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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 HAVEN AVENUE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 306-1650
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $91,028,000 as of January 7, 2000, based upon
the closing sales price on the NASDAQ National Market reported for such date.
Shares of Common Stock and Convertible Preferred Stock held by each officer and
director and by each person who owns 10% or more of the outstanding Common Stock
and Convertible Preferred Stock have been excluded from such calculation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of January 7, 2000, there were 15,922,331 shares of Common Stock and
166,667 shares of Convertible Preferred Stock, convertible into ten shares of
Common Stock for each share of Preferred Stock, par value $0.001 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its
2000 Annual Meeting of Shareholders, which statement will be filed not later
than 120 days after the end of the fiscal year covered by this report, are
incorporated by reference in Part III hereof.
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LANDEC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Page
Part I
1. Business.......................................................................... 3
2. Properties........................................................................ 17
3. Legal Proceedings................................................................. 17
4. Submission of Matters to a Vote of Security Holders............................... 17
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters............. 18
6. Selected Consolidated Financial Data.............................................. 20
Management's Discussion and Analysis of Financial Condition and Results of
7. Operations........................................................................ 21
7A. Quantitative and Qualitative Disclosures about Market Risk........................ 32
8. Financial Statements and Supplementary Data....................................... 32
Changes in and Disagreements with Accountants on Accounting and Financial
9. Disclosure........................................................................ 32
Part III
10. Directors and Executive Officers of the Registrant................................ 33
11. Executive Compensation............................................................ 33
12. Security Ownership of Certain Beneficial Owners and Management.................... 33
13. Certain Relationships and Related Transactions.................................... 33
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 34
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that 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 7 under "Additional Factors That May Affect Future
Results."
GENERAL
Landec Corporation and its subsidiaries ("Landec" or the "Company")
design, develop, manufacture and sell temperature-activated and other specialty
polymer products for a variety of food products, agricultural products,
specialty industrial and medical applications. This proprietary polymer
technology is the foundation, and a key differentiating advantage, upon which
the Company has built its business.
Landec's Food Products Technology business, operated through its wholly
owned subsidiary Apio, combines Landec's proprietary food packaging technology
with the capabilities of a large national food supplier and value-added produce
processor. This combination was consummated in December 1999 when the Company
acquired Apio, Inc. and certain related entities (collectively "Apio").
The Company's Agricultural Seed Technology business, operated through
its wholly owned subsidiary Intellicoat Corporation ("Intellicoat"), combines
Landec's proprietary seed coating technology with the unique direct marketing,
telephone sales and e-commerce distribution capabilities of Fielder's Choice
Direct ("Fielder's Choice"). In September 1997, Intellicoat acquired Fielder's
Choice, a direct marketer of hybrid seed corn.
In addition to its two core businesses, the Company also operates a
Technology Licensing/Research and Development Business which licenses products
outside of Landec's core businesses to industry leaders such as Alcon
Laboratories, Inc. ("Alcon") and Hitachi Chemicals. It also engages in research
and development activities with companies such as ConvaTec, a division of
Bristol Myers Squibb.
To support the polymer manufacturing needs of the core businesses,
Landec has developed and acquired lab scale and pilot plant capabilities in
Menlo Park, California and scale-up and commercial manufacturing capabilities at
its Dock Resins Corporation subsidiary ("Dock Resins") in Linden, New Jersey. In
April 1997, Landec acquired Dock Resins, a manufacturer and marketer of
specialty acrylic and other polymers. In addition to providing manufacturing
capabilities, Dock Resins sells industrial specialty products under the
Doresco-TM- trademark which are used by more than 300 customers throughout the
United States in the coatings, printing inks, laminating and adhesives markets.
The Company's core polymer products are based on its patented
proprietary Intelimer-registered Tradmark- polymers, which differ from other
polymers in that they can be customized to abruptly change their physical
characteristics when heated or cooled through a pre-set temperature switch.
For instance, Intelimer polymers can change within the space of one or two
DEG. Celsius from a slick, non-adhesive state to a highly tacky, adhesive
state; from an impermeable state to a highly permeable state; or from a solid
state to a viscous state. These abrupt changes are repeatedly reversible and
can be tailored by Landec to occur at specific temperatures, thereby offering
substantial competitive advantages in the Company's target markets.
Historically, the Company had managed its operations in three business
segments - Food Products Technology, Agricultural Seed Technology and Industrial
High Performance Materials. However, in conjunction with the acquisition of Apio
on December 2, 1999, the Company is now focusing on two vertically integrated
core businesses - Food Products Technology and Agricultural Seed Technology.
Although not a core business, the Company continues to pursue, mostly with
partners, opportunities both domestically and internationally with its
industrial products focusing primarily on catalysts, resins, formulated products
and adhesives.
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The principal products and services offered by the Company in its two
core businesses - Food Products Technology and Agricultural Seed Technology -
and in the technology licensing and research and development are described
below. Financial information concerning the industry segments for which the
Company reported its operations during fiscal years 1997 through 1999 is
summarized in Note 13 to the Consolidated Financial Statements.
The Company was incorporated in California on October 31, 1986. The
Company completed its initial public offering in 1996 and is listed on the
Nasdaq National Market under the symbol "LNDC."
TECHNOLOGY OVERVIEW
Polymers are important and versatile materials found in many of the
products of modern life. Certain polymers, such as cellulose and natural rubber,
occur in nature. Man-made polymers include nylon fibers used in carpeting and
clothing, coatings used in paints and finishes, plastics such as polyethylene,
and elastomers used in automobile tires and latex gloves. Historically,
synthetic polymers have been designed and developed primarily for improved
mechanical and thermal properties, such as strength and the ability to withstand
high temperatures. Improvements in these and other properties and the ease of
manufacturing of synthetic polymers have allowed these materials to replace
wood, metal and natural fibers in many applications over the last 40 years. More
recently, scientists have focused their efforts on identifying and developing
sophisticated polymers with novel properties for a variety of commercial
applications.
Landec's Intelimer polymers are a proprietary class of synthetic
polymeric materials that respond to temperature changes in a controllable,
predictable way. Typically, polymers gradually change in adhesion, permeability
and viscosity over broad temperature ranges. Landec's Intelimer materials, in
contrast, can be designed to exhibit abrupt changes in permeability, adhesion
and/or viscosity over temperature ranges as narrow as 1DEG.C to 2DEG.C.
These changes can be designed to occur at relatively low temperatures
(0DEG.C to 100DEG.C) that are relatively easy to maintain in industrial
and commercial environments. FIGURE 1 illustrates the effect of temperature on
Intelimer materials as compared to typical polymers.
[GRAPHIC]
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 use of chemically precise
hydrocarbon side chains that are attached to a polymer backbone. Below a
pre-determined switch temperature, the
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polymer's side chains align through weak hydrophobic interactions resulting in a
crystalline structure. When this side chain crystallizable polymer is heated to,
or above, this switch temperature, these interactions are disrupted and the
polymer is transformed into an amorphous, viscous state. Because this
transformation involves a physical and not a chemical change, this process is
repeatedly reversible. Landec can set the polymer switch temperature anywhere
between 0DEG.C to 100DEG.C by varying the length of the side chains. The
reversible transitions between crystalline and amorphous states are illustrated
in FIGURE 2 below.
[GRAPHIC]
Side chain crystallizable polymers were first discovered by academic
researchers in the mid-1950's. These polymers were initially considered to be
merely of scientific curiosity from a polymer physics perspective, and, to the
Company's knowledge, no significant commercial applications were pursued. In the
mid-1980's, Dr. Ray Stewart, the Company's founder, became interested in the
idea of using the temperature-activated permeability properties of these
polymers to deliver various materials such as drugs and pesticides. After
forming Landec in 1986, Dr. Stewart subsequently discovered broader utility for
these polymers. After several years of basic research, commercial development
efforts began in the early 1990's, resulting in initial products in mid-1994.
Landec's Intelimer materials are generally synthesized from long chain
acrylic monomers that are derived primarily from natural materials such as
soybean and corn oils, and are highly purifiable and designed to be manufactured
economically through known polymerization processes. Intelimer materials can be
made into many different forms, including films, coatings, microcapsules and
discreet forms.
DESCRIPTION OF CORE BUSINESS
The Company participates in two core segments- Food Products Technology
and Agricultural Seed Technology. Outside of these two core segments, Landec
will license technology and conduct on going research and development through
its Technology Licensing/Research & Development Business.
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[GRAPH]
FOOD PRODUCTS TECHNOLOGY BUSINESS
Landec began marketing in late 1995 its proprietary Intelimer-based
breathable membranes for use in the fresh-cut produce packaging market, the
fastest growing segment in the food market. Landec's unique technology enabled
Landec's customers to enter into and develop new businesses in this fresh-cut
produce market (also known as the "value-added" market). In December 1999,
Landec acquired Apio, Landec's largest customer in the Food Products Technology
business and one of the nation's leading marketers and packers of produce and
specialty packaged fresh-cut vegetables. With approximately $158 million in
revenue in 1998, Apio provides year-round access to produce, utilizes
state-of-the-art fresh-cut produce processing technology and distributes to 9 of
the top 10 U.S. retail chains and major club stores. Landec's proprietary
Intelimer-based packaging business has been combined with Apio into a wholly
owned subsidiary which retains the Apio, Inc. name. This vertical integration
within the Food Products Technology business places Landec in the unique
position of providing the fresh-cut and whole produce market with both
technology and access to larger end users/customers.
INTELLIPAC-TM- BREATHABLE MEMBRANES
Certain types of fresh-cut produce can spoil or discolor rapidly when
packaged in conventional packaging materials and are therefore limited in their
ability to be distributed broadly to markets. The Company's Intellipac
breathable membranes facilitate the packaging of fresh-cut produce.
Fresh-cut produce is pre-washed, cut and packaged in a form that is
ready to use by the consumer and is thus typically sold at premium price levels.
