UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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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 30, 2010, or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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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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Delaware
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94-3025618
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|
(State
or other jurisdiction of
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(IRS
Employer
|
|
incorporation
or organization)
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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 Global Select Stock
Market
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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 ¨ 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 ¨ 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 ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer” and “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
Accelerated Filer ¨
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Accelerated
Filer x
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Non
Accelerated Filer ¨
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Smaller
Reporting Company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨
No x
The
aggregate market value of voting stock held by non-affiliates of the Registrant
was approximately $157,244,000 as of November 29, 2009, 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 20, 2010, there were 26,507,778 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to its October 2010
Annual Meeting of Stockholders 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.
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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|||||
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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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21
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1B.
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Unresolved
Staff Comments
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28
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2.
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Properties
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29
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3.
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Legal
Proceedings
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29
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4.
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[Removed
and reserved]
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29
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Part
II
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|||||
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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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30
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6.
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Selected
Financial Data
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31
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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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32
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7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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48
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8.
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Financial
Statements and Supplementary Data
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48
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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48
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9A.
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Controls
and Procedures
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49
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9B.
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Other
Information
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50
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Part
III
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|||||
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10.
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Directors
and Executive Officers of the Registrant
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51
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11.
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Executive
Compensation
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51
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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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51
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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51
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14.
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Principal Accountant Fees and
Services
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51
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Part
IV
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|||||
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15.
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Exhibits
and Financial Statement Schedules
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52
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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.
Corporate
Overview
Landec Corporation and its subsidiaries
(“Landec” or the “Company”) design, develop, manufacture and sell polymer
products for food and agricultural products, medical devices and licensed
partner applications that incorporate Landec’s patented polymer
technologies. The Company has two proprietary polymer technology
platforms: 1) Intelimer® polymers, and 2) Hyaluronan (“HA”)
biopolymers. The Company’s proprietary polymer technologies are the
foundation, and a key differentiating advantage, upon which Landec has built its
business.
After the acquisition of Lifecore
Biomedical, Inc. (“Lifecore”) on April 30, 2010, Landec now has four core
businesses – Food Products Technology, Commodity Trading, Hyaluronan-based
Biomaterials and Technology Licensing, each of which is described
below. Financial information concerning the industry segments for
which the Company reported its operations during fiscal years 2008, 2009 and
2010 is summarized in Note 14 to the Consolidated Financial
Statements.
Our
wholly-owned subsidiary, Apio, operates our Food Products Technology business,
combining Landec’s proprietary food packaging technology with the capabilities
of a large national food supplier and value-added produce
processor. In Apio’s value-added operations, produce is processed by
trimming, washing, mixing, and packaging into bags and trays that incorporate
Landec’s BreatheWay® membrane
technology. The BreatheWay membrane increases shelf life and reduces
shrink (waste) for retailers and, for certain products, eliminates the need for
ice during the distribution cycle and helps to ensure that consumers receive
fresh produce by the time the product makes its way through the supply
chain. Apio also licenses the BreatheWay technology to Chiquita Brands
International, Inc. (“Chiquita”) for packaging and distribution of bananas and
avocados and to Windset Farms for packaging of greenhouse grown cucumbers,
peppers and tomatoes.
Apio also operates the Commodity
Trading business, which combines Apio’s export company, Cal Ex Trading Company
(“Cal-Ex”), with Apio’s domestic buy-sell commodity business. The
Commodity Trading business purchases and sells whole fruit and vegetable
products to predominantly Asian markets.
Our newly acquired wholly-owned
subsidiary, Lifecore, operates our Hyaluronan-based Biomaterials business and is
principally involved in the development and manufacture of products utilizing
hyaluronan, a naturally occurring polysaccharide that is widely distributed in
the extracellular matrix of connective tissues in both animals and
humans. Lifecore’s products are primarily sold to three medical
segments: (1) Ophthalmic, (2) Orthopedic and (3) Veterinary. Lifecore
also supplies hyaluronan to customers pursuing other medical applications, such
as aesthetic surgery, medical device coatings, tissue engineering and
pharmaceuticals. Lifecore leverages its proprietary fermentation
process to manufacture premium, pharmaceutical-grade hyaluronan, and its
proprietary aseptic filling capabilities to deliver HA finished goods to its
customers. Lifecore also manufactures and sells its own HA-based
finished goods. Lifecore is known in the medical segments as the
premium supplier of HA. Its name recognition allows Lifecore to
acquire new customers and sell new products with only a small marketing or sales
capability.
Landec’s Technology Licensing business
develops proprietary polymer technologies and applies them in a wide range of
applications including seed coatings and treatments, temperature indicators,
controlled release systems, drug delivery, pressure sensitive adhesives and
personal care products. These applications are commercialized through
partnerships with third parties resulting in licensing and royalty
revenues. For example, Monsanto Company (“Monsanto”) has an exclusive
license to our Intellicoat® seed coating technology for specific seed treatment
applications, Air Products and Chemicals, Inc. (“Air Products”) has an exclusive
license to our Intelimer polymers for personal care products and Nitta
Corporation (“Nitta”) licenses Landec’s proprietary pressure sensitive adhesives
for use in the manufacture of electronic components by their
customers.
- 4 -
Landec was incorporated in California
on October 31, 1986 and reincorporated as a Delaware corporation on November 6,
2008. Our common stock is listed on The NASDAQ Global Select Market
under the symbol “LNDC”.
Technology
Overview
Landec has two polymer technology
platforms. The first platform is its proprietary Intelimer
polymer. The Intelimer polymer is a crystalline, hydrophobic polymer
that has very unique characteristics and benefits. The first unique
feature of this polymer system is the way that it uses a temperature switch to
control and modulate properties such as viscosity, permeability and adhesion
when varying the materials’ temperature above and below the temperature
switch. The sharp temperature switch is adjustable between 0-100°C. A
second unique feature of the Intelimer polymer materials is its unique
controlled release properties. The polymer is able to deliver active
ingredients with low or no burst, with a sustained release over periods of
time. Finally, Intelimer polymers can be designed to contain up to
80% renewable materials from components of natural raw materials such as
rapeseed oil, palm oil or coconut oil, and can be supplied in biocompatible and
bioerodible forms.
With the acquisition of Lifecore on
April 30, 2010, Landec added its second proprietary polymer technology
platform. Hyaluronan is a non-crystalline, hydrophilic polymer
that exists naturally within the human body, especially within the aqueous humor
of the eye, synovial fluid, skin and umbilical cord. The
visco-elastic properties and water solubility of HA make it ideal for medicinal
applications where lubricity and protection are critical. HA can be
produced in two ways, either through bacterial fermentation or through
extraction from rooster combs. Lifecore produces HA only from
fermentation, using an extremely efficient microbial fermentation process and a
highly effective purification operation.
A)
Intelimer Polymers
Our
patented proprietary Intelimer polymers 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 can be irreversible or repeatedly
reversible and can be tailored by Landec to occur at specific temperatures,
thereby offering substantial competitive advantages in the Company's target
markets.
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 or synthetic 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 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.
- 5 -
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 irreversible or repeatedly
reversible. Landec can set the polymer switch temperature anywhere between
0°C to 100°C by varying the
average length of the side chains. The reversible transitions between
crystalline and amorphous states are illustrated in Figure 2 below.
- 6 -
This
chemical structure provides an additional benefit. Spatially distinct
regions of the Intelimer polymer confer different physical properties on the
material. Each part can be tuned independently to meet the needs of a
given application. For example, switching temperature (which arises
from one part of the chain) can be adjusted independently of adhesive properties
(which arise from another part of the chain). In addition to
temperature, the pH and other environmental parameters can be used as the
“switch” to trigger a significant change in physical
properties. Also, side chain crystallizable polymers when mixed with
any active material, for example a therapeutic drug, can control the release of
the active materials by the crystalline structure of the Intelimer polymer while
in the crystalline state. In this manner therapeutic drugs can be delivered over
a sustained and long period of time. Or, a fragrance can be emitted steadily
over a long period of time from a crystalline Intelimer polymer.
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 catalysts 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 1990’s.
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.
B)
Hyaluronan Biopolymers
Hyaluronan, a naturally occurring
polysaccharide, is a component of many tissues in the body and of physiological
fluids that lubricate or otherwise protect the body’s soft tissues. Due to its
widespread presence in tissues, its critical role in normal physiology and its
high degree of biocompatibility, the Company believes that hyaluronan will
continue to be used for an increasing variety of medical
applications. Lifecore produces hyaluronan through a proprietary
fermentation process.
Hyaluronan was first demonstrated to
have commercial medical utility as a viscoelastic solution in
cataract
surgery. In
this application, it is used for maintaining the shape of the anterior chamber
and protecting corneal tissue during the removal and implantation of intraocular
lenses. The first ophthalmic hyaluronan product, produced by
extraction from rooster comb tissue, became commercially available in the United
States in 1981. Hyaluronan-based products, produced either by rooster
comb extraction or by fermentation processes such as Lifecore’s, have since
gained widespread acceptance in ophthalmology and are currently used in the
majority of cataract extraction procedures in the world. Lifecore’s
hyaluronan is also used as an orthopedic carrier vehicle for allogeneic
freeze-dried demineralized bone as the active component of devices to treat the
symptoms of osteoarthritis, and as a formulation component to provide increased
lubricity to medical devices. The Company’s hyaluronan has also been
utilized in veterinary drug applications to treat traumatic
arthritis.
Trademarks/Trade
names
Intelimer®, Landec®, Apio®, Eat Smart®,
BreatheWay®, Intellicoat®, Early Plant®, Pollinator Plus®, Relay® Cropping,
Lifecore®, Revitalure™, LUROCOAT® and
Ortholure™ are trademarks or registered trademarks and trade names of the
Company in the United States and other countries. This Annual Report
on Form 10-K also refers to the trademarks of other companies.
Description
of Core Business
Landec participates in four core
business segments: Apio, Inc. with the Food Products Technology and
Commodity Trading businesses, Lifecore Biomedical, LLC, with Hyaluronan-based
Biomaterials business and Landec’s Technology Licensing
business.
- 7 -
A) 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, historically one of the fastest growing
segments in the produce industry. Landec’s proprietary
BreatheWay packaging technology is
used to package fresh-cut or whole produce, the result is a convenient,
ready-to-eat finished product that achieves increased shelf life and reduced
shrink (waste) without the need for ice during the distribution
cycle. These 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 a state-of-the-art fresh-cut processing
facility and year-round access to quality vegetable sourcing to produce products
which Apio distributes to top U.S. retail grocery chains, major club stores and
foodservice customers. The Company’s proprietary BreatheWay packaging
business has been combined with Apio into a subsidiary that retains the Apio
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: BreatheWay Membranes
Certain types of fresh-cut and whole
produce can spoil or discolor rapidly when packaged in conventional packaging
materials and, therefore, are 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 cut, washed, 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 $100 billion 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, and safety
delivered to the point of sale.
Although fresh-cut produce companies
have had success in the salad market, the industry has been slower to diversify
into other fresh-cut vegetables or fruits due primarily to limitations in film
and plastic tray materials used to package these products. 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. 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. To achieve
optimal product performance, each unique fruit or vegetable requires its own
unique package atmosphere conditions. The challenge facing the
industry is to develop packaging that meets the highly variable needs that each
product requires in order to achieve value creating performance. The Company
believes that its BreatheWay packaging technology possesses all of the critical
functionalities required to serve this diverse market. In creating a
product package, a BreatheWay 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:
- 8 -
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 in many package sizes and
configurations.
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. Other high permeability
packaging materials, such as micro-perforated films cannot differentially
control carbon dioxide permeability resulting in sub-optimal package atmosphere
conditions for many produce products.
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. As the respiration rate of fresh produce also increases with
temperature, the BreatheWay membrane’s temperature responsiveness allows
packages to compensate for the change in produce respiration by automatically
adjusting gas permeation rates. By doing so, detrimental package
atmosphere conditions are avoided and improved quality is maintained through the
distribution chain.
Landec believes that growth of the
overall produce market will be driven by the increasing demand for the
convenience and nutrition 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
respiring 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: Food Products Technology
Our Food Products Technology business,
operated through our Apio subsidiary, had revenues of approximately $175 million
for the fiscal year ended May 30, 2010, $168 million for the fiscal year ended
May 31, 2009 and $171 million for the fiscal year ended May 25,
2008.
Based in Guadalupe, California, Apio’s
primary business is packaged fresh-cut and whole value-added products packaged
in our proprietary BreatheWay packaging. The fresh-cut value-added
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 30, 2010, Apio shipped nearly seventeen million
cartons of produce to leading supermarket retailers, wholesalers, food service
suppliers and club stores throughout North America, primarily in the United
States.
There are
four major distinguishing characteristics of Apio that provide competitive
advantages in the Food Products Technology market:
- 9 -
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 from many locations 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 136,000 square foot value-added processing plant,
recently expanded from 96,000 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
primary strategy is to operate one large central processing facility in one of
California’s largest, lowest cost growing regions, the Santa Maria Valley, and
use packaging technology that allows for the nationwide delivery of fresh
produce products.
Expanded Product Line Using
Technology: Apio, through the use of its BreatheWay packaging technology, is
introducing on average fifteen new value-added products each
year. These new product offerings range from various sizes of
fresh-cut bagged products, to vegetable trays, to whole produce, to vegetable
salads and snack packs. During the last twelve months, Apio has
introduced 19 new products.
Apio
established its Apio Packaging division in 2005 to advance the sales of
BreatheWay packaging technology for shelf-life sensitive vegetables and fruit.
The Company’s specialty packaging for case liner products extends the shelf life
of certain produce commodities up to 50%. This shelf life extension
can enable the utilization of alternative distribution strategies to gain
efficiencies or reach new markets while maintaining product quality to the end
customer.
Apio
Packaging’s first program has concentrated on bananas and was formally
consummated when Apio entered into an agreement to supply Chiquita with its
proprietary banana packaging technology on a worldwide basis for the ripening,
conservation and shelf-life extension of bananas for most 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 quarterly minimum purchase thresholds
of BreatheWay banana packages.
The
initial market focus for the BreatheWay banana packaging technology using
Chiquita bananas has been commercial outlets that normally do not sell bananas
because of their short shelf-life – outlets such as mini marts, convenience
stores and coffee chain outlets.
In fiscal
year 2008, the Company expanded the use of its BreatheWay technology to include
avocados and mangos under an expanded licensing agreement with
Chiquita. Commercial sales of avocados packaged in Landec’s
BreatheWay packaging into the food service industry began late in fiscal year
2008 and commercial retail sales began in fiscal 2010.
In May
2007, Apio 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. Apio is now an approved vendor for
its BreatheWay packaging technology to the U.S. Military.
In June
2008, Apio entered into a collaboration agreement with Seminis Vegetable Seeds,
Inc., a wholly-owned subsidiary of Monsanto, to develop novel broccoli and
cauliflower products for the exclusive sale by Apio in the North American
market. These novel products will be packaged in Landec’s proprietary
BreatheWay packaging and will be sold to retail grocery chains, club stores and
the food service industry. Field trials for the initial target
varieties began in the Fall of 2008 and will take several years to
develop.
- 10 -
In June 2010, Apio entered into an
exclusive license agreement with Windset Farms for Windset to utilize Landec’s
proprietary breathable packaging to extend the shelf life of greenhouse grown
cucumbers, peppers and tomatoes.
B)
Commodity Trading Business
Commodity
Trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex, and from the purchase and sale of whole commodity fruit
and vegetable products domestically. The Commodity Trading business
is a buy/sell business that realizes a commission-based margin in the 5-7%
range.
The
Business: Commodity Trading
Commodity Trading had revenues of
approximately $55 million for the fiscal year ended May 30, 2010, $60 million
for the fiscal year ended May 31, 2009 and $60 million for the fiscal year ended
May 25, 2008.
Apio is
uniquely positioned to benefit from the growth in export sales to Asia and other
parts of the world over the next decade with Cal-Ex. Through Cal-Ex,
Apio is currently one of the largest U.S. exporters of broccoli to
Asia.
C)
Hyaluronan-based Biomaterials Business
Our Hyaluronan-based Biomaterials
business, operated through our Lifecore subsidiary which was acquired by Landec
on April 30, 2010, had revenues of approximately $1.5 million for the one month
included in the fiscal year ended May 30, 2010.
The
Technology: Hyaluronan-based Biomaterials
Lifecore intends to use its proprietary
fermentation process and aseptic formulation and filling expertise to be a
leader in the development of hyaluronan-based products for multiple applications
and to take advantage of non-hyaluronan device and drug opportunities which
leverage our expertise in HA manufacture and syringe filling
capabilities. Elements of Lifecore’s strategy include the
following:
· Establish strategic relationships
with market leaders. Lifecore will continue to develop
applications for products with partners who have strong marketing, sales and
distribution capabilities to end-user markets. Lifecore through its
strong reputation and history of providing premium HA products has been able to
establish long-term relationships with the market leading companies such as
Alcon and Abbott Medical Optics in ophthalmology, and Musculoskeletal Transplant
Foundation (MTF) and Novartis AG in orthopedics.
· Expand medical applications for
hyaluronan. Due to the growing knowledge of the unique
characteristics of hyaluronan and the role it plays in normal physiology,
Lifecore continues to identify and pursue further uses for hyaluronan in other
medical applications, such as wound care, aesthetic surgery, adhesion
prevention, drug delivery, device coatings and pharmaceuticals. Further
applications may involve expanding process development activity and/or
additional licensing of technology.
· License hyaluronan technology from
third parties. Lifecore currently has no commercial products
using cross-linking technology and as a result, Lifecore entered into a
world-wide exclusive license and development agreement with the Cleveland Clinic
Foundation to develop and commercialize hyaluronan-based products and related
applications. The license is for patented hyaluronan-based cross-linking
technology, CorgelTM
Biohydrogel products, that can be used for products in aesthetics,
orthopedics, ophthalmology and other medical fields. Given
the broad number of applications, Lifecore anticipates that it will sublicense
the technology for certain applications while retaining manufacturing
rights.
- 11 -
· Utilize manufacturing infrastructure
to pursue contract aseptic filling and fermentation opportunities. Lifecore will continue
to evaluate providing contract services for opportunities that are suited for
the capital and facility investment related to aseptic filling equipment,
fermentation and purification.
· Maintain flexibility in product
development and supply relationships. Lifecore’s vertically
integrated development and manufacturing capabilities allow it to establish a
variety of relationships with global corporate partners. Lifecore’s role in
these relationships extends from supplying hyaluronan raw materials to
manufacturing of aseptically-packaged, finished sterile products to developing
and manufacturing its own proprietary products.
Hyaluronan
Products
The following table summarizes the
principal products of the Hyaluronan-based Biomaterials business, along with
their applications, and the companies with which Lifecore has related strategic
relationships:
|
PRODUCT
|
DESCRIPTION
|
MARKET
|
STATUS+
|
|||
|
OPHTHALMIC
|
||||||
|
Viscoat®
Intraocular Viscoelastic
|
Lifecore
supplies hyaluronan powder for inclusion in Alcon’s Viscoat®
Ophthalmic
Viscoelastic.
|
Cataract
surgery
|
Commercial
sales since 1986
|
|||
|
LUROCOAT
Ophthalmic Viscoelastic
|
Lifecore
supplies its private label product for marketing on a non-exclusive basis
to multiple distribution partners.
|
Cataract
surgery
|
Commercial
sales since June 1997
|
|||
|
ORTHOPEDIC
|
||||||
|
Hyaluronan
Solution for DBX® Demineralized Bone Matrix
|
Lifecore
supplies a sterile hyaluronan solution to MTF for use as a carrier vehicle
for its allogeneic demineralized, freeze-dried bone.
|
Grafting
material for restoration of bone defects
|
Commercial
sales since 2000
|
|||
|
Hyaluron
HEXAL® Orthopedic Viscosupplement
|
Lifecore
supplies a finished orthopedic viscosupplement for Novartis AG’s
distribution network.
|
Injections
for the local treatment of pain associated with
osteoarthritis
|
Commercial
sales since 2005
|
|||
|
VETERINARY
|
||||||
|
HY-50®
|
|
Lifecore
supplies a finished veterinary viscosupplement to Bexco Pharma, Inc. for
use as an equine injectable.
|
|
Veterinary
drug/device
|
|
Commercial
sales since 1993
|
+
For all products listed above, government regulatory approvals were required
before commercial sales could commence in the United States or elsewhere. See
“Government Regulation.” No assurance can be given that such products
will be successfully approved in new markets.
Ophthalmic
Applications
Cataract
Surgery. Currently, a primary commercial application for
Lifecore’s hyaluronan is in cataract surgery. Hyaluronan, in the form
of a viscoelastic solution, is used to maintain a deep chamber during anterior
segment surgeries (including cataract extraction and intraocular lens
implantation) and to protect the corneal endothelium and other ocular
tissue. These solutions have been shown to reduce surgical trauma and
thereby contribute to more rapid recovery with fewer complications than were
experienced prior to the use of viscoelastics. Hyaluronan-based products are
used in the majority of cataract surgeries in the world.
Lifecore currently sells
hyaluronan for this application to Alcon, the leading producer of ophthalmic
surgical products in the world, for inclusion in Viscoat Ophthalmic
Viscoelastic. Lifecore’s relationship with Alcon and its predecessors
commenced in 1983. Since that time, sales of hyaluronan to Alcon have
continued to be made pursuant to supply agreements. The current
supply agreements are non-exclusive and encompass a term through December
2013.
- 12 -
Lifecore has developed its own
viscoelastic solution, LUROCOAT Ophthalmic Viscoelastic. The Company
received CE marking for LUROCOAT Ophthalmic Viscoelastic in 1997, allowing
LUROCOAT Ophthalmic Viscoelastic to be marketed and sold outside the United
States. Lifecore also has distribution agreements with multiple
companies to supply its hyaluronan-based LUROCOAT Ophthalmic Viscoelastic under
private label.
Lifecore signed an agreement with
Abbott Medical Optics (“AMO”) to supply Lifecore’s hyaluronan-based viscoelastic
under private label with sales commencing in 2004. The current supply agreement
is non-exclusive and incorporates a term through May 2013 with renewal
provisions.
Lifecore estimates that its hyaluronan
has been used in over 40 million ophthalmic patients globally since
1983.
Orthopedic
Applications
Lifecore supplies an aseptic hyaluronan
solution to BioCon, Inc., the non-profit affiliate of MTF, which utilizes the
solution as a carrier vehicle for its allogeneic demineralized, freeze-dried
bone in a final putty composition trademarked as “DBX Demineralized Bone
Matrix”. This bone putty is provided by MTF to orthopedic surgeons
through MTF’s distribution channels. Lifecore has an exclusive supply
agreement with MTF through December 2014.
Lifecore also supplies a
private-labeled finished orthopedic viscosupplement for Novartis AG’s
distribution network.
Veterinary
Applications
Lifecore manufactures Bexco Pharma,
Inc.’s HY-50 product, an aseptically packaged hyaluronan solution for use as a
veterinary viscosupplement as an equine injectable drug, under an exclusive
supply agreement through June 2015 with renewal provisions.
Lifecore estimates that its veterinary
hyaluronan product has been used in over 700,000 equine procedures
worldwide.
Product
Development
Lifecore undertakes its own product
development activities for hyaluronan-based applications, as well as on a
contract basis with certain clients. The majority of the projects are
intended to demonstrate that Lifecore’s hyaluronan is suitable for a particular
medical application. Suitability is often measured by detailed
specifications for product characteristics such as purity, stability, viscosity
and molecular weight, as well as efficacy for a particular medical application
in a clinical setting.
In addition, Lifecore has licensed a
sodium hyaluronate cross-linking technology from Cleveland Clinic Foundation,
the Corgel Biohydrogel technology. The development activity with this
technology will be conducted over several years and is intended to
demonstrate its efficacy in multiple medical applications.
There can be no assurance that products
currently under development by Lifecore or in partnership with others will be
successfully developed or, if so developed, will be successfully and profitably
marketed.
- 13 -
D) Technology
Licensing Business
Seeds
Business – Intellicoat Seed Coatings and Landec Ag
Our
Technology Licensing Business includes our seed coating subsidiary Landec Ag LLC
(“Landec Ag”) which had revenues of $6.1 million for the fiscal year ended May
30, 2010 and $5.4 million for each of the fiscal years ended May 31, 2009 and
May 25, 2008.
Following
the sale of Fielder’s Choice Direct (“FCD”), Landec Ag’s strategy has been to
work closely with Monsanto to further develop our patented, functional polymer
coating technology for sale and/or licensing 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 soybean and seed
corn market and plans to broaden the technology to other seed crop
applications.
The
Technology: Intellicoat Seed Coatings
Landec's
Intellicoat seed coating applications are designed to control seed germination
timing, increase crop yields, reduce risks and extend crop-planting windows.
These coatings are currently available on hybrid corn, soybeans and male inbred
corn used for seed production. In fiscal year 2000, Landec Ag
launched its first commercial product, Pollinator Plusâ coatings, which is a
coating application used by seed companies as a method for spreading pollination
to increase yields and reduce risk in the production of hybrid seed
corn. There are approximately 650,000 acres of seed production in the
United States and in 2010 Pollinator Plus was used by 10 seed companies on
approximately 18% of the seed corn production acres in the U.S.
Monsanto announced in 2008 that it had
formed a new business called the Seed Treatment Business which will allow
Monsanto to develop its seed treatment requirements internally. The
concept of seed treatments is to place an insecticide or fungicide directly onto
the seed surface in order to protect the seed and the seedling as it
emerges. Landec’s Intellicoat seed coating technology could be an
integral and proprietary part of Monsanto’s commitment to building a major
position in seed treatments worldwide by using Landec’s seed coatings as a
“carrier” of insecticides/fungicides which can be dispensed at the appropriate
time based on time or soil temperature. During Fiscal year 2010 we
amended our agreement with Monsanto and as a result our development activities
are focused on a specific technology of interest to Monsanto. During
fiscal year 2010, we have focused on validating the use of Landec’s coating
technology for these applications.
Sale
of FCD
Landec
received $50 million in cash paid at the close for its sale of FCD in December
2006. During fiscal year 2007, Landec recorded income from the sale,
net of direct expenses and bonuses, of $22.7 million. The income that
was recorded was 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, is being allocated to the technology license agreement described
below and is being recognized as revenue ratably over the five year term of the
technology license agreement or $2 million per year beginning December
2006. The fair value of FCD was determined by
management.
In
December 2006, Landec also entered into a five-year co-exclusive technology
license and polymer supply agreement (“the Monsanto Agreement”) with Monsanto
for the use of Landec’s Intellicoat polymer
seed coating technology. Under the terms of the Monsanto Agreement,
Monsanto agreed to pay Landec Ag $2.6 million per year. The Monsanto
Agreement was amended in November 2009. Under the terms of the
amended Monsanto Agreement, Monsanto continues to have an exclusive license to
use Landec’s Intellicoat polymer technology for specific seed treatment
applications. Over the remaining two-year term of the amended
Monsanto Agreement, Monsanto will investigate uses of Landec’s Intellicoat
technology in a variety of seed categories in the field exclusively licensed to
Monsanto.
Along
with regaining the use of the Intellicoat technology outside of the specific
applications licensed to Monsanto under the amended Monsanto Agreement, Landec
has assumed responsibility for Landec Ag’s operating expenses and realizes all
the revenues and profits from the sales of existing and new Intellicoat seed
coating products.
- 14 -
For each
of the fiscal years ended May 30, 2010, May 31, 2009 and May 25, 2008, Landec
recognized $5.4 million in revenues and income from the Agreement.
The
Monsanto Agreement also provides for a fee payable to Landec Ag of $4 million if
Monsanto elects to terminate the Monsanto Agreement or $10 million if Monsanto
elects to purchase the rights to the exclusive field. If the purchase
option is exercised before December 2011, or if Monsanto elects to terminate the
Monsanto Agreement, all annual license fees and supply payments that have not
been paid to Landec Ag will become due upon the purchase or
termination. If Monsanto does not exercise its purchase
option by December 2011 Landec Ag will receive the termination fee and all
rights to the Intellicoat seed
coating technology will revert to Landec. Accordingly, we will
receive aggregate minimum guaranteed payments of $17 million for license fees
and polymer supply payments over five years or $23 million in aggregate maximum
payments if Monsanto elects to purchase the rights to the exclusive
field. 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. The incremental
$6 million to be received in the event Monsanto exercises the purchase option
has been deferred and will be recognized upon the exercise of the purchase
option. The fair value of the purchase option was determined by
management to be less than the amount of the deferred revenue.
If
Monsanto elects to purchase the rights to the exclusive field, a gain or loss on
the sale will be recognized at the time of purchase. If Monsanto
exercises its purchase option, we expect to enter into a new long-term supply
agreement with Monsanto pursuant to which Landec would continue to be the
exclusive supplier of Intellicoat polymer materials to Monsanto.
Non-Seed
Business
We believe our technology has
commercial potential in a wide range of industrial, consumer and medical
applications beyond those identified in our other segments. For
example, our core patented technology, Intelimer materials, can be used to
trigger release of 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.
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.
Intelimer
Latent Catalyst Polymer Systems
Landec
has developed latent catalysts useful in extending pot-life, extending shelf
life, reducing waste and improving thermoset cure methods. Some of
these latent catalysts are currently being distributed by Akzo-Nobel Chemicals
B.V. through our licensing agreement with Air Products. The rights to
develop and sell Landec’s latent catalysts and personal care technologies were
licensed to Air Products in March 2006.
- 15 -
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, as well
as color cosmetics, lipsticks and hair care. The Company's partner,
Air Products, is currently shipping products to L’Oreal, Mentholatum and other
companies for use in lotions and creams. The rights to develop and
sell Landec’s polymers for personal care products were licensed to Air Products
in March 2006 along with the latent catalyst rights.
Intelimer
Drug Delivery Polymers
Landec
has been developing both biodegradable and non-biodegradable polymers for use in
drug delivery applications targeting the use of its highly crystalline polymers
and the tunable physical properties to minimize or eliminate burst, extend drug
release profiles and deliver novel valuable properties to the pharma
industry.
Sales
and Marketing
Each of the Company’s core businesses
is 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
2010, 2009 and 2008, sales to the Company’s top five customers accounted for
approximately 48%, 46% and 47%, respectively, of its revenues, with the top
customer, Costco Wholesale Corp., accounting for approximately 20%, 21% and 20%,
respectively, of the Company’s revenues.
Apio
Apio has
22 sales and marketing employees, located in central California and throughout
the U.S., supporting the Food Products Technology business and the Commodity
Trading 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 fiscal quarters). In addition,
the Food Products Technology business can be heavily affected by seasonal
weather factors which have impacted quarterly results, such as high cost of
sourcing product due to a shortage of essential value-added produce items. The
Commodity Trading business also typically recognized a much higher percentage of
its revenues and profit during the first half of Landec’s fiscal year compared
to the second half. Lifecore’s business is not materially affected by
seasonality.
