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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 1996, 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:
(415) 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 505 of Regulation S-K is not contained herein, and will 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. [X]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $58,635,000 as of January 8, 1997, based upon
the closing sales price on the NASDAQ National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
Number of shares outstanding of the registrant's common stock, as of
January 8, 1997, 10,765,267 shares of common stock, par value $0.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement pursuant to
Regulation 14A, which statement will be filed not later than 120 days after the
end of the fiscal year covered by this report, are incorporated by reference in
Part III hereof.
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LANDEC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Page
----
Part I
1. Business ................................................... 3
2. Properties ................................................. 22
3. Legal Proceedings ........................ ................. 22
4. Submission of Matters to a Vote of Security Holders ........ 22
Part II
5. Market for Registrant's Common Equity and
Related Stockholder Matters ................................ 23
6. Selected Consolidated Financial Data ....................... 24
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation ......................... 25
8. Financial Statements and Supplementary Data ................ 32
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................ 32
Part III
10. Directors and Executive Officers of the Registrant.......... 33
11. Executive Compensation ..................................... 33
12. Security Ownership of Certain Beneficial Owner
and Management ............................................. 33
13. Certain Relationships and Related Transactions ............. 33
Part IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ........................................ 34
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PART I
Item 1. Business
Except for the historical information contained herein, the matters
discussed in this document are forward-looking statements that involve certain
risks and uncertainties, including the risks and uncertainties discussed below.
General
Landec Corporation ("Landec" or the "Company") designs, develops,
manufactures and sells temperature-activated polymer products for a variety of
industrial, medical and agricultural applications. The Company's products are
based on its proprietary Intelimer(R) polymers, which differ from other polymers
in that they can be customized to abruptly change their physical characteristics
when heated or cooled through a pre-set temperature switch. For instance,
Intelimer polymers can change within the space of one or two degrees Celsius
from a slick, non-adhesive state to a highly tacky, adhesive state; from an
impermeable state to a highly permeable state; or from a solid state to a
viscous state. These abrupt changes are repeatedly reversible and can be
tailored by Landec to occur at specific temperatures, thereby offering
substantial competitive advantages in the Company's target markets. The Company
believes its enabling Intelimer technology provides for differentiated,
high-value products that address a wide variety of applications in large,
commercial markets.
The Company has launched and is marketing its first two product lines.
The first product line, QuickCast(TM) splints and casts, was launched in the
United States in mid-1994 and in Europe and selected Asian countries through its
partner Smith & Nephew Medical Limited ("Smith & Nephew") in the fall of 1994.
The Company introduced its second product line, Intellipac(TM) breathable
membranes for use in fresh-cut produce packaging, in the fall of 1995.
The Company is developing and intends to launch additional products
during 1997 and 1998. Products under development include: Intelimer polymer
systems for use with industrial coatings, adhesives, sealants and composites;
temperature-activated, pressure-sensitive adhesives; PORT(TM) ophthalmic devices
for the treatment of dry eye; and Intellicoat(TM) agricultural seed coatings.
The Company is developing products in collaboration with or for sale to
Physician Sales & Services, Inc. ("Physician Sales & Services"), North Coast
Medical, Inc. ("North Coast Medical"), Sammons Preston, Inc. ("Sammons
Preston"), Fresh Express Farms ("Fresh Express"), Printpack, Inc. ("Printpack"),
Hitachi Chemical Co., Ltd. ("Hitachi"), The BFGoodrich Company ("BFGoodrich"),
and Nitta Corporation ("Nitta").
The Company was incorporated in California on October 31, 1986. The
Company's principal executive offices are located at 3603 Haven Avenue, Menlo
Park, California 94025 and its telephone number is (415) 306-1650.
Technology Overview
Polymers are important and versatile materials found in many of the
products of modern life. Man-made polymers include nylon fibers used in
carpeting and clothing, coatings such as paints and finishes, plastics such as
polyethylene, and elastomers used in automobile tires and latex gloves. Natural
polymers include cellulose and natural rubber. Historically, synthetic polymers
have been designed and developed primarily for improved mechanical and physical
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 over the last 40 years have allowed these materials to
replace wood, metal and natural fibers in many applications. 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
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contrast, can be designed to exhibit abrupt changes in permeability, adhesion
and/or viscosity over temperature ranges as narrow as 1(Degree)C to 2(Degree)C.
These changes can be designed to occur at relatively low temperatures
(0(Degree)C to 100(Degree)C) that fall within temperature ranges compatible with
most biological applications. Figure 1 illustrates the effect of temperature on
Intelimer materials as compared to typical polymers.
[GRAPHIC OMITTED]
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(Degree)C to 100(Degree)C by
varying the length of the side chains. The reversible transitions between
crystalline and amorphous states are illustrated in Figure 2 below.
[GRAPHIC OMITTED]
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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 of
these polymers. After several years of basic research, commercial development
efforts began in the early 1990's, resulting in initial products in mid-1994.
Landec's Intelimer materials are generally synthesized from long chain
acrylic monomers that are derived primarily from natural materials such as
soybean and corn oils, and are highly purifiable and designed to be manufactured
economically through known polymerization processes. Intelimer materials can be
made into many different forms, including films, coatings, microcapsules and
plugs.
Business Strategy
Landec's objective is to become the leader in temperature-activated
specialty polymer products by capitalizing on its enabling Intelimer technology.
The principal elements of Landec's strategy to achieve this objective are (i) to
select commercially attractive product opportunities, (ii) to leverage
established distribution channels through distribution agreements or corporate
partnerships with market leaders and (iii) to fully exploit the Intelimer
technology by retaining an economic interest in joint ventures, spinouts and
other vehicles created by the Company to develop non-core applications of the
Company's technology.
Product Selection
The Company believes that its Intelimer technology has the potential to
reach a broad range of markets beyond the current scope of the Company's
resources. As a result, the Company seeks to commercialize selected
Intelimer-based products that exhibit the following characteristics:
Large, Established, Growing Markets. The Company focuses on supplying
products to established, growing markets with a minimum of $500 million to $2
billion in annual, world-wide sales and the potential to further expand due to
Landec's products.
Attractive Margins/Low Capital Intensity. Landec develops products that
it believes can generate attractive margins when competitively priced. In
addition, the Company generally focuses on products which can be developed,
manufactured and marketed without large capital investments.
Significant Unmet Market Needs. Landec seeks to use its temperature
switch technology to develop differentiated products that address significant
market needs not fulfilled by existing products on the market. The Company
intends to develop new products with substantial functional benefits relative to
existing products that are designed to gain market acceptance more readily and
to be sold at attractive price levels.
Strong Proprietary Position. Landec seeks to develop products that fall
within, and can expand, the Company's proprietary position. Currently, Landec
has eight issued patents and numerous additional patent applications covering
methods, compositions and applications of Landec's Intelimer technology. In
addition, the Company has developed considerable technological know-how, trade
secrets and registered trademarks in order to establish a broad proprietary
position in the market.
Minimal Regulatory Risk. Landec generally selects products that are not
likely to undergo lengthy regulatory review processes that could both increase
costs and substantially delay commercialization. For example, the Company is
targeting medical products that can obtain FDA clearance through filing a 510(k)
notification, rather than products that must be submitted under the
substantially longer PMA process.
-5-
Established Distribution Channels
With respect to product commercialization, Landec's strategy is to
establish distribution arrangements or corporate partnerships with market
leaders. The Company currently is collaborating with and intends to sell
products to Hitachi and Nitta in the industrial polymers area. The Company also
has distribution agreements in the splint and casting area in the U.S. with
Physician Sales & Services, a large national distributor of doctor-office
products and North Coast Medical and Sammons Preston, companies focused on the
physical and occupational therapy markets. In certain highly focused markets,
such as the fresh-cut produce market, Landec markets products through its own
sales force. The Company believes that this approach will allow it to focus its
resources on further development of products based on its Intelimer materials
while leveraging the established sales and marketing organizations of its
partners.
Joint Ventures and Spinouts
Another aspect of Landec's strategy is to fully exploit the commercial
applications of the Company's Intelimer technology by retaining an economic
interest in joint ventures, spinouts and other vehicles created by the Company
to develop non-core applications of the Company's technology. For instance, the
Company believes that its seed coating business represents a large commercial
opportunity that will require substantial management time to develop. Therefore,
Landec established a subsidiary, Intellicoat Corporation ("Intellicoat"), in
1995 and hired a president and chief executive officer, Thomas Crowley, in
November 1996 to develop the seed coating business. The Company believes that
commercialization of certain products outside of Landec will enable the Company
to better leverage its resources and more successfully exploit the potential of
its internal programs while retaining an economic interest in Intelimer-based
products.
