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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
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Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 HAVEN AVENUE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 306-1650
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $48,634,000 as of January 6, 1999, based upon
the closing sales price on the NASDAQ National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person
who owns 10% or more of the outstanding Common Stock have been excluded from
such calculation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of January 6, 1999, there were 13,207,329 shares of common stock, par
value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its
1999 Annual Meeting of Shareholders, which statement will be filed not later
than 120 days after the end of the fiscal year covered by this report, are
incorporated by reference in Part III hereof.
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LANDEC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Item No. Page
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Part I
1. Business............................................... 3
2. Properties............................................. 16
3. Legal Proceedings...................................... 16
4. Submission of Matters to a Vote of Security Holders.... 16
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 17
6. Selected Consolidated Financial Data................... 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 20
7A. Quantitative and Qualitative Disclosures about
Market Risk............................................ 29
8. Financial Statements and Supplementary Data............ 29
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 29
Part III
10. Directors and Executive Officers of the Registrant..... 30
11. Executive Compensation................................. 30
12. Security Ownership of Certain Beneficial Owners
and Management......................................... 30
13. Certain Relationships and Related Transactions......... 30
Part IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 31
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and
uncertainties include, without limitation, those mentioned in this Report
and, in particular, the factors described in Item 7 under "Additional Factors
That May Affect Future Results."
GENERAL
Landec Corporation and its subsidiaries ("Landec" or the "Company")
design, develop, manufacture and sell temperature-activated and other
specialty polymer products for a variety of food processing, specialty
industrial, agricultural and medical applications. In addition, as part of
its agricultural business, the Company markets and distributes hybrid seed
corn to farmers. The Company's polymer products are based on its proprietary
Intelimer-Registered Trademark- polymers, which differ from other polymers in
that they can be customized to abruptly change their physical characteristics
when heated or cooled through a pre-set temperature switch. For instance,
Intelimer polymers can change within the space of one or two degrees Celsius
from a slick, non-adhesive state to a highly tacky, adhesive state; from an
impermeable state to a highly permeable state; or from a solid state to a
viscous state. These abrupt changes are repeatedly reversible and can be
tailored by Landec to occur at specific temperatures, thereby offering
substantial competitive advantages in the Company's target markets.
A key element in the Company's growth has been its ability to
commercialize innovative products from research and development activities.
The Company's strategy is to identify commercially attractive business
opportunities and to seek market share through the application of its
proprietary, enabling Intelimer technology. The Company has launched three
product lines from this core technology - QuickCast-Registered Trademark-
splints and casts, in April 1994; Intellipac-Registered Trademark- breathable
membranes for the fresh-cut produce packaging market, in September 1995; and
Intelimer Polymer Systems for the industrial specialties market in June 1997.
Management has recently implemented a focused strategy of building
strong, vertically integrated businesses in three markets: Food Technology
and Packaging, Industrial High Performance Materials and Agricultural Seed
Technology and Distribution. As part of this strategy, the Company has
completed several strategic transactions. In April 1997, the Company
acquired Dock Resins Corporation ("Dock Resins") and incorporated it into its
Industrial High Performance Materials business. Dock Resins is primarily
engaged in the manufacturing and marketing of specialty acrylics and other
polymers. In September 1997, Intellicoat Corporation ("Intellicoat"), the
Company's subsidiary focused on Agricultural Seed Development and
Distribution, merged with Fielder's Choice Hybrids ("Fielder's Choice"), a
direct marketer of hybrid corn seed. To remain focused on its three core
businesses, during 1997 the Company licensed two of its healthcare products
in return for upfront fees, milestone payments and product royalties: in
August 1997, the Company sold its QuickCast product line to Bissell
Healthcare Corporation and in December 1997, the Company licensed the rights
to worldwide manufacturing, marketing and distribution of the PORT-TM-
ophthalmic devices to Alcon Laboratories, Inc.
The principal products and services offered by the Company in its three
principal industry segments are described below. Financial information
concerning the Company's industry segments is summarized in Note 13 to the
Consolidated Financial Statements.
The Company was incorporated in California on October 31, 1986. The
Company completed its initial public offering in 1996 and is listed on the
Nasdaq stock market under the symbol "LNDC."
TECHNOLOGY OVERVIEW
Polymers are important and versatile materials found in many of the
products of modern life. Certain polymers, such as cellulose and natural
rubber, occur in nature. Man-made polymers include nylon fibers used in
carpeting and clothing, coatings used in paints and finishes, plastics such
as polyethylene, and elastomers used in automobile tires and latex gloves.
Historically, synthetic polymers have been designed and developed primarily
for
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improved mechanical and thermal properties, such as strength and the ability
to withstand high temperatures. Improvements in these and other properties
and the ease of manufacturing of synthetic polymers have allowed these
materials to replace wood, metal and natural fibers in many applications over
the last 40 years. More recently, scientists have focused their efforts on
identifying and developing sophisticated polymers with novel properties for a
variety of commercial applications.
Landec's Intelimer polymers are a proprietary class of synthetic
polymeric materials that respond to temperature changes in a controllable,
predictable way. Typically, polymers gradually change in adhesion,
permeability and viscosity over broad temperature ranges. Landec's Intelimer
materials, in contrast, can be designed to exhibit abrupt changes in
permeability, adhesion and/or viscosity over temperature ranges as narrow as
1DEG. C to 2DEG. C. These changes can be designed to occur at relatively low
temperatures (0DEG. C to 100DEG. C) that are relatively easy to maintain in
industrial and commercial environments. FIGURE 1 illustrates the effect of
temperature on Intelimer materials as compared to typical polymers.
[GRAPH]
Landec's proprietary polymer technology is based on the structure and
phase behavior of Intelimer materials. The abrupt thermal transitions of
specific Intelimer materials are achieved through the use of chemically
precise hydrocarbon side chains that are attached to a polymer backbone.
Below a pre-determined switch temperature, the polymer's side chains align
through weak hydrophobic interactions resulting in a crystalline structure.
When this side chain crystallizable polymer is heated to, or above, this
switch temperature, these interactions are disrupted and the polymer is
transformed into an amorphous, viscous state. Because this transformation
involves a physical and not a chemical change, this process is repeatedly
reversible. Landec can set the polymer switch temperature anywhere between
0DEG. C to 100DEG. C by varying the length of the side chains. The
reversible transitions between crystalline and amorphous states are
illustrated in FIGURE 2 below.
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[GRAPH]
Side chain crystallizable polymers were first discovered by academic
researchers in the mid-1950's. These polymers were initially considered to
be merely of scientific curiosity from a polymer physics perspective, and, to
the Company's knowledge, no significant commercial applications were pursued.
In the mid-1980's, Dr. Ray Stewart, the Company's founder, became interested
in the idea of using the temperature-activated permeability properties of
these polymers to deliver various materials such as drugs and pesticides.
After forming Landec in 1986, Dr. Stewart subsequently discovered broader
utility for these polymers. After several years of basic research,
commercial development efforts began in the early 1990's, resulting in
initial products in mid-1994.
Landec's Intelimer materials are generally synthesized from long chain
acrylic monomers that are derived primarily from natural materials such as
soybean and corn oils, and are highly purifiable and designed to be
manufactured economically through known polymerization processes. Intelimer
materials can be made into many different forms, including films, coatings,
microcapsules and discreet forms.
DESCRIPTION OF CORE BUSINESS
The Company participates in three core segments- Food Technology and
Packaging, Industrial High Performance Materials and Agricultural Seed
Technology and Distribution. To date, products using the Company's Intelimer
technology have been commercially launched in two of these three businesses.
FOOD TECHNOLOGY AND PACKAGING - INTELLIPAC-Registered Trademark-
BREATHABLE MEMBRANES
Fresh-cut produce is pre-washed, cut and packaged in a form that is
ready to use by the consumer and is typically sold at premium price levels.
Industry analysts estimate that U.S. retail sales of fresh-cut produce grew
20 percent in 1997 to $6 billion. Combined with food service usage, this
represents an annual market for fresh-cut produce in the U.S. alone of more
than $16 billion. The Company believes that this growth has been driven by
consumer demand and willingness to pay for convenience, labor savings and
uniform quality relative to produce prepared at the point of sale.
Although fresh-cut produce companies have had success in the salad
market, certain types of fresh-cut produce such as broccoli, cauliflower,
asparagus and sweet corn can spoil or discolor rapidly when packaged in
conventional materials and therefore is not widely available for commercial
sale.
The Company believes that today's conventional packaging films cannot be
adapted to meet the diversification of pre-cut vegetables and fruits evolving
in the industry without compromising shelf life and produce quality. To
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mirror the growth experienced in the fresh-cut salad market, the markets for
high respiring and high volume vegetables and fruits such as broccoli,
cauliflower, asparagus, sweet corn and specialty combinations will require a
more versatile and sophisticated packaging solution such as the Company's
Intellipac breathable membranes.
After harvesting, vegetables and fruits continue to respire, consuming
oxygen and releasing carbon dioxide. Too much or too little oxygen can
result in premature spoilage and decay and promote the growth of
microorganisms that jeopardize inherent food safety. Conventional packaging
films used today, such as polyethylene and polypropylene, can be made with
modest permeability to oxygen and carbon dioxide, but often do not provide
the optimal atmosphere for the produce packaged. The respiration rate of
fresh-cut produce varies from vegetable to vegetable and from fruit to fruit.
The challenge facing the industry is to develop packaging for the high
respiring, high value and shelf life sensitive fresh-cut vegetable and fruit
market. The respiration rate of fresh-cut produce also varies with
temperature. As temperature increases, fresh-cut produce generally respires
at a higher rate, which speeds up the aging process, resulting in shortened
shelf life and increased potential for decay, spoilage, loss of texture and
dehydration. As fresh-cut produce is transported from the processing plant
through the refrigerated distribution chain to foodservice locations or
retail stores, and finally to the ultimate consumer, temperatures can
fluctuate significantly. Therefore, temperature control is a constant
challenge in preserving the quality of fresh-cut produce -- a challenge few
current packaging films can fulfill. The Company believes that its
temperature-responsive Intellipac technology responds well to the challenges
of the fresh-cut distribution process.
Using its Intelimer technology, Landec is developing Intellipac
breathable membranes that it believes address many of the shortcomings of
conventional materials. A membrane is applied over a small cut-out section
of a flexible film bag or a pre-molded rigid container. This highly
permeable "window" acts as the mechanism to provide the majority of the gas
transmission properties required for the entire package. These membranes are
designed to provide three principal benefits:
- HIGH PERMEABILITY. Landec's Intellipac breathable membranes are designed
to permit transmission of oxygen and carbon dioxide at 300 times the
rate of conventional packaging films. The Company believes that these
higher permeability levels will facilitate the packaging diversity
required to market many types of fresh-cut produce.
- ABILITY TO ADJUSTABLY SELECT OXYGEN AND CARBON DIOXIDE. Conventional
packaging films diffuse carbon dioxide and oxygen in or out of packages
at a set ratio based on the characteristics of the specific film or, if
perforated, at a fixed ratio of 1.0. Intellipac packages can be
tailored with permeation ratios ranging from 3.0 to 12.0 so they can
selectively transmit oxygen and carbon dioxide at optimum rates to
sustain the quality and shelf life of produce.
- TEMPERATURE RESPONSIVENESS. Landec has developed breathable membranes
that can increase or decrease in permeability in response to
environmental temperature changes. The Company has developed packaging
that responds to higher oxygen requirements at elevated temperatures but
is also reversible, and returns to its original state as temperatures
decline.
Landec launched its first Intellipac breathable membranes in the form of
labels for fresh-cut broccoli packages in September 1995. Since then, the
Company has launched additional packaging products for other vegetables.
These membranes incorporate high permeability, selective oxygen and carbon
dioxide transmission capabilities, and compensate for modest ranges of
temperature fluctuation. Future products may incorporate greater temperature
responsiveness.
Landec is currently working with leaders in the fresh-cut food service,
club store and retail grocery markets. In January 1995, Landec entered into
a non-exclusive supply agreement with Fresh Express, the market leader in
fresh-cut salad. Under this agreement, Fresh Express purchases Landec's
Intellipac breathable membranes for fresh-cut produce sold to the
institutional food service market. In early 1997, Landec announced an
expansion of its Intellipac business through an agreement with Apio, Inc.'s
("Apio") Value Added Group. Apio expanded sales of Intellipac packaged foods
to over 3,000 retail supermarket and over 500 club store locations through
the end of fiscal 1998. Landec Intellipac technology is now being used by
nine out of ten retail grocery chains in the U.S. Landec believes it
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will have growth opportunities for the next several years through new
customers and products in the United States, expansion of its existing
customer relationships, and through export and import shipments of specialty
packaged foods.
Landec manufactures its Intellipac breathable membranes with selected
qualified contract manufacturers and markets and sells Intellipac breathable
membranes directly to food processors.
INDUSTRIAL HIGH PERFORMANCE MATERIALS
Landec's Industrial High Performance Materials products strategy is to
focus on catalyst, resin and fully-formulated products in the thermoset
polymer materials market. Thermoset products are materials that through a
heating process cure to form a three dimensional structure which cannot be
reshaped or reversed to its original form by reheating. Thermosets are in
applications as diverse as industrial prototyping, foam carpet backing,
printed circuit boards, housing construction, auto body parts and floor
finishings. Modern Plastics has estimated the U.S. market for epoxy,
polyurethane and unsaturated polyester thermoset products to be approximately
7.7 billion pounds in 1998, and growing.
INTELIMER-Registered Trademark- POLYMER SYSTEMS
Landec has developed many Intelimer polymer catalysts for use as a raw
material by Landec customers in thermoset applications. In addition, the
company is using Intelimer technology in formulated thermoset products
developed by Landec. Over the past 18 months, the Company has undertaken a
broad-based sample validation program with hundreds of resin suppliers in
over six countries. In the last two years, as this program has developed,
several key uses have been identified in various application areas and with
several key potential customers. Most Intelimer polymer products are
targeted for industrial thermoset applications. The majority of thermosets
are configured in "two package" systems in which a separate resin and
catalyst are packaged individually to prevent premature reaction during
storage or before their intended use. When the two packages are mixed, the
thermoset material either cures or "sets" spontaneously or with moderate
application of heat. The amount of time in which the components can be
mixed, handled, sprayed, or pumped is referred to as the "work time" or pot
life of the thermosetting mixture. Because of the difficulty of mixing the
two components, the need to maintain temperature and limited pot life,
thermosetting materials can be difficult to use in an industrial setting
within a plant and particularly for applications "in the field" which are
remote from the plant. The ability to moderate the thermosetting reaction
once the two components are mixed can be very important in the use of these
fast reacting thermosetting materials.
The Company is directing evaluation and development of its Intelimer
polymer catalyst systems towards improved shelf life and stability of a one
package thermosetting material which normally would be supplied as a two
component system. The ease of handling a one component versus a two
component system results in considerably lower labor investments. Also, the
Intelimer polymer catalysts provide significant reaction control in the use
of thermosetting resins in many applications. The Intelimer polymer
catalysts can be formulated by customers into thermosetting systems which can
be handled easily without concern for premature reaction before their
intended use. Once applied during application, thermoset systems containing
Intelimer polymer catalysts can be exposed to elevated temperatures to
release the catalyst and thereby activate the desired thermosetting reaction
at the appropriate time in the process. This ability to have enhanced
reaction control is valuable in the use of thermosetting resin systems.
Current two package thermoset systems have other limitations. These
systems generally require extensive and costly mixing equipment to ensure the
proper mix ratio and homogeneity to achieve the expected performance in the
product application. The thermoset resin and catalysts are kept in separate
packages until the time of use to prevent a premature reaction. Several
thermoset systems are limited in their use by their work time, causing
incomplete mold or spread, poor product quality, and manufacturing waste.
While a limited number of single package thermoset systems offer the
potential for addressing many of these drawbacks, these products typically
must be refrigerated to prevent curing, must be used very quickly once
activated, and/or must be cured at very high temperatures. These limitations
have hindered market acceptance of these systems. The Intelimer polymer
catalysts are designed to enhance reaction control and enable one package
mixing which allows greater latitude in the formulation of thermosetting
systems. The Company has recently entered into a distribution agreement in
Europe with Akzo-Nobel for the sale of Landec's catalyst products under a
private label supply agreement and has entered into a licensing and
distribution agreement with Hitachi.
Using its proprietary catalyst technology, Landec introduced its first
formulated thermoset product, Aeromark-TM- 80 in December 1998 in Europe.
This product will be used in product prototyping and part design. This
product is initially targeted for the transportation
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industry, including automobile and aerospace manufacturers, as well as other
fabricators and designers who need a prototyping material for their design
work. Aeromark 80 is being sold in Europe through a distributor, Aero
Consultants Ltd. A.G. Aeromark 80 is a stable one component thermoset
material which requires no mixing for use in the prototype, design and
fabrication markets. Other existing products in this market are either
supplied as cured two component material or as two component thermoset
polymers which have the difficulties of two component mixing already
discussed. Aeromark 80 is the first of several formulated products the
Company is evaluating for application in high performance applications which
are based on the proprietary technology.
