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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended October 27, 2002, or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 Haven Avenue
Menlo Park, California 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 306-1650
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No |X|
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $65,297,000 as of April 28, 2002, based upon the
closing sales price on the NASDAQ National Market reported for such date. The
aggregate market value of voting stock held by non-affiliates of the Registrant
was approximately $46,955,000 as of January 10, 2003, based upon the closing
sales price on the NASDAQ National Market reported for such date. Shares of
Common Stock and Convertible Preferred Stock held by each officer and director
and by each person who owns 10% or more of the outstanding Common Stock and
Convertible Preferred Stock have been excluded from such
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calculation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of January 10, 2003, there were 21,103,480 shares of Common Stock and
154,633 shares of Convertible Preferred Stock, convertible into ten shares of
Common Stock for each share of Preferred Stock, par value $0.001 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its
2003 Annual Meeting of Shareholders, which statement will be filed not later
than 120 days after the end of the fiscal year covered by this report, are
incorporated by reference in Part III hereof.
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LANDEC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Description Page
- ------- ----
Part I
1. Business.......................................................................... 4
2. Properties........................................................................ 18
3. Legal Proceedings................................................................. 18
4. Submission of Matters to a Vote of Security Holders............................... 18
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters............. 19
6. Selected Financial Data........................................................... 20
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 22
7A. Quantitative and Qualitative Disclosures about Market Risk........................ 37
8. Financial Statements and Supplementary Data....................................... 37
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 37
Part III
10. Directors and Executive Officers of the Registrant................................ 38
11. Executive Compensation............................................................ 38
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters............................................................... 38
13. Certain Relationships and Related Transactions.................................... 38
14. Controls and Procedures........................................................... 38
Part IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 39
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PART I
Item 1. Business
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Words such as "projected," "expects," "believes,"
"intends" and "assumes" and similar expressions are used to identify
forward-looking statements. These statements are made based upon current
expectations and projections about our business and the semiconductor industry
and assumptions made by our management are not guarantees of future performance,
nor do we assume any obligation to update such forward-looking statements after
the date this report is filed. Our actual results could differ materially from
those projected in the forward-looking statements for many reasons, including
the risk factors listed in Part II, Item 7 "Management's Discussion & Analysis
of Financial Conditions and Results of Operations -- Additional Factors That May
Affect Future Results" and the risk factors contained in Item 1 below.
General
Landec Corporation and its subsidiaries ("Landec" or the "Company")
design, develop, manufacture and sell temperature-activated and other specialty
polymer products for a variety of food products, agricultural products, and
licensed partner applications. This proprietary polymer technology is the
foundation, and a key differentiating advantage, upon which the Company has
built its business.
The principal products and services offered by the Company in its two core
businesses - Food Products Technology and Agricultural Seed Technology - and in
the Technology Licensing/Research and Development business are described below.
Financial information concerning the industry segments for which the Company
reported its operations during fiscal years 2000 through 2002 is summarized in
Note 13 to the Consolidated Financial Statements.
Landec's Food Products Technology business, operated through its
subsidiary Apio Inc., combines Landec's proprietary food packaging technology
with the capabilities of a large national food supplier and value-added produce
processor. This combination was consummated in December 1999 when the Company
acquired Apio, Inc. and certain related entities (collectively "Apio").
Landec's Agricultural Seed Technology business, operated through its
subsidiary Landec Ag, Inc. ("Landec Ag"), combines Landec's proprietary
Intellicoat(R) seed coating technology with its unique eDC(TM) --e-commerce,
direct marketing and consultative selling - capabilities which it obtained with
its acquisition of Fielder's Choice Direct ("Fielder's Choice"), a direct
marketer of hybrid seed corn, in September 1997.
In addition to its two core businesses, the Company also operates a
Technology Licensing/Research and Development business that licenses products
outside of Landec's core businesses to industry leaders such as Alcon, Inc.
("Alcon") and UCB Chemicals, a subsidiary of UCB S.A. of Belgium ("UCB"). The
Company also engages in research and development activities with companies. For
segment disclosure purposes, the Technology Licensing/Research and Development
business is included in Corporate and Other (in Note 13 to the Consolidated
Financial Statements).
To remain focused on its core businesses, in October 2002 the Company sold
Dock Resins Corporation ("Dock Resins"), its specialty chemical subsidiary. The
Company made the decision to sell Dock Resins in order to strengthen its balance
sheet by reducing debt and other liabilities. As a result of the sale of Dock
Resins, the financial results of Dock Resins have been reclassified to
discontinued operations for all years presented. Unless otherwise specified, the
information and descriptions provided in this report relate only to the
continuing operations of the Company.
The Company's core polymer products are based on its patented proprietary
Intelimer(R) polymers, which differ from other polymers in that they can be
customized to abruptly change their physical characteristics when heated or
cooled through a pre-set temperature switch. For instance, Intelimer polymers
can change within the range of one or two degrees Celsius from a non-adhesive
state to a highly tacky, adhesive state; from an impermeable state to a highly
permeable state; or from a solid state to a viscous liquid state. These abrupt
changes are repeatedly reversible and can be tailored by Landec to occur at
specific temperatures, thereby offering substantial competitive advantages in
the Company's target markets.
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The Company was incorporated in California on October 31, 1986. The
Company completed its initial public offering in 1996 and is listed on the
Nasdaq National Market under the symbol "LNDC."
Technology Overview
Polymers are important and versatile materials found in many of the
products of modern life. Certain polymers, such as cellulose and natural rubber,
occur in nature. Man-made polymers include nylon fibers used in carpeting and
clothing, coatings used in paints and finishes, plastics such as polyethylene,
and elastomers used in automobile tires and latex gloves. Historically,
synthetic polymers have been designed and developed primarily for improved
mechanical and thermal properties, such as strength and the ability to withstand
high temperatures. Improvements in these and other properties and the ease of
manufacturing of synthetic polymers have allowed these materials to replace
wood, metal and natural fibers in many applications over the last 40 years. More
recently, scientists have focused their efforts on identifying and developing
sophisticated polymers with novel properties for a variety of commercial
applications.
Landec's Intelimer polymers are a proprietary class of synthetic polymeric
materials that respond to temperature changes in a controllable, predictable
way. Typically, polymers gradually change in adhesion, permeability and
viscosity over broad temperature ranges. Landec's Intelimer materials, in
contrast, can be designed to exhibit abrupt changes in permeability, adhesion
and/or viscosity over temperature ranges as narrow as 1(Degree)C to 2(Degree)C.
These changes can be designed to occur at relatively low temperatures
(0(Degree)C to 100(Degree)C) that are relatively easy to maintain in industrial
and commercial environments. Figure 1 illustrates the effect of temperature on
Intelimer materials as compared to typical polymers.
[GRAPHIC OMITTED]
Landec's proprietary polymer technology is based on the structure and
phase behavior of Intelimer materials. The abrupt thermal transitions of
specific Intelimer materials are achieved through the controlled use of
hydrocarbon side chains that are attached to a polymer backbone. Below a
pre-determined switch temperature, the polymer's side chains align through weak
hydrophobic interactions resulting in a crystalline structure. When this side
chain crystallizable polymer is heated to, or above, this switch temperature,
these interactions are disrupted and the polymer is transformed into an
amorphous, viscous state. Because this transformation involves a physical and
not a chemical change, this process is repeatedly reversible. Landec can set the
polymer switch temperature anywhere between 0(Degree)C to 100(Degree)C by
varying the length of the side chains. The reversible transitions between
crystalline and amorphous states are illustrated in Figure 2 on the next page.
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[GRAPHIC OMITTED]
Side chain crystallizable polymers were first discovered by academic
researchers in the mid-1950's. These polymers were initially considered to be
merely of scientific curiosity from a polymer physics perspective, and, to the
Company's knowledge, no significant commercial applications were pursued. In the
mid-1980's, Dr. Ray Stewart, the Company's founder, became interested in the
idea of using the temperature-activated permeability properties of these
polymers to deliver various materials such as drugs and pesticides. After
forming Landec in 1986, Dr. Stewart subsequently discovered broader utility for
these polymers. After several years of basic research, commercial development
efforts began in the early 1990's, resulting in initial products in mid-1994.
Landec's Intelimer materials are generally synthesized from long
side-chain acrylic monomers that are derived primarily from natural materials
such as soybean and palm oils, that are highly purified and designed to be
manufactured economically through known synthesis processes. These
acrylic-monomer raw materials are then polymerized by Landec leading to many
different side-chain crystallizable polymers whose properties vary depending
upon the initial materials and the synthesis process. Intelimer materials can be
made into many different forms, including films, coatings, microcapsules and
discrete forms.
Description of Core Business
The Company participates in two core business segments- Food Products
Technology and Agricultural Seed Technology. In addition to these two core
segments, Landec will license technology and conduct ongoing research and
development through its Technology Licensing/Research and Development Business.
------------------
Landec Corporation
------------------
-----------------------
Intelimer(R) Technology
-----------------------
------------- ----------------- ---------------------
Food Products Agricultural Seed Technology Licensing/
Technology Technology R&D
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o Intellipac(TM) Packaging o Intellicoat(R) Seed Coatings o R&D Collaborations
o Apio, Inc. o Fielder's Choice Direct(R) Products o Licensing Partners
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Food Products Technology Business
The Company began marketing in early fiscal year 1996 its proprietary
Intelimer-based breathable membranes for use in the fresh-cut produce packaging
market, one of the fastest growing segments in the produce industry. Landec's
proprietary Intellipac packaging technology when combined with produce that is
processed by washing and in some cases cut and mixed, results in packaged
produce with increased shelf life, reduced shrink (waste) and without the need
for ice during the distribution cycle. This is referred to as "value-added"
products. In December 1999, the Company acquired Apio, its then largest customer
in the Food Products Technology business and one of the nation's leading
marketers and packers of produce and specialty packaged fresh-cut vegetables.
Apio provides year-round access to produce, utilizes state-of-the-art fresh-cut
produce processing technology and distributes to the top U.S. retail grocery
chains and major club stores and has recently begun expanding its product
offerings to the foodservice industry. The Company's proprietary Intelimer-based
packaging business has been combined with Apio into a wholly owned subsidiary
that retains the Apio, Inc. name. This vertical integration within the Food
Products Technology business gives Landec direct access to the large and growing
fresh-cut and whole produce market.
