AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LANDEC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 2821 94-3025618
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
3603 HAVEN AVENUE
MENLO PARK, CA 94025-1010
(415) 306-1650
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
GARY T. STEELE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LANDEC CORPORATION
3603 HAVEN AVENUE
MENLO PARK, CA 94025-1010
(415) 306-1650
(Name, address, including zip code, and telephone number
including area code, of agent for service)
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COPIES TO:
Tae Hea Nahm Frederick W. Kanner
John V. Bautista Donald J. Murray
Frances Johnston Eric P. Geismar
VENTURE LAW GROUP DEWEY BALLANTINE
2800 Sand Hill Road 1301 Avenue of the Americas
Menlo Park, California 94025 New York, New York 10019
(415) 854-4488 (212) 259-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $.001 par value per
share........................... 50,542,500 $17,429
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(1) Estimated solely for the purpose of computing the amount of the
registration fee based on the average of the high and low sale prices of
the Common Stock as reported on the Nasdaq National Market on June 28,
1996 pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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LANDEC CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF
PART I ITEMS OF FORM S-1
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front Cover Page
3. Summary Information, Risk Factors and Prospectus Summary; The
Ratio of Earnings to Fixed Charges..... Company; Risk Factors
4. Use of Proceeds......................... Use of Proceeds
5. Determination of Offering Price......... Underwriting
6. Dilution................................ Dilution
7. Selling Security Holders................ Principal and Selling
Shareholders
8. Plan of Distribution.................... Outside and Inside Front Cover
Pages; Underwriting
9. Description of Securities to be
Registered............................. Description of Capital Stock
10. Interests of Named Experts and Counsel.. Legal Matters; Experts
11. Information with Respect to the Inside and Outside Front Cover
Registrant............................. Pages; Prospectus Summary; The
Company; Risk Factors;
Dividend Policy;
Capitalization; Dilution;
Selected Consolidated
Financial Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Business; Management; Certain
Transactions; Principal and
Selling Shareholders;
Description of Capital Stock;
Shares Eligible for Future
Sale; Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Inapplicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, ISSUED JULY , 1996
PROSPECTUS
2,400,000 SHARES
[LOGO]
COMMON STOCK
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Of the 2,400,000 shares of Common Stock offered hereby 1,200,000 shares are
being sold by Landec Corporation ("Landec" or the "Company") and 1,200,000
shares are being sold by the Selling Shareholders named under "Principal and
Selling Shareholders." The Company will not receive any proceeds from the sale
of shares by the Selling Shareholders.
The Common Stock of the Company is traded on the Nasdaq Stock Market's
National Market under the symbol "LNDC." On July 1, 1996, the last reported
sales price of the Common Stock on the Nasdaq National Market was $20.25 per
share.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
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Per Share $ $ $ $
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Total(3) $ $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $400,000, all of which will be paid
by the Company.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option
to purchase up to an aggregate of 360,000 additional shares of Common Stock
on the same terms as set forth above solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1996 at the offices of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
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SMITH BARNEY INC.
LEHMAN BROTHERS
MONTGOMERY SECURITIES
, 1996
[Pictures]
ADHESIVES QUICKCAST(TM)
ORTHOPEDICS
[LOGO APPEARS HERE] LANDEC
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INTELLIGENT MATERIALS
A UNIQUE MATERIALS SCIENCE COMPANY.
LATENT CURING BREATHABLE MEMBRANES
PORT OPHTHALMICS INTELLICOAT(TM) SEED COATINGS
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE
ACT OF 1934. SEE "UNDERWRITING."
--------
"Intelimer(R)," "Landec(R)," and "Q QuickCast(R)" are registered trademarks
of the Company and "QuickCast(TM)" and "Intellicoat(TM)" are trademarks of the
Company. All other trade names and trademarks appearing in this Prospectus are
the property of their respective holders.
2
THE POLYMER TEMPERATURE SWITCH COMPANY.......
BREATHABLE MEMBRANES
[PICTURE OF BREATHABLE MEMBRANES APPEARS HERE]
Landec sells breathable membranes for use in packaging high-respiring, fresh-cut
produce products that may spoil or discolor rapidly when packaged with
conventional film materials.