Landec received the R&D 100 Award from R&D Magazine for its Intelimer
Polymer Systems product line in 1997 in recognition of the unique
capabilities of this technology.
DOCK RESINS CORPORATION
In April 1997, Landec completed the acquisition of Dock Resins, a
privately-held manufacturer and marketer of specialty acrylic and other
polymers. Landec paid approximately $13.7 million in cash, a promissory note
and direct acquisition costs and $2.1 million in Landec Common Stock to
acquire Dock Resins.
Based in Linden, New Jersey, Dock Resins' products are sold under the
Doresco-TM- trademark and are used by more than 300 customers throughout the
United States in the coating, printing ink, laminating and adhesives markets.
Dock Resins is a leading supplier of proprietary polymers including acrylic,
methacrylic, alkyd, polyester, urethane and polyamide polymers to film
converters engaged in hot stamping, decorative wood grain, automotive
interiors, holograms, and metal foil applications. Dock Resins also supplies
products to a number of other markets such as automotive refinishing,
construction, pressure-sensitive adhesives, paper coatings, caulks, concrete
curing compounds and sealers.
The acquisition of Dock Resins was strategic in providing the Company
with immediate access to large-scale polymer manufacturing as well as a
built-in customer base and national distribution network. Dock Resins has a
presence in the specialty polymer industry, a track record of growth in
revenues and earnings and a strong management team under the leadership of
Dock Resins' Chief Executive Officer, Dr. A. Wayne Tamarelli.
AGRICULTURAL SEED TECHNOLOGY AND DISTRIBUTION
Landec formed Intellicoat in 1995 to build a vertically integrated seed
technology company based on Intellicoat's seed coating technology and direct
marketing and sales capability.
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INTELLICOAT-Registered Trademark- SEED COATINGS
Landec has developed and, through Intellicoat, is conducting field
trials of its Intellicoat-Registered Trademark- seed coating, an
Intelimer-based agricultural material designed to provide seed producing
companies and farmers greater flexibility in planting and farming operations.
These coatings are initially being applied to corn and soybean seeds, which
are significant North American field crops. According to the U.S.
Agricultural Statistics Board, the total estimated planted acreage in 1998 in
the U.S. for corn and soybean seed exceeded 81 million and 73 million acres,
respectively.
Currently, seed producers and farmers must make critical planting
decisions based on current and expected field conditions and weather
patterns. If the seeds are planted too early, they may be subject to cold
wet field conditions resulting in rot or seed damage. If the seeds are
planted too late, the growing season may end prior to the crop reaching full
maturity. In either extreme, yield can be significantly reduced. For
companies who grow corn and soybeans in order to resell the resulting crops
as seeds to other farmers, plantings are further complicated by the need to
plant different parent varieties in the same field and may require multiple
planting dates because of maturity differences.
The Company's Intellicoat seed coatings can be designed to control water
uptake and seed germination as a function of time and soil temperature. This
allows for seeds to be planted earlier than normal while still reducing the
risk of chilling injury caused by rapid water uptake by seeds at low
temperatures. Additionally, the coatings can be used with inbred seed
varieties to alter the germination and hence maturity timing of different
varieties to simplify seed production operations and reduce the risk of crop
failure.
The Company has been and is currently cooperating with numerous major
seed companies and universities regarding the evaluation of coatings for use
in hybrid corn seed production and soybean relay cropping. The Company
believes that one to two additional years of expanded commercial product
trials will be needed to support commercial sales. The Company is also
conducting trials on several other seed applications aimed at increasing
farmer productivity and yields.
FIELDER'S CHOICE HYBRIDS
In September 1997, Intellicoat completed the acquisition of Fielder's
Choice, a direct marketer of hybrid seed corn to farmers. Landec paid
approximately $3.6 million in cash and direct acquisition costs and $5.2
million in Landec Common Stock to acquire Fielder's Choice. Terms of the
agreement include additional consideration in the form of a cash earn-out
based on future performance.
Based in Monticello, Indiana, Fielder's Choice offers a comprehensive
line of corn hybrids to more than 16,000 farmers in over forty states through
direct marketing programs. The success of Fielder's Choice comes, in part,
from its expertise in selling directly to the farmers and bypassing the
traditional and costly farmer-dealer system. Fielder's Choice has been
growing at 25% per year or more for the last four years.
In order to support its direct marketing programs, Fielder's Choice has
developed proprietary direct marketing information technology that enables
state-of-the-art methods for communicating with a broad array of farmers.
The acquisition of Fielder's Choice was strategic in providing a cost
effective vehicle for Intellicoat seed coating products when they are ready
for commercial production. The Company believes that this direct channel of
distribution will enable Intellicoat to more quickly achieve meaningful
market penetration.
TECHNOLOGY LICENSING BUSINESSES
The Company believes its technology has commercial potential in a wide
range of industrial and medical applications beyond those identified in its
core businesses. In order to exploit these opportunities, the Company has
entered into licensing and collaborative corporate agreements for product
development and/or distribution in certain fields.
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QUICKCAST-Registered Trademark- SPLINTS AND CASTS
Landec developed, obtained FDA approval of and launched its QuickCast
splints and casts products in 1994. These splints and casts are made from an
elastic fiberglass mesh coated with Landec's temperature-activated materials.
The products' simplicity of application, flexibility in remolding and
handling, and ease in removal provide advantages over traditional methods of
casting and splinting. The Company received a 1995 R&D 100 Award from R&D
Magazine in recognition of QuickCast's innovative features and benefits.
In August 1997, Landec licensed the rights to worldwide manufacturing,
marketing and distribution of and sold certain assets relating to the
QuickCast product line to Bissell Healthcare Corporation (commonly known as
"Sammons Preston") of Bolingbrook, Illinois. Under the terms of the
transaction, Landec received an up-front cash payment for assets and will
receive ongoing royalties on product sales over a 10-year period. Sammons
Preston is one of the leaders in the occupational and physical therapist
market and had been one of Landec's largest customers for its QuickCast
products.
PORT-TM- OPHTHALMIC DEVICES
Landec developed the PORT (Punctal Occluder for the Retention of Tears)
ophthalmic device initially to address a common yet poorly diagnosed
condition known as dry eye that is estimated to affect 30 million Americans
annually. The device consists of a physician-applied applicator containing
solid Intelimer material that transforms into a flowable, viscous state when
heated slightly above body temperature. After inserting the Intelimer
material into the lacrimal drainage duct, it quickly solidifies into a
form-fitting, solid plug. Occlusion of the lacrimal drainage duct allows the
patient to retain tear fluid and thereby provides relief and therapy to the
dry eye patient.
In December 1997, Landec licensed the rights to worldwide manufacturing,
marketing and distribution of its PORT ophthalmic device to Alcon
Laboratories, Inc. ("Alcon"), a wholly-owned subsidiary of Nestle S.A. Under
the terms of the transaction, Landec received a $500,000 up-front cash
payment in November 1997, an additional cash payment of $1 million ($750,000
net of related costs) in November 1998 upon meeting a certain milestone, and
will receive ongoing royalties on product sales over an approximately 15-year
period. Landec will continue to provide development support on a contract
basis through the FDA approval process and product launch.
Alcon is currently conducting human clinical trials. Landec and Alcon
believe that PORT plugs will have additional ophthalmic applications beyond
the dry eye market, including people who cannot wear contact lenses due to
limited tear fluid retention, and patients receiving therapeutic drugs via
eye drops that require longer retention in the eye.
INDUSTRIAL HIGH PERFORMANCE MATERIALS AND ADHESIVES
HITACHI CHEMICAL. The Company entered into two separate collaborations
with Hitachi Chemical in the areas of industrial adhesives and Intelimer
Polymer Systems. On October 1, 1994, the Company entered into a
non-exclusive license agreement for seven years with Hitachi Chemical in the
industrial adhesives area. The agreement provides Hitachi Chemical with a
non-exclusive license to manufacture and sell products using Landec's
Intelimer materials in certain Asian countries. Landec received up-front
license fees upon signing the agreement and is entitled to future royalties
based on net sales by Hitachi Chemical of the licensed products. Any fees
paid to the Company are non-refundable.
On August 10, 1995, the Company entered into the second collaboration
with Hitachi Chemical in the Intelimer Polymer Systems area. The agreement
provided Hitachi Chemical with an exclusive license to use and sell Landec's
Intelimer Polymer Systems in industrial latent curing products in certain
Asian countries. Landec is entitled to be the exclusive supplier of Intelimer
Polymer Systems to Hitachi Chemical for at least seven years after
commercialization. In addition, Hitachi Chemical also received limited
options and rights for certain other technology applications in its Asian
territory. Landec received an up-front license payment upon signing this
agreement and research and development funding over three years and is
entitled to receive future royalties based on net sales by
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Hitachi Chemical of the licensed products. Any fees paid to the Company are
non-refundable. This agreement has been converted to a non-exclusive
agreement except for five selectively designated fields in Asia for certain
catalyst products. In conjunction with this agreement, Hitachi Chemical
purchased Series E Preferred Stock for $1.5 million which converted to common
stock upon the Company's initial public offering.
NITTA CORPORATION. On March 14, 1995, the Company entered into a
license agreement with Nitta Corporation ("Nitta") in the industrial
adhesives area. The agreement provides Nitta with a co-exclusive license to
manufacture and sell products using Landec's Intelimer materials in certain
Asian countries. Landec received up-front license fees upon signing the
agreement and is entitled to future royalties based on net sales by Nitta of
the licensed products. Any fees paid to the Company are non-refundable. In
addition, Nitta also received limited options for certain other technology
applications in its Asian territory. This agreement is terminable at Nitta's
option. Nitta and the Company entered into an additional exclusive license
arrangement in February 1996 covering Landec's medical adhesives technology
for use in Asia. The Company received up-front license fees upon execution
of the agreement and research and development payments and is entitled to
receive future royalties under this agreement. Any fees paid to the Company
are non-refundable. Nitta and the Company also entered into another
worldwide exclusive agreement on January 1, 1998 in the area of industrial
adhesives specific to one field of electronic polishing adhesives. The
Company received research and development payments as a part of this
agreement.
SALES AND MARKETING
Each of the Company's core businesses are supported by dedicated sales
and marketing resources. The Company intends to develop its internal sales
capacity as more products progress toward commercialization and as business
volume expands geographically.
FOOD TECHNOLOGY AND PACKAGING. In the Intellipac breathable membrane
business, there are a limited number of suppliers of fresh-cut produce, most
of whom are located in the western United States. The Company currently has
a small direct sales force targeted at this concentrated marketplace.
INDUSTRIAL HIGH PERFORMANCE MATERIALS. Dock Resins sales are carried
out through a small direct sales group and network of existing manufacturers'
representatives and distributed through public warehouses. Sales are
supported by internal sales and technical service resources at Dock Resins.
Intelimer Polymer Systems U.S. sales are made through a small, technically
oriented, internal sales organization. Global European sales are handled
through non-exclusive distribution agreements.
AGRICULTURAL SEED TECHNOLOGY AND DISTRIBUTION. Fielder's Choice is
supported by over 30 direct telemarketers, operating in two shifts, located
in Monticello, Indiana. Customer contacts are made based on direct responses
and inquiries from customers.
-11-
<PAGE>
MANUFACTURING
Landec will manufacture its own products whenever economics justify
doing so. In many cases, the Company will use third party sources for
manufacturing various components of products.
FOOD TECHNOLOGY AND PACKAGING. The Company currently has its Intellipac
breathable membrane products manufactured by selected outside contract
manufacturers. The manufacturing process for the Company's initial
Intellipac breathable membrane products is comprised of polymer
manufacturing, membrane coating and label conversion.
INDUSTRIAL HIGH PERFORMANCE MATERIALS. Dock Resins' manufacturing
facilities are flexible and adaptable to a wide range of processes. Its
capabilities include various polymerization processes, grafting, dispersing,
blending, pilot plant scale-ups and general synthesis. The Company has
increased the capacity of these facilities during fiscal year 1998. Dock
Resins' policy is to be a leader in safety, health and environmental
protection. In 1998, Dock Resins passed a voluntary comprehensive health and
safety evaluation by the United States Occupational Safety and Health
Administration (OSHA). As a result, OSHA awarded recognition to Dock Resins
as a Merit Site in OSHA's Voluntary Protection Program.
The Company is currently manufacturing Intelimer Polymer Systems
products at its pilot-scale facilities in Menlo Park, California and with
selected outside contract manufacturers. As volumes increase, the Company
plans to transfer portions of its future manufacturing to its Dock Resins
subsidiary.
AGRICULTURAL SEED TECHNOLOGY AND DISTRIBUTION. Fielder's Choice
purchases its hybrid seed corn from an established producer under an
exclusive purchase agreement. When commercial scale-up is required, the
Company will evaluate whether to coat seeds internally or use outside
contract coaters.
GENERAL. Many of the raw materials used in manufacturing certain of
the Company's products are currently purchased from a single source,
including certain monomers used to synthesize Intelimer polymers and
substrate materials for the Company's breathable membrane products. In
addition, virtually all of the hybrid corn varieties sold by Fielder's Choice
are purchased from a single source. Upon manufacturing scale-up and as
hybrid corn sales increase, the Company may enter into alternative supply
arrangements. Although to date the Company has not experienced difficulty
acquiring materials for the manufacture of its products nor has Fielder's
Choice experienced difficulty in acquiring hybrid corn varieties, no
assurance can be given that interruptions in supplies will not occur in the
future, that the Company will be able to obtain substitute vendors, or that
the Company will be able to procure comparable materials or hybrid corn
varieties at similar prices and terms within a reasonable time. Any such
interruption of supply could have a material adverse effect on the Company's
ability to manufacture and distribute its products and, consequently, could
materially and adversely affect the Company's business, operating results and
financial condition.
Landec has historically relied on the guidance of Good Manufacturing
Practices ("GMP") in developing standardized research and manufacturing
processes and procedures. Having entered into licensing agreements for the
QuickCast and PORT devices, the Company is no longer required to adhere to
GMPs. The Company desires to maintain an externally audited quality system
and has chosen to pursue ISO 9001 registration. Such registration is
required in order for the Company to sell product to certain potential
customers, primarily in Europe. The Menlo Park site has successfully
completed a pre-assessment audit, and expects to achieve ISO 9001
registration in fiscal year 1999.
RESEARCH AND DEVELOPMENT
Landec is focusing its research and development resources on both
existing and new applications of its Intelimer technology. Examples of
research and development for product line extensions include additional
Intellipac breathable membranes for other vegetables and fruits and new
catalyst systems for identified market applications for Intelimer catalyst
and promoter systems. Landec is focusing additional research on new product
forms such as new formulated polymers including its Intelimer technology and
new Intelimer polymers for newly identified product
-12-
<PAGE>
applications. Expenditures for research and development increased 24 percent
in fiscal year 1998 to $5.7 million, compared with 28 percent growth and
expenditures of $4.6 million in fiscal year 1997 and expenditures of $3.6
million in fiscal year 1996. In fiscal year 1998, research and development
expenditures funded by corporate partners were $1.4 million, compared with
$863,000 in fiscal year 1997 and $1.1 million in fiscal year 1996. The
Company may continue to seek funds for applied materials research programs
from U.S. government agencies as well as from commercial entities. The
Company anticipates that it will continue to have significant research and
development expenditures in order to maintain its competitive position with a
continuing flow of innovative, high-quality products and services. As of
October 31, 1998, Landec had 34 employees engaged in research and development
(and a total of nine Ph.D.s in the Company) with experience in polymer and
analytical chemistry, product application, product formulation, mechanical
and chemical engineering.
COMPETITION
The Company operates in highly competitive and rapidly evolving fields,
and new developments are expected to continue at a rapid pace. Competition
from large industrial, food packaging and agricultural companies is expected
to be intense. In addition, the nature of the Company's collaborative
arrangements and its technology licensing business may result in its
corporate partners and licensees becoming competitors of the Company. Many of
these competitors have substantially greater financial and technical
resources and production and marketing capabilities than the Company, and
many have substantially greater experience in conducting field trials,
obtaining regulatory approvals and manufacturing and marketing commercial
products. There can be no assurance that these competitors will not succeed
in developing alternative technologies and products that are more effective,
easier to use or less expensive than those which have been or are being
developed by the Company or that would render the Company's technology and
products obsolete and non-competitive.
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on
the proprietary rights of third parties. The Company has been granted eleven
U.S. patents with expiration dates ranging from 2006 to 2015 and has filed
applications for additional U.S. patents, as well as certain corresponding
patent applications outside the United States, relating to the Company's
technology. The Company's issued patents include claims relating to
compositions, devices and use of a class of temperature sensitive polymers
that exhibit distinctive properties of permeability, adhesion and viscosity.
There can be no assurance that any of the pending patent applications will be
approved, that the Company will develop additional proprietary products that
are patentable, that any patents issued to the Company will provide the
Company with competitive advantages or will not be challenged by any third
parties or that the patents of others will not prevent the commercialization
of products incorporating the Company's technology. Furthermore, there can be
no assurance that others will not independently develop similar products,
duplicate any of the Company's products or design around the Company's
patents. Any of the foregoing results could have a material adverse effect
on the Company's business, operating results and financial condition.