According to the Produce Marketing Association, in 1998, the total U.S. fresh
produce market exceeded $100 billion. Of this, U.S. retail sales of fresh-cut
produce grew almost 20 percent to an estimated $7 billion. The Company believes
that the growth of this market has been driven by consumer demand and the
willingness to pay for convenience, labor savings and uniform quality relative
to produce prepared at the point of sale. The International Fresh Cut Produce
Associates estimates that by 2003, U.S. retail sales of fresh-cut produce could
be as much as $19 billion.
Although fresh-cut produce companies have had success in the salad
market, the industry has been slow to diversify into other fresh-cut vegetables
or fruits due to limitations in film materials used to package the fresh-cut
produce. After harvesting, vegetables and fruits continue to respire, consuming
oxygen and releasing carbon dioxide. Too much or too little oxygen can result in
premature spoilage and decay and promote the growth of contaminants and
microorganisms that jeopardize inherent food safety. Conventional packaging
films used today, such as polyethylene and polypropylene, can be made with
modest permeability to oxygen and carbon dioxide, but often do not provide the
optimal atmosphere for the produce packaged. Shortcomings of currently used
materials have not significantly
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hindered the growth in the fresh-cut salad market because lettuce, unlike many
vegetables and fruits, has low respiration requirements.
The respiration rate of fresh-cut produce varies from vegetable to
vegetable and from fruit to fruit. The challenge facing the industry is to
develop packaging for the high respiring, high value and shelf life sensitive
fresh-cut vegetable and fruit markets. The Company believes that today's
conventional packaging films face numerous challenges in adapting to meet the
diversification of pre-cut vegetables and fruits evolving in the industry
without compromising shelf life and produce quality. To mirror the growth
experienced in the fresh-cut salad market, the markets for high respiring
vegetables and fruits such as broccoli, cauliflower, berries and stone fruit
(peaches, apricots, nectarines) will require a more versatile and sophisticated
packaging solution such as the Company's Intellipac breathable membranes.
The respiration rate of fresh-cut produce also varies with
temperature. As temperature increases, fresh-cut produce generally respires at a
higher rate, which speeds up the aging process, resulting in shortened shelf
life and increased potential for decay, spoilage, loss of texture and
dehydration. As fresh-cut produce is transported from the processing plant
through the refrigerated distribution chain to foodservice locations or retail
stores, and finally to the ultimate consumer, temperatures can fluctuate
significantly. Therefore, temperature control is a constant challenge in
preserving the quality of fresh-cut produce -- a challenge few current packaging
films can fulfill. The Company believes that its temperature-responsive
Intellipac technology will respond well to the challenges of the fresh-cut
distribution process.
Using its Intelimer technology, Landec has developed Intellipac
breathable membranes that it believes address many of the shortcomings of
conventional materials. A membrane is applied over a small cutout section or an
aperture of a flexible film bag. This highly permeable "window" acts as the
mechanism to transmit the majority of the gas transmission properties required
for the entire package. These membranes are designed to provide three principal
benefits:
- HIGH PERMEABILITY. Landec's Intellipac breathable membranes are
designed to permit transmission of oxygen and carbon dioxide at 300
times the rate of conventional packaging films. The Company believes
that these higher permeability levels will facilitate the packaging
diversity required to market many types of fresh-cut produce.
- ABILITY TO ADJUSTABLY SELECT OXYGEN AND CARBON DIOXIDE. Conventional
packaging films diffuse gas transfer in and out of packages at an
equal rate or fixed ratio of 1.0. Intellipac packages can be tailored
with carbon dioxide to oxygen transfer ratios ranging from 1.0 to 12.0
and selectively transmit oxygen and carbon dioxide at optimum rates to
sustain the quality and shelf life of produce.
- TEMPERATURE RESPONSIVENESS. Landec has developed breathable membranes
that can be designed to increase or decrease in permeability in
response to environmental temperature changes. The Company has
developed packaging that responds to higher oxygen requirements at
elevated temperatures but is also reversible, and returns to its
original state as temperatures decline.
Landec believes that growth of the overall produce market will be
driven by the increasing demand for the convenience of fresh-cut produce. This
demand will in turn require packaging that facilitates the quality and shelf
life of produce transported to fresh-cut processors in bulk and pallet
quantities. The Company believes that in the future its Intellipac breathable
membranes will be useful for packaging a diverse variety of fresh-cut produce
products. Potential opportunities for using Landec's technology outside of the
fresh-cut produce market exist in cut flowers and in other food products.
Landec is working with leaders in the fresh-cut food service, club
store and retail grocery markets. The Company believes it will have growth
opportunities for the next several years through new customers and products in
the United States, expansion of its existing customer relationships, and through
export and shipments of specialty packaged foods.
-7-
Landec manufactures its Intellipac breathable membranes with selected
qualified contract manufacturers and markets and sells Intellipac breathable
membranes directly to food processors.
APIO, INC.
In December 1999, Landec completed the acquisition of Apio and certain
related entities. Landec paid $23.9 million in cash and Landec Common Stock for
Apio. An additional $16.75 million in future payments over the next five years
may be paid, $10.0 million of which is based on Apio achieving certain
performance milestones. Apio had revenue of approximately $158 million in 1998,
has realized a compounded annual growth in revenues of over 19% between 1996 and
1998 and is profitable.
Based in Guadalupe, California, Apio consists of two major businesses
- -- traditional whole produce harvesting, packing and marketing and specialty
packaged fresh-cut value-added processed products that are pre-cut, washed and
packaged in Landec's Intellipac packaging. The traditional produce business
includes harvesting, packing, cooling and marketing of vegetables and fruits on
a contract basis for growers in California's Santa Maria, San Joaquin and
Imperial Valleys and in Arizona and Mexico. Apio currently has approximately
18,000 acres under contract, including access to approximately 20 percent of the
farmable land in the Santa Maria Valley. The fresh-cut value-added processing
business, developed within the last 4 years, sources a variety of fresh-cut
vegetables to 9 of the top 10 retail grocery chains representing over 3,000
retail stores and to over 500 club stores. During 1998, Apio shipped more than
21 million cartons of produce to some 700 customers including leading
supermarket retailers, wholesalers, food service suppliers and club stores
throughout the United States and internationally, primarily in Asia.
There are four major distinguishing characteristics of Apio that
provide it a competitive advantage in the Food Products Technology market:
- Apio has structured its business as a full service provider of
vegetables, fruits, and fresh-cut value-added produce. As retail and
club store chains consolidate, Apio is well positioned as a single
source of a broad range of products.
- Apio is unique in that it takes on less farming risk than its
competitors. Apio reduces its farming risk by not taking ownership of
farmland, and instead, will contract with growers for produce and
charge for services that include packing, cooling, shipping and
marketing. In many cases, Apio does not take title to the produce but
receives a margin for services rendered. The year-round sourcing of
produce is a key component to both the traditional produce business as
well as the fresh-cut value-added processing business.
- Apio strategically invested in the rapidly growing fresh-cut
value-added business. Apio's new 35,000 square foot value-added plant
operates during the peak seasons two 10-hour shifts per day, seven days
a week. Apio has one of the very few temperature controlled value-added
processing plants in the U.S. Ninety percent of Apio's value-added
products utilize Landec's proprietary Intellipac membrane technology.
Apio is also focused on developing its "Eat Smart" brand name for all
of its fresh-cut value-added products.
- Apio is uniquely positioned to benefit from the growth in export sales
to Asia and Europe over the next decade with its export business,
CalEx. Through CalEx, Apio is currently one of the largest U.S.
exporters of broccoli to Asia.
-8-
AGRICULTURAL SEED TECHNOLOGY BUSINESS
Landec formed its Intellicoat subsidiary in 1995. Intellicoat's
strategy is to build a vertically integrated seed technology company based on
Intellicoat's proprietary seed coating technology and its direct marketing,
telephonic sales and electronic commerce capabilities.
INTELLICOAT SEED COATINGS
Landec has developed and, through Intellicoat, is conducting field
trials of its Intellicoat seed coatings, an Intelimer-based agricultural
material designed to control seed germination timing, increase crop yields and
extend the crop planting windows. These coatings are initially being applied to
corn, soybean, cotton and canola seeds. According to the U.S. Agricultural
Statistics Board, the total planted acreage in 1998 in North America for corn,
soybean, cotton and canola seed exceeded 77.6 million, 77.2 million, 14.6
million and 1.1 million, respectively.
Currently, farmers are required to predict the proper time to plant
seeds. If the seeds are planted too early, they may rot or suffer chilling
injury due to the absorption of water at cold soil temperatures. If they are
planted too late, the growing season may end prior to the crop reaching full
maturity. In either case, the resulting crop yields are sub-optimal. Moreover,
the planting window can be fairly brief, requiring the farmer to focus almost
exclusively on planting during this time. Seeds also germinate at different
times due to variations in absorption of water, thus providing for variations in
the growth rate of the crops.
The Company's Intellicoat seed coating prevents planted seeds from
absorbing water when the ground temperature is below the coating's pre-set
switch. Intellicoat seed coatings are designed to enable coated seeds to be
planted early without risk of chilling damage caused by the absorption of water
at cold soil temperatures. As spring advances and soil temperatures rise to the
pre-determined switch temperature, the polymer's permeability increases and the
coated seeds absorb water and begin to germinate. The Company believes that
Intellicoat seed coatings provide the following advantages: more flexible timing
for planting, avoidance of chilling injury, uniform germination and crop growth,
and protection against harmful fungi. As a result, the Company believes that
Intellicoat seed coatings offer the potential for significant improvements in
crop yields.
Based on the success of fiscal year 1999's field trials, the Company
will be selectively marketing its inbred corn seed coating products beginning in
fiscal year 2000 through regional and national seed companies in the United
States. This application is targeted to approximately 640,000 acres of farmland
in ten states. In addition, Intellicoat seed coatings are being tested with
numerous collaborators for the relay cropping of wheat and soybean. Relay
cropping of wheat and soybeans will allow farmers to plant and harvest two crops
during the year on the same acre of land, providing significant financial
benefit for the farmer. Intellicoat plans to expand its testing of the relay
cropping system in the spring of 2000 and assuming expanded field trials are
successful, expects to commercially launch the technology in the spring of 2001.
