LIFECORE BIOMEDICAL, INC. \DE\ - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
Fiscal Year Ended May 25, 2008, or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
Transition period for _________ to _________.
Commission
file number: 0-27446
LANDEC
CORPORATION
(Exact
name of registrant as specified in its charter)
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California
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94-3025618
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(State
or other jurisdiction of
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(IRS
Employer
|
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incorporation
or organization)
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Identification
Number)
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3603
Haven Avenue
Menlo
Park, California 94025
(Address
of principal executive offices)
Registrant's
telephone number, including area code:
(650)
306-1650
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock
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The
NASDAQ Stock Market, Inc.
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definition of “large accelerated filer” and “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Accelerated
Filer x
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Non
Accelerated Filer o
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Smaller
Reporting Company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o
No
x
The
aggregate market value of voting stock held by non-affiliates of the Registrant
was approximately $291,230,000 as of November 25, 2007, the last business day
of
the registrant’s most recently completed second fiscal quarter,
based
upon the closing sales price on The NASDAQ Global Select Market reported for
such date. Shares of Common Stock held by each officer and director and by
each
person who owns 10% or more of the outstanding Common Stock have been excluded
from such calculation in that such persons may be deemed to be affiliates.
This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As
of
July
18,
2008,
there were 26,164,653 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to its October 2008
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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2
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LANDEC
CORPORATION
ANNUAL
REPORT ON FORM 10-K
TABLE
OF
CONTENTS
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Item
No.
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Description
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Page
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Part
I
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1.
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Business
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4
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1A.
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Risk
Factors
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15
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1B.
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Unresolved
Staff Comments
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21
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2.
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Properties
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22
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3.
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Legal
Proceedings
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22
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4.
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Submission
of Matters to a Vote of Security Holders
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22
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Part
II
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5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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23
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6.
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Selected
Financial Data
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24
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7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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25
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7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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39
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8.
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Financial
Statements and Supplementary Data
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39
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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39
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9A.
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Controls
and Procedures
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40
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9B.
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Other
Information
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41
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Part
III
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10.
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Directors
and Executive Officers of the Registrant
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42
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11.
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Executive
Compensation
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42
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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42
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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42
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14.
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Principal
Accountant Fees and Services
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42
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Part
IV
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15.
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Exhibits
and Financial Statement Schedules
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43
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PART
I
Item
1. Business
This
report contains forward-looking statements within the meaning of Section 21E
of
the Securities Exchange Act of 1934. Words such as “projected,” “expects,”
“believes,” “intends” and “assumes” and similar expressions are used to identify
forward-looking statements. These statements are made based upon current
expectations and projections about our business and assumptions made by our
management and are not guarantees of future performance, nor do we assume any
obligation to update such forward-looking statements after the date
this
report is filed. Our actual results could differ materially from those projected
in the forward-looking statements for many reasons, including the risk factors
listed in Item 1A.“Risk
Factors” and
the
factors discussed below.
General
Landec
Corporation and its subsidiaries (“Landec” or the “Company”) design, develop,
manufacture and sell temperature-activated and other specialty polymer products
for a variety of food products, agricultural products, and licensed partner
applications. The Company’s proprietary polymer technology is the foundation,
and a key differentiating advantage, upon which Landec has built its
business.
On
December 1, 2006, Landec sold its direct marketing and sales seed company,
Fielder’s Choice Direct (“FCD”), which included the Fielder’s Choice
Direct®
and
Heartland Hybrid®
brands,
to American Seeds, Inc., a wholly owned subsidiary of Monsanto Company
(“Monsanto”). Subsequent to the sale of FCD, Landec now has three core
businesses - Food Products Technology, Commodity Trading and Technology
Licensing which are
described below. Financial information concerning the industry segments for
which the Company reported its operations during fiscal years 2006, 2007 and
2008 is summarized in Note 14 to the Consolidated Financial
Statements.
Our
Food
Products Technology business is operated through a subsidiary, Apio, Inc.
(“Apio”), and combines our proprietary food packaging technology with the
capabilities of a large national food supplier and value-added produce
processor. Value-added processing uses Landec’s proprietary BreatheWay®
packaging technology to package produce that is processed by washing, and in
some cases cutting and mixing, resulting in packaged produce that achieves
increased shelf life and reduced shrink (waste) and eliminates the need for
ice
during distribution.
Our
Commodity Trading business is operated through Apio, Inc. and combines Apio’s
export company, Cal Ex Trading Company (“Cal-Ex”) with Apio’s domestic buy-sell
commodity business that purchases and sells whole fruit and vegetable products
to Asia and domestically to Wal-Mart.
Our
Technology Licensing business includes the licensing of proprietary Intellicoat®
seed coating technology which we have licensed to Monsanto and our Intelimer
polymer business that licenses and/or supplies products outside of our Food
Products Technology business to companies such as Air Products and Chemicals,
Inc. (“Air Products”) and Nitta Corporation (“Nitta”).
The
Company's core polymer products are based on its patented proprietary Intelimer®
polymers, which differ from other polymers in that they can be customized to
abruptly change their physical characteristics when heated or cooled through
a
pre-set temperature switch. For instance, Intelimer polymers can change within
the range of one or two degrees Celsius from a non-adhesive state to a highly
tacky, adhesive state; from an impermeable state to a highly permeable state;
or
from a solid state to a viscous liquid state. These abrupt changes are
repeatedly reversible and can be tailored by Landec to occur at specific
temperatures, thereby offering substantial competitive advantages in the
Company's target markets.
The
Company was incorporated in California on October 31, 1986. The Company
completed its initial public offering in 1996 and is listed on The NASDAQ Global
Select Market under the symbol “LNDC”.
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Technology
Overview
Polymers
are important and versatile materials found in many of the products of modern
life. Certain polymers, such as cellulose and natural rubber, occur in nature.
Man-made polymers include nylon fibers used in carpeting and clothing, coatings
used in paints and finishes, plastics such as polyethylene, and elastomers
used
in automobile tires and latex gloves. Historically, synthetic polymers have
been
designed and developed primarily for improved mechanical and thermal properties,
such as strength and the ability to withstand high temperatures. Improvements
in
these and other properties and the ease of manufacturing of synthetic polymers
have allowed these materials to replace wood, metal and natural fibers in many
applications over the last 50 years. More recently, scientists have focused
their efforts on identifying and developing sophisticated polymers with novel
properties for a variety of commercial applications.
Landec's
Intelimer polymers are a proprietary class of synthetic polymeric materials
that
respond to temperature changes in a controllable, predictable way. Typically,
polymers gradually change in adhesion, permeability and viscosity over broad
temperature ranges. Landec's Intelimer materials, in contrast, can be designed
to exhibit abrupt changes in permeability, adhesion and/or viscosity over
temperature ranges as narrow as 1°C
to
2°C.
These
changes can be designed to occur at relatively low temperatures (0°C
to
100°C)
that
are relatively easy to maintain in industrial and commercial environments.
Figure 1
illustrates the effect of temperature on Intelimer materials as compared to
typical polymers.
Landec's
proprietary polymer technology is based on the structure and phase behavior
of
Intelimer materials. The abrupt thermal transitions of specific Intelimer
materials are achieved through the controlled use of hydrocarbon side chains
that are attached to a polymer backbone. Below a pre-determined switch
temperature, the polymer's side chains align through weak hydrophobic
interactions resulting in a crystalline structure. When this side chain
crystallizable polymer is heated to, or above, this switch temperature, these
interactions are disrupted and the polymer is transformed into an amorphous,
viscous state. Because this transformation involves a physical and not a
chemical change, this process is repeatedly reversible. Landec can set the
polymer switch temperature anywhere between 0°C
to
100°C
by
varying the length of the side chains. The reversible transitions between
crystalline and amorphous states are illustrated in Figure 2
below.
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5
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Side
chain crystallizable polymers were first discovered by academic researchers
in
the mid-1950's. These polymers were initially considered to be merely of
scientific curiosity from a polymer physics perspective, and, to the Company's
knowledge, no significant commercial applications were pursued. In the
mid-1980's, Dr. Ray Stewart, the Company's founder, became interested in
the idea of using the temperature-activated permeability properties of these
polymers to deliver various materials such as catalysts and pesticides. After
forming Landec in 1986, Dr. Stewart subsequently discovered broader utility
for
these polymers. After several years of basic research, commercial development
efforts began in the early 1990's, resulting in initial products in mid-1994.
Landec's
Intelimer materials are generally synthesized from long side-chain acrylic
monomers that are derived primarily from natural materials such as coconut
and
palm oils that are highly purified and designed to be manufactured economically
through known synthetic processes. These acrylic-monomer raw materials are
then
polymerized by Landec leading to many different side-chain crystallizable
polymers whose properties vary depending upon the initial materials and the
synthetic process. Intelimer materials can be made into many different forms,
including films, coatings, microcapsules and discrete forms.
Description
of Core Business
Landec
participates in three core business segments- Food Products Technology,
Commodity Trading and Technology Licensing.
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6
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Food
Products Technology Business
The
Company began marketing its proprietary Intelimer-based BreatheWay membranes
in
1996 for use in the fresh-cut produce packaging market, one of the fastest
growing segments in the produce industry. Landec’s proprietary BreatheWay packaging
technology when combined with fresh-cut or whole produce results in packaged
produce with increased shelf life and reduced shrink (waste) without the need
for ice during distribution. The resulting products are referred to as
“value-added” products. In 1999, the Company acquired Apio, its then largest
customer in the Food Products Technology business and one of the nation’s
leading marketers and packers of produce and specialty packaged fresh-cut
vegetables. Apio utilizes state-of-the-art fresh-cut produce processing
technology and year-round access to specialty packaged produce products which
Apio distributes to the top U.S. retail grocery chains, major club stores and
to
the foodservice industry. The Company’s proprietary BreatheWay packaging
business has been combined with Apio into a subsidiary that retains the Apio,
Inc. name. This vertical integration within the Food Products Technology
business gives Landec direct access to the large and growing fresh-cut and
whole
produce market.
The
Technology and Market Opportunity: Proprietary
BreatheWay Packaging Technology
Certain
types of fresh-cut and whole produce can spoil or discolor rapidly when packaged
in conventional packaging materials and are therefore limited in their ability
to be distributed broadly to markets. The Company’s proprietary BreatheWay
packaging technology extends the shelf life and quality of fresh-cut and whole
produce.
Fresh-cut
produce is pre-washed, cut and packaged in a form that is ready to use by the
consumer and is thus typically sold at premium price levels compared to
unpackaged produce. The total U.S. fresh produce market is estimated to be
$100
billion to $120 billion. Of this, U.S. retail sales of fresh-cut produce is
estimated to comprise 10% of the fresh produce market. The Company believes
that
the growth of this market has been driven by consumer demand and the willingness
to pay for convenience, freshness, uniform quality, safety and nutritious
produce delivered to the point of sale. According to the International Fresh-Cut
Produce Association, the fresh-cut produce market is one of the highest growth
areas in retail grocery stores.
Although
fresh-cut produce companies have had success in the salad market, the industry
has been slow to diversify into other fresh-cut vegetables or fruits due
primarily to limitations in film and plastic tray materials used to package
fresh-cut produce. After harvesting, vegetables and fruit continue to respire,
consuming oxygen and releasing carbon dioxide. Too much or too little oxygen
can
result in premature spoilage and decay and, in some cases, promote the growth
of
microorganisms that jeopardize inherent food safety. Conventional packaging
films used today, such as polyethylene and polypropylene, can be made with
modest permeability to oxygen and carbon dioxide, but often do not provide
the
optimal atmosphere for the produce. Shortcomings of conventional packaging
materials have not significantly hindered the growth in the fresh-cut salad
market because lettuce, unlike many vegetables and fruit, has low respiration
requirements.
The
respiration rate of produce varies from vegetable-to-vegetable and from
fruit-to-fruit. The challenge facing the industry is to develop packaging for
the high respiring, high value and shelf life sensitive vegetable and fruit
markets. The Company believes that today’s conventional packaging films face
numerous challenges in adapting to meet the diversification of pre-cut
vegetables and fruit evolving in the industry without compromising shelf life
and produce quality. To mirror the growth experienced in the fresh-cut salad
market, the markets for high respiring vegetables and fruit such as broccoli,
cauliflower, asparagus, papayas, bananas and berries will require a more
versatile and sophisticated packaging solution for which the Company’s
BreatheWay
packaging technology
was
developed.
The
respiration rate of produce also varies with temperature. As temperature
increases, produce generally respires at a higher rate, which speeds up the
aging process, resulting in shortened shelf life and increased potential for
decay, spoilage, and loss of texture and dehydration. As produce is transported
from the processing plant through the refrigerated distribution chain to
foodservice locations, retail grocery stores and club stores, and finally to
the
ultimate consumer, temperatures can fluctuate significantly. Therefore,
temperature control is a constant challenge in preserving the quality of
fresh-cut and whole produce — a challenge for which few current packaging films
can compensate. The Company believes that its temperature-responsive
BreatheWay
packaging technology
is well suited to the challenges of the produce distribution
process.
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7
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Using
its
Intelimer polymer technology, Landec has developed packaging technology that
it
believes addresses many of the shortcomings of conventional packaging materials.
A membrane is applied over a small cutout section or an aperture of a flexible
film bag or plastic tray. This highly permeable “window” acts as the mechanism
to provide the majority of the gas transmission requirements for the entire
package. These membranes are designed to provide three principal
benefits:
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·
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High
Permeability.
Landec's BreatheWay
packaging technology
is
designed to permit transmission of oxygen and carbon dioxide at 300
times
the rate of conventional packaging films. The Company believes that
these
higher permeability levels will facilitate the packaging diversity
required to market many types of fresh-cut and whole produce.
|
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·
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Ability
to Adjust Oxygen and Carbon Dioxide Permeability. BreatheWay
packaging can
be tailored with carbon dioxide to oxygen transfer ratios ranging
from 1.0
to 12.0 and selectively transmit oxygen and carbon dioxide at optimum
rates to sustain the quality and shelf life of packaged
produce.
|
|
·
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Temperature
Responsiveness.
Landec has developed breathable membranes that can be designed to
increase
or decrease permeability in response to environmental temperature
changes.
The Company has developed packaging that responds to higher oxygen
requirements at elevated temperatures but is also reversible, and
returns
to its original state as temperatures decline. The temperature
responsiveness of these membranes allows ice to be removed from the
distribution system which results in numerous benefits. These benefits
include (1) a substantial decrease in freight cost, (2) reduced risk
of
contaminated produce because ice can be a carrier of micro organisms,
(3)
the elimination of expensive waxed cartons that cannot be recycled,
and
(4) the potential decrease in work related accidents due to melted
ice.
|
Landec
believes that growth of the overall produce market will be driven by the
increasing demand for the convenience of fresh-cut produce. This demand will
in
turn require packaging that facilitates the quality and shelf life of produce
transported to fresh-cut distributors in bulk and pallet quantities. The Company
believes that in the future its BreatheWay
packaging technology
will be
useful for packaging a diverse variety of fresh-cut and whole produce products.
Potential opportunities for using Landec’s technology outside of the produce
market exist in cut flowers and in other food products.
Landec
is
working with leaders in the club store, retail grocery chain and foodservice
markets. The Company believes it will have growth opportunities for the next
several years through new customers and products in the United States, expansion
of its existing customer relationships, and through export and shipments of
specialty packaged produce.
Landec
manufactures its BreatheWay
packaging
through
selected qualified contract manufacturers. In addition to using BreatheWay
packaging for its value-added produce business, the Company markets and sells
BreatheWay
packaging
directly
to food distributors.
The
Business: Food Products Technology
Our
Food
Products Technology business, operated through our Apio subsidiary, had revenues
of approximately $171 million for the fiscal year ended May 25, 2008, $156
million for the fiscal year ended May 27, 2007 and $137 million for the fiscal
year ended May 28, 2006.
Based
in
Guadalupe, California, Apio’s primary business surrounds specialty packaged
fresh-cut and whole value-added processed products that are washed and packaged
in our proprietary BreatheWay packaging. The fresh-cut value-added processed
products business markets a variety of fresh-cut and whole vegetables to the
top
retail grocery chains, club stores and foodservice suppliers. During the fiscal
year ended May 25, 2008, Apio shipped nearly nineteen million cartons of produce
to leading supermarket retailers, wholesalers, foodservice suppliers and club
stores throughout North America, primarily in the United States.
There
are
four major distinguishing characteristics of Apio that provide competitive
advantages in the Food Products Technology market:
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·
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Value-Added
Supplier:
Apio has structured its business as a marketer and seller of fresh-cut
and
whole value-added produce. It is focused on selling products under
its Eat
Smart® brand and other brands for its fresh-cut and whole value-added
products. As retail grocery and club store chains consolidate, Apio
is
well positioned as a single source of a broad range of products.
|
|
·
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Reduced
Farming Risks:
Apio reduces its farming risk by not taking ownership of farmland,
and
instead, contracts with growers for produce. The year-round sourcing
of
produce is a key component to the fresh-cut and whole value-added
processing business.
|
|
·
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Lower
Cost Structure:
Apio has strategically invested in the rapidly growing fresh-cut
and whole
value-added produce business. Apio’s 96,000 square foot value-added
processing plant, which was expanded in fiscal year 2007 from 60,000
square feet, is automated with state-of-the-art vegetable processing
equipment. Virtually all of Apio’s value-added products utilize Apio’s
proprietary BreatheWay
packaging technology.
Apio’s strategy is to operate one large central processing facility in
one
of California’s largest, lowest cost growing regions (Santa Maria Valley)
and use packaging technology to allow for the nationwide delivery
of fresh
produce products.
|
|
·
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Expanded
Product Line Using Technology:
Apio, through the use of its BreatheWay
packaging technology,
is introducing on average fifteen new value-added products each year.
These new product offerings range from various sizes of fresh-cut
bagged
products, to vegetable trays, to whole produce, to vegetable salads
and
snack packs. During the last twelve months, Apio has introduced 20
new
products.
|
Apio
established its Apio Packaging division (formerly known as Apio Tech) in 2005
to
advance the sales of BreatheWay packaging technology for shelf-life sensitive
vegetables and fruit. The technology also includes unique packaging solutions
for produce in large packages including shipping and pallet-sized containers.
Apio
Packaging’s first program has concentrated on bananas and was formally
consummated when Apio entered into an agreement to supply Chiquita Brands
International, Inc. (“Chiquita”) with its proprietary banana packaging
technology on a worldwide basis for the ripening, conservation and shelf-life
extension of bananas for most applications on an exclusive basis and for other
applications on a non-exclusive basis. In addition, Apio provides Chiquita
with
ongoing research and development and process technology support for the
BreatheWay membranes and bags, and technical service support throughout the
customer chain in order to assist in the development and market acceptance
of
the technology.
For
its
part, Chiquita provides marketing, distribution and retail sales support for
Chiquita® bananas sold worldwide in BreatheWay packaging. To maintain the
exclusive license, Chiquita must meet quarterly minimum purchase thresholds
of
BreatheWay banana packages.
The
initial market focus for the BreatheWay banana packaging technology using
Chiquita bananas has been commercial outlets that normally do not sell bananas
because of their short shelf-life - outlets such as quick serve restaurants,
convenience stores and coffee chain outlets. Chiquita is currently developing
packaging designs for bananas packaged with Landec’s BreatheWay technology for
sale in retail grocery chains.
The
Company recently expanded the use of its BreatheWay technology to avocados
under
an expanded licensing agreement with Chiquita. Commercial sales of avocados
into
the food service industry recently began.
The
Company’s specialty packaging for case liner products reduces freight expense up
to 50% for certain produce commodities by eliminating the weight and space
consumed by ice. In addition to reducing the cost of freight, the removal of
ice
from the distribution system offers additional benefits as outlined above.
Product
enhancements in the fresh-cut vegetable line include fresh-cut vegetable trays
designed to look like they were freshly made in the retail grocery store or
at
home. The rectangular tray design is convenient for storage in consumers’
refrigerators and expands the Company’s wide-ranging vegetable tray line.
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9
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In
May
2007, Apio entered into an 18-month research and development agreement with
Natick Soldier Research, Development & Engineering Center, a branch of the
U.S. Military, to develop commercial uses for Landec’s BreatheWay packaging
technology within the U.S. Military by significantly increasing the shelf life
of produce for overseas shipments.
In
June
2008, Apio entered into a collaboration agreement with Seminis Vegetable Seeds,
Inc., a wholly-owned subsidiary of Monsanto, to develop novel broccoli and
cauliflower products for the exclusive sale by Apio in the North American
market. These novel products will be packaged in Landec’s proprietary BreatheWay
packaging and will be sold to retail grocery chains, club stores and the food
service industry. Field trials for the initial target varieties are expected
to
being in the Fall of 2008.
In
addition, the Company has commercialized new lines of fresh cut vegetable side
dishes, vegetable salads and vegetable snacks.
Commodity
Trading Business
Commodity
Trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex and from the purchase and sale of whole commodity fruit
and vegetable products domestically to Wal-Mart. The Commodity Trading business
is a buy/sell business that realizes a commission-based margin in the 4-6%
range.
The
Business: Commodity Trading
Commodity
Trading had revenues of approximately $60 million for the fiscal year ended
May
25, 2008, $50 million for the fiscal year ended May 27, 2007 and $58 million
for
the fiscal year ended May 28, 2006.
Apio
is
uniquely positioned to benefit from the growth in export sales to Asia and
Europe over the next decade with Cal-Ex. Through Cal-Ex, Apio is currently
one
of the largest U.S. exporters of broccoli to Asia and is selling its iceless
products to Asia using proprietary BreatheWay packaging technology.
Technology
Licensing Business
Seeds
Business - Intellicoat Seed Coatings and Landec Ag
Landec
Ag
had revenues of approximately $5.4 million for the fiscal year ended May 25,
2008, $2.8 million for the fiscal year ended May 27, 2007 and $34.1 million
for
the fiscal year ended May 28, 2006. Revenues for fiscal years 2008 and 2007
declined significantly from fiscal year 2006 as a result of the sale of FCD
on
December 1, 2006.
Following
the sale of FCD on December 1, 2006, Landec Ag’s strategy has been to work
closely with Monsanto to further develop its patented, functional polymer
coating technology that can be broadly sold and/or licensed to the seed
industry. In accordance with its license, supply and R&D agreement with
Monsanto, Landec Ag is currently focused on commercializing products for the
seed corn market and then plans to broaden the technology to other seed crop
applications.
The
Technology and Market Opportunity: Intellicoat Seed Coatings
Landec's
Intellicoat seed coating applications are designed to control seed germination
timing, increase crop yields, reduce risks and extend crop-planting windows.
These coatings are currently available on hybrid corn, soybeans and male inbred
corn used for seed production. In fiscal year 2000, Landec Ag launched its
first
commercial product, Pollinator Plusâ
coatings, which is a coating application used by seed companies as a method
for
spreading pollination to increase yields and reduce risk in the production
of
hybrid seed corn. There are approximately 650,000 acres of seed production
in
the United States and in 2008 Pollinator Plus was used by 25 seed companies
on
approximately 17% of the seed corn production acres in the U.S.
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10
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Beginning
in 2003, Landec commercialized Early Plantâ
corn by
selling the product directly to farmers through the Fielder's Choice
Directâ
brand.
This application allows farmers to plant into cold soils without the risk of
chilling injury, and enables farmers to plant as much as four weeks earlier
than
normal. With this capability, farmers are able to utilize labor and equipment
more efficiently, provide flexibility during the critical planting period and
avoid yield losses caused by late planting. In 2008, five seed companies offered
Intellicoat on their hybrid seed corn offerings.
Monsanto
announced several months ago that it has formed a new business called the Seed
Treatment Business which will allow Monsanto to develop its seed treatment
requirements internally. The concept of seed treatments is to place an
insecticide or fungicide directly onto the seed surface in order to protect
the
seed and the seedling as it emerges. Landec’s Intellicoat® seed coating
technology could be an integral and proprietary part of Monsanto’s commitment to
building a major position in seed treatments worldwide by using Landec’s seed
coatings as a “carrier” of insecticides/fungicides which can be dispensed at the
appropriate time based on time or soil temperature. During fiscal year 2009
we
will be focused on validating the use of Landec’s coating technology for these
applications.
Landec
Ag - Sale of FCD
The
acquisition price for FCD was $50 million in cash paid at the close. In
addition, the Company could have earned up to an additional $5 million based
on
FCD results for the twelve months ended May 31, 2007. None of the earn-out
was
earned. During the fiscal year 2007, Landec recorded income from the sale,
net
of direct expenses and bonuses, of $22.7 million. The income that was recorded
is equal to the difference between the fair value of FCD of $40 million and
its
net book value, less direct selling expenses and bonuses. In accordance with
generally accepted accounting principles, the portion of the $50 million of
proceeds in excess of the fair value of FCD, or $10 million, will be allocated
to the technology license agreement described below and will be recognized
as
revenue ratably over the five year term of the technology license agreement
or
$2 million per year beginning December 1, 2006. The fair value was determined
by
management with the assistance of an independent appraiser.
On
December 1, 2006, Landec also entered into a five-year co-exclusive technology
license and polymer supply agreement (“the Agreement”) with Monsanto for the use
of Landec’s Intellicoat polymer
seed coating technology. Under the terms of the Agreement, Monsanto will pay
Landec Ag $2.6 million per year in exchange for (1) a co-exclusive right to
use
Landec’s Intellicoat temperature
activated seed coating technology worldwide during the license period, (2)
the
right to be the exclusive global sales and marketing agent for the Intellicoat
seed coating technology, and (3) the right to purchase the technology any time
during the five year term of the Agreement. Monsanto will also fund all
operating costs, including all Intellicoat research
and development, product development and non-replacement capital costs during
the five year agreement period. For the fiscal years ended May 25, 2008 and
May
27, 2007, Landec recognized $5.4 million and $2.7 million, respectively, in
revenues and income from the Agreement.
The
Agreement also provides for a fee payable to Landec Ag of $4 million if Monsanto
elects to terminate the agreement or $8 million if Monsanto elects to purchase
Landec Ag. If the purchase option is exercised before the fifth anniversary
of
the Agreement, or if Monsanto elects to terminate the Agreement, all annual
license fees and supply payments that have not been paid to Landec Ag will
become due upon the purchase. If Monsanto does not exercise its purchase option
by the fifth anniversary of the Intellicoat agreement,
Landec Ag will receive the termination fee and all rights to the
Intellicoat seed
coating technology will revert to Landec. Accordingly, Landec Ag will receive
minimum guaranteed payments of $17 million for license fees and polymer supply
payments over five years or $21 million in maximum payments if Monsanto elects
to purchase Landec Ag. The minimum guaranteed payments and the deferred gain
of
$2 million per year described above will result in Landec recognizing revenue
and operating income of $5.4 million per year for fiscal years 2008 through
2011
and $2.7 million per year for fiscal years 2007 and 2012. The incremental $4
million to be received in the event Monsanto exercises the purchase option
has
been deferred and will be recognized upon the exercise of the purchase option.
