SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Quarter Ended November 28, 2004, or

 

o           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 incorporation or organization)		(IRS Employer 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  ý                   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ý                   No  o

 

As of December 20, 2004, there were 23,995,862 shares of Common Stock outstanding.

 

 

LANDEC CORPORATION

 

FORM 10-Q For the Fiscal Quarter Ended November 28, 2004

 

INDEX

 

	Facing sheet
	Index
Part I.	Financial Information
Item 1.	a)	Consolidated Balance Sheets as of November 28, 2004 and May 30, 2004
	b)	Consolidated Statements of Operations for the Three Months and Six Months Ended November 28, 2004 and November 30, 2003
	c)	Consolidated Statements of Cash Flows for the Six Months Ended November 28, 2004 and November 30, 2003
	d)	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4	Controls and Procedures
Part II.	Other Information
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
	Signatures

 

2

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

LANDEC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		November 28, 2004			May 30, 2004
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	6,215		$	6,458
Accounts receivable, less allowance for doubtful accounts of $240 and $265 at November 28, 2004 and May 30, 2004		15,401			14,851
Accounts receivable, related party		343			498
Inventory		17,256			11,227
Notes and advances receivable		1,042			1,144
Notes receivable, related party		139			306
Prepaid expenses and other current assets		1,737			1,527
Total Current Assets		42,133			36,011
Property and equipment, net		18,771			18,341
Goodwill, net		25,987			25,987
Trademarks and other intangible, net		11,904			11,737
Notes receivable		504			605
Notes receivable, related party		55			96
Other assets		154			230
Total Assets		$	99,508		$	93,007
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	16,466		$	14,960
Related party payables		193			430
Accrued compensation		1,653			1,570
Other accrued liabilities		2,848			2,506
Deferred revenue		3,193			807
Lines of credit		4,192			5,317
Current maturities of long term debt		1,793			1,505
Total Current Liabilities		30,338			27,095
Long term debt, less current maturities		2,806			2,174
Other liabilities		593			637
Minority interest		1,281			1,552
Shareholders’ Equity:
Common stock		121,282			116,841
Accumulated deficit		(56,792		)	(55,292		)
Total Shareholders’ Equity		64,490			61,549
Total Liabilities and Shareholders’ Equity		$	99,508		$	93,007

 

See accompanying notes.

 

3

 

LANDEC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

		Three Months Ended						Six Months Ended
		November 28, 2004			November 30, 2003			November 28, 2004			November 30, 2003
Revenues:
Product sales		$	49,696		$	41,989		$	95,252		$	80,816
Services revenue		¾			9			11			2,083
Services revenue, related party		876			1,063			2,027			1,826
Research, development and royalty revenues		23			60			63			177
Royalty revenues, related party		54			122			128			122
License fees		22			22			44			44
Total revenues		50,671			43,265			97,525			85,068
Cost of revenue:
Cost of product sales		42,748			36,619			81,236			69,403
Cost of product sales, related party		1,506			1,177			3,395			2,285
Cost of services revenue		421			439			1,158			2,269
Total cost of revenue		44,675			38,235			85,789			73,957
Gross profit		5,996			5,030			11,736			11,111
Operating costs and expenses:
Research and development		685			997			1,489			1,918
Selling, general and administrative		5,946			5,221			11,321			10,704
Total operating costs and expenses		6,631			6,218			12,810			12,622
Operating loss		(635		)	(1,188		)	(1,074		)	(1,511		)
Interest income		9			38			19			91
Interest expense		(87		)	(259		)	(205		)	(533		)
Other expense		(95		)	(174		)	(240		)	(254		)
Net loss		(808		)	(1,583		)	(1,500		)	(2,207		)
Dividends on Series B preferred stock		¾			(115		)	¾			(228		)
Net loss applicable to common shareholders		$	(808	)	$	(1,698	)	$	(1,500	)	$	(2,435	)
Basic and diluted net loss per share		$	(0.03	)	$	(0.08	)	$	(0.06	)	$	(0.11	)
Shares used in per share computation		23,595			21,231			23,396			21,215

 

See accompanying notes.

 

4

 

LANDEC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Six Months Ended
		November 28, 2004			November 30, 2003
Cash flows from operating activities:
Net loss		$	(1,500	)	$	(2,207	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,703			1,753
Write down of goodwill		¾			120
Gain on disposal of property and equipment		39			¾
Minority interest		279			321
Changes in current assets and liabilities:
Accounts receivable, net		(395		)	4,193
Inventory		(6,029		)	(4,955		)
Notes and advances receivable		411			1,162
Prepaid expenses and other current assets		(210		)	(1,485		)
Accounts payable		1,506			(2,079		)
Grower payables		¾			(3,234		)
Related party payables		(237		)	(248		)
Accrued compensation		83			(51		)
Other accrued liabilities		342			(790		)
Deferred revenue		2,386			2,656
Net cash used in operating activities		(1,622		)	(4,844		)
Cash flows from investing activities:
Purchases of property and equipment		(2,089		)	(1,699		)
Change in other assets and liabilities		(218		)	(279		)
Change in restricted cash		¾			657
Net cash used in investing activities		(2,307		)	(1,321		)
Cash flows from financing activities:
Proceeds from sale of common stock		4,441			237
Borrowings on lines of credit		55,936			53,480
Payments on lines of credit		(57,061		)	(47,563		)
Payments on long term debt		(280		)	(1,238		)
Proceeds from issuance of long term debt		1,200			¾
Distributions to minority interest		(550		)	(154		)
Net cash provided by financing activities		3,686			4,762
Net decrease in cash and cash equivalents		(243		)	(1,403		)
Cash and cash equivalents at beginning of period		6,458			3,699
Cash and cash equivalents at end of period		$	6,215		$	2,296
Supplemental schedule of noncash investing and financing activities:
Sale of assets and services for notes receivable		$	—		$	239
Issuance of Series B preferred stock as dividends to Series B preferred stockholders		$	—		$	228

 

See accompanying notes.

 

5

 

LANDEC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.     Basis of Presentation

 

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 markets and distributes hybrid corn seed to farmers through its Landec Ag, Inc. (“Landec Ag”) subsidiary and specialty packaged fresh-cut vegetables and whole produce to retailers, club stores, and foodservice companies primarily in the United States and Asia through its Apio, Inc. (“Apio”) subsidiary.

 

The accompanying unaudited consolidated financial statements of Landec have been prepared in accordance with accounting principles generally accepted in the United States 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) have been made which are necessary to present fairly the financial position at November 28, 2004 and the results of operations and cash flows for all periods presented.  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 accounting principles generally accepted in the United States 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 May 30, 2004.

 

The results of operations for the three and six months ended November 28, 2004 are not necessarily indicative of the results that may be expected for an entire fiscal year.  For instance, due to the cyclical nature of the corn seed industry, a significant portion of Landec Ag revenues and profits will be concentrated over a few months during the spring planting season (generally during Landec’s third and fourth fiscal quarters).  In addition, Landec Ag purchases corn seed and collects cash deposits from farmers in advance of shipping the corn during the Company’s third and fourth quarters.  The increased levels of inventory and deferred revenue at November 28, 2004 compared to May 30, 2004 reflect the seasonal nature of Landec Ag’s seed business.  In February 2003, the Company changed its fiscal year end from a fiscal year including 52 or 53 weeks that ended on the last Sunday in October to a fiscal year including 52 or 53 weeks that ends on the last Sunday in May.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ materially from those estimates.

 

For instance, the carrying value of notes and advances receivable, as well as investments in farming activities, 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, note receivable or investment.

 

Recent Accounting Pronouncements

 

On December 16, 2004, the FASB issued an amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation.  The amendment requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values.  The amendment is effective for the Company in the first quarter of fiscal year 2006.  The Company intends to continue to grant stock-

 

6

 

based compensation to employees, and the adoption of the new standard may have a material impact on the future results of operations.

 

Reclassifications

 

Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

 

2.     Exit of Domestic Commodity Vegetable Business

 

Effective June 30, 2003, the Company exited the selling of domestic commodity vegetable products and sold certain assets associated with this business to Apio Fresh LLC (“Apio Fresh”).  Apio Fresh is owned by a group of entities and persons that supply produce to Apio.  One of the owners of Apio Fresh is the Apio CEO (see Note 8). Under the terms of the sale, Apio Fresh purchased certain equipment and carton inventory from the Company at their net book value of approximately $410,000 in exchange for notes receivables due in monthly installments over 24 months.  In addition, Apio will be providing information technology service to Apio Fresh for 36 months in exchange for a note receivable for $235,000.  In connection with the sale, Apio Fresh will pay the Company an on-going royalty fee per carton sold for the use of Apio’s brand names. Apio Fresh and its owner growers also entered into a long-term supply agreement with the Company to supply produce to Apio for its fresh-cut, value-added business.  As a result of the sale, the Company recorded during the first quarter of fiscal year 2004, a write down of goodwill of $120,000 allocable to this business.

 

3.     Licensing Agreement

 

On September 3, 2004, the Company entered into a multi-year joint technology and licensing agreement with Chiquita Brands International, Inc. (“Chiquita”) to provide Landec’s Intelimer packaging technology for Chiquita bananas.  The Company expects to start selling its technology products to Chiquita during the second half of fiscal year 2005.  The revenues from this agreement are not expected to be material in the current fiscal year. In addition, the two companies entered into a stock purchase agreement, whereby the Company sold to Chiquita 486,111 shares of Landec Common Stock on October 14, 2004 for $3.5 million in cash.

 

4.     Stock-Based Compensation

 

As permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” (SFAS 148), the Company elected to continue to apply the provisions of Accounting Principle Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) and related interpretations in accounting for its employee stock option and stock purchase plans. The Company is not required under APB 25 and related interpretations to recognize compensation expense in connection with its employee stock option and stock purchase plans, unless the exercise price of the Company’s employee stock options is less than the market price of the underlying stock at the date of grant.

 

Pro forma information regarding net loss and net loss per share is required by SFAS 148 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: risk-free interest rates ranging from 3.35% to 3.47% for the three months ended November 28, 2004, 3.18% to 3.29% for the three months November 30, 2003; 3.35% to 3.93% for the six months ended November 28, 2004, and 2.27% to 3.37% for the six months ended November 30, 2003; a dividend yield of 0.0% for the three and six months ended November 28, 2004 and November 30, 2003; a volatility factor of the expected market price of the Company’s common stock of 0.59 and 0.77 as of November 28, 2004 and November 30, 2003, respectively; and a weighted average expected life of the options of 4.61 years and 5.14  years for the three and six months ended November 28, 2004 and November 30, 2003, respectively.

 

7

 

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options using the straight-line method. The Company’s pro forma information follows (in thousands except for per share data):

 

		Three Months Ended						Six Months Ended
		November 28, 2004			November 30, 2003			November 28, 2004			November 30, 2003
Net loss		$	(808	)	$	(1,583	)	$	(1,500	)	$	(2,207	)
Deduct:
Stock-based employee expense determined under SFAS 123		(487		)	(380		)	(664		)	(568		)
Pro forma net loss		$	(1,295	)	$	(1,963	)	$	(2,164	)	$	(2,775	)
Basic and diluted net loss per share – as reported		$	(0.03	)	$	(0.08	)	$	(0.06	)	$	(0.11	)
Basic and diluted pro forma net loss per share		$	(0.05	)	$	(0.10	)	$	(0.09	)	$	(0.14	)

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options and employee stock purchase plans have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair market value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options, nor do they necessarily represent the effects of employee stock options on reported net income (loss) for future years.

 

5.     Goodwill and Other Intangibles

 

The Company is required under SFAS 142 to review goodwill and indefinite lived intangible assets at least annually.  During the six months ended November 28, 2004, the Company completed its third 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 using the services of an independent appraiser. 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 November 28, 2004.

 

6.     Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or market and consisted of the following (in thousands):

 

		November 28, 2004			May 30, 2004
Finished goods		$	11,881		$	7,350
Raw material		5,324			3,805
Work in process		51			72
Total		$	17,256		$	11,227

 

8

 

7.     Debt

 

On September 1, 2004, Apio entered into a new $10 million revolving line of credit that expires on August 31, 2006, a 12-month, $4.8 million equipment line of credit, and a 36-month, $1.2 million term note for equipment purchased under the prior equipment line of credit (collectively the “Loan Agreement”) with Wells Fargo Bank N.A . Outstanding amounts under the Loan Agreement bear interest at either the prime rate or the LIBOR adjustable rate plus 2.25% (4.21% at November 28, 2004).  The Loan Agreement contains certain restrictive covenants, which requires Apio to meet certain financial tests including, minimum levels of net income, maximum leverage ratio, minimum net worth and maximum capital expenditures.  The Loan Agreement also affects the ability of Landec to receive payments on debt owed by Apio to Landec.  Landec has pledged substantially all of the assets of Apio to secure the lines with Wells Fargo Bank.  Concurrently with entering into this agreement with Wells Fargo Bank, the Company paid off and terminated its lines of credit with Wells Fargo Business Credit, Inc.  At November 28, 2004, no amounts were outstanding under the revolving line or credit or the equipment line of credit.

 

8.     Related Party

 

Apio provides packing, cooling and distributing services for farms in which the Chief Executive Officer of Apio (the “Apio CEO”) has a financial interest and purchases produce from those farms.  Apio also purchases produce from Apio Fresh for sale to third parties.  Revenues, cost of product sales and the resulting payable and the note receivable from advances for ground lease payments, crop and harvesting costs, are classified as related party in the accompanying financial statements as of November 28, 2004 and May 30, 2004 and for the three and six months ended November 28, 2004 and November 30, 2003.

 

Apio leases, for approximately $1.0 million on an annual basis, agricultural land that is either owned, controlled or leased by the Apio CEO.  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 operations 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.

 

Apio’s domestic commodity vegetable business was sold to Apio Fresh, effective June 30, 2003.  The Apio CEO is a 12.5% owner in Apio Fresh.  During the three and six months ended November 28, 2004, the Company recognized revenues of $28,000 and $206,000 respectively, from the sale of products to Apio Fresh and royalty revenue of $54,000 and $128,000 respectively, from the use by Apio Fresh of Apio’s trademarks.  The related accounts receivable from Apio Fresh are classified as related party in the accompanying financial statements as of November 28, 2004 and May 30, 2004.

 

In addition, the Apio CEO has a 6% ownership interest in Apio Cooling LP, a limited partnership in which Apio is the general partner with a 60% ownership interest.  Included in the minority interest liability as of November 28, 2004 and May 30, 2004 is $184,000 and $214,000, respectively, owed to the Apio CEO.

 

All related party transactions are monitored monthly by the Company and approved by the Audit Committee of the Board of Directors.

 

9.     Comprehensive Income / Loss

 

The comprehensive loss of Landec is the same as the net loss.

 

10.  Shareholders Equity

 

During the three and six months ended November 28, 2004, 180,918 and 220,402 shares of Common Stock, respectively, were issued upon the exercise of options under the Company’s stock option plans.  In addition, the Company sold to Chiquita 486,111 shares of Landec Common Stock on October 14, 2004 for $3.5 million in cash (see Note 3).

 

9

 

11.  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 specialty packaged whole and fresh-cut vegetables that incorporate the Intelimer^® based specialty packaging for the retail grocery, club store and food services industry.  In June 2003, the Company exited the selling of domestic commodity vegetable products (see Note 2).  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 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 and corporate operating costs.  All of the assets of the Company are located within the United States of America.

 

Operations by Business Segment (in thousands):

 

		Food Products Technology			Agricultural Seed Technology			Corporate and Other			TOTAL
Three months ended November 28, 2004
Net revenues		$	50,594		$	7		$	70		$	50,671
International sales		$	18,465		$	—		$	—		$	18,465
Gross profit		$	5,865		$	76		$	55		$	5,996
Net income (loss)		$	1,474		$	(2,320	)	$	38		$	(808	)
Interest expense		$	29		$	58		$	—		$	87
Interest income		$	7		$	—		$	2		$	9
Depreciation and amortization		$	718		$	116		$	25		$	859
Three months ended November 30, 2003
Net revenues		$	43,137		$	19		$	109		$	43,265
International sales		$	15,871		$	—		$	—		$	15,871
Gross profit		$	4,936		$	7		$	87		$	5,030
Net income (loss)		$	864		$	(2,332	)	$	(115	)	$	(1,583	)
Interest expense		$	191		$	68		$	—		$	259
Interest income		$	36		$	—		$	2		$	38
Depreciation and amortization		$	700		$	107		$	47		$	854
Six months ended November 28, 2004
Net revenues		$	97,269		$	105		$	151		$	97,525
International sales		$	36,183		$	—		$	—		$	36,183
Gross profit		$	11,520		$	96		$	120		$	11,736
Net income (loss)		$	2,808		$	(4,354	)	$	46		$	(1,500	)
Interest expense		$	134		$	71		$	—		$	205
Interest income		$	15		$	1		$	3		$	19
Depreciation and amortization		$	1,420		$	232		$	51		$	1,703
Six months ended November 30, 2003
Net revenues		$	84,663		$	146		$	259		$	85,068
International sales		$	28,499		$	—		$	—		$	28,499
Gross profit		$	10,830		$	48		$	233		$	11,111
Net income (loss)		$	2,104		$	(4,313	)	$	2		$	(2,207	)
Interest expense		$	430		$	103		$	—		$	533
Interest income		$	87		$	—		$	4		$	91
Depreciation and amortization		$	1,431		$	232		$	90		$	1,753

 

During the six months ended November 28, 2004 and November 30, 2003, sales to the Company’s top five customers accounted for approximately 45% and 43%, respectively, of revenues, with the Company’s top customers from the Food Products Technology segment, Costco Wholesale Corp., accounting for approximately 14% and 11%, respectively, and Pomina Enterprise Co. LTD, accounting for approximately 10% and 7%, respectively of revenues. The Company expects that, for the foreseeable future, a limited number of customers may continue to account for a significant portion of its net revenues.

 

10

 

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 May 30, 2004.

 

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 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 May 30, 2004.  Landec undertakes no obligation to update or revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

 

Critical Accounting Policies and Use of Estimates

 

There have been no material changes to the Company’s critical accounting policies which are included and described in the Form 10-K for the fiscal year ended May 30, 2004 filed with the Securities and Exchange Commission on August 2, 2004.

 

The Company

 

Landec Corporation and its subsidiaries (“Landec” or the “Company”) design, develop, manufacture and sell temperature-activated and other specialty polymer products for a variety of food products, agricultural products, and licensed partner applications.  This proprietary polymer technology is the foundation, and a key differentiating advantage, upon which Landec has built its business.

 

Landec’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 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.

 

Landec has two core businesses – Food Products Technology and Agricultural Seed Technology, in addition to our Technology Licensing/Research and Development business which is included in Corporate and Other for segment disclosure purposes (see note 11).

 

Our Food Products Technology business is operated through a subsidiary, Apio, Inc., and combines our proprietary food packaging technology with the capabilities of a large national food supplier and value-added produce processor.  Value-added processing incorporates Landec’s proprietary packaging technology with produce that is processed by washing, and in some cases cutting and mixing, resulting in packaged produce to achieve increased shelf life and reduced shrink (waste) and to eliminate the need for ice during the distribution cycle.  This combination was consummated in December 1999 when the Company acquired Apio, Inc. and certain related entities (collectively, “Apio”).

 

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Our Agricultural Seed Technology business is operated through a subsidiary, Landec Ag, Inc., (“Landec Ag”) and combines our proprietary Intellicoat® seed coating technology with our unique eDC® – e-commerce, direct marketing and consultative selling – capabilities which we obtained when we acquired Fielder’s Choice Direct (“Fielder’s Choice”), a direct marketer of hybrid seed corn, in September 1997.

 

In addition to our two core businesses, the Company also operates a Technology Licensing/Research and Development business that licenses and/or supplies products outside of our core businesses to industry leaders such as Alcon Laboratories, Inc. and L’Oreal of Paris.

 

Landec has been unprofitable during each fiscal year since its inception, except for the fiscal year ended May 30, 2004, and the seven-month period ended May 25, 2003, 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 remain consistently profitable.  From inception through November 28, 2004, Landec’s accumulated deficit was $56.8 million.

 

Landec was incorporated in California on October 31, 1986.  We completed our initial public offering in 1996 and our Common Stock is listed on the Nasdaq National Market under the symbol “LNDC.” Our principal executive offices are located at 3603 Haven Avenue, Menlo Park, California 94025 and our telephone number is (650) 306-1650.

 

Description of Core Business

 

Landec participates in two core business segments Food Products Technology and Agricultural Seed Technology.  In addition to these two core segments, we license technology and conduct ongoing research and development through our Technology Licensing/Research and Development Business.

 

 

Food Products Technology Business

 

The Company began marketing in early 1996 our proprietary Intelimer-based specialty packaging for use in the fresh-cut produce market, one of the fastest growing segments in the produce industry.  Our proprietary packaging technology, when combined with produce that is processed by washing, and in some cases cut and mixed, results in packaged produce with increased shelf life, reduced shrink (waste) and without the need for ice during the distribution cycle, which we refer to as our “value-added” products.  In December 1999, we acquired Apio, our largest customer at that time in the Food Products Technology business and one of the nation’s leading marketers and packers of produce and specialty packaged fresh-cut vegetables.  Apio provides year-round access to produce, utilizes state-of-the-art fresh-cut produce processing technology and distributes to the top U.S. retail grocery chains and major club stores and has recently begun expanding its product offerings to the foodservice industry.  Our proprietary Intelimer-based packaging business has been combined with Apio into a wholly owned subsidiary that retains the Apio, Inc. name.  This vertical integration within the Food Products Technology business gives Landec direct access to the large and growing fresh-cut produce market.

 

Based in Guadalupe, California, Apio, when acquired in December 1999, consisted of two major businesses first, the “fee-for-service” selling and marketing of whole produce and second, the specialty packaged fresh-cut and

 

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whole value-added processed products that are washed and packaged in our proprietary packaging. Effective June 30, 2003, the Company exited the selling of domestic commodity vegetable products and sold certain assets associated with this business to Apio Fresh LLC (“Apio Fresh”).  Apio Fresh is owned by a group of entities and persons that supply produce to Apio.  The Apio CEO is a 12.5% owner in Apio Fresh.  The fresh-cut value-added produce processing business sells a variety of fresh-cut vegetables to the top retail grocery chains representing over 11,200 retail and club stores.  During the twelve months ended May 30, 2004, Apio shipped more than 17 million cartons of produce to over 700 customers including leading supermarket retailers, wholesalers, foodservice suppliers and club stores throughout the United States and internationally, primarily in Asia.

 

There are five major distinguishing characteristics of Apio that provide competitive advantages in the Food Products Technology market:

 

•      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 developing its Eat Smart® brand and the Dole® brand for all of its fresh-cut and whole value-added products.  As retail grocery and club store chains consolidate, Apio is well positioned as a single source of a broad range of products.

 

•      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.

 

•      Lower Cost Structure: Apio has strategically invested in the rapidly growing fresh-cut and whole value-added business.  Apio’s 60,000 square foot value-added processing plant is automated with state-of-the-art vegetable processing equipment.  Virtually all of Apio’s value-added products utilize Landec’s proprietary Intelimer packaging technology.  Our strategy is to operate one large central processing facility in one of California’s largest, lowest cost growing regions (Santa Maria Valley) and use packaging technology to allow for the nationwide delivery of fresh produce products.  To augment the strategy, in October 2004 Apio entered into an agreement with Caito Foods Service, Inc. of Indianapolis, Indiana, to regionally process, package and distribute Apio’s value-added specialty packaged fresh-cut vegetable tray products.

 

•      Export Capability: Apio is uniquely positioned to benefit from the growth in export sales to Asia and Europe over the next decade with its export business, CalEx.  Through CalEx, Apio is currently one of the largest U.S. exporters of broccoli to Asia and is selling its iceless products to Asia using proprietary Intelimer packaging technology.

 

•      Expanded Product Line Using Technology: Apio, through the use of Landec’s Intelimer packaging technology, is introducing on average twelve 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 a meal line of products.  During the last twelve months, Apio has introduced twelve new products.

 

Agricultural Seed Technology Business

 

Landec Ag’s strategy is build a vertically integrated seed technology company based on Intellicoat seed coating technology and its eDC¾e-commerce, direct marketing and consultative selling capabilities.

 

For the coating technology the strategy is to develop a patented, functional polymer coating technology that will be broadly licensed to the seed industry. The company will initially commercialize products for the corn and soybean markets and then broaden its applications to other seed crops.  Landec Ag will use its Fielder’s Choice Direct marketing and sales company to launch its applications for corn to build awareness for this technology and then broadly license its applications to the rest of the industry.

 

Landec Ag’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

 

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commercial product, Pollinator Plus® 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 2004 Pollinator Plus was used by over 35 seed companies on approximately 15% of the seed production acres in the U.S.

 

In 2003, after two years of on-farm trails, Landec Ag commercialized Early Plant® corn by selling to farmers through its Fielder’s Choice Direct® brand. This application is a management tool, which 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 2004, seven seed companies offered Intellicoat on their hybrid seed corn offerings and sales increased by 50% over 2003.

 

The third commercial application is the RelayÔ Cropping system of wheat and Intellicoat coated soybeans, which allows farmers to plant and harvest two crops in the same year on the same ground in geographic areas where double cropping is not possible. This provides significant financial benefit especially to farmers in the corn belt who grow wheat as a single crop.

 

Based in Monticello, Indiana, Fielder’s Choice Direct offers a comprehensive line of corn hybrids and alfalfa to more than 12,000 farmers in over forty states through direct marketing programs.  The success of Fielder’s Choice comes, in part, from its expertise in selling directly to the farmer, bypassing the traditional and costly farmer-dealer system.  We believe that this direct channel of distribution provides up to a 35% cost advantage compared to the farmer-dealer system.

 

In order to support its direct marketing programs, Fielder’s Choice has developed a proprietary e-commerce direct marketing, and consultative selling information technology, called “eDC”, that enables state-of-the-art methods for communicating with a broad array of farmers.  This proprietary direct marketing information technology includes a current database of over 95,000 farmers.  In August 1999, we launched the seed industry’s first comprehensive e-commerce website.  This website furthers our ability to provide a high level of consultation to Fielder’s Choice customers, backed by a seven day a week call center capability that enables us to use the internet as a natural extension of our direct marketing strategy.

 

Due to the cyclical nature of the corn seed industry, a significant portion of Landec Ag revenues and profits will be concentrated over a few months during the spring planting season (generally during Landec’s third and fourth fiscal quarters).  In addition, Landec Ag purchases corn seed and collects cash deposits from farmers in advance of shipping the corn during the Company’s third and fourth quarters.

 

Technology Licensing/Research and Development Businesses

 

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 release small molecule drugs, catalysts, pesticides or fragrances just by changing the temperature of the Intelimer materials or to activate adhesives through controlled temperature change.  In order to exploit these opportunities, we have entered into and will enter into licensing and collaborative corporate agreements for product development and/or distribution in certain fields.

 

Results of Operations

 

Revenues (in thousands):

 

		Three months ended 11/28/04			Three months ended 11/30/03			Change		Six months ended 11/28/04			Six months ended 11/30/03			Change
Apio Value Added		$	27,983		$	22,829		23	%	$	53,185		$	45,113		18	%
Apio Trading		21,735			18,778			16	%	42,046			34,696			21	%
Apio Bananas		¾			458			N/M		¾			945			N/M
Apio Service		876			1,072			(18	)%	2,038			3,909			(48	)%
Total Apio		50,594			43,137			17	%	97,269			84,663			15	%
Landec Ag		7			19			(63	)%	105			146			(28	)%
Corporate		70			109			(36	)%	151			259			(42	)%
Total Revenues		50,671			43,265			17	%	97,525			85,068			15	%

 

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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 primarily under Apio’s Eat Smart brand and the Dole brand.

 

The increase in Apio’s value-added revenues for the three and six months ended November 28, 2004 compared to the same periods 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 17% and 14%, respectively, during the three and six months ended November 28, 2004 compared to the same periods last year.  In addition, sales of Apio’s value-added vegetable tray products grew 95% and 97%, respectively, during the three and six months ended November 28, 2004 compared to the same periods last year.  Overall value-added unit sales volume increased 20% during the second quarter of fiscal year 2005 compared to the same period last year and 15% for the six months ended November 28, 2004 compared to the same period of the prior year.

 

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 to Wal-Mart.

 

 The increase in revenues in Apio’s trading business for the three and six months ended November 28, 2004 compared to the same periods last year was primarily due to export unit volume increases of 6% and 15%, respectively, coupled with higher sales prices.

 

Apio Bananas

 

Apio banana revenues have historically consisted of revenues generated from the sale of bananas in our proprietary packaging.  During fiscal year 2004, bananas were sold almost exclusively to food service companies.  Beginning in fiscal year 2005, sales from the Company’s banana program consist of the Company’s proprietary breathable membranes.

 

As a result of discontinuing the sale of bananas in our proprietary packaging to focus on selling our proprietary breathable membranes for banana packaging, which is not expected to begin until our third or fourth fiscal quarter of 2005, there were no revenues in our banana program during the three and six months ended November 28, 2004 compared to $457,000 and $944,000 during the three and six months ended November 30, 2003, respectively.  We do not expect significant revenues or gross profits from our banana program in fiscal year 2005.

 

Apio Service

 

Prior to its sale on June 30, 2003, Apio operated a domestic commodity vegetable business that marketed and sold whole produce for growers.  Apio charged a per carton service fee for marketing and selling these whole commodity products.  Subsequent to June 30, 2003, Apio’s service revenues consist of revenues generated from Apio Cooling, LP, a vegetable cooling operation in which Apio is the general partner with a 60% ownership position.

 

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The decrease in service revenues during the three and six months ended November 28, 2004 compared to the same periods last year is directly attributable to the sale of Apio’s domestic commodity vegetable business on June 30, 2003.

 

Landec Ag

 

Landec Ag revenues consist of revenues generated from the sale of hybrid seed corn to farmers under the Fielder’s Choice Direct® brand and from the sale of Intellicoat coated corn and soybean seeds to farmers and seed companies.  Virtually all of Landec Ag’s revenues are generated during the Company’s third and fourth quarters.

 

The decrease in revenues at Landec Ag during the three and six months ended November 28, 2004 compared to the same periods last year was not material to consolidated Landec revenues.

 

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 three and six months ended November 28, 2004 compared to the same periods of the prior year was not material to consolidated Landec revenues.

 

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Gross Profit (in thousands):

 

		Three months ended 11/28/04		Three months ended 11/30/03		Change		Six months ended 11/28/04		Six months ended 11/30/03		Change
Apio Value Added		4,313		3,642		18	%	8,358		7,826		7	%
Apio Trading		1,098		923		19	%	2,283		1,832		25	%
Apio Bananas		¾		(264	)	N/M		¾		(470	)	N/M
Apio Service		454		635		(29	)%	879		1642		(46	)%
Total Apio		5,865		4,936		19	%	11,520		10,830		6	%
Landec Ag		76		7		986	%	96		48		100	%
Corporate		55		87		(37	)%	120		233		(48	)%
Total Gross Profit		5,996		5,030		19	%	11,736		11,111		6	%

 

General

 

There are numerous factors that can influence gross profits including product mix, customer mix, manufacturing costs (raw materials, such as fresh produce, corn seed, polymer materials and packaging, labor and overhead), 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 following discussion surrounding gross profits includes management’s best estimates of the reasons for the changes for the three months and six months ended November 28, 2004 compared to the same periods last year as outlined in the table above.

 

Apio Value-Added

 

The increase in gross profits for Apio’s value-added specialty packaged vegetable business for the three and six months ended November 28, 2004 compared to the same periods last year was due to (1) the increase in value-added sales which increased 23% for the quarter and 18% for the first six months of fiscal year 2005, (2) product mix changes to higher margin products and (3) improved manufacturing efficiencies through further automation of Apio’s production process.  The increase in gross profits for the first six months of fiscal year 2005 was partially offset by inventory write-offs during the first quarter in preparation for new product introductions.

 

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 profits during the three and six months ended November 28, 2004 compared to the same periods last year was primarily due to a 16% and 21% increase in trading revenues.

 

Apio Service

 

The decrease in Apio’s service gross profits during the three and six months ended November 28, 2004 compared to the same periods last year was directly attributable to the sale of Apio’s domestic commodity vegetable business on June 30, 2003.

 

Apio Bananas, Landec Ag and Corporate

 

The change in gross profits for Apio Bananas, Landec Ag and Corporate for the three and six months ended November 28, 2004 compared to the same periods last year was not material to consolidated Landec gross profits.

 

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Operating Expenses (in thousands):

 

		Three months ended 11/28/04		Three months ended 11/30/03		Change		Six months ended 11/28/04		Six months ended 11/30/03		Change
Research and Development:
Apio		255		386		(34	)%	543		721		(25	)%
Landec Ag		192		284		(32	)%	418		546		(23	)%
Corporate		238		327		(27	)%	528		651		(19	)%
Total R&D		685		997		(31	)%	1,489		1,918		(22	)%
Selling, General and Administrative:
Apio		3,346		2,787		20	%	6,498		6,263		4	%
Landec Ag		1,849		1,664		11	%	3,369		3,071		10	%
Corporate		751		770		(2	)%	1,454		1,370		6	%
Total S,G&A		5,946		5,221		14	%	11,321		10,704		6	%

 

Research and Development

 

Landec’s research and development expenses consist primarily of expenses involved in the development and process scale-up initiatives as well as legal fees associated with protecting Landec’s intellectual property (patents, trademarks, etc.).  Research and developments efforts at Apio are focused on the Company’s proprietary breathable membranes used for packaging produce, with recent focus on extending the shelf life of bananas.  At Landec Ag, the research and development efforts are focused on the Company’s proprietary Intellicoat coatings for seeds, primarily corn seed.  At Corporate, the research and development efforts are focused on uses for the proprietary Intelimer polymers outside of food and agriculture.

 

The decrease in research and development expenses for the three months and six months ended November 28, 2004 compared to the same periods last year was primarily due to lower research and development expenses associated with the Company’s non-banana related programs at Apio and greater emphasis at Apio and Landec Ag on sales and marketing versus research and development.

 

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 increase in selling, general and administrative expenses for the three months and six months ended November 28, 2004 compared to the same periods last year was primarily due to an increase in sales and marketing expenses at both Apio and Landec Ag in order to generate increases in revenue.

 

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Other (in thousands):

 

		Three months ended 11/28/04		Three months ended 11/30/03		Change		Six months ended 11/28/04		Six months ended 11/30/03		Change
Interest Income		9		38		(76	)%	19		91		(79	)%
Interest Expense		(87	)	(259	)	(66	)%	(205	)	(533	)	(62	)%
Other Expense		(95	)	(174	)	(45	)%	(240	)	(254	)	(6	)%
Total Other		(173	)	(395	)	(56	)%	(426	)	(696	)	(39	)%

 

Interest Income

 

The decrease in interest income for the three and six month periods ended November 28, 2004 compared to the same periods last year was due to a reduction in interest bearing notes receivable at Apio.

 

Interest Expense

 

The decrease in interest expense during the three and six months ended November 28, 2004 compared to the same periods last year was due to the Company using cash generated from operations to pay down debt and thus lowering interest expenses.

 

Other Expense

 

Other consists of the minority interest expense associated with the limited partners equity interest in the net income of Apio Cooling, LP and non operating income and expenses such as the gain or loss on the sale of assets.

 

The change in other expense for the three and six months ended November 28, 2004 compared to the same periods last year was not material to the consolidated net loss of Landec.

 

Liquidity and Capital Resources

 

As of November 28, 2004, the Company had cash and cash equivalents of $6.2 million, a net decrease of $243,000 from $6.5 million at May 30, 2004.

 

Cash Flow from Operating Activities

 

Landec used $1.6 million of cash flow in operating activities during the six months ended November 28, 2004 compared to using $4.8 million from operating activities for the six months ended November 30, 2003.  The primary sources of cash during the six months ended November 28, 2004 were from an increase in payables of  $1.5 million due to timing of payments and from an increase in deferred revenue of $2.4 million as a result of cash deposits for future seed corn shipments.  The primary uses of cash in operating activities were from the purchase of seed corn inventory by Landec Ag of $4.8 million and an increase in inventory at Apio of $1.3 million primarily related to export inventory in transit.

 

Cash Flow from Investing Activities

 

Net cash used in investing activities for the six months ended November 28, 2004 was $2.3 million compared to $1.3 million for the same period last year.  The primary uses of cash for investing activities during the first six months of fiscal year 2005 were for the purchase of $2.1 million of property and equipment primarily for the further automation of Apio’s value-added facility.

 

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Cash Flow from Financing Activities

 

Net cash provided by financing activities for the six months ended November 28, 2004 was $3.7 compared to net cash provided by financing activities of $4.8 million for the same period last year.  The cash provided by financing activities during the first six months of fiscal year 2005 was primarily from the sale of $4.4 million of Landec Common Stock, of which $3.5 million was sold to Chiquita and the remainder was from the exercise of stock options.

 

Capital Expenditures

 

During the six months ended November 28, 2004, Landec purchased vegetable processing equipment to support the expansion of Apio’s value added business.  These expenditures represented the majority of the $2.1 million of equipment purchased.

 

Debt

 

In August 2003, Apio entered into a $12 million working capital line and a $3 million equipment line (the “Lines”) with Wells Fargo Business Credit, Inc. The term of the Lines was three years expiring on July 31, 2006. Concurrently with entering into the new revolving line of credit on September 1, 2004 with Wells Fargo Bank N.A., the Company paid off and terminated its Lines with Wells Fargo Business Credit, Inc.

 

On September 1, 2004, Apio entered into a new $10 million revolving line of credit that expires on August 31, 2006, a 12-month, $4.8 million equipment line of credit, and a 36-month, $1.2 million term note for equipment purchased under the prior equipment line of credit (collectively the “Loan Agreement”) with Wells Fargo Bank N.A . Outstanding amounts under the Loan Agreement bear interest at either the prime rate or the LIBOR adjustable rate plus 2.25% (4.21% at November 28, 2004).  The Loan Agreement contains certain restrictive covenants, which requires Apio to meet certain financial tests including, minimum levels of net income, maximum leverage ratio, minimum net worth and maximum capital expenditures.  The Loan Agreement also affects the ability of Landec to receive payments on debt owed by Apio to Landec.  Landec has pledged substantially all of the assets of Apio to secure the lines with Wells Fargo Bank.  Concurrently with entering into this agreement with Wells Fargo Bank, the Company paid off and terminated its lines of credit with Wells Fargo Business Credit, Inc.  At November 28, 2004, no amounts were outstanding under the revolving line or credit or the equipment line of credit.

 

Landec Ag has a revolving line of credit which allows for borrowings of up to $7.5 million, based on Landec Ag’s inventory levels.  The interest rate on the revolving line of credit is the prime rate plus 0.375%.  The line of credit contains certain restrictive covenants, which, among other things, restrict the ability of Landec Ag to make payments on debt owed by Landec Ag to Landec.  Landec has pledged substantially all of the assets of Landec Ag to secure the line of credit.  At November 28, 2004, $4.2 million was outstanding under Landec Ag’s revolving line of credit.

 

At November 28, 2004, Landec’s total debt, including current maturities, was $8.8 million and the total debt to equity ratio was 14% compared to 15% at May 30, 2004.  Of this debt, approximately $4.2 million was comprised of revolving lines of credit and approximately $4.6 million was comprised of term debt, $2.2 million of which is mortgage debt on Apio’s manufacturing facilities.  The amount of debt outstanding on Landec’s revolving lines of credit fluctuates over time.  Borrowings on Landec’s lines of credit are expected to vary with seasonal requirements of the Company’s businesses.  In addition, in connection with Landec’s acquisition of Apio, Landec has remaining obligations to pay the former owners of Apio $1.2 million (recorded at $1.1 million on a discounted basis).  The $1.2 million will be paid during the third quarter of fiscal year 2005 and is recorded as current portion of long-term debt.

 

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