Products
The Company is developing products based on its Intelimer technology in
three product areas: industrial membranes and polymers, medical devices and
agricultural seed coatings. The Company currently has two product lines on the
market and expects to introduce additional product lines during 1997. The
following table sets forth the Company's current product areas, their principal
applications, the attribute of the Intelimer materials utilized by the product,
the commercial status of the products and corporate partners.
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- --------------------------------------------------------------------------------------------------------------
Intelimer
Principal Materials Corporate
Product Area Applications Attribute Status Partners
- ------------ ------------ --------- ------ ---------
Industrial Membranes
and Polymers
Intellipac Breathable Fresh-cut Produce Permeability On Market Fresh Express
Membranes Packaging Printpack
Intelimer Polymer Epoxy and Other Permeability Field Trials BFGoodrich
Systems Thermosets Hitachi
Adhesives Industrial Uses Adhesion In Development Hitachi
Nitta
Medical Uses Adhesion In Development Nitta
Medical Devices
QuickCast Splints and Casts Viscosity On Market Smith & Nephew
Orthopedics Physician Sales
& Services
North Coast Medical
Sammons Preston
PORT Ophthalmic Dry Eye Viscosity Clinical Trials --
Devices Contact Lens Wear Viscosity In Development --
Agricultural Seed
Coatings
Intellicoat Coatings Corn, Soybean, Permeability Field Trials --
Canola, Cotton
and Sugarbeet
- --------------------------------------------------------------------------------------------------------------
Industrial Membranes and Polymers
The Company's main focus is on industrial applications for its
Intelimer materials. To date, these products consist of Intellipac breathable
membranes, Intelimer polymer systems and adhesives.
Intellipac Breathable Membranes
Landec began marketing its Intelimer-based breathable membranes for use
in fresh-cut produce packaging in September 1995. Certain types of fresh-cut
produce can spoil or discolor rapidly when packaged in conventional materials
and therefore are not widely available for commercial sale. The Company believes
its Intellipac breathable membranes facilitate the packaging of these types of
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"), sales of
fresh-cut salads were estimated to be $82 million in 1989 and increased to $600
million in 1994. The Company believes that this growth has been driven by
consumer demand and willingness to pay for convenience. In addition, many
institutional food suppliers purchase fresh-cut produce due to its greater
convenience and uniform quality relative to produce prepared at the point of
sale.
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Although fresh-cut produce companies have had success in the salad
market, the industry has been slow to expand to other fresh-cut vegetables or
fruits due to limitations in the conventional materials used to package the 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/or the growth of harmful bacteria. Conventional
packaging films used today, such as polyethylene and polypropylene, can be made
somewhat permeable to oxygen and carbon dioxide, but often do not allow for the
optimal atmospheric needs of the produce. In addition to having poor
permeability characteristics, these current packages often have less than
desirable strength, clarity, aesthetics and durability. These shortcomings have
not significantly hindered the growth in the fresh-cut salad market because
lettuce, unlike many other vegetables and fruits, respires relatively slowly and
can tolerate less than optimal packaging.
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 a wide variety of fruits and vegetables that can
automatically adjust the transmission rates of oxygen and carbon dioxide.
Today's conventional packaging films are not able to adjust to meet the varying
needs of different vegetables and fruits. To mirror the growth experienced in
the fresh-cut salad market, the markets for high respiring vegetables and fruits
such as broccoli, cauliflower, melons and stone fruit (peaches, apricots,
nectarines) require a better packaging solution.
The respiration rate of fresh-cut produce also varies with fluctuations
in temperature. As temperature increases, fresh-cut produce generally respires
at a higher rate, which speeds up the decaying process, reduces the shelf life
of the produce and increases the potential for the growth of harmful bacteria.
As fresh-cut produce is transported from the processing plant through multiple
distribution steps to the food service or retail store location, and finally to
the ultimate consumer, temperatures can fluctuate significantly. Therefore,
managing the "cold-chain," or the refrigerated environment, throughout the
distribution process presents a significant challenge and cost factor. The
Company believes that conventional food packaging films are unable to adjust to
changes in temperature that exist in the fresh-cut produce distribution process.
Using its Intelimer technology, Landec has developed and is developing
Intellipac breathable membranes that it believes address many of the
shortcomings of conventional materials. A membrane is applied over a small
cut-out section of a standard bag. This highly permeable window acts as a
breathable "valve" supplying most, if not all, of the gas transmission
properties of the entire package. These membranes can be designed with the
following characteristics:
o Super Permeability. Landec's Intellipac breathable membranes are
designed to permit transmission of oxygen and carbon dioxide at
several thousand times the rate of conventional packaging films.
These higher permeability levels facilitate the packaging of many
types of fresh-cut produce.
o Ability to Selectively Transmit Oxygen and Carbon Dioxide. Landec's
Intellipac breathable membranes are designed to selectively permit
the transmission of oxygen and carbon dioxide at two separate rates
that can create a more optimal environment for the produce.
o Temperature Responsiveness. Landec is developing breathable
membranes that can be designed to increase or decrease in
permeability in response to environmental temperature changes. The
Company is developing Intellipac breathable membranes with
permeability characteristics tailored to mimic the changes in
respiration rate that are brought on by changes in temperature for
specific vegetables and fruits.
Landec launched its first Intellipac breathable membrane, a label for
fresh-cut broccoli packages, in September 1995. This membrane incorporates super
permeability and selective oxygen and carbon-dioxide transmission capabilities,
but not temperature responsiveness. The Company launched a second Intellipac
breathable membrane for fresh-cut cauliflower in June 1996. The Company intends
to
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introduce additional membranes tailored for different types of vegetables during
1997. Further membranes may incorporate temperature responsiveness.
The Company believes it can facilitate the packaging of high respiring
produce such as broccoli, cauliflower and fruit with its Intellipac breathable
membranes, thus addressing currently unmet market needs. These breathable
membranes also enable producers to select packaging films that are more cost
effective, easier to process (e.g. stronger, clearer, printable) and more
aesthetically pleasing to consumers. With the proprietary Intelimer polymer
temperature switch, Landec's Intellipac breathable membranes could also provide
protection against breaks in the cold chain, thereby extending shelf life and
product quality and protecting against the growth of harmful bacteria.
Landec believes that growth of the overall produce market will be
driven by the increasing demand for the convenience of fresh-cut produce as well
as by expansion of the number of produce products that may be effectively
packaged. The Company believes that in the future its Intellipac breathable
membranes may be useful for packaging a wide range of fresh-cut produce
products. According to the IFPA, sales of fresh-cut produce, which in 1994
represented 9% of the total produce market, are projected to increase to 25% of
the total produce market by 1999. Potential opportunities for using Landec's
technology outside of the fresh-cut produce market exist in cut flowers and in
other food products.
In January 1995, Landec entered into a non-exclusive supply agreement
with Fresh Express, the market leader in fresh-cut salad. Under this agreement,
Fresh Express is initially purchasing Landec's Intellipac breathable membranes
for fresh-cut produce sold to the institutional food service market. In June
1996, Landec entered into a co-development and marketing agreement with
Printpack, which specializes in flexible packaging for the food industry. Under
this agreement, Landec and Printpack will focus on developing integrated
membrane/film products for low cost, high-throughput, fresh-cut produce market
applications such as retail packaging using Landec's proprietary membrane
technology and Printpack's large-scale printing and film covering expertise.
Landec manufactures its Intellipac breathable membranes in-house and
with selected outside contract manufacturers and markets Intellipac breathable
membranes to the limited number of large fresh-cut produce suppliers through its
own sales force.
Intelimer Polymer Systems
The Company is developing and currently conducting field trials of a
catalyst system incorporating its Intelimer polymer technology for industrial
thermoset applications. Thermosets are plastics that, through a curing process,
undergo a chemical reaction to form a structure that cannot be reshaped through
heating. For example, epoxy glue is a thermoset. The majority of thermosets are
configured in "two-package" systems in which one or more resins are packaged
separately from a curing agent catalyst. When the catalyst is mixed with the
resin, the thermoset materials cure, or "set." The period of time after the two
components are mixed until the mixture has doubled in viscosity is referred to
as its "pot life."