The fair value of the purchase option was determined by management to be less
than the amount of the deferred revenue.
If
Monsanto elects to purchase the stock of Landec Ag, a gain or loss on the sale
of the stock of Landec Ag will be recognized at the time of purchase. If
Monsanto exercises its purchase option, Landec and Monsanto will enter into
a
new long-term supply agreement in which Landec will continue to be the exclusive
supplier of Intellicoat polymer materials to Monsanto.
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11
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Non-Seeds
Business
We
believe our technology has commercial potential in a wide range of industrial,
consumer and medical applications beyond those identified in our core
businesses. For example, our core patented technology, Intelimer materials,
can
be used to trigger catalysts, insecticides or fragrances just by changing the
temperature of the Intelimer materials or to activate adhesives through
controlled temperature change. In order to exploit these opportunities, we
have
entered into and will enter into licensing and collaborative corporate
agreements for product development and/or distribution in certain fields.
However, given the infrequency and unpredictability of when the Company may
enter into any such licensing and research and development arrangements, the
Company is unable to disclose its financial expectations in advance of entering
into such arrangements.
Industrial
Materials and Adhesives
Landec’s
industrial product development strategy is to focus on coatings, catalysts,
resins, additives and adhesives in the polymer materials market. During the
product development stage, the Company identifies corporate partners to support
the ongoing development and testing of these products, with the ultimate goal
of
licensing the applications at the appropriate time.
Intelimer
Polymer Systems
Landec
has developed latent catalysts useful in extending pot-life, extending shelf
life, reducing waste and improving thermoset cure methods. Some of these latent
catalysts are currently being distributed by Akzo-Nobel Chemicals B.V. through
a
licensing agreement with Air Products. The Company has also developed Intelimer
polymer materials useful in enhancing the formulating options for various
personal care products. The rights to develop and sell Landec’s latent catalysts
and personal care technologies were licensed to Air Products in March 2006.
Personal
Care and Cosmetic Applications
Landec’s
personal care and cosmetic applications strategy is focused on supplying
Intelimer materials to industry leaders for use in lotions and creams, and
potentially color cosmetics, lipsticks and hair care. The Company's partner,
Air
Products, is currently shipping products to L’Oreal for use in lotions and
creams. To date, the sales of Landec materials used in L’Oreal products have not
been material to the Company’s financials.
Medical
Applications
On
December 23, 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences Corporation (“Aesthetic Sciences”). Aesthetic Sciences paid
Landec an upfront license fee of $250,000 for the exclusive rights to use
Landec's Intelimer materials technology for the development of dermal fillers
worldwide. Landec will also receive royalties on the sale of products
incorporating Landec’s technology. In addition, the Company has received shares
of preferred stock valued at $1.8 million which as of May 25, 2008 represented
a
19.9% ownership interest in Aesthetic Sciences. At
this
time, the Company is unable to predict the ultimate outcome of the collaboration
with Aesthetic Sciences and the timing or amount of future revenues, if
any.
Sales
and Marketing
Each
of
the Company’s core businesses are supported by dedicated sales and marketing
resources. The Company intends to develop its internal sales capacity as more
products progress toward commercialization and as business volume expands
geographically.
During
fiscal years 2008, 2007 and 2006, sales to the Company’s top five customers
accounted for approximately 47%, 50% and 46%, respectively, of its revenues,
with the top customer, Costco Wholesale Corp., accounting for approximately
20%,
21% and 16%, respectively, of the Company’s revenues.
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12
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Apio
Apio
has
22 sales people, located in central California and throughout the U.S.,
supporting the export business and the specialty packaged value-added produce
business.
Seasonality
The
Company’s sales are moderately seasonal. Prior to the sale of FCD, Landec Ag
revenues and profits were concentrated over a few months during the spring
planting season (generally during the Company’s third and fourth fiscal
quarters). In addition, the Food Products Technology business can be heavily
affected by seasonal weather factors which have impacted quarterly results,
such
as high cost of sourcing product in June/July 2006 and January 2007 due to
a
shortage of essential value-added produce items. The Commodity Trading business
also typically recognized a much higher percentage of its revenues and profit
during the first half of Landec’s fiscal year compared to the second
half.
Manufacturing
and Processing
Food
Products Technology Business
The
manufacturing process for the Company's proprietary
BreatheWay packaging products
is comprised of polymer manufacturing, membrane manufacturing and label package
conversion. A third party toll manufacturer currently makes virtually all of
the
polymers for the BreatheWay
packaging.
Select
outside contractors currently manufacture the breathable membranes and Landec
has transitioned virtually all of the label package conversion to Apio’s
Guadalupe facility to meet the increasing product demand and to provide
additional developmental capabilities.
Apio
processes virtually all of its fresh-cut value-added products in its
state-of-the-art processing facility located in Guadalupe, California. Cooling
of produce is done through third parties and Apio Cooling LP, a separate
consolidated subsidiary in which Apio has a 60% ownership interest and is the
general partner.
Technology
Licensing Business
The
Company performs its batch coating operations in a leased facility in Oxford,
Indiana. This facility is being used to coat other seed companies’ inbred seed
corn with the Company’s Pollinator Plus seed corn coatings.
The
Company has a pilot manufacturing facility in Indiana to support process
development, scale-up and commercialization of the Company’s seed coating
programs. This facility utilizes a continuous coating process that has increased
seed coating capabilities by over tenfold compared to the previous system using
batch coaters.
General
Many
of
the raw materials used in manufacturing certain of the Company’s products are
currently purchased from a single source, including certain monomers used to
synthesize Intelimer polymers
and substrate materials for the Company’s breathable membranes. Upon
manufacturing scale-up of seed coating operations, the Company may enter into
alternative supply arrangements. Although to date the Company has not
experienced difficulty acquiring materials for the manufacture of its products,
no assurance can be given that interruptions in supplies will not occur in
the
future, that the Company will be able to obtain substitute vendors, or that
the
Company will be able to procure comparable materials at similar prices and
terms
within a reasonable time. Any such interruption of supply could have a material
adverse effect on the Company’s ability to manufacture and distribute its
products and, consequently, could materially and adversely affect the Company’s
business, operating results and financial condition.
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13
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Research
and Development
Landec
is
focusing its research and development resources on both existing and new
applications of its Intelimer technology. Expenditures for research and
development for the fiscal years ended May 25, 2008, May 27, 2007 and May 28,
2006 were $3.3 million, $3.1 million and $3.0 million, respectively. Research
and development expenditures funded by corporate or governmental partners were
$418,000 for the fiscal year ended May 25, 2008, $661,000 for the fiscal year
ended May 27, 2007 and $100,000 for the fiscal year ended May 28, 2006. The
Company may continue to seek funds for applied materials research programs
from
U.S. government agencies as well as from commercial entities. The Company
anticipates that it will continue to have significant research and development
expenditures in order to maintain its competitive position with a continuing
flow of innovative, high-quality products and services. As of May 25, 2008,
Landec had 25 employees engaged in research and development with experience
in
polymer and analytical chemistry, product application, product formulation,
mechanical and chemical engineering.
Competition
The
Company operates in highly competitive and rapidly evolving fields, and new
developments are expected to continue at a rapid pace. Competition from large
food packaging and agricultural companies is intense. In addition, the nature
of
the Company's collaborative arrangements and its technology licensing business
may result in its corporate partners and licensees becoming competitors of
the
Company. Many of these competitors have substantially greater financial and
technical resources and production and marketing capabilities than the Company,
and many have substantially greater experience in conducting field trials,
obtaining regulatory approvals and manufacturing and marketing commercial
products. There can be no assurance that these competitors will not succeed
in
developing alternative technologies and products that are more effective, easier
to use or less expensive than those which have been or are being developed
by
the Company or that would render the Company's technology and products obsolete
and non-competitive.
Patents
and Proprietary Rights
The
Company's success depends in large part on its ability to obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has had 35 U.S. patents issued
of which 28 remain active as of May 25, 2008 with expiration dates ranging
from
2010 to 2023. The Company's issued patents include claims relating to
compositions, devices and use of a class of temperature sensitive polymers
that
exhibit distinctive properties of permeability, adhesion and viscosity control.
There can be no assurance that any of the pending patent applications will
be
approved, that the Company will develop additional proprietary products that
are
patentable, that any patents issued to the Company will provide the Company
with
competitive advantages or will not be challenged by any third parties or that
the patents of others will not prevent the commercialization of products
incorporating the Company's technology. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any
of
the Company's products or design around the Company's patents. Any of the
foregoing results could have a material adverse effect on the Company's
business, operating results and financial condition.
The
commercial success of the Company will also depend, in part, on its ability
to
avoid infringing patents issued to others. The Company has received, and may
in
the future receive, from third parties, including some of its competitors,
notices claiming that it is infringing third party patents or other proprietary
rights. If the Company were determined to be infringing any third-party patent,
the Company could be required to pay damages, alter its products or processes,
obtain licenses or cease certain activities. In addition, if patents are issued
to others which contain claims that compete or conflict with those of the
Company and such competing or conflicting claims are ultimately determined
to be
valid, the Company may be required to pay damages, to obtain licenses to these
patents, to develop or obtain alternative technology or to cease using such
technology. If the Company is required to obtain any licenses, there can be
no
assurance that the Company will be able to do so on commercially favorable
terms, if at all. The Company's failure to obtain a license to any technology
that it may require to commercialize its products could have a material adverse
impact on the Company's business, operating results and financial condition.
Litigation,
which could result in substantial costs to the Company, may also be necessary
to
enforce any patents issued or licensed to the Company or to determine the scope
and validity of third-party proprietary rights. If competitors of the Company
prepare and file patent applications in the United States that claim technology
also claimed by the Company, the Company may have to participate in interference
proceedings declared by the U.S. Patent and Trademark Office to determine
priority of invention, which could result in substantial cost to and diversion
of effort by the Company, even if the eventual outcome is favorable to the
Company. Any such litigation or interference proceeding, regardless of outcome,
could be expensive and time consuming and could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology and
consequently, could have a material adverse effect on the Company's business,
operating results and financial condition.
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14
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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.
Employees
As
of May
25, 2008, Landec had 118 full-time employees, of whom 54 were dedicated to
research, development, manufacturing, quality control and regulatory affairs
and
64 were dedicated to sales, marketing and administrative activities. Landec
intends to recruit additional personnel in connection with the development,
manufacturing and marketing of its products. None of Landec's employees is
represented by a union, and Landec believes its relationship with its employees
is good.
Available
Information
Landec’s
Web site is http://www.landec.com. Landec makes available free of charge its
annual, quarterly and current reports, and any amendments to those reports,
as
soon as reasonably practicable after electronically filing such reports with
the
SEC.
Information contained on our website is not part of this Report.
Item
1A. Risk
Factors
Landec
desires to take advantage of the “Safe Harbor” provisions of the Private
Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under
the Securities Exchange Act of 1934. Specifically, Landec wishes to alert
readers that the following important factors, as well as other factors
including, without limitation, those described elsewhere in this report, could
in the future affect, and in the past have affected, Landec’s actual results and
could cause Landec’s results for future periods to differ materially from those
expressed in any forward-looking statements made by or on behalf of Landec.
Landec assumes no obligation to update such forward-looking
statements.
Our
Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock
Price
to Decline
In
the
past, our results of operations have fluctuated significantly from quarter
to
quarter and are expected to continue to fluctuate in the future. Historically,
Landec Ag has been the primary source of these fluctuations, as its revenues
and
profits were concentrated over a few months during the spring planting season
(generally during our third and fourth fiscal quarters). In addition, Apio
can
be heavily affected by seasonal and weather factors which have impacted
quarterly results, such as the high cost of sourcing product in June/July 2006
and January 2007 due to a shortage of essential value-added produce items.
Our
earnings may also fluctuate based on our ability to collect accounts receivables
from customers and note receivables from growers and on price fluctuations
in
the fresh vegetables and fruits markets. Other factors that affect our food
and/or agricultural operations include:
|
·
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the
seasonality of our supplies;
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·
|
our
ability to process produce during critical harvest
periods;
|
|
·
|
the
timing and effects of ripening;
|
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15
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·
|
the
degree of perishability;
|
|
·
|
the
effectiveness of worldwide distribution
systems;
|
|
·
|
total
worldwide industry volumes;
|
|
·
|
the
seasonality of consumer demand;
|
|
·
|
foreign
currency fluctuations; and
|
|
·
|
foreign
importation restrictions and foreign political
risks.
|
As
a
result of these and other factors, we expect to continue to experience
fluctuations in quarterly operating results.
We
May Not Be Able to Achieve Acceptance of Our New Products in the
Marketplace
Our
success in generating significant sales of our products will depend in part
on
the ability of us and our partners and licensees to achieve market acceptance
of
our new products and technology. The extent to which, and rate at which, we
achieve market acceptance and penetration of our current and future products
is
a function of many variables including, but not limited to:
|
·
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price;
|
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·
|
safety;
|
|
·
|
efficacy;
|
|
·
|
reliability;
|
|
·
|
conversion
costs;
|
|
·
|
marketing
and sales efforts; and
|
|
·
|
general
economic conditions affecting purchasing
patterns.
|
We
may
not be able to develop and introduce new products and technologies in a timely
manner or new products and technologies may not gain market acceptance. We
are
in the early stage of product commercialization of certain Intelimer-based
specialty packaging, Intellicoat seed coatings and other Intelimer polymer
products and many of our potential products are in development. We believe
that
our future growth will depend in large part on our ability to develop and market
new products in our target markets and in new markets. In particular, we expect
that our ability to compete effectively with existing food products,
agricultural, industrial and medical companies will depend substantially on
successfully developing, commercializing, achieving market acceptance of and
reducing the cost of producing our products. In addition, commercial
applications of our temperature switch polymer technology are relatively new
and
evolving. Our failure to develop new products or the failure of our new products
to achieve market acceptance would have a material adverse effect on our
business, results of operations and financial condition.
We
Face Strong Competition in the Marketplace
Competitors
may succeed in developing alternative technologies and products that are more
effective, easier to use or less expensive than those which have been or are
being developed by us or that would render our technology and products obsolete
and non-competitive. We operate in highly competitive and rapidly evolving
fields, and new developments are expected to continue at a rapid pace.
Competition from large food products, agricultural, industrial and medical
companies is expected to be intense. In addition, the nature of our
collaborative arrangements may result in our corporate partners and licensees
becoming our competitors. Many of these competitors have substantially greater
financial and technical resources and production and marketing capabilities
than
we do, and may have substantially greater experience in conducting clinical
and
field trials, obtaining regulatory approvals and manufacturing and marketing
commercial products.
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16
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We
Have a Concentration of Manufacturing in One Location for Apio and May Have
to
Depend on Third Parties to Manufacture Our Products
Any
disruptions in our primary manufacturing operation at Apio’s facility in
Guadalupe, California would reduce our ability to sell our products and would
have a material adverse effect on our financial results. Additionally, we may
need to consider seeking collaborative arrangements with other companies to
manufacture our products. If we become dependent upon third parties for the
manufacture of our products, our profit margins and our ability to develop
and
deliver those products on a timely basis may be affected. Failures by third
parties may impair our ability to deliver products on a timely basis and impair
our competitive position. We may not be able to continue to successfully operate
our manufacturing operations at acceptable costs, with acceptable yields, and
retain adequately trained personnel.
Our
Dependence on Single-Source Suppliers and Service Providers May Cause Disruption
in Our Operations Should Any Supplier Fail to Deliver
Materials
We
may
experience difficulty acquiring materials or services for the manufacture of
our
products or we may not be able to obtain substitute vendors. We may not be
able
to procure comparable materials at similar prices and terms within a reasonable
time. Several services that are provided to Apio are obtained from a single
provider. Several of the raw materials we use to manufacture our products are
currently purchased from a single source, including some monomers used to
synthesize Intelimer polymers and substrate materials for our breathable
membrane products. Any interruption of our relationship with single-source
suppliers or service providers could delay product shipments and materially
harm
our business.
We
May Be Unable to Adequately Protect Our Intellectual Property
Rights
We
may
receive notices from third parties, including some of our competitors, claiming
infringement by our products of patent and other proprietary rights. Regardless
of their merit, responding to any such claim could be time-consuming, result
in
costly litigation and require us to enter royalty and licensing agreements
which
may not be offered or available on terms acceptable to us. If a successful
claim
is made against us and we fail to develop or license a substitute technology,
we
could be required to alter our products or processes and our business, results
of operations or financial position could be materially adversely affected.
Our
success depends in large part on our ability to obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights
of
third parties. Any pending patent applications we file may not be approved
and
we may not be able to develop additional proprietary products that are
patentable. Any patents issued to us may not provide us with competitive
advantages or may be challenged by third parties. Patents held by others may
prevent the commercialization of products incorporating our technology.
Furthermore, others may independently develop similar products, duplicate our
products or design around our patents.
Our
Operations Are Subject to Regulations that Directly Impact Our
Business
Our
food
packaging products are subject to regulation under the Food, Drug and Cosmetic
Act (the “FDC Act”). Under the FDC Act, any substance that when used as intended
may reasonably be expected to become, directly or indirectly, a component or
otherwise affect the characteristics of any food may be regulated as a food
additive unless the substance is generally recognized as safe. We believe that
food packaging materials are generally not considered food additives by the
FDA
because these products are not expected to become components of food under
their
expected conditions of use. We consider our breathable membrane product to
be a
food packaging material not subject to regulation or approval by the FDA. We
have not received any communication from the FDA concerning our breathable
membrane product. If the FDA were to determine that our breathable membrane
products are food additives, we may be required to submit a food additive
petition for approval by the FDA. The food additive petition process is lengthy,
expensive and uncertain. A determination by the FDA that a food additive
petition is necessary would have a material adverse effect on our business,
operating results and financial condition.
Federal,
state and local regulations impose various environmental controls on the use,
storage, discharge or disposal of toxic, volatile or otherwise hazardous
chemicals and gases used in some of the manufacturing processes. Our failure
to
control the use of, or to restrict adequately the discharge of, hazardous
substances under present or future regulations could subject us to substantial
liability or could cause our manufacturing operations to be suspended and
changes in environmental regulations may impose the need for additional capital
equipment or other requirements.
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17
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Our
agricultural operations are subject to a variety of environmental laws
including, the Food Quality Protection Act of 1966, the Clean Air Act, the
Clean
Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide,
Fungicide and Rodenticide Act, and the Comprehensive Environmental Response,
Compensation and Liability Act. Compliance with these laws and related
regulations is an ongoing process. Environmental concerns are, however, inherent
in most agricultural operations, including those we conduct. Moreover, it is
possible that future developments, such as increasingly strict environmental
laws and enforcement policies could result in increased compliance
costs.
The
Company is subject to the Perishable Agricultural Commodities Act (“PACA”) law.
PACA regulates fair trade standards in the fresh produce industry and governs
all the products sold by Apio. Our failure to comply with the PACA requirements
could among other things, result in civil penalties, suspension or revocation
of
a license to sell produce, and in the most egregious cases, criminal
prosecution, which could have a material adverse effect on our
business.
Adverse
Weather Conditions and Other Acts of God May Cause Substantial Decreases in
Our
Sales and/or Increases in Our Costs
Our
Food
Products business is subject to weather conditions that affect commodity prices,
crop yields, and decisions by growers regarding crops to be planted. Crop
diseases and severe conditions, particularly weather conditions such as floods,
droughts, frosts, windstorms, earthquakes and hurricanes, may adversely affect
the supply of vegetables and fruits used in our business, which could reduce
the
sales volumes and/or increase the unit production costs. Because a significant
portion of the costs are fixed and contracted in advance of each operating
year,
volume declines due to production interruptions or other factors could result
in
increases in unit production costs which could result in substantial losses
and
weaken our financial condition.
We
Depend on Strategic Partners and Licenses for Future
Development
Our
strategy for development, clinical and field testing, manufacture,
commercialization and marketing for some of our current and future products
includes entering into various collaborations with corporate partners, licensees
and others. We are dependent on our corporate partners to develop, test,
manufacture and/or market some of our products. Although we believe that our
partners in these collaborations have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within our control. Our
partners may not perform their obligations as expected or we may not derive
any
additional revenue from the arrangements. Our partners may not pay any
additional option or license fees to us or may not develop, market or pay any
royalty fees related to products under the agreements. Moreover, some of the
collaborative agreements provide that they may be terminated at the discretion
of the corporate partner, and some of the collaborative agreements provide
for
termination under other circumstances. Our partners may pursue existing or
alternative technologies in preference to our technology. Furthermore, we may
not be able to negotiate additional collaborative arrangements in the future
on
acceptable terms, if at all, and our collaborative arrangements may not be
successful.
Both
Domestic and Foreign Government Regulations Can Have an Adverse Effect on Our
Business Operations
Our
products and operations are subject to governmental regulation in the United
States and foreign countries. The manufacture of our products is subject to
periodic inspection by regulatory authorities. We may not be able to obtain
necessary regulatory approvals on a timely basis or at all. Delays in receipt
of
or failure to receive approvals or loss of previously received approvals would
have a material adverse effect on our business, financial condition and results
of operations. Although we have no reason to believe that we will not be able
to
comply with all applicable regulations regarding the manufacture and sale of
our
products and polymer materials, regulations are always subject to change and
depend heavily on administrative interpretations and the country in which the
products are sold. Future changes in regulations or interpretations relating
to
matters such as safe working conditions, laboratory and manufacturing practices,
environmental controls, and disposal of hazardous or potentially hazardous
substances may adversely affect our business.
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18
-
We
are
subject to USDA rules and regulations concerning the safety of the food products
handled and sold by Apio, and the facilities in which they are packed and
processed. Failure to comply with the applicable regulatory requirements can,
among other things, result in:
·
fines,
injunctions, civil penalties, and suspensions,
·
withdrawal
of regulatory approvals,
·
product
recalls and product seizures, including cessation of manufacturing and
sales,
·
operating
restrictions, and
·
criminal
prosecution.
We
may be
required to incur significant costs to comply with the laws and regulations
in
the future which may have a material adverse effect on our business, operating
results and financial condition.
Our
International Operations and Sales May Expose Our Business to Additional
Risks
For
the
fiscal
year ended May 25,
2008,
approximately 30% of our total revenues were derived from product sales to
international customers. A number of risks are inherent in international
transactions. International sales and operations may be limited or disrupted
by
any of the following:
|
·
|
regulatory
approval process,
|
|
·
|
government
controls,
|
|
·
|
export
license requirements,
|
|
·
|
political
instability,
|
|
·
|
price
controls,
|
|
·
|
trade
restrictions,
|
|
·
|
changes
in tariffs, or
|
|
·
|
difficulties
in staffing and managing international operations.
|
Foreign
regulatory agencies have or may establish product standards different from
those
in the United States, and any inability to obtain foreign regulatory approvals
on a timely basis could have a material adverse effect on our international
business, and our financial condition and results of operations. While our
foreign sales are currently priced in dollars, fluctuations in currency exchange
rates may reduce the demand for our products by increasing the price of our
products in the currency of the countries to which the products are sold.
Regulatory, geopolitical and other factors may adversely impact our operations
in the future or require us to modify our current business
practices.
Cancellations
or Delays of Orders by Our Customers May Adversely Affect Our
Business
During
fiscal year 2008, sales to our top five customers accounted for approximately
47% of our revenues, with our largest customer, Costco Wholesale Corporation,
accounting for approximately 20% of our revenues. We expect that, for the
foreseeable future, a limited number of customers may continue to account for
a
substantial portion of our net revenues. We may experience changes in the
composition of our customer base as we have experienced in the past. We do
not
have long-term purchase agreements with any of our customers. The reduction,
delay or cancellation of orders from one or more major customers for any reason
or the loss of one or more of our major customers could materially and adversely
affect our business, operating results and financial condition. In addition,
since some of the products processed by Apio at its Guadalupe, California
facility are sole sourced to its customers, our operating results could be
adversely affected if one or more of our major customers were to develop other
sources of supply. Our current customers may not continue to place orders,
orders by existing customers may be canceled or may not continue at the levels
of previous periods or we may not be able to obtain orders from new
customers.
-
19
-
Our
Sale of Some Products May Increase Our Exposure to Product Liability
Claims
The
testing, manufacturing, marketing, and sale of the products we develop involve
an inherent risk of allegations of product liability. If any of our products
were determined or alleged to be contaminated or defective or to have caused
a
harmful accident to an end-customer, we could incur substantial costs in
responding to complaints or litigation regarding our products and our product
brand image could be materially damaged. Either event may have a material
adverse effect on our business, operating results and financial condition.
Although we have taken and intend to continue to take what we believe are
appropriate precautions to minimize exposure to product liability claims, we
may
not be able to avoid significant liability. We currently maintain product
liability insurance. While we believe the coverage and limits are consistent
with industry standards, our coverage may not be adequate or may not continue
to
be available at an acceptable cost, if at all. A product liability claim,
product recall or other claim with respect to uninsured liabilities or in excess
of insured liabilities could have a material adverse effect on our business,
operating results and financial condition.
Our
Stock Price May Fluctuate in Accordance with Market
Conditions
The
following events may cause the market price of our common stock to fluctuate
significantly:
|
·
|
technological
innovations applicable to our
products,
|
|
·
|
our
attainment of (or failure to attain) milestones in the commercialization
of our technology,
|
|
·
|
our
development of new products or the development of new products by
our
competitors,
|
|
·
|
new
patents or changes in existing patents applicable to our products,
|
|
·
|
our
acquisition of new businesses or the sale or disposal of a part of
our
businesses,
|
|
·
|
development
of new collaborative arrangements by us, our competitors or other
parties,
|
|
·
|
changes
in government regulations applicable to our business,
|
|
·
|
changes
in investor perception of our business,
|
|
·
|
fluctuations
in our operating results and
|
|
·
|
changes
in the general market conditions in our industry.
|
These
broad fluctuations may adversely affect the market price of our common
stock.
Our
Controlling Shareholders Exert Significant Influence over Corporate Events
that
May Conflict with the Interests of Other Shareholder
Our
executive officers and directors and their affiliates own or control
approximately 12% of our common stock (including options exercisable within
60
days). Accordingly, these officers, directors and shareholders may have the
ability to exert significant influence over the election of our Board of
Directors, the approval of amendments to our articles and bylaws and the
approval of mergers or other business combination transactions requiring
shareholder approval. This concentration of ownership may have the effect of
delaying or preventing a merger or other business combination transaction,
even
if the transaction or amendments would be beneficial to our other shareholders.
In addition, our controlling shareholders may approve amendments to our articles
or bylaws to implement anti-takeover or management friendly provisions that
may
not be beneficial to our other shareholders.
