UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 18, 1997
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
0-27446 94-3025618
(Commission file number) (IRS Employer Identification No.)
3603 Haven Avenue, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 306-1650
N/A
Former name or former address, if changed from last report)
-1-
The undersigned Registrant hereby amends the following items from the
Current Report on Form 8-K filed on May 5, 1997. The Registrant is amending Item
7 to include certain required financial statements and pro forma financial
information and exhibits associated therewith.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Acquired Business
The following pages 3 through 6 contain (1) the unaudited
condensed balance sheet of Dock Resins Corporation ("Dock Resins")
as of March 31, 1997 and December 31, 1996 and the notes thereto
and (2) the unaudited statement of operations and the unaudited
statement of cash flows of Dock Resins and the notes thereto for
the three months ended March 31, 1997 and 1996. The audited
financial statements of Dock Resins as of December 31, 1996 and
December 31, 1995 and for the three years ended December 31, 1996
with the Report of Ernst & Young LLP, Independent Auditors thereon
have been included as Exhibit 99.1 to this filing.
(b) Pro Forma Financial Information
The following pages 7 through 14 contain (1) the unaudited pro
forma condensed combined balance sheets of Landec Corporation
("Landec") and Dock Resins as of January 31, 1997 and the notes
thereto and (2) the unaudited pro forma combined statement of
operations of Landec and Dock Resins for the three months ended
January 31, 1997 and for the year ended October 31, 1996 and the
notes thereto.
(c) Exhibits
2.1* Stock Purchase Agreement (including exhibits thereto) by and
among the Registrant, Dock Resins, and A. Wayne Tamarelli
dated April 18, 1997.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Dock Resins Corporation Financial Statements for December 31,
1996 and 1995 and the three years ended December 31, 1996
with Report of Ernst & Young LLP, Independent Auditors.
- ------------------------------
* Previously filed.
-2-
DOCK RESINS CORPORATION
CONDENSED BALANCE SHEET
(Unaudited)
(In thousands)
March 31, December 31,
1997 1996
------- -------
Assets
Current Assets:
Cash and cash equivalents $ 610 $ 410
Marketable securities 837 841
Accounts receivable, net 1,702 1,644
Inventories 1,555 1,252
Prepaid expenses and other current assets 106 243
------- -------
Total Current Assets 4,810 4,390
Property and equipment, net 1,588 1,537
------- -------
$ 6,398 $ 5,927
======= =======
Liabilities and Stockholder's Equity
Current Liabilities:
Accounts payable $ 1,084 $ 1,012
Payroll, bonuses and payroll taxes payable 947 740
Other accrued liabilities 459 488
Income taxes payable 13 83
Borrowings under revolving line of credit 25 25
Current portion of long term debt 92 86
------- -------
Total Current Liabilities 2,620 2,434
Long-term debt 778 772
Deferred compensation 124 116
Stockholder's Equity:
Common stock 79 79
Treasury stock (355) (355)
Retained earnings 3,152 2,881
------- -------
Total Stockholder's Equity 2,876 2,605
------- -------
$ 6,398 $ 5,927
======= =======
See accompanying notes.
-3-
DOCK RESINS CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended March 31,
1997 1996
------- -------
Net product sales $ 3,479 $ 3,028
Operating costs and expenses:
Cost of product sales 2,153 2,005
Research and development 312 264
Selling, general and administrative 751 600
------- -------
Total operating costs and expenses 3,216 2,869
------- -------
Income from operations 263 159
Interest income 11 2
Interest expense (23) (25)
------- -------
Income before state income tax 251 136
Provision (benefit) for state income tax (24) 3
------- -------
Net income $ 275 $ 133
======= =======
See accompanying notes.
-4-
DOCK RESINS CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
1997 1996
----- -----
Cash flows from operating activities:
Net income $ 275 $ 133
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 51 50
Changes in operating assets and liabilities:
Accounts receivable (58) (424)
Inventories (303) 3
Prepaid expenses and other current assets 137 (25)
Accounts payable 72 (195)
Payroll, bonuses and payroll taxes payable 207 (13)
Other accrued liabilities (29) 15
Income taxes payable (70) 11
Deferred compensation 8 (10)
----- -----
Total adjustments 15 (588)
----- -----
Net cash provided by (used in) operating activities 290 (455)
----- -----
Cash flows from investing activities:
Capital expenditures (102) (23)
----- -----
Net cash used in investing activities (102) (23)
----- -----
Cash flows from financing activities:
Additions to long-term debt 34 --
Payments of long-term debt (22) (20)
----- -----
Net cash provided by (used in) financing activities 12 (20)
----- -----
Net increase (decrease) in cash and cash equivalents 200 (498)
Cash and cash equivalents at beginning of period 410 866
----- -----
Cash and cash equivalents at end of period $ 610 $ 368
===== =====
See accompanying notes.
