10-Q 1 a2051246z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL QUARTER ENDED APRIL 29, 2001, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _____ to _________. Commission file number: 0-27446 LANDEC CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 94-3025618 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 3603 HAVEN AVENUE MENLO PARK, CALIFORNIA 94025 (Address of principal executive offices) Registrant's telephone number, including area code: (650) 306-1650 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No ----- ----- As of May 25, 2001, there were 16,348,138 shares of Common Stock and 166,667 shares of Convertible Preferred Stock, convertible into ten shares of Common Stock for each share of Preferred Stock, outstanding. LANDEC CORPORATION FORM 10-Q For the Quarter Ended April 29, 2001 INDEX
Page Facing sheet 1 Index 2 PART I. FINANCIAL INFORMATION Item 1. a) Consolidated condensed balance sheets as of April 29, 2001 and October 29, 2000 3 b) Consolidated statements of operations for the three months and six months ended April 29, 2001 and April 30, 2000. 4 c) Consolidated statements of cash flows for the six months ended April 29, 2001 and April 30, 2000. 5 d) Notes to consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II. OTHER INFORMATION 20 Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 a) Exhibits 21 b) Reports on Form 8-K 21 Signature 22 Index to Exhibits 23
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LANDEC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
April 29, October 29, 2001 2000 --------- --------- ASSETS Current Assets: Cash and cash equivalents $ 5,937 $ 9,589 Accounts receivable, less allowance for doubtful accounts of $587 and $627 at April 29, 2001 and October 29, 2000 19,469 22,725 Inventory 17,853 14,501 Investment in farming activities 288 2,672 Notes and advances receivable 6,901 8,519 Notes receivable, related party 156 151 Prepaid expenses and other current assets 1,861 1,958 Assets held for sale 3,014 2,963 --------- --------- Total Current Assets 55,479 63,078 Property and equipment, net 27,021 24,437 Intangible assets, net 42,148 43,386 Notes receivable 689 720 Other assets 886 1,631 --------- --------- $ 126,223 $ 133,252 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 22,012 $ 19,374 Grower payables 2,859 13,651 Related party payables 381 262 Accrued compensation 1,449 2,470 Other accrued liabilities 9,037 9,522 Deferred revenue 560 2,265 Lines of credit 16,666 9,609 Current maturities of long term debt 3,757 3,584 --------- --------- Total Current Liabilities 56,721 60,737 Long term debt, less current maturities 14,597 16,631 Other liabilities 2,087 2,442 Minority interest 1,070 1,264 --------- --------- Total Liabilities 74,475 81,074 Shareholders' Equity: Preferred stock 9,149 9,149 Common stock 92,882 92,555 Accumulated deficit (50,283) (49,526) --------- --------- Total Shareholders' Equity 51,748 52,178 --------- --------- $ 126,223 $ 133,252 ========= =========
SEE ACCOMPANYING NOTES. -3- LANDEC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended ------------------------ ------------------------- April 29, April 30, 2000 April 29, April 30, 2000 2001 (restated) 2001 (restated) --------- --------- --------- --------- Revenues: Product sales $ 47,010 $ 43,481 $ 80,035 $ 65,543 Services revenue 14,422 16,943 28,879 27,989 Services revenue, related party 615 202 1,028 761 Research and development revenues 122 145 229 275 License fees 93 93 187 187 --------- --------- --------- --------- Total revenues 62,262 60,864 110,358 94,755 Cost of revenue: Cost of product sales 36,220 33,406 65,099 52,182 Cost of product sales, related party 93 80 107 138 Cost of services revenue 13,940 14,899 27,319 25,599 --------- --------- --------- --------- Total cost of revenue 50,253 48,385 92,525 77,919 Gross profit 12,009 12,479 17,833 16,836 Operating costs and expenses: Research and development 1,102 1,103 2,217 2,154 Selling, general and administrative 7,290 8,133 15,450 13,886 --------- --------- --------- --------- Total operating costs and expenses 8,392 9,236 17,667 16,040 --------- --------- --------- --------- Operating profit 3,617 3,243 166 796 Interest income 169 274 310 416 Interest expense (620) (709) (1,285) (1,039) Other income 16 100 52 95 --------- --------- --------- --------- Net income (loss) before the cumulative effect of change in accounting principle 3,182 2,908 (757) 268 Cumulative effect of change in accounting principle -- -- -- (1,914) --------- --------- --------- --------- Net income (loss) $ 3,182 $ 2,908 $ (757) $ (1,646) ========= ========= ========= ========= Amounts per common share: Net income (loss) before cumulative effect of change in accounting principle $ 0.20 $ 0.18 $ (0.05) $ 0.01 Cumulative effect of change in accounting principle -- -- -- (0.12) --------- --------- --------- --------- Basic net income (loss) per share $ 0.20 $ 0.18 $ (0.05) $ (0.11) ========= ========= ========= ========= Net income (loss) before cumulative effect of change in accounting principle $ 0.15 $ 0.13 $ (0.05) $ 0.01 Cumulative effect of change in accounting principle -- -- -- (0.12) --------- --------- --------- --------- Diluted net income (loss) per share $ 0.15 $ 0.13 $ (0.05) $ (0.11) ========= ========= ========= ========= Shares used in per share computation: Basic 16,306 15,993 16,228 15,537 ========= ========= ========= ========= Diluted 18,357 18,558 16,228 15,537 ========= ========= ========= =========
SEE ACCOMPANYING NOTES. -4- LANDEC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Six Months Ended April 29, April 30, 2000 2001 (restated) ------- ------- Cash flows from operating activities: Net income (loss) $ (757) $ 268 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 3,139 2,701 Cumulative effect of change in accounting principle -- 1,914 Disposal of property and equipment 486 -- Changes in current assets and liabilities: Accounts receivable 3,256 (4,013) Inventory (3,352) (2,330) Investment in farming activities 2,384 1,467 Prepaid expenses and other current assets 97 1,069 Accounts payable 2,638 7,681 Grower payables (10,792) (197) Related party payables 119 157 Accrued compensation (1,021) (344) Other accrued liabilities (485) (3,654) Deferred revenue (1,705) (4,125) ------- ------- Total adjustments (5,236) 326 ------- ------- Net cash (used in) provided by operating activities (5,993) 594 ------- ------- Cash flows from investing activities: Decrease in other assets and liabilities 390 500 Purchases of property and equipment (4,657) (1,727) Decrease (increase) in notes receivable and advances 1,644 (4,621) Acquisition costs related to earn-out provisions (363) (407) Acquisition of Apio, Inc., net of cash received -- (5,813) ------- ------- Net cash used in investing activities (2,986) (12,068) Cash flows from financing activities: Proceeds from sale of preferred stock -- 9,149 Proceeds from sale of common stock 327 308 Borrowings on lines of credit 21,459 6,177 Payments on lines of credit (14,402) -- Borrowing of long term debt 250 -- Repayment of long term debt (2,113) (647) Increase (decrease) in minority interest liability 19 (18) Distributions to minority interest (213) (245) ------- ------- Net cash provided by financing activities 5,327 14,724 Net increase (decrease) in cash and cash equivalents (3,652) 3,250 Cash and cash equivalents at beginning of period 9,589 3,203 ------- ------- Cash and cash equivalents at end of period 5,937 $ 6,453 ======= =======
