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Landec Corp/CA – ‘10-K’ for 10/31/99

On:  Thursday, 1/27/00   ·   For:  10/31/99   ·   Accession #:  912057-0-2678   ·   File #:  0-27446

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 1/27/00  Landec Corp/CA                    10-K       10/31/99    8:564K                                   Merrill Corp/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         59    329K 
 2: EX-3.3      Articles of Incorporation/Organization or By-Laws      6     25K 
 3: EX-10.24    Material Contract                                     11     41K 
 4: EX-10.25    Material Contract                                      7     25K 
 5: EX-10.26    Material Contract                                     11     51K 
 6: EX-10.27    Material Contract                                     95    403K 
 7: EX-23.1     Consent of Experts or Counsel                          1      6K 
 8: EX-27.1     Financial Data Schedule (Pre-XBRL)                     2      7K 


10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Business
11Dock Resins
14Patents and Proprietary Rights
17Item 2. Properties
"Item 3. Legal Proceedings
"Item 4. Submission of Matters to a Vote of Security Holders
18Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
20Item 6. Selected Consolidated Financial Data
21Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
24Additional Factors That May Affect Future Results
32Item 7A. Quantitative and Qualitative Disclosures about Market Risk
"Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
33Item 10. Directors and Executive Officers of the Registrant
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
34Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
44Alcon
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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _____ to _________. Commission file number: 0-27446 LANDEC CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 94-3025618 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 3603 HAVEN AVENUE MENLO PARK, CALIFORNIA 94025 (Address of principal executive offices) Registrant's telephone number, including area code: (650) 306-1650 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $91,028,000 as of January 7, 2000, based upon the closing sales price on the NASDAQ National Market reported for such date. Shares of Common Stock and Convertible Preferred Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock and Convertible Preferred Stock have been excluded from such calculation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 7, 2000, there were 15,922,331 shares of Common Stock and 166,667 shares of Convertible Preferred Stock, convertible into ten shares of Common Stock for each share of Preferred Stock, par value $0.001 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement relating to its 2000 Annual Meeting of Shareholders, which statement will be filed not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference in Part III hereof. -1-
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LANDEC CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS [Enlarge/Download Table] Item No. Page Part I 1. Business.......................................................................... 3 2. Properties........................................................................ 17 3. Legal Proceedings................................................................. 17 4. Submission of Matters to a Vote of Security Holders............................... 17 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 18 6. Selected Consolidated Financial Data.............................................. 20 Management's Discussion and Analysis of Financial Condition and Results of 7. Operations........................................................................ 21 7A. Quantitative and Qualitative Disclosures about Market Risk........................ 32 8. Financial Statements and Supplementary Data....................................... 32 Changes in and Disagreements with Accountants on Accounting and Financial 9. Disclosure........................................................................ 32 Part III 10. Directors and Executive Officers of the Registrant................................ 33 11. Executive Compensation............................................................ 33 12. Security Ownership of Certain Beneficial Owners and Management.................... 33 13. Certain Relationships and Related Transactions.................................... 33 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 34 -2-
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PART I ITEM 1. BUSINESS Except for the historical information contained herein, the matters discussed in this report are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this Report and, in particular, the factors described in Item 7 under "Additional Factors That May Affect Future Results." GENERAL Landec Corporation and its subsidiaries ("Landec" or the "Company") design, develop, manufacture and sell temperature-activated and other specialty polymer products for a variety of food products, agricultural products, specialty industrial and medical applications. This proprietary polymer technology is the foundation, and a key differentiating advantage, upon which the Company has built its business. Landec's Food Products Technology business, operated through its wholly owned subsidiary Apio, combines Landec's proprietary food packaging technology with the capabilities of a large national food supplier and value-added produce processor. This combination was consummated in December 1999 when the Company acquired Apio, Inc. and certain related entities (collectively "Apio"). The Company's Agricultural Seed Technology business, operated through its wholly owned subsidiary Intellicoat Corporation ("Intellicoat"), combines Landec's proprietary seed coating technology with the unique direct marketing, telephone sales and e-commerce distribution capabilities of Fielder's Choice Direct ("Fielder's Choice"). In September 1997, Intellicoat acquired Fielder's Choice, a direct marketer of hybrid seed corn. In addition to its two core businesses, the Company also operates a Technology Licensing/Research and Development Business which licenses products outside of Landec's core businesses to industry leaders such as Alcon Laboratories, Inc. ("Alcon") and Hitachi Chemicals. It also engages in research and development activities with companies such as ConvaTec, a division of Bristol Myers Squibb. To support the polymer manufacturing needs of the core businesses, Landec has developed and acquired lab scale and pilot plant capabilities in Menlo Park, California and scale-up and commercial manufacturing capabilities at its Dock Resins Corporation subsidiary ("Dock Resins") in Linden, New Jersey. In April 1997, Landec acquired Dock Resins, a manufacturer and marketer of specialty acrylic and other polymers. In addition to providing manufacturing capabilities, Dock Resins sells industrial specialty products under the Doresco-TM- trademark which are used by more than 300 customers throughout the United States in the coatings, printing inks, laminating and adhesives markets. The Company's core polymer products are based on its patented proprietary Intelimer-registered Tradmark- polymers, which differ from other polymers in that they can be customized to abruptly change their physical characteristics when heated or cooled through a pre-set temperature switch. For instance, Intelimer polymers can change within the space of one or two DEG. Celsius from a slick, non-adhesive state to a highly tacky, adhesive state; from an impermeable state to a highly permeable state; or from a solid state to a viscous state. These abrupt changes are repeatedly reversible and can be tailored by Landec to occur at specific temperatures, thereby offering substantial competitive advantages in the Company's target markets. Historically, the Company had managed its operations in three business segments - Food Products Technology, Agricultural Seed Technology and Industrial High Performance Materials. However, in conjunction with the acquisition of Apio on December 2, 1999, the Company is now focusing on two vertically integrated core businesses - Food Products Technology and Agricultural Seed Technology. Although not a core business, the Company continues to pursue, mostly with partners, opportunities both domestically and internationally with its industrial products focusing primarily on catalysts, resins, formulated products and adhesives. -3-
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The principal products and services offered by the Company in its two core businesses - Food Products Technology and Agricultural Seed Technology - and in the technology licensing and research and development are described below. Financial information concerning the industry segments for which the Company reported its operations during fiscal years 1997 through 1999 is summarized in Note 13 to the Consolidated Financial Statements. The Company was incorporated in California on October 31, 1986. The Company completed its initial public offering in 1996 and is listed on the Nasdaq National Market under the symbol "LNDC." TECHNOLOGY OVERVIEW Polymers are important and versatile materials found in many of the products of modern life. Certain polymers, such as cellulose and natural rubber, occur in nature. Man-made polymers include nylon fibers used in carpeting and clothing, coatings used in paints and finishes, plastics such as polyethylene, and elastomers used in automobile tires and latex gloves. Historically, synthetic polymers have been designed and developed primarily for improved mechanical and thermal properties, such as strength and the ability to withstand high temperatures. Improvements in these and other properties and the ease of manufacturing of synthetic polymers have allowed these materials to replace wood, metal and natural fibers in many applications over the last 40 years. More recently, scientists have focused their efforts on identifying and developing sophisticated polymers with novel properties for a variety of commercial applications. Landec's Intelimer polymers are a proprietary class of synthetic polymeric materials that respond to temperature changes in a controllable, predictable way. Typically, polymers gradually change in adhesion, permeability and viscosity over broad temperature ranges. Landec's Intelimer materials, in contrast, can be designed to exhibit abrupt changes in permeability, adhesion and/or viscosity over temperature ranges as narrow as 1DEG.C to 2DEG.C. These changes can be designed to occur at relatively low temperatures (0DEG.C to 100DEG.C) that are relatively easy to maintain in industrial and commercial environments. FIGURE 1 illustrates the effect of temperature on Intelimer materials as compared to typical polymers. [GRAPHIC] Landec's proprietary polymer technology is based on the structure and phase behavior of Intelimer materials. The abrupt thermal transitions of specific Intelimer materials are achieved through the use of chemically precise hydrocarbon side chains that are attached to a polymer backbone. Below a pre-determined switch temperature, the -4-
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polymer's side chains align through weak hydrophobic interactions resulting in a crystalline structure. When this side chain crystallizable polymer is heated to, or above, this switch temperature, these interactions are disrupted and the polymer is transformed into an amorphous, viscous state. Because this transformation involves a physical and not a chemical change, this process is repeatedly reversible. Landec can set the polymer switch temperature anywhere between 0DEG.C to 100DEG.C by varying the length of the side chains. The reversible transitions between crystalline and amorphous states are illustrated in FIGURE 2 below. [GRAPHIC] Side chain crystallizable polymers were first discovered by academic researchers in the mid-1950's. These polymers were initially considered to be merely of scientific curiosity from a polymer physics perspective, and, to the Company's knowledge, no significant commercial applications were pursued. In the mid-1980's, Dr. Ray Stewart, the Company's founder, became interested in the idea of using the temperature-activated permeability properties of these polymers to deliver various materials such as drugs and pesticides. After forming Landec in 1986, Dr. Stewart subsequently discovered broader utility for these polymers. After several years of basic research, commercial development efforts began in the early 1990's, resulting in initial products in mid-1994. Landec's Intelimer materials are generally synthesized from long chain acrylic monomers that are derived primarily from natural materials such as soybean and corn oils, and are highly purifiable and designed to be manufactured economically through known polymerization processes. Intelimer materials can be made into many different forms, including films, coatings, microcapsules and discreet forms. DESCRIPTION OF CORE BUSINESS The Company participates in two core segments- Food Products Technology and Agricultural Seed Technology. Outside of these two core segments, Landec will license technology and conduct on going research and development through its Technology Licensing/Research & Development Business. -5-
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[GRAPH] FOOD PRODUCTS TECHNOLOGY BUSINESS Landec began marketing in late 1995 its proprietary Intelimer-based breathable membranes for use in the fresh-cut produce packaging market, the fastest growing segment in the food market. Landec's unique technology enabled Landec's customers to enter into and develop new businesses in this fresh-cut produce market (also known as the "value-added" market). In December 1999, Landec acquired Apio, Landec's largest customer in the Food Products Technology business and one of the nation's leading marketers and packers of produce and specialty packaged fresh-cut vegetables. With approximately $158 million in revenue in 1998, Apio provides year-round access to produce, utilizes state-of-the-art fresh-cut produce processing technology and distributes to 9 of the top 10 U.S. retail chains and major club stores. Landec's proprietary Intelimer-based packaging business has been combined with Apio into a wholly owned subsidiary which retains the Apio, Inc. name. This vertical integration within the Food Products Technology business places Landec in the unique position of providing the fresh-cut and whole produce market with both technology and access to larger end users/customers. INTELLIPAC-TM- BREATHABLE MEMBRANES Certain types of fresh-cut produce can spoil or discolor rapidly when packaged in conventional packaging materials and are therefore limited in their ability to be distributed broadly to markets. The Company's Intellipac breathable membranes facilitate the packaging of fresh-cut produce. Fresh-cut produce is pre-washed, cut and packaged in a form that is ready to use by the consumer and is thus typically sold at premium price levels. According to the Produce Marketing Association, in 1998, the total U.S. fresh produce market exceeded $100 billion. Of this, U.S. retail sales of fresh-cut produce grew almost 20 percent to an estimated $7 billion. The Company believes that the growth of this market has been driven by consumer demand and the willingness to pay for convenience, labor savings and uniform quality relative to produce prepared at the point of sale. The International Fresh Cut Produce Associates estimates that by 2003, U.S. retail sales of fresh-cut produce could be as much as $19 billion. Although fresh-cut produce companies have had success in the salad market, the industry has been slow to diversify into other fresh-cut vegetables or fruits due to limitations in film materials used to package the fresh-cut produce. After harvesting, vegetables and fruits continue to respire, consuming oxygen and releasing carbon dioxide. Too much or too little oxygen can result in premature spoilage and decay and promote the growth of contaminants and microorganisms that jeopardize inherent food safety. Conventional packaging films used today, such as polyethylene and polypropylene, can be made with modest permeability to oxygen and carbon dioxide, but often do not provide the optimal atmosphere for the produce packaged. Shortcomings of currently used materials have not significantly -6-
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hindered the growth in the fresh-cut salad market because lettuce, unlike many vegetables and fruits, has low respiration requirements. The respiration rate of fresh-cut produce varies from vegetable to vegetable and from fruit to fruit. The challenge facing the industry is to develop packaging for the high respiring, high value and shelf life sensitive fresh-cut vegetable and fruit markets. The Company believes that today's conventional packaging films face numerous challenges in adapting to meet the diversification of pre-cut vegetables and fruits evolving in the industry without compromising shelf life and produce quality. To mirror the growth experienced in the fresh-cut salad market, the markets for high respiring vegetables and fruits such as broccoli, cauliflower, berries and stone fruit (peaches, apricots, nectarines) will require a more versatile and sophisticated packaging solution such as the Company's Intellipac breathable membranes. The respiration rate of fresh-cut produce also varies with temperature. As temperature increases, fresh-cut produce generally respires at a higher rate, which speeds up the aging process, resulting in shortened shelf life and increased potential for decay, spoilage, loss of texture and dehydration. As fresh-cut produce is transported from the processing plant through the refrigerated distribution chain to foodservice locations or retail stores, and finally to the ultimate consumer, temperatures can fluctuate significantly. Therefore, temperature control is a constant challenge in preserving the quality of fresh-cut produce -- a challenge few current packaging films can fulfill. The Company believes that its temperature-responsive Intellipac technology will respond well to the challenges of the fresh-cut distribution process. Using its Intelimer technology, Landec has developed Intellipac breathable membranes that it believes address many of the shortcomings of conventional materials. A membrane is applied over a small cutout section or an aperture of a flexible film bag. This highly permeable "window" acts as the mechanism to transmit the majority of the gas transmission properties required for the entire package. These membranes are designed to provide three principal benefits: - HIGH PERMEABILITY. Landec's Intellipac breathable membranes are designed to permit transmission of oxygen and carbon dioxide at 300 times the rate of conventional packaging films. The Company believes that these higher permeability levels will facilitate the packaging diversity required to market many types of fresh-cut produce. - ABILITY TO ADJUSTABLY SELECT OXYGEN AND CARBON DIOXIDE. Conventional packaging films diffuse gas transfer in and out of packages at an equal rate or fixed ratio of 1.0. Intellipac packages can be tailored with carbon dioxide to oxygen transfer ratios ranging from 1.0 to 12.0 and selectively transmit oxygen and carbon dioxide at optimum rates to sustain the quality and shelf life of produce. - TEMPERATURE RESPONSIVENESS. Landec has developed breathable membranes that can be designed to increase or decrease in permeability in response to environmental temperature changes. The Company has developed packaging that responds to higher oxygen requirements at elevated temperatures but is also reversible, and returns to its original state as temperatures decline. Landec believes that growth of the overall produce market will be driven by the increasing demand for the convenience of fresh-cut produce. This demand will in turn require packaging that facilitates the quality and shelf life of produce transported to fresh-cut processors in bulk and pallet quantities. The Company believes that in the future its Intellipac breathable membranes will be useful for packaging a diverse variety of fresh-cut produce products. Potential opportunities for using Landec's technology outside of the fresh-cut produce market exist in cut flowers and in other food products. Landec is working with leaders in the fresh-cut food service, club store and retail grocery markets. The Company believes it will have growth opportunities for the next several years through new customers and products in the United States, expansion of its existing customer relationships, and through export and shipments of specialty packaged foods. -7-