-5-
DOCK RESINS CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited financial statements contain all
adjustments necessary to present fairly the financial position of Dock Resins
Corporation ("Dock Resins") at March 31, 1997, and the results of operations and
cash flows for the three months ended March 31, 1997 and 1996. Interim results
for the three month periods are not necessarily indicative of operating results
to be expected for the full year.
2. INVENTORIES
Inventories are stated at the lower of cost (determined by the last-in,
first-out method, ("LIFO")) or market. At March 31, 1997 and December 31, 1996,
the LIFO inventory value approximated current cost and consisted of the
following:
March 31, December 31,
1997 1996
------ ------
(in thousands)
Raw materials ............................ $ 675 $ 420
Finished goods ........................... 880 832
------ ------
$1,555 $1,252
====== ======
3. INCOME TAXES
Income tax expense associated with Dock Resins on a historical basis reflects
"S" Corporation status. The tax benefit in 1997 resulted from the reversal of a
prior-year accrual.
4. SUBSEQUENT EVENTS
Pursuant to a Stock Purchase Agreement by and among Landec Corporation
("Landec"), Dock Resins and its shareholder, dated April 18, 1997 (the "Purchase
Agreement"), Landec acquired (the "Acquisition") all of the outstanding capital
stock of Dock Resins in exchange for an aggregate of 396,039 shares of Landec's
common stock, $3,262,861 in cash, a payable of $462,000 and a secured promissory
note with principal amount of $8,500,000. The payable and promissory note are
due in January 1998. As a result of the Acquisition, Dock Resins has become a
wholly-owned subsidiary of Landec.
Under the terms of the Purchase Agreement and a related Escrow Agreement dated
April 18, 1997, $1,500,000 and the 396,039 shares of Landec's common stock will
be held in escrow for the purpose of indemnifying Landec against certain
liabilities of Dock Resins and its shareholder. Such escrow will expire on
August 18, 2002.
-6-
LANDEC CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statements (collectively,
"the Pro Forma Financial Statements") were prepared to give effect to the
acquisition by Landec Corporation ("Landec" or the "Company") of all the
outstanding capital stock of Dock Resins. The acquisition has been accounted for
using the purchase method. The pro forma condensed combined balance sheet as of
January 31, 1997, assumed that the acquisition occurred on January 31, 1997. The
pro forma combined statement of operations for the three months ended January
31, 1997, and for the fiscal year ended October 31, 1996 assumes that the
acquisition occurred on November 1, 1995. The Pro Forma Financial Statements do
not purport to represent what Landec's financial position or results of
operations would have been if the acquisition in fact had occurred on the date
or at the beginning of the periods indicated or to project Landec's financial
position or results of operations for any future date or period.
The pro forma adjustments are based upon available information and upon certain
assumptions as described in Note 1 to the Pro Forma Financial Statements that
Landec believes are reasonable under the circumstances. The purchase price has
been allocated to the acquired assets and liabilities based on their respective
fair market values. The Pro Forma Financial Statements and accompanying notes
should be read in conjunction with the respective historical consolidated
financial statements of Landec and Dock Resins, including the notes thereto. The
historical consolidated financial statements of Landec are included in its
Quarterly Report on Form 10-Q for the period ended January 31, 1997, as filed
with the Securities and Exchange Commission on March 14, 1997 and in its Annual
Report on Form 10-K for the fiscal year ended October 31, 1996, as filed with
the Securities and Exchange Commission on January 29, 1997. The historical
financial statements of Dock Resins are included as Exhibit 99.1 to this Form
8-K/A.