QUICKCAST(TM) SPLINTS & CASTS
[PICTURE OF QUICKCAST(TM) SPLINTS & CASTS APPEARS HERE]
Landec's QuickCast(TM) splints and casts shrink to fit a patient's limb in a
matter of minutes with the application of heat from an ordinary hair dryer.
[PICTURE OF LANDEC PRODUCTS APPEARS HERE]
Landec manufactures and sells its line of QuickCast(TM) splints and casts in
the United States. Smith & Nephew is the exclusive distributor in selected
countries worldwide.
PORT OPHTHALMICS
[PICTURE OF PORT OPHTHALMICS IN USE APPEARS HERE]
The Company is developing an ophthalmic device that can be used by an
ophthalmologist or optometrist to plug a patient's tear drainage ducts in a
reversible outpatient procedure in 5 to 10 minutes.
[PICTURE OF PORT OPHTHALMIC DEVICE APPEARS HERE]
The PORT ophthalmic device for the treatment.
....... WITH APPLICATIONS IN INDUSTRIAL, MEDICAL AND AGRICULTURAL MARKETS.
LATENT CURING
[PICTURE OF AUTOMOBILES APPEARS HERE]
Latent curing thermosets are used in large volumes in the automotive,
electronics, aerospace and construction industries.
[PICTURE OF PRODUCT APPEARS HERE]
Landec is developing with its partners, Hitachi Chemical and BFGoodrich, latent
curing catalyst systems for use in one-package, temperature cured epoxy,
polyurethane, and unsaturated polyester thermoset products.
[LOGO OF LANDEC APPEARS HERE]
ADHESIVES
[PICTURES OF PRODUCT DEVELOPMENT APPEARS HERE]
The Company is developing with its partners, Hitachi Chemical and Nitta
Corporation, temperature-activated, pressure sensitive adhesives for industrial
uses. These adhesives change from aggressively adhesive to nonadhesive when
heated or cooled past a pre-set switch temperature.
INTELLICOAT (TM) SEEDS
[PICTURE OF PLANTS APPEARS HERE]
In field trials over 3 years, Landec's seed coatings have typically resulted in
increases of as much as 5% to 20%.
[PICTURE OF SEEDS APPEARS HERE]
Landec's seed coatings prevent planted seeds from absorbing water when the
ground temperature is below the coating's pre-set switch temperature, enabling
early planting with low risk of chilling damage.
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
See "Risk Factors" for a discussion of certain factors to be considered by
prospective investors.
THE COMPANY
Landec designs, develops, manufactures and sells temperature-activated
polymer products for a variety of industrial, medical and agricultural
applications. The Company's products are based on its proprietary Intelimer
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. The Company believes its enabling Intelimer
technology provides for differentiated, high-value products that address a wide
variety of applications in large, commercial markets.
Landec's objective is to become the market leader in temperature-activated,
specialty polymer products by capitalizing on its enabling Intelimer
technology. The principal elements of Landec's strategy to achieve this goal
are (i) to select commercially attractive product opportunities, (ii) to
leverage established distribution channels through distribution agreements or
corporate partnerships with market leaders, and (iii) to fully exploit the
Intelimer technology by retaining an economic interest in joint ventures,
spinouts and other vehicles created by the Company to develop non-core
applications of the Company's technology. The Company currently is developing
products in collaboration with or for sale to corporate partners including
Smith & Nephew, Physician Sales & Service, North Coast Medical, Fresh Express,
Printpack, Hitachi Chemical, BFGoodrich and Nitta. In many of these agreements,
Landec has retained certain marketing rights and in almost all cases the
Company has retained manufacturing rights to its products.
Landec has launched and is marketing its first two product lines and is
developing and intends to launch additional product lines during 1996 and 1997.
The Company's two product lines on the market consist of the following:
QuickCast Splints and Casts. The Company launched its QuickCast products in
the United States in mid-1994 and in Europe and Asia through its partner Smith
& Nephew in the fall of 1994. The U.S. market for orthopedic soft goods and
cast room products was estimated to be approximately $818 million in 1994.
QuickCast splints and casts shrink to fit injured limbs upon the application of
heat from a hair dryer. QuickCast splints and casts are pliable when warmed,
allowing the clinician to mold and form the splint or cast and to reshrink or
reposition the splints or casts as needed. The Company believes that QuickCast
products provide significant advantages over conventional products, including
ease of fit and removal, no mess, and the ability to apply the splint or cast
in the hospital, clinic or a physician's office or at home. The Company
believes that its QuickCast products are especially attractive to primary care
physicians and other non-specialists, many of whom have not traditionally
performed splinting and casting procedures, as well as to occupational and
physical therapists.
