists of non-operating income and expenses.
Income
Taxes
The
increase in the income tax expense in fiscal year 2007 is due to the income
realized from the sale of FCD which resulted in the Company recording a tax
provision of $2.5 million for state income taxes and federal AMT.
Fiscal
Year Ended May 28, 2006 Compared to Fiscal Year Ended May 29,
2005
Revenues
(in
thousands):
|
Fiscal
Year ended May 28, 2006
|
|
Fiscal
Year ended May 29, 2005
|
|
Change
|
||||||
|
Apio
Value Added
|
$
|
136,141
|
$
|
120,445
|
13
|
%
|
||||
|
Apio
Tech
|
685
|
52
|
1217
|
%
|
||||||
|
Technology
Subtotal
|
136,826
|
120,497
|
14
|
%
|
||||||
|
Apio
Trading
|
57,990
|
58,660
|
(1
|
%)
|
||||||
|
Total
Apio
|
194,816
|
179,157
|
9
|
%
|
||||||
|
Landec
Ag
|
34,096
|
25,648
|
33
|
%
|
||||||
|
Corporate
|
3,041
|
425
|
616
|
%
|
||||||
|
Total
Revenues
|
$
|
231,953
|
$
|
205,230
|
13
|
%
|
||||
-33-
Apio
Value Added
Apio’s
value-added revenues consist of revenues generated from the sale of specialty
packaged
fresh-cut and whole value-added processed vegetable products that are washed
and
packaged in our proprietary packaging and sold under Apio’s Eat Smart brand and
various private labels and from service revenues from Apio Cooling LP which
is
now combined with value-added.
The
increase in Apio’s value-added revenues for the fiscal year ended May 28, 2006
compared to the same period last year is due to increased product offerings,
increased sales to existing customers, the addition of new customers and product
mix changes to higher priced products. Specifically, sales of Apio’s value-added
12-ounce specialty packaged retail product line grew 16% and sales of Apio’s
value-added vegetable tray products grew 22% during the fiscal year ended May
28, 2006 compared to the same period last year. Overall value-added sales volume
increased 10% during the fiscal year ended May 28, 2006 compared to the same
period last year.
Apio
Tech
Apio
Tech
consists of Apio’s packaging technology business using its BreatheWay™ membrane
technology. The
first
commercial application included in Apio Tech is the banana packaging
technology.
Current
revenues generated from Apio Tech are primarily from the banana program with
Chiquita.
The
increase in Apio Tech revenues for the fiscal year ended May 28, 2006 compared
to the same period last year was not material to consolidated Landec
revenues.
Apio
Trading
Apio
trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex and from the purchase and sale of whole commodity fruit
and vegetable products domestically to Wal-Mart. The export portion of trading
revenues for fiscal year 2006 was $50.3 million or 87% of total trading
revenues.
The
decrease in revenues in Apio's trading business for the fiscal year ended May
28, 2006 compared to the same period last year was primarily due to a 23%
decrease in the domestic buy/sell commodity sales to Wal-Mart. Overall trading
sales volumes were lower by 2% for the fiscal year ended May 28, 2006 compared
to the same period last year. The decrease in volumes was partially offset
by
higher average sales prices due to the scarcity of product during certain months
of the year.
Landec
Ag
Landec
Ag
revenues consist of revenues generated from the sale of hybrid seed corn to
farmers under the Fielder’s Choice Directâ
and
Heartland Hybrids® brands and from the sale of Intellicoat coated corn and
soybean seeds to farmers and seed companies. For the fiscal years ended May
28,
2006 and May 29, 2005, over 95% of Landec Ag’s revenues were from the sale of
uncoated hybrid seed corn.
The
increase in revenues at Landec Ag during the fiscal year ended May 28, 2006
compared to the same period last year was primarily due to sales under the
Heartland Hybrids brand which was acquired on August 29, 2005.
Corporate
Corporate
revenues consist of revenues generated from partnering with others under
research and development agreements and supply agreements and from fees for
licensing our proprietary Intelimer technology to others and from the
corresponding royalties from these license agreements.