This application is targeted to approximately 10 million acres of farmland in
six states. Future crops under consideration include cotton, canola, sugar beets
and other vegetables.
FIELDER'S CHOICE DIRECT (THE DIRECT MARKETING, TELEPHONIC SALES AND
E-COMMERCE COMPANY)
In September 1997, Intellicoat completed the acquisition of Fielder's
Choice, a direct marketer of hybrid seed corn to farmers. Landec paid
approximately $3.6 million in cash and direct acquisition costs and $5.2 million
in Landec Common Stock for the Company. Terms of the agreement include
additional consideration in the form of a cash earn-out based on future
performance. Fielder's Choice had sales of approximately $13.3 million and $15.2
million in the twelve months ended October 31, 1998 and October 31, 1999,
respectively.
Based in Monticello, Indiana, Fielder's Choice offers a comprehensive
line of corn hybrids to more than 16,000 producer seed customers in over forty
states through direct marketing programs. The success of Fielder's Choice comes,
in part, from its expertise in selling directly to the farmer producer,
bypassing the traditional and costly farmer-dealer system. The Company believes
that this direct channel of distribution provides a 35% cost advantage to its
farmer producers.
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In order to support its direct marketing programs, Fielder's Choice has
developed proprietary direct marketing, telephonic sales and e-commerce
information technology, called "The Farmer First System", that enables
state-of-the-art methods for communicating with a broad array of farmers. This
proprietary direct marketing information technology includes a current database
of over 60,000 farmers. In August 1999, the Company launched the seed industry's
first comprehensive e-commerce website. This new website furthers the Company's
ability to provide a high level of consultation to Fielder's Choice customers,
backed by a six day a week call center capability that enables the Company to
use the internet as a natural extension of its direct marketing strategy.
The acquisition of Fielder's Choice was strategic in providing a
cost-effective vehicle for Intellicoat seed coating products when they are ready
for commercial production. The Company believes that the combination of a direct
channel of distribution, telephonic and electronic commerce capabilities will
enable Intellicoat to more quickly achieve meaningful market penetration.
TECHNOLOGY LICENSING/RESEARCH & DEVELOPMENT BUSINESSES
The Company believes its technology has commercial potential in a wide
range of industrial, consumer and medical applications beyond those identified
in its core businesses. In order to exploit these opportunities, the Company has
entered into licensing and collaborative corporate agreements for product
development and/or distribution in certain fields.
INDUSTRIAL MATERIALS AND ADHESIVES
Landec's industrial products development strategy is to focus on
catalysts, resins, fully-formulated products and adhesives in the polymer
materials market. During the product development stage, the Company identifies
corporate partners to support the ongoing development and testing of these
products, with the ultimate goal of licensing the applications at the
appropriate time.
INTELIMER POLYMER SYSTEMS. The Company is developing catalysts,
curative, and curing agent systems based on its Intelimer technology for use in
one-package thermoset products. These systems can incorporate catalysts,
curatives and curing agents in a unique polymer envelope that prevents
interaction by these agents with the resin when the polymer envelope is in its
impermeable state. This characteristic allows all components of the thermoset
product to be pre-mixed and stored at room temperature, and provides longer
shelf life. Landec's unique polymer envelope system can be designed with a
pre-set opening temperature switch to correspond with elevated temperatures used
during standard manufacturing processes. When the thermoset system is exposed to
the pre-set switch temperature, the Intelimer polymer abruptly changes to its
permeable state, exposing the catalyst to the resin and initiating the curing
process. In addition, the Intelimer polymer can be designed to change state over
a predetermined temperature range in order to achieve a desired reaction time.
Thermoset catalyst systems can eliminate the need for costly on-site
mixing equipment and because thermosets can be pre-mixed by the manufacturer,
will minimize sub-optimal product performance due to incorrect component mixing
ratios. Furthermore, since the thermosets will not cure until exposed to
elevated temperatures, pot life should be extended, resulting in significantly
reduced waste and labor expense. The Company believes that the ability to
control reaction time also provides advantages over existing thermoset systems
and can enhance the throughput of targeted manufacturing customers. Landec
received the R&D 100 Award from R&D Magazine for its Intelimer Polymer Systems
product line in 1997 in recognition of the unique capabilities of this
technology. Certain Intelimer Polymer Systems products are in field trials with
some large industrial companies, which, if approved, will be ready for
commercial introduction during the next year.
AEROMARK-TM- 80. Landec announced in December 1998, the introduction of
its first fully-formulated product, Aeromark 80, using the Company's proprietary
Intelimer catalyst technology. Aeromark 80 and other related products under
development are targeted to the rapidly growing prototyping/design market
estimated to exceed $100 million a year in sales. Landec's initial focus is with
large volume users such as major automakers and aerospace manufacturers. Landec
has been testing materials with several large European automotive companies and
is currently scaling manufacturing at a contract manufacturing site in
Switzerland.
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DOCK RESINS. In April 1997, Landec completed the acquisition of Dock
Resins, a privately-held manufacturer and marketer of specialty acrylic and
other polymers based in Linden, New Jersey. Landec paid approximately $13.7
million in cash, a promissory note and direct acquisition costs and $2.1 million
in Landec Common Stock to acquire Dock Resins. The acquisition of Dock Resins
was strategic in providing the Company with immediate access to large-scale
polymer manufacturing as well as a built-in customer base and national
distribution network. Dock Resins has a track record of growth in revenues and
earnings and a strong management team under the leadership of Dock Resins' Chief
Executive Officer, Dr. A. Wayne Tamarelli.
Dock Resins also sells products under the Doresco trademark which are
used by more than 300 customers throughout the United States and other countries
in the coatings, printing inks, laminating and adhesives markets. Dock Resins is
a leading supplier of proprietary polymers including acrylic, methacrylic,
alkyd, polyester, urethane and polyamide polymers to film converters engaged in
hot stamping, decorative wood grain, automotive interiors, holograms, and metal
foil applications. Dock Resins also supplies products to a number of other
markets such as graphic arts, automotive refinishing, construction,
pressure-sensitive adhesives, paper coatings, caulks, concrete curing compounds
and sealers. Dock Resins had sales of approximately $15.4 million and $14.0
million in the twelve months ended October 31, 1998 and October 31, 1999,
respectively.
HITACHI CHEMICAL. The Company entered into two separate collaborations
with Hitachi Chemical ("Hitachi") in the areas of industrial adhesives and
Intelimer Polymer Systems. On October 1, 1994, the Company entered into a
non-exclusive license agreement for seven years with Hitachi in the industrial
adhesives area. The agreement provides Hitachi with a non-exclusive license to
manufacture and sell products using Landec's Intelimer materials in certain
Asian countries. Landec received up-front license fees upon signing the
agreement and is entitled to future royalties based on net sales by Hitachi of
the licensed products. Any fees paid to the Company are non-refundable.
On August 10, 1995, the Company entered into the second collaboration
with Hitachi in the Intelimer Polymer Systems area. The agreement provided
Hitachi with an exclusive license to use and sell Landec's Intelimer Polymer
Systems in industrial latent curing products in certain Asian countries. Landec
is entitled to be the exclusive supplier of Intelimer Polymer Systems to Hitachi
for at least seven years after commercialization. Landec received an up-front
license payment upon signing this agreement and research and development funding
over three years and is entitled to receive future royalties based on net sales
by Hitachi of the licensed products. Any fees paid to the Company are
non-refundable. This agreement has been converted to a non-exclusive agreement
except for one application field.
NITTA CORPORATION. On March 14, 1995, the Company entered into a
license agreement with Nitta Corporation ("Nitta") in the industrial adhesives
area. The agreement provides Nitta with a co-exclusive license to manufacture
and sell products using Landec's Intelimer materials in certain Asian countries.
Landec received up-front license fees upon signing the agreement and is entitled
to future royalties based on net sales by Nitta of the licensed products. Any
fees paid to the Company are non-refundable. This agreement is terminable at
Nitta's option. Nitta and the Company entered into an additional exclusive
license arrangement in February 1996 covering Landec's medical adhesives
technology for use in Asia. The Company received up-front license fees upon
execution of the agreement and research and development payments and is entitled
to receive future royalties under this agreement. Any fees paid to the Company
are non-refundable. Nitta and the Company also entered into another worldwide
exclusive agreement on January 1, 1998 in the area of industrial adhesives
specific to one field of electronic polishing adhesives. The Company received
research and development payments as a part of this agreement.
MEDICAL APPLICATIONS
PORT-TM- OPHTHALMIC DEVICES. Landec developed the PORT (Punctal
Occluder for the Retention of Tears) ophthalmic device initially to address a
common, yet poorly diagnosed condition known as dry eye that is estimated to
affect 30 million Americans annually. The device consists of a physician-applied
applicator containing solid Intelimer material that transforms into a flowable,
viscous state when heated slightly above body temperature. After inserting the
Intelimer material into the lacrimal drainage duct, it quickly solidifies into a
form-fitting, solid plug. Occlusion of the
-11-
lacrimal drainage duct allows the patient to retain tear fluid and thereby
provides relief and therapy to the dry eye patient.
The PORT product is currently in human clinical trials. Landec and its
partner, Alcon, a wholly-owned subsidiary of Nestle S.A., believe that PORT
plugs will have additional ophthalmic applications beyond the dry eye market.
This would include applications for people who cannot wear contact lenses due to
limited tear fluid retention and patients receiving therapeutic drugs via eye
drops that require longer retention in the eye.
In December 1997, Landec licensed the rights to worldwide
manufacturing, marketing and distribution of its PORT ophthalmic device to
Alcon. Under the terms of the transaction, Landec received an up-front cash
payment of $500,000, a $1 million milestone payment in November 1998, research
and development funding and will receive ongoing royalties of 12.5% on product
sales of each PORT device over an approximately 15-year period. In September
1999, Alcon submitted a 510K application to the FDA seeking approval to
commercially sell the PORT device. Landec will continue to provide development
support on a contract basis through the FDA approval process and product launch.
