This document consists of 32 pages, of which this is page
Number 1. The index to Exhibits is on Page 16.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Quarter Ended April 30, 1996, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 Haven Avenue
Menlo Park, California 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(415) 306-1650
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 at least the past 90 days.
Yes X No
--- ---
As of May 31, 1996, 10,674,858 shares of the Registrant's common stock were
outstanding.
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LANDEC CORPORATION
FORM 10-Q For the Quarter Ended April 30, 1996
<TABLE>
INDEX
<CAPTION>
Page
<S> <C> <C>
Facing sheet 1
Index 2
Part I. Financial Statements
Item 1. a) Consolidated condensed balance sheets as of April 30, 1996 and October 31, 1995 3
b) Consolidated statements of operations for the three and six months ended April 30,
1996 and 1995 4
c) Consolidated statements of cash flows for the six months ended April 30, 1996 and 1995 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Part II. Other Information 14
Signature 15
Index to Exhibits 16
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
<CAPTION>
April 30, October 31,
1996 1995
---------------- ---------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,181 $ 3,585
Short-term investments 19,025 1,964
Accounts receivable, net 63 53
Inventories 508 488
Prepaid expenses and other current assets 237 115
---------------- ---------------
Total Current Assets 40,014 $ 6,205
Property and equipment, net 987 993
Other assets 123 149
---------------- ---------------
$ 41,124 $ 7,347
================ ===============
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current Liabilities:
Convertible notes payable $ - $ -
Accounts payable 298 291
Accrued compensation 326 302
Other accrued liabilities 423 281
Current portion of capital lease obligations 213 239
Deferred revenue 304 129
---------------- ---------------
Total Current Liabilities 1,564 1,942
Non-current portion of capital lease obligations 448 558
Redeemable convertible preferred stock at accreted value - 31,276
Stockholder's Equity (Net Capital Deficiency):
Preferred stock - -
Common stock 68,130 536
Notes receivable from shareholders (12) (20)
Deferred compensation (351) (407)
Accumulated deficit (28,655) (26,538)
---------------- ---------------
Total Stockholders' Equity (Net Capital Deficiency) 39,112 (26,429)
---------------- ---------------
$ 41,124 $ 7,347
================ ===============
<FN>
See accompanying notes.
</FN>
</TABLE>
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<PAGE>
<TABLE>
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share data)
<CAPTION>
Three Months Ended April 30, Six Months Ended April 30,
1996 1995 1996 1995
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 281 $ 198 $ 412 $ 441
License fees 600 450 600 650
Research and development revenues 394 196 682 389
------------ ----------- ------------ ------------
Total revenues 1,275 844 1,694 1,480
------------ ----------- ------------ ------------
Operating costs and expenses:
Cost of product sales 295 327 539 652
Research and development 945 921 1,898 1,776
Selling, general and administrative 733 538 1,224 1,045
------------ ----------- ------------ ------------
Total operating costs and expenses 1,973 1,786 3,661 3,473
------------ ----------- ------------ ------------
Operating loss (698) (942) (1,967) (1,993)
Interest income 439 63 506 133
Interest expense (8) (35) (54) (63)
------------ ----------- ------------ ------------
Net loss $ (267) $ (914) $ (1,515) $ (1,923)
============ =========== ============ ============
Net loss per share $ (0.03) $ (0.77) $ (0.32) $ (1.63)
============ =========== ============ ============
Shares used in computation of net loss per share 8,874 1,182 4,713 1,181
============ =========== ============ ============
Supplemental net loss per share $ (0.03) $ (0.13) $ (0.17) $ (0.27)
Shares used in computation of supplemental net
loss per share ============ =========== ============ ============
10,016 7,095 8,709 7,060
============ =========== ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
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<TABLE>
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Six Months Ended April 30,
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,515) $ (1,923)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 195 195
Loss on disposal of fixed assets -- 24
Amortization of deferred compensation 56 --
Changes in current assets and liabilities:
Accounts receivable (10) 69
Inventories (20) (206)
Prepaid expenses and other current assets (122) 27
Accounts payable 7 (74)
Accrued compensation 24 (1)
Other accrued liabilities 142 86
Deferred revenue 175 131
------------ -----------
Total adjustments 196 32
------------ -----------
Net cash used in operating activities (1,068) (1,672)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (189) (25)
Increase in other assets 26 (12)
Purchases of available-for-sale securities (20,108) (3,960)
Maturities of available-for-sale securities 3,000 5,300
------------ -----------
Net cash (used for) provided by investing activities: (17,271) 1,303
------------ -----------
Cash flows from financing activities:
Proceeds from sale of common stock 35,062 3
Proceeds from repayment of notes receivable 9 2
Payments of capital lease obligations (136) (86)
Proceeds from capital lease financing of prior year capital expenditures -- 138
Proceeds from issuance of convertible notes payable -- 700
------------ -----------
Net cash provided by financing activities 34,935 757
------------ -----------
Net increase in cash and cash equivalents 16,596 388
Cash and cash equivalents at beginning of period 3,585 2,411
------------ -----------
Cash and cash equivalents at end of period $ 20,181 $ 2,799
============ ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
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LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Landec
Corporation (the "Company" or "Landec") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the
opinion of management, all adjustments necessary to present fairly the financial
position, results of operations, and cash flows at April 30, 1996, and for all
periods presented, have been made. Although the Company believes that the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information normally included in financial
statements and related footnotes prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying
financial data should be reviewed in conjunction with the audited financial
statements and notes thereto included in the Company's Registration Statement on
Form S-1 (Registration Statement File. No. 33-80733) and related prospectus for
the Company's initial public offering of its Common Stock, which was completed
on February 15, 1996.
The results of operations for the three and six month periods ended
April 30, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ended October 31, 1996.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consisted of the following:
April 30 October 31,
1996 1995
---- ----
(in thousands)
Raw materials . . . . . . . . . . . . . . . . . . . $ 119 $ 123
Work in process . . . . . . . . . . . . . . . . . . 210 169
Finished goods . . . . . . . . . . . . . . . . . . 179 196
--- ---
$ 508 $ 488
=== ===
3. Net Loss Per Share
Except as noted below, historic net loss per share is computed using
the weighted average number of common shares outstanding. Common equivalent
shares are excluded from the computation as their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares (stock options,
convertible notes payable and preferred stock) issued during the 12-month period
prior to the initial filing of the proposed offering at prices below the assumed
public offering price have been included in the calculation as if they were
outstanding for all periods through October 31, 1995 (using the treasury stock
method for stock options and initial public offering price of $11.00 per share).
As described above, the antidilutive effect of certain stock options is
included in the calculation of loss per share for the three month and six month
periods ended April 30, 1995, but is excluded from the calculation after that
date. Supplemental per share data is provided to show the calculation on a
consistent basis for the periods presented. It has been computed as described
above, but excludes the antidilutive effect of common equivalent shares from
stock options and warrants issued at prices substantially below the public
offering price during the 12-month period prior to the initial filing of the
public offering, and also gives retroactive effect from the date of issuance to
the conversion of preferred stock and promissory notes which automatically
converted to common shares upon the closing of the Company's initial public
offering.
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4. Shareholders' Equity
On February 15, 1996 the Company completed an initial public offering
of 2,800,000 shares of common stock at a price of $12.00 per share. The net
proceeds to the Company from the initial public offering were approximately
$31.2 million, after deducting underwriting discounts and commissions.
Upon completion of the initial public offering all 6,674,415
outstanding shares of redeemable convertible preferred stock and $700,000 of
notes payable were automatically converted into 6,674,415 and 176,432 shares of
common stock, respectively.
In March 1996, the underwriters exercised their overallotment option to
purchase 420,000 shares of common stock for $12.00 per share. The Company
received an additional $4.7 million in offering proceeds, after deducting
underwriting discounts and commissions.
