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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, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 Haven Avenue
Menlo Park, California 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 306-1650
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $35,041,000 as of January 6, 1998, 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 6, 1998, 12,718,017 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...................................................................... 15
3. Legal Proceedings............................................................... 16
4. Submission of Matters to a Vote of Security Holders............................. 16
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters........... 17
6. Selected Consolidated Financial Data............................................ 19
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation....................................................................... 20
8. Financial Statements and Supplementary Data..................................... 28
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... 28
Part III
10. Directors and Executive Officers of the Registrant.............................. 29
11. Executive Compensation.......................................................... 29
12. Security Ownership of Certain Beneficial Owners and Management.................. 29
13. Certain Relationships and Related Transactions.................................. 29
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................ 30
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PART I
Item 1. Business
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this Report and, in particular,
the factors described in Item 7 under "Additional Factors That May Affect Future
Results".
General
Landec Corporation and its subsidiaries ("Landec" or the "Company")
design, develop, manufacture and sell temperature-activated and other specialty
polymer products for a variety of food processing, specialty industrial,
agricultural and medical applications. In addition, the Company markets and
distributes hybrid seed corn to producer customers. The Company's
temperature-activated polymer 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.
A key element in the Company's growth has been its ability to
commercialize innovative products from research and development activities. The
Company's strategy is to identify commercially attractive business opportunities
and to seek market share through the application of its proprietary, enabling
Intelimer technology. As part of this strategy, the Company continues to focus
on the acquisition of complementary businesses that can be integrated into
Landec's existing core businesses to accelerate access to new markets. During
fiscal year 1997, Landec acquired Dock Resins Corporation ("Dock Resins"), a
manufacturer and marketer of specialty acrylic and other polymers, and Fielder's
Choice Hybrids ("Fielder's Choice"), a direct marketer of hybrid seed corn to
farmer producers.
The Company's focus is on three core businesses - Food Products,
Industrial Specialties and Agriculture. The principal products and services
offered by the Company in the three industry segments are described below.
Financial information concerning the Company's industry segments is summarized
in Note 12 to the Consolidated Financial Statements. The Company believes that
there are other attractive commercial opportunities for its Intelimer
technologies outside of its core businesses. To best leverage its resources in
non-core businesses, the Company's strategy has been to license its technology
to corporate partners who are able to more quickly commercialize Intelimer
products in exchange for license fees and future royalties.
The Company was incorporated in California on October 31, 1986. The
Company completed its initial public offering in 1996 and is listed on the
NASDAQ stock exchange under the symbol "LNDC".
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,
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permeability and viscosity over broad temperature ranges. Landec's Intelimer
materials, in contrast, can be designed to exhibit abrupt changes in
permeability, adhesion and/or viscosity over temperature ranges as narrow as
1(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 of Effect of Temperature on Intelimer Materials vs. Typical Polymers]
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 of Intelimer Materials' Temperature Switch]
-4-
Side chain crystallizable polymers were first discovered by academic
researchers in the mid-1950's. These polymers were initially considered to be
merely of scientific curiosity from a polymer physics perspective, and, to the
Company's knowledge, no significant commercial applications were pursued. In the
mid-1980's, Dr. Ray Stewart, the Company's founder, became interested in the
idea of using the temperature-activated permeability properties of these
polymers to deliver various materials such as drugs and pesticides. After
forming Landec in 1986, Dr. Stewart subsequently discovered broader utility for
these polymers. After several years of basic research, commercial development
efforts began in the early 1990's, resulting in initial products in mid-1994.
Landec's Intelimer materials are generally synthesized from long chain
acrylic monomers that are derived primarily from natural materials such as
soybean and corn oils, and are highly purifiable and designed to be manufactured
economically through known polymerization processes. Intelimer materials can be
made into many different forms, including films, coatings, microcapsules and
plugs.
Description of Core Business
The Company has three core businesses - Food Products, Industrial
Specialties and Agriculture. To date, products using the Company's Intelimer
technology have been commercially launched in two of these three businesses.
Food Products - Intellipac(R) 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 certain fresh-cut produce is not widely available for commercial
sale. The Company believes its Intellipac breathable membranes facilitate the
packaging of fresh-cut produce.
Fresh-cut produce is pre-washed, cut and packaged in a form that is
ready to use by the consumer and is thus typically sold at premium price levels.
According to the International Fresh-Cut Produce Trade Association (IFPA) and
A.C. Nielsen scan data, U.S. retail sales of fresh-cut produce in 1997 grew
19.5% to an estimated $1.5 billion. The Company believes that this growth has
been driven by consumer demand and willingness to pay for convenience, labor
savings and uniform quality relative to produce prepared at the point of sale.
The Company believes when combined with institutional food service demand, the
total fresh-cut market represents approximately 8% of total 1997 U.S. produce
sales or $6-8 billion in annual production.
Although fresh-cut produce companies have had success in the salad
market, the industry has been slow to diversify into other fresh-cut vegetables
or fruits due to limitations in film materials used to package the fresh-cut
produce. After harvesting, vegetables and fruits continue to respire, consuming
oxygen and releasing carbon dioxide. Too much or too little oxygen can result in
premature spoilage and decay and promote the growth of contaminates and
microorganisms that jeopardize inherent food safety. Conventional packaging
films used today, such as polyethylene and polypropylene, can be made with
modest permeability to oxygen and carbon dioxide, but often do not provide the
optimal atmosphere for the produce packaged. Shortcomings of currently used
materials have not significantly hindered the growth in the fresh-cut salad
market because lettuce, unlike many vegetables and fruits, has low respiration
requirements.
The respiration rate of fresh-cut produce varies from vegetable to
vegetable and from fruit to fruit. The challenge facing the industry is to
develop packaging for the high respiring, high value and sensitive shelf life
fresh-cut vegetable and fruit market. The Company believes that today's
conventional packaging films cannot be adapted to meet the diversification of
pre-cut vegetables and fruits evolving in the industry without compromising
shelf life and produce quality. To mirror the growth experienced in the
fresh-cut salad market, the markets for high respiring vegetables and fruits
such as broccoli, cauliflower, berries and stone fruit (peaches, apricots,
nectarines) will require a more versatile and sophisticated packaging solution
such as the Company's Intellipac breathable membranes.
The respiration rate of fresh-cut produce also varies with fluctuations
in temperature. As temperature increases, fresh-cut produce generally respires
at a higher rate, which speeds up the aging process, resulting in shortened
shelf life and increased potential for decay, spoilage, loss of texture and
dehydration. As fresh-cut produce is
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transported from the processing plant through the refrigerated distribution
chain to foodservice locations or retail stores, and finally to the ultimate
consumer, temperatures can fluctuate significantly. Therefore, temperature
control is a constant challenge in preserving the quality of fresh-cut produce
- -- a challenge few current packaging films can fulfill. The Company believes
that its temperature-responsive Intellipac technology will respond well to the
challenges of the fresh-cut distribution process.
