Back to GetFilings.com
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 29, 2000, 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 $46,050,000 as of January 5, 2001, 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 5, 2001, there were 16,149,086 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
2001 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.
-1-
LANDEC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
------- ----
Part I
1. Business.......................................................................... 3
2. Properties........................................................................ 16
3. Legal Proceedings................................................................. 16
4. Submission of Matters to a Vote of Security Holders............................... 16
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters............. 17
6. Selected Consolidated Financial Data.............................................. 18
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 20
7A. Quantitative and Qualitative Disclosures about Market Risk........................ 30
8. Financial Statements and Supplementary Data....................................... 30
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 30
Part III
10. Directors and Executive Officers of the Registrant................................ 31
11. Executive Compensation............................................................ 31
12. Security Ownership of Certain Beneficial Owners and Management.................... 31
13. Certain Relationships and Related Transactions.................................... 31
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 32
-2-
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 Landec Ag, Inc. ( "Landec Ag", formerly Intellicoat
Corporation), combines Landec's proprietary Intellicoat-Registered Trademark-
seed coating technology with its unique eDC-TM- -- e-commerce, Direct marketing
and Consultative selling -- capabilities which it obtained with its acquisition
of Fielder's Choice Direct, a direct marketer of hybrid seed corn, in September
1997.
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 Chemical. It also engages in research
and development activities with companies such as ConvaTec, a division of
Bristol-Myers Squibb and UCB Chemicals, a subsidiary of UCB S.A. of Belgium. For
segment disclosure purposes, the Technology Licensing/Research and Development
business is included in Corporate and Other (see Note 13 to the Consolidated
Financial Statements).
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, Dock Resins sells industrial
specialty products under the Doresco-Registered Trademark- trademark that are
used by more than 300 customers throughout the United States in the coatings,
printing inks, laminating and adhesives markets. For segment disclosure
purposes, Dock Resins is included in Corporate and Other (see Note 13 to the
Consolidated Financial Statements).
The Company's core polymer products are based on its patented
proprietary Intelimer-Registered Trademark- polymers, which differ from other
polymers in that they can be customized to abruptly change their physical
characteristics when heated or cooled through a pre-set temperature switch. For
instance, Intelimer polymers can change within the range of one or two degrees
Celsius from a 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.
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/Research and Development business are described
below. Financial information concerning the industry segments for which the
Company reported its operations during fiscal years 1998 through 2000 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."
-3-
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
1 DEG. C to 2 DEG. C. These changes can be designed to occur at relatively
low temperatures (0 DEG. C to 100 DEG. 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.
[TEMPERATURE 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 polymer's side chains align
through weak hydrophobic interactions resulting in a crystalline structure.
When this side chain crystallizable polymer is heated to, or above, this
switch temperature, these interactions are disrupted and the polymer is
transformed into an amorphous, viscous state. Because this transformation
involves a physical and not a chemical change, this process is repeatedly
reversible. Landec can set the polymer switch temperature anywhere between 0
DEG. C to 100 DEG. C by varying the length of the side chains. The reversible
transitions between crystalline and amorphous states are illustrated in
FIGURE 2 below.
-4-
[CRYSTALLINE AMORPHOUS 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
side-chain acrylic monomers that are derived primarily from natural materials
such as soybean and corn oils, that are highly purifiable and designed to be
manufactured economically through known synthesis processes. These side-chain
raw materials are then polymerized by Landec leading to many different
side-chain crystallizable polymers whose properties vary depending upon the
initial materials and the synthesis process. Intelimer materials can be made
into many different forms, including films, coatings, microcapsules and discrete
forms.
DESCRIPTION OF CORE BUSINESS
The Company participates in two core segments -- Food Products
Technology and Agricultural Seed Technology. In addition to these two core
segments, Landec will license technology and conduct on going research and
development through its Technology Licensing/Research & Development Business.
[LANDEC FLOWCHART]
-5-
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 who the Company believes is the nation's leading marketer and
packer of produce and specialty packaged fresh-cut vegetables. Apio provides
year-round access to produce, utilizes state-of-the-art fresh-cut produce
processing technology and distributes to all 10 of the top U.S. retail grocery
chains and major club stores and has recently begun expanding its product
offerings to the foodservice industry. Landec's proprietary Intelimer-based
packaging business has been combined with Apio into a wholly owned subsidiary
that retains the Apio, Inc. name. This vertical integration within the Food
Products Technology business places Landec in the unique position of providing
the fresh-cut and whole produce market with both technology and access to larger
and broader markets.
INTELLIPAC-Registered Trademark- 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 extend the shelf life and quality 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 International Fresh Cut Produce Association ("IFPA"), in 1999,
the total U.S. fresh produce market exceeded $100 billion. Of this, U.S. retail
sales of fresh-cut produce grew to an estimated $10 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 IFPA estimates that by
2005, U.S. retail sales of fresh-cut produce could more than double.
Although fresh-cut produce companies have had success in the salad
market, the industry has been slow to diversify into other fresh-cut vegetables
or fruits due primarily to limitations in film 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 conventional
packaging materials have not significantly 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, bananas, berries and stone
fruit (e.g. peaches, apricots, nectarines) will require a more versatile and
sophisticated packaging solution for which the Company's Intellipac breathable
membranes were developed.
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, retail
grocery stores and club stores, and finally to the ultimate consumer,
temperatures can fluctuate significantly. Therefore, temperature control is a
constant challenge in preserving the quality of fresh-cut produce -- a challenge
few current packaging films can fulfill. The Company believes that its
temperature-responsive Intellipac technology is well suited to the challenges of
the fresh-cut distribution process.