CONVATEC. On October 11, 1999, the Company entered into a joint
development agreement with ConvaTec, a division of Bristol Myers Squibb, under
which Landec will develop adhesive film products for selected ConvaTec medical
products. Landec is receiving support funding for this program. Upon completion
of this agreement, the companies have the option to consider a license and
supply agreement where Landec would supply materials to ConvaTec for use in
specific medical devices.
SALES AND MARKETING
Each of the Company's core businesses are supported by dedicated sales
and marketing resources. The Company intends to develop its internal sales
capacity as more products progress toward commercialization and as business
volume expands geographically.
FOOD PRODUCTS TECHNOLOGY BUSINESS
In the Intellipac breathable membrane business, there are a limited
number of suppliers of fresh-cut produce, most of whom are located in the
western United States. The Company currently has a small internal sales force
targeted at this concentrated marketplace. Apio has over 22 sales people,
located in central California and throughout the U.S., supporting both the
traditional produce marketing business and the specialty packaged value-added
produce business.
AGRICULTURAL SEED TECHNOLOGY BUSINESS
In preparation for the first launch of coated inbred corn seed products
in fiscal year 2000, the Intellicoat seed coating business has identified a
small internal sales force to target a very focused group of seed customers. For
future coated seed products that are sold directly to farmers, the Company will
utilize over 35 direct seed sales consultants located in Monticello, Indiana.
These consultants also support Fielder's Choice in its direct marketing of corn
seed. Customer contacts are made based on direct responses and inquiries from
customers.
OTHER
Dock Resins sales are carried out through a small direct sales group
and network of existing manufacturers' representatives and distributed through
public warehouses. Sales are supported by internal sales and technical service
resources at Dock Resins. Intelimer Polymer Systems sales are made through a
small, technically oriented, internal sales organization in the U.S. and in
Europe through Akzo Nobel and Aero Consultants Ltd. A.G., international
distributors.
-12-
MANUFACTURING
Landec intends to control the manufacturing of its own products
whenever possible, as it believes that there is considerable manufacturing
margin opportunity in its products. In addition, the Company believes that
know-how and trade secrets can be better maintained by Landec retaining
manufacturing capability in-house.
POLYMER MANUFACTURING - DOCK RESINS CORPORATION
Dock Resins has manufacturing facilities that are flexible and
adaptable to a wide range of processes. Its capabilities include various
polymerization processes, grafting, dispersing, blending, pilot plant scale-ups
and general synthesis. The Company has increased the capacity of these
facilities in 1998 and 1999. Dock Resins' policy is to be a leader in safety,
health and environmental protection. In 1998 and 1999, Dock Resins passed a
voluntary comprehensive health and safety evaluation by the United States
Occupational Safety and Health Administration (OSHA). As a result, OSHA awarded
recognition to Dock Resins as a Merit Site in 1998 and a Star Site in 1999 in
OSHA's Voluntary Protection Program.
FOOD PRODUCTS TECHNOLOGY BUSINESS
The manufacturing process for the Company's initial Intellipac
breathable membrane products is comprised of polymer manufacturing, membrane
coating and label conversion. The Company currently has the majority of its
Intellipac breathable membrane products manufactured by selected outside
contract manufacturers. Landec has recently scaled up a significant portion of
label conversion manufacturing in Menlo Park to meet the increasing product
demand and provide additional developmental capabilities.
Apio processes all of its fresh-cut value-added products in a 35,000
square foot, state-of-the-art processing facility located in Guadalupe,
California. The Company is currently running two shifts per day, seven days a
week, and utilizes contract laborers from a third party contact labor supplier.
Cooling of produce is done through third parties and Apio Cooling, a separate
company of which Apio has a 60% ownership interest and is the general partner.
AGRICULTURAL SEED TECHNOLOGY BUSINESS
The Company is currently in the process of scaling up the manufacturing
coating process in Menlo Park, California to support the launch of its inbred
corn product and extend field trials of its wheat/soybean relay product.
Fielder's Choice purchases its hybrid seed corn from an established producer
under an exclusive purchase agreement.
GENERAL.
Many of the raw materials used in manufacturing certain of the
Company's products are currently purchased from a single source, including
certain monomers used to synthesize Intelimer polymers and substrate materials
for the Company's breathable membrane products. In addition, virtually all of
the hybrid corn varieties sold by Fielder's Choice are purchased from a single
source. Upon manufacturing scale-up and as hybrid corn sales increase, the
Company may enter into alternative supply arrangements. Although to date the
Company has not experienced difficulty acquiring materials for the manufacture
of its products nor has Fielder's Choice experienced difficulty in acquiring
hybrid corn varieties, no assurance can be given that interruptions in supplies
will not occur in the future, that the Company will be able to obtain substitute
vendors, or that the Company will be able to procure comparable materials or
hybrid corn varieties at similar prices and terms within a reasonable time. Any
such interruption of supply could have a material adverse effect on the
Company's ability to manufacture and distribute its products and, consequently,
could materially and adversely affect the Company's business, operating results
and financial condition.
Landec has historically relied on the guidance of Good Manufacturing
Practices ("GMP") in developing standardized research and manufacturing
processes and procedures. Having entered into licensing agreements for the PORT
device, the Company is no longer required to adhere to GMPs. The Company desires
to maintain an externally audited quality system and has achieved ISO 9001
registration for the Menlo Park research and development site in
-13-
fiscal year 1999. Such registration is required in order for the Company to sell
product to certain potential customers, primarily in Europe.
RESEARCH AND DEVELOPMENT
Landec is focusing its research and development resources on both
existing and new applications of its Intelimer technology. Expenditures for
research and development in fiscal year 1999 were $5.8 million, compared with
$5.7 million in fiscal year 1998. Fiscal year 1998 expenditures for research and
development increased 24% from fiscal year 1997 expenditures of $4.6 million. In
fiscal year 1999, research and development expenditures funded by corporate
partners were $770,000, compared with $1.4 million in fiscal year 1998 and
$863,000 in fiscal year 1997. The Company may continue to seek funds for applied
materials research programs from U.S. government agencies as well as from
commercial entities. The Company anticipates that it will continue to have
significant research and development expenditures in order to maintain its
competitive position with a continuing flow of innovative, high-quality products
and services. As of October 31, 1999, Landec had 29 employees engaged in
research and development (and a total of eight Ph.D.s in the Company) with
experience in polymer and analytical chemistry, product application, product
formulation, mechanical and chemical engineering.
COMPETITION
The Company operates in highly competitive and rapidly evolving fields,
and new developments are expected to continue at a rapid pace. Competition from
large food packaging and agricultural companies is expected to be intense. In
addition, the nature of the Company's collaborative arrangements and its
technology licensing business may result in its corporate partners and licensees
becoming competitors of the Company. Many of these competitors have
substantially greater financial and technical resources and production and
marketing capabilities than the Company, and many have substantially greater
experience in conducting field trials, obtaining regulatory approvals and
manufacturing and marketing commercial products. There can be no assurance that
these competitors will not succeed in developing alternative technologies and
products that are more effective, easier to use or less expensive than those
which have been or are being developed by the Company or that would render the
Company's technology and products obsolete and non-competitive.
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has been granted eleven U.S.
patents with expiration dates ranging from 2006 to 2015 and has filed
applications for additional U.S. patents, as well as certain corresponding
patent applications outside the United States, relating to the Company's
technology. The Company's issued patents include claims relating to
compositions, devices and use of a class of temperature sensitive polymers that
exhibit distinctive properties of permeability, adhesion and viscosity. There
can be no assurance that any of the pending patent applications will be
approved, that the Company will develop additional proprietary products that are
patentable, that any patents issued to the Company will provide the Company with
competitive advantages or will not be challenged by any third parties or that
the patents of others will not prevent the commercialization of products
incorporating the Company's technology. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products or design around the Company's patents. Any of the
foregoing results could have a material adverse effect on the Company's
business, operating results and financial condition.
The commercial success of the Company will also depend, in part, on its
ability to avoid infringing patents issued to others. The Company has received,
and may in the future receive, from third parties, including some of its
competitors, notices claiming that it is infringing third party patents or other
proprietary rights. If the Company were determined to be infringing any
third-party patent, the Company could be required to pay damages, alter its
products or processes, obtain licenses or cease certain activities. In addition,
if patents are issued to others which contain claims that compete or conflict
with those of the Company and such competing or conflicting claims are
ultimately determined to be valid, the Company may be required to pay damages,
to obtain licenses to these patents, to develop or obtain alternative technology
or to cease using such technology. If the Company is required to obtain any
licenses, there can
-14-
be no assurance that the Company will be able to do so on commercially favorable
terms, if at all. The Company's failure to obtain a license to any technology
that it may require to commercialize its products could have a material adverse
impact on the Company's business, operating results and financial condition.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to and diversion of effort by the Company, even if the eventual
outcome is favorable to the Company. Any such litigation or interference
proceeding, regardless of outcome, could be expensive and time consuming and
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology and consequently, could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which the Company seeks
to protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets and proprietary know-how will not otherwise
become known or be independently discovered by others.
GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial
regulation in the United States and foreign countries.
FOOD PRODUCTS TECHNOLOGY BUSINESS
The Company's food packaging products are subject to regulation under
the Food, Drug and Cosmetic Act ("FDC Act"). Under the FDC Act any substance
that when used as intended may reasonably be expected to become, directly or
indirectly, a component or otherwise affect the characteristics of any food may
be regulated as a food additive unless the substance is generally recognized as
safe. Food additives may be substances added directly to food, such as
preservatives, or substances that could indirectly become a component of food,
such as waxes, adhesives and packaging materials.
A food additive, whether direct or indirect, must be covered by a
specific food additive regulation issued by the FDA. The Company believes its
Intellipac breathable membrane products are not subject to regulation as food
additives because these products are not expected to become a component of food
under their expected conditions of use. If the FDA were to determine that the
Company's Intellipac breathable membrane products are food additives, the
Company may be required to submit a food additive petition. The food additive
petition process is lengthy, expensive and uncertain. A determination by the FDA
that a food additive petition is necessary would have a material adverse effect
on the Company's business, operating results and financial condition.