The commercial success of the Company will also depend, in part, on its
ability to avoid infringing patents issued to others. The Company has
received, and may in the future receive, from third parties, including some
of its competitors, notices claiming that it is infringing third party
patents or other proprietary rights. For example, a customer of the Company
received a letter alleging that the Company's Intellipac breathable membrane
product infringes patents of another party. The Company received a similar
letter from the same party in January 1996. The Company has investigated this
matter and believes that its Intellipac breathable membrane product does not
infringe the specified patents of such party. The Company has received an
opinion of patent counsel that the Intellipac breathable membrane product
does not infringe any valid claims of such patents. No additional
correspondence, other than the initial letters, has been received. If the
Company were determined to be infringing any third-party patent, the Company
could be required to pay damages, alter its products or processes, obtain
licenses or cease certain activities. In addition, if patents are issued to
others which contain claims that compete or conflict with those of the
Company and such competing or conflicting claims are ultimately determined to
be valid, the Company may be required to pay damages, to obtain licenses to
these patents, to develop or obtain alternative technology or to cease using
such technology. If the Company is required to obtain any licenses, there can
be no assurance that the Company will be able to do so on commercially
-13-
<PAGE>
favorable terms, if at all. The Company's failure to obtain a license to any
technology that it may require to commercialize its products could have a
material adverse impact on the Company's business, operating results and
financial condition.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or
to determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may
have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office to determine priority of invention, which could result
in substantial cost to and diversion of effort by the Company, even if the
eventual outcome is favorable to the Company. Any such litigation or
interference proceeding, regardless of outcome, could be expensive and time
consuming and could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
the Company to cease using such technology and consequently, could have a
material adverse effect on the Company's business, operating results and
financial condition.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which the Company
seeks to protect, in part, by confidentiality agreements with its
collaborators, employees and consultants. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets and proprietary
know-how will not otherwise become known or be independently discovered by
others.
GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial
regulation in the United States and foreign countries.
FOOD PACKAGING PRODUCTS. The Company's food packaging products are
subject to regulation under the Food, Drug and Cosmetic Act ("FDC Act").
Under the FDC Act any substance that when used as intended may reasonably be
expected to become, directly or indirectly, a component or otherwise affect
the characteristics of any food may be regulated as a food additive unless
the substance is generally recognized as safe. Food additives may be
substances added directly to food, such as preservatives, or substances that
could indirectly become a component of food, such as waxes, adhesives and
packaging materials.
A food additive, whether direct or indirect, must be covered by a
specific food additive regulation issued by the FDA. The Company believes its
Intellipac breathable membrane products are not subject to regulation as food
additives because these products are not expected to become a component of
food under their expected conditions of use. If the FDA were to determine
that the Company's Intellipac breathable membrane products are food
additives, the Company may be required to submit a food additive petition.
The food additive petition process is lengthy, expensive and uncertain. A
determination by the FDA that a food additive petition is necessary would
have a material adverse effect on the Company's business, operating results
and financial condition.
POLYMER MANUFACTURE. The Company's manufacture of polymers is subject
to regulation by the EPA under the Toxic Substances Control Act ("TSCA").
Pursuant to TSCA, manufacturers of new chemical substances are required to
provide a Pre-Manufacturing Notice ("PMN") prior to manufacturing the new
chemical substance. After review of the PMN, the EPA may require more
extensive testing to establish the safety of the chemical, or limit or
prohibit the manufacture or use of the chemical. To date, PMNs submitted by
the Company have been approved by the EPA without any additional testing
requirements or limitation on manufacturing or use. In addition, the ongoing
manufacture of Dock Resins' existing product line is subject to state and
federal environmental regulations. No assurance can be given that the EPA
will grant similar approval for future PMNs submitted by the Company.
AGRICULTURAL PRODUCTS. The Company's agricultural products are subject
to regulations of the United States Department of Agriculture ("USDA") and
the EPA. The Company believes its current Intellicoat seed coatings are not
pesticides as defined in the Federal Insecticide, Fungicide and Rodenticide
Act ("FIFRA") and are not subject to pesticide regulation requirements. The
process of meeting pesticide registration requirements is lengthy, expensive
and
-14-
<PAGE>
uncertain, and may require additional studies by the Company. There can be no
assurance that future products will not be regulated as pesticides. In
addition, the Company believes that its Intellicoat seed coatings will not
become a component of the agricultural products which are produced from the
seeds to which the coatings are applied and therefore are not subject to
regulation by the FDA as a food additive. While the Company believes that it
will be able to obtain approval from such agencies to distribute its
products, there can be no assurance that the Company will obtain necessary
approvals without substantial expense or delay, if at all.
OTHER. The Company and its products under development may also be
subject to other federal, state and local laws, regulations and
recommendations. Although Landec believes that it will be able to comply with
all applicable regulations regarding the manufacture and sale of its products
and polymer materials, such regulations are always subject to change and
depend heavily on administrative interpretations and the country in which the
products are sold. There can be no assurance that future changes in
regulations or interpretations made by the FDA, EPA or other regulatory
bodies, with possible retroactive effect, relating to such matters as safe
working conditions, laboratory and manufacturing practices, environmental
controls, fire hazard control, and disposal of hazardous or potentially
hazardous substances will not adversely affect the Company's business. There
can also be no assurance that the Company will not be required to incur
significant costs to comply with such laws and regulations in the future, or
that such laws or regulations will not have a material adverse effect upon
the Company's ability to do business. Furthermore, the introduction of the
Company's products in foreign markets may require obtaining foreign
regulatory clearances. There can be no assurance that the Company will be
able to obtain regulatory clearances for its products in such foreign
markets.
EMPLOYEES
As of October 31, 1998, Landec had 175 full-time employees, of whom 78
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 97 were dedicated to sales, marketing and
administrative activities. Landec intends to recruit additional personnel in
connection with the development, manufacturing and marketing of its products.
None of Landec's employees is represented by a union, and Landec believes
relationships with its employees are good.
-15-
<PAGE>
ITEM 2. PROPERTIES
The Company has offices in Menlo Park, California, Linden, New Jersey
and Monticello, Indiana. During fiscal year 1998, the Fielder's Choice
operations located in Monticello, Indiana expanded its office space by 11,900
square feet to support the growth of the Agricultural Seed Distribution
business.
These properties are described below:
<TABLE>
<CAPTION>
Acres
Business of Lease
Location Segment Ownership Facilities Land Expiration
- ---------------- ----------------- --------- --------------------------------- ----- -------------
<S> <C> <C> <C> <C> <C>
Menlo Park, CA All Leased 21,000 square feet of office and -- 12/31/01(1)
laboratory space
Menlo Park, CA All Subleased 5,000 square feet of warehouse and -- 12/31/98(2)
manufacturing space
Linden, NJ Industrial High Owned 20,000 square feet of office, 2.1 -- (3)
Performance laboratory, production, warehouse,
Materials and ancillary space
Monticello, IN Agricultural Owned 19,400 square feet of office space 0.5 --
Seed Technology
and Distribution
</TABLE>
(1) Lease contains one two-year renewal option.
(2) Lease converts to a month to month lease effective January 1999.
(3) Construction plans are underway to build an additional 2,000 square feet
of office and laboratory space in fiscal year 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any material legal proceedings.
In October 1995, a customer of the Company received a letter alleging
that the Company's Intellipac breathable membrane product infringes patents
of another party. The Company received a similar letter from the same party
in January 1996. The Company has investigated this matter and believes that
its Intellipac breathable membrane product does not infringe the specified
patents of such party. The Company has received an opinion of patent counsel
that the Intellipac breathable membrane product does not infringe any valid
claims of such patents. No additional correspondence, other than the initial
letters, has been received. If the Company were determined to be infringing
any third-party patent, the Company could be required to pay damages, alter
its products or processes, obtain licenses or cease certain activities. See
Item 1- Patents and Proprietary Rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ending October 31, 1998.
-16-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded in the over-the-counter market and is quoted
on the Nasdaq Stock Market under the symbol "LNDC". The following table sets
forth for each period indicated the high and low sales prices for the Common
Stock as reported on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
FISCAL YEAR 1998
High Low
----- -----
<S> <C> <C>
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
<CAPTION>
FISCAL YEAR 1997
High Low
----- -----
<S> <C> <C>
4th Quarter ending October 31, 1997................. $6.25 $4.75
3rd Quarter ending July 31, 1997.................... $7.25 $4.75
2nd Quarter ending April 30, 1997................... $7.63 $4.75
1st Quarter ending January 31, 1997................. $9.25 $6.50
</TABLE>
There were approximately 107 holders of record of 13,159,888 shares of
outstanding Common Stock as of October 31, 1998. Since holders are listed
under their brokerage firm's names, the actual number of shareholders is
higher. The Company has not paid any dividends on the Common Stock since its
inception. The Company presently intends to retain all future earnings, if
any, for its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future.
In connection with the Company's acquisition of Dock Resins on April 18,
1997, the shareholder of Dock Resins received an aggregate of approximately
$12.2 million in cash and a secured promissory note and 0.4 million shares of
Landec Common Stock.
In connection with Intellicoat's acquisition of Fielder's Choice on
September 30, 1997, the shareholders of Fielder's Choice received an
aggregate of approximately $2.9 million in cash and approximately 1.4 million
shares of Landec Common Stock. The majority shareholder of Fielder's Choice
is also entitled to receive additional cash consideration up to $2.4 million
from Intellicoat depending on the future performance of the acquired business.
In connection with the sale of Series D Preferred Stock in July 1993,
the Company issued warrants to purchase 186,349 shares of Common Stock at an
exercise price of $4.31 per share for $5,357 in cash. In a cashless exercise
during fiscal year 1998, 46,587 shares were issued in exchange for the
warrants.
In October 1998, certain directors and officers of the Company purchased
200,425 shares of Common Stock for between $3.75 and $3.94 per share for
$776,000.
-17-
<PAGE>
The issuance of securities in this Item 5 was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance on Section 4(2) of the Act as a transaction by an issuer not
involving any public offering. The recipients of the securities in such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
issued in such transaction. The recipients were given adequate access to
information about the Company.
USE OF PROCEEDS
In connection with its initial public offering in 1996, the Company
filed a Registration Statement on Form S-1, SEC File No. 33-80723 (the
"Registration Statement"), which was declared effective by the Commission on
February 12, 1996. Pursuant to the Registration Statement, the Company
registered 3,220,000 shares of its Common Stock, $0.001 par value per share,
for its own account. The offering commenced on February 15, 1996 and did not
terminate until all of the registered shares had been sold. The aggregate
offering price of the registered shares was $38,640,000. The managing
underwriters of the offering were Smith Barney and Lehman Brothers.
From February 1, 1996 to October 31, 1998, the Company incurred the
following expenses in connection with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions $2,705,000
Other expenses 900,000
----------
Total Expenses $3,605,000
----------
----------
</TABLE>
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total
expenses above were $35,035,000. From February 1, 1996 to October 31, 1998,
the Company used such net offering proceeds, in direct or indirect payments
to others, as follows:
<TABLE>
<S> <C>
Purchase and installment of machinery and equipment $5,800,000
Repayment of indebtedness $700,000
Acquisitions of other businesses $17,700,000
Temporary investments* $1,000,000
Working capital $8,600,000
-----------
Total $33,800,000
-----------
-----------
</TABLE>
* All temporary investments are available-for-sale securities; see note 5
of the consolidated financial statements in Part IV, Item 14.
Each of such amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the prospectus of the Registration
Statement.
-18-
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales.............................................. $ 31,664 $ 8,653 $ 371 $ 14 $ --
Research and development revenues.......................... 1,352 863 1,096 796 965
License fees............................................... 500 -- 600 2,650 400
--------- --------- --------- --------- --------
Total revenues........................................... 33,516 9,516 2,067 3,460 1,365
Operating costs and expenses:
Cost of product sales...................................... 20,308 6,215 422 9 --
Research and development................................... 5,713 4,608 3,588 3,175 2,288
Selling, general and administrative........................ 10,835 4,664 2,367 1,332 1,239
Purchased in-process research and development.............. -- 3,022 -- -- --
--------- --------- --------- --------- --------
36,856 18,509 6,377 4,516 3,527
--------- --------- --------- --------- --------
Operating loss............................................... (3,340) (8,993) (4,310) (1,056) (2,162)
Interest income.............................................. 737 1,726 1,546 281 273
Interest expense............................................. (137) (319) (59) (106) (48)
--------- --------- --------- --------- --------
Loss from continuing operations before income taxes.......... (2,740) (7,586) (2,823) (881) (1,937)
Provision for income taxes................................... (150) -- -- -- --
--------- --------- --------- --------- --------
Loss from continuing operations.............................. (2,890) (7,586) (2,823) (881) (1,937)
Discontinued Operations:
Loss from discontinued QuickCast operations................ -- (1,059) (1,377) (1,878) (2,418)
Gain on disposal of QuickCast operations................... -- 70 -- -- --
--------- --------- --------- --------- --------
Loss from discontinued operations............................ -- (989) (1,377) (1,878) (2,418)
--------- --------- --------- --------- --------
Net loss..................................................... $ (2,890) $ (8,575) $ (4,200) $ (2,759) $ (4,355)
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Basic and diluted net loss per share:
Continuing operations...................................... $ (.23) $ (.68) $ (.37) $ (.74)
Discontinued operations.................................... -- (.09) (.18) (1.59)
--------- --------- --------- ---------
Basic and diluted net loss per share......................... $ (.23) $ (.77) $ (.55) $ (2.33)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing basic and diluted net loss per
share...................................................... 12,773 11,144 7,699 1,182
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments............ $ 10,177 $ 14,669 $ 36,510 $ 5,549 $ 5,706
Total assets................................................. 42,356 50,160 38,358 7,347 7,521
Redeemable convertible preferred stock....................... -- -- -- 31,276 27,656
Accumulated deficit.......................................... (42,756) (39,858) (31,278) (26,538) (21,658)
Total shareholders' equity (net capital deficiency).......... $ 33,688 $ 35,615 $ 36,640 $ (26,429) $ (21,584)
</TABLE>
-19-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements contained in Item 8 of this
report. Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and
uncertainties include, without limitation, those mentioned in this report
and, in particular, the factors described below under "Additional Factors
That May Affect Future Results".
OVERVIEW
Since its inception in October 1986, the Company has been primarily
engaged in the research and development of its Intelimer technology and
related products. The Company has launched three product lines from this
core development -- QuickCast splints and casts, in April 1994; Intellipac
breathable membranes for the fresh-cut produce packaging market, in September
1995; and Intelimer Polymer Systems for the industrial specialties market in
June 1997.
Management has recently implemented a focused strategy of building
strong, vertically integrated businesses in three industries: Food Technology
and Packaging, Industrial High Performance Materials and Agricultural Seed
Development and Distribution. As part of this strategy, the Company has
completed several strategic transactions. In April 1997, the Company
acquired Dock Resins and incorporated it into its Industrial High Performance
Materials business. Dock Resins is primarily engaged in the manufacturing
and marketing of specialty acrylics and other polymers. In September 1997,
Intellicoat, the Company's subsidiary focused on Agricultural Seed and
Distribution, acquired Fielder's Choice, a direct marketer of hybrid seed
corn. To remain focused on the three core businesses, during 1997 the
Company licensed two of its healthcare products: in August 1997, the Company
sold its QuickCast product line to Bissell Healthcare Corporation and in
December 1997, the Company licensed the rights to worldwide manufacturing,
marketing and distribution of the PORT ophthalmic devices to Alcon.
The Company has been unprofitable during each fiscal year since its
inception and expects to incur additional losses, primarily due to the
continuation of its research and development activities, charges related to
acquisitions, and expenditures necessary to further develop its manufacturing
and marketing capabilities. From inception through October 31, 1998, the
Company's accumulated deficit was $42.8 million.
RESULTS OF OPERATIONS
The Company's results of operations reflect only the continuing
operations of the Company and do not include the results of the discontinued
QuickCast operation.
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1997
Total revenues were $33.5 million for fiscal year 1998 compared to $9.5
million for fiscal year 1997. Revenues from product sales increased to $31.7
million in fiscal year 1998 from $8.7 million in fiscal year 1997 due
primarily to $13.3 million of product sales from Fielder's Choice, which was
acquired in September 1997; and an increase of $8.0 million of product sales
from Dock Resins, which was acquired in April 1997. Also contributing to the
increase were Intellipac breathable membrane product sales which increased
from $1.2 million in fiscal year 1997 to $2.9 million in fiscal year 1998,
due primarily to an increase in unit sales and the introduction of several
new products. Revenues from research and development funding were $1.4
million for fiscal year 1998 compared to $863,000 for fiscal year 1997. The
increase in research and development revenues was primarily due to the
agreement with Alcon for the funding of the PORT program. Revenues from
license fees during fiscal year 1998 were $500,000 compared to none during
fiscal year 1997. The increase in license fees revenue was due to a payment
in the first quarter of fiscal year 1998 under the PORT license agreement
with Alcon.