Breathable Membranes. Landec began marketing its Intelimer-based breathable
membranes in the form of package labels in September 1995 for use in fresh-cut
produce packaging. Fresh-cut produce is pre-washed, cut and packaged in a form
that is ready to use by the consumer and is thus typically sold at premium
price levels. Certain types of fresh-cut produce have high respiration rates
and can spoil or discolor rapidly when packaged in low-permeability
conventional materials. Sales of fresh-cut salads, which respire relatively
slowly, have increased from $82 million in 1989 to $600 million in 1994.
Aggregate sales of all fresh-cut produce, which in
3
1994 represented 9% of the total produce market, are projected to increase to
25% of the total produce market by 1999. The Company believes that the rapid
growth experienced in the fresh-cut salad market may be replicated in markets
for high-respiring fresh-cut vegetables and fruit that generally cannot be
optimally packaged using conventional materials. The Company's breathable
membrane products transmit oxygen and carbon dioxide several thousand times
faster than conventional materials to accommodate the needs of rapidly
respiring produce. Also, these products can be designed to adjust their
permeability in response to temperature to accommodate changes in produce
respiration. The Company is currently selling breathable membranes for use in
packaging fresh vegetables to Fresh Express, the market leader in fresh-cut
salad.
Landec intends to launch some or all of the following product lines through
1998:
Latent Curing Catalyst Systems. Landec, along with its partner Hitachi
Chemical, is developing and currently conducting field trials of Intelimer-
based temperature-activated catalyst systems for industrial thermoset markets.
Thermoset resins, which include epoxies, polyurethanes and unsaturated
polyesters, are used in coatings, adhesives, sealants and composites in a
variety of industries, including electronics, automotive and aerospace. In
1994, the U.S. market for epoxy, polyurethane and unsaturated polyester
thermoset products was 0.6 billion pounds, 3.8 billion pounds and 1.5 billion
pounds, respectively. The majority of thermosets are supplied in "two-package"
systems that contain resins and catalysts that cure or "set" when mixed. Landec
is developing catalyst systems for one-package thermoset materials that do not
cure until the materials are heated above a pre-set switch temperature. The
Company believes that its one-package catalyst systems address the significant
drawbacks of two-package systems by eliminating the need for costly on-site
mixing equipment, minimizing sub-optimal product performance caused by
incorrect mixing ratios and reducing waste and labor expense.
Temperature-Activated, Pressure-Sensitive Adhesives. Landec, along with its
partners Hitachi Chemical and Nitta, is using its Intelimer technology to
develop temperature-activated, pressure-sensitive adhesive ("PSA") materials
that can be used in a wide variety of industrial applications to aggressively
adhere metals, woods, composites and plastics to surfaces. The U.S. market for
PSA industrial tape products, one potential use of Landec's products, was $2.7
billion in 1994. Typically, the removal of PSA materials damages or tears the
adhered surfaces and may leave a resin residue. To avoid tearing or resin
residue, traditional removal methods involve the use of toxic solvents and/or
labor-intensive washing steps. Upon heating or cooling, Landec's PSAs can be
easily separated without tearing or residue.
PORT Ophthalmic Device. Landec is developing its PORT (Punctal Occlusion for
the Retention of Tears) ophthalmic device for the treatment of dry eye. Of the
estimated 7.5 million Americans affected by severe or moderate dry eye, only
approximately 175,000 patients undergo some type of corrective procedure each
year. These procedures include lacrimal duct electrocautery, laser surgery and
insertion of punctum plugs, and have significant drawbacks related to
reversibility, efficacy, cost and duration of therapeutic effect. Using
Landec's PORT product, Intelimer polymer is heated slightly above body
temperature and introduced into the lacrimal tear drainage duct in a fluid
state where it quickly solidifies into a form fitting, solid plug. This five to
ten minute outpatient procedure may be reversed using a warm saline flush. The
Company initiated human clinical trials of its PORT product in September 1995
and completed its pilot study in March 1996. The Company believes that its PORT
product will have application beyond the dry eye market, including people who
cannot wear contact lenses due to limited tear retention and patients receiving
therapeutic drugs via eye drops that require longer retention in the eye.