-7-
LANDEC CORPORATION
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
January 31, 1997
(in thousands)
Landec Dock Resins Pro Forma Pro Forma
Corporation Corporation Adjustments Combined
----------- ----------- ----------- --------
Assets
Current Assets:
Cash and cash equivalents $ 10,370 $ 610 $ (8,838)(c) $ 2,142
(3,263)(e) (3,263)
Short-term investments 24,429 837 (837)(b) 24,429
Restricted investment -- -- 8,838 (c) 8,838
Accounts receivable, net 102 1,702 -- 1,804
Inventory 478 1,555 249 (a&d) 2,282
72 (b) 72
Prepaid expenses and other current assets 215 106 -- 321
-------- -------- -------- --------
Total Current Assets 35,594 4,810 (3,779) 36,625
Property and equipment, net 1,255 1,588 924 (a) 3,767
268 (b) 268
Intangible assets -- -- 7,074 (a) 7,074
Other assets 125 -- -- 125
-------- -------- -------- --------
$ 36,974 $ 6,398 $ 4,487 $ 47,859
======== ======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable $ 298 $ 1,084 -- $ 1,382
Accrued compensation 307 947 (834)(b) 420
Other accrued liabilities 202 459 1,013 (a) 1,674
(420)(b) (420)
Payable related to acquisition of Dock
Resins -- -- 8,962 (e) 8,962
-- -- 442 (a) 442
Income taxes payable -- 13 (13)(b) --
Borrowings under revolving line of credit -- 25 (25)(b) --
Current portion of long term debt 237 92 (86)(b) 243
Deferred revenue 229 -- -- 229
-------- -------- -------- --------
Total Current Liabilities 1,273 2,620 9,039 12,932
Non-current portion of long term debt 267 778 (752)(b) 293
Deferred compensation -- 124 -- 124
Stockholders' Equity:
Common stock - Landec 68,296 -- 2,098 (e) 70,394
Notes receivable from shareholders -
Landec (13) -- -- (13)
Deferred compensation - Landec (283) -- -- (283)
Accumulated deficit - Landec (32,566) -- (3,022)(a) (35,588)
Common stock - Dock Resins -- 79 (79)(a) --
Treasury stock - Dock Resins -- (355) 355 (a) --
Retained earnings - Dock Resins -- 3,152 (3,152)(a) --
-------- -------- -------- --------
Total Stockholders' Equity 35,434 2,876 (3,800) 34,510
-------- -------- -------- --------
$ 36,974 $ 6,398 $ 4,487 $ 47,859
======== ======== ======== ========
See accompanying notes
-8-
LANDEC CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
January 31, 1997
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet information has been
prepared by combining the historical consolidated balance sheet of Landec at
January 31, 1997 with the historical balance sheet of Dock Resins at March 31,
1997, and gives effect to the pro forma adjustments as described in the notes
below.
(a) The acquisition of Dock Resins, which was accounted for as a purchase,
has been recorded based upon available information and upon certain
assumptions that Landec believes are reasonable under the
circumstances. Estimated acquisition expenses of $1,455,000 include
approximately $1,013,000 of finder's fees, legal, accounting,
consulting and miscellaneous costs and approximately $442,000 payable
to the former shareholder of Dock Resins. The purchase price has been
allocated to the acquired assets and liabilities based on their
relative fair market values, subject to final adjustments. These
allocations are based on independent valuations and other studies. The
final values may differ from those set forth below.
(In thousands)
--------------
Estimated purchase price (Note e) $14,323
Estimated acquisition expenses 1,455
-------
Total estimated acquisition cost $15,778
=======
Historical net book value of the assets at March 31, 1997 $ 2,876
Increase in net book value of assets acquired (Note b) 1,633
Net write-up of inventories (Note d) 249
Write-up of property, plant and equipment 924
Covenant not to compete 77
Customer base 496
Work force in place 690
Trademark 775
Developed technology 5,036
In-process research and development 3,022
-------
$15,778
=======
In accordance with general accepted accounting principles, Landec will
allocate approximately $3.0 million of the purchase price to in-process
research and development. This amount will be taken as a charge to
operations for the quarter ending April 30, 1997, resulting in a
corresponding charge to retained earnings. This one-time charge is
reflected in the unaudited pro forma condensed combined balance sheet
but not in the unaudited pro forma combined statement of operations due
to its unusual, non-recurring nature.
-9-
LANDEC CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
January 31, 1997
(b) The increase in the net book value of the assets from March 31, 1997 to
the close date of April 18, 1997 is a result of an increase in the net
book value of assets acquired due to operating activities from March
31, 1997 to April 18, 1997 and the elimination of certain assets and
liabilities that were not assumed by Landec in the acquisition.
(c) Restricted cash in the form of an irrevocable, non-transferable, direct
pay letter of credit was set aside by Landec as security for the
promissory note issued in connection with the purchase of Dock Resins.
This instrument, which was subordinated by a certificate of time
deposit, matures in January, 1998.
(d) Landec will write-up the value of Dock Resins inventory to market value
(selling price less selling expenses) in connection with its allocation
of the aggregate purchase price for the acquisition. This write-up
includes the impact of the change in accounting policy from the LIFO to
the FIFO inventory method. Landec will charge this net write-up to cost
of goods sold during fiscal year 1997.