The
increase in Corporate revenues for the fiscal year ended May 28, 2006 compared
to the same period of the prior year was primarily due to (1) $1.56 million
in
revenues received from the license of our Intelimer technology in a specific
field to a medical device company in December 2005, (2) $300,000 in licensing
fees and research and development revenues from the license of our Intelimer
technology in specific fields to Air Products in March 2006 and (3) the
recognition of the remaining $550,000 of deferred revenue associated with the
Alcon license agreement through the revised agreement termination date of May
28, 2006.
-34-
Gross
Profit (in
thousands):
|
Fiscal
Year ended May 28, 2006
|
|
Fiscal
Year ended May 29, 2005
|
|
Change
|
||||||
|
Apio
Value Added
|
$
|
23,022
|
$
|
19,062
|
21
|
%
|
||||
|
Apio
Tech
|
619
|
15
|
4027
|
%
|
||||||
|
Technology
Subtotal
|
23,641
|
19,077
|
24
|
%
|
||||||
|
Apio
Trading
|
3,212
|
3,118
|
3
|
%
|
||||||
|
Total
Apio
|
26,853
|
22,195
|
21
|
%
|
||||||
|
Landec
Ag
|
10,439
|
9,448
|
10
|
%
|
||||||
|
Corporate
|
2,752
|
329
|
736
|
%
|
||||||
|
Total
Gross Profit
|
$
|
40,044
|
$
|
31,972
|
25
|
%
|
||||
General
There
are
numerous factors that can influence gross profit including product mix, customer
mix, manufacturing costs, volume, sale discounts and charges for excess or
obsolete inventory, to name a few. Many of these factors influence or are
interrelated with other factors. Therefore, it is difficult to precisely
quantify the impact of each item individually. The Company includes in cost
of
sales all the costs related to the sale of products in accordance with generally
accepted accounting principles. These costs include the following: raw materials
(including produce, seeds and packaging), direct labor, overhead (including
indirect labor, depreciation, and facility related costs) and shipping and
shipping related costs. The following discussion surrounding gross profit
includes management’s best estimates of the reasons for the changes for the
fiscal year ended May 28, 2006 compared to the same period last year as outlined
in the table above.
Apio
Value-Added
The
increase in gross profit for Apio’s value-added specialty packaged vegetable
business for the fiscal year ended May 28, 2006 compared to the same period
last
year was due to (1) the increase in value-added sales which increased 13% during
fiscal year 2006, (2) product mix changes to higher margin products and (3)
improved operational efficiencies driven largely by improved raw material
quality during fiscal year 2006 compared to the prior fiscal year.
Apio
Tech
The
increase in gross profit for Apio Tech for the fiscal year ended May 28, 2006
compared to the same period last year was primarily due to the revenues received
from our licensing agreement with Chiquita.
Apio
Trading
Apio’s
trading business is a buy/sell business that realizes a commission-based margin
in the 4-6% range. The increase in gross profit during the fiscal year ended
May
28, 2006 compared to the prior fiscal year was primarily due to product mix
changes to higher margin products which more than offset the reduction in
revenues.
Landec
Ag
The
increase in gross profit for Landec Ag for the fiscal year ended May 28, 2006
compared to the same period last year was due to the increase in revenues as
a
result of the acquisition of Heartland Hybrids in August 2005, partially offset
by higher royalty fees on corn seed hybrids with traits, such as genetics and
certain chemicals, resulting in lower gross profit as a percentage of sales
in
fiscal year 2006 compared to the same period last year.
-35-
Corporate
The
increase in gross profit for Corporate for the fiscal year ended May 28, 2006
compared to the same period last year was primarily due to (1) $1.56 million
in
revenues received from the license of our Intelimer technology in a specific
field to a medical device company in December 2005, (2) $300,000 in licensing
fees and research and development revenues from the license of our Intelimer
technology in specific fields to Air Products in March 2006 and (3) the
recognition of the remaining $550,000 of deferred revenue associated with the
Alcon license agreement through the revised agreement termination date of May
28, 2006.
.
