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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, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
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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 $48,634,000 as of January 6, 1999, 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 from
such calculation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of January 6, 1999, there were 13,207,329 shares of common stock, par
value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its
1999 Annual Meeting of Shareholders, which statement will be filed not later
than 120 days after the end of the fiscal year covered by this report, are
incorporated by reference in Part III hereof.
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LANDEC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Page
- -------- ----
Part I
1. Business............................................... 3
2. Properties............................................. 16
3. Legal Proceedings...................................... 16
4. Submission of Matters to a Vote of Security Holders.... 16
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 17
6. Selected Consolidated Financial Data................... 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 20
7A. Quantitative and Qualitative Disclosures about
Market Risk............................................ 29
8. Financial Statements and Supplementary Data............ 29
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 29
Part III
10. Directors and Executive Officers of the Registrant..... 30
11. Executive Compensation................................. 30
12. Security Ownership of Certain Beneficial Owners
and Management......................................... 30
13. Certain Relationships and Related Transactions......... 30
Part IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 31
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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, as part of
its agricultural business, the Company markets and distributes hybrid seed
corn to farmers. The Company's polymer products are based on its proprietary
Intelimer-Registered Trademark- polymers, which differ from other polymers in
that they can be customized to abruptly change their physical characteristics
when heated or cooled through a pre-set temperature switch. For instance,
Intelimer polymers can change within the 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. The Company has launched three
product lines from this core technology - QuickCast-Registered Trademark-
splints and casts, in April 1994; Intellipac-Registered Trademark- breathable
membranes for the fresh-cut produce packaging market, in September 1995; and
Intelimer Polymer Systems for the industrial specialties market in June 1997.
Management has recently implemented a focused strategy of building
strong, vertically integrated businesses in three markets: Food Technology
and Packaging, Industrial High Performance Materials and Agricultural Seed
Technology and Distribution. As part of this strategy, the Company has
completed several strategic transactions. In April 1997, the Company
acquired Dock Resins Corporation ("Dock Resins") and incorporated it into its
Industrial High Performance Materials business. Dock Resins is primarily
engaged in the manufacturing and marketing of specialty acrylics and other
polymers. In September 1997, Intellicoat Corporation ("Intellicoat"), the
Company's subsidiary focused on Agricultural Seed Development and
Distribution, merged with Fielder's Choice Hybrids ("Fielder's Choice"), a
direct marketer of hybrid corn seed. To remain focused on its three core
businesses, during 1997 the Company licensed two of its healthcare products
in return for upfront fees, milestone payments and product royalties: in
August 1997, the Company sold its QuickCast product line to Bissell
Healthcare Corporation and in December 1997, the Company licensed the rights
to worldwide manufacturing, marketing and distribution of the PORT-TM-
ophthalmic devices to Alcon Laboratories, Inc.
The principal products and services offered by the Company in its three
principal industry segments are described below. Financial information
concerning the Company's industry segments is summarized in Note 13 to the
Consolidated Financial Statements.
The Company was incorporated in California on October 31, 1986. The
Company completed its initial public offering in 1996 and is listed on the
Nasdaq stock market under the symbol "LNDC."
TECHNOLOGY OVERVIEW
Polymers are important and versatile materials found in many of the
products of modern life. Certain polymers, such as cellulose and natural
rubber, occur in nature. Man-made polymers include nylon fibers used in
carpeting and clothing, coatings used in paints and finishes, plastics such
as polyethylene, and elastomers used in automobile tires and latex gloves.
Historically, synthetic polymers have been designed and developed primarily
for
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improved mechanical and thermal properties, such as strength and the ability
to withstand high temperatures. Improvements in these and other properties
and the ease of manufacturing of synthetic polymers have allowed these
materials to replace wood, metal and natural fibers in many applications over
the last 40 years. More recently, scientists have focused their efforts on
identifying and developing sophisticated polymers with novel properties for a
variety of commercial applications.
Landec's Intelimer polymers are a proprietary class of synthetic
polymeric materials that respond to temperature changes in a controllable,
predictable way. Typically, polymers gradually change in adhesion,
permeability and viscosity over broad temperature ranges. Landec's Intelimer
materials, in contrast, can be designed to exhibit abrupt changes in
permeability, adhesion and/or viscosity over temperature ranges as narrow as
1DEG. C to 2DEG. C. These changes can be designed to occur at relatively low
temperatures (0DEG. C to 100DEG. C) that are relatively easy to maintain in
industrial and commercial environments. FIGURE 1 illustrates the effect of
temperature on Intelimer materials as compared to typical polymers.
[GRAPH]
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
0DEG. C to 100DEG. C by varying the length of the side chains. The
reversible transitions between crystalline and amorphous states are
illustrated in FIGURE 2 below.
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[GRAPH]
Side chain crystallizable polymers were first discovered by academic
researchers in the mid-1950's. These polymers were initially considered to
be merely of scientific curiosity from a polymer physics perspective, and, to
the Company's knowledge, no significant commercial applications were pursued.
In the mid-1980's, Dr. Ray Stewart, the Company's founder, became interested
in the idea of using the temperature-activated permeability properties of
these polymers to deliver various materials such as drugs and pesticides.
After forming Landec in 1986, Dr. Stewart subsequently discovered broader
utility for these polymers. After several years of basic research,
commercial development efforts began in the early 1990's, resulting in
initial products in mid-1994.
Landec's Intelimer materials are generally synthesized from long chain
acrylic monomers that are derived primarily from natural materials such as
soybean and corn oils, and are highly purifiable and designed to be
manufactured economically through known polymerization processes. Intelimer
materials can be made into many different forms, including films, coatings,
microcapsules and discreet forms.
DESCRIPTION OF CORE BUSINESS
The Company participates in three core segments- Food Technology and
Packaging, Industrial High Performance Materials and Agricultural Seed
Technology and Distribution. To date, products using the Company's Intelimer
technology have been commercially launched in two of these three businesses.