(e) The acquisition by Landec for all of the outstanding capital stock of
Dock Resins was exchanged for the following:
(In thousands)
--------------
Landec common stock $ 2,098
Promissory note and other payable 8,962
Cash paid at closing 3,263
-------
Purchase price $14,323
=======
A secured promissory note for $8.5 million and other payable of
approximately $462,000 related to the acquisition are due to the former
shareholder of Dock Resins and are due in January, 1998.
Furthermore, $1.5 million of the cash consideration and all of the
equity consideration was set aside in escrow to cover costs associated
with certain outstanding obligations of Dock Resins as well as any
potential breach of representations and warranties made by Dock Resins
in connection with the acquisition.
-10-
LANDEC CORPORATION
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
Three Months Ended January 31, 1997
(in thousands, except per share amounts)
Landec Dock Resins Pro Forma Pro Forma
Corporation Corporation Adjustments Combined
--------------- -------------- --------------- ---------------
Revenues:
Product sales $ 173 $ 3,479 -- $ 3,652
License fees -- -- -- --
Research and development revenues 217 -- -- 217
-------- -------- -------- --------
Total revenues 390 3,479 -- 3,869
Operating costs and expenses
Cost of product sales 309 2,153 84(b) 2,546
13(a) 13
Research and development 916 312 -- 1,228
Selling, general and administrative 934 751 51(b) 1,736
(5)(d) (5)
-------- -------- -------- --------
Total operating costs and expenses 2,159 3,216 143 5,518
-------- -------- -------- --------
Operating income (loss) (1,769) 263 (143) (1,649)
Interest income 494 11 -- 505
Interest expense (20) (23) 20(d) (23)
-------- -------- -------- --------
Income (loss) before income taxes (1,295) 251 (123) (1,167)
Provision (benefit) for state income tax -- (24) 36(e) 12
-------- -------- -------- --------
Net income (loss) $ (1,295) 275 (159) $ (1,179)
======== ======== ======== ========
Net income (loss) per share $ (0.12) $ (0.11)
======== ========
Shares used in calculating per share
information
10,760 396(c) 11,156
======== ======== ========
See accompanying notes.
-11-
LANDEC CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
January 31, 1997
The unaudited pro forma condensed combined statement of operations information
has been prepared by combining the historical consolidated statement of
operations of Landec for the three months ended January 31, 1997 with the
historical statement of operations of Dock Resins for the three months ended
March 31, 1997, and gives effect to the pro forma adjustments as described in
the notes below.
(a) Depreciation expense of $13,000 for the write-up of property, plant and
equipment arising from the Dock Resins acquisition was reflected as a
pro forma adjustment.
(b) Amortization expense of intangible assets arising from the Dock Resins
acquisition as shown below is reflected in the pro forma adjustments
and detailed as follows (dollars in thousands):
PERIOD OF THREE MONTH
AMOUNT AMORTIZATION AMORTIZATION
-------------- -------------- ----------------
Intangible assets:
Covenant not to compete $ 77 5 years $ 4
Customer base 496 10 years 12
Work force in place 690 7 years 25
Trademark 775 20 years 10
Developed technology 5,036 15 years 84
-------------- --------------
$ 7,074 $ 135
============== ==============
(c) The pro forma adjustments reflects the issuance of 396,039 shares of
Landec common stock that were exchanged as part of the acquisition of
Dock Resins. These shares were assumed to have been issued on November
1, 1995 for purposes of the pro forma statement of operations.
(d) Interest expense and loan guarantee fees that arose from the debt of
Dock Resins have been eliminated as the debt was assumed by the
previous owner upon the close of the acquisition.
(e) Income tax expense associated with Dock Resins on an historical basis
reflects "S" Corporation status. The pro forma adjustment eliminates
this status which provided a benefit resulting from the reversal of a
prior-year accrual and assumes "C" Corporation status for Dock Resins
for federal and state income tax purposes.
-12-
LANDEC CORPORATION
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
Twelve Months Ended October 31, 1996
(In thousands, except per share amounts)
Landec Dock Resins Pro Forma Pro Forma
Corporation Corporation Adjustments Combined
---------------- --------------- --------------- -------------
Revenues:
Product sales $ 755 $ 13,498 $ -- $ 14,253
License fees 600 -- -- 600
Research and development revenues 1,096 -- -- 1,096
-------- -------- -------- --------
Total revenues 2,451 13,498 -- 15,949
-------- -------- -------- --------
Operating costs and expenses
Cost of product sales 1,004 8,540 249(d) 9,793
336(b) 336
52(a) 52
Research and development 3,808 1,097 -- 4,905
Selling, general and administrative 3,288 3,183 202(b) 6,673
-- -- (17)(e) (17)
-------- -------- -------- --------
Total operating costs and expenses 8,100 12,820 822 21,742
-------- -------- -------- --------
Operating income (loss) (5,649) 678 (822) (5,793)
Interest income 1,548 18 -- 1,566
Interest expense (99) (96) (355)(f) (550)
-- -- 85(e) 85
-------- -------- -------- --------
Income (loss ) before income taxes (4,200) 600 (1,092) (4,692)
Provision for state income tax -- (5) 5(g) --
-------- -------- -------- --------
Net income (loss) $ (4,200) $ 605 $ (1,097) $ (4,692)
======== ======== ======== ========
Net income (loss) per share $ (0.55) $ (0.58)
======== ========
Shares used in calculating per share
information 7,699 396(c) 8,095
======== ======== ========
See accompanying notes.
