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
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-
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
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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-
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-
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-
[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-
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-
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-
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.
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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.
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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-
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-
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-
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-
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-
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-
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.
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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 $6.25 per share.
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The issuance of securities in this Item 5 was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance on Section 4(2) of the Act as a transaction by an issuer not involving
any public offering. The recipients of the securities in such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transaction.
The recipients were given adequate access to information about the Company.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements contained in Item 8 of
this report.
[Enlarge/Download Table]
YEAR ENDED OCTOBER 31,
-----------------------
STATEMENT OF OPERATIONS DATA: 1999 1998 1997 1996 1995
---------- ------------ ----------- ----------- ------------
(in thousands, except per share data)
Revenues:
Product sales.....................................$ 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)
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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-
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.
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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-
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-
- 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-
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-
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-
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
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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-
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-
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-
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-
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-
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-
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
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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-
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.
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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.
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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-
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
============= =============
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
============= ==============
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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-
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.
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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-
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-
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-
(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-
(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-
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-
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
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Dates Referenced Herein and Documents Incorporated by Reference
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