5. Reclassifications
Certain prior year balances have been reclassified to conform with
current year presentation.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto included in Part
I--Item 1 of this Form 10Q and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended October 31, 1995 contained in the
Company's Registration Statement on Form S-1 (Registration Statement No.
33-80733) and related prospectus for the Company's initial public offering of
its Common Stock, which was completed on February 15, 1996.
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," and those mentioned in the Company's prospectus dated February 15,
1996, under "Risk Factors."
Overview
Since its inception in October 1986, the Company has been primarily
engaged in the research and development of its Intelimer technology and related
products. The Company launched its first product line, QuickCast splints and
casts, in April 1994. The Company launched its second product line, breathable
membranes for the fresh-cut produce packaging market, in September 1995. To
date, the Company has recognized $1,349,000 in total QuickCast product and
breathable membrane sales. The balance of revenues to date have resulted from
license fees, collaborative arrangements and Small Business Innovative Research
("SBIR") government grants. The Company has been unprofitable since its
inception and expects to incur additional losses, primarily due to the
continuation of its research and development activities and expenditures
necessary to further develop its manufacturing and marketing capabilities. From
inception through April 30, 1996, the Company's accumulated deficit was
$28,655,000.
Results of Operations
Total revenues were $1,275,000 for the second quarter of fiscal year
1996 compared to $844,000 for the second quarter of fiscal year 1995. Revenues
from product sales increased to $281,000 in the second quarter of fiscal year
1996 from $198,000 in the second quarter of fiscal year 1995 due primarily to
the commencement of sales of breathable membrane products in late 1995. Revenues
from license fees increased to $600,000 for the second quarter of fiscal year
1996 from $450,000 in the second quarter of fiscal year 1995. Revenues from
research and development funding increased to $394,000 for the second quarter of
fiscal year 1996 from $196,000 for the second quarter of fiscal year 1995. The
increase in license fees and research and development revenue was due primarily
to increased fees and funding under an expanded agreement with Nitta
Corporation. For the first six months of fiscal year 1996 total revenues were
$1,694,000 compared to $1,480,000 during the same period in 1995. Revenue from
product sales for the first six months in fiscal year 1996 decreased to $412,000
from $441,000 during the same period in 1995 due to a decrease in sales of
QuickCast products which more than offset the increase in sales of the
breathable membrane products. Revenue from license fees for the first six months
in fiscal year 1996 decreased to $600,000 from $650,000 during the same period
in 1995. Revenue from research and development funding for the first six months
in fiscal year 1996 increased to $682,000 from $389,000 during the same period
in 1995 due to an increase in research and development contracts in fiscal year
1996. In March of 1996, the Company agreed to amend their research and
development collaboration with BFGoodrich in the industrial latent curing area
by removing the exclusivity restrictions. This change could result in a
short-term reduction in research and development revenues that may be offset by
other contract revenue.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $295,000 for the second quarter of fiscal year 1996 compared
to $327,000 for the second quarter of fiscal year 1995, a decrease of 10%. Cost
of product sales as a percentage of product sales decreased to 105% in the
second quarter of fiscal year 1996 from 165% in the second quarter of fiscal
year 1995. Cost of product sales for the first six months of fiscal year 1996
was $539,000 compared to $652,000 during the same period in 1995, a decrease of
17%. Cost of
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product sales as a percentage of product sales decreased to 131% for the first
six months of fiscal year 1996 from 148% during the same period in 1995. These
decreases in the cost of product sales was primarily the result of the ramp-up
and increased volume of the breathable membrane product sales. The Company
experienced negative gross margins for its products sales due to the early stage
of commercialization of the Company's products and related product start-up
costs. The Company anticipates that if revenues from product sales increases,
gross margins will improve as the fixed portion of cost of product sales will be
allocated over higher sales. Improvements in gross margins due to increased
products sales, if any, may be offset in the future if the Company increases the
fixed portion of cost of product sales. Due to the early stage of
commercialization, however, the Company is unable to predict with any certainty
future gross margins.
Research and development expenses were $945,000 for the second quarter
of fiscal year 1996 compared to $921,000 for the second quarter of fiscal year
1995, an increase of 3%. For the first six months of fiscal year 1996 research
and development expenses were $1,898,000 compared to $1,776,000 during the same
period in 1995, an increase of 7%. Research and development expenses increased
primarily as a result of increased development costs in the Company's latent
curing products. In future periods, the Company expects that spending for
research and development will continue to increase in absolute dollars, although
it may vary as a percentage of total revenues.
Selling, general and administrative expenses were $733,000 for the
second quarter of fiscal year 1996 compared to $538,000 for the second quarter
of fiscal year 1995, an increase of 36%. For the first six months of fiscal year
1996 selling, general and administrative expenses were $1,224,000 compared to
$1,045,000 during the same period in 1995, an increase of 17%. Selling, general
and administrative expenses increased primarily as a result of increased sales
and marketing expenses and the additional administrative costs associated with
supporting a public company. Selling, general and administrative expenses
consist primarily of sales and marketing expenses associated with the Company's
product sales, business development expenses, staff and administrative expenses.
Sales and marketing expenses increased to $378,000 for the second quarter of
fiscal year 1996 from $222,000 for the second quarter of fiscal year 1995. For
the first six months of fiscal year 1996 sales and marketing expenses increased
to $583,000 compared to $436,000 during the same period in 1995. The increase in
sales and marketing expenses was attributable to the costs to support the market
introduction of the breathable membrane products launched in late fiscal year
1995 and the cost of launching two new national U.S. distributors for the
QuickCast products in the second quarter of fiscal year 1996. The Company
expects that selling, general and administrative spending will increase in
future periods, although it may vary as a percentage of total revenues.
Net interest income for the second quarter and for the first six months
of fiscal year 1996 was $431,000 and $452,000, respectively, as compared to
$28,000 and $70,000 for the comparable periods in 1995. Net interest income
increased due to interest income from the initial public offering proceeds.
Liquidity and Capital Resources
As of April 30, 1996 the Company had $39,206,000 of cash, cash
equivalents and short-term investments. On February 15, 1996 the Company
completed an initial public offering of 2,800,000 shares of common stock at a
price of $12.00 per share. The net proceeds (after deducting underwriting
discounts) to the Company from the initial public offering were approximately
$31.2 million. In March 1996, the Company received an additional $4.7 million in
net proceeds resulting from the exercise of the underwriters' overallotment
option.
During the six months ended April 30, 1996 and 1995, Landec used cash
in operations of $1,068,000 and $1,672,000, respectively. This decrease in cash
used in operations was due primarily to the increase in interest income from the
initial public offering proceeds. The Company believes that existing cash, cash
equivalents and short-term investments, including the proceeds from the initial
public offering, will be sufficient to finance its operational and capital
requirements through at least fiscal 1997. The Company's future capital
requirements, however, depend on numerous factors, including the progress of its
research and development programs; the development of commercial scale
manufacturing capabilities; the development of marketing, sales and distribution
capabilities; the ability of the Company to maintain existing collaborative
arrangements and establish and maintain new collaborative arrangements; payments
received under research and development agreements; the costs involved in
preparing, filing, prosecuting, defending and enforcing intellectual property
rights; complying with regulatory requirements; competing technological and
market developments; the effectiveness of product commercialization activities
and arrangements; and other factors. If the Company's currently available funds
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<PAGE>
together with the internally generated cash flow, are not sufficient to satisfy
its financing needs, the Company would be required to seek additional funding
through other arrangements with collaborative partners, bank borrowings and
public or private sales of its securities. The Company has no credit facility or
other committed sources of capital. There can be no assurance that additional
funds, if required, will be available to the Company on favorable terms.
Additional Factors That May Affect Future Results
The Company desires to take advantage of the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that the following important factors, as well as
other factors, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
quarters to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company.