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Landec manufactures its Intellipac breathable membranes with selected qualified contract manufacturers and markets and sells Intellipac breathable membranes directly to food processors. APIO, INC. In December 1999, Landec completed the acquisition of Apio and certain related entities. Landec paid $23.9 million in cash and Landec Common Stock for Apio. An additional $16.75 million in future payments over the next five years may be paid, $10.0 million of which is based on Apio achieving certain performance milestones. Apio had revenue of approximately $158 million in 1998, has realized a compounded annual growth in revenues of over 19% between 1996 and 1998 and is profitable. Based in Guadalupe, California, Apio consists of two major businesses -- traditional whole produce harvesting, packing and marketing and specialty packaged fresh-cut value-added processed products that are pre-cut, washed and packaged in Landec's Intellipac packaging. The traditional produce business includes harvesting, packing, cooling and marketing of vegetables and fruits on a contract basis for growers in California's Santa Maria, San Joaquin and Imperial Valleys and in Arizona and Mexico. Apio currently has approximately 18,000 acres under contract, including access to approximately 20 percent of the farmable land in the Santa Maria Valley. The fresh-cut value-added processing business, developed within the last 4 years, sources a variety of fresh-cut vegetables to 9 of the top 10 retail grocery chains representing over 3,000 retail stores and to over 500 club stores. During 1998, Apio shipped more than 21 million cartons of produce to some 700 customers including leading supermarket retailers, wholesalers, food service suppliers and club stores throughout the United States and internationally, primarily in Asia. There are four major distinguishing characteristics of Apio that provide it a competitive advantage in the Food Products Technology market: - Apio has structured its business as a full service provider of vegetables, fruits, and fresh-cut value-added produce. As retail and club store chains consolidate, Apio is well positioned as a single source of a broad range of products. - Apio is unique in that it takes on less farming risk than its competitors. Apio reduces its farming risk by not taking ownership of farmland, and instead, will contract with growers for produce and charge for services that include packing, cooling, shipping and marketing. In many cases, Apio does not take title to the produce but receives a margin for services rendered. The year-round sourcing of produce is a key component to both the traditional produce business as well as the fresh-cut value-added processing business. - Apio strategically invested in the rapidly growing fresh-cut value-added business. Apio's new 35,000 square foot value-added plant operates during the peak seasons two 10-hour shifts per day, seven days a week. Apio has one of the very few temperature controlled value-added processing plants in the U.S. Ninety percent of Apio's value-added products utilize Landec's proprietary Intellipac membrane technology. Apio is also focused on developing its "Eat Smart" brand name for all of its fresh-cut value-added products. - Apio is uniquely positioned to benefit from the growth in export sales to Asia and Europe over the next decade with its export business, CalEx. Through CalEx, Apio is currently one of the largest U.S. exporters of broccoli to Asia. -8-
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AGRICULTURAL SEED TECHNOLOGY BUSINESS Landec formed its Intellicoat subsidiary in 1995. Intellicoat's strategy is to build a vertically integrated seed technology company based on Intellicoat's proprietary seed coating technology and its direct marketing, telephonic sales and electronic commerce capabilities. INTELLICOAT SEED COATINGS Landec has developed and, through Intellicoat, is conducting field trials of its Intellicoat seed coatings, an Intelimer-based agricultural material designed to control seed germination timing, increase crop yields and extend the crop planting windows. These coatings are initially being applied to corn, soybean, cotton and canola seeds. According to the U.S. Agricultural Statistics Board, the total planted acreage in 1998 in North America for corn, soybean, cotton and canola seed exceeded 77.6 million, 77.2 million, 14.6 million and 1.1 million, respectively. Currently, farmers are required to predict the proper time to plant seeds. If the seeds are planted too early, they may rot or suffer chilling injury due to the absorption of water at cold soil temperatures. If they are planted too late, the growing season may end prior to the crop reaching full maturity. In either case, the resulting crop yields are sub-optimal. Moreover, the planting window can be fairly brief, requiring the farmer to focus almost exclusively on planting during this time. Seeds also germinate at different times due to variations in absorption of water, thus providing for variations in the growth rate of the crops. The Company's Intellicoat seed coating prevents planted seeds from absorbing water when the ground temperature is below the coating's pre-set switch. Intellicoat seed coatings are designed to enable coated seeds to be planted early without risk of chilling damage caused by the absorption of water at cold soil temperatures. As spring advances and soil temperatures rise to the pre-determined switch temperature, the polymer's permeability increases and the coated seeds absorb water and begin to germinate. The Company believes that Intellicoat seed coatings provide the following advantages: more flexible timing for planting, avoidance of chilling injury, uniform germination and crop growth, and protection against harmful fungi. As a result, the Company believes that Intellicoat seed coatings offer the potential for significant improvements in crop yields. Based on the success of fiscal year 1999's field trials, the Company will be selectively marketing its inbred corn seed coating products beginning in fiscal year 2000 through regional and national seed companies in the United States. This application is targeted to approximately 640,000 acres of farmland in ten states. In addition, Intellicoat seed coatings are being tested with numerous collaborators for the relay cropping of wheat and soybean. Relay cropping of wheat and soybeans will allow farmers to plant and harvest two crops during the year on the same acre of land, providing significant financial benefit for the farmer. Intellicoat plans to expand its testing of the relay cropping system in the spring of 2000 and assuming expanded field trials are successful, expects to commercially launch the technology in the spring of 2001. This application is targeted to approximately 10 million acres of farmland in six states. Future crops under consideration include cotton, canola, sugar beets and other vegetables. FIELDER'S CHOICE DIRECT (THE DIRECT MARKETING, TELEPHONIC SALES AND E-COMMERCE COMPANY) In September 1997, Intellicoat completed the acquisition of Fielder's Choice, a direct marketer of hybrid seed corn to farmers. Landec paid approximately $3.6 million in cash and direct acquisition costs and $5.2 million in Landec Common Stock for the Company. Terms of the agreement include additional consideration in the form of a cash earn-out based on future performance. Fielder's Choice had sales of approximately $13.3 million and $15.2 million in the twelve months ended October 31, 1998 and October 31, 1999, respectively. Based in Monticello, Indiana, Fielder's Choice offers a comprehensive line of corn hybrids to more than 16,000 producer seed customers in over forty states through direct marketing programs. The success of Fielder's Choice comes, in part, from its expertise in selling directly to the farmer producer, bypassing the traditional and costly farmer-dealer system. The Company believes that this direct channel of distribution provides a 35% cost advantage to its farmer producers. -9-
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In order to support its direct marketing programs, Fielder's Choice has developed proprietary direct marketing, telephonic sales and e-commerce information technology, called "The Farmer First System", that enables state-of-the-art methods for communicating with a broad array of farmers. This proprietary direct marketing information technology includes a current database of over 60,000 farmers. In August 1999, the Company launched the seed industry's first comprehensive e-commerce website. This new website furthers the Company's ability to provide a high level of consultation to Fielder's Choice customers, backed by a six day a week call center capability that enables the Company to use the internet as a natural extension of its direct marketing strategy. The acquisition of Fielder's Choice was strategic in providing a cost-effective vehicle for Intellicoat seed coating products when they are ready for commercial production. The Company believes that the combination of a direct channel of distribution, telephonic and electronic commerce capabilities will enable Intellicoat to more quickly achieve meaningful market penetration. TECHNOLOGY LICENSING/RESEARCH & DEVELOPMENT BUSINESSES The Company believes its technology has commercial potential in a wide range of industrial, consumer and medical applications beyond those identified in its core businesses. In order to exploit these opportunities, the Company has entered into licensing and collaborative corporate agreements for product development and/or distribution in certain fields. INDUSTRIAL MATERIALS AND ADHESIVES Landec's industrial products development strategy is to focus on catalysts, resins, fully-formulated products and adhesives in the polymer materials market. During the product development stage, the Company identifies corporate partners to support the ongoing development and testing of these products, with the ultimate goal of licensing the applications at the appropriate time. INTELIMER POLYMER SYSTEMS. The Company is developing catalysts, curative, and curing agent systems based on its Intelimer technology for use in one-package thermoset products. These systems can incorporate catalysts, curatives and curing agents in a unique polymer envelope that prevents interaction by these agents with the resin when the polymer envelope is in its impermeable state. This characteristic allows all components of the thermoset product to be pre-mixed and stored at room temperature, and provides longer shelf life. Landec's unique polymer envelope system can be designed with a pre-set opening temperature switch to correspond with elevated temperatures used during standard manufacturing processes. When the thermoset system is exposed to the pre-set switch temperature, the Intelimer polymer abruptly changes to its permeable state, exposing the catalyst to the resin and initiating the curing process. In addition, the Intelimer polymer can be designed to change state over a predetermined temperature range in order to achieve a desired reaction time. Thermoset catalyst systems can eliminate the need for costly on-site mixing equipment and because thermosets can be pre-mixed by the manufacturer, will minimize sub-optimal product performance due to incorrect component mixing ratios. Furthermore, since the thermosets will not cure until exposed to elevated temperatures, pot life should be extended, resulting in significantly reduced waste and labor expense. The Company believes that the ability to control reaction time also provides advantages over existing thermoset systems and can enhance the throughput of targeted manufacturing customers. Landec received the R&D 100 Award from R&D Magazine for its Intelimer Polymer Systems product line in 1997 in recognition of the unique capabilities of this technology. Certain Intelimer Polymer Systems products are in field trials with some large industrial companies, which, if approved, will be ready for commercial introduction during the next year. AEROMARK-TM- 80. Landec announced in December 1998, the introduction of its first fully-formulated product, Aeromark 80, using the Company's proprietary Intelimer catalyst technology. Aeromark 80 and other related products under development are targeted to the rapidly growing prototyping/design market estimated to exceed $100 million a year in sales. Landec's initial focus is with large volume users such as major automakers and aerospace manufacturers. Landec has been testing materials with several large European automotive companies and is currently scaling manufacturing at a contract manufacturing site in Switzerland. -10-
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DOCK RESINS. In April 1997, Landec completed the acquisition of Dock Resins, a privately-held manufacturer and marketer of specialty acrylic and other polymers based in Linden, New Jersey. Landec paid approximately $13.7 million in cash, a promissory note and direct acquisition costs and $2.1 million in Landec Common Stock to acquire Dock Resins. The acquisition of Dock Resins was strategic in providing the Company with immediate access to large-scale polymer manufacturing as well as a built-in customer base and national distribution network. Dock Resins has a track record of growth in revenues and earnings and a strong management team under the leadership of Dock Resins' Chief Executive Officer, Dr. A. Wayne Tamarelli. Dock Resins also sells products under the Doresco trademark which are used by more than 300 customers throughout the United States and other countries in the coatings, printing inks, laminating and adhesives markets. Dock Resins is a leading supplier of proprietary polymers including acrylic, methacrylic, alkyd, polyester, urethane and polyamide polymers to film converters engaged in hot stamping, decorative wood grain, automotive interiors, holograms, and metal foil applications. Dock Resins also supplies products to a number of other markets such as graphic arts, automotive refinishing, construction, pressure-sensitive adhesives, paper coatings, caulks, concrete curing compounds and sealers. Dock Resins had sales of approximately $15.4 million and $14.0 million in the twelve months ended October 31, 1998 and October 31, 1999, respectively. HITACHI CHEMICAL. The Company entered into two separate collaborations with Hitachi Chemical ("Hitachi") in the areas of industrial adhesives and Intelimer Polymer Systems. On October 1, 1994, the Company entered into a non-exclusive license agreement for seven years with Hitachi in the industrial adhesives area. The agreement provides Hitachi with a non-exclusive license to manufacture and sell products using Landec's Intelimer materials in certain Asian countries. Landec received up-front license fees upon signing the agreement and is entitled to future royalties based on net sales by Hitachi of the licensed products. Any fees paid to the Company are non-refundable. On August 10, 1995, the Company entered into the second collaboration with Hitachi in the Intelimer Polymer Systems area. The agreement provided Hitachi with an exclusive license to use and sell Landec's Intelimer Polymer Systems in industrial latent curing products in certain Asian countries. Landec is entitled to be the exclusive supplier of Intelimer Polymer Systems to Hitachi for at least seven years after commercialization. Landec received an up-front license payment upon signing this agreement and research and development funding over three years and is entitled to receive future royalties based on net sales by Hitachi of the licensed products. Any fees paid to the Company are non-refundable. This agreement has been converted to a non-exclusive agreement except for one application field. NITTA CORPORATION. On March 14, 1995, the Company entered into a license agreement with Nitta Corporation ("Nitta") in the industrial adhesives area. The agreement provides Nitta with a co-exclusive license to manufacture and sell products using Landec's Intelimer materials in certain Asian countries. Landec received up-front license fees upon signing the agreement and is entitled to future royalties based on net sales by Nitta of the licensed products. Any fees paid to the Company are non-refundable. This agreement is terminable at Nitta's option. Nitta and the Company entered into an additional exclusive license arrangement in February 1996 covering Landec's medical adhesives technology for use in Asia. The Company received up-front license fees upon execution of the agreement and research and development payments and is entitled to receive future royalties under this agreement. Any fees paid to the Company are non-refundable. Nitta and the Company also entered into another worldwide exclusive agreement on January 1, 1998 in the area of industrial adhesives specific to one field of electronic polishing adhesives. The Company received research and development payments as a part of this agreement. MEDICAL APPLICATIONS PORT-TM- OPHTHALMIC DEVICES. Landec developed the PORT (Punctal Occluder for the Retention of Tears) ophthalmic device initially to address a common, yet poorly diagnosed condition known as dry eye that is estimated to affect 30 million Americans annually. The device consists of a physician-applied applicator containing solid Intelimer material that transforms into a flowable, viscous state when heated slightly above body temperature. After inserting the Intelimer material into the lacrimal drainage duct, it quickly solidifies into a form-fitting, solid plug. Occlusion of the -11-
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lacrimal drainage duct allows the patient to retain tear fluid and thereby provides relief and therapy to the dry eye patient. The PORT product is currently in human clinical trials. Landec and its partner, Alcon, a wholly-owned subsidiary of Nestle S.A., believe that PORT plugs will have additional ophthalmic applications beyond the dry eye market. This would include applications for people who cannot wear contact lenses due to limited tear fluid retention and patients receiving therapeutic drugs via eye drops that require longer retention in the eye. In December 1997, Landec licensed the rights to worldwide manufacturing, marketing and distribution of its PORT ophthalmic device to Alcon. Under the terms of the transaction, Landec received an up-front cash payment of $500,000, a $1 million milestone payment in November 1998, research and development funding and will receive ongoing royalties of 12.5% on product sales of each PORT device over an approximately 15-year period. In September 1999, Alcon submitted a 510K application to the FDA seeking approval to commercially sell the PORT device. Landec will continue to provide development support on a contract basis through the FDA approval process and product launch. CONVATEC. On October 11, 1999, the Company entered into a joint development agreement with ConvaTec, a division of Bristol Myers Squibb, under which Landec will develop adhesive film products for selected ConvaTec medical products. Landec is receiving support funding for this program. Upon completion of this agreement, the companies have the option to consider a license and supply agreement where Landec would supply materials to ConvaTec for use in specific medical devices. SALES AND MARKETING Each of the Company's core businesses are supported by dedicated sales and marketing resources. The Company intends to develop its internal sales capacity as more products progress toward commercialization and as business volume expands geographically. FOOD PRODUCTS TECHNOLOGY BUSINESS In the Intellipac breathable membrane business, there are a limited number of suppliers of fresh-cut produce, most of whom are located in the western United States. The Company currently has a small internal sales force targeted at this concentrated marketplace. Apio has over 22 sales people, located in central California and throughout the U.S., supporting both the traditional produce marketing business and the specialty packaged value-added produce business. AGRICULTURAL SEED TECHNOLOGY BUSINESS In preparation for the first launch of coated inbred corn seed products in fiscal year 2000, the Intellicoat seed coating business has identified a small internal sales force to target a very focused group of seed customers. For future coated seed products that are sold directly to farmers, the Company will utilize over 35 direct seed sales consultants located in Monticello, Indiana. These consultants also support Fielder's Choice in its direct marketing of corn seed. Customer contacts are made based on direct responses and inquiries from customers. OTHER Dock Resins sales are carried out through a small direct sales group and network of existing manufacturers' representatives and distributed through public warehouses. Sales are supported by internal sales and technical service resources at Dock Resins. Intelimer Polymer Systems sales are made through a small, technically oriented, internal sales organization in the U.S. and in Europe through Akzo Nobel and Aero Consultants Ltd. A.G., international distributors. -12-
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MANUFACTURING Landec intends to control the manufacturing of its own products whenever possible, as it believes that there is considerable manufacturing margin opportunity in its products. In addition, the Company believes that know-how and trade secrets can be better maintained by Landec retaining manufacturing capability in-house. POLYMER MANUFACTURING - DOCK RESINS CORPORATION Dock Resins has manufacturing facilities that are flexible and adaptable to a wide range of processes. Its capabilities include various polymerization processes, grafting, dispersing, blending, pilot plant scale-ups and general synthesis. The Company has increased the capacity of these facilities in 1998 and 1999. Dock Resins' policy is to be a leader in safety, health and environmental protection. In 1998 and 1999, Dock Resins passed a voluntary comprehensive health and safety evaluation by the United States Occupational Safety and Health Administration (OSHA). As a result, OSHA awarded recognition to Dock Resins as a Merit Site in 1998 and a Star Site in 1999 in OSHA's Voluntary Protection Program. FOOD PRODUCTS TECHNOLOGY BUSINESS The manufacturing process for the Company's initial Intellipac breathable membrane products is comprised of polymer manufacturing, membrane coating and label conversion. The Company currently has the majority of its Intellipac breathable membrane products manufactured by selected outside contract manufacturers. Landec has recently scaled up a significant portion of label conversion manufacturing in Menlo Park to meet the increasing product demand and provide additional developmental capabilities. Apio processes all of its fresh-cut value-added products in a 35,000 square foot, state-of-the-art processing facility located in Guadalupe, California. The Company is currently running two shifts per day, seven days a week, and utilizes contract laborers from a third party contact labor supplier. Cooling of produce is done through third parties and Apio Cooling, a separate company of which Apio has a 60% ownership interest and is the general partner. AGRICULTURAL SEED TECHNOLOGY BUSINESS The Company is currently in the process of scaling up the manufacturing coating process in Menlo Park, California to support the launch of its inbred corn product and extend field trials of its wheat/soybean relay product. Fielder's Choice purchases its hybrid seed corn from an established producer under an exclusive purchase agreement. GENERAL. Many of the raw materials used in manufacturing certain of the Company's products are currently purchased from a single source, including certain monomers used to synthesize Intelimer polymers and substrate materials for the Company's breathable membrane products. In addition, virtually all of the hybrid corn varieties sold by Fielder's Choice are purchased from a single source. Upon manufacturing scale-up and as hybrid corn sales increase, the Company may enter into alternative supply arrangements. Although to date the Company has not experienced difficulty acquiring materials for the manufacture of its products nor has Fielder's Choice experienced difficulty in acquiring hybrid corn varieties, no assurance can be given that interruptions in supplies will not occur in the future, that the Company will be able to obtain substitute vendors, or that the Company will be able to procure comparable materials or hybrid corn varieties at similar prices and terms within a reasonable time. Any such interruption of supply could have a material adverse effect on the Company's ability to manufacture and distribute its products and, consequently, could materially and adversely affect the Company's business, operating results and financial condition. Landec has historically relied on the guidance of Good Manufacturing Practices ("GMP") in developing standardized research and manufacturing processes and procedures. Having entered into licensing agreements for the PORT device, the Company is no longer required to adhere to GMPs. The Company desires to maintain an externally audited quality system and has achieved ISO 9001 registration for the Menlo Park research and development site in -13-