We
May Be Exposed to Employment Related Claims and Costs that Could Materially
Adversely Affect Our Business
We
have
been subject in the past, and may be in the future, to claims by employees
based
on allegations of discrimination, negligence, harassment and inadvertent
employment of illegal aliens or unlicensed personnel, and we may be subject
to
payment of workers' compensation claims and other similar claims. We could
incur
substantial costs and our management could spend a significant amount of time
responding to such complaints or litigation regarding employee claims, which
may
have a material adverse effect on our business, operating results and financial
condition.
-
20
-
We
Are Dependent on Our Key Employees and if One or More of Them Were to Leave,
We
Could Experience Difficulties in Replacing Them and Our Operating Results Could
Suffer
The
success of our business depends to a significant extent upon the continued
service and performance of a relatively small number of key senior management,
technical, sales, and marketing personnel. The loss of any of our key personnel
would likely harm our business. In addition, competition for senior level
personnel with knowledge and experience in our different lines of business
is
intense. If any of our key personnel were to leave, we would need to devote
substantial resources and management attention to replace them. As a result,
management attention may be diverted from managing our business, and we may
need
to pay higher compensation to replace these employees.
We
May Issue Preferred Stock with Preferential Rights that Could Affect Your
Rights
Our
Board
of Directors has the authority, without further approval of our shareholders,
to
fix the rights and preferences, and to issue shares, of preferred stock. In
November 1999, we issued and sold shares of Series A Convertible Preferred
Stock
and in October 2001 we issued and sold shares of Series B Convertible Preferred
Stock. The Series A Convertible Preferred Stock was converted into 1,666,670
shares of Common Stock in November 2002 and the Series B Convertible Preferred
Stock was converted into 1,744,102 shares of Common Stock in May
2004.
The
issuance of new shares of preferred stock could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding stock,
and the holders of such preferred stock could have voting, dividend, liquidation
and other rights superior to those of holders of our Common Stock.
We
Have Never Paid any Dividends on Our Common Stock
We
have
not paid any cash dividends on our Common Stock since inception and do not
expect to do so in the foreseeable future. Any dividends may be subject to
preferential dividends payable on any preferred stock we may issue.
Our
Profitability Could Be Materially and Adversely Affected if it Is Determined
that the Book Value of Goodwill is Higher than Fair
Value
Our
balance sheet includes an amount designated as “goodwill” that represents a
portion of our assets and our shareholders’ equity. Goodwill arises when an
acquirer pays more for a business than the fair value of the tangible and
separately measurable intangible net assets. Under Statement of Financial
Accounting Standards No. 142 “Goodwill
and Other Intangible Assets”,
beginning in fiscal year 2002, the amortization of goodwill has been replaced
with an “impairment test” which requires that we compare the fair value of
goodwill to its book value at least annually and more frequently if
circumstances indicate a possible impairment. If we determine at any time in
the
future that the book value of goodwill is higher than fair value then the
difference must be written-off, which could materially and adversely affect
our
profitability.
1B.
Unresolved Staff Comments
None.
-
21
-
Item
2. Properties
As
of May
25, 2008, the Company owned or leased properties in Menlo Park, Arroyo Grande
and Guadalupe, California; West Lebanon and Oxford, Indiana.
These
properties are described below:
|
Location
|
Business
Segment
|
Ownership
|
Facilities
|
Acres
of Land |
Lease
Expiration
|
|||||
|
Menlo
Park, CA
|
Technology
Licensing
|
Leased
|
10,400
square feet of office and laboratory space
|
—
|
12/31/09
|
|||||
|
West
Lebanon, IN
|
Technology
Licensing
|
Owned
|
4,000
square feet of warehouse and manufacturing space
|
—
|
—
|
|||||
|
Oxford,
IN
|
Technology
Licensing
|
Leased
|
13,400
square feet of laboratory and manufacturing space
|
—
|
6/30/09
|
|||||
|
Guadalupe,
CA
|
Food
Products Technology
|
Owned
|
142,000
square feet of office space, manufacturing and cold
storage
|
17.7
|
—
|
|||||
|
Arroyo
Grande, CA
|
Commodity
Trading
|
Leased
|
1,100
square feet of office space
|
—
|
Month
to
Month
|
There
are
no bank liens encumbering any of the Company’s owned land and
buildings.
Item
3. Legal
Proceedings
The
Company is involved in litigation arising in the normal course of business.
The
Company is currently not a party to any legal proceedings which management
believes could result in the payment of any amounts that would be material
to
the business or financial condition of the Company.
Item
4. Submission
of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of the Company’s fiscal year ended May 25, 2008.
-
22
-
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market
Information
The
Common Stock is traded on The NASDAQ Global Select Market under the symbol
“LNDC”. The following table sets forth for each period indicated the high and
low sales prices for the Common Stock.
|
Fiscal
Year Ended May 25, 2008
|
High
|
Low
|
|||||
|
4th
Quarter ending May 25, 2008
|
$
|
9.94
|
$
|
7.50
|
|||
|
3rd
Quarter ending February 24, 2008
|
$
|
14.00
|
$
|
8.26
|
|||
|
2nd
Quarter ending November 25, 2007
|
$
|
16.75
|
$
|
11.11
|
|||
|
1st
Quarter ending August 26, 2007
|
$
|
14.17
|
$
|
9.60
|
|||
|
Fiscal
Year Ended May 27, 2007
|
High
|
Low
|
|||||
|
4th
Quarter ending May 27, 2007
|
$
|
15.13
|
$
|
12.01
|
|||
|
|
|||||||
|
3rd
Quarter ending February 25, 2007
|
$
|
13.80
|
$
|
9.49
|
|||
|
2nd
Quarter ending November 26, 2006
|
$
|
11.32
|
$
|
9.03
|
|||
|
1st
Quarter ending August 27, 2006
|
$
|
11.11
|
$
|
7.96
|
|||
Holders
There
were approximately 78 holders of record of 26,164,653
shares
of
outstanding Common Stock as of July 18, 2008. Since certain holders are listed
under their brokerage firm’s names, the actual number of shareholders is higher.
Dividends
The
Company has not paid any dividends on the Common Stock since its inception.
The
Company presently intends to retain all future earnings, if any, for its
business and does not anticipate paying cash dividends on its Common Stock
in
the foreseeable future.
Issuer
Purchases of Equity Securities
There
were no shares repurchased by the Company during the quarter ending on May
25,
2008.
-
23
-
Item
6. Selected
Financial Data
The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with the information
contained in Item 7 - “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated Financial Statements
and Notes to Consolidated Financial Statements contained in Item 8 of this
report.
|
Year
Ended May 25, 2008 |
|
Year
Ended May 27, 2007 |
|
Year
Ended May 28, 2006 |
|
Year
Ended May 29, 2005 |
|
Year
Ended May 30, 2004 |
||||||||
|
Statement
of Operations Data:
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Product
sales
|
$
|
227,550
|
$
|
201,892
|
$
|
225,404
|
$
|
201,020
|
$
|
185,664
|
||||||
|
Service
revenues
|
3,640
|
3,539
|
3,725
|
3,704
|
5,791
|
|||||||||||
|
License
fees
|
6,231
|
4,013
|
2,398
|
88
|
88
|
|||||||||||
|
R&D
and royalty revenues
|
1,106
|
1,054
|
426
|
418
|
549
|
|||||||||||
|
Total
revenues
|
238,527
|
210,498
|
231,953
|
205,230
|
192,092
|
|||||||||||
|
Cost
of revenue:
|
||||||||||||||||
|
Cost
of product sales
|
197,288
|
175,252
|
188,904
|
170,359
|
158,911
|
|||||||||||
|
Cost
of service revenue
|
3,011
|
2,860
|
3,005
|
2,899
|
3,390
|
|||||||||||
|
Total
cost of revenue
|
200,299
|
178,112
|
191,909
|
173,258
|
162,301
|
|||||||||||
|
Gross
profit
|
38,228
|
32,386
|
40,044
|
31,972
|
29,791
|
|||||||||||
|
Operating
costs and expenses:
|
||||||||||||||||
|
Research
and development
|
3,251
|
3,074
|
3,042
|
2,543
|
3,452
|
|||||||||||
|
Selling,
general and administrative
|
19,801
|
21,616
|
27,979
|
23,412
|
22,284
|
|||||||||||
|
Income
from sale of FCD
|
—
|
(22,669
|
)
|
—
|
—
|
—
|
||||||||||
|
Total
operating costs and expenses
|
23,052
|
2,021
|
31,021
|
25,955
|
25,736
|
|||||||||||
|
Operating
profit
|
15,176
|
30,365
|
9,023
|
6,017
|
4,055
|
|||||||||||
|
Interest
income
|
2,219
|
1,945
|
633
|
214
|
164
|
|||||||||||
|
Interest
expense
|
(22
|
)
|
(251
|
)
|
(452
|
)
|
(414
|
)
|
(811
|
)
|
||||||
|
Minority
interest expense
|
(477
|
)
|
(412
|
)
|
(529
|
)
|
(411
|
)
|
(537
|
)
|
||||||
|
Other
(expense)/income, net
|
—
|
(2
|
)
|
(24
|
)
|
(4
|
)
|
29
|
||||||||
|
Net
income before taxes
|
16,896
|
31,645
|
8,651
|
5,402
|
2,900
|
|||||||||||
|
Income
tax expense
|
(3,354
|
)
|
(2,456
|
)
|
—
|
—
|
—
|
|||||||||
|
Net
income
|
$
|
13,542
|
$
|
29,189
|
$
|
8,651
|
$
|
5,402
|
$
|
2,900
|
||||||
|
Net
income
|
$
|
13,542
|
$
|
29,189
|
$
|
8,651
|
$
|
5,402
|
$
|
2,900
|
||||||
|
Dividends
on preferred stock
|
—
|
—
|
—
|
—
|
(464
|
)
|
||||||||||
|
Net
income applicable to common shareholders
|
$
|
13,542
|
$
|
29,189
|
$
|
8,651
|
$
|
5,402
|
$
|
2,436
|
||||||
|
Basic
net income per share
|
$
|
0.52
|
$
|
1.16
|
$
|
0.35
|
$
|
0.23
|
$
|
0.11
|
||||||
|
Diluted
net income per share
|
$
|
0.50
|
$
|
1.07
|
$
|
0.32
|
$
|
0.21
|
$
|
0.12
|
||||||
|
Shares
used in per share computation:
|
||||||||||||||||
|
Basic
|
26,069
|
25,260
|
24,553
|
23,705
|
21,396
|
|||||||||||
|
Diluted
|
26,935
|
26,558
|
25,657
|
24,614
|
23,556
|
|||||||||||
-
24
-
|
May
25,
|
May
27,
|
May
28,
|
May
29,
|
May
30,
|
||||||||||||
|
Balance
Sheet Data:
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
44,396
|
$
|
62,556
|
$
|
15,164
|
$
|
7,426
|
$
|
4,966
|
||||||
|
Total
assets
|
150,589
|
141,368
|
119,025
|
100,075
|
93,007
|
|||||||||||
|
Debt
|
—
|
—
|
2,018
|
3,088
|
8,996
|
|||||||||||
|
Retained
earnings (deficit)
|
1,492
|
(19,332
|
)
|
(41,239
|
)
|
(48,890
|
)
|
(55,292
|
)
|
|||||||
|
Total
shareholders' equity
|
$
|
114,466
|
$
|
110,228
|
$
|
85,049
|
$
|
72,060
|
$
|
61,549
|
||||||
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the Company’s
Consolidated Financial Statements contained in Item 8 of this report. Except
for
the historical information contained herein, the matters discussed in this
report are forward-looking statements within the meaning of Section 21E of
the
Securities Exchange Act of 1934. These forward-looking statements involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Potential risks and
uncertainties include, without limitation, those mentioned in this report and,
in particular, the factors described in Item 1A. "Risk Factors.” Landec
undertakes no obligation to revise any forward-looking statements in order
to
reflect events or circumstances that may arise after the date of this
report.
Overview
Since
its
inception in October 1986, the Company has been engaged in the research and
development of its Intelimer technology and related products. The Company has
launched four product lines from this core development - QuickCast™
splints
and casts, in April 1994, which was subsequently sold to Bissell Healthcare
Corporation in August 1997;
BreatheWay packaging technology
for the
fresh-cut and whole produce packaging market, in September 1995; Intelimer
Polymer Systems that includes polymer materials for various industrial
applications in June 1997 and for personal care applications in November 2003;
and Intellicoat coated corn seeds in the Fall of 1999.
Landec
has three core businesses - Food Products Technology, Commodity Trading and
Technology Licensing. The
Food
Products Technology segment combines the Company’s Intelimer
packaging
technology with Apio’s fresh-cut and whole produce business. The
Commodity Trading business is operated through Apio, Inc. and combines Apio’s
Cal-Ex export company with Apio’s domestic buy-sell commodity business that
purchases and sells whole fruit and vegetable products to Asia and domestically
to Wal-Mart. The Technology Licensing business includes our proprietary
Intellicoat seed coating technology which we have licensed to Monsanto and
our
Intelimer polymer business that licenses and/or supplies products outside of
our
Food Products Technology business to companies such as Air Products and
Nitta.
See
"Business - Description of Core Business."
From
inception through May 25, 2008, the Company’s retained earnings were $1.5
million. The Company may incur losses in the future. The amount of future net
profits, if any, is uncertain and there can be no assurance that the Company
will be able to sustain profitability in future years.
Critical
Accounting Policies and Use of Estimates
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make certain estimates and
judgments that affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require management’s most
significant, difficult and subjective judgments include revenue recognition;
sales returns and allowances; recognition and measurement of current and
deferred income tax assets and liabilities; the assessment of recoverability
of
long-lived assets; the valuation of intangible assets and inventory; the
valuation and nature of impairments of investments; and the valuation and
recognition of stock-based compensation.
-
25
-
These
estimates involve the consideration of complex factors and require management
to
make judgments. The analysis of historical and future trends, can require
extended periods of time to resolve, and are subject to change from period
to
period. The actual results may differ from management’s estimates.
Notes
and Advances Receivable
Apio
has
made advances to produce growers for crop and harvesting costs. Typically these
advances are paid off within the growing season (less than one year) from crops
harvested by the grower and delivered to Apio. Advances not fully paid during
the current growing season are converted to interest bearing obligations,
evidenced by contracts and notes receivable. These notes receivable and advances
are secured by liens on land and/or crops and have terms that range from 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 to be
delivered or the fair value of the security for the note or advance. If crop
prices or the fair value of the underlying security declines, the Company may
be
unable to fully recoup its note or advance receivable and the estimated losses
would rise in the current period, potentially to the extent of the total note
or
advance receivable.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
allowance for doubtful accounts is based on review of the overall condition
of
accounts receivable balances and review of significant past due accounts. If
the
financial condition of the Company’s customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may
be
required. Bad debt losses are partially mitigated due to low risks related
to
the fact that the Company’s customers are predominantly large financially sound
national and regional retailers.
Inventories
Inventories
are stated at the lower of cost or market. If the cost of the inventories
exceeds their expected market value, provisions are recorded currently for
the
difference between the cost and the market value. These provisions are
determined based on specific identification for unusable inventory and an
additional reserve, based on historical losses, for inventory currently
considered to be unusable.
Revenue
Recognition
Revenue
from product sales is recognized when there is persuasive evidence that an
arrangement exists, title has transferred, the price is fixed and determinable,
and collectibility is reasonably assured. Allowances are established for
estimated uncollectible amounts, product returns, and discounts. If actual
future returns and allowances differ from past experience, additional allowances
may be required.
Licensing
revenue is recognized in accordance with Staff Accounting Bulletin No. 104,
Revenue
Recognition (a replacement of SAB 101),
(SAB
104). Initial license fees are deferred and amortized to revenue over the period
of the agreement when a contract exists, the fee is fixed and determinable,
and
collectibility is reasonably assured. Noncancellable, nonrefundable license
fees
are recognized over the period of the agreement, including those governing
research and development activities and any related supply agreement entered
into concurrently with the license when the risk associated with
commercialization of a product is non-substantive at the outset of the
arrangement.
Contract
revenue for research and development (R&D) is recorded as earned, based on
the performance requirements of the contract. Non-refundable contract fees
for
which no further performance obligations exist, and there is no continuing
involvement by the Company, are recognized on the earlier of when the payments
are received or when collection is assured.
-
26
-
Goodwill
and Other Intangible Asset Impairment
The
Company is required to evaluate its goodwill and indefinite lived intangible
assets for impairment annually in accordance with SFAS No. 142. 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 is required to record an
impairment loss, possibly for the entire carrying balance of goodwill and
intangible assets. To date, no impairment losses have been
incurred.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting
for Income Taxes,”
which
requires that deferred tax assets and liabilities be recognized using enacted
tax rates for the effect of temporary differences between the book and tax
bases
of recorded assets and liabilities. The Company maintains valuation allowances
when it is likely that all or a portion of a deferred tax asset will not be
realized. Changes in valuation allowances from period to period are included
in
the Company’s income tax provision in the period of change. In determining
whether a valuation allowance is warranted, the Company takes into account
such
factors as prior earnings history, expected future earnings, unsettled
circumstances that, if unfavorably resolved, would adversely affect utilization
of a deferred tax asset, carry-back and carry-forward periods, and tax
strategies that could potentially enhance the likelihood of realization of
a
deferred tax asset. At May 25, 2008, the Company had no valuation allowance
against deferred tax assets.
In
addition to valuation allowances, the Company establishes accruals for certain
tax contingencies under FIN 48, “Accounting
for Uncertainty in Income Taxes an interpretation of FASB Statement
No.109,”
when,
despite the belief that the Company’s tax return positions are fully supported,
the Company believes that certain tax positions are likely to be challenged
and
that the Company’s positions may not be fully sustained. The tax-contingency
accruals are adjusted in light of changing facts and circumstances, such as
the
progress of tax audits, case law and emerging legislation. The Company
recognizes interest and penalties related to uncertain tax positions as a
component of income tax expense. The Company’s effective tax rate includes the
impact of tax-contingency accruals as considered appropriate by management.
A
number
of years may elapse before a particular matter, for which the Company has
accrued, is audited and finally resolved. The number of years with open tax
audits varies by jurisdiction. While it is often difficult to predict the final
outcome or the timing of resolution of any particular tax matter, the Company
believes its tax-contingency accruals are adequate to address known tax
contingencies. Favorable resolution of such matters could be recognized as
a
reduction to the Company’s effective tax rate in the year of resolution.
Unfavorable settlement of any particular issue could increase the effective
tax
rate. Any resolution of a tax issue may require the use of cash in the year
of
resolution. The Company’s tax-contingency accruals are presented in the balance
sheet within accrued liabilities.
Stock-Based
Compensation
On
May 29, 2006, the Company adopted SFAS 123R, which is a revision of
SFAS No. 123 “Accounting
for Stock-Based Compensation,”
and
supersedes APB No. 25, “Accounting
for Stock Issued to Employees”
(“APB 25”). Among other items, SFAS 123R requires companies to record
compensation expense for stock-based awards issued to employees and directors
in
exchange for services provided. The amount of the compensation expense is based
on the estimated fair value of the awards on their grant dates and is recognized
over the required service periods. The Company’s stock-based awards include
stock option grants and restricted stock unit awards (RSUs).
Prior
to
the adoption of SFAS 123R, the Company applied the intrinsic value method
set forth in APB 25 to calculate the compensation expense for stock-based
awards. The Company has historically set the exercise price for its stock
options equal to the market value on the grant date. As a result, the options
had no intrinsic value on their grant dates, and therefore the Company did
not
record any compensation expense unless the terms of the stock options were
subsequently modified. For RSUs, the calculation of compensation expense under
APB 25 and SFAS 123R is similar except for the accounting treatment
for forfeitures as discussed below.
-
27
-
The
Company adopted SFAS 123R using the modified prospective transition method,
which requires the application of the accounting standard to (i) all
stock-based awards issued on or after May 29, 2006 and (ii) any
outstanding stock-based awards that were issued but not vested as of
May 29, 2006. Accordingly, the Company’s consolidated financial statements
as of May 28, 2006 and for the fiscal year then-ended, were accounted for
under the provisions of APB 25.
The
estimated fair value for stock options, which determines the Company’s
calculation of compensation expense, is based on the Black-Scholes pricing
model. Upon the adoption of SFAS 123R, the Company changed its method of
calculating and recognizing the fair value of stock-based compensation
arrangements to the straight-line, single-option method. Compensation expense
for all stock option and restricted stock awards granted prior to May 29,
2006 will continue to be recognized using the straight-line, multiple-option
method. In addition, SFAS 123R requires the estimation of the expected
forfeitures of stock-based awards at the time of grant. As a result, the Company
uses historical data to estimate
pre-vesting forfeitures and records stock-based compensation expense only for
those awards that are expected to vest and revises those estimates in subsequent
periods if the actual forfeitures differ from the prior estimates. In the
pro-forma information required under SFAS 123R for periods prior to
May 29, 2006, the Company accounted for forfeitures as they occurred.
Recent
Accounting Pronouncements
In
June
2006, FASB’s EITF reached a consensus on Issue No. 06-3, “How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
be Presented in the Income Statement.”
EITF
Issue 06-3 provides accounting guidance regarding the presentation of taxes
assessed by a governmental authority on a revenue producing transaction between
a seller and a customer such as sales and use taxes. EITF Issue 06-3 was
effective for fiscal years beginning after December 15, 2006. The adoption
did
not have a material effect on the Company’s consolidated financial position or
results of operations. The Company records the expense for sales and use taxes
to general and administrative expenses.
In
July
2006, FASB issued FIN 48 “Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
109”
which
prescribes a recognition threshold and measurement process for recording in
the
financial statements uncertain tax positions taken or expected to be taken
in a
tax return. FIN 48 requires that a company recognize the financial statement
effects of a tax position when there is a likelihood of more than 50 percent,
based on the technical merits, that the position will be sustained upon
examination. It also provides guidance on the derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition
requirements for uncertain tax positions. The accounting provisions of FIN
48
were effective for the Company beginning January 1, 2007. The adoption of FIN
48
did not have a significant effect on the Company’s consolidated financial
position or results of operations.
In
September 2006, FASB issued SFAS No. 157, “Fair
Value Measurements.”
SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
and
expands disclosure about fair value measurements. SFAS No. 157 does not require
new fair value measurements but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of information.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
However, on February 12, 2008, the FASB issued FASB Staff (“FSP”) FAS No. 157-2
which delays the effective date for all non-financial assets and liabilities
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). FSP 157- 2 defers the
effective date of SFAS No. 157 to fiscal years beginning after November 15,
2008, and interim periods within the fiscal years for items within the scope
of
this FSP. Effective for fiscal year 2009, the Company will adopt SFAS No. 157,
except as it applies to those non-financial assets and non-financial liabilities
as noted in FSP FAS 157-2. The Company does not expect such adoption to have
a
material effect on its consolidated financial position, results of operations
or
cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities— Including an
amendment of FASB Statement No. 115.”
SFAS
No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. Subsequent adjustments to the fair value of the financial
instruments and liabilities an entity elects to carry at fair value will be
recognized in earnings. SFAS No. 159 also establishes additional disclosure
requirements. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007, with early adoption permitted provided the entity also elects
to apply the provisions of SFAS No. 157. The Company is currently evaluating
whether it is going to adopt the fair value election under this standard.
-
28
-
The
FASB
issued SFAS No. 141R (revised 2007), “Business
Combinations.”
which
significantly changes the financial accounting and reporting for business
combination transactions. SFAS No. 141R requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction and establishes the acquisition date
fair
value as the measurement objective for all assets acquired and liabilities
assumed in a business combination. Certain provisions of this standard will,
among other things, impact the determination of acquisition-date fair value
of
consideration paid in a business combination (including contingent
consideration); exclude transaction costs from acquisition accounting; and
change accounting practices for acquired contingencies, acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. For the Company, SFAS No. 141R is effective for
business combinations occurring after December 31, 2008. The Company is
currently evaluating the future impacts and disclosures of this
standard.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 160, “Noncontrolling
Interests in Consolidated Financial Statements.”
SFAS
No. 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated
Financial Statements”
and
establishes accounting and reporting standards for the noncontrolling interest
(minority interest) in a subsidiary. This statement requires the reporting
of
all noncontrolling interests as a separate component of stockholders’ equity,
the reporting of consolidated net income (loss) as the amount attributable
to
both the parent and the noncontrolling interests and the separate disclosure of
net income (loss) attributable to the parent and to the noncontrolling
interests. In addition, this statement provides accounting and reporting
guidance related to changes in noncontrolling ownership interests. Other than
the reporting requirements described above which require retrospective
application, the provisions of SFAS No. 160 are to be applied prospectively
in
the first annual reporting period beginning on or after December 15, 2008.
As of
December 31, 2007 and 2006, the Company had no noncontrolling interests on
its
consolidated financial statements. The Company is currently evaluating the
impact of this standard, but would not expect it to have a material impact
on
its consolidated financial statements.
In
December 2007, the FASB ratified the EITF consensus on EITF Issue No. 07-1,
“Accounting
for Collaborative Arrangements”
that
discusses how parties to a collaborative arrangement (which does not establish
a
legal entity within such arrangement) should account for various activities.
The
consensus indicates that costs incurred and revenues generated from transactions
with third parties (i.e. parties outside of the collaborative arrangement)
should be reported by the collaborators on the respective line items in their
income statements pursuant to EITF Issue No. 99-19, “Reporting
Revenue Gross as a Principal Versus Net as an Agent.”
Additionally, the consensus provides that income statement characterization
of
payments between the participants in a collaborative arrangement should be
based
upon existing authoritative pronouncements; analogy to such pronouncements
if
not within their scope; or a reasonable, rational, and consistently applied
accounting policy election. For the Company, EITF Issue No. 07-1 is effective
beginning January 1, 2009 and is to be applied retrospectively to all periods
presented for collaborative arrangements existing as of the date of adoption.
The Company is currently evaluating the impact of this standard on its
consolidated financial statements.
-
29
-
Results
of Operations
Fiscal
Year Ended May 25, 2008 Compared to Fiscal Year Ended May 27,
2007
Revenues
(in
thousands):
|
Fiscal
Year ended
May
25, 2008
|
Fiscal
Year ended
May
27, 2007
|
Change
|
||||||||
|
Apio
Value Added
|
$
|
167,817
|
$
|
154,744
|
8
|
%
|
||||
|
Apio
Packaging
|
3,377
|
1,730
|
95
|
%
|
||||||
|
Food
Technology
|
171,194
|
156,474
|
9
|
%
|
||||||
|
Apio
Trading
|
60,414
|
49,706
|
22
|
%
|
||||||
|
Total
Apio
|
231,608
|
206,180
|
12
|
%
|
||||||
|
Technology
Licensing
|
6,919
|
4,318
|
60
|
%
|
||||||
|
Total
Revenues
|
$
|
238,527
|
$
|
210,498
|
13
|
%
|
||||
Apio
Value Added
Apio’s
value-added revenues consist of revenues generated from the sale of specialty
packaged
fresh-cut and whole value-added processed vegetable products that are washed
and
packaged in our proprietary packaging and sold under Apio’s Eat Smart brand and
various private labels. In addition, value-added revenues include the
revenues
generated from Apio Cooling, LP, a vegetable cooling operation in which Apio
is
the general partner with a 60% ownership position.