Intellicoat Seed Coatings. Landec has developed and is conducting field
trials of its Intellicoat seed coating, an Intelimer-based agricultural
material designed to increase crop yields and extend the crop planting window.
The Company's Intelimer polymer-based seed coating prevents planted seeds from
absorbing water when the ground temperature is below the coating's pre-set
switch temperature, enabling early planting with low risk of chilling damage.
As spring advances, soil temperatures rise above the pre-set switch temperature
and the seed coatings become permeable, allowing water absorption and
germination. In the seed industry, yield increases of
4
4% to 5% are considered significant because of their impact on per acre
profitability. Field trials of Intellicoat coatings during the past three years
have resulted in yield increases of as much as 5% to 20%. The Company believes
that one to two additional years of field trials will be needed to support
initiation of commercial sales.
RECENT DEVELOPMENTS
To date in 1996, the Company has launched new products, formed new partner
collaborations, developed new initiatives for accelerating several programs and
achieved several additional corporate milestones.
New Products
Breathable Membranes. The Company has launched breathable membranes for
cauliflower targeted to the food service market through Landec's partner Fresh
Express. The cauliflower product complements Landec's existing broccoli florets
and spears breathable membrane packaging products launched in late 1995.
QuickCast Orthopedics. The Company introduced several QuickCast products for
lower leg fractures and sprains. These products complement the Company's
existing QuickCast product line for upper extremity fractures and splints.
New Partners
QuickCast Orthopedics. In April 1996, Landec entered into two U.S. national
distribution agreements for its QuickCast line of heat-shrinkable orthopedic
and splinting products. The first agreement is with Physician Sales and
Services, one of the country's largest distributors of medical products to the
office-based physician market, and includes exclusive distribution rights to
the more than 83,000 primary care physicians in the U.S. and co-exclusive
rights in the orthopedic surgeon, cast technician and physician assistant
markets. The second agreement is with North Coast Medical, a leading
distributor in the occupational and physical therapy market, and includes non-
exclusive rights to distribute QuickCast products to that market. These two
organizations combined have more than 750 sales representatives nationwide.
Adhesives. In March 1996, Landec expanded its relationship with Nitta
concerning industrial adhesives to include the field of medical adhesives using
Landec's proprietary technology in certain Asian countries. Under this
agreement the Company received additional license fees and will receive
research and development payments and royalties on product sales.
Latent Curing Catalyst Systems. In March 1996, Landec and BFGoodrich decided
to alter their license, development and manufacturing agreement in the latent
curing area to a non-exclusive arrangement. As a result of this alteration,
Landec may work with other partners and distributors in the U.S. and Europe.
Landec will remain the exclusive supplier of latent curing products to
BFGoodrich and BFGoodrich will no longer fund Landec research and development.
Breathable Membranes. In June 1996, Landec entered into an exclusive co-
development and marketing agreement with Printpack, a manufacturer of flexible
packaging for the food industry. Printpack recently purchased James Rivers'
flexible packaging business in order to enhance its overall position in food
packaging. Under this agreement, Landec and Printpack will focus on developing
integrated membrane/film products for low cost, high throughput fresh-cut
produce market applications such as retail packaging using Landec's proprietary
breathable membrane technology and Printpack's large-scale printing and film
converting expertise.
5
New Initiatives
The Company is pursuing business initiatives that have the potential of
accelerating the launch of new product lines.
Latent Curing Catalyst Systems. The Company is currently evaluating the
acceleration of the development and commercialization of polyurethane and
unsaturated polyester catalyst systems to permit market launch of these
products concurrently with that of Landec's epoxy catalyst systems. The Company
is evaluating distribution alternatives in the United States and Europe for
these products and will begin field testing through Hitachi Chemical, its
exclusive marketing partner in Asia, and a number of U.S. and European
companies.
Intellicoat Seed Coatings. The Company is in discussions with regional seed
companies in the United States with respect to a limited market launch of seed
coating products targeted at corn and soybean markets while Landec continues
its field evaluations with global seed companies.
Other Corporate Milestones
In May 1996, Richard Dulude joined Landec's Board of Directors. Mr. Dulude is
the recently retired Vice-Chairman of Corning, Inc. Mr. Dulude brings to the
Company 36 years of experience in building materials-based businesses in the
United States, Europe and Asia in a variety of management positions within
Corning.