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fiscal year 1999. Such registration is required in order for the Company to sell product to certain potential customers, primarily in Europe. RESEARCH AND DEVELOPMENT Landec is focusing its research and development resources on both existing and new applications of its Intelimer technology. Expenditures for research and development in fiscal year 1999 were $5.8 million, compared with $5.7 million in fiscal year 1998. Fiscal year 1998 expenditures for research and development increased 24% from fiscal year 1997 expenditures of $4.6 million. In fiscal year 1999, research and development expenditures funded by corporate partners were $770,000, compared with $1.4 million in fiscal year 1998 and $863,000 in fiscal year 1997. The Company may continue to seek funds for applied materials research programs from U.S. government agencies as well as from commercial entities. The Company anticipates that it will continue to have significant research and development expenditures in order to maintain its competitive position with a continuing flow of innovative, high-quality products and services. As of October 31, 1999, Landec had 29 employees engaged in research and development (and a total of eight Ph.D.s in the Company) with experience in polymer and analytical chemistry, product application, product formulation, mechanical and chemical engineering. COMPETITION The Company operates in highly competitive and rapidly evolving fields, and new developments are expected to continue at a rapid pace. Competition from large food packaging and agricultural companies is expected to be intense. In addition, the nature of the Company's collaborative arrangements and its technology licensing business may result in its corporate partners and licensees becoming competitors of the Company. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company, and many have substantially greater experience in conducting field trials, obtaining regulatory approvals and manufacturing and marketing commercial products. There can be no assurance that these competitors will not succeed in developing alternative technologies and products that are more effective, easier to use or less expensive than those which have been or are being developed by the Company or that would render the Company's technology and products obsolete and non-competitive. PATENTS AND PROPRIETARY RIGHTS The Company's success depends in large part on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. The Company has been granted eleven U.S. patents with expiration dates ranging from 2006 to 2015 and has filed applications for additional U.S. patents, as well as certain corresponding patent applications outside the United States, relating to the Company's technology. The Company's issued patents include claims relating to compositions, devices and use of a class of temperature sensitive polymers that exhibit distinctive properties of permeability, adhesion and viscosity. There can be no assurance that any of the pending patent applications will be approved, that the Company will develop additional proprietary products that are patentable, that any patents issued to the Company will provide the Company with competitive advantages or will not be challenged by any third parties or that the patents of others will not prevent the commercialization of products incorporating the Company's technology. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the Company's products or design around the Company's patents. Any of the foregoing results could have a material adverse effect on the Company's business, operating results and financial condition. The commercial success of the Company will also depend, in part, on its ability to avoid infringing patents issued to others. The Company has received, and may in the future receive, from third parties, including some of its competitors, notices claiming that it is infringing third party patents or other proprietary rights. If the Company were determined to be infringing any third-party patent, the Company could be required to pay damages, alter its products or processes, obtain licenses or cease certain activities. In addition, if patents are issued to others which contain claims that compete or conflict with those of the Company and such competing or conflicting claims are ultimately determined to be valid, the Company may be required to pay damages, to obtain licenses to these patents, to develop or obtain alternative technology or to cease using such technology. If the Company is required to obtain any licenses, there can -14-
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be no assurance that the Company will be able to do so on commercially favorable terms, if at all. The Company's failure to obtain a license to any technology that it may require to commercialize its products could have a material adverse impact on the Company's business, operating results and financial condition. Litigation, which could result in substantial costs to the Company, may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of third-party proprietary rights. If competitors of the Company prepare and file patent applications in the United States that claim technology also claimed by the Company, the Company may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial cost to and diversion of effort by the Company, even if the eventual outcome is favorable to the Company. Any such litigation or interference proceeding, regardless of outcome, could be expensive and time consuming and could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the Company to cease using such technology and consequently, could have a material adverse effect on the Company's business, operating results and financial condition. In addition to patent protection, the Company also relies on trade secrets, proprietary know-how and technological advances which the Company seeks to protect, in part, by confidentiality agreements with its collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. GOVERNMENT REGULATIONS The Company's products and operations are subject to substantial regulation in the United States and foreign countries. FOOD PRODUCTS TECHNOLOGY BUSINESS The Company's food packaging products are subject to regulation under the Food, Drug and Cosmetic Act ("FDC Act"). Under the FDC Act any substance that when used as intended may reasonably be expected to become, directly or indirectly, a component or otherwise affect the characteristics of any food may be regulated as a food additive unless the substance is generally recognized as safe. Food additives may be substances added directly to food, such as preservatives, or substances that could indirectly become a component of food, such as waxes, adhesives and packaging materials. A food additive, whether direct or indirect, must be covered by a specific food additive regulation issued by the FDA. The Company believes its Intellipac breathable membrane products are not subject to regulation as food additives because these products are not expected to become a component of food under their expected conditions of use. If the FDA were to determine that the Company's Intellipac breathable membrane products are food additives, the Company may be required to submit a food additive petition. The food additive petition process is lengthy, expensive and uncertain. A determination by the FDA that a food additive petition is necessary would have a material adverse effect on the Company's business, operating results and financial condition. The Company's agricultural operations are subject to a variety of environmental laws including the Food Quality Protection Act of 1966, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive Environmental Response, Compensation and Liability Act. Compliance with these laws and related regulations is an ongoing process. Environmental concerns are, however, inherent in most agricultural operations, including those conducted by the Company, and there can be no assurance that the cost of compliance with environmental laws and regulations will not be material. Moreover, it is possible that future developments, such as increasingly strict environmental laws and enforcement policies thereunder, and further restrictions on the use of manufacturing chemicals could result in increased compliance costs. -15-
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As a result of the Apio acquisition, the Company is subject to USDA rules and regulations concerning the safety of the food products handled and sold by Apio, and the facilities in which they are packed and processed. Failure to comply with the applicable regulatory requirements can, among other things, result in fines, injunctions, civil penalties, suspensions or withdrawal of regulatory approvals, product recalls, product seizures, including cessation of manufacturing and sales, operating restrictions and criminal prosecution. AGRICULTURAL SEED TECHNOLOGY BUSINESS The Company's agricultural products are subject to regulations of the United States Department of Agriculture ("USDA") and the EPA. The Company believes its current Intellicoat seed coatings are not pesticides as defined in the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA") and are not subject to pesticide regulation requirements. The process of meeting pesticide registration requirements is lengthy, expensive and uncertain, and may require additional studies by the Company. There can be no assurance that future products will not be regulated as pesticides. In addition, the Company believes that its Intellicoat seed coatings will not become a component of the agricultural products which are produced from the seeds to which the coatings are applied and therefore are not subject to regulation by the FDA as a food additive. While the Company believes that it will be able to obtain approval from such agencies to distribute its products, there can be no assurance that the Company will obtain necessary approvals without substantial expense or delay, if at all. POLYMER MANUFACTURE The Company's manufacture of polymers is subject to regulation by the EPA under the Toxic Substances Control Act ("TSCA"). Pursuant to TSCA, manufacturers of new chemical substances are required to provide a Pre-Manufacturing Notice ("PMN") prior to manufacturing the new chemical substance. After review of the PMN, the EPA may require more extensive testing to establish the safety of the chemical, or limit or prohibit the manufacture or use of the chemical. To date, PMNs submitted by the Company have been approved by the EPA without any additional testing requirements or limitation on manufacturing or use. In addition, the ongoing manufacture of Dock Resins' existing product line is subject to state and federal environmental and safety regulations. No assurance can be given that the EPA will grant similar approval for future PMNs submitted by the Company. OTHER The Company and its products under development may also be subject to other federal, state and local laws, regulations and recommendations. Although Landec believes that it will be able to comply with all applicable regulations regarding the manufacture and sale of its products and polymer materials, such regulations are always subject to change and depend heavily on administrative interpretations and the country in which the products are sold. There can be no assurance that future changes in regulations or interpretations made by the FDA, EPA or other regulatory bodies, with possible retroactive effect, relating to such matters as safe working conditions, laboratory and manufacturing practices, environmental controls, fire hazard control, and disposal of hazardous or potentially hazardous substances will not adversely affect the Company's business. There can also be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect upon the Company's ability to do business. Furthermore, the introduction of the Company's products in foreign markets may require obtaining foreign regulatory clearances. There can be no assurance that the Company will be able to obtain regulatory clearances for its products in such foreign markets. EMPLOYEES As of October 31, 1999, Landec had 173 full-time employees, of whom 64 were dedicated to research, development, manufacturing, quality control and regulatory affairs and 109 were dedicated to sales, marketing and administrative activities. As of December 31, 1999, with the inclusion of Apio, Landec had 316 full-time employees. Landec intends to recruit additional personnel in connection with the development, manufacturing and marketing of its products. None of Landec's employees is represented by a union, and Landec believes relationships with its employees are good. -16-
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ITEM 2. PROPERTIES The Company has offices in Menlo Park, California, Linden, New Jersey and Monticello, Indiana. During fiscal year 1999, the Landec operations located in Menlo Park, California expanded its warehouse and manufacturing space by 6,000 square feet to support the manufacturing efforts of the Intellipac breathable membrane business. Apio, which was acquired in December 1999, has facilities in Guadalupe and Reedley, California. These properties are described below: [Enlarge/Download Table] Acres Business of Lease Location Segment Ownership Facilities Land Expiration -------------------- ---------------- ---------------- -------------------------------- ---------- ----------- Menlo Park, CA All Leased 21,000 square feet of office and -- 12/31/01(1) laboratory space Menlo Park, CA All Subleased 11,000 square feet of warehouse -- 7/31/02(1) and manufacturing space Linden, NJ Industrial Owned 22,000 square feet of office, 2.1 -- High laboratory, production, Performance warehouse, and ancillary space Materials Monticello, IN Agricultural Owned 19,400 square feet of office 0.5 -- Seed space Technology Guadalupe, CA Food Products Owned 94,000 square feet of office 11.6 -- Technology space, manufacturing and cold storage. Reedley, CA Food Products Owned 152,600 square feet of office 19.3 -- Technology space, manufacturing and cold storage. (1) Lease contains one two-year renewal option. ITEM 3. LEGAL PROCEEDINGS The Company is currently not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ending October 31, 1999. -17-
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PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is traded on the Nasdaq National Market under the symbol "LNDC". The following table sets forth for each period indicated the high and low sales prices for the Common Stock as reported on the Nasdaq National Market. [Enlarge/Download Table] Fiscal Year 1999 ---------------- High Low ---- --- 4th Quarter ending October 31, 1999.......................................$8.41 $2.63 3rd Quarter ending July 31, 1999..........................................$4.06 $3.00 2nd Quarter ending April 30, 1999.........................................$5.13 $3.38 1st Quarter ending January 31, 1999.......................................$6.00 $4.00 Fiscal Year 1998 ---------------- High Low ---- --- 4th Quarter ending October 31, 1998.......................................$6.00 $3.25 3rd Quarter ending July 31, 1998..........................................$7.25 $5.50 2nd Quarter ending April 30, 1998.........................................$7.81 $4.50 1st Quarter ending January 31, 1998.......................................$5.13 $3.13 There were approximately 136 holders of record of 15,922,331 shares of outstanding Common Stock as of January 7, 2000. Since holders are listed under their brokerage firm's names, the actual number of shareholders is higher. The Company has not paid any dividends on the Common Stock since its inception. The Company presently intends to retain all future earnings, if any, for its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In connection with the sale of Series D Preferred Stock in July 1993, the Company issued warrants to purchase 186,349 shares of Common Stock at an exercise price of $4.31 per share for $5,357 in cash. In a cashless exercise during fiscal year 1998, 46,587 shares were issued in exchange for the warrants. In October 1998, certain directors and officers of the Company purchased 200,425 shares of Common Stock for between $3.75 and $3.94 per share for $776,000. Pursuant to a Series A Preferred Stock Purchase Agreement (the "Purchase Agreement") dated November 19, 1999, by and among the Company and Frederick Frank, the Company completed a financing that raised approximately $10.0 million through a private placement of its Series A-1 Preferred Stock and Series A-2 Preferred Stock (the "Preferred Stock"). Pursuant to the Purchase Agreement, the Company issued 166,667 shares of Preferred stock of the Company at $60.00 per share (representing 1,666,670 shares of Common Stock on a converted basis). In connection with the Company's acquisition of Apio on December 2, 1999, the prior owners of Apio received 2.5 million shares of Common Stock. As compensation for services rendered by Lehman Brothers Inc. in connection with the closing of the Apio acquisition, the Company issued 62,500 shares of Common Stock to Lehman Brothers, Inc. at $6.25 per share. -18-
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The issuance of securities in this Item 5 was deemed to be exempt from registration under the Securities Act of 1933, as amended (the "Act"), in reliance on Section 4(2) of the Act as a transaction by an issuer not involving any public offering. The recipients of the securities in such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transaction. The recipients were given adequate access to information about the Company. -19-
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the information contained in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in Item 8 of this report. [Enlarge/Download Table] YEAR ENDED OCTOBER 31, ----------------------- STATEMENT OF OPERATIONS DATA: 1999 1998 1997 1996 1995 ---------- ------------ ----------- ----------- ------------ (in thousands, except per share data) Revenues: Product sales.....................................$ 33,927 $ 31,664 $ 8,653 $ 371 $ 14 Research and development revenues................. 770 1,352 863 1,096 796 License fees...................................... 750 500 -- 600 2,650 ---------- ------------ ----------- ----------- ------------ Total revenues................................. 35,447 33,516 9,516 2,067 3,460 Operating costs and expenses: Cost of product sales............................. 21,476 20,308 6,215 422 9 Research and development.......................... 5,758 5,713 4,608 3,588 3,175 Selling, general and administrative............... 11,192 10,835 4,664 2,367 1,332 Purchased in-process research and development..... -- -- 3,022 -- -- ---------- ------------ ----------- ----------- ------------ 38,426 36,856 18,509 6,377 4,516 ---------- ------------ ----------- ----------- ------------ Operating loss....................................... (2,979) (3,340) (8,993) (4,310) (1,056) ---------- ------------ ----------- ----------- ------------ Interest income...................................... 363 737 1,726 1,546 281 Interest expense..................................... (99) (137) (319) (59) (106) ---------- ------------ ----------- ----------- ------------ Loss from continuing operations before income taxes.. (2,715) (2,740) (7,586) (2,823) (881) Provision for income taxes........................... (54) (150) -- -- -- ---------- ------------ ----------- ----------- ------------ Loss from continuing operations...................... (2,769) (2,890) (7,586) (2,823) (881) ---------- ------------ ----------- ----------- ------------ Discontinued Operations: Loss from discontinued QuickCast operations....... -- -- (1,059) (1,377) (1,878) Gain on disposal of QuickCast operations.......... -- -- 70 -- -- ---------- ------------ ----------- ----------- ------------ Loss from discontinued operations.................... -- -- (989) (1,377) (1,878) ---------- ------------ ----------- ----------- ------------ Net loss.............................................$ (2,769) $ (2,890) $(8,575) $(4,200) $ (2,759) ========== ============ =========== =========== ============ Basic and diluted net loss per share: Continuing operations.............................$ (.21) $ (.23) $ (.68) $ (.37) $ (.74) Discontinued operations........................... -- -- (.09) (.18) (1.59) ---------- ------------ ----------- ----------- ------------ Basic and diluted net loss per share.................$ (.21) $ (.23) $ (.77) $ (.55) $ (2.33) ========== ============ =========== =========== ============ Shares used in computing basic and diluted net loss per share......................................... 13,273 12,773 11,144 7,699 1,182 ========== ============ =========== =========== ============ OCTOBER 31, ------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ------------- ----------- ----------- ------------ BALANCE SHEET DATA: (IN THOUSANDS) Cash, cash equivalents and short-term investments....$ 3,203 $ 10,177 $ 14,669 $ 36,510 $ 5,549 Total assets......................................... 40,708 42,356 50,160 38,358 7,347 Redeemable convertible preferred stock............... -- -- -- -- 31,276 Accumulated deficit.................................. (45,528) (42,756) (39,858) (31,278) (26,538) Total shareholders' equity (net capital deficiency)..$ 31,761 $ 33,688 $ 35,615 $ 36,640 $ (26,429) -20-