SEE ACCOMPANYING NOTES. -5- LANDEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Landec Corporation ("Landec" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, and cash flows at April 29, 2001, and for all periods presented, have been made. Although Landec believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted per the rules and regulations of the Securities and Exchange Commission. The accompanying financial data should be reviewed in conjunction with the audited financial statements and accompanying notes included in Landec's Annual Report on Form 10-K for the fiscal year ended October 29, 2000. The results of operations for the six month period ended April 29, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ended October 28, 2001. For instance, due to the cyclical nature of the corn seed industry, a significant portion of revenues and profits for Landec Ag, Landec's agricultural technology subsidiary, is concentrated over a few months during the spring planting season (generally during Landec's second fiscal quarter). 2. RECENT PRONOUNCEMENTS As of October 30, 2000, the Company adopted the Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as amended in June 2000 by Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and measure such instruments at fair value. The adoption of these statements did not have a material impact on the Company's consolidated financial statements. 3. RECLASSIFICATIONS Certain reclassifications have been made to prior period financial statements to conform to the current year presentation. -6- 4. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income for the periods with net income (in thousands except per share amounts):
Three Months Three Months Ended Ended April 29, 2001 April 30, 2000 -------------- -------------- Numerator: Net income for basic net income per share $ 3,182 $ 2,908 Less: Minority interest in income of subsidiary (458) (551) -------- -------- Net income for diluted net income per share $ 2,724 $ 2,357 Denominator: Weighted average shares for basic net income per share 16,306 15,993 Effect of dilutive securities: Stock Options 384 898 Convertible preferred stock 1,667 1,667 -------- -------- Total dilutive common shares 2,051 2,565 Weighted average shares for diluted net income per share 18,357 18,558 Basic net income per share $ 0.20 $ 0.18 Diluted net income per share $ 0.15 $ 0.13
5. REVENUE RECOGNITION AND RESTATEMENT The Company previously recognized noncancellable, nonrefundable license fees as revenue when received and when all significant contractual obligations of the Company relating to the fees had been met. On November 1, 1999, the Company changed its method of accounting for noncancellable, nonrefundable license fees to recognize such fees over the research and development period of the agreement, as well as the term of any related supply agreement entered into concurrently with the license when the risk associated with commercialization of a product is non-substantive at the outset of the arrangement. The Company believes the change in accounting principle is preferable based on guidance provided in the Staff Accounting Bulletin ("SAB") No. 101 - REVENUE RECOGNITION IN FINANCIAL STATEMENTS. The $1.9 million cumulative effect of the change in accounting principle, calculated as of November 1, 1999, was originally reported as a charge in the quarter ended October 29, 2000. SAB No. 101 was adopted in accordance with APB No. 2 and accordingly the financial statements for the six months ended April 29, 2000 have been restated as if the provisions of SAB No. 101 had been applied at the beginning of the year of adoption. The cumulative effect was recorded as deferred revenue and is being recognized as revenue over the research and development period or supply period commitment of the agreement. For the three months and six months ended April 29, 2001 and April 30, 2000, $93,000 and $187,000, respectively, of the related deferred revenue was recognized as "recycled" revenue. -7- 6. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and consisted of the following (in thousands):
April 29, October 29, 2001 2000 ------- ------- Finished goods..................... $ 9,167 $ 5,889 Raw material....................... 7,745 7,661 Work in process.................... 941 951 ------- ------- $17,853 $14,501 ======= =======
7. REVOLVING DEBT AND AMENDMENT TO CREDIT AGREEMENT The $7.1 million increase in the Company's lines of credit during the first six months of fiscal year 2001 was due to seasonal needs at Landec Ag for seed corn purchases that will be carried over and sold in fiscal year 2002 and for sourcing of produce at Apio, Inc. ("Apio") which requires up-front investments of cash. In February 2001, the Apio revolving line of credit was amended. The amendment reduces the maximum borrowings from $12.0 million to $10.0 million but increases the computed amount available under the line, determined as a percentage of certain eligible assets (primarily receivables) by $4.0 million through March 31, 2001 and $2.0 million from April 1, 2001 through July 31, 2001. The amendment also precludes the payment of earn-outs due under the Apio purchase agreement until August 2001. In April 2001, the Apio revolving line of credit was further amended. The amendment increases the maximum borrowings to $12.0 million from $10.0 million until July 31, 2001 and increased the interest rate margin by 75 basis points from prime plus .50% to prime plus 1.25%. In addition, the computed amount available under the line as determined as a percentage of certain eligible assets (primarily receivables) was increased by $4.0 million through July 31, 2001 and capital expenditure limits for fiscal year 2001 were increased from $3.3 million up to $5.7 million based on the additional $2.4 million being financed by a third party lender. In May 2001, Apio entered into a lease agreement to fund the purchase of an ERP business system. Terms of the agreement are 36 months at an average annual interest rate of 11% with a fair market value buyout at the end of the term. Security for the lease is the hardware portion plus a Letter of Credit ("LOC") equal to 50% of the non-hardware portion of the lease. As of June 12, 2001 the LOC balance was $740,000. 8. BUSINESS SEGMENT REPORTING Landec operates in two business segments: the Food Products Technology segment and the Agricultural Seed Technology segment. The Food Products Technology segment markets and packs produce and specialty packaged whole and fresh-cut vegetables that incorporate the Intellipac-TM- breathable membrane for the retail grocery, club store and food services industry through its Apio subsidiary. The amounts presented for the first six months of fiscal year 2000 include the results of Apio from the effective close date of November 29, 1999 through April 30, 2000. The Agricultural Seed Technology segment markets and distributes hybrid seed corn to the farming industry and is developing seed coatings using Landec's proprietary Intelimer(R) polymers. The Food Products Technology and Agricultural Seed Technology segments include charges for corporate services allocated from the Corporate and Other segment. Corporate and other amounts include non-core operating activities, corporate operating costs and net interest expense. -8- Operations by Business Segment (in thousands):