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 system. 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 consolidated subsidiary in which
Apio has a 60% ownership interest and is the general
partner.
- 16 -
Hyaluronan-based
Biomaterials Business
The commercial production of hyaluronan
by Lifecore requires fermentation, separation and purification
capabilities. Products are supplied in a variety of bulk and single
dose configurations.
Lifecore produces its hyaluronan
through a proprietary fermentation process. Until the introduction of Lifecore’s
medical grade hyaluronan, the only commercial source for medical hyaluronan was
through a process of extraction from rooster combs. Lifecore believes
that the fermentation manufacturing approach is superior to rooster comb
extraction because of greater efficiency and flexibility, a more favorable
long-term regulatory environment, and better economies of scale in producing
large commercial quantities.
Lifecore’s 112,000 square foot facility
in Chaska, Minnesota is primarily used for the proprietary hyaluronan
manufacturing process, formulation and aseptic syringe and bulk
filling. The Company believes that the current inventory on-hand,
together with its manufacturing capacity, will be sufficient to allow it to meet
the needs of its current customers for the foreseeable future.
Lifecore provides versatility in the
manufacturing of various types of finished products. Currently, it supplies
several different forms of hyaluronan in a variety of molecular weight fractions
as powders, solutions and gels, and in a variety of bulk and single-use finished
packages. Lifecore continues to conduct development work designed to
improve production efficiencies and expand its capabilities to achieve a wider
range of hyaluronan product specifications in order to address the broadening
opportunities for using hyaluronan in medical applications.
The Company’s facility was designed to
meet applicable regulatory requirements and has been cleared for the manufacture
of both device and pharmaceutical products. The FDA periodically
inspects the Company’s manufacturing systems and requires conformance to the
FDA’s Quality Systems Regulations (“QSR”). In addition, Lifecore’s
corporate partners conduct intensive quality audits of the
facility. Lifecore also periodically contracts with independent
regulatory consultants to conduct audits of its operations. The
Company maintains a Quality System which assures conformance to all applicable
current standards (21 CFR820, 21 CFR210-211, ISO 13485:2003, 93/42/EEC, and
Canadian Medical Device Regulation:1998). These approvals represent
international symbols of quality system assurance and compliance with applicable
European Medical Device Directives, which greatly assist in the marketing of
Lifecore’s products in the European Union.
Lifecore purchases raw materials for
its production of hyaluronan-based products from outside vendors. While these
materials are available from a variety of sources, the Company principally uses
limited sources for some of its key materials to better monitor quality and
achieve cost efficiencies.
Technology
Licensing Business
Landec performs its batch seed 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.
Landec
has a pilot manufacturing facility in Indiana to support process development,
scale-up and commercialization of the Company’s seed coating
programs. 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
Several
of the raw materials used in manufacturing certain of the Company’s products are
currently purchased from a single source. 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.
- 17 -
Research
and Development
Landec is focusing its research and
development resources on both existing and new applications of its polymer
technologies. Expenditures for research and development for the
fiscal years ended May 30, 2010, May 31, 2009 and May 25, 2008 were $4.4
million, $3.7 million and $3.3 million, respectively. Research and
development expenditures funded by corporate or governmental partners were $0
for the fiscal year ended May 30, 2010, $152,000 for the fiscal year ended May
31, 2009 and $418,000 for the fiscal year ended May 25, 2008. 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 30, 2010, Landec had 49 employees engaged in research and development
with experience in polymer and analytical chemistry, product application,
product formulation, mechanical and chemical engineering.
Competition
The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food processors, packaging
companies, agricultural companies, medical and pharmaceutical 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 37 U.S. patents issued of which 27 remain active as of May 30,
2010 with expiration dates ranging from 2010 to 2023. The Company's
issued and pending 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.
- 18 -
Litigation, which could result in
substantial costs to the Company, may also be necessary to enforce any patents
issued or licensed to the Company or to determine the scope and validity of
third-party proprietary rights. If competitors of the Company prepare and file
patent applications in the United States that claim technology also claimed by
the Company, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine priority of
invention, which could result in substantial cost to and diversion of effort by
the Company, even if the eventual outcome is favorable to the Company. Any such
litigation or interference proceeding, regardless of outcome, could be expensive
and time consuming and could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from third parties or
require the Company to cease using such technology and consequently, could have
a material adverse effect on the Company's business, operating results and
financial condition.
In addition to patent protection, the
Company also relies on trade secrets, proprietary know-how and technological
advances which the Company seeks to protect, in part, by confidentiality
agreements with its collaborators, employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets and
proprietary know-how will not otherwise become known or be independently
discovered by others.
Government
Regulation
Government regulation in the United
States and other countries is a significant factor in the marketing of certain
of the Company’s products and in the Company’s ongoing research and development
activities. Some of the Company’s products are subject to extensive
and rigorous regulation by the FDA, which regulates some of the products as
medical devices and which, in some cases, requires Pre-Market Approval (“PMA”),
and by foreign countries, which regulate some of the products as medical devices
or drugs. Under the Federal Food, Drug, and Cosmetic Act (“FDC Act”),
the FDA regulates the clinical testing, manufacturing, labeling, distribution,
sale and promotion of medical devices in the United States.
Following the enactment of the Medical
Device Amendments of 1976 to the FDC Act, the FDA classified medical devices in
commercial distribution at the time of enactment (“pre-Amendment devices”) into
one of three classes - Class I, II or III. This
classification is based on the controls necessary to reasonably assure the
safety and effectiveness of medical devices. Class I devices are
those whose safety and effectiveness can reasonably be assured through general
controls, such as establishment registration and labeling, and adherence to
FDA-mandated current QSR requirements for devices. Most Class I
devices are exempt from FDA premarket review, but some require premarket
notification (“510(k) Notification”). Class II devices are those
whose safety and effectiveness can reasonably be assured through the use of
special controls, such as performance standards, postmarket surveillance,
patient registries and FDA guidelines. Class III devices are
devices that require a PMA from the FDA to assure their safety and
effectiveness. A PMA ordinarily must contain data from a multi-center
clinical study demonstrating the device’s safety and effectiveness for the
intended use and patient population. Class III devices are generally
life-sustaining, life-supporting or implantable devices, and also include most
devices that were not on the market before May 28, 1976 (“new devices”) and
for which the FDA has not made a finding of substantial equivalence based upon a
510(k) Notification. A pre-Amendment Class III device does not
require a PMA unless and until the FDA issues a regulation requiring submission
of a PMA application for the device.
The FDA requires clinical data for a
PMA application and has the authority to require such data for a 510(k)
Notification. If clinical data are necessary, the company that
sponsors the study must follow the FDA’s Investigational Device Exemption
(“IDE”) regulations governing the conduct of human studies. The FDA’s
regulations require institutional review board approval of the study and the
informed consent of the study subjects. In addition, for a
“significant risk” device, the FDA must approve an IDE application before the
study can begin. Non-significant risk devices do not require FDA approval of an
IDE application, and are conducted under the “abbreviated IDE”
requirements. Once in effect, an IDE or abbreviated IDE permits
evaluation of devices under controlled clinical conditions. After a
clinical evaluation process, the resulting data may be included in a PMA
application or a 510(k) Notification. The PMA may be approved or the
510(k) Notification may be cleared by the FDA only after a review process that
may include FDA requests for additional data, sometimes requiring further
studies.
- 19 -
If a manufacturer or distributor of
medical devices can establish to the FDA’s satisfaction through a 510(k)
Notification that a new device is substantially equivalent to what is called a
“predicate device,” i.e., a legally marketed Class I or Class II medical
device or a legally marketed pre-Amendment Class III device for which the
FDA has not required a PMA, the manufacturer or distributor may market the new
device. In the 510(k) Notification, a manufacturer or distributor
makes a claim of substantial equivalence, which the FDA may require to be
supported by various types of information, including data from clinical studies,
showing that the new device is as safe and effective for its intended use as the
predicate device.
Following submission of the 510(k)
Notification, the manufacturer or distributor may not place the new device into
commercial distribution until the FDA issues a “substantial equivalence”
determination finding the new device to be substantially equivalent to a
predicate device. The FDA has a 90 day period in which to respond to
a 510(k) Notification; (30 days for a Special 510(k)). Depending on
the specific submission and subsequent agency information requests, the 510(k)
Notification process can take significantly longer to complete. The
FDA may agree with the manufacturer or distributor that the new device is
substantially equivalent to a predicate device and allow the new device to be
marketed in the United States. The FDA may, however, determine that
the new device is not substantially equivalent and require the manufacturer or
distributor to submit a PMA or require further information, such as additional
test data, including data from clinical studies, before it is able to make a
determination regarding substantial equivalence. Although the PMA
process is significantly more complex, time-consuming and expensive than the
510(k) Notification process, the latter process can also be expensive and
substantially delay the market introduction of a
product. Modifications to a device that is marketed under a 510(k)
Notification might require submission of a new 510(k) prior to their
implementation, although some modifications can be made through a “note to file”
procedure described in FDA guidance.
For devices that cannot be found
“substantially equivalent” to a predicate device, the manufacturer must submit a
PMA application, petition for reclassification, or submit a PMA application via
the de novo process. A PMA must contain information on the materials
and manufacturing process for the device, results of preclinical testing,
clinical data, and labeling for the device. The FDA has 180 days to
review a PMA application, but may request additional information, which could
include additional studies. The FDA might refer a PMA to an advisory
committee of outside experts to review and make recommendation on whether a
device should be approved. After considering the data in the PMA
application and the recommendations of an advisory committee, the FDA can
approve the device, approve the device with conditions or refuse
approval. Devices approved by the FDA are subject to periodic
reporting requirements, and may be subject to restrictions on sale, distribution
or use.
Hyaluronan products are generally Class
III devices. In cases where the Company is supplying hyaluronan to a
corporate partner as a raw material or producing a finished product under a
license for the partner, the corporate partner will be responsible for obtaining
the appropriate FDA clearance or approval. Export of the Company’s
hyaluronan products generally requires approval of the importing country and
compliance with the export provisions of the FDC Act.
Other regulatory requirements are
placed on the manufacture, processing, packaging, labeling, distribution,
recordkeeping and reporting of a medical device and on the quality control
procedures, such as the FDA’s device QSR regulations. Manufacturing
facilities are subject to periodic inspections by the FDA to assure compliance
with device QSR requirements. Lifecore’s facility is subject to
inspections as both a device and a drug manufacturing operation. For
PMA devices, the Company is required to submit an annual report and to obtain
approval of a PMA supplement for modifications to the device or its
labeling. Other applicable FDA requirements include the medical
device reporting (“MDR”) regulation, which requires that the Company provide
information to the FDA regarding deaths or serious injuries alleged to have been
associated with the use of its devices, as well as product malfunctions that
would likely cause or contribute to death or serious injury if the malfunction
were to recur. The FDA also requires reporting regarding notices of
correction and the removal of a medical device.
If the Company is not in compliance
with FDA requirements, the FDA or the federal government can order a recall,
detain the Company’s devices, refuse to grant 510(k) Notification clearances or
PMA approvals, withdraw or limit product approvals, institute proceedings to
seize the Company’s devices, seek injunctions to control or prohibit marketing
and sales of the Company’s devices, assess civil money penalties and impose
criminal sanctions against the Company, its officers or its
employees.
- 20 -
There can be no assurance that any of
the Company’s clinical studies will show safety or effectiveness; that 510(k)
Notifications or PMA applications or supplemental applications will be submitted
or, if submitted, accepted for filing; that any of the Company’s products that
require clearance of a 510(k) Notification or approval of a PMA application or
PMA supplement will obtain such clearance or approval on a timely basis, on
terms acceptable to the Company for the purpose of actually marketing the
products, or at all; or that following any such clearance or approval previously
unknown problems will not result in restrictions on the marketing of the
products or withdrawal of clearance or approval.
Product
Liability
Product liability claims may be
asserted with respect to the Company’s products. The Company
maintains product liability insurance coverage in amounts the Company deems to
be adequate There can be no assurance that the Company will have
sufficient resources to satisfy product claims if they exceed available
insurance coverage.
Employees
As of May 30, 2010, Landec had 229
full-time employees, of whom 158 were dedicated to research, development,
manufacturing, quality control and regulatory affairs and 71 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 its relationship with its employees
is 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 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.
The
Global Economy is Currently Undergoing a Period of Slowdown and Unprecedented
Volatility, Which May Have an Adverse Effect on Our Business
The U.S.
and international economy and financial markets have experienced significant
slowdown and volatility due to uncertainties related to the availability of
credit, energy prices, difficulties in the banking and financial services
sectors, softness in the housing market, severely diminished market liquidity,
geopolitical conflicts, falling consumer confidence and rising unemployment
rates. This slowdown has and could further lead to reduced demand for
our products, which in turn, would reduce our revenues and adversely affect our
business, financial condition and results of operations. In
particular, the slowdown and volatility in the global markets have resulted in
softer demand and more conservative purchasing decisions by customers, including
a tendency toward lower-priced products, which could negatively impact our
revenues, gross margins and results of operations. In addition to a
reduction in sales, our profitability may decrease during downturns because we
may not be able to reduce costs at the same rate as our sales decline. These
slowdowns are expected to worsen if current economic conditions are prolonged or
deteriorate further. We cannot predict the ultimate severity or length of the
current economic crisis, or the timing or severity of future economic or
industry downturns.
- 21 -
Given the
current unfavorable economic environment, our customers may have difficulties
obtaining capital at adequate or historical levels to finance their ongoing
business and operations, which could impair their ability to make timely
payments to us. This may result in lower sales and/or additional
inventory or bad debt expense for Landec. In addition to the impact
of the economic downturn on our customers, some of our vendors and growers may
experience a reduction in their availability of funds and cash flows, which
could negatively impact their business as well as ours. A continuing
or deepening downturn of the U.S. economy, including increased volatility in the
credit markets, could adversely impact our customers’ and vendors’ ability or
willingness to conduct business with us on the same terms or at the same levels
as they have historically.
We are
unable to predict the likely duration and severity of the current disruption in
the financial markets and adverse economic conditions in the U.S. and other
countries and such conditions, if they persist or worsen, will further adversely
impact our business, operating results, and financial
condition. Further, these conditions and uncertainty about future
economic conditions make it challenging for Landec to forecast its operating
results, make business decisions, and identify the risks that may affect its
business, sources and use of cash, financial condition and results of
operations.
Our
Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock Price
to Decline
In the
past, our results of operations have fluctuated significantly from quarter to
quarter and are expected to continue to fluctuate in the
future. Historically, Landec Ag has been the primary source of these
fluctuations, as its revenues and profits were concentrated over a few months
during the spring planting season (generally during our third and fourth fiscal
quarters). In addition, Apio can be heavily affected by seasonal and
weather factors which have impacted quarterly results 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 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.
Uncertainty
Relating To Integration Of Lifecore And Other New Business
Acquisitions.
The Company's acquisition of Lifecore
involves the integration of Lifecore's operations into the
Company. The integration will require the dedication of management
resources in order to achieve the anticipated operating efficiencies of the
acquisition. No assurance can be given that any difficulties
encountered in integrating the operations of Lifecore into the Company will be
overcome or that the benefits expected from such integration will be
realized. The difficulties in combining Lifecore and the Company's
operations are exacerbated by the necessity of coordinating geographically
separate organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. The process
of integrating operations could cause an interruption of, or loss of momentum
in, the activities of the combined company's business. Difficulties
encountered or additional costs incurred in connection with the acquisition and
the integration of the operations of Lifecore and the Company could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
- 22 -
The successful integration of any other
new business acquisitions may require substantial effort from the Company's
management. The diversion of the attention of management and any
difficulties encountered in the transition process could have a material adverse
effect on the Company's ability to realize the anticipated benefits of the
acquisitions. The successful combination of new businesses also
requires coordination of research and development activities, manufacturing, and
sales and marketing efforts. In addition, the process of combining
organizations could cause the interruption of, or a loss of momentum in, the
Company's activities. There can be no assurance that the Company will
be able to retain key management, technical, sales and customer support
personnel, or that the Company will realize the anticipated benefits of any
acquisitions, and the failure to do so would have a material adverse effect on
the Company's business, results of operations and financial
condition.
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:
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price,
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safety,
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efficacy,
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reliability,
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conversion
costs,
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marketing
and sales efforts, and
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general
economic conditions affecting purchasing
patterns.
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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, HA-based products 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, medical and
pharmaceutical 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,
medical and pharmaceutical 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.
- 23 -
We
Have a Concentration of Manufacturing in One Location for Apio and Lifecore 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 or
Lifecore’s facility in Chaska, Minnesota 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 adversely affected. Failures by third parties may impair
our ability to deliver products on a timely basis and impair our competitive
position. We may not be able to continue to successfully operate our
manufacturing operations at acceptable costs, with acceptable yields, and retain
adequately trained personnel.
Our
Dependence on Single-Source Suppliers and Service Providers May Cause Disruption
in Our Operations Should Any Supplier Fail to Deliver Materials
We may experience difficulty acquiring
materials or services for the manufacture of our products or we may not be able
to obtain substitute vendors. We may not be able to procure
comparable materials at similar prices and terms within a reasonable
time. Several services that are provided to Apio are obtained
from a single provider. Several of the raw materials we use to
manufacture our products are currently purchased from a single source, including
some monomers used to synthesize Intelimer polymers, substrate materials for our
breathable membrane products and raw materials for our HA
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 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.
- 24 -
We are subject to FDA 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:
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fines,
injunctions, civil penalties, and
suspensions,
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withdrawal
of regulatory approvals,
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product
recalls and product seizures, including cessation of manufacturing and
sales,
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operating
restrictions, and
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criminal
prosecution.
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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 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.
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.
Our Food Products Technology business
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.
Lifecore’s existing products and its
products under development are considered to be medical devices and, therefore,
require clearance or approval by the FDA before commercial sales can be made in
the United States. The products also require the approval of foreign
government agencies before sales may be made in many other
countries. The process of obtaining these clearances or approvals
varies according to the nature and use of the product. It can involve
lengthy and detailed laboratory and clinical testing, sampling activities and
other costly and time-consuming procedures. There can be no assurance
that any of the required clearances or approvals will be granted on a timely
basis, if at all.
In addition, most of the existing
products being sold by Lifecore and its customers are subject to continued
regulation by the FDA, various state agencies and foreign regulatory agencies
which regulate manufacturing, labeling and record keeping procedures for such
products. Marketing clearances or approvals by these agencies can be
withdrawn due to failure to comply with regulatory standards or the occurrence
of unforeseen problems following initial clearance or approval. These
agencies can also limit or prevent the manufacture or distribution of the
Lifecore’s products. A determination that Lifecore is in violation of
such regulations could lead to the imposition of civil penalties, including
fines, product recalls or product seizures, injunctions, and, in extreme cases,
criminal sanctions.
- 25 -
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.
Adverse
Weather Conditions and Other Acts of God May Cause Substantial Decreases in Our
Sales and/or Increases in Our Costs
Our Food Products Technology 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.
Our
International Operations and Sales May Expose Our Business to Additional
Risks
For fiscal year 2010, approximately 29%
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:
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regulatory
approval process,
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government
controls,
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export
license requirements,
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political
instability,
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price
controls,
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trade
restrictions,
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changes
in tariffs, or
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difficulties
in staffing and managing international
operations.
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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.
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Cancellations
or Delays of Orders by Our Customers May Adversely Affect Our
Business
During fiscal year 2010, sales to our
top five customers accounted for approximately 48% of our revenues, with our
largest customer, Costco Wholesale Corporation, accounting for approximately 20%
of our revenues. We expect that, for the foreseeable future, a
limited number of customers may continue to account for a substantial portion of
our net revenues. We may experience changes in the composition of our
customer base as we have experienced in the past. 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 and by Lifecore at its Chaska, Minnesota facility are sole
sourced to customers, our operating results could be adversely affected if one
or more of our major customers were to develop other sources of
supply. Our current customers may not continue to place orders,
orders by existing customers may be canceled or may not continue at the levels
of previous periods or we may not be able to obtain orders from new
customers.
Our
Sale of Some Products May Increase Our Exposure to Product Liability
Claims
The testing, manufacturing, marketing,
and sale of the products we develop involve an inherent risk of allegations of
product liability. If any of our products were determined or alleged
to be contaminated or defective or to have caused a harmful accident to an
end-customer, we could incur substantial costs in responding to complaints or
litigation regarding our products and our product brand image could be
materially damaged. Either event may have a material adverse effect
on our business, operating results and financial condition. Although
we have taken and intend to continue to take what we believe are appropriate
precautions to minimize exposure to product liability claims, we may not be able
to avoid significant liability. We currently maintain product
liability insurance. While we believe the coverage and limits are
consistent with industry standards, our coverage may not be adequate or may not
continue to be available at an acceptable cost, if at all. A product
liability claim, product recall or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on our business, operating results and financial condition.
Our
Stock Price May Fluctuate in Accordance with Market Conditions
The following events may cause the
market price of our common stock to fluctuate significantly:
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technological
innovations applicable to our
products,
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our
attainment of (or failure to attain) milestones in the commercialization
of our technology,
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our
development of new products or the development of new products by our
competitors,
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new
patents or changes in existing patents applicable to our
products,
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|
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.
- 27 -
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 stockholders, 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 in November 2002 and the Series B Convertible Preferred Stock was
converted into 1,744,102 shares of Common Stock in May 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
stockholders’ equity. Goodwill arises when an acquirer pays more for
a business than the fair value of the tangible and separately measurable
intangible net assets. In accordance with accounting guidance, 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.
- 28 -
Item
2. Properties
As of May
30, 2010, the Company owned or leased properties in Menlo Park, Arroyo Grande
and Guadalupe, California; West Lebanon and Oxford, Indiana and Chaska,
Minnesota.
These
properties are described below:
|
Location
|
Business
Segment
|
Ownership
|
Facilities
|
Acres
of
Land
|
Lease
Expiration
|
|||||
|
Menlo
Park, CA
|
Technology
Licensing
|
Leased
|
14,600
square feet of office and laboratory space
|
—
|
12/31/14
|
|||||
|
Chaska,
MN
|
Hyaluronan-based
Biomaterials
|
Owned
|
112,000
square feet of office, laboratory and manufacturing space
|
27.5
|
—
|
|||||
|
West
Lebanon, IN
|
Technology
Licensing
|
Owned
|
4,000
square feet of warehouse and manufacturing space
|
—
|
—
|
|||||
|
Oxford,
IN
|
Technology
Licensing
|
Leased
|
13,400
square feet of laboratory and manufacturing space
|
—
|
6/30/11
|
|||||
|
Guadalupe,
CA
|
Food
Products Technology
|
Owned
|
199,000
square feet of office space, manufacturing and cold
storage
|
17.7
|
—
|
|||||
|
Arroyo
Grande, CA
|
|
Commodity
Trading
|
|
Leased
|
|
1,100
square feet of office space
|
|
—
|
|
6/30/11
|
The
obligations of the Company under its credit agreement with Wells Fargo Bank,
N.A. are secured by a lien on the Chaska, MN land and building.
Item
3. Legal
Proceedings
The Company is involved in litigation
arising in the normal course of business. The Company is currently
not a party to any legal proceedings which management believes could result in
the payment of any amounts that would be significant to the business or
financial condition of the Company.
Item
4. [Removed
and Reserved]
- 29 -
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 30, 2010
|
High
|
Low
|
||||||
|
4th
Quarter ending May 30, 2010
|
$ | 7.45 | $ | 5.50 | ||||
|
3rd
Quarter ending February 28, 2010
|
$ | 6.63 | $ | 5.81 | ||||
|
2nd
Quarter ending November 29, 2009
|
$ | 7.03 | $ | 6.00 | ||||
|
1st
Quarter ending August 30, 2009
|
$ | 7.17 | $ | 5.99 | ||||
|
Fiscal Year Ended May 31, 2009
|
High
|
Low
|
||||||
|
4th
Quarter ending May 31, 2009
|
$ | 7.00 | $ | 3.87 | ||||
|
3rd
Quarter ending March 1, 2009
|
$ | 7.36 | $ | 4.76 | ||||
|
2nd
Quarter ending November 30, 2008
|
$ | 9.68 | $ | 5.81 | ||||
|
1st
Quarter ending August 31, 2008
|
$ | 9.93 | $ | 6.35 | ||||
Holders
There were approximately 72 holders of
record of 26,507,778 shares of outstanding Common Stock as of July 20,
2010. Since certain holders are listed under their brokerage firm’s
names, the actual number of stockholders 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 fiscal quarter ended on May
30, 2010.
- 30 -
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 30,
2010
|
Year
Ended
May 31,
2009
|
Year
Ended
May 25,
2008
|
Year
Ended
May 27,
2007
|
Year
Ended
May 28,
2006
|
||||||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Product
sales
|
$ | 228,390 | $ | 224,404 | $ | 227,550 | $ | 201,892 | $ | 225,404 | ||||||||||
|
Service
revenues
|
3,699 | 4,145 | 3,640 | 3,539 | 3,725 | |||||||||||||||
|
License
fees
|
5,400 | 6,000 | 6,231 | 4,013 | 2,398 | |||||||||||||||
|
R&D
and royalty revenues
|
735 | 1,389 | 1,106 | 1,054 | 426 | |||||||||||||||
|
Total
revenues
|
238,224 | 235,938 | 238,527 | 210,498 | 231,953 | |||||||||||||||
|
Cost
of revenue:
|
||||||||||||||||||||
|
Cost
of product sales
|
201,466 | 198,369 | 197,288 | 175,252 | 188,904 | |||||||||||||||
|
Cost
of service revenue
|
2,992 | 3,289 | 3,011 | 2,860 | 3,005 | |||||||||||||||
|
Total
cost of revenue
|
204,458 | 201,658 | 200,299 | 178,112 | 191,909 | |||||||||||||||
|
Gross
profit
|
33,766 | 34,280 | 38,228 | 32,386 | 40,044 | |||||||||||||||
|
Operating
costs and expenses:
|
||||||||||||||||||||
|
Research
and development
|
4,361 | 3,665 | 3,251 | 3,074 | 3,042 | |||||||||||||||
|
Selling,
general and administrative
|
17,698 | 18,017 | 19,801 | 21,616 | 27,979 | |||||||||||||||
|
Income
from sale of FCD
|
— | — | — | (22,669 | ) | — | ||||||||||||||
|
Total
operating costs and expenses
|
22,059 | 21,682 | 23,052 | 2,021 | 31,021 | |||||||||||||||
|
Operating
profit
|
11,707 | 12,598 | 15,176 | 30,365 | 9,023 | |||||||||||||||
|
Interest
income
|
834 | 1,306 | 2,219 | 1,945 | 633 | |||||||||||||||
|
Interest
expense
|
(88 | ) | (8 | ) | (22 | ) | (251 | ) | (452 | ) | ||||||||||
|
Other
expenses
|
(3,725 | ) | ― | ― | ― | ― | ||||||||||||||
|
Net
income before taxes
|
8,728 | 13,896 | 17,373 | 32,059 | 9,204 | |||||||||||||||
|
Income
tax expense
|
(4,262 | ) | (5,611 | ) | (3,354 | ) | (2,456 | ) | — | |||||||||||
|
Consolidated
net income
|
4,466 | 8,285 | 14,019 | $ | 29,603 | 9,204 | ||||||||||||||
|
Non
controlling interest
|
(482 | ) | (555 | ) | (477 | ) | (414 | ) | (553 | ) | ||||||||||
|
Net
income applicable to Common Stockholders
|
$ | 3,984 | $ | 7,730 | $ | 13,542 | $ | 29,189 | $ | 8,651 | ||||||||||
|
Basic
net income per share
|
$ | 0.15 | $ | 0.30 | $ | 0.52 | $ | 1.16 | $ | 0.35 | ||||||||||
|
Diluted
net income per share
|
$ | 0.15 | $ | 0.29 | $ | 0.50 | $ | 1.07 | $ | 0.34 | ||||||||||
|
Shares
used in per share computation:
|
||||||||||||||||||||
|
Basic
|
26,382 | 26,202 | 26,069 | 25,260 | 24,553 | |||||||||||||||
|
Diluted
|
26,633 | 26,751 | 26,935 | 26,558 | 25,657 | |||||||||||||||
- 31 -
|
May 30,
2010
|
May 31,
2009
|
May 25,
2008
|
May 27,
2007
|
May 28,
2006
|
||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 27,817 | $ | 43,459 | $ | 44,396 | $ | 62,556 | $ | 15,164 | ||||||||||
|
Total
assets
|
200,197 | 153,498 | 149,957 | 141,368 | 119,025 | |||||||||||||||
|
Debt
|
23,770 | — | — | — | 2,018 | |||||||||||||||
|
Retained
earnings (deficit)
|
13,206 | 9,222 | 1,492 | (19,332 | ) | (41,239 | ) | |||||||||||||
|
Total
stockholders’ equity
|
$ | 130,784 | $ | 125,406 | $ | 114,466 | $ | 110,228 | $ | 85,049 | ||||||||||
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; BreatheWay packaging technology for the fresh-cut
and whole produce packaging market, in September 1995; Intelimer Polymer Systems
that includes polymer materials for various industrial applications in June 1997
and for personal care applications in November 2003; and Intellicoat coated corn
seeds in the Fall of 1999. In addition, on April 30, 2010, the
Company acquired Lifecore which develops and manufactures products utilizing
hyaluronan, a naturally occurring polysaccharide that is widely distributed in
the extracellar matrix of connective tissues in both animals and
humans.
With the acquisition of Lifecore,
Landec has four core businesses – Food Products Technology, Commodity Trading,
Hyaluronan-based Biomaterials and Technology Licensing. The Food
Products Technology segment combines the Company’s Intelimer packaging
technology with Apio’s fresh-cut and whole produce business. The
Commodity Trading business is operated through Apio and combines Apio’s Cal-Ex
export company with Apio’s domestic buy-sell commodity business that purchases
and sells whole fruit and vegetable products to Asia and
domestically. The Hyaluronan-based Biomaterials business sells
products utilizing hyaluronan in the ophthalmic, orthopedic and veterinary
segments and also supplies hyaluronan to customers pursuing other medical
applications, such as aesthetic surgery, medical device coatings, tissue
engineering and pharmaceuticals. The Technology Licensing business includes our
proprietary Intellicoat seed coating technology in which certain fields of
application have been licensed to Monsanto and our Intelimer polymer business
that licenses and/or supplies products to companies such as Air Products and
Nitta. See "Business - Description of Core Business".
From inception through May 30, 2010,
the Company’s retained earnings were $13.2 million. The Company may
incur 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.
- 32 -
Critical
Accounting Policies and Use of Estimates
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make certain estimates and
judgments that affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require management’s most
significant, difficult and subjective judgments include revenue recognition;
sales returns and allowances; recognition and measurement of current and
deferred income tax assets and liabilities; the assessment of recoverability of
long-lived assets; the valuation of intangible assets and inventory; the
valuation and nature of impairments of investments; and the valuation and
recognition of stock-based compensation.