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Cost of product sales consists of material, labor and overhead. Cost of
product sales was $20.3 million for fiscal year 1998 compared to $6.2 million
for fiscal year 1997. Cost of product sales as a percentage of product sales
decreased to 64% in fiscal year 1998 from 72% in fiscal year 1997. The
decrease in the cost of product sales as a percentage of product sales in
fiscal year 1998 as compared to fiscal year 1997 was primarily the result of
higher margins resulting from product sales of Fielder's Choice and Dock
Resins products. The Company anticipates that gross margins would continue
to improve if volume increases in the Intellipac and Dock Resins products.
However, longer-term improvement is unpredictable due to the early stage of
commercialization of several of the Company's products.
Research and development expenses were $5.7 million for fiscal year 1998
compared to $4.6 million for fiscal year 1997, an increase of 24%. The
Company's research and development expenses consist primarily of expenses
involved in the development, process scale-up and efforts to protect
intellectual property content of the Company's enabling side chain
crystallizable polymer technology and research and development expenses
related to Dock Resins' products. The increase in research and development
expenses in fiscal year 1998 compared to fiscal year 1997 was primarily due
to increased development costs for the Company's Intellipac and Intellicoat
seed coating products and a full year of development costs related to Dock
Resins products. In future periods, the Company expects that spending for
research and development will continue to increase in absolute dollars,
although it may vary as a percentage of total revenues.
Selling, general and administrative expenses were $10.8 million for
fiscal year 1998 compared to $4.7 million for fiscal year 1997, an increase
of 130%. Selling, general and administrative expenses consist primarily of
sales and marketing expenses associated with the Company's product sales,
business development expenses, and staff and administrative expenses.
Selling, general and administrative expenses increased primarily as a result
of an entire year of expenses and amortization of goodwill for Dock Resins
and Fielder's Choice, which were acquired during fiscal year 1997.
Specifically, sales and marketing expenses increased to $6.7 million for
fiscal year 1998, from $1.8 million for fiscal year 1997. The Company expects
that total selling, general and administrative spending for existing and
newly acquired products will continue to increase in absolute dollars in
future periods, although it may vary as a percentage of total revenues.
Net interest income was $600,000 for fiscal year 1998 compared to $1.4
million for fiscal year 1997. The decrease during fiscal year 1998 as
compared to fiscal year 1997 was due principally to less cash being available
for investing.
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1996
Total revenues were $9.5 million for fiscal year 1997 compared to $2.1
million for fiscal year 1996. Revenues from product sales increased to $8.7
million in fiscal year 1997 from $371,000 in fiscal year 1996 due primarily
to $7.4 million of product sales from Dock Resins. Also contributing to the
increase were Intellipac breathable membrane product sales which increased
from $371,000 in fiscal year 1996 to $1.2 million in fiscal year 1997, due
primarily to an increase in unit sales. Revenues from research and
development funding was $863,000 for fiscal year 1997 compared to $1.1
million for fiscal year 1996. Product sales for the discontinued QuickCast
product line for the period from November 1, 1996 through the measurement
date of June 12, 1997 were $241,000 which was included in the loss from
discontinued operations. There were no revenues from license fees during
fiscal year 1997 compared to $600,000 during fiscal year 1996. The decrease
in license fees revenue was due to a one-time payment in the second quarter
of fiscal year 1996 under an expanded agreement with Nitta Corporation.
Cost of product sales was $6.2 million for fiscal year 1997 compared to
$422,000 for fiscal year 1996. Cost of product sales as a percentage of
product sales decreased to 72% in fiscal year 1997 from 114% in fiscal year
1996. The decrease in the cost of product sales as a percentage of product
sales in fiscal year 1997 as compared to fiscal year 1996 was primarily the
result of higher margins resulting from product sales of the Dock Resins
products. Cost of product sales for the discontinued QuickCast product line
for the period from November 1, 1996 through the measurement date of June 12,
1997 was $462,000 which was included in the loss from discontinued operations.
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Research and development expenses were $4.6 million for fiscal year 1997
compared to $3.6 million for fiscal year 1996, an increase of 28%. The
increase in research and development expenses in fiscal year 1997 compared to
fiscal year 1996 was primarily due to increased development costs for the
Company's Intelimer Polymer Systems and Intellicoat seed coating products and
the addition of development costs related to Dock Resins' products during
fiscal year 1997.
Selling, general and administrative expenses were $4.7 million for
fiscal year 1997 compared to $2.4 million for fiscal year 1996, an increase
of 97%. Selling, general and administrative expenses increased primarily as a
result of increased sales and marketing expenses, the additional
administrative costs associated with supporting a public company for an
entire year (the Company's initial public offering was completed on February
15, 1996), and the acquisitions of Dock Resins and Fielder's Choice during
fiscal year 1997. Specifically, sales and marketing expenses increased to
$1.8 million for fiscal year 1997 from $406,000 for fiscal year 1996. The
increase in sales and marketing expenses was primarily attributable to the
costs to create marketing departments for the Intelimer Polymer Systems and
Intellicoat products and the acquisition of Dock Resins and Fielder's Choice
during fiscal year 1997. Sales and marketing costs for the discontinued
QuickCast product line for the period from November 1, 1996 through the
measurement date of June 12, 1997 were $822,000 which was included in the
loss from discontinued operations.
Net interest income was $1.4 million for fiscal year 1997 compared to
$1.5 million for fiscal year 1996. The decrease during fiscal year 1997 as
compared to fiscal year 1996 was due principally to the interest expense on
the payable related to the acquisition of Dock Resins.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998 the Company had cash equivalents and short-term
investments of $10.2 million, a net decrease of $4.5 million from $14.7
million as of October 31, 1997. This decrease was primarily due to cash of
approximately $2.3 million used by Fielder's Choice to purchase seed
inventory to be used during the 1999 selling season and to purchase $1.3
million of property and equipment net of long term debt. Although the
Company reduced the cash used in operations during fiscal year 1998 as
compared to fiscal year 1997, there can be no assurance that the Company will
continue to do so in future periods.
During fiscal year 1998, the Company purchased seed processing equipment
and computer hardware and software and incurred building improvement
expenditures to support the development of Intellicoat products, incurred
leasehold improvement expenditures at its Menlo Park location to upgrade
existing facilities and incurred building and equipment improvement
expenditures at Dock Resins to expand capacity. These expenditures
represented the majority of the $4.1 million of property and equipment
purchased during fiscal year 1998.
The Company believes that existing cash, cash equivalents and short-term
investments will be sufficient to finance its operational and capital
requirements through at least the next twelve months. The Company's future
capital requirements, however, will depend on numerous factors, including the
progress of its research and development programs; the development of
commercial scale manufacturing capabilities; the development of marketing,
sales and distribution capabilities; the ability of the Company to maintain
existing collaborative and licensing arrangements and establish and maintain
new collaborative and licensing arrangements; the continued assimilation and
integration of Dock Resins and Fielder's Choice into Landec and Intellicoat,
respectively; the timing and amount, if any, of payments received under
licensing and research and development agreements; the costs involved in
preparing, filing, prosecuting, defending and enforcing intellectual property
rights; the ability to comply with regulatory requirements; the emergence of
competitive technology and market forces; the effectiveness of product
commercialization activities and arrangements; and other factors. If the
Company's currently available funds, together with the internally generated
cash flow from operations, are not sufficient to satisfy its financing needs,
the Company would be required to seek additional funding through other
arrangements with collaborative partners, bank borrowings and public or
private sales of its securities. There can be no assurance that additional
funds, if required, will be available to the Company on favorable terms if at
all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
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The Company desires to take advantage of the "Safe Harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and of Section 21E and
Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, the
Company wishes to alert readers that the following important factors, as well
as other factors including, without limitation, those described elsewhere in
this Report, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
periods to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. The Company assumes no
obligation to update such forward-looking statements.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company has
incurred net losses in each fiscal year since its inception, including a loss
of $2.9 million for fiscal year 1998. The Company's accumulated deficit as
of October 31, 1998 totaled $42.8 million. The Company may incur additional
losses in the future. The amount of future net losses is highly uncertain
and there can be no assurance that the Company will be able to reach or
sustain profitability for an entire fiscal year.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. In the past, the
Company's results of operations have varied significantly from quarter to
quarter and such fluctuations are expected to continue in the future. Due to
the seasonal nature of the corn seed industry, a significant portion of
Fielder's Choice revenues and profits will be concentrated over a few months
during the spring planting season (generally during the Company's second
quarter). Further, the Company's principal customers in its Food Technology
and Packaging segment are heavily affected by seasonal and weather factors,
which could affect their purchases of the Company's products. In addition,
quarterly operating results will depend upon several factors, including the
timing and amount of expenses associated with expanding the Company's
operations, the timing of collaborative agreements with, and performance of,
potential partners, the timing of regulatory approvals and new product
introductions, the mix between pilot production of new products and
full-scale manufacturing of existing products and the mix between domestic
and export sales. The Company also cannot predict rates of licensing fees
and royalties received from its partners. As a result of these and other
factors, the Company expects to continue to experience significant
fluctuations in quarterly operating results, and there can be no assurance
that the Company will be profitable in the future.
UNCERTAINTY RELATING TO INTEGRATION OF NEW BUSINESS ACQUISITIONS. The
successful combination of the Company and Dock Resins and Intellicoat and
Fielder's Choice has required and will continue to require substantial effort
from each organization. The diversion of the attention of management and any
difficulties encountered in the transition process could have a material
adverse effect on the Company's ability to realize the anticipated benefits
of the acquisitions. The successful combination of the companies also
requires coordination of their research and development, manufacturing, and
sales and marketing efforts. In addition, the process of combining the
organizations could cause the interruption of, or a loss of momentum in, the
Company's activities. There can be no assurance that the Company will be
able to retain key management, technical, sales and customer support
personnel of Dock Resins and Fielder's Choice, or that the Company will
realize the anticipated benefits of the acquisitions, and the failure to do
so would have a material adverse effect on the Company's business, operating
results and financial condition.
EARLY COMMERCIALIZATION OF CERTAIN PRODUCTS; DEPENDENCE ON NEW PRODUCTS
AND TECHNOLOGIES; UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the
early stage of product commercialization of certain Intelimer polymer
products and many of its potential products are in development. The Company
believes that its future success will depend in large part on its ability to
develop and market new products in its target markets and in new markets. In
particular, the Company expects that its ability to compete effectively with
existing food products, industrial, agricultural and medical companies will
depend substantially on successfully developing, commercializing, achieving
market acceptance of and reducing the cost of producing the Company's
products. In addition, commercial applications of the Company's temperature
switch polymer technology are relatively new and evolving. There can be no
assurance that the Company will be able to successfully develop,
commercialize, achieve market acceptance of or reduce the costs of producing
the Company's new products, or that the Company's competitors will not
develop competing technologies that are less expensive or otherwise superior
to those of the Company. There can be no assurance that the Company will be
able to develop and introduce new products and technologies in a timely
manner or that new products and technologies will gain market acceptance.
The failure to
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develop and successfully market new products would have a material adverse
effect on the Company's business, operating results and financial condition.
The success of the Company in generating significant sales of its
products will depend in part on the ability of the Company and its partners
and licensees to achieve market acceptance of the Company's new products and
technology. The extent to which, and rate at which, market acceptance and
penetration are achieved by the Company's current and future products are a
function of many variables including, but not limited to, price, safety,
efficacy, reliability, conversion costs and marketing and sales efforts, as
well as general economic conditions affecting purchasing patterns. There can
be no assurance that markets for the Company's new products will develop or
that the Company's new products and technology will be accepted and adopted.
The failure of the Company's new products to achieve market acceptance would
have a material adverse effect on the Company's business, operating results
and financial condition.
COMPETITION AND TECHNOLOGICAL CHANGE. The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food products, industrial,
agricultural and medical companies is expected to be intense. In addition,
the nature of the Company's collaborative arrangements may result in its
corporate partners and licensees becoming competitors of the Company. Many
of these competitors have substantially greater financial and technical
resources and production and marketing capabilities than the Company, and may
have substantially greater experience in conducting clinical and field
trials, obtaining regulatory approvals and manufacturing and marketing
commercial products. There can be no assurance that these competitors will
not succeed in developing alternative technologies and products that are more
effective, easier to use or less expensive than those which have been or are
being developed by the Company or that would render the Company's technology
and products obsolete and non-competitive.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. The
Company's success is dependent in part upon its ability to manufacture its
products in commercial quantities in compliance with regulatory requirements
and at acceptable costs. There can be no assurance that the Company will be
able to achieve this. Although the Company believes Dock Resins will provide
Landec with practical knowledge in the scale-up of Intelimer polymer
products, production in commercial-scale quantities may involve technical
challenges for the Company. The Company anticipates that a portion of the
Company's products will be manufactured in the Linden, New Jersey facility
acquired in the purchase of Dock Resins. The Company's reliance on this
facility involves a number of potential risks, including the absence of
adequate capacity, the unavailability of, or interruption in access to,
certain process technologies and reduced control over delivery schedules, and
low manufacturing yields and high manufacturing costs. The Company may also
need to consider seeking collaborative arrangements with other companies to
manufacture certain of its products. If the Company becomes dependent upon
third parties for the manufacture of its products, then the Company's profit
margins and its ability to develop and deliver such products on a timely
basis may be adversely affected. Moreover, there can be no assurance that
such parties will adequately perform and any failures by third parties may
impair the Company's ability to deliver products on a timely basis, impair
the Company's competitive position, or may delay the submission of products
for regulatory approval. The occurrence of any of these factors could have a
material adverse effect on the Company's business, operating results and
financial condition. The manufacture of the Company's products will be
subject to periodic inspection by regulatory authorities. There can be no
assurance that the Company will be able to obtain necessary regulatory
approvals on a timely basis or at all. Delays in receipt of or failure to
receive such approvals or loss of previously received approvals would have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS. Many of the raw materials used
in manufacturing certain of the Company's products are currently purchased
from a single source, including certain monomers used to synthesize Intelimer
polymers and substrate materials for the Company's Intellipac breathable
membrane products. In addition, virtually all of the hybrid corn varieties
sold by Fielder's Choice are purchased from a single source. Upon
manufacturing scale-up and increases in hybrid corn sales, the Company may
enter into alternative supply arrangements. Although to date the Company has
not experienced difficulty acquiring materials for the manufacture of its
products nor has Fielder's Choice experienced difficulty in acquiring hybrid
corn varieties, no
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assurance can be given that interruptions in supplies will not occur in the
future, that the Company will be able to obtain substitute vendors, or that
the Company will be able to procure comparable materials or hybrid corn
varieties at similar prices and terms, or at all, within a reasonable time.
Any such interruption of supply could have a material adverse effect on the
Company's ability to manufacture and distribute its products and,
consequently, could materially and adversely affect the Company's business,
operating results and financial condition.
CUSTOMER CONCENTRATION. For the fiscal year 1998, sales to the Company's
top five customers accounted for approximately 29% of the Company's product
sales with the top customer accounting for 14% of the Company's product
sales. The Company expects that for the foreseeable future a limited number
of customers may continue to account for a substantial portion of its net
revenues. The Company may experience changes in the composition of its
customer base as Dock Resins and Fielder's Choice have experienced in the
past. The Company does not have long-term purchase agreements with any of
its customers. The reduction, delay or cancellation of orders from one or
more major customers for any reason or the loss of one or more of such major
customers could materially and adversely affect the Company's business,
operating results and financial condition. In addition, since the products
manufactured in the Linden, New Jersey facility are often sole sourced to its
customers, the Company's operating results could be materially and adversely
affected if one or more of its major customers were to develop other sources
of supply. There can be no assurance that the Company's current customers
will continue to place orders, that orders by existing customers will not be
canceled or will continue at the levels of previous periods or that the
Company will be able to obtain orders from new customers.
PATENTS AND PROPRIETARY RIGHTS. The Company's success depends in large
part on its ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of third parties. There
can be no assurance that any pending patent applications will be approved,
that the Company will develop additional proprietary products that are
patentable, that any patents issued to the Company will provide the Company
with competitive advantages or will not be challenged by any third parties or
that the patents of others will not prevent the commercialization of products
incorporating the Company's technology. The Company has received, and may in
the future receive, from third parties, including some of its competitors,
notices claiming that it is infringing third party patents or other
proprietary rights. For example, the Company has received a letter alleging
that its Intellipac breathable membrane product infringes patents of another
party. The Company has investigated this matter and believes that its
Intellipac breathable membrane product does not infringe the specified
patents of such party. The Company has received an opinion of patent counsel
that the Intellipac breathable membrane product does not infringe any valid
claims of such patents. No additional correspondence, other than the initial
letters, has been received. If the Company were determined to be infringing
any third-party patent, the Company could be required to pay damages, alter
its products or processes, obtain licenses or cease certain activities. If
the Company is required to obtain any licenses, there can be no assurance
that the Company will be able to do so on commercially favorable terms, if at
all. Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third-party
proprietary rights. Any such litigation or interference proceeding,
regardless of outcome, could be expensive and time consuming and could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology and, consequently, could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business - Patents and Proprietary Rights" in Item 1.