Agricultural Food Products Seed Corporate Quarter ended April 29, 2001 Technology Technology and Other TOTAL ------------------------------------------- -------------- -------------- -------------- --------- Net sales.................................. $ 43,379 $ 15,685 $ 3,198 $ 62,262 Net income (loss).......................... $ (462) $ 4,049 $ (405) $ 3,182 Quarter ended April 30, 2000 ------------------------------------------- Net sales.................................. $ 40,896 $ 16,399 $ 3,569 $ 60,864 Net income (loss).......................... $ (1,588) $ 4,468 $ 28 $ 2,908 Six months ended April 29, 2001 ------------------------------------------- Net sales.................................. $ 88,299 $ 15,737 $ 6,322 $ 110,358 Net income (loss).......................... $ (1,283) $ 1,462 $ (936) $ (757) Six months ended April 30, 2000 ------------------------------------------- Net sales.................................. $ 71,129 $ 16,654 $ 6,972 $ 94,755 Net income (loss) before cumulative effect of change in accounting principle.......... $ (1,834) $ 2,022 $ 80 $ 268
-9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Part I--Item 1 of this Form 10-Q and the audited consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Landec's Annual Report on Form 10-K for the fiscal year ended October 29, 2000. Except for the historical information contained herein, the matters discussed in this report are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this report and, in particular the factors described below under "Additional Factors That May Affect Future Results," and those mentioned in Landec's Annual Report on Form 10-K for the fiscal year ended October 29, 2000. 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 Landec Corporation and its subsidiaries ("Landec" or the "Company") design, develop, manufacture and sell temperature-activated and other polymer products for a variety of food products, agricultural products, and licensed partner applications. This proprietary polymer technology is the foundation, and key differentiating advantage, upon which Landec has built its business. Landec's Food Products Technology business, operated through its wholly owned subsidiary Apio, combines Landec's proprietary food packaging technology with the capabilities of a large national food supplier and value-added produce processor. This combination was consummated in December 1999 when Landec acquired Apio, Inc. and certain related entities (collectively "Apio"). Landec's Agricultural Seed Technology business, operated through its wholly owned subsidiary Landec Ag, combines Landec's proprietary seed coating technology with a unique Fielder's Choice Direct system of selling called eDC(TM) - e-commerce, direct marketing and consultative sales. In addition to its core businesses, Landec also operates a Technology Licensing/Research and Development Business which licenses products to industry leaders such as Alcon Laboratories, Inc., Nitta Corporation and Hitachi Chemicals. It also engages in research and development activities with companies such as ConvaTec, a division of Bristol-Myers Squibb, and UCB Chemicals Corporation. To support the polymer manufacturing needs of the core businesses, Landec has developed and acquired lab scale and pilot plant capabilities in Menlo Park, California and scale-up and commercial manufacturing capabilities at its Dock Resins Corporation subsidiary ("Dock Resins") in Linden, New Jersey. In addition to providing manufacturing capabilities, Dock Resins sells industrial specialty products under the Doresco(R) trademark which are used by more than 300 customers throughout the United States in coatings, printing inks, laminating and adhesives markets. Landec's core polymer manufacturing products are based on its patented proprietary Intelimer(R) polymers, which differ from other polymers in that they can be customized to abruptly change their physical characteristics when heated or cooled through a pre-set temperature switch. For instance, Intelimer polymers can change within the space of one or two degrees Celsius from a slick, 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 state. These abrupt changes are repeatedly reversible and can be tailored by Landec to occur at specific temperatures, thereby offering substantial competitive advantages in Landec's target markets. -10- Based on this core technology, Landec has launched to date four broad product lines - QuickCast(TM) splints and casts in April 1994, which was subsequently sold to Bissell Healthcare Corporation in August 1997; Intellipac(TM) breathable membranes for the fresh-cut produce packaging market beginning in September 1995; Intelimer polymer systems for the industrial specialties market beginning in June 1997; and Intellicoat(R) coatings for inbred corn seed beginning in October 1999. Landec has been unprofitable during each fiscal year since its inception and may incur additional losses in the future. The amount of future net profits, if any, is highly uncertain and there can be no assurance that Landec will be able to reach or sustain profitability for an entire fiscal year. From inception through April 29, 2001, Landec's accumulated deficit was $50.3 million. RESULTS OF OPERATIONS Total revenues were $62.3 million for the second quarter of fiscal year 2001, compared to $60.9 million for the second quarter of fiscal year 2000. Revenues from product sales and services increased to $62.0 million in the second quarter of fiscal year 2001 from $60.6 million in the second quarter of fiscal year 2000. The increase in product sales and service revenues was primarily due to increased revenues for Apio's value added fresh-cut vegetable business which increased from $13.3 million in the second quarter of fiscal year 2000 to $16.0 million during the same period of fiscal year 2001, partially offset by a reduction in sales for Landec Ag to $15.7 million in the second quarter of fiscal year 2001 from $16.4 million in the second quarter of fiscal year 2000. The decrease in Landec Ag revenues was due to a decrease in the sales volume of uncoated hybrid corn seed. Revenues from research and development funding were $122,000 for second quarter of fiscal year 2001 compared to $145,000 for the second quarter of fiscal year 2000. Revenues from license fees remained unchanged at $93,000 for the second quarter of fiscal years 2001 and 2000. For the first six months of fiscal year 2001 total revenues were $110.4 million compared to $94.8 million during the same period in 2000. Revenues from product sales and services for the first six months of fiscal year 2001 increased to $109.9 million from $94.3 million during the same period of fiscal year 2000 due primarily to including the results of Apio for a full six months in fiscal year 2001 versus only five months in fiscal year 2000. Revenues from research and development funding for the first six months of fiscal year 2001 decreased to $229,000 from $275,000 during the same period of fiscal year 2000. Revenues from licensing fees remained unchanged at $187,000 for the six