The Company received three notices of allowance for certain U.S. patent
applications relating to the use of the Company's temperature-activated
technology utilizing a wide range of catalysts.
6
THE OFFERING
Common Stock being offered by:
The Company......................... 1,200,000 shares
The Selling Shareholders............ 1,200,000 shares (1)
Common Stock to be outstanding after
the offering........................ 11,862,028 shares (1)(2)
Use of proceeds...................... capital expenditures, increase
manufacturing capability, working capital
and other general corporate purposes
Nasdaq National Market Symbol........ LNDC
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS
ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Product sales.......... $ -- $ -- $ -- $ 335 $ 601 $ 441 $ 412
License fees........... -- 475 350 400 2,650 650 600
Research and
development revenues.. 808 811 821 965 796 389 682
------- ------- ------- ------- ------- ------- -------
Total revenues....... 808 1,286 1,171 1,700 4,047 1,480 1,694
Operating costs and
expenses:
Cost of product sales.. -- -- -- 897 987 652 539
Research and
development........... 2,570 2,846 3,740 3,283 3,715 1,776 1,898
Selling, general and
administrative......... 836 987 1,598 2,067 2,236 1,045 1,224
------- ------- ------- ------- ------- ------- -------
Total operating costs
and expenses........ 3,406 3,833 5,338 6,247 6,938 3,473 3,661
------- ------- ------- ------- ------- ------- -------
Operating loss.......... (2,598) (2,547) (4,167) (4,547) (2,891) (1,993) (1,967)
Net interest income..... 54 119 51 192 132 70 452
------- ------- ------- ------- ------- ------- -------
Net loss................ $(2,544) $(2,428) $(4,116) $(4,355) $(2,759) $(1,923) $(1,515)
======= ======= ======= ======= ======= ======= =======
Supplemental net loss
per share (3).......... $ (.38) $ (.27) $ (.17)
======= ======= =======
Shares used in
computation of
supplemental net loss
per share (3).......... 7,175 7,060 8,709
======= ======= =======
APRIL 30, 1996
---------------------
AS
ACTUAL ADJUSTED(4)
-------- -----------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ........ $ 39,206 $ 61,830
Total assets.............................................. 41,124 63,748
Accumulated deficit....................................... (28,655) (28,655)
Total shareholders' equity ............................... $ 39,112 $ 61,736
- --------
(1) Excludes up to 360,000 shares of Common Stock that may be sold by the
Selling Shareholders pursuant to the Underwriters' over-allotment option.
See "Underwriting."
(2) Excludes as of April 30, 1996 111,787 shares of Common Stock issuable upon
the exercise of outstanding warrants on a net issuance basis at an assumed
public offering price of $20.25 per share and 1,191,158 shares of Common
Stock issuable upon the exercise of outstanding options, but includes
34,876 shares of Common Stock issuable upon exercise of outstanding
warrants on a net issuance basis at an assumed public offering price of
$20.25 per share to be sold by the Selling Shareholders hereby. See
"Capitalization" and "Management--Executive Compensation" and Note 6 of
Notes to Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements.
(4) Adjusted to give effect to the sale of the 1,200,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $20.25
per share and the receipt of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
----------------
Unless otherwise indicated, information in this Prospectus assumes no
exercise of the Underwriters' option to purchase from the Selling Shareholders
up to 360,000 additional shares of Common Stock to cover over-allotments, if
any.