Epoxies, polyurethanes and unsaturated polyesters represent three
significant classes of thermosets. According to the January 1995 edition of
Modern Plastics, a trade publication, the U.S. market in 1994 for epoxy,
polyurethane and unsaturated polyester thermoset products was 0.6 billion
pounds, 3.8 billion pounds and 1.5 billion pounds, respectively, and the Company
believes that the world-wide market size is approximately double the U.S. market
size. Because of their hardness and corrosion resistant properties, epoxy
thermosets are widely used in surface coatings for industrial primers and
maintenance finishes, in fiber-reinforced composites for printed circuit boards
and in high performance adhesives in value-added automotive and aerospace
applications. Polyurethane thermosets consist of a variety of flexible and rigid
foam materials essential for inplace insulation (e.g., for refrigeration
applications), molded automobile bumpers, mattresses and furniture cushions and
automotive seating. Polyurethane coatings are also used for abrasion resistance
in floor finishing and durability in transportation and aerospace applications.
Unsaturated polyesters, a third thermoset category, are fast-curing with
excellent hardness characteristics and are primarily used as fiberglass-
reinforced
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composites. Principal applications for unsaturated polyesters are housing
construction (shower modules, bathtub and sink constructions), marine
construction (boats) and transportation products (truck bodies and panels and
automotive trim).
Two-package thermoset systems suffer from a number of drawbacks. These
systems require extensive mixing equipment to ensure proper mixing ratios to
provide expected product performance at the time of use. The thermoset resins
and catalysts must be kept in separate packages until the time of use to prevent
them from pre-reacting with each other. A finite pot life results in significant
waste when the thermoset reacts or cures prior to application. Two-package
thermoset systems frequently result in limited control of reaction time (the
time between the initiation and completion of the curing process) causing
incomplete mold fills and waste. While a limited number of currently available
single package thermoset systems offer the potential for addressing many of
these drawbacks, these systems typically must be refrigerated to prevent curing,
must be used very quickly once activated and/or must be cured at very high
temperatures. These limitations have hindered market acceptance of these
systems.
The Company is developing catalyst systems based on its Intelimer
technology for use in one-package thermoset systems. These systems can
incorporate catalysts, accelerators and curing agents in a way that prevents
interaction by these agents with the resin while the polymer is in its
impermeable state. This characteristic allows all components of the Intelimer
thermoset to be pre-mixed and have a longer shelf life. For example, some Landec
thermoset systems are storage-stable for up to one year. Landec's one-package
system can be designed with a pre-set temperature switch to correspond with
elevated temperatures applied during standard manufacturing processes. When the
thermoset 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.
The Company believes that its thermoset catalyst systems will 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.
Landec is targeting epoxies for its first thermoset catalyst system
because epoxies are typically used in high-value industrial applications, such
as in the electronic, aerospace and automotive industries. In addition, epoxies
are generally used in applications involving elevated temperature curing;
consequently, curing an epoxy thermoset using the Company's product would not
add steps to the end-user's production process. The Company believes that this
product will also have broad applicability for use with polyurethane and
unsaturated polyester thermosets.
The Company's thermoset catalyst systems address the different
drawbacks of existing epoxy, polyurethane and unsaturated polyester thermoset
systems. Shelf life is the most significant limitation for epoxy systems.
Polyurethane systems are often used in applications for which reaction time is
critical. Currently available unsaturated polyester systems exhibit significant
drawbacks in both shelf life and pot life. The Company believes its one-package
catalyst systems address the main limitations in each of these types of
thermoset systems.
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Thermoset Market Opportunity
- -------------------------------------------------------------------------------------------------------------------------
Area 1994 U.S. Market (Lbs.)* Typical Application Landec Benefits
- ---- ------------------------ ------------------- ---------------
Epoxies 602 million Adhesives and coatings for o Improved shelf life
electronics, auto and aerospace o Pre-mixed formulas
o Lower cost of labor and waste
Polyurethanes 3,755 million Foams for auto, aerospace and o Controlled reaction times
furniture. Coatings, adhesives o Better mold filling
and elastomers o Lower cost of labor and waste
Unsaturated 1,496 million Composites and molded products o Improved pot life
Polyesters for auto, boat and construction o Lower cost of labor and waste
*Source: Modern Plastics, January 1995
- -------------------------------------------------------------------------------------------------------------------------
Landec has entered into licensing and distribution agreements for
one-package thermoset catalyst systems exclusively with Hitachi and
non-exclusively with BFGoodrich. Both of these companies are large specialty
chemical companies with strengths in the electronics, automotive and aerospace
markets for thermoset systems. BFGoodrich has in the past and Hitachi is
currently sponsoring research and development activities with respect to
Intelimer technology. The Company's agreement with Hitachi contemplates that
Hitachi, upon successful completion of field testing, will purchase materials
from Landec for resale or for incorporation into fully formulated products.
Landec has retained manufacturing rights in both of these collaborations and has
granted exclusive marketing rights in Asia to Hitachi and non-exclusive rights
in the United States and other territories outside of Asia to BFGoodrich. See
"Corporate Collaborations."
Adhesives
Landec is utilizing its Intelimer technology to develop
temperature-activated, pressure-sensitive adhesive ("PSA") materials for
industrial applications. PSA materials are used for applications such as
adhering the component parts of silicon devices, applying automotive side
moldings and trim, assembling appliances and adhering labels to various
surfaces. According to Adhesives Age, the U.S. market for PSA industrial tape
products was $2.7 billion in 1994. Typically, the removal of PSA materials
damages or tears the adhered surface and leaves a resin residue. To avoid
tearing or resin residue, traditional removal methods involve the use of toxic
solvents and/or labor-intensive washing steps.
The Company is developing PSA materials based on its Intelimer
technology that have demonstrated the capability to have adhesion levels reduced
by over 70% with cooling or heating. This capability can be used in a wide
variety of applications to adhere metals, woods, composites and plastics to
surfaces and then easily remove these materials with changes in temperature. For
example, two surfaces that are adhered together using Landec's PSA materials
during a silicon wafer mounting process for the production of electronic
components can be easily separated without toxic solvents or multiple washing
steps by running the bonded parts through a heating or cooling process.
Landec's PSA materials are currently in development. The Company
entered into a non-exclusive license agreement with Hitachi in October 1994 and
a co-exclusive license agreement with Nitta, a specialty materials company, in
March 1995, both with a focus on industrial applications. These agreements
provide Hitachi and Nitta with the right to manufacture and distribute Landec's
adhesive products for industrial applications in Asia in exchange for license
fees and royalties on future product sales. Landec has retained manufacturing
and distribution rights elsewhere in the world. First commercial sales are
expected to build on the strength of Landec's partners in the electronics and
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automotive industries. The Company believes that additional growth opportunities
for Landec's adhesives technology exist in medical applications. In February of
1996, the Company extended its agreement with Nitta to include exclusive rights
for adhesive medical applications in Asia in return for license fees, research
and development payments and royalties.
Medical Devices
In addition to industrial applications, the Company is currently
developing or commercializing medical devices based on its Intelimer technology.
These products consist of QuickCast splints and casts and PORT ophthalmic
devices.
QuickCast Splints and Casts
Landec has developed and is currently marketing splints and casts
incorporating its Intelimer polymer technology. According to Frost & Sullivan, a
market research organization, the U.S. market for orthopedic soft goods and cast
room products was estimated to be approximately $818 million in 1994. The growth
in the market for orthopedic soft goods and cast room products is being driven
by a number of factors, including an increase in participation in sports and
recreational activities and the aging of the U.S. population. In addition, the
trend towards managed care has increased the need for cost-effective treatment.
Managed care has also resulted in occupational and physical therapists, and
primary care physicians and other non-specialists performing an increasing range
of procedures, including the treatment of selected orthopedic injuries. The
Company believes the simplicity of the application of its QuickCast splints and
casts is especially attractive to non-specialists.
Traditional casting and splinting methods suffer from several
drawbacks. Casts made from plaster of Paris or synthetic cast tape generally
require specialized training. In addition, these casts require a "cast room," as
the preparation and application of plaster of Paris or synthetic cast tape is
messy. Traditional casts must also be cut off and replaced as the muscles in the
casted limb atrophy or as a particular therapy procedure requires a new cast
position. Splints using conventional thermoplastic sheets must be cut to conform
to varying limb sizes. The nature of the materials used in traditional casts and
splints make them difficult to properly conform to the patient's anatomy,
resulting in the possibility of an incorrect cast or splint fit. In addition,
the application of casts and splints are usually performed by two different
groups of specialists. Casts are generally applied by orthopedic surgeons while
splints are typically applied by occupational and physical therapists.