The Technology and Market Opportunity: Intellipac Breathable Membranes
Certain types of fresh-cut and whole produce can spoil or discolor rapidly
when packaged in conventional packaging materials and are therefore limited in
their ability to be distributed broadly to markets. The Company's Intellipac
breathable membranes extend the shelf life and quality of fresh-cut and whole
produce.
Fresh-cut produce is pre-washed, cut and packaged in a form that is ready
to use by the consumer and is thus typically sold at premium price levels
compared to unpackaged produce. According to the International Fresh-Cut Produce
Association ("IFPA"), in 2001, the total U.S. fresh produce market was estimated
to be between $100 to $120 billion. Of this, U.S. retail sales of fresh-cut
produce were estimated to comprise 10% of the fresh produce market. The Company
believes that the growth of this market has been driven by consumer demand and
the willingness to pay for convenience, freshness, uniform quality, safety and
nutritious produce delivered to the point of sale. According to the IFPA, the
fresh-cut produce market is one of the highest growth areas in retail grocery
stores. And according to the Produce Marketing Association the fresh-cut produce
category is growing at double digit rates while total produce is only growing at
2% to 3% per year.
Although fresh-cut produce companies have had success in the salad market,
the industry has been slow to diversify into other fresh-cut vegetables or
fruits due primarily to limitations in film and plastic tray materials used to
package fresh-cut produce. After harvesting, vegetables and fruits continue to
respire, consuming oxygen and releasing carbon dioxide. Too much or too little
oxygen can result in premature spoilage and decay and, in some cases, promote
the growth of microorganisms that jeopardize inherent food safety. Conventional
packaging films used today, such as polyethylene and polypropylene, can be made
with modest permeability to oxygen and carbon dioxide, but often do not provide
the optimal atmosphere for the produce packaged. Shortcomings of conventional
packaging materials have not significantly hindered the growth in the fresh-cut
salad market because lettuce, unlike many vegetables and fruits, has low
respiration requirements.
The respiration rate of produce varies from vegetable-to-vegetable and
from fruit-to-fruit. The challenge facing the industry is to develop packaging
for the high respiring, high value and shelf life sensitive vegetable and fruit
markets. The Company believes that today's conventional packaging films face
numerous challenges in adapting to meet the diversification of pre-cut
vegetables and fruits evolving in the industry without compromising shelf life
and produce quality. To mirror the growth experienced in the fresh-cut salad
market, the markets for high respiring vegetables and fruits such as broccoli,
cauliflower, green onions, asparagus, papayas, bananas and berries will require
a more versatile and sophisticated packaging solution for which the Company's
Intellipac breathable membranes were developed.
The respiration rate of produce also varies with temperature. As
temperature increases, produce generally respires at a higher rate, which speeds
up the aging process, resulting in shortened shelf life and increased potential
for decay, spoilage, loss of texture and dehydration. As produce is transported
from the processing plant through the refrigerated distribution chain to
foodservice locations, retail grocery stores and club stores, and finally to the
ultimate consumer, temperatures can fluctuate significantly. Therefore,
temperature control is a constant challenge in preserving the quality of
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fresh-cut and whole produce -- a challenge few current packaging films can
fulfill. The Company believes that its temperature-responsive Intellipac
technology is well suited to the challenges of the produce distribution process.
Using its Intelimer polymer technology, Landec has developed Intellipac
breathable membranes that it believes address many of the shortcomings of
conventional packaging materials. A membrane is applied over a small cutout
section or an aperture of a flexible film bag or plastic tray. This highly
permeable "window" acts as the mechanism to provide the majority of the gas
transmission requirements for the entire package. These membranes are designed
to provide three principal benefits:
o High Permeability. Landec's Intellipac breathable membranes are designed
to permit transmission of oxygen and carbon dioxide at 300 times the rate
of conventional packaging films. The Company believes that these higher
permeability levels will facilitate the packaging diversity required to
market many types of fresh-cut and whole produce.
o Ability to Adjust Oxygen and Carbon Dioxide Permeability. Conventional
packaging films diffuse gas transfer in and out of packages at an equal
rate or fixed ratio of 1.0. Intellipac packages can be tailored with
carbon dioxide to oxygen transfer ratios ranging from 1.0 to 12.0 and
selectively transmit oxygen and carbon dioxide at optimum rates to sustain
the quality and shelf life of packaged produce.
o Temperature Responsiveness. Landec has developed breathable membranes that
can be designed to increase or decrease in permeability in response to
environmental temperature changes. The Company has developed packaging
that responds to higher oxygen requirements at elevated temperatures but
is also reversible, and returns to its original state as temperatures
decline. The temperature responsiveness of these membranes allows ice to
be removed from the distribution system which results in numerous
benefits. These benefits include (1) a substantial decrease in freight
cost, (2) reduced risk of contaminated produce because ice can be a
carrier of micro organisms, (3) the elimination of expensive waxed cartons
that cannot be recycled, and (4) the potential decrease in work related
accidents due to melted ice.
Landec believes that growth of the overall produce market will be driven
by the increasing demand for the convenience of fresh-cut produce. This demand
will in turn require packaging that facilitates the quality and shelf life of
produce transported to fresh-cut distributors in bulk and pallet quantities. The
Company believes that in the future its Intellipac breathable membranes will be
useful for packaging a diverse variety of fresh-cut and whole produce products.
Potential opportunities for using Landec's technology outside of the produce
market exist in cut flowers and in other food products.
Landec is working with leaders in the foodservice, club store and retail
grocery markets. The Company believes it will have growth opportunities for the
next several years through new customers and products in the United States,
expansion of its existing customer relationships, and through export and
shipments of specialty packaged produce.
Landec manufactures its Intellipac breathable membrane packaging both
internally and through selected qualified contract manufacturers and markets and
sells Intellipac breathable membrane packaging directly to food distributors.
The Business: Apio, Inc.
In December 1999, Landec completed the acquisition of Apio and certain
related entities. Landec paid $21.0 million in cash and Landec Common Stock,
before expenses, at close, $1.1 million in January 2001, $1.2 million in the
first quarter of fiscal year 2002 and $579,000 in March 2002, with another $1.2
million to be paid in the first quarter of fiscal year 2003. An additional $2.5
million in future payments is scheduled to be paid in fiscal years 2004 and
2005. In addition, $4.4 million, which includes $279,000 of accrued interest, is
due in periodic scheduled payments through February 2004. Apio had revenues of
approximately $161 million in fiscal year 2002, $174 million in fiscal year 2001
and $179 million in the eleven-month period ended October 29, 2000.
Based in Guadalupe, California, Apio, when acquired in December 1999,
consisted of two major businesses - first, the "fee-for-service" selling and
marketing of whole produce and second, the specialty packaged fresh-cut and
whole value-added processed products that are washed and packaged in our
Intellipac packaging. The "fee-for-service" business historically included field
harvesting and packing, cooling and marketing of vegetables and fruits on a
contract
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basis for growers in California's Santa Maria, San Joaquin and Imperial Valleys
as well as in Arizona and Mexico. Apio currently has approximately 12,600 acres
under contract, consisting of approximately 17 percent of the farmable land in
the Santa Maria Valley. The fresh-cut value-added processing products business,
developed within the last seven years, markets a variety of fresh-cut and whole
vegetables to the top retail grocery chains representing over 8,700 retail and
club stores. During the fiscal year ended October 27, 2002, Apio shipped more
than 19 million cartons of produce to some 700 customers including leading
supermarket retailers, wholesalers, foodservice suppliers and club stores
throughout the United States and internationally, primarily in Asia.
During the third quarter of fiscal year 2001, the Company announced that
Apio was discontinuing its field harvesting and packing operations in order to
focus on its specialty packaging technology products, and the marketing and
sales of whole produce products. Exiting the labor and equipment-intensive field
harvesting and packing portion of the "fee-for-service" business and focusing on
selling and marketing of whole produce resulted in gross margins increasing in
the "fee-for-service" business from 16% in fiscal year 2001 to 24% in fiscal
year 2002. As a result of the transition of Apio's "fee-for-service" business,
service revenues decreased to $26.8 million in fiscal year 2002 as compared to
$48.4 million in fiscal year 2001.
In September 2000, the Company discontinued its processing of fruit at its
Reedley facility. In June 2002, the Company sold the fruit processing facility
for $2.2 million in cash and recorded a gain of $436,000 on the sale. A portion
of the fruit processing equipment in the facility and rights to the Company's
Great Whites(TM) trademark were sold in December 2002 to the purchaser of the
facility, for $707,000 resulting in a net gain of $39,000. The assets sold in
December 2002 will be paid for in equal annual installments over the next seven
years. In addition, the Company entered into a supply agreement with the
purchaser to supply fruit to the Company's export business for the next three
years with an option for year four.
There are five major distinguishing characteristics of Apio that provide
competitive advantages in the Food Products Technology market:
o Full Service Supplier: Apio has structured its business as a full service
marketer and seller of vegetables, fruits, and fresh-cut and whole
value-added produce. It is focused on developing its Eat Smart(R) brand
name for all of its fresh-cut and whole value-added products. As retail
grocery and club store chains consolidate, Apio is well positioned as a
single source of a broad range of products.
o Reduced Farming Risks: Apio reduces its farming risk by not taking
ownership of farmland, and instead, contracts with growers for produce and
charges for services that include cooling, shipping and marketing. The
year-round sourcing of produce is a key component to both the traditional
produce business as well as the fresh-cut and whole value-added processing
business.
o Lower Cost Structure: Apio has strategically invested in the rapidly
growing fresh-cut and whole value-added business. Apio's 49,000 square
foot value-added processing plant is automated with state-of-the-art
vegetable processing equipment. Virtually all of Apio's value-added
products utilize Landec's proprietary Intellipac membrane technology. Our
strategy is to operate one large central processing facility in one of
California's largest, lowest cost growing regions (Santa Maria Valley) and
use packaging technology to allow for the nationwide delivery of fresh
produce products.
o Export Capability: Apio is uniquely positioned to benefit from the growth
in export sales to Asia and Europe over the next decade with its export
business, CalEx. Through CalEx, Apio is currently one of the largest U.S.
exporters of broccoli to Asia and has recently launched its iceless
products to Asia using Intellipac packaging technology.
o Expanded Product Line Using Technology: Apio, through the use of Landec's
Intellipac membrane technology, is in the early stages of introducing its
technology in the whole produce business. Its introduction of iceless
packaging for broccoli crowns in November 2000 was the beginning of a
conversion from the traditional packing and shipping of whole produce,
which relied heavily on ice, to iceless products utilizing the Intellipac
technology. New iceless packaging is available for various broccoli
products and green onions.