FOOD TECHNOLOGY AND PACKAGING - INTELLIPAC-Registered Trademark-
BREATHABLE MEMBRANES
Fresh-cut produce is pre-washed, cut and packaged in a form that is
ready to use by the consumer and is typically sold at premium price levels.
Industry analysts estimate that U.S. retail sales of fresh-cut produce grew
20 percent in 1997 to $6 billion. Combined with food service usage, this
represents an annual market for fresh-cut produce in the U.S. alone of more
than $16 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.
Although fresh-cut produce companies have had success in the salad
market, certain types of fresh-cut produce such as broccoli, cauliflower,
asparagus and sweet corn can spoil or discolor rapidly when packaged in
conventional materials and therefore is not widely available for commercial
sale.
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
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mirror the growth experienced in the fresh-cut salad market, the markets for
high respiring and high volume vegetables and fruits such as broccoli,
cauliflower, asparagus, sweet corn and specialty combinations will require a
more versatile and sophisticated packaging solution such as the Company's
Intellipac breathable membranes.
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
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. The respiration rate of
fresh-cut produce varies from vegetable to vegetable and from fruit to fruit.
The challenge facing the industry is to develop packaging for the high
respiring, high value and shelf life sensitive fresh-cut vegetable and fruit
market. The respiration rate of fresh-cut produce also varies with
temperature. As temperature increases, fresh-cut produce generally respires
at a higher rate, which speeds up the aging process, resulting in shortened
shelf life and increased potential for decay, spoilage, loss of texture and
dehydration. As fresh-cut produce is transported from the processing plant
through the refrigerated distribution chain to foodservice locations or
retail stores, and finally to the ultimate consumer, temperatures can
fluctuate significantly. Therefore, temperature control is a constant
challenge in preserving the quality of fresh-cut produce -- a challenge few
current packaging films can fulfill. The Company believes that its
temperature-responsive Intellipac technology responds 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
of a flexible film bag or a pre-molded rigid container. This highly
permeable "window" acts as the mechanism to provide the majority of the gas
transmission properties required for the entire package. These membranes are
designed to provide three principal benefits:
- HIGH PERMEABILITY. Landec's Intellipac breathable membranes are designed
to permit transmission of oxygen and carbon dioxide at 300 times the
rate of conventional packaging films. The Company believes that these
higher permeability levels will facilitate the packaging diversity
required to market many types of fresh-cut produce.
- ABILITY TO ADJUSTABLY SELECT OXYGEN AND CARBON DIOXIDE. Conventional
packaging films diffuse carbon dioxide and oxygen in or out of packages
at a set ratio based on the characteristics of the specific film or, if
perforated, at a fixed ratio of 1.0. Intellipac packages can be
tailored with permeation ratios ranging from 3.0 to 12.0 so they can
selectively transmit oxygen and carbon dioxide at optimum rates to
sustain the quality and shelf life of produce.
- TEMPERATURE RESPONSIVENESS. Landec has developed breathable membranes
that can 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 other 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 is currently working with leaders in the fresh-cut food service,
club store and retail grocery 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 3,000 retail supermarket and over 500 club store locations through
the end of fiscal 1998. Landec Intellipac technology is now being used by
nine out of ten retail grocery chains in the U.S. Landec believes it
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will have growth opportunities for the next several years through new
customers and products in the United States, expansion of its existing
customer relationships, and through export and import shipments of specialty
packaged foods.
Landec manufactures its Intellipac breathable membranes with selected
qualified contract manufacturers and markets and sells Intellipac breathable
membranes directly to food processors.
INDUSTRIAL HIGH PERFORMANCE MATERIALS
Landec's Industrial High Performance Materials products strategy is to
focus on catalyst, resin and fully-formulated products in the thermoset
polymer materials market. Thermoset products are materials that through a
heating process cure to form a three dimensional structure which cannot be
reshaped or reversed to its original form by reheating. Thermosets are in
applications as diverse as industrial prototyping, foam carpet backing,
printed circuit boards, housing construction, auto body parts and floor
finishings. Modern Plastics has estimated the U.S. market for epoxy,
polyurethane and unsaturated polyester thermoset products to be approximately
7.7 billion pounds in 1998, and growing.
INTELIMER-Registered Trademark- POLYMER SYSTEMS
Landec has developed many Intelimer polymer catalysts for use as a raw
material by Landec customers in thermoset applications. In addition, the
company is using Intelimer technology in formulated thermoset products
developed by Landec. Over the past 18 months, the Company has undertaken a
broad-based sample validation program with hundreds of resin suppliers in
over six countries. In the last two years, as this program has developed,
several key uses have been identified in various application areas and with
several key potential customers. Most Intelimer polymer products are
targeted for industrial thermoset applications. The majority of thermosets
are configured in "two package" systems in which a separate resin and
catalyst are packaged individually to prevent premature reaction during
storage or before their intended use. When the two packages are mixed, the
thermoset material either cures or "sets" spontaneously or with moderate
application of heat. The amount of time in which the components can be
mixed, handled, sprayed, or pumped is referred to as the "work time" or pot
life of the thermosetting mixture. Because of the difficulty of mixing the
two components, the need to maintain temperature and limited pot life,
thermosetting materials can be difficult to use in an industrial setting
within a plant and particularly for applications "in the field" which are
remote from the plant. The ability to moderate the thermosetting reaction
once the two components are mixed can be very important in the use of these
fast reacting thermosetting materials.