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Consolidated Financial Statements contained in Item 8 of this report. Except for the historical information contained herein, the matters discussed in this report are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this report and, in particular, the factors described below under "Additional Factors That May Affect Future Results". OVERVIEW Since its inception in October 1986, the Company has been primarily engaged in the research and development of its Intelimer technology and related products. The Company has launched four product lines from this core development QuickCast-TM- splints and casts, in April 1994, which was subsequently sold to Bissell Healthcare Corporation in August 1997; Intellipac breathable membranes for the fresh-cut produce packaging market, in September 1995; Intelimer Polymer Systems for the industrial specialties market in June 1997; and Intellicoat coated inbred corn seeds in the Fall of 1999. On December 2, 1999, the Company acquired Apio, Inc and certain related entities ("Apio"). Apio is a leading marketer and packer of produce and specialty packaged fresh-cut vegetables. See "Business - Description of Core Business: Food Products Technology Business - Apio, Inc. During fiscal years 1997 through 1999, the Company managed its operations in three business segments - Food Products Technology, Agricultural Seed Technology and Industrial High Performance Materials. With the acquisition of Apio, the Company will be focusing on two vertically integrated core businesses - Food Products Technology and Agricultural Seed Technology. The Food Products Technology segment combines the Company's Intellipac breathable membrane technology with Apio's fresh-cut produce business. The Agricultural Seed Technology segment integrates the Intellicoat seed coating technology with Fielder's Choice's direct marketing, telephonic sales and e-commerce distribution capabilities. The Company also operates a Technology Licensing/Research and Development business which develops products to be licensed outside of the Company's core businesses. Dock Resins, the Company's polymer manufacturer supports the needs of these core businesses and manufactures products for the specialty polymer industry and Intelimer Polymer Systems customers. The Company has been unprofitable during each fiscal year since its inception. From inception through October 31, 1999, the Company's accumulated deficit was $45.5 million. The Company may incur additional losses in the future. The amount of future net profits, if any, is highly uncertain and there can be no assurance that the Company will be able to reach or sustain profitability for an entire fiscal year. -21-
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RESULTS OF OPERATIONS The Company's results of operations reflect only the continuing operations of the Company and do not include the results of the discontinued QuickCast operation. FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED OCTOBER 31, 1998 Total revenues were $35.4 million for fiscal year 1999 compared to $33.5 million for fiscal year 1998. Revenues from product sales increased to $33.9 million in fiscal year 1999 from $31.7 million in fiscal year 1998 primarily due to increased product sales from Fielder's Choice and Intellipac breathable membrane products which increased from $13.3 million and $2.9 million, respectively, in fiscal year 1998 to $15.2 million and $4.5 million, respectively, during fiscal year 1999. The increase in Fielder's Choice revenues was primarily due to increased per unit sales prices, and the increase in Intellipac breathable membrane revenues was primarily due to the introduction of various new products and increased volumes for existing products. These increases were partially offset by a decrease in Dock Resins product sales from $15.4 million during fiscal year 1998 to $14.0 million during fiscal year 1999. This decrease is a result of the overall weakness in the chemical industry during fiscal year 1999. Revenues from research and development funding were $770,000 for fiscal year 1999 compared to $1.4 million for fiscal year 1998. The decrease in research and development revenues was primarily due to the completion of research and development arrangements with Hitachi Chemical and Nitta Corporation in fiscal year 1998. Revenues from license fees during fiscal year 1999 were $750,000 compared to $500,000 during fiscal year 1998. The increase in revenues from license fees was due to a payment received from Alcon in fiscal year 1999 upon meeting a certain milestone related to the licensing agreement for the PORT ophthalmic devices. With the acquisition of Apio, the Company expects future revenues to be significantly higher. Cost of product sales consists of material, labor and overhead. Cost of product sales was $21.5 million for fiscal year 1999 compared to $20.3 million for fiscal year 1998. Cost of product sales as a percentage of product sales decreased to 63% in fiscal year 1999 from 64% in fiscal year 1998. The decrease in the cost of product sales as a percentage of product sales in fiscal year 1998 as compared to fiscal year 1999 was primarily the result of higher average selling prices of Fielder's Choice products, partially offset by start-up costs associated with establishing a new manufacturing facility in Menlo Park for Intellipac breathable membrane products. The Company anticipates future cost of product sales, in absolute dollars, to be significantly higher due to the acquisition of Apio. Cost of product sales as a percentage of product sales is expected to increase due to Apio's current mix of products having lower percentage margins than Landec's other businesses. However, gross margins in absolute dollars are expected to significantly increase due to Apio's high sales volume. Research and development expenses were $5.8 million for fiscal year 1999 compared to $5.7 million for fiscal year 1998. The Company's research and development expenses consist primarily of expenses involved in product development process scale-up, patent activities related to the Company's side chain crystallizable polymer technology, and research and development expenses related to Dock Resins products. The increase in research and development expenses in fiscal year 1999 compared to fiscal year 1998 was primarily due to increased development costs for the Company's Intellicoat seed coating products, partially offset by a reduction in costs in the Industrial High Performance Materials area. In future periods, the Company expects that spending for research and development will continue to increase in absolute dollars, although it will decrease significantly as a percentage of total revenues due to the acquisition of Apio. Selling, general and administrative expenses were $11.2 million for fiscal year 1999 compared to $10.8 million for fiscal year 1998, an increase of 4%. Selling, general and administrative expenses consist primarily of sales and marketing expenses associated with the Company's product sales, business development expenses, and staff and administrative expenses. Specifically, sales and marketing expenses increased to $6.2 million for fiscal year 1999, from $5.9 million for fiscal year 1998. Beginning fiscal year 2000, total selling, general and administrative spending is expected to increase significantly, due to the acquisition of Apio, although as a percentage of total revenues it is expected to decrease. -22-
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Net interest income was $264,000 for fiscal year 1999 compared to $600,000 for fiscal year 1998. The decrease during fiscal year 1999 as compared to fiscal year 1998 was due principally to less cash being available for investing. FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31, 1997 Total revenues were $33.5 million for fiscal year 1998 compared to $9.5 million for fiscal year 1997. Revenues from product sales increased to $31.7 million in fiscal year 1998 from $8.7 million in fiscal year 1997 due primarily to $13.3 million of product sales from Fielder's Choice, which was acquired in September 1997; and an increase of $8.0 million of product sales from Dock Resins, which was acquired in April 1997. Also contributing to the increase were Intellipac breathable membrane product sales which increased from $1.2 million in fiscal year 1997 to $2.9 million in fiscal year 1998, due primarily to an increase in unit sales and the introduction of several new products. Revenues from research and development funding were $1.4 million for fiscal year 1998 compared to $863,000 for fiscal year 1997. The increase in research and development revenues was primarily due to the agreement with Alcon for the funding of the PORT program. Revenues from license fees during fiscal year 1998 were $500,000 compared to none during fiscal year 1997. The increase in license fees revenue was due to a payment in the first quarter of fiscal year 1998 under the PORT license agreement with Alcon. Cost of product sales consists of material, labor and overhead. Cost of product sales was $20.3 million for fiscal year 1998 compared to $6.2 million for fiscal year 1997. Cost of product sales as a percentage of product sales decreased to 64% in fiscal year 1998 from 72% in fiscal year 1997. The decrease in the cost of product sales as a percentage of product sales in fiscal year 1998 as compared to fiscal year 1997 was primarily the result of higher margins resulting from product sales of Fielder's Choice and Dock Resins products. Research and development expenses were $5.7 million for fiscal year 1998 compared to $4.6 million for fiscal year 1997, an increase of 24%. The increase in research and development expenses in fiscal year 1998 compared to fiscal year 1997 was primarily due to increased development costs for the Company's Intellipac and Intellicoat seed coating products and a full year of development costs related to Dock Resins products. Selling, general and administrative expenses were $10.8 million for fiscal year 1998 compared to $4.7 million for fiscal year 1997, an increase of 130%. Selling, general and administrative expenses increased primarily as a result of an entire year of expenses and amortization of goodwill for Dock Resins and Fielder's Choice, which were acquired during fiscal year 1997. Specifically, sales and marketing expenses increased to $5.9 million for fiscal year 1998, from $1.8 million for fiscal year 1997. Net interest income was $600,000 for fiscal year 1998 compared to $1.4 million for fiscal year 1997. The decrease during fiscal year 1998 as compared to fiscal year 1997 was due principally to less cash being available for investing. LIQUIDITY AND CAPITAL RESOURCES As of October 31, 1999 the Company had cash, cash equivalents and short-term investments of $3.2 million, a net decrease of $7.0 million from $10.2 million as of October 31, 1998. This decrease was primarily due to cash used in operations of $3.6 million and the purchase of $3.7 million of property, plant and equipment partially offset by cash provided by financing activities of approximately $710,000 from primarily the sale of Common Stock and repayment of notes receivable from shareholders. The cash used in operations was primarily comprised of planned purchases of Fielder's Choice corn seed inventory to support the fiscal year 2000 growing season and deferred expenses associated with the Apio acquisition which were recorded to other current assets. The majority of the Company's $3.7 million of property and equipment expenditures during fiscal year 1999 was incurred for building improvement and equipment upgrade expenditures at Dock Resins to expand capacity, and purchasing quality assurance equipment to support the development of Intellipac and Intellicoat products. -23-
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Subsequent to fiscal year end, and as a result of raising $10 million upon the sale of Preferred Stock and securing a new $11.25 million term debt agreement to acquire Apio, Inc., the Company's cash balance increased to over $8 million. In addition, Apio entered into a new $12 million line of credit agreement with Bank of America. The term debt and line of credit agreements ("loan agreements") contain restrictive covenants which require Apio to meet certain financial tests, including minimum levels of EBITDA, minimum fixed charge coverage ratio, minimum current ratio, minimum adjusted net worth and maximum leverage ratios. These requirements and ratios generally become more restrictive over time. The loan agreement, through restricted payment covenants, limits the ability of Apio to make cash payments to Landec, until the outstanding balance is reduced to an amount specified in the loan agreement. In addition to the cash raised during the acquisition of Apio Inc., the Company is currently in the process of establishing a credit facility to be used to fund the expansion of the manufacturing capabilities of Intellicoat seed coating products. The Company believes that with these new facilities, along with existing cash and cash equivalents will be sufficient to finance operational and capital requirements for the foreseeable future. The Company may, however, raise additional funds during the next twelve months through an equity financing. If such financing does occur it will have a dilutive effect on current shareholders. The Company's future capital requirements will depend on numerous factors, including the progress of its research and development programs; the development of commercial scale manufacturing capabilities; the development of marketing, sales and distribution capabilities; the ability of the Company to maintain existing collaborative and licensing arrangements and establish and maintain new collaborative and licensing arrangements; the timing and amount, if any, of payments received under licensing and research and development agreements; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the ability to comply with regulatory requirements; the emergence of competitive technology and market forces; the effectiveness of product commercialization activities and arrangements; the seasonal needs to fund growing costs to ensure adequate and consistent supply of produce; and other factors. If the Company's currently available funds, together with the internally generated cash flow from operations, are not sufficient to satisfy its financing needs, the Company would be required to seek additional funding through other arrangements with collaborative partners, bank borrowings and public or private sales of its securities. There can be no assurance that additional funds, if required, will be available to the Company on favorable terms if at all. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS The Company desires to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, the Company wishes to alert readers that the following important factors, as well as other factors including, without limitation, those described elsewhere in this report, could in the future affect, and in the past have affected, the Company's actual results and could cause the Company's results for future periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. The Company assumes no obligation to update such forward-looking statements. HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company has incurred net losses in each fiscal year since its inception, including a net loss of $2.8 million for fiscal year 1999. The Company's accumulated deficit as of October 31, 1999 totaled $45.5 million. The Company may incur additional losses in the future. The amount of future net profits, if any, is highly uncertain and there can be no assurance that the Company will be able to reach or sustain profitability for an entire fiscal year. THE COMPANY'S SUBSTANTIAL INDEBTEDNESS COULD LIMIT ITS FINANCIAL AND OPERATING FLEXIBILITY AND SUBJECT IT TO OTHER RISKS. Upon the closing of the Apio acquisition, the Company's total debt, including current maturities and capital lease obligations, increased to approximately $22 million and the total debt to equity ratio was approximately 40%. This level of indebtedness could have significant consequences because: - a substantial portion of the Company's net cash flow from operations must be dedicated to debt service and will not be available for other purposes; -24-
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- the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions may be limited; and - the Company's level of indebtedness may limit its flexibility in reacting to changes in the industry and economic conditions generally. The Company's ability to service its indebtedness will depend on its future performance, which will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond the Company's control. If the Company were unable to service its debt, it would be forced to pursue one or more alternative strategies such as selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital, which might not be successful and which could substantially dilute the ownership interest of existing shareholders. In addition, Apio is subject to various financial and operating covenants under its term debt and line of credit facilities (the "loan agreement"), including minimum levels of EBITDA, minimum fixed charge coverage ratio, minimum current ratio, minimum adjusted net worth and maximum leverage ratios. These requirements and ratios generally become more restrictive over time. The loan agreement limits the ability of Apio to make cash payments to Landec until the outstanding balance is reduced to an amount specified in the loan agreement. The Company has pledged substantially all of Apio's assets to secure its bank debt. The Company's failure to comply with the obligations under the loan agreement, including maintenance of financial ratios, could result in an event of default, which, if not cured or waived, would permit acceleration of the indebtedness due under the loan agreement. Any such violations of its obligations under the loan agreement could have a material adverse effect on the Company's business, results of operations and financial condition. QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. In the past, the Company's results of operations have varied significantly from quarter to quarter and such fluctuations are expected to continue in the future. Historically, the Company's corn seed distributor, Fielder's Choice, has been the primary source of these fluctuations, as its revenues and profits are concentrated over a few months during the spring planting season (generally during the Company's second quarter). In addition, Apio can be heavily affected by seasonal and weather factors which could impact quarterly results. The Company's earnings in its Food Products Technology business will be sensitive to price fluctuations in the fresh vegetables and fruits markets. Excess supplies can cause intense price competition. Other factors affecting the Company's food and/or agricultural operations include the seasonality of its supplies, the ability to process produce during critical harvest periods, the timing and effects of ripening, the degree of perishability, the effectiveness of worldwide distribution systems, the terms of various federal and state marketing orders, total worldwide industry volumes, the seasonality of consumer demand, foreign currency fluctuations, foreign importation restrictions and foreign political risks. As a result of these and other factors, the Company expects to continue to experience fluctuations in quarterly operating results, and there can be no assurance that the Company will be able to reach or sustain profitability for an entire fiscal year. UNCERTAINTY RELATING TO INTEGRATION OF APIO AND OTHER NEW BUSINESS ACQUISITIONS. The Company's acquisition of Apio involves the integration of Apio's operations into the Company. The integration will require the dedication of management resources in order to achieve the anticipated operating efficiencies of the acquisition. No assurance can be given that difficulties encountered in integrating the operations of Apio into the Company will be overcome or that the benefits expected from such integration will be realized. The difficulties in combining Apio and the Company's operations are exacerbated by the necessity of coordinating geographically separate organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the combined company's business. Difficulties encountered or additional costs incurred in connection with the acquisition and the integration of the operations of Apio and the Company could have a material adverse effect on the business, results of operations and financial condition of the Company. The successful integration of other new business acquisitions may require substantial effort from the Company's management. The diversion of the attention of management and any difficulties encountered in the transition process could have a material adverse effect on the Company's ability to realize the anticipated benefits of -25-