The
increase in Apio’s value-added revenues for the fiscal year ended May 25, 2008
compared to the same period last year is due to increased product offerings,
new
customers and increased sales to existing customers. Overall value-added sales
volume increased 14% during the fiscal year ended May 25, 2008 compared to
the
same period last year. The increase in value-added sales volumes was higher
than
the increase in revenues due primarily to the introduction of several new
value-added products during fiscal year 2008 that have average sales prices
per
unit that are lower than the average sales prices per unit for other value-added
products.
Apio
Packaging
Apio
packaging revenues consist of Apio’s packaging technology business using its
BreatheWay membrane technology. The
first
commercial application included in Apio packaging is our banana packaging
technology.
The
increase in Apio packaging revenues for the fiscal year ended May 25, 2008
compared to the same period last year was primarily due to the increase in
the
minimum payments received from Chiquita as a result of the amended Chiquita
license agreement (see Note 3 to the Consolidated Financial
Statements).
Apio
Trading
Apio
trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex and from the purchase and sale of whole commodity fruit
and vegetable products domestically. The export portion of trading revenues
for
fiscal year 2008 was $56.2 million or 93% of total trading
revenues.
The
increase in revenues in Apio's trading business for the fiscal year ended May
25, 2008 compared to the same period last year was primarily due to a 16%
increase in trading business sales volumes.
Technology
Licensing
Technology
licensing revenues consist of revenues generated from the licensing agreements
with Monsanto, Air Products and Nitta.
-
30
-
The
increase in technology licensing revenues for the fiscal year ended May 25,
2008
compared to the same period last year was primarily due to the licensing
revenues from the Monsanto license and supply agreement entered into on December
1, 2006.
Gross
Profit (in
thousands):
|
Fiscal Year ended
May 25, 2008
|
Fiscal Year ended
May 27, 2007
|
Change
|
||||||||
|
Apio
Value Added
|
$
|
24,615
|
$
|
23,426
|
5
|
%
|
||||
|
Apio
Packaging
|
3,245
|
1,639
|
98
|
%
|
||||||
|
Food
Technology
|
27,860
|
25,065
|
11
|
%
|
||||||
|
Apio
Trading
|
3,449
|
3,187
|
8
|
%
|
||||||
|
Total
Apio
|
31,309
|
28,252
|
11
|
%
|
||||||
|
Technology
Licensing
|
6,919
|
4,134
|
67
|
%
|
||||||
|
Total
Gross Profit
|
$
|
38,228
|
$
|
32,386
|
18
|
%
|
||||
General
There
are
numerous factors that can influence gross profit including product mix, customer
mix, manufacturing costs, volume, sale discounts and charges for excess or
obsolete inventory, to name a few. Many of these factors influence or are
interrelated with other factors. Therefore, it is difficult to precisely
quantify the impact of each item individually. The Company includes in cost
of
sales all of the costs related to the sale of products in accordance with U.S.
generally accepted accounting principles. These costs include the following:
raw
materials (including produce, seeds and packaging), direct labor, overhead
(including indirect labor, depreciation, and facility related costs) and
shipping and shipping related costs. The following discussion surrounding gross
profit includes management’s best estimates of the reasons for the changes for
the fiscal year ended May 25, 2008 compared to the same period last year as
outlined in the table above.
Apio
Value-Added
The
increase in gross profit for Apio’s value-added specialty packaged vegetable
business for the fiscal year ended May 25,
2008 compared
to the same period last year was due to increased revenues, partially offset
by
increased raw material costs, primarily the cost of produce during fiscal year
2008 compared to fiscal year 2007.
Apio
Packaging
The
increase in gross profit for Apio packaging for the fiscal year ended May 25,
2008 compared to the same period last year was primarily due to the increase
in
minimum payments received from Chiquita as a result of the amended Chiquita
license agreement.
Apio
Trading
Apio’s
trading business is a buy/sell business that realizes a commission-based margin
in the 4-6% range. The increase in gross profit during the fiscal year ended
May
25, 2008 compared to the prior fiscal year was not material to the consolidated
Landec gross profit.
Technology
Licensing
The
increase in technology licensing gross profit for the fiscal year ended May
25,
2008 compared to the same period of the prior year was primarily due to an
increase in gross profit from the Monsanto licensing agreement entered into
on
December 1, 2006.
-
31
-
Operating
Expenses (in
thousands):
|
Fiscal Year ended
May 25, 2008
|
Fiscal Year ended
May 27, 2007
|
Change
|
||||||||
|
Research
and Development:
|
||||||||||
|
Apio
|
$
|
1,251
|
$
|
1,169
|
7
|
%
|
||||
|
Technology
Licensing
|
2,000
|
1,905
|
5
|
%
|
||||||
|
Total
R&D
|
$
|
3,251
|
$
|
3,074
|
6
|
%
|
||||
|
Selling,
General and Administrative:
|
||||||||||
|
Apio
|
$
|
13,831
|
$
|
12,667
|
9
|
%
|
||||
|
Corporate
|
5,970
|
8,949
|
(33
|
)%
|
||||||
|
Total
S,G&A
|
$
|
19,801
|
$
|
21,616
|
(8
|
)%
|
||||
Research
and Development
Landec’s
research and development expenses consist primarily of expenses involved in
product development and commercialization initiatives. Research and development
efforts at Apio are focused on the Company’s proprietary BreatheWay membranes
used for packaging produce, with recent focus on extending the shelf life of
bananas and other shelf-life sensitive vegetables and fruit. In the Technology
Licensing business, the research and development efforts are focused on uses
for
the proprietary Intelimer polymers outside of food.
The
increase in research and development expenses for the fiscal year ended May
25,
2008 compared to the same period last year was not material.
Selling,
General and Administrative
Selling,
general and administrative expenses consist primarily of sales and marketing
expenses associated with Landec’s product sales and services, business
development expenses and staff and administrative expenses.
The
decrease in selling, general and administrative expenses for the fiscal year
ended May 25, 2008 compared to the same period last year was primarily due
to
the fact that selling, general and administrative expenses for Corporate for
the
fiscal year ended May 27, 2007 included $3.9 million of net non-recurring
expenses, of which $5.4 million were from expenses incurred by Landec’s former
direct marketing and sales seed business that was sold to Monsanto in December
2006, partially offset by the recording of net proceeds of $1.5 million from
an
insurance settlement during fiscal year 2007. This decrease in selling, general
and administrative expenses were partially offset by increased sales and
marketing expenses at Apio and increased general and administrative expenses
at
Corporate primarily related to accounting fees and tax consulting fees.
Other
(in
thousands):
|
Fiscal Year ended
May 25, 2008
|
Fiscal Year ended
May 27, 2007
|
Change
|
||||||||
|
Interest
Income
|
$
|
2,219
|
$
|
1,945
|
14
|
%
|
||||
|
Interest
Expense
|
(22
|
)
|
(251
|
)
|
(91
|
)%
|
||||
|
Minority
Interest Expense
|
(477
|
)
|
(412
|
)
|
16
|
%
|
||||
|
Other
Expenses
|
-
|
(2
|
)
|
N/M
|
||||||
|
Total
Other Income
|
$
|
1,720
|
$
|
1,280
|
34
|
%
|
||||
| Income taxes | $ | (3,354 |
)
|
$ | (2,456 |
)
|
37 | % | ||
-
32
-
Interest
Income
The
increase in interest income for the fiscal year ended May 25, 2008 compared
to
the same period last year was due to the increase in cash available for
investing as a result of the cash received from the sale of FCD in December
2006.
Interest
Expense
The
decrease in interest expense during the fiscal year ended May 25, 2008 compared
to the prior year was due to the Company’s reduction of debt that was assumed by
Monsanto in the sale of FCD to Monsanto on December 1, 2006.
Minority
Interest Expense
The
minority interest expense consists of the minority interest associated with
the
limited partners’ equity interest in the net income of Apio Cooling, LP.
The
increase in the minority interest expense in fiscal year 2008 compared to fiscal
year 2007 was not material to consolidated Landec net income.
Other
Expenses
Other
expenses consist of non-operating income and expenses.
Income
Taxes
The
increase in the income tax expense in fiscal year 2008 compared to fiscal year
2007 is due to an increase in the Company’s effective tax rate from 8% last year
to 20% this year due to the decrease in the deferred income tax valuation
allowance and fully utilizing the Company’s net operating loss carryforwards and
tax credits during fiscal year 2008.
Fiscal
Year Ended May 27, 2007 Compared to Fiscal Year Ended May 28,
2006
Revenues
(in
thousands):
|
Fiscal Year ended
May 27, 2007
|
Fiscal Year ended
May 28, 2006
|
Change
|
||||||||
|
Apio
Value Added
|
$
|
154,744
|
$
|
136,141
|
14
|
%
|
||||
|
Apio
Packaging
|
1,730
|
685
|
153
|
%
|
||||||
|
Food
Technology
|
156,474
|
136,826
|
14
|
%
|
||||||
|
Apio
Trading
|
49,706
|
57,990
|
(14
|
)%
|
||||||
|
Total
Apio
|
206,180
|
194,816
|
6
|
%
|
||||||
|
Landec
Ag
|
2,831
|
34,096
|
(92
|
)%
|
||||||
|
Corporate
|
1,487
|
3,041
|
(51
|
)%
|
||||||
|
Technology
Licensing
|
4,318
|
37,137
|
(88
|
)%
|
||||||
|
Total
Revenues
|
$
|
210,498
|
$
|
231,953
|
(9
|
)%
|
||||
Apio
Value Added
Apio’s
value-added revenues consist of revenues generated from the sale of specialty
packaged
fresh-cut and whole value-added processed vegetable products that are washed
and
packaged in our proprietary packaging and sold under Apio’s Eat Smart brand and
various private labels and from service revenues from Apio Cooling
LP.
The
increase in Apio’s value-added revenues for the fiscal year ended May 27, 2007
compared to the same period last year is due to increased product offerings,
increased sales to existing customers and the addition of new customers.
Specifically, sales of Apio’s value-added 12-ounce specialty packaged retail
product line grew 18% and sales of Apio’s value-added vegetable tray products
also grew 18% during the fiscal year ended May 27, 2007 compared to the same
period last year. Overall value-added sales volume increased 15% during the
fiscal year ended May 27, 2007 compared to the same period last
year.
-
33
-
Apio
Packaging
Apio
packaging consists of Apio’s packaging technology business using its BreatheWay
membrane technology. The
first
commercial application included in Apio packaging is our banana packaging
technology.
The
increase in Apio packaging revenues for the fiscal year ended May 27, 2007
compared to the same period last year was not material to consolidated Landec
revenues.
Apio
Trading
Apio
trading revenues consist of revenues generated primarily from the purchase
and
sale of whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex and from the purchase and sale of whole commodity fruit
and vegetable products domestically. The export portion of trading revenues
for
fiscal year 2007 was $46.4 million or 93% of total trading
revenues.
The
decrease in revenues in Apio's trading business for the fiscal year ended May
27, 2007 compared to the same period last year was primarily due to planned
decreases in the domestic buy/sell commodity sales of 57%. Overall trading
sales
volumes were lower by 27% for the fiscal year ended May 27, 2007 compared to
the
prior year. In addition, export revenues decreased 8% due to lower sales
volumes. The decrease in sales volumes was partially offset by higher average
sales prices due to the scarcity of product during certain months of the
year.
Landec
Ag
Landec
Ag
revenues have historically consisted of revenues generated from the sale of
hybrid seed corn to farmers under the Fielder’s Choice Direct brand and from the
sale of hybrid seed corn and soybeans under the Heartland Hybrids® brand (these
brands, collectively FCD, and the related assets were sold to ASI on December
1,
2006) and from the sale of Intellicoat coated corn and soybean seeds to farmers
and seed companies. Prior to the sale of FCD, virtually all of Landec Ag’s
revenues were generated during the Company’s third and fourth quarters. As a
result of the technology licensing agreement with Monsanto, Landec Ag license
fee revenues will be recognized evenly each quarter for a period of five
years.
The
decrease in revenues at Landec Ag during the fiscal year ended May 27, 2007
compared to the same period last year was primarily due to the sale of FCD
to
ASI, partially offset by $2.7 million in license fee revenues from the
Intellicoat license agreement with Monsanto.
Corporate
Corporate
revenues consist of revenues generated from partnering with others under
research and development agreements and supply agreements and from fees for
licensing our proprietary Intelimer technology to others and from the
corresponding royalties from these license agreements.
The
decrease in Corporate revenues for the fiscal year ended May 27,
2007
compared
to the same period of the prior year resulted from certain nonrecurring
licensing revenues recorded in the prior year and was not material to
consolidated Landec revenues.
-
34
-
Gross
Profit (in
thousands):
|
Fiscal Year ended
May 27, 2007
|
Fiscal Year ended
May 28, 2006
|
Change
|
||||||||
|
Apio
Value Added
|
$
|
23,426
|
$
|
23,022
|
2
|
%
|
||||
|
Apio
Packaging
|
1,639
|
619
|
165
|
%
|
||||||
|
Food
Technology
|
25,065
|
23,641
|
6
|
%
|
||||||
|
Apio
Trading
|
3,187
|
3,212
|
(1
|
)%
|
||||||
|
Total
Apio
|
28,252
|
26,853
|
5
|
%
|
||||||
|
Landec
Ag
|
2,647
|
10,439
|
(75
|
)%
|
||||||
|
Corporate
|
1,487
|
2,752
|
(46
|
)%
|
||||||
|
Technology
Licensing
|
4,134
|
13,191
|
(69
|
)%
|
||||||
|
Total
Gross Profit
|
$
|
32,386
|
$
|
40,044
|
(19
|
)%
|
||||
General
There
are
numerous factors that can influence gross profit including product mix, customer
mix, manufacturing costs, volume, sale discounts and charges for excess or
obsolete inventory, to name a few. Many of these factors influence or are
interrelated with other factors. Therefore, it is difficult to precisely
quantify the impact of each item individually. The Company includes in cost
of
sales all of the costs related to the sale of products in accordance with U.S.
generally accepted accounting principles. These costs include the following:
raw
materials (including produce, seeds and packaging), direct labor, overhead
(including indirect labor, depreciation, and facility related costs) and
shipping and shipping related costs. The following discussion surrounding gross
profit includes management’s best estimates of the reasons for the changes for
the fiscal year ended May 27, 2007 compared to the same period last year as
outlined in the table above.
Apio
Value-Added
The
increase in gross profit for Apio’s value-added specialty packaged vegetable
business for the fiscal year ended May 27,
2007 compared
to the same period last year was due to increased revenues, a more profitable
mix of products sold and improved operational efficiencies. The more profitable
mix of products sold and improved operational efficiencies were almost
completely offset by the increased costs associated with weather related
shortages of contracted product during several periods of fiscal 2007. These
shortages required Apio to procure supplemental product on the open market
at
costs significantly above contracted prices and resulted in sales volume
decreases and labor cost increases.
Apio
Packaging
The
increase in gross profit for Apio Packaging for the fiscal year ended May 27,
2007 compared to the same period last year was primarily due to the revenues
received from our licensing agreement with Chiquita and from research and
development contracts with other third parties.
Apio
Trading
Apio’s
trading business is a buy/sell business that realizes a commission-based margin
in the 4-6% range. The decrease in gross profit during the fiscal year ended
May
27, 2007 compared to the prior fiscal year was primarily due to the reduction
in
revenues which was almost completely offset by a shift to higher margin export
products from lower margin domestic commodity products.
Landec
Ag
The
decrease in gross profit for Landec Ag for the fiscal year ended May 27,
2007 compared
to the same periods last year was due to the sale of FCD to ASI and the
consequent loss of product sales and gross profit normally recorded during
the
second half of our fiscal year. The decrease in Landec Ag gross profit was
partially offset by $2.7 million of gross profit from the Intellicoat license
agreement with Monsanto.
-
35
-
Corporate
The
decrease in gross profit for Corporate for the fiscal year ended May 27,
2007 compared
to the prior year was primarily due to the Aesthetic Sciences’ licensing
revenues and gross profit recorded in the prior year.
Operating
Expenses (in
thousands):
|
Fiscal Year ended
May 27, 2007
|
Fiscal Year ended
May 28, 2006
|
Change
|
||||||||
|
Research
and Development:
|
||||||||||
|
Apio
|
$
|
1,169
|
$
|
1,108
|
6
|
%
|
||||
|
Landec
Ag
|
266
|
470
|
(43
|
)%
|
||||||
|
Corporate
|
1,639
|
1,464
|
12
|
%
|
||||||
|
Total
R&D
|
$
|
3,074
|
$
|
3,042
|
1
|
%
|
||||
|
Selling,
General and Administrative:
|
||||||||||
|
Apio
|
$
|
12,667
|
$
|
13,633
|
(7
|
)%
|
||||
|
Landec
Ag
|
5,367
|
9,616
|
(44
|
)%
|
||||||
|
Corporate
|
3,582
|
4,730
|
(24
|
)%
|
||||||
|
Total
S,G&A
|
$
|
21,616
|
$
|
27,979
|
(23
|
)%
|
||||
Research
and Development
Landec’s
research and development expenses consist primarily of expenses involved in
product development and commercialization initiatives. Research and development
efforts at Apio are focused on the Company’s proprietary BreatheWay membranes
used for packaging produce, with recent focus on extending the shelf life of
bananas and other shelf-life sensitive vegetables and fruit. At Landec Ag,
the
research and development efforts are focused on the Company’s proprietary
Intellicoat coatings for seeds, primarily corn seed. Beginning December 1,
2006,
all of the operating costs and expense of Landec Ag are being paid for by
Monsanto in accordance with the technology license and supply agreement. At
Corporate, the research and development efforts are primarily focused on uses
for the proprietary Intelimer polymers outside of food and
agriculture.
The
increase in research and development expenses for the fiscal year ended May
27,
2007 compared to the same period last year was not material.
Selling,
General and Administrative
Selling,
general and administrative expenses consist primarily of sales and marketing
expenses associated with Landec’s product sales and services, business
development expenses and staff and administrative expenses.
The
decrease in selling, general and administrative expenses for the fiscal year
ended May 27,
2007 compared
to the same period last year was due to (1) the sale of FCD to ASI on December
1, 2006, which eliminated selling, general and administrative expenses
associated with agricultural business for the second half of fiscal year 2007,
(2) one-time new packaging design and marketing related costs that were incurred
at Apio during the first quarter of fiscal year 2006 and (3) the recording
of
the net proceeds of $1.5 million from an insurance settlement to Corporate
selling, general and administrative expenses during the first six months of
fiscal year 2007.
-
36
-
Other
(in
thousands):
|
Fiscal Year ended
May 27, 2007
|
Fiscal Year ended
May 28, 2006
|
Change
|
||||||||
|
Interest
Income
|
$
|
1,945
|
$
|
633
|
207
|
%
|
||||
|
Interest
Expense
|
(251
|
)
|
(452
|
)
|
(44
|
)%
|
||||
|
Minority
Interest Expense
|
(412
|
)
|
(529
|
)
|
(22
|
)%
|
||||
|
Other
Expenses
|
(2
|
)
|
(24
|
)
|
(92
|
)%
|
||||
|
Total
Other Income (Exp.)
|
$
|
1,280
|
$
|
(372
|
)
|
N/M
|
||||
|
Income
taxes
|
$
|
(2,456
|
)
|
$
|
0
|
N/M
|
||||
Interest
Income
The
increase in interest income for the fiscal year ended May 27, 2007 compared
to
the prior year was primarily due to the increase in cash available for
investing and
higher average interest rates on those investments.
Interest
Expense
The
decrease in interest expense during the fiscal year ended May 27, 2007 compared
to the prior year was due to the Company’s reduction of debt.
Minority
Interest Expense
The
minority interest expense consists of the minority interest associated with
the
limited partners’ equity interest in the net income of Apio Cooling, LP.
The
decrease in the minority interest expense in fiscal year 2007 compared to fiscal
year 2006 was due to non-recurring gains for Apio Cooling during the first
quarter of fiscal year 2006.
Other
Expenses
Other
consists of non-operating income and expenses.
Income
Taxes
The
increase in the income tax expense in fiscal year 2007 is due to the income
realized from the sale of FCD which resulted in the Company recording a tax
provision of $2.5 million for state income taxes and federal AMT.
Liquidity
and Capital Resources
As
of May
25, 2008, the Company had cash and cash equivalents of $44.4 million, a net
decrease of $18.2 million from $62.6 million at May 27, 2007.
Cash
Flow from Operating Activities
Landec
generated $17.5 million of cash flow from operating activities during the fiscal
year ended May 25, 2008 compared to using $2.5 million in operating
activities for the fiscal year ended May 27, 2007. The primary sources of
cash from operating activities during fiscal year 2008 were from net income
of
$13.5 million and non-cash related expenses of $3.1 million, such as
depreciation and stock based compensation.
Cash
Flow from Investing Activities
Net
cash
used in investing activities for the fiscal year ended May 25, 2008 was $20.2
million compared to cash provided by investing activities of $41.9 million
for
the same period last year due primarily to the sale of FCD. The primary uses
of
cash from investing activities during fiscal year 2008 were for (1) the purchase
of $4.2 million of property and equipment primarily for the growth of Apio’s
value-added processing business, (2) the purchase of $14.6 million of marketable
securities and (3) the repurchase of $1.3 million of subsidiary common stock
not
owned by the Company.
-
37
-
Cash
Flow from Financing Activities
Net
cash
used in financing activities for the fiscal year ended May 25, 2008 was $15.5
million compared to net cash provided by financing activities of $2.5 million
for the same period last year. The primary uses of cash from financing
activities during fiscal year 2008 were for the repurchase of all of the
outstanding options of Apio not owned by Landec for $19.5 million which was
partially offset by the tax benefit from stock based compensation of $3.4
million.
Capital
Expenditures
During
the fiscal year ended May 25, 2008, Landec purchased property and equipment
to
support the growth of Apio’s value added processing business. These expenditures
represented the majority of the $4.2 million of capital
expenditures.
Debt
Apio
has
a $7.0 million revolving line of credit with Wells Fargo Bank N.A. On
September 1, 2007, Apio amended its revolving line of credit with Wells Fargo
Bank N.A. by extending the term of the line to August 31, 2009. In addition,
the
interest rate on the revolving line of credit was reduced to either prime less
0.75% or the LIBOR adjusted rate plus 1.50%. The
revolving line of credit with Wells Fargo contains certain restrictive
covenants, which require Apio to meet certain financial tests, including minimum
levels of net income, maximum leverage ratio, minimum net worth and maximum
capital expenditures. Landec has pledged substantially all of the assets of
Apio
to secure the line with Wells Fargo. At May 25, 2008, no amounts were
outstanding under the revolving line of credit. Apio has been in compliance
with
all loan covenants during fiscal year 2008.
Contractual
Obligations
The
Company’s material contractual obligations for the next five years and
thereafter as of May 25, 2008, are as follows (in thousands):
|
Due
in Fiscal Year Ended May
|
||||||||||||||||||||||
|
Obligation
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
|||||||||||||||
|
Income
taxes
|
$
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Operating
Leases
|
1,465
|
718
|
478
|
258
|
11
|
—
|
—
|
|||||||||||||||
|
Licensing
Obligation
|
350
|
50
|
100
|
100
|
100
|
—
|
—
|
|||||||||||||||
|
Purchase
Commitments
|
2,213
|
2,213
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Total
|
$
|
4,028
|
$
|
2,981
|
$
|
578
|
$
|
358
|
$
|
111
|
$
|
—
|
$
|
—
|
||||||||
The
income tax amounts above exclude liabilities under FASB Interpretation No.
48“Accounting
for Uncertainty in Income Taxes”,
as we
are unable to reasonably estimate the ultimate amount or timing of settlement.
See Note 11 in the Notes to Consolidated Financial Statements for further
discussion.
Landec
is
not a party to any agreements with, or commitments to, any special purpose
entities that would constitute material off-balance sheet financing other than
the operating lease commitments listed above.
-
38
-
Landec’s
future capital requirements will depend on numerous factors, including the
progress of its research and development programs; the continued development
of
marketing, sales and distribution capabilities; the ability of Landec to
establish and maintain new collaborative and licensing arrangements; any
decision to pursue additional acquisition opportunities; weather conditions
that
can affect the supply and price of produce, the timing and amount, if any,
of
payments received under licensing and research and development agreements;
the
costs involved in preparing, filing, prosecuting, defending and enforcing
intellectual property rights; the ability to comply with regulatory
requirements; the emergence of competitive technology and market forces; the
effectiveness of product commercialization activities and arrangements; and
other factors. If Landec’s currently available funds, together with the
internally generated cash flow from operations are not sufficient to satisfy
its
capital needs, Landec would be required to seek additional funding through
other
arrangements with collaborative partners, additional bank borrowings and public
or private sales of its securities. There can be no assurance that additional
funds, if required, will be available to Landec on favorable terms if at
all.
Landec
believes that its debt facilities, cash from operations, along with existing
cash, cash equivalents and existing borrowing capacities will be sufficient
to
finance its operational and capital requirements for the foreseeable
future.
Item
7A. Quantitative
and Qualitative Disclosures about Market Risk
Not
material.
Item
8. Financial
Statements and Supplementary Data
See
Item
15 of Part IV of this report.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
-
39
-
Item
9A. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management evaluated, with participation of our Chief Executive Officer and
our
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on Form
10-K. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures
are
effective in ensuring that information required to be disclosed in reports
filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by the Securities
and
Exchange Commission, and are effective in providing reasonable assurance that
information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal controls over financial reporting during the
quarter ended May 25, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of May 25,
2008. In making this assessment, our management used the criteria set forth
by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control - Integrated Framework. Our management has concluded that,
as
of May 25, 2008, our internal control over financial reporting was effective
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our independent registered public
accounting firm, Ernst & Young LLP, have issued an audit report on the
effectiveness of our internal control over financial reporting, which is
included below.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected.
REPORT
OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
The
Board
of Directors and Shareholders of Landec Corporation
We
have
audited Landec Corporation’s internal control over financial reporting as of May
25, 2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Landec Corporation’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
-
40
-
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, Landec Corporation maintained, in all material respects, effective
internal control over financial reporting as of May 25, 2008, based on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Landec
Corporation and subsidiaries as of May 25, 2008 and May 27, 2007, and the
related statements of income, shareholders' equity, and cash flows for each
of
the three years ended May 25, 2008 of Landec Corporation and our
report dated August 7, 2008 expressed an unqualified opinion
thereon.