month period of fiscal years 2001 and 2000. Cost of product sales and services consists of material, labor and overhead. Cost of product sales and services was $50.3 million for the second quarter of fiscal year 2001 compared to $48.4 million for the second quarter of fiscal year 2000. Gross profit from product sales and services as a percentage of revenue from product sales and services decreased from 20% in the second quarter of fiscal year 2000 to 19% in the second quarter of fiscal year 2001. Cost of product sales and services for the first six months of fiscal year 2001 was $92.5 million compared to $77.9 million during the same period in fiscal year 2000. Gross profit from product sales and services as a percentage of revenue from product sales and services decreased to 16% for the first six months of fiscal year 2001 from 17% during the same period of fiscal year 2000. The decreases in gross profit percentages were primarily the result of Apio's higher costs during fiscal year 2001 associated with sourcing crops during the winter months. Overall gross profit decreased from $12.5 million for the three month period ended April 30, 2000 to $12.0 million for the same period of fiscal year 2001. This decrease was due primarily to lower margins on lower Landec Ag revenues during the second quarter of fiscal year 2001 as compared to the year ago second quarter. For the six month period ended April 30, 2000 gross profits increased from $16.8 million in fiscal year 2000 to $17.8 million for the same period in fiscal year 2001, an increase of 6% for the first six months of fiscal year 2001 compared to the same period in fiscal year 2000. This increase is primarily due to gross profit from Apio value added fresh-cut business partially offset by lower margins on decreased sales at Landec Ag and Apio's increased farming losses from winter season produce sourcing in the desert. Research and development expenses remained the same at $1.1 million for the second quarter of fiscal years 2001 and 2000. Research and development expenses also remained flat at $2.2 million for the first six months of fiscal years 2001 and 2000. Landec's research and development expenses consist primarily of expenses involved in the development of, process scale-up of, and efforts to protect intellectual property content of -11- Landec's enabling side chain crystallizable polymer technology and research and development expenses related to Dock Resins' products. Selling, general and administrative expenses were $7.3 million for the second quarter of fiscal year 2001 compared to $8.1 million for the second quarter of fiscal year 2000, a decrease of 10%. For the first six months of fiscal year 2001 selling, general and administrative expenses were $15.5 million compared to $13.9 million during the same period in fiscal year 2000, an increase of 11%. Selling, general and administrative expenses consist primarily of sales and marketing expenses associated with Landec's product sales and services, business development expenses, and staff and administrative expenses. Selling, general and administrative expenses decreased during the three month period ended April 29, 2001 as compared to the same period of fiscal year 2000 primarily as a result of decreased expenses at Landec Ag after a February 2001 reduction in force. The increase in selling, general and administrative expense during the six month period ended April 29, 2001 as compared to the same period of fiscal year 2000 results from including Apio for a full six months in fiscal year 2001 compared to only five months in fiscal year 2000. Sales and marketing expenses decreased to $3.0 million for the second quarter of fiscal year 2001 from $3.5 million for the second quarter of fiscal year 2000. For the first six months of fiscal year 2001 sales and marketing expenses decreased to $6.2 million from $6.4 million during the same period of fiscal year 2000. Interest income for the three and six month periods ended April 29, 2001 were $169,000 and $310,000, respectively, compared to $274,000 and $416,000 for the same periods of fiscal year 2000. These decreases in interest income were due principally to less cash available for investing. Interest expense for the three and six months periods ended April 29, 2001 were $620,000 and $1.3 million, respectively, compared to $709,000 and $1.0 million for the same periods of fiscal year 2000. The decrease in interest expense for the second quarter of fiscal year 2001 as compared to the same period in fiscal year 2000 is due to the capitalization of interest incurred to finance Apio's new business system and Dock Resins' new laboratory and office building. For the six month period interest expense was higher in fiscal year 2001 as compared to fiscal year 2000 due to having Apio debt for a full six months in fiscal year 2001 versus only five months in fiscal year 2000. LIQUIDITY AND CAPITAL RESOURCES As of April 29, 2001, Landec had cash and cash equivalents of $5.9 million, a net decrease of $3.7 million from $9.6 million as of October 29, 2000. This decrease was primarily due to the net of: a) cash used in operations of $6.0 million; b) the purchase of $4.7 million of property, plant and equipment; c) payment on long term debt and to minority interests of $2.4 million, partially offset by; d) net borrowings of $7.3 million and; e) collections of notes receivable and advances of $1.6 million. During the first six months of fiscal year 2001, Landec purchased equipment to support the development of Apio's value added products, and incurred building and laboratory improvement and equipment upgrade expenditures at Dock Resins and initiated implementation of a new ERP business system at Apio. These expenditures represented the majority of the $4.7 million of property and equipment purchased during the first six months of fiscal year 2001. In November 1999 the Company raised $10 million upon the sale of Preferred Stock ($9.1 million net of issuance costs). In December 1999, in conjunction with the acquisition of Apio, the Company secured $11.25 million of term debt and a $12 million line of credit with Bank of America. The term debt and line of credit agreements ("Loan Agreement") contain restrictive covenants that require Apio to meet certain financial tests, including minimum levels of EBITDA (as defined in the Loan Agreement), minimum fixed charge coverage ratio, minimum current ratio, minimum adjusted net worth and maximum leverage ratios. These requirements and ratios generally become more restrictive over time. The Loan Agreement, through restricted payment covenants, limits the ability of Apio to make cash payments to Landec, until the outstanding balance is reduced to an amount specified in the Loan Agreement. In February 2001 and April 2001, the Apio revolving line of credit was amended. The amendments reduce the maximum borrowings from $12.0 million to $10.0 million effective July 31, 2001 and increase the computed amount available under the line, determined as a percentage of certain eligible assets (primarily receivables) by $4.0 million through July 31, 2001. The amendment also precludes the payment of earn-outs due under the Apio purchase agreement until August 2001. Management does not believe that the reduction of -12- the borrowing capacity on July 31, 2001, adversely