The Company is directing evaluation and development of its Intelimer
polymer catalyst systems towards improved shelf life and stability of a one
package thermosetting material which normally would be supplied as a two
component system. The ease of handling a one component versus a two
component system results in considerably lower labor investments. Also, the
Intelimer polymer catalysts provide significant reaction control in the use
of thermosetting resins in many applications. The Intelimer polymer
catalysts can be formulated by customers into thermosetting systems which can
be handled easily without concern for premature reaction before their
intended use. Once applied during application, thermoset systems containing
Intelimer polymer catalysts can be exposed to elevated temperatures to
release the catalyst and thereby activate the desired thermosetting reaction
at the appropriate time in the process. This ability to have enhanced
reaction control is valuable in the use of thermosetting resin systems.
Current two package thermoset systems have other 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. Several
thermoset systems are limited in their use by their work time, causing
incomplete mold or spread, poor product 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. The Intelimer polymer
catalysts are designed to enhance reaction control and enable one package
mixing which allows greater latitude in the formulation of thermosetting
systems. The Company has recently entered into a distribution agreement in
Europe with Akzo-Nobel for the sale of Landec's catalyst products under a
private label supply agreement and has entered into a licensing and
distribution agreement with Hitachi.
Using its proprietary catalyst technology, Landec introduced its first
formulated thermoset product, Aeromark-TM- 80 in December 1998 in Europe.
This product will be used in product prototyping and part design. This
product is initially targeted for the transportation
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industry, including automobile and aerospace manufacturers, as well as other
fabricators and designers who need a prototyping material for their design
work. Aeromark 80 is being sold in Europe through a distributor, Aero
Consultants Ltd. A.G. Aeromark 80 is a stable one component thermoset
material which requires no mixing for use in the prototype, design and
fabrication markets. Other existing products in this market are either
supplied as cured two component material or as two component thermoset
polymers which have the difficulties of two component mixing already
discussed. Aeromark 80 is the first of several formulated products the
Company is evaluating for application in high performance applications which
are based on the proprietary technology.
Landec received the R&D 100 Award from R&D Magazine for its Intelimer
Polymer Systems product line in 1997 in recognition of the unique
capabilities of this technology.
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 to
acquire Dock Resins.
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, printing ink, laminating and adhesives markets.
Dock Resins is a leading supplier of proprietary polymers including acrylic,
methacrylic, alkyd, polyester, urethane and polyamide polymers to film
converters engaged in hot stamping, decorative wood grain, automotive
interiors, holograms, and metal foil applications. Dock Resins also supplies
products to a number of other markets such as 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 SEED TECHNOLOGY AND DISTRIBUTION
Landec formed Intellicoat in 1995 to build a vertically integrated seed
technology company based on Intellicoat's seed coating technology and direct
marketing and sales capability.
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INTELLICOAT-Registered Trademark- SEED COATINGS
Landec has developed and, through Intellicoat, is conducting field
trials of its Intellicoat-Registered Trademark- seed coating, an
Intelimer-based agricultural material designed to provide seed producing
companies and farmers greater flexibility in planting and farming operations.
These coatings are initially being applied to corn and soybean seeds, which
are significant North American field crops. According to the U.S.
Agricultural Statistics Board, the total estimated planted acreage in 1998 in
the U.S. for corn and soybean seed exceeded 81 million and 73 million acres,
respectively.
Currently, seed producers and farmers must make critical planting
decisions based on current and expected field conditions and weather
patterns. If the seeds are planted too early, they may be subject to cold
wet field conditions resulting in rot or seed damage. If the seeds are
planted too late, the growing season may end prior to the crop reaching full
maturity. In either extreme, yield can be significantly reduced. For
companies who grow corn and soybeans in order to resell the resulting crops
as seeds to other farmers, plantings are further complicated by the need to
plant different parent varieties in the same field and may require multiple
planting dates because of maturity differences.
The Company's Intellicoat seed coatings can be designed to control water
uptake and seed germination as a function of time and soil temperature. This
allows for seeds to be planted earlier than normal while still reducing the
risk of chilling injury caused by rapid water uptake by seeds at low
temperatures. Additionally, the coatings can be used with inbred seed
varieties to alter the germination and hence maturity timing of different
varieties to simplify seed production operations and reduce the risk of crop
failure.
The Company has been and is currently cooperating with numerous major
seed companies and universities regarding the evaluation of coatings for use
in hybrid corn seed production and soybean relay cropping. The Company
believes that one to two additional years of expanded commercial product
trials will be needed to support commercial sales. The Company is also
conducting trials on several other seed applications aimed at increasing
farmer productivity and yields.
FIELDER'S CHOICE HYBRIDS
In September 1997, Intellicoat completed the acquisition of Fielder's
Choice, a direct marketer of hybrid seed corn to farmers. Landec paid
approximately $3.6 million in cash and direct acquisition costs and $5.2
million in Landec Common Stock to acquire Fielder's Choice. Terms of the
agreement include additional consideration in the form of a cash earn-out
based on future performance.
Based in Monticello, Indiana, Fielder's Choice offers a comprehensive
line of corn hybrids to more than 16,000 farmers in over forty states through
direct marketing programs. The success of Fielder's Choice comes, in part,
from its expertise in selling directly to the farmers and bypassing the
traditional and costly farmer-dealer system. Fielder's Choice has been
growing at 25% per year or more for the last four years.
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 its
core businesses. In order to exploit these opportunities, the Company has
entered into licensing and collaborative corporate agreements for product
development and/or distribution in certain fields.
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QUICKCAST-Registered Trademark- 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 from R&D
Magazine 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.
In December 1997, Landec licensed the rights to worldwide manufacturing,
marketing and distribution of its PORT ophthalmic device to Alcon
Laboratories, Inc. ("Alcon"), a wholly-owned subsidiary of Nestle S.A. Under
the terms of the transaction, Landec received a $500,000 up-front cash
payment in November 1997, an additional cash payment of $1 million ($750,000
net of related costs) in November 1998 upon meeting a certain milestone, and
will receive 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.
Alcon is currently conducting human clinical trials. Landec and Alcon
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.