The Company's QuickCast splints and casts shrink to fit injured limbs
upon the application of heat from a hair dryer. These splints and casts are made
from an elastic fiberglass mesh coated with Landec's temperature-activated
materials. This material is made into pre-formed tubular devices that are placed
on injured hands, wrists, arms and legs. The heat from the hair dryer softens
the polymer and allows the device to relax and conform to the patient's anatomy
in approximately two minutes. QuickCast splints and casts are pliable when warm,
allowing the clinician to mold and form the splint or cast and to reshrink or
reposition the splints or casts as needed. Upon removal of the heat, the
products cool and harden. The Company believes that QuickCast splints and casts
provide the following advantages over traditional methods:
o Help ensure a proper therapeutic cast or splint fit
o Allow for easy removal of the splint or cast using scissors, as
compared to the necessity of sawing off a plaster of Paris or
synthetic cast
o Allow for reheating, remolding or reshrinking to change the shape or
position of the device as required by therapy or to accommodate a
reduction in limb size due to muscle atrophy, reducing the wasteful
discarding of casts and splints that can increase overall treatment
costs
o Enable primary care physicians and other non-specialists to perform
both splinting and casting
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o Permit easy conversion of QuickCast casts to splints
o Allow the cast to be applied in any exam room, physician office or
rehabilitation facility or at the patient's bedside, thus eliminating
the need for a special "cast room"
The QuickCast products received 510(k) clearance by the FDA in February
1994, and the Company commenced sales of QuickCast products to regional U.S.
orthopedic distributors in April 1994. In early 1996, Landec entered into
distribution relationships with Physician Sales & Services in the area of
orthopedic and primary care physicians sales. Physician Sales & Services has
over 700 sales representatives in 50 states. In addition, in 1996, Landec
entered into non-exclusive distribution relationships with North Coast Medical
and Sammons Preston, distributors of medical products to occupational and
physical therapists. The addition of the distribution partners broadens the
market access for the Company's QuickCast products. Outside of the United
States, Smith & Nephew has been the exclusive distributor of Landec's
heat-shrinkable casting and splinting products in approximately 25 countries.
The Company anticipates that it will terminate its relationship with Smith &
Nephew in early 1997 and, as a result, the Company is currently in the process
of initiating distribution relationships with other independent distributors in
selected countries. In addition, QuickCast products are sold through independent
distributors in approximately nine other countries.
Landec received a 1995 R&D 100 Award in recognition of QuickCast's
innovative features and benefits. This award is given annually by R&D Magazine
to selected companies with new products that represent significant new
innovations in America. Landec is working with leaders in orthopedics, primary
care and rehabilitation to assist the Company in developing new product and
application ideas. In early 1996, Landec introduced several QuickCast products
for lower leg fractures and sprains, which complement the company's existing
QuickCast product line for upper extremity fractures and sprains.
PORT Ophthalmic Device
Landec is developing a PORT (Punctal Occluder for the Retention of
Tears) ophthalmic device that is designed to allow the eye to retain its natural
tear fluids. The Company is targeting patients with a condition known as dry eye
for the first PORT application. In patients suffering from dry eye, either the
lacrimal gland produces an insufficient volume of tears or the lacrimal drainage
duct clears the tears too quickly from the eye. Either condition may result in
blurred vision, intolerance to bright light, grittiness, redness, burning and,
in some cases, damage to the corneal surface.
Dry eye syndrome is a common yet poorly diagnosed condition that is
estimated to affect 30 million Americans, primarily patients over 50 years of
age. According to the American Academy of Ophthalmology, approximately 25% of
the general population suffers from dry eye syndrome at some time. Approximately
7.5 million cases can be classified as severe or moderate. Landec is initially
targeting this market. According to the Dry Eye and Tear Research Center,
approximately 175,000 dry eye patients in the United States undergo some type of
corrective procedure each year. The Company believes that the opportunity for
dry eye products will expand due to factors such as increased physician
awareness of dry eye, an aging population, poor air quality, improved and
standardized diagnostic techniques, and recent changes allowing reimbursement
for punctum plug procedures and products.
Existing methods for treating dry eye have significant drawbacks.
Silicone punctum plugs often do not provide complete obstruction of the drainage
duct and may not conform to the contours of a particular patient's drainage
duct. In addition, punctum plugs either must be inserted deep into the drainage
duct or rest at the top of the drainage duct, where they are susceptible to
coming loose. Collagen plugs and artificial tear solutions offer only temporary
relief. Laser surgery, which is used to close the drainage duct, is expensive
and difficult to reverse.
Using the PORT product, a physician introduces Intelimer polymer into
the lacrimal drainage duct in a fluid state where it quickly solidifies into a
form-fitting, solid plug. Occlusion of the lacrimal drainage duct allows the
patient to retain tear fluid. The Company has developed an applicator containing
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sterile, solid Intelimer material that will transform into a flowable, viscous
state when heated slightly above body temperature. A physician activates the
battery powered PORT applicator that heats the Intelimer material, inserts the
applicator tip directly into the locally anesthetized punctal eye opening of the
lacrimal drainage duct and dispenses the Intelimer material. This entire
treatment can be completed on an out-patient basis in five to ten minutes.
Subsequently, if the physician believes that occlusion is no longer necessary,
the PORT plug can be removed using a warm saline flush, which activates the
temperature switch, causing the polymer to return to its viscous state and be
flushed from the patient's drainage duct.
The Company has conducted animal tests to assess the safety of PORT
plugs to treat dry eye patients by intentionally obstructing the eye's lacrimal
drainage duct. Human clinical studies are currently underway in San Francisco
and Boston where approximately 25 patients will be enrolled by the middle of
fiscal year 1997. Subsequently, a larger multi-center study will be conducted
with about 90 patients at some ten centers nationwide. The Company is currently
in discussions regarding marketing rights with selected leading ophthalmic
companies. The Company intends to retain manufacturing rights with respect to
the PORT applicator.
The Company believes that PORT plugs will have additional ophthalmic
applications beyond the dry eye market, including 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.
Agricultural Seed Coatings
Landec has developed and is conducting field trials of its Intellicoat
seed coating, an Intelimer-based agricultural material designed to increase crop
yields and extend the crop planting window. These coatings are initially being
applied to corn and soybean seeds. According to the U.S. Agricultural Statistics
Board, the total planted acreage in 1994 in the United States was 79.2 million
for corn and 61.9 million for soybean.
Currently, farmers are required to guess 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 plants reaching full
maturity. In either case, the resulting crop yields are suboptimal. Moreover,
the planting window can be fairly brief, requiring the farmer to focus almost
exclusively on planting during this time. Seeds also germinate at different
times due to variations in absorption of water, thus providing for variations in
the growth rate of the crops.
The Company's Intellicoat seed coating prevents planted seeds from
absorbing water when the ground temperature is below the coating's pre-set
switch temperature. Intellicoat seed coatings are designed to enable coated
seeds to be planted early without risk of chilling damage caused by the
absorption of water at cold soil temperatures. As spring advances and soil
temperatures rise to the pre-determined switch temperature, the polymer's
permeability increases and the coated seeds absorb water and begin to germinate.
The Company believes that Intellicoat seed coatings provide the following
advantages:
o More flexible timing for planting
o Avoidance of chilling injury
o Uniform germination and crop growth
o Protection against harmful fungi
As a result, the Company believes that Intellicoat seed coatings offer
the potential for significant improvements in crop yields.
-14-
In the seed industry, yield increases of 4% to 5% are considered
significant because of their impact on per acre profitability. Field trials of
Intellicoat seed coatings on corn and soybean crops during the past four years
have resulted in yield increases of as much as 5% to 20%. The Company plans to
initially develop seed coating products for corn and soybean markets for
distribution through regional seed companies in the United States in parallel
with continued field evaluations with global seed companies. The Company
believes that with larger seed companies, an additional one to two years of
field trials will be needed to support initiation of commercial sales. In
addition, Intellicoat seed coatings are being independently tested by seed
companies and universities. Future crops under consideration include cotton,
canola, sugar beet and other vegetables.
Corporate Collaborations
The Company believes its technology has commercial potential in a wide
range of industrial, medical and agricultural applications. In order to exploit
these opportunities, the Company has entered into collaborative corporate
agreements for product development and/or distribution in certain fields. The
Company is currently engaged in discussions with potential new collaborative
partners.
To date, the Company has entered into collaborative arrangements with
BFGoodrich and Hitachi in connection with its Intelimer polymer systems, Fresh
Express and Printpack in connection with its Intellipac breathable membrane
products, Nitta and Hitachi in connection with its industrial adhesive products
and Smith & Nephew, Physician Sales & Services, North Coast Medical and Sammons
Preston in connection with its QuickCast orthopedic products. The Company is
dependent on its corporate partners to develop, test, manufacture and/or market
certain of its products. Although the Company believes that its partners in
these collaborations have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be devoted
to these activities are not within the control of the Company.