Using its Intelimer technology, Landec 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 or an
aperture of a flexible film bag. This highly permeable "window" acts as the
mechanism to transmit the majority of the gas transmission properties required
for the entire package. These membranes are designed to provide three principal
benefits:
o High Permeability. Landec's Intellipac breathable membranes are
designed to permit transmission of oxygen and carbon dioxide at 300
times the rate of conventional packaging films. The Company believes
that these higher permeability levels will facilitate the packaging
diversity required to market many types of fresh-cut produce.
o Ability to Adjustably Select Oxygen and Carbon Dioxide. Conventional
films and other materials diffuse gas transfer in and out of packages
at an equal rate or fixed ratio of 1.0. Intellipac packages can be
tailored with ratios ranging from 1.0 to 12.0 and selectively transmit
oxygen and carbon dioxide at optimum rates to sustain the quality and
shelf life of produce.
o Temperature Responsiveness. Landec has developed breathable membranes
that can be designed to increase or decrease in permeability in
response to environmental temperature changes. The Company has
developed packaging that responds to higher oxygen requirements at
elevated temperatures but is also reversible, and returns to its
original state as temperatures decline.
Landec launched its first Intellipac breathable membranes in the form
of labels for fresh-cut broccoli packages in September 1995. Since then, the
Company has launched additional packaging products for vegetables. These
membranes incorporate high permeability, selective oxygen and carbon dioxide
transmission capabilities, and compensate for modest ranges of temperature
fluctuation. Future products may incorporate greater temperature responsiveness.
Landec believes that growth of the overall produce market will be
driven by the increasing demand for the convenience of fresh-cut produce which
will in turn require products which facilitate quality and shelf life of produce
transported to fresh-cut processors in bulk and pallet quantities. The Company
believes that in the future its Intellipac breathable membranes will be useful
for packaging a diverse variety of fresh-cut produce products. Potential
opportunities for using Landec's technology outside of the fresh-cut produce
market exist in cut flowers and in other food products.
Landec is working with leaders in the fresh-cut food service, club
store and retail markets. 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 purchases Landec's Intellipac breathable membranes
for fresh-cut produce sold to the institutional food service market. In early
1997, Landec announced an expansion of its Intellipac business through an
agreement with Apio, Inc.'s ("Apio") Value Added Group. Apio expanded sales of
Intellipac packaged foods to over 2,000 retail supermarket and over 200 club
store locations through the end of fiscal 1997. Landec believes it will have
growth opportunities for the next several years through new customers and
products in the United States, expansion of its existing customer relationships,
and through export shipments of specialty packaged foods with long shelf life.
Landec manufactures its Intellipac breathable membranes with selected
qualified outside contract manufacturers and markets Intellipac breathable
membranes through its own direct sales force and a regional supplier of
packaging films.
-6-
Industrial Specialties
Landec's industrial specialties products strategy is to focus on
catalysts, resins and fully-formulated products in the large and growing
thermoset polymer materials market.
Intelimer Polymer Systems
Landec has developed and is currently testing and validating over ten
new catalyst and fully-formulated products in over 500 sites in seven countries
using its Intelimer polymer technology for industrial thermoset applications.
Thermosets are plastics that, through a curing process, undergo a chemical
crosslinked reaction to form a structure that cannot be reshaped through
heating. For example, epoxy is a thermoset resin. The majority of thermosets are
configured in "two-package" systems in which one or more resins are packaged
separately from a curing agent or catalyst. When the catalyst is mixed with the
resin, the thermoset materials cure, or "set." The limited time the mixed
components can be used is commonly referred as its "work time" or pot life.
Current two-package thermoset systems have a number of limitations.
These systems generally require extensive and costly mixing equipment to ensure
the proper mix ratio and homogeneity to achieve the expected performance in the
product application. The thermoset resin and catalysts are kept in separate
packages until the time of use to prevent a premature reaction. A number of
component thermoset systems are limited by their work time, causing incomplete
mold fills, poor part quality and manufacturing waste. While a limited number of
single package thermoset systems offer the potential for addressing many of
these drawbacks, these products 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.
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 physical and corrosion resistant properties, epoxy
thermosets are widely used in the preparation of industrial primers and
maintenance paint finishes; in composites for printed circuit boards, aerospace
parts and assemblies; and in high performance adhesives for automotive,
aerospace and electrical applications. Polyurethane thermosets consist of a
variety of flexible and rigid foam materials essential for in-place insulation
(e.g., for refrigeration applications), mattresses and furniture cushions and
automotive seating. Polyurethane thermosets are also used in automotive bumpers,
side panels and other industrial applications and polyurethane coatings are used
for abrasion resistance in floor finishing and durability in transportation and
aerospace applications. Unsaturated polyesters are fast-curing with excellent
hardness characteristics and are primarily used in fiberglass-reinforced
composites. Principal applications for unsaturated polyesters are in housing
construction (shower modules, bathtub and sink constructions), marine
construction (boats) and transportation products (truck bodies and panels and
automotive trim).
The Company is developing catalyst, curative, and curing agent systems
based on its Intelimer technology for use in one-package thermoset products.
These systems can incorporate catalysts, curatives and curing agents in a unique
polymer envelope that prevents interaction by these agents with the resin when
the polymer envelope is in its impermeable state. This characteristic allows all
components of the thermoset product to be pre-mixed and stored at room
temperature, and provides longer shelf life. For example, some Landec thermoset
systems are storage-stable for up to one year. Landec's unique polymer envelope
system can be designed with a pre-set opening temperature switch to correspond
with elevated temperatures used during standard manufacturing processes. When
the thermoset system is exposed to the pre-set switch temperature, the Intelimer
polymer abruptly changes to its permeable state, exposing the catalyst to the
resin and initiating the curing process. In addition, the Intelimer polymer can
be designed to change state over a predetermined temperature range in order to
achieve a desired reaction time.
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
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Company believes that the ability to control reaction time also provides
advantages over existing thermoset systems and can enhance the throughput of
targeted manufacturing customers. Landec received the R&D 100 Award for its
Intelimer Polymer Systems product line in 1997 in recognition of the unique
capabilities of this technology.
Landec is targeting epoxies and unsaturated polyesters for its first
thermoset catalyst systems because epoxies and unsaturated polyesters are
typically used in high-value industrial applications, such as in the
construction, electronic, aerospace and automotive industries. In addition,
these materials are generally used in applications involving elevated
temperature curing. Consequently, curing an epoxy or an unsaturated polyester
thermoset material 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 polyurethanes and other thermoset markets
as well.
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 pot life and shelf life. The Company believes its one-package
catalyst systems will be able to address the main limitations in each of these
types of thermoset systems.
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 and shelf 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 Chemical 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 Chemical
is currently sponsoring research and development activities with respect to
Intelimer technology. The Company's agreement with Hitachi Chemical contemplates
that Hitachi Chemical, 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
Chemical and limited non-exclusive rights in the United States and other
territories outside of Asia to BFGoodrich. See "Corporate Collaborations."
Dock Resins Corporation
In April 1997, Landec completed the acquisition of Dock Resins, a
privately-held manufacturer and marketer of specialty acrylic and other
polymers. Landec paid approximately $13.7 million in cash, a promissory note and
direct acquisition costs and $2.1 million in Landec Common Stock for the
company, which had annual sales of approximately $13 million in 1996.
Based in Linden, New Jersey, Dock Resins' products are sold under the
Doresco(TM) trademark and are used by more than 300 customers throughout the
United States in the coating, laminating, adhesives and printing ink markets.
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Dock Resins is a leading supplier of proprietary polymers including acrylic,
methacrylic, alkyd, polyester, urethane and polyamide polymers to film
converters engaged in hot stamping, decorative wood grain, automotive interiors,
holograms, and metal foil applications. Dock Resins also supplies products to a
number of other markets such as automotive refinishing, construction,
pressure-sensitive adhesives, paper coatings, caulks, concrete curing compounds
and sealers.