Operating
Expenses (in
thousands):
|
Fiscal
Year ended May 28, 2006
|
|
Fiscal
Year ended May 29, 2005
|
|
Change
|
||||||
|
Research
and Development:
|
||||||||||
|
Apio
|
$
|
1,108
|
$
|
831
|
33
|
%
|
||||
|
Landec
Ag
|
470
|
647
|
(27
|
%)
|
||||||
|
Corporate
|
1,464
|
1,065
|
37
|
%
|
||||||
|
Total
R&D
|
$
|
3,042
|
$
|
2,543
|
20
|
%
|
||||
|
|
||||||||||
|
Selling,
General and Administrative:
|
||||||||||
|
Apio
|
$
|
13,633
|
$
|
12,354
|
10
|
%
|
||||
|
Landec
Ag
|
9,616
|
7,857
|
22
|
%
|
||||||
|
Corporate
|
4,730
|
3,201
|
48
|
%
|
||||||
|
Total
S,G&A
|
$
|
27,979
|
$
|
23,412
|
20
|
%
|
||||
Research
and Development
Landec’s
research and development expenses consist primarily of expenses involved in
product development and commercalization initiatives. Research and development
efforts at Apio are focused on the Company’s proprietary BreatheWay membranes
used for packaging produce, with recent focus on extending the shelf life of
bananas and other shelf-life sensitive vegetables and fruit. At Landec Ag,
the
research and development efforts are focused on the Company’s proprietary
Intellicoat coatings for seeds, primarily corn seed. At Corporate, the research
and development efforts are primarily focused on uses for the proprietary
Intelimer polymers outside of food and agriculture.
The
increase in research and development expenses for the fiscal year ended May
28,
2006 compared to the same period last year was due to increased efforts expended
at Apio Tech to expand its initiatives to programs beyond just bananas and
increased expenses at Corporate to support new collaborations, including the
addition of Landec’s COO, Dr. David Taft, who was the COO of Apio in fiscal year
2005.
Selling,
General and Administrative
Selling,
general and administrative expenses consist primarily of sales and marketing
expenses associated with Landec’s product sales and services, business
development expenses and staff and administrative expenses.
The
increase in selling, general and administrative expenses for the fiscal year
ended May 28, 2006 compared to the same period last year was primarily due
to
(1)
selling, general and administrative expenses of $2.0 million at Heartland
Hybrids, (2) planned increases in selling and marketing expenses at Apio and
Landec Ag to generate increases in revenues, (3) an increase in general and
administrative expenses at Corporate for business development consulting fees
and legal fees, (4) the accrual of bonuses for exceeding our fiscal year 2006
internal plan and
(5) in
fiscal
year 2005 a $713,000 gain on the sale of land at Apio was netted against
selling, general and administrative expenses.
-36-
Other
(in
thousands):
|
Fiscal
Year ended May 28, 2006
|
|
Fiscal
Year ended May 29, 2005
|
|
Change
|
||||||
|
Interest
Income
|
$
|
633
|
$
|
214
|
196
|
%
|
||||
|
Interest
Expense
|
(452
|
)
|
(414
|
)
|
9
|
%
|
||||
|
Minority
Interest Expense
|
(529
|
)
|
(411
|
)
|
29
|
%
|
||||
|
Other
Expenses
|
(24
|
)
|
(4
|
)
|
500
|
%
|
||||
|
Total
Other Expense
|
$
|
(372
|
)
|
$
|
(615
|
)
|
(40
|
%)
|
||
Interest
Income
The
increase in interest income for the fiscal year ended May 28, 2006 compared
to
the same period last year was primarily due to the increase in cash available
for investing and
higher average interest rates on those investments.
Interest
Expense
The
increase in interest expense during the fiscal year ended May 28, 2006 compared
to the same period last year was due to higher average interest rates on the
Company’s debt.
Minority
Interest Expense
The
minority interest expense consists of the minority interest associated with
the
limited partners’ equity interest in the net income of Apio Cooling, LP.
The
increase in the minority interest expense in fiscal year 2006 compared to fiscal
year 2005 was due to higher net income for Apio Cooling in fiscal year 2006
compared to fiscal year 2005.