7
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth below and the other factors described elsewhere
in this Prospectus. In addition to the other information in this Prospectus,
the following factors should be carefully considered in evaluating the Company
and its business before purchasing the shares of Common Stock offered hereby.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company has incurred net losses in each year since its inception, and
had an accumulated deficit of $28.7 million through April 30, 1996. The
Company expects to incur additional losses for the foreseeable future. The
amount of future net losses and time required by the Company to reach
profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable is dependent in large part on the
ability of the Company to enter into additional collaborative arrangements and
on the ability of the Company and its partners to successfully commercialize
products incorporating the Company's technologies. In addition, accelerating
certain programs could increase the Company's losses in the near term. No
assurance can be given that the Company will generate significant revenue or
become profitable on a sustained basis if at all. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
EARLY STAGE OF COMMERCIALIZATION; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES;
UNCERTAINTY OF MARKET ACCEPTANCE
While the Company recently commenced marketing certain of its products, it
is in the early stage of product commercialization and many of its potential
products are in development. The Company believes that its future success will
depend in large part on its ability to develop and market new products in its
target markets and in new markets. In particular, the Company expects that its
ability to compete effectively with existing industrial, food packaging,
medical and agricultural companies will depend substantially on successfully
developing, commercializing, achieving market acceptance of and reducing the
cost of producing the Company's products. In addition, commercial applications
of the Company's temperature switch polymer technology are relatively new and
evolving. There can be no assurance that the Company will be able to
successfully develop, commercialize, achieve market acceptance of or reduce
the cost of producing the Company's products, or that the Company's
competitors will not develop competing technologies that are less expensive or
otherwise superior to those of the Company. There can be no assurance that the
Company will be able to develop and introduce new products and technologies in
a timely manner or that new products and technologies will gain market
acceptance. The failure to develop and market successfully new products could
have a material adverse effect on the Company's business, operating results
and financial condition.
The success of the Company in generating significant sales of its products
will depend in part on the ability of the Company and its partners to achieve
market acceptance of the Company's products and technology. The extent to
which, and rate at which, market acceptance and penetration are achieved by
the Company's current and future products is a function of many variables
including, but not limited to, price, safety, efficacy, reliability,
conversion costs and marketing and sales efforts, as well as general economic
conditions affecting purchasing patterns. There can be no assurance that
markets for the Company's products will develop or that the Company's products
and technology will be accepted and adopted. The failure of the Company's
products to achieve market acceptance could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business--Products," "--Sales and Marketing" and "--Manufacturing."
DEPENDENCE ON COLLABORATIVE PARTNERS
The Company's strategy for the development, clinical and field testing,
manufacturing, commercialization and marketing of certain of its current and
future products includes entering into various collaborations with corporate
partners, licensees and others. To date, the Company has entered into
collaborative arrangements with Hitachi Chemical Co., Ltd. ("Hitachi
Chemical") and The BFGoodrich Company ("BFGoodrich") in connection with its
latent curing catalyst systems, Fresh Express Incorporated ("Fresh Express")
and Printpack,
8
Inc. ("Printpack") in connection with its breathable membrane products, Nitta
Corporation ("Nitta") and Hitachi Chemical in connection with its industrial
adhesive products and Smith & Nephew Medical Limited ("Smith & Nephew"),
Physician Sales & Service, Inc. ("Physician Sales & Service") and North Coast
Medical ("North Coast") in connection with its QuickCast orthopedic products.
The Company is dependent on its corporate partners to develop, test,
manufacture and/or market certain of its products. Although the Company
believes that its partners in these collaborations have an economic motivation
to succeed in performing their contractual responsibilities, the amount and
timing of resources to be devoted to these activities are not within the
control of the Company.
A significant portion of Landec's revenues to date have been derived from
commercial research and development collaborations and license agreements. In
fiscal year 1995, development funding from these collaborative arrangements
comprised approximately 85% of the Company's total revenues, and in the six
months ended April 30, 1996, approximately 76% of the Company's total
revenues. Development funding and license fees from and product sales to
Hitachi Chemical, BFGoodrich, Nitta and Smith & Nephew represented
approximately 91% and 69% of the Company's revenues for fiscal year 1995 and
for the six months ended April 30, 1996, respectively. Moreover, research and
development revenue and license fees from Hitachi Chemical, BFGoodrich and
Nitta each accounted for more than 10% of the Company's revenues for fiscal
year 1995 and for the six months ended April 30, 1996. There can be no
assurance that such partners will perform their obligations as expected or
that the Company will derive any additional revenue from such arrangements.
There can be no assurance that the Company's partners will pay any additional
option or license fees to the Company or that they will develop and market any
products under the agreements. Moreover, certain of the collaborative
agreements provide that they may be terminated at the discretion of the
corporate partner, and certain of the collaborative agreements provide for
termination under certain circumstances. In March of 1996, the Company and
BFGoodrich decided to alter their research and development collaboration in
the industrial latent curing area by, among other things, removing exclusivity
restrictions. Pursuant to this alteration, BFGoodrich is no longer obligated
to fund the Company's research and development which could result in a short-
term reduction in research and development revenues that may be offset by
other contract revenues.