The acquisition of Dock Resins was strategic in providing the Company
with immediate access to large-scale polymer manufacturing as well as a built-in
customer base and national distribution network. Dock Resins has a presence in
the specialty polymer industry, a track record of growth in revenues and
earnings and a strong management team under the leadership of Dock Resins' Chief
Executive Officer, Dr. A. Wayne Tamarelli.
Agricultural
Landec formed a subsidiary, Intellicoat Corporation ("Intellicoat"), in
1995. Intellicoat's strategy is to build a vertically integrated seed technology
company based on Intellicoat's seed coating technology and direct marketing and
sales capability.
Intellicoat(R) Seed Coatings
Landec has developed and, through Intellicoat, 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, canola, cotton and soybean seeds.
According to the U.S. Agricultural Statistics Board, the total planted acreage
in 1996 in North America for corn, canola, cotton and soybean seed exceeded 79
million, 10 million, 14 million and 64 million, respectively.
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
temperature switch. Intellicoat seed coating is 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 coating provides the following advantages: more flexible
timing for planting, avoidance of chilling injury, uniform germination and crop
growth, and protection against harmful fungi. As a result, the Company believes
that Intellicoat seed coatings offer the potential for significant improvements
in crop yields.
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 five years
have resulted in yield increases in excess of 5%. The Company plans to initially
develop seed coating products for the corn market and distribute its products
directly and through regional and national seed companies in the United States.
The Company believes that 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 sugar beets, wheat and other
vegetables.
Fielder's Choice Hybrids
In September 1997, Intellicoat completed the acquisition of Fielder's
Choice, a direct marketer of hybrid seed corn to farmer producers. Landec paid
approximately $3.6 million in cash and direct acquisition costs and $5.2 million
in Landec Common Stock for the Company. Terms of the agreement include
additional consideration in the form of a
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cash earn-out based on future performance. Fielder's Choice had sales of
approximately $11.0 million in the twelve months ended October 31, 1997.
Based in Monticello, Indiana, Fielder's Choice offers a comprehensive
line-up of corn hybrids to more than 12,000 producer seed customers in over
forty states through direct marketing programs. The success of Fielder's Choice
comes from its expertise in selling directly to the farmer producer, bypassing
the traditional and costly farmer-dealer system.
In order to support its direct marketing programs, Fielder's Choice has
developed proprietary direct marketing information technology that enables
state-of-the-art methods for communicating with a broad array of farmers.
The acquisition of Fielder's Choice was strategic in providing a
cost-effective vehicle for Intellicoat seed coating products when they are ready
for commercial production. The Company believes that this direct channel of
distribution will enable Intellicoat to more quickly achieve meaningful market
penetration.
Technology Licensing Businesses
The Company believes its technology has commercial potential in a wide
range of industrial and medical applications beyond those identified in the core
businesses. In order to exploit these opportunities, the Company has entered
into licensing and collaborative corporate agreements for product development
and/or distribution in certain fields.
QuickCast(TM) Splints and Casts
Landec developed, obtained FDA approval of and launched its QuickCast
splints and casts products in 1994. These splints and casts are made from an
elastic fiberglass mesh coated with Landec's temperature-activated materials.
The products' simplicity of application, flexibility in remolding and handling,
and ease in removal provide advantages over traditional methods of casting and
splinting. The Company received a 1995 R&D 100 Award in recognition of
QuickCast's innovative features and benefits.
In August 1997, Landec licensed the rights to worldwide manufacturing,
marketing and distribution of and sold certain assets relating to the QuickCast
product line to Bissell Healthcare Corporation (commonly known as "Sammons
Preston") of Bolingbrook, Illinois. Under the terms of the transaction, Landec
received an up-front cash payment for assets and will receive ongoing royalties
on product sales over a 10-year period. Sammons Preston is one of the leaders in
the occupational and physical therapist market and had been one of Landec's
largest customers for its QuickCast products.
PORT(TM) Ophthalmic Devices
Landec developed the PORT (Punctal Occluder for the Retention of Tears)
ophthalmic device initially to address a common yet poorly diagnosed condition
known as dry eye that is estimated to affect 30 million Americans annually. The
device consists of a physician-applied applicator containing solid Intelimer
material that transforms into a flowable, viscous state when heated slightly
above body temperature. After inserting the Intelimer material into the lacrimal
drainage duct, it quickly solidifies into a form-fitting, solid plug. Occlusion
of the lacrimal drainage duct allows the patient to retain tear fluid and
thereby provides relief and therapy to the dry eye patient.
The Company is currently in human clinical trials. Landec and its
partner believe 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.
In December 1997, Landec licensed the rights to worldwide
manufacturing, marketing and distribution of its PORT ophthalmic device to a
large national eyecare company. Under the terms of the transaction, Landec
received an up-front cash payment, will receive an additional cash payment upon
meeting a certain milestone, and will receive
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ongoing royalties on product sales over an approximately 15-year period. Landec
will continue to provide development support on a contract basis through the FDA
approval process and product launch.
Industrial Specialties and Adhesives
Hitachi Chemical. The Company has entered into two separate
collaborations with Hitachi Chemical 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 Chemical in the industrial
adhesives area. The agreement provides Hitachi Chemical with a non-exclusive
license to manufacture and sell products using Landec's Intelimer materials in
certain Asian countries. Landec received up-front license fees upon signing the
agreement and is entitled to future royalties based on net sales by Hitachi
Chemical 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 Chemical in the Intelimer Polymer Systems area. The agreement
provides Hitachi Chemical 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 Chemical for at least seven years. In addition, Hitachi
Chemical 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
Chemical of the licensed products. Any fees paid to the Company are
non-refundable. This agreement is terminable at Hitachi Chemical's option. In
conjunction with this agreement, Hitachi Chemical purchased Series E Preferred
Stock for $1.5 million which converted to common stock upon the Company's
initial public offering.
Nitta Corporation. On March 14, 1995, the Company entered into a
license agreement with Nitta Corporation ("Nitta") in the industrial adhesives
area. The agreement provides Nitta with a co-exclusive license to manufacture
and sell products using Landec's Intelimer materials in certain Asian countries.
Landec received up-front license fees upon signing the agreement and is entitled
to future royalties based on net sales by Nitta of the licensed products. Any
fees paid to the Company are non-refundable. 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.
Sales and Marketing
Each of the Company's core businesses are supported by dedicated sales
and marketing resources. The Company intends to develop its internal sales
capacity as more products progress toward commercialization and as business
volume expands geographically.
Food Products. In the Intellipac breathable membrane business there are
a limited number of suppliers of fresh-cut produce, most of whom are located in
the western United States. The Company currently has a small internal sales
force targeted at this concentrated marketplace.
Industrial Specialties. Dock Resins sales are carried out through a
small direct sales group and network of existing manufacturers' representatives
and distributed through public warehouses. Sales are supported by internal sales
and technical service resources at Dock Resins. Intelimer Polymer Systems U.S.
sales are made through a small, technically oriented, internal sales
organization.
Agriculture. Fielder's Choice is supported by over 30 direct
telemarketers, operating in two shifts, located in Monticello, Indiana. Customer
contacts are made based on direct responses and inquiries from customers.