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the acquisitions. The successful combination of new businesses also requires coordination of research and development activities, manufacturing, and sales and marketing efforts. In addition, the process of combining organizations could cause the interruption of, or a loss of momentum in, the Company's activities. There can be no assurance that the Company will be able to retain key management, technical, sales and customer support personnel, or that the Company will realize the anticipated benefits of the acquisitions, and the failure to do so would have a material adverse effect on the Company's business, results of operations and financial condition. EARLY COMMERCIALIZATION OF CERTAIN PRODUCTS; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES; UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early stage of product commercialization of certain Intellipac breathable membrane, Intellicoat seed coating and Intelimer polymer systems products and many of its potential products are in development. The Company believes that its future growth will depend in large part on its ability to develop and market new products in its target markets and in new markets. In particular, the Company expects that its ability to compete effectively with existing food products, agricultural, industrial and medical companies will depend substantially on successfully developing, commercializing, achieving market acceptance of and reducing the cost of producing the Company's products. In addition, commercial applications of the Company's temperature switch polymer technology are relatively new and evolving. There can be no assurance that the Company will be able to successfully develop, commercialize, achieve market acceptance of or reduce the costs of producing the Company's new products, or that the Company's competitors will not develop competing technologies that are less expensive or otherwise superior to those of the Company. There can be no assurance that the Company will be able to develop and introduce new products and technologies in a timely manner or that new products and technologies will gain market acceptance. The failure to develop and successfully market new products would have a material adverse effect on the Company's business, results of operations and financial condition. The success of the Company in generating significant sales of its products will depend in part on the ability of the Company and its partners and licensees to achieve market acceptance of the Company's new products and technology. The extent to which, and rate at which, market acceptance and penetration are achieved by the Company's current and future products are a function of many variables including, but not limited to, price, safety, efficacy, reliability, conversion costs and marketing and sales efforts, as well as general economic conditions affecting purchasing patterns. There can be no assurance that markets for the Company's new products will develop or that the Company's new products and technology will be accepted and adopted. The failure of the Company's new products to achieve market acceptance would have a material adverse effect on the Company's business, results of operations and financial condition. COMPETITION AND TECHNOLOGICAL CHANGE. The Company operates in highly competitive and rapidly evolving fields, and new developments are expected to continue at a rapid pace. Competition from large food products, agricultural, industrial and medical companies is expected to be intense. In addition, the nature of the Company's collaborative arrangements may result in its corporate partners and licensees becoming competitors of the Company. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company, and may have substantially greater experience in conducting clinical and field trials, obtaining regulatory approvals and manufacturing and marketing commercial products. There can be no assurance that these competitors will not succeed in developing alternative technologies and products that are more effective, easier to use or less expensive than those which have been or are being developed by the Company or that would render the Company's technology and products obsolete and non-competitive. LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. The Company's success is dependent in part upon its ability to manufacture its products in commercial quantities in compliance with regulatory requirements and at acceptable costs. There can be no assurance that the Company will be able to achieve this. Although the Company believes Dock Resins will provide Landec with practical knowledge in the scale-up of Intelimer polymer products, production in commercial-scale quantities may involve technical challenges for the Company. The Company anticipates that a portion of the Company's products will be manufactured in the Linden, New Jersey facility acquired in the purchase of Dock Resins. The Company's reliance on this facility involves a number of potential risks, including the unavailability of, or interruption in access to, certain process technologies and reduced control over delivery schedules, and low manufacturing yields and high manufacturing costs. The -26-
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Company may also need to consider seeking collaborative arrangements with other companies to manufacture certain of its products. If the Company becomes dependent upon third parties for the manufacture of its products, then the Company's profit margins and its ability to develop and deliver such products on a timely basis may be adversely affected. Moreover, there can be no assurance that such parties will adequately perform and any failures by third parties may impair the Company's ability to deliver products on a timely basis, impair the Company's competitive position, or may delay the submission of products for regulatory approval. In late fiscal 1999, in an effort to reduce reliance on third party manufacturers, the Company began the set up of a manufacturing operation at its facility in Menlo Park, California, for the production of Intellipac breathable membrane products. There can be no assurance that the Company can successfully operate a manufacturing operation at acceptable costs, with acceptable yields, and retain adequately trained personnel. The occurrence of any of these factors could have a material adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON SINGLE SOURCE SUPPLIERS. Many of the raw materials used in manufacturing certain of the Company's products are currently purchased from a single source, including certain monomers used to synthesize Intelimer polymers and substrate materials for the Company's breathable membrane products. In addition, virtually all of the hybrid corn varieties sold by Fielder's Choice are purchased from a single source. Upon manufacturing scale-up and as hybrid corn sales increase, the Company may enter into alternative supply arrangements. Although to date the Company has not experienced difficulty acquiring materials for the manufacture of its products nor has Fielder's Choice experienced difficulty in acquiring hybrid corn varieties, no assurance can be given that interruptions in supplies will not occur in the future, that the Company will be able to obtain substitute vendors, or that the Company will be able to procure comparable materials or hybrid corn varieties at similar prices and terms within a reasonable time. Any such interruption of supply could have a material adverse effect on the Company's ability to manufacture and distribute its products and, consequently, could materially and adversely affect the Company's business, results of operations and financial condition. PATENTS AND PROPRIETARY RIGHTS. The Company's success depends in large part on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. There can be no assurance that any pending patent applications will be approved, that the Company will develop additional proprietary products that are patentable, that any patents issued to the Company will provide the Company with competitive advantages or will not be challenged by any third parties or that the patents of others will not prevent the commercialization of products incorporating the Company's technology. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the Company's products or design around the Company's patents. The Company has received, and may in the future receive, from third parties, including some of its competitors, notices claiming that it is infringing third party patents or other proprietary rights. If the Company were determined to be infringing any third-party patent, the Company could be required to pay damages, alter its products or processes, obtain licenses or cease certain activities. If the Company is required to obtain any licenses, there can be no assurance that the Company will be able to do so on commercially favorable terms, if at all. Litigation, which could result in substantial costs to and diversion of effort by the Company, may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of third-party proprietary rights. Any such litigation or interference proceeding, regardless of outcome, could be expensive and time consuming and could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the Company to cease using such technology and, consequently, could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business - Patents and Proprietary Rights" in Item 1. ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose various environmental controls on the use, storage, discharge or disposal of toxic, volatile or otherwise hazardous chemicals and gases used in certain manufacturing processes, including those utilized by Dock Resins. As a result of historic off-site disposal practices, Dock Resins was recently involved in two actions seeking to compel the generators of hazardous waste to remediate hazardous waste sites. Dock Resins has been informed by its counsel that it was a DE MINIMIS generator to these sites, and these actions have been settled without the payment of any material amount by the Company. In addition, the New Jersey Industrial Site Recovery Act ("ISRA") requires an investigation and remediation of any industrial establishment, like Dock Resins, which changes ownership. This statute was activated by the Company's acquisition of Dock Resins. Dock Resins has completed its investigation of the site, delineated the limited areas of -27-
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concern on the site, and completed the bulk of the active remediation required under the statute. The costs associated with this effort are being borne by the former owner of Dock Resins, and counsel has advised Dock Resins and the Company that funds of the former owner required by ISRA to be set aside for this effort are sufficient to pay for the successful completion of remedial activities at the site. In most cases, the Company believes its liability will be limited to sharing clean-up or other remedial costs with other potentially responsible parties. Any failure by the Company to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations could subject it to substantial liability or could cause its manufacturing operations to be suspended and could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that changes in environmental regulations will not impose the need for additional capital equipment or other requirements. The Company's agricultural operations are subject to a variety of environmental laws including the Food Quality Protection Act of 1966, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive Environmental Response, Compensation and Liability Act. Compliance with these laws and related regulations is an ongoing process. Environmental concerns are, however, inherent in most agricultural operations, including those conducted by the Company, and there can be no assurance that the cost of compliance with environmental laws and regulations will not be material. Moreover, it is possible that future developments, such as increasingly strict environmental laws and enforcement policies thereunder, and further restrictions on the use of manufacturing chemicals could result in increased compliance costs. ADVERSE GROWING CONDITIONS. The Company's Food Products and Agricultural Seed Technology businesses are subject to weather conditions that affect commodity prices, crop yields, and decisions by growers regarding crops to be planted. Crop diseases and severe conditions, particularly weather conditions such as floods, droughts, frosts, windstorms and hurricanes may adversely affect the supply of vegetables and fruits used in the Company's business, reduce the sales volumes and increase the unit production costs. Because a significant portion of the costs are fixed and contracted in advance of each operating year, volume declines due to production interruptions or other factors could result in increases in unit production costs which could result in substantial losses and weaken the Company's financial condition. If the supply of any of the Company's products is adversely affected by the adverse conditions, there can be no assurance that the Company will be able to obtain sufficient supplies from alternative sources. LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited experience marketing and selling its Intelimer polymer products. While Dock Resins will provide consultation and in some cases direct marketing support for Landec's Intelimer polymer products, establishing sufficient marketing and sales capability will require significant resources. The Company intends to distribute certain of its products through its corporate partners and other distributors and to sell certain other products through a direct sales force. There can be no assurance that the Company will be able to recruit and retain skilled sales management, direct salespersons or distributors, or that the Company's sales and marketing efforts will be successful. To the extent that the Company has entered into or will enter into distribution or other collaborative arrangements for the sale of its products, the Company will be dependent on the efforts of third parties. There can be no assurance that such sales and marketing efforts will be successful and any failure in such efforts could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON COLLABORATIVE PARTNERS AND LICENSEES. For certain of its current and future products, the Company's strategy for development, clinical and field testing, manufacture, commercialization and marketing includes entering into various collaborations with corporate partners, licensees and others. The Company is dependent on its corporate partners to develop, test, manufacture and/or market certain of its products. Although the Company believes that its partners in these collaborations have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted to these activities are not within the control of the Company. There can be no assurance that such partners will perform their obligations as expected or that the Company will derive any additional revenue from such arrangements. There can be no assurance that the Company's partners will pay any additional option or license fees to the Company or that they will develop, market or pay any royalty fees related to products under the agreements. Moreover, certain of the collaborative agreements provide that they may be terminated at the discretion of the corporate partner, and certain -28-
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of the collaborative agreements provide for termination under certain other circumstances. In addition, there can be no assurance as to the amount of royalties, if any, on future sales of QuickCast and PORT products as the Company no longer has control over the sales of such products since the sale of QuickCast and the license of the PORT product lines. There can be no assurance that the Company's partners will not pursue existing or alternative technologies in preference to the Company's technology. Furthermore, there can be no assurance that the Company will be able to negotiate additional collaborative arrangements in the future on acceptable terms, if at all, or that such collaborative arrangements will be successful. GOVERNMENT REGULATION. The Company's products and operations are subject to governmental regulation in the United States and foreign countries. The manufacture of the Company's products is subject to periodic inspection by regulatory authorities. There can be no assurance that the Company will be able to obtain necessary regulatory approvals on a timely basis or at all. Delays in receipt of or failure to receive such approvals or loss of previously received approvals would have a material adverse effect on the Company's business, financial condition and results of operations. Although Landec has no reason to believe that it will not be able to comply with all applicable regulations regarding the manufacture and sale of its products and polymer materials, such regulations are always subject to change and depend heavily on administrative interpretations and the country in which the products are sold. There can be no assurance that future changes in regulations or interpretations relating to such matters as safe working conditions, laboratory and manufacturing practices, environmental controls, and disposal of hazardous or potentially hazardous substances will not adversely affect the Company's business. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect on the Company's business, operating results and financial condition. As a result of the Apio acquisition, the Company is subject to USDA rules and regulations concerning the safety of the food products handled and sold by Apio, and the facilities in which they are packed and processed. Failure to comply with the applicable regulatory requirements can, among other things, result in fines, injunctions, civil penalties, suspensions or withdrawal of regulatory approvals, product recalls, product seizures, including cessation of manufacturing and sales, operating restrictions and criminal prosecution. See "Business - Governmental Regulations" in Item 1. INTERNATIONAL OPERATIONS AND SALES. In fiscal years 1999 and 1998, approximately 2.3% of the Company's total revenues were derived from product sales to and collaborative agreements with international customers. The Company expects that with the acquisition of Apio and its export business, international revenues will become an important component of its total revenues. A number of risks are inherent in international transactions. International sales and operations may be limited or disrupted by the regulatory approval process, government controls, export license requirements, political instability, price controls, trade restrictions, changes in tariffs or difficulties in staffing and managing international operations. Foreign regulatory agencies have or may establish product standards different from those in the United States, and any inability to obtain foreign regulatory approvals on a timely 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 and Apio's export business, 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. CUSTOMER CONCENTRATION. For the fiscal year 1999, sales to the Company's top five customers accounted for approximately 28% of the Company's product sales with the top customer accounting for 10% 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 Apio, 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 certain products manufactured in the Linden, New Jersey facility or processed by Apio at its Guadalupe, California facility -29-
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are often sole sourced to its customers, the Company's operating results could be 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. -30-
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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. In addition, Apio has product liability insurance with limits in the amount of $41.0 million per occurrence and $42.0 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. FINANCIAL AND ACCOUNTING CHANGES. In order to address certain deficiencies in Apio's management information systems and accounting systems, Apio has restructured its financial and accounting department, including hiring a chief financial officer and a new controller, and retained consultants who have worked with Apio to improve accounting processes and procedures. Apio management believes that such changes will improve its managing of operations, including delivering complete and accurate financial statements to Landec's corporate offices in a more timely manner. However, the Company can give no assurances that it will be able to effect such changes in the management information systems and accounting systems in a timely manner or that any delay will not have a material adverse effect on our business, financial condition and results of operations. INTRODUCTION OF THE EURO. On January 1, 1999, certain member states of the European Economic Community fixed their respective currencies to a new currency, commonly known as the "Euro". During the three years beginning on January 1, 1999, business in these countries will be conducted both in the existing national currency, as well as the Euro. Companies operating in or conducting business in these countries will need to ensure that their financial and other software systems are capable of processing transactions and properly handling the existing currencies and the Euro. Based on the current level of direct European business conducted by the Company, and also because the Company expects that any transactions in Europe in the near future will be priced in U.S. dollars, the Company does not expect that introduction and use of the Euro will materially affect the Company's business. The Company will continue to evaluate the impact over time of the introduction of the Euro. However, if the Company encounters unexpected opportunities or difficulties in Europe, the Company's business could be adversely affected, including the inability to bill customers and to pay suppliers for transactions denominated in the Euro and the inability to properly record transactions denominated in the Euro in the Company's financial statements. 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 properly, date-sensitive information in the Year 2000 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. -31-