These
estimates involve the consideration of complex factors and require management to
make judgments. The analysis of historical and future trends, can require
extended periods of time to resolve, and are subject to change from period to
period. The actual results may differ from management’s estimates.
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 the fact that the
Company’s customers are predominantly large financially low-risk national and
international companies.
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 usable.
Revenue
Recognition
Revenue
from product sales is recognized when there is persuasive evidence that an
arrangement exists, delivery has occurred, 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
based on specific identification and historical losses.
The
Company takes title to all produce it trades and/or packages, and therefore,
records revenues and cost of sales at gross amounts in the Consolidated
Statements of Income.
Licensing
revenue is recognized in accordance with prevailing accounting guidance. 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 period of the agreement, including those governing
research and development activities and 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.
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.
- 33
- -
Goodwill
and Other Intangibles
The
Company’s intangible assets are comprised of customer relationships with an
estimated useful life of twelve years and trademarks/trade names and goodwill
with indefinite lives (collectively, “intangible assets”), which the Company
recognized in accordance with accounting guidance (i) upon the acquisition of
Lifecore in April 2010, our Hyaluronan-based Biomaterials reporting unit, (ii)
upon the acquisition of Apio in December 1999, which consists of our Food
Products Technology and Commodity Trading reporting units and (iii) from the
repurchase of all noncontrolling interests in the common stock of Landec Ag in
December 2006. Accounting guidance defines goodwill as “the excess of the cost
of an acquired entity over the net of the estimated fair values of the assets
acquired and the liabilities assumed at date of acquisition.” All intangible
assets, including goodwill, associated with the acquisitions of Lifecore and
Apio were allocated to the Hyaluronan-based Biomaterials and Food Products
Technology reporting unit, respectively, pursuant to accounting guidance based
upon the allocation of assets and liabilities acquired and consideration paid
for each reporting unit. The consideration paid for the Commodity Trading
reporting unit approximated its fair market value at the time of acquisition,
and therefore no intangible assets were recorded in connection with the
Company’s acquisition of this reporting unit. Goodwill associated with the
Technology Licensing reporting unit consists entirely of goodwill resulting from
the repurchase of the Landec Ag non controlling interests.
The
Company tests its intangible assets for impairment at least annually, in
accordance with accounting guidance. When evaluating indefinite-lived intangible
assets for impairment, accounting guidance requires the Company to compare the
fair value of the asset to its carrying value to determine if there is an
impairment loss. When evaluating goodwill for impairment, accounting guidance
requires the Company to first compare the fair value of the reporting unit to
its carrying value to determine if there is an impairment loss. If the fair
value of the reporting unit exceeds its carrying value, goodwill is not
considered impaired; thus application of the second step of the two-step
approach under accounting guidance is not required. Application of the
intangible assets impairment tests requires significant judgment by management,
including identification of reporting units, assignment of assets and
liabilities to reporting units, assignment of intangible assets to reporting
units, and the determination of the fair value of each indefinite-lived
intangible asset and reporting unit based upon projections of future net cash
flows, discount rates and market multiples, which judgments and projections are
inherently uncertain.
Property,
plant and equipment and finite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances occur that indicate that
the carrying amount of an asset (or asset group) may not be recoverable. The
Company’s impairment review requires significant management judgment including
estimating the future success of product lines, future sales volumes, revenue
and expense growth rates, alternative uses for the assets and estimated proceeds
from the disposal of the assets. The Company conducts quarterly reviews of idle
and underutilized equipment, and reviews business plans for possible impairment
indicators. Impairment occurs when the carrying amount of the asset (or asset
group) exceeds its estimated future undiscounted cash flows and the impairment
is viewed as other than temporary. When impairment is indicated, an impairment
charge is recorded for the difference between the asset’s book value and its
estimated fair value. Depending on the asset, estimated fair value may be
determined either by use of a discounted cash flow model or by reference to
estimated selling values of assets in similar condition. The use of different
assumptions would increase or decrease the estimated fair value of assets and
would increase or decrease any impairment measurement.
The
Company tested its indefinite-lived intangible assets and goodwill for
impairment as of July 25, 2010 and determined that no adjustments to the
carrying values of the intangible assets were necessary as of that
date. On a quarterly basis, the Company considers the need to update
its most recent annual tests for possible impairment of its intangible assets,
based on management’s assessment of changes in its business and other economic
factors since the most recent annual evaluation. Such changes, if
significant or material, could indicate a need to update the most recent annual
tests for impairment of the intangible assets during the current
period. The results of these tests could lead to write-downs of the
carrying values of the intangible assets in the current period.
The
Company uses the discounted cash flow (“DCF”) approach to develop an estimate of
fair value. The DCF approach recognizes that current value is
premised on the expected receipt of future economic
benefits. Indications of value are developed by discounting projected
future net cash flows to their present value at a rate that reflects both the
current return requirements of the market and the risks inherent in the specific
investment. The market approach was not used to value the Food
Products Technology, Hyaluronan-based Biomaterials and Technology Licensing
reporting units (the “Reporting Units”) because insufficient market comparables
exist to enable the Company to develop a reasonable fair value of its intangible
assets due to the unique nature of each of the Company’s Reporting
Units.
The DCF
approach requires the Company to exercise judgment in determining future
business and financial forecasts and the related estimates of future net cash
flows. Future net cash flows depend primarily on future product sales, which are
inherently difficult to predict. These net cash flows are discounted at a rate
that reflects both the current return requirements of the market and the risks
inherent in the specific investment.
- 34
- -
The DCF
associated with the Technology Licensing reporting unit is based on the Monsanto
Agreement with Monsanto. Under the Monsanto Agreement, Monsanto has agreed to
pay Landec Ag a license fee of $2.6 million in cash per year for five years
beginning in December 2006, and a fee of $4.0 million if Monsanto elects to
terminate the Monsanto Agreement, or $10.0 million if Monsanto elects to
purchase the rights to the exclusive field. If the purchase option is exercised
before December 2011, or if Monsanto elects to terminate the Monsanto Agreement,
all annual license fees that have not been paid to Landec Ag will become due
upon the purchase or termination. As of May 30, 2010, the fair value of the
Technology Licensing reporting unit, as determined by the DCF approach, exceeded
its book value, and therefore, no intangible asset impairment was deemed to
exist. The discount rate utilized approximates the risk free interest rate as
the cash flow stream is guaranteed under the terms of the Monsanto Agreement. A
1% increase in the discount rate would not have a significant
impact on the excess of fair value over book value.
The DCF
associated with the Food Products Technology reporting unit is based on
management’s five-year projection of revenues, gross profits and operating
profits by fiscal year and assumes a 37% effective tax rate for each
year. Management takes into account the historical trends of Apio and
the industry categories in which Apio operates along with inflationary factors,
current economic conditions, new product introductions, cost of sales, operating
expenses, capital requirements and other relevant data when developing its
projection. As of May 30, 2010, the fair value of the Food Products
Technology reporting unit, as determined by the DCF approach, exceeded its book
value, and therefore, no intangible asset impairment was deemed to exist. A 1%
increase in the discount rate would not have a significant
impact on the excess of fair value over book value.
The fair
value of indefinite and finite-lived intangible assets associated with our
acquisition of Lifecore on April 30, 2010, was determined using a DCF model
based on management’s five-year projections of revenues, gross profits and
operating profits by fiscal year and assumes a 33% effective tax rate for each
year. Management takes into account the historical trends of Lifecore and the
industry categories in which Lifecore operates along with inflationary factors,
current economic conditions, new product introductions, cost of sales, operating
expenses, capital requirements and other relevant data when developing its
projection. The trade name intangible asset was valued using the relief from
royalty valuation method and the customer relationship intangible asset was
valued using the multi-period excess earnings method. The fair value of goodwill
was calculated as the excess of consideration paid, including the fair value of
contingent consideration under the terms of the purchase agreement, over the
fair value of the tangible and intangible assets acquired less liabilities
assumed. The Company updated its analysis of the fair value of the
indefinite-lived intangible assets and goodwill as of its annual impairment
analysis date, concluding that the fair value of the Hyaluronan-based
Biomaterials reporting unit, as determined by the DCF approach, exceeded its
book value, and therefore, no intangible asset impairment was deemed to exist.
There were no impairment indicators identified by the Company in its analysis of
impairment associated with the acquired finite-lived intangible
assets.
Income
Taxes
The Company accounts for income taxes
in accordance with accounting guidance 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. The Company maintains valuation allowances when it is
likely that all or a portion of a deferred tax asset will not be realized.
Changes in valuation allowances from period to period are included in the
Company’s income tax provision in the period of change. In determining whether a
valuation allowance is warranted, the Company takes into account such factors as
prior earnings history, expected future earnings, unsettled circumstances that,
if unfavorably resolved, would adversely affect utilization of a deferred tax
asset, carryback and carryforward periods, and tax strategies that could
potentially enhance the likelihood of realization of a deferred tax asset. At
May 30, 2010, the Company had no valuation allowance against deferred tax
assets.
- 35
- -
In
addition to valuation allowances, the Company establishes accruals for certain
tax contingencies, when, despite the belief that the Company’s tax return
positions are fully supported, the Company believes that certain tax positions
are likely to be challenged and that the Company’s positions may not be fully
sustained. The tax-contingency accruals are adjusted in light of changing facts
and circumstances, such as the progress of tax audits, case law and emerging
legislation. The Company recognizes interest and penalties related to uncertain
tax positions as a component of income tax expense. The Company’s effective tax
rate includes the impact of tax-contingency accruals as considered appropriate
by management.
A number
of years may elapse before a particular matter, for which the Company has
accrued, is audited and finally resolved. The number of years with open tax
audits varies by jurisdiction. While it is often difficult to predict the final
outcome or the timing of resolution of any particular tax matter, the Company
believes its tax-contingency accruals are adequate to address known tax
contingencies. Favorable resolution of such matters could be recognized as a
reduction to the Company’s effective tax rate in the year of resolution.
Unfavorable settlement of any particular issue could increase the effective tax
rate. Any resolution of a tax issue may require the use of cash in the year of
resolution. The Company’s tax-contingency accruals are presented in the balance
sheet within accrued liabilities.
Stock-Based
Compensation
The
Company’s stock-based awards include stock option grants and restricted stock
unit awards (RSUs).
The Company adopted accounting guidance
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.
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 new
accounting guidance, 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 unit awards granted prior to May 29, 2006 will
continue to be recognized using the straight-line, multiple-option
method. In addition, the new accounting guidance 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.
Notes
and Advances Receivable
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 crops
harvested by the grower and delivered to Apio. 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 six to
twelve 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 to be
delivered 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 notes or advances receivable and the estimated losses
would rise in the current period, potentially to the extent of the total notes
or advances receivable of $241,000 as of May 30, 2010.
Recent
Accounting Pronouncements
Recently Adopted
Pronouncements
Accounting
Standards Codification
Effective
July 1, 2009, the FASB Accounting Standards Codification (FASB ASC) is the
single source of authoritative accounting principles recognized by the FASB to
be applied by non-governmental entities in the preparation of financial
statements in conformity with GAAP. The adoption of the FASB ASC does not impact
the Company’s consolidated financial statements, however, the Company’s
references to accounting literature within its notes to the condensed
consolidated financial statements have been revised to conform to the FASB ASC
beginning with the fiscal quarter ending November 29, 2009.
- 36
- -
Business
Combinations
In
December 2007, the FASB issued new guidance which significantly changes the
financial accounting and reporting for business combination transactions. The
new guidance requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of the new guidance will, among other things,
impact the determination of acquisition-date fair value of consideration paid in
a business combination (including contingent consideration); exclude transaction
costs from acquisition accounting; and change accounting practices for acquired
contingencies, acquisition-related restructuring costs, in-process research and
development, indemnification assets, and tax benefits. The Company adopted the
new guidance on June 1, 2009. The Company acquisition of Lifecore (see Note 2)
was subject to the provisions of this new guidance, under which the Company
recognizing $2.7 million of expenses related to the acquisition during the
fiscal year ended May 30, 2010. These expenses are classified as other
expenses.
Non
Controlling Interests
In
December 2007, the FASB issued new guidance with respect to non controlling
interests in consolidated financial statements. The new guidance requires the
reporting of all non controlling interests as a separate component of
stockholders’ equity, the reporting of consolidated net income (loss) as the
amount attributable to both the parent and the non controlling interests and the
separate disclosure of net income (loss) attributable to the parent and to the
non controlling interests. Changes in a parent’s ownership interest while the
parent retains its controlling interest will be accounted for as equity
transactions and any retained non controlling equity investment upon the
deconsolidation of a subsidiary will be initially measured at fair value. Other
than the reporting requirements described above which require retrospective
application, the provisions of the new guidance are to be applied prospectively.
The Company adopted the new guidance on June 1, 2009 and such adoption did not
have a material impact on the Company’s results of operations or financial
position for the fiscal year ended May 30, 2010, however, as required,
presentation of non controlling interests has been conformed to the requirements
of the new guidance for all periods presented.
Collaborative
Arrangements
In
December 2007, the FASB issued new guidance concerning the accounting for
collaborative arrangements (which does not establish a legal entity within such
arrangement). The consensus indicates that costs incurred and
revenues generated from transactions with third parties (i.e. parties outside of
the collaborative arrangement) should be reported by the collaborators on the
respective line items in their income statements based upon their role as either
principal or agent. Additionally, the consensus provides that income
statement characterization of payments between the participants in a
collaborative arrangement should be based upon existing authoritative guidance;
analogy to such guidance if not within their scope; or a reasonable, rational,
and consistently applied accounting policy election. The Company
adopted the new guidance on June 1, 2009 and such adoption did not have an
impact on the Company’s results of operations or financial position for the
fiscal year ended May 30, 2010.
Fair
Value Disclosures in Interim Reports
In April
2009, the FASB issued new guidance that requires disclosures about the fair
value of financial instruments at interim reporting periods. The new
guidance is effective for interim reporting periods ending after June 15, 2009.
The Company adopted the new guidance on June 1, 2009 and such adoption did not
have an impact on the Company’s results of operations or financial position for
the fiscal year ended May 30, 2010.
- 37
- -
Subsequent
Events
In May
2009, the FASB issued new guidance that establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before the financial statements are issued or are available to be
issued. The Company adopted the new guidance on June 1, 2009 and such
adoption did not impact the Company’s consolidated financial
statements. The Company determined that the basis for the date
through which the entity has evaluated subsequent events represents the date the
financial statements were file with the Securities and Exchange
Commission.
Fair
Value Measurements
In
January 2010, the FASB new guidance whereas reporting entities will have to
provide information about movements of assets among Levels 1 and 2; and a
reconciliation of purchases, sales, issuance, and settlements of activity valued
with a Level 3 method, of the three-tier fair value hierarchy established by
previous accounting guidance. The new guidance also clarifies the
existing guidance to require fair value measurement disclosures for each class
of assets and liabilities. The new guidance is effective for interim
and annual reporting periods beginning after December 15, 2009 for Level 1
and 2 disclosure requirements and after December 15, 2010 for Level 3
disclosure requirements. The Company adopted the guidance during
fiscal 2010 and such adoption did not impact the Company’s consolidated
financial statements other than the required disclosures.
Recently Issued
Pronouncements
Variable
Interest Entities
In June
2009, the FASB issued new guidance which amends the evaluation criteria to
identify the primary beneficiary of a variable interest
entity. Additionally, the new guidance requires ongoing reassessments
of whether an enterprise is the primary beneficiary of the variable interest
entity. The Company will adopt this new guidance in fiscal year 2011
and does not expect a material impact on the Company’s consolidated financial
statements as a result of the new guidance.
Revenue
Recognition
In October 2009, the FASB issued new
guidance in relation to "Multiple-Deliverable Revenue
Arrangements". The new standard changes the requirements for
establishing separate units of accounting in a multiple element arrangement and
requires the allocation of arrangement consideration to each deliverable to be
based on the relative selling price. The Company plans to
early adopt these standards as of the beginning of fiscal 2011 for new deals
originating after May 30, 2010. There will be no materially modified
deals as a result of the adoption. The Company is not able to reasonably
estimate the effect of adopting these standards on future financial periods as
the impact will vary based on the nature and volume of new multiple-deliverable
revenue arrangements in any given period.
Fair
Value Measurements
The
Company adopted fair value measurement accounting guidance on May 26, 2008 for
financial assets and liabilities and for financial instruments and certain other
items at fair value. The Company did not elect the fair value option
for any of its eligible financial assets or liabilities.
The
accounting guidance established a three-tier hierarchy for fair value
measurements, which prioritizes the inputs used in measuring fair value as
follows:
|
|
·
|
Level
1 – observable inputs such as quoted prices for identical instruments in
active markets.
|
|
|
·
|
Level
2 – inputs other than quoted prices in active markets that are observable
either directly or indirectly through corroboration with observable market
data.
|
- 38
- -
|
|
·
|
Level
3 – unobservable inputs in which there is little or no market data, which
would require the Company to develop its own
assumptions.
|
As of May
30, 2010, the Company held certain assets that are required to be measured at
fair value on a recurring basis. These included the Company’s cash
equivalents and marketable securities for which the fair value is determined
based on observable inputs that are readily available in public markets or can
be derived from information available in publicly quoted markets. Therefore, the
Company has categorized its cash equivalents and marketable securities as Level
1. As of May 30, 2010, the Company recorded to Other Comprehensive
Loss on the Consolidated Balance Sheets an unrealized loss of $179,000, net of
taxes of $105,000, as a result of the interest rate swap. The
unrealized loss was based on a Level 2 hierarchy for fair value
measurements. If the interest rate swap is terminated or the debt
borrowed is paid off prior to April 30, 2015, the amount of unrealized loss or
gain included in Other Comprehensive Income (Loss) would be reclassified to
earnings. The Company has no intentions of terminating the interest
rate swap or prepaying the debt in the next twelve months. The
interest rate swap liability is included in other non-current liabilities as of
May 30, 2010. The Company has no other financial assets or
liabilities for which fair value measurement has been adopted.
Results
of Operations
Fiscal
Year Ended May 30, 2010 Compared to Fiscal Year Ended May 31, 2009
Revenues (in
thousands):
|
Fiscal Year ended
May 30, 2010
|
Fiscal Year ended
May 31, 2009
|
Change
|
||||||||||
|
Apio
Value Added
|
$ | 172,416 | $ | 165,648 | 4 | % | ||||||
|
Apio
Packaging
|
2,630 | 2,608 | 1 | % | ||||||||
|
Food
Technology
|
175,046 | 168,256 | 4 | % | ||||||||
|
Commodity
Trading
|
54,926 | 60,445 | (9 | )% | ||||||||
|
Total
Apio
|
229,972 | 228,701 | 1 | % | ||||||||
|
HA
|
1,457 | — | N/M | |||||||||
|
Technology
Licensing
|
6,795 | 7,237 | (6 | )% | ||||||||
|
Total Revenues
|
$ | 238,224 | $ | 235,938 | 1 | % | ||||||
Apio
Value Added
Apio’s
value-added revenues consist of revenues generated from the sale of specialty
packaged fresh-cut and whole value-added processed vegetable products that are
washed and packaged in our proprietary packaging and sold under Apio’s Eat Smart
brand and various private labels. In addition, value-added revenues
include the revenues generated from Apio Cooling, LP, a produce cooling
operation in which Apio is the general partner with a 60% ownership
position.
The
increase in Apio’s value-added revenues for the fiscal year ended May 30, 2010
compared to the same period last year was primarily due to a increase in
value-added unit sales volumes of 14% partially offset by a year over year mix
change to greater sales of lower priced bag products from higher priced tray
products.
Apio
Packaging
Apio
packaging revenues consist of Apio’s packaging technology business using its
BreatheWay membrane technology. The first commercial
application included in Apio packaging is our banana packaging technology and
more recently the addition of a second application for avocados.
The
increase in Apio packaging revenues for the fiscal year ended May 30, 2010
compared to the same period last year was not significant to consolidated Landec
revenues.
- 39
- -
Commodity
Trading
Apio
trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex, and from the purchase and sale of whole commodity fruit
and vegetable products domestically. The export portion of trading
revenues for fiscal year 2010 and 2009 was $52.3 million and $55.3 million or
95% and 91%, respectively, of total trading revenues.
The
decrease in revenues in Apio's trading business for the fiscal year ended May
30, 2010 compared to the same period last year was due to a 9% decrease in unit
volume sales due to a shortage of produce to export.
Hyaluronan-based
Biomaterials (“HA”)
The
Company’s Lifecore subsidiary generates revenue through sale of products
containing hyaluronan, Lifecore was acquired on April 30, 2010.
Technology
Licensing
Technology
licensing revenues consist of revenues generated from the licensing agreements
with Monsanto, Air Products and Nitta.
The
decrease in technology licensing revenues for the fiscal year ended May 30, 2010
compared to the same period last year was not significant to consolidated Landec
revenues.
Gross Profit (in
thousands):
|
Fiscal Year ended
May 30, 2010
|
Fiscal Year ended
May 31, 2009
|
Change
|
||||||||||
|
Apio
Value Added
|
$ | 20,261 | $ | 21,020 | (4 | )% | ||||||
|
Apio
Packaging
|
2,253 | 2,366 | (5 | )% | ||||||||
|
Food
Technology
|
22,514 | 23,386 | (4 | )% | ||||||||
|
Commodity
Trading
|
3,906 | 3,657 | 7 | % | ||||||||
|
Total
Apio
|
26,420 | 27,043 | (2 | )% | ||||||||
|
HA
|
815 | — | N/M | |||||||||
|
Technology
Licensing
|
6,531 | 7,237 | (10 | )% | ||||||||
|
Total
Gross Profit
|
$ | 33,766 | $ | 34,280 | (1 | )% | ||||||
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 30, 2010 compared to the same period
of the prior fiscal year as outlined in the table above.
Apio Value-Added
The decrease in gross profit for Apio’s
value-added specialty packaged vegetable business for the fiscal year ended
May 30, 2010 compared to the same period last year was primarily due to an
increase in the cost for sourcing produce during the fourth quarter of fiscal
year 2010 which resulted in lower gross margins coupled with a sales mix change
to lower margin bag products from higher margin tray products. These
decreases in gross profit were partially offset by decreased packaging
costs. The gross margin for Apio’s value-added business for fiscal
year 2010 was 11.8% compared to a gross margin of 12.7% for fiscal year
2009.
- 40
- -
Apio
Packaging
The
decrease in gross profit for Apio packaging for the fiscal year ended May 30,
2010 compared to the same period last year was not significant to consolidated
Landec gross profit.
Apio
Trading
Apio’s trading business is a buy/sell
business that realizes a commission-based margin in the 5-7% range. The increase
in gross profit during the fiscal year ended May 30, 2010 compared to the prior
fiscal year was primarily due to product mix changes to higher margin products
in our export business which resulted in a higher gross margin during fiscal
year 2010 of 7.1% compared to a gross margin of 6.1% in fiscal year
2009.
Hyaluronan-based
Biomaterials
Lifecore
was acquired on April 30, 2010.
Technology
Licensing
The
decrease in technology licensing gross profit for the fiscal year ended May 30,
2010 compared to the same period of the prior year was primarily due to
completion of license payments by Air Products in fiscal year 2009 which
resulted in $600,000 being recognized last fiscal year and none this fiscal
year.
Operating Expenses (in
thousands):
|
Fiscal Year ended
May 30, 2010
|
Fiscal Year ended
May 31, 2009
|
Change
|
||||||||||
|
Research
and Development:
|
||||||||||||
|
Apio
|
$ | 1,182 | $ | 1,321 | (11 | )% | ||||||
|
HA
|
395 | — | N/M | |||||||||
|
Technology
Licensing
|
2,784 | 2,344 | 19 | % | ||||||||
|
Total
R&D
|
$ | 4,361 | $ | 3,665 | 19 | % | ||||||
|
Selling,
General and Administrative:
|
||||||||||||
|
Apio
|
$ | 12,128 | $ | 12,709 | (5 | )% | ||||||
|
HA
|
339 | — | N/M | |||||||||
|
Corporate
|
5,231 | 5,308 | (1 | )% | ||||||||
|
Total
S,G&A
|
$ | 17,698 | $ | 18,017 | (2 | )% | ||||||
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. In the HA business,
the research and development efforts are focused on new products and
applications for Hyaluronan-based biomaterials. In the Technology
Licensing business, the research and development efforts are focused on uses for
the proprietary Intelimer polymers outside of food.
- 41
- -
The increase in research and
development expenses for the fiscal year ended May 30, 2010 compared to the same
period last year was primarily due to increased headcount, increased consulting
fees surrounding development work in our Technology Licensing business and the
acquisition of Lifecore on April 30, 2010.
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 30, 2010 compared to the
same period last year was not significant.
Other (in
thousands):
|
Fiscal Year ended
May 30, 2010
|
Fiscal Year ended
May 31, 2009
|
Change
|
||||||||||
|
Interest
Income
|
$ | 834 | $ | 1,306 | (36 | )% | ||||||
|
Interest
Expense
|
$ | (88 | ) | $ | (8 | ) | 1000 | % | ||||
|
Other
Expense
|
$ | (3,725 | ) | $ | ― | N/M | ||||||
|
Income
Taxes
|
$ | (4,262 | ) | $ | (5,611 | ) | (24 | )% | ||||
|
Non
Controlling Interest
|
$ | (482 | ) | $ | (555 | ) | (13 | )% | ||||
Interest
Income
The decrease in interest income for the
fiscal year ended May 30, 2010 compared to the same period last year was due to
lower yields on investments.
Interest Expense
The increase in interest expense during
the fiscal year ended May 30, 2010 compared to the prior year was due to the new
credit facility entered into on April 30, 2010 in conjunction with the
acquisition of Lifecore.
Other Expenses
The increase in other expenses during
fiscal year 2010 compared to fiscal year 2009 was due to $2.7 million in
acquisition related expenses and $1.0 million from an impairment charge related
to our investment in Aesthetic Sciences.
Income Taxes
The decrease in the income tax expense
in fiscal year 2010 compared to fiscal year 2009 was due to a 37% decrease in
net income before taxes partially offset by an increase in the Company’s
effective tax rate to 50% in fiscal year 2010 up from 42% in fiscal year
2009.
Non Controlling Interest
The non controlling 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 non controlling
interest expense in fiscal year 2010 compared to fiscal year 2009 was not
significant.
- 42
- -
Fiscal
Year Ended May 31, 2009 Compared to Fiscal Year Ended May 25, 2008
Revenues (in
thousands):
|
Fiscal Year ended
May 31, 2009
|
Fiscal Year ended
May 25, 2008
|
Change
|
||||||||||
|
Apio
Value Added
|
$ | 165,648 | $ | 167,817 | (1 | )% | ||||||
|
Apio
Packaging
|
2,608 | 3,377 | (23 | )% | ||||||||
|
Food
Technology
|
168,256 | 171,194 | (2 | )% | ||||||||
|
Apio
Trading
|
60,445 | 60,414 | 0 | % | ||||||||
|
Total
Apio
|
228,701 | 231,608 | (1 | )% | ||||||||
|
Technology
Licensing
|
7,237 | 6,919 | 5 | % | ||||||||
|
Total
Revenues
|
$ | 235,938 | $ | 238,527 | (1 | )% | ||||||
Apio
Value Added
Apio’s
value-added revenues consist of revenues generated from the sale of specialty
packaged fresh-cut and whole value-added processed vegetable products that are
washed and packaged in our proprietary packaging and sold under Apio’s Eat Smart
brand and various private labels. In addition, value-added revenues
include the revenues generated from Apio Cooling, LP, a vegetable cooling
operation in which Apio is the general partner with a 60% ownership
position.
The
decrease in Apio’s value-added revenues for the fiscal year ended May 31, 2009
compared to the fiscal year ended May 25, 2008 was primarily due to a decrease
in value-added unit sales volumes of 1%.
Apio
Packaging
Apio
packaging revenues consist of Apio’s packaging technology business using its
BreatheWay membrane technology. The first commercial
application included in Apio packaging is our banana packaging
technology.
The
decrease in Apio packaging revenues for the fiscal year ended May 31, 2009
compared to the fiscal year ended May 25, 2008 was primarily due to the decrease
in the minimum payments received from Chiquita as a result of the amended
Chiquita license agreement.
Apio
Trading
Apio
trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex, and from the purchase and sale of whole commodity fruit
and vegetable products domestically. The export portion of trading
revenues for fiscal year 2009 was $55.3 million or 91% of total trading
revenues.
The
increase in revenues in Apio's trading business for the fiscal year ended May
31, 2009 compared to the fiscal year ended May 25, 2008 was not
significant.
Technology
Licensing
Technology
licensing revenues consist of revenues generated from the licensing agreements
with Monsanto, Air Products and Nitta.
The
increase in technology licensing revenues for the fiscal year ended May 31, 2009
compared to the fiscal year ended May 25, 2008 was not significant to
consolidated Landec revenues.
- 43
- -
Gross Profit (in
thousands):
|
Fiscal Year ended
May 31, 2009
|
Fiscal Year ended
May 25, 2008
|
Change
|
||||||||||
|
Apio
Value Added
|
$ | 21,020 | $ | 24,615 | (15 | )% | ||||||
|
Apio
Packaging
|
2,366 | 3,245 | (27 | )% | ||||||||
|
Food
Technology
|
23,386 | 27,860 | (16 | )% | ||||||||
|
Apio
Trading
|
3,657 | 3,449 | 6 | % | ||||||||
|
Total
Apio
|
27,043 | 31,309 | (14 | )% | ||||||||
|
Technology
Licensing
|
7,237 | 6,919 | 5 | % | ||||||||
|
Total
Gross Profit
|
$ | 34,280 | $ | 38,228 | (10 | )% | ||||||
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 31, 2009 compared to the same period
of the prior fiscal year as outlined in the table above.
Apio Value-Added
The decrease in gross profit for Apio’s
value-added specialty packaged vegetable business for the fiscal year ended
May 31, 2009 compared to the fiscal year ended May 25, 2008 was due to
decreased revenues coupled with increased raw material costs, primarily the cost
of produce during fiscal year 2009 compared to fiscal year 2008. The
gross margin for Apio’s value-added business for fiscal year 2009 was 12.7%
compared to a gross margin of 14.7% for fiscal year 2008.
Apio
Packaging
The
decrease in gross profit for Apio packaging for the fiscal year ended May 31,
2009 compared to the fiscal year ended May 25, 2008 was primarily due to the
decrease in minimum payments received from Chiquita as a result of the amended
Chiquita license agreement.
Apio
Trading
Apio’s trading business is a buy/sell
business that realizes a commission-based margin in the 5-7% range. The increase
in gross profit during the fiscal year ended May 31, 2009 compared to the fiscal
year ended May 25, 2008 was primarily due to product mix changes to higher
margin vegetable products from lower margin fruit products in our export
business which resulted in a higher gross margin during fiscal year 2009 of 6.1%
compared to a gross margin of 5.7% in fiscal year 2008.