-11-
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.
Food Products. The Company currently has its Intellipac breathable
membrane products manufactured by 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.
Industrial Specialties. Dock Resins' manufacturing facilities are
flexible and adaptable to a wide range of processes. Its capabilities include
various polymerization processes, grafting, dispersing, blending, pilot plant
scale-ups and general synthesis. The Company plans to increase the capacity of
these facilities and is in the process of installing additional vessels and
tanks anticipated to be operational by the end of fiscal year 1998.
The Company is currently manufacturing Intelimer Polymer Systems
products at its pilot-scale facilities in Menlo Park, California and with
selected outside contract manufacturers. As volumes increase, the Company plans
to transfer future manufacturing to its Dock Resins subsidiary.
Agriculture. Fielder's Choice purchases its hybrid seed corn from an
established producer under an exclusive purchase agreement.
General. Many of the raw materials used in manufacturing certain of the
Company's products are currently purchased from a single source, including
certain monomers used to synthesize Intelimer polymers and substrate materials
for the Company's breathable membrane products. In addition, virtually all of
the hybrid corn varieties sold by Fielder's Choice are purchased from a single
source. Upon manufacturing scale-up and as hybrid corn sales increase, the
Company may enter into alternative supply arrangements. Although to date the
Company has not experienced difficulty acquiring materials for the manufacture
of its products nor has Fielder's Choice experienced difficulty in acquiring
hybrid corn varieties, no assurance can be given that interruptions in supplies
will not occur in the future, that the Company will be able to obtain substitute
vendors, or that the Company will be able to procure comparable materials or
hybrid corn varieties at similar prices and terms within a reasonable time. Any
such interruption of supply could have a material adverse effect on the
Company's ability to manufacture and distribute its products and, consequently,
could materially and adversely affect the Company's business, operating results
and financial condition.
Research and Development
Landec is focusing its research and development resources on both
existing and new applications of its Intelimer technology. Examples of research
and development for product line extensions include 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 December
31, 1997 Landec had 30 employees engaged in research and development (and a
total of ten Ph.D.s in the Company) 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 and agricultural companies is expected to be
intense. In addition, the nature of the Company's collaborative arrangements and
its technology licensing business may result in its corporate partners and
licensees becoming competitors of the Company. Many of these competitors have
substantially greater financial and technical resources and production and
marketing capabilities than the
-12-
Company, and many have substantially greater experience in conducting field
trials, obtaining regulatory approvals and manufacturing and marketing
commercial products. There can be no assurance that these competitors will not
succeed in developing alternative technologies and products that are more
effective, easier to use or less expensive than those which have been or are
being developed by the Company or that would render the Company's technology and
products obsolete and non-competitive.
Patents and Proprietary Rights
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has been granted nine U.S.
patents with expiration dates ranging from 2006 to 2014 and has filed
applications for additional U.S. patents, as well as certain corresponding
patent applications outside the United States, relating to the Company's
technology. The Company's issued patents include claims relating to
compositions, devices and use of a class of temperature sensitive polymers that
exhibit distinctive properties of permeability, adhesion and viscosity. There
can be no assurance that any of the pending patent applications will be
approved, that the Company will develop additional proprietary products that are
patentable, that any patents issued to the Company will provide the Company with
competitive advantages or will not be challenged by any third parties or that
the patents of others will not prevent the commercialization of products
incorporating the Company's technology. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products or design around the Company's patents. Any of the
foregoing results could have a material adverse effect on the Company's
business, operating results and financial condition.
The commercial success of the Company will also depend, in part, on its
ability to avoid infringing patents issued to others. The Company has received,
and may in the future receive, from third parties, including some of its
competitors, notices claiming that it is infringing third party patents or other
proprietary rights. 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.
-13-
FDA and Other Government Regulations
The Company's products and operations are subject to substantial
regulation in the United States and foreign countries.
Food Packaging Products. The Company's food packaging products are
subject to regulation under the Food, Drug and Cosmetic Act ("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 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's business, operating results and financial condition.
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, certain of the Company's Intelimer polymers have qualified for the
exemption. 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.
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.
Other. The Company and its products under development may also be
subject to other federal, state and local laws, regulations and recommendations.
Although Landec believes that it will be able to comply with all applicable
regulations regarding the manufacture and sale of its products and polymer
materials, such regulations are always subject to change and depend heavily on
administrative interpretations and the country in which the products are sold.
There can be no assurance that future changes in regulations or interpretations
made by the FDA, EPA or other regulatory bodies, with possible retroactive
effect, relating to such matters as safe working conditions, laboratory and
manufacturing practices, environmental controls, fire hazard control, and
disposal of hazardous or potentially hazardous substances will not adversely
affect the Company's business. There can also be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business. Furthermore,
the introduction of the Company's products in foreign markets may require
obtaining foreign regulatory clearances. There
-14-
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, 1997, Landec had 162 full-time employees, of whom 71
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 91 were dedicated to sales, marketing and administrative
activities. Landec intends to recruit additional personnel in connection with
the development, manufacturing and marketing of its products. None of Landec's
employees is represented by a union, and Landec believes relationships with its
employees are good.
Item 2. Properties
During fiscal year 1997, the Company acquired Dock Resins and
Intellicoat acquired Fielder's Choice which resulted in the Company and its
subsidiary acquiring properties owned by each of these acquired companies. In
addition, the Company extended its lease on the office and laboratory space it
occupies in Menlo Park, California.
These properties are described below:
Acres
of Lease
Location Ownership Facilities Land Expiration
- --------------- ---------- -------------------------------- ------- ----------
Menlo Park, CA Leased 21,000 square feet of office and -- 12/31/01(1)
laboratory space
Menlo Park, CA Subleased 5,000 square feet of warehouse -- 12/31/98
and manufacturing space
Linden, NJ Owned 20,000 square feet of office, 2.1 -- (2)
laboratory, production,
warehouse, and ancillary space
Monticello, IN Owned 7,500 square feet of office space 0.5 -- (3)
(1) Lease contains one two-year renewal option.
(2) Construction plans are underway to build an additional 2,000 square feet of office and laboratory space
in fiscal year 1998.
(3) Construction plans are underway to build an additional 11,000 square feet of office and ancillary space
in fiscal year 1998.
-15-
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. See "Business - Patents and Proprietary
Rights" in Item 1.
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, 1997.
-16-
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 the high and low
sales prices for the Common Stock as reported on the NASDAQ National Market.
Fiscal Year 1997
- ----------------
High Low
---- ---
4th Quarter ending October 31, 1997.......................................$6.25 $4.75
3rd Quarter ending July 31, 1997..........................................$7.25 $4.75
2nd Quarter ending April 30, 1997.........................................$7.63 $4.75
1st Quarter ending January 31, 1997.......................................$9.25 $6.50
Fiscal Year 1996
- ----------------
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 89 holders of record of 12,687,416 shares of
outstanding Common Stock as of October 31, 1997. The Company has not paid any
dividends on the Common Stock since its inception. The Company presently intends
to retain all future earnings, if any, for its business and does not anticipate
paying cash dividends on its common stock in the foreseeable future.