The Company's agricultural operations are subject to a variety of
environmental laws including the Food Quality Protection Act of 1966, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive
Environmental Response, Compensation and Liability Act. Compliance with these
laws and related regulations is an ongoing process. Environmental concerns are,
however, inherent in most agricultural operations, including those conducted by
the Company, and there can be no assurance that the cost of compliance with
environmental laws and regulations will not be material. Moreover, it is
possible that future developments, such as increasingly strict environmental
laws and enforcement policies thereunder, and further restrictions on the use of
manufacturing chemicals could result in increased compliance costs.
-15-
As a result of the Apio acquisition, the Company is subject to USDA
rules and regulations concerning the safety of the food products handled and
sold by Apio, and the facilities in which they are packed and processed. Failure
to comply with the applicable regulatory requirements can, among other things,
result in fines, injunctions, civil penalties, suspensions or withdrawal of
regulatory approvals, product recalls, product seizures, including cessation of
manufacturing and sales, operating restrictions and criminal prosecution.
AGRICULTURAL SEED TECHNOLOGY BUSINESS
The Company's agricultural products are subject to regulations of the
United States Department of Agriculture ("USDA") and the EPA. The Company
believes its current Intellicoat seed coatings are not pesticides as defined in
the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA") and are not
subject to pesticide regulation requirements. The process of meeting pesticide
registration requirements is lengthy, expensive and uncertain, and may require
additional studies by the Company. There can be no assurance that future
products will not be regulated as pesticides. In addition, the Company believes
that its Intellicoat seed coatings will not become a component of the
agricultural products which are produced from the seeds to which the coatings
are applied and therefore are not subject to regulation by the FDA as a food
additive. While the Company believes that it will be able to obtain approval
from such agencies to distribute its products, there can be no assurance that
the Company will obtain necessary approvals without substantial expense or
delay, if at all.
POLYMER MANUFACTURE
The Company's manufacture of polymers is subject to regulation by the
EPA under the Toxic Substances Control Act ("TSCA"). Pursuant to TSCA,
manufacturers of new chemical substances are required to provide a
Pre-Manufacturing Notice ("PMN") prior to manufacturing the new chemical
substance. After review of the PMN, the EPA may require more extensive testing
to establish the safety of the chemical, or limit or prohibit the manufacture or
use of the chemical. To date, PMNs submitted by the Company have been approved
by the EPA without any additional testing requirements or limitation on
manufacturing or use. In addition, the ongoing manufacture of Dock Resins'
existing product line is subject to state and federal environmental and safety
regulations. No assurance can be given that the EPA will grant similar approval
for future PMNs submitted by the Company.
OTHER
The Company and its products under development may also be subject to
other federal, state and local laws, regulations and recommendations. Although
Landec believes that it will be able to comply with all applicable regulations
regarding the manufacture and sale of its products and polymer materials, such
regulations are always subject to change and depend heavily on administrative
interpretations and the country in which the products are sold. There can be no
assurance that future changes in regulations or interpretations made by the FDA,
EPA or other regulatory bodies, with possible retroactive effect, relating to
such matters as safe working conditions, laboratory and manufacturing practices,
environmental controls, fire hazard control, and disposal of hazardous or
potentially hazardous substances will not adversely affect the Company's
business. There can also be no assurance that the Company will not be required
to incur significant costs to comply with such laws and regulations in the
future, or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business. Furthermore, the introduction of the
Company's products in foreign markets may require obtaining foreign regulatory
clearances. There can be no assurance that the Company will be able to obtain
regulatory clearances for its products in such foreign markets.
EMPLOYEES
As of October 31, 1999, Landec had 173 full-time employees, of whom 64
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 109 were dedicated to sales, marketing and administrative
activities. As of December 31, 1999, with the inclusion of Apio, Landec had 316
full-time employees. Landec intends to recruit additional personnel in
connection with the development, manufacturing and marketing of its products.
None of Landec's employees is represented by a union, and Landec believes
relationships with its employees are good.
-16-
ITEM 2. PROPERTIES
The Company has offices in Menlo Park, California, Linden, New Jersey
and Monticello, Indiana. During fiscal year 1999, the Landec operations located
in Menlo Park, California expanded its warehouse and manufacturing space by
6,000 square feet to support the manufacturing efforts of the Intellipac
breathable membrane business. Apio, which was acquired in December 1999, has
facilities in Guadalupe and Reedley, California.
These properties are described below:
Acres
Business of Lease
Location Segment Ownership Facilities Land Expiration
- -------------------- ---------------- ---------------- -------------------------------- ---------- -----------
Menlo Park, CA All Leased 21,000 square feet of office and -- 12/31/01(1)
laboratory space
Menlo Park, CA All Subleased 11,000 square feet of warehouse -- 7/31/02(1)
and manufacturing space
Linden, NJ Industrial Owned 22,000 square feet of office, 2.1 --
High laboratory, production,
Performance warehouse, and ancillary space
Materials
Monticello, IN Agricultural Owned 19,400 square feet of office 0.5 --
Seed space
Technology
Guadalupe, CA Food Products Owned 94,000 square feet of office 11.6 --
Technology space, manufacturing and cold
storage.
Reedley, CA Food Products Owned 152,600 square feet of office 19.3 --
Technology space, manufacturing and cold
storage.
(1) Lease contains one two-year renewal option.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the Company's fiscal year ending October 31, 1999.
-17-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the
symbol "LNDC". The following table sets forth for each period indicated the high
and low sales prices for the Common Stock as reported on the Nasdaq National
Market.
Fiscal Year 1999
- ----------------
High Low
---- ---
4th Quarter ending October 31, 1999.......................................$8.41 $2.63
3rd Quarter ending July 31, 1999..........................................$4.06 $3.00
2nd Quarter ending April 30, 1999.........................................$5.13 $3.38
1st Quarter ending January 31, 1999.......................................$6.00 $4.00
Fiscal Year 1998
- ----------------
High Low
---- ---
4th Quarter ending October 31, 1998.......................................$6.00 $3.25
3rd Quarter ending July 31, 1998..........................................$7.25 $5.50
2nd Quarter ending April 30, 1998.........................................$7.81 $4.50
1st Quarter ending January 31, 1998.......................................$5.13 $3.13
There were approximately 136 holders of record of 15,922,331 shares of
outstanding Common Stock as of January 7, 2000. Since holders are listed under
their brokerage firm's names, the actual number of shareholders is higher. The
Company has not paid any dividends on the Common Stock since its inception. The
Company presently intends to retain all future earnings, if any, for its
business and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future.
In connection with the sale of Series D Preferred Stock in July 1993,
the Company issued warrants to purchase 186,349 shares of Common Stock at an
exercise price of $4.31 per share for $5,357 in cash. In a cashless exercise
during fiscal year 1998, 46,587 shares were issued in exchange for the warrants.
In October 1998, certain directors and officers of the Company
purchased 200,425 shares of Common Stock for between $3.75 and $3.94 per share
for $776,000.
Pursuant to a Series A Preferred Stock Purchase Agreement (the
"Purchase Agreement") dated November 19, 1999, by and among the Company and
Frederick Frank, the Company completed a financing that raised approximately
$10.0 million through a private placement of its Series A-1 Preferred Stock and
Series A-2 Preferred Stock (the "Preferred Stock"). Pursuant to the Purchase
Agreement, the Company issued 166,667 shares of Preferred stock of the Company
at $60.00 per share (representing 1,666,670 shares of Common Stock on a
converted basis).
In connection with the Company's acquisition of Apio on December 2,
1999, the prior owners of Apio received 2.5 million shares of Common Stock. As
compensation for services rendered by Lehman Brothers Inc. in connection with
the closing of the Apio acquisition, the Company issued 62,500 shares of Common
Stock to Lehman Brothers, Inc. at $6.25 per share.
-18-
The issuance of securities in this Item 5 was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance on Section 4(2) of the Act as a transaction by an issuer not involving
any public offering. The recipients of the securities in such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transaction.
The recipients were given adequate access to information about the Company.
-19-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in Item 8 of
this report.
YEAR ENDED OCTOBER 31,
-----------------------
STATEMENT OF OPERATIONS DATA: 1999 1998 1997 1996 1995
---------- ------------ ----------- ----------- ------------
(in thousands, except per share data)
Revenues:
Product sales.....................................$ 33,927 $ 31,664 $ 8,653 $ 371 $ 14
Research and development revenues................. 770 1,352 863 1,096 796
License fees...................................... 750 500 -- 600 2,650
---------- ------------ ----------- ----------- ------------
Total revenues................................. 35,447 33,516 9,516 2,067 3,460
Operating costs and expenses:
Cost of product sales............................. 21,476 20,308 6,215 422 9
Research and development.......................... 5,758 5,713 4,608 3,588 3,175
Selling, general and administrative............... 11,192 10,835 4,664 2,367 1,332
Purchased in-process research and development..... -- -- 3,022 -- --
---------- ------------ ----------- ----------- ------------
38,426 36,856 18,509 6,377 4,516
---------- ------------ ----------- ----------- ------------
Operating loss....................................... (2,979) (3,340) (8,993) (4,310) (1,056)
---------- ------------ ----------- ----------- ------------
Interest income...................................... 363 737 1,726 1,546 281
Interest expense..................................... (99) (137) (319) (59) (106)
---------- ------------ ----------- ----------- ------------
Loss from continuing operations before income taxes.. (2,715) (2,740) (7,586) (2,823) (881)
Provision for income taxes........................... (54) (150) -- -- --
---------- ------------ ----------- ----------- ------------
Loss from continuing operations...................... (2,769) (2,890) (7,586) (2,823) (881)
---------- ------------ ----------- ----------- ------------
Discontinued Operations:
Loss from discontinued QuickCast operations....... -- -- (1,059) (1,377) (1,878)
Gain on disposal of QuickCast operations.......... -- -- 70 -- --
---------- ------------ ----------- ----------- ------------
Loss from discontinued operations.................... -- -- (989) (1,377) (1,878)
---------- ------------ ----------- ----------- ------------
Net loss.............................................$ (2,769) $ (2,890) $(8,575) $(4,200) $ (2,759)
========== ============ =========== =========== ============
Basic and diluted net loss per share:
Continuing operations.............................$ (.21) $ (.23) $ (.68) $ (.37) $ (.74)
Discontinued operations........................... -- -- (.09) (.18) (1.59)
---------- ------------ ----------- ----------- ------------
Basic and diluted net loss per share.................$ (.21) $ (.23) $ (.77) $ (.55) $ (2.33)
========== ============ =========== =========== ============
Shares used in computing basic and diluted net loss
per share......................................... 13,273 12,773 11,144 7,699 1,182
========== ============ =========== =========== ============
OCTOBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ------------- ----------- ----------- ------------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash, cash equivalents and short-term investments....$ 3,203 $ 10,177 $ 14,669 $ 36,510 $ 5,549
Total assets......................................... 40,708 42,356 50,160 38,358 7,347
Redeemable convertible preferred stock............... -- -- -- -- 31,276
Accumulated deficit.................................. (45,528) (42,756) (39,858) (31,278) (26,538)
Total shareholders' equity (net capital deficiency)..$ 31,761 $ 33,688 $ 35,615 $ 36,640 $ (26,429)
-20-
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 that involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include,
without limitation, those mentioned in this report and, in particular, the
factors described below under "Additional Factors That May Affect Future
Results".