GOVERNMENT REGULATION. The Company's products and operations are
subject to substantial regulation in the United States and foreign countries.
Although Landec believes that it will be able to comply with all applicable
regulations regarding the manufacture and sale of its products and polymer
materials, such regulations are always subject to change and depend heavily
on administrative interpretations and the country in which the products are
sold. There can be no assurance that future changes in regulations or
interpretations relating to such matters as safe working conditions,
laboratory and manufacturing practices, environmental controls, and disposal
of hazardous or potentially hazardous substances will not adversely affect
the Company's business. There can be no assurance that the Company will not
be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect on the Company's business, operating results and
financial condition. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, injunctions, civil
penalties, suspensions or withdrawal of regulatory approvals, product
recalls,
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product seizures, including cessation of manufacturing and sales, operating
restrictions and criminal prosecution. See "Business - Governmental
Regulations" in Item 1.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various environmental controls on the use, storage, discharge or disposal of
toxic, volatile or otherwise hazardous chemicals and gases used in certain
manufacturing processes, including those utilized by Dock Resins. As a
result of historic off-site disposal practices, Dock Resins was recently
involved in two actions seeking to compel the generators of hazardous waste
to remediate hazardous waste sites. Dock Resins has been informed by its
counsel that it is a DE MINIMIS generator to these sites, and that its
financial exposure in these sites is not material to the Company's financial
position. These matters have been settled on terms consistent with the
above. In addition, the New Jersey Industrial Site Recovery Act ("ISRA")
requires an investigation and remediation of any industrial establishment,
like Dock Resins, which changes ownership. This statute was activated by the
Company's acquisition of Dock Resins. Dock Resins has completed its
investigation of the site, delineated the limited areas of concern on the
site, and completed the bulk of the active remediation required under the
statute. The costs associated with this effort are being borne by the former
owner of Dock Resins, and counsel has advised Dock Resins and the Company
that funds of the former owner required by ISRA to be set aside for this
effort are sufficient to guarantee the successful completion of remedial
activities at the site. In most cases, the Company believes its liability
will be limited to sharing clean-up or other remedial costs with other
potentially responsible parties. Any failure by the Company to control the
use of, or to restrict adequately the discharge of, hazardous substances
under present or future regulations could subject it to substantial liability
or could cause its manufacturing operations to be suspended and could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that changes in environmental
regulations will not impose the need for additional capital equipment or
other requirements.
LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited
experience marketing and selling its Intelimer polymer products. While Dock
Resins will provide consultation and in some cases direct marketing support
for Landec's Intelimer polymer products, establishing sufficient marketing
and sales capability will require significant resources. The Company intends
to distribute certain of its products through its corporate partners and
other distributors and to sell certain other products through a direct sales
force. There can be no assurance that the Company will be able to recruit and
retain skilled sales management, direct salespersons or distributors, or that
the Company's sales and marketing efforts will be successful. To the extent
that the Company has or will enter into distribution or other collaborative
arrangements for the sale of its products, the Company will be dependent on
the efforts of third parties. There can be no assurance that such sales and
marketing efforts will be successful and any failure in such efforts could
have a material adverse effect on the Company's business, operating results
and financial condition.
DEPENDENCE ON COLLABORATIVE PARTNERS AND LICENSEES. The Company's
strategy for the development, clinical and field testing, manufacture,
commercialization and marketing of certain of its current and future products
includes entering into various collaborations with corporate partners,
licensees and others. To date, the Company has entered into collaborative
arrangements with The BFGoodrich Company and Hitachi Chemical in connection
with its Intelimer Polymer Systems; Fresh Express Farms and Apio in
connection with its Intellipac breathable membrane products; Bissell in
connection with the QuickCast splints and casts; Alcon in connection with the
PORT ophthalmic devices; and Nitta Corporation and Hitachi Chemical in
connection with its adhesive products. The Company is dependent on its
corporate partners to develop, test, manufacture and/or market certain of its
products. Although the Company believes that its partners in these
collaborations have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be
devoted to these activities are not within the control of the Company. There
can be no assurance that such partners will perform their obligations as
expected or that the Company will derive any additional revenue from such
arrangements. There can be no assurance that the Company's partners will pay
any additional option or license fees to the Company or that they will
develop, and market and pay any royalty fees related to products under the
agreements. Moreover, certain of the collaborative agreements provide that
they may be terminated at the discretion of the corporate partner, and
certain of the collaborative agreements provide for termination under certain
other circumstances. In addition, there can be no assurance as to the amount
of royalties, if any, on future sales of QuickCast and PORT products as the
Company no longer has control over the sales of such products since the sale
of the QuickCast and the license of the PORT product lines.
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There can be no assurance that the Company's partners will not pursue
existing or alternative technologies in preference to the Company's
technology. Furthermore, there can be no assurance that the Company will be
able to negotiate additional collaborative arrangements in the future on
acceptable terms, if at all, or that such collaborative arrangements will be
successful. To the extent that the Company chooses not to or is unable to
establish such arrangements, it would experience increased capital
requirements to undertake research, development, manufacture, marketing or
sale of its current and future products. There can be no assurance that the
Company will be able to independently develop, manufacture, market, or sell
its current and future products in the absence of such collaborative
agreements and failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition.
INTERNATIONAL OPERATIONS AND SALES. In fiscal years 1998 and 1997,
approximately 3% and 12%, respectively, of the Company's total revenues were
derived from product sales to and collaborative agreements with international
customers, and the Company expects that international revenues, although down
on a percentage basis from historical levels, will continue to be an
important component of its total revenues. The Company has recently entered
into agreements with European distributors to sell certain products in the
Industrial High Performance Materials market. A number of risks are inherent
in international transactions. International sales and operations may be
limited or disrupted by the regulatory approval process, government controls,
export license requirements, political instability, price controls, trade
restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies have or may establish
product standards different from those in the United States, and any
inability to obtain foreign regulatory approvals on a timely basis could have
a material adverse effect on the Company's international business and its
financial condition and results of operations. While the Company's foreign
sales are currently priced in dollars, fluctuations in currency exchange
rates, such as those recently experienced in many Asian countries which
comprise a part of the territories of certain of the Company's collaborative
partners, may reduce the demand for the Company's products by increasing the
price of the Company's products in the currency of the countries to which the
products are sold. There can be no assurance that regulatory, geopolitical
and other factors will not adversely impact the Company's operations in the
future or require the Company to modify its current business practices.
PRODUCT LIABILITY EXPOSURE AND AVAILABILITY OF INSURANCE. The testing,
manufacturing, marketing, and sale of the products being developed by the
Company involve an inherent risk of allegations of product liability. While
no product liability claims have been made against the Company to date, if
any such claims were made and adverse judgments obtained, they could have a
material adverse effect on the Company's business, operating results and
financial condition. Although the Company has taken and intends to continue
to take what it believes are appropriate precautions to minimize exposure to
product liability claims, there can be no assurance that it will avoid
significant liability. The Company currently maintains medical and
non-medical product liability insurance with limits in the amount of $4.0
million per occurrence and $5.0 million in the annual aggregate. There can
be no assurance that such coverage is adequate or will continue to be
available at an acceptable cost, if at all. A product liability claim,
product recall or other claim with respect to uninsured liabilities or in
excess of insured liabilities could have a material adverse effect on the
Company's business, operating results and financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE. Factors such as announcements of
technological innovations, the attainment of (or failure to attain)
milestones in the commercialization of the Company's technology, new
products, new patents or changes in existing patents, the acquisition of new
businesses or the sale or disposal of a part of the Company's businesses, or
development of new collaborative arrangements by the Company, its competitors
or other parties, as well as government regulations, investor perception of
the Company, fluctuations in the Company's operating results and general
market conditions in the industry may cause the market price of the Company's
Common Stock to fluctuate significantly. In addition, the stock market in
general has recently experienced extreme price and volume fluctuations, which
have particularly affected the market prices of technology companies and
which have been unrelated to the operating performance of such companies.
These broad fluctuations may adversely affect the market price of the
Company's Common Stock.
IMPACT OF YEAR 2000. The Year 2000 issue concerns the potential
inability of computer applications, other information technology systems, and
certain software-based "embedded" control systems to recognize and process
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properly date-sensitive information as the Year 2000 approaches and beyond.
The Company could suffer material adverse impacts on its operations and
financial results if the applications and systems used by the Company, or by
third parties with whom the Company does business, do not accurately or
adequately process or manage dates or other information as a result of the
Year 2000 issue. The Company has completed a review of its financial
accounting and inventory tracking systems and concluded that they are not
materially affected by the Year 2000 issue.
The Company also uses a variety of other software applications, business
information systems, accounting subsystems, process control systems and
related software, communication devices, and networking and other operating
systems. The Company is in the process of completing its inventory of all
such systems and will commence in testing, upgrading, replacing, or otherwise
modifying these systems to adequately address the Year 2000 issue in February
1999. The Company believes it will be able to timely modify or replace its
affected systems to prevent any material detrimental effects on operations
and financial results. The company anticipates this work will continue, with
appropriate testing, remediation and/or replacement taking place during the
first and second quarters of 1999. Possible risks of this process include,
but are not limited to, the ability of the Company's personnel and outside
vendors to adequately and timely identify and resolve all critical Year 2000
issues. The Company can give no assurance that all critical Year 2000 issues
will be resolved in a timely manner or that potentially unresolved issues
would not have a material adverse impact on the results of operations.
The Company has certain key relationships with customers, vendors and
outside service providers. Failure by the Company's key customers, vendors
and outside service providers to adequately address the Year 2000 issue could
have a material adverse impact on the Company's operations and financial
results. The Company is currently assessing the Year 2000 readiness of these
key customers and suppliers and, at this time, cannot determine what the
impact of this assessment will be on the Company. The Company is primarily
relying upon the voluntary disclosures from third parties for this review of
their Year 2000 readiness. This assessment includes, but is not limited to,
soliciting responses from each of these parties concerning their Year 2000
readiness and reviewing public documents filed by many of these parties.
Management expects to complete the assessment of these key suppliers during
the second quarter of 1999.
Since the Company anticipates that its affected systems will be
remediated or replaced to timely address the Year 2000 issue and is currently
focusing its resources in those areas, the Company has not yet developed any
other contingency plans regarding the Year 2000 issue for its internal
systems. However, the Company intends to develop contingency plans if at a
later date management determines that any of its systems will not be Year
2000 compliant and that such noncompliance would be expected to have a
material adverse impact on the Company's operations or financial results.
Many of the identified risks from key customers, vendors and outside service
providers are both general and speculative in nature, such as possible power
or telecommunication failures, breakdowns in transportation systems,
inability to process financial transactions, and similar events affecting
general business services. The Company has not developed any contingency
plans for these general risks, is not currently able to ascertain the
likelihood that any of these risks will actually occur, and has not otherwise
analyzed or identified possible "worst case" scenarios relating to Year 2000
issues. Once the Company has completed its assessment of Year 2000 readiness
of key customers, vendors and outside service providers, management intends
to develop contingency plans to mitigate material known detrimental effects
that may be caused by their Year 2000 noncompliance. However, it is unlikely
that any contingency plan would mitigate the adverse impact to the financial
condition or operations of the Company of any catastrophic event due to the
Year 2000 issue that leads to a prolonged disruption of essential services.
Management believes that total Year 2000 costs will not exceed $300,000,
most of which will be incurred in fiscal year 1999. The costs associated
with this effort are incremental to the Company. As of October 31, 1998 the
Company has not incurred any costs related to the Year 2000 issue. In
addition to the costs mentioned above, the Company's capital spending for
upgrading certain non-information systems to enhance the capabilities of
those systems will be accelerated, in part, due to the Year 2000 issue. The
total estimated increase in accelerated capital spending for these systems is
anticipated to be under $500,000. The Company's current estimates of the
amount of time and costs necessary to remediate and test its computer systems
are based on the facts and circumstances existing at this time. The
estimates were made using assumptions of future events including the
continued
-28-
<PAGE>
availability of certain resources, Year 2000 readiness plans, implementation
success by key third party vendors, and other factors. New developments may
occur that could increase the Company's estimates of the amount of time and
costs necessary to modify and test its various information and
non-information systems. These potential developments include but are not
limited to the availability and increased cost of personnel trained in this
area of expertise, the ability to locate and correct all relevant computer
codes and equipment, and any unanticipated Year 2000 problems from key
customers, vendors, and outside service providers.
INTRODUCTION OF THE EURO. The Company is in the process of addressing
the issues raised by the introduction of the Single European Currency
("Euro") for initial implementation as of January 1, 1999, and through the
transition period to January 1, 2002. The Company expects to be able to meet
related legal requirements by April 1, 1999, and through the transition
period. The delay in meeting legal requirements should not materially affect
the Company as the Company does not expect to have any transactions in Europe
during the first calendar quarter of 1999. The Company does not expect the
cost of any system modifications to be material or result in any material
increase in transaction costs. The Company will continue to evaluate the
impact over time of the introduction of the Euro; however, based on currently
available information management does not believe that the introduction of
the Euro will have a material adverse impact on the Company's financial
condition or the overall trends in results of operations.
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.
-29-
<PAGE>
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 27, 1999 (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 27, 1999 (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 27, 1999 (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 27, 1999 (120 days
after the Registrant's fiscal year end covered by this Report) and
is incorporated herein by reference.
-30-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements of Landec Corporation and
Subsidiaries
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP Independent Auditors 32
Consolidated Balance Sheets at October 31, 1998 and 1997 33
Consolidated Statement of Operations for the Years Ended 34
October 31, 1998, 1997 and 1996
Consolidated Statement of Changes in Redeemable 35
Convertible Preferred Stock and Shareholders' Equity
(Net Capital Deficiency) for the Years Ended October
31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the Years 36
Ended October 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 37
2. Schedule II
Valuation and Qualifying Accounts for the Years Ended 52
October 31, 1998, 1997 and 1996
</TABLE>
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.
3. Exhibits 53
The exhibits listed in the accompanying index to exhibits
are filed or incorporated by reference as part of this annual
report.