/s/
ERNST
& YOUNG
LLP
San
Francisco, California
August
7,
2008
Item
9B. Other
Information
None
-
41
-
PART
III
Item
10. Directors
and Executive Officers of the Registrant
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the Commission
no
later than September 22, 2008 (120 days after the Registrant’s fiscal year end
covered by this Report) and is incorporated herein by reference.
Item
11. Executive
Compensation
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the Commission
no
later than September 22, 2008 (120 days after the Registrant’s fiscal year end
covered by this Report) and is incorporated herein by reference.
Item
12. Security
Ownership of Certain Beneficial Owners and Management
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the Commission
no
later than September 22, 2008 (120 days after the Registrant’s fiscal year end
covered by this Report) and is incorporated herein by reference.
Item
13. Certain
Relationships and Related Transactions and Director
Independence
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the Commission
no
later than September 22, 2008 (120 days after the Registrant’s fiscal year end
covered by this Report) and is incorporated herein by reference.
Item
14. Principal
Accountant Fees and Services
This
information required by this item will be contained in the Registrant’s
definitive proxy statement which the Registrant will file with the Commission
no
later than September 22, 2008 (120 days after the Registrant’s fiscal year end
covered by this Report) and is incorporated herein by
reference.
-
42
-
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
|
(a) 1.
|
Consolidated
Financial Statements of Landec Corporation
|
|
|
Page
|
||
|
Report
of Ernst & Young LLP, Independent Registered Public Accounting
Firm
|
44
|
|
|
Consolidated
Balance Sheets at May 25, 2008 and May 27, 2007
|
45
|
|
|
Consolidated
Statements of Income for the Years Ended May 25, 2008, May 27, 2007
and
May 28, 2006
|
46
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended May 25,
2008, May 27, 2007 and May 28, 2006
|
47
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended May 25, 2008, May 27,
2007
and May 28, 2006
|
48
|
|
|
Notes
to Consolidated Financial Statements
|
49
|
|
|
2.
|
All
schedules provided for in the applicable accounting regulations of
the
Securities and Exchange Commission have been omitted since they pertain
to
items which do not appear in the financial statements of Landec
Corporation and its subsidiaries or to items which are not significant
or
to items as to which the required disclosures have been made elsewhere
in
the financial statements and supplementary notes and such
schedules.
|
|
|
3.
|
Index
of Exhibits
|
75
|
|
The
exhibits listed in the accompanying Index of Exhibits are filed or
incorporated by reference as part of this report.
|
-
43
-
REPORT
OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
Board
of
Directors and Shareholders of Landec Corporation
We
have
audited the accompanying consolidated balance sheets of Landec Corporation
and
subsidiaries as of May 25, 2008 and May 27, 2007, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years ended May 25, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Landec Corporation
and
subsidiaries at May 25, 2008 and May 27, 2007, and the consolidated results
of
their operations and their cash flows for each of the three years ended May
25,
2008, in conformity with U.S. generally accepted accounting
principles.
As
discussed in the Notes to the consolidated financial statements, on May 28,
2007, the Company adopted the provisions of SFAS Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109,
and
changed its method of recognizing uncertain tax positions. Also, effective
May
29, 2006, the Company changed its method of accounting for share-based
compensation to conform with SFAS No. 123-R, Share
Based Payments.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Landec Corporation’s internal control over
financial reporting as of May 25, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated August 7, 2008
expressed an unqualified opinion thereon.
/s/
ERNST
& YOUNG
LLP
San
Francisco, California
August
7,
2008
-
44
-
LANDEC
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
May
25, 2008
|
May
27, 2007
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
44,396
|
$
|
62,556
|
|||
|
Marketable
securities
|
14,643
|
—
|
|||||
|
Accounts
receivable, less allowance for doubtful accounts of $169 and
$206 at May
25, 2008 and May 27, 2007, respectively
|
19,460
|
17,631
|
|||||
|
Accounts
receivable, related party
|
411
|
554
|
|||||
|
Inventories,
net
|
7,329
|
6,800
|
|||||
|
Notes
and advances receivable
|
501
|
282
|
|||||
|
Deferred
taxes
|
2,180
|
―
|
|||||
|
Prepaid
expenses and other current assets
|
1,746
|
1,316
|
|||||
|
Total
current assets
|
90,666
|
89,139
|
|||||
|
Property
and equipment, net
|
21,306
|
20,270
|
|||||
|
Goodwill,
net
|
27,354
|
21,402
|
|||||
|
Trademarks,
net
|
8,228
|
8,228
|
|||||
|
Notes
receivable
|
—
|
96
|
|||||
|
Other
assets
|
3,035
|
2,233
|
|||||
|
Total
Assets
|
$
|
150,589
|
$
|
141,368
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
18,991
|
$
|
14,163
|
|||
|
Related
party payables
|
273
|
175
|
|||||
|
Accrued
compensation
|
2,197
|
3,126
|
|||||
|
Other
accrued liabilities
|
2,930
|
1,340
|
|||||
|
Deferred
revenue
|
3,613
|
3,491
|
|||||
|
Total
current liabilities
|
28,004
|
22,295
|
|||||
|
Deferred
revenue
|
5,000
|
7,000
|
|||||
|
Deferred
taxes
|
1,569
|
―
|
|||||
|
Minority
interest
|
1,550
|
1,845
|
|||||
|
Total
liabilities
|
36,123
|
31,140
|
|||||
|
Commitments
and contingencies
|
|
|
|||||
|
Shareholders'
equity:
|
|||||||
|
Common
stock, $0.001 par value; 50,000,000 shares authorized; 26,156,323
and
25,891,168 shares issued and outstanding at May 25, 2008 and
May 27, 2007,
respectively
|
112,974
|
129,560
|
|||||
|
Retained
earnings (deficit)
|
1,492
|
(19,332
|
)
|
||||
|
Total
shareholders' equity
|
114,466
|
110,228
|
|||||
|
Total
Liabilities and Shareholders’ Equity
|
$
|
150,589
|
$
|
141,368
|
|||
See
accompanying notes.
-
45
-
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands, except per share amounts)
|
Year
Ended
May
25,
2008
|
Year
Ended
May
27,
2007
|
Year
Ended
May
28,
2006
|
||||||||
|
Statement
of Operations Data:
|
||||||||||
|
Revenues:
|
||||||||||
|
Product
sales
|
$
|
227,550
|
$
|
201,892
|
$
|
225,404
|
||||
|
Services
revenue, related party
|
3,640
|
3,539
|
3,725
|
|||||||
|
License
fees
|
6,231
|
4,013
|
2,398
|
|||||||
|
Research,
development and royalty revenues
|
1,075
|
805
|
162
|
|||||||
|
Royalty
revenues, related party
|
31
|
249
|
264
|
|||||||
|
Total
revenues
|
238,527
|
210,498
|
231,953
|
|||||||
|
Cost
of revenue:
|
||||||||||
|
Cost
of product sales
|
194,868
|
172,251
|
184,345
|
|||||||
|
Cost
of product sales, related party
|
2,420
|
3,001
|
4,559
|
|||||||
|
Cost
of services revenue
|
3,011
|
2,860
|
3,005
|
|||||||
|
Total
cost of revenue
|
200,299
|
178,112
|
191,909
|
|||||||
|
Gross
profit
|
38,228
|
32,386
|
40,044
|
|||||||
|
Operating
costs and expenses:
|
||||||||||
|
Research
and development
|
3,251
|
3,074
|
3,042
|
|||||||
|
Selling,
general and administrative
|
19,801
|
21,616
|
27,979
|
|||||||
|
Income
from sale of FCD (Note 2)
|
—
|
(22,669
|
)
|
—
|
||||||
|
Total
operating costs and expenses
|
23,052
|
2,021
|
31,021
|
|||||||
|
Operating
income
|
15,176
|
30,365
|
9,023
|
|||||||
|
Interest
income
|
2,219
|
1,945
|
633
|
|||||||
|
Interest
expense
|
(22
|
)
|
(251
|
)
|
(452
|
)
|
||||
|
Minority
interest expense
|
(477
|
)
|
(412
|
)
|
(529
|
)
|
||||
|
Other
expense, net
|
—
|
(2
|
)
|
(24
|
)
|
|||||
|
Net
income before taxes
|
16,896
|
31,645
|
8,651
|
|||||||
|
Income
tax expense
|
(3,354
|
)
|
(2,456
|
)
|
—
|
|||||
|
Net
income
|
$
|
13,542
|
$
|
29,189
|
$
|
8,651
|
||||
|
Basic
net income per share
|
$
|
0.52
|
$
|
1.16
|
$
|
0.35
|
||||
|
Diluted
net income per share
|
$
|
0.50
|
$
|
1.07
|
$
|
0.32
|
||||
|
Shares
used in per share computation:
|
||||||||||
|
Basic
|
26,069
|
25,260
|
24,553
|
|||||||
|
Diluted
|
26,935
|
26,558
|
25,657
|
|||||||
See
accompanying notes.
-
46
-
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN
SHAREHOLDERS'
EQUITY
(in
thousands, except share and per share amounts)
|
Common
Stock
|
Retained
Earnings
|
Total
Shareholders'
|
|||||||||||
|
Shares
|
Amount
|
(Deficit)
|
Equity
|
||||||||||
|
Balance
at May 29, 2005
|
24,086,368
|
$
|
121,950
|
$
|
(49,890
|
)
|
$
|
72,060
|
|||||
|
Issuance
of common stock at $0.86 to $6.75 per share
|
678,744
|
3,378
|
—
|
3,378
|
|||||||||
|
Issuance
of common stock for the net assets of Heartland Hybrids
|
152,186
|
960
|
—
|
960
|
|||||||||
|
Net
income and comprehensive income
|
—
|
—
|
8,651
|
8,651
|
|||||||||
|
Balance
at May 28, 2006
|
24,917,298
|
126,288
|
(41,239
|
)
|
85,049
|
||||||||
|
Issuance
of common stock at $1.66 to $8.86 per share
|
973,870
|
2,657
|
—
|
2,657
|
|||||||||
|
Stock-based
compensation
|
—
|
615
|
—
|
615
|
|||||||||
|
Repurchase
of subsidiary common stock and options
|
—
|
—
|
(7,282
|
)
|
(7,282
|
)
|
|||||||
|
Net
income and comprehensive income
|
—
|
—
|
29,189
|
29,189
|
|||||||||
|
Balance
at May 27, 2007
|
25,891,168
|
129,560
|
(19,332
|
)
|
110,228
|
||||||||
|
Reclassify
repurchase of subsidiary common stock and options
|
—
|
(2,502
|
)
|
7,282
|
4,780
|
||||||||
|
Issuance
of common stock at $1.89 to $7.53 per
share
|
255,153
|
1,120
|
—
|
1,120
|
|||||||||
|
Issuance
of common stock for vested restricted stock units
|
10,002
|
—
|
—
|
—
|
|||||||||
|
Stock-based
compensation
|
—
|
871
|
—
|
871
|
|||||||||
|
Tax
benefit from stock-based compensation expense
|
—
|
3,423
|
—
|
3,423
|
|||||||||
|
Repurchase
of subsidiary common stock and options (Note 5)
|
—
|
(19,498
|
)
|
—
|
(19,498
|
)
|
|||||||
|
Net
income and comprehensive income
|
—
|
—
|
13,542
|
13,542
|
|||||||||
|
Balance
at May 25, 2008
|
26,156,323
|
$
|
112,974
|
$
|
1,492
|
$
|
114,466
|
||||||
See
accompanying notes
-
47
-
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||
|
May
25,
|
May
27,
|
May
28,
|
||||||||
|
2008
|
2007
|
2006
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
13,542
|
$
|
29,189
|
$
|
8,651
|
||||
|
Adj.
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
3,204
|
3,260
|
3,203
|
|||||||
|
Stock-based
compensation expense
|
871
|
615
|
—
|
|||||||
|
Deferred
taxes
|
(611
|
)
|
—
|
—
|
||||||
|
Minority
interest
|
477
|
412
|
529
|
|||||||
|
Increase
in long-term receivable
|
(800
|
)
|
(400
|
)
|
—
|
|||||
|
Income
from sale of FCD (Note 2)
|
—
|
(24,587
|
)
|
—
|
||||||
|
Net
loss (gain) on disposal of property and equipment
|
—
|
43
|
(120
|
)
|
||||||
|
Investment
in unconsolidated business
|
—
|
(481
|
)
|
(1,311
|
)
|
|||||
|
Changes
in assets and liabilities, net of effects from
acquisitions:
|
||||||||||
|
Accounts
receivable, net
|
(1,829
|
)
|
(273
|
)
|
(1,883
|
)
|
||||
|
Accounts
receivable, related party
|
143
|
7
|
(85
|
)
|
||||||
|
Inventories,
net
|
(529
|
)
|
(8,733
|
)
|
(3,123
|
)
|
||||
|
Issuance
of notes and advances receivable
|
(2,652
|
)
|
(2,186
|
)
|
(1,761
|
)
|
||||
|
Collection
of notes and advances receivable
|
2,425
|
2,228
|
1,882
|
|||||||
|
Prepaid
expenses and other current assets
|
(430
|
)
|
(268
|
)
|
431
|
|||||
|
Accounts
payable
|
4,828
|
(2,967
|
)
|
3,685
|
||||||
|
Related
party accounts payable
|
98
|
(358
|
)
|
(260
|
)
|
|||||
|
Accrued
compensation
|
(929
|
)
|
95
|
1,396
|
||||||
|
Other
accrued liabilities
|
1,590
|
(658
|
)
|
(146
|
)
|
|||||
|
Deferred
revenue
|
(1,878
|
)
|
2,600
|
(223
|
)
|
|||||
|
Net
cash provided by (used in) operating activities
|
17,520
|
(2,462
|
)
|
10,865
|
||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchases
of property and equipment
|
(4,240
|
)
|
(6,782
|
)
|
(4,746
|
)
|
||||
|
Net
proceeds from sale of FCD (Note 2)
|
—
|
49,441
|
—
|
|||||||
|
Acquisition
of businesses, net of cash acquired and earnout payments
|
(1,433
|
)
|
(1,320
|
)
|
(3,860
|
)
|
||||
|
Issuance
of notes and advances receivable
|
(12
|
)
|
(37
|
)
|
(425
|
)
|
||||
|
Collection
of notes and advances receivable
|
116
|
638
|
224
|
|||||||
|
Proceeds
from the sale of property and equipment
|
—
|
—
|
1,350
|
|||||||
|
Purchase
of marketable securities
|
(14,643
|
)
|
—
|
(991
|
)
|
|||||
|
Proceeds
from maturities
of
marketable securities
|
—
|
—
|
2,959
|
|||||||
|
Net
cash (used in) provided by investing activities
|
(20,212
|
)
|
41,940
|
(5,489
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from sale of common stock
|
1,120
|
2,657
|
3,378
|
|||||||
|
Proceeds
from the exercise of subsidiary options
|
—
|
66
|
105
|
|||||||
|
Repurchase
of subsidiary options
|
(19,498
|
)
|
(7,282
|
)
|
—
|
|||||
|
Tax
benefit from stock-based compensation expense
|
3,423
|
—
|
—
|
|||||||
|
Net
change in other assets
|
(2
|
)
|
72
|
254
|
||||||
|
Borrowings
on lines of credit
|
—
|
9,338
|
14,904
|
|||||||
|
Payments
on lines of credit
|
—
|
—
|
(14,904
|
)
|
||||||
|
Payments
on long term debt
|
—
|
(1,990
|
)
|
(1,136
|
)
|
|||||
|
Payments
to minority interest .
|
(511
|
)
|
(302
|
)
|
(329
|
)
|
||||
|
Net
cash (used in) provided by financing activities
|
(15,468
|
)
|
2,559
|
2,272
|
||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(18,160
|
)
|
42,037
|
7,648
|
||||||
|
Cash
and cash equivalents at beginning of year (including FCD)
|
62,556
|
20,519
|
12,871
|
|||||||
|
Cash
and cash equivalents at end of year (including FCD)
|
44,396
|
62,556
|
20,519
|
|||||||
|
Less:
Cash held in assets held for sale
|
—
|
—
|
(5,355
|
)
|
||||||
|
Cash
and cash equivalents at end of year
|
$
|
44,396
|
$
|
62,556
|
$
|
15,164
|
||||
|
Supplemental
disclosure of cash flows information:
|
||||||||||
|
Cash
paid during the period for interest
|
$
|
8
|
$
|
179
|
$
|
312
|
||||
|
Cash
paid during the period for income taxes
|
$
|
850
|
$
|
1,198
|
$
|
—
|
||||
|
Supplemental
schedule of noncash operating and investing activities:
|
||||||||||
|
Long-term
receivable from Monsanto
|
$
|
800
|
$
|
400
|
$
|
—
|
||||
|
Preferred
stock received from investment in unconsolidated business
|
$
|
—
|
$
|
481
|
$
|
1,311
|
||||
|
Sale
of land and equipment for note receivable
|
$
|
—
|
$
|
—
|
$
|
380
|
||||
See
accompanying notes.
-
48
-
LANDEC
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies
Organization
Landec
Corporation and its subsidiaries ("Landec" or the "Company") design, develop,
manufacture, and sell temperature-activated and other specialty polymer products
for a variety of food products, agricultural products, and licensed partner
applications. The Company sells Intellicoat® coated seed products through its
Landec Ag, Inc. (“Landec Ag”) subsidiary and specialty packaged fresh-cut
vegetables and whole produce to retailers and club stores, primarily in the
United States and Asia through its Apio, Inc. (“Apio”) subsidiary.
Basis
of Presentation
Basis
of Consolidation
The
consolidated financial statements are presented on the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles
and
include the accounts of
Landec
Corporation and its subsidiaries, Apio and Landec Ag. All material inter-company
transactions and balances have been eliminated.
The
Company follows FASB Interpretation No. 46R, "Consolidation
of Variable Interest Entities"
("FIN 46R"), which addresses the consolidation of variable interest
entities ("VIEs"). Under FIN 46R, arrangements that are not controlled
through voting or similar rights are accounted for as VIEs. An enterprise is
required to consolidate a VIE if it is the primary beneficiary of the
VIE.
Under
FIN 46R, a VIE is created when (i) the equity investment at risk is
not sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or (ii) the entity's
equity holders as a group either: (a) lack direct or indirect ability to
make decisions about the entity through voting or similar rights, (b) are
not obligated to absorb expected losses of the entity if they occur, or
(c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a VIE pursuant to
FIN 46R, the enterprise that is deemed to absorb a majority of the expected
losses or receive a majority of expected residual returns of the VIE is
considered the primary beneficiary and must consolidate the VIE.
Based
on
the provisions of FIN 46R, the Company has concluded that as a result of
the license and supply agreement between Landec and Monsanto Company (see Note
2), Monsanto has a variable interest in the Company’s Intellicoat coating
subsidiary, Landec Ag, and therefore Landec Ag has been determined to be a
VIE.
The Company has also determined that it is the primary beneficiary of Landec
Ag
and therefore the accounts of Landec Ag are consolidated with the accounts
of
the Company.
Reclassifications
Certain
reclassifications have been made to prior year financial statements to conform
to the current year presentation.
Summary
of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make certain estimates and
judgments that affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require management’s most
significant, difficult and subjective judgments include revenue recognition;
sales returns and allowances; recognition and measurement of current and
deferred income tax assets and liabilities; the assessment of recoverability
of
long-lived assets; the
-
49
-
1.
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
valuation
of intangible assets and inventory; the valuation and nature of impairments
of
investments; and the valuation and recognition of stock-based
compensation.
These
estimates involve the consideration of complex factors and require management
to
make judgments. The analysis of historical and future trends, can require
extended periods of time to resolve, and are subject to change from period
to
period. The actual results may differ from management’s estimates.
For
instance, the carrying value of notes and advances receivable, are impacted
by
current market prices for the related crops, weather conditions and the fair
value of the underlying security obtained by the Company, such as, liens on
property and crops. The Company recognizes losses when it estimates that the
fair value of the related crops or security is insufficient to cover the advance
or note receivable.
Concentrations
of Risk
Cash
and
cash equivalents, short-term investments, trade accounts receivable, grower
advances and notes receivable are financial instruments that potentially subject
the Company to concentrations of credit risk. Corporate policy limits, among
other things, the amount of credit exposure to any one issuer and to any one
type of investment, other than securities issued or guaranteed by the U.S.
government. The Company routinely assesses the financial strength of customers
and growers and, as a consequence, believes that trade receivables, grower
advances and notes receivable credit risk exposure is limited. Credit losses
for
bad debt are provided for in the consolidated financial statements through
a
charge to operations. A valuation allowance is provided for known and
anticipated credit losses. The recorded amounts for these financial instruments
approximate their fair value.
Several
of the raw materials used to manufacture the Company’s products are currently
purchased from a single source, including some monomers used to synthesize
Intelimer® polymers and substrate materials for the production of Intelimer
packaging used
on a
multitude of Apio value-added products.
During
the fiscal year ended May 25, 2008, sales to the Company’s top five customers
accounted for approximately 47% of total revenue, with the top customer, Costco
Wholesale Corporation from the Food Products Technology segment, accounting
for
approximately 20% of total revenues. In addition, approximately 30% of the
Company’s total revenues were derived from product sales to international
customers, none of whom individually accounted for more than 5% of total
revenues. As of May 25, 2008, Costco Wholesale Corporation represented
approximately 19% of total accounts receivable.
During
the fiscal year ended May 27, 2007, sales to the Company’s top five customers
accounted for approximately 50% of total revenue, with the top customers, Costco
Wholesale Corporation and Sam’s Club from the Food Products Technology segment,
accounting for approximately 21% and 10%, respectively, of total revenues.
In
addition, approximately 28% of the Company’s total revenues were derived from
product sales to international customers, none of whom individually accounted
for more than 5% of total revenues. As of May 27, 2007, Costco Wholesale
Corporation and Sam’s Club represented approximately 20% and 11%, respectively,
of total accounts receivable.
Impairment
of Long-Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. Recoverability
of
assets is measured by comparison of the carrying amount of the asset to the
net
undiscounted future cash flow expected to be generated from the asset. If the
future undiscounted cash flows are not sufficient to recover the carrying value
of the assets, the assets’ carrying value is adjusted to fair
value.
The
Company regularly evaluates its long-lived assets for indicators of possible
impairment. To date, no impairment has been recorded.
-
50
-
1. Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
Financial
Instruments
The
Company’s financial instruments are primarily composed of marketable debt
securities, commercial-term trade payables and grower advances, and notes
receivable, as well as long-term notes receivables and debt instruments. For
short-term instruments, the historical carrying amount is a reasonable estimate
of fair value. Fair values for long-term financial instruments not readily
marketable are estimated based upon discounted future cash flows at prevailing
market interest rates. Based on these assumptions, management believes the
fair
market values of the Company’s financial instruments are not materially
different from their recorded amounts as of May 25, 2008.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
sales discounts. The allowance for doubtful accounts is based on review of
the
overall condition of accounts receivable balances and review of significant
past
due accounts. The allowance for doubtful accounts is based on specific
identification of past due amounts and a general reserve for accounts over
90-days past due. The changes in the Company’s allowances for doubtful accounts
are summarized in the following table (in thousands).
|
Balance at beginning
of period
|
Additions charged
to costs and
expenses
|
Deductions
|
Balance at end of
period
|
||||||||||
|
Year
ended May 28, 2006 Allowance for doubtful accounts receivable and
notes
receivable
|
$
|
345
|
$
|
10
|
$
|
(135
|
)
|
$
|
220
|
||||
|
Year
ended May 27, 2007 Allowance for doubtful accounts receivable and
notes
receivable
|
$
|
220
|
$
|
64
|
$
|
(78
|
)
|
$
|
206
|
||||
|
Year
ended May 25, 2008 Allowance for doubtful accounts receivable and
notes
receivable
|
$
|
206
|
$
|
-
|
$
|
(37
|
)
|
$
|
169
|
||||
Revenue
Recognition
Revenue
from product sales is recognized when there is persuasive evidence that an
arrangement exists, title has transferred, the price is fixed and determinable,
and collectibility is reasonably assured. Allowances are established for
estimated uncollectible amounts, product returns, and discounts.
Licensing
revenue is recognized in accordance with Staff Accounting Bulletin No. 104,
Revenue
Recognition (a replacement of SAB 101),
(SAB
104). Initial license fees are deferred and amortized 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.
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.
-
51
-
1.
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
Other
Accounting Policies and Disclosures
Cash,
Cash Equivalents and Marketable Securities
The
Company records all highly liquid securities with three months or less from
date
of purchase to maturity as cash equivalents and consists mainly of certificate
of deposits, money market funds and U.S. Treasuries. Short-term marketable
securities consist of certificates of deposit that are FDIC insured with
original maturities of more than three months at the date of purchase and less
than one year from the date of the balance sheet. The Company classifies all
debt securities with readily determined market values as “available for sale” in
accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
These
investments are classified as marketable securities on the consolidated balance
sheet as of May 25, 2008 and are carried at fair market value. Unrealized gains
and losses are reported as a component of shareholders’ equity and were
immaterial in fiscal year 2008. The cost of debt securities is adjusted for
amortization of premiums and discounts to maturity. This amortization is
recorded to interest income. Realized gains and losses on the sale of
available-for-sale securities are also recorded to interest income and were
immaterial in fiscal year 2008. The cost of securities sold is based on the
specific identification method.
Inventories
Inventories
are stated at the lower of cost (using the first-in, first-out method) or
market. As of May 25, 2008 and May 27, 2007 inventories consisted of (in
thousands):
|
May
25,
2008
|
May
27,
2007
|
||||||
|
Finished
goods
|
$
|
2,949
|
$
|
2,273
|
|||
|
Raw
materials
|
4,380
|
4,527
|
|||||
|
Inventories,
net
|
$
|
7,329
|
$
|
6,800
|
|||
If
the
cost of the inventories exceeds their expected market value, provisions are
recorded currently for the difference between the cost and the market value.
These provisions are determined based on specific identification for unusable
inventory and an additional reserve, based on historical losses, for inventory
considered to be useable.
Advertising
Expense
Prior
to
the sale of FCD on December 1, 2006, the Company deferred certain costs related
to direct-response advertising of Landec Ag’s hybrid corn seeds. Such costs were
amortized over periods (less than one year) that correspond to the estimated
revenue stream of the advertising activity. Advertising expenditures for Landec
Ag and Apio that are not direct-response advertisements are expensed as
incurred. Advertising expense for the Company for fiscal years 2008, 2007 and
2006 was $474,000, $205,000 and $1.6 million, respectively. The amount of
deferred advertising included in prepaid expenses and other current assets
at
both May 25, 2008 and May 27, 2007 was zero.
-
52
-
1.