OVERVIEW
Since its inception in October 1986, the Company has been primarily
engaged in the research and development of its Intelimer technology and related
products. The Company has launched four product lines from this core development
QuickCast-TM- splints and casts, in April 1994, which was subsequently sold to
Bissell Healthcare Corporation in August 1997; Intellipac breathable membranes
for the fresh-cut produce packaging market, in September 1995; Intelimer Polymer
Systems for the industrial specialties market in June 1997; and Intellicoat
coated inbred corn seeds in the Fall of 1999.
On December 2, 1999, the Company acquired Apio, Inc and certain related
entities ("Apio"). Apio is a leading marketer and packer of produce and
specialty packaged fresh-cut vegetables. See "Business - Description of Core
Business: Food Products Technology Business - Apio, Inc.
During fiscal years 1997 through 1999, the Company managed its
operations in three business segments - Food Products Technology, Agricultural
Seed Technology and Industrial High Performance Materials.
With the acquisition of Apio, the Company will be focusing on two
vertically integrated core businesses - Food Products Technology and
Agricultural Seed Technology. The Food Products Technology segment combines the
Company's Intellipac breathable membrane technology with Apio's fresh-cut
produce business. The Agricultural Seed Technology segment integrates the
Intellicoat seed coating technology with Fielder's Choice's direct marketing,
telephonic sales and e-commerce distribution capabilities. The Company also
operates a Technology Licensing/Research and Development business which develops
products to be licensed outside of the Company's core businesses.
Dock Resins, the Company's polymer manufacturer supports the needs of
these core businesses and manufactures products for the specialty polymer
industry and Intelimer Polymer Systems customers.
The Company has been unprofitable during each fiscal year since its
inception. From inception through October 31, 1999, the Company's accumulated
deficit was $45.5 million. The Company may incur additional losses in the
future. The amount of future net profits, if any, is highly uncertain and there
can be no assurance that the Company will be able to reach or sustain
profitability for an entire fiscal year.
-21-
RESULTS OF OPERATIONS
The Company's results of operations reflect only the continuing
operations of the Company and do not include the results of the discontinued
QuickCast operation.
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1998
Total revenues were $35.4 million for fiscal year 1999 compared to
$33.5 million for fiscal year 1998. Revenues from product sales increased to
$33.9 million in fiscal year 1999 from $31.7 million in fiscal year 1998
primarily due to increased product sales from Fielder's Choice and Intellipac
breathable membrane products which increased from $13.3 million and $2.9
million, respectively, in fiscal year 1998 to $15.2 million and $4.5 million,
respectively, during fiscal year 1999. The increase in Fielder's Choice revenues
was primarily due to increased per unit sales prices, and the increase in
Intellipac breathable membrane revenues was primarily due to the introduction of
various new products and increased volumes for existing products. These
increases were partially offset by a decrease in Dock Resins product sales from
$15.4 million during fiscal year 1998 to $14.0 million during fiscal year 1999.
This decrease is a result of the overall weakness in the chemical industry
during fiscal year 1999. Revenues from research and development funding were
$770,000 for fiscal year 1999 compared to $1.4 million for fiscal year 1998. The
decrease in research and development revenues was primarily due to the
completion of research and development arrangements with Hitachi Chemical and
Nitta Corporation in fiscal year 1998. Revenues from license fees during fiscal
year 1999 were $750,000 compared to $500,000 during fiscal year 1998. The
increase in revenues from license fees was due to a payment received from Alcon
in fiscal year 1999 upon meeting a certain milestone related to the licensing
agreement for the PORT ophthalmic devices. With the acquisition of Apio, the
Company expects future revenues to be significantly higher.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $21.5 million for fiscal year 1999 compared to $20.3 million
for fiscal year 1998. Cost of product sales as a percentage of product sales
decreased to 63% in fiscal year 1999 from 64% in fiscal year 1998. The decrease
in the cost of product sales as a percentage of product sales in fiscal year
1998 as compared to fiscal year 1999 was primarily the result of higher average
selling prices of Fielder's Choice products, partially offset by start-up costs
associated with establishing a new manufacturing facility in Menlo Park for
Intellipac breathable membrane products. The Company anticipates future cost of
product sales, in absolute dollars, to be significantly higher due to the
acquisition of Apio. Cost of product sales as a percentage of product sales is
expected to increase due to Apio's current mix of products having lower
percentage margins than Landec's other businesses. However, gross margins in
absolute dollars are expected to significantly increase due to Apio's high sales
volume.
Research and development expenses were $5.8 million for fiscal year
1999 compared to $5.7 million for fiscal year 1998. The Company's research and
development expenses consist primarily of expenses involved in product
development process scale-up, patent activities related to the Company's side
chain crystallizable polymer technology, and research and development expenses
related to Dock Resins products. The increase in research and development
expenses in fiscal year 1999 compared to fiscal year 1998 was primarily due to
increased development costs for the Company's Intellicoat seed coating products,
partially offset by a reduction in costs in the Industrial High Performance
Materials area. In future periods, the Company expects that spending for
research and development will continue to increase in absolute dollars, although
it will decrease significantly as a percentage of total revenues due to the
acquisition of Apio.
Selling, general and administrative expenses were $11.2 million for
fiscal year 1999 compared to $10.8 million for fiscal year 1998, an increase of
4%. Selling, general and administrative expenses consist primarily of sales and
marketing expenses associated with the Company's product sales, business
development expenses, and staff and administrative expenses. Specifically, sales
and marketing expenses increased to $6.2 million for fiscal year 1999, from $5.9
million for fiscal year 1998. Beginning fiscal year 2000, total selling, general
and administrative spending is expected to increase significantly, due to the
acquisition of Apio, although as a percentage of total revenues it is expected
to decrease.
-22-
Net interest income was $264,000 for fiscal year 1999 compared to
$600,000 for fiscal year 1998. The decrease during fiscal year 1999 as compared
to fiscal year 1998 was due principally to less cash being available for
investing.
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1997
Total revenues were $33.5 million for fiscal year 1998 compared to $9.5
million for fiscal year 1997. Revenues from product sales increased to $31.7
million in fiscal year 1998 from $8.7 million in fiscal year 1997 due primarily
to $13.3 million of product sales from Fielder's Choice, which was acquired in
September 1997; and an increase of $8.0 million of product sales from Dock
Resins, which was acquired in April 1997. Also contributing to the increase were
Intellipac breathable membrane product sales which increased from $1.2 million
in fiscal year 1997 to $2.9 million in fiscal year 1998, due primarily to an
increase in unit sales and the introduction of several new products. Revenues
from research and development funding were $1.4 million for fiscal year 1998
compared to $863,000 for fiscal year 1997. The increase in research and
development revenues was primarily due to the agreement with Alcon for the
funding of the PORT program. Revenues from license fees during fiscal year 1998
were $500,000 compared to none during fiscal year 1997. The increase in license
fees revenue was due to a payment in the first quarter of fiscal year 1998 under
the PORT license agreement with Alcon.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $20.3 million for fiscal year 1998 compared to $6.2 million
for fiscal year 1997. Cost of product sales as a percentage of product sales
decreased to 64% in fiscal year 1998 from 72% in fiscal year 1997. The decrease
in the cost of product sales as a percentage of product sales in fiscal year
1998 as compared to fiscal year 1997 was primarily the result of higher margins
resulting from product sales of Fielder's Choice and Dock Resins products.
Research and development expenses were $5.7 million for fiscal year
1998 compared to $4.6 million for fiscal year 1997, an increase of 24%. The
increase in research and development expenses in fiscal year 1998 compared to
fiscal year 1997 was primarily due to increased development costs for the
Company's Intellipac and Intellicoat seed coating products and a full year of
development costs related to Dock Resins products.
Selling, general and administrative expenses were $10.8 million for
fiscal year 1998 compared to $4.7 million for fiscal year 1997, an increase of
130%. Selling, general and administrative expenses increased primarily as a
result of an entire year of expenses and amortization of goodwill for Dock
Resins and Fielder's Choice, which were acquired during fiscal year 1997.
Specifically, sales and marketing expenses increased to $5.9 million for fiscal
year 1998, from $1.8 million for fiscal year 1997.