(b) Reports on Form 8-K 53
-31-
<PAGE>
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, 1998 and 1997, and the related consolidated
statements of operations, changes in redeemable convertible preferred stock
and shareholders' equity (net capital deficiency) and cash flows for each of
the three years in the period ended October 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997 and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended October 31, 1998 in conformity with generally accepted
accounting principles. 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 10, 1998
-32-
<PAGE>
LANDEC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 9,185 $ 5,163
Short-term investments.............................. 992 9,506
Restricted investment............................... -- 8,837
Accounts receivable, less allowance for doubtful
accounts of $50 and $27 at October 31, 1998
and 1997.......................................... 2,808 2,162
Inventory........................................... 4,676 2,652
Deferred advertising................................ 394 410
Prepaid expenses and other current assets........... 1,728 1,310
---------- ---------
Total current assets............................. 19,783 30,040
Property and equipment, net........................... 8,280 5,023
Intangible assets, net................................ 14,255 14,985
Other assets.......................................... 38 112
---------- ---------
$ 42,356 $ 50,160
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 1,399 $ 642
Accrued compensation................................ 1,017 836
Other accrued liabilities........................... 942 1,520
Payable related to acquisition of Dock Resins
Corporation....................................... -- 9,189
Deferred revenue.................................... 2,499 2,326
Current portion of long term debt................... 156 6
---------- ---------
Total current liabilities....................... 6,013 14,519
Noncurrent portion of long term debt.................. 2,655 26
Commitments and contingencies
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; 13,159,888 and 12,687,416
shares issued and outstanding at October 31,
1998 and 1997, respectively....................... 76,821 75,679
Notes receivable from shareholders.................. (291) (8)
Deferred compensation............................... (86) (198)
Accumulated deficit................................. (42,756) (39,858)
---------- ---------
Total shareholders' equity...................... 33,688 35,615
---------- ---------
$ 42,356 $ 50,160
---------- ---------
---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
-33-
<PAGE>
LANDEC CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales..................................................... $31,664 $ 8,653 $ 371
Research and development revenues................................. 1,352 863 1,096
License fees...................................................... 500 -- 600
------- -------- --------
Total revenues.................................................. 33,516 9,516 2,067
Operating costs and expenses:
Cost of product sales............................................. 20,308 6,215 422
Research and development.......................................... 5,713 4,608 3,588
Selling, general and administrative............................... 10,835 4,664 2,367
Purchased in-process research and development..................... -- 3,022 --
------- -------- --------
Total operating costs and expenses.............................. 36,856 18,509 6,377
------- -------- --------
Operating loss...................................................... (3,340) (8,993) (4,310)
Interest income..................................................... 737 1,726 1,546
Interest expense.................................................... (137) (319) (59)
------- -------- --------
Loss from continuing operations before income taxes................. (2,740) (7,586) (2,823)
Provision for income taxes.......................................... (150) -- --
------- -------- --------
Loss from continuing operations..................................... (2,890) (7,586) (2,823)
Discontinued Operations:
Loss from discontinued QuickCast operations....................... -- (1,059) (1,377)
Gain on disposal of QuickCast operations.......................... -- 70 --
------- -------- --------
Loss from discontinued operations................................... -- (989) (1,377)
------- -------- --------
Net loss............................................................ $ (2,890) $ (8,575) $ (4,200)
------- -------- --------
------- -------- --------
Basic and diluted net loss per share:
Continuing operations............................................. $ (.23) $ (.68) $ (.37)
Discontinued operations........................................... -- (.09) (.18)
------- -------- --------
Basic and diluted net loss per share................................ $ (.23) $ (.77) $ (.55)
------- -------- --------
------- -------- --------
Shares used in computing basic and diluted net loss per share....... 12,773 11,144 7,699
------- -------- --------
------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
-34-
<PAGE>
LANDEC CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
-------------------------------------------------------------------------
TOTAL
REDEEMABLE CONVERTIBLE NOTES SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK RECEIVABLE EQUITY (NET
------------------------ ------------------- FROM DEFERRED ACCUMULATED CAPITAL
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS COMPENSATION DEFICIT DEFICIENCY)
---------- --------- ---------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995.... 6,674,415 $ 31,276 547,678 $ 536 $ (20) $ (407) $ (26,538) $ (26,429)
Initial Public Offering of
common stock, $12.00 per
share, net of issuance
costs....................... -- -- 3,220,000 35,035 -- -- -- 35,035
Accretion of redemption price
differential on redeemable
convertible preferred stock. -- 556 -- -- -- -- (556) (556)
Conversion of Series B, C,
D and E redeemable
convertible preferred stock
into common stock........... (6,674,415) (31,832) 6,674,415 31,832 -- -- -- 31,832
Conversion of convertible
notes payable............... -- -- 176,432 700 -- -- -- 700
Deferred compensation related
to grant of stock options... -- -- -- 17 -- (17) -- --
Issuance of common stock at
$0.58 to $10.20 per share... -- -- 135,186 122 -- -- -- 122
Repayment of notes receivable.. -- -- -- -- 7 -- -- 7
Amortization of deferred
compensation................ -- -- -- -- -- 113 -- 113
Change in unrealized gain on
available-for-sale
securities.................. -- -- -- -- -- -- 16 16
Net loss....................... -- -- -- -- -- -- (4,200) (4,200)
---------- --------- ---------- -------- ------------ ------------ ----------- -------------
Balance at October 31, 1996.... -- $ -- 10,753,711 $ 68,242 $ (13) $ (311) $ (31,278) $ 36,640
Issuance of common stock for
acquired businesses......... -- -- 1,821,687 7,273 -- -- -- 7,273
Issuance of common stock at
$0.58 to $6.48 per share.... -- -- 112,018 164 -- -- -- 164
Repayment of notes
receivable.................. -- -- -- -- 5 -- -- 5
Amortization of deferred
compensation................ -- -- -- -- -- 113 -- 113
Change in unrealized gain
on available-for-sale
securities.................. -- -- -- -- -- -- (5) (5)
Net loss....................... -- -- -- -- -- -- (8,575) (8,575)
---------- --------- ---------- -------- ------------ ------------ ----------- -------------
Balance at October 31, 1997.... -- $ -- 12,687,416 $ 75,679 $ (8) $ (198) $ (39,858) $ 35,615
Issuance of common stock at
$0.58 to $7.00 per share.... -- -- 425,885 1,142 -- -- -- 1,142
Exercise of warrants........... -- -- 46,587 -- -- -- -- --
Net increase in notes
receivable from
shareholders................ -- -- -- -- (283) -- -- (283)
Amortization of deferred
compensation................ -- -- -- -- -- 112 -- 112
Change in unrealized gain
on available-for-sale
securities.................. -- -- -- -- -- -- (8) (8)
Net loss....................... -- -- -- -- -- -- (2,890) (2,890)
---------- --------- ---------- -------- ------------ ------------ ----------- -------------
Balance at October 31, 1998.... -- $ -- 13,159,888 $ 76,821 $ (291) $ (86) $ (42,756) $ 33,688
---------- --------- ---------- -------- ------------ ------------ ----------- -------------
---------- --------- ---------- -------- ------------ ------------ ----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
-35-
<PAGE>
LANDEC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net loss from continuing operations.......................................... $ (2,890) $ (7,586) $ (2,823)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 2,075 1,051 510
Write-off of purchased in-process research and development................ -- 3,022 --
Loss from discontinued operations......................................... -- (989) (1,377)
Changes in assets and liabilities, net of effects from acquisitions and
discontinued operations:
Accounts receivable..................................................... (646) (328) 30
Inventory............................................................... (2,024) 24 (61)
Deferred advertising.................................................... 16 (97) --
Receivables from related parties........................................ (500) -- --
Prepaid expenses and other current assets............................... 82 (902) (73)
Accounts payable........................................................ 757 (1,275) 193
Accrued compensation.................................................... 181 218 (52)
Other accrued liabilities............................................... (578) 975 (22)
Deferred revenue........................................................ 173 389 37
----------- ----------- -----------
Total adjustments (464) 2,088 (815)
----------- ----------- -----------
Net cash used in operating activities.......................................... (3,354) (5,498) (3,638)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (4,100) (1,344) (367)
Decrease in other assets..................................................... 74 31 24
Purchases of available-for-sale securities................................... (5,033) (14,828) (26,345)
Sale of available-for-sale securities........................................ 4,805 4,041 --
Maturities of available-for-sale securities.................................. 8,734 23,602 6,000
Acquisition of businesses, net of cash acquired.............................. (390) (6,224) --
Net proceeds from disposition of QuickCast operation......................... -- 425 --
----------- ----------- -----------
Net cash provided by (used in) investing activities............................ 4,090 5,703 (20,688)
----------- ----------- -----------
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....................... 1,142 164 35,157
Decrease (increase) in repayment of notes receivable from shareholders...... (283) 5 7
Payments on long term debt................................................... (10) (559) (238)
Proceeds from issuance of long term debt..................................... 2,789 -- --
Payment of payable related to the acquisition of Dock Resins Corporation.... (9,189) -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities............................ 3,286 (9,227) 34,926
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........................... 4,022 (9,022) 10,600
Cash and cash equivalents at beginning of year................................. 5,163 14,185 3,585
----------- ----------- -----------
Cash and cash equivalents at end of year...................................... $ 9,185 $ 5,163 $ 14,185
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flows information:
Cash paid during the period for interest..................................... $ 383 $ 75 $ 99
----------- ----------- -----------
----------- ----------- -----------
Supplemental schedule of noncash investing and financing activities:
Conversion of convertible notes payable into common stock................... $ -- $ -- $ 700
----------- ----------- -----------
----------- ----------- -----------
Common stock issued in the acquisition of businesses........................ $ -- $ 7,273 $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
-36-
<PAGE>
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, industrial, agricultural and medical
applications. In addition, the Company markets and distributes hybrid seed
corn 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, 1998 and 1997, 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 1998. 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, 1998 and 1997 inventories
consisted of (in thousands):
<TABLE>
OCTOBER 31,
-----------------------
1998 1997
------------ ----------
<S> <C> <C>
Raw materials...................................... $663 $617
Work in process.................................... 228 152
Finished goods..................................... 3,785 1,883
------------ ----------
$4,676 $2,652
------------ ----------
------------ ----------
</TABLE>
-37-
<PAGE>
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
year 1998 was $1,165,000, and the advertising expense for fiscal years 1997
and 1996 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. The outstanding principal accrues
interest at 7.50% per annum, compounded annually. A minimum payment of
$480,000 is due and payable on July 31, 1999. The balance of principal and
interest, if any, is due and payable on July 31, 2000. The $500,000 note has
been included in other current assets at October 31, 1998.
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. The Company reviewed intangible assets for the possibility of
impairment and determined that there was no impairment of intangible assets
as of October 31, 1998.
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, 1998 approximately $2.5 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.
-38-
<PAGE>
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 are
included in research and development expenses.
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." In
1995, the Financial Accounting Standards Board released SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after
December 15, 1995. The Company expects to continue to account for its
employee stock plans in accordance with the provision of APB 25. Accordingly,
SFAS No. 123 has not had a material impact on the Company's financial
position or results of operations.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 (SFAS No. 130), "Reporting Comprehensive Income", and Statement No.
131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related
Information". The Company is required to adopt these Statements in fiscal
year 1999. SFAS 130 establishes new standards for reporting and displaying
comprehensive income and its components. SFAS 131 requires disclosure of
certain information regarding operating segments, products and services,
geographic areas of operation and major customers. Adoption of these
Statements is expected to have no impact on the Company's consolidated
financial position, results of operations or cash flows.
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, approximately $460,000 of cash was
drawn down from the escrow account to pay for obligations under the
agreement. 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
-39-
<PAGE>
2. BUSINESS ACQUISITIONS (CONTINUED)
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.
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 year 1998, additional earn-out was paid in
the amount of $390,000. The acquisition was accounted for using the purchase
method.
The following pro-forma summary of consolidated revenues, net loss and
net loss per share for fiscal years 1997 and 1996 assumes the Dock Resins and
Fielder's Choice acquisitions occurred on November 1, 1995. These pro-forma
results, which excludes the purchased in-process research and development
charge in fiscal year 1997, have been prepared for comparative purposes only
and are not necessarily indicative of the Company's financial results if the
acquisition had taken place at the beginning of fiscal year 1996 or of future
results.
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
1997 1996
----- ----
(in thousands, except per share amounts)
<S> <C> <C>
Revenues $ 27,119 $ 24,024
Net loss $ (6,598) $ (4,799)
Net loss per share $ (0.52) $ (0.50)
</TABLE>
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 years 1997 and 1996 have been classified as
discontinued in the consolidated statements of operations. During fiscal
year 1998, the Company recognized $20,000 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 has entered into two separate collaborations
with Hitachi Chemical in the areas of industrial adhesives and Intelimer
Polymer Systems. On October 1, 1994, the Company entered into a
non-exclusive license agreement for seven years with Hitachi Chemical in the
industrial adhesives area. The agreement provides Hitachi Chemical with a
non-exclusive license to manufacture and sell products using Landec's
Intelimer materials in certain Asian countries. Landec received up-front
license fees upon signing the agreement and is entitled to future royalties
based on net sales by Hitachi Chemical of the licensed products. Any fees
paid to the Company are non-refundable.
On August 10, 1995, the Company entered into the second collaboration
with Hitachi Chemical in the Intelimer Polymer Systems area. The agreement
provided Hitachi Chemical with an exclusive license to use and sell Landec's
Intelimer Polymer Systems in industrial latent curing products in certain
Asian countries. Landec is entitled to be the exclusive supplier of Intelimer
Polymer Systems to Hitachi Chemical for at least seven years after
commercialization. In addition, Hitachi Chemical also received limited
options and rights for certain other technology applications in its Asian
territory. Landec received an up-front license payment upon signing this
-40-
<PAGE>
4. COLLABORATIVE AGREEMENTS (CONTINUED)
agreement and research and development funding over three years and is
entitled to receive future royalties based on net sales by Hitachi Chemical
of the licensed products. Any fees paid to the Company are non-refundable.
This agreement was converted to a non-exclusive agreement, at the request of
Hitachi Chemical, except for one application field and five products, where
Hitachi Chemical retains an exclusive right to use and sell for an additional
year (through August, 1999). In conjunction with this agreement, Hitachi
Chemical purchased 189,723 shares of Series E Preferred Stock for $1.5
million which converted into 189,723 shares of common stock upon the
Company's initial public offering.
BFGOODRICH. On October 13, 1993, the Company entered into a collaboration
with BFGoodrich. The agreement was amended on July 29, 1995 and again in
March 1996, and provides BFGoodrich with a nonexclusive worldwide (excluding
Asia) license to use and sell selective Intelimer polymer catalyst systems in
several industrial applications. Landec received an up-front license payment
upon signing and additional license fees upon achieving certain development
milestones. Under the agreement, development was funded by BFGoodrich for the
first year, was extended to subsequent years, and was concluded during the
second quarter of fiscal year 1996. Any fees paid to the Company are
non-refundable.
NITTA. 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. In
addition, Nitta also received limited options for certain other technology
applications in its Asian territory. This agreement is terminable at Nitta's
option. In March 1996, this agreement was expanded to provide Nitta an
exclusive license to use and sell products based on the Company's Intelimer
materials in the medical adhesives area in certain Asian countries. The
Company received up-front license fees upon execution of the expanded
agreement and research and development payments and is entitled to receive
future royalties under this agreement. Nitta and the Company also entered
into another 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. Any funds paid to the Company are non-refundable.
ALCON. In December 1997, the Company granted an exclusive world-wide
license to Alcon, a wholly-owned subsidiary of Nestle S.A., to register,
manufacture, promote and market the PORT ophthalmic devices in exchange for
an upfront license fee of $500,000 in cash and future license revenue based
on achieving certain milestones, research and development revenue, and
royalties on the sale of commercial products. In November 1998, the Company
received an additional cash payment of $1 million ($750,000 net of related
costs) upon meeting a certain milestone.
-41-
<PAGE>
5. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
OCTOBER 31, 1998 UNREALIZED UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
-------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
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
-------------- ------------ ----------- ---------------
-------------- ------------ ----------- ---------------
OCTOBER 31, 1997
U.S. government and agency obligations.......... $ 6,841 $ 9 $ -- $ 6,850
Corporate debt securities....................... 3,987 2 -- 3,989
-------------- ------------ ----------- ---------------
Total securities................................ $ 10,828 $ 11 $ -- $ 10,839
-------------- ------------ ----------- ---------------
-------------- ------------ ----------- ---------------
Amounts included in:
Cash equivalents................................ $ 1,333 $ -- $ -- $ 1,333
Short-term investments.......................... 9,495 11 -- 9,506
-------------- ------------ ----------- ---------------
Total securities................................ $ 10,828 $11 $ -- $ 10,839
-------------- ------------ ----------- ---------------
-------------- ------------ ----------- ---------------
</TABLE>
The contractual maturities of debt securities included in short-term
investments at October 31, 1998 are all due within one year.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land and buildings................................ $ 3,132 $ 1,347
Leasehold improvements............................ 1,291 1,178
Computer, machinery and equipment and autos....... 5,293 4,339
Furniture and fixtures............................ 291 225
Construction in process........................... 1,651 470
------------ ------------
11,658 7,559
Less accumulated depreciation and amortization.... (3,378) (2,536)
------------ ------------
$ 8,280 $ 5,023
------------ ------------
------------ ------------
</TABLE>
There were no capital leases at October 31, 1998.
Depreciation expense for fiscal years 1998, 1997 and 1996 was $844,000,
$603,000 and $397,000, respectively.
-42-
<PAGE>
7. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
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........................ 2,116 1,726
------------ ------------
15,710 15,320
Less accumulated amortization... (1,455) (335)
------------ ------------
$ 14,255 $ 14,985
------------ ------------
------------ ------------
</TABLE>
Amortization expense for fiscal years 1998, 1997 and 1996 was
$1,120,000, $335,000 and $0, respectively.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS
Upon closing of the Company's initial public offering in February 1996,
all outstanding shares of redeemable convertible preferred stock (an
aggregate of 6,674,415 shares) were converted into 6,674,415 shares of common
stock.
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 December 1995, the Board approved a one-for-2.875 reverse stock split
of its common stock and preferred stock through an amendment to the Articles
of Incorporation. All share and per share amounts in the accompanying
financial statements have been retroactively adjusted to reflect this event.
The Board also approved an amendment to the Articles of Incorporation to
change the number of authorized shares of common stock to 50,000,000 shares
and Preferred Stock to 2,000,000 shares upon the closing of the Company's
initial public offering.
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
$30.3 million, after deducting underwriting discounts, commissions and
expenses.
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, commissions and expenses.
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 3,954,046 common shares reserved for future issuance
under Landec Corporation stock option plans and employee stock purchase plans.
-43-
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
The Company established the 1988 Stock Option Plan under which the Board
of Directors may grant incentive stock options or nonqualified stock options
to its employees and outside consultants. This plan was terminated during
fiscal year 1998. As of October 31, 1998, the Company had reserved 1,574,161
shares of common stock for issuance under the plan. The exercise price of
incentive stock options and nonqualified stock options may be no less than
100% and 85%, respectively, of the fair market value of the Company's common
stock as determined by the Board of Directors. Options are exercisable upon
grant and generally vest ratably over four years (commencing one year after
an employee's hire date) and are subject to repurchase, if exercised before
being vested.
In December 1995, the Board also approved the adoption of the 1995
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan,
as amended in 1998, authorizes the issuance of 400,000 shares under the 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.
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.
In September 1996, the Board approved the 1996 Non-Executive Stock
Option Plan which authorizes the issuance of 750,000 shares under the plan.
The Board of Directors may 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. 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. The plan, as amended, authorizes the issuance of
1,500,000 shares of Landec common stock under the 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. 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 and 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
-44-
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
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.