A significant portion of Landec's revenues to date have been derived
from commercial research and development collaborations and license agreements.
In fiscal year 1996, development funding from these collaborative arrangements
comprised approximately 62% of the Company's total revenues and in fiscal year
1995, comprised approximately 82% of the Company's revenues. Development funding
and license fees from and product sales to Hitachi, BFGoodrich, Nitta, and Smith
& Nephew represented approximately 65% and 91% of the Company's revenues for
fiscal years 1996 and 1995, respectively. Moreover, research and development
revenue and license fees from Hitachi and Nitta each accounted for more than 10%
of the Company's revenues for fiscal years 1996 and 1995.
There can be no assurance that such partners will perform their
obligations as expected or that the Company will derive any additional revenue
from such arrangements. There can be no assurance that the Company's partners
will pay any additional option or license fees to the Company or that they will
develop and market any products under the agreements. Moreover, certain of the
collaborative agreements provide that they may be terminated at the discretion
of the corporate partner, and certain of the collaborative agreements provide
for termination under certain circumstances. There can be no assurance that the
partners will not pursue existing or alternative technologies in preference to
the Company's technology. Furthermore, there can be no assurance that the
Company will be able to negotiate additional collaborative arrangements in the
future on acceptable terms, if at all, or that such collaborative arrangements
will be successful. To the extent that the Company chooses not to or is unable
to establish such arrangements, it would experience increased capital
requirements to undertake research, development, manufacture, marketing or sale
of its current and future products in such markets. There can be no assurance
that the Company will be able to independently develop, manufacture, market, or
sell its current and future products in the absence of such collaborative
agreements. See "Additional Factors That May Affect Future Results -- Dependence
on Collaborative Partners".
Hitachi. The Company has entered into two separate collaborations with
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
-15-
in certain Asian countries. Landec received up-front license fees upon signing
the agreement and is entitled to future royalties based on net sales by Hitachi
of the licensed products. Any fees paid to the Company are non-refundable.
On August 10, 1995, the Company entered into the second collaboration
with Hitachi in the Intelimer polymer systems area. The agreement provides
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. In addition, Hitachi also received limited options and
rights for certain other technology applications in its Asian territory. Landec
received an up-front license payment upon signing this agreement and is entitled
to receive research and development funding over three years and future
royalties based on net sales by Hitachi of the licensed products. Any fees paid
to the Company are non-refundable. This agreement is terminable at Hitachi's
option. In conjunction with this agreement, Hitachi purchased Series E Preferred
Stock for $1.5 million which converted to common stock on the Company's initial
public offering.
BFGoodrich. On October 13, 1993, the Company entered into a
collaboration with BFGoodrich. On March 29, 1996, the Company and BFGoodrich
decided to amend their license, development and manufacturing agreement to a
non-exclusive agreement. The agreement provides BFGoodrich with a non-exclusive
worldwide (excluding Asia) license to use and sell Landec's Intelimer polymer
systems in industrial latent curing products. Landec is entitled to be the
exclusive supplier of Intelimer polymer systems to BFGoodrich during the term of
the agreement. BFGoodrich must meet certain requirements to maintain
non-exclusive rights to fields of use. Landec received an up-front license
payment upon signing and additional license fees upon achieving certain
milestones. Under the agreement, development was funded by BFGoodrich for
several years and such funding was terminated as a result of the amended
agreement. The Company is also entitled to receive future royalties based on net
sales by BFGoodrich of the licensed products. Fees paid to the Company were
non-refundable. This agreement is terminable at BFGoodrich's option.
Nitta. On March 14, 1995, the Company entered into a license agreement
with 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.
In addition, Nitta also received limited options for certain other technology
applications in its Asian territory. 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 is entitled to receive research and development payments and
royalties under this agreement. Any fees paid to the Company are non-refundable.
Fresh Express. On January 18, 1995, the Company entered into a
non-exclusive supply agreement with Fresh Express. Fresh Express collaborates
with the Company in biological product testing. Fresh Express has the right to
become a non-exclusive customer for certain future products.
Printpack. On June 21, 1996, the Company entered into an exclusive
co-development and marketing agreement with Printpack. Under the agreement,
Landec and Printpack will focus on developing integrated membrane film products
for low cost, high-throughput, fresh-cut product market applications, such as
retail packaging, using Landec's proprietary Intellipac breathable membrane
technology and Printpack's large-scale printing and film converting expertise.
Smith & Nephew. On September 30, 1994, the Company entered into an
exclusive distribution agreement with Smith & Nephew for QuickCast products in
certain European and Pacific Rim countries, Canada and South Africa. Products
distributed under this agreement are sold under Smith & Nephew's
"Dynacast*Rapide" tradename. As discussed above, the Company anticipates that it
will terminate this relationship in early 1997.
-16-
Physician Sales & Services. On March 18, 1996, the Company entered into
a distribution agreement with Physician Sales & Services for QuickCast
orthopedic and splinting products. Under this agreement, Physician Sales &
Services is granted exclusive rights to distribute such products in the United
States to primary care physicians and co-exclusive rights to distribute such
products in the United States to orthopedic surgeons, cast technicians and
physician assistants. There are more than 83,000 primary care physicians in the
United States.
North Coast Medical. On January 3, 1996, the Company entered into a
distribution agreement with North Coast Medical for QuickCast orthopedic and
splinting products. Under the agreement, North Coast Medical is granted
non-exclusive rights to distribute such products in the United States to the
occupational and physical therapy market.
Sammons Preston. On June 18, 1996, the Company entered into a
distribution agreement with Sammons Preston for QuickCast orthopedic and
splinting products. Under the agreement, Sammons Preston is granted
non-exclusive rights to distribute such products in the United States to the
occupational and physical therapy market.
Sales and Marketing
The Company's products fall into two groups: those intended to be
marketed and sold by the Company and those expected to be marketed by
distributors and corporate partners. The Company intends to provide technical
support for all of its products, irrespective of the sales and marketing channel
of a particular product. With respect to the Company's Intellipac breathable
membrane products, the Company has entered into a non-exclusive supply agreement
with Fresh Express. Since there are a limited number of suppliers of fresh-cut
produce, the Company believes that a small sales force can successfully
introduce these products in this concentrated marketplace. The Company intends
to develop its internal sales capacity as more products progress toward
commercialization. The Company's other commercially available products,
QuickCast splints and casts, are sold in the United States through the Company's
national distribution partners, Physician Sales & Services, North Coast Medical
and Sammons Preston, in conjunction with the Company's internal sales force.
Manufacturing
Landec intends to manufacture 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 through Landec retaining manufacturing capability in-house.
The Company currently manufactures its QuickCast and Intellipac
breathable membrane products at its facilities in Menlo Park, California and
with selected outside contract manufacturers. The manufacturing process for the
Company's initial Intellipac breathable membrane products is comprised of
polymer manufacturing, membrane coating and label conversion. Portions of this
process are done at the Company on pilot-scale equipment while the remainder is
performed by a third-party manufacturer. As volume increases, the Company plans
to have the entire process completed by third party manufacturers. Manufacture
of the Company's QuickCast products is performed by the Company. Components and
new materials for QuickCast are purchased from vendors. QuickCast products and
Intellipac breathable membranes are required to be manufactured under Good
Manufacturing Practices as required by the FDA and California Department of
Health Services.
Many of the raw materials used in manufacturing certain of the
Company's products are currently purchased from a single source, such as certain
monomers to synthesize Intelimer polymers and substrate materials for the
Company's Intellipac breathable membrane products. The Company believes,
however, that it currently has adequate inventories and that additional sources
of supply are available. Upon an increase in manufacturing capability, the
Company may enter into alternative supply arrangements. To date, the Company has
not experienced difficulty acquiring this material for the manufacture of its
products. However, no assurance can be given that interruptions in supplies will
not occur in the future, that the Company could obtain substitute vendors or
that the Company will be able to procure comparable
-17-
raw materials at similar prices and terms within a reasonable time. Any such
interruption of supply could have a material adverse effect on the Company's
ability to manufacture its products and, consequently, could materially and
adversely affect the Company's business, operating results and financial
condition.
The Company intends to build or acquire large-scale polymer
manufacturing facilities by 1998. In the interim, the Company believes that its
current facilities and readily available additional facilities will meet its
manufacturing needs. The Company believes that by 1998, in-house polymer
manufacturing capability will be necessary to support its polymer requirements.
Polymer manufacturing facilities will be separate from the QuickCast and
Intellipac breathable membrane manufacturing facilities.