-6-
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 provide the majority of the gas transmission requirements 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 ADJUST OXYGEN AND CARBON DIOXIDE PERMEABILITY. 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. The temperature responsiveness
of these membranes allows ice to be removed from the distribution
system which results in numerous benefits. These benefits include (1) a
substantial decrease in freight cost, (2) reduced risk of contaminated
produce because ice is a carrier of micro organisms, (3) the
elimination of expensive waxed cartons that cannot be recycled, and (4)
the potential decrease in work related accidents due to melted ice.
Landec believes that growth of the overall produce market will be
driven by the increasing demand for the convenience of fresh-cut produce. This
demand will in turn require packaging that facilitates the quality and shelf
life of produce transported to fresh-cut distributors in bulk and pallet
quantities. The Company believes that in the future its 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 foodservice, 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 produce.
Landec manufactures its Intellipac breathable membrane packaging both
internally and through selected qualified contract manufacturers and markets and
sells Intellipac breathable membranes packaging directly to food distributors.
APIO, INC.
In December 1999, Landec completed the acquisition of Apio and
certain related entities. Landec paid $21.0 million in cash and Landec Common
Stock, before expenses, at close and $1.1 million in January 2001 with
another $4.1 million due to be paid in March 2001. An additional $11.4
million in future payments over the next four years may be paid, $5.9 million
of which is based on Apio achieving certain performance milestones in fiscal
year 2001. Apio had revenues of approximately $179 million in the
eleven-month period ended October 29, 2000.
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 service
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
16,000 acres under contract, including access to approximately 20 percent of the
farmable land in the Santa Maria Valley. The fresh-cut value-added processing
products business, developed within the last 5 years, sources a variety of
fresh-cut vegetables to the top retail grocery chains representing over 6,900
retail stores and to over 600 club stores. During the eleven month period ended
October 29, 2000, Apio shipped more than 23 million cartons of produce to some
700 customers including leading supermarket retailers, wholesalers, foodservice
suppliers and club stores throughout the United States and internationally,
primarily in Asia.
-7-
In September 2000, due to disappointing financial results, management
of Landec decided to discontinue processing fruit at its Reedley facility. The
Company has put the facility and the packing and cold storage assets up for
sale. The Company will continue to provide field support and sales and marketing
services to current contracted growers through Apio's existing staff and will
outsource all remaining services to third parties. As a result of the shutdown
of the Reedley facility, the Company recorded a $525,000 charge during the
fourth quarter of fiscal year 2000, primarily for severance and payroll related
costs. The sale is expected to result in a gain. The current net book value of
the assets is $3.0 million. The Company anticipates closing a sale during the
second fiscal quarter of 2001.
There are five 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. It is focused on
developing its Eat Smart-TM- brand name for all of its fresh-cut
value-added products. As retail grocery and club store chains
consolidate, Apio is well positioned as a single source of a broad
range of products.
- 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. Generally, 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
packed more than 59 million pounds in the past twelve months. 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 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.
- Apio, through the use of Landec's Intellipac membrane technology, is in
the early stages of changing selective categories of the whole produce
business. Its introduction of iceless broccoli crowns in October 2000
is the beginning of a conversion from the traditional packing and
shipping of whole produce, which relied heavily on ice, to iceless
products utilizing the Intellipac technology.
AGRICULTURAL SEED TECHNOLOGY BUSINESS
Landec formed its Landec Ag (formerly Intellicoat Corporation)
subsidiary in 1995. Landec Ag's strategy is to build a vertically integrated
seed technology company based on the proprietary Intellicoat-Registered
Trademark- seed coating technology and its eDC -- e-commerce, direct marketing
and consultative selling -- capabilities.
INTELLICOAT SEED COATINGS
Landec has developed and, through Landec Ag, 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, and canola seeds. According to the U.S. Agricultural Statistics Board,
the total planted acreage in 1999 in North America for corn, soybean, and canola
seed exceeded 77.6 million, 77.2 million, and 1.1 million, respectively.
Currently, farmers must 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
temperature 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
-8-
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, more 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.
In fiscal year 2000, the Company successfully launched its first
commercial product, Pollinator Plus-TM- coatings for inbred corn seed products.
As a result of the success realized in fiscal year 2000, the Company will be
expanding its sales of inbred corn seed coating products in fiscal year 2001 to
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,
based on the successful field trial results during 2000 for its Relay Crop-TM-
System for wheat and coated soybeans and its Early Plant-TM- hybrid coated corn,
the Company will be expanding its sales of each product. The Company's Relay
Crop System 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.
Early Plant hybrid corn will allow the farmer to plant 2 to 4 weeks earlier than
typically possible due to cold soil temperatures. By allowing the farmer to
plant earlier than normal Early Plant hybrid corn will enable large farmers to
utilize staff and equipment more efficiently and provide flexibility during the
critical planting period. Future crops under consideration include cotton,
canola, sugar beets and other vegetables.
FIELDER'S CHOICE DIRECT (THE EDC COMPANY)
In September 1997, Landec Ag 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 Fielder's Choice. Terms of the agreement include a
cash earn-out of $2.4 million based on future sales of Fielder's Choice
Direct-Registered Trademark- hybrid seed corn. As of October 29, 2000, $1.2
million of the earn-out had been earned and paid. Fielder's Choice had sales of
approximately $13.3 million and $15.2 million in the twelve months ended October
31, 1998 and 1999, respectively, and $17.2 million for the twelve months ended
October 29, 2000.
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.
In order to support its direct marketing programs, Fielder's Choice has
developed proprietary e-commerce direct marketing, and consultative selling
information technology, called "eDC", that enables state-of-the-art methods for
communicating with a broad array of farmers. This proprietary direct marketing
information technology includes a current database of over 80,000 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 marketing Intellicoat seed coating products. 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, 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.
-9-
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 currently being sold
in the U.S. and Europe while others are in developmental stages.
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
provided the Company with immediate access to large-scale polymer manufacturing
as well as a built-in customer base and national distribution network.
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 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 1999, respectively and $12.4 for the twelve
months ended October 29, 2000.