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For the past seven years, the Company has marketed its Eat Smart fresh-cut
vegetables, party trays and iceless products using Intellipac specialty
packaging and has now expanded its technology to include packaging for bananas.
The Company has been conducting laboratory, shipping, ripening room and retail
grocery store trials on its own and with select banana companies. In addition,
the Company is in the process of qualifying banana sourcing in the several
primary banana growing countries in Central and South America. Bananas are a $4
to $4.5 billion annual worldwide market for distributors, which in turn, is a $9
to $10 billion annual worldwide market for retailers. Bananas are the nation's
leading produce item, contributing approximately nine to ten percent of produce
department sales in the United States.
Trials have shown that Intellipac breathable membrane packaging can
significantly extend the shelf life of bananas at the prime color stage for
consumers and retailers. By extending the shelf life of the number one item in
the produce department, retailers can reduce shrink (waste) and increase sales
by displaying bananas at the optimum ripeness.
The Company has commercially launched the banana packaging technology for
use in the food service industry. The Company intends to significantly expand
its sales of bananas to the food service industry during fiscal year 2003 while
optimizing its Intellipac specialty packaging for retail banana customers.
In addition to the introduction of specialty packaging for bananas, the
Company has rapidly extended its commercialization of Intellipac technology for
case liner packaging for bunch and crown broccoli, eighteen pound cases of loose
broccoli florets, Asian cut broccoli crowns, export cut broccoli crowns, and
green onions.
The Company's specialty packaging for case liner products reduces freight
expense up to 50% by eliminating the weight and space consumed by ice. In
addition to reducing the cost of freight, the removal of ice from the
distribution system offers additional benefits. The Company's new packaging
system can decrease the potential for work-related accidents due to melted ice,
eliminate the risk of ice as a carrier of microorganisms that could potentially
contaminate produce and eliminate the need for expensive waxed cartons that
cannot be recycled.
During the third quarter of fiscal year 2002, the Company started
commercially shipping a re-sealable package utilizing the Intellipac technology
on its larger-sized fresh-cut vegetable packages. The Company expects the
re-sealable package to facilitate the introduction of new retail products.
Product enhancements in the fresh-cut vegetable line include a new
fresh-cut vegetable party tray designed to look like it was freshly made in the
retail grocery store which was launched in October 2002. The rectangular tray
design is convenient for storage in consumers' refrigerators and expands the
Company's wide-ranging party tray line.
Additionally, the Company commercially launched in October 2002, smaller
ready-to-eat vegetable snack trays under the Eat Smart Snak Pak(R) line. The
launch of the Snak Pak line is in response to the recent trend toward healthier
food alternatives for consumers.
Agricultural Seed Technology Business
Landec formed its Landec Ag (formerly Intellicoat Corporation) subsidiary
in 1995. Landec Ag's strategy is to build a vertically integrated seed
technology company based on the proprietary Intellicoat seed coating technology
and its eDC--e-commerce, direct marketing and consultative selling capabilities.
The Technology and Market Opportunity: Intellicoat Seed Coatings
Landec has developed and, through Landec Ag, is commercially selling its
Intellicoat seed coatings, an Intelimer-based agricultural material designed to
control seed germination timing, increase crop yields and extend crop planting
windows. These coatings are being applied to corn and soybean seeds. According
to the U.S. Agricultural Statistics Board, the total planted acreage in 2002 in
the United States for corn and soybean seed exceeded 78.9 million and 73.0
million, respectively.
In fiscal year 2000, the Company successfully launched its first
commercial product, Pollinator Plus(R) coatings for inbred corn seed. As a
result of the success realized in fiscal year 2001, the Company expanded its
sales of inbred corn seed coating products in fiscal year 2002 to regional and
national seed companies in the United States. This application is targeted to
approximately 640,000 acres in ten states and is now being used by 30 seed
companies in the
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United States. In addition, based on the successful field trial results during
2001 for its Early Plant(TM) hybrid coated seed corn, the Company expanded its
sales in 2002. The Company's Relay(TM) Intercropping System of wheat and
Intellicoat coated soybean will allow farmers to plant and harvest two crops
during the same year on the same land, providing financial benefit for the
farmer. Early Plant hybrid seed corn, perhaps Landec Ag's largest seed coating
opportunity, allows the farmer to plant corn seed 3 to 4 weeks earlier than
typically possible due to cold soil temperatures. By allowing the farmer to
plant earlier than normal, Early Plant hybrid seed corn will enable farmers to
utilize staff and equipment more efficiently and provide flexibility during the
critical planting period. Recent market research with farmers in seven corn
growing states verified that farmers would pay a significant premium for Landec
Ag's Early Plant hybrid seed corn product if they were able to plant a portion
of their acreage up to one month early. The Company estimates that 1 of every 7
corn acres could be converted to Intellicoat coated seed within 3 years of
industry-wide commercialization.
Currently, farmers must work within a narrow window of time to plant
seeds. If the seeds are planted too early, they may rot or suffer chilling
injury due to the absorption of water at cold soil temperatures below which
germination occurs. If they are planted too late, the growing season may end
prior to the crop reaching full maturity. In either case, the resulting crop
yields are sub-optimal. Moreover, the planting window can be fairly brief,
requiring the farmer to focus almost exclusively on planting during this time.
Seeds also germinate at different times due to variations in absorption of
water, thus providing for variations in the growth rate of the crops.
The Company's Intellicoat seed coating prevents planted seeds from
absorbing water when the ground temperature is below the coating's pre-set
temperature switch. Intellicoat seed coatings are designed to enable coated
seeds to be planted early without risk of chilling damage caused by the
absorption of water at cold soil temperatures. As spring advances and soil
temperatures rise to the pre-determined switch temperature close to where seed
germination normally occurs, the polymer's permeability increases and the coated
seeds absorb water and begin to germinate. The Company believes that Intellicoat
seed coatings provide the following advantages: a longer planting window,
avoidance of chilling injury, more uniform germination and better utilization of
equipment and labor. As a result, the Company believes that Intellicoat seed
coatings offer the potential for improvements in crop yields and net income to
the farmer.
The Business: Landec Ag
In September 1997, Landec Ag completed the acquisition of Fielder's
Choice, a direct marketer of hybrid seed corn to farmers. Landec paid
approximately $3.6 million in cash and direct acquisition costs and $5.2 million
in Landec Common Stock for Fielder's Choice. Terms of the agreement include a
cash earn-out of $2.4 million based on future sales of Fielder's Choice
Direct(R) hybrid seed corn. As of October 27, 2002, $2.0 million of the earn-out
had been earned and paid. Fielder's Choice had sales of approximately $19.4
million for the twelve months ended October 27, 2002, $16.2 million for the
twelve months ended October 28, 2001 and $17.2 million for the twelve months
ended October 29, 2000.
Based in Monticello, Indiana, Fielder's Choice offers a comprehensive line
of hybrid seed corn to more than 14,000 farmers in over forty states through
direct marketing programs. The success of Fielder's Choice comes, in part, from
its expertise in selling directly to the farmer, bypassing the traditional and
costly farmer-dealer system. The Company believes that this direct channel of
distribution provides a 35% cost advantage to its customers.
In order to support its direct marketing programs, Fielder's Choice has
developed a proprietary e-commerce direct marketing, and consultative selling
information technology, called "eDC", that enables state-of-the-art methods for
communicating with a broad array of farmers. This proprietary direct marketing
information technology includes a current database of over 95,000 farmers. In
August 1999, the Company launched the seed industry's first comprehensive
e-commerce website. This website furthers the Company's ability to provide a
high level of consultation to Fielder's Choice customers, backed by a six day a
week call center capability that enables the Company to use the internet as a
natural extension of its direct marketing strategy.
The acquisition of Fielder's Choice was strategic in providing a
cost-effective vehicle for marketing Intellicoat seed coating products. The
Company believes that the combination of coating technology and a direct channel
of distribution, telephonic and electronic commerce capabilities will enable
Landec Ag to more quickly achieve meaningful market penetration.
-11-
Technology Licensing/Research and Development Businesses
The Company believes its technology has commercial potential in a wide
range of industrial, consumer and medical applications beyond those identified
in its core businesses. For example, Landec's core patented technology Intelimer
materials, can be used to trigger release of small molecule drugs, catalysts,
pesticides or fragrances just by changing the temperature of the Intelimer
materials or to activate adhesives through controlled temperature change. In
order to exploit these opportunities, the Company has entered into or will enter
into licensing and collaborative corporate agreements for product development
and/or distribution in certain fields.
Industrial Materials and Adhesives
Landec's industrial products development strategy is to focus on
catalysts, resins, and adhesives in the polymer materials market. During the
product development stage, the Company identifies corporate partners to support
the ongoing development and testing of these products, with the ultimate goal of
licensing the applications at the appropriate time.
Intelimer Polymer Systems. Landec has developed latent catalysts useful in
extending pot-life, extending shelf-life, reducing waste and improving thermoset
cure methods. Some of these latent catalysts are currently being distributed by
Akzo-Nobel Chemicals B.V. and The Norac Company. The Company has also developed
Intelimer polymer materials useful in enhancing the formulating options for
various personal care products. Landec's pressure sensitive adhesives ("PSA")
technology is currently being evaluated in a variety of industrial and medical
applications where strong adhesion to a substrate (i.e. steel, glass, silicon,
skin, etc.) is desired for a defined time period and upon thermal triggering,
results in a significant peel strength reduction. For example, select PSA
systems exhibit greater than 90% reduction in peel strength upon warming, making
them ideal for applications on fragile substrates.