History of Operating Losses and Accumulated Deficit. The Company has
incurred net losses in each year since its inception, including net losses of
approximately $914,000 and $267,000 during the second quarter of fiscal year
1995 and 1996, respectively, and the Company's accumulated deficit as of April
30, 1996 totaled $28,655,000. The Company expects to incur additional losses for
the foreseeable future. The amount of future net losses and time required by the
Company to reach profitability are highly uncertain.
Early Commercialization; Dependence on New Products and Technologies;
Uncertainty of Market Acceptance. While the Company recently commenced marketing
certain of its products, it is in the early stage of product commercialization
and many of its potential products are in development. The Company believes that
its future success will depend in large part on its ability to develop and
market new products in its target markets and in new markets. In particular, the
Company expects that its ability to compete effectively with existing
industrial, food packaging, medical and agricultural companies will depend
substantially on successfully developing, commercializing, achieving market
acceptance of and reducing the cost of producing the Company's products. In
addition, commercial applications of the Company's temperature switch polymer
technology are relatively new and evolving. There can be no assurance that the
Company will be able to successfully develop, commercialize, achieve market
acceptance of or reduce the cost of producing the Company's products, or that
the Company's competitors will not develop competing technologies that are less
expensive or otherwise superior to those of the Company. There can be no
assurance that the Company will be able to develop and introduce new products
and technologies in a timely manner or that new products and technologies will
gain market acceptance. The failure to develop and market successfully new
products could have a material adverse effect on the Company's business,
operating results and financial condition.
The success of the Company in generating significant sales of its
products will depend in part on the ability of the Company and its partners to
achieve market acceptance of the Company's products and technology. The extent
to which, and rate at which, market acceptance and penetration are achieved by
the Company's current and future products is a function of many variables
including, but not limited to, price, safety, efficacy, reliability, conversion
costs and marketing and sales efforts, as well as general economic conditions
affecting purchasing patterns. There can be no assurance that markets for the
Company's products will develop or that the Company's products and technology
will be accepted and adopted. The failure of the Company's products to achieve
market acceptance could have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Collaborative Partners. The Company's strategy for the
development, clinical and field testing, manufacturing, commercialization and
marketing of certain of its current and future products includes entering into
various collaborations with corporate partners, licensees and others. To date,
the Company has entered into collaborative arrangements with The BFGoodrich
Company ("BFGoodrich") and Hitachi Chemical Co., Ltd. ("Hitachi Chemical") in
connection with its latent curing catalyst systems, Fresh Express Incorporated
("Fresh Express") in connection with its breathable membrane products, Nitta
Corporation ("Nitta") and Hitachi Chemical in connection with its adhesive
products and Smith & Nephew Medical Limited ("Smith & Nephew") in connection
with its QuickCast orthopedic products. The Company is dependent on its
corporate partners to develop, test, manufacture and/or market certain of its
products. Although the Company believes that its partners in these
collaborations have an economic motivation to succeed in performing their
contractual responsibilities, the
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amount and timing of resources to be devoted to these activities are not within
the control of the Company. A significant portion of Landec's revenues to date
have been derived from commercial research and development collaborations and
license agreements. In the second quarter of fiscal year 1996, development
funding from these collaborative arrangements comprised approximately 78% of the
Company's total revenues. Development funding and license fees from product
sales to BFGoodrich, Hitachi Chemical, Nitta and Smith & Nephew represented
approximately 69% of the Company's revenues for the second quarter of fiscal
year 1996. Moreover, research and development revenue and license fees from
Nitta accounted for a significant portion of the Company's total revenues for
the second quarter of fiscal year 1996. There can be no assurance that such
partners will perform their obligations as expected or that the Company will
derive any additional revenue from such arrangements. There can be no assurance
that the Company's partners will pay any additional option or license fees to
the Company or that they will develop and market any products under the
agreements. Moreover, certain of the collaborative agreements provide that they
may be terminated at the discretion of the corporate partner, and certain of the
collaborative agreements provide for termination under certain circumstances.
In March of 1996, the Company agreed to amend their research and development
collaboration with BFGoodrich in the industrial latent curing area by removing
the exclusivity restrictions. This amendment will allow Landec to explore direct
distribution and other licensing and product development opportunities while
continuing the collaboration with BFGoodrich on a non-exclusive basis. This
change could result in a short-term reduction in research and development
revenues.
There can be no assurance that the partners will not pursue existing or
alternative technologies in preference to the Company's technology. Furthermore,
there can be no assurance that the Company will be able to negotiate additional
collaborative arrangements in the future on acceptable terms, if at all, or that
such collaborative arrangements will be successful. To the extent that the
Company chooses not to or is unable to establish such arrangements, it would
experience increased capital requirements to undertake research, development,
manufacture, marketing or sale of its current and future products in such
markets. There can be no assurance that the Company will be able to
independently develop, manufacture, market, or sell its current and future
products in the absence of such collaborative agreements.
Competition and Technological Change. The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large industrial, food packaging,
medical and agricultural companies is expected to be intense. In addition, the
nature of the Company's collaborative arrangements may result in its corporate
partners becoming competitors of the Company. Many of these competitors have
substantially greater financial and technical resources and production and
marketing capabilities than the Company, and may have substantially greater
experience in conducting clinical and field trials, obtaining regulatory
approvals and manufacturing and marketing commercial products. There can be no
assurance that these competitors will not succeed in developing alternative
technologies and products that are more effective, easier to use or less
expensive than those which have been or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive.
Limited Manufacturing Experience; Dependence on Third Parties. The
Company's success is dependent in part upon its ability to manufacture its
products in commercial quantities in compliance with regulatory requirements and
at acceptable costs. There can be no assurance that the Company will be able to
achieve this. The Company has experienced negative gross margins for its product
sales to date. The Company intends to build or acquire large-scale polymer
manufacturing and formulations facilities by 1998. Production in
commercial-scale quantities may involve technical challenges for the Company.
Establishing its own manufacturing capabilities would require significant
scale-up expenses and additions to facilities and personnel. The Company may
also consider seeking collaborative arrangements with other companies to
manufacture certain of its products. If the Company is dependent upon third
parties for the manufacture of its products, then the Company's profit margins
and its ability to develop and deliver such products on a timely basis may be
adversely affected. Moreover, there can be no assurance that such parties will
adequately perform and any failures by third parties may delay the submission of
products for regulatory approval, impair the Company's ability to deliver
products on a timely basis, or otherwise impair the Company's competitive
position. The occurrence of any of these factors could have a material adverse
effect on the Company's business, operating results and financial condition. The
manufacture of the Company's products will be subject to periodic inspection by
regulatory authorities. There can be no assurance that the Company will be able
to obtain necessary regulatory approvals on a timely basis or at all. Delays in
receipt
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of or failure to receive such approvals or loss of previously received approvals
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Single Source Suppliers. Many of the raw materials used
in manufacturing certain of the Company's products are currently purchased from
a single source, including certain monomers used to synthesize Intelimer
polymers and substrate materials for the Company's breathable membrane products.
Upon manufacturing scale-up, 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, 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 at similar prices and terms within a
reasonable time. Any such interruption of supply could have a material adverse
effect on the Company's ability to manufacture its products and, consequently,
could materially and adversely affect the Company's business, operating results
and financial condition.
Patents and Proprietary Rights. The Company's success depends in large
part on its ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of third parties. There can
be no assurance that any pending patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any patents issued to the Company will provide the Company with competitive
advantages or will not be challenged by any third parties or that the patents of
others will not prevent the commercialization of products incorporating the
Company's technology. The Company has received, and may in the future receive,
from third parties, including some of its competitors, notices claiming that it
is infringing third party patents or other proprietary rights. For example, the
Company recently received a letter alleging that the Company's breathable
membrane product infringes patents of another party. The Company has
investigated this matter and believes that its breathable membrane product does
not infringe the specified patents of such party. The Company has received an
opinion of patent counsel that the breathable membrane product does not infringe
any valid claims of such patents. If the Company were determined to be
infringing any third-party patent, the Company could be required to pay damages,
alter its products or processes, obtain licenses or cease certain activities. If
the Company is required to obtain any licenses, there can be no assurance that
the Company will be able to do so on commercially favorable terms, if at all.