Net interest income was $600,000 for fiscal year 1998 compared to $1.4
million for fiscal year 1997. The decrease during fiscal year 1998 as compared
to fiscal year 1997 was due principally to less cash being available for
investing.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1999 the Company had cash, cash equivalents and
short-term investments of $3.2 million, a net decrease of $7.0 million from
$10.2 million as of October 31, 1998. This decrease was primarily due to cash
used in operations of $3.6 million and the purchase of $3.7 million of property,
plant and equipment partially offset by cash provided by financing activities of
approximately $710,000 from primarily the sale of Common Stock and repayment of
notes receivable from shareholders. The cash used in operations was primarily
comprised of planned purchases of Fielder's Choice corn seed inventory to
support the fiscal year 2000 growing season and deferred expenses associated
with the Apio acquisition which were recorded to other current assets.
The majority of the Company's $3.7 million of property and equipment
expenditures during fiscal year 1999 was incurred for building improvement and
equipment upgrade expenditures at Dock Resins to expand capacity, and purchasing
quality assurance equipment to support the development of Intellipac and
Intellicoat products.
-23-
Subsequent to fiscal year end, and as a result of raising $10 million
upon the sale of Preferred Stock and securing a new $11.25 million term debt
agreement to acquire Apio, Inc., the Company's cash balance increased to over $8
million. In addition, Apio entered into a new $12 million line of credit
agreement with Bank of America. The term debt and line of credit agreements
("loan agreements") contain restrictive covenants which require Apio to meet
certain financial tests, including minimum levels of EBITDA, minimum fixed
charge coverage ratio, minimum current ratio, minimum adjusted net worth and
maximum leverage ratios. These requirements and ratios generally become more
restrictive over time. The loan agreement, through restricted payment covenants,
limits the ability of Apio to make cash payments to Landec, until the
outstanding balance is reduced to an amount specified in the loan agreement.
In addition to the cash raised during the acquisition of Apio Inc.,
the Company is currently in the process of establishing a credit facility to
be used to fund the expansion of the manufacturing capabilities of
Intellicoat seed coating products. The Company believes that with these new
facilities, along with existing cash and cash equivalents will be sufficient
to finance operational and capital requirements for the foreseeable future.
The Company may, however, raise additional funds during the next twelve
months through an equity financing. If such financing does occur it will have
a dilutive effect on current shareholders. The Company's future capital
requirements will depend on numerous factors, including the progress of its
research and development programs; the development of commercial scale
manufacturing capabilities; the development of marketing, sales and
distribution capabilities; the ability of the Company to maintain existing
collaborative and licensing arrangements and establish and maintain new
collaborative and licensing arrangements; the timing and amount, if any, of
payments received under licensing and research and development agreements;
the costs involved in preparing, filing, prosecuting, defending and enforcing
intellectual property rights; the ability to comply with regulatory
requirements; the emergence of competitive technology and market forces; the
effectiveness of product commercialization activities and arrangements; the
seasonal needs to fund growing costs to ensure adequate and consistent supply
of produce; and other factors. If the Company's currently available funds,
together with the internally generated cash flow from operations, are not
sufficient to satisfy its financing needs, the Company would be required to
seek additional funding through other arrangements with collaborative
partners, bank borrowings and public or private sales of its securities.
There can be no assurance that additional funds, if required, will be
available to the Company on favorable terms if at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company 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, the Company
wishes to alert readers that the following important factors, as well as other
factors including, without limitation, those described elsewhere in this report,
could in the future affect, and in the past have affected, the Company's actual
results and could cause the Company's results for future periods to differ
materially from those expressed in any forward-looking statements made by or on
behalf of the Company. The Company assumes no obligation to update such
forward-looking statements.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company has
incurred net losses in each fiscal year since its inception, including a net
loss of $2.8 million for fiscal year 1999. The Company's accumulated deficit as
of October 31, 1999 totaled $45.5 million. The Company may incur additional
losses in the future. The amount of future net profits, if any, is highly
uncertain and there can be no assurance that the Company will be able to reach
or sustain profitability for an entire fiscal year.
THE COMPANY'S SUBSTANTIAL INDEBTEDNESS COULD LIMIT ITS FINANCIAL AND
OPERATING FLEXIBILITY AND SUBJECT IT TO OTHER RISKS. Upon the closing of the
Apio acquisition, the Company's total debt, including current maturities and
capital lease obligations, increased to approximately $22 million and the total
debt to equity ratio was approximately 40%. This level of indebtedness could
have significant consequences because:
- a substantial portion of the Company's net cash flow from operations
must be dedicated to debt service and will not be available for other
purposes;
-24-
- the Company's ability to obtain additional debt financing in the future
for working capital, capital expenditures or acquisitions may be
limited; and
- the Company's level of indebtedness may limit its flexibility in
reacting to changes in the industry and economic conditions generally.
The Company's ability to service its indebtedness will depend on its future
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, some of which are beyond the Company's
control. If the Company were unable to service its debt, it would be forced to
pursue one or more alternative strategies such as selling assets, restructuring
or refinancing its indebtedness or seeking additional equity capital, which
might not be successful and which could substantially dilute the ownership
interest of existing shareholders.
In addition, Apio is subject to various financial and operating covenants
under its term debt and line of credit facilities (the "loan agreement"),
including minimum levels of EBITDA, minimum fixed charge coverage ratio, minimum
current ratio, minimum adjusted net worth and maximum leverage ratios. These
requirements and ratios generally become more restrictive over time. The loan
agreement limits the ability of Apio to make cash payments to Landec until the
outstanding balance is reduced to an amount specified in the loan agreement. The
Company has pledged substantially all of Apio's assets to secure its bank debt.
The Company's failure to comply with the obligations under the loan agreement,
including maintenance of financial ratios, could result in an event of default,
which, if not cured or waived, would permit acceleration of the indebtedness due
under the loan agreement. Any such violations of its obligations under the loan
agreement could have a material adverse effect on the Company's business,
results of operations and financial condition.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. In the past, the Company's
results of operations have varied significantly from quarter to quarter and such
fluctuations are expected to continue in the future. Historically, the Company's
corn seed distributor, Fielder's Choice, has been the primary source of these
fluctuations, as its revenues and profits are concentrated over a few months
during the spring planting season (generally during the Company's second
quarter). In addition, Apio can be heavily affected by seasonal and weather
factors which could impact quarterly results. The Company's earnings in its Food
Products Technology business will be sensitive to price fluctuations in the
fresh vegetables and fruits markets. Excess supplies can cause intense price
competition. Other factors affecting the Company's food and/or agricultural
operations include the seasonality of its supplies, the ability to process
produce during critical harvest periods, the timing and effects of ripening, the
degree of perishability, the effectiveness of worldwide distribution systems,
the terms of various federal and state marketing orders, total worldwide
industry volumes, the seasonality of consumer demand, foreign currency
fluctuations, foreign importation restrictions and foreign political risks. As a
result of these and other factors, the Company expects to continue to experience
fluctuations in quarterly operating results, and there can be no assurance that
the Company will be able to reach or sustain profitability for an entire fiscal
year.
UNCERTAINTY RELATING TO INTEGRATION OF APIO AND OTHER NEW BUSINESS
ACQUISITIONS. The Company's acquisition of Apio involves the integration of
Apio's operations into the Company. The integration will require the dedication
of management resources in order to achieve the anticipated operating
efficiencies of the acquisition. No assurance can be given that difficulties
encountered in integrating the operations of Apio into the Company will be
overcome or that the benefits expected from such integration will be realized.
The difficulties in combining Apio and the Company's operations are exacerbated
by the necessity of coordinating geographically separate organizations,
integrating personnel with disparate business backgrounds and combining
different corporate cultures. The process of integrating operations could cause
an interruption of, or loss of momentum in, the activities of the combined
company's business. Difficulties encountered or additional costs incurred in
connection with the acquisition and the integration of the operations of Apio
and the Company could have a material adverse effect on the business, results of
operations and financial condition of the Company.
The successful integration of other 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
-25-
the acquisitions. The successful combination of new businesses also requires
coordination of research and development activities, manufacturing, and sales
and marketing efforts. In addition, the process of combining organizations 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 the acquisitions, and the failure to do
so would have a material adverse effect on the Company's business, results of
operations and financial condition.
EARLY COMMERCIALIZATION OF CERTAIN PRODUCTS; DEPENDENCE ON NEW PRODUCTS AND
TECHNOLOGIES; UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early
stage of product commercialization of certain Intellipac breathable membrane,
Intellicoat seed coating and Intelimer polymer systems products and many of its
potential products are in development. The Company believes that its future
growth will depend in large part on its ability to develop and market new
products in its target markets and in new markets. In particular, the Company
expects that its ability to compete effectively with existing food products,
agricultural, industrial and medical companies will depend substantially on
successfully developing, commercializing, achieving market acceptance of and
reducing the cost of producing the Company's products. In addition, commercial
applications of the Company's temperature switch polymer technology are
relatively new and evolving. There can be no assurance that the Company will be
able to successfully develop, commercialize, achieve market acceptance of or
reduce the costs of producing the Company's new products, or that the Company's
competitors will not develop competing technologies that are less expensive or
otherwise superior to those of the Company. There can be no assurance that the
Company will be able to develop and introduce new products and technologies in a
timely manner or that new products and technologies will gain market acceptance.
The failure to develop and successfully market new products would have a
material adverse effect on the Company's business, results of operations and
financial condition.
The success of the Company in generating significant sales of its
products will depend in part on the ability of the Company and its partners and
licensees to achieve market acceptance of the Company's new products and
technology. The extent to which, and rate at which, market acceptance and
penetration are achieved by the Company's current and future products are a
function of many variables including, but not limited to, price, safety,
efficacy, reliability, conversion costs and marketing and sales efforts, as well
as general economic conditions affecting purchasing patterns. There can be no
assurance that markets for the Company's new products will develop or that the
Company's new products and technology will be accepted and adopted. The failure
of the Company's new products to achieve market acceptance would have a material
adverse effect on the Company's business, results of operations and financial
condition.
COMPETITION AND TECHNOLOGICAL CHANGE. 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 products, agricultural,
industrial and medical companies is expected to be intense. In addition, the
nature of the Company's collaborative arrangements may result in its corporate
partners and licensees becoming competitors of the Company. Many of these
competitors have substantially greater financial and technical resources and
production and marketing capabilities than the Company, and may have
substantially greater experience in conducting clinical and 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.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. The
Company's success is dependent in part upon its ability to manufacture its
products in commercial quantities in compliance with regulatory requirements and
at acceptable costs. There can be no assurance that the Company will be able to
achieve this.