Nitta Corporation. On March 14, 1995, the Company entered into a license
agreement with Nitta Corporation ("Nitta") in the industrial adhesives area. The
agreement provides Nitta with a co-exclusive license to manufacture and sell
products using Landec's Intelimer materials in certain Asian countries. Landec
received up-front license fees upon signing the agreement and is entitled to
future royalties based on net sales by Nitta of the licensed products. Any fees
paid to the Company are non-refundable. This agreement is terminable at Nitta's
option. Nitta and the Company entered into an additional exclusive license
arrangement in February 1996 covering Landec's medical adhesives technology for
use in Asia. The Company received up-front license fees upon execution of the
agreement and research and development payments and is entitled to receive
future royalties under this agreement. Any fees paid to the Company are
non-refundable. Nitta and the Company also entered into another worldwide
exclusive agreement on January 1, 1998 in the area of industrial adhesives
specific to one field of electronic polishing adhesives. The Company received
research and development payments as a part of this agreement. As of January
1999, the Company had no future obligations under any of the aforementioned
agreements with Nitta.
UCB Chemicals Corporation. On April 10, 2000, the Company entered into a
research and development agreement with UCB Chemicals Corporation ("UCB"), an
operating entity of UCB S.A., a major pharmaceutical and chemical company
located in Belgium. UCB's chemical business is a major supplier of radiation
curing and powder coating resins. Under this agreement, the Company explored
polymer systems for evaluation in several industrial product applications. Based
on the success of this initial research and development collaboration, in
December 2001, the Company entered into a $2.5 million license and research and
development agreement with UCB. This agreement has a term of one year through
December 2002 and is for the exclusive rights to use the Company's Intelimer
materials technology in the fields of powder coatings worldwide and pressure
sensitive adhesives worldwide, except Asia.
Medical Applications
PORT(TM) Ophthalmic Devices. Landec developed the PORT (Punctal Occluder
for the Retention of Tears) ophthalmic device initially to address a common, yet
poorly diagnosed condition known as dry eye that is estimated to affect 30
million Americans annually. The device consists of a physician-applied
applicator containing solid Intelimer material that transforms into a flowable,
viscous state when heated slightly above body temperature. After inserting the
Intelimer material into the lacrimal drainage duct, it quickly solidifies into a
form-fitting, solid plug. Occlusion of the lacrimal drainage duct allows the
patient to retain tear fluid and thereby provides relief and therapy to the dry
eye patient.
-12-
The PORT product is currently in human clinical trials. Landec and its
partner Alcon, believe that PORT plugs will have additional ophthalmic
applications beyond the dry eye market. This would include applications for
people who cannot wear contact lenses due to limited tear fluid retention and
patients receiving therapeutic drugs via eye drops that require longer retention
in the eye.
In December 1997, Landec licensed the rights to worldwide manufacturing,
marketing and distribution of its PORT ophthalmic device to Alcon. Under the
terms of the transaction, Landec received an up-front cash payment of $500,000,
a $750,000 milestone payment in November 1998, research and development funding
and will receive ongoing royalties of 11.5% on product sales of each PORT device
through 2012. Any fees paid to the Company are non-refundable. Landec will
continue to provide development support on a contract basis through the FDA
approval process and product launch. Landec also provides the Intelimer polymer
to Alcon which is used in the PORT device.
Medical Device. On April 18, 2002, Landec entered into an exclusive
licensing and one year research and development collaboration with a large
medical device company. Upfront payments totaled $420,000 with total potential
payments, which are based on certain milestones being met, of $1.35 million. In
addition, royalties of 8% will be paid on future product sales.
Discontinued Operations
Dock Resins. In April 1997, the Company acquired Dock Resins, a
privately-held manufacturer and marketer of specialty acrylic and other polymers
based in Linden, New Jersey. Dock Resins sells products under the Doresco(R)
trademark which are used by more than 300 customers throughout the United States
and other countries in the coatings, printing inks, laminating and adhesives
markets. Dock Resins is a supplier of proprietary polymers including acrylic,
methacrylic, alkyd, polyester, urethane and polyamide polymers to film
converters engaged in hot stamping, decorative wood grain, automotive interiors,
holograms, and metal foil applications. Dock Resins also supplies products to a
number of other markets, such as, graphic arts, automotive refinishing,
construction, pressure-sensitive adhesives, paper coatings, caulks, concrete
curing compounds and sealers.
In October 2002, the Company sold Dock Resins for $14.5 million ($10.2
million net of debt not assumed and before expenses) in order to strengthen its
balance sheet and focus management's attention on our core food and agricultural
technology businesses. In accordance with the Stock Purchase Agreement, $1.35
million of the sales price was placed into an escrow fund to satisfy any
breaches of representations and warranties made on behalf of the Company. The
escrow funds will be released on January 31, 2004.
The Company recorded a loss on the sale of $4.2 million, of which $2.5
million was recorded in fiscal year 2001 and $1.7 million was recorded in the
fourth quarter of fiscal year 2002 upon the close of the sale. The loss was
comprised of a loss on the disposal of Dock Resins of $3.3 million, transaction
costs and certain costs directly related to the sale, including consulting fees
and professional fees, of $1.2 million less $300,000 of operating income from
the measurement date of October 18, 2001 to the disposal date of October 24,
2002.
As a result of the sale of Dock Resins, the financial results of Dock
Resins have been reclassed to discontinued operations for all periods presented.
Unless otherwise specified, the information and descriptions provided in this
report relate only to the continuing operations of the Company.
Sales and Marketing
Each of the Company's core businesses are supported by dedicated sales and
marketing resources. The Company intends to develop its internal sales capacity
as more products progress toward commercialization and as business volume
expands geographically.
Food Products Technology Business
Apio has 19 sales people, located in central California and throughout the
U.S., supporting both the traditional produce marketing business and the
specialty packaged value-added produce business.
-13-
Agricultural Seed Technology Business
Landec Ag utilizes 34 direct seed sales consultants and associates located
in Monticello, Indiana for its direct marketing of Fielders Choice Direct seed
corn and Intellicoat coated products. Customer contacts are made based on direct
responses and inquiries from customers.
Manufacturing and Processing
Landec intends to control the manufacturing of its own products whenever
possible, as it believes that there is considerable manufacturing margin
opportunity in its products. In addition, the Company believes that know-how and
trade secrets can be better maintained by Landec retaining manufacturing
capability in-house.
Food Products Technology Business
The manufacturing process for the Company's Intellipac breathable membrane
products is comprised of polymer manufacturing, membrane manufacturing and label
package conversion. Dock Resins currently manufactures virtually all of the
polymers for the Intellipac breathable membranes and the Company anticipates
that it will continue to do so in the foreseeable future. Select outside
contractors currently manufacture the breathable membranes and Landec has
recently transitioned most of the label package conversion to Apio's Guadalupe
facility to meet the increasing product demand and to provide additional
developmental capabilities.
Apio processes all of its fresh-cut value-added products in its
state-of-the-art processing facility located in Guadalupe, California. Cooling
of produce is done through third parties and Apio Cooling, a separate company in
which Apio has a 60% ownership interest and is the general partner.
Agricultural Seed Technology Business
During fiscal year 2001, the Company moved its batch coating capabilities
from Menlo Park, California to a new leased facility in Oxford, Indiana. This
facility is being used to coat other seed companies' inbred seed corn using the
Company's Pollinator Plus corn seed coatings.
During fiscal year 2000, the Company completed construction of a pilot and
semi-works manufacturing facility in Indiana to support the commercialization of
its Early Plant hybrid seed corn and for its Relay Intercropping System for
wheat/coated soybean products. The new facility utilizes a new continuous
coating process that has increased seed coating capabilities by tenfold compared
to the previous system using batch coaters. Landec Ag contracts for production
of its hybrid seed corn from established seed producers.
General
Many of the raw materials used in manufacturing certain of the Company's
products are currently purchased from a single source, including certain
monomers used to synthesize Intelimer polymers and substrate materials for the
Company's breathable membrane products. In addition, a large majority of the
hybrid corn varieties sold by Fielder's Choice are sourced from a single seed
producer. Upon manufacturing scale-up of seed coating operations and as hybrid
corn sales increase, the Company may enter into alternative supply arrangements.
Although to date the Company has not experienced difficulty acquiring materials
for the manufacture of its products nor has Fielder's Choice experienced
difficulty in acquiring hybrid corn varieties, no assurance can be given that
interruptions in supplies will not occur in the future, that the Company will be
able to obtain substitute vendors, or that the Company will be able to procure
comparable materials or hybrid corn varieties at similar prices and terms within
a reasonable time. Any such interruption of supply could have a material adverse
effect on the Company's ability to manufacture and distribute its products and,
consequently, could materially and adversely affect the Company's business,
operating results and financial condition.
The Company desires to maintain an externally audited quality system and
achieved ISO 9001 registration for the Menlo Park research and development site
in fiscal year 1999 and for both the Menlo Park research and development and
-14-
manufacturing sites in fiscal year 2000. Such registration is required in order
for the Company to sell product to certain potential customers, primarily in
Europe.
Research and Development
Landec is focusing its research and development resources on both existing
and new applications of its Intelimer technology. Expenditures for research and
development in fiscal year 2002 were $3.7 million, compared with $3.3 million in
fiscal year 2001 and $3.4 million in fiscal year 2000. In fiscal year 2002,
research and development expenditures funded by corporate partners were $975,000
compared with $473,000 in fiscal year 2001 and $539,000 in fiscal year 2000. The
Company may continue to seek funds for applied materials research programs from
U.S. government agencies as well as from commercial entities. The Company
anticipates that it will continue to have significant research and development
expenditures in order to maintain its competitive position with a continuing
flow of innovative, high-quality products and services. As of October 27, 2002,
Landec had 28 employees, including 5 with Ph.D.'s, engaged in research and
development with experience in polymer and analytical chemistry, product
application, product formulation, mechanical and chemical engineering.
Competition
The Company operates in highly competitive and rapidly evolving fields,
and new developments are expected to continue at a rapid pace. Competition from
large food packaging and agricultural companies is intense. In addition, the
nature of the Company's collaborative arrangements and its technology licensing
business may result in its corporate partners and licensees becoming competitors
of the Company. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than the
Company, and many have substantially greater experience in conducting field
trials, obtaining regulatory approvals and manufacturing and marketing
commercial products. There can be no assurance that these competitors will not
succeed in developing alternative technologies and products that are more
effective, easier to use or less expensive than those which have been or are
being developed by the Company or that would render the Company's technology and
products obsolete and non-competitive.