impacts liquidity as the Company has generally not needed to borrow in excess of $10.0 million on the line with the exception of the current year due to excess costs incurred in sourcing produce this winter. In May 2001, Apio entered into a lease agreement to fund the purchase of a new ERP business system. As of June 2001, $1.6 million of the estimated $2.3 million in total costs had been financed. In June 2000, Landec Ag established a $3.0 million bank line of credit for working capital needs based on inventory values and a $1.0 million equipment line of credit to be used to fund the expansion of the manufacturing capabilities of Intellicoat seed coating products. In February 2001, Dock Resins increased its equipment line of credit by $1.0 million to pay for building and lab improvements. Landec believes that these facilities, the sale of the Reedley facility and related fruit processing equipment, along with existing cash, cash equivalents and existing borrowing capacities will be sufficient to finance its operational and capital requirements through at least the next twelve months. Borrowings on Landec's lines of credit are expected to vary with seasonal requirements of the Company's businesses. The Company may, however, raise additional funds during the next twelve months through another debt financing or an equity financing. If an equity financing occurs it will have a dilutive effect on current shareholders. Landec's future capital requirements, however, will depend on numerous factors, including the progress of its research and development programs; the development of commercial scale manufacturing capabilities; the development of marketing, sales and distribution capabilities; the ability of Landec to establish and maintain new collaborative and licensing arrangements; the continued assimilation and integration of Apio into Landec; any decision to pursue additional acquisition opportunities; adverse 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; the amount of future earn-out payments; and other factors. If Landec's currently available funds, together with the internally generated cash flow from operations are not sufficient to satisfy its financing needs, Landec would be required to seek additional funding through other arrangements with collaborative partners, additional bank borrowings and public or private sales of its securities. There can be no assurance that additional funds, if required, will be available to Landec on favorable terms if at all. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS Landec desires to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, Landec wishes to alert readers that the following important factors, as well as other factors including, without limitation, those described elsewhere in this report, could in the future affect, and in the past have affected, Landec's actual results and could cause Landec's results for future periods to differ materially from those expressed in any forward-looking statements made by or on behalf of Landec. Landec assumes no obligation to update such forward-looking statements. WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE Landec has incurred net losses in each fiscal year since its inception. Landec's accumulated deficit as of April 29, 2001 totaled $50.3 million. Landec may incur additional losses in the future. The amount of future net profits, if any, is highly uncertain and there can be no assurance that Landec will be able to reach or sustain profitability for an entire fiscal year. OUR SUBSTANTIAL INDEBTEDNESS COULD LIMIT OUR FINANCIAL AND OPERATING FLEXIBILITY At April 29, 2001, Landec's total debt, including current maturities and capital lease obligations, was approximately $35.0 million and the total debt to equity ratio was approximately 68%. This level of indebtedness could have significant consequences because a substantial portion of Landec's net cash flow from operations must be dedicated to debt service and will not be available for other purposes, Landec's ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions may be limited, and Landec's level of indebtedness may limit its flexibility in reacting to changes in the industry and economic conditions generally. -13- In connection with the Apio acquisition, Landec may be obligated to make future payments to the former stockholders of Apio of up to $15.5 million for a performance based earnout and future supply of produce. Of this amount, $4.1 million is due to be paid in August 2001. Landec's ability to service its indebtedness will depend on its future performance, which will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond Landec's control. If Landec were unable to service its debt, it would be forced to pursue one or more alternative strategies such as selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital, which might not be successful and which could substantially dilute the ownership interest of existing shareholders. Apio is subject to various financial and operating covenants under its term debt and line of credit facilities, including minimum levels of EBITDA (as defined in the Loan Agreement), minimum fixed charge coverage ratio, minimum current ratio, minimum adjusted net worth and maximum leverage ratios. These requirements and ratios generally become more restrictive over time. The Loan Agreement limits the ability of Apio to make cash payments to Landec until the outstanding balance is reduced to an amount specified in the Loan Agreement. Landec Ag and Dock Resins are subject to certain restrictive covenants in their loan agreements which limit the ability of Landec Ag and Dock Resins to make payments on debt owed to Landec. Landec has pledged substantially all of Apio's, Landec Ag's and Dock Resins' assets to secure their bank debt. Landec's failure to comply with the obligations under the loan agreements, including maintenance of financial ratios, could result in an event of default, which, if not cured or waived, would permit acceleration of the indebtedness due under the loan agreements. OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE In the past, Landec's results of operations have fluctuated significantly from quarter to quarter and are expected to continue in the future. Historically, Landec's direct marketer of hybrid corn seed, Landec Ag, has been the primary source of these fluctuations, as its revenues and profits are concentrated over a few months during the spring planting season (generally during Landec's second quarter). In addition, Apio can be heavily affected by seasonal and weather factors which could impact quarterly results, such as the high cost of sourcing product during the first quarter of fiscal year 2001 as a result of weather related freezes in November and early December of 2000. Landec's earnings in its Food Products Technology business will be sensitive to price fluctuations in the fresh vegetables and fruits markets. Excess supplies can cause intense price competition. Other factors affecting Landec's food and/or agricultural operations include the seasonality of its supplies, the ability to process produce during critical harvest periods, the timing and effects of ripening, the degree of perishability, the effectiveness of worldwide distribution systems, the terms of various federal and