Production in commercial-scale quantities may involve technical
challenges for the Company. Establishing its own manufacturing capabilities
would require significant scale-up expenses and additions to facilities and
personnel. There can be no assurance that the Company will be able to develop
commercial-scale manufacturing capabilities at acceptable costs or enter into
agreements with third parties with respect to these activities.
Research and Development
Landec is focusing its research and development resources both on
existing and new applications of its Intelimer technology. Examples of research
and development for product line extensions include QuickCast products for the
lower extremities, additional Intellipac breathable membranes for other
vegetables and fruits and flowers and new catalyst systems for latent curing
products. Landec is focusing additional research on new product forms such as
composites, films, and laminates. The Company intends to periodically seek funds
for applied materials research programs from U.S. government agencies such as
the National Institutes of Health, as well as from commercial entities. To date,
much of Landec's research has been funded by the U.S. Government and corporate
partners. As of January 8, 1997 Landec had 23 employees in research and
development (seven of whom have Ph.D.s) with experience in polymer, analytical
and formulation chemistry 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 industrial, food packaging, medical and agricultural companies is expected
to be intense. In addition, the nature of the Company's collaborative
arrangements may result in its corporate partners 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 clinical and field
trials, obtaining regulatory approvals and manufacturing and marketing
commercial products. There can be no assurance that these competitors will not
succeed in developing alternative technologies and products that are more
effective, easier to use or less expensive than those which have been or are
being developed by the Company or that would render the Company's technology and
products obsolete and non-competitive.
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 eight U.S.
patents with expiration dates ranging from 2007 to 2012 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
-18-
Company's products or if patents are issued to the Company, 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 also will depend, in part, on its
ability to avoid infringing patents issued to others. The Company has received,
and may in the future receive, from third parties, including some of its
competitors, notices claiming that it is infringing third party patents or other
proprietary rights. For example, the Company received a letter in January 1996
alleging that the Company's Intellipac breathable membrane product infringes
patents of another party. The Company has investigated this matter and believes
that its Intellipac breathable membrane product does not infringe the specified
patents of such party. The Company has received an opinion of patent counsel
that the Intellipac breathable membrane product does not infringe any valid
claims of such patents. 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.
FDA and Other Government Regulations
The Company's products and operations are subject to substantial
regulation in the United States and foreign countries.
Medical Products. The Company's medical products are subject to
stringent government regulation in the United States and other countries. In the
United States, the Food, Drug, and Cosmetic Act, as amended ("FDC Act"), and
other statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record keeping, approval, advertising and promotion
of such products. Failure to comply with applicable requirements can result in
fines, recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution.
The regulatory process is lengthy, expensive and uncertain. Prior to
commercial sale in the United States, most medical devices, including the
Company's products, must be cleared or approved by
-19-
the FDA. Securing FDA approvals and clearances may require the submission of
extensive clinical data and supporting information to the FDA.
Under the FDC Act, medical devices are classified into one of three
classes (i.e., class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Safety and effectiveness can
reasonably be assured for class I devices through general controls (e.g.,
labeling, premarket notification and adherence to Good Manufacturing Practices)
and for class II devices through the use of general and special controls (e.g.,
performance standards, postmarket surveillance, patient registries and FDA
guidelines). Generally, class III devices are those which must receive premarket
approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices or new devices which
have been found not to be substantially equivalent to legally marketed devices.)
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a PMA. A 510(k) clearance will be granted if the submitted data
establishes that the proposed device is "substantially equivalent" to a legally
marketed class I or class II medical device, or to a class III medical device
for which the FDA has not called for PMAs. It generally takes from four to
twelve months from submission to obtain 510(k) premarket clearance, although it
may take longer. The FDA may determine that the proposed device is not
substantially equivalent, or that additional clinical data are needed before a
substantial equivalence determination can be made. Modifications or enhancements
to products that are cleared through the 510(k) process that could significantly
affect safety or effectiveness or effect a major change in the intended use of
the device require new 510(k) submissions. The Company is also required to
adhere to FDA Good Manufacturing Practices and similar regulation in other
countries, which include testing, control and documentation requirements
enforced by periodic inspections.
The Company's QuickCast products have received clearance through the
510(k) process and the Company intends to obtain clearance for its medical
products pursuant to Section 510(k) of the FDC Act whenever possible. The
Company plans to seek 510(k) clearance for its PORT ophthalmic device. The
Company is conducting clinical trials under an Investigational Device Exemption
("IDE") that is granted by the FDA to permit testing of a device in a limited
number of human beings in clinical trials conducted at a restricted group of
clinical sites. The Company has completed a pilot clinical study and anticipates
additional clinical studies with an expanded patient population. No assurance
can be given that the necessary clearances for its products will be obtained by
the Company on a timely basis, if at all, or that extensive clinical data and
supporting information or a PMA application will not be required. FDA clearance
is subject to continual review, and later discovery of previously unknown
problems may result in restrictions on a product's marketing or withdrawal of
the product from the market.
The Company understands that the FDA has recently been requiring a more
rigorous demonstration of substantial equivalence in connection with 510(k)
notifications and that in many cases the time periods required for product
approvals have increased. If additional data is requested by the FDA, it could
delay the Company's market introduction of its products. There can be no
assurance that the FDA will not require additional data or that the Company will
receive marketing clearance from the FDA for any of its products.
If a product is found to be not substantially equivalent to a legally
marketed device or if it is a class III device for which the FDA has called for
PMAs, a premarket approval application must be filed with the FDA. To obtain a
PMA, a device must undergo extensive clinical trials to establish its safety and
effectiveness. The PMA process can be expensive, uncertain and lengthy,
typically requiring several years, with no guarantee of ultimate approval.
Determination by the FDA that any of the Company's products or applications are
subject to the PMA process could have a material adverse effect on the Company's
business.
Food Packaging Products. The Company's food packaging products are also
subject to regulation under the FDC Act. The manufacture of food packaging
materials is subject to Good Manufacturing Practices regulations. In addition,
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
-20-
characteristics of any food may be regulated as a food additive unless the
substance is generally recognized as safe ("GRAS"). 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.
Agricultural Products. 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 pre-manufacturing notice ("PMN") to the EPA which can then require
extensive testing to establish the safety of a new chemical or limit or prohibit
the manufacture, use or distribution of such chemical. The EPA has promulgated
an exemption from PMN requirements for certain polymers which it believes are of
low concern due to their lack of reactivity and their molecular structure. To
date, the Company's polymers have qualified for the exemption and the Company
believes any future polymers it plans to develop will also qualify. No assurance
can be given that future products will qualify for the exemption or that
additional studies or restrictions will not be required by the EPA.
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 might require
obtaining foreign regulatory clearances. There can be no assurance that the
Company will be able to obtain regulatory clearances for its products in such
foreign markets.
Employees
As of October 31, 1996, Landec had 52 full-time employees, of whom 33
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 19 were dedicated to sales, marketing and administrative
activities. Landec intends to recruit additional personnel in
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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.
Item 2. Properties
Landec leases and occupies approximately 30,000 square feet of office,
laboratory and manufacturing space in Menlo Park, California. Of these
facilities, approximately 21,000 square feet is leased through December 1997
with two three-year renewal options, 3,500 sq. feet of warehouse space is
subleased through December 1996 and the remaining manufacturing space is
subleased through December 1998. The Company believes that it will require
additional space in 1998.
Item 3. Legal Proceedings
The Company is currently not a party to any material legal proceedings.
In October 1995, a customer of the Company received a letter alleging
that the Company's Intellipac breathable membrane product infringes patents of
another party. The Company received a similar letter in January 1996. The
Company has investigated this matter and believes that its Intellipac breathable
membrane product does not infringe the specified patents of such party. The
Company has received an opinion of patent counsel that the Intellipac breathable
membrane product does not infringe any valid claims of such patents. 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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the Company's fiscal year ending October 31, 1996.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Common Stock is traded in the over-the-counter market and is quoted
on the NASDAQ National Market under the symbol "LNDC". The Common Stock was
initially offered to the public on February 15, 1996 at a price of $12.00 per
share. The following table sets forth for each period indicated during 1996 the
high and low sales prices for the Common Stock as reported on the NASDAQ
National Market.
High Low
---- ---
4th Quarter ending October 31, 1996............. $16.00 $ 8.38
3rd Quarter ending July 31, 1996................ $20.75 $14.88
2nd Quarter ending April 30, 1996
(commencing February 15, 1996)................ $19.00 $12.00
There were approximately 112 holders of record of 10,753,711 shares of
outstanding Common Stock as of October 31, 1996. The Company has not paid any
dividends on the Common Stock since its inception. The Company presently intends
to retain all future earnings for its business and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future.