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The Company has certain key relationships with customers, vendors and outside service providers. The Company is primarily relying upon the voluntary disclosures from third parties for this review of their Year 2000 readiness. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 of Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -32-
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PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information required by this item is contained in the Registrant's definitive proxy statement which the Registrant will file with the Commission no later than February 28, 2000 (120 days after the Registrant's fiscal year end covered by this Report) and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION This information required by this item is contained in the Registrant's definitive proxy statement which the Registrant will file with the Commission no later than February 28, 2000 (120 days after the Registrant's fiscal year end covered by this Report) and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information required by this item is contained in the Registrant's definitive proxy statement which the Registrant will file with the Commission no later than February 28, 2000 (120 days after the Registrant's fiscal year end covered by this Report) and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information required by this item is contained in the Registrant's definitive proxy statement which the Registrant will file with the Commission no later than February 28, 2000 (120 days after the Registrant's fiscal year end covered by this Report) and is incorporated herein by reference. -33-
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PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K [Enlarge/Download Table] (a) 1. Consolidated Financial Statements of Landec Corporation and Subsidiaries Page ---- Report of Ernst & Young LLP Independent Auditors 35 Consolidated Balance Sheets at October 31, 1999 and 1998 36 Consolidated Statement of Operations for the Years Ended October 31, 1999, 1998 and 1997 37 Consolidated Statement of Changes in Shareholders' Equity for the Years Ended October 31, 1999, 1998 and 1997 38 Consolidated Statement of Cash Flows for the Years Ended October 31, 1999, 1998 and 1997 39 Notes to Consolidated Financial Statements 40 2. Schedule II: Valuation and Qualifying Accounts for the Years Ended October 31, 1999, 1998 and 1997 55 All other schedules provided for in the applicable accounting regulation of the Securities and Exchange Commission pertain to items which do not appear in the financial statements of Landec Corporation and its subsidiaries or to items which are not significant or to items as to which the required disclosures have been made elsewhere in the financial statements and supplementary notes and such schedules have therefore been omitted. (b) Reports on Form 8-K 56 (c) Exhibits 56 The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this report. -34-
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Landec Corporation We have audited the accompanying consolidated balance sheets of Landec Corporation as of October 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended October 31, 1999. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Landec Corporation at October 31, 1999 and 1998 and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 1999 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP San Francisco, California December 6, 1999 -35-
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LANDEC CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) [Enlarge/Download Table] OCTOBER 31, ----------- 1999 1998 --------------- --------------- ASSETS Current assets: Cash and cash equivalents......................................... $ 3,203 $ 9,185 Short-term investments............................................ -- 992 Accounts receivable, less allowance for doubtful accounts of $45 and $50 at October 31, 1999 and 1998........................... 2,952 2,808 Inventory......................................................... 7,641 4,676 Deferred advertising.............................................. 522 394 Related party note receivable..................................... 138 500 Prepaid expenses and other current assets......................... 1,711 1,228 --------------- --------------- Total current assets.......................................... 16,167 19,783 Property and equipment, net.......................................... 11,002 8,280 Intangible assets, net............................................... 13,506 14,255 Other assets......................................................... 33 38 --------------- --------------- $ 40,708 $ 42,356 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................. $ 1,687 $ 1,399 Accrued compensation.............................................. 1,036 1,017 Other accrued liabilities......................................... 1,327 942 Deferred revenue.................................................. 2,135 2,499 Current portion of long term debt................................. 125 156 --------------- --------------- Total current liabilities....................................... 6,310 6,013 Noncurrent portion of long term debt................................. 2,637 2,655 Shareholders' equity: Preferred stock, $0.001 par value; 2,000,000 shares authorized, issueable in series............................................ -- -- Common stock, $0.001 par value; 50,000,000 shares authorized; 13,353,352 and 13,159,888 shares issued and outstanding at October 31, 1999 and 1998, respectively........................ 77,289 76,821 Notes receivable from shareholders................................ -- (291) Deferred compensation............................................. -- (86) Accumulated deficit............................................... (45,528) (42,756) --------------- --------------- Total shareholders' equity...................................... 31,761 33,688 --------------- --------------- $ 40,708 $ 42,356 =============== =============== SEE ACCOMPANYING NOTES. -36-
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LANDEC CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) [Enlarge/Download Table] YEAR ENDED OCTOBER 31, ---------------------- 1999 1998 1997 ----------- ------------ ------------- Revenues: Product sales....................................................$ 33,927 $ 31,664 $ 8,653 Research and development revenues................................ 770 1,352 863 License fees..................................................... 750 500 -- ----------- ------------ ------------- Total revenues................................................ 35,447 33,516 9,516 Operating costs and expenses: Cost of product sales............................................ 21,476 20,308 6,215 Research and development......................................... 5,758 5,713 4,608 Selling, general and administrative.............................. 11,192 10,835 4,664 Purchased in-process research and development.................... -- -- 3,022 ----------- ------------- ------------ Total operating costs and expenses............................ 38,426 36,856 18,509 ----------- ------------ ------------- Operating loss...................................................... (2,979) (3,340) (8,993) Interest income..................................................... 363 737 1,726 Interest expense.................................................... (99) (137) (319) ----------- ------------ ------------- Loss from continuing operations before income taxes................. (2,715) (2,740) (7,586) Provision for income taxes.......................................... (54) (150) -- ----------- ------------ ------------- Loss from continuing operations..................................... (2,769) (2,890) (7,586) Discontinued Operations: Loss from discontinued QuickCast operations...................... -- -- (1,059) Gain on disposal of QuickCast operations......................... -- -- 70 ----------- ------------ ------------- Loss from discontinued operations................................... -- -- (989) ----------- ------------ ------------- Net loss............................................................ $(2,769) $(2,890) $(8,575) =========== ============ ============= Basic and diluted net loss per share: Continuing operations............................................$ (.21) $ (.23) $ (.68) Discontinued operations.......................................... -- -- (.09) ----------- ------------ ------------- Basic and diluted net loss per share................................$ (.21) $ (.23) $ (.77) =========== ============ ============= Shares used in computing basic and diluted net loss per share....... 13,273 12,773 11,144 =========== ============ ============= SEE ACCOMPANYING NOTES. -37-
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LANDEC CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) [Enlarge/Download Table] SHAREHOLDERS' EQUITY ------------------------------------------------------------ NOTES COMMON STOCK RECEIVABLE ----------------------- FROM DEFERRED SHARES AMOUNT SHAREHOLDERS COMPENSATION ---------- --------- -------------- ------------ Balance at October 31, 1996 ........................ 10,753,711 $68,242 $ (13) $(311) Issuance of common stock for acquired businesses ... 1,821,687 7,273 -- -- Issuance of common stock at $0.58 to $6.48 per share 112,018 164 -- -- Repayment of notes receivable ...................... -- -- 5 -- Amortization of deferred compensation .............. -- -- -- 113 Change in unrealized gain on available-for-sale securities ...................................... -- -- -- -- Net loss ........................................... -- -- -- -- ---------- --------- -------------- ------------ Balance at October 31, 1997 ........................ 12,687,416 $75,679 $ (8) $(198) Issuance of common stock at $0.58 to $7.00 per share 425,885 1,142 -- -- Exercise of warrants ............................... 46,587 -- -- -- Net increase in notes receivable from shareholders . -- -- (283) -- Amortization of deferred compensation .............. -- -- -- 112 Change in unrealized gain on available-for-sale securities ...................................... -- -- -- -- Net loss ........................................... -- -- -- -- ---------- --------- -------------- ------------ Balance at October 31, 1998 ........................ 13,159,888 $76,821 $(291) $ (86) ========== ========= ============== ============ Issuance of common stock at $0.58 to $5.56 per share 193,464 468 -- -- Net decrease in notes receivable from shareholders . -- -- 291 -- Amortization of deferred compensation .............. -- -- -- 86 Change in unrealized gain on available-for-sale securities ...................................... -- -- -- -- Net loss ........................................... -- -- -- -- ---------- --------- -------------- ------------ Balance at October 31, 1999 ........................ 13,353,352 $77,289 $ -- $ -- ========== ========= ============== ============ TOTAL ACCUMULATED SHAREHOLDERS' DEFICIT EQUITY -------------- ---------------- Balance at October 31, 1996 ........................ $(31,278) $ 36,640 Issuance of common stock for acquired businesses ... -- 7,273 Issuance of common stock at $0.58 to $6.48 per share -- 164 Repayment of notes receivable ...................... -- 5 Amortization of deferred compensation .............. -- 113 Change in unrealized gain on available-for-sale securities ...................................... (5) (5) Net loss ........................................... (8,575) (8,575) -------------- ---------------- Balance at October 31, 1997 ........................ $(39,858) $ 35,615 Issuance of common stock at $0.58 to $7.00 per share -- 1,142 Exercise of warrants ............................... -- -- Net increase in notes receivable from shareholders . -- (283) Amortization of deferred compensation .............. -- 112 Change in unrealized gain on available-for-sale securities ...................................... (8) (8) Net loss ........................................... (2,890) (2,890) -------------- ---------------- Balance at October 31, 1998 ........................ $(42,756) $ 33,688 ============== ================ Issuance of common stock at $0.58 to $5.56 per share -- 468 Net decrease in notes receivable from shareholders . -- 291 Amortization of deferred compensation .............. -- 86 Change in unrealized gain on available-for-sale securities ...................................... (3) (3) Net loss ........................................... (2,769) (2,769) -------------- ---------------- Balance at October 31, 1999 ........................ $(45,528) $ 31,761 ============== ================ SEE ACCOMPANYING NOTES. -38-
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LANDEC CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) [Enlarge/Download Table] YEAR ENDED OCTOBER 31, ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities: Net loss from continuing operations..........................................$ (2,769) $ (2,890) $ (7,586) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................................. 2,214 2,075 1,051 Write-off of purchased in-process research and development................. -- -- 3,022 Loss from discontinued operations.......................................... -- -- (989) Changes in assets and liabilities, net of effects from acquisitions and discontinued operations: Accounts receivable...................................................... (144) (646) (328) Inventory................................................................ (2,965) (2,024) 24 Deferred advertising..................................................... (128) 16 (97) Receivables from related parties......................................... 362 (500) -- Prepaid expenses and other current assets................................ (483) 82 (902) Accounts payable......................................................... 288 757 (1,275) Accrued compensation..................................................... 19 181 218 Other accrued liabilities................................................ 385 (578) 975 Deferred revenue......................................................... (364) 173 389 ----------- ----------- ----------- Total adjustments (816) (464) 2,088 ----------- ----------- ----------- Net cash used in operating activities........................................... (3,585) (3,354) (5,498) ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment........................................... (3,708) (4,100) (1,344) Decrease in other assets...................................................... 5 74 31 Purchases of available-for-sale securities.................................... -- (5,033) (14,828) Sale of available-for-sale securities......................................... -- 4,805 4,041 Maturities of available-for-sale securities................................... 989 8,734 23,602 Acquisition of businesses, net of cash acquired............................... (393) (390) (6,224) Net proceeds from disposition of QuickCast operation.......................... -- -- 425 ----------- ----------- ----------- Net cash provided by (used in) investing activities............................. (3,107) 4,090 5,703 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from sale of restricted investment................................... -- 8,837 -- Purchase of restricted investment............................................. -- -- (8,837) Proceeds from sale of common stock, net of repurchases........................ 468 1,142 164 Decrease (increase) in repayment of notes receivable from shareholders....... 291 (283) 5 Payments on long term debt.................................................... (90) (10) (559) Proceeds from issuance of long term debt...................................... 41 2,789 -- Payment of payable related to the acquisition of Dock Resins Corporation...... -- (9,189) -- ----------- ----------- ----------- Net cash provided by (used in) financing activities............................. 710 3,286 (9,227) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............................ (5,982) 4,022 (9,022) Cash and cash equivalents at beginning of year.................................. 9,185 5,163 14,185 ----------- ----------- ----------- Cash and cash equivalents at end of year.......................................$ 3,203 $ 9,185 $ 5,163 =========== =========== =========== Supplemental disclosure of cash flows information: Cash paid during the period for interest, net of capitalized interest........$ 76 $ 383 $ 75 =========== =========== =========== Cash paid during the period for income taxes.................................$ 33 $ 38 $ 32 =========== =========== =========== Supplemental schedule of noncash investing and financing activities: Common stock issued in the acquisition of businesses.........................$ -- $ -- $ 7,273 =========== =========== =========== SEE ACCOMPANYING NOTES. -39-
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LANDEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Landec Corporation and its subsidiaries (the "Company") design, develop, manufacture, and sell temperature-activated and other specialty polymer products for a variety of food product, agricultural products, specialty industrial and medical applications. In addition, the Company markets and distributes hybrid corn seed to producer customers. BASIS OF CONSOLIDATION The consolidated financial statements comprise the accounts of Landec Corporation and its wholly owned subsidiaries, Intellicoat Corporation ("Intellicoat") and Dock Resins Corporation ("Dock Resins"). All intercompany transactions and balances have been eliminated. CONCENTRATIONS OF CREDIT RISK Cash, cash equivalents and short-term investments are financial instruments which potentially subject the Company to concentrations of risk. Corporate policy limits, among other things, the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued or guaranteed by the U.S. government. CASH, CASH EQUIVALENTS AND INVESTMENTS The Company records all highly liquid securities with three months or less from date of purchase to maturity as cash equivalents. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. As of October 31, 1999 and 1998, the Company's debt securities are carried at fair value and classified as available-for-sale, as the Company may not hold these securities until maturity in order to take advantage of market conditions. Unrealized gains and losses are reported as a component of shareholders' equity and were immaterial for all years presented. The cost of debt securities is adjusted for amortization of premiums and discounts to maturity. This amortization is included in interest income. Realized gains and losses on the sale of available-for-sale securities are also included in interest income and were immaterial for fiscal year 1999. The cost of securities sold is based on the specific identification method. INVENTORIES Inventories are stated at the lower of cost (using the first-in, first-out method) or market. As of October 31, 1999 and 1998 inventories consisted of (in thousands): [Enlarge/Download Table] OCTOBER 31, --------------------------- 1999 1998 ------------- ------------- Finished goods.......................................................... $6,169 $3,785 Raw materials........................................................... 1,015 663 Work in process......................................................... 457 228 ------------- ------------- $7,641 $4,676 ============= ============= -40-
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED ADVERTISING The Company defers certain costs related to direct-response advertising of its hybrid corn seeds. Such costs are amortized over periods (less than one year) that correspond to the estimated revenue stream of the advertising activity. Advertising expenditures that are not direct-response advertisements are expensed as incurred. The advertising expense for fiscal years 1999 and 1998 was $1,272,000 and $1,165,000, respectively. The advertising expense for fiscal year 1997 was zero as the Company acquired Fielder's Choice in September, 1997. RECEIVABLE FROM RELATED PARTIES In October 1998, the Company loaned an officer of Intellicoat $500,000 in cash in exchange for a promissory note. Interest accrued at 7.50% per annum, compounded annually. On July 31, 1999 the balance of principal and accrued interest were offset by an earn-out provision related to the acquisition of Fielder's Choice by the Company. The resulting principal balance of $138,000 plus interest, if any, is due and payable on July 31, 2000. The $138,000 note has been included in other current assets at October 31, 1999. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are charged to expense. Depreciation is expensed on a straight-line basis over the estimated useful lives of the respective assets, generally twenty to thirty-one years for buildings and improvements and three to ten years for furniture, computers, machinery and equipment. Leasehold improvements are amortized over the lesser of the economic life of the improvement or the life of the lease on a straight-line basis. INTANGIBLE ASSETS Intangible assets represent the excess of acquisition costs over the estimated fair value of net assets acquired and consist of covenants not to compete, customer bases, work forces in place, trademarks, developed technology and goodwill. These assets are amortized on a straight-line basis over periods ranging from five to twenty years based on their estimated useful lives. DEFERRED REVENUE Cash received in advance of services performed or shipment of products, primarily hybrid corn seed, are recognized as a liability and recorded as deferred revenue. At October 31, 1999 approximately $2.1 million has been recognized as a liability for advances on future hybrid corn seed shipments. PER SHARE INFORMATION In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Due to the Company's net loss in all periods presented, net loss per share includes only weighted average shares outstanding. All earnings per share amounts for all periods have been presented in accordance with SFAS No. 128 requirements. -41-