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 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. This
agreement on industrial adhesives has terminated. 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 which began in February 2000.
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
-10-
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. As of January
1999, the Company had no future obligations under any of the aforementioned
agreements with Nitta.
UCB CHEMICALS CORPORATION. On April 10, 2000, the Company entered into
a one-year research and development agreement with UCB Chemicals Corporation
("UCB"), an operating entity of UCB S.A., a major pharmaceutical and chemical
company located in Belgium. UCB's chemical business is a major supplier of
radiation curing and powder coating resins. Under this agreement, the Company
will explore polymer systems for evaluation in several industrial product
applications. The program is exploratory in nature and, if successful, could
lead to a supply agreement for additive materials for UCB products.
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 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 final stages of 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 $750,000 milestone payment in November 1998, research and
development funding and will receive ongoing royalties of 11.5% on product sales
of each PORT device over an approximately 15-year period. Any fees paid to the
Company are non-refundable. 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. Landec also provides the Intelimer
polymer to Alcon which is used in the PORT device.
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.
AGRICULTURAL APPLICATIONS
CELPRIL. On September 12, 2000, the Company entered into a joint
development agreement with CelPril, a subsidiary of Aventis CropScience, under
which Landec will develop seed coatings for fall and spring planted canola and
assist CelPril in conducting field trials. Landec is receiving support funding
for this program. Upon completion of this agreement, the companies have the
option to consider additional support funding and a license and supply agreement
where Landec would supply materials to CelPril for use in specific canola seed
coating applications.
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
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.
-11-
AGRICULTURAL SEED TECHNOLOGY BUSINESS
In preparation for the launch of Early Plant-TM- hybrid corn seed and
Relay Crop-TM- wheat/soybean products, Landec Ag 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
50 direct seed sales consultants and associates located in Monticello, Indiana.
These consultants and associates 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 Dock
Resins in the U.S. and in Europe through Akzo Nobel, an international
distributor.
MANUFACTURING AND PROCESSING
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 in order to offer new products to new and existing
customers and to supply polymer products to Landec's other businesses. Dock
Resins' policy is to be a leader in safety, health and environmental protection.
In 1998 and 1999, in order to offer new products to new and existing customers
and to supply polymer products to Landec's other businesses. 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 Intellipac breathable
membrane products is comprised of polymer manufacturing, membrane manufacturing
and label conversion. Dock Resins manufactures virtually all of the polymers for
the Intellipac breathable membranes. Select outside contractors currently
manufacture the breathable membranes and Landec has recently transitioned most
of the label conversion manufacturing to its Menlo Park facility 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
During fiscal year 2000, the Company completed construction of a pilot
manufacturing facility in Indiana to support the commercialization of its Relay
Crop System for wheat/coated soybean products and for Early Plant hybrid corn.
The new facility will utilize a new continuous coating process that has
increased seed coating capabilities by tenfold compared to the previous system
using batch coaters. 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
-12-
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 fiscal year
1999 and for both the Menlo Park research and development and manufacturing
sites in fiscal year 2000. 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 2000 were $4.7 million, compared with
$5.8 million in fiscal year 1999 and $5.7 million in fiscal year 1998. In fiscal
year 2000, research and development expenditures funded by corporate partners
were $539,000 compared with $770,000 in fiscal year 1999 and $1.4 million in
fiscal year 1998. 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 29, 2000, Landec had 27 employees, including 7 with
Ph.D.'s, engaged in research and development with experience in polymer and
analytical chemistry, product application, product formulation, mechanical and
chemical engineering.
COMPETITION
The Company operates in highly competitive and rapidly evolving fields,
and new developments are expected to continue at a rapid pace. Competition from
large food packaging and agricultural companies is 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 sixteen U.S.
patents with expiration dates ranging from 2006 to 2018 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
-13-
competitors, notices claiming that it is infringing third party patents or other
proprietary rights. If the Company were determined to be infringing any
third-party patent, the Company could be required to pay damages, alter its
products or processes, obtain licenses or cease certain activities. In addition,
if patents are issued to others which contain claims that compete or conflict
with those of the Company and such competing or conflicting claims are
ultimately determined to be valid, the Company may be required to pay damages,
to obtain licenses to these patents, to develop or obtain alternative technology
or to cease using such technology. If the Company is required to obtain any
licenses, there can be no assurance that the Company will be able to do so on
commercially favorable terms, if at all. The Company's failure to obtain a
license to any technology that it may require to commercialize its products
could have a material adverse impact on the Company's business, operating
results and financial condition.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to and diversion of effort by the Company, even if the eventual
outcome is favorable to the Company. Any such litigation or interference
proceeding, regardless of outcome, could be expensive and time consuming and
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology and consequently, could have a material adverse
effect on the Company's business, operating results and financial condition.
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 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.
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,
-14-
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 29, 2000, Landec had 460 full-time employees, of whom 233
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 227 were dedicated to sales, marketing and administrative
activities. Landec intends to recruit additional personnel in connection with
the development, manufacturing and marketing of its products. None of Landec's
employees is represented by a union, and Landec believes relationships with its
employees are good.
-15-
ITEM 2. PROPERTIES
The Company has offices in Menlo Park, Guadalupe and Reedley,
California, Linden, New Jersey and Monticello, Indiana. During fiscal year 2000,
Landec constructed a 4,000 square foot facility in West Lebanon, Indiana to
support the seed coating efforts of the Intellicoat seed coating business. The
Reedley facility is currently for sale with an offer pending.
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
West Lebanon, IN Agricultural Owned 4,000 square feet of warehouse -- --
Seed and manufacturing space
Technology
Guadalupe, CA Food Products Owned 94,000 square feet of office 11.6 --
Technology space, manufacturing and cold
storage
Reedley, CA(2) 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.
(2) Currently for sale.
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 29, 2000.