-13-
LANDEC CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
October 31, 1996
The unaudited pro forma combined statement of operations information has been
prepared by combining the historical consolidated statement of operations of
Landec for the fiscal year ended October 31, 1996 with the historical statement
of operations of Dock Resins for the fiscal year ended December 31, 1996, and
gives effect to the pro forma adjustments as described in the notes below.
(a) Depreciation expense of $52,000 for the write-up of property, plant and
equipment arising from the Dock Resins acquisition was reflected as a
pro forma adjustment.
(b) Amortization expense of intangible assets arising from the Dock Resins
acquisition as shown below are reflected in the pro forma adjustments
and detailed as follows (dollars in thousands):
PERIOD OF ANNUAL
AMOUNT AMORTIZATION AMORTIZATION
-------------- -------------- --------------
Intangible assets:
Covenant not to compete $ 77 5 years $ 15
Customer base 496 10 years 50
Work force in place 690 7 years 98
Trademark 775 20 years 39
Developed technology 5,036 15 years 336
-------------- --------------
$ 7,074 $ 538
============== ==============
(c) The pro forma adjustment reflects the issuance of 396,039 shares of
Landec common stock that were exchanged as part of the acquisition of
Dock Resins. These shares were assumed to have been issued on November
1, 1995 for purposes of the pro forma statement of operations.
(d) Cost of product sales includes the charge for the inventory recorded in
connection with the purchase price allocation and assumes that the
inventory was sold during the twelve months ended October 31, 1996
based on historical inventory turnover.
(e) Interest expense and loan guarantee fees that arose from the debt of
Dock Resins have been eliminated as the debt was assumed by the
previous owner upon the close of the acquisition.
(f) Interest expense associated with the secured promissory note exchanged
in the purchase price of Dock Resins.
(g) Income tax expense associated with Dock Resins on an historical basis
reflects "S" Corporation status. The pro forma adjustment eliminates
this status which provided a benefit as a result of the difference
between book and state tax depreciation and assumes "C" Corporation
status for Dock Resins for federal and state income tax purposes.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LANDEC CORPORATION
(Registrant)
Date: July 3, 1997 By: /s/ Joy T. Fry
----------------------------
Joy T. Fry
Vice President of Finance and
Administration and Chief Financial
Officer
-15-
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 31, 1997, with respect to the
financial statements of Dock Resins Corporation included in the Current Report
on Form 8-K/A dated July 3, 1997 of Landec Corporation, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
MetroPark, New Jersey
June 30, 1997
Exhibit 99.1
Financial Statements
Dock Resins Corporation
December 31, 1996
Dock Resins Corporation
Financial Statements
December 31 1996
Contents
Report of Independent Auditors...............................................1
Balance Sheets...............................................................2
Statements of Income.........................................................3
Statements of Stockholder's Equity...........................................4
Statements of Cash Flows.....................................................5
Notes to Financial Statements................................................6
Report of Independent Auditors
The Board of Directors
Dock Resins Corporation
We have audited the accompanying balance sheets of Dock Resins Corporation at
December 31, 1996 and 1995, and the related statements of income, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dock Resins Corporation at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
MetroPark, New Jersey
January 31, 1997
1
Dock Resins Corporation
Balance Sheets
December 31
1996 1995
---------------------------------
Assets
Current assets:
Cash and cash equivalents $ 410,230 $ 866,366
Marketable securities 841,392 --
Accounts receivable 1,644,170 1,110,334
Inventories:
Raw materials 419,692 424,361
Finished goods 832,395 732,443
---------------------------------
1,252,087 1,156,804
Prepaid expenses and other current assets 241,595 106,330
---------------------------------
Total current assets 4,389,474 3,239,834
Property, plant and equipment, at cost:
Land 236,824 236,824
Buildings and improvements 550,548 550,548
Machinery and equipment 2,504,348 2,452,877
Construction in progress 219,932 --
---------------------------------
3,511,652 3,240,249
Less accumulated depreciation 1,974,369 1,786,207
---------------------------------
Net property, plant and equipment 1,537,283 1,454,042
---------------------------------
$5,926,757 $4,693,876
=================================
Liabilities and stockholder's equity Current liabilities:
Accounts payable $1,011,999 $ 952,676
Payroll, bonuses and payroll taxes payable 739,890 165,562
Other accrued expenses 487,662 447,913
Income taxes payable 83,077 61,192
Borrowings under revolving line of credit 25,000 25,000
Current portion of long-term debt 86,384 86,384
---------------------------------
Total current liabilities 2,434,012 1,738,727
Long-term debt 771,939 858,358
Deferred compensation 115,884 96,713
Stockholder's equity:
Common stock, no par value:
Authorized 2,500 shares
Issued 300 shares 78,754 78,754
Retained earnings 2,881,505 2,276,661
---------------------------------
2,960,259 2,355,415
Less cost of treasury stock-75 shares 355,337 355,337
---------------------------------
Total stockholder's equity 2,604,922 2,000,078
---------------------------------
$5,926,757 $4,693,876
=================================
See accompanying notes.