There can be no assurance that the Company's collaborative partners will not
pursue existing or alternative technologies in preference to the Company's
technology. Furthermore, there can be no assurance that the Company will be
able to negotiate additional collaborative arrangements in the future on
acceptable terms, if at all, or that such collaborative arrangements will be
successful. To the extent that the Company chooses not to or is unable to
establish such arrangements, it would experience increased capital
requirements to undertake research, development, manufacture, marketing or
sale of its current and future products in such markets. There can be no
assurance that the Company will be able to independently develop, manufacture,
market, or sell its current and future products in the absence of such
collaborative agreements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Corporate
Collaborations."
COMPETITION AND TECHNOLOGICAL CHANGE
The Company operates in highly competitive and rapidly evolving fields, and
new developments are expected to continue at a rapid pace. Competition from
large industrial, food packaging, medical and agricultural companies is
expected to be intense. In addition, the nature of the Company's collaborative
arrangements may result in its corporate partners becoming competitors of the
Company. Many of the Company's current and potential competitors have
substantially greater financial and technical resources and production and
marketing capabilities than the Company, and many 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. See "Business--Competition."
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
The Company has limited volume manufacturing capacity and has limited
experience in manufacturing its products. In order to be profitable, the
Company must be able to manufacture its products in greater quantities
9
than it has to date, as well as improve production efficiency. Therefore, 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. As a result, the Company has experienced negative gross
margins for its product sales to date. The Company intends to build or acquire
large-scale polymer manufacturing facilities by 1998. Production in
commercial-scale quantities may involve technical challenges for the Company.
Establishing its own manufacturing capabilities would require significant
scale-up expenses and additions to facilities and personnel. The Company may
also consider seeking collaborative arrangements with other companies to
manufacture certain of its products. If the Company is dependent upon third
parties for the manufacture of its products, then the Company's profit margins
and its ability to develop and deliver such products on a timely basis may be
adversely affected. Moreover, there can be no assurance that such parties will
adequately perform and any failures by third parties may delay the submission
of products for regulatory approval, impair the Company's ability to deliver
products on a timely basis, or otherwise impair the Company's competitive
position. The occurrence of any of these factors could have a material adverse
effect on the Company's business, operating results and financial condition.
The manufacture of the Company's products will be subject to periodic
inspection by regulatory authorities. In addition, manufacture of the
Company's medical products is required to meet Good Manufacturing Practices
stipulated by the U.S. Food and Drug Administration ("FDA") and must undergo
equivalent inspections conducted by state and foreign officials. 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. See "Use of Proceeds" and "Business--Manufacturing."
DEPENDENCE ON SINGLE SOURCE SUPPLIERS
Many of the raw materials used in manufacturing certain of the Company's
products are currently purchased from a single source, including certain
monomers used to synthesize Intelimer polymers and substrate materials for the
Company's breathable membrane products. Upon an increase in manufacturing
capability, the Company may enter into alternative supply arrangements.
Although to date the Company has not experienced difficulty acquiring
materials for the manufacture of its products, no assurance can be given that
interruptions in supplies will not occur in the future, that the Company will
be able to obtain substitute vendors, or that the Company will be able to
procure comparable materials at similar prices and terms within a reasonable
time. Any such interruption of supply could have a material adverse effect on
the Company's ability to manufacture its products and, consequently, could
materially and adversely affect the Company's business, operating results and
financial condition. See "Business--Manufacturing."
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 eight
U.S. patents with expiration dates ranging from 2007 to 2012 and has filed
applications for additional U.S. patents, three of which have been issued
notices of allowance as well as certain corresponding patent applications
outside the United States, relating to the Company's technology. 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 also will 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,
10
in January 1996 the Company received a letter alleging that the Company's
breathable membrane product infringes patents of another party. The Company
has investigated this matter and believes that its breathable membrane product
does not infringe the specified patents of such party. The Company has
received an opinion of patent counsel that the breathable membrane product
does not infringe any valid claims of such patents. If the Company were
determined to be infringing any third-party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. 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 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 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. 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 costs 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 partners, 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. See "Business--Patents and
Proprietary Rights."