Technology
Licensing
The
increase in technology licensing gross profit for the fiscal year ended May 31,
2009 compared to the fiscal year ended May 25, 2008 was not significant to
consolidated Landec gross profit.
- 44
- -
Operating Expenses (in
thousands):
|
Fiscal Year ended
May 31, 2009
|
Fiscal Year ended
May 25, 2008
|
Change
|
||||||||||
|
Research
and Development:
|
||||||||||||
|
Apio
|
$ | 1,321 | $ | 1,251 | 6 | % | ||||||
|
Technology
Licensing
|
2,344 | 2,000 | 17 | % | ||||||||
|
Total
R&D
|
$ | 3,665 | $ | 3,251 | 13 | % | ||||||
|
Selling,
General and Administrative:
|
||||||||||||
|
Apio
|
$ | 12,709 | $ | 13,831 | (8 | )% | ||||||
|
Corporate
|
5,308 | 5,970 | (11 | )% | ||||||||
|
Total
S,G&A
|
$ | 18,017 | $ | 19,801 | (9 | )% | ||||||
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. In the Technology
Licensing business, the research and development efforts are focused on
development of new polymer technologies and application of existing and new
technologies to industries outside of food.
The increase in research and
development expenses for the fiscal year ended May 31, 2009 compared to the
fiscal year ended May 25, 2008 was primarily due to increased headcount and
increased consulting fees surrounding development work in our technology
licensing area.
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 31, 2009 compared to
the fiscal year ended May 25, 2008 was primarily due to a decrease in
sales and marketing expenses at Apio due to the decreases in value-added
revenues and from decreases in general and administrative expenses at Apio
primarily as a result of not accruing bonuses this fiscal year whereas for the
same period last year bonuses were accrued. The decreases in selling,
general and administrative expenses at Corporate were primarily due to a
decrease in auditing and tax fees coupled with the fact that in fiscal year 2008
the Company amended its agreement with Air Products resulting in a non recurring
charge of $600,000. These decreases were partially offset by legal
fees associated with the Company’s pursuit of merger and acquisition
activities.
Other (in
thousands):
|
Fiscal Year ended
May 31, 2009
|
Fiscal Year ended
May 25, 2008
|
Change
|
||||||||||
|
Interest
Income
|
$ | 1,306 | $ | 2,219 | (41 | )% | ||||||
|
Interest
Expense
|
$ | (8 | ) | (22 | ) | (64 | )% | |||||
|
Income
Taxes
|
$ | (5,611 | ) | (3,354 | ) | 67 | % | |||||
|
Non
Controlling Interest
|
$ | (555 | ) | (477 | ) | 16 | % | |||||
- 45
- -
Interest
Income
The decrease in interest income for the
fiscal year ended May 31, 2009 compared to the fiscal year ended May 25, 2008
was due to lower yields on investments, driven by both declines in interest
rates and a shift in our investment portfolio to lower yielding investment
vehicles.
Interest Expense
The decrease in interest expense during
the fiscal year ended May 31, 2009 compared to the fiscal year ended May 25,
2008 was not significant.
Non Controlling Interest
The non controlling 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 non controlling
interest expense in fiscal year 2009 compared to fiscal year 2008 was not
significant.
Income Taxes
The increase in the income tax expense
in fiscal year 2009 compared to fiscal year 2008 was due to the Company
utilizing all of its net operating loss carryforwards and tax credits during
fiscal year 2008 for book income tax expense purposes which resulted in the
estimated effective tax rate for fiscal year 2009 for federal and state income
taxes increasing to 42% from 20% last year, partially offset by a 21% decrease
in pre-tax net income.
Liquidity
and Capital Resources
As of May 30, 2010, the Company had
cash and cash equivalents of $27.8 million, a net decrease of $15.7 million from
$43.5 million at May 31, 2009.
Cash Flow from Operating
Activities
Landec generated $7.5 million of cash
flow from operating activities during the fiscal year ended May 30, 2010
compared to generating $9.4 million from operating activities during the fiscal
year ended May 31, 2009. The primary sources of cash from operating activities
during fiscal year 2010 were $4.0 million of net income and non-cash related
expenses of $7.8 million, partially offset by a net decrease of $4.3 million in
working capital. The primary changes in working capital during fiscal year 2010
were (1) a $1.6 million increase in accounts receivable due to revenues at Apio
during May 2010 being higher than revenues during May 2009, (2) a $764,000
receivable for the overpayment of income taxes (3) a $1.3 million increase in
inventories primarily due to increased inventory levels at both Apio and
Lifecore, and (4) a $2.0 million decrease in deferred revenue due to recognizing
$2.0 million of revenue associated with deferred revenue from the Monsanto
licensing agreement during fiscal year 2010.
Cash Flow from Investing
Activities
Net cash used in investing activities
for the fiscal year ended May 30, 2010 was $42.8 million compared to net cash
used in investing activities of $12.3 million for the same period last
year. The primary uses of cash from investing activities during
fiscal year 2010 were from the acquisition of Lifecore for $39.7 million (net of
cash acquired), from the purchase of $5.2 million of property and equipment
primarily for the growth of Apio’s value-added vegetable business partially
offset by net proceeds of $2.1 million from the sale of marketable
securities.
Cash Flow from Financing
Activities
Net cash provided by financing
activities for the fiscal year ended May 30, 2010 was $19.7 million compared to
net cash provided by financing activities of $2.0 million for the same period
last year. The primary source of cash from financing activities
during fiscal year 2010 was from the $20.0 million of proceeds from long-term
debt entered into in conjunction with the acquisition of
Lifecore.
- 46
- -
Capital Expenditures
During the fiscal year ended May 30,
2010, Landec purchased property and equipment to support the growth of Apio’s
value-added vegetable business. These expenditures represented the
majority of the $5.2 million of capital expenditures. In addition, we
expect to incur increased capital expenditures in fiscal year 2011 in order to
complete the 40,000 square foot expansion of Apio’s value-added vegetable
processing plant to meet projected increased capacity requirements in the future
and to meet the capital needs of the recently acquired subsidiary,
Lifecore. We anticipate that our capital expenditures in the year
ending May 29, 2011 will be approximately $6.0 million to $6.5
million.
Debt
On April 30, 2010 in conjunction with
the acquisition of Lifecore, Lifecore entered into a new $20 million Credit
Agreement with Wells Fargo Bank N.A. (“Wells Fargo”) with a five year term that
provides for equal monthly principal payments plus interest. The
Credit Agreement contains certain restrictive covenants, which require Lifecore
to meet certain financial tests, including minimum levels of net income, minimum
quick ratio, minimum fixed coverage ratio and maximum capital
expenditures. All of Lifecore’s assets have been pledged to secure
the debt incurred pursuant to the Credit Agreement. Landec is the
guarantor of the debt. On August 9, 2010, the Company amended its Credit
Agreement with Wells Fargo to amend certain financial covenants. As
of May 30, 2010, $19.7 million was outstanding under the Credit
Agreement. As a result of the amendment, the Company was in
compliance with all financial covenants as of May 30, 2010.
On May 4,
2010, the Company entered into an interest rate swap agreement that has the
economic effect of modifying the variable interest obligations associated with
the $20 million Credit Agreement so that the interest payable is effectively
fixed at a rate of 4.24% (see Note 10).
Contractual Obligations
The Company’s material contractual
obligations for the next five years and thereafter as of May 30, 2010, are as
follows (in thousands):
|
Due in Fiscal Year Ended May
|
||||||||||||||||||||||||||||
|
Obligation
|
Total
|
2011
|
2012
|
2013
|
2014
|
2015
|
Thereafter
|
|||||||||||||||||||||
|
Income
taxes
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Long-term
debt
|
23,770 | 4,521 | 4,338 | 4,351 | 4,362 | 4,039 | 2,159 | |||||||||||||||||||||
|
Operating
leases
|
2,278 | 676 | 390 | 314 | 240 | 248 | 410 | |||||||||||||||||||||
|
Licensing
obligation
|
200 | 100 | 100 | — | — | — | — | |||||||||||||||||||||
|
Purchase
commitments
|
4,989 | 4,989 | — | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 31,237 | $ | 10,286 | $ | 4,828 | $ | 4,665 | $ | 4,602 | $ | 4,287 | $ | 2,569 | ||||||||||||||
The income tax amounts above exclude
liabilities associated with the accounting for uncertainty in income taxes as we
are unable to reasonably estimate the ultimate amount or timing of settlement.
See Note 11 in the Notes to Consolidated Financial Statements for further
discussion.
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.
- 47
- -
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 cash from
operations, along with existing cash, cash equivalents and marketable securities
will be sufficient to finance its operational and capital requirements for at
least the next twelve months.
Item
7A. Quantitative and
Qualitative Disclosures about Market Risk
Not significant.
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.
- 48
- -
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 Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by the Securities and
Exchange Commission, and are effective in providing 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.
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 30,
2010. 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 30, 2010, 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. We have excluded from our
evaluation the internal control over financial reporting of Lifecore Biomedical,
Inc. (Lifecore), which we acquired on April 30, 2010, as discussed in Note 2 of
Notes to Consolidated Financial Statements. Total revenues subject to Lifecore’s
internal control over financial reporting represented $1.5 million of our
consolidated total revenues for the fiscal year ended May 30, 2010. Total assets
subject to Lifecore’s internal control over financial reporting represented $80
million and $41 million of our consolidated total and net assets respectively,
as of May 30, 2010.
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.
Our
independent registered public accounting firm, Ernst & Young LLP, has issued
an audit report on our assessment of our internal control over financial
reporting, which is included herein.
Changes
in Internal Controls over Financial Reporting
Except as
described above, there were no changes in our internal controls over financial
reporting during the quarter ended May 30, 2010 that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
- 49
- -
REPORT
OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
The Board
of Directors and Stockholders of Landec Corporation
We have
audited Landec Corporation and subsidiaries’ internal control over financial
reporting as of May 30, 2010, 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 and
subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, 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, Landec Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of May 30,
2010, based on the COSO criteria.
As
indicated in the accompanying Management’s Report on Internal Control over
Financial Reporting, management’s assessment of and conclusions on the
effectiveness of internal controls over financial reporting did not include the
internal controls of Lifecore Biomedical, Inc., which is included in the May 30,
2010 consolidated financial statements of Landec Corporation and constituted $80
million and $41 million of total and net assets, respectively, as of May 30,
2010 and $1.5 million of revenues, for the year then ended. Our audit of the
internal controls or financial statements of Landec Corporation also did not
include an evaluation of internal controls or financial statements of Lifecore
Biomedical, Inc.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Landec
Corporation and subsidiaries as of May 30, 2010 and May 31, 2009, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for each of the three years in the period ended May 30, 2010 of Landec
Corporation and subsidiaries and our report dated August 12, 2010 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG
LLP
San
Francisco, California
August
12, 2010
Item
9B. Other
Information
None
- 50
- -
PART
III
|
Item
10.
|
Directors and Executive
Officers of the Registrant
|
|
|
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the
Commission no later than September 27, 2010 (120 days after the
Registrant’s fiscal year end covered by this Report) and is incorporated
herein by reference.
|
|
Item
11.
|
Executive
Compensation
|
|
|
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the
Commission no later than September 27, 2010 (120 days after the
Registrant’s fiscal year end covered by this Report) and is incorporated
herein by reference.
|
|
Item
12.
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
|
|
|
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the
Commission no later than September 27, 2010 (120 days after the
Registrant’s fiscal year end covered by this Report) and is incorporated
herein by reference.
|
|
Item
13.
|
Certain Relationships and
Related Transactions and Director
Independence
|
|
|
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the
Commission no later than September 27, 2010 (120 days after the
Registrant’s fiscal year end covered by this Report) and is incorporated
herein by reference.
|
|
Item 14.
|
Principal Accountant Fees and
Services
|
|
|
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the
Commission no later than September 27, 2010 (120 days after the
Registrant’s fiscal year end covered by this Report) and is incorporated
herein by reference.
|
- 51
- -
PART
IV
|
Item
15.
|
Exhibits and Financial
Statement Schedules
|
|
(a)
1.
|
Consolidated
Financial Statements of Landec Corporation
|
||
|
Page
|
|||
|
Report
of Ernst & Young LLP, Independent Registered Public Accounting
Firm
|
53
|
||
|
Consolidated
Balance Sheets at May 30, 2010 and May 31, 2009
|
54
|
||
|
Consolidated
Statements of Income for the Years Ended May 30, 2010, May 31, 2009 and
May 25, 2008
|
55
|
||
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Years Ended May 30,
2010, May 31, 2009 and May 25, 2008
|
56
|
||
|
Consolidated
Statements of Cash Flows for the Years Ended May 30, 2010, May 31, 2009
and May 25, 2008
|
57
|
||
|
Notes
to Consolidated Financial Statements
|
58
|
||
|
2.
|
All
schedules provided for in the applicable accounting regulations of the
Securities and Exchange Commission have been omitted since they pertain to
items which do not appear in the financial statements of Landec
Corporation and its subsidiaries or to items which are not significant or
to items as to which the required disclosures have been made elsewhere in
the financial statements and supplementary notes and such
schedules.
|
||
|
3.
|
Index
of Exhibits
|
86
|
|
|
The
exhibits listed in the accompanying Index of Exhibits are filed or
incorporated by reference as part of this report.
|
- 52
- -
REPORT
OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
The Board
of Directors and Stockholders of Landec Corporation
We have
audited the accompanying consolidated balance sheets of Landec Corporation and
subsidiaries as of May 30, 2010 and May 31, 2009, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended May 30, 2010. 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 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 the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Landec Corporation and
subsidiaries at May 30, 2010 and May 31, 2009, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended May 30, 2010, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the
consolidated financial statements, under the heading ‘Business Combinations,’
the Company adopted Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 805, Business Combinations,
effective June 1, 2009.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Landec Corporation’s internal control over
financial reporting as of May 30, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated August 12, 2010
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG
LLP
San
Francisco, California
August
12, 2010
- 53
- -
LANDEC
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
May 30, 2010
|
May 31, 2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 27,817 | $ | 43,459 | ||||
|
Marketable
securities
|
20,421 | 22,498 | ||||||
|
Accounts
receivable, less allowance for doubtful accounts of $189 and $165 at May
30, 2010 and May 31, 2009, respectively
|
18,637 | 15,271 | ||||||
|
Accounts
receivable, related party
|
729 | 632 | ||||||
|
Income
taxes receivable
|
739 | — | ||||||
|
Inventories,
net
|
16,107 | 5,829 | ||||||
|
Notes
and advances receivable
|
241 | 186 | ||||||
|
Deferred
taxes
|
1,262 | 2,161 | ||||||
|
Prepaid
expenses and other current assets
|
2,989 | 1,298 | ||||||
|
Total
current assets
|
88,942 | 91,334 | ||||||
|
Property
and equipment, net
|
50,161 | 22,743 | ||||||
|
Goodwill,
net
|
41,154 | 27,361 | ||||||
|
Trademarks/
trade names, net
|
12,428 | 8,228 | ||||||
|
Customer
relationships, net
|
3,674 | ― | ||||||
|
Other
assets
|
3,838 | 3,832 | ||||||
|
Total
Assets
|
$ | 200,197 | $ | 153,498 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 14,354 | $ | 12,430 | ||||
|
Related
party payables
|
349 | 299 | ||||||
|
Income
taxes payable
|
— | 107 | ||||||
|
Accrued
compensation
|
2,043 | 1,112 | ||||||
|
Other
accrued liabilities
|
3,277 | 1,805 | ||||||
|
Deferred
revenue
|
3,391 | 3,430 | ||||||
|
Current
portion of long-term debt
|
4,521 | ― | ||||||
|
Total
current liabilities
|
27,935 | 19,183 | ||||||
|
Long-term
debt
|
19,249 | ― | ||||||
|
Deferred
revenue
|
1,000 | 3,000 | ||||||
|
Deferred
taxes
|
8,801 | 4,119 | ||||||
|
Other
non-current liabilities
|
10,737 | ― | ||||||
|
Total
liabilities
|
67,722 | 26,302 | ||||||
|
Commitments
and contingencies (Note 12)
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock, $0.001 par value; 50,000,000 shares authorized; 26,490,259 and
26,326,889 shares issued and outstanding at May 30, 2010 and May 31, 2009,
respectively
|
27 | 26 | ||||||
|
Additional
paid-in capital
|
117,730 | 116,158 | ||||||
|
Accumulated
other comprehensive loss
|
(179 | ) | — | |||||
|
Retained
earnings
|
13,206 | 9,222 | ||||||
|
Total
stockholders’ equity
|
130,784 | 125,406 | ||||||
|
Non-controlling
interest
|
1,691 | 1,790 | ||||||
|
Total
Equity
|
132,475 | 127,196 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 200,197 | $ | 153,498 | ||||
See
accompanying notes.
- 54
- -
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands, except per share amounts)
|
Year Ended
May 30,
|
Year Ended
May 31,
|
Year Ended
May 25,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Revenues:
|
||||||||||||
|
Product
sales
|
$ | 228,390 | $ | 224,404 | $ | 227,550 | ||||||
|
Services
revenue, related party
|
3,699 | 4,145 | 3,640 | |||||||||
|
License
fees
|
5,400 | 6,000 | 6,231 | |||||||||
|
Research,
development and royalty revenues
|
735 | 1,389 | 1,075 | |||||||||
|
Royalty
revenues, related party
|
— | — | 31 | |||||||||
|
Total
revenues
|
238,224 | 235,938 | 238,527 | |||||||||
|
Cost
of revenue:
|
||||||||||||
|
Cost
of product sales
|
198,075 | 195,180 | 194,868 | |||||||||
|
Cost
of product sales, related party
|
3,391 | 3,189 | 2,420 | |||||||||
|
Cost
of services revenue
|
2,992 | 3,289 | 3,011 | |||||||||
|
Total
cost of revenue
|
204,458 | 201,658 | 200,299 | |||||||||
|
Gross
profit
|
33,766 | 34,280 | 38,228 | |||||||||
|
Operating
costs and expenses:
|
||||||||||||
|
Research
and development
|
4,361 | 3,665 | 3,251 | |||||||||
|
Selling,
general and administrative
|
17,698 | 18,017 | 19,801 | |||||||||
|
Total
operating costs and expenses
|
22,059 | 21,682 | 23,052 | |||||||||
|
Operating
income
|
11,707 | 12,598 | 15,176 | |||||||||
|
Interest
income
|
834 | 1,306 | 2,219 | |||||||||
|
Interest
expense
|
(88 | ) | (8 | ) | (22 | ) | ||||||
|
Other
expenses
|
(3,725 | ) | ― | ― | ||||||||
|
Net
income before taxes
|
8,728 | 13,896 | 17,373 | |||||||||
|
Income
tax expense
|
(4,262 | ) | (5,611 | ) | (3,354 | ) | ||||||
|
Consolidated
net income
|
4,466 | 8,285 | 14,019 | |||||||||
|
Non
controlling interest
|
(482 | ) | (555 | ) | (477 | ) | ||||||
|
Net
Income applicable to Common Stockholders
|
$ | 3,984 | $ | 7,730 | $ | 13,542 | ||||||
|
Basic
net income per share
|
$ | 0.15 | $ | 0.30 | $ | 0.52 | ||||||
|
Diluted
net income per share
|
$ | 0.15 | $ | 0.29 | $ | 0.50 | ||||||
|
Shares
used in per share computation:
|
||||||||||||
|
Basic
|
26,382 | 26,202 | 26,069 | |||||||||
|
Diluted
|
26,633 | 26,751 | 26,935 | |||||||||
See accompanying
notes.
- 55
- -
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN
STOCKHOLDERS’
EQUITY
(in
thousands, except share and per share amounts)
|
Common Stock
|
Additional
Paid-in
|
Retained
Earnings
|
Other
Comprehensive
|
Total
Stockholders’
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
Loss
|
Equity
|
|||||||||||||||||||
|
Balance
at May 27, 2007
|
25,891,168 | $ | 26 | $ | 129,534 | $ | (19,332 | ) | $ | ― | $ | 110,228 | ||||||||||||
|
Reclassify
repurchase of subsidiary common stock and options
|
— | — | (2,502 | ) | 7,282 | ― | 4,780 | |||||||||||||||||
|
Issuance
of common stock at $1.89 to $7.53 per share
|
255,153 | — | 1,120 | — | ― | 1,120 | ||||||||||||||||||
|
Issuance
of common stock for vested restricted stock units
|
10,002 | — | — | — | ― | — | ||||||||||||||||||
|
Stock
based compensation
|
— | — | 871 | — | ― | 871 | ||||||||||||||||||
|
Tax
benefit from stock-based compensation expense
|
— | — | 3,423 | — | ― | 3,423 | ||||||||||||||||||
|
Repurchase
of subsidiary common stock and options (Note 5)
|
— | — | (19,498 | ) | — | ― | (19,498 | ) | ||||||||||||||||
|
Net
income and comprehensive income
|
— | — | — | 13,542 | ― | 13,542 | ||||||||||||||||||
|
Balance
at May 25, 2008
|
26,156,323 | 26 | 112,948 | 1,492 | ― | 114,466 | ||||||||||||||||||
|
Issuance
of common stock at $2.82 to $5.34 per share
|
160,570 | — | 379 | — | ― | 379 | ||||||||||||||||||
|
Issuance
of common stock for vested restricted stock units
|
9,996 | — | — | — | ― | — | ||||||||||||||||||
|
Stock-based
compensation
|
— | — | 933 | — | ― | 933 | ||||||||||||||||||
|
Tax
benefit from stock-based compensation expense
|
— | — | 1,898 | — | ― | 1,898 | ||||||||||||||||||
|
Net
income and comprehensive income
|
— | — | — | 7,730 | ― | 7,730 | ||||||||||||||||||
|
Balance
at May 31, 2009
|
26,326,889 | 26 | 116,158 | 9,222 | ― | 125,406 | ||||||||||||||||||
|
Issuance
of common stock at $1.89 to $6.75 per share, net of taxes paid by Landec
on behalf of employees
|
121,442 | 1 | 378 | — | ― | 379 | ||||||||||||||||||
|
Issuance
of common stock for vested restricted stock units
|
41,928 | — | ― | — | ― | — | ||||||||||||||||||
|
Taxes
paid by Company for stock swaps and RSUs
|
― | ― | (339 | ) | — | ― | (339 | ) | ||||||||||||||||
|
Stock-based
compensation
|
— | — | 1,016 | — | ― | 1,016 | ||||||||||||||||||
|
Tax
benefit from stock-based compensation expense
|
— | — | 517 | — | ― | 517 | ||||||||||||||||||
|
Net
income and comprehensive loss
|
— | — | — | 3,984 | (179 | ) | 3,805 | |||||||||||||||||
|
Balance
at May 30, 2010
|
26,490,259 | $ | 27 | $ | 117,730 | $ | 13,206 | $ | (179 | ) | $ | 130,784 | ||||||||||||
See
accompanying notes
- 56
- -
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
|
May 30,
|
May 31,
|
May 25,
|
||||||||||
|
|
2010
|
2009
|
2008
|
|||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 3,984 | $ | 7,730 | $ | 13,542 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
3,364 | 3,139 | 3,204 | |||||||||
|
Stock-based
compensation expense
|
1,016 | 933 | 871 | |||||||||
|
Deferred
taxes
|
3,248 | 2,569 | (611 | ) | ||||||||
|
Non
controlling interest
|
482 | 555 | 477 | |||||||||
|
Increase
in long-term receivable
|
(800 | ) | (800 | ) | (800 | ) | ||||||
|
Tax
benefit from stock based compensation
|
(517 | ) | (1,898 | ) | (3,423 | ) | ||||||
|
Impairment
charges
|
1,000 | ― | ― | |||||||||
|
Changes
in assets and liabilities, net of effects from
acquisitions:
|
||||||||||||
|
Accounts
receivable, net
|
(1,506 | ) | 4,189 | (1,829 | ) | |||||||
|
Accounts
receivable, related party
|
(97 | ) | (221 | ) | 143 | |||||||
|
Income
taxes receivable
|
(764 | ) | — | — | ||||||||
|
Inventories,
net
|
(1,269 | ) | 1,500 | (529 | ) | |||||||
|
Issuance
of notes and advances receivable
|
(3,030 | ) | (3,055 | ) | (2,652 | ) | ||||||
|
Collection
of notes and advances receivable
|
2,975 | 3,269 | 2,425 | |||||||||
|
Prepaid
expenses and other current assets
|
(1,172 | ) | (184 | ) | 202 | |||||||
|
Accounts
payable
|
957 | (5,929 | ) | 4,196 | ||||||||
|
Related
party accounts payable
|
50 | 26 | 98 | |||||||||
|
Income
taxes payable
|
1,162 | 2,005 | 3,423 | |||||||||
|
Accrued
compensation
|
(264 | ) | (1,085 | ) | (929 | ) | ||||||
|
Other
accrued liabilities
|
703 | (1,125 | ) | 1,590 | ||||||||
|
Deferred
revenue
|
(2,039 | ) | (2,183 | ) | (1,878 | ) | ||||||
|
Net
cash provided by operating activities
|
7,483 | 9,435 | 17,520 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of property and equipment
|
(5,192 | ) | (4,576 | ) | (4,240 | ) | ||||||
|
Acquisition
of Lifecore, net of cash acquired (Note 2)
|
(39,682 | ) | — | — | ||||||||
|
Acquisition
related earnout payments
|
— | (7 | ) | (1,433 | ) | |||||||
|
Issuance
of notes and advances receivable
|
― | (2 | ) | (12 | ) | |||||||
|
Collection
of notes and advances receivable
|
― | 103 | 116 | |||||||||
|
Purchase
of marketable securities
|
(67,433 | ) | (45,808 | ) | (14,643 | ) | ||||||
|
Proceeds
from maturities and sales of marketable securities
|
69,510 | 37,953 | — | |||||||||
|
Net
cash used in investing activities
|
(42,797 | ) | (12,337 | ) | (20,212 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from sale of common stock
|
379 | 379 | 1,120 | |||||||||
|
Taxes
paid by Company for stock swaps and RSUs
|
(339 | ) | ― | ― | ||||||||
|
Repurchase
of subsidiary options
|
— | — | (19,498 | ) | ||||||||
|
Tax
benefit from stock-based compensation expense
|
517 | 1,898 | 3,423 | |||||||||
|
Net
change in other assets/liabilities
|
0 | 3 | (2 | ) | ||||||||
|
Proceeds
from long term debt
|
20,000 | — | — | |||||||||
|
Payments
on long term debt
|
(387 | ) | — | — | ||||||||
|
Payments
to non controlling interest.
|
(498 | ) | (315 | ) | (511 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
19,672 | 1,965 | (15,468 | ) | ||||||||
|
Net
decrease in cash and cash equivalents
|
(15,642 | ) | (937 | ) | (18,160 | ) | ||||||
|
Cash
and cash equivalents at beginning of year
|
43,459 | 44,396 | 62,556 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 27,817 | $ | 43,459 | $ | 44,396 | ||||||
|
Supplemental
disclosure of cash flows information:
|
||||||||||||
|
Cash
paid during the period for interest
|
$ | 88 | $ | 8 | $ | 22 | ||||||
|
Cash
paid during the period for income taxes
|
$ | 652 | $ | 1,135 | $ | 850 | ||||||
|
Supplemental
schedule of noncash operating and financing activities:
|
||||||||||||
|
Long-term
receivable from Monsanto
|
$ | 800 | $ | 800 | $ | 800 | ||||||
|
Income
tax expense not payable
|
$ | 517 | $ | 1,898 | $ | 3,423 | ||||||
|
Accrued
non controlling interest distribution
|
$ | 250 | $ | — | $ | — | ||||||
|
Impairment
charges
|
$ | 1,000 | $ | — | $ | — | ||||||
See
accompanying notes.
- 57
- -
LANDEC
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies
|
Organization
Landec
Corporation and its subsidiaries ("Landec" or the "Company") design, develop,
manufacture, and sell specialty polymer products for a variety of food products,
agricultural products, medical device products and licensed partner
applications. The Company sells specialty packaged fresh-cut vegetables and
whole produce to retailers and club stores, primarily in the United States and
Asia through its Apio, Inc. (“Apio”) subsidiary, Hyaluranon-based (“HA”)
biomaterials in the United States, Canada and Europe through its Lifecore
Biomedical, Inc. (“Lifecore”) subsidiary and Intellicoat® coated seed products
through its Landec Ag, LLC (“Landec Ag”) subsidiary.
Basis
of Presentation
Basis
of Consolidation
The
consolidated financial statements are presented on the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles and
include the accounts of Landec Corporation and its subsidiaries, Apio, Lifecore
and Landec Ag. All material inter-company transactions and balances
have been eliminated.
The
Company follows FASB guidance concerning the consolidation of variable interest
entities ("VIEs"). Under the guidance, arrangements that are not
controlled through voting or similar rights are accounted for as
VIEs. An enterprise is required to consolidate a VIE if it is the
primary beneficiary of the VIE.
Under the
guidance, a VIE is created when (i) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or (ii) the entity's
equity holders as a group either: (a) lack direct or indirect ability to
make decisions about the entity through voting or similar rights, (b) are
not obligated to absorb expected losses of the entity if they occur, or
(c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a VIE, the
enterprise that is deemed to absorb a majority of the expected losses or receive
a majority of expected residual returns of the VIE is considered the primary
beneficiary and must consolidate the VIE.
Under the
initial agreement between Landec and Monsanto Company (“Monsanto”) (see Note 3),
the Company had concluded that Landec Ag was a VIE. The Company had
also determined that it was the primary beneficiary of Landec Ag and therefore
the accounts of Landec Ag were consolidated with the accounts of the
Company. As a result of the amended and restated agreement between
Landec and Monsanto (see Note 3), Landec Ag is no longer deemed to be a VIE,
however, because Landec Ag is wholly owned, it continues to be consolidated with
the accounts of the Company.
Reclassifications
Certain reclassifications have been
made to prior year financial statements to conform to the current year
presentation.
- 58
- -
|
1.
|
Organization, Basis of
Presentation, and Summary of Significant Accounting Policies (continued)
|
Summary
of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make certain
estimates and judgments that affect the amounts reported in the financial
statements and accompanying notes. The accounting estimates that require
management’s most significant, difficult and subjective judgments include
revenue recognition; sales returns and allowances; recognition and measurement
of current and deferred income tax assets and liabilities; the assessment of
recoverability of long-lived assets; the valuation of intangible assets and
inventory; the valuation and nature of impairments of investments; and the
valuation and recognition of stock-based compensation.
These
estimates involve the consideration of complex factors and require management to
make judgments. The analysis of historical and future trends, can require
extended periods of time to resolve, and are subject to change from period to
period. The actual results may differ from management’s estimates.