2
Dock Resins Corporation
Statements of Income
Year ended December 31
1996 1995 1994
----------------------------------------------------------
Net sales $ 13,498,204 $ 11,889,186 $ 11,185,215
Operating costs and expenses:
Cost of sales 8,540,435 8,026,647 7,714,511
Research and development 1,096,792 1,031,167 977,942
Selling, general and administrative 3,182,547 2,312,687 2,077,225
----------------------------------------------------------
Total operating costs and expenses 12,819,774 11,370,501 10,769,678
----------------------------------------------------------
Operating profit 678,430 518,685 415,537
Interest income 18,246 5,860 2,517
Interest expense (96,332) (122,527) (152,945)
----------------------------------------------------------
Income before income taxes 600,344 402,018 265,109
Provision (benefit) for state income taxes:
Current 17,400 6,500 12,500
Deferred (12,900) (4,700) --
----------------------------------------------------------
(4,500) 1,800 12,500
----------------------------------------------------------
Net income $ 604,844 $ 400,218 $ 252,609
==========================================================
See accompanying notes.
3
Dock Resins Corporation
Statements of Changes in Stockholder's Equity
Common Stock Total
---------------------------- Retained Treasury Stockholder's
Shares Amount Earnings Stock Equity
-----------------------------------------------------------------------------------
Balance at December 31, 1993 300 $ 78,754 $1,623,834 $ (355,337) $1,347,251
Net income 252,609 252,609
-----------------------------------------------------------------------------------
Balance at December 31, 1994 300 78,754 1,876,443 (355,337) 1,599,860
Net income 400,218 400,218
-----------------------------------------------------------------------------------
Balance at December 31, 1995 300 78,754 2,276,661 (355,337) 2,000,078
Net income 604,844 604,844
-----------------------------------------------------------------------------------
Balance at December 31 1996 300 $ 78,754 $2,881,505 $ (355,337) $2,604,922
===================================================================================
See accompanying notes.
4
Dock Resins Corporation
Statements of Cash Flows
Year ended December 31
1996 1995 1994
---------------------------------------------------
Cash flows from operating activities
Net income $ 604,844 $ 400,218 $ 252,609
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 205,012 214,714 232,257
Changes in operating assets and liabilities:
Accounts receivable (533,836) 46,193 162,986
Inventories (95,283) 36,414 (252,955)
Prepaid expenses (135,265) (4,606) (7,328)
Accounts payable 59,323 187,493 (76,391)
Payroll, bonuses and payroll taxes payable 574,328 72,150 (6,790)
Other accrued expenses 39,749 100,963 156,331
Income taxes payable 21,885 (10,550) 41,410
Deferred compensation 19,171 11,520 10,230
---------------------------------------------------
Net cash provided by operating activities 759,928 1,054,509 512,359
---------------------------------------------------
Cash flows from investing activities
Capital expenditures (288,253) (63,554) (34,281)
Purchase of marketable securities (841,392) -- --
Decrease in other assets -- -- 545,651
---------------------------------------------------
Net cash (used in) provided by investing activities (1,129,645) (63,554) 511,370
---------------------------------------------------
Cash flows from financing activities
Borrowings under line of credit 150,000 550,000 1,275,000
Payments under line of credit (150,000) (950,000) (1,800,000)
Payments of long-term debt (86,419) (104,120) (120,314)
---------------------------------------------------
Net cash used in financing activities (86,419) (504,120) (645,314)
---------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (456,136) 486,835 378,415
Cash and cash equivalents at beginning of year 866,366 379,531 1,116
---------------------------------------------------
Cash and cash equivalents at end of year $ 410,230 $ 866,366 $ 379,531
===================================================
Supplemental disclosures of cash flow information Cash paid (refunded) during
the year:
Interest $ 84,462 $ 116,796 $ 154,963
===================================================
Income taxes $ (4,485) $ 12,550 $ (7,941)
===================================================
See accompanying notes.