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
Notes
and Advances Receivable
Apio
has
made advances to produce growers for crop and harvesting costs and to the buyer
of a fruit processing facility. Notes and advances receivable related to
operating activities are for the sourcing of crops for Apio’s business and notes
and advances receivable related to investing activities are for financing
transactions with third parties. Typically operating advances are paid off
within the growing season (less than one year) from harvested crops. Advances
not fully paid during the current growing season are converted to interest
bearing obligations, evidenced by contracts and notes receivable. These notes
and advances receivable are secured by perfected liens on land and/or crops
and
have terms that range from 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.
Related
Party Transactions
Apio
provides cooling and distributing services for farms
in
which the Chairman of Apio (the “Apio Chairman”) has a financial
interest
and
purchases produce from those farms. Apio also purchases produce from Beachside
Produce LLC for sale to third parties. Beachside Produce is owned by a group
of
entities and persons that supply produce to Apio including the Apio Chairman.
Revenues and the resulting accounts receivable and cost of product sales and
the
resulting
accounts payable are classified as related party items in the accompanying
financial statements as of May 25, 2008 and May 27, 2007 and for the years
ended
May 25, 2008, May 27, 2007 and May 28, 2006.
Apio
leases, for approximately $306,000 on a current annual basis, agricultural
land
that is owned by the Apio Chairman. Apio, in turn, subleases that land at cost
to growers who are obligated to deliver product from that land to Apio for
value
added products. There is generally no net statement of income impact to Apio
as
a result of these leasing activities but Apio creates a guaranteed source of
supply for the value added business. Apio has loss exposure on the leasing
activity to the extent that it is unable to sublease the land. For the years
ended May 25, 2008, May 27, 2007 and May 28, 2006, the Company subleased all
of
the land leased from the Apio Chairman and received sublease income of $344,000,
$504,000 and $554,000, respectively, which is substantially equal to the amount
the Company paid to lease that land for such periods.
Apio's
domestic commodity vegetable business was sold to Beachside Produce, effective
June 30, 2003. The Apio Chairman is a 12.5% owner in Beachside Produce. During
fiscal years 2008, 2007 and 2006, the Company recognized revenues of $1.6
million, $83,000 and $103,000, respectively, from the sale of products to
Beachside Produce and royalty revenues of $31,000, $249,000 and $264,000,
respectively, from the use by Beachside Produce of Apio’s trademarks. The
related accounts receivable from Beachside Produce are classified as related
party in the accompanying Consolidated Balance Sheets as of May 25, 2008 and
May
27, 2007.
At
May
27, 2007, the Apio Chairman held a 6% ownership interest in Apio Cooling LP
(“Apio Cooling”), a limited partnership in which Apio is the general partner and
majority owner with a 60% ownership interest. During the first quarter of fiscal
year 2008, the Apio Chairman withdrew from Apio Cooling. The $227,000 owed
to
the Apio Chairman as of May 27, 2007, which was included in the minority
interest liability at May 27, 2007, was paid in full during fiscal year
2008.
All
related party transactions are monitored quarterly by the Company and approved
by the Audit Committee of the Board of Directors.
Property
and Equipment
Property
and equipment are stated at cost. Expenditures for major improvements are
capitalized while repairs and maintenance are charged to expense. Depreciation
is expensed on a straight-line basis over the estimated useful lives of the
respective assets, generally three to thirty years for buildings and leasehold
improvements and three to seven years for furniture and fixtures, computers,
capitalized software, machinery, equipment and autos. Leasehold improvements
are
amortized over the lesser of the economic life of the improvement or the life
of
the lease on a straight-line basis.
-
53
-
1.
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
The
Company capitalizes software development costs for internal use in accordance
with Statement of Position 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for Internal
Use"
("SOP
98-1"). Capitalization of software development costs begins in the application
development stage and ends when the asset is placed into service. The Company
amortizes such costs using the straight-line basis over estimated useful lives
of three to seven years. The Company did not capitalized any software
development costs during fiscal years 2008 or 2007.
Intangible
Assets
In
June
2001, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 141, Business
Combinations,
and No.
142, Goodwill
and Other Intangible Assets (SFAS
142), effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives are no longer
amortized but are subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
The
Company is required under SFAS 142 to review goodwill and indefinite lived
intangible assets at least annually. During fiscal year 2008, the Company
completed its annual impairment review. The review is performed by grouping
the
net book value of all long-lived assets for reporting entities, including
goodwill and other intangible assets, and comparing this value to the related
estimated fair value. The determination of fair value is based on estimated
future discounted cash flows related to these long-lived assets. The discount
rate used was based on the risks associated with the reporting entities. The
determination of fair value was performed by management. The review concluded
that the fair value of the reporting entities exceeded the carrying value of
their net assets and thus no impairment charge was warranted as of May 25,
2008.
Equity
Investment in Non-Public Company
The
Company’s equity investment of $1.8 million in a non-public company is carried
at cost and adjusted for impairment losses, if any. Since there is no readily
available market value information, the Company periodically reviews this
investment to determine if any other than temporary declines in value have
occurred based on the financial stability and viability of the company. To
date,
no impairment has been recorded.
Deferred
Revenue
Cash
received in advance of services performed (principally revenues related to
upfront license fees) are recorded as deferred revenue. At May 25, 2008, $8.3
million has been recognized as a liability for deferred license fee revenues
and
$313,000 for advances from customers and on ground lease payments from growers.
At May 27, 2007, $10.3 million has been recognized as a liability for deferred
license fee revenues and $160,000 for advances on ground lease payments from
growers.
Minority
Interest
In
connection with the acquisition of Apio, Landec acquired Apio’s 60% general
partner interest in Apio Cooling, a California limited partnership. Apio Cooling
is included in the consolidated financial statements of Landec for all periods
presented. The minority interest balance of $1.6 million, at May 25, 2008 is
comprised of the limited partners’ interest in Apio Cooling. The minority
interest balance of $1.8 million at May 27, 2007 is comprised of $1.6 million
of
limited partners’ interest in Apio Cooling and $261,000 of third party ownership
in Apio which was repurchased by the Company during fiscal year 2008 (see Note
5).
-
54
-
1.
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
Income Taxes
The
Company accounts for income taxes using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences
are
expected to reverse. In
evaluating the Company’s ability to recover its deferred tax assets, management
considered all available positive and negative evidence including the Company’s
past results of operations and its forecast of future taxable income in the
jurisdictions in which Landec has operations. The Company records a valuation
allowance to reduce deferred tax assets to the amount that is expected to be
realized on a more-likely-than-not basis. A deferred tax expense results from
the change in the net deferred tax asset or liability between
periods.
Effective
May 28, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes.”
In
accordance with FIN 48, paragraph 19, the Company has decided to classify
interest and penalties related to uncertain tax positions as a component of
its
provision for income taxes.
The
Company is subject to routine audits by federal and state tax authorities that
may result in additional tax liabilities. Several factors drive the calculation
of the Company’s tax liabilities including, (i) the expiration of various
statutes of limitations, (ii) changes in tax law and regulations,
(iii) issuance of tax rulings, and (iv) settlements with tax
authorities. Changes in any of these factors may result in adjustments in the
Company’s liabilities, which would impact the Company’s reported financial
results.
Per
Share Information
Financial
Accounting Standards Board issued Statement No. 128, "Earnings
Per Share"
(SFAS
128) requires the presentation of basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities and is computed using the weighted average number of
common share outstanding. Diluted earnings per share reflects the potential
dilution if securities or other contracts to issue common stock were exercised
or converted into common stock. Diluted common equivalent shares consist of
stock options using the treasury stock method.
The
following table sets forth the computation of diluted net income per share
(in
thousands, except per share amounts):
|
Fiscal
Year
Ended
May
25, 2008
|
Fiscal
Year
Ended
May
27, 2007
|
Fiscal
Year
Ended
May
28, 2006
|
||||||||
|
Numerator:
|
||||||||||
|
Net
income
|
$
|
13,542
|
$
|
29,189
|
$
|
8,651
|
||||
|
Less:
Minority interest in income of subsidiary
|
—
|
(778
|
)
|
(556
|
)
|
|||||
|
Net
income for diluted net income per share
|
$
|
13,542
|
$
|
28,411
|
$
|
8,095
|
||||
|
Denominator:
|
||||||||||
|
Weighted
average shares for basic net income per share
|
26,069
|
25,260
|
24,553
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Stock
options
|
866
|
1,298
|
1,104
|
|||||||
|
Weighted
average shares for diluted net income per share
|
26,935
|
26,558
|
25,657
|
|||||||
|
Diluted
net income per share
|
$
|
0.50
|
$
|
1.07
|
$
|
0.32
|
||||
Options
to purchase 96,300, 81,030 and 276,313 shares of Common Stock at a weighted
average exercise price of $13.32, $8.86 and $6.70 per share were outstanding
during fiscal years ended May 25, 2008, May 27, 2007 and May 28, 2006,
respectively, but were not included in the computation of diluted net income
per
share because the options’ exercise price were greater than the average market
price of the Common Stock and, therefore, the effect would be
antidilutive.
-
55
-
1.
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
Cost
of Sales
The
Company includes in cost of sales all the costs related to the sale of products
in accordance with generally accepted accounting principles. These costs include
the following: raw materials (including produce, seeds and packaging), direct
labor, overhead (including indirect labor, depreciation, and facility related
costs) and shipping and shipping related costs.
Research
and Development Expenses
Costs
related to both research contracts and Company-funded research is included
in
research and development expenses. Costs to fulfill research contracts generally
approximate the corresponding revenue. Research and development costs are
primarily comprised of salaries and related benefits, supplies, travel expenses
and corporate allocations.
Accounting
for Stock-Based Compensation
On
May 29, 2006, the Company adopted SFAS 123R, which is a revision of
SFAS No. 123 “Accounting for Stock-Based Compensation”
(“SFAS 123”), and supersedes APB No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”). Among other items, SFAS 123R requires
companies to record compensation expense for stock-based awards issued to
employees and directors in exchange for services provided. The amount of
the
compensation expense is based on the estimated fair value of the awards on
their
grant dates and is recognized over the required service periods. The Company’s
stock-based awards include stock option grants and restricted stock unit
awards
(RSUs).
Prior
to
the adoption of SFAS 123R, the Company applied the intrinsic value method
set forth in APB 25 to calculate the compensation expense for stock-based
awards. The Company has historically set the exercise price for its stock
options equal to the market value on the grant date. As a result, the options
had no intrinsic value on their grant dates, and therefore the Company did
not
record any compensation expense unless the terms of the stock options were
subsequently modified. For RSUs, the calculation of compensation expense under
APB 25 and SFAS 123R is similar except for the accounting treatment
for forfeitures as discussed below.
The
Company adopted SFAS 123R using the modified prospective transition method,
which requires the application of the accounting standard to (i) all
stock-based awards issued on or after May 29, 2006 and (ii) any
outstanding stock-based awards that were issued but not vested as of
May 29, 2006. Accordingly, the Company’s consolidated financial statements
as of May 28, 2006 and for the fiscal year then-ended, were accounted for
under the provisions of APB 25. During the fiscal year ended May 25, 2008,
the
Company recognized stock-based compensation expense of $871,000 which included
$306,000 for restricted stock unit awards and $565,000 for stock option grants,
respectively. During the fiscal year ended May 27, 2007, the Company recognized
stock-based compensation expense of $615,000 which included $160,000 for
restricted stock unit awards and $455,000 for stock option grants,
respectively.
The
following table summarizes the stock-based compensation by income statement
line
item:
|
Fiscal
Year Ended
May
25, 2008
|
Fiscal
Year Ended
May
27, 2007
|
||||||
|
Research
and development
|
$
|
148,000
|
$
|
82,000
|
|||
|
Sales,
general and administrative
|
723,000
|
533,000
|
|||||
|
Total
stock-based compensation expense
|
$
|
871,000
|
$
|
615,000
|
|||
The
estimated fair value for stock options, which determines the Company’s
calculation of compensation expense, is based on the Black-Scholes option
pricing model. Upon the adoption of SFAS 123R, the Company changed its
method of calculating and recognizing the fair value of stock-based compensation
arrangements to the straight-line, single-option method. Compensation expense
for all stock option and restricted stock awards granted prior to May 29,
2006 will continue to be recognized using the straight-line, multiple-option
method. In addition, SFAS 123R requires the estimation of the expected
forfeitures of stock-based awards at the time of grant. As a result, the Company
uses historical data to estimate pre-vesting forfeitures and records stock-based
compensation expense only for those awards that are expected to vest and revises
those estimates in subsequent periods if the actual forfeitures differ from
the
prior estimates. In the pro-forma information required under SFAS 123R for
periods prior to May 29, 2006, the Company accounted for forfeitures as
they occurred.
-
56 -
1. Organization,
Basis of Presentation, and Summary of Significant Accounting Policies
(continued)
As
of May
25, 2008, May 27, 2007 and May 28, 2006, the fair value of stock option grants
was estimated using the Black-Scholes option pricing model. The following
weighted average assumptions were used:
|
Landec
Employee Stock Options
|
||||||||||
|
Fiscal Year
Ended
May 25, 2008
|
Fiscal Year
Ended
May 27, 2007
|
Fiscal Year
Ended
May 28, 2006
|
||||||||
|
Expected
life (in years)
|
4.40
|
4.27
|
4.58
|
|||||||
|
Risk-free
interest rate
|
5.02
|
%
|
5.08
|
%
|
4.37
|
%
|
||||
|
Volatility
|
0.46
|
0.51
|
0.52
|
|||||||
|
Dividend
yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||
The
Black-Scholes option pricing model requires the input of highly subjective
assumptions, including the expected stock price volatility. The change in the
volatility in the fiscal years ended May 25, 2008, May 27, 2007 and May 28,
2006
is a result of basing the volatility on Landec's stock price.
The
weighted average estimated fair value of Landec employee stock options granted
at grant date market prices during the fiscal years ended May 25, 2008, May
27,
2007 and May 28, 2006 was $5.74, $4.15 and $3.36 per share, respectively. No
stock options were granted above or below grant date market prices during the
fiscal years ended May 25, 2008, May 27, 2007 and May 28, 2006. The weighted
average estimated fair value of shares granted under the Landec Employee Stock
Purchase Plan during the both fiscal years ended May 27, 2007 and May 28, 2006
was $2.19. The Company terminated the Employee Stock Purchase Plan on June
1,
2006.
For
purposes of pro forma disclosures, the estimated fair value of the options
is
amortized to expense over the service period of the options using the
straight-line method. The Company’s pro forma information follows (in thousands
except for per share data):
|
Year
Ended
|
||||
|
May
28, 2006
|
||||
|
Net
income – as reported
|
$
|
8,651
|
||
|
Deduct:
|
||||
|
Stock-based
employee expense determined under SFAS 123
|
(1,160
|
)
|
||
|
Pro
forma net income
|
$
|
7,491
|
||
|
Basic
net income per share
– as reported
|
$
|
0.35
|
||
|
Diluted
net income per share
– as reported
|
$
|
0.32
|
||
|
Basic
pro forma net income per
share
|
$
|
0.31
|
||
|
Diluted
pro forma net income per
share
|
$
|
0.27
|
||
-
57 -
1.
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
Recent
Accounting Pronouncements
In
June
2006, FASB’s EITF reached a consensus on Issue No. 06-3, “How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
be Presented in the Income Statement.”
EITF
Issue 06-3 provides accounting guidance regarding the presentation of taxes
assessed by a governmental authority on a revenue producing transaction between
a seller and a customer such as sales and use taxes. EITF Issue 06-3 was
effective for fiscal years beginning after December 15, 2006. The adoption
did
not have a material effect on the Company’s consolidated financial position or
results of operations. The Company records the expense for sales and use taxes
to general and administrative expenses.
In
July
2006, FASB issued FIN 48 “Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
109”
which
prescribes a recognition threshold and measurement process for recording in
the
financial statements uncertain tax positions taken or expected to be taken
in a
tax return. FIN 48 requires that a company recognize the financial statement
effects of a tax position when there is a likelihood of more than 50 percent,
based on the technical merits, that the position will be sustained upon
examination. It also provides guidance on the derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition
requirements for uncertain tax positions. The accounting provisions of FIN
48
were effective for the Company beginning January 1, 2007. The adoption of FIN
48
did not have a significant effect on the Company’s consolidated financial
position or results of operations.
In
September 2006, FASB issued SFAS No. 157, “Fair
Value Measurements.”
SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
and
expands disclosure about fair value measurements. SFAS No. 157 does not require
new fair value measurements but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of information.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
However, on February 12, 2008, the FASB issued FASB Staff (“FSP”) FAS No. 157-2
which delays the effective date for all non-financial assets and liabilities
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). FSP 157- 2 defers the
effective date of SFAS No. 157 to fiscal years beginning after November 15,
2008, and interim periods within the fiscal years for items within the scope
of
this FSP. Effective for fiscal year 2009, the Company will adopt SFAS No. 157,
except as it applies to those non-financial assets and non-financial liabilities
as noted in FSP157-2. The Company does not expect such adoption to have a
material effect on its consolidated financial position, results of operations
or
cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities— Including an
amendment of FASB Statement No. 115.”
SFAS
No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. Subsequent adjustments to the fair value of the financial
instruments and liabilities an entity elects to carry at fair value will be
recognized in earnings. SFAS No. 159 also establishes additional disclosure
requirements. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007, with early adoption permitted provided the entity also elects
to apply the provisions of SFAS No. 157. The Company is currently evaluating
whether it is going to adopt the fair value election under this standard..
The
FASB
issued SFAS No. 141R (revised 2007), “Business
Combinations.”
which
significantly changes the financial accounting and reporting for business
combination transactions. SFAS No. 141R requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction and establishes the acquisition date
fair
value as the measurement objective for all assets acquired and liabilities
assumed in a business combination. Certain provisions of this standard will,
among other things, impact the determination of acquisition-date fair value
of
consideration paid in a business combination (including contingent
consideration); exclude transaction costs from acquisition accounting; and
change accounting practices for acquired contingencies, acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. For the Company, SFAS No. 141R is effective for
business combinations occurring after December 31, 2008. The Company is
currently evaluating the future impacts and disclosures of this
standard.
-
58 -
1.
Organization,
Basis of Presentation, and Summary of Significant Accounting
Policies (continued)
In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 160, “Noncontrolling
Interests in Consolidated Financial Statements.”
SFAS
No. 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated
Financial Statements”
and
establishes accounting and reporting standards for the noncontrolling interest
(minority interest) in a subsidiary. This statement requires the reporting
of
all noncontrolling interests as a separate component of stockholders’ equity,
the reporting of consolidated net income (loss) as the amount attributable
to
both the parent and the noncontrolling interests and the separate disclosure
of
net income (loss) attributable to the parent and to the noncontrolling
interests. In addition, this statement provides accounting and reporting
guidance related to changes in noncontrolling ownership interests. Other than
the reporting requirements described above which require retrospective
application, the provisions of SFAS No. 160 are to be applied prospectively
in
the first annual reporting period beginning on or after December 15, 2008.
As of
December 31, 2007 and 2006, the Company had no noncontrolling interests on
its
consolidated financial statements. The Company is currently evaluating the
impact of this standard, but would not expect it to have a material impact
on
its consolidated financial statements.
In
December 2007, the FASB ratified the EITF consensus on EITF Issue No. 07-1,
“Accounting
for Collaborative Arrangements”
that
discusses how parties to a collaborative arrangement (which does not establish
a
legal entity within such arrangement) should account for various activities.
The
consensus indicates that costs incurred and revenues generated from transactions
with third parties (i.e. parties outside of the collaborative arrangement)
should be reported by the collaborators on the respective line items in their
income statements pursuant to EITF Issue No. 99-19, “Reporting
Revenue Gross as a Principal Versus Net as an Agent.”
Additionally, the consensus provides that income statement characterization
of
payments between the participants in a collaborative arrangement should be
based
upon existing authoritative pronouncements; analogy to such pronouncements
if
not within their scope; or a reasonable, rational, and consistently applied
accounting policy election. For the Company, EITF Issue No. 07-1 is effective
beginning January 1, 2009 and is to be applied retrospectively to all periods
presented for collaborative arrangements existing as of the date of adoption.
The Company is currently evaluating the impact of this standard on its
consolidated financial statements.
2.
Sale of Fielder’s Choice Direct and License Agreement
On
December 1, 2006, Landec sold its direct marketing and sales seed company FCD,
which included the Fielder’s Choice Direct®
and
Heartland Hybrid®
brands,
to American Seeds, Inc. (ASI), a wholly owned subsidiary of Monsanto Company.
The acquisition price for FCD was $50 million in cash paid at the close. In
addition, the Company could have earned up to an additional $5 million based
on
FCD results for the twelve months ended May 31, 2007. None of the earn-out
was
earned. During the fiscal year 2007, Landec recorded income from the sale,
net
of direct expenses and bonuses, of $22.7 million. The income that was recorded
is equal to the difference between the fair value of FCD of $40 million and
its
net book value, less direct selling expenses and bonuses. In accordance with
generally accepted accounting principles, the portion of the $50 million of
proceeds in excess of the fair value of FCD, or $10 million, will be allocated
to the technology license agreement described below and will be recognized
as
revenue ratably over the five year term of the technology license agreement
or
$2 million per year beginning December 1, 2006. The fair value was determined
by
management with the assistance of an independent appraiser.
-
59 -
2.
Sale of Fielder’s Choice Direct and License Agreement
(continued)
The
following summarizes sales proceeds allocated to the technology license
agreement and the net income from the sale of FCD (in thousands):
|
Cash
received at close
|
$
|
50,000
|
||
|
Fair
market value of FCD
|
40,000
|
|||
|
Proceeds
allocated to technology license agreement (1)
|
$
|
10,000
|
||
|
Fair
market value of FCD
|
$
|
40,000
|
||
|
Less:
Cost basis of assets sold net of liabilities assumed
|
(14,856
|
)
|
||
|
Less:
Direct expenses of sale
|
(557
|
)
|
||
|
Net
gain from sale of FCD
|
24,587
|
|||
|
Less:
Bonuses paid to employees as a result of the sale
|
(1,918
|
)
|
||
|
Income
from sale of FCD
|
$
|
22,669
|
(1)
Represents a deferred gain at the closing date which will be recognized as
revenue over 5 years as described below.
As
a
result of the sale of FCD, the Company recorded an income tax expense of $2.5
million in fiscal year 2007 for state income taxes and federal AMT.
On
December 1, 2006, Landec also entered into a five-year co-exclusive technology
license and polymer supply agreement (“the Agreement”) with Monsanto Company for
the use of Landec’s Intellicoat polymer
seed coating technology. Under the terms of the Agreement, Monsanto will pay
Landec Ag $2.6 million per year in exchange for (1) a co-exclusive right to
use
Landec’s Intellicoat temperature-activated
seed coating technology worldwide during the license period, (2) the right
to be
the exclusive global sales and marketing agent for the Intellicoat seed coating
technology, and (3) the right to purchase the stock of Landec Ag at any time
during the five year term of the Agreement. Monsanto will also fund all
operating costs, including all Intellicoat research
and development, product development and non-replacement capital costs during
the five year agreement period. For the fiscal years 2008 and 2007, Landec
recognized $5.4 million and $2.7 million, respectively, in revenues from the
Agreement.
The
Agreement also provides for a fee payable to Landec Ag of $4 million if Monsanto
elects to terminate the agreement or $8 million if Monsanto elects to purchase
the stock of Landec Ag. If the purchase option is exercised before the fifth
anniversary of the Agreement, or if Monsanto elects to terminate the Agreement,
all annual license fees and supply payments that have not been paid to Landec
Ag
will become due upon the purchase. If Monsanto does not exercise its purchase
option by the fifth anniversary of the Intellicoat agreement,
Landec Ag will receive the termination fee and all rights to the
Intellicoat seed
coating technology will revert to Landec. Accordingly, Landec Ag will receive
minimum guaranteed payments of $17 million for license fees and polymer supply
payments over five years or $21 million in maximum payments if Monsanto elects
to purchase the stock of Landec Ag. The minimum guaranteed payments and the
deferred gain of $2 million per year described above will result in Landec
recognizing revenue and operating income of $5.4 million per year for fiscal
years 2008 through 2011 and $2.7 million per year for fiscal years 2007 and
2012. The incremental $4 million to be received in the event Monsanto exercises
the purchase option has been deferred and will be recognized upon the exercise
of the purchase option. The fair value of the purchase option was determined
by
management to be less than the amount of the deferred revenue.
If
Monsanto elects to purchase the stock of Landec Ag, a gain or loss on the sale
of the stock of Landec Ag will be recognized at the time of purchase. If
Monsanto exercises its purchase option, Landec and Monsanto will enter into
a
new long-term supply agreement in which Landec will continue to be the exclusive
supplier of Intellicoat polymer materials to Monsanto.
-
60 -
2.
Sale of Fielder’s Choice Direct and License Agreement
(continued)
In
conjunction with the sale of FCD, Landec purchased all of the outstanding common
stock and options of Landec Ag not owned by Landec at the fair market value
of
each share as if all options had been exercised as of December 1, 2006. The
fair
market value was $7.4 million which was funded with proceeds from the sale
of
FCD. After the purchase, Landec Ag became a wholly owned subsidiary of Landec.
In accordance with SFAS 123R, this purchase did not result in additional
compensation expense to the Company as all of the options purchased were fully
vested at the time of the purchase and the consideration paid was equal to
the
fair value on the date of the purchase. The repurchase of Landec Ag’s
outstanding common stock and options was recorded to retained earnings as the
repurchase occurred after the sale of FCD to Monsanto. At May 25, 2008, $4.8
million of the $7.4 million repurchase was reclassified from retained earnings
to goodwill in accordance with SFAS 141 to reflect the amount of the repurchase
for common stock that was subsequently determined to be a repurchase of minority
interest.
Excluding
the $2.7 million in revenues from the Agreement, Landec Ag revenues for the
fiscal years 2007 and 2006 were $131,000 and $34.1 million, respectively. The
net operating losses for Landec Ag, excluding the income from the sale of FCD
and the $2.7 million in license fees from the Agreement, for fiscal year 2007
were $5.8 million compared to net operating income of $353,000 in fiscal year
2006.
3.
License
Agreements
On
December 23, 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences Corporation (“Aesthetic Sciences”), a medical device company.
Aesthetic Sciences paid Landec an upfront license fee of $250,000 for the
exclusive rights to use Landec's IntelimerÒ
materials technology for the development of dermal fillers worldwide. Landec
will also receive royalties on the sale of products incorporating Landec’s
technology. In addition, the Company received shares of preferred stock valued
at $1.3 million which represents a 19.9% ownership interest in Aesthetic
Sciences as of May 25, 2008. The $1.3 million is included in other assets in
the
accompanying Consolidated Balance Sheet. The $1.6 million of value received
under this agreement was recorded as licensing revenue in fiscal year 2006
in
the accompanying Consolidated Statements of Operations since Landec has no
further obligations under this agreement.