Patents and Proprietary Rights
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has been granted twenty-two
U.S. patents with expiration dates ranging from 2006 to 2018 and has filed
applications for additional U.S. patents, as well as certain corresponding
patent applications outside the United States, relating to the Company's
technology. The Company's issued patents include claims relating to
compositions, devices and use of a class of temperature sensitive polymers that
exhibit distinctive properties of permeability, adhesion and viscosity. There
can be no assurance that any of the pending patent applications will be
approved, that the Company will develop additional proprietary products that are
patentable, that any patents issued to the Company will provide the Company with
competitive advantages or will not be challenged by any third parties or that
the patents of others will not prevent the commercialization of products
incorporating the Company's technology. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products or design around the Company's patents. Any of the
foregoing results could have a material adverse effect on the Company's
business, operating results and financial condition.
The commercial success of the Company will also depend, in part, on its
ability to avoid infringing patents issued to others. The Company has received,
and may in the future receive, from third parties, including some of its
competitors, notices claiming that it is infringing third party patents or other
proprietary rights. If the Company were determined to be infringing any
third-party patent, the Company could be required to pay damages, alter its
products or processes, obtain licenses or cease certain activities. In addition,
if patents are issued to others which contain claims that compete or conflict
with those of the Company and such competing or conflicting claims are
ultimately determined to be valid, the Company may be required to pay damages,
to obtain licenses to these patents, to develop or obtain alternative technology
or to cease using such technology. If the Company is required to obtain any
licenses, there can be no assurance that the Company will be able to do so on
commercially favorable terms, if at all. The Company's failure to obtain a
license to any technology that it may require to commercialize its products
could have a material adverse impact on the Company's business, operating
results and financial condition.
-15-
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to and diversion of effort by the Company, even if the eventual
outcome is favorable to the Company. Any such litigation or interference
proceeding, regardless of outcome, could be expensive and time consuming and
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology and consequently, could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which the Company seeks
to protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets and proprietary know-how will not otherwise
become known or be independently discovered by others.
Government Regulations
The Company's products and operations are subject to regulation in the
United States and foreign countries.
Food Products Technology Business
The Company's food packaging products are subject to regulation under the
Food, Drug and Cosmetic Act ("FDC Act"). Under the FDC Act any substance that
when used as intended may reasonably be expected to become, directly or
indirectly, a component or otherwise affect the characteristics of any food may
be regulated as a food additive unless the substance is generally recognized as
safe. Food additives may be substances added directly to food, such as
preservatives, or substances that could indirectly become a component of food,
such as waxes, adhesives and packaging materials.
A food additive, whether direct or indirect, must be covered by a specific
food additive regulation issued by the FDA. The Company believes its Intellipac
breathable membrane products are not subject to regulation as food additives
because these products are not expected to become a component of food under
their expected conditions of use. If the FDA were to determine that the
Company's Intellipac breathable membrane products are food additives, the
Company may be required to submit a food additive petition. The food additive
petition process is lengthy, expensive and uncertain. A determination by the FDA
that a food additive petition is necessary would have a material adverse effect
on the Company's business, operating results and financial condition.
The Company's agricultural operations are subject to a variety of
environmental laws including the Food Quality Protection Act of 1966, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive
Environmental Response, Compensation and Liability Act. Compliance with these
laws and related regulations is an ongoing process. Environmental concerns are,
however, inherent in most agricultural operations, including those conducted by
the Company, and there can be no assurance that the cost of compliance with
environmental laws and regulations will not be material. Moreover, it is
possible that future developments, such as increasingly strict environmental
laws and enforcement policies thereunder, and further restrictions on the use of
manufacturing chemicals could result in increased compliance costs.
The Company is subject to the United States Department of Agriculture
("USDA") rules and regulations concerning the safety of the food products
handled and sold by Apio, and the facilities in which they are packed and
processed. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, injunctions, civil penalties, suspensions
or withdrawal of regulatory approvals, product recalls, product seizures,
including cessation of manufacturing and sales, operating restrictions and
criminal prosecution.
Agricultural Seed Technology Business
The Company's agricultural products are subject to regulations of the USDA
and the EPA. The Company believes its current Intellicoat seed coatings are not
pesticides as defined in the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA") and are not subject to pesticide regulation requirements. The process
of meeting pesticide registration
-16-
requirements is lengthy, expensive and uncertain, and may require additional
studies by the Company. There can be no assurance that future products will not
be regulated as pesticides. In addition, the Company believes that its
Intellicoat seed coatings will not become a component of the agricultural
products which are produced from the seeds to which the coatings are applied and
therefore are not subject to regulation by the FDA as a food additive. While the
Company believes that it will be able to obtain approval from such agencies to
distribute its products, there can be no assurance that the Company will obtain
necessary approvals without substantial expense or delay, if at all.
Polymer Manufacture
The Company's manufacture of polymers is subject to regulation by the EPA
under the Toxic Substances Control Act ("TSCA"). Pursuant to TSCA, manufacturers
of new chemical substances are required to provide a Pre-Manufacturing Notice
("PMN") prior to manufacturing the new chemical substance. After review of the
PMN, the EPA may require more extensive testing to establish the safety of the
chemical, or limit or prohibit the manufacture or use of the chemical. To date,
PMNs submitted by the Company have been approved by the EPA without any
additional testing requirements or limitation on manufacturing or use. No
assurance can be given that the EPA will grant similar approval for future PMNs
submitted by the Company.
Other
The Company and its products under development may also be subject to
other federal, state and local laws, regulations and recommendations. Although
Landec believes that it will be able to comply with all applicable regulations
regarding the manufacture and sale of its products and polymer materials, such
regulations are always subject to change and depend heavily on administrative
interpretations and the country in which the products are sold. There can be no
assurance that future changes in regulations or interpretations made by the FDA,
EPA or other regulatory bodies, with possible retroactive effect, relating to
such matters as safe working conditions, laboratory and manufacturing practices,
environmental controls, fire hazard control, and disposal of hazardous or
potentially hazardous substances will not adversely affect the Company's
business. There can also be no assurance that the Company will not be required
to incur significant costs to comply with such laws and regulations in the
future, or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business. Furthermore, the introduction of the
Company's products in foreign markets may require obtaining foreign regulatory
clearances. There can be no assurance that the Company will be able to obtain
regulatory clearances for its products in such foreign markets.
Employees
As of October 27, 2002, Landec had 215 full-time employees, of whom 53
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 162 were dedicated to sales, marketing and administrative
activities. Landec intends to recruit additional personnel in connection with
the development, manufacturing and marketing of its products. None of Landec's
employees is represented by a union, and Landec believes relationships with its
employees are good.
Available Information
Landec's Web site is http://www.landec.com. Landec makes available free of
charge its annual, quarterly and current reports, and any amendments to those
reports, as soon as reasonably practicable after electronically filing such
reports with the SEC.
-17-
Item 2. Properties
The Company has offices in Menlo Park and Guadalupe, California, and
Monticello, Indiana.
These properties are described below:
Acres
Business of Lease
Location Segment Ownership Facilities Land Expiration
- --------------------- -------------- ------------ -------------------------------- ------ ----------
Menlo Park, CA All Leased 21,000 square feet of office and -- 12/31/03
laboratory space
Monticello, IN Agricultural Owned 19,400 square feet of office 0.5 --
Seed space
Technology
West Lebanon, IN Agricultural Owned 4,000 square feet of warehouse -- --
Seed and manufacturing space
Technology
Oxford, IN Agricultural Leased 13,400 square feet of laboratory -- 6/30/05
Seed and manufacturing space
Technology
Guadalupe, CA Food Products Owned 94,000 square feet of office 11.6 --
Technology space, manufacturing and cold
storage
Item 3. Legal Proceedings
The Company is currently not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ending October 27, 2002.
-18-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is traded on the Nasdaq National Market under the symbol
"LNDC". The following table sets forth for each period indicated the high and
low sales prices for the Common Stock as reported on the Nasdaq National Market.
Fiscal Year 2002 High Low
- ---------------- ---- ---
4th Quarter ending October 27, 2002 ...... $3.64 $1.51
3rd Quarter ending July 28, 2002 ......... $4.40 $3.00
2nd Quarter ending April 28, 2002 ........ $4.24 $3.30
1st Quarter ending January 27, 2002 ...... $5.70 $2.81
Fiscal Year 2001 High Low
- ---------------- ---- ---
4th Quarter ending October 28, 2001 ...... $5.25 $3.22
3rd Quarter ending July 29, 2001 ......... $5.27 $3.02
2nd Quarter ending April 29, 2001 ........ $4.50 $3.31
1st Quarter ending January 28, 2001 ...... $4.59 $2.50
There were approximately 123 holders of record of 21,103,480 shares of
outstanding Common Stock as of January 10, 2003. Since holders are listed under
their brokerage firm's names, the actual number of shareholders is higher. The
Company has not paid any dividends on the Common Stock since its inception. The
Company presently intends to retain all future earnings, if any, for its
business and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future.
Pursuant to a Series A Preferred Stock Purchase Agreement dated November
19, 1999, by and among the Company and Frederick Frank, the Company completed a
financing that raised approximately $10.0 million through a private placement of
its Series A-1 Preferred Stock and Series A-2 Preferred Stock (the "Series A
Preferred Stock"). Pursuant to this agreement, the Company issued 166,667 shares
of Series A Preferred Stock of the Company at $60.00 per share (representing
1,666,670 shares of Common Stock on a converted basis). Frederick Frank was
elected as a director of the Company in December 1999. The shares were converted
to Common Stock on November 19, 2002.
In connection with the Company's acquisition of Apio, Inc. on December 2,
1999, the prior owners of Apio received 2.5 million shares of Common Stock. As
compensation for services rendered by Lehman Brothers Inc. in connection with
the closing of the Apio acquisition, the Company issued 62,500 shares of Common
Stock to Lehman Brothers, Inc. at $6.00 per share.
Pursuant to a Series B Preferred Stock Purchase Agreement dated October
24, 2001, by and among the Company and the Seahawk Ranch Irrevocable Trust, the
Company completed a financing that raised approximately $5.0 million through a
private placement of its Series B Preferred Stock (the "Series B Preferred
Stock"). Pursuant to this agreement, the Company issued 142,857 shares of Series
B Preferred Stock of the Company at $35.00 per share (representing 1,428,570
shares of Common Stock on a converted basis). Ken Jones, a director of the
Company, is a trustee of the Seahawk Ranch Irrevocable Trust. During fiscal year
2002, 11,776 shares of Series B Preferred Stock were issued as dividends to the
Seahawk Ranch Irrevocable Trust.