-16-
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 2000
- ----------------
HIGH LOW
---- ---
4th Quarter ending October 29, 2000.......................................$6.63 $4.13
3rd Quarter ending July 30, 2000..........................................$6.75 $4.00
2nd Quarter ending April 30, 2000.........................................$7.50 $5.06
1st Quarter ending January 30, 2000.......................................$8.81 $4.56
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
There were approximately 164 holders of record of 16,149,086 shares of
outstanding Common Stock as of January 5, 2001. 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). Frederick Frank was elected as a director of the Company in
December 1999.
In connection with the Company's acquisition of Apio, Inc. 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 $6.00 per share.
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.
-17-
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.
-18-
YEAR ENDED
OCTOBER 29, YEAR ENDED OCTOBER 31,
----------- --------------------------------------------
STATEMENT OF OPERATIONS DATA: 2000 1999 1998 1997 1996
(in thousands, except per share data)
Revenues:
Product sales......................................... $ 135,412 $ 33,927 $ 31,664 $ 8,653 $ 371
Services revenue ...................................... 71,280 -- -- -- --
Services revenue, related party ....................... 1,898 -- -- -- --
Research, development and royalty revenues ............ 586 770 1,352 863 1,096
License fees .......................................... 374 750 500 -- 600
--------- -------- -------- -------- -------
Total revenues ..................................... 209,550 35,447 33,516 9,516 2,067
Cost of revenue:
Cost of product sales ................................. 113,113 21,476 20,308 6,215 422
Cost of services revenue .............................. 63,075 -- -- -- --
--------- -------- -------- -------- -------
Total cost of revenue .................................... 176,188 21,476 20,308 6,215 422
Gross profit ............................................. 33,362 13,971 13,208 3,301 1,645
Operating costs and expenses:
Research and development .............................. 4,696 5,758 5,713 4,608 3,588
Selling, general and administrative ................... 28,879 11,192 10,835 4,664 2,367
Exit of fruit processing business ..................... 525 -- -- -- --
Purchased in-process research and development ......... -- -- -- 3,022 --
--------- -------- -------- -------- -------
Total operating costs and expenses ................. 34,100 16,950 16,548 12,294 5,955
--------- -------- -------- -------- -------
Operating loss ........................................... (738) (2,979) (3,340) (8,993) (4,310)
Interest income .......................................... 877 363 737 1,726 1,546
Interest expense ......................................... (2,335) (99) (137) (319) (59)
Other income ............................................. 70 -- -- -- --
--------- -------- -------- -------- -------
Loss from continuing operations before income taxes ...... (2,126) (2,715) (2,740) (7,586) (2,823)
Provision for income taxes ............................... 42 (54) (150) -- --
--------- -------- -------- -------- -------
Loss from continuing operations .......................... (2,084) (2,769) (2,890) (7,586) (2,823)
Discontinued Operations:
Loss from discontinued QuickCast operations ........... -- -- -- (1,059) (1,377)
Gain on disposal of QuickCast operations .............. -- -- -- 70 --
--------- -------- -------- -------- -------
Loss from discontinued operations ........................ -- -- -- (989) (1,377)
--------- -------- -------- -------- -------
Net loss before cumulative effect of accounting change ... (2,084) (2,769) (2,890) (8,575) (4,200)
Cumulative effect of change in accounting for upfront
license fee revenue ................................... (1,914) -- -- -- --
--------- -------- -------- -------- -------
Net Loss ................................................. $ (3,998) $ (2,769) $ (2,890) $ (8,575) $(4,200)
========= ======== ======== ======== =======
Basic and diluted net loss per share:
Continuing operations ................................. $ (.13) $ (.21) $ (.23) $ (.68) $ (.37)
Discontinued operations ............................... -- -- -- (.09) (.18)
Cumulative effect of change in accounting ............. (.12) -- -- -- --
--------- -------- -------- -------- -------
Basic and diluted net loss per share ..................... $ (.25) $ (.21) $ (.23) $ (.77) $ (.55)
========= ======== ======== ======== =======
Pro forma amounts assuming the accounting change is
applied retroactively:
Net loss ............................................. $ (2,084) $ (3,145) $ (3,070) $ (8,289) $(3,914)
========= ======== ======== ======== =======
Net loss per share ................................... $ (.13) $ (.24) $ (.24) $ (.74) $ (.51)
========= ======== ======== ======== =======
Shares used in computing basic and diluted net loss
per share ............................................. 15,796 13,273 12,773 11,144 7,699
========= ======== ======== ======== =======
-19-
OCTOBER 29, OCTOBER 31,
----------- -------------------------------------------------
2000 1999 1998 1997 1996
----------- -------- -------- --------- --------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents.......................... $ 9,589 $ 3,203 $ 10,177 $ 14,669 $ 36,510
Total assets ....................................... 133,252 40,708 42,356 50,160 38,358
Debt ............................................... 29,824 2,762 2,811 32 --
Convertible preferred stock ........................ 9,149 -- -- -- --
Accumulated deficit ................................ (49,526) (45,528) (42,756) (39,858) (31,278)
Total shareholders' equity......................... $ 52,178 $ 31,761 $ 33,688 $ 35,615 $ 36,640
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.
Revenues related to research contracts are recognized ratably over the
related funding periods for each contract, which is generally as research is
performed. Product sales are recognized upon shipment except for shipments sent
FOB destination in which revenue is recognized upon receipt by the customer.
Services revenue is recognized when the service is rendered.
The Company previously recognized noncancellable, nonrefundable license
fees as revenue when received and when all significant contractual obligations
of the company relating to the fees had been met. Effective November 1, 1999,
the Company changed its method of accounting for noncancellable, nonrefundable
license fees to recognize such fees over the research and development period of
the agreement, as well as the term of any related supply agreement entered into
concurrently with the license when the risk associated with commercialization of
a product is non-substantive at the outset of the arrangement. The Company
believes the change in accounting principle is preferable based on guidance
provided in SEC Staff Accounting Bulletin No. 101 - REVENUE RECOGNITION IN
FINANCIAL STATEMENTS. The $1.9 million cumulative effect of the change in
accounting principle, calculated as of November 1, 1999, was reported as a
charge in the year ended October 29, 2000.