INDUSTRIAL HIGH PERFORMANCE MATERIALS AND ADHESIVES
HITACHI CHEMICAL. The Company 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 for seven years 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
provided 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 after
commercialization. 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 research and development funding over three years and is
entitled to receive future royalties based on net sales by
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Hitachi Chemical of the licensed products. Any fees paid to the Company are
non-refundable. This agreement has been converted to a non-exclusive
agreement except for five selectively designated fields in Asia for certain
catalyst products. 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 research and development payments and is entitled to
receive future royalties under this agreement. Any fees paid to the Company
are non-refundable. Nitta and the Company also entered into another
worldwide exclusive agreement on January 1, 1998 in the area of industrial
adhesives specific to one field of electronic polishing adhesives. The
Company received research and development payments as a part of this
agreement.
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 TECHNOLOGY AND PACKAGING. 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 direct sales force targeted at this concentrated marketplace.
INDUSTRIAL HIGH PERFORMANCE MATERIALS. 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. Global European sales are handled
through non-exclusive distribution agreements.
AGRICULTURAL SEED TECHNOLOGY AND DISTRIBUTION. 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 will manufacture its own products whenever economics justify
doing so. In many cases, the Company will use third party sources for
manufacturing various components of products.
FOOD TECHNOLOGY AND PACKAGING. 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 HIGH PERFORMANCE MATERIALS. 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 has
increased the capacity of these facilities during fiscal year 1998. Dock
Resins' policy is to be a leader in safety, health and environmental
protection. In 1998, Dock Resins passed a voluntary comprehensive health and
safety evaluation by the United States Occupational Safety and Health
Administration (OSHA). As a result, OSHA awarded recognition to Dock Resins
as a Merit Site in OSHA's Voluntary Protection Program.
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 portions of its future manufacturing to its Dock Resins
subsidiary.
AGRICULTURAL SEED TECHNOLOGY AND DISTRIBUTION. Fielder's Choice
purchases its hybrid seed corn from an established producer under an
exclusive purchase agreement. When commercial scale-up is required, the
Company will evaluate whether to coat seeds internally or use outside
contract coaters.
GENERAL. Many of the raw materials used in manufacturing certain of
the Company's products are currently purchased from a single source,
including certain monomers used to synthesize Intelimer polymers and
substrate materials for the Company's breathable membrane products. In
addition, virtually all of the hybrid corn varieties sold by Fielder's Choice
are purchased from a single source. Upon manufacturing scale-up and as
hybrid corn sales increase, the Company may enter into alternative supply
arrangements. Although to date the Company has not experienced difficulty
acquiring materials for the manufacture of its products nor has Fielder's
Choice experienced difficulty in acquiring hybrid corn varieties, no
assurance can be given that interruptions in supplies will not occur in the
future, that the Company will be able to obtain substitute vendors, or that
the Company will be able to procure comparable materials or hybrid corn
varieties at similar prices and terms within a reasonable time. Any such
interruption of supply could have a material adverse effect on the Company's
ability to manufacture and distribute its products and, consequently, could
materially and adversely affect the Company's business, operating results and
financial condition.
Landec has historically relied on the guidance of Good Manufacturing
Practices ("GMP") in developing standardized research and manufacturing
processes and procedures. Having entered into licensing agreements for the
QuickCast and PORT devices, the Company is no longer required to adhere to
GMPs. The Company desires to maintain an externally audited quality system
and has chosen to pursue ISO 9001 registration. Such registration is
required in order for the Company to sell product to certain potential
customers, primarily in Europe. The Menlo Park site has successfully
completed a pre-assessment audit, and expects to achieve ISO 9001
registration in fiscal year 1999.
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 new
catalyst systems for identified market applications for Intelimer catalyst
and promoter systems. Landec is focusing additional research on new product
forms such as new formulated polymers including its Intelimer technology and
new Intelimer polymers for newly identified product
-12-
applications. Expenditures for research and development increased 24 percent
in fiscal year 1998 to $5.7 million, compared with 28 percent growth and
expenditures of $4.6 million in fiscal year 1997 and expenditures of $3.6
million in fiscal year 1996. In fiscal year 1998, research and development
expenditures funded by corporate partners were $1.4 million, compared with
$863,000 in fiscal year 1997 and $1.1 million in fiscal year 1996. The
Company may continue to seek funds for applied materials research programs
from U.S. government agencies as well as from commercial entities. The
Company anticipates that it will continue to have significant research and
development expenditures in order to maintain its competitive position with a
continuing flow of innovative, high-quality products and services. As of
October 31, 1998, Landec had 34 employees engaged in research and development
(and a total of nine Ph.D.s in the Company) with experience in polymer and
analytical chemistry, product application, product formulation, mechanical
and chemical engineering.
COMPETITION
The Company operates in highly competitive and rapidly evolving fields,
and new developments are expected to continue at a rapid pace. Competition
from large 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 Company, and
many have substantially greater experience in conducting field trials,
obtaining regulatory approvals and manufacturing and marketing commercial
products. There can be no assurance that these competitors will not succeed
in developing alternative technologies and products that are more effective,
easier to use or less expensive than those which have been or are being
developed by the Company or that would render the Company's technology and
products obsolete and non-competitive.
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on
the proprietary rights of third parties. The Company has been granted eleven
U.S. patents with expiration dates ranging from 2006 to 2015 and has filed
applications for additional U.S. patents, as well as certain corresponding
patent applications outside the United States, relating to the Company's
technology. The Company's issued patents include claims relating to
compositions, devices and use of a class of temperature sensitive polymers
that exhibit distinctive properties of permeability, adhesion and viscosity.
There can be no assurance that any of the pending patent applications will be
approved, that the Company will develop additional proprietary products that
are patentable, that any patents issued to the Company will provide the
Company with competitive advantages or will not be challenged by any third
parties or that the patents of others will not prevent the commercialization
of products incorporating the Company's technology. Furthermore, there can be
no assurance that others will not independently develop similar products,
duplicate any of the Company's products or design around the Company's
patents. Any of the foregoing results could have a material adverse effect
on the Company's business, operating results and financial condition.