Pursuant to Subscription Agreements dated March 26, 2002 (the
"Subscription Agreements"), the Company sold 2,580,663 shares of Common Stock to
certain accredited, institutional investors at $3.10 per share resulting in
aggregate proceeds of $8,000,000. Roth Capital Partners, LLC ("Roth") served as
placement agent in connection with
-19-
the private placement and received a placement fee of $640,000. The Company has
filed a registration statement with the SEC for the resale of the stock.
The issuance of securities in this Item 5 was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance on Section 4(2) of the Act as a transaction by an issuer not involving
any public offering. The recipients of the securities in such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transaction.
The recipients were given adequate access to information about the Company.
Item 6. Selected Financial Data
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in Item 8 of
this report.
-20-
Year Ended Year Ended Year Ended Year Ended
October 27, October 28, October 29, October 31,
----------- ----------- ----------- ----------------------
Statement of Operations Data: 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
Revenues:
Product sales ........................................... $152,958 $141,314 $129,457 $ 19,926 $ 16,244
Services revenue ........................................ 23,312 43,346 64,911 -- --
Services revenue, related party ......................... 3,515 5,083 1,898 -- --
License fees ............................................ 2,330 374 374 750 500
Research, development and royalty revenues .............. 1,040 529 586 770 1,352
-------- -------- -------- -------- --------
Total revenues ....................................... 183,155 190,646 197,226 21,446 18,096
Cost of revenue:
Cost of product sales ................................... 131,352 122,081 110,594 12,016 10,119
Cost of services revenue ................................ 20,463 40,751 56,621 -- --
-------- -------- -------- -------- --------
Total cost of revenue ...................................... 151,815 162,832 167,215 12,016 10,119
-------- -------- -------- -------- --------
Gross profit ............................................... 31,340 27,814 30,011 9,430 7,977
Operating costs and expenses:
Research and development ................................ 3,664 3,270 3,444 4,653 4,643
Selling, general and administrative ..................... 26,418 27,398 26,927 8,523 8,260
Exit of fruit processing ................................ -- -- 525 -- --
-------- -------- -------- -------- --------
Total operating costs and expenses ................... 30,082 30,668 30,896 13,176 12,903
======== ======== ======== ======== ========
Operating profit/(loss) .................................... 1,258 (2,854) (885) (3,746) (4,926)
Interest income ............................................ 247 617 873 290 705
Interest expense ........................................... (1,551) (2,789) (2,083) -- (79)
Other income, net .......................................... 247 188 25 -- --
-------- -------- -------- -------- --------
Income/(loss) from continuing operations ................... 201 (4,838) (2,070) (3,456) (4,300)
Discontinued Operations:
(Loss)/ income from discontinued operations ............. -- (537) (14) 687 1,410
Loss on disposal of operations .......................... (1,688) (2,500) -- -- --
-------- -------- -------- -------- --------
(Loss)/income from discontinued operations ................. (1,688) (3,037) (14) 687 1,410
-------- -------- -------- -------- --------
Net loss before cumulative effect of change in accounting .. (1,487) (7,875) (2,084) (2,769) (2,890)
Cumulative effect of change in accounting for upfront
license fee revenue ..................................... -- -- (1,914) -- --
-------- -------- -------- -------- --------
Net loss ................................................... $ (1,487) $ (7,875) $ (3,998) $ (2,769) $ (2,890)
======== ======== ======== ======== ========
Net loss ................................................... $ (1,487) $ (7,875) $ (3,998) $ (2,769) $ (2,890)
Dividends on Series B preferred stock ...................... (412) -- -- -- --
-------- -------- -------- -------- --------
Net loss applicable to common shareholders ................. $ (1,899) $ (7,875) $ (3,998) $ (2,769) $ (2,890)
======== ======== ======== ======== ========
-21-
Year Ended Year Ended Year Ended Year Ended
October 27, October 28, October 29, October 31,
----------- ----------- ----------- --------------------
Statement of Operations Data: 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(in thousands, except per share data)
Basic and diluted net income (loss) per share:
Continuing operations ................................ $ (.01) $ (.29) $ (.13) $ (.26) $ (.34)
Discontinued operations .............................. (.09) (.19) -- .05 .11
Cumulative effect of change in accounting ............ -- -- (.12) -- --
------- ------- ------- ------- -------
Basic and diluted net loss per share .................... $ (.10) $ (.48) $ (.25) $ (.21) $ (.23)
======= ======= ======= ======= =======
Pro forma amounts assuming the change in accounting is
applied retroactively:
Net loss applicable to common shareholders ........... $(1,899) $(7,875) $(2,084) $(3,145) $(3,070)
======= ======= ======= ======= =======
Net loss per share ................................... $ (.10) $ (.48) $ (.13) $ (.24) $ (.24)
======= ======= ======= ======= =======
Shares used in computing basic and diluted net loss
per share ............................................ 18,172 16,371 15,796 13,273 12,773
======= ======= ======= ======= =======
Year Ended Year Ended Year Ended Year Ended
October 27, October 28, October 29, October 31,
----------- ----------- ----------- ------------------------
Balance Sheet Data: 2002 2001 2000 1999 1998
----------- ----------- ----------- --------- ---------
(in thousands, except per share data)
Cash and cash equivalents .... $ 7,849 $ 8,695 $ 8,636 $ 2,399 $ 5,377
Total assets ................. 107,803 120,122 128,165 36,097 38,075
Debt ......................... 17,543 33,416 26,350 -- --
Convertible preferred stock .. 14,461 14,049 9,149 -- --
Accumulated deficit .......... (59,300) (57,401) (49,526) (45,528) (42,756)
Total shareholders' equity ... 55,963 49,839 52,178 31,761 33,688
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements contained in Item 8 of this report. Except for
the historical information contained herein, the matters discussed in this
report are forward-looking statements within the meaning of Section 21E of the
Securities and Exchange Act of 1934. These forward-looking statements involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Potential risks and
uncertainties include, without limitation, those mentioned in this report and,
in particular, the factors described below under "Additional Factors That May
Affect Future Results." Landec undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
Overview
Since its inception in October 1986, the Company has been engaged in the
research and development of its Intelimer technology and related products. The
Company has launched four product lines from this core development -
QuickCast(TM) splints and casts, in April 1994, which was subsequently sold to
Bissell Healthcare Corporation in August 1997; Intellipac breathable membranes
for the fresh-cut and whole produce packaging market, in September 1995;
Intelimer Polymer Systems for the industrial specialties market in June 1997;
and Intellicoat coated inbred corn seeds in the Fall of 1999.
With the acquisition of Landec Ag in September 1997 and Apio in December
1999, the Company is focused on two core businesses - Food Products Technology
and Agricultural Seed Technology. The Food Products Technology segment combines
the Company's Intellipac breathable membrane technology with Apio's fresh-cut
produce business.
-22-
The Agricultural Seed Technology segment integrates the Intellicoat seed coating
technology with Fielder's Choice's direct marketing, telephone sales and
e-commerce distribution capabilities. The Company also operates a Technology
Licensing/Research and Development business which develops products to be
licensed outside of the Company's core businesses. See "Business - Description
of Core Business".
The Company has been unprofitable during each fiscal year since its
inception. From inception through October 27, 2002, the Company's accumulated
deficit was $59.3 million. The Company may incur additional losses in the
future. The amount of future net profits, if any, is highly uncertain and there
can be no assurance that the Company will be able to reach or sustain
profitability for an entire fiscal year.
Critical Accounting Policies and Use of Estimates
Use of Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
materially from those estimates. The judgements and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances.
Notes and Advances Receivables
Apio has made advances to fruit growers for the development of orchards,
and to produce growers for crop and harvesting costs. Typically, except for
development advances, these advances are paid off within the growing season
(less than one year) from harvested crops. Development advances and advances not
fully paid during the current growing season are converted to interest bearing
obligations, evidenced by contracts and notes receivable. These notes receivable
and advances are secured by perfected liens on land and/or crops and have terms
that range from twelve to sixty months. Notes receivable are periodically
reviewed (at least quarterly) for collectibility. A reserve is established for
any note or advance deemed to not be fully collectible based upon an estimate of
the crop value or the fair value of the security for the note or advance. If
crop prices or the fair value of the underlying security declines the Company
may be unable to fully recoup its investment and the estimated losses would rise
in the current period, potentially to the extent of the total investment.
Investments in Farming Activities
Investments in farming activities consist of cash advances to growers for
expenses to be incurred during the growing season, in exchange for a percentage
ownership in the proceeds of the crops. Net income or loss is generally
recognized on these investments based on the Company's percentage ownership of
the net proceeds of the crops as fields are harvested and proceeds are settled.
These investments are periodically reviewed for impairment (at least quarterly).
Additionally, certain farming agreements contain provisions wherein the Company
bears the risk of loss if the net proceeds from the crops are not sufficient to
cover the expense incurred. If crop prices decline the Company may be unable to
fully recoup its investment and the estimated losses would rise in the current
period, potentially to the extent of the total investment.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The allowance for doubtful accounts is based on review of the overall condition
of accounts receivable balances and review of significant past due accounts. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Bad debt losses are partially mitigated due to low
risks related to the fact that the Company's customers are predominantly large
financially sound national and regional retailers and because the Company
carries foreign credit insurance to cover a portion of its foreign receivables
exposure.
-23-
Inventories
Inventories are stated at the lower of cost or market. If the cost of the
inventories exceeds their expected market value, provisions are recorded
currently for the difference between the cost and the market value. These
provisions are determined based on specific identification for unuseable
inventory and a general reserve, based on historical losses, for inventory
considered to be useable.
Revenue Recognition
Revenue from product sales is recognized when there is persuasive evidence
that an arrangement exists, delivery has occurred, the price is fixed and
determinable, and collectibility is reasonably assured. Allowances are
established for estimated uncollectible amounts, product returns, and discounts.
If actual future returns and allowances differ from past experience, additional
allowances may be required.