Concentrations
of Risk
Cash and cash equivalents, marketable
securities, trade accounts receivable, grower advances and notes receivable are
financial instruments that potentially subject the Company to concentrations of
credit risk. Corporate policy limits, among other things, the amount
of credit exposure to any one issuer and to any one type of investment, other
than securities issued or guaranteed by the U.S. government. The
Company routinely assesses the financial strength of customers and growers and,
as a consequence, believes that trade receivables, grower advances and notes
receivable credit risk exposure is limited. Credit losses for bad
debt are provided for in the consolidated financial statements through a charge
to operations. A valuation allowance is provided for known and
anticipated credit losses. The recorded amounts for these financial
instruments approximate their fair value.
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, substrate materials for our breathable membrane products and raw
materials for our HA products.
During
the fiscal year ended May 30, 2010, sales to the Company’s top five customers
accounted for approximately 48% of total revenue, with the top customer, Costco
Wholesale Corporation from the Food Products Technology segment, accounting for
approximately 20% of total revenues. In addition, approximately 29%
of the Company’s total revenues were derived from product sales to international
customers, none of whom individually accounted for more than 5% of total
revenues. As of May 30, 2010, Costco Wholesale Corporation
represented approximately 15% of total accounts receivable.
During
the fiscal year ended May 31, 2009, sales to the Company’s top five customers
accounted for approximately 46% of total revenue, with the top customer, Costco
Wholesale Corporation from the Food Products Technology segment, accounting for
approximately 21% of total revenues. In addition, approximately 30%
of the Company’s total revenues were derived from product sales to international
customers, none of whom individually accounted for more than 5% of total
revenues. As of May 31, 2009, Costco Wholesale Corporation
represented approximately 21% of total accounts receivable.
Impairment
of Long-Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. Recoverability of
assets is measured by comparison of the carrying amount of the asset to the net
undiscounted future cash flow expected to be generated from the asset. If the
future undiscounted cash flows are not sufficient to recover the carrying value
of the assets, the assets’ carrying value is adjusted to fair
value.
- 59
- -
|
1.
|
Organization, Basis of
Presentation, and Summary of Significant Accounting Policies (continued)
|
The
Company regularly evaluates its long-lived assets for indicators of possible
impairment. On July 16, 2010, Aesthetic Science sold the rights to
its Smartfil™ Injector System. The Company evaluated its cost method
investment for impairment, utilizing a discounted cash flow analysis under the
terms of the purchase agreement. Based on the terms of the agreement,
the Company has determined that its investment is other than temporarily
impaired and therefore recorded an impairment loss of $1.0 million as of May 30,
2010.
Financial
Instruments
The Company’s financial instruments are
primarily composed of marketable debt securities, commercial-term trade
payables, grower advances, and notes receivable, as well as long-term notes
receivables and debt instruments. For short-term instruments, the
historical carrying amount is a reasonable estimate of fair
value. Fair values for long-term financial instruments not readily
marketable are estimated based upon discounted future cash flows at prevailing
market interest rates. Based on these assumptions, management
believes the fair market values of the Company’s financial instruments are not
materially different from their recorded amounts as of May 30,
2010.
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 and
sales discounts. The allowance for doubtful accounts is based on
review of the overall condition of accounts receivable balances and review of
significant past due accounts. The allowance for doubtful accounts is
based on specific identification of past due amounts and a general reserve for
accounts over 90-days past due. The changes in the Company’s
allowances for doubtful accounts are summarized in the following table (in
thousands).
|
Balance at beginning
of period
|
Additions
charged to costs
and expenses
|
Deductions
|
Balance at end of
period
|
|||||||||||||
| Year ended May 25, 2008 | ||||||||||||||||
|
Allowance
for doubtful accounts receivable and notes and advances
receivable
|
$ | 206 | $ | - | $ | (37 | ) | $ | 169 | |||||||
| Year ended May 31, 2009 | ||||||||||||||||
|
Allowance
for doubtful accounts receivable and notes and advances
receivable
|
$ | 169 | $ | - | $ | (4 | ) | $ | 165 | |||||||
|
Year
ended May 30, 2010
|
||||||||||||||||
|
Allowance
for doubtful accounts receivable and notes and advances
receivable
|
$ | 165 | $ | 68 | $ | (44 | ) | $ | 189 | |||||||
Revenue
Recognition
Revenue
from product sales is recognized when there is persuasive evidence that an
arrangement exists, delivery has occurred, 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 based on specific identification and
historical losses.
The
Company takes title to all produce it trades and/or packages, and therefore,
records revenues and cost of sales at gross amounts in the Consolidated
Statements of Income.
- 60
- -
|
1.
|
Organization, Basis of
Presentation, and Summary of Significant Accounting Policies (continued)
|
Licensing
revenue is recognized in accordance with accounting guidance. 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 period of the agreement, including those
governing research and development activities and 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.
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.
Other
Accounting Policies and Disclosures
Cash,
Cash Equivalents and Marketable Securities
The
Company records all highly liquid securities with three months or less from date
of purchase to maturity as cash equivalents and consists mainly of certificate
of deposits (CDs), money market funds and U.S. Treasuries. Short-term
marketable securities consist of CDs that are FDIC insured and single A or
better rated municipal bonds with original maturities of more than three months
at the date of purchase regardless of the maturity date as the Company views its portfolio
as available
for use in its current operations. The aggregate amount of CDs
included in marketable securities at May 30, 2010 and May 31, 2009 was $1.5
million and $2.1 million, respectively. The Company classifies all
debt securities with readily determined market values as “available for
sale”. The
contractual maturities of the Company's marketable securities that are due in
less than one year represent $9.5 million of its marketable securities and those
due in one to two years represent the remaining $10.9 million of the Company’s
marketable securities as of May 30, 2010. These investments are
classified as marketable securities on the consolidated balance sheet as of May
30, 2010 and May 31, 2009 and are carried at fair market
value. Unrealized gains and losses are reported as a component of
stockholders’ equity. The cost of debt securities is adjusted for
amortization of premiums and discounts to maturity. This amortization
is recorded to interest income. Realized gains and losses on the sale
of available-for-sale securities are also recorded to interest income and were
not significant for the fiscal years ended May 30, 2010 and May 31,
2009. During fiscal year 2010, the Company received proceeds of $9.5
million from the sale of marketable securities. The cost of
securities sold is based on the specific identification method.
Inventories
Inventories are stated at the lower of
cost (using the first-in, first-out method) or market. As of May 30, 2010 and
May 31, 2009 inventories consisted of (in thousands):
|
May 30,
2010
|
May 31,
2009
|
|||||||
|
Finished
goods
|
$ | 7,226 | $ | 2,108 | ||||
|
Raw
materials
|
6,868 | 3,721 | ||||||
|
Work
in progress
|
2,013 | — | ||||||
|
Inventories,
net
|
$ | 16,107 | $ | 5,829 | ||||
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.
- 61
- -
|
1.
|
Organization, Basis of
Presentation, and Summary of Significant Accounting Policies (continued)
|
Advertising
Expense
Advertising
expenditures for the Company are expensed as incurred. Advertising
expense for the Company for fiscal years 2010, 2009 and 2008 was $557,000,
$475,000 and $474,000, respectively.
Notes
and Advances Receivable
Apio has made advances to produce
growers for crop and harvesting costs. Notes and advances receivable
related to operating activities are for the sourcing of crops for Apio’s
business and notes and advances receivable related to investing activities are
for financing transactions with third parties. Typically operating
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 and advances receivable are secured by
perfected liens on land and/or crops and have terms that range from six to
twelve 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.
Related
Party Transactions
Apio
provides cooling and distributing services for farms in which the Chairman of
Apio (the “Apio Chairman”) has a financial interest and purchases produce from
those farms. Apio also purchases produce from Beachside Produce LLC
for sale to third parties. Beachside Produce is owned by a group of
entities and persons that supply produce to Apio, including the Apio
Chairman. Revenues and the resulting accounts receivable and cost of
product sales and the resulting accounts payable are classified as related party
items in the accompanying financial statements as of May 30, 2010 and May 31,
2009 and for the three years ended May 30, 2010.
Prior to
the expiration of the leases in December 2009, Apio leased, for approximately
$310,000 on an annual basis, agricultural land that is owned by the Apio
Chairman. Apio, in turn, subleased that land at cost to growers who
were obligated to deliver product from that land to Apio for value added
products. There was generally no net statement of income impact to
Apio as a result of these leasing activities but Apio created a guaranteed
source of supply for the value added business. Apio had loss exposure
on the leasing activity to the extent that it was unable to sublease the land.
For the years ended May 30, 2010, May 31, 2009 and May 25, 2008, the Company
subleased all of the land leased from the Apio Chairman and received sublease
income of $150,000, $316,000 and $344,000, respectively, which is substantially
equal to the amount the Company paid to lease that land for such
periods.
Apio's
domestic commodity vegetable business was sold to Beachside Produce, effective
June 30, 2003. The Apio Chairman is a 12.5% owner in Beachside
Produce. During fiscal years 2010, 2009 and 2008, the Company
recognized revenues of $853,000, $1.3 million and $1.6 million, respectively,
from the sale of products to Beachside Produce and royalty revenues of $0, $0
and $31,000, respectively, from the use by Beachside Produce of Apio’s
trademarks. The related accounts receivable from Beachside Produce
are classified as related party in the accompanying Consolidated Balance Sheets
as of May 30, 2010 and May 31, 2009.
All
related party transactions are monitored quarterly by the Company and approved
by the Audit Committee of the Board of Directors.
Property
and Equipment
Property and equipment are
stated at cost. Expenditures for major improvements are capitalized
while repairs and maintenance are charged to expense. Depreciation is
expensed on a straight-line basis over the estimated useful lives of the
respective assets, generally three to thirty years for buildings and leasehold
improvements and three to seven years for furniture and fixtures, computers,
capitalized software, machinery, equipment and autos. Leasehold
improvements
are amortized over the lesser of the economic life of the improvement or the
life of the lease on a straight-line basis.
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|
1.
|
Organization,
Basis of Presentation, and Summary of Significant Accounting Policies
(continued)
|
The
Company capitalizes software development costs for internal use in accordance
with accounting guidance. Capitalization of software development
costs begins in the application development stage and ends when the asset is
placed into service. The Company amortizes such costs using the
straight-line basis over estimated useful lives of three to seven
years. The Company did not capitalize any software development costs
during fiscal years 2010 or 2009.
Intangible
Assets
The
Company’s intangible assets are comprised of customer relationships with an
estimated useful life of twelve years and trademarks/trade names and goodwill
with indefinite lives (collectively, “intangible assets”), which the Company
recognized in accordance with accounting guidance (i) upon the acquisition of
Lifecore in April 2010, our Hyaluronan-based Biomaterials reporting unit, (ii)
upon the acquisition of Apio in December 1999, which consists of our Food
Products Technology and Commodity Trading reporting units and (iii) from the
repurchase of all non controlling interests in the common stock of Landec Ag in
December 2006. Accounting guidance defines goodwill as “the excess of
the cost of an acquired entity over the net of the estimated fair values of the
assets acquired and the liabilities assumed at date of
acquisition.” All intangible assets, including goodwill, associated
with the acquisitions of Lifecore and Apio were allocated to the
Hyaluronan-based Biomaterials and Food Products Technology reporting unit,
respectively, pursuant to accounting guidance based upon the
allocation of assets and liabilities acquired and consideration paid for each
reporting unit. The consideration paid for the Commodity Trading
reporting unit approximated its fair market value at the time of acquisition,
and therefore no intangible assets were recorded in connection with the
Company’s acquisition of this reporting unit. Goodwill associated
with the Technology Licensing reporting unit consists entirely of goodwill
resulting from the repurchase of the Landec Ag non controlling
interests.
The
Company tests its intangible assets for impairment at least annually, in
accordance with accounting guidance. When evaluating indefinite-lived
intangible assets for impairment, accounting guidance requires the Company to
compare the fair value of the asset to its carrying value to determine if there
is an impairment loss. When evaluating goodwill for impairment, accounting
guidance requires the Company to first compare the fair value of the reporting
unit to its carrying value to determine if there is an impairment
loss. If the fair value of the reporting unit exceeds its carrying
value, goodwill is not considered impaired; thus application of the second step
of the two-step approach under accounting guidance is not
required. Application of the intangible assets impairment tests
requires significant judgment by management, including identification of
reporting units, assignment of assets and liabilities to reporting units,
assignment of intangible assets to reporting units, and the determination of the
fair value of each indefinite-lived intangible asset and reporting unit based
upon projections of future net cash flows, discount rates and market multiples,
which judgments and projections are inherently uncertain.
Property,
plant and equipment and finite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances occur that indicate that
the carrying amount of an asset (or asset group) may not be recoverable. The
Company’s impairment review requires significant management judgment including
estimating the future success of product lines, future sales volumes, revenue
and expense growth rates, alternative uses for the assets and estimated proceeds
from the disposal of the assets. The Company conducts quarterly reviews of idle
and underutilized equipment, and reviews business plans for possible impairment
indicators. Impairment occurs when the carrying amount of the asset (or asset
group) exceeds its estimated future undiscounted cash flows and the impairment
is viewed as other than temporary. When impairment is indicated, an impairment
charge is recorded for the difference between the asset’s book value and its
estimated fair value. Depending on the asset, estimated fair value may be
determined either by use of a discounted cash flow model or by reference to
estimated selling values of assets in similar condition. The use of different
assumptions would increase or decrease the estimated fair value of assets and
would increase or decrease any impairment measurement.
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1.
|
Organization,
Basis of Presentation, and Summary of Significant Accounting Policies
(continued)
|
The
Company tested its indefinite-lived intangible assets and goodwill for
impairment as of July 25, 2010 and determined that no adjustments to the
carrying values of the intangible assets were necessary as of that
date. On a quarterly basis, the Company considers the need to update
its most recent annual tests for possible impairment of its intangible assets,
based on management’s assessment of changes in its business and other economic
factors since the most recent annual evaluation. Such changes, if
significant or material, could indicate a need to update the most recent annual
tests for impairment of the intangible assets during the current
period. The results of these tests could lead to write-downs of the
carrying values of the intangible assets in the current period.
The
Company uses the discounted cash flow (“DCF”) approach to develop an estimate of
fair value. The DCF approach recognizes that current value is
premised on the expected receipt of future economic
benefits. Indications of value are developed by discounting projected
future net cash flows to their present value at a rate that reflects both the
current return requirements of the market and the risks inherent in the specific
investment. The market approach was not used to value the Food
Products Technology, Hyaluronan-based Biomaterials and Technology Licensing
reporting units (the “Reporting Units”) because insufficient market comparables
exist to enable the Company to develop a reasonable fair value of its intangible
assets due to the unique nature of each of the Company’s Reporting
Units.
The DCF
approach requires the Company to exercise judgment in determining future
business and financial forecasts and the related estimates of future net cash
flows. Future net cash flows depend primarily on future product sales, which are
inherently difficult to predict. These net cash flows are discounted at a rate
that reflects both the current return requirements of the market and the risks
inherent in the specific investment.
The DCF
associated with the Technology Licensing reporting unit is based on the Monsanto
Agreement with Monsanto. Under the Monsanto Agreement, Monsanto has
agreed to pay Landec Ag a license fee of $2.6 million in cash per year for five
years beginning in December 2006, and a fee of $4.0 million if Monsanto elects
to terminate the Agreement, or $10.0 million if Monsanto elects to purchase the
rights to the exclusive field. If the purchase option is exercised
before December 2011, or if Monsanto elects to terminate the Monsanto Agreement,
all annual license fees that have not been paid to Landec Ag will become due
upon the purchase or termination. As of May 30, 2010, the fair value
of the Technology Licensing reporting unit, as determined by the DCF approach,
exceeded its book value, and therefore, no intangible asset impairment was
deemed to exist. The discount rate utilized approximates the risk
free interest rate as the cash flow stream is guaranteed under the terms of the
Agreement. A 1% increase in the discount rate would not have a significant
impact on the excess of fair value over book value.
The DCF
associated with the Food Products Technology reporting unit is based on
management’s five-year projection of revenues, gross profits and operating
profits by fiscal year and assumes a 37% effective tax rate for each
year. Management takes into account the historical trends of Apio and
the industry categories in which Apio operates along with inflationary factors,
current economic conditions, new product introductions, cost of sales, operating
expenses, capital requirements and other relevant data when developing its
projection. As of May 30, 2010, the fair value of the Food Products
Technology reporting unit, as determined by the DCF approach, exceeded its book
value, and therefore, no intangible asset impairment was deemed to exist. A 1%
increase in the discount rate would not have a significant
impact on the excess of fair value over book value.
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|
1.
|
Organization,
Basis of Presentation, and Summary of Significant Accounting Policies
(continued)
|
The fair
value of indefinite and finite-lived intangible assets associated with our
acquisition of Lifecore on April 30, 2010, was determined using a DCF model
based on management’s five-year projections of revenues, gross profits and
operating profits by fiscal year and assumes a 33% effective tax rate for each
year. Management takes into account the historical trends of Lifecore and the
industry categories in which Lifecore operates along with inflationary factors,
current economic conditions, new product introductions, cost of sales, operating
expenses, capital requirements and other relevant data when developing its
projection. The trade name intangible asset was valued using the relief from
royalty valuation method and the customer relationship intangible asset was
valued using the multi-period excess earnings method. The fair value of goodwill
was calculated as the excess of consideration paid, including the fair value of
contingent consideration under the terms of the purchase agreement, over the
fair value of the tangible and intangible assets acquired less liabilities
assumed. The Company updated its analysis of the fair value of the
indefinite-lived intangible assets and goodwill as of its annual impairment
analysis date, concluding that the fair value of the Hyaluronan-based
Biomaterials reporting unit, as determined by the DCF approach, exceeded its
book value, and therefore, no intangible asset impairment was deemed to exist.
There were no impairment indicators identified by the Company in its analysis of
impairment associated with the acquired finite-lived intangible
assets.
Investment
in Non-Public Company
The
Company’s investment in Aesthetic Science is carried at cost and adjusted for
impairment losses. Since there is no readily available market
value information, the Company periodically reviews this investment to determine
if any other than temporary declines in value have occurred based on the
financial stability and viability of Aesthetic Science. Aesthetic
Science has recently sold the rights to its Smartfil™ Injector System on July
16, 2010. Landec has evaluated its cost method investment for
impairment, utilizing a discounted cash flow analysis under the terms of the
purchase agreement. Based on the terms of the agreement, the Company
has determined that its investment is other than temporarily impaired and
therefore recorded an impairment loss of $1.0 million as of May 30, 2010, which
is classified as part of other expenses in the Consolidated Statements of
Income. The Company’s carrying value of its investment in Aesthetic
Sciences, net of the impairment loss, is $792,000 at May 30, 2010 and is
reported as a component of other non current assets.
Deferred
Revenue
Cash received in advance of services
performed (principally revenues related to upfront license fees) are recorded as
deferred revenue. At May 30, 2010, $4.3 million has been recognized
as a liability for deferred license fee revenues and $91,000 for advances from
customers. At May 31, 2009, $6.3 million has been recognized as a
liability for deferred license fee revenues and $130,000 for advances from
customers and on ground lease payments from growers.
Comprehensive
Loss
Comprehensive
loss consists of net income and other comprehensive income for which Landec
includes changes in unrealized gains and losses on its interest rate swap with
Wells Fargo Bank, N.A. Accumulated other comprehensive loss is
reported as a component of stockholders’ equity. For the fiscal year
ended May 30, 2010, the comprehensive loss from the unrealized loss on the
interest rate swap, net of $105,000 of income taxes, was
$179,000. There was no comprehensive income or loss in the fiscal
years ended May 31, 2009 and May 25, 2008.
Non
Controlling Interest
In connection with the acquisition of
Apio, Landec acquired Apio’s 60% general partner interest in Apio Cooling, a
California limited partnership. Apio Cooling is included in the
consolidated financial statements of Landec for all periods
presented. The non controlling interest balance of $1.7 million and
$1.8 million at May 30, 2010 and May 31, 2009, respectively, is comprised of the
limited partners’ interest in Apio Cooling.
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Income
Taxes
The
Company accounts for income taxes in accordance with accounting guidance 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. The Company maintains valuation
allowances when it is likely that all or a portion of a deferred tax asset will
not be realized. Changes in valuation allowances from period to period are
included in the Company’s income tax provision in the period of change. In
determining whether a valuation allowance is warranted, the Company takes into
account such factors as prior earnings history, expected future earnings,
unsettled circumstances that, if unfavorably resolved, would adversely affect
utilization of a deferred tax asset, carryback and carryforward periods, and tax
strategies that could potentially enhance the likelihood of realization of a
deferred tax asset. At May 30, 2010, the Company had $390,000 valuation
allowance against deferred tax assets.
In
addition to valuation allowances, the Company establishes accruals for uncertain
tax positions. The tax-contingency accruals are adjusted in light of
changing facts and circumstances, such as the progress of tax audits, case law
and emerging legislation. The Company recognizes interest and penalties related
to uncertain tax positions as a component of income tax expense. The Company’s
effective tax rate includes the impact of tax-contingency accruals as considered
appropriate by management.
A number
of years may elapse before a particular matter, for which the Company has
accrued, is audited and finally resolved. The number of years with open tax
audits varies by jurisdiction. While it is often difficult to predict the final
outcome or the timing of resolution of any particular tax matter, the Company
believes its tax-contingency accruals are adequate to address known tax
contingencies. Favorable resolution of such matters could be recognized as a
reduction to the Company’s effective tax rate in the year of resolution.
Unfavorable settlement of any particular issue could increase the effective tax
rate. Any resolution of a tax issue may require the use of cash in the year of
resolution. The Company’s tax-contingency accruals are presented in the balance
sheet within accrued liabilities.
Per
Share Information
Accounting
guidance requires the presentation of basic and diluted earnings per
share. Basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities and is computed using the
weighted average number of common share outstanding. Diluted earnings
per share reflects the potential dilution if securities or other contracts to
issue common stock were exercised or converted into common
stock. Diluted common equivalent shares consist of stock options
using the treasury stock method.
The
following table sets forth the computation of diluted net income per share (in
thousands, except per share amounts):
|
Fiscal Year
Ended
May 30, 2010
|
Fiscal Year
Ended
May 31, 2009
|
Fiscal Year
Ended
May 25, 2008
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income
|
$ | 3,984 | $ | 7,730 | $ | 13,542 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average shares for basic net income per share
|
26,382 | 26,202 | 26,069 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options
|
251 | 549 | 866 | |||||||||
|
Weighted
average shares for diluted net income per share
|
26,633 | 26,751 | 26,935 | |||||||||
|
Diluted
net income per share
|
$ | 0.15 | $ | 0.29 | $ | 0.50 | ||||||
Options to purchase 1,016,239, 357,514
and 96,300 shares of Common Stock at a weighted average exercise price of $7.62,
$9.72 and $13.32 per share were outstanding during fiscal years ended May 30,
2010, May 31, 2009 and May 25, 2008, respectively, but were not included in the
computation of diluted net income per share because the options’ exercise price
were greater than the average market price of the Common Stock and, therefore,
the effect would be antidilutive.
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1.
|
Organization,
Basis of Presentation, and Summary of Significant Accounting Policies
(continued)
|
Cost
of Sales
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, packaging, syringes and fermentation
and purification supplies), direct labor, overhead (including indirect labor,
depreciation, and facility related costs) and shipping and shipping related
costs.
Research
and Development Expenses
Costs related to both research
contracts and Company-funded research is included in research and development
expenses. Costs to fulfill research contracts generally approximate
the corresponding revenue. Research and development costs are
primarily comprised of salaries and related benefits, supplies, travel expenses,
consulting expenses and corporate allocations.
Accounting
for Stock-Based Compensation
The
Company records compensation expense for stock-based awards issued to employees
and directors in exchange for services provided based on the estimated fair
value of the awards on their grant dates and is recognized over the required
service periods. The cash flows resulting from the tax benefit due to tax
deductions in excess of the compensation expense recognized for those options
(excess tax benefit) are classified as financing activities with the statement
of cash flows. The Company’s stock-based awards include stock option
grants and restricted stock unit awards (RSUs).
During
the fiscal year ended May 30, 2010, the Company recognized stock-based
compensation expense of $1,016,000 which included $474,000 for restricted stock
unit awards and $542,000 for stock option grants. During the fiscal
year ended May 31, 2009, the Company recognized stock-based compensation expense
of $933,000 which included $308,000 for restricted stock unit awards and
$625,000 for stock option grants. During the fiscal year ended May
25, 2008, the Company recognized stock-based compensation expense of $871,000
which included $306,000 for restricted stock unit awards and $565,000 for stock
option grants.
The
following table summarizes the stock-based compensation by income statement line
item:
|
Fiscal Year
Ended
May 30, 2010
|
Fiscal Year
Ended
May 31, 2009
|
Fiscal Year
Ended
May 25, 2008
|
||||||||||
|
Research
and development
|
$ | 185,000 | $ | 171,000 | $ | 148,000 | ||||||
|
Sales,
general and administrative
|
831,000 | 762,000 | 723,000 | |||||||||
|
Total
stock-based compensation expense
|
$ | 1,016,000 | $ | 933,000 | $ | 871,000 | ||||||
The
estimated fair value for stock options, which determines the Company’s
calculation of compensation expense, is based on the Black-Scholes option
pricing model. The Company uses the straight line single option
method to calculate and recognize the fair value of stock-based compensation
arrangements. 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, 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.
Valuation
Assumptions
As of May
30, 2010, May 31, 2009 and May 25, 2008, the fair value of stock option grants
was estimated using the Black-Scholes option pricing model. The following
weighted average assumptions were used:
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1.
|
Organization, Basis of
Presentation, and Summary of Significant Accounting Policies (continued)
|
|
Fiscal Year
Ended
May 30, 2010
|
Fiscal Year
Ended
May 31, 2009
|
Fiscal Year
Ended
May 25, 2008
|
||||||||||
|
Expected
life (in years)
|
3.76 | 3.78 | 4.40 | |||||||||
|
Risk-free
interest rate
|
1.55 | % | 2.35 | % | 5.02 | % | ||||||
|
Volatility
|
0.53 | 0.52 | 0.46 | |||||||||
|
Dividend
yield
|
0 | % | 0 | % | 0 | % | ||||||
The
Black-Scholes option pricing model requires the input of highly subjective
assumptions, including the expected stock price volatility. The
change in the volatility in the fiscal years ended May 31, 2009, May 25, 2008
and May 27, 2007 is a result of basing the volatility on Landec's stock
price.
The
weighted average estimated fair value of Landec employee stock options granted
at grant date market prices during the fiscal years ended May 30, 2010, May 31,
2009 and May 25, 2008 was $2.37, $2.74 and $5.74 per share,
respectively. No stock options were granted above or below grant date
market prices during the fiscal years ended May 30, 2010, May 31, 2009 and May
25, 2008.
Fair
Value Measurements
The
Company adopted fair value measurement accounting guidance on May 26, 2008 for
financial assets and liabilities and for financial instruments and certain other
items at fair value. The Company did not elect the fair value option
for any of its eligible financial assets or liabilities.
The
accounting guidance established a three-tier hierarchy for fair value
measurements, which prioritizes the inputs used in measuring fair value as
follows:
|
|
·
|
Level
1 – observable inputs such as quoted prices for identical instruments in
active markets.
|
|
|
·
|
Level
2 – inputs other than quoted prices in active markets that are observable
either directly or indirectly through corroboration with observable market
data.
|
|
|
·
|
Level
3 – unobservable inputs in which there is little or no market data, which
would require the Company to develop its own
assumptions.
|
As of May
30, 2010, the Company held certain assets that are required to be measured at
fair value on a recurring basis. These included the Company’s cash
equivalents and marketable securities for which the fair value is determined
based on observable inputs that are readily available in public markets or can
be derived from information available in publicly quoted markets. Therefore, the
Company has categorized its cash equivalents and marketable securities as Level
1. As of May 30, 2010, the Company recorded to Other Comprehensive
Loss on the Consolidated Balance Sheets an unrealized loss of $179,000, net of
taxes of $105,000, as a result of the interest rate swap. The
unrealized loss was based on a Level 2 hierarchy for fair value
measurements. If the interest rate swap is terminated or the debt
borrowed is paid off prior to April 30, 2015, the amount of unrealized loss or
gain included in Other Comprehensive Income (Loss) would be reclassified to
earnings. The Company has no intentions of terminating the interest
rate swap or prepaying the debt in the next twelve months. The
interest rate swap liability is included in other non-current liabilities as of
May 30, 2010. The Company has no other financial assets or
liabilities for which fair value measurement has been
adopted.
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1.
|
Organization, Basis of
Presentation, and Summary of Significant Accounting Policies (continued)
|
Recent
Accounting Pronouncements
Recently Adopted
Pronouncements
Accounting
Standards Codification
Effective
July 1, 2009, the FASB Accounting Standards Codification (FASB ASC) is the
single source of authoritative accounting principles recognized by the FASB to
be applied by non-governmental entities in the preparation of financial
statements in conformity with GAAP. The adoption of the FASB ASC does not impact
the Company’s consolidated financial statements, however, the Company’s
references to accounting literature within its notes to the condensed
consolidated financial statements have been revised to conform to the FASB ASC
beginning with the fiscal quarter ending November 29, 2009.
Business
Combinations
In
December 2007, the FASB issued new guidance which significantly changes the
financial accounting and reporting for business combination transactions. The
new guidance requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of the new guidance will, among other things,
impact the determination of acquisition-date fair value of consideration paid in
a business combination (including contingent consideration); exclude transaction
costs from acquisition accounting; and change accounting practices for acquired
contingencies, acquisition-related restructuring costs, in-process research and
development, indemnification assets, and tax benefits. The Company adopted the
new guidance on June 1, 2009. The Company acquisition of Lifecore (see Note 2)
was subject to the provisions of this new guidance, under which the Company
recognizing $2.7 million of expenses related to the acquisition during the
fiscal year ended May 30, 2010. These expenses are classified as other
expenses.
Non
Controlling Interests
In
December 2007, the FASB issued new guidance with respect to non controlling
interests in consolidated financial statements. The new guidance requires the
reporting of all non controlling interests as a separate component of
stockholders’ equity, the reporting of consolidated net income (loss) as the
amount attributable to both the parent and the non controlling interests and the
separate disclosure of net income (loss) attributable to the parent and to the
non controlling interests. Changes in a parent’s ownership interest while the
parent retains its controlling
interest will be accounted for as equity transactions and any retained non
controlling equity investment upon the deconsolidation of a subsidiary will be
initially measured at fair value. Other than the reporting requirements
described above which require retrospective application, the provisions of the
new guidance are to be applied prospectively. The Company adopted the new
guidance on June 1, 2009 and such adoption did not have a material impact on the
Company’s results of operations or financial position for the fiscal year ended
May 30, 2010, however, as required, presentation of non controlling interests
has been conformed to the requirements of the new guidance for all periods
presented.