Litigation, which could result in substantial costs to and diversion of effort
by the Company, may also be necessary to enforce any patents issued or licensed
to the Company or to determine the scope and validity of third-party proprietary
rights. Any such litigation or interference proceeding, regardless of outcome,
could be expensive and time consuming and could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology and,
consequently, could have a material adverse effect on the Company's business,
operating results and financial condition.
Government Regulation. The Company's products and operations are
subject to substantial regulation in the United States and foreign countries.
Although Landec believes that it will be able to comply with all applicable
regulations regarding the manufacture and sale of its products and polymer
materials, such regulations are always subject to change and depend heavily on
administrative interpretations and the country in which the products are sold.
There can be no assurance that future changes in regulations or interpretations
relating to such matters as safe working conditions, laboratory and
manufacturing practices, environmental controls, and disposal of hazardous or
potentially hazardous substances will not adversely effect the Company's
business. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations in the future,
or that such laws or regulations will not have a material adverse effect on the
Company's business, operating results and financial condition. Failure to comply
with the applicable regulatory requirements can, among other things, result in
fines, injunctions, civil penalties, suspensions or withdrawal of regulatory
approvals, product recalls, product seizures, including cessation of
manufacturing and sales, operating restrictions and criminal prosecution.
Limited Sales or Marketing Experience. The Company has only limited
experience marketing and selling its products. While the Company intends to
distribute certain of its products through its corporate partners and other
distributors, the Company intends to sell certain other products through a
direct sales force. Establishing sufficient marketing and sales capability may
require significant resources. 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 efforts will be successful. The
Company is currently in the process of changing its distribution
12
<PAGE>
approach with respect to the QuickCast product line in the United States to
include several national distributors. To the extent that the Company enters
into distribution 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
efforts will be successful.
International Operations and Sales. In the second quarter of the fiscal
year 1995 and 1996, approximately 66% of the Company's total revenues were
derived from product sales to and collaborative agreements with international
customers, and the Company expects that international revenues will continue to
account for a significant portion of its total revenues. A number of risks are
inherent in international transactions. International sales and operations may
be limited or disrupted by the regulatory approval process, government controls,
export license requirements, political instability, price controls, trade
restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies have or may establish
product standards different from those in the United States, and any inability
to obtain foreign regulatory approvals on a timely basis could have an adverse
effect on the Company's international business and its financial condition and
results of operations. While the Company's foreign sales are priced in dollars,
fluctuations in currency exchange rates may reduce the demand for the Company's
products by increasing the price of the Company's products in the currency of
the countries to which the products are sold. There can be no assurance that
regulatory, geopolitical and other factors will not adversely impact the
Company's operations in the future or require the Company to modify its current
business practices.
Quarterly Fluctuations in Operating Results. The Company's results of
operations have varied significantly from quarter to quarter. Quarterly
operating results will depend upon several factors, including the timing and
amount of expenses associated with expanding the Company's operations, the
timing of collaborative agreements with, and performance of, potential partners,
the timing of regulatory approvals and new product introductions, the mix
between pilot production of new products and full-scale manufacturing of
existing products and the mix between domestic and export sales. In addition,
the Company cannot predict rates of licensing fees and royalties received from
its partners or ordering rates by its distributors, some of which place
infrequent stocking orders, while others order at regular intervals. As a result
of these and other factors, the Company expects to continue to experience
significant fluctuations in quarterly operating results, and there can be no
assurance that the Company will become or remain consistently profitable in the
future.
Product Liability Exposure and Availability of Insurance. The testing,
manufacturing, marketing, and sale of the products being developed by the
Company involve an inherent risk of allegations of product liability. While no
product liability claims have been made against the Company to date, if any such
claims were made and adverse judgments obtained, they could have a material
adverse effect on the Company's business, financial condition and results of
operations. 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 product liability insurance in the
amount of $1.0 million per claim with an annual aggregate limit of $2.0 million.
There can be no assurance that such coverage is adequate or will continue to be
available at an acceptable cost, if at all. A product liability claim, product
recall or other claim with respect to uninsured liabilities or in excess of
insured liabilities could have a material adverse effect on the Company's
business, operating results and financial condition.
No Prior Public Market; 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, or
development of new, collaborative arrangements by the Company, its competitors
or other parties, as well as government regulations, investor perception of the
Company, fluctuations in the Company's operating results and general market
conditions in the industry may cause the market price of the Company's Common
Stock to fluctuate significantly. In addition, the stock market in general has
recently experienced extreme price and volume fluctuations, which have
particularly affected the market prices of technology companies and which have
been unrelated to the operating performance of such companies. These broad
fluctuations may adversely effect the market price of the Company's Common
Stock.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.12+ Agreement dated February 26, 1996 between the
Registrant and Nitta Corporation.
10.13 Letter dated March 29, 1996 regarding the Agreement
dated as of July 29, 1995 between the Registrant and
BFGoodrich Company.
11.1 Computation of loss per share (see Note 1 to Financial
Information in Part I of this Form 10-Q).
(b) Reports on Form 8-K.
None.
+CONFIDENTIAL TREATMENT REQUESTED.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANDEC CORPORATION
By:/s/ JOY T. FRY
-----------------------------------------------
Joy T. Fry
Vice President, Finance and Administration
and Chief Financial Officer
(Duly Authorized and Principal Financial and
Accounting Officer)
Date: June 7, 1996
15
<PAGE>
<TABLE>
LANDEC CORPORATION
INDEX TO EXHIBITS
<CAPTION>
Exhibit Sequentially Numbered
Number Exhibit Page
<C> <C> <C>
10.12+ Agreement dated February 26, 1996 between the Registrant 17
and Nitta Corporation.
10.13 Letter dated March 29, 1996 regarding the Agreement dated 31
as of July 29, 1995 between the Registrant and BFGoodrich Company.
11.1 Statement Regarding Computation of Net Loss Per Share 32
27 Financial Data Schedule 33
</TABLE>
+CONFIDENTIAL TREATMENT REQUESTED.
16
AGREEMENT
THIS AGREEMENT is made and entered into this Twenty-sixth (26th) day of
February, 1996 by and between LANDEC CORPORATION, a corporation of California,
having its principal place of business at 3603 Haven Avenue, Menlo Park,
California 94025, U.S.A. (hereinafter called "LANDEC") and NITTA CORPORATION, a
corporation of Japan, having its principal place of business at 8-12. Hommachi
1-chome. Chuo-ku. Osaka. 541. Japan (hereinafter called "NITTA"),
WITNESSETH:
WHEREAS, LANDEC is engaged in development, manufacture, use and sale of
Adhesives and owns and controls patents and know-how therefor; and
WHEREAS, NITTA is engaged in development, manufacture and sale of
chemicals including adhesives and other industrial products and possesses
experience in connection therewith; and
WHEREAS, NITTA desires to manufacture and sell products made using
LANDEC's know-how and/or patents and LANDEC is willing to grant a right and
license thereto to NITTA.
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein, both parties have agreed as follows:
1 ARTICLE 1 DEFINITIONS
1.1 The following terms as used herein shall have the meanings set
forth below:
1.1.1 "Adhesives" shall mean temperature sensitive adhesives
containing side-chain crystallizable polymer, which shall include LANDEC's
proprietary adhesives such as XXXXXXXXX XXXXXXXXXXXXX Adhesives as explained in
detail in Appendix 1 hereof.
1.1.2 "Patents" shall mean those patents and patent
applications listed in Appendix 2 and patents issuing from the patent
applications listed in Appendix 2 and any patents covering new improvements to
the Licensed Technology and within the claims of the patents listed in Appendix
2, provided such improvement is invented by LANDEC while NITTA is funding R&D at
LANDEC or paying royalties to LANDEC pursuant to Article 4.