Licensing revenue is recognized in accordance with Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. Initial
license fees are deferred and amortized over the period of the agreement to
revenue when a contract exists, the fee is fixed and determinable, and
collectibility is reasonably assured. Noncancellable, nonrefundable license fees
are recognized over the research and development period of the agreement, as
well as the term of any related supply agreement entered into concurrently with
the license when the risk associated with commercialization of a product is
non-substantive at the outset of the arrangement.
Prior to November 1, 1999, the Company recognized noncancellable,
nonrefundable license fees as revenue when received and when all significant
contractual obligations of the Company relating to the fees had been met.
Effective November 1, 1999, the Company changed its method of accounting for
noncancellable, nonrefundable license fees to recognize such fees over the
research and development period of the agreement, as well as the term of any
related supply agreement entered into concurrently with the license when the
risk associated with commercialization of a product is non-substantive at the
outset of the arrangement. The Company believes the change in accounting
principle is preferable based on guidance provided in SEC Staff Accounting
Bulletin No. 101 - Revenue Recognition in Financial Statements. The $1.9 million
cumulative effect of the change in accounting principle, calculated as of
November 1, 1999, was reported as a charge in the year ended October 29, 2000.
The cumulative effect was initially recorded as deferred revenue and is being
recognized as revenue over the research and development period or supply period
commitment of the agreement. During the year ended October 29, 2000 the impact
of the change in accounting was to increase net loss by approximately $1.5
million, or $0.10 per share, comprised of the $1.9 million cumulative effect of
the change as described above ($0.12 per share), net of $374,000 of the related
deferred revenue which was recognized as "recycled" revenue during 2000 ($0.02
per share). During fiscal years 2002 and 2001, $302,000 and $374,000,
respectively, of the related deferred revenue was recognized as "recycled"
revenue. The remainder of the related deferred revenue will be recognized as
revenue per fiscal year as follows: $88,000 in 2003 - 2011, and $72,000 in 2012.
The pro forma amounts presented in the consolidated statement of operations were
calculated assuming the accounting change was made retroactive to prior periods.
Contract revenue for research and development (R&D) is recorded as earned,
based on the performance requirements of the contract. Non-refundable contract
fees for which no further performance obligations exist, and there is no
continuing involvement by the Company, are recognized on the earlier of when the
payments are received or when collection is assured.
-24-
Goodwill and Other Intangible Asset Impairment
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, effective October 29, 2001 and
will be required to evaluate its goodwill and indefinite lived intangible assets
for impairment annually. This evaluation incorporates a variety of estimates
including the fair value of the Company's operating segments. If the carrying
value of an operating segment's assets exceeds the estimated fair value, the
Company would likely be required to record an impairment loss, possibly for the
entire carrying balance of goodwill and intangible assets. To date no impairment
losses have been incurred.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 (SFAS143), Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. The Company is in the process of assessing the
effect of adopting SFAS 143, which will be effective for the Company's fiscal
year ending October 26, 2003.
Results of Operations
The Company's results of operations reflect only the continuing operations
of the Company and do not include the results of the discontinued Dock Resins
operation.
Fiscal Year Ended October 27, 2002 Compared to Fiscal Year Ended October
28, 2001
Total revenues were $183.2 million for fiscal year 2002, compared to
$190.6 million for fiscal year 2001. Revenues from product sales and services
decreased to $179.8 million in fiscal year 2002 from $189.7 million in fiscal
year 2001. The decrease in product sales and service revenues was primarily due
to decreased revenues from Apio's "fee for service" whole produce business,
which decreased from $48.4 million in fiscal year 2001 to $26.8 million during
fiscal year 2002. The decrease in the "fee-for-service" whole produce business
is primarily due to the Company's decision during the third quarter of fiscal
year 2001 to exit the cash, labor and equipment-intensive field harvesting and
packing operations of its "fee-for-service" business, which resulted in
decreased volumes during fiscal year 2002 as compared to fiscal year 2001.
Volumes in the "fee-for-service" business are expected to be relatively flat in
the foreseeable future as the Company focuses on higher margin, less cash
intensive aspects of its businesses. The decrease in Apio's "fee-for-service"
revenue was partially offset by an increase in revenues from Apio's value-added
specialty packaging business which increased to $84.0 million in fiscal year
2002 from $70.4 million in fiscal year 2001. In addition, revenues from Landec
Ag increased to $19.4 million in fiscal year 2002 from $16.2 million in fiscal
year 2001. The increase in Landec Ag revenues was due to an increase in sales
volume and a higher average selling price per unit. Revenues from research,
development and royalties increased to $1.0 million in fiscal year 2002 compared
to $529,000 for fiscal year 2001. Revenues from license fees increased to $2.3
million in fiscal year 2002 compared to $374,000 for fiscal year 2001. The
increases in research, development, royalties and license fee revenues were due
to the Company entering into new collaborations with UCB in December 2001 and
with a major medical device company in April 2002.
Cost of product sales and services consists of material, labor and
overhead. Cost of product sales and services was $151.8 million for fiscal year
2002 compared to $162.8 million for fiscal year 2001. Gross profit from product
sales and services as a percentage of revenue from product sales and services
increased to 16% in fiscal year 2002 compared to 14% in fiscal year 2001.
Overall gross profit increased to $31.3 million in fiscal year 2002 from $27.8
million in fiscal year 2001. This increase was primarily due to a $1.4 million
gross profit increase at Landec Ag which increased its gross profit to $8.0
million in fiscal year 2002 from $6.6 million in fiscal year 2001. In addition,
gross profit from Landec's licensing business increased $2.4 million to $3.1
million in fiscal year 2002 from $697,000 in fiscal year 2001. Apio's gross
profit decreased slightly to $20.2 million in fiscal year 2002 from $20.5
million in fiscal year 2001. This decrease was due to several offsetting
reasons; 1) in fiscal year 2002 Apio realized income from farming of $1.1
million compared to a loss of $2.0 million in fiscal year 2001, 2) higher crop
sourcing costs of approximately $2.5 million during fiscal year 2002 as compared
to fiscal year 2001 due to the unusually cold winter in the desert areas of
California and Arizona, 3) lower volumes in the "fee-for-service" business
during fiscal year 2002 as compared to fiscal year 2001 as a result of
discontinuing the field harvesting and packing operations of the business in the
third quarter of fiscal year
-25-
2001 resulting in a $1.3 million decrease in gross profit, and 4) losses of
$400,000 from the initial launch of the banana packaging technology.
Research and development expenses increased to $3.7 million in fiscal year
2002 from $3.3 million in fiscal year 2001. Landec's research and development
expenses consist primarily of expenses related to new product development,
process scale-up work, and investments in patents to protect the intellectual
property content of Landec's enabling side chain crystallizable polymers. The
increase in research and development expenses was due to increased development
costs associated with the Company's banana program.
Selling, general and administrative expenses were $26.4 million for fiscal
year 2002 compared to $27.4 million for fiscal year 2001, a decrease of 4%.
Selling, general and administrative expenses consist primarily of sales and
marketing expenses associated with Landec's product sales and services, business
development expenses, and staff and administrative expenses. Selling, general
and administrative expenses decreased during fiscal year 2002 as compared to
fiscal year 2001 primarily due to intangible amortization expenses decreasing
$2.6 million as a result of the adoption of SFAS 142. This decrease was
partially offset by increased selling, general and administrative expenses at
Apio as a result of expenses related to Apio's new ERP business operating
system. Specifically, sales and marketing expenses decreased to $10.3 million
for fiscal year 2002 from $10.9 million for fiscal year 2001.
Interest income for fiscal year 2002 was $247,000 compared to $617,000 for
fiscal year 2001. This decrease in interest income was due principally to lower
market interest rates and a lower interest-bearing notes receivable balance.
Interest expense for fiscal year 2002 was $1.6 million compared to $2.8 million
for fiscal year 2001. The decrease in interest expense was primarily due to
having a lower average debt balance outstanding during fiscal year 2002 due to
paying down debt by nearly $16.0 million during fiscal year 2002.
Fiscal Year Ended October 28, 2001 Compared to Fiscal Year Ended October
29, 2000
Total revenues were $190.6 million for fiscal year 2001, compared to
$197.2 million for fiscal year 2000. Revenues from product sales and services
decreased to $189.7 million in fiscal year 2001 from $196.3 million in fiscal
year 2000. The decrease in product sales and service revenues was primarily due
to decreased revenues from Apio's "fee for service" whole produce business,
which decreased from $66.8 million in fiscal year 2000 to $48.4 million during
fiscal year 2001. The decrease in the "fee-for-service" whole produce business
is primarily due to the Company's decision during the third quarter of fiscal
year 2001 to exit the cash, labor and equipment-intensive field harvesting and
packing operations of its "fee-for-service" business, which resulted in
decreased volumes during fiscal year 2001. The decrease in Apio's
"fee-for-service" revenue was partially offset by an increase in revenues from
Apio's value-added specialty packaging business which increased to $70.4 million
in fiscal year 2001 from $56.1 million in fiscal year 2000 and the fact that
Apio was included for a full year in fiscal year 2001 compared to only eleven
months in fiscal year 2000. Revenues from research, development and royalties
were $529,000 for fiscal year 2001 compared to $586,000 for fiscal year 2000.
Revenues from license fees remained unchanged at $374,000 for fiscal years 2001
and 2000.
Cost of product sales and services was $162.8 million for fiscal year 2001
compared to $167.2 million for fiscal year 2000. Gross profit from product sales
and services as a percentage of revenue from product sales and services remained
unchanged at 14% in fiscal years 2000 and 2001. Overall gross profit decreased
to $27.8 million in fiscal year 2001 from $30.0 million in fiscal year 2000.
This decrease was primarily due to gross profit from Apio's "fee-for-service"
business which decreased $2.5 million to $7.7 million in fiscal year 2001
compared to $10.2 million in fiscal year 2000. The decrease in Apio's gross
profit was primarily due to 1) farming losses from the winter season produce
sourcing, which increased to $2.0 million in fiscal year 2001 from $944,000 in
fiscal year 2000; 2) higher crop sourcing costs during the first half of fiscal
year 2001 as compared to fiscal year 2000 and; 3) lower volumes during the
second half of fiscal year 2001 as compared to fiscal year 2000 as a result of
discontinuing the field harvesting and packing operations of the business. Gross
profit also decreased $565,000 at Landec Ag due to lower product sales in fiscal
year 2001 compared to fiscal year 2000. These decreases in gross profit were
partially offset by increased gross profit from Apio's value-added specialty
packaging business which increased $2.8 million in fiscal year 2001 to $12.2
million as compared to $9.4 million in fiscal year 2000.