Collaborative
Arrangements
In
December 2007, the FASB issued new guidance concerning the accounting for
collaborative arrangements (which does not establish a legal entity within such
arrangement). The consensus indicates that costs incurred and revenues generated
from transactions with third parties (i.e. parties outside of the collaborative
arrangement) should be reported by the collaborators on the respective line
items in their income statements based upon their role as either principal or
agent. Additionally, the consensus provides that income statement
characterization of payments between the participants in a collaborative
arrangement should be based upon existing authoritative guidance; analogy to
such guidance if not within their scope; or a reasonable, rational, and
consistently applied accounting policy election. The Company adopted the new
guidance on June 1, 2009 and such adoption did not have an impact on the
Company’s results of operations or financial position for the fiscal year ended
May 30, 2010.
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1.
|
Organization, Basis of
Presentation, and Summary of Significant Accounting Policies (continued)
|
Fair
Value Disclosures in Interim Reports
In April
2009, the FASB issued new guidance that requires disclosures about the fair
value of financial instruments at interim reporting periods. The new
guidance is effective for interim reporting periods ending after June 15, 2009.
The Company adopted the new guidance on June 1, 2009 and such adoption did not
have an impact on the Company’s results of operations or financial position for
the fiscal year ended May 30, 2010.
Subsequent
Events
In May
2009, the FASB issued new guidance that establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before the financial statements are issued or are available to be
issued. The Company adopted the new guidance on June 1, 2009 and such
adoption did not impact the Company’s consolidated financials
statements. The Company determined that the basis for the date
through which the entity has evaluated subsequent events represents the date the
financial statements were file with the Securities and Exchange
Commission.
Fair
Value Measurements
In
January 2010, the FASB new guidance whereas reporting entities will have to
provide information about movements of assets among Levels 1 and 2; and a
reconciliation of purchases, sales, issuance, and settlements of activity valued
with a Level 3 method, of the three-tier fair value hierarchy established by
previous accounting guidance. The new guidance also clarifies the
existing guidance to require fair value measurement disclosures for each class
of assets and liabilities. The new guidance is effective for interim
and annual reporting periods beginning after December 15, 2009 for Level 1
and 2 disclosure requirements and after December 15, 2010 for Level 3
disclosure requirements. The Company adopted the guidance during
fiscal 2010 and such adoption did not impact the Company’s consolidated
financial statements other than the required disclosures.
Recently Issued
Pronouncements
Variable
Interest Entities
In June
2009, the FASB issued new guidance which amends the evaluation criteria to
identify the primary beneficiary of a variable interest
entity. Additionally, the new guidance requires ongoing reassessments
of whether an enterprise is the primary beneficiary of the variable interest
entity. The Company will adopt this new guidance in fiscal year 2011
and does not expect a material impact on the Company’s consolidated financial
statements as a result of the new guidance
Revenue
Recognition
In October 2009, the FASB issued new
guidance in relation to "Multiple-Deliverable Revenue
Arrangements". The new standard changes the requirements for
establishing separate units of accounting in a multiple element arrangement and
requires the allocation of arrangement consideration to each deliverable to be
based on the relative selling price. The Company plans to
early adopt these standards as of the beginning of fiscal 2011 for new deals
originating after May 30, 2010. There will be no materially modified
deals as a result of the adoption. The Company is not able to reasonably
estimate the effect of adopting these standards on future financial periods as
the impact will vary based on the nature and volume of new multiple-deliverable
revenue arrangements in any given period.
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|
2.
|
Acquisition
of Lifecore Biomedical,
Inc.
|
On
April 30, 2010 (the “Acquisition Date”), the Company acquired all of the
common stock of Lifecore Biomedical, Inc. (“Lifecore”) under a Stock Purchase
Agreement (“Purchase Agreement”) in order to expand its product offerings and
enter into new markets. Lifecore was a privately-held
hyaluronan-based biomaterials company located in Chaska,
Minnesota. Lifecore is principally involved in the development and
manufacture of products utilizing hyaluronan, a naturally occurring
polysaccharide that is widely distributed in the extracellular matrix of
connective tissues in both animals and humans. In addition, Lifecore
has licensed a sodium hyaluronate cross-linking technology from The Cleveland
Clinic Foundation (“CCF”) designed to provide a development vehicle for a
product platform to introduce new products for the existing medical segments, as
well as potentially new market segments. Furthermore, Lifecore is
pursuing other development activities to utilize its fermentation and aseptic
filling capabilities for non-hyaluronan based products.
Under the
Purchase Agreement, the aggregate consideration payable by the Company to the
former Lifecore stockholder at closing consisted of $40.0 million in cash,
which includes $6.6 million that is temporarily held in an escrow account
to secure the indemnification rights of Landec and other indemnitees with
respect to certain matters, including breaches of representations, warranties
and covenants of Lifecore included in the Purchase Agreement. The
escrow account is in the name of the seller and Landec’s right under the escrow
agreement consist solely of its ability to file a claim against the escrow. In addition, the
Company may be required to pay in cash up to an additional $10.0 million in
earnout payments based on Lifecore achieving certain revenue targets in calendar
years 2011 and 2012.
In
accordance with the Purchase Agreement, each issued and outstanding share of
Lifecore’s capital stock was cancelled and converted into the right to receive
the purchase consideration described in the Purchase
Agreement.
The
operating results of Lifecore are reported in the Company’s financial statements
beginning May 1, 2010, in the Hyaluronan-based Biomaterials operating segment.
Included in the Company’s results for the fiscal year 2010 was $1.5 million of
Lifecore’s net sales. Lifecore’s total net sales for the twelve months ended May
30, 2010 was $20.7 million, which include net sales prior to the Company’s
acquisition of Lifecore. Lifecore’s total net sales for the twelve months ended
May 31, 2009 was $22.9 million.
The
following table provides unaudited pro forma results of operations of the
Company for fiscal years 2010 and 2009 as if the acquisition of Lifecore had
occurred as of the beginning of each of the fiscal periods presented.The
unaudited pro forma results include certain recurring purchase accounting
adjustments such as depreciation and amortization expense on acquired tangible
and intangible assets and assumed interest costs. However, unaudited pro forma
results do not include certain transaction-related costs including the effect of
a step-up of the value of acquired inventory, cost savings or other effects of
potential integration of Lifecore. Accordingly, such results of operations are
not necessarily indicative of the actual results as if the acquisition had
occurred at the beginning of the dates indicated or that may result in the
future.
|
Year ended May 30,
2010
|
Year ended May
31, 2009
|
|||||||
|
Pro
forma net income
|
$ | 1,722 | $ | 8,658 | ||||
|
Basic
net income per share
|
$ | 0.07 | $ | 0.33 | ||||
|
Diluted
net income per share
|
$ | 0.06 | $ | 0.32 | ||||
These
amounts have been calculated after applying the Company’s accounting policies
and adjusting the results of Lifecore to reflect the adjustments to depreciation
expense and amortization expense assuming the fair value adjustments to property
and equipment and intangible assets had been applied on May 26, 2008 and
the interest expense on long-term debt entered into in conjunction with the
acquisition as if the debt had been borrowed on May 26, 2008. The
proforma adjustments were tax affected at the Company’s effective tax rate for
the periods presented. For the fiscal year ended May 30, 2010, the
proforma net income includes actual expenses at Lifecore incurred prior to the
close of the acquisition of $3.1 million for the termination of its stock option
plan, establishing reserves for potential bad debts and unusable inventory and
for direct acquisition related expenses, primarily legal
expenses.
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- -
The
acquisition date fair value of the total consideration transferred was
$49.65 million, which consisted of the following (in
thousands):
|
Cash
|
$ | 40,000 | ||
|
Contingent
consideration
|
9,650 | |||
|
Total
|
$ | 49,650 |
The
assets and liabilities of Lifecore were recorded at their respective estimated
fair values as of the date of the acquisition using generally accepted
accounting principles for business combinations. The excess of the purchase
price over the fair value of the net identifiable assets acquired has been
allocated to goodwill. Goodwill represents a substantial portion of the
acquisition proceeds because the Lifecore trade name provides the Company with
entry into the growing, higher margin hyaluronan product market. Management
believes that there is further growth potential by extending Lifecore’s product
lines into new channels.
The
following table summarizes the estimated fair values of Lifecore’s assets
acquired and liabilities assumed and related deferred income taxes, effective
April 30, 2010, the date the Company obtained control of Lifecore. Changes to
the fair values of the assets acquired and liabilities assumed may be recorded
in future periods as the Company finalizes its estimates of the fair value.
|
(000’s)
|
||||
|
Cash
and cash equivalents
|
$ | 318 | ||
|
Accounts
receivable, net
|
1,860 | |||
|
Inventories,
net
|
9,009 | |||
|
Property
and equipment
|
25,564 | |||
|
Other
tangible assets
|
1,455 | |||
|
Intangible
assets
|
7,900 | |||
|
Total
identifiable assets acquired
|
46,106 | |||
|
Accounts
payable and other liabilities
|
(2,983 | ) | ||
|
Long-term
debt
|
(4,157 | ) | ||
|
Deferred
taxes
|
(3,109 | ) | ||
|
Total
liabilities assumed
|
(10,249 | ) | ||
|
Net
identifiable assets acquired
|
35,857 | |||
|
Goodwill
|
13,793 | |||
|
Net
assets acquired
|
$ | 49,650 | ||
The
Company used a combination of the market and cost approaches to estimate the
fair values of the Lifecore assets acquired and liabilities
assumed.
Inventory
A step-up
in the value of inventory of $523,000 was recorded in the allocation of the
purchase price based on valuation estimates. During fiscal year 2010, $27,000 of
this step-up was charged to cost of products sold as the inventory was sold. The
remaining step-up is expected to be charged to cost of products sold in fiscal
2011 as the inventory is sold.
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- -
Intangible
Assets
The fair
value of indefinite and finite-lived intangible assets was determined using a
DCF model, under an income valuation methodology, based on management’s
five-year projections of revenues, gross profits and operating profits by fiscal
year and assumes a 33% effective tax rate for each year. Management takes into
account the historical trends of Lifecore and the industry categories in which
Lifecore operates along with inflationary factors, current economic conditions,
new product introductions, cost of sales, operating expenses, capital
requirements and other relevant data when developing its projection. The Company
believes that the level and timing of cash flows appropriately reflect market
participant assumptions. The projected cash flows from these intangibles were
based on key assumptions such as estimates of revenues and operating profits
related to the intangibles over their respective forecast periods. The resultant
cash flows were then discounted using a rate the Company believes is appropriate
given the inherent risks associated with each intangible asset and reflect
market participant assumptions.
The
Company identified two intangible assets in connection with the Lifecore
acquisition: trade names valued at $4.2 million, which is considered to be an
indefinite life asset and therefore will not be amortized; and customer base
valued at $3.7 million with a twelve year useful life. The trade name intangible
asset was valued using the relief from royalty valuation method and the customer
relationship intangible asset was valued using the multi-period excess earnings
method.
Goodwill
The
excess of the consideration transferred over the fair values assigned to the
assets acquired and liabilities assumed was $13.8 million, which represents
the goodwill amount resulting from the acquisition which can be attributable to
its long history and future prospects. None of the goodwill is expected to be
deductible for income tax purposes. The Company will test goodwill
for impairment on an annual basis or sooner, if deemed necessary. As
of May 30, 2010, there were no changes in the recognized amount of goodwill
resulting from the acquisition of Lifecore.
Liability for
Contingent Consideration
In
addition to the cash consideration paid to the former shareholder of Lifecore,
the Company may be required to pay up to an additional $10.0 million in
earnout payments based on Lifecore achieving certain revenue targets in calendar
years 2011 and 2012. The fair value of the liability for the
contingent consideration recognized on the acquisition date was
$9.65 million and is classified as a non current liability in the
Consolidated Balance Sheets as of May 30, 2010. The Company
determined the fair value of the liability for the contingent consideration
based on a probability-weighted discounted cash flow analysis. This
fair value measurement is based on significant imputs not observed in the market
and thus represents a Level 3 measurement. The Company expects to pay
the entire $10 million earn out during the third quarter of fiscal year
2012.
Deferred Tax
Liabilities
The
$2.4 million of net deferred tax liabilities resulting from the acquisition
was primarily related to the difference between the book basis and tax basis of
the intangible assets.
Acquisition-Related
Transaction Costs
The
Company recognized $2.7 million of acquisition-related expenses that were
expensed in the year ended May 30, 2010 and are included in other expenses
in the Consolidated Statements of Income for the year ended May 30,
2010. These expenses included investment banker fees, legal and
accounting fees and appraisals fees.
|
3.
|
Sale
of Fielder’s Choice Direct and License
Agreement
|
On
December 1, 2006, Landec sold its direct marketing and sales seed company FCD,
which included the Fielder’s Choice Direct® and
Heartland Hybrid® brands,
to American Seeds, Inc., a wholly owned subsidiary of Monsanto
Company. The acquisition price for FCD was $50 million in cash paid
at the close. During fiscal year 2007, Landec recorded income from
the sale, net of direct expenses and bonuses, of $22.7 million. The
income that was recorded is equal to the difference between the fair value of
FCD of $40 million and its net book value, less direct selling expenses and
bonuses. In accordance with generally accepted accounting principles,
the portion of the $50 million of proceeds in excess of the fair value of FCD,
or $10 million, was allocated to the technology license agreement described
below and is being recognized as revenue ratably over the five year term of the
license agreement or $2 million per year beginning December 1,
2006. The fair value was determined by management.
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- -
|
3.
|
Sale
of Fielder’s Choice Direct and License Agreement
(continued)
|
In
December 2006, Landec also entered into a five-year co-exclusive technology
license and polymer supply agreement (“the Monsanto Agreement”) with Monsanto
for the use of Landec’s Intellicoat polymer
seed coating technology. Under the terms of the Monsanto Agreement,
Monsanto has agreed to pay Landec Ag $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 Monsanto Agreement. Monsanto has
also agreed to fund all operating costs, including all Intellicoat research
and development, product development and non-replacement capital costs during
the five year agreement period. For each of the fiscal years ended
May 30, 2010, May 31, 2009 and May 25, 2008 Landec recognized $5.4 million in
revenues and income from the Monsanto Agreement.
The
Agreement also provides for a fee payable to Landec Ag of $4 million if Monsanto
elects to terminate the agreement or $10 million if Monsanto elects to purchase
the rights to the exclusive field. If the purchase option is
exercised before December 2011, or if Monsanto elects to terminate the
Agreement, all annual license fees and supply payments that have not been paid
to Landec Ag will become due upon the purchase. If Monsanto does not
exercise its purchase option by December 2011, Landec Ag 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 $23 million in maximum payments if Monsanto
elects to purchase Landec Ag. 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. The incremental $6 million to be received in the event Monsanto
exercises the purchase option has been deferred and will be
recognized upon the exercise of the purchase option. The fair value
of the purchase option was determined by management to be less than the amount
of the deferred revenue.
If
Monsanto elects to purchase the rights to the licensed fields, a gain or loss on
the sale will be recognized at the time of purchase. If Monsanto
exercises its purchase option, Landec expects to enter into a new long-term
supply agreement with Monsanto pursuant to which Landec would continue to be the
exclusive supplier of Intellicoat polymer materials to Monsanto.
|
4.
|
License
Agreements
|
In
December 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences Corporation (“Aesthetic Sciences”), a medical device
company. Aesthetic Sciences paid Landec an upfront license fee of
$250,000 for the exclusive rights to use Landec's IntelimerÒ materials technology for
the development of dermal fillers worldwide under the
agreement. Landec would also receive royalties on the sale of
products incorporating Landec’s technology. In addition, the Company
received shares of preferred stock originally valued at $1.3 million which
represented a 19.9% ownership interest in Aesthetic Sciences as of December
2005.
As part
of the original agreement with Aesthetic Sciences, Landec was to receive
additional shares upon the completion of a specific milestone. In
November 2006, that milestone was met and as a result Landec received an
additional 800,000 shares of preferred stock originally valued at
$481,000. The receipt of the additional 800,000 preferred shares did
not change Landec’s 19.9% ownership interest in Aesthetic
Sciences. During fiscal year 2009, Aesthetic Sciences completed a
second preferred stock offering in which Landec did not participate and as a
result Landec’s ownership interest in Aesthetic Sciences was 17.3% as of May 30,
2010 and May 31, 2009. In July 2010, Aesthetic Science sold the
rights to its Smartfil™ Injector System on July 16, 2010. Landec has
evaluated its investment in Aesthetic Sciences for impairment, utilizing a
discounted cash flow analysis under the terms of the purchase
agreement. Based on the terms of the recent sale, the Company has
determined that its investment is other than temporarily impaired and therefore
recorded an impairment charge of $1.0 million as of May 30, 2010, which is
included
in other expense. The Company’s carrying value of its investment in
Aesthetic Sciences, net of the impairment losses, is $782,000 and is included in
other non current assets.
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- -
|
4.
|
License
Agreements (continued)
|
In March
2006, Landec entered into an exclusive license and research and development
agreement with Air Products and Chemicals, Inc. (“Air
Products”). Landec agreed to provide research and development support
to Air Products for three years with a mutual option for two additional
years. The license fees were recognized as license revenue over a
three year period beginning March 2006. In addition, in accordance
with the agreement, Landec receives 40% of the gross profit generated from the
sale of products by Air Products occurring after April 1, 2007, that incorporate
Landec’s Intelimer materials. In 2008, an amendment was entered into
by the Company whereby certain technology applications were re-acquired as well
as the elimination of an existing contract claim in order to refine the existing
relationship. As a result, the Company recorded a $600,000 expense to
selling, general and administrative expense during the year ended May 25,
2008. The Company recognized $600,000 in license revenues under this
agreement in fiscal year 2009 and $800,000 in license revenues under this
agreement during fiscal year 2008. During fiscal years 2010, 2009 and
2008 the Company recognized $539,000, $1.1 million and $528,000, respectively,
for its share of the gross profits realized from the sale of Intelimer-based
products by Air Products.
In
September 2007, the Company amended its licensing and supply agreement with
Chiquita Brands International, Inc. (“Chiquita”). Under the
terms of the amendment, the license for bananas was expanded to include
additional exclusive fields using Landec’s BreatheWay® packaging technology, and
a new exclusive license was added for the sale and marketing of avocados and
mangos using Landec’s BreatheWay packaging technology. The agreement
with Chiquita, which terminates in December 2011 (Chiquita has a five year
renewal option), requires Chiquita to pay annual gross profit minimums to Landec
in order for Chiquita to maintain its exclusive license for bananas, avocados
and mangos. Under the terms of the agreement, Chiquita must notify
Landec before December 1st of each
year whether it is going to maintain its exclusive license for the following
calendar year and thus agree to pay the minimums for that
year. Landec was notified by Chiquita in November 2009 that Chiquita
wanted to maintain its exclusive license for calendar year 2010 and thus agreed
at that time to pay the minimum gross profit for calendar year
2010. During fiscal years 2010, 2009 and 2008, the Company recognized
$2.2 million, $2.2 million and $2.9 million, respectively, of gross profits from
the Chiquita agreement.
|
5.
|
Repurchase
of Subsidiary Common Stock and
Options
|
On August 7, 2007, Landec repurchased
all of the outstanding common stock and options of Apio not owned by Landec at
the fair market value of each share as if all options had been exercised on that
date. The fair market value repurchase price for all of Apio’s common
stock and options not owned by Landec was $20.8 million. After the
repurchase, Apio became a wholly owned subsidiary of Landec. In
accordance with accounting guidance, this repurchase did not result in
additional compensation expense to the Company as all of the options repurchased
were fully vested at the time of the repurchase and the consideration paid was
equal to the fair value. The repurchase of Apio options for $19.7
million was recorded as a reduction to equity and the repurchase of Apio’s
common stock not owned by Landec for $1.1 million was recorded to goodwill in
accordance with accounting guidance.
|
6.
|
Property
and Equipment
|
Property and equipment consists of the
following (in thousands):
|
Years of
|
||||||||||||
|
Useful Life
|
May 30, 2010
|
May 31, 2009
|
||||||||||
|
Land
and building
|
15-30
|
$ | 41,990 | $ | 18,225 | |||||||
|
Leasehold
improvements
|
3-20
|
1,111 | 952 | |||||||||
|
Computer,
capitalized software, machinery, equipment and auto
|
3-7
|
31,869 | 24,162 | |||||||||
|
Furniture
and fixtures
|
5-7
|
411 | 349 | |||||||||
|
Construction
in process
|
618 | 1,818 | ||||||||||
|
Gross
property and equipment
|
75,999 | 45,506 | ||||||||||
|
Less
accumulated depreciation and amortization
|
(25,838 | ) | (22,763 | ) | ||||||||
|
Net
property and equipment
|
$ | 50,161 | $ | 22,743 | ||||||||
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|
6.
|
Property
and Equipment (continued)
|
Depreciation
and amortization expense for the fiscal years ended May 30, 2010, May 31, 2009
and May 25, 2008 was $3.4 million, $3.1 million and $3.2 million,
respectively. There was no equipment under capital leases at May 30,
2010 or May 31, 2009. Amortization related to capitalized software
was $39,000, $175,000 and $400,000 for fiscal years ended May 30, 2010, May 31,
2009 and May 25, 2008, respectively. The unamortized computer
software costs at May 30, 2010 and May 31, 2009 were $260,000 and $299,000,
respectively.
|
7.
|
Intangible
Assets
|
Changes
in the carrying amount of goodwill for the fiscal years ended May 30, 2010, May
31, 2009 and May 25, 2008 by reportable segment, are as follows (in
thousands):
|
Food
Products
Technology
|
Technology
Licensing
|
Hyaluronan-
based
Biomaterials
|
Total
|
|||||||||||||
|
Balance
as of May 27, 2007
|
$ | 21,402 | $ | — | $ | — | $ | 21,402 | ||||||||
|
Goodwill
acquired/reclassified during the period
|
1,172 | 4,780 | — | 5,952 | ||||||||||||
|
Balance
as of May 25, 2008
|
22,574 | 4,780 | — | 27,354 | ||||||||||||
|
Goodwill
acquired during the period
|
7 | — | — | 7 | ||||||||||||
|
Balance
as of May 31, 2009
|
22,581 | 4,780 | — | 27,361 | ||||||||||||
|
Goodwill
acquired during the period
|
— | — | 13,793 | 13,793 | ||||||||||||
|
Balance
as of May 30, 2010
|
$ | 22,581 | $ | 4,780 | $ | 13,793 | $ | 41,154 | ||||||||
Information
regarding Landec’s other intangible assets is as follows (in
thousands):
|
Trademarks &
Trade names
|
Customer
Relationships
|
Total
|
||||||||||
|
Balance
as of May 27, 2007
|
$ | 8,228 | $ | — | $ | 8,228 | ||||||
|
Amortization
expense
|
— | — | — | |||||||||
|
Balance
as of May 25, 2008
|
8,228 | — | 8,228 | |||||||||
|
Amortization
expense
|
— | — | — | |||||||||
|
Balance
as of May 31, 2009
|
8,228 | — | 8,228 | |||||||||
|
Acquired
during the period
|
4,200 | 3,700 | 7,900 | |||||||||
|
Amortization
expense
|
— | (26 | ) | (26 | ) | |||||||
|
Balance
as of May 30, 2010
|
$ | 12,428 | $ | 3,674 | $ | 16,102 | ||||||
Accumulated
amortization as of May 30, 2010, May 31, 2009 and May 25, 2008 was $3.4
million. The amortization expense for fiscal years 2011 through 2022
will be $308,000 per year.
|
8.
|
Stockholders’
Equity
|
On
November 6, 2008, the Company reincorporated from California to
Delaware. As a result of this reincorporation, the Company has
established an additional paid-in capital account and reclassified as of May 27,
2007, $129.5 million from Common Stock to additional paid-in
capital.
Holders
of Common Stock are entitled to one vote per share.
Convertible
Preferred Stock
The Company has authorized two million
shares of preferred stock, and as of May 30, 2010 has no outstanding preferred
stock.
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- -
|
8.
|
Stockholders’ Equity
(continued)
|
Common
Stock and Stock Option Plans
At May 30, 2010, the Company had 3.7
million
common shares reserved for future issuance under Landec equity incentive
plans.
On October 15, 2009, following
stockholder approval at the Annual Meeting of Stockholders of the Company, the
2009 Stock Incentive Plan (the “Plan”) became effective and replaced the
Company’s 2005 Stock Incentive Plan. Employees (including officers), consultants
and directors of the Company and its subsidiaries and affiliates are eligible to
participate in the Plan.
The Plan provides for the grant of
stock options (both nonstatutory and incentive stock options), stock grants,
stock units and stock appreciation rights. Awards under the Plan will be
evidenced by an agreement with the Plan participants and 1.9 million shares of
the Company’s Common Stock (“Shares”) are available for award under the Plan.
Under the Plan, no recipient may receive awards during any fiscal year that
exceeds the following amounts: (i) stock options covering in excess of 500,000
Shares; (ii) stock grants and stock units covering in excess of 250,000 Shares
in the aggregate; or (iii) stock appreciation rights covering more than 500,000
Shares. In addition, awards to non-employee directors are discretionary.
However, a non-employee director may not be granted awards in excess of 30,000
Shares in the aggregate during any fiscal year. The exercise price of the
options was the fair market value of the Company’s Common Stock on the date the
options were granted.
On October 14, 2005, following
stockholder approval at the Annual Meeting of Stockholders of the Company, the
2005 Stock Incentive Plan (“2005 Plan”) became effective. The 2005 Plan replaced
the Company’s four then existing equity plans and no shares remain available for
grant under those plans. Employees (including officers), consultants and
directors of the Company and its subsidiaries and affiliates eligible to
participate in the 2005 Plan. The 2005 Plan provided for the grant of stock
options (both nonstatutory and incentive stock options), stock grants, stock
units and stock appreciation rights. Under the 2005 Plan, 861,038 Shares were
initially available for awards, and as of May 30, 2010, 733,416 shares and
options to purchase shares were outstanding. The exercise price of the options
was the fair market value of the Company’s Common Stock on the date the options
were granted.
The 1995
Directors’ Stock Option Plan (the “Directors’ Plan”) provided that each person
who became a non- employee director of the Company, who had not received a
previous grant, be granted a nonstatutory stock option to purchase 20,000 shares
of Common Stock on the date on which the optionee first became a non-employee
director of the Company. Thereafter, on the date of each annual meeting of the
stockholders each non-employee director was granted an additional option to
purchase 10,000 shares of Common Stock if, on such date, he or she had served on
the Company’s Board of Directors for at least six months prior to the date of
such annual meeting. The exercise price of the options was the fair market value
of the Company’s Common Stock on the date the options were granted. Options
granted under this plan were exercisable and vested upon grant.
The 1996
Non-Executive Stock Option Plan authorized the Board of Directors to grant
non-qualified stock options to employees, including executive officers, and
outside consultants of the Company. The exercise price of the options was equal
to the fair market value of the Company’s Common Stock on the date the options
were granted. Options were generally exercisable upon vesting and generally
vested ratably over four years and were subject to repurchase if exercised
before being vested.
The 1996
Stock Option Plan authorized the Board of Directors to grant stock purchase
rights, incentive stock options or non-statutory stock options to Landec
executives. The exercise price of the stock purchase rights, incentive stock
options and non-statutory stock options could be no less than 100% of the fair
market value of Landec’s Common Stock on the date the options were granted.
Options generally were exercisable upon vesting, generally vested ratably over
four years and were subject to repurchase if exercised before being
vested.
- 77
- -
|
8.
|
Stockholders’
Equity (continued)
|
The New
Executive Stock Option Plan authorized the Board of Directors to grant
non-statutory stock options to officers of Landec or officers of Apio or Landec
Ag whose employment with each of those companies began after October 24,
2000. The exercise price of the non-statutory stock options could be
no less than 100% and 85%, for named executives and non-named executives,
respectively, of the fair market value of Landec's Common Stock on the date the
options were granted. Options generally were exercisable upon
vesting, generally vested ratably over four years and were subject to repurchase
if exercised before being vested.
Activity
under all Landec equity incentive plans is as follows:
Stock-Based
Compensation Activity
|
Restricted Stock Outstanding
|
Stock Options Outstanding
|
|||||||||||||||||||
|
RSU’s and
Options
Available
for Grant
|
Number
of
Restricted
Shares
|
Weighted
Average
Grant Date
Fair Value
|
Number of
Stock
Options
|
Weighted
Average
Exercise
Price
(FairValue)
|
||||||||||||||||
|
Balance
at May 27, 2007
|
706,731 | 38,335 | $ | 8.86 | 2,061,337 | $ | 5.14 | |||||||||||||
|
Granted
|
(139,335 | ) | 34,835 | $ | 13.32 | 104,500 | $ | 13.32 | ||||||||||||
|
Awarded/Exercised
|
— | (10,002 | ) | $ | 8.86 | (267,148 | ) | $ | 4.57 | |||||||||||
|
Forfeited
|
— | — | — | (1,739 | ) | $ | 3.80 | |||||||||||||
|
Balance
at May 25, 2008
|
567,396 | 63,168 | $ | 11.32 | 1,896,950 | $ | 5.68 | |||||||||||||
|
Granted
|
(506,254 | ) | 127,504 | $ | 6.62 | 378,750 | $ | 6.62 | ||||||||||||
|
Awarded/Exercised
|
— | (10,002 | ) | $ | 13.32 | (331,950 | ) | $ | 3.66 | |||||||||||
|
Forfeited
|
14,875 | (3,666 | ) | $ | 7.45 | (11,209 | ) | $ | 8.59 | |||||||||||
|
Plan
shares expired
|
(209 | ) | — | — | — | — | ||||||||||||||
|
Balance
at May 31, 2009
|
75,808 | 177,004 | $ | 7.88 | 1,932,541 | $ | 6.19 | |||||||||||||
|
Additional
shares reserved
|
1,900,000 | ― | ||||||||||||||||||
|
Granted
|
(1,195,189 | ) | 309,439 | $ | 5.80 | 885,750 | $ | 5.78 | ||||||||||||
|
Awarded/Exercised
|
— | (51,671 | ) | $ | 8.11 | (190,962 | ) | $ | 4.32 | |||||||||||
|
Forfeited
|
2,000 | (1,000 | ) | $ | 13.32 | (1,000 | ) | $ | 13.32 | |||||||||||
|
Plan
shares expired
|
― | — | — | (169,500 | ) | $ | 7.01 | |||||||||||||
|
Terminated
plan
|
(16,975 | ) | ― | ― | ― | ― | ||||||||||||||
|
Balance
at May 30, 2010
|
765,644 | 433,772 | $ | 6.35 | 2,456,829 | $ | 6.18 | |||||||||||||
Included
in exercises for fiscal years 2010, 2009 and 2008 are 4,634, 171,380 and 11,995
options, respectively, that were exercised through a net share settlement
transaction (no cash) to pay for the exercise price of the options and the
related taxes due on the exercise.