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 1998 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 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, telephone 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.
-20-
Dock Resins, the Company's polymer manufacturer supports the polymer
needs of these core businesses and manufactures products for the specialty
polymer industry and Intelimer Polymer Systems customers. Dock Resins is
included in the Corporate and Other segment.
The Company has been unprofitable during each fiscal year since its
inception. From inception through October 29, 2000, the Company's accumulated
deficit was $49.5 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.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 29, 2000 COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1999
Total revenues were $209.6 million for fiscal year 2000, compared to
$35.4 million for fiscal year 1999. Revenues from product sales and services
increased to $208.6 million in fiscal year 2000 from $33.9 million in fiscal
year 1999. The increase in product sales and service revenues was primarily due
to $177.0 million in revenues from Apio, which was acquired effective November
29, 1999 and from increased product sales from Landec Ag. Landec Ag product
sales increased to $17.2 million in fiscal year 2000 from $15.2 million during
fiscal year 1999 due to an increase in the volume of hybrid corn seed sold and
revenue from the introduction of Intellicoat seed coated products. These
increases were partially offset by a decrease in Dock Resins product sales from
$14.0 million in fiscal year 1999 to $12.4 million in fiscal year 2000. This
decrease was a result of the continued weakness in the chemical industry during
fiscal year 2000. Revenues from research and development funding and from
royalties decreased to $586,000 in fiscal year 2000 from $770,000 during fiscal
year 1999. The decrease in research, development and royalty revenues was
primarily due to the expiration of the research and development agreement with
Alcon Laboratories, Inc. ("Alcon") related to the PORT-TM- ophthalmic devices,
partially offset by new research and development contracts with ConvaTec, a
division of Bristol Myers Squibb, in the area of medical adhesives, and UCB
Chemicals Corporation in the area of industrial applications. Revenues from
licensing fees for fiscal year 2000 were attributable to the Company's adoption
of SEC Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial
Statements (SAB 101). Effective November 1, 1999, the Company changed its method
of accounting for noncancellable, nonrefundable license fees to recognize such
fees over the research and development period of the agreement, as well as the
term of any related supply agreement entered into concurrently with the license
when the risk associated with commercialization of a product is non-substantive
at the outset of the arrangement. The adoption of SAB 101 resulted in a
cumulative effect adjustment that increased the reported net loss for fiscal
year 2000 by $1.9 million related to upfront license fees received from the 1995
Hitachi agreement and the 1997 Alcon agreement (see Note 1 to the Consolidated
Financial Statements). The cumulative effect adjustment was initially recorded
as deferred revenue, and $374,000 of this deferred amount was "recycled" into
revenue in fiscal year 2000. The $750,000 license fee revenues for fiscal year
1999 represent a milestone payment from Alcon related to the PORT ophthalmic
devices during the first quarter, which was recorded in accordance with the
Company's historical accounting practice.
Cost of revenue consists of material, labor and overhead. Cost of
revenue was $176.2 million for fiscal year 2000 compared to $21.5 million for
fiscal year 1999. Gross profit from product sales and services as a percentage
of revenue from product sales and services decreased from 37% in fiscal year
1999 to 16% in fiscal year 2000. The decrease in gross profit percentage was
primarily the result of Apio's mix of products having a lower gross margin than
Landec's other businesses coupled with disappointing results in Apio's stone
fruit business during fiscal year 2000, and Apio's higher costs associated with
sourcing crops during the winter months. In addition, during fiscal year 2000,
Landec incurred startup costs associated with Apio's new value-added food
processing plant and establishing a new manufacturing facility in Menlo Park for
Intellipac breathable membrane products. Overall gross profit increased from
$14.0 million in fiscal year 1999 to $33.4 million during fiscal year 2000, an
increase of 139%. This increase is primarily due to gross profit from Apio of
$19.8 million partially offset by lower license fee gross profits in fiscal year
2000 compared to fiscal year 1999.
Research and development expenses were $4.7 million for fiscal year
2000 compared to $5.8 million for fiscal year 1999, a decrease of 18%. Landec's
research and development expenses consist primarily of expenses involved in the
development of, process scale-up of, and efforts to protect intellectual
property content of Landec's enabling side chain crystallizable polymer
technology and research and development expenses related to Dock Resins'
products. The decrease in research and development expenses during fiscal year
2000 compared to fiscal year 1999 were primarily due to substantially reduced
PORT research and development activities and the shift in Intellicoat seed
coating to less research and development and greater production efforts.
-21-
Selling, general and administrative expenses were $28.9 million for
fiscal year 2000 compared to $11.2 million for fiscal year 1999, an increase of
158%. Selling, general and administrative expenses consist primarily of sales
and marketing expenses associated with Landec's product sales and services,
business development expenses, and staff and administrative expenses. Selling,
general and administrative expenses increased during fiscal year 2000 as
compared to fiscal year 1999 primarily as a result of expenses from Apio of
$15.6 million, and increased sales and marketing expenses associated with
marketing efforts at Landec Ag. Specifically, sales and marketing expenses
increased to $13.6 million during fiscal year 2000 from $6.2 million for fiscal
year 1999. Landec expects that total selling, general and administrative
spending for existing and newly acquired products will continue to increase in
absolute dollars in future periods, although it may vary as a percentage of
total revenues.
In September 2000, due to disappointing financial results, management
of Landec decided to discontinue processing fruit at its Reedley facility. The
Company has put the facility and the packing and cold storage assets up for
sale. The Company will continue to provide field support and sales and marketing
services to current contracted growers through Apio's existing staff and will
outsource all remaining services to third parties. As a result of the shutdown
of the Reedley facility, the Company recorded a $525,000 charge during the
fourth quarter of fiscal year 2000, primarily for severance and payroll related
costs. The sale is expected to result in a gain. The current net book value of
the assets is $3.0 million. The Company anticipates closing a sale during the
second fiscal quarter of 2001.