Activity under all Landec Stock Option Plans is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------
Options Weighted
Available Number Average
for Grant of Shares Exercise Price
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1995 325,483 1,211,919 $0.79
Additional shares reserved 950,000 -- --
Options granted (128,959) 128,959 $15.91
Options exercised -- (131,537) $0.64
Options forfeited 30,993 (30,993) $1.05
-------------------------------------------------------------------------
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
</TABLE>
At October 31, 1998, 1997 and 1996, options to purchase 1,101,387,
902,135 and 744,355 of Landec's common stock were vested, respectively. No
options have been exercised prior to being vested.
For options granted through October 31, 1998, 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 1998 was $112,000 and for 1997 and 1996 was $113,000 for each year.
-45-
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
The following tables summarize information about Landec options
outstanding and exerciseable at October 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------------------
Weighted
Average Weighted
Contractual Average
Range of Number Life Exercise
Exercise Prices of Shares (in years) Price
----------------------- ------------- ------------- --------------
<S> <C> <C> <C>
$0.5800 - $0.5800 400,649 3.83 $0.58
$0.8600 - $1.4400 345,956 6.47 $1.11
$3.5000 - $4.8750 48,836 9.32 $4.03
$5.0000 - $5.0000 1,315,848 9.12 $5.00
$5.1250 - $6.7500 309,450 8.78 $5.94
$7.0000 - $9.3400 60,166 8.31 $7.60
-------------
$0.5800 - $9.3400 2,480,905 7.83 $3.90
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISEABLE
-----------------------------------------------------------------
Weighted
Range of Number Average
Exercise Prices of Shares Exercise Price
----------------------- -------------------- --------------------
<S> <C> <C>
$0.5800 - $0.5800 400,649 $0.58
$0.8600 - $1.4400 302,063 $1.10
$3.5000 - $4.8750 4,006 $4.24
$5.0000 - $5.0000 195,246 $5.00
$5.1250 - $6.7500 171,886 $6.32
$7.0000 - $9.3400 27,537 $7.87
--------------------
$0.5800 - $9.3400 1,101,387 $2.60
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. In December 1995, the Board approved the
adoption of the 1995 Employee Stock Purchase Plan (the "Purchase Plan"),
which authorizes the issuance of 300,000 shares under the plan. The Purchase
Plan 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, 1998,
82,198 shares have been issued under the Purchase Plan.
INTELLICOAT STOCK PLAN. In October 1996, the Board of Directors of
Intellicoat approved the adoption of the 1996 Intellicoat Stock Plan which
authorizes the issuance of 2,000,000 shares of Intellicoat common stock under
the 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. Options are
exercisable upon vesting and generally vest ratably over four years and are
subject to repurchase if exercised before being vested.
-46-
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes activity under the Intellicoat Stock
Option Plan.
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------
Options
Available Number of Shares Weighted Average
---------------- -------------------- -------------------
<S> <C> <C> <C>
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
</TABLE>
At October 31, 1998 options to purchase 667,235 shares with an average
exercise price of $0.11 per share of Intellicoat's common stock were vested.
Through October 31, 1998 no Intellicoat options have been exercised. For the
options outstanding at October 31, 1998, 1,033,000 shares were granted with
an exercise price of $0.10 and 251,100 shares were granted with an exercise
price of $0.20.
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 1998, 1997 and 1996
reported below has been estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
LANDEC LANDEC
EMPLOYEE STOCK OPTIONS STOCK PURCHASE PLAN SHARES
- ------------------------------ ----------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) 3.91 4.33 2.70 .50 .47 .44
Risk-free interest rate 5.62% 6.16% 6.28% 5.37% 5.30% 5.28%
Volatility .44 .40 .40 .44 .40 .40
Dividend yield 0% 0% 0% 0% 0% 0%
</TABLE>
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 1998 and 1997. The volatility for the Intellicoat options is assumed to
be zero since Intellicoat stock is not publicly traded.
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.
-47-
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted average estimated fair value of Landec employee stock
options granted at grant date market prices during fiscal years 1998, 1997
and 1996 was $1.67, $2.50 and $4.92 per share, respectively. The weighted
average exercise price of employee stock options granted at grant date market
prices during fiscal year 1998, 1997 and 1996 was $5.86, $7.00 and $15.50 per
share, respectively. The weighted average estimated fair value of Landec
employee stock options granted above grant date market prices during fiscal
years 1998, 1997 and 1996 was $7.84, $3.05 and $6.22 per share, respectively.
The weighted average exercise price of employee stock options granted above
grant date market prices during fiscal year 1998, 1997 and 1996 was $5.00,
$12.00 and $20.16 per share, respectively. The weighted average estimated
fair value of shares granted under the Landec Stock Purchase Plan during
fiscal years 1998, 1997 and 1996 was $1.57, $2.26 and $3.15 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):
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31, 1998 1997 1996
----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Pro forma net loss $(4,355) $(9,554) $(4,437)
Pro forma net loss per share $(0.34) $(0.86) $(0.58)
</TABLE>
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. Because SFAS No. 123 is applicable only to options granted subsequent
to October 31, 1995, the pro forma effect will not be fully reflected until
1999.
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, 1998,
the Company had approximately $61,000 of equipment loans outstanding.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
1998
(in thousands)
---------------
<S> <C>
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 $ 2,750
Equipment financing agreements 61
Less current portion (156)
---------------
$ 2,655
---------------
---------------
</TABLE>
-48-
<PAGE>
10. DEBT (CONTINUED)
Maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
FY 1999 $156
FY 2000 201
FY 2001 201
FY 2002 190
FY 2003 183
Thereafter 1,880
-----
$2,811
</TABLE>
The long-term loan limits dividend payments and contains various
financial covenants including minimum working capital levels, net worth and
debt service ratio for Dock Resins.
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, 1998.
Interest paid on the long-term loan during the year ended October 31,
1998 was $35,000.
11. INCOME TAXES
The Company's provision for income taxes of $150,000 for the year ended
October 31, 1998 is attributable to state taxes. As of October 31, 1998, the
Company had net operating loss carryforwards of approximately $25.4 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 2013, 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):
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $ 9,000 $ 7,700
Research credit carryforwards.............. 1,400 1,000
Capitalized research costs................. 1,400 1,700
In-process research costs.................. 1,000 1,400
Other - net................................ 1,000 2,100
----------------------------
Total deferred tax assets..................... 13,800 13,900
Valuation allowance........................... (13,800) (13,900)
----------------------------
Net deferred tax assets....................... $ -- $ --
----------------------------
----------------------------
</TABLE>
Due to the Company's absence of earning history, the net deferred tax
asset has been fully offset by a valuation allowance.
-49-
<PAGE>
11. INCOME TAXES (CONTINUED)
The valuation allowance increased by $4,700,000 during the fiscal year
ended October 31, 1997.
12. COMMITMENTS
LEASES
The Company leases office and laboratory space and certain equipment.
Rent expense for the years ended October 31, 1998, 1997 and 1996 was
approximately $481,000, $392,000 and $370,000 respectively.
Future minimum lease obligations as of October 31, 1998 under all leases
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING LEASES
-----------------
<S> <C>
1999................................................... $ 419
2000................................................... 420
2001................................................... 433
2002................................................... 72
-----------------
Total minimum lease payments........................... $ 1,344
-----------------
-----------------
</TABLE>
Under the terms of the acquisition of Dock Resins (see Note 2), the
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, approximately $460,000
of cash was drawn down from the escrow account to pay for obligations under
the acquisition agreement. Any cost not paid by the shareholder of Dock
Resins is not expected to have a material effect on consolidated operations
or financial position of the Company.
13. BUSINESS SEGMENT REPORTING
The Company reports its operations in three business segments: the Food
Technology and Packaging segment, the Agricultural Seed Technology and
Distribution segment and the Industrial High Performance Materials segment.
The Food Technology and Packaging segment manufactures and sells film
packages applied with the Intellipac breathable membrane to the fresh-cut
produce industry. The Agricultural Seed Technology and Distribution 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.
-50-
<PAGE>
13. BUSINESS SEGMENT REPORTING (CONTINUED)
Operations by Business Segment (in thousands):
<TABLE>
<CAPTION>
AGRICULTURAL
SEED INDUSTRIAL
FOOD TECHNOLOGY HIGH
TECHNOLOGY AND PERFORMANCE CORPORATE
1998 AND PACKAGING DISTRIBUTION MATERIALS AND OTHER TOTAL
- -------------------------------------------- --------------- --------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
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
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
1996
- --------------------------------------------
Net sales.................................. $ 371 $ 100 $ 1,496 $ 100 $ 2,067
Income (loss) from continuing operations... $ (1,099) $ (461) $ (60) $ (1,203) $ (2,823)
Identifiable assets........................ $ 376 $ 20 $ 188 $ 37,774 $ 38,358
Depreciation and amortization.............. $ 46 $ 3 $ 68 $ 280 $ 397
Capital expenditures....................... $ 129 $ 19 $ 137 $ 82 $ 367
</TABLE>
Revenues from customers representing 10% or more of total revenue during
fiscal years 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer:
A (Industrial High Performance Materials) 13% 25% 0%
B (Industrial High Performance Materials) 1% 3% 35%
C (Industrial High Performance Materials) 1% 5% 20%
D (Food Technology and Packaging) 1% 1% 14%
</TABLE>
Export product sales were approximately $863,000, $421,000 and $136,000
in the years ended October 31, 1998, 1997 and 1996, respectively.
-51-
<PAGE>
LANDEC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
SCHEDULE II
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended October 31, 1996
Allowance for doubtful accounts............. $ 32 $ -- $ -- $ 32
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
</TABLE>
-52-
<PAGE>
(b) No reports on Form 8-K were filed by the Company during the period
August 1, 1998 to October 31, 1998.
(c) Index of Exhibits
<TABLE>
<S> <C>
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.
3.1(1) Amended and Restated Bylaws of Registrant.
3.2(2) Ninth Amended and Restated Articles of Incorporation of
Registrant.
10.1(3) Form of Indemnification Agreement.
10.2(3) 1988 Stock Option Plan and form of Option Agreements.
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
Agreements.
10.16(4) 1996 Non-Executive Stock Option Plan and form of Option
Agreements.
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+ Form of Common Stock Purchase Agreement for certain officers
and directors for restricted stock purchase.
10.23+ Loan agreement between Registrant and Michael Williams dated
October 1, 1998.
21.1 Subsidiaries of the Registrant.
Subsidiary State of Incorporation
---------- ----------------------
Intellicoat Corporation Delaware
Dock Resins Corporation New Jersey
23.1+ Consent of Independent Auditors.
24.1+ Power of Attorney. See page 55.
27.1+ Financial Data Schedule
</TABLE>
- -------------------
(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 years ended
October 31, 1996.
-53-
<PAGE>
(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.
* Confidential treatment requested.
+ Filed herewith.
-54-
<PAGE>
SIGNATURES
Pursuant to the requirements 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 28, 1999.
LANDEC CORPORATION
By: /s/ Joy T. Fry
------------------------------------------
Joy T. Fry
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION 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 JOY T. FRY,
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gary T. Steele
- --------------------------------
Gary T. Steele President and Chief Executive January 28, 1999
Officer (Principal Executive
Officer)
/s/ Joy T. Fry
- --------------------------------
Joy T. Fry Vice President of Finance and January 28, 1999
Administration and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
/s/ Kirby L. Cramer
- --------------------------------
Kirby L. Cramer Director January 28, 1999
/s/ Richard Dulude
- --------------------------------
Richard Dulude Director January 28, 1999
/s/ Stephen E. Halprin
- --------------------------------
Stephen E. Halprin Director January 28, 1999
/s/ Richard S. Schneider
- --------------------------------
Richard S. Schneider Director January 28, 1999
/s/ Ray F. Stewart
- --------------------------------
Ray F. Stewart Director January 28, 1999
/s/ Damion Wicker
- --------------------------------
Damion Wicker Director January 28, 1999
</TABLE>
<PAGE>
EXHIBIT 10.22
LANDEC CORPORATION
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "AGREEMENT") is made as of
((Date)), by and between Landec Corporation, a California corporation (the
"COMPANY"), ((Principal)) (the "PRINCIPAL") and ((Name)) ("PURCHASER").
1. SALE OF STOCK. Subject to the terms and conditions of this
Agreement, on the Purchase Date (as defined below) the Company will issue and
sell to Purchaser, and Purchaser agrees to purchase from the Company,
((Shares)) shares of the Company's Common Stock (the "SHARES") at a purchase
price of $((Price)) per Share for a total purchase price of $((TotalPrice)).
The term "Shares" refers to the purchased Shares and all securities received
in replacement of or in connection with the Shares pursuant to stock
dividends or splits, all securities received in replacement of the Shares in
a recapitalization, merger, reorganization, exchange or the like, and all
new, substituted or additional securities or other properties to which
Purchaser is entitled by reason of Purchaser's ownership of the Shares.
2. PURCHASE. The purchase and sale of the Shares under this Agreement
shall occur at the principal office of the Company simultaneously with the
execution of this Agreement by the parties or on such other date as the
Company and Purchaser shall agree (the "PURCHASE DATE"). On the Purchase
Date, the Purchaser shall make payment for the Shares by a check made payable
to the Company, cash or wire transfer to an account designated by the
Company. As soon as practicable after the Purchase Date, the Company will
cause a certificate representing the Shares to be purchased by Purchaser
(which shall be issued in Purchaser's name) to be delivered to the Secretary
of the Company or his designee, as specified in Section 4 hereof.
3. LIMITATIONS ON TRANSFER. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares while the Shares are
subject to the Company's Repurchase Option (as defined below). After any
Shares have been released from the Repurchase Option, Purchaser shall not
assign, encumber or dispose of any interest in such Shares except in
compliance with the provisions below and applicable securities laws.
(a) REPURCHASE OPTION.
(i) In the event of the voluntary or involuntary
termination of the Principal's relationship with the Company as an employee,
consultant or director, for any reason (including death or disability), with
or without cause, the Company shall, upon the date of such termination (the
"TERMINATION DATE") have an irrevocable, exclusive option (the "REPURCHASE
OPTION") to repurchase all or any portion of the Shares held by Purchaser as
of the Termination Date which have not yet been released from the Company's
Repurchase Option at the original
-1-
<PAGE>
purchase price per Share specified in Section 1 (adjusted for any stock
splits, stock dividends and the like).
(ii) The Repurchase Option shall be exercised by the
Company by written notice at any time following the Termination Date to
Purchaser and, at the Company's option, by delivery to Purchaser with such
notice of a check in the amount of the purchase price for the Shares being
purchased. Upon delivery of such notice and payment of the purchase price,
the Company shall become the legal and beneficial owner of the Shares being
repurchased and all rights and interest therein or related thereto, and the
Company shall have the right to transfer to its own name the number of Shares
being repurchased by the Company, without further action by Purchaser.
(iii) One hundred percent (100%) of the Shares shall
initially be subject to the Repurchase Option. One-twelfth (1/12) of the
total number of Shares shall be released from the Repurchase Option at the
end of each one-month period after the Vesting Commencement Date (as set
forth on the signature page of this Agreement), until all Shares are released
from the Repurchase Option; provided, however, that such releases from the
Repurchase Option shall immediately cease as of the Termination Date.
Fractional shares shall be rounded to the nearest whole share.
(b) ASSIGNMENT. The right of the Company to purchase any part
of the Shares may be assigned in whole or in part to any shareholder or
shareholders of the Company or other persons or organizations.
(c) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of
Shares or any interest therein will receive and hold such Shares or interest
subject to the provisions of this Agreement. Any sale or transfer of the
Shares shall be void unless the provisions of this Agreement are satisfied.
4. ESCROW OF UNVESTED SHARES. For purposes of facilitating the
enforcement of the provisions of Section 3 above, Purchaser agrees,
immediately upon receipt of the certificate(s) for the Shares subject to the
Repurchase Option, to deliver such certificate(s), together with an
Assignment Separate from Certificate in the form attached to this Agreement
as EXHIBIT A executed by Purchaser in blank to the Secretary of the Company,
or the Secretary's designee, to hold such certificate(s) and Assignment
Separate from Certificate in escrow and to take all such actions and to
effectuate all such transfers and/or releases as are in accordance with the
terms of this Agreement. Purchaser hereby acknowledges that the Secretary of
the Company, or the Secretary's designee, is so appointed as the escrow
holder with the foregoing authorities as a material inducement to make this
Agreement and that said appointment is coupled with an interest and is
accordingly irrevocable. Purchaser agrees that said escrow holder shall not
be liable to any party hereof (or to any other party). The escrow holder may
rely upon any letter, notice or other document executed by any signature
purported to be genuine and may resign at any time. Purchaser agrees that if
the Secretary of the Company, or the Secretary's designee, resigns as escrow
holder for any or no reason, the Board of Directors of the Company shall have
-2-
<PAGE>
the power to appoint a successor to serve as escrow holder pursuant to the
terms of this Agreement.
5. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Shares.
Purchaser is purchasing the Shares for investment for its own account only
and not with a view to, or for resale in connection with, any "distribution"
thereof within the meaning of the Securities Act.