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Item 6. Selected Consolidated Financial Data
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in Item 8 of
this report.
Year Ended October 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Product sales............................ $ 755 $ 601 $ 335 $ -- $ --
License fees............................. 600 2,650 400 350 475
Research and development revenues........ 1,096 796 965 821 811
--------- --------- --------- ---------- ----------
Total revenues........................ 2,451 4,047 1,700 1,171 1,286
Operating costs and expenses:
Cost of product sales.................... 1,004 987 897 -- --
Research and development................. 3,808 3,715 3,283 3,740 2,846
Selling, general and administrative...... 3,288 2,236 2,067 1,598 987
--------- --------- --------- ---------- ----------
Total operating costs and expenses.... 8,100 6,938 6,247 5,338 3,833
--------- --------- --------- ---------- ----------
Operating loss.............................. (5,649) (2,891) (4,547) (4,167) (2,547)
Net interest income......................... 1,449 132 192 51 119
--------- --------- --------- ---------- ----------
Net loss.................................... $(4,200) $ (2,759) $ (4,355) $ (4,116) $ (2,428)
========= ========= ========= ========== ==========
Net loss per share.......................... $ (.55)
=========
Shares used in computation of net loss per
share....................................... 7,699
=========
Supplemental net loss per share (1)......... $ (.43) $ (.38)
========= =========
Shares used in computation of supplemental
net loss per share (1)................... 9,697 7,175
========= =========
October 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments.............................. $36,510 $ 5,549 $ 5,706 $ 9,772 $ 1,975
Total assets................................ 38,358 7,347 7,521 11,253 2,786
Redeemable convertible preferred stock...... -- 31,276 27,656 25,567 11,881
Accumulated deficit......................... (31,278) (26,538) (21,658) (15,213) (9,804)
Total shareholders' equity (net capital
deficiency).............................. $36,640 $(26,429) $(21,584) $(15,159) $(9,766)
(1) Computed on a supplemental basis as described in Note 1 of Notes to
Consolidated Financial Statements.
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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 launched its first product line, QuickCast splints and
casts, in April 1994. The Company launched its second product line, Intellipac
breathable membranes for the fresh-cut produce packaging market, in September
1995. To date, the Company has recognized $1.7 million in total QuickCast
product and Intellipac breathable membrane sales. The balance of revenues from
inception through October 31, 1996 have resulted from license fees and
collaborative arrangements and, through October 31, 1994 have also resulted from
Small Business Innovative Research ("SBIR") government grants. The Company has
been unprofitable since its inception and expects to incur additional losses,
primarily due to the continuation of its research and development activities and
expenditures necessary to further develop its manufacturing and marketing
capabilities. From inception through October 31, 1996, the Company's accumulated
deficit was $31.3 million.
Results of Operations
Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended
October 31, 1995
Total revenues were $2.5 million for fiscal year 1996 compared to $4.0
million for fiscal year 1995, a decrease of 39%. Revenues from research and
development funding increased to $1.1 million for fiscal year 1996 from $796,000
for fiscal year 1995 due to an increase in the effort spent on research and
development contracts in fiscal year 1996. Revenues from product sales increased
to $755,000 for fiscal year 1996 from $601,000 for fiscal year 1995 due to
increased sales volume of Intellipac breathable membrane products in the first
three quarters of fiscal year 1996. In August 1996, Fresh Express decided to
suspend orders of the Company's Intellipac breathable membranes for its
fresh-cut broccoli and cauliflower packaging primarily due to cost issues.
Subsequent to this decision, however, the Company worked with Fresh Express to
reduce costs, and as a result, in October 1996, Fresh Express resumed ordering
the Company's Intellipac breathable membranes. License fees decreased to
$600,000 for fiscal year 1996 from $2.7 million for fiscal year 1995 primarily
due to non-recurring license fee revenue recognized during the fourth quarter of
fiscal year 1995 under the Company's agreement with Hitachi. In consideration
for the license fees and research and development funding received from its
corporate partners, the Company granted certain licenses and product rights. See
"Business - Corporate Collaborations."
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $1.0 million for fiscal year 1996 compared to $987,000 for
fiscal year 1995, an increase of 2%. Cost of product sales as a percentage of
product sales decreased to 133% in fiscal year 1996 from 164% in fiscal year
1995. This decrease was primarily the result of the increased volume of the
Intellipac breathable membrane product sales and increased labor efficiencies in
both the QuickCast device and Intellipac breathable membrane product lines. The
Company has experienced negative gross margins for its product sales due to the
early stage of commercialization of the Company's products and related product
start-up costs. The Company anticipates that if revenues from product sales
increase, gross margins will improve as the fixed portion of the cost of product
sales will be allocated over higher sales. Improvements in gross margins due to
increased product sales, if any, may be offset in the future if the Company
increases the fixed portion of cost of product sales. Due to the early stage of
commercialization, however, the Company is unable to predict with any certainty
future gross margins.
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Research and development expenses were $3.8 million for fiscal year
1996 compared to $3.7 million for fiscal year 1995, an increase of 3%. The
Company's research and development expenses arise from the development, process
scale-up and efforts to protect the intellectual property content of its
enabling side-chain crystallizable polymer technology, which is the basis of the
Company's products. In future periods, the Company expects that spending for
research and development will continue to increase in absolute dollars, although
it may vary as a percentage of total revenues.
Selling, general and administrative expenses were $3.3 million for
fiscal year 1996 compared to $2.2 million for fiscal year 1995, an increase of
47%. Selling, general and administrative expenses consist primarily of sales and
marketing expenses associated with the Company's product sales, business
development and administrative expenses. Selling, general and administrative
expenses increased as a result of expenses associated with the Company's
withdrawal of a planned secondary public offering and business development
initiatives totaling $340,000 or $.04 per share, increased sales and marketing
expenses and the additional administrative costs associated with supporting a
public company. Sales and marketing expenses were $1.3 million for fiscal year
1996 compared to $905,000 for fiscal year 1995, an increase of 47%. The increase
in sales and marketing expenses was attributable to the costs to support the
market introduction of the breathable membrane products launched in late fiscal
year 1995 and the cost of launching three new national U.S. distributors for
QuickCast products in fiscal year 1996. The Company expects that selling,
general and administrative spending will continue to increase in absolute
dollars, although it may vary as a percentage of total revenues.
Net interest income was $1.4 million for fiscal year 1996 compared to
$132,000 for fiscal year 1995. Net interest income increased due to interest
income earned on the Company's initial public offering proceeds.
Fiscal Year Ended October 31, 1995 Compared to Fiscal Year Ended
October 31, 1994
Total revenues were $4.0 million for fiscal year 1995 compared to $1.7
million for fiscal year 1994, an increase of 138%. Revenues from research and
development funding increased to $796,000 for fiscal year 1995 from $680,000 for
fiscal year 1994. The Company received no revenues from SBIR government grant
funding for fiscal year 1995 compared to $285,000 for fiscal year 1994. Revenues
from product sales increased to $601,000 for fiscal year 1995 from $335,000 for
fiscal year 1994 primarily due to increased sales volume for QuickCast products
and a small increase in their average selling prices. License fees increased to
$2.7 million for fiscal year 1995 from $400,000 for fiscal year 1994.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $987,000 for fiscal year 1995 compared to $897,000 for fiscal
year 1994, an increase of 10%. Cost of product sales as a percentage of product
sales decreased to 164% in fiscal year 1995 from 268% in fiscal year 1994. This
decrease was primarily the result of increased volumes and manufacturing
efficiencies for the QuickCast products. The Company experienced negative gross
margins for its product sales due to the early stage of commercialization of the
Company's products and related product start-up costs. Cost of product sales did
not increase at the same rate as revenues from product sales due to these
start-up costs, and the fact that fiscal year 1995 was the first full year of
product sales.
Research and development expenses were $3.7 million for fiscal year
1995 compared to $3.3 million for fiscal year 1994, an increase of 13%. Research
and development expenses increased primarily as a result of increased process
development costs associated with the launch of the Company's Intellipac
breathable membrane products and development of the PORT ophthalmic device,
which were offset by a decline in development expenses associated with the
QuickCast product line launched in fiscal year 1994.
Selling, general and administrative expenses were $2.2 million for
fiscal year 1995 compared to $2.1 million for fiscal year 1994, an increase of
8%. Sales and marketing expenses increased to $905,000 for fiscal year 1995 from
$823,000 for fiscal year 1994, primarily due to marketing and sales activities
for the QuickCast product line.