The commercial success of the Company will also depend, in part, on its
ability to avoid infringing patents issued to others. The Company has
received, and may in the future receive, from third parties, including some
of its competitors, notices claiming that it is infringing third party
patents or other proprietary rights. For example, 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 from the same party 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. No additional
correspondence, other than the initial letters, has been received. 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
-13-
favorable terms, if at all. The Company's failure to obtain a license to any
technology that it may require to commercialize its products could have a
material adverse impact on the Company's business, operating results and
financial condition.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or
to determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may
have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office to determine priority of invention, which could result
in substantial cost to and diversion of effort by the Company, even if the
eventual outcome is favorable to the Company. Any such litigation or
interference proceeding, regardless of outcome, could be expensive and time
consuming and could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
the Company to cease using such technology and consequently, could have a
material adverse effect on the Company's business, operating results and
financial condition.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which the Company
seeks to protect, in part, by confidentiality agreements with its
collaborators, employees and consultants. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets and proprietary
know-how will not otherwise become known or be independently discovered by
others.
GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial
regulation in the United States and foreign countries.
FOOD PACKAGING PRODUCTS. The Company's food packaging products are
subject to regulation under the Food, Drug and Cosmetic Act ("FDC Act").
Under the FDC Act any substance that when used as intended may reasonably be
expected to become, directly or indirectly, a component or otherwise affect
the characteristics of any food may be regulated as a food additive unless
the substance is generally recognized as safe. Food additives may be
substances added directly to food, such as preservatives, or substances that
could indirectly become a component of food, such as waxes, adhesives and
packaging materials.
A food additive, whether direct or indirect, must be covered by a
specific food additive regulation issued by the FDA. The Company believes its
Intellipac breathable membrane products are not subject to regulation as food
additives because these products are not expected to become a component of
food under their expected conditions of use. If the FDA were to determine
that the Company's Intellipac breathable membrane products are food
additives, the Company may be required to submit a food additive petition.
The food additive petition process is lengthy, expensive and uncertain. A
determination by the FDA that a food additive petition is necessary would
have a material adverse effect on the Company's business, operating results
and financial condition.
POLYMER MANUFACTURE. The Company's manufacture of polymers is subject
to regulation by the EPA under the Toxic Substances Control Act ("TSCA").
Pursuant to TSCA, manufacturers of new chemical substances are required to
provide a Pre-Manufacturing Notice ("PMN") prior to manufacturing the new
chemical substance. After review of the PMN, the EPA may require more
extensive testing to establish the safety of the chemical, or limit or
prohibit the manufacture or use of the chemical. To date, PMNs submitted by
the Company have been approved by the EPA without any additional testing
requirements or limitation on manufacturing or use. In addition, the ongoing
manufacture of Dock Resins' existing product line is subject to state and
federal environmental regulations. No assurance can be given that the EPA
will grant similar approval for future PMNs submitted by the Company.
AGRICULTURAL PRODUCTS. The Company's agricultural products are subject
to regulations of the United States Department of Agriculture ("USDA") and
the EPA. The Company believes its current Intellicoat seed coatings are not
pesticides as defined in the Federal Insecticide, Fungicide and Rodenticide
Act ("FIFRA") and are not subject to pesticide regulation requirements. The
process of meeting pesticide registration requirements is lengthy, expensive
and
-14-
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 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, 1998, Landec had 175 full-time employees, of whom 78
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 97 were dedicated to sales, marketing and
administrative activities. Landec intends to recruit additional personnel in
connection with the development, manufacturing and marketing of its products.
None of Landec's employees is represented by a union, and Landec believes
relationships with its employees are good.
-15-
ITEM 2. PROPERTIES
The Company has offices in Menlo Park, California, Linden, New Jersey
and Monticello, Indiana. During fiscal year 1998, the Fielder's Choice
operations located in Monticello, Indiana expanded its office space by 11,900
square feet to support the growth of the Agricultural Seed Distribution
business.
These properties are described below:
Acres
Business of Lease
Location Segment Ownership Facilities Land Expiration
- ---------------- ----------------- --------- --------------------------------- ----- -------------
Menlo Park, CA All Leased 21,000 square feet of office and -- 12/31/01(1)
laboratory space
Menlo Park, CA All Subleased 5,000 square feet of warehouse and -- 12/31/98(2)
manufacturing space
Linden, NJ Industrial High Owned 20,000 square feet of office, 2.1 -- (3)
Performance laboratory, production, warehouse,
Materials and ancillary space
Monticello, IN Agricultural Owned 19,400 square feet of office space 0.5 --
Seed Technology
and Distribution
(1) Lease contains one two-year renewal option.
(2) Lease converts to a month to month lease effective January 1999.
(3) Construction plans are underway to build an additional 2,000 square feet
of office and laboratory space in fiscal year 1999.
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 from the same party
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. No additional correspondence, other than the initial
letters, has been received. 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
Item 1- Patents and Proprietary Rights.
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, 1998.
-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 Stock Market under the symbol "LNDC". The following table sets
forth for each period indicated the high and low sales prices for the Common
Stock as reported on the Nasdaq Stock Market.
FISCAL YEAR 1998
High Low
----- -----
4th Quarter ending October 31, 1998................. $6.00 $3.25
3rd Quarter ending July 31, 1998.................... $7.25 $5.50
2nd Quarter ending April 30, 1998................... $7.81 $4.50
1st Quarter ending January 31, 1998................. $5.13 $3.13
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
There were approximately 107 holders of record of 13,159,888 shares of
outstanding Common Stock as of October 31, 1998. Since holders are listed
under their brokerage firm's names, the actual number of shareholders is
higher. The Company has not paid any dividends on the Common Stock since its
inception. The Company presently intends to retain all future earnings, if
any, for its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future.