1.1.3 "Know-How" shall mean any and all technology, trade
secrets, non-patented improvements and other confidential information relating
to processes, compositions, fabrications, manufacturing, scale-up and uses of
the Adhesives which LANDEC owns or controls and has the right to freely dispose
of while NITTA is funding R&D at LANDEC or paying royalties to LANDEC pursuant
to Article 4.
1.1.4 "Licensed Technology" shall mean Patents and/or
Know-How.
1.1.5 "Subject Adhesives" shall mean the Adhesives
incorporating, made with or using all or part of Licensed Technology.
1.1.6 "Territory" shall mean Asian countries as listed in
Appendix 3.
1
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
1.1.7 "Field" shall mean medical applications of Subject
Adhesives in the following product categories which are defined in Appendix 4:
* XXXXXXXXXXXXXXXXXXXXXXXX * XXXXXXXXXXXXX
* XXXXXXXXXXXXXXXXXXXXX * XXXXXXXXXXXXXXXXX
* XXXXXXXXXXXXXX * XXXXXXXXXXXXXXXX
* XXXXXXXXXXXXXX * XXXXXXXXXXXXXXXXX
* XXXXXXXXXXXXX * XXXXXXXXXXXXXXXX
* XXXXXXXXXXXXXXXXXXXX * XXXXXXXXXXXXXXX
* XXXXXXXXXXXXXXXXXXXX
Other product categories will be added by mutual consent. The parties will
discuss inclusion or exclusion of any product regarding which there is
uncertainty as to its being in the Field.
1.1.8 "Products" shall mean:
(i) Subject Adhesives themselves which are sold by
NITTA in unincorporated form or consumed by NITTA in manufacturing NITTA
products such that the properties and benefits of Subject Adhesives are not
evident to customer;
(ii) Tapes, films, coated substrates and other
products incorporating Subject Adhesives such that the Subject Adhesives add
value to the product and the user directly receives the benefits of Subject
Adhesives; and
(iii) Tapes, films, coated substrates and other
products incorporating Subject Adhesives which are sold in conjunction with
components or parts which components or parts have significant intrinsic value
to the customer.
(iv) Adhesive coated intermediates (semi-finished
goods, coated substrates in sheets or rolls) incorporating Subject Adhesives
which are sold to customers who will convert such intermediates into final
products.
1.1.9 "NITTA's Subsidiaries" shall mean the corporations of
which NITTA or the NITTA family owns fifty percent (50%) or more of the
outstanding stock.
1.1.10 "Net Sales" shall mean the gross invoice price of the
Products less i) credits for products returned, quantity and other discounts,
and ii) charges for packaging, shipping, insurance, and sales taxes which are
separately identified and invoiced and paid by the customer.
1.1.11 "Fair Market Value" shall mean the net invoice price of
the Products which NITTA would receive from an unaffiliated third party in an
arm's length sale of the Products of the same type and grade in the same
quantity and at the same time and place of use or sale.
1.1.12 "Effective Date" shall mean the date and year upon
which this Agreement is executed.
1.1.13 "Commercial Launch" shall mean the date when the
accumulated Net Sales and Fair Market Value shall reach XXXXXXXXXXX Japanese Yen
((Y)XXXXXXXXX).
1.1.14 Development Program shall have the meaning put forth in
Article 3.
2
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
2 ARTICLE 2 GRANT OF LICENSES
2.1 In accordance with the provisions provided herein, LANDEC grants to
NITTA an exclusive license under the Licensed Technology within the Field to
make and have made Subject Adhesives in the Territory.
2.2 LANDEC also grants to NITTA an exclusive license under the Licensed
Technology within the Field to use and sell Subject Adhesives in the Territory.
2.3 NITTA shall have the right to grant sublicenses to NITTA's
Subsidiaries with prior written notice to LANDEC and on the condition that NITTA
agrees to guarantee such NITTA Subsidiaries' fulfillment of the obligation under
this Agreement.
2.4 NITTA shall not nor shall NITTA allow its distributors or its
customers to resell or transfer the Subject Adhesives themselves knowingly in
unincorporated form outside the Territory, or in forms such that the user who
resides outside the Territory is able to directly utilize the Subject Adhesives
benefits and properties.
2.5 NITTA will have the right to use subcontractors to perform adhesive
coating and other conversion processes on NITTA's behalf as long as such
subcontractors agree to comply with the Confidentiality provisions set forth in
Article 10 of this Agreement.
3 THE DEVELOPMENT PROGRAM
3.1 LANDEC and NITTA anticipate the need for LANDEC to provide
assistance and support to NITTA's research and development regarding the Subject
Adhesives. Within fourteen (14) days after the Effective Date, the Parties will
mutually agree on a written Development Program. The "Development Program" shall
mean work performed jointly or independently by LANDEC and NITTA pursuant to
Article 3. Such work shall be funded by NITTA as set forth in Article 3.2 and
shall encompass the following:
i) Research and development regarding Subject Adhesives for
applications in the Field as well as for industrial applications of Subject
Adhesive which were licensed to NITTA in a prior agreement dated March 14, 1995
for which development support has been provided by LANDEC since January 1, 1996;
ii) Polymer synthesis, adhesive formulation and coating of
substrates by LANDEC; and
iii) Testing, polymer scale-up and manufacture of Products by
NITTA.
LANDEC agrees to provide NITTA with reasonable quantities of research sample
polymers and pilot scale coated samples at no additional charge as part of the
Development Program. The amount of such samples shall be mutually agreed in the
Development Program.
3.2 NITTA shall provide LANDEC with funding for the amount of the
Development Program at the rate of XXXXXXXXXXXXX dollars ($XXXXX) per year for
the first XXXXX years after the Effective Date reflecting XXXX man-years per
year at LANDEC's annual cost-per-scientist of XXXXXXXXXXXXXXXXXX dollars
($XXXXX). Such funding shall be made in two installments of XXXXXXXXXXXXXXX
dollars ($XXXXX) each. The first such installment shall be paid to LANDEC within
fourteen (14) days of the Effective Date and shall be retroactive to January 1,
1996. The second installment shall be paid on January 1, 1997.
3
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
4 ARTICLE 4 COMPENSATION
4.1 In consideration of the rights and licenses granted hereunder, and
in addition to the funding set forth in Article 3.2, NITTA shall pay to LANDEC a
non-refundable sum of XXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXX U.S. Dollars (U.S.
$XXXXXX) (not to be less than U.S. $XXXXXX net after deduction of the Japanese
withholding taxes) as an initial fee under this Agreement.
4.2 NITTA shall also pay to LANDEC a running royalty at the rate of
XXXX percent (XX%) of Net Sales of Products when sold to third parties other
than NITTA's Subsidiaries and NITTA, or of Fair Market Value when used by NITTA
or sold to NITTA's Subsidiaries or NITTA. Such royalty on Products shall be
payable until XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX or XXXXXXXX years from
Commercial Launch of such Product, whichever is longer.
4.3 For the sale of any Product in a given calendar year the
manufacture, use or sale of which does not come within the scope of any licensed
Patent in the country in which such Product is manufactured, used or sold,
LANDEC agrees to discuss with NITTA a XXXXXXXXXXXXXX in such country based on
the XXXXXXXXXXXXXXXXXXXXX as measured by XXXXXXXXXXXXXXXXXX.
5 ARTICLE 5 PAYMENTS AND REPORTS
5.1 Payment of initial fee in accordance with Article 4.1 shall be made
within XXXXXXXXXXXXX days after the Effective Date of this Agreement.
5.2 Payments of running royalty shall be made quarterly within XXXXX
days after the end of each calendar quarter each year for the Products sold or
used during the applicable calendar quarter. The last running royalty payment
hereunder shall be made within XXXXXXX days from the termination date hereof,
and the Products made during the term of this Agreement but remaining unsold or
unused at its termination shall be deemed to have been sold on the last day of
the term of this Agreement and the running royalty shall be paid on such
Products in accordance with this Article 5.