Interest income for fiscal year 2000 was $877,000 compared to $363,000
for fiscal year 1999. This increase in interest income was due principally to
interest earned on Apio's notes receivable. Interest expense for fiscal year
2000 was $2.3 million, compared to $99,000 for fiscal year 1999. This increase
was primarily due to the increase in debt from the acquisition of Apio.
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 Landec Ag 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 Landec Ag 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
was 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.
Cost of product sales was $21.5 million for fiscal year 1999 compared
to $20.3 million for fiscal year 1998. Gross profit from product sales as a
percentage of product sales increased to 37% in fiscal year 1999 from 36% in
fiscal year 1998. The increase in gross profit from product sales as a
percentage of product sales in fiscal year 1999 as compared to fiscal year 1998
was primarily the result of higher average selling prices of Landec Ag products,
partially offset by start-up costs associated with establishing a new
manufacturing facility in Menlo Park for Intellipac breathable membrane products
late in fiscal year 1999.
Research and development expenses were $5.8 million for fiscal year
1999 compared to $5.7 million for fiscal year 1998. 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.
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
3%. Specifically, sales and marketing expenses increased to $6.2 million for
fiscal year 1999, from $5.9 million for fiscal year 1998.
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.
-22-
LIQUIDITY AND CAPITAL RESOURCES
As of October 29, 2000, Landec had cash and cash equivalents of $9.6
million, a net increase of $6.4 million from $3.2 million as of October 31,
1999. This increase was primarily due to: (a) net borrowings under Landec's
lines of credit of $9.6 million; (b) cash acquired in the acquisition of Apio of
$3.3 million; (c) cash from operations of $5.0 million; (d) cash from the sale
of common stock of $0.7 million; partially offset by (e) the purchase of $5.3
million of property, plant and equipment; (f) advances to growers of $3.8
million; (g) payments on long term debt of $2.3 million; and (h) acquisition
related costs of $1.0 million.
During fiscal year 2000, Landec purchased equipment to support the
development of Intellipac and Intellicoat products, incurred building
improvement and equipment upgrade expenditures at Dock Resins and Apio to expand
capacity, and constructed a new pilot facility for Intellicoat seed coating
products in Indiana. These expenditures represented the majority of the $5.3
million of property and equipment purchased during fiscal year 2000.
In November 1999 the Company raised $10 million upon the sale of
Preferred Stock ($9.1 million net of issuance costs). In December, 1999, in
conjunction with the acquisition of Apio, the Company secured $11.25 million of
term debt and a $12 million line of credit with Bank of America. The term debt
and line of credit agreements ("Loan Agreement") contain restrictive covenants
that require Apio to meet certain financial tests, including minimum levels of
EBITDA (as defined in the Loan Agreement), minimum fixed charge coverage ratio,
minimum current ratio, minimum adjusted net worth and maximum leverage ratios.
These requirements and ratios generally become more restrictive over time. The
Loan Agreement, through restricted payment covenants, limits the ability of Apio
to make cash payments to Landec, until the outstanding balance is reduced to an
amount specified in the loan agreement. In June 2000, Landec Ag established a
$3.0 million bank line of credit for working capital needs and a $1.0 million
equipment line of credit to be used to fund the expansion of the manufacturing
capabilities of Intellicoat seed coating products. Landec believes that these
new facilities, along with existing cash, cash equivalents and existing
borrowing capacities will be sufficient to finance its operational and capital
requirements through at least the next twelve months. Borrowings on Landec's
lines of credit are expected to vary with seasonal requirements of the Company's
businesses. The Company may, however, raise additional funds during the next
twelve months through another debt financing or an equity financing. If an
equity financing occurs it will have a dilutive effect on current shareholders.
Landec's future capital requirements, however, will depend on numerous factors,
including the progress of its research and development programs; the development
of commercial scale manufacturing capabilities; the development of marketing,
sales and distribution capabilities; the ability of Landec to establish and
maintain new collaborative and licensing arrangements; the continued
assimilation and integration of Apio into Landec; any decision to pursue
additional acquisition opportunities; adverse weather conditions that can affect
the supply and price of produce, the timing and amount, if any, of payments
received under licensing and research and development agreements; the costs
involved in preparing, filing, prosecuting, defending and enforcing intellectual
property rights; the ability to comply with regulatory requirements; the
emergence of competitive technology and market forces; the effectiveness of
product commercialization activities and arrangements; the amount of future
earn-out payments; and other factors. If Landec's currently available funds,
together with the internally generated cash flow from operations are not
sufficient to satisfy its financing needs, Landec would be required to seek
additional funding through other arrangements with collaborative partners,
additional bank borrowings and public or private sales of its securities. There
can be no assurance that additional funds, if required, will be available to
Landec on favorable terms if at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Landec desires to take advantage of the "Safe Harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule
3b-6 under the Securities Exchange Act of 1934. Specifically, Landec wishes to
alert readers that the following important factors, as well as other factors
including, without limitation, those described elsewhere in this report, could
in the future affect, and in the past have affected, Landec's actual results and
could cause Landec's results for future periods to differ materially from those
expressed in any forward-looking statements made by or on behalf of Landec.
Landec assumes no obligation to update such forward-looking statements.
-23-
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE
Landec has incurred net losses in each fiscal year since its inception.
Landec's accumulated deficit as of October 29, 2000 totaled $49.5 million.
Landec may incur additional losses in the future. The amount of future net
profits, if any, is highly uncertain and there can be no assurance that Landec
will be able to reach or sustain profitability for an entire fiscal year.