The
following table summarizes information concerning stock options outstanding and
exercisable at May 30, 2010:
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||||||||
|
Range of
Exercise
Prices
|
Number of Shares
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Number of
Shares
Exercisable
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
|||||||||||||||||||||
|
(in years)
|
|
|
|
|||||||||||||||||||||||||
|
$
1.660 - $3.800
|
366,385 | 1.44 | $ | 3.30 | $ | 1,060,221 | 366,385 | $ | 3.30 | $ | 1,060,221 | |||||||||||||||||
|
$
4.094 - $6.130
|
986,194 | 5.46 | $ | 5.73 | $ | 457,769 | 348,444 | $ | 5.90 | $ | 100,629 | |||||||||||||||||
|
$
6.190 - $8.860
|
1,008,750 | 5.23 | $ | 6.87 | $ | — | 610,207 | $ | 7.24 | $ | — | |||||||||||||||||
|
$
13.32 - $13.32
|
95,500 | 4.08 | $ | 13.32 | $ | — | 88,124 | $ | 13.32 | $ | — | |||||||||||||||||
|
$
1.660 - $13.32
|
2,456,829 | 4.76 | $ | 6.18 | $ | 1,517,990 | 1,413,160 | $ | 6.36 | $ | 1,160,850 | |||||||||||||||||
The
weighted average remaining contractual life of options exercisable as of May 30,
2010 was 3.23 years.
At May
30, 2010 and May 31, 2009 options to purchase 1,413,160 and 1,602,633 shares of
Landec’s Common Stock were vested, respectively. No options have been
exercised prior to being vested.
- 78
- -
|
8.
|
Stockholders’
Equity (continued)
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $6.19 on May 28,
2010, which would have been received by holders of stock options had all holders
of stock options exercised their stock options that were in-the-money as of that
date. The total number of in-the-money stock options exercisable as of May 30,
2010, was approximately 715,000 shares. The aggregate intrinsic value
of stock options exercised during the fiscal year 2010 was
$825,000.
Shares
Subject to Vesting
The
following table summarizes the activity relating to unvested stock option grants
and RSUs during the fiscal year ended May 30, 2010:
|
|
Stock Options
|
Restricted Stock
|
||||||||||||||
|
|
Shares
|
Weighted
Average Fair
Value
|
Shares
|
Weighted
Average Fair
Value
|
||||||||||||
|
Unvested
at May 31, 2009
|
329,908 |
$
|
2.72 | 177,004 | $ | 7.88 | ||||||||||
|
Granted
|
885,750 |
$
|
2.37 | 309,439 | $ | 5.80 | ||||||||||
|
Vested/Awarded
|
(170,989 | ) | $ | 2.99 | (51,671 | ) | $ | 8.11 | ||||||||
|
Forfeited
|
(1,000 | ) | $ | 6.44 | (1,000 | ) | $ | 13.32 | ||||||||
|
Unvested
at May 30, 2010
|
1,043,669 | $ | 2.72 | 433,772 | $ | 6.35 | ||||||||||
As of May
30, 2010, there was $4.6 million of total unrecognized compensation expense
related to unvested equity compensation awards granted under the Company’s
incentive stock plans. Total expense is expected to be recognized over the
weighted-average period of 2.6 years for stock options and 1.7 years for
restricted stock awards.
|
9.
|
Debt
|
On April
30, 2010 in conjunction with the acquisition of Lifecore, Lifecore entered into
a new $20 million Credit Agreement with Wells Fargo Bank N.A. (“Wells Fargo”)
with a five year term that provides for equal monthly principal payments plus
interest. All of Lifecore’s assets have been pledged to secure
the debt incurred pursuant to the Credit Agreement. Landec is the
guarantor of the debt.
On August
19, 2004, Lifecore issued variable rate industrial revenue bonds (“IRB”).
These bonds were assumed by Landec in the acquisition of Lifecore (see Note
2). The bonds are collateralized by a bank letter of credit
which is secured by a first mortgage on the Company’s facility in Chaska,
Minnesota. In addition, the Company pays an annual remarketing
fee equal to 0.125% and an annual letter of credit fee of 0.50%.
The
Credit Agreement and the IRB contain certain restrictive covenants, which
require Lifecore to meet certain financial tests, including minimum levels of
net income, minimum quick ratio, minimum fixed coverage ratio and maximum
capital expenditures. As of May 30, 2010, the Company was in
compliance with all covenants.
Long-term
debt consists of the following (in thousands):
|
May 30, 2010
|
May 31, 2009
|
|||||||
|
Credit
agreement with Wells Fargo; due in monthly payments of $333,333 through
April 30, 2015 with interest payable monthly at Libor plus 2% per
annum
|
$ | 19,667 | $ | — | ||||
|
Industrial
revenue bond issued by Lifecore; due in annual payments through 2020 with
interest at a variable rate set weekly by the bond remarketing agent
(2.56% at May 30, 2010)
|
4,103 | — | ||||||
|
Total
|
23,770 | — | ||||||
|
Less
current portion
|
(4,521 | ) | — | |||||
|
Long-term
portion
|
$ | 19,249 | $ | — | ||||
- 79
- -
|
9.
|
Debt
(continued)
|
The future minimum principal payments
of the Company’s debt for each year presented are as follows (in
thousands):
|
Wells
Fargo
|
IRB
|
Total
|
||||||||||
|
FY2011
|
$ | 4,000 | $ | 521 | $ | 4,521 | ||||||
|
FY2012
|
4,000 | 338 | 4,338 | |||||||||
|
FY2013
|
4,000 | 351 | 4,351 | |||||||||
|
FY2014
|
4,000 | 362 | 4,362 | |||||||||
|
FY2015
|
3,667 | 372 | 4,039 | |||||||||
|
Thereafter
|
— | 2,159 | 2,159 | |||||||||
| $ | 19,667 | $ | 4,103 | $ | 23,770 | |||||||
The maturities on the IRB are held in a
sinking fund account, recorded in Other Current Asset in the accompanying
Consolidated Balance Sheets, and is paid out each year on September 1st.
|
10.
|
Derivative
Financial Instruments
|
The
Company is exposed to interest rate risks primarily through borrowings under its
Credit Agreement with Wells Fargo (see Note 9). Interest on all of
the Company’s borrowings under its Credit Agreement is based upon variable
interest rates. As of May 30, 2010, the Company had borrowings of
$19.7 million outstanding under its Credit Agreement which bear interest at a
rate equal to the one-month LIBOR plus 2%. As of May 30, 2010,
the interest rate on borrowings under the Credit Agreement was accruing at
2.375%.
In May
2010, the Company entered into a five-year interest rate swap agreement under
the Company’s Credit Agreement which expires on April 30, 2015. The
interest rate swap was designated as a cash flow hedge of future interest
payments of LIBOR and has a notional amount of $20 million. As a result of the
interest rate swap transaction, the Company fixed for a five-year period the
interest rate at 4.24% subject to market based interest rate risk on $20 million
of borrowings under its Credit Agreement. The Company’s obligations
under the interest rate swap transaction as to the scheduled payments were
guaranteed and secured on the same basis as is its obligations under the Credit
Agreement. As of May 30, 2010, the Company recorded to Other
Comprehensive Loss on the Consolidated Balance Sheets an unrealized loss of
$179,000, net of taxes of $105,000, as a result of the interest rate
swap. The unrealized loss was based Level 2 hierarchy for fair value
measurements. If the interest rate swap is terminated or the debt
borrowed is paid off prior to April 30, 2015, the amount of unrealized loss or
gain included in Other Comprehensive Income (Loss) would be reclassified to
earnings. The Company has no intentions of terminating the interest
rate swap or prepaying the debt in the next twelve months. The
interest rate swap liability is included in other non current liabilities as of
May 30, 2010.
|
11.
|
Income
Taxes
|
The
provision for income taxes consisted of the following (in
thousands):
|
Year ended
|
Year ended
|
Year ended
|
||||||||||
|
May 30, 2010
|
May 31, 2009
|
May 25, 2008
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 844 | $ | 2,217 | $ | 1,557 | ||||||
|
State
|
170 | 883 | 2,408 | |||||||||
|
Total
|
1,014 | 3,100 | 3,965 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
3,186 | 2,060 | 233 | |||||||||
|
State
|
62 | 451 | (844 | ) | ||||||||
|
Total
|
3,248 | 2,511 | (611 | ) | ||||||||
|
Income
tax expense
|
$ | 4,262 | $ | 5,611 | $ | 3,354 | ||||||
- 80
- -
|
11.
|
Income
Taxes (continued)
|
The
actual provision for income taxes differs from the statutory U.S. federal income
tax rate as follows (in thousands):
|
Year Ended
May 30, 2010
|
Year Ended
May 31, 2009
|
Year Ended
May 25, 2008
|
||||||||||
|
Provision
at U.S. statutory rate (1)
|
$ | 2,886 | $ | 4,669 | $ | 5,914 | ||||||
|
State
income taxes, net of federal benefit
|
217 | 1,023 | 1,152 | |||||||||
|
Change
in valuation allowance
|
390 | — | (3,647 | ) | ||||||||
|
Tax-exempt
interest
|
(209 | ) | (196 | ) | — | |||||||
|
Tax
credit carryforwards
|
(102 | ) | (159 | ) | (510 | ) | ||||||
|
Transaction
Costs
|
982 | |||||||||||
|
Other
|
98 | 274 | 445 | |||||||||
|
Total
|
$ | 4,262 | $ | 5,611 | $ | 3,354 | ||||||
|
(1)
Statutory rate was 35% for fiscal years 2010, 2009 and
2008.
|
||||||||||||
The decrease in the income tax expense
in fiscal year 2010 compared to fiscal years 2009 is due to a 37% decrease in
net income before taxes partially offset by an increase in the Company’s
effective tax rate to 51% in fiscal year 2010 up from 42% in fiscal year
2009. The increase in the income tax expense in fiscal year 2009
compared to fiscal year 2008 is due to an increase in the Company’s effective
tax rate to 42% in fiscal year 2009 up from 20% in fiscal year 2008 partially
offset by a 20% decrease in net income before taxes in fiscal year 2009 compared
to fiscal year 2008. These changes in the Company’s income tax
expense are due to fully utilizing the Company’s net operating loss
carryforwards and tax credits during fiscal years 2009 and 2008 and accounting
for acquisition related costs associated with the Lifecore acquisition in fiscal
year 2010.
Significant
components of deferred tax assets and liabilities consisted of the following (in
thousands):
|
May 30, 2010
|
May 31, 2009
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Research
and AMT credit carryforwards
|
$ | 705 | $ | 643 | ||||
|
Accruals
and reserves, not currently deductible for tax
|
1,528 | 2,161 | ||||||
|
Stock-based
compensation
|
605 | 543 | ||||||
|
Other
|
344 | 234 | ||||||
|
Gross
deferred tax assets
|
3,182 | 3,581 | ||||||
|
Valuation
allowance
|
(390 | ) | — | |||||
|
Net
deferred tax assets
|
2,792 | 3,581 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
and amortization
|
(2,425 | ) | (253 | ) | ||||
|
Goodwill
and other indefinite life intangibles
|
(7,906 | ) | (5,286 | ) | ||||
|
Deferred
tax liabilities
|
(10,331 | ) | (5,539 | ) | ||||
|
Net
deferred tax (liabilities) assets
|
$ | (7,539 | ) | $ | (1,958 | ) | ||
Valuation
allowances are reviewed each period on a tax jurisdiction by jurisdiction basis
to analyze whether there is sufficient positive or negative evidence to support
a change in judgment about the realizability of the related deferred tax assets.
Based on this analysis and considering all positive and negative evidence, we
determined that a valuation allowance of $390,000 should be recorded as a result
of a book impairment loss on the Company’s investment in Aesthetic Sciences as
it is more likely than not that a portion of the deferred tax asset will not be
realized in the foreseeable future.
- 81
- -
|
11.
|
Income
Taxes (continued)
|
As of May
30, 2010, the Company had federal and state net operating loss carryforwards of
approximately $14.6 million and $5.4 million, respectively. These losses expire
in different periods through 2021, if not utilized. Such net operating losses
consist of excess tax benefits from employee stock options exercises and have
not been recorded in the Company’s deferred tax assets. The Company will record
a credit to additional paid in capital as and when such excess tax benefits are
ultimately realized.
The
Company also had federal and state research and development tax credits
carryforwards of approximately $1.8 million and $1.5 million,
respectively. The research and development tax credit carryforwards
expire in different periods through 2030 for federal purposes and have an
unlimited carryforward period for state purposes. Furthermore, the
Company has federal alternative minimum tax credits of approximately $690,000
that can be carried forward indefinitely. Certain tax credit carryovers are
attributable to excess tax benefits from employee stock option exercises and
have not been recorded in the Company’s deferred tax assets. The Company will
record a credit to additional paid in capital as and when such excess tax
benefits are ultimately realized.
The
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements 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, and the derecognition of
tax benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure, and transition.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
|
|
As of
|
|||||||||||
|
|
May30, 2010
|
May 31, 2009
|
May 25, 2008
|
|||||||||
|
Unrecognized
tax benefits – beginning of the period
|
|
$
|
619
|
|
$
|
679
|
|
$
|
278
|
|||
|
Gross
increases – tax positions in prior period
|
|
138
|
|
16
|
|
86
|
|
|||||
|
Gross
decreases – tax positions in prior period
|
|
(203
|
)
|
(51
|
)
|
—
|
|
|||||
|
Gross
increases – current-period tax positions
|
|
332
|
|
14
|
|
315
|
|
|||||
|
Settlements
|
|
(18
|
)
|
(39
|
)
|
—
|
|
|||||
|
Lapse
of statute of limitations
|
|
—
|
—
|
—
|
|
|||||||
|
|
||||||||||||
|
Unrecognized
tax benefits – end of the period
|
|
$
|
868
|
|
$
|
619
|
|
$
|
679
|
|
||
The
unrecognized tax benefits at May 30, 2010, May 31, 2009 and May 25,
2008 was $868,000, $619,000 and $679,000, of which $708,000, $549,000
and $599,000, respectively, will impact the effective tax rate. The Company
accrues interest and penalties related to unrecognized tax benefits in its
provision for income taxes. The total amount of penalties and interest is not
material as of May 30, 2010. Additionally, the Company does not expect a
material changes in its unrecognized tax benefits within the next 12
months.
Due to
tax attribute carryforwards, the Company is subject to examination for tax years
1994 forward for U.S. tax purposes. The Company was also subject to examination
in various state jurisdictions for tax years 1998 forward, none of which were
individually material.
|
12.
|
Commitments
and Contingencies
|
Operating
Leases
Landec leases facilities and equipment
under operating lease agreements with various terms and conditions, which expire
at various dates through 2016.
- 82
- -
|
12.
|
Commitments
and Contingencies (continued)
|
The approximate future minimum lease
payments under these operating leases, excluding land leases, at May 30, 2010
are as follows (in thousands):
|
Amount
|
||||
|
FY2011
|
$ | 676 | ||
|
FY2012
|
390 | |||
|
FY2013
|
314 | |||
|
FY2014
|
240 | |||
|
FY2015
|
248 | |||
|
Thereafter
|
410 | |||
| $ | 2,278 | |||
Rent
expense for operating leases, including month to month arrangements was $1.5
million for the fiscal year ended May 30, 2010, $1.6 million for the fiscal year
ended May 31, 2009 and $1.5 million for the fiscal year ended May 25,
2008.
Employment
Agreements
Landec
has entered into employment agreements with certain key
employees. These agreements provide for these employees to receive
incentive bonuses based on the financial performance of certain divisions in
addition to their annual base salaries. The accrued incentive bonuses
amounted to $359,000 at May 30, 2010 and $308,000 at May 31, 2009.
Licensing
Agreement
In fiscal
year 2001, the Company entered into an agreement for the exclusive worldwide
rights to market grapes under certain brand names. Under the terms of
the amended agreement (amended in fiscal year 2004), the Company is obligated to
make annual payments of $100,000 for fiscal years 2011 and 2012.
Purchase
Commitments
At May
30, 2010, the Company was committed to purchase $5.0 million of produce during
fiscal year 2011 in accordance with contractual terms. Payments of
$8.2 million were made in fiscal year 2010 under these
arrangements.
|
13.
|
Employee
Savings and Investment Plans
|
The
Company sponsors a 401(k) plan which is available to substantially all of the
Company’s employees. Landec’s Corporate Plan, which is available to all Landec
employees (“Landec Plan”), allows participants to contribute from 1% to 50% of
their salaries, up to the Internal Revenue Service (IRS) limitation into
designated investment funds. Beginning in fiscal year 2001, the
Company amended the plan so that it contributes an amount equal to 50% of the
participants’ contribution up to 3% of the participants’ salary. In
May 2003, the Company again amended the plan to make the Company’s matching
contribution to the plan on behalf of participants voluntary, and to make
employees participation in the plan voluntary. In June 2006, the
Company again amended the plan to increase the company match from 50% on the
first 6% contributed by an employee to 67% on the first 6%
contributed. Participants are at all times fully vested in their
contributions. The Company's contribution vests over a four-year
period at a rate of 25% per year. The Company retains the right, by
action of the Board of Directors, to amend, modify, or terminate the
plan. For the fiscal years ended May 30, 2010, May 31, 2009 and May
25, 2008, the Company contributed $368,000, $341,000 and
$352,000, respectively,
to the Landec Plan.
- 83
- -
|
14.
|
Business
Segment Reporting
|
Landec
operates in four business segments: the Food Products Technology segment, the
Commodity Trading segment, the Hyaluronan-based Biomaterials segment and the
Technology Licensing segment. The Food Products Technology segment
markets and packs specialty packaged whole and fresh-cut vegetables that
incorporate the BreatheWay specialty packaging for the retail grocery, club
store and food services industry. In addition, the Food Products
Technology segment sells BreatheWay packaging to partners for non-vegetable
products. The Commodity Trading segment consists of revenues
generated from the purchase and sale of primarily whole commodity fruit and
vegetable products to Asia and domestically. The Hyaluronan-based
Biomaterials segment sells products utilizing hyaluronan, a naturally occurring
polysaccharide that is widely distributed in the extracellar matrix of
connective tissues in both animals and humans for medical use in the Ophthalmic,
Orthopedic and Veterinary markets. The Technology Licensing segment
licenses Landec’s patented Intellicoat seed coatings to the farming industry and
licenses the Company’s Intelimer polymers for personal care products and other
industrial products. Corporate includes corporate general and
administrative expenses, non Food Products Technology interest income and
Company-wide income tax expenses. All of the assets of the Company
are located within the United States of America. The Company’s
international sales are primarily to Canada, Taiwan, Indonesia, China and
Japan. Operations and identifiable assets by business segment
consisted of the following (in thousands):
|
Fiscal Year Ended May 30, 2010
|
Food Products
Technology
|
Trading
|
Hyaluronan-
based
Biomaterials
|
Technology
Licensing
|
Corporate
|
TOTAL
|
||||||||||||||||||
|
Net
sales
|
$ | 175,046 | $ | 54,926 | $ | 1,457 | $ | 6,795 | $ | — | $ | 238,224 | ||||||||||||
|
International
sales
|
$ | 15,714 | $ | 52,319 | $ | 603 | $ | ― | $ | ― | $ | 68,636 | ||||||||||||
|
Gross
profit
|
$ | 22,514 | $ | 3,906 | $ | 815 | $ | 6,531 | $ | — | $ | 33,766 | ||||||||||||
|
Net
income (loss)
|
$ | 11,051 | $ | 1,789 | $ | 13 | $ | 2,745 | $ | (11,614 | ) | $ | 3,984 | |||||||||||
|
Identifiable
assets
|
$ | 75,280 | $ | 13,979 | $ | 79,604 | $ | 11,848 | $ | 19,486 | $ | 200,197 | ||||||||||||
|
Depreciation
and amortization
|
$ | 3,055 | $ | 8 | $ | 141 | $ | 160 | $ | — | $ | 3,364 | ||||||||||||
|
Capital
expenditures
|
$ | 4,212 | $ | — | $ | 739 | $ | 241 | $ | — | $ | 5,192 | ||||||||||||
|
Interest
income
|
$ | 223 | $ | — | $ | 8 | $ | — | $ | 603 | $ | 834 | ||||||||||||
|
Interest
expense
|
$ | 12 | $ | — | $ | 76 | $ | — | $ | — | $ | 88 | ||||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | — | $ | — | $ | 4,262 | $ | 4,262 | ||||||||||||
|
Fiscal
Year Ended May 31, 2009
|
||||||||||||||||||||||||
|
Net
sales
|
$ | 168,256 | $ | 60,445 | $ | ― | $ | 7,237 | $ | — | $ | 235,938 | ||||||||||||
|
International
sales
|
$ | 14,393 | $ | 55,267 | $ | ― | $ | ― | $ | ― | $ | 69,660 | ||||||||||||
|
Gross
profit
|
$ | 23,386 | $ | 3,657 | $ | ― | $ | 7,237 | $ | — | $ | 34,280 | ||||||||||||
|
Net
income (loss)
|
$ | 11,279 | $ | 1,555 | $ | ― | $ | 4,893 | $ | (9,997 | ) | $ | 7,730 | |||||||||||
|
Identifiable
assets
|
$ | 75,466 | $ | 14,329 | $ | ― | $ | 12,278 | $ | 51,425 | $ | 153,498 | ||||||||||||
|
Depreciation
and amortization
|
$ | 2,947 | $ | 14 | $ | ― | $ | 178 | $ | — | $ | 3,139 | ||||||||||||
|
Capital
expenditures
|
$ | 4,367 | $ | — | $ | ― | $ | 209 | $ | — | $ | 4,576 | ||||||||||||
|
Interest
income
|
$ | 385 | $ | — | $ | ― | $ | — | $ | 921 | $ | 1,306 | ||||||||||||
|
Interest
expense
|
$ | 8 | $ | — | $ | ― | $ | — | $ | — | $ | 8 | ||||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | ― | $ | — | $ | 5,611 | $ | 5,611 | ||||||||||||
|
Fiscal
Year Ended May 25, 2008
|
||||||||||||||||||||||||
|
Net
sales
|
$ | 171,194 | $ | 60,414 | $ | ― | $ | 6,919 | $ | — | $ | 238,527 | ||||||||||||
|
International
sales
|
$ | 15,703 | $ | 56,191 | $ | ― | $ | ― | $ | ― | $ | 71,894 | ||||||||||||
|
Gross
profit
|
$ | 27,860 | $ | 3,449 | $ | ― | $ | 6,919 | $ | — | $ | 38,228 | ||||||||||||
|
Net
income (loss)
|
$ | 14,844 | $ | 1,406 | $ | ― | $ | 4,919 | $ | (7,627 | ) | $ | 13,542 | |||||||||||
|
Identifiable
assets
|
$ | 81,945 | $ | 16,128 | $ | ― | $ | 11,011 | $ | 40,873 | $ | 149,957 | ||||||||||||
|
Depreciation
and amortization
|
$ | 2,970 | $ | 20 | $ | ― | $ | 214 | $ | — | $ | 3,204 | ||||||||||||
|
Capital
expenditures
|
$ | 4,051 | $ | — | $ | ― | $ | 189 | $ | — | $ | 4,240 | ||||||||||||
|
Interest
income
|
$ | 522 | $ | — | $ | ― | $ | — | $ | 1,697 | $ | 2,219 | ||||||||||||
|
Interest
expense
|
$ | 22 | $ | — | $ | ― | $ | — | $ | — | $ | 22 | ||||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | ― | $ | — | $ | 3,354 | $ | 3,354 | ||||||||||||
- 84
- -
|
15.
|
Quarterly
Consolidated Financial Information
(unaudited)
|
The
following is a summary of the unaudited quarterly results of operations for
fiscal years 2010, 2009 and 2008 (in thousands, except for per share
amounts):
|
FY 2010
|
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
FY 2010
|
|||||||||||||||
|
Revenues
|
$ | 60,943 | $ | 60,933 | $ | 58,133 | $ | 58,215 | $ | 238,224 | ||||||||||
|
Gross
profit
|
$ | 8,870 | $ | 7,417 | $ | 8,127 | $ | 9,352 | $ | 33,766 | ||||||||||
|
Net
income
|
$ | 2,184 | $ | 1,534 | $ | 1,734 | $ | (1,468 | ) | $ | 3,984 | |||||||||
|
Net
income per basic share
|
$ | 0.08 | $ | 0.06 | $ | 0.07 | $ | (0.06 | ) | $ | 0.15 | |||||||||
|
Net
income per diluted share
|
$ | 0.08 | $ | 0.06 | $ | 0.07 | $ | (0.06 | ) | $ | 0.15 | |||||||||
|
FY 2009
|
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
FY 2009
|
|||||||||||||||
|
Revenues
|
$ | 71,753 | $ | 58,038 | $ | 53,911 | $ | 52,236 | $ | 235,938 | ||||||||||
|
Gross
profit
|
$ | 10,123 | $ | 7,557 | $ | 7,591 | $ | 9,009 | $ | 34,280 | ||||||||||
|
Net
income
|
$ | 2,839 | $ | 1,498 | $ | 1,540 | $ | 1,853 | $ | 7,730 | ||||||||||
|
Net
income per basic share
|
$ | 0.11 | $ | 0.06 | $ | 0.06 | $ | 0.07 | $ | 0.30 | ||||||||||
|
Net
income per diluted share
|
$ | 0.11 | $ | 0.06 | $ | 0.06 | $ | 0.07 | $ | 0.29 | ||||||||||
|
FY 2008
|
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
FY 2008
|
|||||||||||||||
|
Revenues
|
$ | 62,659 | $ | 58,961 | $ | 59,607 | $ | 57,300 | $ | 238,527 | ||||||||||
|
Gross
profit
|
$ | 8,974 | $ | 8,857 | $ | 10,746 | $ | 9,651 | $ | 38,228 | ||||||||||
|
Net
income
|
$ | 3,077 | $ | 3,125 | $ | 3,966 | $ | 3,374 | $ | 13,542 | ||||||||||
|
Net
income per basic share
|
$ | 0.12 | $ | 0.12 | $ | 0.15 | $ | 0.13 | $ | 0.52 | ||||||||||
|
Net
income per diluted share
|
$ | 0.11 | $ | 0.12 | $ | 0.15 | $ | 0.13 | $ | 0.50 | ||||||||||
|
16.
|
Subsequent
Events
|
On July 14, 2010, the Company announced
that the Board of Directors of the Company had approved the establishment of a
stock repurchase plan which allows the Company to repurchase up to $10 million
of the Company’s Common Stock. The Company may repurchase its
common stock from time to time in open market purchases or in privately
negotiated transactions. The timing and actual number of shares
repurchased is at the discretion of management of the Company and will depend on
a variety of factors, including stock price, corporate and regulatory
requirements, market conditions, the relative attractiveness of other capital
deployment opportunities and other corporate priorities. The stock
repurchase program does not obligate Landec to acquire any amount of its common
stock and the program may be modified, suspended or terminated at any time at
the Company's discretion without prior notice.
On July
16, 2010, Aesthetic Science sold the rights to its Smartfil™ Injector
System. The Company evaluated its cost method investment for
impairment, utilizing a discounted cash flow analysis under the terms of the
purchase agreement. Based on the terms of the agreement, the Company
has determined that its investment is other than temporarily impaired and
therefore recorded an impairment loss of $1.0 million as of May 30,
2010.
On August 9, 2010, the Company amended
its Credit Agreement with Wells Fargo to amend certain financial
covenants.
- 85
- -
|
(b)
|
Index
of Exhibits.
|
|
Exhibit
Number:
|
Exhibit Title
|
|
|
3.1
|
Certificate
of Incorporation of Registrant, incorporated herein by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated November
7, 2008.
|
|
|
3.2
|
Amended
and Restated Bylaws of Registrant, incorporated herein by reference to
Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated December
16, 2008.
|
|
|
10.1
|
Form
of Indemnification Agreement, incorporated herein by reference to Exhibit
10.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended May 29, 2005.
|
|
|
10.2*
|
Form
of Option Agreement for 1995 Directors’ Stock Option Plan, incorporated
herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended October 31, 1996.
|
|
|
10.3
|
Industrial
Real Estate Lease dated March 1, 1993 between the Registrant and Wayne R.