state marketing orders, total worldwide industry volumes, the seasonality of consumer demand, foreign currency fluctuations, foreign importation restrictions and foreign political risks. As a result of these and other factors, Landec expects to continue to experience fluctuations in quarterly operating results, and there can be no assurance that Landec will be able to reach or sustain profitability for an entire fiscal year. WE MAY NOT BE ABLE TO ACHIEVE ACCEPTANCE OF OUR NEW PRODUCTS IN THE MARKETPLACE The success of Landec in generating significant sales of its products will depend in part on the ability of Landec and its partners and licensees to achieve market acceptance of Landec's new products and technology. The extent to which, and rate at which, market acceptance and penetration are achieved by Landec's current and future products are a function of many variables including, but not limited to, price, safety, efficacy, reliability, conversion costs and marketing and sales efforts, as well as general economic conditions affecting purchasing patterns. There can be no assurance that markets for Landec's new products will develop or that Landec's new products and technology will be accepted and adopted. The failure of Landec's new products to achieve market acceptance would have a material adverse effect on Landec's business, results of operations and financial condition. There can be no assurance that Landec will be able to successfully develop, commercialize, achieve market acceptance of or reduce the costs of producing Landec's new products, or that Landec's competitors will not develop competing technologies that are less expensive or otherwise superior to those of Landec. There can be no assurance that Landec will be able to develop and introduce new products and technologies in a timely manner or that new products and technologies will gain market acceptance. Landec is in the early stage of product commercialization of Intellipac breathable membrane, Intellicoat seed coating and Intelimer polymer systems products and many of its potential -14- products are in development. Landec believes that its future growth will depend in large part on its ability to develop and market new products in its target markets and in new markets. In particular, Landec expects that its 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 Landec's products. In addition, commercial applications of Landec's temperature switch polymer technology are relatively new and evolving. WE FACE 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 Landec or that would render Landec's technology and products obsolete and non-competitive. Landec operates 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 Landec's collaborative arrangements may result in its corporate partners and licensees becoming competitors of Landec. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than Landec, and may have substantially greater experience in conducting clinical and field trials, obtaining regulatory approvals and manufacturing and marketing commercial products. WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY HAVE TO DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS Landec may need to consider seeking collaborative arrangements with other companies to manufacture some of its products. If Landec becomes dependent upon third parties for the manufacture of its products, then Landec's profit margins and its ability to develop and deliver those products on a timely basis may be affected. Failures by third parties may impair Landec's ability to deliver products on a timely basis, impair Landec's competitive position, or may delay the submission of products for regulatory approval. In late fiscal 1999, in an effort to reduce reliance on third party manufacturers, Landec began the set up of a manufacturing operation at its facility in Menlo Park, California, for the production of Intellipac breathable membrane packaging products. There can be no assurance that Landec can successfully operate a manufacturing operation at acceptable costs, with acceptable yields, and retain adequately trained personnel. Although Landec believes Dock Resins will provide Landec with practical knowledge in the scale-up of Intelimer polymer products, production in commercial-scale quantities may involve technical challenges for Landec. Landec anticipates that a portion of its products will be manufactured in the Linden, New Jersey facility acquired in the purchase of Dock Resins. Landec's reliance on this facility involves a number of potential risks, including the unavailability of, or interruption in access to, some process technologies and reduced control over delivery schedules, and low manufacturing yields and high manufacturing costs. In February 2000, Dock Resins had a fire in its research and development laboratory in Linden, New Jersey which hindered its ability to develop new products and samples for potential and existing customers. The laboratory has been rebuilt and became fully operational in June 2001. OUR DEPENDENCE ON SINGLE SUPPLIERS MAY CAUSE DISRUPTION IN OUR OPERATIONS SHOULD ANY SUPPLIER FAIL TO DELIVER MATERIALS No assurance can be given that Landec will not experience difficulty is acquiring materials for the manufacture of its products or that Landec will be able to obtain substitute vendors, or that Landec will be able to procure comparable materials or hybrid corn varieties at similar prices and terms within a reasonable time. Many of the raw materials used in manufacturing Landec's products are currently purchased from a single source, including some monomers used to synthesize Intelimer polymers and substrate materials for Landec's breathable membrane products. In addition, virtually all of the hybrid corn varieties sold by Landec Ag are purchased from a single source. Any interruption of supply could delay product shipments and materially harm our business. WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS -15- Landec 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 Landec were determined to be infringing any third-party patent, Landec could be required to pay damages, alter its products or processes, obtain licenses or cease the infringing activities. If Landec is required to obtain any licenses, there can be no assurance that Landec will be able to do so on commercially favorable terms, if at all. Litigation, which could result in substantial costs to and diversion of effort by Landec, may also be necessary to enforce any patents issued or licensed to Landec or to determine the scope and validity of third-party proprietary rights. Any litigation or interference proceeding, regardless of outcome, could be expensive and time consuming and could subject Landec to significant liabilities to third parties, require disputed rights to be licensed from third parties or require Landec to cease using that technology. Landec'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. There can be no assurance that any pending patent applications will be approved, that Landec will develop additional proprietary products that are patentable, that any patents issued to Landec will provide Landec 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 Landec's technology. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of Landec's products or design around Landec's patents. OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATIONS THAT DIRECTLY IMPACT OUR BUSINESS 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, including those utilized by Dock Resins. As a result of historic off-site disposal practices, Dock Resins was involved in two actions seeking to compel the generators of hazardous waste to remediate hazardous waste sites. Dock Resins has been informed by its counsel that it was a DE MINIMIS generator to these sites, and these actions have been settled without the payment of any material amount by Landec. In addition, the New Jersey Industrial Site Recovery Act ("ISRA") requires an investigation and remediation of any industrial establishment, like Dock Resins, which changes ownership. This statute was activated by Landec's acquisition of Dock Resins. Dock Resins has completed its investigation of the site, delineated the limited areas of concern on the site, and completed the bulk of the active remediation required under the statute. The costs associated with this effort are being borne by the former owner of Dock Resins, and counsel has advised Dock Resins and Landec that funds of the former owner required by ISRA to be set aside for this effort are sufficient to pay for the successful completion of remedial activities at the site. In most cases, Landec believes its liability will be limited to sharing clean-up or other remedial costs with other potentially responsible parties. Any failure by Landec to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations could subject it to substantial liability or could cause its manufacturing operations to be suspended and changes in environmental regulations may impose the need for additional capital equipment or other requirements. Landec's agricultural operations are subject to a variety of environmental laws including the Food Quality Protection Act of 1966, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive Environmental Response, Compensation and Liability Act. Compliance with these laws and related regulations is an ongoing process. Environmental concerns are, however, inherent in most agricultural operations, including those conducted by Landec, and there can be no assurance that the cost of compliance with environmental laws and regulations will not be material. Moreover, it is possible that future developments, such as increasingly strict environmental laws and enforcement policies and further restrictions on the use of manufacturing chemicals could result in increased compliance costs. -16- ADVERSE WEATHER CONDITIONS CAN CAUSE SUBSTANTIAL DECREASES IN OUR SALES AND/OR INCREASES IN OUR COSTS Landec's Food Products and Agricultural Seed Technology businesses are 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 and hurricanes may adversely affect the supply of vegetables and fruits used in Landec's business, which could reduce the sales volumes and/or increase the unit production costs. During the first quarter of fiscal year 2001, optimal weather conditions after the November/December freezes resulted in an over supply of certain crops in which the Company had an invested interest. The over supply resulted in reduced prices for these crops which caused the Company to report a loss on its investment during the first six months of fiscal year 2001. 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 Landec's financial condition. WE DEPEND ON STRATEGIC PARTNERS AND LICENSES FOR FUTURE DEVELOPMENT For some of its current and future products, Landec's strategy for development, clinical and field testing, manufacture, commercialization and marketing includes entering into various collaborations with corporate partners, licensees and others. Landec is dependent on its corporate partners to develop, test, manufacture and/or market some of its products. Although Landec believes that its 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 the control of Landec. There can be no assurance that those partners will perform their obligations as expected or that Landec will derive any additional revenue from the arrangements. There can be no assurance that Landec's partners will pay any additional option or license fees to Landec or that they will 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. In addition, there can be no assurance as to the amount of royalties, if any, on future sales of QuickCast and PORT products as Landec no longer has control over the sales of those products since the sale of QuickCast and the license of the PORT product lines. There can be no assurance that Landec's partners will not pursue existing or alternative technologies in preference to Landec's technology. Furthermore, there can be no assurance that Landec will be able to negotiate additional collaborative arrangements in the future on acceptable terms, if at all, or that the collaborative arrangements will be successful. BOTH DOMESTIC AND FOREIGN GOVERNMENT REGULATIONS CAN HAVE AN ADVERSE EFFECT ON OUR BUSINESS OPERATIONS Landec's products and operations are subject to governmental regulation in the United States and foreign countries. The manufacture of Landec's products is subject to periodic inspection by regulatory authorities. There can be no assurance that Landec will 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 Landec's business, financial condition and results of operations. Although Landec has no reason to believe that it will not be able to comply with all applicable regulations regarding the manufacture and sale of its 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. There can be no assurance that 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 will not adversely affect Landec's business. There can be no assurance that Landec will not be required to incur significant costs to comply with the laws and regulations in the future, or that the laws or regulations will not have a material adverse effect on Landec's business, operating results and financial condition. As a result of the Apio acquisition, Landec is 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, suspensions or withdrawal of regulatory approvals, product recalls, product seizures, including cessation of manufacturing and sales, operating restrictions and criminal prosecution. -17- OUR INTERNATIONAL OPERATIONS AND SALES MAY EXPOSE OUR BUSINESS TO ADDITIONAL RISKS For the first six months of fiscal year 2001, approximately 13% of Landec's total revenues were derived from product sales to and collaborative agreements with international customers. Landec expects that with the acquisition of Apio and its export business, international revenues will become an important component of its total revenues. A number of risks are inherent in international transactions. International sales and operations may be limited or disrupted by the 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 Landec's international business and its financial condition and results of operations. While Landec's foreign sales are currently priced in dollars, fluctuations in currency exchange rates, such as those recently experienced in many Asian countries, may reduce the demand for Landec's products by increasing the price of Landec's products in the currency of the countries to which the products are sold. There can be no assurance that