Research and development expenses remained virtually the same at $3.3
million in fiscal year 2001 and $3.4 million in fiscal year 2000.
-26-
Selling, general and administrative expenses were $27.4 million for fiscal
year 2001 compared to $26.9 million for fiscal year 2000, an increase of 2%.
Selling, general and administrative expenses increased during fiscal year 2001
as compared to fiscal year 2000 primarily as a result of increased expenses at
Apio for general and administrative expenses due to including Apio for a full
year in fiscal year 2001 compared to only eleven months in fiscal year 2000.
This increase was offset by decreased sales and marketing expenses at Landec Ag
from a February 2001 reduction in force. Specifically, sales and marketing
expenses decreased to $10.9 million for fiscal year 2001 from $12.6 million for
fiscal year 2000.
Interest income for fiscal year 2001 was $617,000 compared to $873,000 for
fiscal year 2000. This decrease in interest income was due principally to less
cash available for investing and lower market interest rates. Interest expense
for fiscal year 2001 was $2.8 million compared to $2.1 million for fiscal year
2000. The increase in interest expense was primarily due to having a higher
average debt balance outstanding during fiscal year 2001.
Liquidity and Capital Resources
As of October 27, 2002, Landec had cash and cash equivalents of $7.8
million, a net decrease of $846,000 from $8.7 million as of October 28, 2001.
This decrease was primarily due to: a) the reduction of net borrowings under
Landec's lines of credit of $5.5 million; b) the reduction of long-term debt of
$10.4 million; c) the purchase of $2.5 million of property and equipment;
partially offset by; d) net proceeds from the sale of Dock Resins of $9.4
million; and (e) proceeds from the sale of Common Stock of $7.6 million.
During fiscal year 2002, Landec purchased equipment to support the
development of Apio's value added products, and incurred building and laboratory
improvement costs at Apio. These expenditures represented the majority of the
$2.5 million of property and equipment purchased during fiscal year 2002.
In December 1999, in conjunction with the acquisition of Apio, the Company
secured $11.25 million of term debt and a $12 million line of credit with Bank
of America. The term debt and line of credit agreements, as amended ("Loan
Agreement") contain restrictive covenants that require Apio to meet certain
financial tests, including minimum fixed charge coverage ratio, minimum current
ratio, minimum adjusted net worth and maximum leverage ratios. As of October 27,
2002, Apio was in compliance with all of its financial covenants. The Loan
Agreement, through restricted payment covenants and amendments, limits the
ability of Apio to make cash payments to Landec. Landec has pledged
substantially all of the assets of Apio to Bank of America pursuant to the Loan
Agreement. At October 27, 2002, $7.6 million was outstanding under Apio's line
of credit at an annual interest rate of 6.0%. The total principal amount plus
accrued interest outstanding under the line of credit is due and payable in full
on January 31, 2003. Landec intends to enter into a $12 million replacement line
of credit to cover the outstanding amount of the current facility and for future
financing. The term loan was paid off on October 25, 2002.
In May 2001, Apio entered into a capital lease agreement to fund the
majority of the costs of a new ERP business system. As of October 27, 2002, $1.1
million was outstanding under this lease agreement.
Landec Ag has a revolving line of credit which allows for borrowings of up
to $3 million, based on Landec Ag's inventory levels. The interest rate on the
revolving line of credit is the prime rate plus 0.75. The line of credit
contains certain restrictive covenants, which, among other things, affect the
ability of Landec Ag to make payments on debt owed by Landec Ag to Landec.
Landec has pledged substantially all of the assets of Landec Ag to secure the
line of credit. In December 2002, Landec Ag increased its line of credit by $2.0
million to $5.0 million through January 2003. At October 27, 2002, $2.5 million
was outstanding under the revolving line of credit. In addition, $419,000 was
outstanding on Landec Ag's four-year, 8% per annum, term note and is due and
payable in full in June 2005.
In March 2002, the Company raised $7.3 million, net of $700,000 of
expenses, through a private placement of 2.6 million shares of Common Stock.
In June 2002, the Company sold its Reedley, CA fruit processing facility
for net proceeds of $2.2 million, resulting in a gain of $436,000.
In October 2002, the Company sold its wholly owned subsidiary Dock Resins
and received $9.4 million of cash, net of the repayment of $4.3 million of Dock
Resin's debt. In January 2003, an additional $1.0 million in cash was
-27-
received by Landec because of an increase in Dock Resins working capital as
specified in the Stock Purchase Agreement.
At October 27, 2002, Landec's total debt, including current maturities
and capital lease obligations, was approximately $17.5 million and the total
debt to equity ratio was approximately 31% as compared to 67% at October 28,
2001. Of this debt, approximately $10.1 million is comprised of revolving lines
of credit and approximately $7.4 million is comprised of term debt and capital
lease obligations, $2.4 million of which is mortgage debt on Apio's
manufacturing facilities. The amount of debt outstanding on Landec's revolving
lines of credit fluctuates over time, and the agreements contain financial and
other limiting covenants. Borrowings on Landec's lines of credit are expected to
vary with seasonal requirements of the Company's businesses. In addition, in
connection with Landec's acquisition of Apio, Landec is obligated to pay the
former owners of Apio $1.2 million in the first quarter of fiscal year 2003,
$2.5 million in fiscal years 2004 and 2005, and an additional $4.4 million in
periodic scheduled payments through February 2004. The Company's material
contractual obligations for the next five years and thereafter as of October 27,
2002 are as follows (in thousands):
Due in Fiscal Year
---------------------------------------------------------------------------------
Obligation Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Lines of Credit $10,098 $10,098 $ -- $ -- $ -- $ -- $ --
Long-term Debt 6,013 1,298 1,318 1,356 121 128 1,792
Capital Leases 1,432 895 525 9 3 -- --
Operating Leases 1,193 851 268 68 6 -- --
Land Leases 238 191 47 -- -- -- --
Earn-Out Liability 4,371 3,771 600 -- -- -- --
Licensing Obligation 1,750 150 200 200 200 200 800
------- ------- ------- ------- ------- ------- -------
Total $25,095 $17,254 $ 2,958 $ 1,633 $ 330 $ 328 $ 2,592
======= ======= ======= ======= ======= ======= =======
Landec believes that its debt facilities, cash from operations, along with
existing cash, cash equivalents and existing borrowing capacities will be
sufficient to finance its operational and capital requirements through at least
the next twelve months.
Landec's future capital requirements will depend on numerous factors,
including the progress of its research and development programs; the development
of commercial scale manufacturing capabilities; the development of marketing,
sales and distribution capabilities; the ability of Landec to establish and
maintain new collaborative and licensing arrangements; any decision to pursue
additional acquisition opportunities; weather conditions that can affect the
supply and price of produce, the timing and amount, if any, of payments received
under licensing and research and development agreements; the costs involved in
preparing, filing, prosecuting, defending and enforcing intellectual property
rights; the ability to comply with regulatory requirements; the emergence of
competitive technology and market forces; the effectiveness of product
commercialization activities and arrangements; and other factors. If Landec's
currently available funds, together with the internally generated cash flow from
operations are not sufficient to satisfy its capital needs, Landec would be
required to seek additional funding through other arrangements with
collaborative partners, additional bank borrowings and public or private sales
of its securities. There can be no assurance that additional funds, if required,
will be available to Landec on favorable terms if at all.
Additional Factors That May Affect Future Results
Landec desires to take advantage of the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under
the Securities Exchange Act of 1934. Specifically, Landec wishes to alert
readers that the following important factors, as well as other factors
including, without limitation, those described elsewhere in this report, could
in the future affect, and in the past have affected, Landec's actual results and
could cause Landec's results for future periods to differ materially from those
expressed in any forward-looking statements made by or on behalf of Landec.
Landec assumes no obligation to update such forward-looking statements.
-28-
We Have a History of Losses Which May Continue
We have incurred net losses in each fiscal year since our inception. Our
accumulated deficit as of October 27, 2002 totaled $59.3 million. We may incur
additional losses in the future. The amount of future net profits, if any, is
highly uncertain and we may never generate significant revenues or achieve
profitability.
Our Substantial Indebtedness Could Limit Our Financial and Operating Flexibility
At October 27, 2002, our total debt, including current maturities and capital
lease obligations, was approximately $17.5 million and the total debt to equity
ratio was approximately 31%. Of this debt, approximately $10.1 million is
comprised of revolving lines of credit and approximately $7.4 million is
comprised of term debt and capital lease obligations. The amount of debt
outstanding on our revolving lines of credit fluctuates over time, and the
agreements contain financial and other limiting covenants. All $10.1 million
outstanding under the revolving lines of credit is due in fiscal year 2003. Of
our term debt and capital lease obligations, approximately $2.2 million, $1.8
million and $1.4 million become due over each of the next three fiscal years,
respectively. This level of indebtedness limits our financial and operating
flexibility in the following ways:
o a substantial portion of net cash flow from operations must be
dedicated to debt service and will not be available for other
purposes;
o our ability to obtain additional debt financing in the future for
working capital is reduced;
o our ability to fund capital expenditures or acquisitions may be
limited;
o our ability to react to changes in the industry and economic
conditions generally may be limited.
In connection with the Apio acquisition, we may be obligated to make future
payments to the former shareholders of Apio of up to $7.8 million, plus an
additional $279,000 of accrued interest, for a performance based earn out and
future supply of produce. Of this amount, $4.1 million relates to the earn out
from fiscal year 2000 that is due to be paid in periodic scheduled payments
through February 2004 and $3.7 million relates to payments to be made in January
2003, 2004 and 2005.
Our ability to service this indebtedness and these future payments will depend
on our future performance, which will be affected by prevailing economic
conditions and financial, business and other factors, some of which are beyond
our control. If we are unable to service this debt, we would be forced to pursue
one or more alternative strategies such as selling assets, restructuring or
refinancing our indebtedness or seeking additional equity capital, which might
not be successful and which could substantia