In connection with Intellicoat's acquisition of Fielder's Choice on
September 30, 1997, the shareholders of Fielder's Choice received an aggregate
of approximately $2.9 million in cash and approximately 1.4 million shares of
Landec Common Stock. The majority shareholder of Fielder's Choice is also
entitled to receive additional cash consideration up to $2.4 million from
Intellicoat depending on the future performance of the business acquired. The
issuance of securities in this Item 5 was deemed to be exempt from registration
under the Securities Act of 1933, as amended (the "Act") in reliance on Section
4(2) of the Act as a transaction by an issuer not involving any public offering.
The recipients of the securities in such transaction represented their intention
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the securities issued in such transaction. The recipients were given adequate
access to information about the Company.
Use of Proceeds
In connection with its initial public offering in 1996, the Company
filed a Registration Statement on Form S-1, SEC File No. 33-80723 (the
"Registration Statement"), which was declared effective by the Commission on
February 12, 1996. Pursuant to the Registration Statement, the Company
registered 3,220,000 shares of its Common Stock, $0.001 par value per share, for
its own account. The offering commenced on February 15, 1996 and did not
terminate until all of the registered shares had been sold. The aggregate
offering price of the registered shares was $38,640,000. The managing
underwriters of the offering were Smith Barney and Lehman Brothers.
-17-
From February 1, 1996 to October 31, 1997, the Company incurred the
following expenses in connection with the offering:
Underwriting discounts and commissions $2,705,000
Other expenses 900,000
----------
Total Expenses $3,605,000
----------
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total
expenses above were $35,035,000. From February 1, 1996 to October 31, 1997, the
Company used such net offering proceeds, in direct or indirect payments to
others, as follows:
Purchase and installment of machinery and equipment $ 1,700,000
Repayment of indebtedness $ 600,000
Acquisitions of other businesses $ 16,900,000
Temporary investments* $ 9,500,000
Working capital $ 4,900,000
------------
Total $33,600,000
* All temporary investments are available-for-sale securities; see note
5 of the consolidated financial statements in Part IV, Item 14.
Each of such amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a material change
in the use of proceeds described in the prospectus of the Registration
Statement.
-18-
Item 6. Selected Consolidated Financial Data
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in Item 8 of
this report.
Year Ended October 31,
----------------------------------------------------------
Statement of Operations Data: 1997 1996 1995 1994 1993
----------- ----------- ----------- ------------- --------
(in thousands, except per share data)
Revenues:
Product sales............................ $ 8,653 $ 371 $ 14 $ -- $ --
License fees............................. -- 600 2,650 400 350
Research and development revenues........ 863 1,096 796 965 821
-------- -------- -------- ------- -------
Total revenues........................ 9,516 2,067 3,460 1,365 1,171
Operating costs and expenses:
Cost of product sales.................... 6,215 422 9 -- --
Research and development................. 4,608 3,588 3,175 2,288 2,952
Selling, general and administrative...... 4,664 2,367 1,332 1,239 1,332
Purchased in-process research and
development.............................. 3,022 -- -- -- --
-------- -------- -------- ------- -------
18,509 6,377 4,516 3,527 4,284
-------- -------- -------- ------- -------
Operating loss.............................. (8,993) (4,310) (1,056) (2,162) (3,113)
Interest income............................. 1,726 1,546 281 273 154
Interest expense............................ (319) (59) (106) (48) (78)
-------- -------- -------- ------- -------
Loss from continuing operations............. (7,586) (2,823) (881) (1,937) (3,037)
-------- -------- -------- ------- -------
Discontinued operations:
Loss from discontinued QuickCast
operations............................... (1,059) (1,377) (1,878) (2,418) (1,079)
Gain on disposal of QuickCast operations. 70 -- -- -- --
-------- -------- -------- ------- -------
Loss from discontinued operations........... (989) (1,377) (1,878) (2,418) (1,079)
-------- -------- -------- ------- -------
Net Loss.................................... $ (8,575) $ (4,200) $ (2,759) $(4,355) $(4,116)
======== ======== ======== ======= =======
Loss per share:
Continuing operations.................... $ (.68) $ (.37) $ (.74)
Discontinued operations.................. (.09) (.18) (1.59)
-------- -------- --------
Net Loss per share........................... $ (.77) $ (.55) $ (2.33)
======== ======== ========
Shares used in computation of per
share amounts............................ 11,144 7,699 1,182
======== ======== ========
October 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ----------- ------------ -----------
Balance Sheet Data: (in thousands)
Cash, cash equivalents and short-term
investments.............................. $ 14,669 $ 36,510 $ 5,549 $ 5,706 $ 9,772
Total assets................................ 50,160 38,358 7,347 7,521 11,253
Redeemable convertible preferred stock...... -- -- 31,276 27,656 25,567
Accumulated deficit......................... (39,858) (31,278) (26,538) (21,658) (15,213)
Total shareholders' equity (net capital
deficiency).............................. $ 35,615 $ 36,640 $ (26,429) $(21,584) $(15,159)
-19-
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(R) technology and
related products. The Company has launched three product lines from this core
development -- QuickCast splints and casts, in April 1994; Intellipac(R)
breathable membranes for the fresh-cut produce packaging market, in September
1995; and Intelimer Polymer Systems in June 1997. To date, the Company has
recognized $3.3 million in total sales of its QuickCast products (included in
discontinued operations), Intellipac breathable membrane products and Intelimer
Polymer Systems products. As part of an effort to focus and build on three
strategic businesses -- Food Products, Industrial Specialties and Agriculture --
the Company has recently completed or plans to complete several strategic
transactions. On April 18, 1997 the Company acquired Dock Resins, which is
primarily engaged in the manufacturing and marketing of specialty acrylics and
other polymers. On September 30, 1997, Intellicoat acquired Fielder's Choice, a
direct marketer of hybrid seed corn. On August 28, 1997 the Company sold its
QuickCast product line to Bissell. In December 1997, the Company licensed the
rights to worldwide manufacturing, marketing and distribution of the PORT
ophthalmic devices to a large national eyecare company. 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,
charges related to acquisitions, and expenditures necessary to further develop
its manufacturing and marketing capabilities. From inception through October 31,
1997, the Company's accumulated deficit was $39.9 million.
Results of Operations
The Company's results of operations reflect only continuing operations
of the Company. The results of the discontinued QuickCast operation are
discussed seperately in the respective sections.
Fiscal Year Ended October 31, 1997 Compared to Fiscal Year Ended
October 31, 1996
Total revenues were $9.5 million for fiscal year 1997 compared to $2.1
million for fiscal year 1996. Revenues from product sales increased to $8.7
million in fiscal year 1997 from $371,000 in fiscal year 1996 due primarily to
$7.4 million of product sales from Dock Resins. Also contributing to the
increase were Intellipac breathable membrane product sales which increased from
$371,000 in fiscal year 1996 to $1.2 million in fiscal year 1997, due primarily
to an increase in unit sales. Revenues from research and development funding was
$863,000 for fiscal year 1997 compared to $1.1 million for fiscal year 1996.