-26-
Net interest income was $132,000 for fiscal year 1995 compared to
$192,000 for fiscal year 1994, a decrease of 31%. The decrease resulted
primarily from interest expense of $42,000 associated with the convertible
promissory notes issued in March 1995.
Liquidity and Capital Resources
The Company completed its initial public offering of common stock in
February 1996, raising approximately $35.0 million, net of underwriting
discounts and commissions, and issuance costs. Prior to the Company's initial
public offering, the Company financed its operations primarily through private
sales of its equity securities, issuances of convertible debt, equipment lease
financings and license and development fees. Through October 31, 1996 the
Company has received net offering proceeds of approximately $23.8 million from
private sales of equity securities, $700,000 from the issuance of convertible
notes in March 1995 and $1.1 million from lease financing.
Cash used in operating activities increased by $1.4 million to $3.6
million in fiscal year 1996 from $2.2 million in fiscal year 1995. The increase
is primarily due to an increase in the Company's net loss in fiscal year 1996
compared to fiscal year 1995.
The Company has not made significant outlays for capital expenditures
since inception. During fiscal year 1996 the Company spent approximately
$367,000 on capital expenditures. Capital expenditures to date have consisted
primarily of purchases of laboratory and manufacturing equipment, computers and
related peripheral equipment, furniture and fixtures and leasehold improvements.
The Company currently anticipates that capital expenditures in fiscal year 1997
will be approximately $1.0 million. Such expenditures will include purchases of
additional laboratory and manufacturing equipment, computers and related
peripheral equipment and leasehold improvements.
The Company believes that existing cash, cash equivalent and short-term
investments, which totaled $36.5 million at October 31, 1996, will be sufficient
to finance its capital requirements through at least the next twelve months.
However, the Company's future capital requirements will depend on numerous
factors, including the progress of its research and development programs; the
development of commercial scale manufacturing capabilities; the development of
marketing, sales and distribution capabilities; the ability of the Company to
maintain existing collaborative arrangements and establish and maintain new
collaborative arrangements; payments received under research and development
agreements; the costs involved in preparing, filing, prosecuting, defending and
enforcing intellectual property rights; complying with regulatory requirements;
competing technological and market developments; the effectiveness of product
commercialization activities and arrangements; and other factors. If the
Company's currently available funds and internally generated cash flow, are not
sufficient to satisfy its financing needs, the Company would be required to seek
additional funding through other arrangements with collaborative partners,
through bank borrowings and through public or private sales of its securities,
including equity securities. The Company has no credit facility or other
committed sources of capital. There can be no assurance that additional funds,
if required, will be available to the Company on favorable terms.
The Company has not generated taxable income to date. At October 31,
1996, the net operating losses available to offset future taxable income for
federal income tax purposes were approximately $17.7 million. Because the
Company has experienced ownership changes, future utilization of the
carryforwards may be limited in any one fiscal year pursuant to Internal Revenue
Code regulations. The carryforwards expire at various dates beginning in 2001
through 2011, if not utilized. As a result of the annual limitation, a portion
of these carryforwards may expire before ultimately becoming available to reduce
federal income tax liabilities.
Additional Factors That May Affect Future Results
The Company desires to take advantage of the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that the following important factors, as well as
other factors, could in the future affect, and in the past have affected, the
-27-
Company's actual results and could cause the Company's results for future
quarters to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company.
History of Operating Losses and Accumulated Deficit. The Company has
incurred net losses in each year since its inception, including net losses of
approximately $4.2 million and $2.8 million during fiscal years 1996 and 1995,
respectively, and the Company's accumulated deficit as of October 31, 1996
totaled $31.3 million. The Company expects to incur additional losses for the
foreseeable future. The amount of future net losses and time required by the
Company to reach profitability are highly uncertain.
Early Commercialization; Dependence on New Products and Technologies;
Uncertainty of Market Acceptance. While the Company recently commenced marketing
certain of its products, it is in the early stage of product commercialization
and many of its potential products are in development. The Company believes that
its future success will depend in large part on its ability to develop and
market new products in its target markets and in new markets. In particular, the
Company expects that its ability to compete effectively with existing
industrial, food packaging, medical and agricultural companies will depend
substantially on successfully developing, commercializing, achieving market
acceptance of and reducing the cost of producing the Company's products. In
addition, commercial applications of the Company's temperature switch polymer
technology are relatively new and evolving. There can be no assurance that the
Company will be able to successfully develop, commercialize, achieve market
acceptance of or reduce the cost of producing the Company's products, or that
the Company's competitors will not develop competing technologies that are less
expensive or otherwise superior to those of the Company. There can be no
assurance that the Company will be able to develop and introduce new products
and technologies in a timely manner or that new products and technologies will
gain market acceptance. The failure to develop and market successfully new
products could have a material adverse effect on the Company's business,
operating results and financial condition.
The success of the Company in generating significant sales of its
products will depend in part on the ability of the Company and its partners to
achieve market acceptance of the Company's products and technology. The extent
to which, and rate at which, market acceptance and penetration are achieved by
the Company's current and future products is a function of many variables
including, but not limited to, price, safety, efficacy, reliability, conversion
costs and marketing and sales efforts, as well as general economic conditions
affecting purchasing patterns. There can be no assurance that markets for the
Company's products will develop or that the Company's products and technology
will be accepted and adopted. The failure of the Company's products to achieve
market acceptance could have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Collaborative Partners. The Company's strategy for the
development, clinical and field testing, manufacturing, commercialization and
marketing of certain of its current and future products includes entering into
various collaborations with corporate partners, licensees and others. To date,
the Company has entered into collaborative arrangements with Hitachi and
BFGoodrich in connection with its Intelimer polymer systems, Fresh Express and
Printpack in connection with its Intellipac breathable membrane products, Nitta
and Hitachi in connection with its industrial adhesive products and Smith &
Nephew, Physician Sales & Services, North Coast Medical and Sammons Preston in
connection with its QuickCast orthopedic products. The Company is dependent on
its corporate partners to develop, test, manufacture and/or market certain of
its products. Although the Company believes that its partners in these
collaborations have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be devoted
to these activities are not within the control of the Company. A significant
portion of Landec's revenues to date have been derived from commercial research
and development collaborations and license agreements. Development funding and
license fees from product sales to Hitachi, BFGoodrich, Nitta and Smith & Nephew
represented approximately 65% of the Company's revenues for fiscal year 1996.
Moreover, research and development revenue from Hitachi and Nitta each accounted
for more than 10% of the Company's total revenues for fiscal year 1996. There
can be no assurance that such partners will perform their obligations as
expected or that the Company will derive any additional revenue from such
arrangements. There can be no assurance that the Company's partners will pay any
additional option or license fees to the Company or that they will develop and
market any products under the agreements. Moreover, certain of
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the collaborative agreements provide that they may be terminated at the
discretion of the corporate partner, and certain of the collaborative agreements
provide for termination under certain circumstances.
In March of 1996, the Company agreed to amend its research and
development collaboration with BFGoodrich in the Intelimer polymer systems area
by removing certain exclusivity restrictions. This amendment will allow Landec
to explore direct distribution and other licensing and product development
opportunities while continuing the collaboration with BFGoodrich on a
non-exclusive basis.
In August 1996, Fresh Express informed the Company that it had decided
to suspend orders of Landec's Intellipac breathable membranes for Fresh Express'
fresh-cut broccoli and cauliflower packaging primarily due to cost issues.
Subsequent to this decision, however, the Company worked with Fresh Express to
reduce these cost issues, and as a result, in October 1996 Fresh Express resumed
ordering the Company's Intellipac breathable membranes. In October 1996, the
Company also began shipping its Intellipac breathable membrane for fresh-cut
broccoli packaging to a second produce customer. However, there can be no
assurance that Fresh Express will continue to order Landec's Intellipac
breathable membranes or that other customers will order such products.
The Company anticipates that it will terminate its relationship with
Smith & Nephew in early 1997 for QuickCast products in certain European and
Pacific Rim countries, Canada and South Africa, and, as a result, the Company is
currently in the process of initiating distribution relationships with other
independent distributors in selected countries.
There can be no assurance that the partners will not pursue existing or
alternative technologies in preference to the Company's technology. Furthermore,
there can be no assurance that the Company will be able to negotiate additional
collaborative arrangements in the future on acceptable terms, if at all, or that
such collaborative arrangements will be successful. To the extent that the
Company chooses not to or is unable to establish such arrangements, it would
experience increased capital requirements to undertake research, development,
manufacture, marketing or sale of its current and future products in such
markets. There can be no assurance that the Company will be able to
independently develop, manufacture, market, or sell its current and future
products in the absence of such collaborative agreements.
Competition and Technological Change. The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a ra