Other
Expenses
Other
consists of non-operating income and expenses.
Liquidity
and Capital Resources
As
of May
27, 2007, the Company had cash and cash equivalents of $62.6 million, a net
increase of $42.1 million from $20.5 million at May 28, 2006 including Landec
Ag’s cash of $5.3 million as of May 28, 2006.
Cash
Flow from Operating Activities
Landec
used $2.1 million of cash flow in operating activities during the fiscal year
ended May 27,
2007
compared to generating $10.9 million from operating activities for the fiscal
year ended May 28,
2006.
The primary sources of cash during fiscal year 2007 were from fiscal year 2007
net income and non-cash related income/expenses, such as the income from the
sale of FCD and depreciation, of $8.5 million and an increase in deferred
revenue of $2.6 million due to the annual license payment received in accordance
with the license agreement with Monsanto (see Note 2 of Notes to Consolidated
Financial Statements). The primary uses of cash in operating activities during
fiscal year 2007 were from an $8.7 million increase in inventory, primarily
due
to the purchase of seed corn inventory by Landec Ag of $7.9 million prior to
the
sale of FCD on December 1, 2006 and a decrease in accounts payable of $2.9
million of which $4.8 million was from Landec Ag which was primarily related
to
royalty payments from fiscal year 2006 sales prior to the sale of
FCD.
-37-
Cash
Flow from Investing Activities
Net
cash
provided by investing activities for the year ended May 27, 2007 was $42 million
compared to the use of $5.5 million for the same period last year. The primary
source of cash from investing activities during fiscal year 2007 was from $49.4
million of proceeds, net of direct transaction expenses, from the sale of FCD.
The primary uses of cash from investing activities during fiscal year 2007
were
from the purchase of $6.8 million of property, plant and equipment primarily
for
the further expansion and automation of Apio’s value-added
facility.
Cash
Flow from Financing Activities
Net
cash
provided by financing activities for the fiscal year ended May 27, 2007 was
$2.1
million compared to $2.3 million for the same period last year. The cash
provided by financing activities during fiscal year 2007 was primarily due
to
net borrowings under Landec Ag’s line of credit of $9.3 million primarily for
the purchase of seed corn (the line of credit was assumed by Monsanto in the
sale of FCD and was immediately paid in full) and $2.7 million of cash received
from employees exercising their stock options. The cash used from financing
activities during fiscal year 2007 was primarily used to buy back Landec Ag’s
subsidiary options and stock for $7.4 million and to pay off all of Apio’s
long-term bank debt totaling $2.0 million.
Capital
Expenditures
During
the fiscal year ended May 27, 2007, Landec expanded Apio’s value added
processing facility and purchased vegetable processing equipment to support
the
further automation of Apio’s value added processing facility. These expenditures
represented the majority of the $6.8 million of capital
expenditures.
Debt
On
November 1, 2005, Apio amended its revolving line of credit with Wells Fargo
Bank N.A. extending the term of the line to August 31, 2007. In addition, the
line was reduced from $10.0 million to $7.0 million and outstanding amounts
under the line of credit now bear interest at either the prime rate less 0.25%
or the LIBOR adjustable rate plus 1.75% (7.07% at May 27, 2007). The revolving
line of credit with Wells Fargo contains certain restrictive covenants, which
require Apio to meet certain financial tests, including minimum levels of net
income, maximum leverage ratio, minimum net worth and maximum capital
expenditures. Landec has pledged substantially all of the assets of Apio to
secure the line of credit with Wells Fargo. At May 27,
2007,
no
amounts were outstanding under the revolving line of credit. Apio has been
in
compliance with all loan covenants since the inception of this
loan.
On
August
29, 2006, Landec Ag amended and restated its revolving line of credit with
Old
National Bank which increased the line from $7.5 million to $10 million. In
conjunction with the sale of FCD to ASI on December 1, 2006 (see Note 2 of
Notes
to Consolidated Financial Statements), Landec Ag’s line of credit was paid in
full by ASI and subsequently terminated.