Product sales for the discontinued QuickCast product line for the period from
November 1, 1996 through the measurement date of June 12, 1997 were $241,000
which was included in the loss from discontinued operations. There were no
revenues from license fees during fiscal year 1997 compared to $600,000 during
fiscal year 1996. The decrease in license fees revenue was due to a one-time
payment in the second quarter of fiscal year 1996 under an expanded agreement
with Nitta Corporation.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $6.2 million for fiscal year 1997 compared to $422,000 for
fiscal year 1996. Cost of product sales as a percentage of product sales
decreased to 72% in fiscal year 1997 from 114% in fiscal year 1996. The decrease
in the cost of product sales as a percentage of product sales in fiscal year
1997 as compared to fiscal year 1996 was primarily the result of higher margins
resulting from product sales of the Dock Resins products. Cost of product sales
for the discontinued QuickCast product line for the period from November 1, 1996
through the measurement date of June 12, 1997 was $462,000 which was included in
the loss from discontinued operations. The Company anticipates that gross
-20-
margins as a percentage of revenue will continue to improve due to the
historically higher margins achieved from sales of Dock Resins' and Fielder's
Choice's products which have historically ranged between approximately 30% to
45%. However, longer-term improvement is unpredictable due to the early stage of
commercialization of several of the Company's products and integration of
certain of these products into Dock Resins' manufacturing process.
Research and development expenses were $4.6 million for fiscal year
1997 compared to $3.6 million for fiscal year 1996, an increase of 28%. The
Company's research and development expenses consist primarily of expenses
involved in the development, process scale-up and efforts to protect
intellectual property content of the Company's enabling side chain
crystallizable polymer technology and research and development expenses related
to Dock Resins' products. The increase in research and development expenses in
fiscal year 1997 compared to fiscal year 1996 was primarily due to increased
development costs for the Company's Intelimer Polymer Systems and
Intellicoat(TM) seed coating products and the addition of development costs
related to Dock Resins' products during fiscal year 1997. 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.
During fiscal year 1997, the Company expensed in accordance with
generally accepted accounting principles, $3.0 million of in-process research
and development acquired as part of the Dock Resins acquisition in April 1997.
Such in-process technology was determined to have no alternative future uses.
Selling, general and administrative expenses were $4.7 million for
fiscal year 1997 compared to $2.4 million for fiscal year 1996, an increase of
97%. Selling, general and administrative expenses consist primarily of sales and
marketing expenses associated with the Company's product sales, business
development expenses, and staff and administrative expenses. Selling, general
and administrative expenses increased primarily as a result of increased sales
and marketing expenses, the additional administrative costs associated with
supporting a public company for an entire year (the Company's initial public
offering was completed on February 15, 1996), and the acquisitions of Dock
Resins and Fielder's Choice during fiscal year 1997. Specifically, sales and
marketing expenses increased to $1.8 million for fiscal year 1997 from $406,000
for fiscal year 1996. The increase in sales and marketing expenses was primarily
attributable to the costs to create marketing departments for the Intelimer
Polymer Systems and Intellicoat products and the acquisition of Dock Resins and
Fielder's Choice during fiscal year 1997. Sales and marketing costs for the
discontinued QuickCast product line for the period from November 1, 1996 through
the measurement date of June 12, 1997 were $822,000 which was included in the
loss from discontinued operations. Although the Company expects to achieve
certain future cost savings as a result of the discontinuation of the QuickCast
product line, the Company's total selling, general and administrative spending
for existing and newly acquired products will continue to increase in absolute
dollars in future periods, although it may vary as a percentage of total
revenues.
Net interest income was $1.4 million for fiscal year 1997 compared to
$1.5 million for fiscal year 1996. The decrease during fiscal year 1997 as
compared to fiscal year 1996 was due principally to the interest expense on the
payable related to the acquisition of Dock Resins.
Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended
October 31, 1995
Total revenues were $2.1 million for fiscal year 1996 compared to $3.5
million for fiscal year 1995, a decrease of 40%. 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 $371,000 for fiscal year 1996 from $14,000 for fiscal year 1995 due to
increased sales volume of Intellipac breathable membrane products. 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
Chemical. 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 - Technology Licensing Business."
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $422,000 for fiscal year 1996 compared to $9,000 for fiscal
year 1995. This increase was primarily the result of the costs
-21-
associated with ramping up the Intellipac breathable membrane product line and
the minimal sales in fiscal year 1995.
Research and development expenses were $3.6 million for fiscal year
1996 compared to $3.2 million for fiscal year 1995, an increase of 13%. Research
and development expenses increased in fiscal year 1996 as compared to fiscal
year 1995 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.
Selling, general and administrative expenses were $2.4 million for
fiscal year 1996 compared to $1.3 million for fiscal year 1995, an increase of
78%. 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, business development
initiatives, increased sales and marketing expenses and the additional
administrative costs associated with supporting a public company. Sales and
marketing expenses were $406,000 for fiscal year 1996 compared to none for
fiscal year 1995. 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 creation of marketing
departments for the Intelimer Polymer Systems and Intellicoat products during
the fourth quarter of fiscal year 1996.
Net interest income was $1.5 million for fiscal year 1996 compared to
$175,000 for fiscal year 1995. Net interest income increased due to interest
income earned on the Company's initial public offering proceeds.
Liquidity and Capital Resources
As of October 31, 1997 the Company had unrestricted cash, cash
equivalents and short-term investments of $14.7 million, a net decrease of $21.8
million from $36.5 million as of October 31, 1996. This decrease was primarily
due to cash used by operations of $5.5 million for fiscal year 1997, the net
payment of $3.6 million and the establishment of a restricted investment of $8.8
million related to the acquisition of Dock Resins and the net payment of $2.7
million related to the acquisition of Fielder's Choice. As of October 31, 1997,
the Company had payables totaling $9.2 million related to the acquisition of
Dock Resins which will be paid by the end of the first quarter of fiscal 1998.
During fiscal year 1997, the Company purchased seed processing
equipment and incurred leasehold improvements expenditures to support the
development of Intellicoat products, purchased packaging equipment to meet the
increased demand for the Intellipac breathable membrane products and incurred
building improvement expenditures to expand capacity at Dock Resins. These
expenditures represented the majority of the $1.3 million of property and
equipment purchased during fiscal year 1997.
The Company believes that existing cash, cash equivalents and
short-term investments will be sufficient to finance its operational and capital
requirements through at least the next twelve months. The Company's future
capital requirements, however, depend on numerous factors, including the
progress of its research and development programs; the development of commercial
scale manufacturing capabilities; the development of marketing, sales and
distribution capabilities; the ability of the Company to maintain existing
collaborative and licensing arrangements and establish and maintain new
collaborative and licensing arrangements; the assimilation and integration of
Dock Resins and Fielder's Choice into Landec and Intellicoat, respectively; the
timing and amount, if any, of payments received under licensing and research and
development agreements; the costs involved in preparing, filing, prosecuting,
defending and enforcing intellectual property rights; the ability to comply with
regulatory requirements; the emergence of competitive technology and market
forces; the effectiveness of product commercialization activities and
arrangements; and other factors. If the Company's currently available funds,
together with the internally generated cash flow from operations are not
sufficient to satisfy its financing needs, the Company would be required to seek
additional funding through other arrangements with collaborative partners, bank
borrowings and public or private sales of its securities. 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 if at all.
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Additional Factors That May Affect Future Results
The Company desires to take advantage of the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995 and of Section 21E and
Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, the Company
wishes to alert readers that the following important factors, as well as other
factors including, without limitation, those described elsewhere in this Report,
could in the future affect, and in the past have affected, the Company's actual
results and could cause the Company's results for future periods to differ
materially from those expressed in any forward-looking statements made by or on
behalf of the Company. The Company assumes no obligation to update such
forward-looking statements.