regulatory, geopolitical and other factors will not adversely impact Landec's operations in the future or require Landec to modify its current business practices. CANCELLATIONS OR DELAYS OF ORDERS BY OUR CUSTOMERS MAY ADVERSELY AFFECT OUR BUSINESS During the six months ended April 29, 2001, sales to Landec's top five customers accounted for approximately 44% of Landec's revenues, with the top customer accounting for 14% of Landec's revenues. Landec expects that for the foreseeable future a limited number of customers may continue to account for a substantial portion of its net revenues. Landec may experience changes in the composition of its customer base, as Apio, Dock Resins and Landec Ag have experienced in the past. Landec does not have long-term purchase agreements with any of its 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 the major customers could materially and adversely affect Landec's business, operating results and financial condition. In addition, since some of the products manufactured in the Linden, New Jersey facility or processed by Apio at its Guadalupe, California facility are often sole sourced to its customers, Landec's operating results could be adversely affected if one or more of its major customers were to develop other sources of supply. There can be no assurance that Landec's current customers will continue to place orders, that orders by existing customers will not be canceled or will continue at the levels of previous periods or that Landec will be able to obtain orders from new customers. OUR SALE OF SOME PRODUCTS MAY INCREASE OUR EXPOSURE TO PRODUCT LIABILITY CLAIMS The testing, manufacturing, marketing, and sale of the products being developed by Landec involve an inherent risk of allegations of product liability. While no product liability claims have been made against Landec to date, if any product liability claims were made and adverse judgments obtained, they could have a material adverse effect on Landec's business, operating results and financial condition. Although Landec has taken and intends to continue to take what it believes are appropriate precautions to minimize exposure to product liability claims, there can be no assurance that it will avoid significant liability. Landec currently maintains medical and non-medical product liability insurance with limits in the amount of $4.0 million per occurrence and $5.0 million in the annual aggregate. In addition, Apio has product liability insurance with limits in the amount of $41.0 million per occurrence and $42.0 million in the annual aggregate. There can be no assurance that the coverage is adequate or will 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 Landec's business, operating results and financial condition. OUR STOCK PRICE MAY FLUCTUATE IN ACCORDANCE WITH MARKET CONDITIONS Factors such as announcements of technological innovations, the attainment of (or failure to attain) milestones in the commercialization of Landec's technology, new products, new patents or changes in existing patents, the acquisition of new businesses or the sale or disposal of a part of Landec's businesses, or development of new collaborative arrangements by Landec, its competitors or other parties, as well as government regulations, investor perception of Landec, fluctuations in Landec's operating results and general market conditions in the industry may cause the market price of Landec's common stock to fluctuate significantly. In addition, the stock market in general has recently experienced extreme price and volume fluctuations, which have particularly affected the market prices of -18- technology companies and which have been unrelated to the operating performance of technology companies. These broad fluctuations may adversely affect the market price of Landec's common stock. THE IMPLEMENTATION OF FINANCIAL AND ACCOUNTING CHANGES MAY CAUSE AN INCREASE IN COSTS AND DELAYS In order to address deficiencies in Apio's management information systems and accounting systems, Apio has restructured its financial and accounting department, including hiring a chief financial officer and a new controller, and retained consultants who have worked with Apio to improve accounting processes and procedures. Apio management believes that those changes will improve its managing of operations, including delivering complete and accurate financial statements to Landec's corporate offices in a more timely manner. However, Landec can give no assurances that it will be able to effect those changes in the management information systems and accounting systems in a timely manner or sustain the process improvements over time. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's reported market risks since the end of fiscal year 2000. -19- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Shareholders held on March 29, 2001 the following proposals were adopted by the margins indicated:
Number of Shares ---------------- Voted For Withheld --------- -------- 1. Three Class I directors were elected by the margins indicated to serve until the next odd-numbered year Annual Meeting (2003) during which their successors will be elected and qualified: Frederick Frank 12,897,801 1,070,630 Stephen E. Halprin 12,898,301 1,070,130 Richard S. Schneider, PH.D. 12,898,301 1,070,130
The three Class II directors were not up for election at the Annual Meeting. These three Class II directors, Gary T. Steele, Kirby. L. Cramer and Richard Dulude, will serve as Class II directors until the next even-numbered Annual Meeting (2002), when their successors will be elected and qualified.
Voted Voted Broker For Against Abstain Non-Votes ---------- ------------- ------- ---------- 2. To approve an amendment to the Company's 1996 Stock 12,030,079 1,909,808 28,544 0 Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 500,000 shares to an aggregate total of 2,000,000 shares.
Voted Voted Broker For Against Abstain Non-Votes ---------- ------------- ------- ---------- 3. To ratify the appointment of Ernst & Young LLP as 13,952,302 15,680 449 0 independent public accountants of the Company for the fiscal year ending October 28, 2001.
-20- ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 3.1+ Amended and Restated Bylaws of Registrant 10.17+ 1996 Stock Option Plan, as amended 10.31+ Amendment No. 2 to the Loan Agreement between Apio, Inc. and the Bank of America dated as of February 28, 2001. 10.32+ Amendment No. 3 to the Loan Agreement between Apio, Inc. and the Bank of America dated as of April 26, 2001.
(b) Reports on Form 8-K None ----------------------- + Filed herewith. -21- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LANDEC CORPORATION By: /s/ Gregory S. Skinner -------------------------------------------- Gregory S. Skinner Vice President, Finance and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer) Date: June 13, 2001 -22- LANDEC CORPORATION INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT ------ ------- 3.1 Amended and Restated Bylaws of Registrant 10.17 1996 Stock Option Plan, as amended 10.31 Amendment No. 2 to the Loan Agreement between Apio, Inc. and the Bank of America dated as of February 28, 2001. 10.32 Amendment No. 3 to the Loan Agreement between Apio, Inc. and the Bank of America dated as of April 26, 2001.
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