5
Dock Resins Corporation
Notes to Financial Statements
December 31 1996
1. Summary of Significant Accounting Policies
Organization
Dock Resins Corporation (the Company) manufactures and sells resins, adhesives,
sealants, coatings and related products to various industrial customers
principally in the United States.
Inventories
Inventories are stated at the lower of cost (determined by the last-in,
first-out method) or market. At December 31, 1996 and 1995, the LIFO inventory
value approximates current cost.
Property, Plant and Equipment
For financial reporting purposes, depreciation is provided on the straight-line
basis over the estimated useful life of each asset. Accelerated methods are used
for tax purposes. Replacements, betterments and additions to property, plant and
equipment are capitalized at cost. Expenditures for maintenance and repairs are
charged to income as incurred.
The estimated useful lives used in computing depreciation are as follows:
Buildings and improvements 20 years
Machinery and equipment 5 - 10 years
Depreciation expense charged to earnings for the years ended December 31, 1996,
1995 and 1994 was approximately $205,000, $207,000 and $220,000, respectively.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
6
Dock Resins Corporation
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Research and Development
Research and development costs are expensed as incurred.
Cash Equivalents
The Company considers as cash equivalents all highly-liquid marketable
securities with an original maturity of three months or less.
Marketable Securities
Marketable securities consist of fixed income investments (state and local
government obligations and short-term commercial paper) with maturity dates
ranging from 1997 through 2007 as of December 31, 1996 which can be readily
purchased or sold using established markets. Management determines the
appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. Such securities are
classified as available for sale and, accordingly, are carried at fair value
which approximates cost at December 31, 1996. The amortized cost of debt
securities is adjusted for amortization of premium and accretion of discounts to
maturity. Such amortization, realized gains and losses, interest and dividends
are included in interest income.
Profit Sharing Plan
The Company has a profit sharing plan which covers substantially all employees.
Contributions to the plan, which are funded as accrued, are determined at the
discretion of the Board of Directors. Such contributions were $80,000 for 1996,
$65,000 for 1995 and $60,000 for 1994, respectively.
Effective January 1, 1995, the Company's profit sharing plan was amended to
allow for contributions qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees may elect to contribute up to 12% of their salaries,
subject to IRS limitations, to the plan. The Company contributes an amount equal
to 30% of the first 5% of employee contributions. Contributions to the plan by
the Company amounted to approximately $24,800 in 1996 and $15,300 in 1995.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
7
Dock Resins Corporation
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of', which has no
effect on its financial condition or results of operations. The Company records
impairment losses on long-lived assets used in operations or expected to be
disposed when events and circumstances indicate that the assets are less than
the carrying amounts of those assets. No such events and circumstances have
occurred.
Fair Value of Financial Instruments
The estimated fair value of the Company's marketable securities (based upon
quoted market prices) and long-term debt (based upon current rates offered to
the Company) approximate their carrying values at December 31, 1996.
Reclassifications
Certain 1995 and 1994 balances have been reclassified to conform to 1996
presentation.
2. Debt
Long-term debt consists of the following:
1996 1995
-----------------------------------
Unsecured note payable to shareholder, interest at 10.5%, payable in annual
principal installments of $7,500 through 2004. $ 52,500 $ 60,000
Mortgage loan payable to bank, interest at 8.5%, payable in monthly
installments of principal and interest of $6,042 and the remaining
principal of $494,936 due August 2000. 591,383 611,818
Equipment line of credit/term loan facility payable to bank, interest at
9.0%, payable in monthly installments of principal of $4,874 plus
interest due August 2000. 214,440 272,924
-----------------------------------
858,323 944,742
Less current maturities 86,384 86,384
-----------------------------------
$ 771,939 $ 858,358
===================================
8
Dock Resins Corporation
Notes to Financial Statements (continued)
2. Debt (continued)
At December 31, 1996, long-term debt was due in aggregate annual installments,
as follows:
1997 $ 86,384
1998 91,233
1999 93,465
2000 564,741
Thereafter 22,500
--------
$858,323
========
The Company's Amended and Restated Loan and Security Agreement, dated as of June
30, 1996, provides for a $ 1,250,000 revolving line of credit, a $ 1,000,000
equipment line of credit and a $614,000 mortgage loan. Each of the borrowings
under the Amended and Restated Loan and Security Agreement is collateralized by
substantially all of the Company's assets and is guaranteed by the Company's
shareholder. Further, the unsecured note payable to the shareholder is
subordinated to each of the borrowings. The Amended and Restated Loan and
Security Agreement contains certain restrictive covenants, the more significant
of which relate to limitations on additional borrowings and require maintenance
of a specified financial leverage ratio.