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenues related to research contracts are recognized ratably over the related funding periods for each contract, which is generally as research is performed. Revenues related to license agreements with noncancelable, nonrefundable terms and no significant future obligations are recognized upon inception of the agreements. Product sales are recognized upon shipment. RESEARCH AND DEVELOPMENT EXPENSES Costs related to both research contracts and Company-funded research is included in research and development expenses. Costs to fulfill research contracts generally approximate cost. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for its stock option plans and its employee stock purchase plans in accordance with the provisions of the Accounting Principles Board Opinion No. 25 (APB 25) "Accounting for Stock Issued to Employees." USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPAIRMENT OF LONG LIVED ASSETS The Company has adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company records impairment losses on long-lived assets used in operations or expected to be disposed when events and circumstances indicate that the assets are less than the carrying amounts of those assets. No such event and circumstances have occurred. 2. BUSINESS ACQUISITIONS On April 18, 1997, the Company acquired Dock Resins Corporation ("Dock Resins") a privately-held manufacturer and marketer of specialty acrylics and other polymers located in Linden, New Jersey for $15.8 million, comprised of $13.7 million in cash, a secured promissory note paid in January 1998 and direct acquisition costs along with 396,039 shares of common stock valued at $2.1 million. A payable of $9.5 million was recorded as of the acquisition date to recognize the promissory note and other liabilities related to the acquisition. A marketable investment of $8.8 million was set aside as security for payment of the promissory note, and subsequently used to pay off the promissory note in January 1998. In addition, $1.5 million of the cash consideration and all of the equity consideration was set aside in escrow to cover future costs associated with obligations under the representations and warranties made by the shareholder of Dock Resins in connection with the acquisition. During fiscal year 1998 $460,000 was drawn down from the escrow account to pay for obligations under the agreement. No amounts were drawn from the account during fiscal years 1999 and 1997. The escrow account expires on April 18, 2002. Management determined the portion of the purchase price allocable to in-process research and development based on the assessment of the technology and the effort required to complete the technology and sought advice from an independent appraiser with respect to the value of the in-process research and development. This assessment resulted in a $3.0 million charge during fiscal year 1997 as required under generally accepted accounting principles. Such in-process technology was determined to have no alternative future uses. The acquisition was accounted for using the purchase method. -42-
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2. BUSINESS ACQUISITIONS (CONTINUED) On September 30, 1997, Intellicoat acquired Williams & Sun, Inc. d/b/a Fielder's Choice Hybrids ("Fielder's Choice") a privately-held direct marketer of hybrid seed corn, located in Monticello, Indiana for $8.8 million, comprised of $3.6 million in cash and direct acquisition costs along with 1,425,648 shares of common stock valued at approximately $5.2 million. Terms of the agreement include additional consideration up to $2.4 million in the form of a cash earn-out based on the future performance of the Fielder's Choice business. During fiscal years 1999 and 1998, earn-out payments were made in the amount of $393,000 and $390,000, respectively. The acquisition was accounted for using the purchase method. 3. DISCONTINUED OPERATIONS In fiscal year 1997, the Company entered into an agreement with Bissell Healthcare Corporation ("Bissell") to sell substantially all of the net assets of QuickCast for $950,000 in cash plus royalties on future sales through August 28, 2007. As a result, the operations of the QuickCast product line for fiscal year 1997 has been classified as discontinued in the consolidated statements of operations. During fiscal years 1999 and 1998, the Company recognized $12,000 and $20,000 respectively, of royalties income related to this agreement. 4. COLLABORATIVE AGREEMENTS To facilitate the commercialization of its products, the Company has established a number of strategic alliances in which the Company receives license payments, research and development funding and/or future royalties in exchange for certain technology or marketing rights. HITACHI CHEMICAL. The Company entered into two separate collaborations with Hitachi Chemical ("Hitachi") in the areas of industrial adhesives and Intelimer Polymer Systems. On October 1, 1994, the Company entered into a non-exclusive license agreement for seven years with Hitachi in the industrial adhesives area. The agreement provides Hitachi with a non-exclusive license to manufacture and sell products using Landec's Intelimer materials in certain Asian countries. Landec received up-front license fees upon signing the agreement and is entitled to future royalties based on net sales by Hitachi of the licensed products. Any fees paid to the Company are non-refundable. On August 10, 1995, the Company entered into the second collaboration with Hitachi in the Intelimer Polymer Systems area. The agreement provided Hitachi with an exclusive license to use and sell Landec's Intelimer Polymer Systems in industrial latent curing products in certain Asian countries. Landec is entitled to be the exclusive supplier of Intelimer Polymer Systems to Hitachi for at least seven years after commercialization. Landec received an up-front license payment upon signing this agreement and research and development funding over three years and is entitled to receive future royalties based on net sales by Hitachi of the licensed products. Any fees paid to the Company are non-refundable. This agreement has been converted to a non-exclusive agreement except for one application field. In conjunction with this agreement, Hitachi 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. 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. -43-
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4. COLLABORATIVE AGREEMENTS (CONTINUED) ALCON. In December 1997, Landec licensed the rights to worldwide manufacturing, marketing and distribution of its PORT ophthalmic device to Alcon. Under the terms of the transaction, Landec received an up-front cash payment, a $1 million milestone payment in November 1998, research and development funding and will receive ongoing royalties of 12.5% on product sales of each PORT device over an approximately 15-year period. In September 1999, Alcon submitted a 510K application to the FDA seeking approval to commercially sell the PORT device. Landec will continue to provide development support on a contract basis through the FDA approval process and product launch. CONVATEC. On October 11, 1999, the Company entered into a joint development agreement ConvaTec, a division of Bristol Myers Squibb, under which Landec will develop adhesive film products for selected ConvaTec medical products. Landec is receiving support funding for this program. Upon completion of this agreement, the companies have the option to consider a supply agreement where Landec would supply materials to ConvaTec of use in specific medical devices. 5. AVAILABLE-FOR-SALE SECURITIES There were no available-for-sale securities as of October 31, 1999. The following is a summary of available-for-sale securities as of October 31, 1998 (in thousands): [Enlarge/Download Table] GROSS GROSS OCTOBER 31, 1998 UNREALIZED UNREALIZED ESTIMATED FAIR AMORTIZED COST GAINS LOSSES VALUE -------------- ----------- ----------- -------------- U.S. government and agency obligations..........$ 996 $ -- $ -- $ 996 U.S. states or political subdivisions obligations.................................. 359 -- -- 359 Corporate debt securities....................... 1,987 3 -- 1,990 -------------- ----------- ----------- -------------- Total securities................................$ 3,342 $ 3 $ -- $ 3,345 ============== =========== =========== ============== Amounts included in: Cash equivalents................................$ 2,353 $ -- $ -- $ 2,353 Short-term investments.......................... 989 3 -- 992 -------------- ----------- ----------- -------------- Total securities................................$ 3,342 $ 3 $ -- $ 3,345 ============== =========== =========== ============== 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): [Enlarge/Download Table] OCTOBER 31, -------------------------- 1999 1998 ------------- ------------- Land and buildings.........................................$ 3,945 $ 3,132 Leasehold improvements..................................... 1,372 1,291 Computer, machinery, equipment and autos................... 8,155 5,293 Furniture and fixtures..................................... 592 291 Construction in process.................................... 1,173 1,651 ------------- ------------- 15,237 11,658 Less accumulated depreciation and amortization............. (4,235) (3,378) ------------- ------------- $ 11,002 $ 8,280 ============ ============ Depreciation expense for fiscal years 1999, 1998 and 1997 was $986,000, $844,000, and $603,000, respectively. -44-
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7. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands): [Download Table] OCTOBER 31, ------------------------ 1999 1998 --------- ------------ Developed technology....................... $ 5,036 $ 5,036 Trademark.................................. 4,975 4,975 Customer base.............................. 2,396 2,396 Workforce in place......................... 910 910 Covenants not to compete................... 277 277 Goodwill................................... 2,509 2,116 -------------- ------------- 16,103 15,710 Less accumulated amortization............... (2,597) (1,455) -------------- ------------- $13,506 $ 14,255 ============== ============= Amortization expense for fiscal years 1999, 1998, and 1997 was $1,142,000, $1,120,000, and $335,000, respectively. 8. WARRANTS 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. 9. SHAREHOLDERS' EQUITY COMMON STOCK, STOCK PURCHASE PLANS AND STOCK OPTION PLANS 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. At October 31, 1998, certain directors and officers of the Company were obligated to the Company for $291,000 relating to this issuance. This amount was recorded to shareholders' equity at October 31, 1998. The outstanding balances were paid in full by December 1998. The Company has 4,507,144 common shares reserved for future issuance under Landec Corporation stock option plans and employee stock purchase plans. The Company terminated its 1988 Stock Option Plan during fiscal year 1998 and canceled all stock options available for grant. The 1995 Directors' Stock Option Plan (the "Directors' Plan") provides that each person who becomes a nonemployee director of the Company, who has not received a previous grant, shall be granted a nonstatutory stock option to purchase 20,000 shares of common stock on the date on which the optionee first becomes a nonemployee director of the Company. Thereafter, on the date of each annual meeting of the shareholders each non-employee director shall be granted an additional option to purchase 10,000 shares of common stock if, on such date, he or she shall have served on the Company's Board of Directors for at least six months prior to the date of such annual meeting. The exercise price of the options is the fair market value of the Company's common stock on the date the options are granted. The Directors' Plan, as amended in 1998, authorizes the issuance of 400,000 shares under the plan. Options granted under this plan are exerciseable and vest upon grant. All directors' stock option grants outstanding on December 4, 1997 with an exercise price greater than $6.75, were repriced to $6.75 per share, the fair market value of the Company's common stock on April 15, 1998, the date of the annual shareholders' meeting. -45-
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9. SHAREHOLDERS' EQUITY (CONTINUED) The 1996 Non-Executive Stock Option Plan authorizes the Board of Directors to grant non-qualified stock options to employees and outside consultants who are not officers or directors of the Company. The exercise price of the options will be equal to the fair market value of the Company's common stock on the date the options are granted. As amended in 1999, 1,500,000 shares are authorized to be issued under this plan. Options are exercisable upon vesting and generally vest ratably over four years and are subject to repurchase if exercised before being vested. In November 1996, the Company's Board of Directors approved the 1996 Stock Option Plan. Under this plan, the Board of Directors of Landec may grant stock purchase rights, incentive stock options or non-statutory stock options to Landec executives. The exercise price of the stock purchase rights, incentive stock options and non-statutory stock options may be no less than 100% of the fair market value of Landec's common stock on the date the options are granted. The plan, as amended, authorizes the issuance of 1,500,000 shares of Landec common stock under the plan. Options are exercisable upon vesting and generally vest ratably over four years and are subject to repurchase if exercised before being vested. In January 1997, the company effected an option repricing program to allow non-officer employees and outside consultants who were issued options under the 1988 Stock Option Plan at an exercise price above $14.50 per share to exchange their out-of-money stock options for the same number of options at a more favorable exercise price. Under this repricing program, one new option could be obtained for every option cancelled. The exercise price of the new option was based on the fair market value of the Company's common stock on the date the old options were exchanged. The new options vest ratably over four years (commencing one year from January 7, 1997, the repricing date) and are subject to repurchase if exercised before being vested. As a result of this repricing program, options to purchase 58,250 shares were repriced. In January 1998, the Company effected another option repricing program to allow employees, directors and officers who were issued options under the 1988 Stock Option Plan, 1996 Non-Executive Stock Option Plan and 1996 Stock Option Plan at an exercise price above $5.00 per share to exchange their out-of-money stock options for the same number of options at a more favorable exercise price. The officers and directors repricing was approved at the April 15, 1998 shareholders' meeting. Under this repricing program, one new option could be obtained for every option cancelled. The exercise price of the new option was based on the higher of fair market value of the Company's common stock on the date the old options were exchanged, or $5.00 per share. The new options vest ratably over four years (commencing December 4, 1997, the repricing date) and are subject to repurchase if exercised before being vested. As a result of this repricing program and the repricing of the options issued under the 1995 Directors' Plan, options to purchase 753,100 shares were repriced. -46-
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9. SHAREHOLDERS' EQUITY (CONTINUED) Activity under all Landec Stock Option Plans is as follows: [Enlarge/Download Table] Outstanding Options ------------------------------------- Options Weighted Available Number Average for Grant of Shares Exercise Price ----------------------------------------------------------------------------------------------- Balance at October 31, 1996 1,177,517 1,178,348 $2.46 Additional shares reserved 750,000 -- -- Options granted (1,070,300) 1,070,300 $8.63 Options exercised -- (95,592) $0.78 Options forfeited 158,384 (158,384) $6.88 Options canceled 58,250 (58,250) $19.11 ---------------------------------------------------------------------------- Balance at October 31, 1997 1,073,851 1,936,422 $5.11 Additional shares reserved 950,000 -- -- Options granted (1,584,828) 1,584,828 $5.12 Options exercised -- (163,394) $0.69 Options forfeited 123,851 (123,851) $6.46 Options canceled 753,100 (753,100) $9.84 Expired in 1988 Plan (60,633) -- -- ---------------------------------------------------------------------------- Balance at October 31, 1998 1,255,341 2,480,905 $3.90 Additional shares reserved 750,000 -- -- Options granted (663,300) 663,300 $4.79 Options exercised -- (100,265) $1.52 Options forfeited 108,220 (108,220) $5.20 Expired in 1988 Plan (2,977) -- -- ---------------------------------------------------------------------------- Balance at October 31, 1999 1,447,284 2,935,720 $4.14 At October 31, 1999, 1998 and 1997, options to purchase 1,494,662, 1,101,387 and 902,135 of Landec's common stock were vested, respectively. No options have been exercised prior to being vested. For options granted through October 31, 1999, the Company recognized an aggregate of $451,000 as deferred compensation for the excess of the deemed value for accounting purposes of the common stock not issueable on exercise of such options over the aggregate exercise price of such options. The deferred compensation expense is being amortized ratably over the vesting period of the options. Total deferred compensation expense recognized in the Company's financial statements for stock-option awards under APB 25 for fiscal years 1999, 1998 and 1997 was $86,000, $112,000 and $113,000, respectively. -47-
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9. SHAREHOLDERS' EQUITY (CONTINUED) The following tables summarize information about Landec options outstanding and exerciseable at October 31, 1999. [Download Table] OPTIONS OUTSTANDING ------------------------------------------------------------------- Weighted Average Weighted Contractual Average Range of Number Life Exercise Exercise Prices of Shares (in years) Price ------------------------------------------------------------------- $0.5800 - $0.5800 365,505 2.78 $0.58 $0.8600 - $1.4400 301,630 5.44 $1.13 $3.3750 - $4.9380 631,907 9.26 $4.75 $5.0000 - $5.0000 1,273,850 8.15 $5.00 $5.0630 - $6.7500 315,328 8.11 $5.89 $7.0000 - $9.3400 47,500 7.38 $7.59 ------------- $0.5800 - $9.3400 2,935,720 7.42 $4.14 [Download Table] OPTIONS EXERCISEABLE ------------------------------------------------------------------- Weighted Range of Number Average Exercise Prices of Shares Exercise Price ------------------------------------------------------------------- $0.5800 - $0.5800 365,505 $0.58 $0.8600 - $1.4400 300,399 $1.13 $3.3750 - $4.9380 143,235 $4.45 $5.0000 - $5.0000 437,786 $5.00 $5.0630 - $6.7500 217,063 $6.13 $7.0000 - $9.3400 30,674 $7.75 -------------------- $0.5800 - $9.3400 1,494,662 $3.31 EMPLOYEE STOCK PURCHASE PLAN. The Company has an employee stock purchase plan which permits eligible employees to purchase common stock, which may not exceed 10% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of the Company's common stock at the beginning of the offering period or on the purchase date. As of October 31, 1999, 175,860 shares have been issued under the Purchase Plan. INTELLICOAT STOCK PLAN. Under the 1996 Intellicoat Stock Plan, the Board of Directors of Intellicoat may grant stock purchase rights, incentive stock options or non-statutory stock options to employees and outside consultants. The exercise price of the stock purchase rights, incentive stock options and non-statutory stock options may be no less than 85%, 100% and 85%, respectively, of the fair market value of Intellicoat's common stock as determined by Intellicoat's Board of Directors. Two million shares are authorized to be issued under this plan. Options are exercisable upon vesting and generally vest ratably over four years and are subject to repurchase if exercised before being vested. -48-