In connection with the Company's acquisition of Dock Resins on April 18,
1997, the shareholder of Dock Resins received an aggregate of approximately
$12.2 million in cash and a secured promissory note and 0.4 million shares of
Landec Common Stock.
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 acquired business.
In connection with the sale of Series D Preferred Stock in July 1993,
the Company issued warrants to purchase 186,349 shares of Common Stock at an
exercise price of $4.31 per share for $5,357 in cash. In a cashless exercise
during fiscal year 1998, 46,587 shares were issued in exchange for the
warrants.
In October 1998, certain directors and officers of the Company purchased
200,425 shares of Common Stock for between $3.75 and $3.94 per share for
$776,000.
-17-
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.
From February 1, 1996 to October 31, 1998, 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, 1998,
the Company used such net offering proceeds, in direct or indirect payments
to others, as follows:
Purchase and installment of machinery and equipment $5,800,000
Repayment of indebtedness $700,000
Acquisitions of other businesses $17,700,000
Temporary investments* $1,000,000
Working capital $8,600,000
-----------
Total $33,800,000
-----------
-----------
* 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: 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(in thousands, except per share data)
Revenues:
Product sales.............................................. $ 31,664 $ 8,653 $ 371 $ 14 $ --
Research and development revenues.......................... 1,352 863 1,096 796 965
License fees............................................... 500 -- 600 2,650 400
--------- --------- --------- --------- --------
Total revenues........................................... 33,516 9,516 2,067 3,460 1,365
Operating costs and expenses:
Cost of product sales...................................... 20,308 6,215 422 9 --
Research and development................................... 5,713 4,608 3,588 3,175 2,288
Selling, general and administrative........................ 10,835 4,664 2,367 1,332 1,239
Purchased in-process research and development.............. -- 3,022 -- -- --
--------- --------- --------- --------- --------
36,856 18,509 6,377 4,516 3,527
--------- --------- --------- --------- --------
Operating loss............................................... (3,340) (8,993) (4,310) (1,056) (2,162)
Interest income.............................................. 737 1,726 1,546 281 273
Interest expense............................................. (137) (319) (59) (106) (48)
--------- --------- --------- --------- --------
Loss from continuing operations before income taxes.......... (2,740) (7,586) (2,823) (881) (1,937)
Provision for income taxes................................... (150) -- -- -- --
--------- --------- --------- --------- --------
Loss from continuing operations.............................. (2,890) (7,586) (2,823) (881) (1,937)
Discontinued Operations:
Loss from discontinued QuickCast operations................ -- (1,059) (1,377) (1,878) (2,418)
Gain on disposal of QuickCast operations................... -- 70 -- -- --
--------- --------- --------- --------- --------
Loss from discontinued operations............................ -- (989) (1,377) (1,878) (2,418)
--------- --------- --------- --------- --------
Net loss..................................................... $ (2,890) $ (8,575) $ (4,200) $ (2,759) $ (4,355)
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Basic and diluted net loss per share:
Continuing operations...................................... $ (.23) $ (.68) $ (.37) $ (.74)
Discontinued operations.................................... -- (.09) (.18) (1.59)
--------- --------- --------- ---------
Basic and diluted net loss per share......................... $ (.23) $ (.77) $ (.55) $ (2.33)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing basic and diluted net loss per
share...................................................... 12,773 11,144 7,699 1,182
--------- --------- --------- ---------
--------- --------- --------- ---------
OCTOBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash, cash equivalents and short-term investments............ $ 10,177 $ 14,669 $ 36,510 $ 5,549 $ 5,706
Total assets................................................. 42,356 50,160 38,358 7,347 7,521
Redeemable convertible preferred stock....................... -- -- -- 31,276 27,656
Accumulated deficit.......................................... (42,756) (39,858) (31,278) (26,538) (21,658)
Total shareholders' equity (net capital deficiency).......... $ 33,688 $ 35,615 $ 36,640 $ (26,429) $ (21,584)
-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 technology and
related products. The Company has launched three product lines from this
core development -- QuickCast splints and casts, in April 1994; Intellipac
breathable membranes for the fresh-cut produce packaging market, in September
1995; and Intelimer Polymer Systems for the industrial specialties market in
June 1997.
Management has recently implemented a focused strategy of building
strong, vertically integrated businesses in three industries: Food Technology
and Packaging, Industrial High Performance Materials and Agricultural Seed
Development and Distribution. As part of this strategy, the Company has
completed several strategic transactions. In April 1997, the Company
acquired Dock Resins and incorporated it into its Industrial High Performance
Materials business. Dock Resins is primarily engaged in the manufacturing
and marketing of specialty acrylics and other polymers. In September 1997,
Intellicoat, the Company's subsidiary focused on Agricultural Seed and
Distribution, acquired Fielder's Choice, a direct marketer of hybrid seed
corn. To remain focused on the three core businesses, during 1997 the
Company licensed two of its healthcare products: in August 1997, the Company
sold its QuickCast product line to Bissell Healthcare Corporation and in
December 1997, the Company licensed the rights to worldwide manufacturing,
marketing and distribution of the PORT ophthalmic devices to Alcon.
The Company has been unprofitable during each fiscal year 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, 1998, the
Company's accumulated deficit was $42.8 million.
RESULTS OF OPERATIONS
The Company's results of operations reflect only the continuing
operations of the Company and do not include the results of the discontinued
QuickCast operation.
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1997
Total revenues were $33.5 million for fiscal year 1998 compared to $9.5
million for fiscal year 1997. Revenues from product sales increased to $31.7
million in fiscal year 1998 from $8.7 million in fiscal year 1997 due
primarily to $13.3 million of product sales from Fielder's Choice, which was
acquired in September 1997; and an increase of $8.0 million of product sales
from Dock Resins, which was acquired in April 1997. Also contributing to the
increase were Intellipac breathable membrane product sales which increased
from $1.2 million in fiscal year 1997 to $2.9 million in fiscal year 1998,
due primarily to an increase in unit sales and the introduction of several
new products. Revenues from research and development funding were $1.4
million for fiscal year 1998 compared to $863,000 for fiscal year 1997. The
increase in research and development revenues was primarily due to the
agreement with Alcon for the funding of the PORT program. Revenues from
license fees during fiscal year 1998 were $500,000 compared to none during
fiscal year 1997. The increase in license fees revenue was due to a payment
in the first quarter of fiscal year 1998 under the PORT license agreement
with Alcon.
-20-
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $20.3 million for fiscal year 1998 compared to $6.2 million
for fiscal year 1997. Cost of product sales as a percentage of product sales
decreased to 64% in fiscal year 1998 from 72% in fiscal year 1997. The
decrease in the cost of product sales as a percentage of product sales in
fiscal year 1998 as compared to fiscal year 1997 was primarily the result of
higher margins resulting from product sales of Fielder's Choice and Dock
Resins products. The Company anticipates that gross margins would continue
to improve if volume increases in the Intellipac and Dock Resins products.
However, longer-term improvement is unpredictable due to the early stage of
commercialization of several of the Company's products.
Research and development expenses were $5.7 million for fiscal year 1998
compared to $4.6 million for fiscal year 1997, an increase of 24%. The
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 1998 compared to fiscal year 1997 was primarily due
to increased development costs for the Company's Intellipac and Intellicoat
seed coating products and a full year of development costs related to Dock
Resins products. In future periods, the Company expects that spending for
research and development will continue to increase in absolute dollars,
although it may vary as a percentage of total revenues.
Selling, general and administrative expenses were $10.8 million for
fiscal year 1998 compared to $4.7 million for fiscal year 1997, an increase
of 130%. Selling, general and administrative expenses 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 an entire year of expenses and amortization of goodwill for Dock Resins
and Fielder's Choice, which were acquired during fiscal year 1997.
Specifically, sales and marketing expenses increased to $6.7 million for
fiscal year 1998, from $1.8 million for fiscal year 1997. The Company expects
that total selling, general and administrative spending for existing and
newly acquired products will continue to increase in absolute dollars in
future periods, although it may vary as a percentage of total revenues.
Net interest income was $600,000 for fiscal year 1998 compared to $1.4
million for fiscal year 1997. The decrease during fiscal year 1998 as
compared to fiscal year 1997 was due principally to less cash being available
for investing.
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 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.
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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
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 seed coating products and
the addition of development costs related to Dock Resins' products during
fiscal year 1997.
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 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998 the Company had cash equivalents and short-term
investments of $10.2 million, a net decrease of $4.5 million from $14.7
million as of October 31, 1997. This decrease was primarily due to cash of
approximately $2.3 million used by Fielder's Choice to purchase seed
inventory to be used during the 1999 selling season and to purchase $1.3
million of property and equipment net of long term debt. Although the
Company reduced the cash used in operations during fiscal year 1998 as
compared to fiscal year 1997, there can be no assurance that the Company will
continue to do so in future periods.
During fiscal year 1998, the Company purchased seed processing equipment
and computer hardware and software and incurred building improvement
expenditures to support the development of Intellicoat products, incurred
leasehold improvement expenditures at its Menlo Park location to upgrade
existing facilities and incurred building and equipment improvement
expenditures at Dock Resins to expand capacity. These expenditures
represented the majority of the $4.1 million of property and equipment
purchased during fiscal year 1998.
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, will depend on numerous factors, including the
progress of its research and development programs; the development of
commercial scale manufacturing capabilities; the development of marketing,
sales and distribution capabilities; the ability of the Company to maintain
existing collaborative and licensing arrangements and establish and maintain
new collaborative and licensing arrangements; the continued 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. There can be no assurance that additional
funds, if required, will be available to the Company on favorable terms if at
all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
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The Company desires to take advantage of the "Safe Harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and of Section 21E and
Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, the
Company wishes to alert readers that the following important factors, as well
as other factors including, without limitation, those described elsewhere in
this Report, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
periods to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. The Company assumes no
obligation to update such forward-looking statements.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company has
incurred net losses in each fiscal year since its inception, including a loss
of $2.9 million for fiscal year 1998. The Company's accumulated deficit as
of October 31, 1998 totaled $42.8 million. The Company may incur additional
losses in the future. The amount of future net losses is highly uncertain
and there can be no assurance that the Company will be able to reach or
sustain profitability for an entire fiscal year.
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. Due to
the seasonal 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
quarter). Further, the Company's principal customers in its Food Technology
and Packaging segment are heavily affected by seasonal and weather factors,
which could affect their purchases of the Company's products. In addition,
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. 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 be profitable in the future.
UNCERTAINTY RELATING TO INTEGRATION OF NEW BUSINESS ACQUISITIONS. The
successful combination of the Company and Dock Resins and Intellicoat and
Fielder's Choice has required and will continue to 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 acquisitions. The successful combination of the companies also
requires 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 OF CERTAIN PRODUCTS; DEPENDENCE ON NEW PRODUCTS
AND TECHNOLOGIES; UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the
early stage of product commercialization of certain Intelimer polymer
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 costs of producing
the Company's new products, or that the Company's competitors will not
develop competing technologies that are less expensive or otherwise superior
to those of the Company. There can be no assurance that the Company will be
able to develop and introduce new products and technologies in a timely
manner or that new products and technologies will gain market acceptance.
The failure to
-23-
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 new products and
technology. The extent to which, and rate at which, market acceptance and
penetration are achieved by the Company's current and future products are a
function of many variables including, but not limited to, price, safety,
efficacy, reliability, conversion costs and marketing and sales efforts, as
well as general economic conditions affecting purchasing patterns. There can
be no assurance that markets for the Company's new products will develop or
that the Company's new products and technology will be accepted and adopted.
The failure of the Company's new products to achieve market acceptance would
have a material adverse effect on the Company's business, operating results
and financial condition.
COMPETITION AND TECHNOLOGICAL CHANGE. The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food products, 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. Although the Company believes Dock Resins will provide
Landec with practical knowledge in the scale-up of Intelimer polymer
products, production in commercial-scale quantities may involve technical
challenges for the Company. The Company anticipates that a portion of the
Company's products will be manufactured in the Linden, New Jersey facility
acquired in the purchase of Dock Resins. The Company's reliance on this
facility involves a number of potential risks, including the 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
impair the Company's ability to deliver products on a timely basis, impair
the Company's competitive position, or may delay the submission of products
for regulatory approval. 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
-24-
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, or at all, 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 1998, sales to the Company's
top five customers accounted for approximately 29% of the Company's product
sales with the top customer accounting for 14% of the Company's product
sales. The Company expects that for the foreseeable future a limited number
of customers may continue to 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 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. No additional correspondence, other than the initial
letters, has been received. 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 affect
the Company's business. There can be no assurance that the Company will not
be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect on the Company's business, operating results and
financial condition. 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,
-25-
product seizures, including cessation of manufacturing and sales, operating
restrictions and criminal prosecution. See "Business - Governmental
Regulations" in Item 1.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various environmental controls on the use, storage, discharge or disposal of
toxic, volatile or otherwise hazardous chemicals and gases used in certain
manufacturing processes, including those utilized by Dock Resins. As a
result of historic off-site disposal practices, Dock Resins was recently
involved in two actions seeking to compel the generators of hazardous waste
to remediate hazardous waste sites. Dock Resins has been informed by its
counsel that it is a DE MINIMIS generator to these sites, and that its
financial exposure in these sites is not material to the Company's financial
position. These matters have been settled on terms consistent with the
above. In addition, the New Jersey Industrial Site Recovery Act ("ISRA")
requires an investigation and remediation of any industrial establishment,
like Dock Resins, which changes ownership. This statute was activated by the
Company's acquisition of Dock Resins. Dock Resins has completed its
investigation of the site, delineated the limited areas of concern on the
site, and completed the bulk of the active remediation required under the
statute. The costs associated with this effort are being borne by the former
owner of Dock Resins, and counsel has advised Dock Resins and the Company
that funds of the former owner required by ISRA to be set aside for this
effort are sufficient to guarantee the successful completion of remedial
activities at the site. In most cases, the Company believes its liability
will be limited to sharing clean-up or other remedial costs with other
potentially responsible parties. Any failure by the Company to control the
use of, or to restrict adequately the discharge of, hazardous substances
under present or future regulations could subject it to substantial liability
or could cause its manufacturing operations to be suspended and could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that changes in environmental
regulations will not impose the need for additional capital equipment or
other requirements.
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 and Apio in
connection with its Intellipac breathable membrane products; Bissell in
connection with the QuickCast splints and casts; Alcon in connection with the
PORT ophthalmic devices; and Nitta Corporation 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 and pay any royalty fees related to products under the
agreements. Moreover, certain of the collaborative agreements provide that
they may be terminated at the discretion of the corporate partner, and
certain 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 the PORT product lines.
-26-
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. 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. In fiscal years 1998 and 1997,
approximately 3% and 12%, 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
on a percentage basis from historical levels, will continue to be an
important component of its total revenues. The Company has recently entered
into agreements with European distributors to sell certain products in the
Industrial High Performance Materials market. 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
a material adverse effect on the Company's international business and its
financial 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.
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 with limits in the amount of $4.0
million per occurrence and $5.0 million in the annual aggregate. 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 affect the market price of the
Company's Common Stock.
IMPACT OF YEAR 2000. The Year 2000 issue concerns the potential
inability of computer applications, other information technology systems, and
certain software-based "embedded" control systems to recognize and process
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properly date-sensitive information as the Year 2000 approaches and beyond.
The Company could suffer material adverse impacts on its operations and
financial results if the applications and systems used by the Company, or by
third parties with whom the Company does business, do not accurately or
adequately process or manage dates or other information as a result of the
Year 2000 issue. The Company has completed a review of its financial
accounting and inventory tracking systems and concluded that they are not
materially affected by the Year 2000 issue.
The Company also uses a variety of other software applications, business
information systems, accounting subsystems, process control systems and
related software, communication devices, and networking and other operating
systems. The Company is in the process of completing its inventory of all
such systems and will commence in testing, upgrading, replacing, or otherwise
modifying these systems to adequately address the Year 2000 issue in February
1999. The Company believes it will be able to timely modify or replace its
affected systems to prevent any material detrimental effects on operations
and financial results. The company anticipates this work will continue, with
appropriate testing, remediation and/or replacement taking place during the
first and second quarters of 1999. Possible risks of this process include,
but are not limited to, the ability of the Company's personnel and outside
vendors to adequately and timely identify and resolve all critical Year 2000
issues. The Company can give no assurance that all critical Year 2000 issues
will be resolved in a timely manner or that potentially unresolved issues
would not have a material adverse impact on the results of operations.
The Company has certain key relationships with customers, vendors and
outside service providers. Failure by the Company's key customers, vendors
and outside service providers to adequately address the Year 2000 issue could
have a material adverse impact on the Company's operations and financial
results. The Company is currently assessing the Year 2000 readiness of these
key customers and suppliers and, at this time, cannot determine what the
impact of this assessment will be on the Company. The Company is primarily
relying upon the voluntary disclosures from third parties for this review of
their Year 2000 readiness. This assessment includes, but is not limited to,
soliciting responses from each of these parties concerning