The revolving line of credit, which bears interest at the lender's floating base
rate (8.25% at December 31, 1996) plus .5%, is available through June 30, 1997.
The line of credit provides for borrowings equal to 80% of the Company's
eligible accounts receivable. No commitment fees were charged under the
agreement and no compensating balances are required.
The equipment line of credit provides for borrowings by the Company through June
30, 1997 to a maximum of 80% of the purchase price of equipment purchased by the
Company. Each borrowing under this line is evidenced by a separate term loan
note, due in equal monthly principal payments over either 60 months or, for
certain specified equipment, 59 months with a balloon payment equal to the
remaining balance due on the sixtieth month.
3. Income Taxes
The Company is an "S" Corporation for federal income tax purposes. This election
generally eliminates federal income taxes at the corporate level and profits are
taxed directly to the Company's shareholder. Therefore, no provision for federal
income taxes is included in the accompanying financial statements.
9
Dock Resins Corporation
Notes to Financial Statements (continued)
3. Income Taxes (continued)
The Company is also an "S" Corporation for New Jersey state income tax purposes.
This election generally reduces state income taxes at the corporate level to a
rate equal to the difference between the corporate tax rate and the highest
marginal personal tax rate (such rate differential was 2.63% for 1996, 2.42% for
1995 and 2.35% for 1994). The Company's shareholder is also taxed directly by
New Jersey on the Company's profits.
For 1996 and 1995, the effective state income tax rates are lower than the
statutory state tax rates, principally reflecting the tax benefits of state
research and development tax credits. For 1994, the effective state income tax
rate is higher than the statutory tax rate. This results from the
non-deductibility of certain payments and charges.
Deferred state income taxes are primarily attributable to temporary differences
which are not currently deductible for income tax purposes, including inventory
reserves, bonuses, deferred compensation and certain other reserves and accrued
liabilities, partially offset by differences between book and state tax
depreciation.
The Company has not recorded any valuation allowances against its deferred tax
assets at December 31, 1996 and 1995 as full realization of these assets is
expected.
4. Bonus and Deferred Compensation Plans
Certain officers and employees of the Company are paid bonuses at the discretion
of the board of directors.
The Company maintains a deferred compensation agreement for one of its
employees, with benefits payable, contingent upon continued employment, three
years after being earned. The annual expense for this agreement was $31,171 for
1996, $26,519 for 1995 and $23,500 for 1994. Included in payroll, bonuses and
payroll taxes payable was $27,000 and $25,000 at December 31, 1996 and 1995,
respectively, representing the current portion of deferred compensation.
5. Contingencies
The Company's largest customer accounted for approximately 24%, 17% and 20% of
sales in 1996, 1995 and 1994, respectively, and approximately 39% and 19% of
accounts receivable at December 31, 1996 and 1995, respectively.
10
Dock Resins Corporation
Notes to Financial Statements (continued)
5. Contingencies (continued)
The Company is subject to legal proceedings and environmental claims which arise
in the ordinary course of business. In the opinion of management and counsel,
the ultimate amount of liability, if any, resulting from these actions will not
materially affect the financial position of the Company.
6. Subsequent Events (Unaudited)
Pursuant to a Stock Purchase Agreement by and among Landec Corporation
("Landec"), the Company and its stockholder, dated April 18, 1997 (the "Purchase
Agreement"), Landec acquired (the "Acquisition") all of the outstanding capital
stock of the Company in exchange for an aggregate of 396,039 shares of Landec's
common stock, $3,262,861 in cash, a payable of $462,000 and a secured promissory
note with principal amount of $8,500,000. The payable and promissory note are
due in January 1998. As a result of the Acquisition, the Company has become a
wholly-owned subsidiary of Landec.
Under the terms of the Purchase Agreement and a related Escrow Agreement dated
April 18, 1997, $1,500,000 and the 396,039 shares of Landec's common stock will
be held in escrow for the purpose of indemnifying Landec against certain
liabilities of the Company and its stockholder. Such escrow will expire on
August 18, 2002.
11