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9. SHAREHOLDERS' EQUITY (CONTINUED) The following table summarizes activity under the Intellicoat Stock Option Plan. [Enlarge/Download Table] Outstanding Options ------------------------------------------ Options Available Number of Shares Weighted Average ------------- ------------------ ------------------- Balance at October 31, 1996 2,000,000 0 -- Options granted (1,239,300) 1,239,300 $0.12 Options forfeited 3,300 (3,300) $0.12 ------------- ------------------ Balance at October 31, 1997 764,000 1,236,000 $0.12 Options granted (59,900) 59,900 $0.20 Options forfeited 11,800 (11,800) $0.20 ------------- ------------------ Balance at October 31, 1998 715,900 1,284,100 $0.12 Options granted (248,800) 248,800 $0.83 Options exercised -- (534) $0.20 Options forfeited 9,591 (9,591) $0.20 ------------- ------------------ Balance at October 31, 1999 476,691 1,522,775 $0.24 At October 31, 1999 options to purchase 986,897 shares with an average exercise price of $0.14 per share of Intellicoat's common stock were vested. For the options outstanding at October 31, 1999, 1,033,000 shares were granted with an exercise price of $0.10, 292,775 shares were granted with an exercise price of $0.20 and 197,000 were granted with an exercise price of $1.00. As of October 31, 1999, the Company has 1,999,466 common shares reserved for future issuance under the Intellicoat Corporation stock option plan. PRO FORMA INFORMATION. The Company has elected to follow APB 25 in accounting for its employee stock option because, as discussed below, the alternative fair value accounting provided for under SFAS 123 required the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized in the Company's financial statements unless the exercise price of the Company's employee stock options is less than the market price of the underlying stock on the date of grant. Pro forma information regarding net loss and net loss per share has been determined as if the Company had accounted for the Landec stock option plans and employee stock purchase plan under the fair value method and the Intellicoat Stock Plan under the minimum value method prescribed by SFAS No. 123. The fair value of options granted in fiscal years 1999, 1998 and 1997 reported below has been estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions: [Enlarge/Download Table] LANDEC LANDEC EMPLOYEE STOCK OPTIONS STOCK PURCHASE PLAN SHARES ----------------------------------------------------------------------------------------------------------------- YEARS ENDED OCTOBER 31, 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Expected life (in years) 3.30 3.91 4.33 .49 .50 .47 Risk-free interest rate 5.08% 5.62% 6.16% 4.74% 5.37% 5.30% Volatility .43 .44 .40 .43 .44 .40 Dividend yield 0% 0% 0% 0% 0% 0% The assumptions used for the Landec stock options for the expected life, the risk-free interest rate and the dividend yield are the same assumptions used to determine the fair value of the Intellicoat options granted in fiscal year 1999, 1998 and 1997. The volatility for the Intellicoat options is assumed to be zero since Intellicoat stock is not publicly traded. -49-
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9. SHAREHOLDERS' EQUITY (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair value of Landec employee stock options granted at grant date market prices during fiscal years 1999, 1998 and 1997 was $1.71, $1.67 and $2.50 per share, respectively. The weighted average exercise price of employee stock options granted at grant date market prices during fiscal year 1999, 1998 and 1997 was $4.78, $5.86 and $7.00 per share, respectively. No stock options were granted above grant date market prices during fiscal year 1999. The weighted average estimated fair value of Landec employee stock options granted above grant date market prices during fiscal years 1998 and 1997 was $7.84 and $3.05 per share, respectively. The weighted average exercise price of employee stock options granted above grant date market prices during fiscal year 1998 and 1997 was $5.00 and $12.00 per share, respectively. The weighted average estimated fair value of shares granted under the Landec Stock Purchase Plan during fiscal years 1999, 1998 and 1997 was $1.42, $1.57 and $2.26 per share, respectively. The weighted average estimated fair value of shares granted under the Intellicoat Stock Purchase Plan during fiscal years 1999, 1998 and 1997 was $0.30, $0.03 and $0.02 per share, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share amounts): [Enlarge/Download Table] YEARS ENDED OCTOBER 31, 1999 1998 1997 ------------------------------------- ---------------- ----------------- ---------------- Pro forma net loss $(4,126) $(4,355) $(9,554) Pro forma net loss per share $(0.31) $(0.34) $(0.86) The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. 10. DEBT In December 1997, Dock Resins entered into a loan and security agreement which provides for a long-term loan and a short-term revolving line of credit with a bank. Both the long-term loan and the short-term revolving line of credit are collateralized by a security interest in substantially all of the assets of Dock Resins. The Company pays interest on its long-term debt at an 8.19% fixed rate. From time to time the Company enters into equipment financing agreements when interest rates and payment terms are favorable. At October 31, 1999 and 1998, the Company had approximately $84,000 and $61,000, respectively, of equipment loans outstanding. LONG-TERM DEBT Long-term debt consists of the following (in thousands): [Enlarge/Download Table] OCTOBER 31, 1999 1998 ------------- -------------- Bank term loan; principal payable in monthly installments of $15,278 beginning February 1, 1999 through January, 2006 with the balance due January 31, 2006; interest is paid monthly $ 2,678 $ 2,750 Equipment financing agreements 84 61 Less current portion (125) (156) ------------- -------------- $ 2,637 $ 2,655 ============= ============== -50-
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10. DEBT (CONTINUED) Maturities of long-term debt are as follows (in thousands): [Download Table] FY 2000 $ 125 FY 2001 131 FY 2002 134 FY 2003 137 FY 2004 148 Thereafter 2,087 ----- $ 2,762 The long-term loan limits Dock Resins' dividend payments and contains various financial covenants including minimum working capital levels, net worth and debt service ratio. For the year ended October 31, 1999 and 1998, the Company paid interest on the long-term debt of $217,000 and $35,000, respectively. In fiscal year 1999, $141,000 was capitalized as the amount related to financing for capital expenditures. No interest was capitalized during fiscal year 1998. Management believes the fair value of its debt approximates carrying value. SHORT-TERM DEBT The short-term revolving line of credit allows for borrowings of up to $1,250,000. The interest rate on the revolving line of credit is principally charged at the LIBOR rate plus 1.75%. The revolving line of credit expires on January 31, 2000, and contains certain restrictive covenants which, among other things, require Dock Resins to maintain minimum levels of net working capital and tangible net worth. No amounts were outstanding on the revolving line of credit at October 31, 1999. 11. INCOME TAXES The Company's provision for income taxes of $54,000 for the year ended October 31, 1999 is attributable to state taxes. As of October 31, 1999, the Company had net operating loss carryforwards of approximately $27.8 million for federal income tax purposes. The Company also had federal research and development tax credit carryforwards of approximately $1.0 million. The net operating loss carryforwards will expire at various dates beginning in 2002 through 2014, if not utilized. Utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. Significant components of the Company's deferred tax assets are as follows (in thousands): [Enlarge/Download Table] YEARS ENDED OCTOBER 31, ------------------------------- 1999 1998 ---- ---- Deferred tax assets: Net operating loss carryforwards.................... $ 9,800 $ 9,000 Research credit carryforwards....................... 1,600 1,400 Capitalized research costs.......................... 1,400 1,400 In-process research costs........................... 1,000 1,000 Other - net......................................... 1,100 1,000 --------------- --------------- Total deferred tax assets.............................. 14,900 13,800 Valuation allowance.................................... (14,900) (13,800) --------------- --------------- Net deferred tax assets................................ $ -- $ -- =============== =============== Due to the Company's absence of earning history, the net deferred tax asset has been fully offset by a valuation allowance. -51-
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The valuation allowance decreased by $100,000 during the fiscal year ended October 31, 1998. 12. COMMITMENTS LEASES The Company leases office and laboratory space and certain equipment. Rent expense for the fiscal years ended October 31, 1999, 1998, and 1997 was approximately $522,000, $481,000, and $392,000 respectively. Future minimum lease obligations as of October 31, 1999 under all leases are as follows (in thousands): [Download Table] OPERATING LEASES ------ 2000....................................... $ 511 2001....................................... 527 2002....................................... 145 2003....................................... -- -------------- Total minimum lease payments............... $ 1,183 ============== OTHER Under the terms of the acquisition of Dock Resins (see Note 2), the former shareholder of Dock Resins has indemnified the Company with regard to expenditures subsequent to the acquisition for certain environmental matters relating to circumstances existing at the time of the acquisition. To cover any such cost, an escrow for $1.5 million in cash and all of the equity consideration was set aside. During fiscal year 1998, $460,000 was drawn down from the escrow account to pay for environmental expenses incurred by Dock Resins, that had been indemnified by the former shareholder of Dock Resins in the purchase agreement. During fiscal years 1999 and 1997 no costs associated with the pre-acquisition environmental matters were incurred. 13. BUSINESS SEGMENT REPORTING During the years presented, the Company reported its operations in three business segments: the Food Products Technology segment, the Agricultural Seed Technology segment and the Industrial High Performance Materials segment. The Food Products Technology segment manufactures and sells film packages applied with the Intellipac breathable membrane to the fresh-cut produce industry. The Agricultural Seed Technology segment markets and distributes hybrid seed corn to the farming industry and is developing seed coatings using the Company's proprietary Intelimer polymers. The Industrial High Performance Materials segment manufactures and sells specialty acrylics and polymers to the coating, laminating, adhesive and printing industries. Corporate and Other amounts include corporate operating costs and net interest income. Assets classified as corporate and other amounts consist primarily of cash and marketable securities. -52-
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13. BUSINESS SEGMENT REPORTING (CONTINUED) Operations by Business Segment (in thousands): [Enlarge/Download Table] INDUSTRIAL AGRICULTURAL HIGH FOOD PRODUCTS SEED PERFORMANCE CORPORATE 1999 TECHNOLOGY TECHNOLOGY MATERIALS AND OTHER TOTAL -------------------------------------------------------------------------------------------------------------------- Net sales.................................. $ 4,459 $ 15,197 $ 14,313 $ 1,478 $ 35,447 Income (loss) from continuing operations... $ 105 $ (1,219) $ (319) $ (1,336) $ (2,769) Identifiable assets........................ $ 2,352 $ 17,318 $ 18,588 $ 2,450 $ 40,708 Depreciation and amortization.............. $ 139 $ 983 $ 846 $ 160 $ 2,128 Capital expenditures....................... $ 347 $ 295 $ 2,760 $ 306 $ 3,708 Interest income............................ $ -- $ 113 $ 98 $ 152 $ 363 Interest expense........................... $ -- $ -- $ (99) $ -- $ (99) Income tax expense......................... $ -- $ -- $ (54) $ -- $ (54) 1998 --------------------------------------------- Net sales.................................. $ 2,859 $ 13,275 $ 16,153 $ 1,229 $ 33,516 Income (loss) from continuing operations... $ (353) $ (1,427) $ 179 $ (1,289) $ (2,890) Identifiable assets........................ $ 1,513 $ 14,356 $ 19,397 $ 7,090 $ 42,356 Depreciation and amortization.............. $ 125 $ 917 $ 780 $ 142 $ 1,964 Capital expenditures....................... $ 142 $ 1,389 $ 2,298 $ 271 $ 4,100 Interest income............................ $ -- $ 95 $ 70 $ 572 $ 737 Interest expense........................... $ -- $ (9) $ (58) $ (70) $ (137) Income tax expense......................... $ -- $ -- $ (150) $ -- $ (150) 1997 --------------------------------------------- Net sales.................................. $ 1,201 $ 70 $ 8,137 $ 108 $ 9,516 Loss from continuing operations............ $ (837) $ (1,756) $ (3,930) $ (1,063) $ (7,586) Identifiable assets........................ $ 970 $ 11,945 $ 15,209 $ 22,036 $ 50,160 Depreciation and amortization.............. $ 76 $ 157 $ 444 $ 261 $ 938 Capital expenditures....................... $ 197 $ 440 $ 554 $ 153 $ 1,344 Interest income............................ $ -- $ 3 $ 15 $ 1,708 $ 1,726 Interest expense........................... $ -- $ -- $ (8) $ (311) $ (319) Income tax expense......................... $ -- $ -- $ -- $ -- $ -- During fiscal years 1999, 1998 and 1997, an industrial high performance materials customer accounted for 10%, 13% and 25% of the Company's total revenue, respectively. This was the only customer with revenues individually representing 10% or more of total revenue. Export product sales were approximately $828,000, $863,000, and $421,000 in the years ended October 31, 1999, 1998 and 1997, respectively. 14. SUBSEQUENT EVENTS On December 2, 1999, the Company acquired Apio, Inc. and certain related entities, of Guadalupe, California, one of the nation's leading marketers and packers of produce and specialty packaged fresh-cut vegetables with annual sales of approximately $158 million. Upon closing, Landec paid $23.9 million in cash and stock, before expenses, for Apio, which will operate as a wholly owned subsidiary of Landec. Additional terms of the agreement include up to $16.75 million in future payments over five years, with $10.0 million of that amount based on Apio achieving certain performance milestones. The transaction was accounted for as a purchase. -53-
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14. SUBSEQUENT EVENTS (CONTINUED) To fund the transaction, Landec issued 2.5 million shares of common stock to the prior owners of Apio. Apio replaced a portion of its existing bank debt with a $11.25 million term note and entered into a new $12 million line of credit agreement with the Bank of America. Existing debt of $3.7 million was assumed in the transaction. In a separate transaction, Landec has sold $10 million of convertible preferred stock (convertible into 1,666,670 shares of Common Stock) to a private, long-term, investor at a $6.00 per share equivalent price. Under the terms of these transactions, Landec has agreed to effect the registration of approximately 2.5 million shares of Landec common stock by March 31, 2000. -54-
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LANDEC CORPORATION VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) [Enlarge/Download Table] SCHEDULE II ADDITIONS BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD ----------- ----------- ----------- --------------- Year ended October 31, 1997 Allowance for doubtful accounts............. $ 32 $ -- $(5) $ 27 Year ended October 31, 1998 Allowance for doubtful accounts............. $ 27 $ 31 $ (8) $ 50 Year ended October 31, 1999 Allowance for doubtful accounts............. $ 50 $ -- $ (5) $ 45 -55-
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(b) No reports on Form 8-K were filed by the Company during the period August 1, 1999 to October 31, 1999. (c) Index of Exhibits 2.1(6) Stock Purchase Agreement by and among the Registrant, Dock Resins Corporation and A. Wayne Tamarelli dated as of April 18, 1997. 2.2(7) Agreement and Plan of Reorganization by and among the Registrant, Intellicoat Corporation, Williams & Sun, Inc. (d/b/a Fielder's Choice Hybrids) and Michael L. Williams dated as of August 20, 1997. 2.3(11) Form of Agreement and Plan Merger and Purchase Agreement by and among the Registrant, Apio, Inc. and related companies and each of the respective shareholders dated as of November 29, 1999. 3.1(1) Amended and Restated Bylaws of Registrant. 3.2(2) Ninth Amended and Restated Articles of Incorporation of Registrant. 3.3+ Certificate of Determination of Series A Preferred Stock 4.1(12) Series A Preferred Stock Purchase Agreement between the Registrant and Frederick Frank, dated as of November 19, 1999. 10.1(3) Form of Indemnification Agreement. 10.3(4)* 1995 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement. 10.4(4)* 1995 Directors' Stock Option Plan, as amended, and form of Option Agreement. 10.6(3) Industrial Real Estate Lease dated March 1, 1993 between the Registrant and Wayne R. Brown & Bibbits Brown, Trustees of the Wayne R. Brown & Bibbits Brown Living Trust dated December 30, 1987. 10.14(4)* Consulting Agreement dated May 1, 1996 between the Registrant and Richard Dulude. 10.15(4)* 1996 Intellicoat Stock Option Plan and form of Option Agreement. 10.16(4)* 1996 Non-Executive Stock Option Plan and form of Option Agreement. 10.17(5)* 1996 Stock Option Plan and form of Option Agreement. 10.18(8) Asset Purchase Agreement between Bissell Healthcare Corporation and the Registrant, dated as of August 28, 1997. 10.19(8) Technology License Agreement between Bissell Healthcare Corporation and the Registrant, dated as of August 28, 1997. 10.20(8) Supply Agreement between Bissell Healthcare Corporation and the Registrant, dated as of August 28, 1997. 10.21(9)* Employment Agreement between the Registrant and A. Wayne Tamarelli dated as of April 18, 1997. 10.22(10) Form of Common Stock Purchase Agreement for certain officers and directors for restricted stock purchase. 10.23(10) Loan agreement between Registrant and Michael Williams dated October 1, 1998. 10.24+ Employment agreement between the Registrant and Nicholas Tompkins dated as of November 29, 1999. 10.25+ Stock Option Agreement between the Registrant and Nicholas Tompkins dated as of November 29, 1999. 10.26+ 1999 Apio, Inc. Stock Option Plan and form of Option Agreement. 10.27+ Loan agreement between Apio, Inc. and the Bank of America dated as of November 29, 1999. 21.1 Subsidiaries of the Registrant. [Download Table] SUBSIDIARY STATE OF INCORPORATION ---------- ---------------------- Intellicoat Corporation Delaware Dock Resins Corporation New Jersey Apio, Inc. Delaware 23.1+ Consent of Independent Auditors. 24.1+ Power of Attorney. See page 58. 27.1+ Financial Data Schedule ------------------- -56-
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(1) Incorporated by reference to Exhibit 3.4 filed with Registrant's Registration Statement on Form S-1 (File No. 33-80723) declared effective on February 12, 1996. (2) Incorporated by reference to Exhibit 3.5 filed with Registrant's Registration Statement on Form S-1 (File No. 33-80723) declared effective on February 12, 1996. (3) Incorporated by reference to the identically numbered exhibits filed with the Registrant's Registration Statement on Form S-1 (File No. 33-80723) declared effective on February 12, 1996. (4) Incorporated by reference to the identically numbered exhibits filed with the Registrant's Form 10-K filed for the year ended October 31, 1996. (5) Incorporated by reference to the identically numbered exhibits filed with the Registrant's Form 10-Q filed for the quarter ended April 30, 1997. (6) Incorporated by reference to Exhibit 2.1 filed with the Registrant's Form 8-K dated April 18, 1997. (7) Incorporated by reference to Exhibit 2.1 filed with the Registrant's Form 10-Q for the quarter ended July 31, 1997. (8) Incorporated by reference to the identically numbered exhibits filed with the Registrant's Form 8-K dated August 28, 1997. (9) Incorporated by reference to Exhibit C to Exhibit 2.1 filed with the Registrant's Form 8-K dated April 18, 1997. (10) Incorporated by reference to identically numbered exhibits filed with the Registrant's Form 10-K filed for the year ended October 31, 1998. (11) Incorporated by reference to the Exhibit 2.1 filed with the Registrant's Form 8-K dated December 2, 1999. (12) Incorporated by reference to identically numbered exhibits filed with the Registrant's Form 8-K dated December 2, 1999. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to item 14(c) of Form 10-K. + Filed herewith. -57-
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California, on January 26, 2000. LANDEC CORPORATION By: /s/ Gregory S. Skinner ------------------------------------ Gregory S. Skinner Vice President of Finance and Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS GARY T. STEELE AND GREGORY S. SKINNER, AND EACH OF THEM, AS HIS ATTORNEY-IN-FACT, WITH FULL POWER OF SUBSTITUTION, FOR HIM IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS REPORT ON FORM 10-K, AND TO FILE THE SAME, WITH EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, HEREBY RATIFYING AND CONFIRMING OUR SIGNATURES AS THEY MAY BE SIGNED BY OUR SAID ATTORNEY TO ANY AND ALL AMENDMENTS TO SAID REPORT ON FORM 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated: [Enlarge/Download Table] SIGNATURE TITLE DATE --------- ------ ----- /s/ Gary T. Steele ------------------------------------------------------ Gary T. Steele President and Chief Executive Officer (Principal Executive Officer) January 26, 2000 /s/ Gregory S. Skinner ------------------------------------------------------ Gregory S. Skinner Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting January 26, 2000 Officer) /s/ Kirby L. Cramer ------------------------------------------------------ Kirby L. Cramer Director January 26, 2000 /s/ Richard Dulude ------------------------------------------------------ Richard Dulude Director January 26, 2000 /s/ Frederick Frank ------------------------------------------------------ Frederick Frank Director January 26, 2000 /s/ Stephen E. Halprin ------------------------------------------------------ Stephen E. Halprin Director January 26, 2000 /s/ Richard S. Schneider ------------------------------------------------------ Richard S. Schneider Director January 26, 2000 /s/ Damion Wicker ------------------------------------------------------ Damion Wicker Director January 26, 2000 -58-
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EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 3.3 Certificate of Determination of Series A Preferred Stock 10.24 Employment agreement between the Registrant and Nicholas Tompkins dated as of November 29, 1999. 10.25 Stock Option Agreement between the Registrant and Nicholas Tompkins dated as of 10.25 November 29, 1999. 10.26 1999 Apio, Inc. Stock Option Plan and form of Option Agreement. 10.27 Loan agreement between Apio, Inc. and the Bank of America dated as of November 29, 1999. 23.1 Consent of Independent Auditors 24.1 Power of Attorney. See page 58. 27.1 Financial Data Schedule -59-

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