As
part
of the original agreement with Aesthetic Sciences, Landec was to receive
additional shares upon the completion of a specific milestone. On
November 22, 2006, that milestone was met and as a result Landec received
an additional 800,000 shares of preferred stock valued at $481,000. The receipt
of the additional 800,000 preferred shares did not change Landec’s 19.9%
ownership interest in Aesthetic Sciences. The $481,000 is included in other
assets in the accompanying Consolidated Balance Sheet and was recorded as
licensing revenue during fiscal year 2007 in the accompanying Consolidated
Statements of Operations since Landec has no further obligations under this
agreement.
On
March
14, 2006, Landec entered into an exclusive license and research and development
agreement with Air Products and Chemicals, Inc. Landec received an upfront
licensing fee of $800,000 at close and rights to receive up to an additional
$1.6 million of license payments to be paid in quarterly installments of
$200,000 each during years two and three of the agreement for the exclusive
rights to use Landec's Intelimer materials technology in specific fields
worldwide. The first installment for $200,000 was received during the fourth
quarter of fiscal year 2007. In addition, Landec received at close $100,000
for
technology transfer work that was performed by Landec prior to May 28, 2006.
Landec will provide research and development support to Air Products for three
years with a mutual
option for two additional years. The license fees are being recognized as
license revenue over a three year period beginning March 2006. In addition,
in
accordance with the agreement, Landec will receive approximately 40% of the
gross profit generated from the sale of products by Air Products that
incorporate Landec’s Intelimer materials. In 2008, an amendment was entered into
by the Company whereby certain technology applications were re-acquired as
well
as the elimination of an existing contract claim in order to refine the existing
relationship. As a result, the Company recorded a $600,000 expense to selling,
general and administrative expense during the year ended May 25, 2008. The
Company recognized $800,000 in license revenues under this agreement during
both
fiscal year 2008 and 2007 and recognized $300,000 during fiscal year 2006.
During fiscal years 2008 and 2007 the Company recognized $528,000 and $20,000,
respectively, for its share of the gross profits realized from the sale of
Intelimer-based products by Air Products.
-
61 -
3. License
Agreements (continued)
On
September 19, 2007, the Company amended its licensing and supply agreement
with
Chiquita Brands International, Inc. (“Chiquita”). Under the terms of the
amendment, the license for bananas has been expanded to include additional
exclusive fields using Landec’s BreatheWay® packaging technology, and a new
exclusive license has been added for the sale and marketing of avocados using
Landec’s BreatheWay packaging technology. In exchange for expanding the
exclusive fields for bananas and adding a new exclusive field for avocados,
the
minimum gross profits to be received by Landec from the sale of BreatheWay
packaging to Chiquita for bananas and avocados will increase to $2.9 million
in
fiscal year 2008 and to $2.2 million in fiscal year 2009. In addition, the
minimum gross profits the Company is to receive are calculated and payable
on a
calendar quarter basis per the terms of the amended agreement. Accordingly,
the
minimum amounts under the amended agreement will be calculated each calendar
quarter and thus will be due at the end of March, June, September and December
of each year. During fiscal years 2008, 2007 and 2006, the Company recognized
$2.9 million, $1.0 million and $515,000, respectively, of gross profits from
the
Chiquita licensing and supply agreement.
4.
Insurance
Settlement
On
August
25, 2006 the Company received a cash payment of $1.6 million from the settlement
of insurance claims associated with a fire that occurred at its Dock Resins
facility in February 2000. The settlement resulted in the Company recording
a
reduction to selling, general and administrative expenses of $1.3 million,
net
of expenses, during the Company’s first quarter of fiscal year 2007. In
addition, $381,000 had been placed in escrow pending the outcome of certain
disputed professional fees. In September 2006, the Company resolved the fee
dispute and paid professional fees of $227,000 from the escrow and received
the
balance of $154,000 which the Company recorded as a reduction to selling,
general and administrative expenses during the second quarter of fiscal year
2007.
5.
Repurchase
of Subsidiary Common Stock and Options
On
August
7, 2007, Landec repurchased all of the outstanding common stock and options
of
Apio not owned by Landec at the fair market value of each share as if all
options had been exercised on that date. The fair market value repurchase price
for all of Apio’s common stock and options not owned by Landec was $20.8
million. After the repurchase, Apio became a wholly owned subsidiary of Landec.
In accordance with SFAS 123R, this repurchase did not result in additional
compensation expense to the Company as all of the options repurchased were
fully
vested at the time of the repurchase and the consideration paid was equal to
the
fair value. The repurchase of Apio options for $19.5 million was recorded as
a
reduction to equity and the repurchase of Apio’s common stock not owned by
Landec for $1.3 million was recorded to goodwill in accordance with SFAS
141.
-
62 -
6.
Notes
and Advances Receivable
|
May
25,
2008
|
May
27,
2007
|
||||||
|
Notes
and advances receivable at May 25, 2008 and May 27, 2007 consisted
of the
following (in thousands):
|
|||||||
|
Note
receivable due from buyer of fruit processing equipment in annual
installments of $98 plus interest at prime rate plus 1.0%, with final
payment due October 20, 2009, secured by purchased assets
(2)
|
$
|
101
|
$
|
205
|
|||
|
Note
receivable due from grower in annual installments of $33 plus interest
at
prime rate plus 1.0%, with final payment due December 31, 2007, unsecured
(1)
|
—
|
33
|
|||||
|
Advances
to grower of $2 per acre to be recovered by withholding proceeds
derived
from crops. Additional advances of $60 on January 1 and July 1 to
be
recovered via weekly deductions of $2 from proceeds. Agreement ends
December 27, 2008 (1)
|
270
|
—
|
|||||
|
Advances
to a grower under agricultural subleases in semi-annual installments
of $150, to be repaid at $12 per week by withholding proceeds from
crop
produced on this property. Leases expire October 31, 2009 (1)
|
130
|
140
|
|||||
|
Gross
notes and advances receivable
|
501
|
378
|
|||||
|
Less
allowance for doubtful notes
|
—
|
—
|
|||||
|
Net
notes and advances receivable
|
501
|
378
|
|||||
|
Less
current portion of notes and advances receivable
|
(501
|
)
|
(282
|
)
|
|||
|
Non-current
portion of notes and advances receivable
|
$
|
0
|
$
|
96
|
|||
(1)
Represents notes and advances receivable associated with operating
activities.
(2)
Represents notes and advances receivable associated with investing
activities.
Interest
income from interest bearing notes receivable for the fiscal years ended May
25,
2008, May 27, 2007 and May 28, 2006 was $15,000, $52,000 and $89,000,
respectively.
7.
Property
and Equipment
Property
and equipment consists of the following (in thousands):
|
Years
of
|
||||||||||
|
Useful
Life
|
May
25, 2008
|
May
27, 2007
|
||||||||
|
Land
and building
|
15-30
|
$
|
18,182
|
$
|
16,783
|
|||||
|
Leasehold
improvements
|
3-20
|
775
|
1,031
|
|||||||
|
Computer,
capitalized software, machinery, equipment and auto
|
3-7
|
21,973
|
20,383
|
|||||||
|
Furniture
and fixtures
|
5-7
|
301
|
456
|
|||||||
|
Construction
in process
|
217
|
204
|
||||||||
|
Gross
property and equipment
|
41,448
|
38,857
|
||||||||
|
Less
accumulated depreciation and amortization
|
(20,142
|
)
|
(18,587
|
)
|
||||||
|
Net
property and equipment
|
$
|
21,306
|
$
|
20,270
|
||||||
Depreciation
and amortization expense for the fiscal years ended May 25, 2008, May 27, 2007
and May 28, 2006 was $3.2 million, $3.3 million and $3.2 million, respectively.
Equipment under capital leases, which is the security for the related lease
obligation, at May 25, 2008 and May 27, 2007 was $104,000 and $104,000,
respectively. The related accumulated amortization for equipment under capital
leases at May 25, 2008 and May 27, 2007 was $99,000 and $78,000, respectively.
Amortization related to capitalized software was $400,000, $666,000 and
$661,000, respectively, for fiscal years ended May 25, 2008, May 27, 2007 and
May 28, 2006. The unamortized computer software costs at May 25, 2008 and May
27, 2007 were $278,000 and $594,000, respectively.
-
63 -
8.
Intangible
Assets
Changes
in the carrying amount of goodwill for the fiscal years ended May 25, 2008,
May
27, 2007 and May 28, 2006 by reportable segment, are as follows (in
thousands):
|
Food
Products
Technology
|
Technology
Licensing
|
Total
|
||||||||
|
Balance
as of May 29, 2005
|
$
|
21,233
|
$
|
4,754
|
$
|
25,987
|
||||
|
Goodwill
acquired during the period
|
—
|
3,137
|
3,137
|
|||||||
|
Reclassified
to assets held for sale
|
—
|
(7,876
|
)
|
(7,876
|
)
|
|||||
|
Balance
as of May 28, 2006
|
21,233
|
15
|
21,248
|
|||||||
|
Goodwill
acquired during the period
|
169
|
1,050
|
1,219
|
|||||||
|
Goodwill
sold during the period
|
—
|
(1,065
|
)
|
(1,065
|
)
|
|||||
|
Balance
as of May 27, 2007
|
21,402
|
—
|
21,402
|
|||||||
|
Goodwill
acquired/reclassified during the period
|
1,172
|
4,780
|
5,952
|
|||||||
|
Balance
as of May 25, 2008
|
$
|
22,574
|
$
|
4,780
|
$
|
27,354
|
||||
Information
regarding Landec’s other intangible assets is as follows (in
thousands):
|
Trademarks
|
Other
|
Total
|
||||||||
|
Balance
as of May 29, 2005
|
$
|
11,570
|
$
|
58
|
$
|
11,628
|
||||
|
Other
intangibles acquired
|
1,700
|
810
|
2,510
|
|||||||
|
Reclassified
to assets held for sale
|
(5,042
|
)
|
(860
|
)
|
(5,902
|
)
|
||||
|
Amortization
expense
|
—
|
(8
|
)
|
(8
|
)
|
|||||
|
Balance
as of May 28, 2006
|
8,228
|
—
|
8,228
|
|||||||
|
Amortization
expense
|
—
|
—
|
—
|
|||||||
|
Balance
as of May 27, 2007
|
8,228
|
—
|
8,228
|
|||||||
|
Amortization
expense
|
—
|
—
|
—
|
|||||||
|
Balance
as of May 25, 2008
|
$
|
8,228
|
$
|
—
|
$
|
8,228
|
||||
9.
Shareholders' Equity
Holders
of Common Stock are entitled to one vote per share.
Convertible
Preferred Stock
The
Company has authorized two million shares of preferred stock, and as of May
25,
2008 has no outstanding preferred stock.
Common
Stock, Stock Purchase Plans and Stock Option Plans
At
May
25, 2008, the Company had 2,527,514 common
shares reserved for future issuance under Landec stock option
plans.
On
October 14, 2005, following shareholder approval at the Annual Meeting of
Shareholders of the Company, the 2005 Stock Incentive Plan (the “Plan”) became
effective. The Plan replaced the Company’s four then existing equity plans and
no shares remain available for grant under these existing plans. Employees
(including officers), consultants and directors of the Company and its
subsidiaries and affiliates are eligible to participate in the Plan.
-
64 -
9. Shareholders’
Equity (continued)
The
Plan
provides for the grant of stock options (both nonstatutory and incentive stock
options), stock grants, stock units and stock appreciation rights. Awards under
the Plan will be evidenced by an agreement with the Plan participant. Under
the
Plan, 861,038 shares of the Company’s Common Stock (“Shares”) were initially
available
for awards, and as of May 25, 2008, 567,396 shares were available for awards.
Under the Plan no recipient may be awarded any of the following during any
fiscal year: (i) stock options covering in excess of 500,000 Shares;
(ii) stock grants and stock units covering in excess of 250,000 Shares in
the aggregate; or (iii) stock appreciation rights covering more than
500,000 Shares. In addition, awards to non-employee directors are discretionary.
However, a non-employee director may not be granted awards covering in excess
of
30,000 Shares in the aggregate during any fiscal year.
The
1995
Directors’ Stock Option Plan (the “Directors’ Plan”) provided that each person
who became a non- employee director of the Company, who had not received a
previous grant, be granted a nonstatutory stock option to purchase 20,000 shares
of Common Stock on the date on which the optionee first became a non-employee
director of the Company. Thereafter, on the date of each annual meeting of
the
shareholders each non-employee director was granted an additional
option to purchase 10,000 shares of Common Stock if, on such date, he or she
had
served on the Company’s Board of Directors for at least six months prior to the
date of such annual meeting. The exercise price of the options was the fair
market value of the Company’s Common Stock on the date the options were granted.
Options granted under this plan were exercisable and vested upon
grant.
The
1996
Non-Executive Stock Option Plan authorized the Board of Directors to grant
non-qualified stock options to employees, including executive officers, and
outside consultants of the Company. The exercise price of the options was equal
to the fair market value of the Company’s Common Stock on the date the options
were granted. Options were generally exercisable upon vesting and generally
vested ratably over four years and were subject to repurchase if exercised
before being vested.
The
1996
Stock Option Plan authorized the Board of Directors to grant stock purchase
rights, incentive stock options or non-statutory stock options to Landec
executives. The exercise price of the stock purchase rights, incentive stock
options and non-statutory stock options could be no less than 100% of the fair
market value of Landec’s Common Stock on the date the options were granted.
Options generally were exercisable upon vesting, generally vested ratably over
four years and were subject to repurchase if exercised before being vested.
The
New
Executive Stock Option Plan authorized the Board of Directors to grant
non-statutory stock options to officers of Landec or officers of Apio or Landec
Ag whose employment with each of those companies began after October 24, 2000.
The exercise price of the non-statutory stock options could be no less than
100%
and 85%, for named executives and non-named executives, respectively, of the
fair market value of Landec's Common Stock on the date the options were granted.
Options generally were exercisable upon vesting, generally vested ratably over
four years and were subject to repurchase if exercised before being vested.
Employee
Stock Purchase Plan. The
Company had an employee stock purchase plan which permitted eligible employees
to purchase Common Stock, which may not exceed 10% of an employee’s
compensation, at a price equal to the lower of 85% of the fair market value
of
the Company’s Common Stock at the beginning of the offering period or on the
purchase date. The Company issued 869,271 shares under the Employee Stock
Purchase Plan prior to it being terminated on June 1, 2006.
-
65 -
9.
Shareholders’
Equity (continued)
Activity
under all Landec Stock Option Plans is as follows:
|
Restricted Stock Outstanding
|
Stock Options Outstanding
|
|||||||||||||||
|
RSU’s and
Options
Available
for Grant
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Stock
Options
|
|
Weighted
Average
Exercise
Price
(FairValue)
|
|
|||||||
|
Balance
at May 29, 2005
|
941,038
|
—
|
—
|
4,122,496
|
$
|
5.08
|
||||||||||
|
Additional
shares reserved
|
861,038
|
—
|
—
|
—
|
—
|
|||||||||||
|
Granted
|
(83,333
|
)
|
833
|
$
|
7.53
|
82,500
|
$
|
6.68
|
||||||||
|
Exercised
|
—
|
—
|
—
|
(1,027,718
|
)
|
$
|
5.83
|
|||||||||
|
Forfeited
|
59,762
|
—
|
—
|
(59,762
|
)
|
$
|
6.36
|
|||||||||
|
Terminated
plans
|
(920,800
|
)
|
—
|
—
|
—
|
—
|
||||||||||
|
Balance
at May 28, 2006
|
857,705
|
833
|
$
|
7.53
|
3,117,516
|
$
|
4.85
|
|||||||||
|
Granted
|
(153,335
|
)
|
38,335
|
$
|
8.86
|
115,000
|
$
|
8.86
|
||||||||
|
Exercised
|
—
|
—
|
—
|
(1,163,234
|
)
|
$
|
4.72
|
|||||||||
|
Forfeited
|
8,778
|
(833
|
)
|
$
|
7.53
|
(7,945
|
)
|
$
|
4.93
|
|||||||
|
Plan
shares expired
|
(6,417
|
)
|
—
|
—
|
—
|
|||||||||||
|
Balance
at May 27, 2007
|
706,731
|
38,335
|
$
|
8.86
|
2,061,337
|
$
|
5.14
|
|||||||||
|
Granted
|
(139,335
|
)
|
34,835
|
$
|
13.32
|
104,500
|
$
|
13.32
|
||||||||
|
Awarded/Exercised
|
—
|
(10,002
|
)
|
$
|
8.86
|
(267,148
|
)
|
$
|
4.57
|
|||||||
|
Forfeited
|
—
|
—
|
—
|
(1,739
|
)
|
$
|
3.80
|
|||||||||
|
Balance
at May 25, 2008
|
567,396
|
63,168
|
$
|
11.32
|
1,896,950
|
$
|
5.68
|
|||||||||
Included
in exercises for fiscal years 2008 and 2007 are 11,995 and 207,112 options,
respectively, that were exercised through a net share settlement transaction
(no
cash) to pay for the exercise price of the options and the related taxes due
on
the exercise.
The
following table summarizes information concerning stock options outstanding
and
exercisable at May 25, 2008:
|
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
|
Range of
Exercise
Prices
|
Number of Shares
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Number of
Shares
Exercisable
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
|||||||||||||||
|
|
|
(in years)
|
|
|
|
|
|
|||||||||||||||
|
$ 1.660 -
$3.180 1
|
1226,013
|
4.06
|
$
|
2.91
|
$
|
1,159,447
|
226,013
|
$
|
2.91
|
$
|
1,159,447
|
|||||||||||
|
$ 3.250
- $3.375
|
266,597
|
2.61
|
$
|
3.37
|
$
|
1,245,008
|
266,597
|
$
|
3.37
|
$
|
1,245,008
|
|||||||||||
|
$ 3.400 -
$3.700
|
206,146
|
2.21
|
$
|
3.47
|
$
|
942,087
|
206,146
|
$
|
3.47
|
$
|
942,087
|
|||||||||||
|
$ 3.750 -
$6.125
|
234,694
|
2.45
|
$
|
5.07
|
$
|
697,041
|
232,506
|
$
|
5.06
|
$
|
692,868
|
|||||||||||
|
$
6.130 - $6.130
|
262,000
|
3.98
|
$
|
6.13
|
$
|
500,420
|
224,500
|
$
|
6.13
|
$
|
428,795
|
|||||||||||
|
$
6.563 - $6.750
|
300,000
|
3.70
|
$
|
6.68
|
$
|
408,000
|
300,000
|
$
|
6.68
|
$
|
408,000
|
|||||||||||
|
$
6.790 - $8.860
|
297,000
|
5.94
|
$
|
7.77
|
$
|
80,190
|
266,298
|
$
|
7.64
|
$
|
90,519
|
|||||||||||
|
$
13.32 - $13.32
|
104,500
|
6.09
|
$
|
13.32
|
$
|
—
|
39,718
|
$
|
13.32
|
$
|
—
|
|||||||||||
|
$
1.660 - $13.32
|
1,896,950
|
3.79
|
$
|
5.68
|
$
|
5,032,193
|
1,761,778
|
$
|
5.33
|
$
|
4,966,724
|
|||||||||||
At
May
25, 2008 and May 27, 2007 options to purchase 1,761,778 and 1,920,424 shares
of
Landec’s Common Stock were vested, respectively. No options have been exercised
prior to being vested.
-
66 -
9. Shareholders’
Equity (continued)
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $8.04 on May 23,
2008, which would have been received by holders of stock options had all holders
of stock options exercised their stock options that were in-the-money as of
that
date. The total number of in-the-money stock options exercisable as of
May 25, 2008, was approximately 1.6 million shares. The aggregate intrinsic
value of stock options exercised during the fiscal year 2008 was $1.8 million.
The
following table summarizes the activity relating to unvested stock option grants
and RSUs during the fiscal year ended May 25, 2008:
|
|
Stock Options
|
Restricted Stock
|
|||||||||||
|
|
Shares
|
Weighted
Average Fair
Value
|
Shares
|
Weighted
Average Fair
Value
|
|||||||||
|
Unvested
at May 27, 2007
|
140,913
|
$
|
3.70
|
38,335
|
$
|
8.32
|
|||||||
|
Granted
|
104,500
|
$
|
5.74
|
34,835
|
$
|
13.32
|
|||||||
|
Vested/Awarded
|
(108,502
|
)
|
$
|
4.49
|
(10,002
|
)
|
$
|
6.79
|
|||||
|
Forfeited
|
(1,739
|
)
|
$
|
3.80
|
—
|
—
|
|||||||
|
Unvested
at May 25, 2008
|
135,172
|
$
|
4.73
|
63,168
|
$
|
11.32
|
|||||||
As
of
May 25, 2008, there was $875,000 of total unrecognized compensation expense
related to unvested equity compensation awards granted under the Company’s
incentive stock plans. Total expense is expected to be recognized over the
weighted-average period of 1.24 years.
As
of
May 25, 2008 the Company had reserved 2.5 million shares of common stock
for future issuance under its current and former stock plans.
Repurchase
of Landec Ag Common Stock and Options. The
Company has reclassified $4.8 million and $2.5 million from retained earnings
to
goodwill and common stock, respectively, to reflect the amount of the repurchase
of Landec Ag’s common stock and options. The reclassification had no impact on
operations for the year ended May 25, 2008.
Apio
Stock Plan. In
connection with the acquisition of Apio, the Board of Directors of Landec
authorized the establishment of the 1999 Apio Stock Option Plan ("1999 Plan").
Under the 1999 Plan, the Board of Directors of Apio could grant incentive stock
options or non-statutory stock options to employees and outside consultants.
The
exercise price of the incentive stock options and non-statutory stock options
could be no less than 100% and 85%, respectively, of the fair market value
of
Apio's common stock as determined by Apio's Board of Directors. Five million
shares were authorized to be issued under this plan. Options were exercisable
upon vesting and generally vested ratably over four years and were subject
to
repurchase if exercised before being vested. As of May 25, 2008, there were
no
options outstanding under the 1999 Plan, the 1999 Plan was terminated on August
7, 2007.
In
May
2000, the 1999 Plan was terminated. All existing grants remain outstanding,
and
no future grants will be made from the plan. Concurrently, the 2000 Apio Stock
Option Plan ("2000 Plan") was authorized by Apio's Board of Directors, which
authorized the issuance of two million shares under the same terms and
conditions as the 1999 Plan. As of May 25, 2008, there were no options
outstanding under the 2000 Plan, the 2000 Plan was terminated on August 7,
2007.
As discussed in Note 5, the Company repurchased all of the outstanding common
stock and options of Apio not owned by Landec on August 7, 2007.
-
67 -
9. Shareholders’
Equity (continued)
The
following table summarizes activity under the Apio Stock Option
Plan.
|
Outstanding Options
|
||||||||||
|
Options
Available
|
Number of Shares
|
Weighted Average
Exercise Price
|
||||||||
|
Balance
at May 29, 2005
|
1,622,929
|
2,327,322
|
$
|
2.10
|
||||||
|
Options
exercised
|
—
|
(50,158
|
)
|
$
|
2.10
|
|||||
|
Options
forfeited
|
8,469
|
(8,469
|
)
|
$
|
2.10
|
|||||
|
Balance
at May 28, 2006
|
1,631,398
|
2,268,695
|
$
|
2.10
|
||||||
|
Options
exercised
|
—
|
(24,500
|
)
|
$
|
2.10
|
|||||
|
Options
forfeited
|
28,695
|
(28,695
|
)
|
$
|
2.10
|
|||||
|
Balance
at May 27, 2007
|
1,660,093
|
2,215,500
|
$
|
2.10
|
||||||
|
Plan
shares expired
|
(1,660,093
|
)
|
—
|
—
|
||||||
|
Repurchased
by Landec
|
—
|
(2,215,500
|
)
|
$
|
10.77
|
|||||
|
Balance
at May 25, 2008
|
—
|
—
|
—
|
|||||||
10.
Debt
Revolving
Debt
Apio
has
a $7.0 million revolving line of credit with Wells Fargo Bank N.A. (“Wells
Fargo”). On
September 1, 2007, Apio amended its revolving line of credit with Wells Fargo
by
extending the term of the line to August 31, 2009. In addition, the interest
rate on the revolving line of credit was reduced to either prime less 0.75%
or
the LIBOR adjusted rate plus 1.50%. The
revolving line of credit with Wells Fargo contains certain restrictive
covenants, which require Apio to meet certain financial tests, including minimum
levels of net income, maximum leverage ratio, minimum net worth and maximum
capital expenditures. Landec has pledged substantially all of the assets of
Apio
to secure the line of credit with Wells Fargo. At May 25,
2008,
no
amounts were outstanding under the revolving line of credit. Apio has been
in
compliance with all loan covenants during fiscal year 2008.
-
68 -
11.
Income Taxes
|
Year ended
|
Year ended
|
Year ended
|
||||||||
|
May 25, 2008
|
May 27, 2007
|
May 28, 2006
|
||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
1,557
|
$
|
623
|
$
|
8
|
||||
|
State
|
2,408
|
1,833
|
3
|
|||||||
|
Total
|
3,965
|
2,456
|
11
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
233
|
—
|
—
|
|||||||
|
State
|
(844
|
)
|
—
|
—
|
||||||
|
Total
|
(611
|
)
|
—
|
—
|
||||||
|
Income
tax expense
|
$
|
3,354
|
$
|
2,456
|
$
|
11
|
||||
For
fiscal year 2006 the income tax expense is included in other expense in the
accompanying Consolidated Statements of Income as the amount was not material.
The
actual provision for income taxes differs from the statutory U.S. federal income
tax rate as follows (in thousands):
|
Year Ended
May 25, 2008
|
Year Ended
May 27, 2007
|
Year Ended
May 28, 2006
|
||||||||
|
Provision
at U.S. statutory rate (1)
|
$
|
5,914
|
$
|
11,076
|
$
|
2,949
|
||||
|
State
income taxes, net of federal benefit
|
1,152
|
1,818
|
506
|
|||||||
|
Change
in valuation allowance
|
(3,647
|
)
|
(10,026
|
)
|
(3,788
|
)
|
||||
|
Tax
credit carryforwards
|
(510
|
)
|
(78
|
)
|
375
|
|||||
|
Other
|
445
|
(334
|
)
|
(31
|
)
|
|||||
|
Total
|
$
|
3,354
|
$
|
2,456
|
$
|
11
|
||||
(1)
Statutory rate was 35% for fiscal years 2008 and 2007 and 34% for fiscal year
2006.