Brown & Bibbits Brown, Trustees of the Wayne R. Brown & Bibbits
Brown Living Trust dated December 30, 1987, incorporated by reference to
Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 (File
No. 33-80723) declared effective on February 12, 1996.
|
|
|
10.4*
|
Form
of Option Agreement for the 1996 Non-Executive Stock Option Plan, as
amended, incorporated herein by reference to Exhibit 10.16 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended October
31, 1996.
|
|
|
10.5*
|
1996
Amended and Restated Stock Option Plan, incorporated herein by reference
to Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10-Q for the
fiscal quarter ended April 29, 2001.
|
|
|
10.6*
|
Form
of Option Agreement for 1996 Amended and Restated Stock Option Plan,
incorporated herein by reference to Exhibit 10.17 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended April 30,
1997.
|
|
|
10.7*
|
New
Executive Stock Option Plan, incorporated herein by reference to Exhibit
10.30 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended October 29, 2000.
|
|
|
10.8*
|
1996
Non-Executive Stock Option Plan, as amended, incorporated herein by
reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended October 28, 2001.
|
|
|
10.9*
|
Employment
Agreement between the Registrant and Gary T. Steele effective as of
January 1, 2009, incorporated herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K dated December 16,
2008
|
|
|
10.10
|
Supply
Agreement between the Registrant and Apio Fresh LLC and the Growers listed
therein, dated as of July 3, 2003, incorporated herein by reference to
Exhibit 2.3 to the Registrant’s Current Report on Form 8-K dated July 3,
2003.
|
|
|
10.11*
|
1995
Directors’ Stock Option Plan, as amended, incorporated herein by reference
to Exhibit 10.53 to the Registrant’s Annual Report on Form 10-Q for the
fiscal quarter ended May 25,
2003.
|
|
Exhibit
Number:
|
Exhibit Title
|
|
|
10.12#
|
License
and research and development agreement between the Registrant and Air
Products and Chemicals, Inc. dated March 14, 2006, incorporated herein by
reference to Exhibit 10.63 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended May 28, 2006.
|
|
|
10.13*
|
2005
Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to
the Registrant's Current Report on Form 8-K dated October 14,
2005.
|
|
|
10.14*
|
Form
of Stock Grant Agreement for 2005 Stock Incentive Plan, incorporated
herein by reference to Exhibit 99.2 to the Registrant's Current Report on
Form 8-K dated October 14, 2005.
|
|
|
10.15*
|
Form
of Notice of Stock Option Grant and Stock Option Agreement for 2005 Stock
Incentive Plan, incorporated herein by reference to Exhibit 10.66 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended May 28,
2006.
|
|
|
10.16*
|
Form
of Stock Unit Agreement for 2005 Stock Incentive Plan, incorporated herein
by reference to Exhibit 10.67 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended May 28, 2006.
|
|
|
10.17*
|
Form
of Stock Appreciation Right Agreement for 2005 Stock Incentive Plan,
incorporated
herein by reference to Exhibit 99.5 to the Registrant's Current Report on
Form 8-K dated October 14, 2005.
|
|
|
10.18
|
License,
Supply and R&D Agreement dated as of December 1, 2006 by and among the
Registrant, Landec Ag and Monsanto Company, incorporated herein by
reference to Exhibit 10.71 to the Registrant’s Current Report on Form 8-K
dated December 6, 2006.
|
|
|
10.19
|
Amendment
No. 1 to the License, Supply and R&D Agreement dated May 29, 2009 by
and among the Registrant, Landec Ag and Monsanto Company, incorporated
herein by reference to Exhibit 10.26 to the Registrant’s Current Report on
Form 8-K dated June 1,
2009.
|
|
Exhibit
Number:
|
Exhibit Title
|
|
|
10.20
|
Agreement
and Plan of Merger between Landec Corporation, a California corporation,
and the Registrant, dated as of November 6, 2008, incorporated herein by
reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
dated November 7, 2008.
|
|
|
10.21*
|
2009
Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to
the Registrant's Current Report on Form 8-K dated October 19,
2009.
|
|
|
10.22*
|
Form
of Stock Grant Agreement for 2005 Stock Incentive Plan, incorporated
herein by reference to Exhibit 99.2 to the Registrant's Current Report on
Form 8-K dated October 19, 2009.
|
|
|
10.23*
|
Form
of Notice of Stock Option Grant and Stock Option Agreement for 2005 Stock
Incentive Plan, incorporated herein by reference to Exhibit 99.3 to the
Registrant's Current Report on Form 8-K dated October 19,
2009.
|
|
|
10.24*
|
Form
of Stock Unit Agreement for 2005 Stock Incentive Plan, incorporated herein
by reference to Exhibit 99.4 to the Registrant's Current Report on Form
8-K dated October 19, 2009.
|
|
|
10.25*
|
Form
of Stock Appreciation Right Agreement for 2005 Stock Incentive Plan,
incorporated herein by reference to Exhibit 99.5 to the Registrant's
Current Report on Form 8-K dated October 19, 2009.
|
|
|
10.26*
|
First
Amendment to Executive Employment between the Registrant and Gary Steele
dated as of December 10, 2009, incorporated herein by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K dated December 15,
2009.
|
|
|
10.27
|
Stock
Purchase Agreement by and among the Registrant, Lifecore Biomedical, Inc.,
Lifecore Biomedical, LLC and Warburg Pincus Private Equity IX, L.P., dated
April 30, 2010, incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K dated May 5,
2010.
|
|
|
10.28
|
Credit
Agreement by and between Lifecore Biomedical, LLC and Wells Fargo Bank,
N.A. dated April 30, 2010, incorporated herein by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K dated May 5,
2010.
|
|
|
10.29
|
Continuing
Guaranty Agreement by and between the Registrant and Wells Fargo Bank,
N.A., dated April 30, 2010, incorporated herein by reference to Exhibit
10.3 to the Registrant’s Current Report on Form 8-K dated May 5,
2010.
|
|
|
10.29*
|
2011
Cash Bonus Plan, incorporated herein by reference to the Registrant’s
Current Report on Form 8-K dated June 1, 2010.
|
|
|
10.30+
|
Amendment
No. 1 to the Credit Agreement by and between Lifecore Biomedical, LLC and
Wells Fargo Bank, N.A. dated August 9, 2010.
|
|
|
16.1
|
Letter
from McGladrey & Pullen, LLP, dated June 23, 2008 regarding change in
independent registered public accounting firm, incorporated herein by
reference to Exhibit 16.2 to the Registrant’s Current Report on Form 8-K/A
dated June 25, 2008.
|
|
Exhibit
Number:
|
Exhibit Title
|
||
|
21.1
|
Subsidiaries
of the Registrant
|
State
of Incorporation
|
|
|
Landec
Ag, LLC
|
Delaware
|
||
|
Apio,
Inc.
|
Delaware
|
||
|
Lifecore
Biomedical, Inc.
|
Delaware
|
||
|
23.1+
|
Consent
of Independent Registered Public Accounting Firm
|
||
|
24.1+
|
Power
of Attorney – See page 89
|
||
|
31.1+
|
CEO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
||
|
31.2+
|
CFO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
||
|
32.1+
|
CEO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
||
|
32.2+
|
CFO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
||
|
*
|
Represents
a management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 15(b) of Form
10-K.
|
|
+
|
Filed
herewith.
|
|
#
|
Confidential
treatment requested as to certain portions. The term
“confidential treatment” and the mark “*” as used throughout the indicated
Exhibit means that material has been
omitted.
|
SIGNATURES
Pursuant
to the requirements of section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Menlo
Park, State of California, on August 12, 2010.
| LANDEC CORPORATION | |
|
By:
|
/s/ Gregory S. Skinner
|
|
Gregory
S. Skinner
|
|
|
Vice President of Finance and Administration
|
|
|
and Chief Financial
Officer
|
|
POWER
OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS,
that each person whose signature appears below hereby constitutes and appoints
Gary T. Steele and Gregory S. Skinner, and each of them, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Report on Form 10-K.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report on Form
10-K has been signed by the following persons in the capacities and on the dates
indicated:
|
Signature
|
Title
|
Date
|
||
|
/s/ Gary T. Steele
|
||||
|
Gary
T. Steele
|
President
and Chief Executive Officer and Director
(Principal
Executive Officer)
|
August
12, 2010
|
||
|
/s/ Gregory S. Skinner
|
||||
|
Gregory
S. Skinner
|
Vice
President of Finance and Administration and
Chief
Financial Officer (Principal Financial and
Accounting
Officer)
|
August
12, 2010
|
||
|
/s/ Nicholas Tompkins
|
||||
|
Nicholas
Tompkins
|
Chairman
of the Board of Apio, Inc. and Director
|
August
12, 2010
|
||
|
/s/ Robert Tobin
|
||||
|
Robert
Tobin
|
Director
|
August
12, 2010
|
||
|
/s/ Duke K. Bristow, Ph.D
|
||||
|
Duke
K. Bristow, Ph.D
|
Director
|
August
12, 2010
|
||
|
/s/ Frederick Frank
|
||||
|
Frederick
Frank
|
Director
|
August
12, 2010
|
||
|
/s/ Stephen E. Halprin
|
||||
|
Stephen
E. Halprin
|
Director
|
August
12, 2010
|
||
|
/s/ Richard S. Schneider,
Ph.D
|
||||
|
Richard
S. Schneider, Ph.D
|
Director
|
August
12, 2010
|
||
|
/s/ Steven Goldby
|
||||
|
Steven Goldby
|
Director
|
August
12, 2010
|
||
|
/s/ Richard Dean Hollis
|
||||
|
Richard
Dean Hollis
|
Director
|
August
12,
2010
|
EXHIBIT
INDEX
|
Exhibit
Number
|
Exhibit Title
|
|
|
10.30
|
Amendment
No. 1 to the Credit Agreement by and between Lifecore Biomedical, LLC and
Wells Fargo Bank, N.A. dated August 9, 2010.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
24.1
|
Power
of Attorney. See page 89.
|
|
|
31.1
|
CEO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
CFO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
CEO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
CFO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
|
Execution
Copy
First
Amendment To Credit Agreement
This
First Amendment To Credit Agreement (this “Amendment”) is entered into
as of August 9, 2010, by and between Lifecore Biomedical, LLC, a Minnesota
limited liability company (“Borrower”), and Wells Fargo
Bank, National Association (“Bank”).
Recitals
Whereas,
Borrower is currently indebted to Bank pursuant to the terms and conditions of
that certain Credit Agreement, dated and made as of April 30, 2010, by and
between Borrower and Bank (as amended, restated, modified and/or supplemented
from time to time, the “Credit
Agreement”).
Whereas,
Bank and Borrower have agreed to certain changes in the terms and conditions set
forth in the Credit Agreement and have agreed to amend the Credit Agreement to
reflect such changes.
Now,
Therefore, for valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree that the Credit Agreement shall be
amended as follows:
1.
Definitions. Each
capitalized term used and not otherwise defined herein has the meaning ascribed
thereto in the Credit Agreement.
2.
Amendments
to Credit Agreement. Subject to Section 5 hereof, the
Credit Agreement is hereby as follows:
(a)
Section 1.1 of the Credit Agreement is hereby amended by amending and
restating in their entirety each of the following definitions as
follows:
“Net Income” means fiscal
year-to-date after-tax net income from continuing operations of the Companies,
as determined in accordance with GAAP; provided, however, that any amounts
deducted in arriving at Borrower’s Net Income shall be determined exclusive of
(i) non-recurring fees and expenses incurred in connection with the Acquisition
in an aggregate amount not to exceed $2,537,000, (ii) expenses incurred during
the month ended April 30, 2010 relating to a one-time reserve for Accounts and
Inventory in an amount not to exceed $600,000 in the aggregate in connection
with Borrower’s contract with a customer previously disclosed to the Bank, (iii)
expenses incurred during the two months ended April 30, 2010 relating to a
one-time reserve for Inventory in an amount not to exceed $200,000 in the
aggregate, and (iv) expenses related to the one-time adjustment to Inventory in
an aggregate amount not to exceed $1,500,000 as required by GAAP in connection
with the Acquisition and the Warburg Acquisition.
“Quick Ratio” means, as of
the last day of each fiscal quarter of Borrower, the ratio of (i) the
aggregate of unrestricted cash, unrestricted marketable securities and
receivables convertible into cash of the Companies as of the last day of such
fiscal quarter to (b) the aggregate of total current liabilities and,
without duplication, Contingent Purchase Price Payments payable of the Companies
as of the last day of the same fiscal quarter.
(b) Section 1.1
of the Credit Agreement is hereby amended by adding each of the following
definitions thereto in such as manner as to retain proper alphabetic order of
the terms defined therein:
“Code” means the IRC, as
defined herein.
“Warburg Acquisition” means
the acquisition, prior to the Closing Date, by Seller of all the issuing and
outstanding equity interests of Holdings.
(c) Section 6.3(a)(i)
of the Credit Agreement is hereby amended by amending and restating in its
entirety the last paragraph thereof as follows:
For
purposes of this Section 6.3(a)(i) Net Income After Taxes shall be determined
for all fiscal periods ending on or before April 30, 2010, as reported in
Borrower’s audited financial statements for such periods (i.e., since for such
periods Borrower was a “disregarded entity” for tax purposes, as if Borrower was
a C-Corporation under the IRC), and for all fiscal periods ending after
April 30, 2010, to the extent that Borrower is treated as a pass through
entity for tax purposes, by calculating Net Income before taxes for the four
fiscal quarters then ended minus dividends and other distributions paid during
the same four fiscal quarters to each of Holdings and any other member of the
Borrower in connection with its federal income tax liability (and, if
applicable, state income tax liability) attributable to its share of Borrower’s
taxable income (determined in accordance with the IRC) (including estimated tax
payments determined in good faith by Borrower which are required to be made by
its members with respect thereto).
(d) Section 6.3(a)(iii)
of the Credit Agreement is hereby amended and restated in its entirety as
follows:
(iii)Fixed Charge Coverage
Ratio. As of the last day of each fiscal quarter of Borrower
ending during the relevant period set forth below (commencing with the fiscal
quarter ending November 30, 2010), Borrower, together with the other Companies,
will maintain a Fixed Charge Coverage Ratio of not less than the corresponding
ratio set forth opposite such period:
- 2
- -
|
Period(s) Ending
|
Fixed Charge Coverage
Ratio shall not be less
than:
|
|
Fiscal
quarters ending
November
30, 2010 through
and
including May 31, 2011
|
1.20
to 1.0
|
|
August 31,
2011
|
1.30
to 1.0
|
|
November
30, 2011
|
1.40
to 1.0
|
|
February 29,
2012 and each
fiscal
quarter ending
thereafter
|
1.50
to
1.0
|
(e) “Exhibit
B-1” to the Credit Agreement is hereby deleted in its entirety and
Exhibit A attached hereto is substituted therefor and shall be deemed for
all purposes the “Exhibit B-1” referred to in the Credit Agreement.
(f) “Exhibit
B-2” to the Credit Agreement is hereby deleted in its entirety and
Exhibit B attached hereto is substituted therefor and shall be deemed for
all purposes the “Exhibit B-2” referred to in the Credit Agreement.
(g) All
references in the Credit Agreement and other Loan Documents to the term “Note”
shall be deemed to mean and refer to the Note as supplemented by the Addendum to
Promissory Note (Swap Agreement Adjustments) executed in connection with this
amendment, a form of which is attached hereto as Exhibit C and incorporated
herein by this reference.
3.
Survival of Terms;
Interpretation. Except as specifically provided herein, all
terms and conditions of the Credit Agreement remain in full force and effect,
without waiver or modification. This Amendment and the Credit
Agreement shall be read together, as one document. The Recitals
hereto, including the terms defined therein, are incorporated herein by this
reference and acknowledged by Borrower to be true, correct and
accurate.
4.
Representations, Warranties
and Covenants. Borrower remakes all representations and
warranties contained in the Credit Agreement (except to the extent that such
representations and warranties relate solely to an earlier date, in which case
Borrower confirms that such representations and warranties were correct as of
the date made) and reaffirm all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Default
or Event of Default, in each case, as defined in the Credit
Agreement.
5.
Effective
Date. This Amendment will become effective as of the date
first set forth above (the “Effective Date”), provided
that all of the following conditions precedent have been satisfied on or before
August 13, 2010:
- 3
- -
(a) Bank
shall have received a duly executed original (or, if elected by Bank, an
executed facsimile copy, to be followed promptly by delivery of an executed
original) of each of the following, duly executed by each party thereto and in
form and substance satisfactory to Bank:
(i)
this Amendment;
(ii) the
General Consent and Reaffirmation attached hereto;
(iii)
the Addendum to Promissory Note attached hereto as Exhibit C;
and
(iv)
Such other documents as Bank may require under any other
Section of this Amendment.
(b) All
of the representations and warranties contained herein (or incorporated herein
by reference) are true and correct as of the Effective Date.
(c) All
legal matters incidental hereto shall be reasonably satisfactory to Bank’s
counsel.
6.
Counterparts. This
Amendment may be executed in two or more counterparts, each of which shall be
deemed to be an original but all of which together shall constitute one and the
same instrument. Delivery of an executed counterpart of a signature
page to this Amendment by telefacsimile shall be as effective as delivery of a
manually executed counterpart of this Amendment.
7.
Severability. If
any term or provision of this Amendment shall be deemed prohibited by or invalid
under any applicable law, such provision shall be invalidated without affecting
the remaining provisions of this Amendment or the Credit Agreement.
8.
Governing
Law. This Amendment shall be governed by and construed in
accordance with the internal laws of the State of California.
9.
Non-Impairment. Except
as expressly provided herein, nothing in this Agreement shall alter or affect
any provision, condition, or covenant contained in the Loan Documents or affect
or impair any rights, powers, or remedies of Bank, it being the intent of the
parties hereto that the provisions of the Loan Documents shall continue in full
force and effect except as expressly modified hereby.
[Signatures
on Next Page]
- 4
- -
In Witness Whereof, the parties hereto
have caused this Amendment to be executed as of the day and year first written
above.
|
Lifecore
Biomedical, LLC,
a
Minnesota limited liability company
|
Wells
Fargo Bank,
National
Association
|
||||
|
By:
|
/s/
Dennis J. Allingham
|
By:
|
/s/
Tim Palmer
|
||
|
Dennis
J. Allingham
|
Name:
|
Tim
Palmer
|
|||
|
President
and Chief Executive Officer
|
Title:
|
Vice President | |||
Signature
Page to First Amendment To Credit Agreement
General
Consent and Reaffirmation
Each of
the undersigned guarantors of, and/or third party pledgors having pledged
property securing, all indebtedness of Lifecore Biomedical, LLC
hereby: (i) consents to the foregoing First Amendment to Credit
Agreement dated as of August 9, 2010; (ii) reaffirms its obligations
under its respective guaranty, security agreement and/or pledge agreement;
(iii) reaffirms its waivers of each and every one of the defenses to such
obligations as set forth in its respective guaranty, security agreement and/or
pledge agreement; and (iv) reaffirms that its obligations under its
respective guaranty, security agreement and/or pledge agreement are separate and
distinct from the obligations of any other party under such First Amendment to
Credit Agreement, the Credit Agreement referred to therein and the other Loan
Documents (as defined in the Credit Agreement).
Agreed
and Acknowledged as of August 9, 2010:
|
Lifecore
Biomedical, Inc.
|
Apio,
Inc.
|
||||
|
By:
|
/s/ Dennis J. Allingham |
By:
|
/s/
Gary T. Steele
|
||
|
Dennis
J. Allingham
|
Gary
T. Steele
|
||||
|
President/Secretary
|
Secretary
|
||||
|
Cal
Ex Trading Company
|
Landec
AG, LLC
|
||||
|
By:
|
/s/
Gary T. Steele
|
By:
|
/s/
Gary T. Steele
|
||
|
Gary
T. Steele
|
Gary
T. Steele
|
||||
|
Secretary
|
President/Chief
Executive Officer
|
||||
|
Landec
Corporation
|
|
||||
|
By:
|
/s/
Gary T. Steele
|
||||
|
Gary
T. Steele
|
|||||
|
President/Chief
Executive Officer/
Chairman
of the Board
|
|||||
Signature
Page to General Consent and Reaffirmation
|
Exhibit
A
|
|
to
First Amendment to Credit Agreement
|
Exhibit
B-1
Form
of Compliance Certificate
(Lifecore
Biomedical, LLC)
|
To:
|
Caroline
Peyton
|
Wells Fargo Bank, National
Association
|
Date:
|
__________________,
201__
|
|
Subject:
|
Lifecore
Biomedical, LLC
|
Financial
Statements
In
accordance with our Credit Agreement, dated as of April 30, 2010 (the “Credit Agreement”), attached
are the financial statements of Lifecore Biomedical (the “Borrower”) as of and for
________________, 20___ (the “Reporting Date”) and the
year-to-date period then ended (the “Current
Financials”). All terms used in this certificate have the
meanings given in the Credit Agreement.
I certify
that the Current Financials have been prepared in accordance with GAAP, subject
to year-end audit adjustments, and fairly present the Companies’ financial
condition as of the date thereof.
Events of
Default. (Check one):
|
|
o
|
The
undersigned does not have knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement except as previously reported
in writing to Bank.
|
|
|
o
|
The
undersigned has knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement not previously reported in writing to
Bank and attached hereto is a statement of the facts with respect to
thereto. Borrower acknowledges that Bank may impose the Default
Rate at any time during the resulting Default
Period.
|
Financial
Covenants. I further hereby certify as follows:
1.
Minimum Net Income After
Taxes. Pursuant to
Section 6.3(a)(i)(A) of the Credit Agreement, as of the Reporting Date, the
Companies’ Net Income After Taxes, measured on a trailing four quarter basis
(other than the four quarters ending August 31, 2010), was $___________ which
o
satisfies o does
not satisfy the requirement that such amount be not less than $1.00 for the four
fiscal quarters then ended.
- A-1
- -
2.
Minimum Net Income After
Taxes. Pursuant to
Section 6.3(a)(i)(B) of the Credit Agreement, as of the Reporting Date, the
Companies’ Net Income After Taxes, measured for the fiscal quarter ended August
31, 2010, was $___________ which o
satisfies o does
not satisfy the requirement that such amount be not less than $500,000 for the
fiscal quarter then ended.
3.
Minimum Net Income After
Taxes. Pursuant to Section 6.3(a)(i)(C) of the Credit
Agreement, as of the Reporting Date, the Companies’ o did
not have o had
Net Income After Taxes less than or equal to $1.00 for two (2) consecutive
fiscal quarters during the four fiscal quarters then ended.
4.
Minimum Quick
Ratio. Pursuant to
Section 6.3(a)(ii) of the Credit Agreement, as of the Reporting Date, the
Companies’ Quick Ratio was _____ : 1.0 which o
satisfies o does
not satisfy the requirement that ratio must not be less than (i) 1.1 to 1.0 for
each fiscal quarter ending from the Closing Date through and including the
fiscal quarter ending May 31, 2011 and (ii) 1.25 to 1.0 for each fiscal
quarter ending thereafter.
5.Fixed Charge Coverage
Ratio. Pursuant to
Section 6.3(a)(iii) of the Credit Agreement, the Companies’ Fixed Charge
Coverage Ratio for the four fiscal quarters ending on the Reporting Date, was
____ : 1.0, which o
satisfies o does
not satisfy the requirement that such ratio be not less than _____ : 1.0 during
such period as set forth in table below:
|
Period(s) Ending
|
Fixed Charge Coverage
Ratio shall not be less
than:
|
|
Fiscal
quarters ending
November
30, 2010 through
and
including May 31, 2011
|
1.20
to 1.0
|
|
August 31,
2011
|
1.30
to 1.0
|
|
November
30, 2011
|
1.40
to 1.0
|
|
February 29,
2012 and each
fiscal
quarter ending
thereafter
|
1.50
to
1.0
|
6.
Capital
Expenditures. Pursuant to
Section 6.3(a)(iv) of the Credit Agreement, the Companies have expended
$__________________ in the aggregate during the last full fiscal year, ending
May 31, 201___, for Capital Expenditures, which o
satisfies o does
not satisfy the requirement that such expenditures not exceed $3,000,000 in the
aggregate during such year.
- A-2
- -
Attached
hereto are all relevant facts in reasonable detail to evidence, and the
computations of the financial covenants referred to above. These
computations were made in accordance with GAAP (except for the computation of
Net Income to the extent Net Income is determined without giving effect to the
amounts deducted arriving in such Net Income as set forth in the proviso of such
definition).
|
Lifecore
Biomedical, LLC
|
|||
|
By
|
|||
|
Its
|
Chief
Financial Officer
|
||
- A-3
- -
|
Exhibit
B
|
|
to
First Amendment to Credit Agreement
|
Exhibit
B-2
Form
of Compliance Certificate
(Landec
Corporation)
|
To:
|
Caroline
Peyton
|
Wells Fargo Bank, National
Association
|
Date:
|
__________________,
201__
|
|
Subject:
|
Lifecore
Biomedical, LLC
|
Financial
Statements
In
accordance with that certain Credit Agreement, dated as of April 30, 2010
(the “Credit
Agreement”) between Lifecore Biomedical, LLC (the “Borrower” and Wells Fargo
Bank, National Association (“Bank”), attached are the
consolidated financial statements of Landec Corporation (the “Parent”) as of and for
________________, 20___ (the “Reporting Date”) and the
year-to-date period then ended (the “Current
Financials”). All terms used in this certificate have the
meanings given in the Credit Agreement.
I certify
that the Current Financials have been prepared in accordance with GAAP, subject
to year-end audit adjustments, and fairly present Parent’s consolidated
financial condition as of the date thereof.
Financial Covenants.
I further hereby certify as follows:
1.
Minimum Net Income After
Taxes. Pursuant to
Section 6.3(b)(i) of the Credit Agreement, as of the Reporting Date, the
Net Income after taxes of Parent and its Subsidiaries, measured on a trailing
four quarter basis, was $___________ which o
satisfies o does
not satisfy the requirement that such amount be not less than $1.00 for the four
fiscal quarters then ended.
2.
Leverage
Ratio. Pursuant to Section 6.3(b)(ii) of the Credit
Agreement, as of the Reporting Date, the ratio of Funded Debt of Parent and its
Subsidiaries as of the Reporting Date to EBITDA of Parent and its Subsidiaries
for the four fiscal quarters of Parent and its Subsidiaries ending on the
Reporting Date, was ____ : 1.0, which o
satisfies o does
not satisfy the requirement that such ratio be not greater than 2.0 to
1.0.
- B-1
- -
Attached
hereto are all relevant facts in reasonable detail to evidence, and the
computations of the financial covenants referred to above. These computations
were made in accordance with GAAP.
|
Landec
Corporation
|
|||
|
By
|
|||
|
Its
|
Chief
Financial Officer
|
||
- B-2
- -
|
Exhibit
C
|
|
to
First Amendment to Credit Agreement
|
|
Form
of
|
|
Addendum
to Promissory Note (Swap Agreement
Adjustments)
|
Execution
Copy
ADDENDUM
TO PROMISSORY NOTE
(SWAP
AGREEMENT ADJUSTMENTS)
THIS ADDENDUM is attached to and made a
part of that certain promissory note executed by LIFECORE BIOMEDICAL, LLC
(“Borrower”) and payable to WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”), or
order, dated April 30, 2010, in the original principal amount of Twenty
Million Dollars ($20,000,000.00) (the “Note”).
The following provisions are hereby
incorporated into the Note to reflect the interest rate adjustments agreed to by
Bank and Borrower in connection with any interest rate swap agreement entered
into in connection with this Note:
SWAP
AGREEMENT PROVISIONS:
Notwithstanding
anything to the contrary set forth herein, at any time during which an interest
rate swap confirmation between Borrower and Bank (a “Swap Confirmation”) is in
effect with respect to all or a portion of the principal balance outstanding
under this Note, the following revisions to this Note shall be in effect with
respect to that portion of the principal balance outstanding under this Note
which is subject to the Swap Confirmation (the “Swap Portion”), but not with
respect to any portion of the principal balance outstanding under this Note
which is not subject to the Swap Confirmation:
|
(a)
|
With
respect to the Swap Portion, no Daily Three Month LIBOR Rate interest
option shall be available
hereunder.
|
|
(b)
|
With
respect to the Swap Portion, the definition of “Fixed Rate Term” shall be
amended and restated to read as
follows:
|
“Fixed Rate Term” means a period of one
(1) month during which the Swap Portion bears interest determined in relation to
LIBOR, with the understanding that (i) the initial Fixed Rate Term shall
commence on the later of (A) the effective date stated on the Swap Confirmation
and (B) the date this Note is initially disbursed and shall continue up to, but
shall not include, the first day of the next occurring calculation period
designated in the Swap Confirmation, (ii) there shall be successive Fixed Rate
Terms thereafter, each of which shall commence automatically, without notice to
or consent from Borrower, and run concurrently with the calculation period
designated in the Swap Confirmation and (iii) if, on the first day of the last
Fixed Rate Term applicable hereto the remaining term of this Note is less than
one (1) month, said Fixed Rate Term shall be in effect only until the scheduled
maturity date hereof, except that if the scheduled maturity date hereof is not a
Business Day, then such Fixed Rate Term shall be extended to the next succeeding
Business Day.
- C-1
- -
|
(c)
|
The
Swap Portion shall be in an amount equal to or greater than Two Hundred
Fifty Thousand Dollars
($250,000.00).
|
Borrower
understands and acknowledges that each Swap Confirmation constitutes an
independent agreement between Borrower and Bank and that nothing contained in
this Note shall be construed as amending or modifying any such Swap Confirmation
or be interpreted in any way as inferring or creating an obligation on the part
of Bank to amend or modify such Swap Confirmation, based on any action that may
be taken by Borrower in respect of this Note. Further, Borrower
acknowledges that Borrower is responsible for verifying the terms of any Swap
Confirmation into which it enters; understands the effect of a Swap Confirmation
having payment dates that do not concur exactly with the payment dates of this
Note; and agrees that any Swap Confirmation may still be considered in effect
with respect to any principal portion of this Note even if the payment dates
thereon do not concur exactly with the payment dates of this Note.
[Signatures
on Next Page]
- C-2
- -
IN WITNESS WHEREOF, this Addendum has
been executed as of August 9, 2010.
|
LIFECORE
BIOMEDICAL, LLC,
a
Minnesota limited liability company
|
||
|
By:
|
/s/ Dennis J. Allingham | |
|
Dennis
J. Allingham
|
||
|
President
and Chief Executive Officer
|
||
ACCEPTED
AND AGREED:
|
WELLS
FARGO BANK,
NATIONAL
ASSOCIATION
|
|||
|
By:
|
/s/ Tim Palmer | ||
|
Name:
|
Tim Palmer | ||
|
Title:
|
Vice President | ||
Signature
Page to Addendum To Promissory Note
(Swap
Agreement Adjustments)
- C-3
- -
Exhibit
23.1
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in the Registration Statement (Form
S-8 Nos. 333-109889, 333-89368, 333-62866, 333-06163, 333-29103, 333-80313,
333-52339, 333-129895, 333-163926) pertaining to the Non-Plan Stock Option, 1996
Stock Option Plan, New Executive Stock Option Plan, 1995 Employee Stock Purchase
Plan, 1995 Directors' Stock Option Plan, 1996 Stock Option Plan, 1996
Non-Executive Stock Option Plan, 1988 Incentive Stock Option Plan, 2005 Stock
Incentive Plan and 2009 Stock Incentive Plan of our reports dated August 12,
2010, with respect to the consolidated financial statements of Landec
Corporation and the effectiveness of internal control over financial reporting
of Landec Corporation, included in this Annual Report (Form 10-K) for the year
ended May 30, 2010.
|
/s/ ERNST
& YOUNG LLP
|
San
Fransciso, California
August,
12, 2010
Exhibit
31.1
CERTIFICATIONS
I, Gary
T. Steele, certify that:
1. I have
reviewed this annual report on Form 10-K of Landec Corporation;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
(c)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent function):
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
August 12, 2010
|
/s/ Gary T. Steele
|
|
Gary
T. Steele
|
|
President
and Chief Executive Officer
|
Exhibit
31.2
I,
Gregory S. Skinner, certify that:
1. I have
reviewed this annual report on Form 10-K of Landec Corporation;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
(c)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent function):
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
|
Date: August
12, 2010
|
/s/ Gregory S. Skinner
|
|
Gregory
S. Skinner
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Vice
President of Finance and Administration
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and
Chief Financial Officer
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Exhibit
32.1
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Landec Corporation (the “Company”) on Form
10-K for the period ending May 30, 2010 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Gary T. Steele, Chief
Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
Date: August
12, 2010
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/s/ Gary T.
Steele
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Gary
T. Steele
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Chief
Executive Officer and President
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(Principal
Executive Officer)
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*
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The
foregoing certification is being furnished solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section
1350, Chapter 63 of Title 18, United States Code) and is not being filed
as part of the Form 10-K or as a separate disclosure
document.
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Exhibit
32.2
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Landec Corporation (the “Company”) on Form
10-K for the period ending May 30, 2010 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Gregory S. Skinner,
Vice President and Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
Date: August
12, 2010
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/s/ Gregory S. Skinner
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Gregory
S. Skinner
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|
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Vice
President and Chief Financial Officer
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|
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(Principal
Accounting Officer)
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|
|
*
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The
foregoing certification is being furnished solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section
1350, Chapter 63 of Title 18, United States Code) and is not being filed
as part of the Form 10-K or as a separate disclosure
document.
|