History of Operating Losses and Accumulated Deficit. The Company has
incurred net losses in each year since its inception, including a loss from
continuing operations of $7.6 million for fiscal year 1997, and the Company's
accumulated deficit as of October 31, 1997 totaled $39.9 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 and there can be no assurance that the Company will be able to
reach or sustain profitability.
Uncertainty Relating to Integration of New Business Acquisitions. The
successful combination of the Company and Dock Resins and Intellicoat and
Fielder's Choice will require substantial effort from each organization. The
diversion of the attention of management and any difficulties encountered in the
transition process could have a material adverse effect on the Company's ability
to realize the anticipated benefits of the acquisition. The successful
combination of the companies will also require coordination of their research
and development, manufacturing, and sales and marketing efforts. In addition,
the process of combining the organizations could cause the interruption of, or a
loss of momentum in, the Company's activities. There can be no assurance that
the Company will be able to retain key management, technical, sales and customer
support personnel of Dock Resins and Fielder's Choice, or that the Company will
realize the anticipated benefits of the acquisitions, and the failure to do so
would have a material adverse effect on the Company's business, operating
results and financial condition.
Early Commercialization; Dependence on New Products and Technologies;
Uncertainty of Market Acceptance. While the Company recently commenced marketing
certain of its Intelimer polymer products, it is in the early stage of product
commercialization of these products 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 food products, industrial, agricultural and medical
companies will depend substantially on successfully developing, commercializing,
achieving market acceptance of and reducing the cost of producing the Company's
products. In addition, commercial applications of the Company's temperature
switch polymer technology are relatively new and evolving. There can be no
assurance that the Company will be able to successfully develop, commercialize,
achieve market acceptance of or reduce the 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
successfully market new products would 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 and
licensees 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 would have a material adverse effect on the
Company's business, operating results and financial condition.
-23-
Competition and Technological Change. The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food products, industrial,
agricultural and medical companies is expected to be intense. In addition, the
nature of the Company's collaborative arrangements may result in its corporate
partners and licensees becoming competitors of the Company. Many of these
competitors have substantially greater financial and technical resources and
production and marketing capabilities than the Company, and may have
substantially greater experience in conducting clinical and field trials,
obtaining regulatory approvals and manufacturing and marketing commercial
products. There can be no assurance that these competitors will not succeed in
developing alternative technologies and products that are more effective, easier
to use or less expensive than those which have been or are being developed by
the Company or that would render the Company's technology and products obsolete
and non-competitive.
Limited Manufacturing Experience; Dependence on Third Parties. The
Company's success is dependent in part upon its ability to manufacture its
products in commercial quantities in compliance with regulatory requirements and
at acceptable costs. There can be no assurance that the Company will be able to
achieve this. The Company has experienced negative gross margins on certain of
its products sold. Although the Company believes Dock Resins will provide Landec
with practical knowledge in the scale-up of Intelimer polymer products,
production in commercial-scale quantities may involve technical challenges for
the Company. The Company anticipates that a substantial portion of the Company's
products will be manufactured in the Linden, New Jersey facility acquired in the
purchase of Dock Resins. The Company's reliance on this facility involves a
number of potential risks, including the absence of adequate capacity, the
unavailability of, or interruption in access to, certain process technologies
and reduced control over delivery schedules, and low manufacturing yields and
high manufacturing costs. The Company may also need to consider seeking
collaborative arrangements with other companies to manufacture certain of its
products. If the Company becomes dependent upon third parties for the
manufacture of its products, then the Company's profit margins and its ability
to develop and deliver such products on a timely basis may be adversely
affected. Moreover, there can be no assurance that such parties will adequately
perform and any failures by third parties may delay the submission of products
for regulatory approval, impair the Company's ability to deliver products on a
timely basis, or otherwise impair the Company's competitive position. The
occurrence of any of these factors could have a material adverse effect on the
Company's business, operating results and financial condition. The manufacture
of the Company's products will be subject to periodic inspection by regulatory
authorities. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals on a timely basis or at all. Delays in receipt of
or failure to receive such approvals or loss of previously received approvals
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Single Source Suppliers. Many of the raw materials used
in manufacturing certain of the Company's products are currently purchased from
a single source, including certain monomers used to synthesize Intelimer
polymers and substrate materials for the Company's Intellipac breathable
membrane products. In addition, virtually all of the hybrid corn varieties sold
by Fielder's Choice are purchased from a single source. Upon manufacturing
scale-up and increases in hybrid corn sales, the Company may enter into
alternative supply arrangements. Although to date the Company has not
experienced difficulty acquiring materials for the manufacture of its products
nor has Fielder's Choice experienced difficulty in acquiring hybrid corn
varieties, no assurance can be given that interruptions in supplies will not
occur in the future, that the Company will be able to obtain substitute vendors,
or that the Company will be able to procure comparable materials or hybrid corn
varieties at similar prices and terms within a reasonable time. Any such
interruption of supply could have a material adverse effect on the Company's
ability to manufacture and distribute its products and, consequently, could
materially and adversely affect the Company's business, operating results and
financial condition.
Customer Concentration. For the fiscal year 1997, sales to the
Company's top five customers accounted for approximately 50% of the Company's
product sales with the top customer accounting for 27% of the Company's product
sales. The Company expects that for the foreseeable future a limited number of
customers may account for a substantial portion of its net revenues. The Company
may experience changes in the composition of its customer base as Dock Resins
and Fielder's Choice have experienced in the past. The Company does not have
long-term purchase agreements with any of its customers. The reduction, delay or
cancellation of orders from one
-24-
or more major customers for any reason or the loss of one or more of such major
customers could materially and adversely affect the Company's business,
operating results and financial condition. In addition, since the products
manufactured in the Linden, New Jersey facility are often sole sourced to its
customers, the Company's operating results could be materially and adversely
affected if one or more of its major customers were to develop other sources of
supply. There can be no assurance that the Company's current customers will
continue to place orders, that orders by existing customers will not be canceled
or will continue at the levels of previous periods or that the Company will be
able to obtain orders from new customers.
Patents and Proprietary Rights. The Company's success depends in large
part on its ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of third parties. There can
be no assurance that any pending patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any patents issued to the Company will provide the Company with competitive
advantages or will not be challenged by any third parties or that the patents of
others will not prevent the commercialization of products incorporating the
Company's technology. 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 has received a letter alleging that its 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. If the Company is required to obtain any licenses, there can be no
assurance that the Company will be able to do so on commercially favorable
terms, if at all. Litigation, which could result in substantial costs to and
diversion of effort by the Company, may also be necessary to enforce any patents
issued or licensed to the Company or to determine the scope and validity of
third-party proprietary rights. Any such litigation or interference proceeding,
regardless of outcome, could be expensive and time consuming and could subject
the Company to significant liabilities to third parties, require disputed rights
to be licensed from third parties or require the Company to cease using such
technology and, consequently, could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business -
Patents and Proprietary Rights" in Item 1.
Government Regulation. The Company's products and operations are
subject to substantial regulation in the United States and foreign countries.
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
relating to such matters as safe working conditions, laboratory and
manufacturing practices, environmental controls, and disposal of hazardous or
potentially hazardous substances will not adversely effect the Company's
business. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations in the future,
or that such laws or regulations will not have a material adverse effect on the
Company's business, operating results and financial condition. Failure to comply
with the applicable regulatory requirements can, among other things, result in
fines, injunctions, civil penalties, suspensions or withdrawal of regulatory
approvals, product recalls, product seizures, including cessation of
manufacturing and sales, operating restrictions and criminal prosecution. See
"Business - FDA and Other Governmental Regulations" in Item 1.
Environmental Regulations. Federal, state and local regulations impose
various environmental controls on the discharge or disposal of toxic, volatile
or otherwise hazardous chemicals and gases used in certain manufacturing
processes. Dock Resins is involved in various investigations and proceedings
conducted by the federal Environmental Protection Agency and certain state
environmental agencies regarding disposal of waste materials and the remediation
of its Linden, New Jersey facility. Although the factual situations and the
progress of each of these matters differ, the Company believes certain escrowed
funds will prove adequate to account for any resultant liability, including any
New Jersey Industrial Site Recovery Act remediation regarding its Linden, New
Jersey facility. In most cases, the Company's liability will be limited to
sharing clean-up or other remedial costs with other potentially responsible
parties. Any failure by the Company to control the use of, or to restrict
adequately the discharge of, hazardous substances under present or future
regulations could subject it to substantial
-25-
liability or could cause its manufacturing operations to be suspended and could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that changes in environmental
regulations will not impose the need for additional capital equipment or other
requirements.
Limited Sales and Marketing Experience. The Company has only limited
experience marketing and selling its Intelimer polymer products. While Dock
Resins will provide consultation and in some cases direct marketing support for
Landec's Intelimer polymer products, establishing sufficient marketing and sales
capability will require significant resources. The Company intends to distribute
certain of its products through its corporate partners and other distributors
and to sell certain other products through a direct sales force. There can be no
assurance that the Company will be able to recruit and retain skilled sales
management, direct salespersons or distributors, or that the Company's sales and
marketing efforts will be successful. To the extent that the Company has or will
enter into distribution or other collaborative arrangements for the sale of its
products, the Company will be dependent on the efforts of third parties. There
can be no assurance that such sales and marketing efforts will be successful and
any failure in such efforts could have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence on Collaborative Partners and Licensees. The Company's
strategy for the development, clinical and field testing, manufacture,
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 The BFGoodrich Company and Hitachi Chemical in connection with its
Intelimer Polymer Systems; Fresh Express Farms, Apio, Inc., Roplast Industries,
Inc. and PrintPack, Inc. in connection with its Intellipac breathable membrane
products; and Nitta and Hitachi Chemical in connection with its adhesive
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. 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 other circumstances. In addition, there can be no
assurance as to the amount of royalties, if any, on future sales of QuickCast
and PORT products as the Company no longer has control over the sales of such
products since the sale of the QuickCast and the license of PORT product lines.
There can be no assurance that the Company's partners will not pursue
existing or alternative technologies in preference to the Company's technology.
Furthermore, there can be no assurance that the Company will be able to
negotiate additional collaborative arrangements in the future on acceptable
terms, if at all, or that such collaborative arrangements will be successful. 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 and failure to
do so could have a material adverse effect on the Company's business, operating
results and financial condition.
International Operations and Sales. During fiscal years 1997 and 1996,
approximately 12% and 60%, respectively, of the Company's total revenues were
derived from product sales to and collaborative agreements with international
customers, and the Company expects that international revenues, although down
from historical levels, will continue to be an important component of its total
revenues. A number of risks are inherent in international transactions.
International sales and operations may be limited or disrupted by the regulatory
approval process, government controls, export license requirements, political
instability, price controls, trade restrictions, changes in tariffs or
difficulties in staffing and managing international operations. Foreign
regulatory agencies have or may establish product standards different from those
in the United States, and any inability to obtain foreign regulatory approvals
on a timely basis could have an adverse effect on the Company's international
business and its financial
-26-
condition and results of operations. While the Company's foreign sales are
currently priced in dollars, fluctuations in currency exchange rates, such as
those recently experienced in many Asian countries which comprise a part of the
territories of certain of the Company's collaborative partners, may reduce the
demand for the Company's products by increasing the price of the Company's
products in the currency of the countries to which the products are sold. There
can be no assurance that regulatory, geopolitical and other factors will not
adversely impact the Company's operations in the future or require the Company
to modify its current business practices.
Quarterly Fluctuations in Operating Results. In the past, the Company's
results of operations have varied significantly from quarter to quarter and such
fluctuations are expected to continue in the future. Quarterly operating results
will depend upon several factors, including the timing and amount of expenses
associated with expanding the Company's operations, the timing of collaborative
agreements with, and performance of, potential partners, the timing of
regulatory approvals and new product introductions, the mix between pilot
production of new products and full-scale manufacturing of existing products and
the mix between domestic and export sales. The Company also cannot predict rates
of licensing fees and royalties received from its partners. In addition, due to
the cyclical nature of the corn seed industry, a significant portion of
Fielder's Choice revenues and profits will be concentrated over a few months
during the spring planting season (generally during the Company's second and
third fiscal quarters). As a result of these and other factors, the Company
expects to continue to experience significant fluctuations in quarterly
operating results, and there can be no assurance that the Company will become or
remain profitable in the future.
Product Liability Exposure and Availability of Insurance. The testing,
manufacturing, marketing, and sale of the products being developed by the
Company involve an inherent risk of allegations of product liability. While no
product liability claims have been made against the Company to date, if any such
claims were made and adverse judgments obtained, they could have a material
adverse effect on the Company's business, operating results and financial
condition. Although the Company has taken and intends to continue to take what
it believes are appropriate precautions to minimize exposure to product
liability claims, there can be no assurance that it will avoid significant
liability. The Company currently maintains medical and non-medical product
liability insurance in the minimum amount of $4.0 million per occurrence with a
minimum annual aggregate limit of $5.0 million. There can be no assurance that
such coverage is adequate or will continue to be available at an acceptable
cost, if at all. A product liability claim, product recall or other claim with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on the Company's business, operating results and
financial condition.
Possible Volatility of Stock Price. Factors such as announcements of
technological innovations, the attainment of (or failure to attain) milestones
in the commercialization of the Company's technology, new products, new patents
or changes in existing patents, the acquisition of new businesses or the sale or
disposal of a part of the Company's businesses, or development of new,
collaborative arrangements by the Company, its competitors or other parties, as
well as government regulations, investor perception of the Company, fluctuations
in the Company's operating results and general market conditions in the industry
may cause the market price of the Company's Common Stock to fluctuate
significantly. In addition, the stock market in general has recently experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of technology companies and which have been unrelated to the
operating performance of such companies. These broad fluctuations may adversely
effect the market price of the Company's Common Stock.
Impact of Year 2000. The Company is in the process of performing its
assessment of the impact of year 2000 on its operations. Management is in the
process of formalizing its assessment procedures and developing a plan to
address identified issues. The Company has evaluated its financial and
accounting and inventory tracking systems and concluded that they are not
materially affected by the year 2000. It is unknown the extent, if any, of the
impact of the year 2000 on other systems and equipment. A corporate-wide
inventory of computer applications is being performed and is expected to be
completed by the end of fiscal year 1998 after which the Company will attempt to
remedy any issues. The Company has also begun communications with its facilities
managers to determine the impact on building security and related equipment.
There can be no assurance that all third parties will address the year 2000
issue in a timely fashion if at all. Any year 2000 compliance problems of either<