OUR SUBSTANTIAL INDEBTEDNESS COULD LIMIT OUR FINANCIAL AND OPERATING FLEXIBILITY
At October 29, 2000, Landec's total debt, including current maturities
and capital lease obligations, was approximately $29.8 million and the total
debt to equity ratio was approximately 57%. This level of indebtedness could
have significant consequences because a substantial portion of Landec's net cash
flow from operations must be dedicated to debt service and will not be available
for other purposes, Landec's ability to obtain additional debt financing in the
future for working capital, capital expenditures or acquisitions may be limited,
and Landec's level of indebtedness may limit its flexibility in reacting to
changes in the industry and economic conditions generally.
In connection with the Apio acquisition, Landec may be obligated to
make future payments to the former stockholders of Apio of up to $16.55 million.
Of this amount, $1.1 million was paid in January 2001 and $4.1 is due to be paid
in March 2001.
Landec's ability to service its indebtedness will depend on its future
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, some of which are beyond Landec's
control. If Landec were unable to service its debt, it would be forced to pursue
one or more alternative strategies such as selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital, which might
not be successful and which could substantially dilute the ownership interest of
existing shareholders.
Apio is subject to various financial and operating covenants under its
term debt and line of credit facilities, including minimum levels of EBITDA (as
defined in the Loan Agreement), minimum fixed charge coverage ratio, minimum
current ratio, minimum adjusted net worth and maximum leverage ratios. These
requirements and ratios generally become more restrictive over time. The Loan
Agreement limits the ability of Apio to make cash payments to Landec until the
outstanding balance is reduced to an amount specified in the Loan Agreement.
Landec Ag and Dock Resins are subject to certain restrictive covenants such as
the ability of Landec to receive payments on debt owed to Landec. Landec has
pledged substantially all of Apio's, Landec Ag's and Dock Resins' assets to
secure their bank debt. Landec's failure to comply with the obligations under
the loan 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.
OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE WHICH MAY CAUSE OUR STOCK
PRICE TO DECLINE
In the past, Landec's results of operations have fluctuated
significantly from quarter to quarter and are expected to continue in the
future. Historically, Landec's direct marketer of hybrid corn seed, Intellicoat,
has been the primary source of these fluctuations, as its revenues and profits
are concentrated over a few months during the spring planting season (generally
during Landec's second quarter). In addition, Apio can be heavily affected by
seasonal and weather factors which could impact quarterly results, such as the
lower than expected volumes and poor yields experienced in the stone fruit
business during the third quarter of fiscal year 2000. Landec's earnings in its
Food Products Technology business will be sensitive to price fluctuations in the
fresh vegetables and fruits markets. Excess supplies can cause intense price
competition. Other factors affecting Landec's food and/or agricultural
operations include the seasonality of its supplies, the ability to process
produce during critical harvest periods, the timing and effects of ripening, the
degree of perishability, the effectiveness of worldwide distribution systems,
the terms of various federal and state marketing orders, total worldwide
industry volumes, the seasonality of consumer demand, foreign currency
fluctuations, foreign importation restrictions and foreign political risks. As a
result of these and other factors, Landec expects to continue to experience
fluctuations in quarterly operating results, and there can be no assurance that
Landec will be able to reach or sustain profitability for an entire fiscal year.
WE MAY EXPERIENCE DIFFICULTIES IN INTEGRATING APIO AND OTHER NEW BUSINESS
ACQUISITIONS
Landec's acquisition of Apio involves the integration of Apio's
operations into Landec. 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 Landec will be overcome or that the
benefits expected from integration will be realized. The difficulties in
combining Apio and Landec's operations are exacerbated by the necessity of
coordinating geographically separate organizations, integrating
-24-
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 companies' business.
The successful integration of other new business acquisitions may
require substantial effort from Landec's management. The diversion of the
attention of management and any difficulties encountered in the transition
process could have a material adverse effect on Landec's ability to realize the
anticipated benefits of the acquisitions. The successful combination of new
businesses also requires coordination of research and development activities,
manufacturing, and sales and marketing efforts. In addition, the process of
combining organizations could cause the interruption of, or a loss of momentum
in, Landec's activities. There can be no assurance that Landec will be able to
retain key management, technical, sales and customer support personnel, or that
Landec will realize the anticipated benefits of the acquisitions.
WE MAY NOT BE ABLE TO ACHIEVE ACCEPTANCE OF OUR NEW PRODUCTS IN THE MARKETPLACE
The success of Landec in generating significant sales of its products
will depend in part on the ability of Landec and its partners and licensees to
achieve market acceptance of Landec's new products and technology. The extent to
which, and rate at which, market acceptance and penetration are achieved by
Landec's current and future products are a function of many variables including,
but not limited to, price, safety, efficacy, reliability, conversion costs and
marketing and sales efforts, as well as general economic conditions affecting
purchasing patterns. There can be no assurance that markets for Landec's new
products will develop or that Landec's new products and technology will be
accepted and adopted. The failure of Landec's new products to achieve market
acceptance would have a material adverse effect on Landec's business, results of
operations and financial condition.
There can be no assurance that Landec will be able to successfully
develop, commercialize, achieve market acceptance of or reduce the costs of
producing Landec's new products, or that Landec's competitors will not develop
competing technologies that are less expensive or otherwise superior to those of
Landec. There can be no assurance that Landec will be able to develop and
introduce new products and technologies in a timely manner or that new products
and technologies will gain market acceptance. Landec is in the early stage of
product commercialization of Intellipac breathable membrane, Intellicoat seed
coating and Intelimer polymer systems products and many of its potential
products are in development. Landec believes that its future growth will depend
in large part on its ability to develop and market new products in its target
markets and in new markets. In particular, Landec expects that its ability to
compete effectively with existing food products, agricultural, industrial and
medical companies will depend substantially on successfully developing,
commercializing, achieving market acceptance of and reducing the cost of
producing Landec's products. In addition, commercial applications of Landec's
temperature switch polymer technology are relatively new and evolving.