Although the Company believes Dock Resins will provide Landec with
practical knowledge in the scale-up of Intelimer polymer products, production in
commercial-scale quantities may involve technical challenges for the Company.
The Company anticipates that a portion of the Company's products will be
manufactured in the Linden, New Jersey facility acquired in the purchase of Dock
Resins. The Company's reliance on this facility involves a number of potential
risks, including the unavailability of, or interruption in access to, certain
process technologies and reduced control over delivery schedules, and low
manufacturing yields and high manufacturing costs. The
-26-
Company may also need to consider seeking collaborative arrangements with other
companies to manufacture certain of its products. If the Company becomes
dependent upon third parties for the manufacture of its products, then the
Company's profit margins and its ability to develop and deliver such products on
a timely basis may be adversely affected. Moreover, there can be no assurance
that such parties will adequately perform and any failures by third parties may
impair the Company's ability to deliver products on a timely basis, impair the
Company's competitive position, or may delay the submission of products for
regulatory approval. In late fiscal 1999, in an effort to reduce reliance on
third party manufacturers, the Company began the set up of a manufacturing
operation at its facility in Menlo Park, California, for the production of
Intellipac breathable membrane products. There can be no assurance that the
Company can successfully operate a manufacturing operation at acceptable costs,
with acceptable yields, and retain adequately trained personnel. The occurrence
of any of these factors could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS. Many of the raw materials used in
manufacturing certain of the Company's products are currently purchased from a
single source, including certain monomers used to synthesize Intelimer polymers
and substrate materials for the Company's breathable membrane products. In
addition, virtually all of the hybrid corn varieties sold by Fielder's Choice
are purchased from a single source. Upon manufacturing scale-up and as hybrid
corn sales increase, the Company may enter into alternative supply arrangements.
Although to date the Company has not experienced difficulty acquiring materials
for the manufacture of its products nor has Fielder's Choice experienced
difficulty in acquiring hybrid corn varieties, no assurance can be given that
interruptions in supplies will not occur in the future, that the Company will be
able to obtain substitute vendors, or that the Company will be able to procure
comparable materials or hybrid corn varieties at similar prices and terms within
a reasonable time. Any such interruption of supply could have a material adverse
effect on the Company's ability to manufacture and distribute its products and,
consequently, could materially and adversely affect the Company's business,
results of operations and financial condition.
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. There can be no
assurance that any 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. The Company has received, and
may in the future receive, from third parties, including some of its
competitors, notices claiming that it is infringing third party patents or other
proprietary rights. If the Company were determined to be infringing any
third-party patent, the Company could be required to pay damages, alter its
products or processes, obtain licenses or cease certain activities. 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.
Litigation, which could result in substantial costs to and diversion of effort
by the Company, may also be necessary to enforce any patents issued or licensed
to the Company or to determine the scope and validity of third-party proprietary
rights. Any such litigation or interference proceeding, regardless of outcome,
could be expensive and time consuming and could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology and,
consequently, could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business - Patents and
Proprietary Rights" in Item 1.
ENVIRONMENTAL REGULATIONS. 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 certain
manufacturing processes, including those utilized by Dock Resins. As a result of
historic off-site disposal practices, Dock Resins was recently involved in two
actions seeking to compel the generators of hazardous waste to remediate
hazardous waste sites. Dock Resins has been informed by its counsel that it was
a DE MINIMIS generator to these sites, and these actions have been settled
without the payment of any material amount by the Company. In addition, the New
Jersey Industrial Site Recovery Act ("ISRA") requires an investigation and
remediation of any industrial establishment, like Dock Resins, which changes
ownership. This statute was activated by the Company's acquisition of Dock
Resins. Dock Resins has completed its investigation of the site, delineated the
limited areas of
-27-
concern on the site, and completed the bulk of the active remediation required
under the statute. The costs associated with this effort are being borne by the
former owner of Dock Resins, and counsel has advised Dock Resins and the Company
that funds of the former owner required by ISRA to be set aside for this effort
are sufficient to pay for the successful completion of remedial activities at
the site. In most cases, the Company believes its liability will be limited to
sharing clean-up or other remedial costs with other potentially responsible
parties. Any failure by the Company to control the use of, or to restrict
adequately the discharge of, hazardous substances under present or future
regulations could subject it to substantial liability or could cause its
manufacturing operations to be suspended and could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that changes in environmental regulations will not
impose the need for additional capital equipment or other requirements.
The Company's agricultural operations are subject to a variety of
environmental laws including the Food Quality Protection Act of 1966, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive
Environmental Response, Compensation and Liability Act. Compliance with these
laws and related regulations is an ongoing process. Environmental concerns are,
however, inherent in most agricultural operations, including those conducted by
the Company, and there can be no assurance that the cost of compliance with
environmental laws and regulations will not be material. Moreover, it is
possible that future developments, such as increasingly strict environmental
laws and enforcement policies thereunder, and further restrictions on the use of
manufacturing chemicals could result in increased compliance costs.
ADVERSE GROWING CONDITIONS. The Company's Food Products and Agricultural
Seed Technology businesses are subject to weather conditions that affect
commodity prices, crop yields, and decisions by growers regarding crops to be
planted. Crop diseases and severe conditions, particularly weather conditions
such as floods, droughts, frosts, windstorms and hurricanes may adversely affect
the supply of vegetables and fruits used in the Company's business, reduce the
sales volumes and increase the unit production costs. Because a significant
portion of the costs are fixed and contracted in advance of each operating year,
volume declines due to production interruptions or other factors could result in
increases in unit production costs which could result in substantial losses and
weaken the Company's financial condition. If the supply of any of the Company's
products is adversely affected by the adverse conditions, there can be no
assurance that the Company will be able to obtain sufficient supplies from
alternative sources.
LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited
experience marketing and selling its Intelimer polymer products. While Dock
Resins will provide consultation and in some cases direct marketing support for
Landec's Intelimer polymer products, establishing sufficient marketing and sales
capability will require significant resources. The Company intends to distribute
certain of its products through its corporate partners and other distributors
and to sell certain other products through a direct sales force. There can be no
assurance that the Company will be able to recruit and retain skilled sales
management, direct salespersons or distributors, or that the Company's sales and
marketing efforts will be successful. To the extent that the Company has entered
into or will enter into distribution or other collaborative arrangements for the
sale of its products, the Company will be dependent on the efforts of third
parties. There can be no assurance that such sales and marketing efforts will be
successful and any failure in such efforts could have a material adverse effect
on the Company's business, operating results and financial condition.
DEPENDENCE ON COLLABORATIVE PARTNERS AND LICENSEES. For certain of its
current and future products, the Company's strategy for development, clinical
and field testing, manufacture, commercialization and marketing includes
entering into various collaborations with corporate partners, licensees and
others. The Company is dependent on its corporate partners to develop, test,
manufacture and/or market certain of its products. Although the Company believes
that its partners in these collaborations have an economic motivation to succeed
in performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within the control of the
Company. There can be no assurance that such partners will perform their
obligations as expected or that the Company will derive any additional revenue
from such arrangements. There can be no assurance that the Company's partners
will pay any additional option or license fees to the Company or that they will
develop, market or pay any royalty fees related to products under the
agreements. Moreover, certain of the collaborative agreements provide that they
may be terminated at the discretion of the corporate partner, and certain
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of the collaborative agreements provide for termination under certain other
circumstances. In addition, there can be no assurance as to the amount of
royalties, if any, on future sales of QuickCast and PORT products as the Company
no longer has control over the sales of such products since the sale of
QuickCast and the license of the PORT product lines. There can be no assurance
that the Company's partners will not pursue existing or alternative technologies
in preference to the Company's technology. Furthermore, there can be no
assurance that the Company will be able to negotiate additional collaborative
arrangements in the future on acceptable terms, if at all, or that such
collaborative arrangements will be successful.
GOVERNMENT REGULATION. The Company's products and operations are subject to
governmental regulation in the United States and foreign countries. The
manufacture of the Company's products is subject to periodic inspection by
regulatory authorities. There can be no assurance that the Company will be able
to obtain necessary regulatory approvals on a timely basis or at all. Delays in
receipt of or failure to receive such approvals or loss of previously received
approvals would have a material adverse effect on the Company's business,
financial condition and results of operations. Although Landec has no reason to
believe that it will not be able to comply with all applicable regulations
regarding the manufacture and sale of its products and polymer materials, such
regulations are always subject to change and depend heavily on administrative
interpretations and the country in which the products are sold. There can be no
assurance that future changes in regulations or interpretations relating to such
matters as safe working conditions, laboratory and manufacturing practices,
environmental controls, and disposal of hazardous or potentially hazardous
substances will not adversely affect the Company's business. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect on the Company's business,
operating results and financial condition. As a result of the Apio acquisition,
the Company is subject to USDA rules and regulations concerning the safety of
the food products handled and sold by Apio, and the facilities in which they are
packed and processed. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, injunctions, civil
penalties, suspensions or withdrawal of regulatory approvals, product recalls,
product seizures, including cessation of manufacturing and sales, operating
restrictions and criminal prosecution. See "Business - Governmental Regulations"
in Item 1.
INTERNATIONAL OPERATIONS AND SALES. In fiscal years 1999 and 1998,
approximately 2.3% of the Company's total revenues were derived from product
sales to and collaborative agreements with international customers. The Company
expects that with the acquisition of Apio and its export business, international
revenues will become an important component of its total revenues. A number of
risks are inherent in international transactions. International sales and
operations may be limited or disrupted by the regulatory approval process,
government controls, export license requirements, political instability, price
controls, trade restrictions, changes in tariffs or difficulties in staffing and
managing international operations. Foreign regulatory agencies have or may
establish product standards different from those in the United States, and any
inability to obtain foreign regulatory approvals on a timely