(b) Purchaser understands that the Shares have not been
registered under the Securities Act by reason of a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Purchaser's investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, Purchaser must hold the Shares indefinitely unless
they are registered with the Securities and Exchange Commission and qualified
by state authorities, or an exemption from such registration and
qualification requirements is available. Purchaser acknowledges that the
Company has no obligation to register or qualify the Shares for resale.
Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding
period for the Shares, and requirements relating to the Company which are
outside of the Purchaser's control, and which the Company is under no
obligation and may not be able to satisfy.
(d) Purchaser understands that Purchaser may suffer adverse tax
consequences as a result of Purchaser's purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted any tax consultants
Purchaser deems advisable in connection with the purchase or disposition of
the Shares and that Purchaser is not relying on the Company for any tax
advice.
6. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. The certificate or certificates representing the
Shares shall bear the following legends (as well as any legends required by
applicable state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION
MAY BE EFFECTED WITHOUT AN
-3-
<PAGE>
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A
COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make
appropriate notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i)
to transfer on its books any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Agreement or (ii)
to treat as owner of such Shares or to accord the right to vote or pay
dividends to any purchaser or other transferee to whom such Shares shall have
been so transferred.
(d) REMOVAL OF LEGEND. Upon the expiration or exercise in full
of the Repurchase Option, the Shares then held by Purchaser will no longer be
subject to the legend referred to in Section 6(a)(ii). After such time, and
upon Purchaser's request, a new certificate or certificates representing the
Shares not repurchased shall be issued without the legend referred to in
Section 6(a)(ii), and delivered to Purchaser.
7. NO THIRD PARTY BENEFICIARY; NO EMPLOYMENT RIGHTS. Nothing in this
Agreement its intended to create any right in any party other than the rights
specifically granted to the parties hereto. Nothing in this Agreement shall
affect in any manner whatsoever the right or power of the Company, or a
parent or subsidiary of the Company, to terminate the Principal's
relationship with the Company as an employee, consultant or director, for any
reason, with or without cause.
8. SECTION 83(b) ELECTION. Purchaser and the Principal understand
that Section 83(a) of the Internal Revenue Code of 1986, as amended (the
"CODE"), taxes as ordinary income the difference between the amount paid for
the Shares and the fair market value of the Shares as of the date any
restrictions on the Shares lapse. In this context, "RESTRICTION" means the
right of the Company to buy back the Shares pursuant to the Repurchase Option
set forth in Section 3(a) of this Agreement. Purchaser and the Principal
understand that Purchaser may elect to be taxed at the time the Shares are
purchased, rather than when and as the Repurchase Option expires, by having
the Principal file an election under Section 83(b) (an "83(b) ELECTION") of
the Code with the Internal Revenue Service within 30 days from the date of
purchase. Even if the
-4-
<PAGE>
fair market value of the Shares at the time of the execution of this
Agreement equals the amount paid for the Shares, the election must be made to
avoid income under Section 83(a) in the future. Purchaser and the Principal
understand that failure to file such an election in a timely manner may
result in adverse tax consequences for Purchaser. Purchaser and the
Principal further understand that an additional copy of such election form
should be filed with each of their respective federal income tax return for
the calendar year in which the date of this Agreement falls. Purchaser and
the Principal acknowledge that the foregoing is only a summary of the effect
of United States federal income taxation with respect to purchase of the
Shares hereunder, and does not purport to be complete. Purchaser and the
Principal further acknowledge that the Company has directed them to seek
independent advice regarding the applicable provisions of the Code, the
income tax laws of any municipality, state or foreign country in which they
are organized or resident, and the tax consequences of Purchaser's
dissolution.
Purchaser and the Principal agree that the Principal has, in
consultation with the Purchaser, executed and delivered to the Company with
this executed Agreement a copy of the Acknowledgment and Statement of
Decision Regarding Section 83(b) Election (the "ACKNOWLEDGMENT"), attached
hereto as EXHIBIT B. Purchaser and the Principal further agree that the
Principal will execute and submit with the Acknowledgment a copy of the 83(b)
Election, attached hereto as EXHIBIT C, if the Principal has indicated in the
Acknowledgment its decision to make such an election.
9. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State
of California, without giving effect to principles of conflicts of law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement
sets forth the entire agreement and understanding of the parties relating to
the subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the
parties to this Agreement. The failure by either party to enforce any rights
under this Agreement shall not be construed as a waiver of any rights of such
party.
(c) SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties
cannot reach a mutually agreeable and enforceable replacement for such
provision, then (i) such provision shall be excluded from this Agreement,
(ii) the balance of the Agreement shall be interpreted as if such provision
were so excluded and (iii) the balance of the Agreement shall be enforceable
in accordance with its terms.
(d) CONSTRUCTION. This Agreement is the result of negotiations
between and has been reviewed by each of the parties hereto and their
respective counsel, if any; accordingly, this Agreement shall be deemed to be
the product of all of the parties hereto, and no ambiguity shall be construed
in favor of or against any one of the parties hereto.
-5-
<PAGE>
(e) NOTICES. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient when delivered personally
or sent by telegram or fax or 48 hours after being deposited in the U.S.
mail, as certified or registered mail, with postage prepaid, and addressed to
the party to be notified at such party's address or fax number as set forth
below or as subsequently modified by written notice.
(f) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) SUCCESSORS AND ASSIGNS. The rights and benefits of this
Agreement shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
[Signature Page Follows]
-6-
<PAGE>
The parties have executed this Agreement as of the date first set forth
above.
LANDEC CORPORATION
By:
--------------------------------
Title:
-----------------------------
Address: 3603 Haven Avenue
Menlo Park, CA 94025
PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY THE CONTINUING SERVICE OF THE PRINCIPAL
FOR THE COMPANY. PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN
THIS AGREEMENT SHALL CONFER UPON PURCHASER OR THE PRINCIPAL ANY RIGHT WITH
RESPECT TO CONTINUATION OF THE PRINCIPAL'S RELATIONSHIP WITH THE COMPANY.
PURCHASER:
((NAME))
By:
--------------------------------
Title:
-----------------------------
Address:
-------------------------
-------------------------
Vesting Commencement Date: November 1, 1998
-7-
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Common Stock Purchase
Agreement between the undersigned ("PURCHASER") and Landec Corporation (the
"COMPANY") dated October ___, 1998 (the "AGREEMENT"), Purchaser hereby sells,
assigns and transfers unto the Company _________________________________
(________) shares of the Common Stock of the Company standing in Purchaser's
name on the Company's books and represented by Certificate No. _____, and
does hereby irrevocably constitute and appoint ______________________ to
transfer said stock on the books of the Company with full power of
substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED
BY THE AGREEMENT AND THE EXHIBITS THERETO.
Dated:
----------------------------
PURCHASER:
((Name))
By:
-------------------------------
Title:
----------------------------
Instruction: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
repurchase option set forth in the Agreement without requiring additional
signatures on the part of Purchaser.
-8-
<PAGE>
EXHIBIT B
ACKNOWLEDGMENT AND STATEMENT OF DECISION
REGARDING SECTION 83(b) ELECTION
The undersigned has entered a stock purchase agreement with Landec
Corporation, a California corporation (the "COMPANY"), pursuant to which an
affiliate of the undersigned is purchasing _______ shares of Common Stock of
the Company (the "SHARES"). In connection with the purchase of the Shares,
the undersigned hereby represents as follows:
1. The undersigned has carefully reviewed the stock purchase agreement
pursuant to which the undersigned is purchasing the Shares.
2. The undersigned either [check and complete as applicable]:
(a) ____ has consulted, and has been fully advised by, the
undersigned's own tax advisor, __________________________,
whose business address is _____________________________,
regarding the federal, state and local tax consequences of
purchasing the Shares, and particularly regarding the
advisability of making elections pursuant to Section 83(b)
of the Internal Revenue Code of 1986, as amended (the
"CODE") and pursuant to the corresponding provisions, if
any, of applicable state law; or
(b) ____ has knowingly chosen not to consult such a tax advisor.
3. The undersigned hereby states that the undersigned has decided
[check as applicable]:
(a) ____ to make an election pursuant to Section 83(b) of the Code,
and is submitting to the Company, together with the
undersigned's executed Common Stock Purchase Agreement, an
executed form entitled "Election Under Section 83(b) of the
Internal Revenue Code of 1986"; or
(b) ____ not to make an election pursuant to Section 83(b) of the
Code.
4. Neither the Company nor any subsidiary or representative of the
Company has made any warranty or representation to the undersigned with
respect to the tax consequences of the undersigned's purchase of the Shares
or of the making or failure to make an election pursuant to Section 83(b) of
the Code or the corresponding provisions, if any, of applicable state law.
Date:
-------------------------- ------------------------------
Signature of Principal
-9-
<PAGE>
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code, to include in taxpayer's gross income for the current
taxable year, the amount of any compensation taxable to taxpayer in
connection with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of
the undersigned are as follows:
NAME OF TAXPAYER: ((Name))
NAME OF SPOUSE:
-------------------
ADDRESS:
-------------------------------------------
-------------------------------------------
IDENTIFICATION NO. OF TAXPAYER:
--------------------
IDENTIFICATION NO. OF SPOUSE:
---------------------
TAXABLE YEAR: 1998
2. The property with respect to which the election is made is described as
follows:
______________ shares of the Common Stock _______________ par value,
Landec Corporation, a California corporation (the "Company").
3. The date on which the property was transferred is: __________________
4. The property is subject to the following restrictions:
Repurchase option at cost in favor of the Company upon termination of
the undersigned's employment, board membership or consulting
relationship.
5. The fair market value at the time of transfer, determined without regard
to any restriction other than a restriction which by its terms will
never lapse, of such property is: $_____________.
6. The amount (if any) paid for such property: $______________
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of
the above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated:
------------------------- ------------------------------
(Taxpayer)
Dated:
------------------------- ------------------------------
(Spouse of Taxpayer)
-10-
<PAGE>
EXHIBIT 10.23
PLEDGE AND SECURITY AGREEMENT
This Pledge and Security Agreement (the "AGREEMENT") is entered into
this 1st day of October, 1998 by and between Landec Corporation, a California
corporation (the "COMPANY") and Michael L. Williams ("PURCHASER").
RECITALS
In order to assist Purchaser in meeting certain financial commitments
and obligations, the Company has agreed to lend Purchaser $500,000 pursuant
to a promissory note of even date herewith (the "NOTE"). The Company
requires that the Note be secured by a pledge of Purchaser's interest in the
Earn-Out payments described in Section 1.3 of the Agreement and Plan of
Reorganization among the Company, the undersigned, Intellicoat Corporation
and Williams & Sun, Inc. dated August 20, 1997 (the "EARN-OUT") on the terms
set forth below.
AGREEMENT
In consideration of the Company's acceptance of the Note, and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
1. The Note shall become payable as described therein.
2. Purchaser shall deliver to the Chief Financial Officer of the
Company, or her designee (hereinafter referred to as the "PLEDGE HOLDER"), an
Assignment of Interest in the form attached to this Agreement as ATTACHMENT A
executed by Purchaser and by Purchaser's spouse, in blank, for use in
transferring all or a portion of the Collateral to the Company if, as and
when required pursuant to this Agreement. In addition, if Purchaser is
married, Purchaser's spouse shall execute the signature page attached to this
Agreement.
3. As security for the payment of the Note and any renewal, extension
or modification of the Note, Purchaser hereby grants to the Company a
security interest in and pledges with and delivers to the Company, the
Earn-Out (sometimes referred to herein as the "COLLATERAL").
4. In the event of any foreclosure of the security interest created by
this Agreement, the Company may assign the rights to the Earn-Out payment to
a third party or retain the payments itself.
5. In the event of default in payment when due of any indebtedness
under the Note, the Company may elect then, or at any time thereafter, to
exercise all rights available to a secured party under the California
Commercial Code including the right to sell the Collateral at a private
<PAGE>
or public sale or retain the Collateral as provided above. The proceeds of
any sale shall be applied in the following order:
(a) To the extent necessary, proceeds shall be used to
pay all reasonable expenses of the Company in enforcing this Agreement and
the Note, including, without limitation, reasonable attorney's fees and legal
expenses incurred by the Company.
(b) To the extent necessary, proceeds shall be used to
satisfy any remaining indebtedness under Purchaser's Note.
(c) Any remaining proceeds shall be delivered to
Purchaser.
6. Upon full payment by Purchaser of all amounts due under the Note,
Pledge Holder shall destroy the executed Assignment of Interest, and Pledge
Holder shall thereupon be discharged of all further obligations under this
Agreement.
The parties have executed this Pledge and Security Agreement as of the
date first set forth above.
COMPANY: PURCHASER:
LANDEC CORPORATION MICHAEL L. WILLIAMS
By: /s/ Joy T. Fry /s/ Michael L. Williams
-------------------------- -----------------------------------
Joy T. Fry, VP and CFO
Address: 3603 Haven Avenue Address: 306 NORTH MIN STREET
Menlo Park, CA 94025 MONTICELLO, IN 47960
<PAGE>
ASSIGNMENT OF INTEREST
Michael L. Williams does hereby sell, assign and/or transfer to Landec
Corporation or its assigns the right to receive $____________ pursuant to the
terms of Section 1.3 of that certain Agreement and Plan of Reorganization
dated August 20, 1997 among Landec Corporation, Intellicoat Corporation,
Williams & Sun, Inc. and Michael L. Williams and does hereby irrevocably
constitute and appoints Gary T. Steele and Joy T. Fry and each of them as his
attorney-in-fact to execute and deliver any documents associated with such
transfer with full power of substitution in the premises.
Dated:
---------------
/s/ Michael L. Williams
------------------------------
Michael L. Williams
In consideration for the willingness of Landec Corporation to loan
$500,000.00 to Michael L. Williams, I hereby consent to the foregoing
assignment.
/s/ Diane Williams
------------------------------
Diane Williams
<PAGE>
PROMISSORY NOTE
$500,000 Monticello, Indiana
October 1, 1998
For value received, the undersigned promises to pay Landec Corporation,
a California corporation (the "COMPANY"), at its principal office the
principal sum of $500,000 (the "PRINCIPAL") with interest from the date
hereof at a rate of 7.50% per annum, compounded annually, on the unpaid
balance of such principal sum.
Such principal and interest shall be due and payable as follows:
(a) the greater of (1) $480,000, and (2) the payment payable to
the undersigned by the Company pursuant to Section 1.3 of the Agreement and
Plan of Reorganization among the Company, Intellicoat Corporation, Williams &
Sun, Inc. and the undersigned dated August 20, 1997 (the "REORGANIZATION
AGREEMENT") for the Base Year (as defined in the Reorganization Agreement)
ending on June 30, 1999, together with any accrued interest thereon, shall be
due and payable on July 31, 1999, PROVIDED HOWEVER, that in no event shall
this Note cause the undersigned to be obligated to pay more than the
Principal together with interest accrued thereon.
(b) All remaining amounts outstanding hereunder, including any
accrued but unpaid interest shall be due and payable on July 31, 2000.
Principal and interest are payable in lawful money of the United States
of America. AMOUNTS DUE UNDER THIS NOTE MAY BE PREPAID AT ANY TIME WITHOUT
INTEREST OR PENALTY.
Should suit be commenced to collect any sums due under this Note, such
sum as the Court may deem reasonable shall be added hereto as attorneys'
fees. The makers and endorsers have severally waived presentment for
payment, protest, notice of protest, and notice of nonpayment of this Note.
This Note, is secured by a pledge of the undersigned's interest in the
Earn-Out payments for all Base Years described in Section 1.3 of the
Reorganization Agreement and is subject to the terms of a Pledge and Security
Agreement between the undersigned and the Company of even date herewith.
/s/ Michael L. Williams
------------------------------
Michael L. Williams
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 333-06163 and 333-29103) pertaining to the 1988 Stock Option
Plan, 1995 Employee Stock Purchase Plan, 1995 Directors' Stock Option Plan,
1996 Stock Option Plan and 1996 Non-Executive Stock Option Plan, of our
report dated December 10, 1998, with respect to the consolidated financial
statements and schedule of Landec Corporation included in this Annual Report
(Form 10-K) for the year ended October 31, 1998.
/s/ Ernst & Young LLP
San Francisco, California
January 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 9,185
<SECURITIES> 992
<RECEIVABLES> 2,858
<ALLOWANCES> (50)
<INVENTORY> 4,676
<CURRENT-ASSETS> 19,783
<PP&E> 11,658
<DEPRECIATION> (3,378)
<TOTAL-ASSETS> 42,356
<CURRENT-LIABILITIES> 6,013
<BONDS> 0
0
0
<COMMON> 76,821
<OTHER-SE> (43,133)
<TOTAL-LIABILITY-AND-EQUITY> 42,356
<SALES> 31,664
<TOTAL-REVENUES> 33,516
<CGS> 20,308
<TOTAL-COSTS> 26,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 31
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> (2,740)
<INCOME-TAX> 150
<INCOME-CONTINUING> (2,890)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,890)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