WE FACE STRONG COMPETITION IN THE MARKETPLACE
Competitors may succeed in developing alternative technologies and
products that are more effective, easier to use or less expensive than those
which have been or are being developed by Landec or that would render Landec's
technology and products obsolete and non-competitive. Landec operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food products, agricultural,
industrial and medical companies is expected to be intense. In addition, the
nature of Landec's collaborative arrangements may result in its corporate
partners and licensees becoming competitors of Landec. Many of these competitors
have substantially greater financial and technical resources and production and
marketing capabilities than Landec, and may have substantially greater
experience in conducting clinical and field trials, obtaining regulatory
approvals and manufacturing and marketing commercial products.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY HAVE TO DEPEND ON THIRD PARTIES
TO MANUFACTURE OUR PRODUCTS
Landec may need to consider seeking collaborative arrangements with
other companies to manufacture some of its products. If Landec becomes dependent
upon third parties for the manufacture of its products, then Landec's profit
margins and its ability to develop and deliver those products on a timely basis
may be affected. Failures by third parties may impair Landec's ability to
deliver products on a timely basis, impair Landec's competitive position, or may
delay the submission of products for regulatory approval. In late fiscal 1999,
in an effort to reduce reliance on third party manufacturers, Landec began the
set up of a manufacturing operation at its facility in Menlo Park, California,
for the production of Intellipac breathable membrane packaging products. There
can be no assurance that Landec can successfully operate a manufacturing
operation at acceptable costs, with acceptable yields, and retain adequately
trained personnel.
-25-
Although Landec believes Dock Resins will provide Landec with practical
knowledge in the scale-up of Intelimer polymer products, production in
commercial-scale quantities may involve technical challenges for Landec. Landec
anticipates that a portion of its products will be manufactured in the Linden,
New Jersey facility acquired in the purchase of Dock Resins. Landec's reliance
on this facility involves a number of potential risks, including the
unavailability of, or interruption in access to, some process technologies and
reduced control over delivery schedules, and low manufacturing yields and high
manufacturing costs. In February 2000, Dock Resins had a fire in its research
and development laboratory in Linden, New Jersey which interrupted its ability
to develop new products and samples for potential and existing customers.
OUR DEPENDENCE ON SINGLE SUPPLIERS MAY CAUSE DISRUPTION IN OUR OPERATIONS SHOULD
ANY SUPPLIER FAIL TO DELIVER MATERIALS
No assurance can be given that Landec will not experience difficulty is
acquiring materials for the manufacture of its products or that Landec will be
able to obtain substitute vendors, or that Landec will be able to procure
comparable materials or hybrid corn varieties at similar prices and terms within
a reasonable time. Many of the raw materials used in manufacturing Landec's
products are currently purchased from a single source, including some monomers
used to synthesize Intelimer polymers and substrate materials for Landec's
breathable membrane products. In addition, virtually all of the hybrid corn
varieties sold by Fielder's Choice are purchased from a single source. Any
interruption of supply could delay product shipments and materially harm our
business.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
Landec has received, and may in the future receive, from third parties,
including some of its competitors, notices claiming that it is infringing third
party patents or other proprietary rights. If Landec were determined to be
infringing any third-party patent, Landec could be required to pay damages,
alter its products or processes, obtain licenses or cease the infringing
activities. If Landec is required to obtain any licenses, there can be no
assurance that Landec will be able to do so on commercially favorable terms, if
at all. Litigation, which could result in substantial costs to and diversion of
effort by Landec, may also be necessary to enforce any patents issued or
licensed to Landec or to determine the scope and validity of third-party
proprietary rights. Any litigation or interference proceeding, regardless of
outcome, could be expensive and time consuming and could subject Landec to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require Landec to cease using that technology. Landec's
success depends in large part on its ability to obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties. There can be no assurance that any pending patent applications
will be approved, that Landec will develop additional proprietary products that
are patentable, that any patents issued to Landec will provide Landec with
competitive advantages or will not be challenged by any third parties or that
the patents of others will not prevent the commercialization of products
incorporating Landec's technology. Furthermore, there can be no assurance that
others will not independently develop similar products, duplicate any of
Landec's products or design around Landec's patents.
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATIONS THAT DIRECTLY IMPACT OUR
BUSINESS
Federal, state and local regulations impose various environmental
controls on the use, storage, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals and gases used in some of the manufacturing
processes, including those utilized by Dock Resins. As a result of historic
off-site disposal practices, Dock Resins was involved in two actions seeking to
compel the generators of hazardous waste to remediate hazardous waste sites.
Dock Resins has been informed by its counsel that it was a DE MINIMIS generator
to these sites, and these actions have been settled without the payment of any
material amount by Landec. In addition, the New Jersey Industrial Site Recovery
Act ("ISRA") requires an investigation and remediation of any industrial
establishment, like Dock Resins, which changes ownership. This statute was
activated by Landec's acquisition of Dock Resins. Dock Resins has completed its
investigation of the site, delineated the limited areas of concern on the site,
and completed the bulk of the active remediation required under the statute. The
costs associated with this effort are being borne by the former owner of Dock
Resins, and counsel has advised Dock Resins and Landec that funds of the former
owner required by ISRA to be set aside for this effort are sufficient to pay for
the successful completion of remedial activities at the site. In most cases,
Landec believes its liability will be limited to sharing clean-up or other
remedial costs with other potentially responsible parties. Any failure by Landec
to control the use of, or to restrict adequately the discharge of, hazardous
substances under present or future regulations could subject it to substantial
liability or could cause its manufacturing operations to be suspended and
changes in environmental regulations may impose the need for additional capital
equipment or other requirements.
Landec's agricultural operations are subject to a variety of
environmental laws including the Food Quality Protection Act of 1966, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
-26-
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 agr