Contractual
Obligations
The
Company’s material contractual obligations for the next five years and
thereafter as of May 27, 2007, are as follows (in thousands):
|
Due
in Fiscal Year Ended May
|
||||||||||||||||||||||
|
Obligation
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|||||||||||||||
|
Capital
Leases
|
$
|
28
|
28
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Operating
Leases
|
1,096
|
535
|
352
|
180
|
29
|
—
|
—
|
|||||||||||||||
|
Licensing
Obligation
|
500
|
100
|
100
|
100
|
100
|
100
|
—
|
|||||||||||||||
|
Purchase
Commitments
|
1,862
|
1,862
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Total
|
$
|
3,486
|
$
|
2,525
|
$
|
452
|
$
|
280
|
$
|
129
|
$
|
100
|
$
|
—
|
||||||||
-38-
Landec
is
not a party to any agreements with, or commitments to, any special purpose
entities that would constitute material off-balance sheet financing other than
the operating lease commitments listed above.
Landec’s
future capital requirements will depend on numerous factors, including the
progress of its research and development programs; the continued development
of
marketing, sales and distribution capabilities; the ability of Landec to
establish and maintain new collaborative and licensing arrangements; any
decision to pursue additional acquisition opportunities; weather conditions
that
can affect the supply and price of produce, the timing and amount, if any,
of
payments received under licensing and research and development agreements;
the
costs involved in preparing, filing, prosecuting, defending and enforcing
intellectual property rights; the ability to comply with regulatory
requirements; the emergence of competitive technology and market forces; the
effectiveness of product commercialization activities and arrangements; and
other factors. If Landec’s currently available funds, together with the
internally generated cash flow from operations are not sufficient to satisfy
its
capital needs, Landec would be required to seek additional funding through
other
arrangements with collaborative partners, additional bank borrowings and public
or private sales of its securities. There can be no assurance that additional
funds, if required, will be available to Landec on favorable terms if at
all.
Landec
believes that its debt facilities, cash from operations, along with existing
cash, cash equivalents and existing borrowing capacities will be sufficient
to
finance its operational and capital requirements for the foreseeable
future.
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 fiscal year of expected maturity for the Company’s debt
obligations. The carrying value of the Company’s debt obligations approximates
the fair value of the debt obligations as of May
27,
2007.
|
2008
|
2009
|
2010
|
2011
|
2012
|
There-after
|
Total
|
||||||||||||||||
|
Liabilities
(in 000’s)
|
||||||||||||||||||||||
|
Lines
of Credit
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||
|
Avg.
Int. Rate
|
||||||||||||||||||||||
|
Long
term debt, including current portion
|
||||||||||||||||||||||
|
Fixed
Rate
|
$
|
28
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
28
|
||||||||
|
Avg.
Int. Rate
|
5.90
|
%
|
5.90
|
%
|
||||||||||||||||||
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.
-39-
Item
9A. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management evaluated, with participation of our Chief Executive Officer and
our
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on Form
10-K. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures
are
effective in ensuring that information required to be disclosed in reports
filed
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission, and to
provide reasonable assurance that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal controls over financial reporting during the
quarter ended May 27, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of May 27,
2007. In making this assessment, our management used the criteria set forth
by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control - Integrated Framework. Our management has concluded that,
as
of May 27, 2007, our internal control over financial reporting was effective
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our independent registered public
accounting firm, Ernst & Young LLP, have issued an audit report on our
assessment of our internal control over financial reporting, which is included
herein.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected.
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of Landec Corporation
We
have
audited management’s assessment, included in the accompanying Management Report
on Internal Controls over Financial Reporting, that Landec Corporation
maintained effective internal control over financial reporting as of May 27,
2007, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Landec Corporation’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal control over financial
reporting based on our audit.
-40-
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Landec Corporation maintained effective
internal control over financial reporting as of May 27, 2007, is fairly stated,
in all material respects, based on the COSO criteria. Also, in our opinion,
Landec Corporation maintained, in all material respects, effective internal
control over financial reporting as of May 27, 2007, based on the COSO criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet