Landec is driving growth with a focus on developing products that promote healthy living. In the five fiscal years
from 2010-2015 Landec grew revenues 126% with approximately 37% of that growth coming through strategic
acquisitions, and 63% through organic growth driven by innovation in its food and biomaterial businesses.
In FY15 Landec grew year-over-year revenues 13% and exceeded $500 million for the first time in its history.
Landec Revenue Growth in Past Five Years
$600
$500
$400
$300
$200
$100
$
$539mm
126%
Growth
$238mm
FY10
FY15
Historical Apio Salad Kit Business Green Bean Business Lifecore BioMedical Licensing
Investing in Growth
Over the last five years Landec has grown through a focus on strategic acquisitions and organic growth from innovation in its food and
biomaterial businesses. In April 2010, Landec acquired Lifecore Biomedical, Inc., a high margin biomaterials company that was poised
for future growth. In April 2012, Landec acquired GreenLine Holding Company within its packaged fresh vegetables subsidiary, Apio,
Inc. This acquisition not only added an incremental green bean business, but more importantly, provided East Coast processing and
distribution facilities as well as North American logistics capabilities to better service Apio’s customers and to provide the infrastructure
for future expansion. Simultaneously, Apio has been focused on augmenting its internal innovation efforts and entered the salad kit
category in late calendar 2012, creating a new, high growth platform within a $1.2 billion market segment.
For FY15, Landec increased revenues 13% to $539mm from $477mm in FY14. Landec also invested $24.5mm
in growth initiatives, including $17.5mm in capital equipment and $7.0mm in new product development.
Packaged Fresh Vegetables
Apio utilizes Landec’s BreatheWay® packaging technology to naturally extend the shelf life of fresh produce. Apio is a leader in
packaged fresh vegetables in North America. In FY15, Apio achieved revenues of $498mm, representing a $68mm or 16%
year-over-year increase, and generated $22.1mm in operating income. This growth was primarily a result of continued expansion of
Apio’s new salad kit products that are now being offered by more than 10,000 club, foodservice and grocery retail locations throughout
North America. Incremental capacity was added in FY15 to process the growing demand for these salad
kit products. Finally, Apio’s equity investment in its strategic licensing partner, Windset Farms, contributed
$5.3mm in pre-tax net income during FY15.
Biomedical Materials
Lifecore is a premium provider of the biopolymer hyaluronan (HA) for multiple applications, with a leadership position in ophthalmology.
Most notably, HA is used as a lubricant to help protect the eye during cataract surgery. Lifecore leverages its proprietary fermentation
and filling processes to deliver medical-grade HA to its customers. With a long history of formulating and manufacturing FDA approved
HA-based products, Lifecore has developed specialized capabilities that are attracting non-HA customers with similar needs. In FY15
Lifecore delivered revenues of $40.4mm and operating income of $5.7mm. Revenues and operating profit declined in FY15 compared to
FY14 due to lower purchases related to a one-time inventory adjustment by a key Lifecore customer. Also during FY15, Lifecore invested
$8.6mm in new growth initiatives, with the majority of this investment being utilized to advance its aseptic
filling capabilities with new development partners.
Landec Corporation 2015 Annual Report
Landec FY15 Financial Overview
Growth Through Innovation (in millions)
Fiscal Year 2010 2011 2012 2013 2014 2015 5-year CAGR
Revenue
$238
$277 $318 $442 $477 $539 18%
Gross Profit:
$33.8 $46.7 $52.1 $62.8 $62.6 $65.4 14%
Operating Cash $7.5 $14.5 $22.2 $20.1m $21.0 $26.2 29%
Revenue Growth by Segment (in millions)
FY2011 FY2012 FY2013 FY2014 FY2015
$32.5
$34.3
$41.3
$45.7
$175.7
$207.6
$320.4
$360.7
$40.4
$430.4
$277mm $318mm $442mm $477mm $539mm
Apio Packaged Fresh Vegetables (core business)
Apio Export
Lifecore Biomedical (core business)
Landec Licensing
For FY15, Landec increased revenues 13% to $539mm from $477mm in FY14. The $62mm increase was primarily due to growth at
Apio, with a $70mm, or 19%, increase in its packaged vegetables business driven by the new salad kit line of products which increased
88%. Lifecore revenues decreased $5mm, or 12%, due to lower shipments from a one-time inventory adjustment by a key Lifecore
customer while Apio’s Food Export business decreased $2.0 million, or 3%, due primarily to lower volume sales as a result of the West
Coast longshoreman labor dispute during a portion of FY15.
Landec’s gross profit continues to grow as a result of increasing revenues. Gross profit in Apio’s packaged fresh vegetables business
increased $9.7mm, or 27%, in FY15 compared to FY14 as a result of increased revenues driven by increased sales of our higher margin
salad kit products. The increase in gross profit in Apio’s packaged fresh vegetables business was partially offset by a $5.8mm, or 29%,
decrease in gross profit in our Lifecore business due to lower revenues and an unfavorable product mix change to a higher percentage of
sales being from Lifecore’s lower margin aseptically filled products compared to the higher margin fermentation products driven primarily
by the lower purchases related to a customer adjusting their inventory levels. In addition, gross profit in Apio’s Food Export business
decreased $1.1 million, or 20%, due to lower revenues and from higher costs to source the higher priced export products.
Looking to FY16, we expect Landec consolidated revenues to increase 7-9% compared to FY15. We expect net income to grow 60-65%
with the resumption of historical purchase quantities for a key Lifecore customer who reduced purchases in FY15, and continued growth
of Apio’s salad kit product line both from existing products and new product introductions. We also plan to spend between $40-45mm in
capital expenditures during FY16 to advance our two core businesses.
Landec Corporation 2015 Annual Report
1
Apio FY15 Highlights
FY15
Revenue:
$498.3mm
Operating Income:
$22.1mm
Year-over-year Revenue Growth:
16%
Year-over-year Operating Income Growth: 25%
Apio is making it easy and delicious for consumers to eat healthy. Our fresh vegetable
products are ‘on trend’ with North American consumers who are increasingly equating
healthy living with healthy eating.
Apio’s FY15 revenues were $498mm, an increase of 16% over FY14 revenues of
$431mm. This increase was driven by a $70mm increase in Apio's packaged fresh
vegetables business, which was a result of the rapid expansion of the sales of our
Eat Smart® salad kit products which grew 88% in FY15. Apio’s FY15
operating income increased 25% to $22.1mm from $17.7mm in
FY14, as a result of increased sales of Apio’s higher margin
salad kit products.
During FY15, we invested heavily in our Eat Smart packaged fresh
vegetable products, launching five new salad kits including Wild Greens
and Quinoa, Beets and Greens, the Roasted Yam Salad and a new line of
Plant Powered Protein™ Salads with over 10 grams of plant-based protein
per serving. Apio significantly increased its sales and marketing efforts
leading to a 20% increase in SG&A expenditures compared to FY14. These
increased expenditures were primarily focused on supporting and promoting
our line of superfood salad kit products and marketing our Eat Smart and
GreenLine® brands. We also expanded
our salad processing capacity in our
Bowling Green, OH facility to support East Coast distribution of these products.
Apio is always striving to reduce costs and maximize quality for the consumer.
For example, process improvement projects were implemented, such as the
installation of new green bean snipping equipment for our green bean product line.
This initiative simultaneously improved quality and increased yield to save over
$1mm annually. We also completed the implementation of a new JDE inventory
management system which achieved 100% system uptime for the year.
Windset Farms is the largest hydroponic greenhouse grower of premium vegetables
in North America. The fair market value of Apio’s 26.9% minority investment in Windset
Farms continues to grow, as it has done every year since Apio’s initial investment in
February 2011. In FY15, Windset Farms contributed $5.3mm to Apio’s pre-tax
net income. This was $5.8mm lower than last year due to an expected pause
in expansion during FY15 and unexpected permitting issues in California
associated with Windset’s new crop production originally planned to begin
in October 2015. We continue to be excited about our relationship with
Windset Farms and their opportunities for future growth.
During FY16, we plan to continue to invest in and grow our Eat Smart salad
kit products. Apio will be stepping up its overall investments in new product
development, marketing and sales while significantly expanding its
processing capacity and capabilities. This includes plans to more
than triple our Hanover, PA facility which will enable us to better
serve consumers across the United States and Canada as demand
for our products continues to grow.
Landec Corporation 2015 Annual Report
Lifecore FY15 Highlights
FY15
Revenue:
Operating Income:
Year-over-year Revenue Decrease:
Year-over-year Operating Income Decrease:
$40.4mm
$5.7mm
12%
50%
Lifecore delivers technically advanced medical products that improve the
quality of life as people age through Lifecore’s expertise in formulating and
filling hard-to-handle, viscous biomaterials.
Lifecore Biomedical is a premium supplier of fermented hyaluronan (also known as hyaluronic acid, sodium hyaluronate, or HA for short)
and a contract manufacturer in aseptic fill and finish services (CMO) for use in medical and pharmaceutical applications. Lifecore® HA has
been used by over 50 million patients in the past 25 years, primarily for use during cataract surgery. In FY15, Lifecore had revenues of
$40.4mm and operating income of $5.7mm compared to $45.7mm and $11.5mm for FY14. During FY15, Lifecore advanced new CMO
partnerships that have positioned them for growth over the next five years. With specialized formulation, filling and packaging
competencies, Lifecore provides distinguishable capabilities to serve the needs of diverse partners and their unique products.
Lifecore develops and manufactures products composed of the biopolymer HA. HA is a natural
and important extra-cellular matrix component involved in lubricating and biological
maintenance of many tissues. Lifecore’s HA is used in a wide and growing range of
products for several medical specialties, including ophthalmic surgery, orthopedics,
veterinary medicine, drug delivery, tissue regeneration and aesthetics.
Lifecore is dedicated to the development of technically advanced HA-based products that offer
long-term compatibility with the human body. There are now 45 million Americans age 65 or older,
a greater percentage than at any other time in U.S. history, and this trend is going to accelerate
dramatically over the upcoming years. As our population ages, procedures such as cataract
surgeries will continue to grow. In addition, Lifecore’s capabilities in product formulation
and development, filling viscous fluids into vials and syringes and managing the FDA
regulatory process, has expanded Lifecore’s reach beyond HA to a greater variety of
biomaterials. As companies of all sizes look to out-source the highly specialized
processes, Lifecore is uniquely qualified to meet their needs.
Looking toward FY16, we expect Lifecore to show significant year over year growth
as the key customer’s historical purchase quantities are restored which should
result in its purchases doubling in FY15, and new business development
initiatives accelerate as they advance toward sustainable
commercial products. We intend to expand Lifecore’s
manufacturing facility, and add new aseptic filling capacity
in FY16 to align with the commercial requirements
of its marketing partners in both HA and
non-HA opportunities.
Landec Corporation 2015 Annual Report
Shareholders Letter
Fiscal year 2015 propelled Landec past $500 million in sales for the first time.
Revenues grew 13% to a record $539 million. This growth was primarily driven by an
88% annual sales increase in our Eat Smart salad kits. Landec was recently named
as one of Fortune 100 Fastest Growing U.S. Companies and we are well positioned
in our healthy living food and biomaterial markets for continued growth in the future.
Dear Shareholders,
We achieved another year of record sales growth in fiscal year 2015 driven by sales of our Eat Smart salad kits. Overall sales
increased $62 million to $539 million. Our packaged vegetable business, which accounted for 80% of total revenues, benefitted
from the growth of our Eat Smart salad kit products, generated a 19% increase in revenues and an increase of 60 basis points in
gross margin. Our vegetable salad kit product line has grown from zero to over $125 million in annual sales in the last 36 months.
Led by our unique Sweet Kale Salad, our new salad kit products are comprised of nutrient rich vegetables in a kit format providing
the ultimate in freshness, nutrition and convenience. We now offer a family of eight salad kit products containing superfoods which
are being sold throughout North America, and combined with our other packaged vegetable products we now have distribution in
most Costco stores and 70% of all North American retail grocery stores – an excellent customer platform for further growth.
We believe that Landec’s new salad kit products are “on trend” as more and more consumers recognize the value of healthy eating.
We intend to continue to launch a family of healthy vegetable products packaged in our proprietary BreatheWay packaging.
Our packaging technology extends the shelf life of produce and, combined with our innovative ingredient blends and strong
channels of distribution, provides substantial future growth potential.
Lifecore Biomedical, as forecasted, had a down year in revenues and earnings because of a one-time inventory reduction by a
major customer. This customer has returned to its historical purchasing levels, and combined with projected new partner revenues,
should result in Lifecore having a record year in fiscal year 2016.
We continue to be pleased with our investment in Windset Farms and, accordingly during the past year, we increased our ownership
of Windset Farms from 20% to 27%. Windset Farms has experienced greater than 20% annual revenue growth for the past five years
and has achieved market leadership in the use of hydroponic greenhouse technology for growing high quality produce year round.
I will be retiring on October 15, 2015. Molly Hemmeter has been elected the new CEO, and the Board and I believe Molly is a very
capable successor. Since joining Landec in 2009 as VP of Business Development, Molly has subsequently served as
Chief Commercial Officer and most recently as Landec’s Chief Operating Officer. In each role Molly has served with distinction.
The election of Molly as CEO ensures leadership, with uninterrupted knowledge of Landec’s businesses and uninterrupted progress,
driven by proven management vision and execution. I will remain on the Landec Board of Directors and am committed to making
this a smooth transition. I have been honored to be part of Landec’s growth from a start-up company in 1991 to over $500 million in
sales today. Landec has achieved market leadership positions in the Apio and Lifecore markets we serve. In response to consumer
healthy living trends, Landec has, and will continue to, invest in and develop innovative products that promote healthy living and help
people improve and maintain their good health.
Landec has a bright future and I thank our employees, partners and shareholders for their consistent support over the years.
Thank you for allowing me to serve you.
Respectfully,
Gary T. Steele
Chairman of the Board, President and CEO
Landec Corporation 2015 Annual Report
Landec Corporation 2015 Annual Report
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 15, 2015
TO THE STOCKHOLDERS OF LANDEC CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Landec Corporation (the “Company”) will be
held on Thursday, October 15, 2015, at 1:30 p.m., local time, at Seaport Conference Center, 459 Seaport Court, Redwood
City, CA 94063 for the following purposes:
1. To elect five directors to serve for a term expiring at the Annual Meeting of Stockholders held in the second
year following the year of their election and until their successors are duly elected and qualified;
2. To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting
firm for the fiscal year ending May 29, 2016;
3. To approve a non-binding advisory proposal on executive compensation; and
4. To transact such other business as may properly come before the meeting or any postponement or
adjournment(s) thereof.
The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.
Only stockholders of record at the close of business on August 17, 2015, are entitled to notice of and to vote at the
meeting and any adjournment(s) thereof.
All stockholders are cordially invited to attend the meeting in person. However, to assure your representation at the
meeting, you are urged to mark, sign, and date and return the enclosed proxy card as promptly as possible in the postage-
prepaid envelope enclosed for that purpose or vote your shares by telephone or via the Internet.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Geoffrey P. Leonard
GEOFFREY P. LEONARD
Secretary
Menlo Park, California
August 24, 2015
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE ENCLOSED
PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE OR VOTE
YOUR SHARES BY TELEPHONE OR VIA THE INTERNET. IF A QUORUM IS NOT REACHED, THE COMPANY
MAY HAVE THE ADDED EXPENSE OF RE-ISSUING THESE PROXY MATERIALS. IF YOU ATTEND THE
MEETING AND SO DESIRE, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON. THANK YOU
FOR ACTING PROMPTLY.
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 15, 2015
____________________
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy is solicited on behalf of the Board of Directors of Landec Corporation, a Delaware corporation
(“Landec” or the “Company”), for use at the annual meeting of stockholders (the “Annual Meeting”) to be held on Thursday,
October 15, 2015, at 1:30 p.m., local time, or at any postponement or adjournment thereof, for the purposes set forth herein
and in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at Seaport Conference
Center, 459 Seaport Court, Redwood City, CA 94063. The telephone number at that location is (650) 482-3500.
The Company’s principal executive offices are located at 3603 Haven Avenue, Menlo Park, California 94025. The
Company’s telephone number at that location is (650) 306-1650.
Solicitation
These proxy solicitation materials are to be mailed on or about September 10, 2015 to all stockholders entitled to
vote at the meeting. The costs of soliciting these proxies will be borne by the Company. These costs will include the expenses
of preparing and mailing proxy materials for the Annual Meeting and the reimbursement of brokerage firms and others for
their expenses incurred in forwarding solicitation material regarding the Annual Meeting to beneficial owners of the
Company’s common stock, par value $0.001 per share (the “Common Stock”). The Company may conduct further
solicitation personally, telephonically or by facsimile through its officers, directors and regular employees, none of whom
will receive additional compensation for assisting with the solicitation.
Important Notice Regarding the Availability of Proxy Materials for the
Stockholder Meeting to Be Held on October 15, 2015.
This Proxy Statement and the Company’s Annual Report to Stockholders are available at
http://landec.com/proxy
You may also find a copy of this Proxy Statement and our Annual Report (with exhibits) on the SEC website at
http://www.sec.gov. We will, upon written request and without charge, send you additional copies of our Annual Report
(without exhibits) and this Proxy Statement. To request additional copies, please send your request by mail to Gregory
S. Skinner, Chief Financial Officer, Landec Corporation, 3603 Haven Avenue, Menlo Park, CA 94025 (telephone
number: (650) 306-1650). Exhibits to the Annual Report may be obtained upon written request to Mr. Skinner and
payment of the Company’s reasonable expenses in furnishing such exhibits.
Voting Procedure
You may vote by mail.
To vote by mail, please sign your proxy card and return it in the enclosed, prepaid and addressed envelope. If you
mark your voting instructions on the proxy card, your shares will be voted as you instruct.
You may vote in person at the Annual Meeting.
We will pass out written ballots to anyone who wants to vote at the Annual Meeting. Holding shares in “street name”
means your shares of stock are held in an account by your stockbroker, bank or other nominee, and the stock certificates and
record ownership are not in your name. If your shares are held in “street name” and you wish to attend the Annual Meeting,
you must notify your broker, bank or other nominee and obtain proper documentation to vote your shares at the Annual
Meeting.
You may vote by telephone or electronically.
You may submit your proxy by following the Vote by Phone instructions accompanying the proxy card. Also, you
may vote online by following the Vote by Internet instructions accompanying the proxy card.
You may change your mind after you have returned your proxy card.
If you change your mind after you return your proxy card or submit your proxy by telephone or Internet, you may
revoke your proxy at any time before the polls close at the Annual Meeting. You may do this by:
●
signing and returning another proxy card with a later date, or
● voting in person at the Annual Meeting.
Voting
Holders of Common Stock are entitled to one vote per share.
Votes cast in person or by proxy at the Annual Meeting will be tabulated by the Inspector of Elections. The Inspector
of Elections will also determine whether or not a quorum is present. A majority of the shares entitled to vote, represented
either in person or by proxy, will constitute a quorum for the transaction of business. The Inspector of Elections will treat
abstentions as shares that are present and entitled to vote for purposes of determining the presence of a quorum.
If a broker indicates on the enclosed proxy or its substitute that it has not received voting instructions with respect
to shares held in “street name” with such broker and either (i) does not have discretionary authority as to certain shares to
vote on a particular matter or (ii) has discretionary voting authority but nevertheless refrained from voting on the matter
(“broker non-votes”), those shares will be counted for purposes of determining the presence of a quorum, but will not be
considered as voting with respect to that matter.
Proposal No. 1 – Election of directors: Each director is elected by a majority of the votes cast with respect to such
director. Any votes “withheld” for a particular director are effectively votes against that director. Shares present and not
voted, whether by broker non-vote, abstention or otherwise, will have no effect on this vote.
Proposal No. 2 – Ratification of independent registered public accounting firm: This proposal must be approved by
a majority of the shares present and voted on the proposal. Shares present and not voted, whether by broker non-vote,
abstention or otherwise, will have no effect on this vote.
Proposal No. 3 — Advisory (non-binding) vote on executive compensation: This advisory proposal will be approved
if a majority of the shares present and voted on the proposal are voted in favor of the resolution. Shares present and not voted,
whether by broker non-vote, abstention or otherwise, will have no effect on this advisory vote.
2
Any proxy which is returned using the form of proxy enclosed and which is not marked as to a particular item will
be voted FOR the election of the director nominees proposed by the Board of Directors; FOR the ratification of the
appointment of Ernst & Young LLP to serve as the Company’s independent registered public accounting firm for the fiscal
year ending May 29, 2016; FOR the advisory vote on executive compensation; and as the proxy holders deem advisable on
other matters that may come before the meeting or any adjournment(s) thereof, as the case may be, with respect to the item
not marked. Broker non-votes will not be considered as voting with respect to these matters.
Record Date and Share Ownership
Only stockholders of record at the close of business on August 17, 2015, are entitled to notice of, and to vote at, the
Annual Meeting. As of August 17, 2015, 27,010,381 shares of the Company’s Common Stock were issued and outstanding.
Deadline for Receipt of Stockholder Proposals for the Company’s Annual Meeting of Stockholders in 2016
If any stockholder desires to present a stockholder proposal at the Company’s 2016 Annual Meeting of Stockholders,
such proposal must be received by the Secretary of the Company no later than May 13, 2016, in order that they may be
considered for inclusion in the proxy statement and form of proxy relating to that meeting.
Householding of Proxy Materials
Some companies, brokers, banks, and other nominee record holders participate in a practice commonly known as
“householding,” where a single copy of our Proxy Statement and Annual Report is sent to one address for the benefit of two
or more stockholders sharing that address. Householding is permitted under rules adopted by the SEC as a means of satisfying
the delivery requirements for proxy statements and annual reports, potentially resulting in extra convenience for stockholders
and cost savings for companies. We will promptly deliver a separate copy of either document to you if you contact our Chief
Financial Officer at the address listed above or call us at (650) 306-1650. If you are receiving multiple copies of our Proxy
Statement and Annual Report at your household and wish to receive only one, please notify your bank, broker, or other
nominee record holder, or contact our Chief Financial Officer at the address listed above.
3
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Nominees
The Company’s Bylaws currently provide for no fewer than six (6) and no more than ten (10) directors, and the
Company’s Certificate of Incorporation provides for the classification of the Board of Directors into two classes serving
staggered terms. Each Class 1 and Class 2 director is elected for a two-year term, with the Class 2 directors elected in odd
numbered years (e.g., 2015) and the Class 1 directors elected in even numbered years (e.g., 2016). Accordingly, at the Annual
Meeting five (5) Class 2 directors will be elected.
The Board of Directors has nominated the persons named below to serve as Class 2 directors until the 2017 Annual
Meeting, at which their successors will be elected and qualified. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company’s five (5) nominees named below. In the event that any nominee of the Company
is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. In the event that additional persons are nominated
for election as directors, the proxy holders intend to vote all proxies received by them in such a manner as will assure the
election of as many of the nominees listed below as possible, and, in such event, the specific nominees to be voted for will
be determined by the proxy holders. Assuming a quorum is present, the five (5) nominees for director receiving at least a
majority of votes cast at the Annual Meeting will be elected.
Nominees for Class 2 Directors
Name of Director
Age
Principal Occupation
Director Since
Albert D. Bolles, Ph.D. .........
Tonia Pankopf .......................
Robert Tobin .........................
Nicholas Tompkins ...............
58
Retired Executive Vice President and Chief Technical and
Operations Officer, ConAgra Foods, Inc.
47 Managing Partner, Pareto Advisors, LLC
77
60 Managing Member, NKT Commercial LLC, Chairman of the
Retired Chief Executive Officer, Ahold, USA
Molly A. Hemmeter ..............
48
Board of Apio, Inc.
Chief Operating Officer of the Company (1)
2014
2012
2004
2003
N/A
(1) On July 23, 2015, Ms. Hemmeter was elected as President and Chief Executive Officer of the Company effective
as of the date of the Annual Meeting.
Except as set forth below, each of the Class 2 directors has been engaged in the principal occupation set forth next
to his or her name above during the past five years. There is no family relationship between any director and any executive
officer of the Company.
Albert D. Bolles, Ph.D, has served as a director since May 2014. Dr. Bolles served as the Executive Vice President
and Chief Technical and Operations Officer of ConAgra until his retirement in August 2015. Dr. Bolles led ConAgra’s
Research, Quality & Innovation and Supply Chain organizations. He joined ConAgra in 2006 as Executive Vice President,
Research, Quality & Innovation. Under his leadership, the ConAgra’s Research, Quality & Innovation team has brought to
market highly successful products that have led to substantial business growth. Prior to joining ConAgra, Dr. Bolles led
worldwide research and development for PepsiCo Beverages and Foods. Dr. Bolles serves on several professional advisory
boards, including the Grocery Manufacturers Association (GMA) Scientific Regulatory Committee, and is currently the
chairman of the Trout Council/Food Science program which is an endowed scholarship fund at Michigan State University in
the Department of Food Science and Human Nutrition. He has a Ph.D. and master's degree in food science and a bachelor's
degree in microbiology, all from Michigan State University. He holds several patents and has won numerous awards for his
contributions to the world of food science.
Dr. Bolles is a preeminent leader in food science and provides the Board of Directors with valuable areas of expertise
in new product development, innovation, quality, and supply chain in the packaged consumer food business.
4
Tonia Pankopf has served as a director since November 2012. Ms. Pankopf has been managing partner of Pareto
Advisors, LLC since 2005. Previously, she was a senior analyst and managing director at Palladio Capital Management from
January 2004 through April 2005. From 2001 to 2003, Ms. Pankopf served as an analyst and portfolio manager with P.A.W.
Capital Partners, LP. Ms. Pankopf was a senior analyst and vice president at Goldman, Sachs & Co. from 1999 to 2001 and
at Merrill Lynch & Co. from 1998 to 1999. Ms. Pankopf serves on the board of directors of TICC Capital Corp. and served
on the Board of the University System of Maryland Foundation from 2006 to 2012. Ms. Pankopf is a member of the National
Association of Corporate Directors (“NACD”) and has been designated an NACD Governance Fellow in recognition of her
ongoing involvement in director professionalism and engagement with the director community. Ms. Pankopf received a
Bachelor of Arts degree summa cum laude from the University of Maryland and an M.S. degree from the London School of
Economics.
Ms. Pankopf’s extensive experience in investment research and financial analysis and corporate governance
provides the Board of Directors with valuable insights of an experienced investment manager and institutional shareholder
as well as a diverse perspective.
Robert Tobin has served as a director since December 2004. Mr. Tobin retired from his position as Chief Executive
Officer of Ahold USA, a food retailer, in 2001. Mr. Tobin has over 40 years of industry experience in the food retail and food
service sectors, having served as Chairman and CEO of Stop and Shop Supermarkets. An industry leader, Mr. Tobin serves
on the advisory boards of the College of Agriculture and Life Sciences and the Undergraduate Business Program at Cornell
University where he received his B.S. in Agricultural Economics.
Mr. Tobin’s experience as the chief executive officer of food retailers and his knowledge of the food retail and food
service sectors provide the Board of Directors with significant expertise with respect to issues facing the Company’s food
business. In addition, Mr. Tobin’s service on advisory boards provides the Board of Directors with knowledge of the scientific
issues that face Apio, Inc. (“Apio”).
Nicholas Tompkins has served as a director since October 2003. Mr. Tompkins has been the Chairman of the Board
of Apio, since January 2008. Prior to becoming the Chairman of the Board of Apio, Mr. Tompkins was the Chief Executive
Officer of Apio, a position he had held since Apio’s inception in 1979. Landec acquired Apio in December 1999. Mr.
Tompkins is also a current board member and past chairman of the Ag Business Advisory Council for California Polytechnic
State University in San Luis Obispo, California. He was a member of the board of directors of the United Fresh Fruit and
Vegetable Association through 2008 and was Chairman of that organization in 2005 and 2006. Mr. Tompkins received a B.S.
in Agricultural Business from California State University, Fresno.
Mr. Tompkins brings to the Board of Directors extensive experience in the area of agriculture. In addition, Mr.
Tompkins’s prior service as the Chief Executive Officer of Apio and as its current Chairman provides the Board of Directors
with in-depth knowledge of the operations of Apio, a significant portion of the Company’s business.
Molly A. Hemmeter has been elected to serve as the Company’s President and Chief Executive Officer effective as
of the date of the Annual Meeting. She has served as Chief Operating Officer of the Company since January 2014, prior to
which she served as Chief Commercial Officer of the Company from December 2010 to January 2014 and Vice President,
Business Development and Global Marketing of the Company from June 2009 to December 2010. From July 2006 until
joining the Company in June 2009, Ms. Hemmeter was Vice President of Global Marketing and New Business Development
for the Performance Materials division of Ashland, Inc., a global specialty chemicals company. Prior to joining Ashland, Inc.,
Ms. Hemmeter was Vice President of Strategy and Marketing for Siterra Corporation in San Francisco, a privately held
company delivering on-demand software for managing real estate asset portfolios.
Ms. Hemmeter’s significant knowledge and understanding of the Company and its businesses, together with her
extensive experience in business development and marketing, along with her knowledge of Apio’s food business where she
was instrumental in creating and developing Apio’s line of salad kit products, the fastest growing products in Landec’s long
history, provides the Board of Directors with detailed knowledge of Company’s products and strategic direction.
Director Dean Hollis will complete his term as a Class 2 director at the time of the Annual Meeting and will not
stand for re-election.
5
Class 1 Directors
Name of Director
Age
Principal Occupation
Director Since
Gary T. Steele....................................
66
Frederick Frank .................................
Steven Goldby ...................................
Catherine A. Sohn, Pharma.D. ..........
83
75
62
President, Chief Executive Officer and Chairman of the
Board of Directors of the Company
Chairman, Evolution Life Sciences Partners
Partner, Venrock
Retired Senior Executive Glaxo Smith Kline
1991
1999
2008
2012
Except as set forth below, each of the Class 1 directors has been engaged in the principal occupation set forth next
to his or her name above during the past five years. There is no family relationship between any director and executive officer
of the Company.
Gary T. Steele has served as President, Chief Executive Officer and a director since September 1991 and as
Chairman of the Board of Directors since January 1996. Mr. Steele will retire from these positions as of the date of the Annual
Meeting, but will continue to serve as a director of the Company. Mr. Steele has over 30 years of experience in the
biotechnology, instrumentation and material science fields. From 1985 to 1991, Mr. Steele was President and Chief Executive
Officer of Molecular Devices Corporation, a bioanalytical instrumentation company. From 1981 to 1985, Mr. Steele was
Vice President, Product Development and Business Development at Genentech, Inc., a biomedical company focusing on
pharmaceutical drug development. Mr. Steele has also worked with McKinsey & Company and Shell Oil Company. Mr.
Steele received a B.S. from Georgia Institute of Technology and an M.B.A. from Stanford University.
Mr. Steele’s significant knowledge and understanding of the Company and its businesses together with his extensive
experience in the biotechnology field provide the Board of Directors with significant insight into the Company’s businesses
and operations.
Frederick Frank has served as director since December 1999. Mr. Frank is Chairman of the Board of Evolution Life
Sciences Partners. Prior to joining Evolution Partners, Mr. Frank was Chairman of the Board of Burrill Securities. Prior to
joining Burrill Securities, Mr. Frank was Vice Chairman of Peter J. Solomon Company (“Solomon”). Before joining
Solomon, Mr. Frank was Vice Chairman of Lehman Brothers, Inc. (“Lehman”) and Barclays Capital. Before joining Lehman
as a Partner in October 1969, Mr. Frank was co-director of research, as well as Vice President and Director of Smith Barney
& Co. Incorporated. During his over 50 years on Wall Street, Mr. Frank has been involved in numerous financings and merger
and acquisition transactions. He serves as an advisor to the board of directors of PDL BioPharma, and was a director for the
Institute for Systems Biology and Pharmaceutical Product Development, Inc. Mr. Frank is Chairman of the National Genetics
Foundation and he serves on the Advisory Boards for Yale School of Organization and Management, the Massachusetts
Institute of Technology Center of Biomedical Innovation and was formerly an Advisory Member of the Johns Hopkins
Bloomberg School of Public Health, and the Harvard School of Public Health. He is a graduate of Yale University, received
an M.B.A. from Stanford University and is a Chartered Financial Analyst.
Mr. Frank has over 50 years of capital markets experience and has been involved in numerous financings,
commercial transactions and mergers and acquisitions. As such, Mr. Frank provides the Board of Directors with extensive
experience and knowledge with respect to transactions and financings in the public company context and corporate
governance experience based on his experience as a director of public and non-public companies.
Steven Goldby has served as a director since December 2008 and will become Chairman of the Board in a non-
executive capacity as of the date of the Annual Meeting. Mr. Goldby has been a Partner at Venrock, a venture capital firm,
since 2007. Mr. Goldby was Chairman and Chief Executive Officer of Symyx Technologies, Inc. (“Symyx”) from 1998 to
2007; he became the Executive Chairman in 2008, and Chairman in 2009. Before joining Symyx, Mr. Goldby served as Chief
Executive Officer for more than ten years at MDL Information Systems, Inc., the enterprise software company that pioneered
scientific information management. Earlier, Mr. Goldby held various management positions at ALZA Corporation, including
President of Alza Pharmaceuticals. Mr. Goldby received a B.S. degree in chemistry from the University of North Carolina
and a law degree from Georgetown University Law Center.
Mr. Goldby’s extensive experience with biotechnology companies provides the Board of Directors with significant
understanding of the technology issues facing the Company.
6
Catherine A. Sohn, Pharma.D. has served as a director since November 2012. Dr. Sohn brings significant industry
experience in pharmaceutical and health-related sectors based on her leadership and achievements in business development
and new product development for 28 years at Glaxo Smith Kline (“GSK”). Most recently, Dr. Sohn was Senior Vice President
of Worldwide Business Development and Strategic Alliance for GSK’s $8 billion consumer healthcare division. Early in her
career, Dr. Sohn established the U.S. vaccine business unit for SmithKline Beecham Pharmaceuticals and she subsequently
led the commercialization of Paxil, which became one of GSK’s top five pharmaceutical products. Currently Dr. Sohn serves
as president of Sohn Health Strategies, LLC, providing business development and new product marketing consultation to
biotechnology, specialty pharmaceutical and healthcare companies. Dr. Sohn is a NACD Governance Fellow. She has
demonstrated her commitment to boardroom excellence by completing NACD’s comprehensive program of study for
corporate directors. She supplements her skill sets through ongoing engagement with the director community and access to
leading practices. Dr. Sohn received her Doctor of Pharmacy degree from University of California in San Francisco.
With over 30 years of experience in health-related sectors, Dr. Sohn provides the Board of Directors with significant
expertise in business development and new product development within healthcare, which has a direct benefit to Landec’s
wholly-owned biomedical subsidiary, Lifecore Biomedical, Inc. (“Lifecore”).
Board of Directors Meetings and Committees
The Board of Directors held a total of eight meetings during the fiscal year ended May 31, 2015. Each director
attended at least 75% of all Board and applicable committee meetings during fiscal year 2015. The Board of Directors has an
Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, each of which
operates under a written charter approved by the Board of Directors. The charter for each of the committees is available on
the Company’s website (http://landec.com). It is our policy to encourage the members of the Board of Directors to attend the
Company’s annual meeting of stockholders. All directors on the Board of Directors at the time attended our 2014 Annual
Meeting of Stockholders.
The Audit Committee currently consists of Ms. Pankopf (Chairperson), Mr. Goldby and Dr. Sohn. Effective as of
the date of the Annual Meeting, Mr. Tobin will replace Dr. Sohn on the Audit Committee. In the determination of the Board
of Directors, each of Ms. Pankopf, Mr. Goldby, Dr. Sohn and Mr. Tobin meets the independence requirements of the
Securities and Exchange Commission (the “SEC”) and The Nasdaq Stock Market, LLC (“NASDAQ”). The Audit Committee
assists the Board of Directors in its oversight of Company affairs relating to the quality and integrity of the Company’s
financial statements, the qualifications and independence of the Company’s independent registered public accounting firm,
the performance of the Company’s internal audit function and independent registered public accounting firm, and the
Company’s compliance with legal and regulatory requirements. The Audit Committee is responsible for appointing,
compensating, retaining and overseeing the Company’s independent registered public accounting firm, approving the services
performed by the independent registered public accounting firm and reviewing and evaluating the Company’s accounting
principles and its system of internal accounting controls. Rules adopted by the SEC require us to disclose whether the Audit
Committee includes at least one member who is an “audit committee financial expert,” as that phrase is defined in SEC rules
and regulations. The Board of Directors has determined that Ms. Pankopf and Mr. Goldby are “audit committee financial
experts” within the meaning of applicable SEC rules. The Audit Committee held four meetings during fiscal year 2015.
Please see the section entitled “Audit Committee Report” for further matters related to the Audit Committee. The Board has
adopted a written charter for the Audit Committee. The Audit Committee reviews the charter annually for changes, as
appropriate.
The Compensation Committee currently consists of Mr. Hollis (Chairman), Mr. Frank, Mr. Tobin and Dr. Sohn.
Effective as of the date of the Annual Meeting, the Compensation Committee will consist of Dr. Sohn (Chairperson), Dr.
Bolles and Mr. Frank. In the determination of the Board of Directors, each of Mr. Hollis, Mr. Frank, Mr. Tobin, Dr. Sohn
and Dr. Bolles meets the current independence requirements of the SEC and NASDAQ. The function of the Compensation
Committee is to review and set the compensation of the Company’s Chief Executive Officer and certain of the Company’s
most highly compensated officers, including salary, bonuses and other cash incentive awards, stock equity awards and other
forms of compensation, to administer the Company’s stock plans and approve stock equity awards, and to oversee the career
development of senior management. The Compensation Committee held five meetings during fiscal year 2015.
The Nominating and Corporate Governance Committee currently consists of Mr. Frank (Chairman), Mr. Tobin, Ms.
Pankopf and Dr. Bolles, each of whom, in the determination of the Board of Directors, meets the current independence
requirements of the SEC and NASDAQ. The functions of the Nominating and Corporate Governance Committee are to
recommend qualified candidates for election as officers and directors of the Company and oversee the Company’s corporate
governance policies. The Nominating and Corporate Governance Committee held one meeting during fiscal year 2015.
7
The Nominating and Corporate Governance Committee will consider director nominees proposed by current
directors, officers, employees and stockholders. Any stockholder who wishes to recommend candidates for consideration by
the Nominating and Corporate Governance Committee may do so by writing to the Secretary of the Company, Geoffrey P.
Leonard of Ropes & Gray LLP, Three Embarcadero Center, San Francisco, CA 94111, and providing the candidate’s name,
biographical data and qualifications. The Company does not have a formal policy regarding the consideration of director
candidates recommended by security holders. The Company believes this is appropriate because the Nominating and
Corporate Governance Committee evaluates any such nominees based on the same criteria as all other director nominees. In
selecting candidates for the Board of Directors, the Nominating and Corporate Governance Committee strives for a variety
of experience and background that adds depth and breadth to the overall character of the Board of Directors. The Nominating
and Corporate Governance Committee evaluates potential candidates using standards and qualifications such as the
candidates’ business experience, independence, diversity, skills and expertise to collectively establish a number of areas of
core competency of the Board of Directors, including business judgment, management and industry knowledge. Although
the Nominating and Corporate Governance Committee does not have a formal policy on diversity, it believes that diversity
is an important consideration in the composition of the Board of Directors, and it seeks to include Board members with
diverse backgrounds and experiences. Further criteria include the candidates’ integrity and values, as well as the willingness
to devote sufficient time to attend meetings and participate effectively on the Board of Directors and its committees.
Corporate Governance
The Company provides information about its corporate governance policies, including the Company’s Code of
Ethics, and charters for the Audit, Nominating and Corporate Governance, and Compensation Committees of the Board of
Directors on the Corporate Governance page of its website. The website can be found at www.landec.com.
The Company’s policies and practices reflect corporate governance initiatives that are compliant with the listing
requirements of NASDAQ and the corporate governance requirements of the Sarbanes-Oxley Act of 2002, including:
(cid:127) A majority of the members of the Board of Directors are independent;
(cid:127) All members of the Audit Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee are independent;
(cid:127) The independent members of the Board of Directors meet at each board meeting, and at least twice per year, in
executive sessions without the presence of management. The Board of Directors has designated a lead independent
director who, among other duties, is responsible for presiding over executive sessions of the independent directors.
Effective as of the date of the Annual Meeting, Mr. Goldby, currently the lead independent director, will become
Chairman of the Board in a non-executive capacity, and, in that role, will continue to preside over executive
sessions;
(cid:127) The Company has an ethics hotline available to all employees, and the Audit Committee has procedures in place
for the anonymous submission of employee complaints regarding accounting, internal controls, or auditing
matters; and
(cid:127) The Company has adopted a Code of Ethics that applies to all of its employees, including its principal executive
officer and all members of its finance department, including the principal financial officer and principal accounting
officer, as well as the Board of Directors. Any substantive amendments to the Code of Ethics or grant of any
waiver, including any implicit waiver, from a provision of the Code of Ethics to the Company’s principal executive
officer, principal financial officer or principal accounting officer, will be disclosed either on the Company’s
website or in a report on Form 8-K.
Following a review of all relevant relationships and transactions between each director (including each director’s
family members) and the Company, the Board has determined that each member of the Board or nominee for election to the
Board, other than Mr. Steele and Ms. Hemmeter, is an independent director under applicable NASDAQ listing standards.
Mr. Steele and Ms. Hemmeter do not meet the independence standards because they are employees of the Company and, in
the case of Ms. Hemmeter, will continue to serve as an employee following the Annual Meeting.
8
Leadership Structure of the Board of Directors
The Board of Directors believes that it is important to retain its flexibility to allocate the responsibilities of the
positions of the Chairman of the Board (the “Chairman”) and Chief Executive Officer in the way that it believes is in the
best interests of the Company. The Board of Directors does not have a formal policy with respect to whether the Chief
Executive Officer should also serve as Chairman. Rather, the Board of Directors makes this decision based on its evaluation
of current circumstances and the specific needs of the Company at any time it is considering either or both roles.
Based on Mr. Steele’s significant knowledge of the Company and its industry, the Board of Directors had concluded
that combining the roles of Chairman and an experienced Chief Executive Officer is in the best interest of the Company. The
Board of Directors believed that the combination of the roles of Chairman and Chief Executive Officer promoted the pursuit
of the Company’s business objectives. In light of Mr. Steele’s retirement as Chief Executive Officer and concurrent with the
election of Ms. Hemmeter as the Company’s new Chief Executive Officer at the Annual Meeting, the Board of Directors has
determined that the roles of Chairman and Chief Executive Officer will be separated and Mr. Goldby will assume the role of
non-executive Chairman from his current role as lead independent director. The Board of Directors believes that the
appointment of Mr. Goldby as non-executive Chairman allows the Chief Executive Officer, who also possesses significant
business and industry knowledge, to lead and speak on behalf of both the Company and the Board of Directors, while also
providing for effective independent oversight by non-management directors through a non-executive Chairman.
At each Board of Directors meeting, the lead independent director or non-executive Chairman presides over an
executive session of the non-management directors without the presence of management. The lead independent director or
non-executive Chairman also may call additional meetings of the non-management directors as he deems necessary. If the
Board does not have a non-executive Chairman, the lead independent director serves as a liaison between the Chairman and
the non-management directors; advises the Chairman of the informational needs of the Board of Directors and approves
information sent to the Board of Directors; and is available for consultation and communication if requested by major
stockholders.
The Board of Directors also adheres to sound corporate governance practices, as reflected in the Company’s
corporate governance policies, which the Board of Directors believes has promoted, and continues to promote, the effective
and independent exercise of Board leadership for the Company and its stockholders.
Stockholder Communications
Our Board of Directors welcomes communications from our stockholders. Stockholders and other interested parties
may send communications to the Board of Directors, or the independent directors as a group, or to any director in particular,
including the lead independent director or Chairman, c/o Gregory S. Skinner, Chief Financial Officer, Landec Corporation,
3603 Haven Avenue, Menlo Park, CA 94025. Any correspondence addressed to the Board of Directors or to any one of our
directors in care of Mr. Skinner will be promptly forwarded to the addressee. The independent directors review and approve
the stockholder communication process periodically to ensure effective communication with stockholders.
Oversight of Risk Management
The Board of Directors’ role in the Company’s risk oversight process includes receiving regular reports from
members of senior management on areas of material risk to the Company, including operational, financial, legal and
regulatory, and strategic and reputational risks. Our Audit Committee oversees management of financial risk exposures,
including the integrity of our accounting and financial reporting processes and controls. As part of this responsibility, the
Audit Committee meets periodically with the Company’s independent registered public accounting firm, our internal auditor
and our financial and accounting personnel to discuss significant financial risk exposures and the steps management has taken
to monitor, control and report such exposures. Additionally, the Audit Committee reviews significant findings prepared by
the Company’s independent registered public accounting firm and our internal auditor, together with management’s response.
Our Nominating and Corporate Governance Committee has responsibility for matters relating to corporate governance. As
such, the charter for our Nominating and Corporate Governance Committee provides for the committee to periodically review
and discuss our corporate governance guidelines and policies.
Our management also reviewed with our Compensation Committee the compensation policies and practices of the
Company that could have a material impact on the Company. Our management review considered whether any of these
policies and practices may encourage inappropriate risk-taking, whether any policy or practice may give rise to risks that are
reasonably likely to have a material adverse effect on the Company, and whether it would recommend any changes to the
Company’s compensation policies and practices. Management also reviewed with the Board of Directors risk-mitigating
9
controls such as the degree of committee and senior management oversight of each compensation program and the level and
design of internal controls over such programs. Based on these reviews, the Board of Directors determined that risks arising
from the Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the
Company.
The Board of Directors has adopted an executive compensation clawback policy, which provides for recoupment of
executive incentive compensation in the event of certain restatements of financial results of the Company. Under the policy,
in the event of a substantial restatement of the Company’s financial results due to material noncompliance with financial
reporting requirements, if the Board of Directors determines in good faith that any portion of a current or former executive
officer’s incentive compensation was paid as a result of such noncompliance, then the Company may recover the portion of
such compensation that was based on the erroneous financial data.
Compensation of Directors
The following table sets forth compensation information for the fiscal year ended May 31, 2015, for each member
of our Board of Directors who was not an executive officer during fiscal year 2015. The Chief Executive Officer, Gary T.
Steele, who serves on our Board of Directors, does not receive additional compensation for serving on the Board of Directors.
See “Summary Compensation Table” for disclosure related to Mr. Steele.
Name
Albert D. Bolles, Ph.D. ........................................................ $
Fee Earned
or Paid in
Cash (1)
Stock
Awards (2)
Option
Awards
Total
45,000 $
100,000 $
— $
145,000
Frederick Frank ................................................................... $
57,500 $
100,000 $
— $
157,500
Steven Goldby ...................................................................... $
66,667 $
100,000 $
— $
166,667
Stephen Halprin (3) .............................................................. $
35,417 $
0 $
— $
35,417
Dean Hollis .......................................................................... $
55,000 $
70,832 $
— $
125,832
Tonia Pankopf ...................................................................... $
61,000 $
100,000 $
— $
161,000
Catherine A. Sohn, Pharma.D. ............................................. $
57,500 $
100,000 $
— $
157,500
Robert Tobin ....................................................................... $
52,500 $
100,000 $
— $
152,500
Nicholas Tompkins .............................................................. $
40,000 $
100,000 $
— $
140,000
(1) Includes amounts (if any) deferred pursuant to the Company's Nonqualified Deferred Compensation Plan, the terms
of which are described under “Nonqualified Deferred Compensation Plan” below.
(2) The amounts shown in the Stock Awards column do not reflect compensation actually received by a director. Instead,
the amounts shown are the aggregate grant date fair value, computed in accordance with Financial Accounting
Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Options (“ASC 718”), of
awards granted in fiscal year 2015. The stock award amounts for fiscal year 2015 include the value of two awards
granted in one fiscal year, the fiscal year 2014 award granted on May 29, 2014 and the fiscal year 2015 award granted
on May 28, 2015.
(3) Mr. Halprin retired from the Board at the end of his term as a Class 1 director on October 9, 2014.
At May 31, 2015, the aggregate number of stock awards and option awards outstanding was: Dr. Bolles – 3,475
shares; Mr. Frank – 23,475 shares; Mr. Goldby – 33,475 shares; Mr. Hollis – 26,448 shares; Ms. Pankopf – 13,475 shares;
Dr. Sohn – 13,475 shares; Mr. Tobin – 38,475 shares; and Mr. Tompkins – 28,475 shares.
For fiscal year 2015, each non-employee director received an annual retainer of $40,000 for service as a member of
our Board of Directors. In addition, each director who served on the Audit Committee received an annual retainer of $10,000,
with the Chairman of the Audit Committee receiving an annual retainer of $20,000. Each director who served on the
Compensation Committee received an annual retainer of $7,500, with the Chairman of the Compensation Committee
10
receiving an annual retainer of $15,000. Each director who served on the Nominating and Corporate Governance Committee
received an annual retainer of $5,000, with the Chairman of the Nominating and Corporate Governance Committee receiving
an annual retainer of $10,000. The lead independent director received an annual retainer of $25,000. Consistent with the
general industry trend toward fixed-value restricted stock unit (“RSU”) awards, each non-employee director receives an RSU
award each year with a face value of $50,000, based on the fair market value of the Company’s Common Stock on the date
of the grant, vesting on the first anniversary of the date of grant.
In addition to cash fees, each director is reimbursed for reasonable out-of-pocket expenses incurred by a director to
attend Board meetings, committee meetings or stockholder meetings in his or her capacity as a director.
Stock Ownership Requirement
The Board of Directors has determined that ownership of Landec Common Stock by officers and directors promotes
a focus on long-term growth and aligns the interests of the Company’s officers and directors with those of its stockholders.
As a result, the Board of Directors has adopted stock ownership guidelines stating that the Company’s non-employee directors
and its executive officers should maintain certain minimum ownership levels of Common Stock. Under these guidelines,
each non-employee director of the Company is expected to maintain ownership of Common Stock having a value of at least
three times the amount of the annual cash retainer paid to such non-employee director. For purposes of the guidelines, the
value of a share of Common Stock is measured as the greater of (i) the then current market price or (ii) the closing price of a
share of Common Stock on the date when the stock was acquired, or the vesting date in the case of RSUs.
Newly-elected directors have five years from the date they are elected to meet these guidelines. Directors who joined
the Board of Directors prior to May 31, 2015 have until May 31, 2020 to meet the guidelines. In the event a non-employee
director’s cash retainer increases, he or she will have two years from the date of the increase to acquire any additional shares
or RSUs needed to meet the guidelines. Until the required ownership level is reached, directors are required to retain 50% of
net shares acquired upon any future vesting of RSUs and/or exercise of stock options, after deducting shares used to pay any
applicable taxes and/or exercise price.
Required Vote
The election of each of the five (5) Class 2 director nominees requires the affirmative vote of the holders of a
majority of the shares of the Company’s Common Stock present at the Annual Meeting in person or by proxy and voted with
respect to such director. This means that in order for a director to be elected, the number of shares voted “FOR” a director
must exceed the number of votes cast against that director. As such, a “WITHHOLD” vote is effectively a vote against a
director.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF THE
NOMINEES LISTED ABOVE.
11
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed the firm of Ernst & Young LLP as the Company’s independent registered public
accounting firm to audit the financial statements of the Company for the fiscal year ending May 29, 2016, and recommends
that the stockholders vote for ratification of this appointment. In the event the stockholders do not ratify such appointment,
the Audit Committee may reconsider its selection. Ernst & Young LLP has audited the Company’s financial statements since
the fiscal year ending October 31, 1994. Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting with the opportunity to make a statement if they desire to do so, and are expected to be available to respond to
appropriate questions.
Fees Paid to Independent Registered Public Accounting Firm
The following table presents the aggregate fees billed to the Company for professional services rendered by Ernst
& Young LLP for the fiscal years ended May 31, 2015 and May 25, 2014.
Fee Category
Audit Fees ........................................................................................................... $
Fiscal Year 2015 Fiscal Year 2014
1,343,000
1,312,000 $
Audit-Related Fees(1) ..........................................................................................
Tax Fees ..............................................................................................................
13,000
—
All Other Fees .....................................................................................................
—
12,000
—
—
Total ..................................................................................................................... $
1,325,000 $
1,355,000
(1) Audit-related fees were for agreed upon procedures work performed by Ernst & Young LLP related to the
Company’s loans from General Electric Capital Corporation.
Audit Fees were for professional services rendered for the integrated audit of the Company’s annual financial
statements and internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, for
the review of the Company’s interim financial statements included in the Company’s Quarterly Reports on Form 10-Q, and
for assistance with and review of documents filed by the Company with the SEC.
Audit Committee Pre-Approval Policies
The Audit Committee pre-approves all audit and permissible non-audit services provided by the Company’s
independent registered public accounting firm. These services may include audit services, audit-related services, tax services
and other services. Any pre-approval is detailed as to the particular service or category of services and is generally subject to
a specific budget. The Company’s independent registered public accounting firm and management are required to periodically
report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm
in accordance with such pre-approval, and the fees for the services performed to date. The Audit Committee, or its designee,
may also pre-approve particular services on a case-by-case basis.
Required Vote
The ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public
accounting firm requires the affirmative vote of the holders of a majority of the shares of the Company’s Common Stock
present at the Annual Meeting in person or by proxy and voted on this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING MAY 29, 2016.
12
PROPOSAL NO. 3
NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION
The Compensation Discussion and Analysis beginning on page 20 of this Proxy Statement describes the Company’s
executive compensation program and the compensation decisions that the Compensation Committee and Board of Directors
made in fiscal year 2015 with respect to the compensation of our named executive officers. The Board of Directors is asking
stockholders to cast a non-binding, advisory vote FOR the following resolution:
“RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item
402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative
discussion, is hereby APPROVED on an advisory basis.”
We urge stockholders to read the Compensation Discussion and Analysis beginning on page 20 of this Proxy
Statement, as well as the Summary Compensation Table and related compensation tables, appearing on pages 27 through 30,
which provide detailed information on the Company’s compensation policies and practices.
As we describe in the Compensation Discussion and Analysis, our executive compensation program is designed to
attract, reward and retain talented officers and embodies a pay-for-performance philosophy that supports Landec’s business
strategy and aligns the interests of our executives with our stockholders. Specifically, executive compensation is allocated
among base salaries and short- and long-term incentive compensation. The base salaries are fixed in order to provide the
executives with a stable cash income, which allows them to focus on the Company’s strategies and objectives as a whole,
while the short- and long-term incentive compensation are designed to both reward the named executive officers based on
the Company’s overall performance and align the named executive officers’ interests with those of our stockholders. Our
annual cash incentive award program is intended to encourage our named executive officers to focus on specific short-term
goals important to our success. Our executive officers’ cash incentive awards are determined based on objective performance
criteria. The Company’s current practice is to grant our named executive officers both options and restricted stock units. This
mixture is designed to provide a balance between the goals of increasing the price of our Common Stock and aligning the
interests of our executive officers with those of our stockholders (as stock options only have value if the stock price increases
after the option is granted) and encouraging retention of our executive officers. Because grants are generally subject to vesting
schedules, they help ensure that executives always have significant value tied to long-term stock price performance.
For these reasons, the Board of Directors is asking stockholders to support this proposal. Although the vote we are
asking you to cast is non-binding, the Compensation Committee and the Board of Directors value the views of our
stockholders and will consider the outcome of the vote when determining future compensation arrangements for our named
executive officers.
At the 2014 annual meeting of stockholders, 97.9% of votes cast expressed support for our compensation policies
and practices, and we believe our program continues to be effective.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE ADVISORY
RESOLUTION ON EXECUTIVE COMPENSATION.
13
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information with respect to options and other equity awards under Landec’s equity
compensation plans as of May 31, 2015:
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights (1)
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights (2)
Number of
Securities Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding
Securities Reflected
in Column (a))
Plan Category
Equity compensation plans approved by security
holders ...............................................................
2,129,489 $
Total .....................................................................
2,129,489 $
11.19
11.19
881,143(3)
881,143
(1)
Includes options and restricted stock units outstanding under Landec’s equity compensation plans, as no stock warrants
or other rights were outstanding as of May 31, 2015.
(2) The weighted average exercise price of outstanding options, warrants and rights does not take restricted stock units into
account as restricted stock units have no purchase price.
(3) Represents shares remaining for issuance pursuant to the 2013 Stock Incentive Plan.
The 2013 Stock Incentive Plan
The 2013 Stock Incentive Plan (the “2013 Plan”), which was approved by stockholders, authorizes the grant of
equity awards, including stock options, restricted stock and restricted stock units to employees, including officers and
directors, outside consultants and non-employee directors of the Company. 2,000,000 shares are authorized to be issued under
this plan. The exercise price of stock options to be granted under the 2013 Plan will be the fair market value of the Company’s
Common Stock on the date the options are granted. Options to be granted under the 2013 Plan will generally be exercisable
upon vesting and will generally vest ratably over three years.
The 2009 Stock Incentive Plan
The 2009 Stock Incentive Plan (the “2009 Plan”), which was approved by stockholders and has been terminated,
authorized the grant of equity awards, including stock options, restricted stock and restricted stock units to employees,
including officers and directors, outside consultants and non-employee directors of the Company. 1,900,000 shares were
authorized to be issued under this plan. The exercise price of stock options granted under the 2009 Plan was the fair market
value of the Company’s Common Stock on the date the options were granted. Options granted under the 2009 Plan were
exercisable upon vesting and generally vested ratably over three years. No further awards will be made pursuant to the 2009
Plan.
The 2005 Stock Incentive Plan
The 2005 Stock Incentive Plan, which was approved by stockholders and has been terminated, authorized the grant
of equity awards, including stock options, restricted stock units and restricted stock to employees, including officers and
directors, outside consultants and non-employee directors of the Company. 861,038 shares were authorized to be issued under
this plan. The exercise price of stock options granted under this plan was the fair market value of the Company’s Common
Stock on the date the options were granted. Options generally were exercisable upon vesting and generally vested ratably
over three years. No further awards will be made pursuant to this plan.
14
AUDIT COMMITTEE REPORT
The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or
subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to
the extent that the Company specifically incorporates it by reference into a document filed under the Securities Act of 1933,
as amended (the “Securities Act”), or the Exchange Act.
Composition
The Audit Committee of the Board of Directors consists of the three directors whose names appear below and
operates under a written charter adopted by the Board of Directors. Each member of the Audit Committee meets the
independence and financial experience requirements of NASDAQ and the SEC currently in effect. In addition, the Board of
Directors has determined that Mr. Goldby and Ms. Pankopf are audit committee financial experts, as defined by the rules and
regulations of the SEC.
Responsibilities
The responsibilities of the Audit Committee include appointing an independent registered public accounting firm
and assisting the Board of Director’s oversight of the preparation of the Company’s financial statements. The independent
registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial
statements in accordance with generally accepted auditing standards and for issuing a report thereon. Management is
responsible for the Company’s internal controls and financial reporting process. The Audit Committee’s responsibility is to
oversee these processes and the Company’s internal controls. The Audit Committee members are not acting as professional
accountants or auditors, and their functions are not to duplicate or to certify the activities of management and the independent
registered public accounting firm.
Review with Management and Independent Auditors
The Audit Committee held four meetings during fiscal year 2015. The Audit Committee met and held discussions
with management and representatives of the Company’s independent registered public accounting firm, Ernst & Young LLP.
Management represented to the Audit Committee that the Company’s consolidated financial statements for the fiscal year
ended May 31, 2015 were prepared in accordance with generally accepted accounting principles, and the Audit Committee
has reviewed and discussed the consolidated financial statements for the fiscal year ended May 31, 2015 with management
and the Company’s independent registered public accounting firm.
The Audit Committee met with the Company’s independent registered public accounting firm, with and without
management present, to discuss the overall scope and plans for their audit, the results of their examination, their evaluation
of the Company’s internal controls and the overall quality of the Company’s financial reporting. The Audit Committee
discussed with the independent registered public accounting firm matters required to be discussed by Statement on Auditing
Standards (“SAS”) No. 114, The Auditor’s Communication with Those Charged with Governance, as adopted by the Public
Company Accounting Oversight Board (“PCAOB”) in Rule 3200T, which supersedes SAS No. 61, as amended, including
the judgment of the independent registered public accounting firm as to the quality of the Company’s accounting principles.
The Audit Committee has received the written disclosures and the letter from Ernst & Young LLP required by the
PCAOB regarding the independent accountants’ communications with the Audit Committee concerning independence, and
has discussed with Ernst & Young LLP its independence.
Summary
Based upon the Audit Committee’s discussions with management and the Company’s independent registered
public accounting firm, the Audit Committee’s review of the representations of management and the report of the
independent registered public accounting firm to the Audit Committee, the Audit Committee recommended to the Board
of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-
K for the fiscal year ended May 31, 2015, as filed with the SEC.
This report is submitted by the Audit Committee.
Tonia Pankopf (Chairperson)
Steven Goldby
Catherine A. Sohn, Pharma.D.
15
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with regard to each named executive officer and each current executive
officer of the Company. Ages are as of August 17, 2015.
Gary T. Steele (age 66) has been President, Chief Executive Officer and a director of the Company since 1991 and
Chairman of the Board of Directors since January 1996. Mr. Steele will retire from these positions as of the date of the Annual
Meeting, but will continue to serve as a director of the Company. Mr. Steele has over 30 years of experience in the
biotechnology, instrumentation and material science fields. From 1985 to 1991, Mr. Steele was President and Chief Executive
Officer of Molecular Devices Corporation, a bioanalytical instrumentation company. From 1981 to 1985, Mr. Steele was
Vice President, Product Development and Business Development at Genentech, Inc., a biomedical company focusing on
pharmaceutical drug development. Mr. Steele has also worked with McKinsey & Company and Shell Oil Company.
Gregory S. Skinner (age 54) has been Chief Financial Officer and Vice President of Finance of the Company since
November 1999 and Vice President of Administration since November 2000. From May 1996 to October 1999, Mr. Skinner
served as Controller of the Company. From 1994 to 1996, Mr. Skinner was Controller of DNA Plant Technology and from
1988 to 1994 he was with Litton Electron Devices. Prior to joining Litton Electron Devices, Mr. Skinner was with Litton
Industries, Inc. and Arthur Anderson & Company.
Molly A. Hemmeter (age 48) has been elected to serve as the Company’s President and Chief Executive Officer
effective as of the date of the Annual Meeting. She has served as Chief Operating Officer of the Company since January
2014. Prior to that she served as Chief Commercial Officer of the Company from December 2010 to January 2014 and Vice
President, Business Development and Global Marketing of the Company from June 2009 to December 2010. From July 2006
until joining the Company in June 2009, Ms. Hemmeter was Vice President of Global Marketing and New Business
Development for the Performance Materials division of Ashland, Inc., a global specialty chemicals company. Prior to joining
Ashland, Inc., Ms. Hemmeter was Vice President of Strategy and Marketing for Siterra Corporation in San Francisco, a
privately held company delivering on-demand software for managing real estate asset portfolios.
Ronald L. Midyett (age 49) has been elected to serve as the Company’s Chief Operating Officer effective as of the
date of the Annual Meeting. He has served as President and Chief Executive Officer of Apio since January 2008, and a Vice
President of the Company since February 2008. Mr. Midyett joined Apio in May 2005 as Chief Operating Officer. Prior to
joining Apio, Mr. Midyett was Senior Vice President of Operations for Dole Fresh Vegetables. Mr. Midyett has over 20 years
of technology and operations experience in the produce industry. Mr. Midyett was chairman of the board of directors of the
United Fresh Fruit and Vegetable Association from April 2013 through April 2014 and is currently a member of its executive
committee. Mr. Midyett is currently a director of Windset Holdings 2010 Ltd., a privately held Canadian corporation.
Larry D. Hiebert (age 59) has been President of Lifecore and a Vice President of the Company since June 2013. Mr.
Hiebert served as Lifecore’s Vice President and General Manager from July 2006 to June 2013. Prior to that he was Lifecore’s
Vice President of Operations from March 2004 to June 2006 and Director of Operations from March 1997 to March 2004,
and held various Manufacturing and Materials Management positions within Lifecore from October 1983 to March 1997.
Mr. Hiebert has over 30 years of operational experience in the biomaterials industry.
Steven P. Bitler, Ph.D. (age 57) has been Vice President, Corporate Technology of the Company since March 2002.
From 1988 until March 2002, Dr. Bitler held various positions with the Company related to the Company’s polymer product
development and thermal switch products. Prior to joining the Company, Dr. Bitler developed new high strength polymeric
materials at SRI International.
16
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company’s Common Stock as of August 17, 2015 as
to (i) each person who is known by the Company to beneficially own more than five percent of any class of the Company’s
voting stock, (ii) each of the Company’s directors, (iii) each of the executive officers named in the Summary Compensation
Table of this proxy statement (the “Named Executive Officers”), and (iv) all directors and executive officers as a group. The
business address of each director and executive officer named below is c/o Landec Corporation, 3603 Haven Avenue, Menlo
Park, CA 94025.
Shares Beneficially Owned (1)
Number of Shares
of Common Stock
Percent of Total (2)
2,650,000 (3)
9.81%
2,272,648 (4)
8.41%
1,742,075 (5)
6.45%
1,539,220 (6)
5.70%
1,441,871 (7)
5.34%
221,342 (8)
*
359,776 (9)
1.33%
98,332 (10)
131,854 (11)
25,301 (12)
*
*
*
Name
5% Stockholders
Wynnefield Capital, Inc ............................................................
450 Seventh Ave, #509
New York, NY 10123
Dimensional Fund Advisors, L.P. .............................................
6300 Bee Cave Road, Building One
Austin, TX 78746
BlackRock, Inc ..........................................................................
40 E. 52nd Street
New York, NY 10022
NWQ Investment Management Company, LLC .......................
2049 Century Park East, 16th Floor
Los Angeles, CA 90067
Ariel Investments LLC ..............................................................
200 E. Randolph Street, Suite 2700
Chicago, IL 60601
Executive Officers and Directors
Gary T. Steele ...........................................................................
President and Chief Executive Officer and Chairman of the
Board of Directors
Gregory S. Skinner ....................................................................
Chief Financial Officer and Vice President of Finance &
Administration
Molly A. Hemmeter ..................................................................
Chief Operating Officer
Ronald L. Midyett .....................................................................
President and Chief Executive Officer of Apio, Inc and Vice
President of Landec
Larry D. Hiebert ........................................................................
President of Lifecore Biomedical, Inc. and Vice President of
Landec
17
Name
Shares Beneficially Owned (1)
Number of Shares
of Common Stock
Percent of Total (2)
Albert D. Bolles, Ph.D., Director .....................................................
4,219
Frederick Frank, Director .................................................................
66,162 (13)
Steven Goldby, Director ...................................................................
47,716 (14)
Dean Hollis, Director .......................................................................
41,049 (15)
Tonia Pankopf, Director ...................................................................
15,143 (16)
Catherine A. Sohn, Pharma.D., Director ..........................................
17,437 (17)
Robert Tobin, Director .....................................................................
56,227 (18)
Nicholas Tompkins, Director ...........................................................
47,238 (19)
*
*
*
*
*
*
*
*
All directors and executive officers as a group (14 persons) ............
1,232,795 (20)
4.47%
* Less than 1%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to all shares of capital stock.
As of August 17, 2015, 27,010,381 shares of Common Stock were issued and outstanding. Percentages are
calculated with respect to a holder of options exercisable within 60 days after August 17, 2015 as if such holder
had exercised his options. Option shares held by other holders are not included in the percentage calculation with
respect to any other holder.
This information is based on a Form 13F filed by Wynnefield Capital, Inc with the SEC showing such beneficial
owner’s holdings as of June 30, 2015.
This information is based on a Form 13F filed by Dimensional Fund Advisors LP with the SEC showing such
beneficial owner’s holdings as of June 30, 2015.
This information is based on a Form 13F filed by the five institutions with the SEC: BlackRock Institutional Trust
Company, N.A.; BlackRock Fund Advisors; BlackRock Advisors, LLC; BlackRock Investment Management,
LLC; and BlackRock Asset Management Canada Limited under the parent company BlackRock, Inc showing its
holdings as of June 30, 2015.
This information is based on a Form 13F filed by NWQ Investment Management Company, LLC with the SEC
showing such beneficial owner’s holdings as of June 30, 2015.
This information is based on a Form 13F filed by Ariel Investments, LLC with the SEC showing such beneficial
owner’s holdings as of June 30, 2015.
This number includes 67,176 shares held in trust of which Mr. Steele is a beneficial owner. This number also
includes 154,166 shares subject to outstanding stock options exercisable within 60 days after August 17, 2015.
This number includes 125,833 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
(10)
This number includes 98,332 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
18
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
This number includes 26,666 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
This number includes 19,000 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
This number includes 20,000 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
This number includes 30,000 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
This number includes 25,000 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
This number includes 6,389 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
This number includes 9,722 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
This number includes 30,000 shares subject to outstanding stock options exercisable within 60 days after August
17, 2015.
(19)
This number includes 47,238 shares held in trust of which Mr. Tompkins is a beneficial owner.
(20)
This number includes an aggregate of 595,662 shares held by officers and directors that are subject to outstanding
stock options exercisable within 60 days after August 17, 2015.
19
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Compensation Discussion and Analysis
This Compensation Discussion and Analysis (“CD&A”) section discusses the compensation programs and policies
for our Named Executive Officers. The CD&A also provides an overview of the Compensation Committee’s role in the
design and administration of these programs and policies, and its role in making specific compensation decisions for our
Named Executive Officers. Our Named Executive Officers for fiscal year 2015 were Gary T. Steele, President and Chief
Executive Officer and Chairman of the Board, Gregory S. Skinner, Vice President of Finance and Administration and Chief
Financial Officer, Molly A. Hemmeter, Chief Operating Officer, Ronald L. Midyett, President and Chief Executive Officer
of Apio and Larry D. Hiebert, President of Lifecore.
Overview of Compensation Program and Philosophy
Landec’s compensation program is intended to meet three principal objectives: (1) attract, reward and retain officers
and other key employees; (2) motivate these individuals to achieve the Company’s short-term and long-term corporate goals;
and (3) align the interests of our executives with those of our stockholders.
The compensation program is designed to balance an executive’s achievements in managing the day-to-day business
and addressing shorter-term challenges facing the Company or its subsidiaries, such as the effects of weather-related
disruptions and competitive pressures, with incentives to achieve our long-term vision to be the innovative leader in our food
products technology and hyaluronan-based biomaterials businesses.
The above policies guide the Compensation Committee (the “Committee”) in assessing the proper allocation among
long-term compensation, current cash compensation and short-term bonus compensation. Other considerations include
Landec’s business objectives, its fiduciary and corporate responsibilities (including internal equity considerations and
affordability), competitive practices and trends, and regulatory requirements.
Establishing Executive Compensation
Landec’s executive compensation program is overseen and administered by the Committee, which is comprised
entirely of independent directors as determined in accordance with applicable NASDAQ, SEC and Internal Revenue Code
rules. The Committee operates under a written charter adopted by our Board of Directors. A copy of the Committee’s charter
is available at www.landec.com.
In determining the particular elements of compensation that are used to implement Landec’s overall compensation
policies, the Committee takes into consideration a number of objective factors related to Landec’s performance, such as
Landec’s earnings per share, profitability, revenue growth and business-unit-specific operational and financial performance,
as well as the competitive practices among our peer group. The Committee evaluates the Company’s financial and strategic
performance in the context of determining compensation as well as the individual performance of each Named Executive
Officer.
The Committee meets regularly to review overall executive compensation. The Committee also meets with Landec’s
President and Chief Executive Officer, Mr. Steele, and other executives to obtain recommendations with respect to Company
compensation programs, practices and packages for executives and other employees. The CEO makes recommendations to
the Committee on the base salary, bonus targets and equity compensation for the executive team and other employees, but
not for himself. The Committee, however, has the ultimate responsibility for determining executive compensation, which is
recommended to the Board of Directors for its final approval.
Peer Group
The Committee uses peer group information to provide context for its compensation decision-making for the Named
Executive Officers. The Committee monitors the peer group to assess its appropriateness as a source of competitive
compensation data and reassesses the relevance of the peer group as needed. In an effort to more accurately reflect the
significant portion of the Company’s business attributable to Apio’s operations, the peer group was adjusted and simplified
in 2014, to allow for comparisons on how these peers address the volatility and unpredictability of financial results as well
as to assess competitive pay levels in the food and life sciences industries. The Committee did not revise its peer group for
fiscal year 2015, which remains as follows: Anika Therapeutics, Balchem, Calavo Growers, Cal-Maine Foods, Diamond
20
Foods, Farmer Bros., Hi-Tech Pharmacal, J&J Snack Foods, John B Sanfilippo & Sons, Limoneira, Nature’s Sunshine
Products, Omega Protein, Penford, Seneca, and Surmodics.
Peer group data is gathered with respect to base salary, bonus targets and all equity and non-equity awards (including
stock options, performance shares, restricted stock and long-term, cash-based awards).
Landec’s goal is to target total compensation for Named Executive Officers at a level that is competitive with the
50th percentile within the selected peer group for the Named Executive Officers. The Committee analyzes base pay, target
cash compensation and target total direct compensation to determine if there are any variances between the peer group and
the Company’s compensation targets.
Clawback Policy
In May 2014, the Board of Directors adopted an executive compensation clawback policy, which provides for
recoupment of executive incentive compensation in the event of certain restatements of financial results of the Company.
Under the policy, in the event of a substantial restatement of the Company’s financial results due to material noncompliance
with financial reporting requirements, if the Board of Directors determines in good faith that any portion of a current or
former executive officer’s incentive compensation was paid as a result of such noncompliance, then the Company may
recover that portion of such compensation that was based on the erroneous financial data. In determining whether to seek
recovery of compensation, the Board of Directors or the Committee may take into account any considerations it deems
appropriate, including whether the assertion of a claim may violate applicable law or adversely impact the interests of the
Company in any related proceeding or investigation, the extent to which the executive officer was responsible for the error
that resulted in the restatement, and the cost and likely outcome of any potential litigation in connection with the Company’s
attempts to recoup such compensation.
Elements of Compensation
There are three major elements that comprise Landec’s compensation program: (i) base salary; (ii) annual cash
incentive opportunities, including bonuses; and (iii) equity incentives in the form of stock options and/or restricted stock unit
awards.
Base Salaries
The base salaries of executive officers are set at levels intended to be competitive with those companies in our peer
groups with which we compete for executive talent. In determining base salary, the Committee also considers factors such as
job performance, skill set, prior experience, the executive’s time in his or her position and with Landec, internal consistency
regarding pay levels for similar positions or skill levels within the Company, external pressures to attract and retain talent,
and market conditions generally.
Base salaries are not adjusted annually but are generally adjusted when the Committee judges that a change is
warranted by a change in an executive officer’s responsibilities, demonstrated performance or relevant market data. For a
discussion of base salary decisions made in or for fiscal year 2015, see “Compensation of Chief Executive Officer” and
“Compensation of Other Named Executive Officers” below.
Annual Cash Incentive Award Plan
Landec maintains an annual cash incentive award plan for senior executives to encourage and reward achievement
of Landec’s business goals and to assist Landec in attracting and retaining executives by offering an opportunity to earn a
competitive level of compensation. This plan is consistent with our overall “pay-for-performance” compensation objective
and our goal of attracting and retaining top level executive officers in the industry. In keeping with our “pay for performance”
philosophy, a portion of our Named Executive Officers’ annual compensation is “at risk” compensation, resulting in years,
such as fiscal year 2014, in which most of our Named Executive Officers received no annual cash incentive award. Award
targets are set as a percentage of base salary. Incentive award targets and ranges are typically set early in each fiscal year,
together with specific criteria for corporate, business unit and individual objectives. The overall corporate objectives are
intended to be challenging but achievable. Such objectives are based on actual performance compared to predetermined
financial performance targets, which are weighted depending upon whether the employee is a member of a business unit or
the corporate staff. Incentive award targets and criteria for executive officers are subject to approval by the Committee.
21
Fiscal Year 2015 Cash Incentive Award Plan
At the beginning of fiscal year 2015, the Committee approved the cash incentive award plan for the year (the “2015
Incentive Award Plan”), which included financial objectives for each business unit and at the corporate level on a
consolidated basis. The financial objectives were based on the internally-developed financial plan for the fiscal year. In fiscal
year 2015, the Company’s financial performance was measured based on established targets for revenues and operating
income. With respect to 80% of the award payable to each Named Executive Officer under the 2015 Incentive Award Plan,
a specific operating income target had to be met in order for the officer to earn that portion of the award. Payment of the
remaining 20% of the award payable to each Named Executive Officer was subject to the condition that management present
an operating plan for fiscal year 2016 in which the Company would achieve a specific target for net earnings per share, and
that such operating plan be approved by the Board of Directors. For fiscal year 2015, the CEO’s target cash incentive award
was 100% of his base salary, and the other Named Executive Officers’ target incentive awards ranged from 50% to 60% of
base salary.
For Messrs. Steele and Skinner (the “Corporate Executives”), the award target for fiscal year 2015 was based on
the Company’s annual consolidated financial results, and consisted of targets for the Company’s consolidated revenues of
$520.6 million and consolidated operating income of $21.0 million. For Mr. Midyett and Ms. Hemmeter, the award target
was based on Apio’s annual financial results, and consisted of targets for Apio’s revenues of $472.7 million and operating
income of $21.4 million. For Mr. Hiebert, the award target was based on Lifecore’s annual financial results, and consisted of
targets for Lifecore’s revenues of $47.4 million and operating income of $10.5 million.
Based on the metrics described above, the Named Executive Officers’ target incentive awards, maximum awards
and actual amounts earned for fiscal year 2015 were as follows:
Named Executive Officer
Gary T. Steele................................................................................. $
Gregory S. Skinner ......................................................................... $
Molly A. Hemmeter ....................................................................... $
Ronald L. Midyett .......................................................................... $
Larry D. Hiebert ............................................................................. $
Long-Term Incentive Compensation
Target
Incentive
Awards
Maximum
Incentive
Awards
Earned
Incentive
Awards
500,000 $
195,000 $
172,500 $
170,000 $
150,000 $
500,000 $
325,000 $
345,000 $
340,000 $
300,000 $
399,569
155,832
195,079
192,246
30,000
Landec provides long-term incentive compensation through equity-based awards, generally in the form of stock
options and restricted stock units (also referred to as “restricted stock units,” “RSUs” or “stock awards”) under a broad-
based equity award program (“Equity Award Plan”). Landec’s Equity Award Plan is intended to align the interests of officers
with those of the stockholders by creating an incentive for officers to maximize long-term stockholder value. The Equity
Award Plan also is designed to encourage officers to remain employed with Landec despite a competitive labor market in its
industry.
Awards to eligible employees, including Named Executive Officers, are generally made on an annual basis. Awards
must be approved by the Committee or the Board of Directors. Awards typically take the form of stock options and RSUs,
and are generally granted with a three-year vesting schedule. In general, the number of options/RSUs awarded to each
executive officer is determined subjectively based on a number of factors, including an analysis of peer group data, the
officer’s degree of responsibility, general level of performance, ability to affect future Company performance, salary level
and recent noteworthy achievements, as well as prior years’ awards. All stock option grants have a per share exercise price
equal to the fair market value of Landec Common Stock on the grant date. The Committee has not granted, nor does it intend
in the future to grant, equity compensation awards to executives in anticipation of the release of material nonpublic
information that is likely to result in changes to the price of Landec Common Stock, such as a significant positive or negative
earnings announcement. Similarly, the Committee has not timed and does not intend to time the release of material nonpublic
information based on equity award grant dates. Also, because equity compensation awards typically vest over a three-year
period, the value to recipients of any immediate increase in the price of Landec’s stock following a grant will be attenuated.
The Committee regularly monitors the environment in which Landec operates and makes changes to the Equity
Award Plan and the overall annual compensation paid to executives in order to help the Company meet its goals, including
achieving long-term stockholder value. The Company has granted both stock options and RSUs as part of the Equity Award
Plan. Landec grants stock options because they can be an effective tool for meeting Landec’s compensation goal of increasing
22
long-term stockholder value. Employees are able to profit from stock options only if Landec’s stock price increases in value
over the stock option’s exercise price. Landec believes that the options it grants provide effective incentives to option holders
to achieve increases in the value of Landec’s stock. Landec grants RSUs because they provide a more predictable value to
employees than stock options, and therefore are efficient tools in retaining and motivating employees, while also serving as
an incentive to increase the value of Landec’s stock. RSUs also can be a more efficient means of using equity plan share
reserves because fewer RSUs are needed to provide a retention and incentive value as compared to awards of stock options.
During fiscal year 2015, the Committee granted awards under the Equity Award Plan to executive officers, including
our Named Executive Officers, as noted below under “Grants of Plan-Based Awards”. In making this determination, the
Committee considered prior awards made to our Named Executive Officers and the value of such holdings as well as the
overall compensation package paid to our executive officers for fiscal year 2015. These awards are reflected in compensation
paid to our Named Executive Officers for fiscal year 2015.
Stock Ownership Requirement
The Board of Directors has determined that ownership of Landec Common Stock by officers and directors promotes
a focus on long-term growth and aligns the interests of the Company’s officers and directors with those of its stockholders.
As a result, the Board of Directors has adopted stock ownership guidelines stating that the Company’s non-employee directors
and its executive officers should maintain certain minimum ownership levels of Common Stock. Under these guidelines, the
Company’s Chief Executive Officer is expected to maintain ownership of Common Stock having a value of at least five times
his or her annual base salary, and the Company’s other executive officers are expected to maintain ownership of Common
Stock having a value of at least three times their base salaries. For purposes of the guidelines, the value of a share of Common
Stock is measured as the greater of (i) the then current market price or (ii) the closing price of a share of Common Stock on
the date when the stock was acquired, or the vesting date in the case of RSUs.
Newly-appointed executive officers have five years from the date they are appointed or promoted to meet these
guidelines. Persons who became executive officers prior to May 31, 2015 have until May 31, 2020 to meet the guidelines. In
the event of an increase in base salary, the executive officer will have two years from the date of the increase to acquire any
additional shares or RSUs needed to meet the guidelines. Until the required ownership level is reached, executive officers
are required to retain 50% of net shares acquired upon any future vesting of RSUs and/or exercise of stock options, after
deducting shares used to pay any applicable taxes and/or exercise price.
Long-Term Incentive Plan
On July 25, 2013, the Board of Directors approved a long-term incentive plan (“LTIP”) under which certain
employees (“Participating Employees”) of the Company selected by the Committee, including the Company’s Named
Executive Officers, were eligible to receive bonuses based on the Company’s aggregate operating income, excluding non-
recurring events and future acquisitions (“Adjusted Operating Income”) for fiscal years 2014, 2015 and 2016. If the
aggregate Adjusted Operating Income for those fiscal years met a specified target amount, each Participating Employee
would receive a bonus equal to the average of his or her annual base salary during those fiscal years or such shorter period
of time as such Participating Employee was receiving a base salary (the “Target Bonus”). If the aggregate Adjusted
Operating Income for fiscal years 2014, 2015 and 2016 exceeds the target amount, then a sum equal to 15% of the excess
would be added to the bonus pool and distributed to the Participating Employees pro rata based on the Target Bonus payable
to each of them, subject to his or her continuing as an employee or director of the Company through the last day of fiscal year
2016. During fiscal year 2015, the Company determined that it was unlikely that the three-year Adjusted Operating Income
target would be met, and therefore, all LTIP bonus accruals were reversed during fiscal year 2015.
Nonqualified Deferred Compensation Plan
On July 25, 2013, the Board approved the Nonqualified Deferred Compensation Plan (the “Deferral Plan”) for non-
employee directors and certain participating employees, including the Named Executive Officers. The Deferral Plan is
administered by a committee consisting of the Chief Executive Officer and the Chief Financial Officer of the Company or
persons designated by them. The Deferral Plan allows non-employee directors to defer up to 100% of the fees earned for
their service as director and allows participating employees to defer up to 50% of their base salary and up to 100% of their
annual cash bonus. Any amounts deferred by a participating employee are invested on behalf of the participating employee,
and any investment returns earned thereon are credited to the participating employee’s account. Investment options are
determined by the committee that administers the Deferral Plan. Each participating employee may designate the investment
option or options for his or her account and may change those investment options at any time.
23
A participating employee may elect to receive distributions from his or her account beginning in a specified payment
year no sooner than three years after the calendar year to which the deferred compensation relates, to be paid in a lump sum
or in annual installments not to exceed ten years, according to the participating employee’s election. This election is made at
the time when the participating employee makes an election to defer compensation. The participating employee may
subsequently elect to delay the year in which deferred compensation is paid, provided that such election must be made at
least 12 months before the year in which payment was previously scheduled to occur, must specify a new payment year that
is at least five years after the year in which payment was to be made and will not take effect for 12 months. A participating
employee will also receive distributions upon the occurrence of certain events specified in Deferral Plan, including
termination of employment.
The Company has the discretion, but not the obligation, to make contributions to the Deferral Plan for the benefit of
the participating employees, subject to the terms and conditions of the Deferral Plan.
Retirement Benefits under the 401(k) Plan, Executive Perquisites and Generally Available Benefit Programs
Landec maintains a tax-qualified 401(k) plan (the “401(k) Plan”), which provides for broad-based employee
participation. Under the 401(k) Plan, all Landec employees are eligible to receive matching contributions from Landec. The
401(k) Plan is a safe harbor plan (as defined in the Internal Revenue Code of 1986) with a safe harbor match of 100% on the
first 3% of deferrals and 50% on the next 2% of each participant’s pretax contributions; and the match is calculated and paid
to participants’ accounts on a payroll-by-payroll basis, subject to applicable federal limits. The 401(k) Plan does not have an
associated vesting schedule. Landec also makes an annual “reconciling match” by recalculating the regular matching
contribution as if it were paid on an annualized, instead of payroll-by-payroll, basis. If the annualized matching contribution
would have been higher, Landec makes a contribution to the participant’s account in an amount equal to the difference
between the two amounts. Other than the 401(k) Plan, Landec does not provide defined benefit pension plans or defined
contribution retirement plans to its executives or other employees.
Landec also offers a number of other benefits to the Named Executive Officers pursuant to benefit programs that
provide for broad-based employee participation. These benefit programs include medical, dental and vision insurance, long-
term and short-term disability insurance, life and accidental death and dismemberment insurance, health and dependent care
flexible spending accounts, wellness programs, educational assistance and certain other benefits.
The 401(k) Plan and other generally available benefit programs allow Landec to remain competitive with respect to
employee talent, and Landec believes that the availability of the benefit programs generally enhances employee productivity
and loyalty to Landec. The main objectives of Landec’s benefit programs are to give our employees access to quality
healthcare, financial protection from unforeseen events, assistance in achieving retirement financial goals and enhanced
health and productivity. These generally available benefits typically do not specifically factor into decisions regarding an
individual executive’s total compensation or equity award package.
Compensation of Chief Executive Officer
On June 19, 2014, the Company entered into a new executive employment agreement with Mr. Steele, (the “Steele
Agreement”), effective as of May 26, 2014, setting forth the terms of his employment. The Steele Agreement expires on
May 29, 2016 unless renewed or extended by both parties, and provides that Mr. Steele shall be paid an annual base salary
of $500,000 through the term of the Steele Agreement, and continues to participate in the annual cash incentive award
plan. Mr. Steele is also eligible for grants of equity interests under the Equity Award Plan at such times and in such amounts
as determined by the Committee. See the section entitled “Employment Contracts and Potential Payments upon Termination
or Change in Control” for a further discussion of the terms of the Steele Agreement. Mr. Steele is retiring as President,
Chairman of the Board and Chief Executive Officer, effective on the date of the Annual Meeting.
On July 23, 2015, the Board of Directors elected Molly Hemmeter to replace Mr. Steele as President and Chief
Executive Officer, effective on the date of the Annual Meeting. Upon the effectiveness of her election, Ms. Hemmeter’s
annual base salary will be increased to $475,000, and her target bonus under the 2015 Incentive Award Plan will be increased
to 100% of base salary.
In making decisions with respect to Mr. Steele’s salary, target bonus and equity compensation grant, the Committee
relied on the peer group data described above and gave considerable weight to the Chief Executive Officer’s significant and
direct influence over Landec’s overall performance. In determining Ms. Hemmeter’s salary and target bonus when she
becomes Chief Executive Officer, the Committee also relied on the peer group data described above and considered Ms.
24
Hemmeter’s accomplishments as Chief Operating Officer and her expected influence of the Company’s future performance.
The Committee also considered the overall compensation policies discussed above.
As discussed above under “Annual Cash Incentive Award Plan,” Landec’s actual financial performance for fiscal
year 2015 resulted in an incentive award payment to Mr. Steele under the 2015 Incentive Award Plan equal to $399,569. As
noted below under “Grants of Plan-Based Awards”, during fiscal year 2015, the Committee granted Mr. Steele an option to
purchase 60,000 shares of Common Stock and 20,000 RSUs. Mr. Steele’s total compensation for fiscal year 2015 was below
the 50th percentile of companies described above under “Peer Group.”
Compensation of Other Named Executive Officers
On December 7, 2012, the Company entered into an executive employment agreement with Mr. Skinner (the
“Skinner Agreement”), effective as of January 1, 2013, setting forth the terms of his employment. The Skinner Agreement
expires on December 31, 2015 unless renewed or extended by both parties, and provides that Mr. Skinner shall be paid an
annual base salary of $310,000 through the term of the Skinner Agreement (Mr. Skinner’s base salary was recently increased
by the Compensation Committee to $380,000 commencing in fiscal year 2016), and continue to participate in the annual cash
incentive award plan. Mr. Skinner is also eligible for grants of equity interests under the Equity Award Plan at such times
and in such amounts as determined by the Committee. See the section entitled “Employment Contracts and Potential
Payments upon Termination or Change in Control” for a further discussion of the terms of the Skinner Agreement.
In making decisions with respect to base salary for Named Executive Officers other than the CEO, the Committee
reviews peer group data as described above and takes into account the date of the most recent adjustment in the base pay of
each Named Executive Officer.
As indicated above under “Annual Cash Incentive Award Plan,” each of the Named Executive Officers, other than
Larry Hiebert, received cash awards under the 2015 Incentive Award Plan as a result of the financial performance of the
Company and Apio, which exceeded the target approved by the Committee at the beginning of fiscal year 2015, and each of
the Named Executive Officers received cash awards under the 2015 Incentive Award Plan as a result of meeting the 2016
operating plan targets. As noted below under “Grants of Plan-Based Awards”, the Committee granted equity awards to the
Named Executive Officers under the Equity Award Plan in fiscal year 2015. The total compensation received by each Named
Executive Officer during fiscal year 2015 was below the 50th percentile for his or her peer group as described above under
“Peer Group.”
Say on Pay Voting Results
At the 2014 annual meeting of stockholders, the Company asked stockholders to cast a non-binding advisory vote
to approve the compensation of the Named Executive Officers as disclosed in the 2014 proxy statement. The holders of
97.9% of the shares present and voting at the 2014 annual meeting of stockholders voted for approval of the compensation
of our Named Executive Officers. The Company is pleased with this result and believes that stockholders confirmed our
executive compensation philosophy, policies and programs. The Committee took these results into account by continuing to
emphasize our pay-for-performance philosophy which utilizes performance measures that provide incentives to deliver value
to our stockholders.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction to public
companies for certain compensation in excess of $1 million paid to a company’s executive officers. Certain compensation,
including qualified performance-based compensation, will not be subject to the deduction limit if specified requirements are
met. The Committee reviews the potential effect of Section 162(m) periodically and may seek to structure the long-term
incentive compensation granted to Named Executive Officers in a manner that is intended to avoid disallowance of deductions
under Section 162(m). Nevertheless, there can be no assurance that compensation attributable to long-term incentive awards
will be treated as qualified performance-based compensation under Section 162(m). In addition, the Committee reserves the
right to authorize compensation payments that may be in excess of the limit when the Committee believes such payments are
appropriate and in the best interest of Landec and its stockholders, after taking into consideration changing business
conditions and the performance of its employees.
25
Compensation Committee Interlocks and Insider Participation
The Committee is composed of Mr. Hollis (Chairman), Dr. Sohn, Mr. Frank and Mr. Tobin. During fiscal year 2015,
none of the Company’s executive officers served on the board of directors of any entities whose directors or officers serve
on the Committee. None of the Committee’s current or former members has at any time been an officer or employee of
Landec. None of Landec’s executive officers currently serve, or in the past fiscal year have served, as members of the board
of directors or compensation committee of any entity that has one or more of its executive officers serving on Landec’s Board
of Directors or the Committee.
Compensation Committee Report
The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or
subject to the liabilities of Section 18 of the Exchange Act, except to the extent that Landec specifically incorporates it by
reference into a document filed under the Securities Act or the Exchange Act.
The Committee has reviewed and discussed with management the Compensation Discussion and Analysis for fiscal
year 2015. Based on the review and discussions, the Committee recommended to the Board of Directors, and the Board of
Directors has approved, that the Compensation Discussion and Analysis be included in Landec’s Proxy Statement for its
2015 Annual Meeting of Stockholders and incorporated into our Annual Report on Form 10-K for the fiscal year ended May
31, 2015.
This report is submitted by the Committee.
Dean Hollis (Chairman)
Frederick Frank
Robert Tobin
Catherine A. Sohn, Pharma.D.
26
Summary Compensation
The following table shows compensation information for fiscal years 2015, 2014 and 2013 for the Named Executive
Officers.
Summary Compensation Table
Name and Principal Position Year
Gary T. Steele ...........................
President, Chief Executive
Officer and Chairman of the
Board
2015 500,000
2014 450,000
2013 450,000
Salary
($) (1)
Stock
Awards
($) (2)
287,800
214,500
Option
Awards
($)(3)
205,380
198,397
—
Non-Equity
Incentive Plan
Compensation
($)(4)
All Other
Compensation
($)(5)
Total
($)
399,569
—
—
17,431 1,410,180
876,845
13,948
463,882
13,882
Gregory S. Skinner ....................
Chief Financial Officer and
V.P. of Finance and
Administration
Molly A. Hemmeter ..................
Chief Operating Officer
Ronald L Midyett ......................
President and Chief Executive
Officer of Apio, Inc.
Vice President of Landec
Larry D. Hiebert (6) ..................
President of Lifecore
Biomedical, Inc.
Vice President of Landec
2015 325,000
2014 310,000
2013 310,000
215,850
143,000
—
154,035
132,265
—
155,832
—
—
12,114
11,160
10,873
862,831
596,425
320,873
2015 345,000 1,439,000 1,026,900
132,265
—
2014 285,000
2013 285,000
143,000
—
2015 340,000
2014 330,000
2013 300,000
143,900
143,000
—
102,690
132,265
—
195,079
—
—
192,246
—
—
12,906 3,018,885
571,425
11,160
293,786
8,786
27,652
26,668
27,294
806,488
631,933
327,294
2015 300,000
2014 259,231
107,925
85,800
77,018
79,359
30,000
130,110
14,339
22,872
529,282
577,372
(1) Includes amounts (if any) deferred at the election of the Named Executive Officer pursuant to the Deferral Plan.
(2) Amounts shown do not reflect compensation actually received by the Named Executive Officer. Instead, the amounts
shown are the aggregate grant date fair value of RSUs granted during fiscal year 2015 computed for financial statement
reporting purposes in accordance with ASC 718. The assumptions used to calculate the value of the RSU awards are set
forth under Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for
the fiscal year ended May 31, 2015. In accordance with SEC rules, these amounts exclude estimates of forfeitures in the
case of awards with service-based vesting conditions.
(3) Amounts shown do not reflect compensation actually received by the Named Executive Officer. Instead, the amounts
shown are the aggregate grant date fair value of stock options granted during fiscal year 2015 computed for financial
statement reporting purposes in accordance with ASC 718. The assumptions used to calculate the value of stock option
awards are set forth under Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on
Form 10-K for the fiscal year ended May 31, 2015. In accordance with SEC rules, these amounts exclude estimates of
forfeitures in the case of awards with service-based vesting conditions.
(4) Amounts consist of bonuses earned for meeting and/or exceeding financial performance targets in fiscal year 2015 under
the 2015 Incentive Award Plan.
(5) Amounts consist of Company-paid life insurance and an employer 401(k) match for all Named Executive Officers. The
amount shown for Mr. Steele also includes Company-paid disability insurance for which Mr. Steele is the beneficiary.
The amount shown for Mr. Hiebert also includes Company-paid disability insurance for which Mr. Heibert is the
beneficiary. For Mr. Midyett, the amount shown includes an annual car allowance of $15,000.
(6) Mr. Hiebert became President of Lifecore and a Vice President of the Company on June 1, 2013.
27
Grants of Plan-Based Awards
The following table shows all plan-based awards granted to the Named Executive Officers during fiscal year 2015.
The option awards and the unvested portion of the stock awards identified in the table below are also reported in the
“Outstanding Equity Awards at Fiscal 2015 Year-End” table on the following page.
Grants of Plan-Based Awards
Name
Gary T. Steele ..........
Grant
Date
Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards (1)
Target
($)
500,000
Maximum
($)
Threshold
($)
0
N/A
5/28/2015
5/28/2015
Gregory S. Skinner ..
0
195,000
N/A
5/28/2015
5/28/2015
Molly A. Hemmeter .
0
172,500
N/A
5/28/2015
5/28/2015
Ronald L. Midyett ....
0
170,000
N/A
5/28/2015
5/28/2015
Larry D. Hiebert ......
0
150,000
N/A
5/28/2015
5/28/2015
All Other
Stock
Awards:
Number of
Shares of
Stock
or Units (#)
All Other
Option
Awards:
Number
of Securities
Underlying
Options (#)
Exercise or
Base Price of
Option
Awards
($/share)
Grant Date
Fair Value
of Stock and
Option
Awards
($)(2)
—
20,000
—
—
15,000
—
—
—
60,000
—
—
45,000
—
100,000
—
—
—
300,000
—
10,000
—
—
7,500
—
—
—
30,000
—
—
22,500
—
—
14.39
—
—
14.39
—
—
14.39
—
—
14.39
—
—
14.39
—
287,800
205,380
—
215,850
154,035
—
1,439,000
1,026,900
—
143,900
102,690
—
107,925
77,018
(1) Amounts shown are estimated payouts for fiscal year 2015 to the Named Executive Officers under the 2015 Incentive
Award Plan. The target amount is based on a percentage of the individual’s fiscal year 2015 base salary. All Executives
received cash incentive awards for fiscal year 2015. For more information on these awards, including the amount actually
paid, see “Compensation Discussion and Analysis-Annual Cash Incentive Award Plan.”
(2) The value of a stock award or option award is based on the fair value as of the grant date of such award determined
pursuant to ASC 718. Stock awards consist only of RSUs. The exercise price for all options granted to the Named
Executive Officers is 100% of the fair market value of Landec Common Stock on the grant date. The option exercise
price has not been deducted from the amounts indicated above. Regardless of the value placed on a stock option on the
grant date, the actual value of the option will depend on the market value of Landec Common Stock at such date in the
future when the option is exercised. The value of the option following this exercise does not include the option exercise
price. All options vest at the rate of 1/36th per month other than the option for 300,000 shares granted to Molly Hemmeter,
which vests at the rate of 1/3 on first anniversary of the date of grant and then 1/36 monthly thereafter, and all options are
fully vested three years after the date of grant. RSUs vest on the third anniversary of the date of grant.
28
Equity Awards
The following table shows all outstanding equity awards held by the Named Executive Officers at the end of fiscal
year 2015. The awards for fiscal year 2015 identified in the table below are also reported in the “Grants of Plan-Based
Awards” table on the previous page.
Outstanding Equity Awards at Fiscal 2015 Year-End
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#) (1)
Number of
Securities
Underlying
Unexercised
Options
Exercisable
—
28,750
75,000
37,500
Option
Exercise
Price
($)
Option
Expiration
Date
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#) (2)
14.39 05/28/2022
14.30 06/07/2020
5.63 05/26/2017
6.22 05/21/2016
14.39 05/28/2022
14.30 06/07/2020
5.63 05/26/2017
6.22 05/21/2016
20,000
15,000
—
—
15,000
10,000
—
—
Market
Value of
Shares
Or Units
of Stock
That
Have Not
Vested
($) (3)
285,800
214,350
—
—
214,350
142,900
—
—
14.39 05/28/2022
14.30 06/07/2020
5.63 05/26/2017
6.47 06/22/2016
100,000 1,429,000
142,900
—
—
10,000
—
—
14.39 05/28/2022
14.30 06/07/2020
10,000
10,000
142,900
142,900
14.39 05/28/2022
14.30 06/07/2020
5.63 05/26/2017
7,500
6,000
—
107,175
85,740
—
60,000
16,250
—
—
45,000
10,833
—
—
300,000
10,835
—
—
30,000
10,834
22,500
11,500
—
Name
Grant Date
Gary T. Steele........... 05/28/2015
06/07/2013
05/26/2010
05/21/2009
Gregory S. Skinner ... 05/28/2015
06/07/2013
05/26/2010
05/21/2009
Molly A. Hemmeter . 05/28/2015
06/07/2013
05/26/2010
06/22/2009
—
19,167
75,000
22,500
—
19,165
37,500
37,500
Ronald L. Midyett .... 05/28/2015
06/07/2013
—
19,166
Larry D. Hiebert ....... 05/28/2015
06/07/2013
05/26/2010
—
6,500
2,500
(1) All options vest at the rate of 1/36 per month over a three-year period from date of grant, other than the option for
300,000 shares granted to Molly Hemmeter, which vests at the rate of 1/3 on first anniversary of the date of grant and
then 1/36 monthly thereafter.
(2) The RSUs vest on the third anniversary of the date of grant.
(3) Value is based on the closing price of the Company’s Common Stock of $14.29 on May 31, 2015 as reported on the
Nasdaq Global Select Market.
29
Option Exercises and Stock Vested
The following table shows all stock options exercised and the value realized upon exercise and the number of stock
awards vested and the value realized upon vesting by the Named Executive Officers during fiscal year 2015.
Option Exercises and Stock Vested For Fiscal 2015
Option Awards
Stock Awards
Number of
shares
withheld to
cover
exercise
price and
taxes
(#) (2)
Number of
Shares
Acquired
on
Vesting
(#)
Value
Realized on
Exercise
($) (1)
Value
Realized
on Vesting
($)
Number of
shares
withheld to
cover taxes
(#) (2)
Number of
Shares
Acquired
on
Exercise
(#)
—
—
—
—
—
Name
Gary T. Steele................................
—
—
—
—
—
—
Gregory S. Skinner ........................
9,000
13,000
47,520
61,880
5,281
—
Molly A. Hemmeter ......................
—
—
—
Ronald L. Midyett .........................
67,000
52,500
529,970
413,700
35,774
34,410
Larry D. Hiebert ............................
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) The value realized equals the difference between the option exercise price and the fair market value of Landec Common
Stock on the date of exercise, multiplied by the number of shares for which the option was exercised.
(2) Indicates shares withheld at the election of the Named Executive Officer to cover the exercise price and/or the taxes
owed on the exercise of the option or the vesting of the stock award.
Nonqualified Deferred Compensation
The following table shows all compensation deferred by the Named Executive Officers, and earnings on such
deferred compensation, under the Deferral Plan during fiscal year 2015.
NONQUALIFED DEFERRED COMPENSATION
Executive
Contributions
in Fiscal Year
2015
($)(1)
Registrant
Contributions
in Fiscal Year
2015
($)
Aggregate
Earnings
in Fiscal
Year 2015
($)(2)
Aggregate
Withdrawals
in Fiscal
Year 2015
($)
Aggregate
Balance
at End of
Fiscal Year
2015
($)
—
—
74,285
—
—
—
—
—
—
—
—
—
8,899
—
—
—
—
—
—
—
—
—
83,184
—
—
Name
Gary T. Steele................
Gregory S. Skinner ........
Molly A. Hemmeter ......
Ronald L. Midyett .........
Larry D. Hiebert ............
(1) Contributions reported in this column are reported as compensation in the Salary column of the Summary
Compensation Table.
(2) Amounts reported in this column represent the aggregate earnings accrued and credited to a Named Executive
Officer’s account during fiscal year 2015.
30
Employment Contracts and Potential Payments upon Termination or Change in Control
Employment Contracts
On June 19, 2014, the Company entered into a new executive employment agreement with Mr. Steele, (the “Steele
Agreement”) effective as of May 26, 2014, setting forth the terms of his employment. The Steele Agreement expires on May
29, 2016 unless renewed or extended by both parties, and provides that Mr. Steele shall be paid an annual base salary of
$500,000 through the term of the Steele Agreement, and continue to participate in the annual cash incentive award plan. Mr.
Steele is also eligible for grants of equity interests under the Equity Award Plan at such times and in such amounts as
determined by the Compensation Committee.
The Steele Agreement provides that upon Mr. Steele’s death or disability, the Company shall pay Mr. Steele or his
estate his unpaid base salary and the pro rata portion of his annual cash incentive award through the date of termination.
Mr. Steele agreed, as part of the Steele Agreement, not to solicit, induce, recruit, encourage or take away employees
or consultants of the Company for a period of two years following his termination. In addition, Mr. Steele agreed not to solicit
any licensor to or customer of the Company for a period of two years following his termination.
On December 7, 2012, the Company entered into an executive employment agreement with Mr. Skinner (the
“Skinner Agreement”), effective as of January 1, 2013, setting forth the terms of his employment. The Skinner Agreement
expires on December 31, 2015 unless renewed or extended by both parties, and provides that Mr. Skinner shall be paid an
annual base salary of $310,000 through the term of the Skinner Agreement (unless modified by the Compensation
Committee), and continue to participate in the annual cash incentive award plan. Mr. Skinner is also eligible for grants of
equity interests under the Equity Award Plan at such times and in such amounts as determined by the Committee.
Mr. Skinner agreed, as part of the Skinner Agreement, not to solicit, induce, recruit, encourage or take away
employees or consultants of the Company for a period of two years following his termination. In addition, Mr. Skinner
agreed not to solicit any licensor to or customer of the Company for a period of two years following his termination.
Potential Payments upon Termination or Change in Control
If Mr. Steele is terminated without cause or if he terminates his employment for good reason (generally, any
relocation of Mr. Steele’s place of employment, reduction in salary, reduction in his target bonus amount or material reduction
of his duties or authority), Mr. Steele will receive a severance payment equal to 100% of his annual base salary over a twelve
month period, a pro-rated portion of any annual cash incentive award to which he is entitled and a one-year acceleration of
his unvested stock options and other equity awards, and the Company will pay or reimburse Mr. Steele for the monthly
Medicare premiums for Mr. Steele (and his spouse) for the remainder of their lives or at such earlier time as Mr. Steele
receives substantially equivalent health insurance coverage in connection with new employment. In addition, the Steele
Agreement provides that if Mr. Steele is terminated without cause or terminates his employment for good reason within two
(2) years following a “change of control,” Mr. Steele will receive a severance payment equal to 150% of his annual base
salary over a twelve month period, a pro-rated portion of any annual cash incentive award to which he is entitled and the
Company will pay or reimburse Mr. Steele for the monthly Medicare premiums for Mr. Steele (and his spouse) for the
remainder of their lives or until such earlier time as Mr. Steele receives substantially equivalent health insurance coverage in
connection with new employment. In the event of a “change of control,” all of Mr. Steele’s unvested stock options and other
equity awards shall immediately vest and become exercisable.
The Steele Agreement provides that if Mr. Steele retires, the Company will pay or reimburse Mr. Steele for the
monthly premiums for Medicare for the remainder of the lives of Mr. Steele and his spouse; provided that this benefit shall
cease to be available at such time as Mr. Steele commences receiving substantially equivalent health insurance coverage in
connection with new employment.
If Mr. Skinner is terminated without cause or if he terminates his employment for good reason (generally, any
relocation of Mr. Skinner’s place of employment, reduction in salary, reduction in his target bonus amount or material
reduction of his duties or authority), Mr. Skinner will receive a severance payment equal to 100% of his annual base salary
over a twelve month period, a pro-rated portion of any annual cash incentive award to which he is entitled and a one-year
acceleration of his unvested stock options and other equity awards, and the Company will pay the monthly premiums for
health insurance coverage for Mr. Skinner (and his spouse and eligible dependents) for the maximum period permitted under
COBRA or at such earlier time as Mr. Skinner receives substantially equivalent health insurance coverage in connection with
new employment. In addition, the Skinner Agreement provides that if Mr. Skinner is terminated without cause or terminates
31
his employment for good reason within two (2) years following a “change of control,” Mr. Skinner will receive a severance
payment equal to 150% of his annual base salary over a twelve month period and a pro-rated portion of any annual cash
incentive award to which he is entitled and the Company will pay the monthly premiums for health insurance coverage for
Mr. Skinner (and his spouse and eligible dependents) for the maximum period permitted under COBRA or at such earlier
time as Mr. Skinner receives substantially equivalent health insurance coverage in connection with new employment. In the
event of a “change of control,” all of Mr. Skinner’s unvested stock options and other equity awards shall immediately vest
and become exercisable.
If Mr. Steele’s or Mr. Skinner’s employment with the Company had been terminated without cause or for good
reason not in connection with a change of control of the Company on May 31, 2015, the last day of Landec’s fiscal year
2015, Mr. Steele and Mr. Skinner would have received the following severance benefits under the Steele Agreement and
Skinner Agreement, respectively:
Name
Base Salary (1)
Bonus
Payment
Accelerated
Vesting of
Options (2)
Accelerated
Vesting of
RSUs (3)
Gary T. Steele
Gregory S. Skinner
$500,000
$325,000
$399,569
$155,832
$ —
$ —
$ —
$ —
Post-
Termination
Health Insurance
Premiums
$201,310 (4)
$ 25,273 (5)
Total
$1,100,879
$ 506,105
(1) Reflects potential payments based on salaries as of May 31, 2015.
(2) All unvested options for Mr. Steele and Mr. Skinner are out of the money (exercise price above stock price as of May
31, 2015) and therefore there is no value to the acceleration.
(3) Accelerating the vesting of the outstanding RSUs by one year does not result in any of the current outstanding RSUs
vesting as of May 31, 2015.
(4) Represents the maximum amount of Medicare premiums that would have been paid by the Company on behalf of Mr.
Steele and his spouse, assuming life expectancy as estimated in the Actuarial Life Tables compiled by the Social
Security Administration.
(5) Represents the maximum amount of premiums that would have been paid under COBRA on behalf of Mr. Skinner
If Mr. Steele’s or Mr. Skinner’s employment with the Company had been terminated without cause or for good
reason in connection with a change of control of the Company on May 31, 2015, the last day of Landec’s fiscal year 2015,
Mr. Steele and Mr. Skinner would have received the severance benefits under the Steele Agreement and Skinner Agreement
set forth above, except that amounts received for base salary would have been $750,000 and $487,500 for Mr. Steele and Mr.
Skinner, respectively, and the amounts received for the acceleration of RSUs would have been $500,150 and $357,250 for
Mr. Steele and Mr. Skinner, respectively. Therefore total compensation would have been $1,851,029 and $1,025,855 for Mr.
Steele and Mr. Skinner, respectively.
Policies and Procedures with Respect to Related Party Transactions
The Audit Committee, all of whose members are independent directors, reviews and approves in advance all related
party transactions (other than compensation transactions). In reviewing related party transactions, the Audit Committee takes
into account factors it deems appropriate, such as whether the related party transaction is on terms no less favorable than
terms generally available to an unrelated third party under the same or similar conditions and the extent of the related party’s
interest in the transaction. To identify related party transactions, each year we require our executive officers and directors to
complete a questionnaire identifying any transactions between the Company and the respective executive officer or director
and their family members. Additionally, under the Company’s Code of Ethics, directors, officers and all other employees and
consultants are expected to avoid any relationship, influence or activity that would cause or even appear to cause a conflict
of interest.
Certain Relationships and Related Transactions
Apio sells products to and earns license fees from Windset Holdings 2010 Ltd., a Canadian corporation (“Windset”).
Apio holds a 26.9% equity interest in Windset. During fiscal year 2015, Apio recognized $689,000 of revenues from Windset.
Additionally, unrelated to the revenue transactions above, Apio purchases produce from Windset for sale to third
parties. During fiscal year 2015, Apio purchased $1.6 million of produce from Windset.
32
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own
more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and
holders of more than ten percent of the Company’s Common Stock are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely upon review of the copies of such reports filed with the SEC and written
representations that no other reports were required, during the fiscal year ended May 31, 2015 all Section 16(a) filing
requirements applicable to the Company’s officers, directors and holders of more than ten percent of the Company’s Common
Stock were satisfied.
OTHER MATTERS
The Board of Directors knows of no other matters to be submitted to the stockholders at the annual meeting. If any
other matters properly come before the meeting, then the persons named in the enclosed form of proxy will vote the shares
they represent in such manner as the Board of Directors may recommend.
It is important that the proxies be returned promptly and that your shares be represented. Stockholders are urged to
mark, date, execute and promptly return the accompanying proxy card in the enclosed envelope or vote their shares by
telephone or via the Internet.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Geoffrey P. Leonard
GEOFFREY P. LEONARD
SECRETARY
Menlo Park, California
August 24, 2015
33
The graph below matches Landec Corporation's cumulative 5-Year total shareholder return on common stock with the
cumulative total returns of the S&P 500 index and the NASDAQ Industrial index. The graph tracks the performance of a $100
investment in our common stock and in each index (with the reinvestment of all dividends) from 5/30/2010 to 5/31/2015.
5/30/10
5/29/11
5/27/12
5/26/13
5/25/14
5/31/15
Landec Corporation
S&P 500
NASDAQ Industrial
100.00
100.00
100.00
94.18
125.95
137.04
114.22
125.43
133.94
224.23
159.64
178.59
194.02
192.28
215.23
230.86
214.99
235.99
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended May 31, 2015, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period for _________ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3025618
(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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Name of each exchange on which registered
The NASDAQ Global Select Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ___ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. __
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large Accelerated Filer ___ Accelerated Filer X
Non Accelerated Filer ___ Smaller Reporting Company ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ___ No X
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $344,754,000 as of November 30, 2014,
the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price on The NASDAQ
Global Select Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 10% or
more of the outstanding Common Stock have been excluded from such calculation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of July 17, 2015, there were 27,009,342 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its October 2015 Annual Meeting of Stockholders which statement will be
filed not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference in Part III hereof.
LANDEC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Description
Page
Part I
1.
Business .........................................................................................................................................................
1
1A.
Risk Factors ...................................................................................................................................................
10
1B.
Unresolved Staff Comments ..........................................................................................................................
17
2.
3.
4.
Part II
5.
6.
7.
Properties .......................................................................................................................................................
18
Legal Proceedings ..........................................................................................................................................
18
Mine Safety Disclosures ................................................................................................................................
18
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .......................................................................................................................................................
19
Selected Financial Data .................................................................................................................................
20
Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................
21
7A.
Quantitative and Qualitative Disclosures about Market Risk ........................................................................
37
8.
9.
Financial Statements and Supplementary Data ..............................................................................................
37
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................
37
9A.
Controls and Procedures ................................................................................................................................
38
9B.
Other Information ..........................................................................................................................................
39
Part III
10.
11.
12.
13.
14.
Part IV
15.
Directors, Executive Officers and Corporate Governance .............................................................................
40
Executive Compensation ...............................................................................................................................
40
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......
40
Certain Relationships and Related Transactions, and Director Independence ...............................................
40
Principal Accountant Fees and Services ........................................................................................................
40
Exhibits and Financial Statement Schedules .................................................................................................
41
- i -
Item 1. Business
PART I
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Words such as “projected,” “expects,” “believes,” “intends,” “assumes” and similar expressions are used to identify
forward-looking statements. These statements are made based upon current expectations and projections about our business and
assumptions made by our management and are not guarantees of future performance, nor do we assume any obligation to update
such forward-looking statements after the date this report is filed. Our actual results could differ materially from those projected
in the forward-looking statements for many reasons, including the risk factors listed in Item 1A. “Risk Factors” and the factors
discussed below.
Corporate Overview
Landec Corporation and its subsidiaries (“Landec” or the “Company”) design, develop, manufacture and sell
differentiated products for food and biomaterials markets and license technology applications to partners. The Company is
focused on health and wellness solutions and applications within the packaged food and biomaterial markets. In our Apio, Inc.
(“Apio”) food business, we are committed to offering healthy, fresh produce products conveniently packaged to consumers. Apio
also exports whole fruit and vegetables, predominantly to Asia through its subsidiary, Cal Ex Trading Company (“Cal-Ex”). In
our Lifecore Biomedical, Inc. (“Lifecore”) biomaterials business, we commercialize products that enable people to stay more
active as they grow older.
Landec’s food and biomaterials businesses utilize polymer chemistry technology, a key differentiating factor. Both core
businesses focus on business-to-business selling such as selling directly to retail grocery store chains and club stores for Apio
and directly to large ophthalmic suppliers for Lifecore. Both core businesses also benefit from the momentum that underlies
consumer interest in healthy living - eating better and staying active.
Within our two core businesses, Landec has three operating segments – Food Products Technology, Food Export and
HA-based Biomaterials, each of which is described below. Financial information concerning each of these segments for fiscal
years 2015, 2014 and 2013 is summarized in Note 11 to the Consolidated Financial Statements.
Apio operates our Food Products Technology business, which combines our proprietary BreatheWay® food packaging
technology with the capabilities of a large national food supplier and value-added produce processor which sells products under
the Eat Smart® and GreenLine® brands and under private labels. In Apio’s value-added operations, produce is processed by
trimming, washing, mixing, and packaging in bags and trays that in most cases incorporate Landec’s BreatheWay membrane
technology. The BreatheWay membrane increases shelf life and reduces shrink (waste) for retailers and helps ensure that
consumers receive fresh produce by the time the product makes its way through the supply chain. Apio also licenses the
BreatheWay technology to partners such as Chiquita Brands International, Inc. (“Chiquita”) for packaging and distribution of
bananas and to Windset Holding 2010 Ltd., a Canadian corporation (“Windset”), for packaging of greenhouse grown cucumbers
and peppers.
Apio also operates the Food Export business. The Food Export business purchases and sells whole fruit and vegetable
products predominantly to Asian markets.
Lifecore operates our HA-based Biomaterials business and is principally involved in the manufacture of pharmaceutical-
grade sodium hyaluronate (“HA”) products. Sodium hyaluronate is a naturally occurring polysaccharide that is widely distributed
in the extracellular matrix in animals and humans. Based upon Lifecore’s expertise working with highly viscous HA, the
Company also specializes in aseptic filling services, as a contract development and manufacturing organization (CDMO), for
difficult to handle (viscous) medicines filled in finished dose syringes.
Landec was incorporated in California on October 31, 1986 and reincorporated as a Delaware corporation on November
6, 2008. Our common stock is listed on The NASDAQ Global Select Market under the symbol “LNDC”.
- 1 -
Technology Overview
The Company has two proprietary polymer technology platforms: 1) Intelimer® materials, which are the key technology
behind our BreatheWay membrane technology, and 2) hyaluronan biopolymers. The Company’s materials are generally
proprietary as a result of being patented or due to being specially formulated for specific customers to meet specific commercial
applications and/or specific regulatory requirements. The Company’s polymer technologies, its customer relationships and trade
names and its strong channels of distribution, are the foundation and key differentiating advantages on which Landec has built
its business.
A) Intelimer Polymers
Intelimer polymers are crystalline, hydrophobic polymers that use a temperature switch to control and modulate
properties such as viscosity, permeability and adhesion when varying the materials’ temperature above and below the temperature
switch. The sharp temperature switch is adjustable at relatively low temperatures (0°C to 100°C) and the changes resulting from
the temperature switch are relatively easy to maintain in industrial and commercial environments. For instance, Intelimer
polymers can change within the range of one or two degrees Celsius from a non-adhesive state to a highly tacky, adhesive state;
from an impermeable state to a highly permeable state; or from a solid state to a viscous liquid state.
Landec's proprietary polymer technology is based on the structure and phase behavior of Intelimer materials. The abrupt
thermal transitions of specific Intelimer materials are achieved through the controlled use of hydrocarbon side chains that are
attached to a polymer backbone. Below a pre-determined switch temperature, the polymer's side chains align through weak
hydrophobic interactions resulting in a crystalline structure. When this side chain crystallizable polymer is heated to, or above,
this switch temperature, these interactions are disrupted and the polymer is transformed into an amorphous, viscous state. Because
this transformation involves a physical and not a chemical change, this process can be repeatedly reversible. Landec can set the
polymer switch temperature anywhere between 0°C to 100°C by varying the average length of the side chains.
Landec's Intelimer materials are readily available and are generally synthesized from long side-chain acrylic monomers
that are derived primarily from natural materials such as coconut and palm oils that are highly purified and designed to be
manufactured economically through known synthetic processes. These acrylic-monomer raw materials are then polymerized by
Landec leading to many different side-chain crystallizable polymers whose properties vary depending upon the initial materials
and the synthetic process. Intelimer materials can be made into many different forms, including films, coatings, microcapsules
and discrete forms. Intelimer polymers are the coatings on the substrate used to form our BreatheWay membranes.
BreatheWay Membrane Packaging
Certain types of fresh-cut and whole produce can spoil or discolor rapidly when packaged in conventional packaging
materials and, therefore, are limited in their ability to be distributed broadly to markets. The Company’s proprietary BreatheWay
packaging technology utilizes Landec’s Intelimer polymer technology to naturally extend the shelf life and quality of fresh-cut
and whole produce.
After harvesting, vegetables and fruit continue to respire, consuming oxygen and releasing carbon dioxide. Too much
or too little oxygen can result in premature spoilage and decay. The respiration rate of produce varies for each fruit and vegetable.
Conventional packaging films used today, such as polyethylene and polypropylene, can be made with modest permeability to
oxygen and carbon dioxide, but often do not provide the optimal atmosphere for the packaged produce. To achieve optimal
product performance, each fruit or vegetable requires its own unique package atmosphere conditions. The challenge facing the
industry is to develop packaging that meets the highly variable needs that each product requires in order to achieve value-creating
performance. The Company believes that its BreatheWay packaging technology possesses all of the critical functionalities
required to serve this diverse market. In creating a product package, a BreatheWay membrane is applied over a small cutout
section or an aperture of a flexible film bag or plastic tray. This highly permeable “window” acts as the mechanism to provide
the majority of the gas transmission requirements for the entire package. These membranes are designed to provide three principal
benefits:
- 2 -
High Permeability. Landec's BreatheWay packaging technology is designed to permit transmission of oxygen and carbon
dioxide at 300 to 1,000 times the rate of conventional packaging films. The Company thinks that these higher
permeability levels will facilitate the packaging diversity required to market many types of fresh-cut and whole produce
in many package sizes and configurations.
Ability to Adjust Oxygen and Carbon Dioxide Ratios. BreatheWay packaging can be tailored with carbon dioxide to oxygen
transfer ratios ranging from 1.0 to 12.0 to selectively transmit oxygen and carbon dioxide at optimum rates to sustain
the quality and shelf life of packaged produce. Other high permeability packaging materials, such as micro-perforated
films cannot differentially control carbon dioxide permeability, resulting in sub-optimal package atmosphere conditions
for many produce products.
Temperature Responsiveness. Landec has developed breathable membranes that can be designed to increase or decrease
permeability in response to environmental temperature changes. The Company has developed packaging that responds
to higher oxygen requirements at elevated temperatures but is also reversible, and returns to its original state as
temperatures decline. As the respiration rate of fresh produce also increases with temperature, the BreatheWay
membrane’s temperature responsiveness allows packages to compensate for the change in produce respiration by
automatically adjusting gas permeation rates. By doing so, detrimental package atmosphere conditions are avoided and
improved quality is maintained through the distribution chain.
B) Sodium Hyaluronate (HA)
Sodium hyaluronate is a non-crystalline, hydrophilic polymer that exists naturally as part of the extracellular matrix in
many tissues within the human body, most notably within the aqueous humor of the eye, synovial fluid, skin and umbilical cord.
The viscoelastic properties and water solubility of HA make it ideal for medical applications where space maintenance, lubricity
or tissue protection are critical. Because of its widespread presence in tissues, its critical role in normal physiology, and its high
degree of biocompatibility, the Company believes that hyaluronan will continue to be used in existing applications and for an
increasing variety of other medical applications.
Sodium hyaluronate can primarily be produced in two ways, either through bacterial fermentation or through extraction
from rooster combs. Lifecore produces HA only from fermentation, using an extremely efficient microbial fermentation process
and a highly effective purification operation.
Sodium hyaluronate was first demonstrated to have commercial medical utility as a viscoelastic solution in cataract
surgery. In this application, it is used for maintaining the space in the anterior chamber and protecting corneal tissue during the
removal and implantation of intraocular lenses. The first ophthalmic HA product, produced by extraction from rooster comb
tissue, became commercially available in the United States in 1981. In 1985, Lifecore introduced the bacterial fermentation
process to manufacture premium HA and received patent protection until 2002. HA-based products, produced either by rooster
comb extraction or by fermentation processes such as Lifecore’s, have since gained widespread acceptance in ophthalmology
and are currently used in the majority of cataract extraction procedures in the world. HA has also become a significant component
in several products used in orthopedics. Lifecore’s HA is used as a viscous carrier for allogeneic freeze-dried demineralized bone
used in spinal surgery, and as the active component of devices to treat the symptoms of osteoarthritis, and as a component to
provide increased lubricity to medical devices. Lifecore’s HA has also been utilized in veterinary drug applications to treat
traumatic arthritis.
Description of Business Segments
In this Description of Business Segments section, “Apio” and the “Food Products Technology business” will be used
interchangeably; however, when describing Apio’s export business it will be referred to as the “Food Export business”.
- 3 -
A) Food Products Technology Business
The Food Products Technology business had revenues of $430 million for the fiscal year ended May 31, 2015, $361
million for the fiscal year ended May 25, 2014 and $320 million for the fiscal year ended May 26, 2013.
Based in Guadalupe, California, Apio’s primary business is fresh-cut and whole value-added products typically
packaged in our proprietary BreatheWay packaging. Apio’s fresh-cut value-added products business markets a variety of fresh-
cut and whole vegetables to the top retail grocery chains, club stores and food service operators. During the fiscal year ended
May 31, 2015, Apio shipped approximately 32 million cartons of produce to its customers throughout North America, primarily
in the United States.
Most vegetable products packaged in our BreatheWay packaging have 17 to 20 days of shelf life. In addition to
packaging innovation, Landec’s Apio food business develops innovative blends and combinations of vegetables that are sold in
flexible film bags or rigid trays. More recently, the Company has launched a family of salad kits that are comprised of “superfood”
mixtures of vegetables with healthy toppings/dressings. The launch of the first of these products called Sweet Kale Salad has
broken all of Apio’s records for speed of adoption with weekly sales of over $2 million as of May 2015. Additionally, we have
launched several other superfood salad kits including Ginger Bok Choy, Wild Greens and Quinoa, Beets and Greens, Kale and
Chard Stir Fry and Shanghai Stir Fry. The Company’s expertise includes accessing leading culinary experts and nutritionists
nationally to help in the new product development process. We believe that our new products are “on trend” and strong market
acceptance supports this belief. Recent statistics show that more than two-thirds (68.8%) of adults are considered to be overweight
or obese and more than one-third (35.7%) of adults are considered to be obese. More and more consumers are beginning to make
better food choices in their schools, homes and in restaurants and that is where our superfood products can fit into consumers
daily healthy food choices.
In addition to proprietary packaging technology and a strong new product development pipeline, the Company has
strong channels of distribution throughout North America with retail grocery store chains and club stores. Landec has one or
more of its products in approximately 70% of all retail and club store sites in North America giving us a strong platform for
introducing new products.
The Company sells its products under the nationally-known brands EatSmart and GreenLine. The Company also
periodically licenses its BreatheWay packaging technology to partners such as Chiquita for packaging bananas and to Windset
for packaging peppers and cucumbers that are grown hydroponically in greenhouses. These packaging license relationships
generate revenues either from product sales or royalties once commercialized. The Company is engaged in the testing and
development of other BreatheWay products. Landec manufactures its BreatheWay packaging through selected qualified contract
manufacturers.
Apio Business Model
- 4 -
Landec is working with leaders in club stores, retail grocery chains and food service customers. The Company thinks it
will have growth opportunities for the next several years through new customers and the introduction of innovative products in
the United States, expansion of its existing customer relationships, and export and shipment of specialty packaged produce.
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 branded and private label fresh-cut and
whole value-added produce. It is focused on selling products under its Eat Smart and GreenLine brands and private
label brands for its fresh-cut and whole value-added products. As retail grocery chains, club stores and food service
operators 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 and during certain times of the year, enters into joint ventures with growers for produce. The year-
round sourcing of produce is a key component to the fresh-cut and whole value-added processing business.
Access to Customer Base: Apio has strategically invested in the rapidly growing fresh-cut and whole value-added business.
Apio’s value-added processing plant in Guadalupe, CA, is automated with state-of-the-art vegetable processing
equipment. Apio operates one large central processing facility in one of the lowest cost growing regions in California,
the Santa Maria Valley, and for the majority of its non-green bean vegetable business, uses its packaging technology
for nationwide delivery. With the acquisition of GreenLine, Apio now has three East Coast processing facilities and five
East Coast distribution centers for nationwide delivery of green beans and Apio has begun processing non-green bean
products in one of its East Coast processing facilities to meet the next-day delivery needs of customers.
Expanded Product Line Using Technology and Unique Blends: Apio, through the use of its BreatheWay packaging
technology, is introducing new value-added products each year. These new product offerings range from various sizes
of fresh-cut bagged products, to vegetable trays, to whole produce, to vegetable salads and to snack packs. During the
last twelve months, Apio has introduced nine new unique products.
Products Currently in Approximately 70% of U.S. Retail Grocery Stores: With the acquisition of GreenLine, Apio now
has products in approximately 70% of all U.S. retail grocery stores. This gives Apio the opportunity to cross sell Eat
Smart value-added products to GreenLine customers and GreenLine value-added products to Eat Smart customers.
Windset
The Company thinks that hydroponically grown produce using Windset’s (see Note 2 to the Consolidated Financial
Statements for a description of the Company’s investment in Windset) know-how and growing practices will result in higher
yields with competitive growing costs that will provide dependable year round supply to Windset’s customers. In addition, the
produce grown in Windset’s greenhouses has a very high safety profile as no soil is used in the growing process. Windset owns
and operates greenhouses in British Columbia, Canada and in Nevada and California. In addition to growing produce in its own
greenhouses, Windset has numerous marketing arrangements with other greenhouse growers and utilizes buy/sell arrangements
to meet fluctuation in demand from their customers.
B) Food Export Business
Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity fruit and
vegetable products to Asia through Apio’s export business, Cal-Ex. The Food Export business is a commission-based buy/sell
business that typically realizes a gross margin in the 5-10% range.
- 5 -
The Food Export business had revenues of $68 million for the fiscal year ended May 31, 2015, $70 million for the fiscal
year ended May 25, 2014 and $79 million for the fiscal year ended May 26, 2013.
Apio is strategically positioned with Cal-Ex to benefit from the growing population and wealth in Asia and other parts
of the world over the next decade. Through Cal-Ex, Apio is currently one of the largest U.S. exporters of broccoli to Asia. Other
large export items include apples, grapes, stonefruit and citrus.
C) HA-based Biomaterials
Our HA-based Biomaterials business operates through our Lifecore subsidiary. Lifecore had revenues of $40 million
for the fiscal year ended May 31, 2015, $46 million for the fiscal year ended May 25, 2014 and $41 million for the fiscal year
ended May 26, 2013.
Lifecore operates our medical materials business and is principally involved in the manufacture of pharmaceutical-grade
sodium hyaluronate products in the form of injectable products for ophthalmologic and orthopedic applications. There is now a
greater percentage of Americans age 65 and older than at any other time in U.S. history and currently over 45 million Americans
are 65 years of age or older and this trend is going to accelerate dramatically over the upcoming years. As our population ages,
eye surgeries such as cataract surgeries, will increase and patients will increasingly seek joint therapy as cartilage and soft tissue
deteriorates. HA injections are a primary course of treatment for such conditions and Lifecore has built a leadership position in
the markets it serves. The World Health Organization estimates that by 2020, 32 million cataract operations will be performed
worldwide, up from 12 million in 2000. Lifecore’s expertise includes its ability to ferment, separate, purify, and aseptically fill
HA for injectable product use. In addition to ophthalmic and orthopedic uses, veterinary medicine is another application for
Lifecore’s HA. Lifecore leverages its fermentation process to manufacture premium, pharmaceutical-grade HA and uses its
aseptic filling capabilities to also deliver private-labeled HA finished products to its customers. Lifecore sells its products through
partners in the U.S., Europe and South America. Lifecore has built its reputation as a premium supplier of HA.
Lifecore’s products are primarily sold to strategic marketing partners for use in three medical areas: (1) Ophthalmic, (2)
Orthopedic and (3) Veterinary. In addition, Lifecore provides product development services to its partners for HA-based, as well
as non-HA based, fermented products and aseptically formulated products. These services include activities such as tech transfer,
material component changes, analytical method development, pilot studies, stability studies, process validation, and clinical
production.
By leveraging its fermentation process and aseptic formulation and filling expertise, Lifecore has become a leader in
the supply of HA-based products for multiple applications, and has taken advantage of non-HA device and drug opportunities
by leveraging its expertise in manufacturing and aseptic syringe filling capabilities. Elements of Lifecore’s strategy include the
following:
(cid:127) Establish strategic relationships with market leaders. Lifecore will continue to develop applications for products
with partners who have strong marketing, sales and distribution capabilities to end-user markets. Through its strong reputation
and history of providing pharmaceutical grade HA and products, Lifecore has been able to establish long-term relationships with
the market leading ophthalmic surgical companies, and leverages those partnerships to attract new relationships in other medical
markets.
(cid:127) Expand medical applications for HA. Due to the growing knowledge of the unique characteristics of HA, and the
role it plays in normal physiology, Lifecore continues to identify and pursue opportunities for the use of HA in other medical
applications, such as wound care, aesthetic surgery, drug delivery, device coatings and through pharmaceutical sales to academic
and corporate research customers. Further applications may involve expanding process development activity and/or additional
licensing of technology.
(cid:127) Utilize manufacturing infrastructure to pursue contract aseptic filling and fermentation opportunities. Lifecore has
made strategic capital investments in its contract manufacturing and development business focusing on extending its aseptic
filling capacity and capabilities. It is investing in this segment to meet increasing partner demand and attract new contract filling
opportunities. Lifecore is using its manufacturing capabilities to provide contract manufacturing and development services to its
partners in the area of sterile pre-filled syringes and fermentation and purification requirements.
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(cid:127) Maintain flexibility in product development and supply relationships. Lifecore’s vertically integrated development
and manufacturing capabilities allow it to establish a variety of contractual relationships with global corporate partners.
Lifecore’s role in these relationships extends from supplying HA raw materials to providing tech transfer and development
services to manufacturing aseptically-packaged, finished sterile products and to assuming full supply chain responsibilities.
Trademarks/Trade names
Intelimer®, Landec®, Apio™, Eat Smart®, BreatheWay®, GreenLine®, Clearly Fresh™, Lifecore®, LUROCOAT®
and Ortholure™ are some of the trademarks or registered trademarks and trade names of the Company in the United States and
other countries. This Annual Report on Form 10-K also refers to the trademarks of other companies.
Sales and Marketing
Apio is supported by dedicated sales and marketing resources. Apio has 42 sales and marketing employees, located in
central California and throughout the U.S., supporting the Food Products Technology business and the Food Export business.
During fiscal years 2015, 2014 and 2013, sales to the Company’s top five customers accounted for approximately 46%, 42% and
40%, respectively, of its revenues, with the top two customers, both from the Food Products Technology segment, Costco
Wholesale Corporation (“Costco”) which accounted for approximately 21%, 21%, and 16%, respectively, and Wal-mart, Inc.
(“Wal-mart”) which accounted for approximately 11%, 11%, and 13%, respectively, of the Company’s revenues. A loss of either
of these customers would have a material adverse effect on the Company’s business.
Lifecore sells products to partners under supply agreements and also through distribution agreements. Excluding
research sales, Lifecore does not sell to end users and, therefore, does not have the traditional infrastructure of a dedicated sales
force and marketing employees and its name recognition allows Lifecore to attract new customers and offer its services with a
minimal marketing and sales infrastructure.
Seasonality
Apio’s sales are seasonal. The Food Products Technology business can be affected by seasonal weather factors, such as
the high cost of sourcing product due to a shortage of essential value-added produce items, which have impacted quarterly results
in the past. The Food Export business also typically recognizes a much higher percentage of its revenues and profit during the
first half of Landec’s fiscal year compared to the second half. Lifecore’s business is not significantly affected by seasonality.
Manufacturing and Processing
Food Products Technology Business
The manufacturing process for the Company's proprietary BreatheWay packaging products is comprised of polymer
manufacturing, membrane manufacturing and label package conversion. A third party toll manufacturer currently makes virtually
all of the polymers for the BreatheWay packaging system. Select outside contractors currently manufacture the breathable
membranes, and Apio performs the label package conversion in its various processing facilities.
Apio processes a large majority of its fresh-cut, value-added non-green bean products in its processing facility located
in Guadalupe, California. Cooling of produce is done through third parties and Apio Cooling LP, a separate consolidated
subsidiary in which Apio has a 60% ownership interest and is the general partner.
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Apio processes its fresh-cut, value-added green bean products in four processing plants located in Guadalupe, California;
Bowling Green, Ohio; Hanover, Pennsylvania; and Vero Beach, Florida.
Hyaluronan-based Biomaterials Business
The commercial production of HA by Lifecore requires fermentation, separation and purification capabilities. Products
are supplied in a variety of bulk and single dose configurations.
Lifecore produces its HA through a bacterial fermentation process. Medical grade HA was initially commercially
available only through an extraction process from rooster combs. Lifecore believes that the fermentation manufacturing approach
is superior to rooster comb extraction because of greater efficiency and flexibility, a more favorable long-term regulatory
environment, and better economies of scale in producing large commercial quantities. Today’s HA competitors are primarily
utilizing a fermentation process.
Lifecore’s 114,000 square foot facility in Chaska, Minnesota is used primarily for the HA manufacturing process,
formulation and aseptic syringe and bulk filling. The Company considers that the current inventory on-hand, together with its
manufacturing capacity, will be sufficient to allow it to meet the needs of its current customers for the foreseeable future.
Lifecore provides versatility in the manufacturing of various types of finished products. It supplies several different
forms of HA in a variety of molecular weight fractions as powders, solutions and gels, and in a variety of bulk and single-use
finished packages. Lifecore continues to conduct development work designed to improve production efficiencies and expand its
capabilities to achieve a wider range of HA product specifications in order to address the broadening opportunities for using HA
in medical applications.
The FDA inspects the Company’s manufacturing systems periodically and requires compliance with the FDA’s Quality
System Regulation (“QSR”). In addition, Lifecore’s customers conduct intensive quality audits of the facility and its operations.
Lifecore also periodically contracts with independent regulatory consultants to conduct audits of its operations. Similar to other
manufacturers subject to regulatory and customer specific requirements, Lifecore’s facility was designed to meet applicable
regulatory requirements and has been cleared for the manufacturing of both device and pharmaceutical products. The Company
maintains a Quality System which complies with applicable standards and regulations: FDA Medical Device Quality System
requirements (21 CFR 820); FDA Drug Good Manufacturing Practices (21 CFR 210-211); European Union Good Manufacturing
Practices (EudraLex Volume 4); Medical Device Quality Management System (ISO 13485); European Medical Device Directive;
Canadian Medical Device Regulations; International Guide for Active Pharmaceutical Ingredients (ICH Q7), and Australian
Therapeutic Goods Regulations). Compliance with these international standards of quality greatly assists in the marketing of
Lifecore’s products globally.
General
Several of the raw materials used in manufacturing certain of the Company’s products are currently purchased from a
single source. Although to date the Company has not experienced difficulty acquiring materials for the manufacture of its
products, no assurance can be given that interruptions in supplies will not occur in the future, that the Company will be able to
obtain substitute vendors, or that the Company will be able to procure comparable materials at similar prices and terms within a
reasonable time. Any such interruption of supply could have a material adverse effect on the Company’s ability to manufacture
and distribute its products and, consequently, could materially and adversely affect the Company’s business, operating results
and financial condition.
Research and Development
Landec is focusing its research and development resources on both existing and new product applications. Expenditures
for research and development for the fiscal years ended May 31, 2015, May 25, 2014 and May 26, 2013 were $7.0 million, $7.2
million and $9.3 million, respectively. Research and development expenditures funded by corporate or governmental partners
were zero during fiscal years 2015 and 2014 and $688,000 during fiscal year 2013. The Company may seek funds for applied
materials research programs from U.S. government agencies as well as from commercial entities. The Company anticipates that
it will continue to incur significant research and development expenditures in order to maintain its competitive position with a
continuing flow of innovative, high-quality products and services. As of May 31, 2015, Landec had 64 employees engaged in
research and development with experience in polymer and analytical chemistry, product application, product formulation, and
mechanical and chemical engineering.
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Competition
The Company operates in highly competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food processors, packaging companies, and medical and pharmaceutical
companies is intense. Many of these competitors have substantially greater financial and technical resources and production and
marketing capabilities than the Company, and many have substantially greater experience in conducting field trials, obtaining
regulatory approvals and manufacturing and marketing commercial products. There can be no assurance that these competitors
will not succeed in developing alternative technologies and products that are more effective, easier to use or less expensive than
those which have been or are being developed by the Company or that would render the Company's technology and products
obsolete and non-competitive.
Patents and Proprietary Rights
The Company's success depends in large part on its ability to obtain patents, maintain trade secret protection and operate
without infringing on the proprietary rights of third parties. The Company has had 48 U.S. patents issued of which 33 remain
active as of May 31, 2015 with expiration dates ranging from 2015 to 2031. There can be no assurance that any of the pending
patent applications will be approved, that the Company will develop additional proprietary products that are patentable, that any
patents issued to the Company will provide the Company with competitive advantages or will not be challenged by any third
parties or that the patents of others will not prevent the commercialization of products incorporating the Company's technology.
Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the
Company's products or design around the Company's patents. Any of the foregoing results could have a material adverse effect
on the Company's business, operating results and financial condition.
The commercial success of the Company will also depend, in part, on its ability to avoid infringing patents issued to
others. If the Company were determined to be infringing any third party patent, the Company could be required to pay damages,
alter its products or processes, obtain licenses or cease certain activities. In addition, if patents are issued to others which contain
claims that compete or conflict with those of the Company and such competing or conflicting claims are ultimately determined
to be valid, the Company may be required to pay damages, to obtain licenses to these patents, to develop or obtain alternative
technology or to cease using such technology. If the Company is required to obtain any licenses, there can be no assurance that
the Company will be able to do so on commercially favorable terms, if at all. The Company's failure to obtain a license to any
technology that it may require to commercialize its products could have a material adverse impact on the Company's business,
operating results and financial condition.
Government Regulation
Government regulation in the United States and other countries is a significant factor in the marketing of certain of the
Company’s products and in the Company’s ongoing research and development activities. Some of the Company’s products are
subject to extensive and rigorous regulation by the FDA, which regulates some of the products as medical devices and which, in
some cases, requires Pre-Market Approval (“PMA”), and by foreign countries, which regulate some of the products as medical
devices or drugs. Under the Federal Food, Drug, and Cosmetic Act (“FDC Act”), the FDA regulates the clinical testing,
manufacturing, labeling, distribution, sale and promotion of medical devices in the United States.
Other regulatory requirements are placed on the manufacture, processing, packaging, labeling, distribution,
recordkeeping and reporting of a medical device and on the quality control procedures, such as the FDA’s device QSR
regulations. Manufacturing facilities are subject to periodic inspections by the FDA to assure compliance with device QSR
requirements, along with pre-approval inspection (PAI) for PMA product introduction. Lifecore’s facility is subject to inspections
as both a device and a drug manufacturing operation. For PMA devices, the Company that owns the product submission is
required to submit an annual report and to obtain approval of a PMA supplement for modifications to the device or its labeling.
Other applicable FDA requirements include the medical device reporting (“MDR”) regulation, which requires that the Company
provide information to the FDA regarding deaths or serious injuries alleged to have been associated with the use of its devices,
as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur.
Employees
As of May 31, 2015, Landec had 550 full-time employees, of whom 442 were dedicated to research, development,
manufacturing, quality control and regulatory affairs and 108 were dedicated to sales, marketing and administrative activities.
Landec intends to recruit additional personnel in connection with the development, manufacturing and marketing of its products.
None of Landec's employees are represented by a union, and Landec considers its relationship with its employees to be good.
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Available Information
Landec’s website is http://www.landec.com. Landec makes available free of charge its annual, quarterly and current
reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the
SEC. Information contained on our website is not part of this Report.
Item 1A. Risk Factors
Landec desires to take advantage of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of
1995 and of Section 21E and Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, Landec wishes to alert readers
that the following important factors could in the future affect, and in the past have affected, Landec’s actual results and could
cause Landec’s results for future periods to differ materially from those expressed in any forward-looking statements made by
or on behalf of Landec. Landec assumes no obligation to update such forward-looking statements.
Adverse Weather Conditions and Other Acts of God May Cause Substantial Decreases in Our Sales and/or Increases in Our
Costs
Our Food Products Technology business is subject to weather conditions that affect commodity prices, crop quality and
yields, and decisions by growers regarding crops to be planted. Crop diseases and severe conditions, particularly weather
conditions such as unexpected or excessive rain or other precipitation, unseasonable temperature fluctuations, floods, droughts,
frosts, windstorms, earthquakes and hurricanes, may adversely affect the supply of vegetables and fruits used in our business,
which could reduce the sales volumes and/or increase the unit production costs. Because a significant portion of the costs are
fixed and contracted in advance of each operating year, volume declines reflecting production interruptions or other factors could
result in increases in unit production costs which could result in substantial losses and weaken our financial condition.
We Depend on Our Infrastructure to Have Sufficient Capacity to Handle Our On-Going Production Needs
We have an infrastructure that has sufficient capacity for our on-going production needs, but if we lose machinery or
facilities due to natural disasters or mechanical failure, we may not be able to operate at a sufficient capacity to meet our
production needs. This could have a material adverse effect on our business, which could impact our results of operations and
our financial condition.
Our Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock Price to Decline
In the past, our results of operations have fluctuated significantly from quarter to quarter and are expected to continue
to fluctuate in the future. Apio can be affected by seasonal and weather factors which have impacted our financial results in the
past due to shortages of essential value-added produce items. In addition, the quarterly fair market value change in our Windset
investment can fluctuate substantially quarter to quarter. Our earnings may also fluctuate based on our ability to collect accounts
receivable from customers and notes receivable from growers and on price fluctuations in the fresh vegetable and fruit markets.
Other factors that affect our operations include:
our ability and our growers ability to obtain an adequate supply of labor,
our growers ability to obtain an adequate supply of water,
the seasonality and availability of our supplies,
our ability to process produce during critical harvest periods,
the timing and effects of ripening,
the degree of perishability,
the effectiveness of worldwide distribution systems,
total worldwide industry volumes,
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the seasonality and timing of consumer demand,
foreign currency fluctuations, and
foreign importation restrictions and foreign political risks.
As a result of these and other factors, we expect to continue to experience fluctuations in quarterly operating results.
We May Not Be Able to Achieve Acceptance of Our New Products in the Marketplace
Our success in generating significant sales of our products depends in part on our ability and that of our partners and
licensees to achieve market acceptance of our new products and technology. The extent to which, and rate at which, we achieve
market acceptance and penetration of our current and future products is a function of many variables including, but not limited
to:
price,
safety,
efficacy,
reliability,
conversion costs,
regulatory approvals,
marketing and sales efforts, and
general economic conditions affecting purchasing patterns.
We may not be able to develop and introduce new products and technologies in a timely manner or new products and
technologies may not gain market acceptance. We or our partners/customers are in the early stage of product commercialization
of certain Intelimer-based specialty packaging, HA-based products and other Intelimer polymer products. We expect that our
future growth will depend in large part on our or our partners/customers ability to develop and market new products in our target
markets and in new markets. In particular, we expect that our ability to compete effectively with existing food products companies
will depend substantially on developing, commercializing, achieving market acceptance of and reducing the cost of producing
our products. In addition, commercial applications of our temperature switch polymer technology are relatively new and
evolving. Our failure to develop new products or the failure of our new products to achieve market acceptance would have a
material adverse effect on our business, results of operations and financial condition.
We Face Strong Competition in the Marketplace
Competitors may succeed in developing alternative technologies and products that are more effective, easier to use or
less expensive than those which have been or are being developed by us or that would render our technology and products
obsolete and non-competitive. We operate in highly competitive and rapidly evolving fields, and new developments are expected
to continue at a rapid pace. Competition from large food products, industrial, medical and pharmaceutical companies is expected
to be intense. In addition, the nature of our collaborative arrangements may result in our corporate partners and licensees
becoming our competitors. Many of these competitors have substantially greater financial and technical resources and production
and marketing capabilities than we do, and may have substantially greater experience in conducting clinical and field trials,
obtaining regulatory approvals and manufacturing and marketing commercial products.
We Have a Concentration of Manufacturing for Apio and Lifecore and May Have to Depend on Third Parties to Manufacture
Our Products
Any disruptions in our primary manufacturing operation at Apio’s facilities in Guadalupe, California or Bowling Green,
Ohio or Lifecore’s facility in Chaska, Minnesota would reduce our ability to sell our products and would have a material adverse
effect on our financial results. Additionally, we may need to consider seeking collaborative arrangements with other companies
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to manufacture our products. If we become dependent upon third parties for the manufacture of our products, our profit margins
and our ability to develop and deliver those products on a timely basis may be adversely affected. Failures by third parties may
impair our ability to deliver products on a timely basis and impair our competitive position. We may not be able to continue to
successfully operate our manufacturing operations at acceptable costs, with acceptable yields, and retain adequately trained
personnel.
Our Dependence on Single-Source Suppliers and Service Providers May Cause Disruption in Our Operations Should Any
Supplier Fail to Deliver Materials
We may experience difficulty acquiring materials or services for the manufacture of our products or we may not be able
to obtain substitute vendors. In addition, we may not be able to procure comparable materials at similar prices and terms within
a reasonable time. Several services that are provided to Apio are obtained from a single provider. Several of the raw materials
we use to manufacture our products are currently purchased from a single source, including some monomers used to synthesize
Intelimer polymers, substrate materials for our breathable membrane products and raw materials for our HA products. Any
interruption of our relationship with single-source suppliers or service providers could delay product shipments and materially
harm our business.
Any New Business Acquisition Will Involve Uncertainty Relating to Integration
We have acquired other businesses in the past and may make additional acquisitions in the future. The successful
integration of new business acquisitions may require substantial effort from the Company's management. The diversion of the
attention of management and any difficulties encountered in the transition process could have a material adverse effect on the
Company's ability to realize the anticipated benefits of the acquisitions. The successful combination of new businesses also
requires coordination of research and development activities, manufacturing, sales and marketing efforts. In addition, the process
of combining organizations located in different geographic regions could cause the interruption of, or a loss of momentum in,
the Company's activities. There can be no assurance that the Company will be able to retain key management, technical, sales
and customer support personnel, or that the Company will realize the anticipated benefits of any acquisitions, and the failure to
do so would have a material adverse effect on the Company's business, results of operations and financial condition.
We May Be Unable to Adequately Protect Our Intellectual Property Rights or May Infringe Intellectual Property Rights of
Others
We may receive notices from third parties, including some of our competitors, claiming infringement by our products
of their patent and other proprietary rights. Regardless of their merit, responding to any such claim could be time-consuming,
result in costly litigation and require us to enter royalty and licensing agreements which may not be offered or available on terms
acceptable to us. If a successful claim is made against us and we fail to develop or license a substitute technology, we could be
required to alter our products or processes and our business, results of operations or financial position could be materially
adversely affected. Our success depends in large part on our ability to obtain patents, maintain trade secret protection and operate
without infringing on the proprietary rights of third parties. Any pending patent applications we file may not be approved and
we may not be able to develop additional proprietary products that are patentable. Any patents issued to us may not provide us
with competitive advantages or may be challenged by third parties. Patents held by others may prevent the commercialization of
products incorporating our technology. Furthermore, others may independently develop similar products, duplicate our products
or design around our patents.
Our Operations Are Subject to Regulations that Directly Impact Our Business
Our products and operations are subject to governmental regulation in the United States and foreign countries. The
manufacture of our products is subject to periodic inspection by regulatory authorities. We may not be able to obtain necessary
regulatory approvals on a timely basis or at all. Delays in receipt of or failure to receive approvals or loss of previously received
approvals would have a material adverse effect on our business, financial condition and results of operations. Although we have
no reason to believe that we will not be able to comply with all applicable regulations regarding the manufacture and sale of our
products and polymer materials, regulations are always subject to change and depend heavily on administrative interpretations
and the country in which the products are sold. Future changes in regulations or interpretations relating to matters such as safe
working conditions, laboratory and manufacturing practices, environmental controls, and disposal of hazardous or potentially
hazardous substances may adversely affect our business.
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We are subject to FDA rules and regulations concerning the safety of the food products handled and sold by Apio, and
the facilities in which they are packed and processed. Failure to comply with the applicable regulatory requirements can, among
other things, result in:
fines, injunctions, civil penalties, and suspensions,
withdrawal of regulatory approvals,
product recalls and product seizures, including cessation of manufacturing and sales,
operating restrictions, and
criminal prosecution.
We may be required to incur significant costs to comply with the laws and regulations in the future which may have a
material adverse effect on our business, operating results and financial condition.
Our food packaging products are subject to regulation under the FDC Act. Under the FDC Act, any substance that when
used as intended may reasonably be expected to become, directly or indirectly, a component or otherwise affect the characteristics
of any food may be regulated as a food additive unless the substance is generally recognized as safe. Food packaging materials
are generally not considered food additives by the FDA because these products are not expected to become components of food
under their expected conditions of use. We consider our breathable membrane product to be a food packaging material not subject
to regulation or approval by the FDA. We have not received any communication from the FDA concerning our breathable
membrane product. If the FDA were to determine that our breathable membrane products are food additives, we may be required
to submit a food additive petition for approval by the FDA. The food additive petition process is lengthy, expensive and uncertain.
A determination by the FDA that a food additive petition is necessary would have a material adverse effect on our business,
operating results and financial condition.
Our Food Products Technology business is subject to the Perishable Agricultural Commodities Act (“PACA”). PACA
regulates fair trade standards in the fresh produce industry and governs all the products sold by Apio. Our failure to comply with
the PACA requirements could among other things, result in civil penalties, suspension or revocation of a license to sell produce,
and in the most egregious cases, criminal prosecution, which could have a material adverse effect on our business.
Lifecore’s existing products and its products under development are considered to be medical devices and therefore,
require clearance or approval by the FDA before commercial sales can be made in the United States. The products also require
the approval of foreign government agencies before sales may be made in many other countries. The process of obtaining these
clearances or approvals varies according to the nature and use of the product. It can involve lengthy and detailed safety, efficacy
and clinical studies, as well as extensive site inspections and lengthy regulatory agency reviews. There can be no assurance that
any of the Company’s clinical studies will show safety or effectiveness; that any of the Company’s products that require FDA
clearance or approval will obtain such clearance or approval on a timely basis, on terms acceptable to the Company for the
purpose of actually marketing the products, or at all; or that following any such clearance or approval previously unknown
problems will not result in restrictions on the marketing of the products or withdrawal of clearance or approval.
In addition, most of the existing products being sold by Lifecore and its customers are subject to continued regulation
by the FDA, various state agencies and foreign regulatory agencies which regulate manufacturing, labeling and record keeping
procedures for such products. Marketing clearances or approvals by these agencies can be withdrawn due to failure to comply
with regulatory standards or the occurrence of unforeseen problems following initial clearance or approval. These agencies can
also limit or prevent the manufacture or distribution of Lifecore’s products. A determination that Lifecore is in violation of such
regulations could lead to the imposition of civil penalties, including fines, product recalls or product seizures, injunctions, and,
in extreme cases, criminal sanctions.
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 our manufacturing processes. Our failure to control
the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations could subject us to
substantial liability or could cause our manufacturing operations to be suspended and changes in environmental regulations may
impose the need for additional capital equipment or other requirements.
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We Depend on Strategic Partners and Licenses for Future Development
Our strategy for development, clinical and field testing, manufacture, commercialization and marketing for some of our
current and future products includes entering into various collaborations with corporate partners, licensees and others. We are
dependent on our corporate partners to develop, test, manufacture and/or market some of our products. Although we believe that
our partners in these collaborations have an economic motivation to succeed in performing their contractual responsibilities, the
amount and timing of resources to be devoted to these activities are not within our control. Our partners may not perform their
obligations as expected or we may not derive any additional revenue from the arrangements. Our partners may not pay any
additional option or license fees to us or may not develop, market or pay any royalty fees related to products under such
agreements. Moreover, some of the collaborative agreements provide that they may be terminated at the discretion of the
corporate partner, and some of the collaborative agreements provide for termination under other circumstances. Our partners
may pursue existing or alternative technologies in preference to our technology. Furthermore, we may not be able to negotiate
additional collaborative arrangements in the future on acceptable terms, if at all, and our collaborative arrangements may not be
successful.
Our Reputation and Business May Be Harmed if Our Computer Network Security or Any of the Databases Containing Our
Trade Secrets, Proprietary Information or the Personal Information of Our Employees Are Compromised, Which Could
Cause a Material Adverse Effect on Our Results of Operations.
Cyber attacks or security breaches could compromise our confidential business information, cause a disruption in the
Company’s operations or harm our reputation. We maintain numerous information assets, including intellectual property, trade
secrets and other sensitive information critical to the operation and success of our business on computer networks, and such
information may be compromised in the event that the security of such networks is breached. We also maintain confidential
information regarding our employees and job applicants, including personal identification information. The protection of
employee and company data in the information technology systems we utilize (including those maintained by third-party
providers) is critical. Despite the efforts by us to secure computer networks utilized for our business, security could be
compromised, confidential information, such as Company information assets and personally identifiable employee information,
could be misappropriated or system disruptions could occur.
In addition, we may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of
cyber attacks. Attacks may be targeted at us, our customers or others who have entrusted us with information. Actual or
anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection
technologies, train employees and engage third-party experts and consultants. Advances in computer capabilities, new
technological discoveries or other developments may result in the technology used by us to protect sensitive Company data being
breached or compromised. Furthermore, actual or anticipated cyber attacks or data breaches may cause significant disruptions to
our network operations, which may impact our ability to deliver shipments or respond to customer needs in a timely or efficient
manner.
Data and security breaches could also occur as a result of non-technical issues, including an intentional or inadvertent
breach by our employees or by persons with whom we have commercial relationships that result in the unauthorized release of
confidential information related to our business or personal information of our employees. Any compromise or breach of our
computer network security could result in a violation of applicable privacy and other laws, costly investigations and litigation
and potential regulatory or other actions by governmental agencies. As a result of any of the foregoing, we could experience
adverse publicity, the compromise of valuable information assets, loss of sales, the cost of remedial measures and/or significant
expenditures to reimburse third parties for resulting damages, any of which could adversely impact our brand, our business and
our results of operations.
The Global Economy is Experiencing Continued Volatility, Which May Have an Adverse Effect on Our Business
In recent years, the U.S. and international economy and financial markets experienced a significant slowdown and
volatility due to uncertainties related to the availability of credit, energy prices, difficulties in the banking and financial services
sectors, softness in the housing market, diminished market liquidity, geopolitical conflicts, falling consumer confidence and high
unemployment rates. Ongoing volatility in the economy and financial markets could further lead to reduced demand for our
products, which in turn, would reduce our revenues and adversely affect our business, financial condition and results of
operations. In particular, volatility in the global markets have resulted in softer demand and more conservative purchasing
decisions by customers, including a tendency toward lower-priced products, which could negatively impact our revenues, gross
margins and results of operations. In addition to a reduction in sales, our profitability may decrease because we may not be able
to reduce costs at the same rate as our sales decline. We cannot predict the ultimate severity or length of the current period of
- 14 -
volatility, whether the recent signs of economic recovery will prove sustainable, or the timing or severity of future economic or
industry downturns.
Given the current uncertain economic environment, our customers, suppliers and partners may have difficulties
obtaining capital at adequate or historical levels to finance their ongoing business and operations, which could impair their ability
to make timely payments to us. This may result in lower sales and/or inventory that may not be saleable or bad debt expense for
Landec. In addition to the impact of the current market uncertainty on our customers, some of our vendors and growers may
experience a reduction in their availability of funds and cash flows, which could negatively impact their business as well as ours.
A further worsening of the economic environment or continued or increased volatility of the U.S. economy, including increased
volatility in the credit markets, could adversely impact our customers’ and vendors’ ability or willingness to conduct business
with us on the same terms or at the same levels as they have historically. Further, this economic volatility and uncertainty about
future economic conditions makes it challenging for Landec to forecast its operating results, make business decisions, and identify
the risks that may affect its business, sources and uses of cash, financial condition and results of operations.
Our International Sales May Expose Our Business to Additional Risks
For fiscal year 2015, approximately 30% of our total revenues were derived from product sales to international
customers. A number of risks are inherent in international transactions. International sales and operations may be limited or
disrupted by any of the following:
regulatory approval process,
government controls,
export license requirements,
political instability,
price controls,
trade restrictions,
changes in tariffs, or
difficulties in staffing and managing international operations.
Foreign regulatory agencies have or may establish product standards different from those in the United States, and any
inability on our part to obtain foreign regulatory approvals on a timely basis could have a material adverse effect on our
international business, and our financial condition and results of operations. While our foreign sales are currently priced in dollars,
fluctuations in currency exchange rates may reduce the demand for our products by increasing the price of our products in the
currency of the countries in which the products are sold. Regulatory, geopolitical and other factors may adversely impact our
operations in the future or require us to modify our current business practices.
Cancellations or Delays of Orders by Our Customers May Adversely Affect Our Business
During fiscal year 2015, sales to our top five customers accounted for approximately 46% of our revenues, with our two
largest customers from our Food Products Technology segment, Costco and Wal-mart accounting for approximately 21% and
11%, respectively, of our revenues. We expect that, for the foreseeable future, a limited number of customers may continue to
account for a substantial portion of our revenues. We may experience changes in the composition of our customer base as we
have experienced in the past. The reduction, delay or cancellation of orders from one or more major customers for any reason or
the loss of one or more of our major customers could materially and adversely affect our business, operating results and financial
condition. In addition, since some of the products processed by Apio and Lifecore are sole sourced to customers, our operating
results could be adversely affected if one or more of our major customers were to develop other sources of supply. Our current
customers may not continue to place orders, orders by existing customers may be canceled or may not continue at the levels of
previous periods or we may not be able to obtain orders from new customers.
- 15 -
Our Sale of Some Products May Expose Us to Product Liability Claims
The testing, manufacturing, marketing, and sale of the products we develop involve an inherent risk of allegations of
product liability. If any of our products were determined or alleged to be contaminated or defective or to have caused a harmful
accident to an end-customer, we could incur substantial costs in responding to complaints or litigation regarding our products
and our product brand image could be materially damaged. Such events may have a material adverse effect on our business,
operating results and financial condition. Although we have taken and intend to continue to take what we consider to be
appropriate precautions to minimize exposure to product liability claims, we may not be able to avoid significant liability. We
currently maintain product liability insurance. While we think the coverage and limits are consistent with industry standards, our
coverage may not be adequate or may not continue to be available at an acceptable cost, if at all. A product liability claim, product
recall or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on
our business, operating results and financial condition.
Our Stock Price May Fluctuate in Response to Various Conditions, Many of Which Are Beyond Our Control
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are
beyond our control, including the following:
technological innovations applicable to our products,
our attainment of (or failure to attain) milestones in the commercialization of our technology,
our development of new products or the development of new products by our competitors,
new patents or changes in existing patents applicable to our products,
our acquisition of new businesses or the sale or disposal of a part of our businesses,
development of new collaborative arrangements by us, our competitors or other parties,
changes in government regulations applicable to our business,
changes in investor perception of our business,
fluctuations in our operating results, and
changes in the general market conditions in our industry.
Fluctuations in our quarterly results may, particularly if unforeseen, cause us to miss projections which might result in
analysts or investors changing their valuation of our stock.
Lapses in Disclosure Controls and Procedures or Internal Control Over Financial Reporting Could Materially and Adversely
Affect the Company’s Operations, Profitability or Reputation.
We are committed to maintaining high standards of internal control over financial reporting and disclosure controls and
procedures. Nevertheless, lapses or deficiencies in disclosure controls and procedures or in our internal control over financial
reporting may occur from time to time. On January 2, 2013, we reported that our audit committee reached a determination to
restate our previously-filed interim financial statements for the quarter ended August 26, 2012 and that our previously-filed
interim financial statements for the quarter ended August 26, 2012 should not be relied upon. We also reported management’s
determination that a material weakness existed in our internal control over financial reporting at August 26, 2012. As a result of
the material weakness, management also concluded that our disclosure controls and procedures were not effective at August 26,
2012.
There can be no assurance that our disclosure controls and procedures will be effective in preventing a material weakness
or significant deficiency in internal control over financial reporting from occurring in the future. Any such lapses or deficiencies
may materially and adversely affect our business and results of operations or financial condition, restrict our ability to access the
- 16 -
capital markets, require us to expend resources to correct the lapses or deficiencies, expose us to regulatory or legal proceedings,
harm our reputation, or otherwise cause a decline in investor confidence.
We May Be Exposed to Employment Related Claims and Costs that Could Materially Adversely Affect Our Business
We have been subject in the past, and may be in the future, to claims by employees based on allegations of
discrimination, negligence, harassment and inadvertent employment of undocumented workers or unlicensed personnel, and we
may be subject to payment of workers' compensation claims and other similar claims. We could incur substantial costs and our
management could spend a significant amount of time responding to such complaints or litigation regarding employee claims,
which may have a material adverse effect on our business, operating results and financial condition.
We Are Dependent on Our Key Employees and if One or More of Them Were to Leave, We Could Experience Difficulties in
Replacing Them, Efficiently or Effectively Transitioning Their Replacements and Our Operating Results Could Suffer
The success of our business depends to a significant extent on the continued service and performance of a relatively
small number of key senior management, technical, sales, and marketing personnel. It has been announced that in October 2015
Molly Hemmeter, Landec’s current COO, will become the new CEO of the Company, succeeding Gary Steele, who has served
as the Company’s CEO since September 1991 and is retiring as CEO, but will remain on the Company’s Board of Directors. The
loss of any of our key personnel for an extended period would likely harm our business. In addition, competition for senior level
personnel with knowledge and experience in our different lines of business is intense. If any of our key personnel were to leave,
we would need to devote substantial resources and management attention to replace them. As a result, management attention
may be diverted from managing our business, and we may need to pay higher compensation to replace these employees.
We May Issue Preferred Stock with Preferential Rights that Could Affect Your Rights
The issuance of shares of preferred stock could have the effect of making it more difficult for a third party to acquire a
majority of our outstanding stock, and the holders of such preferred stock could have voting, dividend, liquidation and other
rights superior to those of holders of our Common Stock.
We Have Never Paid any Dividends on Our Common Stock
We have not paid any dividends on our Common Stock since inception and do not expect to in the foreseeable future.
Any dividends may be subject to preferential dividends payable on any preferred stock we may issue.
Our Profitability Could Be Materially and Adversely Affected if it is Determined that the Book Value of Goodwill is Higher
than Fair Value
Our balance sheet includes an amount designated as “goodwill” that represents a portion of our assets and our
stockholders’ equity. Goodwill arises when an acquirer pays more for a business than the fair value of the tangible and separately
measurable intangible net assets. In accordance with accounting guidance, goodwill is tested for impairment at least annually
and more frequently if circumstances indicate a possible impairment. If we determine at any time in the future that the book value
of goodwill is higher than fair value then the difference must be written off, which could materially and adversely affect our
reported profitability.
Item 1B. Unresolved Staff Comments
None.
- 17 -
Item 2. Properties
As of May 31, 2015, the Company owned or leased properties in Menlo Park, Arroyo Grande and Guadalupe California;
Chaska, Minnesota; Bowling Green and McClure, Ohio; Hanover, Pennsylvania; Vero Beach, Florida; Rock Hill, South Carolina
and Rock Tavern, New York as described below.
Location
Menlo Park, CA ...........
Business
Segment
Corporate
Ownership
Facilities
Acres of
Land
Leased
14,600 square feet of office and
—
laboratory space
Chaska, MN .................
HA-based
Biomaterials
Guadalupe, CA ............. Food Products
Owned
114,000 square feet of office,
Owned
laboratory and manufacturing space
199,000 square feet of office space,
Technology
Bowling Green, OH ..... Food Products
Owned
Hanover, PA ................. Food Products
Owned
Technology
Vero Beach, FL ............ Food Products
Leased
Technology
Technology
manufacturing and cold storage
55,900 square feet of office space,
manufacturing and cold storage
18,700 square feet of office space,
manufacturing and cold storage
9,200 square feet of office space,
manufacturing and cold storage
27.5
17.7
7.7
15.3
Lease
Expiration
12/31/16
—
—
—
—
—
12/31/17
Rock Hill, SC ............... Food Products
Owned
16,400 square feet of cold storage and
3.6
—
Technology
office space
Rock Tavern, NY ......... Food Products
Leased
7,700 square feet of cold storage and
—
8/23/23
Technology
office space
McClure, OH ................ Food Products
Leased
Farm land
185
12/31/17
Technology
Guadalupe, CA ............. Food Products
Leased
105,000 square feet of parking space
2.4
9/30/18
Technology
Guadalupe, CA ............. Food Products
Leased
5,300 square feet of office space
—
5/31/17
Technology
Arroyo Grande, CA ...... Food Export
Leased
1,100 square feet of office space
—
Month-to-
Month
The obligations of the Company under its credit agreement with BMO Harris Bank N.A. (“BMO Harris”) are secured
by a lien on the Chaska, MN land and building. The obligations of the Company under its credit agreement with General Electric
Capital Corporation (“General Electric”) are secured by a lien on all of the land and buildings of the Food Products Technology
segment.
Item 3. Legal Proceedings
As of the date of this report, the Company is not a party to any legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
- 18 -
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Common Stock is traded on The NASDAQ Global Select Market under the symbol “LNDC”. The following table
sets forth for each period indicated the high and low sales prices for the Common Stock.
Fiscal Year Ended May 31, 2015
High
Low
4th Quarter ending May 31, 2015 ......................................... $
3rd Quarter ending March 1, 2015 ........................................ $
2nd Quarter ending November 30, 2014 ............................... $
1st Quarter ending August 31, 2014 ..................................... $
15.16 $
14.73 $
13.64 $
13.26 $
Fiscal Year Ended May 25, 2014
High
Low
4th Quarter ending May 25, 2014 ......................................... $
3rd Quarter ending February 23, 2014 .................................. $
2nd Quarter ending November 24, 2013 ............................... $
1st Quarter ending August 25, 2013 ..................................... $
12.16 $
12.62 $
13.57 $
15.82 $
Holders
13.38
12.66
10.75
11.15
10.19
10.08
11.34
13.21
There were approximately 48 holders of record of 27,009,342 shares of outstanding Common Stock as of July 17, 2015.
Since certain holders are listed under their brokerage firm’s names, the actual number of stockholders is higher.
Dividends
The Company has not paid any dividends on the Common Stock since its inception. The Company presently intends to
retain all future earnings, if any, for its business and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
Issuer Purchases of Equity Securities
There were no shares repurchased by the Company during fiscal years 2015 or 2014. The Company may still repurchase
up to $3.8 million of the Company’s Common Stock under the Company’s stock repurchase plan announced on July 14, 2010.
- 19 -
Item 6. Selected Financial Data
The information set forth below is not necessarily indicative of the results of future operations and should be read in
conjunction with the information contained in Item 7 – “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in
Item 8 of this report.
Year Ended
May 31, 2015
Year Ended
May 25, 2014
Year Ended
May 26, 2013
Year Ended
May 27, 2012
Year Ended
May 29, 2011
Statement of Income Data:
(in thousands)
Product sales ............................ $
539,257 $
476,813 $
441,708 $
317,552 $
276,729
Cost of product sales ................
473,850
414,249
378,948
265,414
230,034
Gross profit ..............................
65,407
62,564
62,760
52,138
46,695
Operating costs and expenses:
Research and development ...
Selling, general and
administrative .....................
Other operating
(income)/expenses ..............
Total operating costs and
expenses ..............................
6,988
7,204
9,294
9,625
9,275
39,958
35,170
32,531
26,515
24,608
—
—
(3,933)
1,421
4,780
46,946
42,374
37,892
37,561
38,663
Operating profit ........................
18,461
20,190
24,868
14,577
Dividend income ......................
Interest income .........................
Interest expense and other ........
Other income ............................
Net income before taxes ...........
Income tax expense ..................
Consolidated net income ..........
Non-controlling interest ...........
Net income applicable to
common stockholders ............. $
1,417
315
(1,829)
3,107
21,471
(7,746)
13,725
(181)
1,125
260
(1,650)
10,000
29,925
(10,583)
19,342
(197)
1,125
179
(2,008)
8,100
32,264
(9,452)
22,812
(225)
1,125
180
(929)
5,331
20,284
(7,185)
13,099
(403)
13,544 $
19,145 $
22,587 $
12,696 $
3,920
Basic net income per share ....... $
Diluted net income per share .... $
0.50 $
0.50 $
0.72 $
0.71 $
0.87 $
0.85 $
0.49 $
0.49 $
0.15
0.15
Shares used in per share
computation:
Basic .........................................
Diluted ......................................
26,884
27,336
26,628
27,120
25,830
26,626
25,849
26,126
26,397
26,626
May 31, 2015 May 25, 2014 May 26, 2013 May 27, 2012 May 29, 2011
Balance Sheet Data:
(in thousands)
Cash and cash equivalents ........ $
Total assets ...............................
Long-term debt .........................
Retained earnings .....................
Total stockholders’ equity ........ $
14,127 $
346,465
42,519
85,098
218,432 $
13,718 $
290,942
40,305
52,409
178,693 $
22,177 $
277,692
47,317
29,822
149,742 $
8,135
206,312
19,830
17,126
136,055
14,243 $
313,623
34,372
71,554
203,069 $
- 20 -
8,032
328
430
(820)
472
8,442
(4,181)
4,261
(341)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements
contained in Item 8 of this report. Except for the historical information contained herein, the matters discussed in this report are
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-
looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this report and, in particular,
the factors described in Item 1A. "Risk Factors.” Landec undertakes no obligation to revise any forward-looking statements in
order to reflect events or circumstances that may arise after the date of this report.
Overview
Landec Corporation and its subsidiaries (“Landec” or the “Company”) design, develop, manufacture and sell
differentiated products for food and biomaterials markets and license technology applications to partners. The Company has two
proprietary polymer technology platforms: 1) Intelimer polymers, and 2) hyaluronan (“HA”) biopolymers. The Company’s HA
biopolymers are proprietary in that they are specially formulated for specific customers to meet strict regulatory requirements.
The Company’s polymer technologies, along with its customer relationships and trade names, are the foundation, and a key
differentiating advantage upon which Landec has built its business. The Company sells specialty packaged branded Eat Smart
and GreenLine and private label fresh-cut vegetables and whole produce to retailers, club stores and foodservice operators,
primarily in the United States, Canada and Asia through its Apio, Inc. (“Apio”) subsidiary and sells HA-based biomaterials
through its Lifecore Biomedical, Inc. (“Lifecore”) subsidiary.
Landec has three operating segments – Food Products Technology, Food Export, and HA-based Biomaterials. The Food
Products Technology segment combines the Company’s BreatheWay packaging technology with Apio’s branded Eat Smart and
GreenLine and private label fresh-cut and whole produce business. The Food Export business is operated through Apio’s Cal-Ex
export company which purchases and sells whole fruit and vegetable products to predominantly Asian markets. The HA-based
Biomaterials business sells products utilizing HA in the ophthalmic, orthopedic and veterinary segments and also supplies HA
to customers pursuing other medical applications, such as aesthetic surgery, medical device coatings, tissue engineering and
pharmaceuticals. See "Business - Description of Business Segments".
As of May 31, 2015, the Company’s retained earnings were $85 million. The Company may incur losses in the future.
The amount of future net profits, if any, is uncertain and there can be no assurance that the Company will be able to sustain
profitability in future years.
Critical Accounting Policies and Use of Estimates
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make certain estimates and judgments that affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include
revenue recognition; sales returns and allowances; self insurance liabilities; recognition and measurement of current and deferred
income tax assets and liabilities; the assessment of recoverability of long-lived assets; the valuation of intangible assets and
inventory; the valuation of investments; and the valuation and recognition of stock-based compensation.
These estimates involve the consideration of complex factors and require management to make judgments. The analysis
of historical and future trends can require extended periods of time to resolve, and are subject to change from period to period.
The actual results may differ from management’s estimates.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance for doubtful accounts is based on review of the overall condition of
accounts receivable balances and review of significant past due accounts. If the financial condition of the Company’s customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
- 21 -
Inventories
Inventories are stated at the lower of cost or market. If the cost of the inventories exceeds their expected market value,
provisions are recorded currently for the difference between the cost and the market value. These provisions are determined
based on specific identification for unusable inventory and an additional reserve, based on historical losses, for inventory
currently considered to be usable.
Revenue Recognition
Revenue from product sales is recognized when there is persuasive evidence that an arrangement exists, title has
transferred, the price is fixed and determinable, and collectability is reasonably assured. Allowances are established for estimated
uncollectible amounts, product returns, and discounts based on specific identification and historical losses.
Apio’s Food Products Technology revenues generally consist of revenues generated from the sale of specialty packaged
fresh-cut and whole value-added processed vegetable products that are generally washed and packaged in our proprietary
packaging and sold under Apio’s Eat Smart and GreenLine brands and various private labels. Revenue is generally recognized
upon shipment of these products to customers. The Company takes title to all produce it trades and/or packages, and therefore,
records revenues and cost of sales at gross amounts in the Consolidated Statements of Comprehensive Income.
In addition, Food Products Technology value-added revenues include the revenues generated from Apio Cooling, LP,
a vegetable cooling operation in which Apio is the general partner with a 60% ownership position and from the sale of
BreatheWay packaging to license partners. Revenue is recognized on the vegetable cooling operations as cooling and storage
services are provided to our customers. Sales of BreatheWay packaging are recognized when shipped to our customers.
Apio’s Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity
fruit and vegetable products to Asia by Cal-Ex. As most Cal-Ex customers are in countries outside of the U.S., title transfers and
revenue is generally recognized upon arrival of the shipment in the foreign port. Apio records revenue equal to the sale price to
third parties because it takes title to the product while in transit.
Our HA-based Biomaterials business principally generates revenue through the sale of products containing HA. Lifecore
primarily sells products to customers in three medical areas: (1) Ophthalmic, which represented approximately 60% of Lifecore’s
revenues in fiscal year 2015, (2) Orthopedic, which represented approximately 20% of Lifecore’s revenues in fiscal year 2015
and (3) Veterinary/Other. The vast majority of revenues from our HA-based Biomaterials business are recognized upon shipment.
Lifecore’s business development revenues, a portion of which are included in all three medical areas, are related to
contract research and development (R&D) services and multi-element arrangement services with customers where the Company
provides products and/or services in a bundled arrangement.
Contract R&D revenue is recorded as earned, based on the performance requirements of the contract. Non-refundable
contract fees for which no further performance obligations exist, and there is no continuing involvement by the Company, are
recognized on the earlier of when the payment is received or collection is assured.
For sales arrangements that contain multiple elements, the Company splits the arrangement into separate units of
accounting if the individually delivered elements have value to the customer on a standalone basis. The Company also evaluates
whether multiple transactions with the same customer or related party should be considered part of a multiple element
arrangement, whereby the Company assesses, among other factors, whether the contracts or agreements are negotiated or
executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of
each other. The Company then allocates revenue to each element based on a selling price hierarchy. The relative selling price for
a deliverable is based on its vendor-specific objective evidence (VSOE), if available, third-party evidence (TPE), if VSOE is not
available, or estimated selling price, if neither VSOE nor TPE is available. The Company then recognizes revenue on each
deliverable in accordance with its policies for product and service revenue recognition. The Company is not typically able to
determine VSOE or TPE, and therefore, uses the estimated selling price to allocate revenue between the elements of an
arrangement.
The Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on
the future delivery of products or services or future performance obligations or subject to customer-specific cancellation rights.
The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting. A
deliverable constitutes a separate unit of accounting when it has stand-alone value, and for an arrangement that includes a general
right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is
- 22 -
considered probable and is substantially controlled by the Company. The Company considers a deliverable to have stand-alone
value if the product or service is sold separately by the Company or another vendor or could be resold by the customer. Further,
the revenue arrangements generally do not include a general right of return relative to the delivered products. Where the
aforementioned criteria for a separate unit of accounting are not met, the deliverable is combined with the undelivered element(s)
and treated as a single unit of accounting for the purposes of allocation of the arrangement consideration and revenue recognition.
The Company allocates the total arrangement consideration to each separable element of an arrangement based upon the relative
selling price of each element. Allocation of the consideration is determined at arrangement inception on the basis of each unit’s
relative selling price. In instances where the Company has not established fair value for any undelivered element, revenue for all
elements is deferred until delivery of the final element is completed and all recognition criteria are met.
Licensing revenue is recognized in accordance with prevailing accounting guidance. Initial license fees are deferred and
amortized to revenue over the period of the agreement when a contract exists, the fee is fixed and determinable, and collectability
is reasonably assured. Noncancellable, nonrefundable license fees are recognized over the period of the agreement, including
those governing research and development activities and any related supply agreement entered into concurrently with the license
when the risk associated with commercialization of a product is non-substantive at the outset of the arrangement.
From time to time, the Company offers customers sales incentives, which include volume rebates and discounts. These
amounts are estimated on a quarterly basis and recorded as a reduction of revenue.
A summary of revenues by type of revenue arrangement as described above is as follows (in thousands):
Year ended
May 31, 2015
Year ended
May 25, 2014
Year ended
May 26, 2013
Recorded upon shipment ....................................................................... $
Recorded upon acceptance in foreign port ............................................
Revenue from multiple element arrangements ......................................
Revenue from license fees, R&D contracts and royalties/profit
sharing .................................................................................................
Total ...................................................................................................... $
465,484 $
67,714
4,253
1,806
539,257 $
398,938 $
69,710
6,811
1,354
476,813 $
359,518
78,442
1,773
1,975
441,708
Goodwill and Other Intangibles
The Company’s intangible assets are comprised of customer relationships with an estimated useful life of twelve to
thirteen years and trademarks/trade names and goodwill with indefinite lives (collectively, “intangible assets”), which the
Company recognized in accordance with accounting guidance (i) upon the acquisition of GreenLine by Apio in April 2012, (ii)
upon the acquisition of Lifecore in April 2010 and (iii) upon the acquisition of Apio in December 1999. Accounting guidance
defines goodwill as “the excess of the cost of an acquired entity over the net of the estimated fair values of the assets acquired
and the liabilities assumed at date of acquisition.” All intangible assets, including goodwill, associated with the acquisition of
Lifecore was allocated to our HA-based Biomaterials reporting unit and the acquisitions of Apio and GreenLine were allocated
to our Food Products Technology reporting unit pursuant to accounting guidance based upon the allocation of assets and liabilities
acquired and consideration paid for each reporting unit. As of May 31, 2015, the HA-based Biomaterials reporting unit had $13.9
million of goodwill and the Food Products Technology reporting unit had $35.7 million of goodwill.
The Company tests its indefinite-lived intangible assets for impairment at least annually, in accordance with accounting
guidance. For all indefinite-lived assets, including goodwill, the Company performs a qualitative analysis in accordance with
ASC 350-30-35. Application of the impairment tests for indefinite-lived intangible assets requires significant judgment by
management, including identification of reporting units, assignment of assets and liabilities to reporting units, assignment of
intangible assets to reporting units which judgments are inherently uncertain.
During the fiscal quarter ended February 23, 2014, the Company voluntarily changed the date of its annual goodwill
and indefinite-lived intangible assets impairment testing from the last day of the fiscal month in July to the first day of the fiscal
fourth quarter. This voluntary change was preferable under the circumstances as it provides the Company with additional time
to complete its annual goodwill and indefinite-lived intangible asset impairment testing in advance of its year-end reporting and
results in better alignment with the Company’s strategic planning and forecasting process. This change was not applied
retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates
and assumptions with the use of hindsight. Accordingly, the change was applied prospectively.
- 23 -
The Company tested its indefinite-lived intangible assets, including goodwill, for impairment as of March 2, 2015 and
determined that no adjustments to the carrying values of these assets were necessary as of that date. As a result, it was not
necessary to perform the two-step quantitative goodwill impairment test at the time. Subsequent to the 2015 annual impairment
test, there have been no significant events or circumstances affecting the valuation of goodwill. As of May 31, 2015, there were
no events or changes in circumstances that indicated that the carrying amount of intangible assets may not be recoverable or that
goodwill should be tested for impairment. Therefore, there was no impairment to the carrying value of the Company's goodwill.
There were no impairment losses for goodwill during fiscal years 2014 and 2013.
On a quarterly basis, the Company considers the need to update its most recent annual tests for possible impairment of
its indefinite-lived intangible assets, based on management’s assessment of changes in its business and other economic factors
since the most recent annual evaluation. Such changes, if significant or material, could indicate a need to update the most recent
annual tests for impairment of the indefinite-lived intangible assets during the current period. The results of these tests could lead
to write-downs of the carrying values of these assets in the current period.
In the annual impairment test, the Company first assesses qualitative factors to determine whether it is necessary to
perform the two-step quantitative goodwill impairment test. In assessing the qualitative factors, management considers the impact
of these key factors: macro-economic conditions, industry and market environment, overall financial performance of the
Company, cash flow from operating activities, market capitalization and stock price. If management determines as a result of the
qualitative assessment that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting
unit is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required.
If a quantitative test is required, the Company compares the fair value of indefinite-lived intangible assets to its carrying
value including goodwill. The Company determines the fair value using both an income approach and a market approach. Under
the income approach, fair value is determined based on estimated future cash flows, discounted by an estimated weighted-average
cost of capital, which reflects the overall level of inherent risk of the Company and the rate of return an outside investor would
expect to earn. Under the market-based approach, information regarding the Company is utilized as well as publicly available
industry information to determine earnings multiples that are used to value each reporting unit. If the carrying value of the
reporting unit exceeds its fair value, the Company will determine the amount of impairment loss by comparing the implied fair
value of goodwill with the carrying value of goodwill. An impairment charge is recognized for the excess of the carrying value
of goodwill over its implied fair value.
Income Taxes
The Company accounts for income taxes in accordance with accounting guidance which requires that deferred tax assets
and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of
recorded assets and liabilities. The Company maintains valuation allowances when it is likely that all or a portion of a deferred
tax asset will not be realized. Changes in valuation allowances from period to period are included in the Company’s income tax
provision in the period of change. In determining whether a valuation allowance is warranted, the Company takes into account
such factors as prior earnings history, expected future earnings, unsettled circumstances that, if unfavorably resolved, would
adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially
enhance the likelihood of realization of a deferred tax asset. At May 31, 2015, the Company had a valuation allowance of $1.2
million against deferred tax assets.
- 24 -
In addition to valuation allowances, the Company establishes tax-contingency accruals for uncertain tax positions. The
tax-contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law
and emerging legislation. The Company recognizes interest and penalties related to uncertain tax positions as a component of
income tax expense. The Company’s effective tax rate includes the impact of tax-contingency accruals as considered appropriate
by management.
A number of years may elapse before a particular matter, for which the Company has accrued, is audited and finally
resolved. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome
or the timing of resolution of any particular tax matter, the Company believes its tax-contingency accruals are adequate to address
known tax contingencies. Favorable resolution of such matters could be recognized as a reduction to the Company’s effective
tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective tax rate. Any
resolution of a tax issue may require the use of cash in the year of resolution. The Company’s tax-contingency accruals are
presented in the balance sheet within accrued liabilities.
Stock-Based Compensation
The Company’s stock-based awards include stock option grants and restricted stock unit awards (RSUs).
The estimated fair value for stock options, which determines the Company’s calculation of compensation expense, is
based on the Black-Scholes pricing model. In addition, the accounting guidance requires the estimation of the expected forfeitures
of stock-based awards at the time of grant. As a result, the Company uses historical data to estimate pre-vesting forfeitures and
records stock-based compensation expense only for those awards that are expected to vest and revises those estimates in
subsequent periods if the actual forfeitures differ from the prior estimates.
Fair Value Measurements
The Company uses fair value measurement accounting for financial assets and liabilities and for financial instruments
and certain other items measured at fair value. The Company has elected the fair value option for its investment in a non-public
company (see Note 2 to the Consolidated Financial Statements). The Company has not elected the fair value option for any of
its other eligible financial assets or liabilities.
The accounting guidance established a three-tier hierarchy for fair value measurements, which prioritizes the inputs
used in measuring fair value as follows:
Level 1 – observable inputs such as quoted prices for identical instruments in active markets.
Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through
corroboration with observable market data.
Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop
its own assumptions.
As of May 31, 2015, the only asset of the Company that was measured at fair value on a recurring basis was its minority
interest investment in Windset.
- 25 -
The Company has elected the fair value option of accounting for its investment in Windset. The calculation of fair value
utilizes significant unobservable inputs in the discounted cash flow models, including projected cash flows, growth rates and
discount rates. As a result, the Company’s investment in Windset is considered to be a Level 3 measurement investment. The
change in the fair market value of the Company’s investment in Windset for the fiscal years ended May 31, 2015 and May 25,
2014 was due to the Company’s 26.9% and 20.1%, respectively, minority interest in the change in the fair market value of
Windset during those periods. In determining the fair value of the investment in Windset, the Company utilizes the following
significant unobservable inputs in the discounted cash flow models:
Annual consolidated revenue growth rates......................................................................
Annual consolidated expense growth rates .....................................................................
Consolidated income tax rates .........................................................................................
Consolidated discount rates .............................................................................................
At May 31, 2015 At May 25, 2014
4%
4%
4%
4%
15%
15%
16% to 22%
15% to 21%
The revenue growth, expense growth and income tax rate assumptions, consider the Company's best estimate of the
trends in those items over the discount period. The discount rate assumption takes into account the risk-free rate of return, the
market equity risk premium and the company’s specific risk premium and then applies an additional discount for lack of
marketability of the underlying securities. The discounted cash flow valuation model used by the Company has the following
sensitivity to changes in inputs and assumptions (in thousands):
10% increase in revenue growth rates ........................................................................................................ $
10% increase in expense growth rates ........................................................................................................ $
10% increase in income tax rates ............................................................................................................... $
10% increase in discount rates ................................................................................................................... $
Impact on value of
Windset investment
as of May 31, 2015
2,300
(1,200)
(100)
(1,500)
Imprecision in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular
position. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date.
The following table summarizes the fair value of the Company’s assets and liabilities that are measured at fair value on
a recurring basis, as of May 31, 2015 and May 25, 2014 (in thousands):
Level 1
Fair Value at May 31, 2015
Level 2
Level 3
Fair Value at May 25, 2014
Level 1
Level 2
- $
-
- $
- $
-
- $
Level 3
-
39,600
39,600
- $
61,500
61,500 $
-
- $
-
- $
44
44 $
-
-
Assets:
Marketable securities ..................... $
Investment in private company ......
Total ............................................ $
Liabilities:
Interest rate swap ............................
Total ............................................ $
Recent Accounting Pronouncements
Debt Issuance Costs
- $
-
- $
-
- $
- $
-
- $
-
- $
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No.
2015-03, Simplifying the Presentation of Debt Issuance Cost ("ASU 2015-03"), which requires that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The new guidance is effective for the Company beginning in the fourth quarter of fiscal year
2016, with early adoption permitted. Management is currently evaluating the impact that adoption of ASU 2015-03 will have on
the Company’s Consolidated Financial Statements and disclosures.
- 26 -
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-
09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard
requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also
includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive
information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a company’s contracts with
customers. ASU 2014-09 will be effective beginning the first quarter of the Company's fiscal year 2019 and early application is
not permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods
presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the
financial statements. Management is currently evaluating the effect ASU 2014-09 will have on the Company's Consolidated
Financial Statements and disclosures.
Results of Operations
Fiscal Year Ended May 31, 2015 Compared to Fiscal Year Ended May 25, 2014
Revenues (in thousands):
Fiscal Year ended
May 31, 2015
Fiscal Year ended
May 25, 2014
Food Products Technology ......................................... $
Food Export ................................................................
Total Apio .................................................................
HA-based Biomaterials ...............................................
Corporate .....................................................................
Total Revenues ......................................................... $
430,415 $
67,837
498,252
40,432
573
539,257 $
360,728
69,827
430,555
45,704
554
476,813
Change
19 %
(3%)
16 %
(12%)
3 %
13 %
Food Products Technology (Apio)
Apio’s Food Products Technology revenues consist of revenues generated from the sale of specialty packaged fresh-cut
and whole value-added processed vegetable products that are washed and packaged in our proprietary packaging and sold under
Apio’s Eat Smart and GreenLine brands and various private labels. In addition, Food Products Technology revenues include the
revenues generated from Apio Cooling, LP, a vegetable cooling operation in which Apio is the general partner with a 60%
ownership position and from the sale of BreatheWay packaging to license partners.
The increase in Apio's Food Products Technology revenues for the fiscal year ended May 31, 2015 compared to the
same period last year was primarily due to a 12% increase in unit volume sales resulting primarily from new salad kit products
which typically have a higher price per unit than historical offerings. In addition, fiscal year 2015 included an extra week
compared to fiscal year 2014 as a result of the timing of the Company’s 2015 fiscal year end.
Food Export (Apio)
Apio’s Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity
fruit and vegetable products to Asia by Cal-Ex. Apio records revenue equal to the sale price to third parties because it takes title
to the product while in transit.
The decrease in revenues in Apio’s Food Export business for the fiscal year ended May 31, 2015 compared with fiscal
year 2014 was due to a 9% decrease in unit volume sales primarily as a result of a west coast longshoremans labor dispute which
was partially offset by a favorable product mix to higher priced export products.
- 27 -
HA-based Biomaterials (Lifecore)
Lifecore principally generates revenue through the sale of products containing HA. Lifecore primarily sells products to
customers in three medical areas: (1) Ophthalmic, which represented approximately 60% of Lifecore’s revenues in fiscal year
2015, (2) Orthopedic, which represented approximately 20% of Lifecore’s revenues in fiscal year 2015 and (3) Veterinary/Other.
The decrease in Lifecore's revenues for fiscal year 2015 compared to fiscal year 2014 was primarily due to a 29%
decrease in revenues in Lifecore's fermentation business for Ophthalmic products as a result of lower shipments to a major
customer as it aligns its inventory levels with newly stated corporate guidelines and a 25% decrease in business development
revenues due to the delay in the timing of certain development activities. These decreases were partially offset by increased
aseptic filling revenues.
Corporate
Corporate revenues are generated from the licensing agreements with corporate partners.
The increase in Corporate revenues for fiscal year 2015 compared to the same period of last year was not significant.
Gross Profit (in thousands):
Fiscal Year ended
May 31, 2015
Fiscal Year ended
May 25, 2014
Food Products Technology ......................................... $
Food Export ................................................................
Total Apio ....................................................................
HA-based Biomaterials ...............................................
Corporate .....................................................................
Total Gross Profit ........................................................ $
45,993 $
4,252
50,245
14,609
553
65,407 $
36,318
5,340
41,658
20,456
450
62,564
Change
27 %
(20%)
21 %
(29%)
23 %
5 %
General
There are numerous factors that can influence gross profit including product mix, customer mix, manufacturing costs,
volume, sale discounts and charges for excess or obsolete inventory, to name a few. Many of these factors influence or are
interrelated with other factors. The Company includes in cost of sales all of the costs related to the sale of products in accordance
with U.S. generally accepted accounting principles. These costs include the following: raw materials (including produce, seeds,
packaging, syringes and fermentation and purification supplies), direct labor, overhead (including indirect labor, depreciation,
and facility related costs) and shipping and shipping-related costs. The following are the primary reasons for the changes in gross
profit for the fiscal year ended May 31, 2015 compared to the same period last year as outlined in the table above.
Food Products Technology (Apio)
The increase in gross profit for Apio’s Food Products Technology business for fiscal year 2015 compared to the same
period last year was primarily due to the gross profit generated from the 19% increase in revenues and from a favorable product
mix change to a greater percentage of revenues coming from higher margin salad kit products versus the lower margin core
packaged vegetable products. In addition, fiscal year 2014 Apio’s Food Products Technology business experienced higher than
expected raw produce sourcing costs due to a variety of factors, most importantly the heavy rains in the Midwest and along the
East Coast and cooler than normal temperatures in California.
Food Export (Apio)
Apio’s Food Export business is a buy/sell business that typically realizes a gross margin in the 5-10% range.
The decrease in gross profit for Apio’s export business for fiscal year 2015 compared to the same period last year was
due to a 3% decrease in revenues and from higher costs to source the higher priced export produce resulting in a lower gross
profit as a percent of sales. The gross margin during fiscal year 2015 was 6.3% compared to a gross margin of 7.6% during the
same period last year.
- 28 -
HA-based Biomaterials (Lifecore)
Lifecore operates in the medical devices industry and has historically realized an overall gross margin percentage of
approximately 35-50%.
The decrease in gross profit during fiscal year 2015 compared to the same period last year was due to the 12% decrease
in revenues and from an unfavorable product mix change to a higher percentage of sales being from the lower margin aseptically
filled products compared to the higher margin fermentation products and business development revenues in the prior year.
Corporate
The decrease in Corporate gross profit for fiscal year 2015 compared to the same period last year was not significant.
Operating Expenses (in thousands):
Fiscal Year ended
May 31, 2015
Fiscal Year ended
May 25, 2014
Change
Research and Development:
Apio .............................................................................. $
Lifecore ........................................................................
Corporate .....................................................................
Total R&D ................................................................ $
Selling, General and Administrative:
Apio ............................................................................. $
Lifecore ........................................................................
Corporate .....................................................................
Total S,G&A ............................................................. $
Research and Development
745 $
4,806
1,437
6,988 $
27,380 $
4,057
8,521
39,958 $
1,105
4,739
1,360
7,204
22,860
4,251
8,059
35,170
(33%)
1%
6%
(3%)
20%
(5%)
6%
14%
Landec’s research and development consisted primarily of product development and commercialization initiatives.
Research and development efforts at Apio are focused on the Company’s proprietary BreatheWay membranes used for packaging
produce, with a focus on extending the shelf-life of sensitive vegetables and fruit. In the Lifecore business, the research and
development efforts are focused on new products and applications for HA and non-HA based biomaterials. For Corporate, the
research and development efforts are primarily focused on supporting the development and commercialization of new products
and new technologies in our food and HA businesses.
The decrease in R&D expenses for fiscal year 2015 compared to the same period last year was primarily due to a
decrease in Apio R&D as products move from the development stage to commercialization offset by slight increases in R&D at
Lifecore and Corporate.
Selling, General and Administrative (S,G&A)
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 S,G&A expenses for fiscal year 2015 compared to the same period last year was primarily due to a 20%
increase in sales and marketing expenses at Apio primarily to promote our new salad kit products and from the addition of
incremental headcount to assist in developing and promoting future products.
- 29 -
Non-operating income/(expense) (in thousands):
Fiscal Year ended
May 31, 2015
Fiscal Year ended
May 25, 2014
Change
Dividend Income ......................................................... $
Interest Income ............................................................ $
Interest Expense .......................................................... $
Other Income ............................................................... $
Income Taxes .............................................................. $
Non controlling Interest .............................................. $
1,417 $
315 $
(1,829) $
3,107 $
(7,746) $
(181) $
1,125
260
(1,650)
10,000
(10,583)
(197)
26%
21%
11%
(69%)
(27%)
(8%)
Dividend Income
Dividend income is derived from the dividends accrued on our $22.0 million preferred stock investment in Windset
which yields a cash dividend of 7.5% annually. The increase in dividend income for fiscal year 2015 compared to the same period
last year was due to the Company increasing its preferred stock investment in Windset by $7.0 million on October 29, 2014.
Interest Income
The increase in interest income in fiscal year 2015 compared to fiscal year 2014 was not significant.
Interest Expense
The increase in interest expense during fiscal year 2015 compared to the same period last year was due to an $8.1 million
net increase in long-term debt during fiscal year 2015.
Other Income
The decrease in other income for fiscal year 2015 was due to the change in the increase in the fair value of our Windset
investment being lower in fiscal year 2015 compared to fiscal year 2014. In addition, other income during fiscal year 2015
included a $793,000 expense for the write off of the Company’s investment in Aesthetic Sciences, Inc.
Income Taxes
The decrease in the income tax expense for fiscal year 2015 was primarily due to a 28% decrease in net income before
taxes compared to the same period last year.
Non controlling Interest
The non controlling interest consists of the limited partners’ equity interest in the net income of Apio Cooling, LP.
The decrease in non controlling interest for fiscal year 2015 compared to the same period last year was not significant.
Fiscal Year Ended May 25, 2014 Compared to Fiscal Year Ended May 26, 2013
Revenues (in thousands):
Fiscal Year ended
May 25, 2014
Fiscal Year ended
May 26, 2013
Food Products Technology ......................................... $
Food Export ................................................................
Total Apio .................................................................
HA-based Biomaterials ...............................................
Corporate .....................................................................
Total Revenues ......................................................... $
360,728 $
69,827
430,555
45,704
554
476,813 $
320,447
78,568
399,015
41,281
1,412
441,708
Change
13%
(11%)
8%
11%
(61%)
8%
- 30 -
Food Products Technology (Apio)
Apio’s Food Products Technology revenues consist of revenues generated from the sale of specialty packaged fresh-cut
and whole value-added processed vegetable products that are washed and packaged in our proprietary packaging and sold under
Apio’s Eat Smart and GreenLine brands and various private labels. In addition, value-added revenues include the revenues
generated from Apio Cooling, LP, a vegetable cooling operation in which Apio is the general partner with a 60% ownership
position, and from the sale of BreatheWay packaging to license partners.
The increase in Apio's Food Products Technology revenues for the fiscal year ended May 25, 2014 compared to the
same period last year was primarily due to a 8% increase in unit volume sales resulting primarily from expanded product offerings
and a 10% unit volume increase in the fresh-cut vegetable category, according to Nielsen, coupled with new product introductions
which typically have a higher price per unit than historical offerings.
Food Export (Apio)
Apio’s Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity
fruit and vegetable products to Asia by Cal-Ex. Apio records revenue equal to the sale price to third parties because it takes title
to the product while in transit.
The decrease in revenues in Apio’s Food Export business for the fiscal year ended May 25, 2014 compared to the same
period last year was due to a 6% decrease in unit volume sales primarily as a result of new Indonesian import quotas on fruit
coupled with a product mix change to lower priced export items compared to fiscal year 2013.
HA-based Biomaterials (Lifecore)
Lifecore principally generates revenue through the sale of products containing HA. Lifecore primarily sells products to
customers in three medical areas: (1) Ophthalmic, which represented approximately 60% of Lifecore’s revenues in fiscal year
2014, (2) Orthopedic, which represented approximately 20% of Lifecore’s revenues in fiscal year 2014 and (3) Veterinary/Other.
The increase in Lifecore’s revenues for fiscal year 2014 compared to the same period last year was due to a 32% increase
in revenues in Lifecore’s aseptic filling business from increased sales to existing customers partially offset by a 13% decrease in
fermentation sales.
Corporate
Corporate revenues are generated from the licensing agreements with corporate partners.
The decrease in Corporate revenues for fiscal year 2014 compared to the same period of last year was not significant.
Gross Profit (in thousands):
Fiscal Year ended
May 25, 2014
Fiscal Year ended
May 26, 2013
Food Products Technology ......................................... $
Food Export ................................................................
Total Apio .................................................................
HA-based Biomaterials ...............................................
Corporate .....................................................................
Total Gross Profit .................................................... $
36,318 $
5,340
41,658
20,456
450
62,564 $
37,077
5,274
42,351
19,102
1,307
62,760
Change
(2%)
1%
(2%)
7%
(66%)
0%
General
There are numerous factors that can influence gross profit including product mix, customer mix, manufacturing costs,
volume, sale discounts and charges for excess or obsolete inventory, to name a few. Many of these factors influence or are
interrelated with other factors. The Company includes in cost of sales all of the costs related to the sale of products in accordance
with U.S. generally accepted accounting principles. These costs include the following: raw materials (including produce, seeds,
packaging, syringes and fermentation and purification supplies), direct labor, overhead (including indirect labor, depreciation,
- 31 -
and facility related costs) and shipping and shipping-related costs. The following are the primary reasons for the changes in gross
profit for the fiscal year ended May 25, 2014 compared to the same period last year as outlined in the table above.
Food Products Technology (Apio)
The decrease in gross profit for the Food Products Technology business for fiscal year 2014 compared to the same
period last year was primarily due to much higher than expected operating costs including higher labor costs to meet higher than
expected volumes and higher raw produce sourcing costs during primarily the first six months of fiscal year 2014 resulting from
lower yields and poor quality due to a variety of factors, most importantly the heavy rains in the Midwest and along the East
Coast and large temperatures swings in California throughout most of the year. The higher operating costs reduced Apio’s gross
profit by approximately $9.3 million during fiscal year 2014 which was partially offset by the gross profit generated from the
13% increase in revenues.
Food Export (Apio)
Apio’s Food Export business is a buy/sell business that typically realizes a gross margin in the 5-8% range.
The increase in gross profit for Apio’s Food Export business for fiscal year 2014 compared to the same period last year
was primarily due to favorable product mix changes to higher margin products, primarily into Indonesia, which resulted in a
higher gross margin percentage during fiscal year 2014 of 7.6% compared to a gross margin percentage of 6.7% during fiscal
year 2013. The favorable product mix was offset by the decrease in gross profit resulting from an 11% decrease in revenues.
HA-based Biomaterials (Lifecore)
Lifecore operates in the medical devices industry and has historically realized an overall gross margin percentage of
approximately 35-50%.
The increase in gross profit for fiscal year 2014 compared to the same period last year was due to an 11%, or $4.4
million increase in revenues resulting from the increased sales of both historical products and new products to existing customers.
The increase in gross profit from higher revenues was partially offset by an unfavorable product mix change to higher sales of
lower margin aseptically filled products from higher margin fermentation sales.
Corporate
The decrease in Corporate gross profit for fiscal year 2014 compared to the same period last year was not significant.
Operating Expenses (in thousands):
Fiscal Year ended
May 25, 2014
Fiscal Year ended
May 26, 2013
Change
Research and Development:
Apio .............................................................................. $
Lifecore ........................................................................
Corporate .....................................................................
Total R&D ................................................................ $
Selling, General and Administrative:
Apio ............................................................................. $
Lifecore ........................................................................
Corporate .....................................................................
Total S,G&A ............................................................. $
Other operating expenses:
Apio ............................................................................. $
Total Other Operating Expenses ............................. $
1,105 $
4,739
1,360
7,204 $
22,860 $
4,251
8,059
35,170 $
— $
— $
1,088
4,930
3,276
9,294
21,976
4,595
5,960
32,531
(3,933)
(3,933)
2%
(4%)
(58%)
(22%)
4%
(7%)
35%
8%
N/M
N/M
- 32 -
Research and Development
Landec’s research and development consisted primarily of product development and commercialization initiatives.
Research and development efforts at Apio are focused on the Company’s proprietary BreatheWay membranes used for packaging
produce, with a focus on extending the shelf-life of sensitive vegetables and fruit. In the Lifecore business, the research and
development efforts are focused on new products and applications for HA-based biomaterials. For Corporate, the research and
development efforts are focused on supporting the development and commercialization of new products and new technologies
in our food and HA businesses along with developing uses for our proprietary Intelimer polymers outside of our food and HA
businesses.
The decrease in research and development expenses for fiscal year 2014 compared to last year was primarily due to a
decrease in Corporate R&D because of the Company transitioning away from R&D and licensing collaborations to maintain
focus on R&D efforts at its core food and HA businesses.
Selling, General and Administrative (S,G&A)
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 S,G&A expenses for fiscal year 2014 compared to the same period last year was primarily due to an
increase in accounting and tax fees, public company costs and board of director fees in fiscal year 2014.
Other Operating Expenses
Other operating expenses in fiscal year 2013 consisted of a $3.9 million reversal of the earn-out liability at Apio
associated with the GreenLine acquisition.
Non-operating income/(expense) (in thousands):
Fiscal Year ended
May 25, 2014
Fiscal Year ended
May 26, 2013
Change
Dividend Income ......................................................... $
Interest Income ............................................................ $
Interest Expense .......................................................... $
Other Income ............................................................... $
Income Taxes .............................................................. $
Non controlling Interest .............................................. $
1,125 $
260 $
(1,650) $
10,000 $
(10,583) $
(197) $
1,125
179
(2,008)
8,100
(9,452)
(225)
—
45%
(18%)
23%
12%
(12%)
Dividend Income
Dividend income is derived from the dividends accrued on our $15 million preferred stock investment in Windset which
yields a cash dividend of 7.5% annually. There was no change in dividend income in fiscal year 2014 compared to fiscal year
2013.
Interest Income
The increase in interest income for the fiscal year 2014 compared to the same period last year was not significant.
Interest Expense
The decrease in interest expense during fiscal year 2014 compared to the same period last year was due to the Company
paying down its debt by $9.9 million during fiscal year 2014.
- 33 -
Other Income
The increase in other income for fiscal year 2014 compared to the same period last year is primarily due to the change
in the fair market value of our Windset investment being $1.9 million higher in fiscal year 2014 compared to the increase in
fiscal year 2013.
Income Taxes
The increase in the income tax expense for fiscal year 2014 was due to an increase in the effective tax rate for fiscal
year 2014 to 36% compared to 30% in fiscal year 2013. The effective tax rates for last year was lower than this year as a result
of the $3.9 million earn out adjustment last year which was not subject to income tax. The increase in income taxes due to the
increase in the effective tax rate was partially offset by a 7% decrease in net income before taxes compared to the same period
last year.
Non controlling Interest
The non controlling interest consists of the limited partners’ equity interest in the net income of Apio Cooling, LP.
The decrease in non controlling interest for fiscal year 2014 compared to the same period last year was not significant.
Liquidity and Capital Resources
As of May 31, 2015, the Company had cash and cash equivalents of $14.1 million, a net decrease of $116,000 from
$14.2 million at May 25, 2014.
Cash Flow from Operating Activities
Landec generated $26.2 million of cash from operating activities during fiscal year 2015 compared to generating $21.0
million from operating activities during fiscal year 2014. The primary sources of cash from operating activities during fiscal year
2015 were from (1) $13.7 million of net income, (2) $8.7 million of depreciation/amortization and stock-based compensation
expenses, (3) a $4.2 million net increase in deferred tax liabilities and (4) a net decrease of $3.3 million in working capital. Theses
sources of cash were partially offset by the $3.9 million non-cash increase in the value of the Company’s investment in Windset.
The factors which decreased working capital during fiscal year 2015 were a $2.9 million increase in accounts payable
due mainly to a $2.0 million increase at Apio due to costs from operations being $5.1 million higher in May 2015 compared to
May 2014 and a $2.6 million increase in accrued compensation primarily from bonuses earned at Apio and Corporate for
achieving financial performance targets. These decreases in working capital were partially offset by a $1.8 million increase in
accounts receivable primarily due to Apio’s May 2015 revenues being $5.2 million higher than May 2014 revenues and from a
$2.2 million increase in prepaid expenses and other current assets due to a $2.5 million increase at Apio primarily due to increased
prepayments for raw product.
Cash Flow from Investing Activities
Net cash used in investing activities for fiscal year 2015 was $34.4 million compared to $13.3 million for the same
period last year. The primary uses of cash in investing activities during fiscal year 2015 were for the purchase of $17.5 million
of facilities and equipment primarily to support the growth of the Apio value-added and Lifecore businesses and the purchase of
additional Windset shares of common stock and preferred stock for $18.0 million.
Cash Flow from Financing Activities
Net cash provided by financing activities for fiscal year 2015 was $8.2 million compared to $7.2 million used in
financing activities for the same period last year. The net cash provided by financing activities during fiscal year 2015 was
primarily due to $15.0 million of proceeds from long-term debt. These sources from financing activities were partially offset by
$6.9 million of payments on the Company’s long-term debt.
- 34 -
Capital Expenditures
During the fiscal year ended May 31, 2015, Landec continued its expansion of Apio’s value-added processing facility
and purchased vegetable processing equipment as well as made facility modifications and equipment purchases at Lifecore to
support business growth. These expenditures represented the majority of the $17.5 million of capital expenditures during fiscal
year 2015.
Debt
On August 19, 2004, Lifecore issued variable rate industrial revenue bonds (“IRBs”). These IRBs were assumed by
Landec in the acquisition of Lifecore (see Note 6 to the Consolidated Financial Statements). The IRBs are collateralized by a
bank letter of credit which is secured by a first mortgage on Lifecore’s facility in Chaska, Minnesota. In addition, Lifecore pays
an annual remarketing fee equal to 0.125% and an annual letter of credit fee of 0.75%.
On April 23, 2012 in connection with the acquisition of GreenLine, Apio entered into three loan agreements with
General Electric Capital Corporation and/or its affiliates (“GE Capital”), (collectively the “GE Debt Agreements”):
1)
2)
3)
A five-year, $25.0 million asset-based working capital revolving line of credit, with an interest rate of LIBOR plus 2%,
with availability based on the combination of the eligible accounts receivable and inventory balances of Apio and its
subsidiaries.
A $12.7 million capital equipment loan which matures in seven years payable in monthly principal and interest payments
of $175,356 with interest based on a fixed rate of 4.39% per annum.
A $19.2 million real estate loan, $1.2 million of which was paid in April 2013, and the remainder maturing in ten years.
The real estate loan has a fifteen year amortization period due in monthly principal and interest payments of $141,962
with interest based on a fixed rate of 4.02% per annum. The principal balance remaining at the end of the ten year term
is due in one lump sum on April 23, 2022.
On July 17, 2014, Apio entered into an amendment with GE Capital, which amended the revolving line of credit dated
April 23, 2012 among the parties. Under the amendment, the revolving line of credit increased from $25 million to $40 million,
the interest rate was reduced from LIBOR plus 2.0% to LIBOR plus 1.75%, and the term was extended to July 17, 2019, among
other changes. The availability under the revolving line of credit is based on the combination of the eligible accounts receivable
and eligible inventory (availability was $30.3 million at May 31, 2015). Apio’s revolving line of credit has an unused fee of
0.375% per annum. At both May 31, 2015 and May 25, 2014, there was no outstanding balance under Apio’s revolving line of
credit.
Also on July 17, 2014, Apio entered into a new equipment loan with GE Capital whereby Apio can borrow up to $25
million based on eligible equipment purchases between August 1, 2012 and August 31, 2015. Each borrowing under this new
equipment loan has a five year term with a seven year amortization period. On August 28, 2014, Apio borrowed $7.1 million
under the new equipment loan at a fixed rate of 3.68%. On November 24, 2014, Apio borrowed an additional $4.1 million under
the new equipment loan at a fixed rate of 3.74%. The Company does not intend to borrow any more funds under this loan.
On May 15, 2015, GE Capital and Apio entered into a commitment letter, pursuant to which GE Capital committed to
lend Apio up to approximately $14.7 million in equipment financing and approximately $7.7 million in real property financing.
The equipment loan and the real property loan will be made pursuant to existing loan agreements dated as of April 23, 2012, as
amended May 17, 2013 and July 17, 2014. The equipment loan is available to finance purchases of equipment between May 1,
2015 and June 30, 2017. Borrowings under the equipment loan will have a five-year term and a seven-year amortization. Interest
on each borrowing under the equipment loan will be at a fixed rate based on an index rate plus a 5-year swap rate at the time of
borrowing. The real property loan will be used to finance the expansion of Apio’s facility in Hanover, PA. The real property loan
will have a 10-year term and a 20-year amortization. Interest will be at a fixed rate based on an index rate plus a 10-year swap
rate on at the time of borrowing. No amounts had been borrowed under these committed loans as of May 31, 2015.
The GE real estate, equipment and line of credit agreements (collectively the “GE Debt Agreements”) are secured by
liens on all of the property of Apio and its subsidiaries. The GE Debt Agreements contain customary events of default under
which obligations could be accelerated or increased. The GE Capital real estate and equipment loans are guaranteed by Landec,
and Landec has pledged its equity interest in Apio as collateral under the line of credit agreement. The GE Debt Agreements
contain customary covenants, such as limitations on the ability to (1) incur indebtedness or grant liens or negative pledges on
Apio’s assets; (2) make loans or other investments; (3) pay dividends, sell stock or repurchase stock or other securities; (4) sell
- 35 -
assets; (5) engage in mergers; (6) enter into sale and leaseback transactions; or (7) make changes in Apio’s corporate structure.
In addition, Apio must maintain a minimum fixed charge coverage ratio of 1.10 to 1.0 if the availability under its line of credit
falls below $12.0 million. Apio was in compliance with all financial covenants as of May 31, 2015 and May 25, 2014.
On May 15, 2015, Apio and Bank of America (“BofA”) entered into a commitment letter and loan agreement, pursuant
to which Apio will be permitted to borrow up to $15.0 million to finance equipment purchases made between October 1, 2014
and April 30, 2016 (the “BofA Loan”). Each borrowing under the BofA Loan will have a five-year term and will have a fixed
interest rate based on the 2.5-year swap rate at the time of borrowing. Borrowings will be secured by equipment financed with
proceeds of the BofA Loan. In addition, on May 15, 2015, Landec and BofA entered into a Guaranty, pursuant to which Landec
guaranteed Apio’s payment obligations under the BofA Loan.
During fiscal year 2015, Apio capitalized $397,000 of loan origination fees from new equipment loans and/or
amendments with GE Capital and BofA, no loan origination fees were capitalized in fiscal year 2014. Amortization of loan
origination fees for Apio recorded to interest expense for fiscal years 2015, 2014 and 2013 were $206,000, $187,000 and
$181,000, respectively. Unamortized loan origination fees were $1.2 million and $1.0 million at May 31, 2015 and May 25,
2014, respectively, and are included in other assets in the Consolidated Balance Sheets.
On May 23, 2012, Lifecore entered into two financing agreements with BMO Harris Bank N.A. and/or its affiliates
(“BMO Harris”), collectively (the “Lifecore Loan Agreements”):
(1)
(2)
A $12.0 million term loan which matures in four years due in monthly payments of $250,000 with interest payable
monthly based on a variable interest rate of LIBOR plus 2% (the “Term Loan”).
A Reimbursement Agreement pursuant to which BMO Harris caused its affiliate Bank of Montreal to issue an
irrevocable letter of credit in the amount of $3.5 million (the “Letter of Credit”) which is securing the IRBs described
above.
On May 22, 2015, Lifecore entered into a Credit and Security Agreement (the “Credit Agreement”) with BMO Harris
which includes (a) a two-year, $10.0 million asset-based working capital revolving line of credit, with an interest rate of LIBOR
plus 1.85%, with availability based on the combination of Lifecore’s eligible accounts receivable and inventory balances
(availability was $9.4 million at May 31, 2015) and with no unused fee. As of May 31, 2015 no amounts were outstanding under
this line of credit.
The obligations of Lifecore under the Lifecore Loan Agreements and Credit Agreement (collectively “Lifecore Debt
Agreements”) are secured by liens on all of the property of Lifecore. The Lifecore Debt Agreements contain customary
covenants, such as limitations on the ability to (1) incur indebtedness or grant liens or negative pledges on Lifecore’s assets; (2)
make loans or other investments; (3) pay dividends or repurchase stock or other securities; (4) sell assets; (5) engage in mergers;
(6) enter into sale and leaseback transactions; (7) adopt certain benefit plans; and (8) make changes in Lifecore’s corporate
structure. In addition, under the Credit Agreement, Lifecore must maintain (a) a minimum fixed charge coverage ratio of 1.10 to
1.0 if Lifecore’s unrestricted cash balance is less than 50% of total funded debt at the end of each fiscal quarter and (b) a net debt
cash flow leverage ratio of less than 2.0 to 1.0 at the end of each fiscal quarter. Lifecore was in compliance with all financial
covenants as of May 31, 2015 and May 25, 2014. Unamortized loan origination fees for the Lifecore Debt Agreements were
$48,000 and $98,000 at May 31, 2015 and May 25, 2014, respectively, and are included in other assets in the Consolidated
Balance Sheets.
The market value of the Company’s debt approximates its recorded value as the interest rates on each debt instrument
approximates current market rates.
The Term Loan was used to repay Lifecore’s former credit facility with Wells Fargo Bank, N.A. (“Wells Fargo”). The
Letter of Credit (which replaces a letter of credit previously provided by Wells Fargo) provides liquidity and credit support for
the IRBs.
In May 2010, the Company entered into a five-year interest rate swap agreement under the credit agreement with Wells
Fargo which terminated in May 2015. The interest rate swap was designated as a cash flow hedge of future interest payments of
LIBOR and had a notional amount of $20 million. As a result of the interest rate swap transaction, the Company fixed for a five-
year period the interest rate at 4.24% subject to market based interest rate risk on $20 million of borrowings under the credit
agreement with Wells Fargo. The Company’s obligations under the interest rate swap transaction as to the scheduled payments
were guaranteed and secured on the same basis as its obligations under the credit agreement with Wells Fargo at the time the
agreement was consummated. Upon entering into the new Term Loan with BMO Harris in May 2012, the Company used the
- 36 -
proceeds from that loan to pay off the Wells Fargo credit facility. The swap with Wells Fargo was not terminated upon the
extinguishment of the debt with Wells Fargo. The fair value of the swap arrangement as of May 31, 2015 and May 25, 2014 was
zero and $44,000, respectively, and is included in other accrued liabilities in the accompanying Consolidated Balance Sheets.
Contractual Obligations
The Company’s material contractual obligations for the next five years and thereafter as of May 31, 2015, are as follows
(in thousands):
Total
Obligation
8,353 $
Debt principal payments .................... $ 42,519 $
1,415
5,494
Interest payments ...............................
3,136
Operating leases .................................
9,419
Purchase commitments ....................... 16,100
15,100
Total ................................................... $ 73,532 $ 28,004 $
2016
Due in Fiscal Year Ended May
2019
2018
2017
5,567 $
1,176
2,631
500
9,874 $
5,782 $
967
1,768
500
9,017 $
6,005 $
749
1,003
—
7,757 $
2020
Thereafter
6,655 $ 10,157
688
624
—
7,411 $ 11,469
499
257
—
The interest payment amounts above include: (1) the 4.39% fixed interest rate payments on the April 23, 2012 GE
Capital equipment loan, (2) the 4.02% fixed interest rate payments on the GE Capital real estate loan, (3) the 3.68% fixed interest
rate payments on the August 28, 2014 GE Capital equipment loan, (4) the 3.74% fixed interest rate payments on the November
24, 2014 GE Capital equipment loan, (5) the 2.79% fixed interest rate payments on the BofA equipment loan, (6) the estimated
interest rate payment on the variable Term Loan with BMO Harris based on the four year historical average 30-day LIBOR plus
2% or 2.20% and (7) the estimated interest rate payment on the variable rate IRB based on the five year historical interest rate
average for the Municipal Swap Index plus 20 basis points plus the letter of credit and remarketing fees of 0.875% resulting in a
estimated rate of 1.21%.
Landec is not a party to any agreements with, or commitments to, any special purpose entities that would constitute
material off-balance sheet financing other than the operating lease commitments.
Landec’s future capital requirements will depend on numerous factors, including the progress of its research and
development programs; the continued development of marketing, sales and distribution capabilities; the ability of Landec to
establish and maintain new collaborative and licensing arrangements; any decision to pursue additional acquisition opportunities;
weather conditions that can affect the supply and price of produce, the timing and amount, if any, of payments received under
licensing and research and development agreements; the costs involved in preparing, filing, prosecuting, defending and enforcing
intellectual property rights; the ability to comply with regulatory requirements; the emergence of competitive technology and
market forces; the effectiveness of product commercialization activities and arrangements; and other factors. If Landec’s
currently available funds, together with the internally generated cash flow from operations were not sufficient to satisfy its capital
needs, Landec would be required to seek additional funding through other arrangements with collaborative partners, additional
bank borrowings and public or private sales of its securities. There can be no assurance that additional funds, if required, will be
available to Landec on favorable terms, if at all.
Landec believes that its cash from operations, along with existing cash, cash equivalents and marketable securities will
be sufficient to finance its operational and capital requirements for at least the next twelve months.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not significant.
Item 8. Financial Statements and Supplementary Data
See Item 15 of Part IV of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
- 37 -
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of May 31, 2015 our management evaluated, with participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded
that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission, and are effective in providing reasonable assurance that information
required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness
of our internal control over financial reporting as of May 31, 2015. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated
Framework (2013 Framework). Our management has concluded that, as of May 31, 2015, our internal control over financial
reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been
detected.
Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on our internal
control over financial reporting, which is included herein.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting during the fiscal year ended May 31, 2015 that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
- 38 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Landec Corporation
We have audited Landec Corporation and subsidiaries’ internal control over financial reporting as of May 31, 2015,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) (the COSO criteria). Landec Corporation and subsidiaries’ management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Landec Corporation and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of May 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Landec Corporation and subsidiaries as of May 31, 2015 and May 25, 2014, and the
related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in
the period ended May 31, 2015 and our report dated July 30, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Francisco, California
July 30, 2015
Item 9B. Other Information
None
- 39 -
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
This information required by this item will be contained in the Registrant’s definitive proxy statement which the
Registrant will file with the Commission no later than September 28, 2015 (120 days after the Registrant’s fiscal year
end covered by this Report) and is incorporated herein by reference.
Item 11.
Executive Compensation
This information required by this item will be contained in the Registrant’s definitive proxy statement which the
Registrant will file with the Commission no later than September 28, 2015 (120 days after the Registrant’s fiscal year
end covered by this Report) and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
This information required by this item will be contained in the Registrant’s definitive proxy statement which the
Registrant will file with the Commission no later than September 28, 2015 (120 days after the Registrant’s fiscal year
end covered by this Report) and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions and Director Independence
This information required by this item will be contained in the Registrant’s definitive proxy statement which the
Registrant will file with the Commission no later than September 28, 2015 (120 days after the Registrant’s fiscal year
end covered by this Report) and is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
This information required by this item will be contained in the Registrant’s definitive proxy statement which the
Registrant will file with the Commission no later than September 28, 2015 (120 days after the Registrant’s fiscal year
end covered by this Report) and is incorporated herein by reference.
- 40 -
Item 15.
Exhibits and Financial Statement Schedules
(a) 1. Consolidated Financial Statements of Landec Corporation
PART IV
Report of Independent Registered Public Accounting Firm .....................................................
Consolidated Balance Sheets at May 31, 2015 and May 25, 2014 ...........................................
Consolidated Statements of Comprehensive Income for the Years Ended May 31, 2015, May
25, 2014 and May 26, 2013 ......................................................................................................
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended May 31,
2015, May 25, 2014 and May 26, 2013 ....................................................................................
Consolidated Statements of Cash Flows for the Years Ended May 31, 2015, May 25, 2014
and May 26, 2013 .....................................................................................................................
Notes to Consolidated Financial Statements .............................................................................
Page
42
43
44
45
46
47
2.
All schedules provided for in the applicable accounting regulations of the Securities and
Exchange Commission have been omitted since they pertain to items which do not appear in
the financial statements of Landec Corporation and its subsidiaries or to items which are not
significant or to items as to which the required disclosures have been made elsewhere in the
financial statements and supplementary notes and such schedules.
3.
Index of Exhibits .......................................................................................................................
74
The exhibits listed in the accompanying Index of Exhibits are filed or incorporated by
reference as part of this report.
- 41 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Landec Corporation
We have audited the accompanying consolidated balance sheets of Landec Corporation and subsidiaries as of May 31,
2015 and May 25, 2014, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows
for each of the three years in the period ended May 31, 2015. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Landec Corporation and subsidiaries at May 31, 2015 and May 25, 2014, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended May 31, 2015, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Landec Corporation’s internal control over financial reporting as of May 31, 2015, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework) and our report dated July 30, 2015 expressed an unqualified opinion thereon.
San Francisco, California
July 30, 2015
/s/ ERNST & YOUNG LLP
- 42 -
LANDEC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents ............................................................................................ $
Accounts receivable, less allowance for doubtful accounts of $382 and $516 at May
31, 2015 and May 25, 2014, respectively .................................................................
Accounts receivable, related party ................................................................................
Income taxes receivable ................................................................................................
Inventories, net .............................................................................................................
Deferred taxes ..............................................................................................................
Prepaid expenses and other current assets ....................................................................
Total current assets ................................................................................................
Investment in non-public company, non-fair value ..........................................................
Investment in non-public company, fair value .................................................................
Property and equipment, net .............................................................................................
Goodwill, net ....................................................................................................................
Trademarks/ trade names, net ...........................................................................................
Customer relationships, net ..............................................................................................
Other assets ......................................................................................................................
Total Assets ........................................................................................................... $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable .......................................................................................................... $
Accounts payable, related party ....................................................................................
Income taxes payable ....................................................................................................
Accrued compensation .................................................................................................
Other accrued liabilities ................................................................................................
Deferred revenue ..........................................................................................................
Current portion of long-term debt .................................................................................
Total current liabilities ..............................................................................................
Long-term debt .................................................................................................................
Deferred taxes ..................................................................................................................
Other non-current liabilities .............................................................................................
Total liabilities ..........................................................................................................
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 26,990,490 and
26,815,253 shares issued and outstanding at May 31, 2015 and May 25, 2014,
respectively ...............................................................................................................
Additional paid-in capital .............................................................................................
Retained earnings .........................................................................................................
Total stockholders’ equity .........................................................................................
Non-controlling interest ................................................................................................
Total Equity ..............................................................................................................
Total Liabilities and Stockholders’ Equity ................................................................ $
May 31,
2015
May 25,
2014
14,127 $
14,243
46,173
306
152
25,027
2,111
5,306
93,202
—
61,500
84,465
49,620
48,428
7,835
1,415
346,465 $
34,765 $
244
1,229
6,742
3,983
843
8,353
56,159
34,166
34,340
1,691
126,356
44,421
304
2,000
24,735
2,056
3,170
90,929
793
39,600
74,140
49,620
48,428
8,720
1,393
313,623
31,981
134
—
4,096
4,871
1,254
6,055
48,391
28,317
30,133
2,021
108,862
27
133,307
85,098
218,432
1,677
220,109
346,465 $
27
131,488
71,554
203,069
1,692
204,761
313,623
See accompanying notes.
- 43 -
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Year Ended
May 31,
2015
Year Ended
Year Ended
May 25,
2014
May 26,
2013
Product sales ...................................................................................... $
539,257 $
476,813 $
441,708
Cost of product sales ..........................................................................
473,850
414,249
378,948
Gross profit ........................................................................................
65,407
62,564
62,760
Operating costs and expenses:
Research and development .............................................................
Selling, general and administrative .................................................
Other operating expenses ................................................................
Total operating costs and expenses .............................................
6,988
39,958
—
46,946
7,204
35,170
—
42,374
9,294
32,531
(3,933)
37,892
Operating income ...............................................................................
18,461
20,190
24,868
Dividend income ................................................................................
Interest income ...................................................................................
Interest expense ..................................................................................
Other income ......................................................................................
Net income before taxes .....................................................................
Income tax expense ............................................................................
Consolidated net income ....................................................................
Non-controlling interest .....................................................................
1,417
315
(1,829)
3,107
21,471
(7,746)
13,725
(181)
1,125
260
(1,650 )
10,000
29,925
(10,583 )
19,342
(197 )
1,125
179
(2,008)
8,100
32,264
(9,452)
22,812
(225)
Net income and comprehensive income applicable to common
stockholders .................................................................................... $
13,544 $
19,145 $
22,587
Basic net income per share ................................................................. $
0.50 $
0.72 $
Diluted net income per share .............................................................. $
0.50 $
0.71 $
0.87
0.85
Shares used in per share computation:
Basic ...............................................................................................
26,884
26,628
25,830
Diluted ............................................................................................
27,336
27,120
26,626
See accompanying notes.
- 44 -
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
Common Stock
Shares
25,644,580
Amount
$
Additional
Paid-in
Capital
26
$
119,894
Retained
Earnings
$
29,822
Total
Stockholders’
Equity
Non-
controlling
Interest
$
149,742
$
1,816
Balance at May 27, 2012 ..............
Issuance of common stock at
$1.66 to $13.32 per share, net
of taxes paid by Landec on
behalf of employees ..............
Issuance of common stock for
597,537
vested restricted stock units ..
160,130
Taxes paid by Company for
stock swaps and RSUs ...........
Stock-based compensation ......
Tax benefit from stock-based
compensation expense ...........
Non-controlling interest ...........
Payments to non-controlling
interest ...................................
Net and comprehensive
—
—
—
—
—
income ...................................
Balance at May 26, 2013 ..............
Issuance of common stock at
—
26,402,247
$5.63 to $13.32 per share, net
of taxes paid by Landec on
behalf of employees ..............
Issuance of common stock for
vested restricted stock units ..
Taxes paid by Company for
stock swaps and RSUs ...........
Stock-based compensation ......
Tax benefit from stock-based
compensation expense ...........
Non-controlling interest ...........
Payments to non-controlling
interest ...................................
Net and comprehensive
income ...................................
Balance at May 25, 2014 ..............
Issuance of common stock at
$5.63 to $8.19 per share, net
of taxes paid by Landec on
behalf of employees ..............
Issuance of common stock for
372,852
40,154
—
—
—
—
—
—
26,815,253
102,745
vested restricted stock units ..
72,492
Taxes paid by Company for
stock swaps and RSUs ...........
Stock-based compensation ......
Tax benefit from stock-based
compensation expense ...........
Non-controlling interest ...........
Payments to non-controlling
interest ...................................
Net and comprehensive
—
—
—
—
—
income ...................................
Balance at May 31, 2015 ..............
—
26,990,490
$
—
—
—
—
—
—
—
—
26
1
—
—
—
—
—
—
—
27
—
—
—
—
—
—
—
—
27
3,416
—
(49)
1,695
1,302
—
—
—
—
—
—
—
—
—
3,416
—
(49)
1,695
1,302
—
—
—
126,258
22,587
52,409
22,587
178,693
2,297
—
(345)
1,356
1,922
—
—
—
—
—
—
—
—
—
2,298
—
(345)
1,356
1,922
—
—
—
131,488
19,145
71,554
19,145
203,069
122
—
(343)
1,577
463
—
—
—
—
—
—
—
—
—
122
—
(343)
1,577
463
—
—
$
—
133,307
$
13,544
85,098
$
13,544
218,432
$
—
—
—
—
—
225
(320)
—
1,721
—
—
—
—
—
197
(226)
—
1,692
—
—
—
—
—
181
(196)
—
1,677
See accompanying notes.
- 45 -
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Year Ended Year Ended
Year Ended
May 31,
2015
May 25,
2014
May 26,
2013
Consolidated net income ........................................................................... $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..............................................................
Stock-based compensation expense .......................................................
Deferred taxes .......................................................................................
Change in investment in non-public company , fair value.....................
Tax benefit from stock based compensation ..........................................
Impairment of non-public company, non-fair value investment ............
Net loss (gain) on disposal of property and equipment .........................
Earn out liability ....................................................................................
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable, net ....................................................................
Accounts receivable, related party .....................................................
Income taxes receivable ....................................................................
Inventories, net ..................................................................................
Issuance of notes and advances receivable ........................................
Collection of notes and advances receivable .....................................
Prepaid expenses and other current assets .........................................
Accounts payable ..............................................................................
Accounts payable, related party .........................................................
Income taxes payable ........................................................................
Accrued compensation ......................................................................
Other accrued liabilities .....................................................................
Deferred revenue ...............................................................................
Net cash provided by operating activities ......................................................
Cash flows from investing activities:
Purchases of property and equipment ........................................................
Investment in non-public company, fair value ..........................................
Proceeds from sale of fixed assets .............................................................
Purchase of marketable securities..............................................................
Proceeds from maturities of marketable securities ....................................
Net cash used in investing activities ..............................................................
Cash flows from financing activities:
Proceeds from sale of common stock ........................................................
Taxes paid by Company for stock swaps and RSUs ..................................
Tax benefit from stock-based compensation expense ...............................
Earn out payment from Lifecore acquisition .............................................
Net change in other assets/liabilities .........................................................
Proceeds from long term debt ....................................................................
Payments on long term debt ......................................................................
Proceeds from lines of credit .....................................................................
Payments on lines of credit .......................................................................
Payments to non-controlling interest. ........................................................
Net cash (used in) provided by financing activities ......................................
Net increase (decrease) in cash and cash equivalents ....................................
Cash and cash equivalents at beginning of year ............................................
Cash and cash equivalents at end of year ...................................................... $
13,725 $
19,342 $
22,812
7,090
1,577
4,152
(3,900)
(463)
793
(90)
—
(1,752)
(2)
2,313
(292)
(5,691)
5,730
(2,175)
2,784
110
1,229
2,646
(1,218)
(411)
26,155
(17,511)
(18,000)
1,071
—
—
(34,440)
122
(343)
463
—
(24)
15,014
(6,867)
30,417
(30,417)
(196)
8,169
(116)
14,243
14,127 $
7,114
1,356
5,605
(10,000 )
(1,922 )
—
329
—
(7,994 )
12
5,025
(622 )
(4,763 )
4,481
(32 )
(50 )
(91 )
—
38
3,211
6
21,045
(14,886 )
—
—
(1,417 )
2,962
(13,341 )
2,298
(1,271 )
1,922
—
31
—
(5,933 )
9,500
(13,500 )
(226 )
(7,179 )
525
13,718
14,243 $
7,295
1,695
6,511
(8,100)
(1,302)
—
217
(3,933)
(4,121)
(348)
(3,754)
(2,102)
(4,173)
4,173
(278)
8,826
10
—
(798)
(2,486)
1,086
21,230
(8,877)
—
—
(4,959)
3,414
(10,422)
3,416
(49)
1,302
(9,650)
712
—
(7,012)
—
(7,666)
(320)
(19,267)
(8,459)
22,177
13,718
Supplemental disclosure of cash flows information:
Cash paid during the period for interest .................................................... $
Cash paid during the period for income taxes, net of refunds received ..... $
1,994 $
150 $
1,504 $
50 $
1,728
5,605
See accompanying notes.
- 46 -
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies
Organization
Landec Corporation and its subsidiaries (“Landec” or the “Company”) design, develop, manufacture and sell
differentiated products for food and biomaterials markets and license technology applications to partners. The Company has two
proprietary polymer technology platforms: 1) Intelimer® polymers, and 2) hyaluronan (“HA”) biopolymers. The Company’s HA
biopolymers are proprietary in that they are specially formulated for specific customers to meet strict regulatory requirements.
The Company’s polymer technologies, along with its customer relationships and trade names, are the foundation, and a key
differentiating advantage upon which Landec has built its business. The Company sells specialty packaged branded Eat Smart®
and GreenLine® and private label fresh-cut vegetables and whole produce to retailers, club stores and foodservice operators,
primarily in the United States, Canada and Asia through its Apio, Inc. (“Apio”) subsidiary and sells HA-based biomaterials
through its Lifecore Biomedical, Inc. (“Lifecore”) subsidiary.
Basis of Presentation
Basis of Consolidation
The consolidated financial statements are presented on the accrual basis of accounting in accordance with U.S. generally
accepted accounting principles and include the accounts of Landec Corporation and its subsidiaries, Apio and Lifecore. All
material inter-company transactions and balances have been eliminated.
Arrangements that are not controlled through voting or similar rights are reviewed under the guidance for variable
interest entities (“VIEs”). A company is required to consolidate the assets, liabilities and operations of a VIE if it is determined
to be the primary beneficiary of the VIE.
An entity is a VIE and subject to consolidation, if by design: a) the total equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated financial support provided by any parties, including
equity holders or b) as a group the holders of the equity investment at risk lack any one of the following three characteristics:
(i) the power, through voting rights or similar rights to direct the activities of an entity that most significantly impact the entity’s
economic performance, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected
residual returns of the entity. The Company reviewed the consolidation guidance and concluded that the partnership interest and
equity investment in non-public companies by the Company are not VIEs.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make certain estimates and judgments that affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include
revenue recognition; sales returns and allowances; self insurance liabilities; recognition and measurement of current and deferred
income tax assets and liabilities; the assessment of recoverability of long-lived assets; the valuation of intangible assets and
inventory; the valuation of investments; and the valuation and recognition of stock-based compensation.
These estimates involve the consideration of complex factors and require management to make judgments. The analysis
of historical and future trends can require extended periods of time to resolve and are subject to change from period to period.
The actual results may differ from management’s estimates.
- 47 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
Concentrations of Risk
Cash and cash equivalents, marketable securities, trade accounts receivable, grower advances and notes receivable are
financial instruments that potentially subject the Company to concentrations of credit risk. Our Company policy limits, among
other things, the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued or
guaranteed by the U.S. government. The Company routinely assesses the financial strength of customers and growers and, as a
consequence, believes that trade receivables, grower advances and notes receivable credit risk exposure is limited. Credit losses
for bad debt are provided for in the consolidated financial statements through a charge to operations. A valuation allowance is
provided for known and anticipated credit losses. The recorded amounts for these financial instruments approximate their fair
value.
Several of the raw materials we use to manufacture our products are currently purchased from a single source, including
some monomers used to synthesize Intelimer polymers, substrate materials for our breathable membrane products and raw
materials for our HA products.
The operations of Windset, in which the Company holds a 26.9% minority investment, are predominantly located in
British Columbia and Santa Maria, California. Routinely, the Company evaluates the financial strength and ability for Windset
to continue as a going concern.
During the fiscal year ended May 31, 2015, sales to the Company’s top five customers accounted for approximately
46% of total revenue with the top two customers from the Food Products Technology segment, Costco Wholesale Corporation
(“Costco”) and Wal-mart, Inc. (“Wal-mart”) accounting for approximately 21% and 11%, respectively, of total revenues. In
addition, approximately 30% of the Company’s total revenues were derived from product sales to international customers, none
of which individually accounted for more than 5% of total revenues. As of May 31, 2015, the top two customers, Costco and
Wal-mart represented approximately 15% and 13%, respectively, of total accounts receivable.
During the fiscal year ended May 25, 2014, sales to the Company’s top five customers accounted for approximately
42% of total revenue with the top two customers from the Food Products Technology segment, Costco Wholesale Corporation
and Wal-mart, Inc. accounting for approximately 21% and 11%, respectively, of total revenues. In addition, approximately 29%
of the Company’s total revenues were derived from product sales to international customers, none of which individually
accounted for more than 5% of total revenues. As of May 25, 2014, the top two customers, Costco Wholesale Corporation and
Wal-mart, Inc. represented approximately 16% and 12%, respectively, of total accounts receivable.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying
amounts may not be recoverable. Recoverability of assets is measured by comparison of the carrying amount of the asset to the
net undiscounted future cash flow expected to be generated from the asset. If the future undiscounted cash flows are not sufficient
to recover the carrying value of the assets, the assets’ carrying value is adjusted to fair value. The Company regularly evaluates
its long-lived assets for indicators of possible impairment.
Financial Instruments
The Company’s financial instruments are primarily composed of marketable securities, commercial-term trade payables,
grower advances, notes receivable and debt instruments. For short-term instruments, the historical carrying amount approximates
the fair value of the instrument. The fair value of long-term debt and lines of credit approximates their carrying value. Fair values
for long-term financial instruments not readily marketable are estimated based upon discounted future cash flows at prevailing
market interest rates. Based on these assumptions, management believes the fair market values of the Company’s financial
instruments are not significantly different from their recorded amounts as of May 31, 2015 and May 25, 2014.
- 48 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
Accounts Receivable and Sales Returns and Allowance for Doubtful Accounts
The Company carries its accounts receivable at their face amounts less an allowance for estimated sales returns and
doubtful accounts. Sales return allowances are estimated based on historical sales return amounts. Further, on a periodic basis,
the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts and estimated losses resulting
from the inability of its customers to make required payments. The allowance for doubtful accounts is determined based on
review of the overall condition of accounts receivable balances and review of significant past due accounts. The allowance for
doubtful accounts is based on specific identification of past due amounts and for accounts over 90-days past due. The changes in
the Company’s allowance for sales returns and doubtful accounts are summarized in the following table (in thousands).
Additions
from
acquisitions
and
adjustments
charged to
revenue
and
expenses
Balance at
beginning
of period
Write offs,
net of
recoveries
Balance at
end of
period
Year ended May 26, 2013 ............................................................... $
512 $
109 $
(38) $
Year ended May 25, 2014 ............................................................... $
583 $
143 $
(210) $
Year ended May 31, 2015 ............................................................... $
516 $
— $
(134) $
583
516
382
Revenue Recognition
Revenue from product sales is recognized when there is persuasive evidence that an arrangement exists, title has
transferred, the price is fixed and determinable, and collectability is reasonably assured. Allowances are established for estimated
uncollectible amounts, product returns, and discounts based on specific identification and historical losses.
Apio’s Food Products Technology revenues generally consist of revenues generated from the sale of specialty packaged
fresh-cut and whole value-added processed vegetable products that are generally washed and packaged in our proprietary
packaging and sold under Apio’s Eat Smart and GreenLine brands and various private labels. Revenue is generally recognized
upon shipment of these products to customers. The Company takes title to all produce it trades and/or packages, and therefore,
records revenues and cost of sales at gross amounts in the Consolidated Statements of Comprehensive Income.
In addition, Food Products Technology value-added revenues include the revenues generated from Apio Cooling, LP,
a vegetable cooling operation in which Apio is the general partner with a 60% ownership position and from the sale of
BreatheWay® packaging to license partners. Revenue is recognized on the vegetable cooling operations as cooling and storage
services are provided to our customers. Sales of BreatheWay packaging are recognized when shipped to our customers.
Apio’s Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity
fruit and vegetable products to Asia by Cal-Ex. As most Cal-Ex customers are in countries outside of the U.S., title transfers and
revenue is generally recognized upon arrival of the shipment in the foreign port. Apio records revenue equal to the sale price to
third parties because it takes title to the product while in transit.
Our HA-based Biomaterials business principally generates revenue through the sale of products containing HA. Lifecore
primarily sells products to customers in three medical areas: (1) Ophthalmic, which represented approximately 60% of Lifecore’s
revenues in fiscal year 2015, (2) Orthopedic, which represented approximately 20% of Lifecore’s revenues in fiscal year 2015
and (3) Veterinary/Other. The vast majority of revenues from our HA-based Biomaterials business are recognized upon shipment.
- 49 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
Lifecore’s business development revenues, a portion of which are included in all three medical areas, are related to
contract research and development (R&D) services and multi-element arrangement services with customers where the Company
provides products and/or services in a bundled arrangement.
Contract R&D revenue is recorded as earned, based on the performance requirements of the contract. Non-refundable
contract fees for which no further performance obligations exist, and there is no continuing involvement by the Company, are
recognized on the earlier of when the payment is received or collection is assured.
For sales arrangements that contain multiple elements, the Company splits the arrangement into separate units of
accounting if the individually delivered elements have value to the customer on a standalone basis. The Company also evaluates
whether multiple transactions with the same customer or related party should be considered part of a multiple element
arrangement, whereby the Company assesses, among other factors, whether the contracts or agreements are negotiated or
executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of
each other. The Company then allocates revenue to each element based on a selling price hierarchy. The relative selling price for
a deliverable is based on its vendor-specific objective evidence (VSOE), if available, third-party evidence (TPE), if VSOE is not
available, or estimated selling price, if neither VSOE nor TPE is available. The Company then recognizes revenue on each
deliverable in accordance with its policies for product and service revenue recognition. The Company is not typically able to
determine VSOE or TPE, and therefore, uses the estimated selling price to allocate revenue between the elements of an
arrangement.
The Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on
the future delivery of products or services or future performance obligations or subject to customer-specific cancellation rights.
The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A
deliverable constitutes a separate unit of accounting when it has stand-alone value, and for an arrangement that includes a general
right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is
considered probable and is substantially controlled by the Company. The Company considers a deliverable to have stand-alone
value if the product or service is sold separately by the Company or another vendor or could be resold by the customer. Further,
the revenue arrangements generally do not include a general right of return relative to delivered products. Where the
aforementioned criteria for a separate unit of accounting are not met, the deliverable is combined with the undelivered element(s)
and treated as a single unit of accounting for the purposes of allocation of the arrangement consideration and revenue recognition.
The Company allocates the total arrangement consideration to each separable element of an arrangement based upon the relative
selling price of each element. Allocation of the consideration is determined at arrangement inception on the basis of each unit’s
relative selling price. In instances where the Company has not established fair value for any undelivered element, revenue for all
elements is deferred until delivery of the final element is completed and all recognition criteria are met.
Licensing revenue is recognized in accordance with prevailing accounting guidance. Initial license fees are deferred and
amortized to revenue over the period of the agreement when a contract exists, the fee is fixed and determinable, and collectability
is reasonably assured. Noncancellable, nonrefundable license fees are recognized over the period of the agreement, including
those governing research and development activities and any related supply agreement entered into concurrently with the license
when the risk associated with commercialization of a product is non-substantive at the outset of the arrangement.
From time to time, the Company offers customers sales incentives, which include volume rebates and discounts. These
amounts are estimated on a quarterly basis and recorded as a reduction of revenue.
- 50 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
A summary of revenues by type of revenue arrangement as described above is as follows (in thousands):
Year ended
May 31, 2015
Year ended
May 25, 2014
Year ended
May 26, 2013
Recorded upon shipment ....................................................................... $
Recorded upon acceptance in foreign port ............................................
Revenue from multiple element arrangements ......................................
Revenue from license fees, R&D contracts and royalties/profit
sharing .................................................................................................
Total ...................................................................................................... $
465,484 $
67,714
4,253
1,806
539,257 $
398,938 $
69,710
6,811
1,354
476,813 $
359,518
78,442
1,773
1,975
441,708
Shipping and Handling Costs
Amounts billed to third-party customers for shipping and handling are included as a component of revenues. Shipping
and handling costs incurred are included as a component of cost of products sold and represent costs incurred to ship product
from the sourcing locations to the end consumer markets.
Other Accounting Policies and Disclosures
Cash and Cash Equivalents
The Company records all highly liquid securities with three months or less from date of purchase to maturity as cash
equivalents. Cash equivalents consist mainly of certificate of deposits (CDs), money market funds and U.S. Treasuries. The
market value of cash equivalents approximates their historical cost given their short-term nature.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out method) or market. As of May 31, 2015 and May
25, 2014 inventories consisted of (in thousands):
Finished goods ........................................................................................................... $
Raw materials ..............................................................................................................
Work in progress .........................................................................................................
Inventories, net ........................................................................................................ $
May 31,
2015
May 25,
2014
13,271 $
9,879
1,877
25,027 $
11,111
10,376
3,248
24,735
If the cost of the inventories exceeds their net realizable value, provisions are recorded currently to reduce them to net
realizable value. The Company also provides a provision for slow moving and obsolete inventories based on the estimate of
demand for its products.
Advertising Expense
Advertising expenditures for the Company are expensed as incurred. Advertising expense for the Company for fiscal
years 2015, 2014 and 2013 was $1.3 million, $447,000 and $445,000, respectively.
Notes and Advances Receivable
Apio issues notes and makes advances to produce growers for their crop and harvesting costs primarily for the purpose
of sourcing crops for Apio's business. Notes receivable and advances are generally recovered during the growing season (less
than one year) using proceeds from the crops sold to Apio. Notes are interest bearing obligations, evidenced by contracts and
notes receivable. These notes and advances receivable are secured by perfected liens on crops, have terms that range from three
to nine months, and are reviewed at least quarterly for collectability. A reserve is established for any note or advance deemed to
not be fully collectible based upon an estimate of the crop value or the fair value of the security for the note or advance. There
were no notes or advances outstanding at May 31, 2015.
- 51 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
Related Party Transactions
The Company sold products to and earned license fees from Windset Holding 2010 Ltd., a Canadian corporation
(“Windset”) during the last three fiscal years. During fiscal years 2015, 2014 and 2013, the Company recognized related party
revenues of $537,000, $365,000, and $316,000, respectively. These amounts have been included in product sales in the
accompanying Consolidated Statements of Comprehensive Income, from the sale of products to and license fees from Windset.
The related receivable balances of $306,000 and $304,000 from Windset are included in accounts receivable, related party in the
accompanying Consolidated Balance Sheets as of May 31, 2015 and May 25, 2014, respectively.
Additionally, unrelated to the revenue transactions above, the Company purchases produce from Windset for sale to
third parties. During fiscal years 2015, 2014 and 2013, the Company recognized related party cost of product sales of $1.6
million, $1.6 million and $2.1 million, respectively, in the accompanying Consolidated Statements of Comprehensive Income,
from the sale of products purchased from Windset. The related accounts payable of $244,000 and $134,000 from Windset are
included in accounts payable, related party in the accompanying Consolidated Balance Sheets as of May 31, 2015 and May 25,
2014, respectively.
All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the
Board of Directors.
Property and Equipment
Property and equipment are stated at cost. Expenditures for major improvements are capitalized while repairs and
maintenance are charged to expense. Depreciation is expensed on a straight-line basis over the estimated useful lives of the
respective assets, generally three to forty years for buildings and leasehold improvements and three to twenty years for furniture
and fixtures, computers, capitalized software, capitalized leases, machinery, equipment and autos. Leasehold improvements are
amortized on a straight-line basis over the lesser of the economic life of the improvement or the life of the lease.
The Company capitalizes software development costs for internal use in accordance with accounting guidance.
Capitalization of software development costs begins in the application development stage and ends when the asset is placed into
service. The Company amortizes such costs using the straight-line basis over estimated useful lives of three to seven years.
During fiscal years 2015 and 2014, the Company capitalized $509,000 and $913,000 in software development costs, respectively.
During fiscal year 2013, the Company did not capitalize any software development costs.
Long-Lived Assets
The Company’s Long-Lived Assets consist of property, plant and equipment, and intangible assets. Intangible assets
are comprised of customer relationships with an estimated useful life of twelve to thirteen years (the “finite-lived intangible
assets”) and trademarks/trade names and goodwill with indefinite lives (collectively, “the indefinite-lived intangible assets”),
which the Company recognized in accordance with accounting guidance (i) upon the acquisition of GreenLine Holding Company
(“GreenLine”) by Apio in April 2012, (ii) upon the acquisition of Lifecore in April 2010 and (iii) upon the acquisition of Apio
in December 1999. Accounting guidance defines goodwill as “the excess of the cost of an acquired entity over the net of the
estimated fair values of the assets acquired and the liabilities assumed at date of acquisition.” All intangible assets, including
goodwill, associated with the acquisition of Lifecore was allocated to the HA-based Biomaterials reporting unit and the
acquisitions of Apio and GreenLine were allocated to the Food Products Technology reporting unit pursuant to accounting
guidance based upon the allocation of assets and liabilities acquired and consideration paid for each reporting unit. As of May
31, 2015, the HA-based Biomaterials reporting unit had $13.9 million of goodwill and the Food Products Technology reporting
unit had $35.7 million of goodwill.
- 52 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
Property, plant and equipment and finite-lived intangible assets are reviewed for possible impairment whenever events
or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group) may not be recoverable. The
Company’s impairment review requires significant management judgment including estimating the future success of product
lines, future sales volumes, revenue and expense growth rates, alternative uses for the assets and estimated proceeds from the
disposal of the assets. The Company conducts quarterly reviews of idle and underutilized equipment, and reviews business plans
for possible impairment indicators. Impairment is indicated when the carrying amount of the asset (or asset group) exceeds its
estimated future undiscounted cash flows and the impairment is viewed as other than temporary. When impairment is indicated,
an impairment charge is recorded for the difference between the asset’s book value and its estimated fair value. Depending on
the asset, estimated fair value may be determined either by use of a discounted cash flow model or by reference to estimated
selling values of assets in similar condition. The use of different assumptions would increase or decrease the estimated fair value
of assets and would increase or decrease any impairment measurement.
The Company tests its indefinite-lived intangible assets for impairment at least annually, in accordance with accounting
guidance. For all indefinite-lived assets, including goodwill, the Company performs a qualitative analysis in accordance with
ASC 350-30-35. Application of the impairment tests for indefinite-lived intangible assets requires significant judgment by
management, including identification of reporting units, assignment of assets and liabilities to reporting units, assignment of
intangible assets to reporting units, which judgments are inherently uncertain.
During the fiscal quarter ended February 23, 2014, the Company voluntarily changed the date of its annual goodwill
and indefinite-lived intangible assets impairment testing from the last day of the fiscal month in July to the first day of the fiscal
fourth quarter. This voluntary change was preferable under the circumstances as it provides the Company with additional time
to complete its annual goodwill and indefinite-lived intangible asset impairment testing in advance of its year-end reporting and
results in better alignment with the Company’s strategic planning and forecasting process. This change was not applied
retrospectively as it was impracticable to do so because retrospective application would have required application of significant
estimates and assumptions with the use of hindsight. Accordingly, the change was applied prospectively.
The Company tested its indefinite-lived intangible assets, including goodwill, for impairment as of March 2, 2015 and
determined that no adjustments to the carrying values of these assets were necessary as of that date. As a result, it was not
necessary to perform the two-step quantitative goodwill impairment test at the time. Subsequent to the 2015 annual impairment
test, there have been no significant events or circumstances affecting the valuation of goodwill. As of May 31, 2015, there were
no events or changes in circumstances that indicated that the carrying amount of intangible assets may not be recoverable or that
goodwill should be tested for impairment. Therefore, there was no impairment to the carrying value of the Company's goodwill.
There were no impairment losses for goodwill during fiscal years 2014 and 2013.
On a quarterly basis, the Company considers the need to update its most recent annual tests for possible impairment of
its indefinite-lived intangible assets, based on management’s assessment of changes in its business and other economic factors
since the most recent annual evaluation. Such changes, if significant or material, could indicate a need to update the most recent
annual tests for impairment of the indefinite-lived intangible assets during the current period. The results of these tests could lead
to write-downs of the carrying values of these assets in the current period.
In the annual impairment test, the Company first assess qualitative factors to determine whether it is necessary to
perform the two-step quantitative goodwill impairment test. In assessing the qualitative factors, management considers the impact
of these key factors: macro-economic conditions, industry and market environment, overall financial performance of the
Company, cash flow from operating activities, market capitalization and stock price. If management determines as a result of the
qualitative assessment that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting
unit is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required.
- 53 -
In a quantitative test, the Company compares the fair value of indefinite-lived intangible assets to its carrying value
including goodwill. The Company determines the fair value using both an income approach and a market approach. Under the
income approach, fair value is determined based on estimated future cash flows, discounted by an estimated weighted-average
cost of capital, which reflects the overall level of inherent risk of the Company and the rate of return an outside investor would
expect to earn. Under the market-based approach, information regarding the Company is utilized as well as publicly available
industry information to determine earnings multiples that are used to value the Company. If the carrying value of the Company
exceeds its fair value, the Company will determine the amount of impairment loss by comparing the implied fair value of goodwill
with the carrying value of goodwill. An impairment charge is recognized for the excess of the carrying value of goodwill over
its implied fair value.
Investment in Non-Public Company
In December 2005, Landec entered into a licensing agreement with Aesthetic Sciences for the exclusive rights to use
Landec's Intelimer® materials technology for the development of dermal fillers worldwide under the agreement. The Company
received shares of preferred stock in exchange for the license. As of March 1, 2015, the Company concluded that its investment
in Aesthetic Sciences was other than temporarily impaired, and therefore wrote off its remaining $793,000 investment (see Note
2).
On February 15, 2011, the Company made an investment in Windset which is reported as an investment in non-public
company, fair value, in the accompanying Consolidated Balance Sheets as of May 31, 2015 and May 25, 2014. The Company
has elected to account for its investment in Windset under the fair value option (see Note 2).
Partial Self-Insurance on Employee Health Plan
The Company provides health insurance benefits to eligible employees under a self-insured plan whereby the Company
pays actual medical claims subject to certain stop loss limits. The Company records self-insurance liabilities based on actual
claims filed and an estimate of those claims incurred but not reported. Any projection of losses concerning the Company's liability
is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as inflation
rates, changes in severity, benefit level changes, medical costs, and claims settlement patterns. This self-insurance liability is
included in accrued liabilities and represents management's best estimate of the amounts that have not been paid as of May 31,
2015. It is reasonably possible that the expense the Company ultimately incurs could differ and adjustments to future reserves
may be necessary.
Deferred Revenue
Cash received in advance of services performed are recorded as deferred revenue. At May 31, 2015, $843,000 was
recognized as advances from customers. At May 25, 2014, $1.3 million was recognized as advances from customers.
Non-Controlling Interest
The Company reports all non-controlling interests as a separate component of stockholders’ equity. The non-controlling
interest’s share of the income or loss of the consolidated subsidiary is reported as a separate line item in our Consolidated
Statements of Comprehensive Income, following the consolidated net income caption.
In connection with the acquisition of Apio, Landec acquired Apio’s 60% general partner interest in Apio Cooling, a
California limited partnership. Apio Cooling is included in the consolidated financial statements of Landec for all periods
presented. The non-controlling interest balance of $1.7 at both May 31, 2015 and May 25, 2014 was comprised of the non-
controlling limited partners’ interest in Apio Cooling.
- 54 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes in accordance with accounting guidance which requires that deferred tax assets
and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of
recorded assets and liabilities. The Company maintains valuation allowances when it is likely that all or a portion of a deferred
tax asset will not be realized. Changes in valuation allowances from period to period are included in the Company’s income tax
provision in the period of change. In determining whether a valuation allowance is warranted, the Company takes into account
such factors as prior earnings history, expected future earnings, unsettled circumstances that, if unfavorably resolved, would
adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially
enhance the likelihood of realization of a deferred tax asset. At May 31, 2015, the Company had a $1.2 million valuation
allowance against its deferred tax assets.
In addition to valuation allowances, the Company establishes accruals for uncertain tax positions. The tax-contingency
accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging
legislation. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax
expense. The Company’s effective tax rate includes the impact of tax-contingency accruals as considered appropriate by
management.
A number of years may elapse before a particular matter, for which the Company has accrued, is audited and finally
resolved. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome
or the timing of resolution of any particular tax matter, the Company believes its tax-contingency accruals are adequate to address
known tax contingencies. Favorable resolution of such matters could be recognized as a reduction to the Company’s effective
tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective tax rate. Any
resolution of a tax issue may require the use of cash in the year of resolution. The Company’s tax-contingency accruals are
recorded in other accrued liabilities in the accompanying Consolidated Balance Sheets.
Per Share Information
Accounting guidance requires the presentation of basic and diluted earnings per share. Basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities and is computed using the weighted average number of
common shares outstanding. Diluted earnings per share reflect the potential dilution as if securities or other contracts to issue
common stock were exercised or converted into common stock. Diluted common equivalent shares consist of stock options and
restricted stock units, calculated using the treasury stock method.
The following table sets forth the computation of diluted net income per share (in thousands, except per share amounts):
Numerator:
Net income applicable to Common Stockholders .......................... $
Denominator:
Fiscal Year
Ended
May 31, 2015
Fiscal Year
Ended
May 25, 2014
Fiscal Year
Ended
May 26, 2013
13,544 $
19,145 $
22,587
Weighted average shares for basic net income per share .............
26,884
26,628
25,830
Effect of dilutive securities:
Stock options and restricted stock units .......................................
Weighted average shares for diluted net income per share .............
452
27,336
492
27,120
796
26,626
Diluted net income per share .......................................................... $
0.50 $
0.71 $
0.85
Options to purchase 371,115, 333,993 and 88,022 shares of Common Stock at a weighted average exercise price of
$14.02, $14.15 and $12.80 per share were outstanding during fiscal years ended May 31, 2015, May 25, 2014 and May 26, 2013,
respectively, but were not included in the computation of diluted net income per share because the options’ exercise price were
greater than the average market price of the Common Stock and, therefore, their inclusion would be antidilutive.
- 55 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
Cost of Sales
The Company includes in cost of sales all the costs related to the sale of products. These costs include the following:
raw materials (including produce, seeds, packaging, syringes and fermentation and purification supplies), direct labor, overhead
(including indirect labor, depreciation, and facility related costs) and shipping and shipping related costs.
Research and Development Expenses
Costs related to both research and development contracts and Company-funded research is included in research and
development expenses. Research and development costs are primarily comprised of salaries and related benefits, supplies, travel
expenses, consulting expenses and corporate allocations.
Accounting for Stock-Based Compensation
The Company records compensation expense for stock-based awards issued to employees and directors in exchange for
services provided based on the estimated fair value of the awards on their grant dates and is recognized over the required service
periods (generally the vesting period). For nonstatutory options, the cash flows resulting from the tax benefit due to tax deductions
in excess of the compensation expense recognized for those options (excess tax benefit) are classified as financing activities
within the statement of cash flows. The Company’s stock-based awards include stock option grants and restricted stock unit
awards (“RSUs”).
The following table summarizes the stock-based compensation for options and RSUs (in thousands):
Options ................................................................................ $
RSUs ...................................................................................
Total stock-based compensation expense ........................ $
561 $
1,016
1,577 $
558 $
798
1,356 $
788
907
1,695
Fiscal Year Ended
May 31, 2015
Fiscal Year Ended
Fiscal Year Ended
May 25, 2014
May 26, 2013
The following table summarizes the stock-based compensation by income statement line item (in thousands):
Research and development .................................................. $
Sales, general and administrative ........................................
Total stock-based compensation expense ........................ $
38 $
1,539
1,577 $
39 $
1,317
1,356 $
718
977
1,695
Fiscal Year Ended
May 31, 2015
Fiscal Year Ended
Fiscal Year Ended
May 25, 2014
May 26, 2013
The estimated fair value for stock options, which determines the Company’s calculation of compensation expense, is
based on the Black-Scholes option pricing model. RSUs are valued at the closing market price of the Company’s common stock
on the date of grant. The Company uses the straight line single option method to calculate and recognize the fair value of stock-
based compensation arrangements. In addition, the Company uses historical data to estimate pre-vesting forfeitures and records
stock-based compensation expense only for those awards that are expected to vest and revises those estimates in subsequent
periods if the actual forfeitures differ from the prior estimates.
The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the expected
stock price volatility and expected life of option awards, which have a significant impact on the fair value estimates. As of May
31, 2015, May 25, 2014 and May 26, 2013, the fair value of stock option grants was estimated using the following weighted
average assumptions:
- 56 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
Expected life (in years) ......................................................
Risk-free interest rate .........................................................
Volatility ............................................................................
Dividend yield ....................................................................
3.25
1.00%
0.32
0%
3.50
0.71%
0.41
0%
3.76
0.48%
0.53
0%
Fiscal Year Ended
May 31, 2015
Fiscal Year Ended
Fiscal Year Ended
May 25, 2014
May 26, 2013
The weighted average estimated fair value of Landec employee stock options granted at grant date market prices during
the fiscal years ended May 31, 2015, May 25, 2014 and May 26, 2013 was $3.42, $4.41 and $3.57 per share, respectively. No
stock options were granted above or below grant date market prices during the fiscal years ended May 31, 2015, May 25, 2014
and May 26, 2013.
Fair Value Measurements
The Company uses fair value measurement accounting for financial assets and liabilities and for financial instruments
and certain other items measured at fair value. The Company has elected the fair value option for its investment in a non-public
company (see Note 2 to the Consolidated Financial Statements). The Company has not elected the fair value option for any of
its other eligible financial assets or liabilities.
The accounting guidance established a three-tier hierarchy for fair value measurements, which prioritizes the inputs
used in measuring fair value as follows:
Level 1 – observable inputs such as quoted prices for identical instruments in active markets.
Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through
corroboration with observable market data.
Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop
its own assumptions.
As of May 31, 2015, the only asset of the Company that was measured at fair value on a recurring basis was its minority
interest investment in Windset.
The Company has elected the fair value option of accounting for its investment in Windset. The calculation of fair value
utilizes significant unobservable inputs in the discounted cash flow models, including projected cash flows, growth rates and
discount rates. As a result, the Company’s investment in Windset is considered to be a Level 3 measurement investment. The
change in the fair market value of the Company’s investment in Windset for the fiscal years ended May 31, 2015 and May 25,
2014 was due to the Company’s 26.9% and 20.1%, respectively, minority interest in the change in the fair market value of
Windset during those periods. In determining the fair value of the investment in Windset, the Company utilizes the following
significant unobservable inputs in the discounted cash flow models:
Annual consolidated revenue growth rates......................................................................
Annual consolidated expense growth rates .....................................................................
Consolidated income tax rates .........................................................................................
Consolidated discount rates .............................................................................................
At May 31, 2015 At May 25, 2014
4%
4%
4%
4%
15%
15%
16% to 22%
15% to 21%
The revenue growth, expense growth and income tax rate assumptions, consider the Company's best estimate of the
trends in those items over the discount period. The discount rate assumption takes into account the risk-free rate of return, the
market equity risk premium and the company’s specific risk premium and then applies an additional discount for lack of
marketability of the underlying securities. The discounted cash flow valuation model used by the Company has the following
sensitivity to changes in inputs and assumptions (in thousands):
- 57 -
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued)
10% increase in revenue growth rates ........................................................................................................ $
10% increase in expense growth rates ........................................................................................................ $
10% increase in income tax rates ............................................................................................................... $
10% increase in discount rates ................................................................................................................... $
Impact on value of
Windset investment
as of May 31, 2015
2,300
(1,200)
(100)
(1,500)
Imprecision in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular
position. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date.
The following table summarizes the fair value of the Company’s assets and liabilities that are measured at fair value on
a recurring basis, as of May 31, 2015 and May 25, 2014 (in thousands):
Level 1
Fair Value at May 31, 2015
Level 2
Level 3
Fair Value at May 25, 2014
Level 1
Level 2
- $
-
- $
- $
-
- $
Level 3
-
39,600
39,600
- $
61,500
61,500 $
-
- $
-
- $
44
44 $
-
-
Assets:
Marketable securities ..................... $
Investment in private company ......
Total ............................................ $
Liabilities:
Interest rate swap ............................
Total ............................................ $
Recent Accounting Pronouncements
Debt Issuance Costs
- $
-
- $
-
- $
- $
-
- $
-
- $
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No.
2015-03, Simplifying the Presentation of Debt Issuance Cost ("ASU 2015-03"), which requires that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The new guidance is effective for the Company beginning in the fourth quarter of fiscal year
2016, with early adoption permitted. Management is currently evaluating the impact that adoption of ASU 2015-03 will have on
the Company’s Consolidated Financial Statements and disclosures.
Revenue Recognition
In May 2014, the FASB issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with
Customers (Topic 606) ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for
revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-
specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial
statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising
from a company’s contracts with customers. ASU 2014-09 will be effective beginning the first quarter of the Company's fiscal
year 2019 and early application is not permitted. The standard allows for either “full retrospective” adoption, meaning the
standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to
the most current period presented in the financial statements. Management is currently evaluating the effect ASU 2014-09 will
have on the Company's Consolidated Financial Statements and disclosures.
- 58 -
2. Investments in non-public companies
Aesthetic Sciences
In December 2005, Landec entered into a licensing agreement with Aesthetic Sciences for the exclusive rights to use
Landec's Intelimer® materials technology for the development of dermal fillers worldwide under the agreement. The Company
received shares of preferred stock in exchange for the license. Aesthetic Sciences sold the rights to its Smartfil Injector System
on July 16, 2010. The royalty period from the sale of the Smartfil Injector System began November 1, 2014 and as a result the
Company obtained for the first time during the third quarter of fiscal year 2015 financial information for the products for which
a royalty is due Aesthetic Sciences. Based on the review of this historical financial information and discussions with the acquirer,
the Company concluded that its investment in Aesthetic Sciences was other than temporarily impaired, and therefore wrote off
its remaining $793,000 investment in Aesthetic Sciences as of March 1, 2015 and is included in other income in the Consolidated
Statements of Comprehensive Income.
Windset
On February 15, 2011, Apio entered into a share purchase agreement (the “Windset Purchase Agreement”) with
Windset. Pursuant to the Windset Purchase Agreement, Apio purchased from Windset 150,000 Senior A preferred shares for $15
million and 201 common shares for $201. On July 15, 2014, Apio increased its investment in Windset by purchasing from the
Newell Capital Corporation an additional 68 shares of common stock and 51,211 shares of junior preferred stock of Windset for
$11.0 million. After this purchase, the Company’s common shares represent a 26.9% ownership interest in Windset. The non-
voting Senior A preferred shares yield a cash dividend of 7.5% annually. The dividend is payable within 90 days of each
anniversary of the execution of the Windset Purchase Agreement. The non-voting junior preferred stock does not yield a dividend
unless declared by the Board of Directors of Windset and no such dividend has been declared.
The Windset Purchase Agreement includes a put and call option, which can be exercised on the sixth anniversary of the
Windset Purchase Agreement whereby Apio can exercise the put to sell its common, Senior A preferred shares and junior
preferred shares to Windset, or Windset can exercise the call to purchase those shares from Apio, in either case, at a price equal
to 26.9% of the appreciation in the fair market value of Windset’s common shares from the date of the Company’s investment
through the put and call date, plus the liquidation value of the preferred shares of $20.1 million ($15 million for the Senior A
preferred shares and $5.1 million for the junior preferred shares). Under the terms of the arrangement with Windset, the Company
is entitled to designate one of five members on the Board of Directors of Windset.
On October 29, 2014, Apio further increased its investment in Windset by purchasing 70,000 shares of Senior B
preferred shares for $7.0 million. The Senior B Preferred Stock pays an annual dividend of 7.5% on the amount outstanding at
each anniversary date of the Windset Purchase Agreement. The Senior B shares purchased by Apio have a put feature whereby
Apio can sell back to Windset $1.5 million of shares on the first anniversary, an additional $2.75 million of shares on the second
anniversary and the remaining $2.75 million on the third anniversary. After the third anniversary, Apio may at any time put any
or all of the shares not previously sold back to Windset. At any time on or after February 15, 2017, Windset has the right to call
any or all of the outstanding common shares and at such time must also call the same proportion of Senior A preferred shares,
Senior B preferred shares and junior preferred shares owned by Apio. Windset’s partial call provision is restricted such that a
partial call cannot result in Apio holding less than 10% of Windset’s common shares outstanding.
The investment in Windset does not qualify for equity method accounting as the investment does not meet the criteria
of in-substance common stock due to returns through the annual dividend on the non-voting senior preferred shares that are not
available to the common stock holders. As the put and call options require the Purchased Shares to be put or called in equal
proportions, the Company has deemed that the investment, in substance, should be treated as a single security for purposes of
accounting. The Company has adopted fair value option in the accounting for its investment in Windset effective on the
acquisition date. The fair value of the Company’s investment in Windset utilizes significant unobservable inputs in the discounted
cash flow models, including projected cash flows, growth rates and the discount rate, and is therefore considered a Level 3 for
fair value measurement purposes (see Note 1). The Company believes that reporting its investment at fair value provides its
investors with useful information on the performance of the Company’s investment and the anticipated appreciation in value as
Windset expands its business.
- 59 -
2. Investments in non-public companies (continued)
The fair value of the Company’s investment in Windset was determined utilizing the Windset Purchase Agreement’s
put/call calculation for value and a discounted cash flow model based on projections developed by Windset, and considers the
put and call conversion options. These features impact the duration of the cash flows utilized to derive the estimated fair values
of the investment. These two discounted cash flow models’ estimate for fair value, which generally approximate a similar result,
is then weighted. Assumptions included in these discounted cash flow models will be evaluated quarterly based on Windset’s
actual and projected operating results to determine the change in fair value.
During the year ended May 31, 2015, the Company recorded $1.4 million in dividends and in fiscal years ended May
25, 2014 and May 26, 2013, the Company recorded $1.1 million in dividend income. In addition, the Company recorded $3.9
million, $10.0 million and $8.1 million of income for fiscal years ended May 31, 2105, May 25, 2014 and May 26, 2013,
respectively, which is included in other income in the Consolidated Statements of Comprehensive Income, from the increase in
the fair market value of the Company’s investment in Windset.
The Company also entered into an exclusive license agreement with Windset, which was executed in June 2010, prior
to contemplation of Apio’s investment in Windset.
3. Property and Equipment
Property and equipment consists of the following (in thousands):
Land and building .............................................................................
Leasehold improvements...................................................................
Computer, capitalized software, machinery, equipment and auto .....
Furniture and fixtures ........................................................................
Construction in process .....................................................................
Gross property and equipment .......................................................
Less accumulated depreciation and amortization ..............................
Net property and equipment ..........................................................
Years of
Useful Life
15-40
3-20
3-20
3-7
May 31, 2015 May 25, 2014
56,378
$
1,079
53,715
824
6,975
118,971
(44,831)
74,140
57,426 $
1,360
68,260
804
6,837
134,687
(50,222)
84,465 $
$
Depreciation and amortization expense for property and equipment for the fiscal years ended May 31, 2015, May 25,
2014 and May 26, 2013 was $6.2 million, $6.2 million and $6.3 million, respectively. There was no equipment under capital
leases at May 31, 2015 or May 25, 2014. Amortization related to capitalized software was $158,000, $189,000 and $160,000 for
fiscal years ended May 31, 2015, May 25, 2014 and May 26, 2013, respectively. The unamortized computer software costs as of
both May 31, 2015 and May 25, 2014 was $1.1 million.
4. Intangible Assets
The carrying amount of goodwill as of May 31, 2015, May 25, 2014 and May 26, 2013 was $35.7 million for the Food
Products Technology segment and $13.9 million for the Hyaluronan-based Biomaterials segment.
- 60 -
4. Intangible Assets (continued)
Information regarding Landec’s other intangible assets is as follows (in thousands):
Trademarks &
Trade names
Customer
Relationships
Total
Balance as of May 27, 2012 ......................................... $
Amortization expense ...............................................
Balance as of May 26, 2013 .........................................
Amortization expense ...............................................
Balance as of May 25, 2014 .........................................
Amortization expense ...............................................
Balance as of May 31, 2015 ......................................... $
48,428 $
—
48,428
—
48,428
—
48,428 $
10,557 $
(951)
9,606
(886)
8,720
(885)
7,835 $
58,985
(951)
58,034
(886)
57,148
(885)
56,263
Accumulated amortization of Trademark and Trade names as of both May 31, 2015 and May 25, 2014 was $872,000.
Accumulated amortization of Customer Relationships as of May 31, 2015 and May 25, 2014 was $3.4 million and $2.5 million,
respectively. Accumulated impairment losses as of both May 31, 2015 and May 25, 2014 were $4.8 million. Lifecore’s Customer
Relationships amount of $3.7 million is being amortized over 12 years and Apio’s customer relationships amount of $7.5 million
is being amortized over 13 years. The amortization expense for the next five fiscal years is estimated to be $885,000 per year.
5. Stockholders’ Equity
Holders of Common Stock are entitled to one vote per share.
Convertible Preferred Stock
The Company has authorized two million shares of preferred stock, and as of May 31, 2015 has no outstanding preferred
Common Stock and Stock Option Plans
At May 31, 2015, the Company had 881,143 common shares reserved for future issuance under Landec equity incentive
stock.
plans.
On October 10, 2013, following stockholder approval at the Annual Meeting of Stockholders of the Company, the 2013
Stock Incentive Plan (the “Plan”) became effective and replaced the Company’s 2009 Stock Incentive Plan. Employees
(including officers), consultants and directors of the Company and its subsidiaries and affiliates are eligible to participate in the
Plan.
The Plan provides for the grant of stock options (both nonstatutory and incentive stock options), stock grants, stock
units and stock appreciation rights. Awards under the Plan will be evidenced by an agreement with the Plan participants and 2.0
million shares of the Company’s Common Stock (“Shares”) were initially available for award under the Plan. Under the Plan,
no recipient may receive awards during any fiscal year that exceeds the following amounts: (i) stock options covering in excess
of 500,000 Shares; (ii) stock grants and stock units covering in excess of 250,000 Shares in the aggregate; or (iii) stock
appreciation rights covering more than 500,000 Shares. In addition, awards to non-employee directors are discretionary.
However, a non-employee director may not be granted awards in excess of 30,000 Shares in the aggregate during any fiscal year.
The exercise price of the options is the fair market value of the Company’s Common Stock on the date the options are granted.
On October 15, 2009, following stockholder approval at the Annual Meeting of Stockholders of the Company, the 2009
Stock Incentive Plan (the “2009 Plan”) became effective and replaced the Company’s 2005 Stock Incentive Plan. Employees
(including officers), consultants and directors of the Company and its subsidiaries and affiliates were eligible to participate in the
2009 Plan. The 2009 Plan provided for the grant of stock options (both nonstatutory and incentive stock options), stock grants,
stock units and stock appreciation rights. Under the 2009 Plan, 1.9 million Shares were initially available for awards and as of
May 31, 2015, 865,834 options to purchase shares and restricted stock units (RSUs) were outstanding.
- 61 -
5. Stockholders’ Equity (continued)
On October 14, 2005, following stockholder approval at the Annual Meeting of Stockholders of the Company, the 2005
Stock Incentive Plan (“2005 Plan”) became effective. The 2005 Plan replaced the Company’s four then existing equity plans and
no shares remain available for grant under those plans. Employees (including officers), consultants and directors of the Company
and its subsidiaries and affiliates were eligible to participate in the 2005 Plan. The 2005 Plan provided for the grant of stock
options (both nonstatutory and incentive stock options), stock grants, stock units and stock appreciation rights. Under the 2005
Plan, 861,038 Shares were initially available for awards, and as of May 31, 2015, 168,550 options to purchase shares were
outstanding. The exercise price of the options was the fair market value of the Company’s Common Stock on the date the options
were granted.
The 1995 Directors’ Stock Option Plan (the “Directors Plan”) provided that each person who became a non- employee
director of the Company, who had not received a previous grant, be granted a nonstatutory stock option to purchase 20,000 shares
of Common Stock on the date on which the optionee first became a non-employee director of the Company. Thereafter, on the
date of each annual meeting of the stockholders each non-employee director was granted an additional option to purchase 10,000
shares of Common Stock if, on such date, he or she had served on the Company’s Board of Directors for at least six months prior
to the date of such annual meeting. The exercise price of the options was the fair market value of the Company’s Common Stock
on the date the options were granted. Options granted under this plan were exercisable and vested upon grant. Under the Directors
Plan, 800,000 Shares were initially available for awards, and as of May 31, 2015, 10,000 options to purchase shares were
outstanding. No shares remain available for grant under the Directors’ Plan.
Activity under all Landec equity incentive plans is as follows:
Stock-Based Compensation Activity
RSUs and
Options
Available
for Grant
Restricted Stock Outstanding
Number
of
Restricted
Shares
Weighted
Average
Grant Date
Fair Value
Stock Options Outstanding
Number of
Stock
Options
Weighted
Average
Exercise
Price
Balance at May 27, 2012 ....................
Granted ...............................................
Awarded/Exercised ............................
Forfeited .............................................
Plan shares expired ............................
Balance at May 26, 2013 ....................
Additional shares reserved .................
Granted ...............................................
Awarded/Exercised ............................
Forfeited .............................................
Plan shares expired ............................
Balance at May 25, 2014 ....................
Granted ...............................................
Awarded/Exercised ............................
Forfeited .............................................
Plan shares expired ............................
Balance at May 31, 2015 ....................
449,643
(26,666)
—
—
—
422,977
2,000,000
(420,131)
—
—
(2,846)
2,000,000
(1,118,857)
—
—
—
881,143
348,166 $
6,666 $
(231,086) $
(28,416) $
—
95,330 $
—
128,631 $
(62,499) $
(12,162) $
—
149,300 $
324,357 $
(79,219) $
(1,667) $
—
392,771 $
5.93
9.01
5.74
6.20
—
6.52
—
14.30
6.18
8.86
—
13.17
13.97
11.57
14.30
—
14.15
2,046,432 $
20,000 $
(671,563) $
(44,977) $
(10,000) $
1,339,892 $
—
291,500 $
(398,080) $
(12,452) $
(5,000) $
1,215,860 $
794,500 $
(205,419) $
(2,223) $
(66,000) $
1,736,718 $
6.50
9.01
6.30
6.34
13.32
6.58
—
14.30
6.45
6.66
13.32
8.45
14.20
6.55
14.30
11.32
11.19
- 62 -
5. Stockholders’ Equity (continued)
Upon vesting of certain RSUs and the exercise of certain options during fiscal years 2015, 2014 and 2013, certain RSUs
and exercised options were net share-settled to cover the required exercise price and withholding tax and the remaining amounts
were converted into an equivalent number of shares of Common Stock. The Company withheld shares with value equivalent to
the exercise price for options and the employees' minimum statutory obligation for the applicable income and other employment
taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld for fiscal years 2015, 2014 and 2013
were 112,443, 47,573 and 145,159 RSUs and options, respectively, which was based on the value of the option and/or RSUs on
their exercise or vesting date as determined by the Company's closing stock price. Total payments for the employees' tax
obligations to the taxing authorities during fiscal years 2015, 2014 and 2013 were approximately $343,000, $1.3 million and
$49,000, respectively. These net-share settlements had the effect of share repurchases by the Company as they reduced and
retired the number of shares that would have otherwise have been issued as a result of the vesting and did not represent an expense
to the Company.
The following table summarizes information concerning stock options outstanding and exercisable at May 31, 2015:
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (in
years)
Range of
Exercise
Prices
$ 5.00 - $6.00 ....................
$ 6.01 - $9.00 ....................
$ 9.01 - $14.00 ..................
$14.01- $14.39 ..................
$ 5.00 - $14.39 ...................
Number of
Shares
Outstanding
317,750
315,191
140,000
963,777
1,736,718
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
2.10 $
1.83 $
6.14 $
6.39 $
4.76 $
5.65 $ 2,746,675
6.46 $ 2,466,904
240,900
12.57 $
—
14.36 $
11.19 $ 5,454,479
Number of
Shares
Exercisable
317,750 $
315,191 $
30,732 $
185,791 $
849,464 $
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
5.65 $ 2,746,675
6.46 $ 2,466,904
115,027
10.55 $
—
14.30 $
8.02 $ 5,328,606
At May 31, 2015 and May 25, 2014 options to purchase 849,464 and 984,610 shares of Landec’s Common Stock were
vested, respectively, and 887,254 and 231,250 were unvested, respectively. No options have been exercised prior to being vested.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock
price of $14.29 on May 29, 2015, which would have been received by holders of stock options had all holders of stock options
exercised their stock options that were in-the-money as of that date. The total number of in-the-money stock options exercisable
as of May 31, 2015, was 663,673 shares. The aggregate intrinsic value of stock options exercised during the fiscal year 2015 was
$1.5 million.
Option Awards
Weighted
Average
Exercise
Price
Outstanding
Options
Weighted
Average
Remaining
Contract
Term
(in years)
Aggregate
Intrinsic
Value
Vested .............................................................................................
Expected to vest ..............................................................................
Total .....................................................................................
849,464 $
861,612 $
1,711,076 $
8.02
14.22
11.14
2.74 $ 5,328,606
6.69
123,261
4.73 $ 5,451,867
As of May 31, 2015, there was $7.6 million of total unrecognized compensation expense related to unvested equity
compensation awards granted under the Company’s incentive stock plans. Total expense is expected to be recognized over the
weighted-average period of 2.6 years for both stock options and restricted stock awards.
- 63 -
Stock Repurchase Plan
On July 14, 2010, the Board of Directors of the Company approved the establishment of a stock repurchase plan which
allows for the repurchase of up to $10 million of the Company’s Common Stock. The Company may repurchase its common
stock from time to time in open market purchases or in privately negotiated transactions. The timing and actual number of shares
repurchased is at the discretion of management of the Company and will depend on a variety of factors, including stock price,
corporate and regulatory requirements, market conditions, the relative attractiveness of other capital deployment opportunities
and other corporate priorities. The stock repurchase program does not obligate Landec to acquire any amount of its common
stock and the program may be modified, suspended or terminated at any time at the Company's discretion without prior notice.
During fiscal years 2015, 2014 and 2013, the Company did not purchase any shares on the open market.
6. Debt
Long-term debt consists of the following (in thousands):
May 31, 2015
May 25, 2014
Real estate loan agreement with General Electric Capital Corporation (“GE
Capital”); due in monthly principal and interest payments of $133,060 through
May 1, 2022 with interest based on a fixed rate of 4.02% per annum ..................... $
Capital equipment loan with GE Capital; due in monthly principal and interest
payments of $175,356 through May 1, 2019 with interest based on a fixed rate of
4.39% per annum .....................................................................................................
Capital equipment loan with GE Capital; due in monthly principal and interest
payments of $95,120 through September 1, 2019 with interest based on a fixed
rate of 3.68% per annum ..........................................................................................
Capital equipment loan with GE Capital; due in monthly principal and interest
payments of $55,828 through December 1, 2019 with interest based on a fixed
rate of 3.74% per annum ..........................................................................................
Capital equipment loan with Bank of America (“BofA”); due in monthly principal
and interest payments of $68,274 through June 28, 2020 with interest based on a
fixed rate of 2.79% per annum ................................................................................
Term note with BMO Harris; due in monthly payments of $250,000 through May
23, 2016 with interest payable monthly at LIBOR plus 2% per annum ..................
Industrial revenue bonds (“IRBs”) issued by Lifecore; due in annual payments
through 2020 with interest at a variable rate set weekly by the bond remarketing
agent (0.31% and 0.28% at May 31, 2015 and May 25, 2014, respectively) ..........
Total ............................................................................................................................
Less current portion .....................................................................................................
Long-term portion ....................................................................................................... $
15,172 $
16,137
7,705
9,430
6,476
3,907
3,819
3,000
2,440
42,519
(8,353)
34,166 $
—
—
—
6,000
2,805
34,372
(6,055)
28,317
- 64 -
6. Debt (continued)
The future minimum principal payments of the Company’s debt for each year presented are as follows (in thousands):
FY 2016..............................................
GE and BofA
GE RE Loan M&E Loans BMO Harris
3,000
3,973
1,005
FY 2017..............................................
1,047
4,130
FY 2018..............................................
1,089
4,293
FY 2019..............................................
1,134
4,461
FY 2020..............................................
1,180
5,050
Thereafter ...........................................
9,717
—
—
—
—
—
—
IRB
Total
375
390
400
410
425
8,353
5,567
5,782
6,005
6,655
440
10,157
Total ................................................ $
15,172 $
21,907 $
3,000 $
2,440 $
42,519
On July 17, 2014, Apio entered into an amendment with GE Capital, which amended the revolving line of credit dated
April 23, 2012 among the parties. Under the amendment, the revolving line of credit increased from $25 million to $40 million,
the interest rate was reduced from LIBOR plus 2.0% to LIBOR plus 1.75%, and the term was extended to July 17, 2019, among
other changes. The availability under the revolving line of credit is based on the combination of the eligible accounts receivable
and eligible inventory (availability was $30.3 million at May 31, 2015). Apio’s revolving line of credit has an unused fee of
0.375% per annum. At both May 31, 2015 and May 25, 2014, there was no outstanding balance under Apio’s revolving line of
credit.
Also on July 17, 2014, Apio entered into a new equipment loan with GE Capital whereby Apio can borrow up to $25
million based on eligible equipment purchases between August 1, 2012 and August 31, 2015. Each borrowing under this new
equipment loan has a five year term with a seven year amortization period. On August 28, 2014, Apio borrowed $7.1 million
under the new equipment loan at a fixed rate of 3.68%. On November 24, 2014, Apio borrowed an additional $4.1 million under
the new equipment loan at a fixed rate of 3.74%. The Company does not intend to borrow any more funds under this loan.
On May 15, 2015, GE Capital and Apio entered into a commitment letter, pursuant to which GE Capital committed to
lend Apio up to approximately $14.7 million in equipment financing and approximately $7.7 million in real property financing.
The equipment loan and the real property loan will be made pursuant to existing loan agreements dated as of April 23, 2012, as
amended May 17, 2013 and July 17, 2014. No amounts had been borrowed under these committed loans as of May 31, 2015.
The equipment loan is available to finance purchases of equipment between May 1, 2015 and June 30, 2017. Borrowings under
the equipment loan will have a five-year term and a seven-year amortization. Interest on each borrowing under the equipment
loan will be at a fixed rate based on an index rate plus a 5-year swap rate at the time of borrowing. The real property loan will be
used to finance the expansion of Apio’s facility in Hanover, PA. The real property loan will have a 10-year term and a 20-year
amortization. Interest will be at a fixed rate based on an index rate plus a 10-year swap rate on at the time of borrowing. No
amounts had been borrowed under these committed loans as of May 31, 2015.
The GE real estate, equipment and line of credit agreements (collectively the “GE Debt Agreements”) are secured by
liens on all of the property of Apio and its subsidiaries. The GE Debt Agreements contain customary events of default under
which obligations could be accelerated or increased. The GE Capital real estate and equipment loans are guaranteed by Landec,
and Landec has pledged its equity interest in Apio as collateral under the line of credit agreement. The GE Debt Agreements
contain customary covenants, such as limitations on the ability to (1) incur indebtedness or grant liens or negative pledges on
Apio’s assets; (2) make loans or other investments; (3) pay dividends, sell stock or repurchase stock or other securities; (4) sell
assets; (5) engage in mergers; (6) enter into sale and leaseback transactions; or (7) make changes in Apio’s corporate structure.
In addition, Apio must maintain a minimum fixed charge coverage ratio of 1.10 to 1.0 if the availability under its line of credit
falls below $12.0 million. Apio was in compliance with all financial covenants as of May 31, 2015 and May 25, 2014.
- 65 -
6. Debt (continued)
On May 15, 2015, Apio and BofA entered into a commitment letter and loan agreement, pursuant to which Apio will
be permitted to borrow up to $15.0 million to finance equipment purchases made between October 1, 2014 and April 30, 2016
(the “BofA Loan”). Each borrowing under the BofA Loan will have a five-year term and a seven-year amortization period and
will have a fixed interest rate based on the 2.5-year swap rate at the time of borrowing. Borrowings will be secured by equipment
financed with proceeds of the BofA Loan. In addition, on May 15, 2015, Landec and BofA entered into a Guaranty, pursuant to
which Landec guaranteed Apio’s payment obligations under the BofA Loan.
During fiscal year 2015, Apio capitalized $397,000 of loan origination fees from new equipment loans and/or
amendments with GE Capital and BofA. No loan origination fees were capitalized in fiscal year 2014. Amortization of loan
origination fees for Apio recorded to interest expense for fiscal years 2015, 2014 and 2013 were $206,000, $187,000 and
$181,000, respectively. Unamortized loan origination fees were $1.2 million and $1.0 million at May 31, 2015 and May 25,
2014, respectively, and are included in other assets in the Consolidated Balance Sheets.
On May 23, 2012, Lifecore entered into two financing agreements with BMO Harris Bank N.A. and/or its affiliates
(“BMO Harris”), collectively (the “Lifecore Loan Agreements”):
(1)
(2)
A $12.0 million term loan which matures in four years due in monthly payments of $250,000 with interest payable
monthly based on a variable interest rate of LIBOR plus 2% (the “Term Loan”).
A Reimbursement Agreement pursuant to which BMO Harris caused its affiliate Bank of Montreal to issue an
irrevocable letter of credit in the amount of $3.5 million (the “Letter of Credit”) which is securing the IRBs described
above.
On May 22, 2015, Lifecore entered into a Credit and Security Agreement (the “Credit Agreement”) with BMO Harris
which includes (a) a two-year, $10.0 million asset-based working capital revolving line of credit, with an interest rate of LIBOR
plus 1.85%, with availability based on the combination of Lifecore’s eligible accounts receivable and inventory balances
(availability was $9.4 million at May 31, 2015) and with no unused fee and as of May 31, 2015 no amounts were outstanding
under the line of credit.
The obligations of Lifecore under the Lifecore Loan Agreements and Credit Agreement (collectively “Lifecore Debt
Agreements”) are secured by liens on all of the property of Lifecore. The Lifecore Debt Agreements contain customary
covenants, such as limitations on the ability to (1) incur indebtedness or grant liens or negative pledges on Lifecore’s assets; (2)
make loans or other investments; (3) pay dividends or repurchase stock or other securities; (4) sell assets; (5) engage in mergers;
(6) enter into sale and leaseback transactions; (7) adopt certain benefit plans; and (8) make changes in Lifecore’s corporate
structure. In addition, under the Credit Agreement, Lifecore must maintain (a) a minimum fixed charge coverage ratio of 1.10 to
1.0 if Lifecore’s unrestricted cash balance is less than 50% of total funded debt at the end of each fiscal quarter and (b) a net debt
cash flow leverage ratio of less than 2.0 to 1.0 at the end of each fiscal quarter. Lifecore was in compliance with all financial
covenants as of May 31, 2015 and May 25, 2014. Unamortized loan origination fees for the Lifecore Debt Agreements were
$48,000 and $98,000 at May 31, 2015 and May 25, 2014, respectively, and are included in other assets in the Consolidated
Balance Sheets.
The market value of the Company’s debt approximates its recorded value as the interest rates on each debt instrument
approximates current market rates.
The Term Loan was used to repay Lifecore’s former credit facility with Wells Fargo Bank, N.A. (“Wells Fargo”). The
Letter of Credit (which replaces a letter of credit previously provided by Wells Fargo) provides liquidity and credit support for
the IRBs.
- 66 -
6. Debt (continued)
On August 19, 2004, Lifecore issued variable rate industrial revenue bonds (“IRBs”). These IRBs were assumed by
Landec in the acquisition of Lifecore. The IRBs are collateralized by a bank letter of credit which is secured by a first mortgage
on the Company’s facility in Chaska, Minnesota. In addition, the Company pays an annual remarketing fee equal to 0.125% and
an annual letter of credit fee of 0.75%. The maturities on the IRBs are held in a sinking fund account, recorded in Other Current
Assets in the accompanying Consolidated Balance Sheets, and are paid out each year on September 1st.
7. Derivative Financial Instruments
In May 2010, the Company entered into a five-year interest rate swap agreement under the credit agreement with Wells
Fargo which terminated in May 2015. The interest rate swap was designated as a cash flow hedge of future interest payments of
LIBOR and had a notional amount of $20 million. As a result of the interest rate swap transaction, the Company fixed for a five-
year period the interest rate at 4.24% subject to market based interest rate risk on $20 million of borrowings under the credit
agreement with Wells Fargo. The Company’s obligations under the interest rate swap transaction as to the scheduled payments
were guaranteed and secured on the same basis as its obligations under the credit agreement with Wells Fargo at the time the
agreement was consummated. Upon entering into the new Term Loan with BMO Harris in May 2012, the Company used the
proceeds from that loan to pay off the Wells Fargo credit facility. The swap with Wells Fargo was not terminated upon the
extinguishment of the debt with Wells Fargo. The fair value of the swap arrangement as of May 31, 2015 and May 25, 2014 was
zero and $44,000, respectively, and is included in other accrued liabilities in the accompanying Consolidated Balance Sheets.
8. Income Taxes
The provision for income taxes consisted of the following (in thousands):
Current:
Federal ....................................................................... $
State ...........................................................................
Foreign .......................................................................
Total ..............................................................................
Deferred:
Federal .......................................................................
State ...........................................................................
Total ..............................................................................
Income tax expense ....................................................... $
Year ended
May 31, 2015
Year ended
May 25, 2014
Year ended
May 26, 2013
3,480 $
43
71
3,594
3,789
363
4,152
7,746 $
4,785 $
157
56
4,998
5,059
526
5,585
10,583 $
2,808
(18)
56
2,846
6,218
388
6,606
9,452
The actual provision for income taxes differs from the statutory U.S. federal income tax rate as follows (in thousands):
Provision at U.S. statutory rate (1) ................................ $
State income taxes, net of federal benefit ......................
Change in valuation allowance .....................................
Tax-exempt interest .......................................................
Tax credit carryforwards ...............................................
Domestic manufacturing deduction ...............................
Change in value of contingent consideration ................
Other ............................................................................
Total ................................................................... $
Year Ended
May 31, 2015
Year Ended
May 25, 2014
Year Ended
May 26, 2013
7,451 $
566
353
—
(375)
(369)
—
120
7,746 $
10,405 $
711
99
—
(378)
(406)
—
152
10,583 $
11,214
731
370
—
(801)
(172)
(1,450)
(440)
9,452
(1) Statutory rate was 35% for fiscal years 2015, 2014 and 2013.
- 67 -
8. Income Taxes (continued)
The decrease in income tax expense in fiscal year 2015 compared to fiscal year 2014 was primarily due to a 28%
decrease in income before taxes. The increase in income tax expense in fiscal year 2014 compared to fiscal year 2013 is primarily
due to the benefit received in fiscal year 2013 related to the change in value of contingent consideration, the absence of which
increased the effective tax rate from 30% in fiscal year 2013 to 36% in fiscal year 2014 partially offset by a 7% decrease in net
income before taxes.
The effective tax rates for fiscal year 2015 differ from the statutory federal income tax rate of 35% as a result of several
factors, including state taxes, valuation allowance on the impairment of the investment in Aesthetic Sciences Corporation, and
non-deductible stock-based compensation expense; partially offset by the domestic manufacturing deduction and state and federal
research and development credits. The effective tax rates for fiscal year 2014 differ from the statutory federal income tax rate of
35% as a result of several factors, including state taxes, non-deductible stock-based compensation expense, disqualified
dispositions of incentive stock options, domestic manufacturing deduction, the benefit of federal and state research and
development credits, and the change in valuation allowance. The effective tax rates for fiscal year 2013 differ from the statutory
federal income tax rate of 35% as a result of several factors, including state taxes, change in value of contingent consideration,
non-deductible stock-based compensation expense, disqualified dispositions of incentive stock options, domestic manufacturing
deduction, the benefit of federal and state research and development credits, and the change in valuation allowance.
Significant components of deferred tax assets and liabilities consisted of the following (in thousands):
May 31, 2015
May 25, 2014
Deferred tax assets:
Net operating loss carryforwards ..................................................................... $
Accruals and reserves ......................................................................................
Stock-based compensation...............................................................................
Research and AMT credit carryforwards .........................................................
Other ................................................................................................................
Gross deferred tax assets .....................................................................................
Valuation allowance ............................................................................................
Net deferred tax assets ........................................................................................
Deferred tax liabilities:
Basis difference in investment in non-public company ...................................
Depreciation and amortization .........................................................................
Goodwill and other indefinite life intangibles .................................................
Deferred tax liabilities .........................................................................................
3,415 $
1,964
662
515
966
7,522
(1,234)
6,288
(10,753)
(7,186)
(20,578)
(38,517)
Net deferred tax liabilities ................................................................................... $
(32,229) $
3,630
1,746
723
495
545
7,139
(881)
6,258
(9,270)
(5,705)
(19,360)
(34,335)
(28,077)
As of May 31, 2015, the Company had federal, California, Indiana, and other state net operating loss carryforwards of
approximately $7.8 million, $0.8 million, $6.6 million, and $13.3 million respectively. These losses expire in different periods
through 2032, if not utilized. Such net operating losses consist of excess tax benefits from employee stock option exercises and
have not been recorded in the Company’s deferred tax assets. The Company will record approximately $500,000 of the gross
California net operating loss to additional paid in capital as and when such excess tax benefits are ultimately realized. The
Company acquired additional net operating losses through the acquisition of GreenLine. Utilization of these acquired net
operating losses in a specific year is limited due to the “change in ownership” provision of the Internal Revenue Code of 1986
and similar state provisions. The net operating losses presented above for federal and state purposes is net of any such limitation.
The Company has California research and development tax credits carryforwards of approximately $1.6 million. The
research and development tax credit carryforwards have an unlimited carryforward period for California purposes. Certain tax
credit carryovers are attributable to excess tax benefits from employee stock option exercises and have not been recorded in the
Company’s deferred tax assets. The Company will record $1.1 million of the gross California research and development credit
to additional paid in capital as and when such excess tax benefits are ultimately realized.
- 68 -
8. Income Taxes (continued)
Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is
sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets.
Based on this analysis and considering all positive and negative evidence, the Company determined that a valuation allowance
of $1.2 million should be recorded as a result of uncertainty around the utilization of certain state net operating losses and a book
impairment loss on the Company's investment in Aesthetic Sciences as it is more likely than not that a portion of the deferred tax
asset will not be realized in the foreseeable future. The valuation allowance increased by $353,000 in fiscal year 2015 primarily
due to uncertainty around the utilization of certain state net operating losses and credits.
The accounting for uncertainty in income taxes recognized in an enterprise’s financial statements prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and
penalties, accounting in interim periods, disclosure, and transition.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
May 31, 2015
May 25, 2014
May 26, 2013
As of
Unrecognized tax benefits – beginning of the period .... $
Gross increases – tax positions in prior period ..............
Gross decreases – tax positions in prior period .............
Gross increases – current-period tax positions ..............
Lapse of statute of limitations .......................................
Unrecognized tax benefits – end of the period .............. $
1,035 $
17
(141)
76
—
987 $
998 $
7
(48)
78
—
1,035 $
766
103
—
129
—
998
As of May 31, 2015, the total amount of net unrecognized tax benefits was $987,000, of which, $800,000, if recognized,
would affect the effective tax rate. As of May 25, 2014, the total amount of net unrecognized tax benefits was $1.0 million, of
which, $817,000, if recognized, would affect the effective tax rate. The Company accrues interest and penalties related to
unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest was not material as of May
31, 2015 and May 25, 2014. Additionally, the Company does not expect its unrecognized tax benefits to change materially within
the next twelve months.
Due to tax attribute carryforwards, the Company is subject to examination for tax years 1997 forward for U.S. tax
purposes. The Company is also subject to examination in various state jurisdictions for tax years 1998 forward, none of which
were individually material.
9. Commitments and Contingencies
Operating Leases
Landec leases facilities and equipment under operating lease agreements with various terms and conditions, which
expire at various dates through fiscal year 2023. Certain of these leases have renewal options.
- 69 -
9. Commitments and Contingencies (continued)
The approximate future minimum lease payments under these operating leases, excluding land leases, at May 31, 2015
are as follows (in thousands):
FY 2016...................................................................................................................................................... $
FY 2017......................................................................................................................................................
FY 2018......................................................................................................................................................
FY 2019......................................................................................................................................................
FY 2020......................................................................................................................................................
Thereafter ...................................................................................................................................................
Total ........................................................................................................................................................ $
Amount
3,136
2,631
1,768
1,003
257
624
9,419
Rent expense for operating leases, including month to month arrangements was $5.0 million, $4.4 million and $4.8
million for the fiscal years 2015, 2014 and 2013, respectively.
Capital Leases
There was no equipment under capital lease agreements at May 31, 2015.
Employment Agreements
Landec has entered into employment agreements with certain key employees. These agreements provide for these
employees to receive incentive bonuses based on the financial performance of certain divisions in addition to their annual base
salaries. The accrued incentive bonuses amounted to $1.0 million at May 31, 2015 and $656,000 at May 25, 2014.
Purchase Commitments
At May 31, 2015, the Company was committed to purchase $15.1 million of produce during fiscal year 2016 in
accordance with contractual terms at market rates. Payments of $16.8 million were made in fiscal year 2015 under similar
arrangements.
Loss Contingencies
As of May 31, 2015, the Company is not a party to any legal proceedings.
10. Employee Savings and Investment Plans
The Company sponsors a 401(k) plan which is available to substantially all of the Company’s employees. Landec’s
Corporate Plan, which is available to all Landec employees (“Landec Plan”), allows participants to contribute from 1% to 50%
of their salaries, up to the Internal Revenue Service (“IRS”) limitation into designated investment funds. The Company matches
67% on the first 6% contributed by an employee. Employee and Company contributions are fully vested at the time of the
contributions. The Company retains the right, by action of the Board of Directors, to amend, modify, or terminate the plan. For
fiscal years 2015, 2014 and 2013, the Company contributed $1.2 million, $1.1 million and $939,000, respectively, to the Landec
Plan.
11. Business Segment Reporting
The Company manages its business operations through three strategic business units. Based upon the information
reported to the chief operating decision maker, who is the Chief Executive Officer, the Company has the following reportable
segments: the Food Products Technology segment, the Food Export segment and the Hyaluronan-based Biomaterials segment.
- 70 -
11. Business Segment Reporting (continued)
The Food Products Technology segment markets and packs specialty packaged whole and fresh-cut fruit and vegetables,
the majority of which incorporate the BreatheWay specialty packaging for the retail grocery, club store and food services
industry. In addition, the Food Products Technology segment sells BreatheWay packaging to partners for non-vegetable products.
The Food Export segment consists of revenues generated from the purchase and sale of primarily whole commodity fruit and
vegetable products to Asia and domestically. The HA-based Biomaterials segment sells products utilizing hyaluronan, a naturally
occurring polysaccharide that is widely distributed in the extracellular matrix of connective tissues in both animals and humans,
for medical use primarily in the Ophthalmic, Orthopedic and Veterinary markets. Corporate licenses Landec’s patented Intellicoat
seed coatings to the farming industry and licenses the Company’s Intelimer polymers for personal care products and other
industrial products. The Corporate segment also includes general and administrative expenses, non-Food Products Technology
and non HA-based Biomaterials interest income and income tax expenses. Beginning in fiscal year 2013, the Food Products
Technology, the Food Export and the Hyaluronan-based Biomaterials segments include charges for corporate services and tax
sharing allocated from the Corporate segment. All of the assets of the Company are located within the United States of America.
The Company’s international sales by geography are based on the billing address of the customer and were as follows
(in millions):
Canada ........................................................................... $
Taiwan ........................................................................... $
Indonesia ....................................................................... $
China ............................................................................. $
Japan ............................................................................. $
Belgium ......................................................................... $
All Other Countries ....................................................... $
May 31, 2015
May 25, 2014
May 26, 2013
79.7 $
32.1 $
9.0 $
9.0 $
8.5 $
6.8 $
18.4 $
46.6 $
30.7 $
9.6 $
8.2 $
9.9 $
13.1 $
19.1 $
27.8
31.0
21.0
5.0
10.6
16.6
20.8
- 71 -
11. Business Segment Reporting (continued)
Operations by segment consisted of the following (in thousands):
Food
Products
Technology
Food
Export
Hyaluronan-
based
Biomaterials
Fiscal Year Ended May 31, 2015
Net sales ................................................................. $
International sales ................................................... $
Gross profit ............................................................ $
Net income (loss) ................................................... $
Identifiable assets ................................................... $
Depreciation and amortization ............................... $
Capital expenditures ............................................... $
Dividend income .................................................... $
Interest income ....................................................... $
Interest expense ...................................................... $
Income tax expense ............................................... $
Fiscal Year Ended May 25, 2014
Net sales ................................................................. $
International sales ................................................... $
Gross profit ............................................................ $
Net income (loss) ................................................... $
Identifiable assets ................................................... $
Depreciation and amortization ............................... $
Capital expenditures ............................................... $
Dividend income .................................................... $
Interest income ....................................................... $
Interest expense ...................................................... $
Income tax expense ............................................... $
Fiscal Year Ended May 26, 2013
Net sales ................................................................. $
International sales ................................................... $
Gross profit ............................................................ $
Net income (loss) ................................................... $
Identifiable assets ................................................... $
Depreciation and amortization ............................... $
Capital expenditures ............................................... $
Dividend income .................................................... $
Interest income ....................................................... $
Interest expense ...................................................... $
Income tax expense ............................................... $
430,415 $
80,500 $
45,993 $
17,145 $
228,672 $
4,766 $
12,895 $
1,417 $
32 $
1,655 $
792 $
360,728 $
47,224 $
36,318 $
19,041 $
196,257 $
4,751 $
10,950 $
1,125 $
12 $
1,402 $
33 $
320,447 $
27,532 $
37,077 $
20,526 $
180,104 $
4,761 $
5,598 $
1,125 $
42 $
1,707 $
3,399 $
67,837 $
67,714 $
4,252 $
1,041 $
27,746 $
6 $
— $
— $
— $
— $
48 $
69,827 $
69,710 $
5,340 $
1,973 $
25,391 $
6 $
— $
— $
— $
— $
3 $
78,568 $
78,442 $
5,274 $
1,660 $
21,737 $
4 $
— $
— $
— $
— $
339 $
- 72 -
Corporate TOTAL
573 $
— $
553 $
(8,480) $
4,268 $
134 $
117 $
— $
29 $
— $
6,729 $
539,257
163,460
65,407
13,544
346,465
7,090
17,511
1,417
315
1,829
7,746
40,432 $
15,246 $
14,609 $
3,838 $
85,779 $
2,184 $
4,499 $
— $
254 $
174 $
177 $
45,704 $
20,312 $
20,456 $
9,695 $
85,858 $
2,221 $
3,877 $
— $
242 $
248 $
17 $
41,281 $
26,792 $
19,102 $
6,835 $
80,940 $
2,379 $
3,190 $
— $
137 $
301 $
1,400 $
554 $
— $
450 $
(11,564) $
6,117 $
136 $
59 $
— $
6 $
— $
10,530 $
1,412 $
— $
1,307 $
(6,434) $
8,161 $
151 $
89 $
— $
— $
— $
4,314 $
476,813
137,246
62,564
19,145
313,623
7,114
14,886
1,125
260
1,650
10,583
441,708
132,766
62,760
22,587
290,942
7,295
8,877
1,125
179
2,008
9,452
12. Quarterly Consolidated Financial Information (unaudited)
The following is a summary of the unaudited quarterly results of operations for fiscal years 2015, 2014 and 2013 (in
thousands, except for per share amounts):
FY 2015
539,257
65,407
13,544
0.50
0.50
FY 2014
476,813
62,564
19,145
0.72
0.71
FY 2013
441,708
62,760
22,587
0.87
0.85
FY 2015
Revenues ................................................................. $
Gross profit ............................................................. $
Net income ............................................................. $
Net income per basic share ...................................... $
Net income per diluted share ................................... $
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
133,614 $
14,188 $
2,353 $
0.09 $
0.09 $
132,665 $
15,666 $
3,223 $
0.12 $
0.12 $
138,530 $
16,885 $
3,772 $
0.14 $
0.14 $
134,448 $
18,668 $
4,196 $
0.16 $
0.15 $
FY 2014
Revenues ................................................................. $
Gross profit ............................................................. $
Net income ............................................................. $
Net income per basic share ...................................... $
Net income per diluted share ................................... $
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
109,479 $
12,532 $
4,752 $
0.18 $
0.18 $
120,026 $
13,734 $
3,451 $
0.13 $
0.13 $
126,379 $
20,155 $
6,400 $
0.24 $
0.24 $
120,929 $
16,143 $
4,542 $
0.17 $
0.17 $
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
FY 2013
Revenues ................................................................. $
Gross profit ............................................................. $
Net income (loss) .................................................... $
Net income (loss) per basic share ............................ $
Net income (loss) per diluted share ......................... $
102,074 $
13,763 $
4,366 $
0.17 $
0.17 $
114,654 $
18,459 $
8,913 $
0.35 $
0.34 $
117,867 $
17,508 $
4,789 $
0.19 $
0.18 $
107,113 $
13,030 $
4,519 $
0.17 $
0.17 $
- 73 -
(b) Index of Exhibits.
Exhibit
Number:
Exhibit Title
3.1
Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K dated November 7, 2008.
3.2
Amended and Restated Bylaws of Registrant, incorporated herein by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K dated October 18, 2011.
10.1
10.2*
10.3
10.4*
10.5*
10.6*
Form of Indemnification Agreement, incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended May 29, 2005.
Form of Option Agreement for 1995 Directors’ Stock Option Plan, incorporated herein by reference to
Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 1996.
Industrial Real Estate Lease dated March 1, 1993 between the Registrant and Wayne R. Brown &
Bibbits Brown, Trustees of the Wayne R. Brown & Bibbits Brown Living Trust dated December 30,
1987, incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1
(File No. 33-80723) declared effective on February 12, 1996.
Form of Option Agreement for the 1996 Non-Executive Stock Option Plan, as amended, incorporated
herein by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended October 31, 1996.
1996 Amended and Restated Stock Option Plan, incorporated herein by reference to Exhibit 10.17 to
the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 2001.
Form of Option Agreement for 1996 Amended and Restated Stock Option Plan, incorporated herein by
reference to Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended
April 30, 1997.
10.7*
New Executive Stock Option Plan, incorporated herein by reference to Exhibit 10.30 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended October 29, 2000.
10.8*
10.9
10.10*
10.11#
1996 Non-Executive Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.35
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 28, 2001.
Supply Agreement between the Registrant and Apio Fresh LLC and the Growers listed therein, dated as
of July 3, 2003, incorporated herein by reference to Exhibit 2.3 to the Registrant’s Current Report on
Form 8-K dated July 3, 2003.
1995 Directors’ Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.53 to
the Registrant’s Annual Report on Form 10-Q for the fiscal quarter ended May 25, 2003.
License and research and development agreement between the Registrant and Air Products and
Chemicals, Inc. dated March 14, 2006, incorporated herein by reference to Exhibit 10.63 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended May 28, 2006.
- 74 -
Exhibit
Number:
10.12*
10.13*
10.14*
10.15*
10.16*
10.17
10.18*
10.19*
10.20*
10.21*
10.22*
10.23
10.24
Exhibit Title
2005 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K dated October 14, 2005.
Form of Stock Grant Agreement for 2005 Stock Incentive Plan, incorporated herein by reference to
Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated October 14, 2005.
Form of Notice of Stock Option Grant and Stock Option Agreement for 2005 Stock Incentive Plan,
incorporated herein by reference to Exhibit 10.66 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended May 28, 2006.
Form of Stock Unit Agreement for 2005 Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.67 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended May 28, 2006.
Form of Stock Appreciation Right Agreement for 2005 Stock Incentive Plan, incorporated herein by
reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated October 14, 2005.
Agreement and Plan of Merger between Landec Corporation, a California corporation, and the
Registrant, dated as of November 6, 2008, incorporated herein by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K dated November 7, 2008.
2009 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K dated October 19, 2009.
Form of Stock Grant Agreement for 2009 Stock Incentive Plan, incorporated herein by reference to
Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated October 19, 2009.
Form of Notice of Stock Option Grant and Stock Option Agreement for 2009 Stock Incentive Plan,
incorporated herein by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated
October 19, 2009.
Form of Stock Unit Agreement for 2009 Stock Incentive Plan, incorporated herein by reference to
Exhibit 99.4 to the Registrant's Current Report on Form 8-K dated October 19, 2009.
Form of Stock Appreciation Right Agreement for 2009 Stock Incentive Plan, incorporated herein by
reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated October 19, 2009.
Stock Purchase Agreement by and among the Registrant, Lifecore Biomedical, Inc., Lifecore
Biomedical, LLC and Warburg Pincus Private Equity IX, L.P., dated April 30, 2010, incorporated herein
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 5, 2010.
Amended and Restated License, Supply and R&D Agreement dated November 27, 2009 by and among
the Registrant, Landec Ag, LLC and Monsanto Company, incorporated by reference to Exhibit 10.25 to
the Registrant’s Current Report on Form 8-K dated December 3, 2009.
- 75 -
Exhibit
Number:
10.25
10.26
10.27
10.28
10.29*
10.30*
Exhibit Title
Share Purchase Agreement, dated February 15, 2011, by and between Apio, Inc. and Windset Holdings
2010 Ltd., incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K dated February 18, 2011.
Stock Purchase Agreement by and among Apio, Inc., GreenLine Holding Company and 2003 Riverside
Capital Appreciation Fund, L.P., dated April 23, 2012, incorporated herein by reference to Exhibit 2.1
to the Registrant’s Current Report on Form 8-K dated April 27, 2012.
Loan agreements by and between the Registrant, Apio, Inc. and General Electric Capital Corporation
dated April 23, 2012, incorporated herein by reference to Exhibits 10.1 through 10.9 to the Registrant’s
Current Report on Form 8-K dated May 27, 2012.
Credit Agreement and Reimbursement Agreement by and between Lifecore Biomedical, LLC and BMO
Harris Bank N.A. dated May 23, 2012, incorporated herein by reference to Exhibits 10.1 and 10.2 to the
Registrant’s Current Report on Form 8-K dated May 29, 2012.
Long-Term Incentive Plan, incorporated herein by reference to the Registrant’s Current Report on Form
8-K dated July 31, 2013.
Employment Agreement between the Registrant and Gregory S. Skinner effective as of January 1, 2013,
incorporated herein by reference to Exhibit 10.37 to the Registrant’s Current Report on Form 8-K dated
December 10, 2012.
10.31*
Nonqualified Deferred Compensation Plan, incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated July 31, 2013.
10.32*
10.33*
10.34*
10.35*
10.36*
10.37*
2013 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K dated October 11, 2013.
Form of Stock Grant Agreement for 2013 Stock Incentive Plan, incorporated herein by reference to
Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated October 11, 2013.
Form of Notice of Stock Option Grant and Stock Option Agreement for 2013 Stock Incentive Plan,
incorporated herein by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated
October 11, 2013.
Form of Stock Unit Agreement for 2013 Stock Incentive Plan, incorporated herein by reference to
Exhibit 99.4 to the Registrant's Current Report on Form 8-K dated October 11, 2013.
Form of Stock Appreciation Right Agreement for 2013 Stock Incentive Plan, incorporated herein by
reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated October 11, 2013.
2015 Cash Bonus Plan, incorporated herein by reference to the Registrant’s Current Report on Form 8-
K dated June 23, 2014.
- 76 -
Exhibit
Number:
10.38*
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
Exhibit Title
Employment Agreement between the Registrant and Gary T. Steele effective as of May 26, 2014,
incorporated herein by reference to Exhibit 10.35 to the Registrant’s Current Report on Form 8-K dated
June 23, 2014.
Stock Transfer Agreement dated July 15, 2014 among Apio, Inc., Newell Capital Corporation and
Windset Holdings 2010 Ltd., incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K dated July 21, 2014.
Second Amendment to Credit Agreement dated July 17, 2014 among Apio, Inc., Cal-Ex Trading
Company, GreenLine Logistics, Inc. and General Electric Capital Corporation, incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 21, 2014.
First Amendment to Loan Agreement dated as of August 28, 2014 among Apio, Inc., Apio Cooling LP
and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K dated September 2, 2014.
Promissory Note dated as of August 28, 2014 by Apio, Inc., payable to GE Capital Commercial, Inc.,
incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated
September 2, 2014.
Third Amendment to Credit Agreement dated as of August 28, 2014 among Apio, Inc., Cal-Ex Trading
Company, GreenLine Logistics, Inc. and General Electric Capital Corporation, incorporated herein by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated September 2, 2014.
Senior B Preferred Share Purchase Agreement dated October 29. 2014 among Apio, Inc. and Windset
Holdings 2010 Ltd., incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K dated November 4, 2014.
Second Amendment to Loan Agreement dated as of November 24, 2014 among Apio, Inc., Apio
Cooling LP and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K dated December 3, 2014.
Promissory Note dated as of November 24, 2014 by Apio, Inc., payable to GE Capital Commercial, Inc.,
incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated
December 3, 2014.
Proposal Letter dated April 2, 2015 between Banc of America Leasing & Capital, LLC, Apio, Inc. and
Landec Corporation, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K dated May 21, 2015.
Master Loan and Security Agreement dated as of May 7, 2015 between Apio, Inc. and Banc of America
Leasing & Capital, LLC, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K dated May 21, 2015.
Form of Equipment Security Note between Apio, Inc. and Banc of America Leasing & Capital, LLC,
incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated
May 21, 2015.
- 77 -
Exhibit
Number:
10.50
Exhibit Title
Guaranty dated as of May 7, 2015 between Landec Corporation and Banc of America Leasing & Capital,
LLC, incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K
dated May 21, 2015.
10.51
Commitment Letter dated May 15, 2015 between General Electric Capital Corporation and Apio, Inc.,
incorporated herein by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K dated
May 21, 2015.
10.52*
2016 Cash Bonus Plan, incorporated herein by reference to the Registrant’s Current Report on Form 8-K
dated May 28, 2015.
21.1
Subsidiaries of the Registrant at May 31, 2015
Apio, Inc.
Lifecore Biomedical, Inc.
State of Incorporation
Delaware
Delaware
23.1+
Consent of Independent Registered Public Accounting Firm
24.1+
Power of Attorney – See signature page
31.1+
CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2+
CFO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1+
CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2+
CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS**
XBRL Instance
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation
101.DEF**
XBRL Taxonomy Extension Definition
101.LAB**
XBRL Taxonomy Extension Labels
101.PRE**
XBRL Taxonomy Extension Presentation
*
**
+
#
Represents a management contract or compensatory plan or arrangement required to be filed as an exhibit
to this report pursuant to Item 15(b) of Form 10-K.
Information is furnished and not filed or a part of a registration statement or prospectus for purposes of
sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section
18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under
these sections.
Filed herewith.
Confidential treatment requested as to certain portions. The term “confidential treatment” and the mark
“*” as used throughout the indicated Exhibit means that material has been omitted.
- 78 -
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo
Park, State of California, on July 30, 2015.
LANDEC CORPORATION
By: /s/ Gregory S. Skinner
Gregory S. Skinner
Vice President of Finance and Administration
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Gary T. Steele and Gregory S. Skinner, and each of them, as his attorney-in-fact, with full power
of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all
amendments to said Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed
by the following persons in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Gary T. Steele
Gary T. Steele
President and Chief Executive Officer and Director
(Principal Executive Officer)
July 30, 2015
/s/ Gregory S. Skinner
Gregory S. Skinner
Vice President of Finance and Administration and Chief Financial
Officer (Principal Financial and Accounting Officer)
July 30, 2015
/s/ Nicholas Tompkins
Nicholas Tompkins
/s/ Robert Tobin
Robert Tobin
/s/ Albert D. Bolles, Ph.D
Albert D. Bolles, Ph.D
/s/ Frederick Frank
Frederick Frank
/s/ Steven Goldby
Steven Goldby
/s/ Richard Dean Hollis
Richard Dean Hollis
/s/ Catherine A. Sohn
Catherine A. Sohn
/s/ Tonia Pankopf
Tonia Pankopf
Chairman of the Board of Apio, Inc. and Director
July 30, 2015
Director
Director
Director
Director
Director
Director
Director
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July 30, 2015
July 30, 2015
July 30, 2015
July 30, 2015
July 30, 2015
July 30, 2015
July 30, 2015
EXHIBIT INDEX
Exhibit
Number
Exhibit Title
23.1 Consent of Independent Registered Public Accounting Firm
24.1 Power of Attorney. See signature page.
31.1 CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2 CFO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1 CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2 CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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Corporate Directory
BOARD OF DIRECTORS
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Albert D. Bolles, Ph.D.
Retired Executive Vice President,
Chief Technical and Operations Officer,
ConAgra Foods, Inc.
Frederick Frank
Chairman,
Evolution Life Sciences Partners
Steven Goldby
Partner,
Venrock
Dean Hollis
Retired President and Chief Operating Officer,
ConAgra Foods, Inc.
Consumer Foods and International Division
Tonia Pankopf
Managing Partner,
Pareto Advisors, LLC
Catherine A. Sohn, Pharma.D.
Retired Senior Executive,
GlaxoSmithKline (GSK)
Gary T. Steele
Chairman of the Board,
President and Chief Executive Officer,
Landec Corporation
Robert Tobin
Retired CEO,
AHOLD USA
Nicholas Tompkins
Chairman of the Board,
Apio, Inc.
CORPORATE MANAGEMENT
Gary T. Steele
Chairman of the Board,
President and Chief Executive Officer
Gregory S. Skinner
Vice President of Finance and
Administration and Chief Financial Officer
Molly A. Hemmeter
Vice President,
Chief Operating Officer
Ronald L. Midyett
President and Chief Executive Officer,
Apio, Inc.
Larry D. Hiebert
President,
Lifecore Biomedical, Inc.
Steven P. Bitler, Ph.D.
Vice President,
Corporate Technology
Landec Corporation 2015 Annual Report
Ernst & Young LLP
San Francisco, CA
CORPORATE COUNSEL
Ropes & Gray LLP
San Francisco, CA
SHAREHOLDERS’ INFORMATION
Transfer Agent and Registrar
The stock transfer agent and registrar for Landec Corporation is
Broadridge. Shareholders who wish to transfer their stock, or
change the name in which the shares are registered, should
contact:
Broadridge Corporate Issuer Solutions, Inc.
44 West Lancaster Ave.
Ardmore, PA 19003
Tel 610-649-7300
Fax 610-649-7302
www.shareholder.broadridge.com
CORPORATE HEADQUARTERS
Landec Corporation
3603 Haven Avenue
Menlo Park, CA 94025-1010
650-306-1650
STOCK LISTING
The Company’s common stock is traded on the Nasdaq Global
Select Market under the symbol LNDC. The Company has filed
an annual report on Form 10-K with the Securities and Exchange
Commission. Shareholders may obtain a copy of this report and
Form 10-K without charge by writing the Company at:
3603 Haven Avenue
Menlo Park, CA 94025
Attn: Investor Relations
Except for the historical information contained here, the matters
discussed in the enclosed materials are forward-looking
statements that involve certain risks and uncertainties that could
cause actual results to differ materially including risks detailed
from time to time in the Company’s filings with the Securities and
Exchange Commission.
TRADEMARKS
The following are some of the official trademarks and service marks
of the Landec Corporation and its subsidiaries:
Landec®
Intelimer®
Lifecore®
Clearly Fresh®
BreatheWay®
Eat Smart®
Cal Ex®
GreenLine®
Revitalure™
Corgel® BioHydrogel
Lurocoat® Ophthalmic Viscoelastic
Ortholure™ Orthopedic Viscosupplement
Smart Polymers to Fuel Innovation™
Windset Farms® is a registered trademark of Greenhouse Grown
Foods Inc.
Apio’s patented BreatheWay technology controls the
ratio of oxygen and carbon dioxide in each bag or
tray of vegetables, creating the ideal environment
to keep produce fresh longer. BreatheWay
even has a “temperature switch” that naturally
adjusts this ratio in response to temperature
changes further protecting freshness.
Discover “Fresh” when you see the “BreatheWay patch”
on the back of your vegetable bag or tray.