5.3 All the payments to be made to LANDEC hereunder shall be net after
deducting withholding taxes to be imposed by the tax authority of Japan at the
rate specified by the government authority, and NITTA shall send LANDEC
appropriate tax certificates issued by the tax authority of Japan on such
withholding taxes.
5.4 The payments due under Articles 3, 4 and this Article 5 hereof
shall be made to LANDEC by telegraphic transfer in U.S. Dollars to the bank
account designated by LANDEC. The running royalties due under Articles 5.3
hereof shall be initially calculated in the currency used in the sales of the
Products or the currency of the country where the Products are used, and then
converted into U.S. dollars at the prevailing rate of exchange as used by
Sakura, Sanwa or Tokai Banks on the day on which the respective payments are
made.
5.5 NITTA shall pay to LANDEC interest calculated at the rate of one
and one-half percent (1.5%) per month for the days of delay from the due date on
any payment not received by LANDEC on the due date.
5.6 Within sixty (60) days from the last day of each calendar quarter
respectively of each year, NITTA shall prepare and send to LANDEC a written
statement showing in detail the production, sale and use of Products and the
royalty amounts to be paid for the applicable calendar quarter.
6 ARTICLE 6 INSPECTION OF ACCOUNTS
4
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
6.1 NITTA shall keep true and accurate records and books of account, in
accordance with generally accepted accounting principles, containing all the
data reasonably required for the full computation and verification of the
running royalty payable under Article 5 in connection with any Product hereof
for three (3) years after the sale or use of such Product. NITTA shall permit
LANDEC or a certified public accountant designated by LANDEC and approved by
NITTA (but whose approval shall not unreasonably withheld) upon reasonable
notice to inspect any or all parts of such records and books of account and to
make copies thereof at normal business hours during the term of this Agreement
and within three (3) years after the termination thereof. LANDEC shall bear the
expenses associated with such inspection, except in the case that such
inspection reveals underpayment of royalties by greater than 5% in which case
NITTA shall reimburse LANDEC for the expenses associated with the inspection.
7 ARTICLE 7 GRANT-BACK
7.1 NITTA grants to LANDEC a XXXXXXXXXXXXXXXXX license to utilize
NITTA's XXXXXXXXXXXXXXXXXXXX (i) XXXXXXXXXXXXXXXXXXXXX and (ii) XXXXXXXXXXX
XXXXXXXXXXXXXX.
7.2 NITTA grants to LANDEC an XXXXXXXXX license with the XXXXXXXXX
XXXXXXXX to utilize NITTA's patented and non-patented (know-how) improvements to
Licensed Technology XXXXXXXXXXXX. The royalty will be XXXX percent (XX%) of
LANDEC's net sales of products using such patented improvements.
8 ARTICLE 8 MEETINGS
8.1 NITTA and LANDEC will meet at least twice per year to discuss
technical and commercial progress and information exchange relating to the
Licensed Technology in the initial period of two (2) years after the Effective
Date during the term of this Agreement at the expense of each respective party
and may meet at any time both of the parties should so desire and agree during
the remaining term of this Agreement.
9 ARTICLE 9 SUPPLY OF SUBJECT ADHESIVES
9.1 If NITTA decides in the future not to manufacture Subject
Adhesives, NITTA will give LANDEC the first opportunity to be NITTA's supplier.
If LANDEC is supplying Subject Adhesives to NITTA, the parties will negotiate
the method of payment such that a single method of paying royalties and supply
payments is used.
10 ARTICLE 10 SECRECY OBSERVANCE
10.1 Except as expressly set forth in 2.3 and 7.2, any Know-How to be
exchanged hereunder between LANDEC and NITTA shall be only for the recipient's
use for the purpose of this Agreement, and the recipient shall keep such
information in strict confidence during the term of this Agreement and for three
(3) years thereafter and shall not disclose the same to any third parties,
provided, however, such obligations shall not apply if the recipient can provide
documented proof that:
10.1.1 Such information already is known to the recipient at
the time of the disclosure by the disclosing party to the recipient.
10.1.2 Such information had already been made public and
entered the public domain at the time of disclosure by the disclosing party to
the recipient; or has become public and entered the public domain since the time
of disclosure by the disclosing party to the recipient without any cause
attributable to the recipient;
5
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
10.1.3 Such information has been lawfully obtained by the
recipient since the time of disclosure by the disclosing party to the recipient
from a third party under no obligation of secrecy to the disclosing party;
10.1.4 Such information has been independently acquired or
developed by the recipient without reference to any information disclosed by the
disclosing party hereunder since the time of disclosure by the disclosing party
to the recipient; or
10.1.5 Such information has been disclosed by the disclosing
party to any third party without any obligation of secrecy.
11 ARTICLE 11 BANKRUPTCY
11.1 The parties acknowledge that the license rights granted to NITTA
in Licensed Technology are protected by Section 365 (n) of the U.S. Bankruptcy
Code. In the event that any bankruptcy court rejects this Agreement, NITTA will
have the right to exercise all rights provided by Section 365 (n) including the
right to require the trustee to deliver to NITTA all tangible embodiments of all
Licensed Technology pertaining to the Subject Adhesives.
12 ARTICLE 12 TERMINATION
12.1 This Agreement shall become effective as of the Effective Date.
NITTA shall have the right to terminate this Agreement with 90 days written
notice to LANDEC.
12.2 In case when this Agreement should expire in accordance with
Article 4.2, NITTA then shall have a fully paid up perpetual right to utilize
Licensed Technology as to such Product.
12.3 NITTA shall make a reasonable effort to commercialize the
Products. If NITTA has not launched a Product containing or utilizing any of the
Subject Adhesives in all countries within the Territory within five (5) years
after the Effective Date of this Agreement, the Parties shall negotiate a
modification to the Territories such that NITTA's license hereunder with respect
to countries in which no product has been launched or royalty has been paid
shall become non-exclusive or revoked.
12.4 Either party may terminate this Agreement by written notice of its
intention to terminate on a date therein specified not less than thirty (30)
days after the date of giving such notice, if the other party shall:
12.4.1 be in default in the performance of any of the
provisions of this Agreement on its part to be performed and shall fail to
remedy or correct such default within thirty (30) days after the receipt of such
notice from the other party specifying the event of default; or
12.4.2 become insolvent or go into liquidation or receivership
or be admitted to the benefits of any procedure for the settlement of debt or be
declared bankrupt or be dissolved.
No such termination shall affect any right accrued at the time of termination or
discharge the defaulting party from any liability then existing to the other
party, provided, however, that (i) if NITTA is the party whose default,
insolvency, liquidation or receivership has caused such termination then NITTA
shall not have any right or license to use specifically identified trade secrets
and the Licensed Technology (with the exception of Know-How) after the
termination of this Agreement, or (ii) if LANDEC is the party whose default,
insolvency, liquidation or receivership has caused such termination then LANDEC
shall not have any right or license to use NITTA's specifically identified trade
secrets and patented improvements to the
6
<PAGE>
Licensed Technology (with the exception of know-how) pursuant to Article 7
hereof after the termination of this Agreement.
12.5 Notwithstanding the other provisions of this Article 12, the
provisions of Articles 3, 4, 5, 6.1, 7 (only to the extent that patented and
non-patented improvements have already been granted to LANDEC and for which
LANDEC is paying a royalty to NITTA), 10, 12.2, 12.5, 13.1, 17.1, 18.1, 19.1 and
21 shall survive the termination or expiration of this Agreement.