Significant
components of deferred tax assets and liabilities consisted of the following
(in
thousands):
|
|
May 25, 2008
|
May 27, 2007
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carryforwards
|
$
|
—
|
$
|
2,385
|
|||
|
Research
and AMT credit carryforwards
|
620
|
2,496
|
|||||
|
Accruals
and reserves, not currently deductible for tax
|
3,912
|
1,460
|
|||||
|
Stock-based
compensation
|
361
|
193
|
|||||
|
Capitalized
research and development
|
196
|
38
|
|||||
|
Gross
deferred tax assets
|
5,089
|
6,572
|
|||||
|
Less:
valuation allowance
|
—
|
(2,374
|
)
|
||||
|
Deferred
tax assets
|
5,089
|
4,198
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Depreciation
and amortization
|
(53
|
)
|
(611
|
)
|
|||
|
Goodwill
and other indefinite life intangibles
|
(4,425
|
)
|
(3,587
|
)
|
|||
|
Deferred
tax liabilities
|
(4,478
|
)
|
(4,198
|
)
|
|||
|
Net
deferred tax assets
|
$
|
611
|
$
|
—
|
|||
-
69 -
11.
Income Taxes (continued)
Valuation
allowances are reviewed each period on a tax jurisdiction by jurisdiction basis
to analyze whether there is sufficient positive or negative evidence to support
a change in judgment about the realizability of the related deferred tax assets.
During
the second quarter of the year ended May 25, 2008, the Company released the
valuation allowance on the net deferred tax assets, primarily as a result of
achieving sustained profitability from continuing operations.
As
of May
25, 2008, the Company had federal and state net operating loss carryforwards
of
approximately $24.6 million and $5.5 million, respectively. These losses expire
in different periods through 2028, if not utilized. Such net operating losses
consist of excess tax benefits from employee stock options exercises and have
not been recorded in the Company’s deferred tax assets in accordance with FAS
123(R). The Company will record a credit to additional paid in capital as and
when such excess tax benefits are ultimately realized.
The
Company also had federal and state tax credit carryforwards of approximately
$1.8 million and $1.5 million, respectively. The research and development tax
credit carryforwards expire in different periods through 2028 for federal
purposes and have an unlimited carryforward period for state purposes. Certain
tax credit carryovers are attributable to excess tax benefits from employee
stock option exercises and have not been recorded in the Company’s deferred tax
assets in accordance with FAS 123(R). The Company will record a credit to
additional paid in capital as and when such excess tax benefits are ultimately
realized.
In
June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, “Accounting
for Uncertainty in Income Taxes”
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with Statement of
Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS
109”). This interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition of tax benefits, classification on the balance sheet,
interest and penalties, accounting in interim periods, disclosure, and
transition.
The
Company adopted FIN 48 effective May 28, 2007. As a result of the implementation
of FIN 48, the Company did not recognize a cumulative adjustment to the May
28,
2007 balance of retained earnings as the amount was deemed
immaterial.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
|
Balance
at May 27, 2007
|
$
|
277
|
||
|
Additions
based on tax positions related to the current year
|
86
|
|||
|
Additions
based on tax positions related to the prior year
|
315
|
|||
|
Settlements
|
—
|
|||
|
Reduction
for lapse of statute of limitations
|
—
|
|||
|
Balance
at May 25, 2008
|
$
|
678
|
As
of May
25, 2008, the total amount of net unrecognized tax benefits is $678,000, of
which, $599,000, if recognized, would affect the effective tax rate. The Company
accrues interest and penalties related to unrecognized tax benefits in its
provision for income taxes. Given the Company’s historical net operating loss
position, the total amount of penalties and interest is not material as of
May
25, 2008. Additionally, the Company does not expect a material changes in its
unrecognized tax benefits within the next 12 months.
Due
to
tax attribute carryforwards, the Company is subject to examination for tax
years
1992 forward for U.S. tax purposes. The Company was also subject to examination
in various state jurisdictions for tax years 1996 forward, none of which were
individually material.
-
70 -
12. Commitments
and Contingencies
Operating
Leases
Landec
leases facilities and equipment under operating lease agreements with various
terms and conditions, which expire at various dates through 2012. The
approximate future minimum lease payments under these operating leases,
excluding land leases, at May 25, 2008 are as follows (in
thousands):
|
Amount
|
||||
|
FY2009
|
$
|
718
|
||
|
FY2010
|
478
|
|||
|
FY2011
|
258
|
|||
|
FY2012
|
11
|
|||
|
FY2013
|
—
|
|||
|
$
|
1,465
|
|||
Rent
expense for operating leases, including month to month arrangements was $1.5
million for the fiscal year ended May 25, 2008, $1.4 million for the fiscal
year
ended May 27, 2007 and $1.4 million for the fiscal year ended May 28,
2006.
Land
Leases
Landec,
through its Apio subsidiary, also leases farmland under various non-cancelable
leases expiring through October 2009. Landec subleases substantially all of
the
farmland to growers on an annual basis. The subleases are generally
non-cancelable and expire through October 2009. The approximate future minimum
leases and sublease amounts receivable under farmland leases at May 25, 2008
are
$435,000 through fiscal year 2010.
Rent
income for land leases net of sublease rents, including month to month
arrangements was $0 for the fiscal year ended May 25, 2008 and $0 for the fiscal
year ended May 27, 2007. Rent expense for land leases net of sublease rents,
including month to month arrangements was $25,000 for the fiscal year ended
May
28, 2006.
Employment
Agreements
Landec
has entered into employment agreements with certain key employees. These
agreements provide for these employees to receive incentive bonuses based on
the
financial performance of certain divisions in addition to their annual base
salaries. The accrued incentive bonuses amounted to $259,000 at May 25, 2008
and
$631,000 at May 27, 2007.
Licensing
Agreement
In
fiscal
year 2001, the Company entered into an agreement for the exclusive worldwide
rights to market grapes under certain brand names. Under the terms of the
amended agreement (amended in fiscal year 2004), the Company is obligated to
make annual payments of $100,000 for fiscal years 2009 through
2012.
Purchase
Commitments
At
May
25, 2008, the Company was committed to purchase $2.2 million of produce during
fiscal year 2009 in accordance with contractual terms. Payments of $3.3 million
were made in fiscal year 2008 under these arrangements.
-
71 -
13.
Employee
Savings and Investment Plans
The
Company sponsors a 401(k) plan which is available to substantially all of the
Company’s employees.
Landec’s
Corporate Plan, which is available to all Landec employees (“Landec Plan”),
allows participants to contribute from 1% to 50% of their salaries, up to the
Internal Revenue Service (IRS) limitation into designated investment funds.
Beginning in fiscal year 2001, the Company amended the plan so that it
contributes an amount equal to 50% of the participants’ contribution up to 3% of
the participants’ salary. In
May
2003, the Company again amended the plan to make the Company’s matching
contribution to the plan on behalf of participants voluntary, and to make
employees participation in the plan voluntary.
In June
2006, the Company again amended the plan to increase the company match from
50%
on the first 6% contributed by an employee to 67% on the first 6% contributed.
Participants
are at all times fully vested in their contributions. The Company's contribution
vests over a four-year period at a rate of 25% per year. The Company retains
the
right, by action of the Board of Directors, to amend, modify, or terminate
the
plan. For the fiscal years ended May 25, 2008, May 27, 2007 and May 28, 2006,
the Company contributed $352,000, $401,000 and $335,000,
respectively, to the Landec Plan.
-
72 -
14.
Business
Segment Reporting
Landec
operates in three business segments: the Food Products Technology segment,
the
Commodity Trading segment and the Technology Licensing segment. The Food
Products Technology segment markets and packs specialty packaged whole and
fresh-cut vegetables that incorporate the BreatheWay specialty packaging for
the
retail grocery, club store and food services industry. In addition, the Food
Products Technology segment sells BreatheWay packaging to partners for
non-vegetable products. The Commodity Trading segment consist
of revenues generated from the purchase and sale of primarily whole commodity
fruit and vegetable products to Asia and domestically to Wal-Mart.
The
Technology Licensing segment licenses Landec’s patented Intellicoat seed
coatings to the farming industry and licenses the Company’s Intelimer polymers
for personal care products and other industrial products. Corporate includes
corporate general and administrative expenses, non Food Products Technology
interest income and Company-wide income tax expenses. All of the assets of
the
Company are located within the United States of America. Prior to fiscal year
2008, Landec’s operating segments were Food Products Technology and Agricultural
Seed Technology. At fiscal year end 2008, the Company reexamined its segment
reporting. As a result, the Company has eliminated the Agricultural Seed
Technology segment and has established the Commodity Trading and the Technology
Licensing segments. As a result, the segment information for fiscal years 2007
and 2006 has been reclassified to conform with the current year classification.
Included in the Technology Licensing segment for fiscal years 2007 and 2006
are
the results of Landec Ag which includes FCD. In addition, the licensing activity
for non food and Ag collaborations is included in the Technology Licensing
segment whereas in periods prior to fiscal year 2008 it was included in
Corporate. Corporate amounts include corporate general and administrative
expenses, non Food Products Technology interest income and Company-wide income
taxes. The Company’s international sales are primarily to Canada, Taiwan,
Indonesia, and Japan. Operations and identifiable assets by business segment
consisted of the following (in thousands):
|
Fiscal
Year Ended May 25, 2008
|
Food Products
Technology
|
Commodity
Trading |
Technology
Licensing
|
Corporate
|
TOTAL
|
|||||||||||
|
Net
sales
|
$
|
171,194
|
$
|
60,414
|
$
|
6,919
|
$
|
—
|
$
|
238,527
|
||||||
|
International
sales
|
$
|
15,703
|
$
|
56,191
|
$
|
¾
|
$
|
¾
|
$
|
71,894
|
||||||
|
Gross
profit
|
$
|
27,860
|
$
|
3,449
|
$
|
6,919
|
$
|
—
|
$
|
38,228
|
||||||
|
Net
income (loss)
|
$
|
14,844
|
$
|
1,406
|
$
|
4,919
|
$
|
(7,627
|
)
|
$
|
13,542
|
|||||
|
Identifiable
assets
|
$
|
82,577
|
$
|
16,128
|
$
|
11,011
|
$
|
40,873
|
$
|
150,589
|
||||||
|
Depreciation
and amortization
|
$
|
2,970
|
$
|
20
|
$
|
214
|
$
|
—
|
$
|
3,204
|
||||||
|
Capital
expenditures
|
$
|
4,051
|
$
|
—
|
$
|
189
|
$
|
—
|
$
|
4,240
|
||||||
|
Interest
income
|
$
|
522
|
$
|
—
|
$
|
—
|
$
|
1,697
|
$
|
2,219
|
||||||
|
Interest
expense
|
$
|
22
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
22
|
||||||
|
Income
tax expense
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
3,354
|
$
|
3,354
|
||||||
|
Fiscal
Year Ended May 27, 2007
|
||||||||||||||||
|
Net
sales
|
$
|
156,474
|
$
|
49,706
|
$
|
4,318
|
$
|
—
|
$
|
210,498
|
||||||
|
International
sales
|
$
|
12,406
|
$
|
46,406
|
$
|
¾
|
$
|
¾
|
$
|
58,812
|
||||||
|
Gross
profit
|
$
|
25,065
|
$
|
3,187
|
$
|
4,134
|
$
|
—
|
$
|
32,386
|
||||||
|
Net
income (loss)
|
$
|
13,159
|
$
|
1,518
|
$
|
19,254
|
$
|
(4,742
|
)
|
$
|
29,189
|
|||||
|
Identifiable
assets
|
$
|
81,769
|
$
|
12,216
|
$
|
3,776
|
$
|
43,607
|
$
|
141,368
|
||||||
|
Depreciation
and amortization
|
$
|
2,665
|
$
|
19
|
$
|
576
|
$
|
—
|
$
|
3,260
|
||||||
|
Capital
expenditures
|
$
|
6,259
|
$
|
18
|
$
|
505
|
$
|
—
|
$
|
6,782
|
||||||
|
Interest
income
|
$
|
751
|
$
|
—
|
$
|
—
|
$
|
1,194
|
$
|
1,945
|
||||||
|
Interest
expense
|
$
|
80
|
$
|
—
|
$
|
171
|
$
|
¾
|
$
|
251
|
||||||
|
Income
tax expense
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
2,456
|
$
|
2,456
|
||||||
|
Fiscal
Year Ended May 28, 2006
|
||||||||||||||||
|
Net
sales
|
$
|
136,826
|
$
|
57,990
|
$
|
37,137
|
$
|
—
|
$
|
231,953
|
||||||
|
International
sales
|
$
|
5,689
|
$
|
50,337
|
$
|
¾
|
$
|
¾
|
$
|
56,026
|
||||||
|
Gross
profit
|
$
|
23,641
|
$
|
3,212
|
$
|
13,191
|
$
|
—
|
$
|
40,044
|
||||||
|
Net
income (loss)
|
$
|
10,306
|
$
|
1,416
|
$
|
1,389
|
$
|
(4,460
|
)
|
$
|
8,651
|
|||||
|
Identifiable
assets
|
$
|
73,679
|
$
|
9,852
|
$
|
29,660
|
$
|
5,834
|
$
|
119,025
|
||||||
|
Depreciation
and amortization
|
$
|
2,553
|
$
|
19
|
$
|
631
|
$
|
—
|
$
|
3,203
|
||||||
|
Capital
expenditures
|
$
|
4,263
|
$
|
—
|
$
|
483
|
$
|
—
|
$
|
4,746
|
||||||
|
Interest
income
|
$
|
502
|
$
|
—
|
$
|
—
|
$
|
131
|
$
|
633
|
||||||
|
Interest
expense
|
$
|
300
|
$
|
—
|
$
|
152
|
$
|
¾
|
$
|
452
|
||||||
|
Income
tax expense
|
$
|
¾
|
$
|
—
|
$
|
—
|
$
|
¾
|
$
|
¾
|
||||||
-
73 -
15. Quarterly
Consolidated Financial Information (unaudited)
The
following is a summary of the unaudited quarterly results of operations for
fiscal years 2008, 2007 and 2006 (in thousands, except for per share
amounts):
|
FY
2008
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
FY 2008
|
|||||||
|
Revenues
|
$
|
62,659
|
$
|
58,961
|
$
|
59,607
|
$
|
57,300
|
$
|
238,527
|
||||||
|
Gross
profit
|
$
|
8,974
|
$
|
8,857
|
$
|
10,746
|
$
|
9,651
|
$
|
38,228
|
||||||
|
Net
income
|
$
|
3,077
|
$
|
3,125
|
$
|
3,966
|
$
|
3,374
|
$
|
13,542
|
||||||
|
Net
income per basic share
|
$
|
0.12
|
$
|
0.12
|
$
|
0.15
|
$
|
0.13
|
$
|
0.52
|
||||||
|
Net
income per diluted share
|
$
|
0.11
|
$
|
0.12
|
$
|
0.15
|
$
|
0.13
|
$
|
0.50
|
||||||
|
FY
2007
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
FY 2007
|
|||
|
Revenues
|
$
|
51,147
|
$
|
55,194
|
$
|
52,956
|
$
|
51,201
|
$
|
210,498
|
||||||
|
Gross
profit
|
$
|
5,556
|
$
|
8,276
|
$
|
9,091
|
$
|
9,463
|
$
|
32,386
|
||||||
|
Net
income
|
$
|
14
|
$
|
108
|
$
|
24,644
|
$
|
4,423
|
$
|
29,189
|
||||||
|
Net
income per basic share
|
$
|
0.00
|
$
|
0.00
|
$
|
0.97
|
$
|
0.17
|
$
|
1.16
|
||||||
|
Net
income per diluted share
|
$
|
0.00
|
$
|
0.00
|
$
|
0.92
|
$
|
0.16
|
$
|
1.07
|
||||||
|
FY
2006
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
FY 2006
|
|||
|
Revenues
|
$
|
49,705
|
$
|
53,712
|
$
|
57,249
|
$
|
71,287
|
$
|
231,953
|
||||||
|
Gross
profit
|
$
|
6,590
|
$
|
7,089
|
$
|
11,415
|
$
|
14,950
|
$
|
40,044
|
||||||
|
Net
(loss) income
|
$
|
(521
|
)
|
$
|
(1,037
|
)
|
$
|
3,514
|
$
|
6,695
|
$
|
8,651
|
||||
|
Net
(loss)/income per basic share
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
0.14
|
$
|
0.27
|
$
|
0.35
|
||||
|
Net
(loss)/income per diluted share
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
0.13
|
$
|
0.24
|
$
|
0.32
|
||||
-
74 -
(b) Index
of
Exhibits.
|
Exhibit
Number:
|
Exhibit
Title
|
|
|
2.1
|
Purchase
Agreement between the Registrant and Apio Fresh LLC and the Growers
listed
therein, dated as of July 3, 2003, incorporated herein by reference
to
Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated July 3,
2003.
|
|
|
2.2
|
Stock
Purchase Agreement between The Lubrizol Corporation and the Registrant
dated as of October 24, 2002, incorporated herein by reference to
Exhibit
2.1 to the Registrant’s Current Report on Form 8-K dated October 24,
2002.
|
|
|
2.3
|
Purchase
Agreement between the Registrant and Apio Fresh LLC and the Growers
listed
therein, dated as of July 3, 2003, incorporated herein by reference
to
Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated July 3,
2003.
|
|
|
3.1
|
Amended
and Restated Bylaws of Registrant, incorporated herein by reference
to
Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated December
17, 2007.
|
|
|
3.2
|
Ninth
Amended and Restated Articles of Incorporation of Registrant, incorporated
herein by reference to Exhibit 3.2 to the Registrant’s Registration
Statement on Form S-1 (File No. 33-80723) declared effective on February
12, 1996.
|
|
|
3.3
|
Certificate
of Determination of Series A Preferred Stock, incorporated herein
by
reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended October 31, 1999.
|
|
|
3.4
|
Certificate
of Determination of Series B Preferred Stock, incorporated
herein by reference to Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K dated October 25, 2001.
|
|
|
10.1
|
Form
of Indemnification Agreement, incorporated herein by reference to
Exhibit
10.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended May 29, 2005.
|
|
|
10.2*
|
Form
of Option Agreement for 1995 Directors’ Stock Option Plan, incorporated
herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended October 31, 1996.
|
|
|
10.3
|
Industrial
Real Estate Lease dated March 1, 1993 between the Registrant and
Wayne R.
Brown & Bibbits Brown, Trustees of the Wayne R. Brown & Bibbits
Brown Living Trust dated December 30, 1987, incorporated
by reference to Exhibit 10.6 to the Registrant’s Registration Statement on
Form S-1 (File No. 33-80723) declared effective on February 12,
1996.
|
|
|
10.4*
|
Form
of Option Agreement for the 1996 Non-Executive Stock Option Plan,
as
amended, incorporated herein by reference to Exhibit 10.16 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended October
31, 1996.
|
|
|
10.5*
|
1996
Amended and Restated Stock Option Plan, incorporated herein by reference
to Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10-Q for the
fiscal quarter ended April 29, 2001.
|
|
|
10.6*
|
Form
of Option Agreement for 1996 Amended and Restated Stock Option Plan,
incorporated herein by reference to Exhibit 10.17 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended April
30,
1997.
|
-
75 -
|
Exhibit
Number:
|
Exhibit
Title
|
|
|
10.7*
|
New
Executive Stock Option Plan, incorporated herein by reference to
Exhibit
10.30 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended October 29, 2000.
|
|
|
10.8*
|
1996
Non-Executive Stock Option Plan, as amended, incorporated herein
by
reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended October 28, 2001.
|
|
|
10.9*
|
Employment
Agreement between the Registrant and Gary T. Steele effective as
of
January 1, 2006, incorporated herein by reference to Exhibit 99.1
to the
Registrant’s Current Report on Form 8-K dated December 15,
2005.
|
|
|
10.10
|
Supply
Agreement between the Registrant and Apio Fresh LLC and the Growers
listed
therein, dated as of July 3, 2003, incorporated herein by reference
to
Exhibit 2.3 to the Registrant’s Current Report on Form 8-K dated July 3,
2003.
|
|
|
10.11*
|
1995
Directors’ Stock Option Plan, as amended, incorporated herein by reference
to Exhibit 10.53 to the Registrant’s Annual Report on Form 10-Q for the
fiscal quarter ended May 25, 2003.
|
|
|
10.12
|
Amended
and Restated Credit Agreement by and among Apio, Inc. as Borrower,
and
Wells Fargo Bank, National Association, dated as of November 1, 2005,
incorporated herein by reference to Exhibit 10.57 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended November
27,
2005.
|
|
|
10.13#
|
License
and research and development agreement between the Registrant and
Air
Products and Chemicals, Inc. dated March 14, 2006, incorporated herein
by
reference to Exhibit 10.63 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended May 28, 2006.
|
|
|
10.14*
|
2005
Stock Incentive Plan, incorporated herein by reference to Exhibit
99.1 to
the Registrant's Current Report on Form 8-K dated October 14,
2005.
|
|
|
10.15*
|
Form
of Stock Grant Agreement for 2005 Stock Incentive Plan, incorporated
herein by reference to Exhibit 99.2 to the Registrant's Current Report
on
Form 8-K dated October 14, 2005.
|
|
|
10.16*
|
Form
of Notice of Stock Option Grant and Stock Option Agreement for 2005
Stock
Incentive Plan, incorporated herein by reference to Exhibit 10.66
to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended May 28,
2006.
|
|
|
10.17*
|
Form
of Stock Unit Agreement for 2005 Stock Incentive Plan, incorporated
herein
by reference to Exhibit 10.67 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended May 28, 2006.
|
|
|
10.18*
|
Form
of Stock Appreciation Right Agreement for 2005 Stock Incentive Plan,
incorporated
herein by reference to Exhibit 99.5 to the Registrant's Current Report
on
Form 8-K dated October 14, 2005.
|
|
|
10.19
|
Stock
Purchase Agreement dated as of December 1, 2006 by and among the
Registrant, Landec Ag and American Seeds, Inc., incorporated herein
by
reference to Exhibit 10.70 to the Registrant’s Current Report on Form 8-K
dated December 6, 2006.
|
-
76 -
|
Exhibit
Number:
|
Exhibit
Title
|
||
|
10.20
|
License,
Supply and R&D Agreement dated as of December 1, 2006 by and among the
Registrant, Landec Ag and Monsanto Company, incorporated herein by
reference to Exhibit 10.71 to the Registrant’s Current Report on Form 8-K
dated December 6, 2006.
|
||
|
10.21*
|
2009
Cash Bonus Plan, incorporated herein by reference to the Registrant’s
Current Report on Form 8-K dated July 22, 2008.
|
||
|
10.22
|
Amendment
No. 1 to the Amended and Restated Credit Agreement between Apio,
Inc. and
Wells Fargo Bank, N.A., dated as of September 1, 2007 incorporated
herein
by reference to Exhibit 10.73 to the Registrant’s Quarterly Report on Form
10-Q for the fiscal quarter ended November 25, 2007.
|
||
|
10.23*
|
Stock
Option Agreement between the Registrant and Nicholas Tompkins dated
as of
November 29, 1999, incorporated herein by reference to Exhibit 10.25
to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended
October 31, 1999.
|
||
|
10.24*
|
1999
Apio, Inc. Stock Option Plan and form of Option Agreement, incorporated
herein by reference to Exhibit 10.26 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended October 31, 1999.
|
||
|
10.25*
|
2000
Apio, Inc. Stock Option Plan and form of Option Agreement, incorporated
herein by reference to Exhibit 10.28 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended October 29, 2000.
|
||
|
16.1
|
Letter
from McGladrey & Pullen, LLP, dated June 23, 2008 regarding change in
independent registered public accounting firm, incorporated herein
by
reference to Exhibit 16.2 to the Registrant’s Current Report on Form 8-K/A
dated June 25, 2008.
|
||
|
21.1
|
Subsidiaries
of the Registrant
|
||
|
Subsidiary
|
State
of Incorporation
|
||
|
Landec
Ag, Inc.
|
Delaware
|
||
|
Apio,
Inc.
|
Delaware
|
||
|
23.1+
|
Consent
of Independent Registered Public Accounting Firm.
|
||
|
24.1+
|
Power
of Attorney – See page 78
|
||
|
31.1+
|
CEO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
||
|
31.2+
|
CFO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
||
|
32.1+
|
CEO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
||
|
32.2+
|
CFO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
||
|
*
|
Represents
a management contract or compensatory plan or arrangement required
to be
filed as an exhibit to this report pursuant to Item 15(b) of Form
10-K.
|
| + |
Filed
herewith.
|
# Confidential
treatment requested as to certain portions. The term “confidential treatment”
and the mark “*” as used throughout the indicated Exhibit means that material
has been omitted and
-
77 -
SIGNATURES
Pursuant
to the requirements of section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report on Form 10-K to be signed
on
its behalf by the undersigned, thereunto duly authorized, in the City of Menlo
Park, State of California, on August 8, 2008.
|
LANDEC
CORPORATION
|
|
|
By:
|
/s/
Gregory S. Skinner
|
|
Gregory
S. Skinner
|
|
|
Vice
President of Finance and Administration
|
|
|
and
Chief Financial Officer
|
|
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Gary T. Steele and Gregory S. Skinner, and
each
of them, as his attorney-in-fact, with full power of substitution, for him
in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Report on Form
10-K.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report on
Form
10-K
has
been signed by the following persons in the capacities and on the dates
indicated:
|
Signature
|
Title
|
Date
|
||
|
/s/
Gary T. Steele
|
||||
|
Gary
T. Steele
|
President
and Chief Executive Officer and Director (Principal Executive
Officer)
|
August
8, 2008
|
||
|
/s/
Gregory S. Skinner
|
||||
|
Gregory
S. Skinner
|
Vice
President of Finance and Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
August
8, 2008
|
||
|
/s/
Nicholas Tompkins
|
||||
|
Nicholas
Tompkins
|
Chairman
of the Board of Apio, Inc. and Director
|
August
8, 2008
|
||
|
/s/
Robert Tobin
|
||||
|
Robert
Tobin
|
Director
|
August
8, 2008
|
||
|
/s/
Duke K. Bristow, Ph.D
|
||||
|
Duke
K. Bristow, Ph.D
|
Director
|
August
8, 2008
|
||
|
/s/
Frederick Frank
|
||||
|
Frederick
Frank
|
Director
|
August
8, 2008
|
||
|
/s/
Stephen E. Halprin
|
||||
|
Stephen
E. Halprin
|
Director
|
August
8, 2008
|
||
|
/s/
Richard S. Schneider, Ph.D
|
||||
|
Richard
S. Schneider, Ph.D
|
Director
|
August
8, 2008
|
||
|
/s/
Kenneth E. Jones
|
||||
|
Kenneth
E. Jones
|
Director
|
August
8, 2008
|
-
78 -
EXHIBIT
INDEX
|
Exhibit
Number
|
Exhibit
Title
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
24.1
|
Power
of Attorney. See page 78.
|
|
|
31.1
|
CEO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
CFO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
CEO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
CFO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
|
-
79 -