13 ARTICLE 13 WARRANTY
13.1 LANDEC HEREBY REPRESENTS AND WARRANTS THAT (WITH THE EXCEPTION OF
INFORMATION LISTED IN APPENDIX 5) AS OF THE EFFECTIVE DATE IT IS NOT CURRENTLY
AWARE OF ANY THIRD PARTY PATENT OR PATENTS WHICH WOULD BE INFRINGED BY THE
MANUFACTURE, USE OR SALE OF SUBJECT ADHESIVES. EXCEPT AS SET FORTH IN THE
PRECEDING SENTENCE, LANDEC MAKES NO REPRESENTATION OR WARRANTY THAT THE
MANUFACTURE, USE OR SALE OF ANY SUBJECT ADHESIVES OR PRODUCTS BY NITTA DOES NOT
INFRINGE ANY PATENT OR INTELLECTUAL PROPERTY RIGHT HELD BY THE THIRD PARTIES,
AND LANDEC SPECIFICALLY DISCLAIMS ANY WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE. NITTA shall indemnify and hold LANDEC harmless from
any claim, liability, expense or damages arising from NITTA's manufacture, use,
sale or other disposition of the Products.
14 INFRINGEMENT OF PATENTS
14.1 Notification of Infringement. Each party shall advise the other
promptly upon its becoming aware of any third party infringement of a Patent.
14.2 Action by Landec. Landec agrees, within reasonable business
judgment and at its own discretion, to promptly take such action as is required
to restrain such infringement. NITTA shall cooperate fully with LANDEC at
NITTA's expense in LANDEC's attempt to restrain such infringers. NITTA may be
represented by counsel of its own selection at its own expense at any suit or
proceeding brought by LANDEC to restrain such infringement provided that such
representation of NITTA shall be subject to LANDEC's overall control of such
suit or proceeding. LANDEC shall bear the expense of its prosecution of any such
suit or suits and shall obtain all benefits of the recoveries from such suit or
suits, whether by judgment, award, decree or settlement.
14.3 Action by NITTA. If within sixty (60) days of NITTA's advising
LANDEC of a third party infringement of a licensed patent in any Field in which
NITTA then has a license to operate under this Agreement, Landec fails to
institute an infringement suit that NITTA feels is reasonably required, NITTA
shall have the right, at its own discretion, within thirty (30) days thereafter,
to institute an action for infringement. It is agreed that in such event NITTA
can institute any such suit in the names of both parties to this Agreement and
that NITTA shall bear the expense of any such suit or suits and shall obtain all
of the benefits of the recoveries from such suit or suits, whether by judgment,
award, decree or settlement. Should NITTA bring any such suit, LANDEC shall
cooperate in all reasonable ways with NITTA in any such suit or suits at
LANDEC's expense. LANDEC may be represented by counsel of its own selection at
its own expense.
14.4 Mutual Action. Notwithstanding Articles 14.1 and 14.2, if the
parties agree to mutually share expenses and to pursue an infringement suit
together, they shall (a) share in any and all benefits in the recovery from such
suit, whether by judgment, award, decree or settlement, and (b) agree on the
lead plaintiff, selection of counsel and other litigation strategy matters.
7
<PAGE>
15 INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS
In the event that (i) NITTA's use as set forth in this Agreement of any item or
information transferred or licensed under this Agreement (including, without
limitation, the Patents or Licensed Technology) is held by a court of competent
jurisdiction to infringe any patent or other intellectual property rights of any
other party, and (ii) such infringement prevents NITTA from selling Products as
contemplated hereunder, then after a final, non-appealable judgment or
settlement has been reached and only to the extent that NITTA is required to pay
royalties to a third party, NITTA shall offset against future royalties under
this Agreement derived from the country or jurisdiction of such Action any
future royalties that NITTA is obligated to pay to any third party. NITTA shall
be responsible for, and shall not offset damages awarded by a court or any
license fees negotiated with the other party.
Notwithstanding any credits or offsets to the contrary, NITTA will pay at least
XXXXX percent (XX%) of the royalties which would otherwise be payable to LANDEC
under this Agreement.
NITTA shall be entitled to credit the amount of its documented, reasonable
out-of-pocket litigation costs paid by NITTA to third parties, including
attorneys' fees, as a result of any such action hereunder against royalties
derived from the country or jurisdiction of such action due to LANDEC under this
Agreement. NITTA agrees that royalties payable to LANDEC hereunder which are not
a subject of such action, such as, for example, Net Sales derived from other
countries shall be paid directly to LANDEC without any credits and shall not be
delayed or otherwise affected by such suit or action.
If as a result of any action, NITTA is the recipient of an award, settlement or
license fee, or royalty, XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
16 ARTICLE 16 ASSIGNMENT
16.1 This Agreement or any rights or obligations hereunder may not be
assigned or transferred by either of the parties without prior written consent
of the other party, provided, however, such consent shall not be unreasonably
withheld. This Agreement will bind and inure to the benefit of the parties and
their respective successors and permitted assigns.
17 ARTICLE 17 NOTICES
17.1 Any notice made or required hereunder shall be deemed sufficiently
given if made by registered mail (or its equivalent), or by telefax or telex and
confirmed by registered mail, properly addressed and sent to the recipient at
its designated address. All notices shall be deemed to have been sent on the
registered date and to have been received on the tenth (10th) business day
thereafter or when actually received, whichever is sooner. For purposes hereof,
the designated addresses of the parties shall be the addresses set forth below
or at such other address as such party shall have last designated by a writing
delivered to and received by the party giving notice. If to NITTA: Mr. Takuji
Watanabe, General Manager of R&D, NITTA Corp., 172 Ikezawa-cho, Yamato
Kohriyama-shi, Japan. If to LANDEC: Mr. Steven James, Vice President of Business
and Market Development, LANDEC Corporation, 3603 Haven Avenue, Menlo Park,
California 94025-1010, U.S.A.
18 ARTICLE 18 FORCE MAJEURE
18.1 Neither of the parties shall be liable for failure of performing
its obligation hereunder (except for payment of money) due to riot, act of God,
war, fire, flood, invasion, earthquake, epidemic, interruption of
transportation, embargo, explosion, strike, lockout or other labor troubles or
any other causes similar to the foregoing which are beyond the reasonable
control of the party and the performance of obligation hereunder shall be
suspended during, but no longer than, the existence of such cause.
8
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
19 ARTICLE 19 GOVERNING LAW
19.1 This Agreement will be governed by and construed in accordance
with the laws of the State of California applicable to agreements entered into,
and to be performed entirely, within California between California residents and
without reference to conflict of laws principles.
20 ARTICLE 20 SETTLEMENT OF DISPUTES
20.1 Prior to the initiation of any litigation or other proceeding, the
parties will negotiate in good faith to resolve any dispute between them
regarding the Agreement. If such negotiations do not resolve the dispute to the
satisfaction of both parties, then the President of LANDEC and the appropriate
Executive Vice President of NITTA shall use their best efforts to resolve the
dispute prior to the initiation of any other proceeding. If they are unable to,
the dispute shall be finally settled by binding arbitration in Honolulu, Hawaii
under the Rules of Arbitration of the International Chamber of Commerce Court of
Arbitration, by one mutually acceptable arbitrator appointed in accordance with
said Rules. Judgment on the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. The arbitral proceedings and all
pleadings and written evidence shall be in the English language. Any written
evidence originally in a language other than English shall be submitted in
English translation accompanied by the original or true copy thereof.
21 ARTICLE 21 MISCELLANEOUS
21.1 The waiver, express or implied, by either party of any right
hereunder or any failure to perform this Agreement or breach hereof by the
party, shall not constitute or be deemed as a waiver of any other right
hereunder or of any other failure to perform this Agreement or breach hereof by
such other party, whether of a similar or dissimilar nature hereto.
21.2 If any article of this Agreement should be held unenforceable or
in conflict with the laws of any jurisdiction, the validity of the remaining
parts or articles shall continue to be valid, and both parties shall negotiate
in good faith to replace such unenforceable or conflicting part(s) or
articles(s) with a valid part(s) or article(s).
21.3 This Agreement contains the entire agreement and understanding
between the parties and merges and supersedes all prior discussions and writings
with respect to the subject matter hereof.
21.4 No modification or alteration of this Agreement shall be effective
unless they are made in writing and signed by duly authorized representatives of
both parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in
duplicate by the duly authorized representatives of each party as of the day and
year first above written.
LANDEC CORPORATION NITTA CORPORATION
- - --------------------------------- ------------------------------------
By: Mr. Gary T. Steele By: Mr. Tetsushi Saito
Title: President and CEO Title: Executive Vice President
9
<PAGE>
APPENDIX 1
Adhesives shall mean temperature responsive compositions comprising a polymer
derived from one or more monomers having
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX, and which side-chain units
are crystallizable, or an adhesive assemblage containing such a temperature
responsive polymer composition as an essential ingredient, compound or element.
Adhesives shall also mean Adhesives which have one or more of the following
properties:
XXXXX -- shall mean adhesives which below a preset temperature exhibit
substantially less tack, XXXXXXXXX peel force and wear time than conventional
adhesives and which exhibit tack, XXXXXXXXXX peel force (which when cooled is
not reduced by more than XX%) and wear time substantially equivalent to
conventional adhesives at or above the preset temperature.
XXXXXXXX -- shall mean adhesives which below a preset temperature exhibit
substantially less tack, XXXXXXXXXX peel force and wear time than conventional
adhesives and which exhibit tack, XXXXXXXX peel force (which when cooled is
reduced by more than XX%) and wear time substantially equivalent to conventional
adhesives at or above the preset temperature.
XXXXXXXX -- shall mean adhesives which below a preset temperature exhibit
equivalent or greater tack, XXXXXXXXXX peel force (which when warmed above the
preset temperature is reduced by more than XX%) and wear time than conventional
adhesives. XXXXXXXX comprises a XXXXXXXXXXXXXXXXX XXXXXXXXXXXX such as XXXXXX,
and from XXXXXXXXXX of a XX molecular weight side-chain crystallizable polymer
as described above.
10
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
APPENDIX 2
<TABLE>
LANDEC Licensed Patents
<CAPTION>
- - ------------------------------------ --------------------------------------------- ----------------------------------------
<S> <C> <C>
U.S.A. XXXXX XXXXX
- - ------------------------------------ --------------------------------------------- ----------------------------------------
USP 5,156,911 XXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXX
Skin-Activated Temperature XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXX
Sensitive Adhesive Assemblies XXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXX
Issued on 10/20/92 XXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXX
Filed on 5/11/89 XXXX
XXXXXXXXXXXXXXXXXXXXX
- - ------------------------------------ --------------------------------------------- ----------------------------------------
USP 5,387,450 No Corresponding XXXXXXXX Patent Application No Corresponding XXXXXX
Temperature-Activated Adhesive Patent Application
Assemblies
Issued on 2/7/95
Filed on 2/27/92
- - ------------------------------------ --------------------------------------------- ----------------------------------------
USP 5,412,035 XXXXXXXXXXXXXXXXX No Corresponding XXXXXX
Pressure-Sensitive Adhesives XXXXXXXXXXXXXXXXXXXXXXX Patent Application
Issued on 5/2/95 XXXXXXXXXXXXXXXXXXXXXXX
Filed on 8/12/92 XXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXX
- - ------------------------------------ --------------------------------------------- ----------------------------------------
USP (Pending) XXXXXXXXXXXXXX No Corresponding XXXXXX
XXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXX Patent Application
XXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXX
- - ------------------------------------ --------------------------------------------- ----------------------------------------
</TABLE>
11
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
APPENDIX 3
List of Asian Countries
1. XXXXXXXXX
2. XXXXX
3. XXXXXXXXX
4. XXXXX
5. XXXXXXXXXXXXXXXXXXXX
6. XXXXXXXX
7. XXXXXXXXXXXXXXXXXXXXXXXXX
8. XXXXXXXXXXX
9. XXXXXXXXX
10. XXXXXX
11. XXXXXXXX
12. XXXXXXX
The names listed above are for convenience only. The term, Asia, as used in this
Agreement, relates to the territories encompassed by the above countries as of
the date of this Agreement.
12
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
APPENDIX 4
<TABLE>
Definitions
<CAPTION>
<S> <C>
XXXXXXXXXXXXXXXXXXXXXX.........................................XXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXX.................................................XXXXXXXXXXXXXXXXXXXXXXXXXX
XXXX
XXXXXXXXXXXXXX.................................................XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXX..................................................XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXX...................................XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXX..................................................XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXX....................................XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX............................................XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXX
XXXXXXXXXXXXXXXXXXXX...........................................XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXX..................................XXXXXXXXXXXXXXXXXXXXXXXXXX
</TABLE>
13
XXX = CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
APPENDIX 5
Exceptions to Article 13 Warranty
1. XXXXXXXXXXXXXXXX patent application XXXXXXXX (which has been opposed
in XXXX by LANDEC with assistance from NITTA).
2. XXXXXXXXXXXXXXXXXXXXXX patent application XXXXXXXX and XXXXXXXX.
14
XXX = CONFIDENTIAL TREATMENT REQUESTED
BFGoodrich
Specialty Chemicals
BFGoodrich Specialty Chemicals
9911 Brecksville Road Thomas M. Holleran
Cleveland, Ohio 44141-3247 Vice President
800-331-1144 and General Manager
216-447-7579 Industrial Specialties
Division
FAX 216-447-5760
March 29, 1995
Mr. David Taft
Landec Corporation
3603 Haven Avenue
Menlo Park, CA 94025-1010
Dear David:
The purpose of this letter is to confirm recent discussions that BFGoodrich is
exercising its option to become a non-exclusive licensee according to the terms
of our agreement, dated July 29, 1995.
Our decision to become a non-exclusive licensee is not a decision to abandon the
project, and we look forward to Landec's continued cooperation as we seek
opportunities for BFGoodrich to enjoy a return from this investment.
I will address the questions raised in your March 19, 1996 letter regarding
mutual expectations in a non-exclusive relationship under separate cover.
Sincerely,
Thomas M. Holleran
Vice President & General Manager
TMH/mas
Exhibit 11.1
LANDEC CORPORATION
<TABLE>
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(In thousands, except per share data)
<CAPTION>
Three Months Ended April 30, Six Months Ended April 30,
1996 1995 1996 1995
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Loss $ (267) $ (914) $ (1,515) $ (1,923)
============= ============= ============== =============
Shares used in calculating net loss per share:
Weighted average shares of common stock
outstanding 8,874 542 4,713 541
SEC Staff Accounting Bulletin Topic 4D - 640 - 640
------------- ------------- -------------- -------------
Total shares used in calculating net loss per 8,874 1,182 4,713 1,181
share ============= ============= ============== =============
Net loss per share $ (0.03) $ (0.77) $ (0.32) $ (1.63)
============= ============= ============== =============
Shares used in calculating supplemental net loss
per share:
Weighted average shares of common stock
outstanding 8,874 542 4,713 541
Weighted average shares of the assumed
conversion of preferred stock and
promissory notes from the date of issuance 1,142 6,553 3,996 6,519
------------- ------------- -------------- -------------
Total shares used in calculating supplemental net
loss per share 10,016 7,095 8,709 7,060
============= ============= ============== =============
Supplemental net loss per share $ (0.03) $ (0.13) $ (0.17) $ (0.27)
============= ============= ============== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 20,181
<SECURITIES> 19,025
<RECEIVABLES> 136
<ALLOWANCES> (73)
<INVENTORY> 508
<CURRENT-ASSETS> 40,014
<PP&E> 3,071
<DEPRECIATION> 2,084
<TOTAL-ASSETS> 41,124
<CURRENT-LIABILITIES> 1,564
<BONDS> 0
<COMMON> 68,130
0
0
<OTHER-SE> (29,018)
<TOTAL-LIABILITY-AND-EQUITY> 41,124
<SALES> 412
<TOTAL-REVENUES> 1,694
<CGS> 539
<TOTAL-COSTS> 2,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> (1,515)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,515)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