FINANCING REQUIREMENTS AND ACCESS TO CAPITAL
Implementation of the Company's business strategy may require significant
expenditures of capital, and the Company anticipates requiring additional
financing in the future. The Company's future capital requirements will depend
on many factors, including the progress of its research and development
programs; the development of commercial-scale manufacturing capabilities; the
development of marketing, sales and distribution capabilities; the ability of
the Company to maintain existing collaborative arrangements and establish and
maintain new collaborative arrangements; payments received under research and
development agreements; the costs involved in preparing, filing, prosecuting,
defending and enforcing intellectual property rights; complying with
regulatory requirements; competing technological and market developments; the
effectiveness of product commercialization activities and arrangements; and
other factors. If the proceeds of this offering together with the Company's
internally generated cash flow are not sufficient to satisfy its financing
needs, the Company would be required to seek additional funding through other
arrangements with corporate partners, bank borrowings or public or private
sales of its securities, including equity securities. Any such collaboration
could result in limitations on the Company's ability to control the research,
development and commercialization of resulting products, if any, as well as
its profits therefrom. In addition, the terms of any future bank borrowings
could place restrictions on the Company's ability to take certain actions, and
any equity financing could result in dilution to the Company's shareholders.
There can be no assurance that additional funds will be available on a timely
basis, on favorable terms or at all, or that such funds, if raised, would be
sufficient to permit the Company to continue to conduct its operations. The
Company has no credit facility or other committed sources of capital. If
adequate funds are not available, the Company may be required to curtail
significantly, or discontinue, one or more of its research and
11
development programs or to license third parties the right to commercialize
products or technologies that the Company would otherwise seek to develop
itself. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GOVERNMENT REGULATION
The Company's products and operations are subject to substantial regulation
in the United States and foreign countries.
Medical Products. The manufacturing, labeling, distribution and marketing of
the Company's medical products are subject to extensive and rigorous
regulation in the United States under the Food, Drug and Cosmetic Act, as
amended (the "FDC Act"), and in certain other countries. The Company intends
to obtain clearance for its medical products pursuant to Section 510(k) of the
FDC Act whenever possible. The 510(k) process generally takes less time to
complete than the premarket approval ("PMA") process. There can be no
assurance that the FDA will act favorably or quickly in its review of the
Company's 510(k) submissions, will not request additional data, will not
require that the Company conduct further clinical studies, will not limit the
intended use of the Company's products, or will not require the submission of
a PMA. Failure to receive or delays in receipt of FDA clearances or approvals,
including the need for extensive clinical trials or additional data as a
prerequisite to clearance or approval, or any limitations on the intended use
of the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is also required to adhere to FDA current Good Manufacturing Practices and
similar regulations in other countries which include testing, control and
documentation requirements enforced by periodic inspections. Moreover, if FDA
clearances for commercial sale of the Company's medical products are obtained,
there can be no assurance that reimbursement in the United States or foreign
countries will be available for any of the Company's medical products, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for or the price of the Company's medical products.
Food Packaging. Food packaging is also regulated under the FDC Act. The
Company believes that its breathable membrane products will not become a
component of the packaged food under expected conditions of use and therefore
are not subject to regulation as food additives by FDA. An FDA determination
that such products are food additives could have a material adverse effect on
the Company's business, operating results and financial condition. Food
packaging materials are also subject to FDA current Good Manufacturing
Practices requirements.
Agricultural Products. The Company's agricultural products are subject to
regulations of the United States Department of Agriculture ("USDA") and
Environmental Protection Agency ("EPA"). The Company believes its current
Intellicoat seed coatings are not pesticides as defined in the Federal
Insecticide, Fungicide and Rodenticide Act ("FIFRA") and are not subject to
pesticide regulation requirements. The process of meeting pesticide
registration requirements is lengthy, expensive and uncertain, and may require
additional studies by the Company. There can be no assurance that future
products will not be regulated as pesticides. In addition, the Company
believes that its Intellicoat seed coatings will not become a component of the
agricultural products which are produced from the seeds to which the coatings
are applied and therefore are not subject to regulation by the FDA as a food
additive. While the Company believes that it will be able to obtain approval
from such agencies to distribute its products, there can be no assurance that
the Company will obtain necessary approvals without substantial expense or
delay, if at all.
The Company and its products under development may also be subject to other
international, 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 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
12
with such laws and regulations in the future, or that such laws or regulations
will not have a material adverse effect on the Company's business, operating
results and financial condition. Failure to comply with the applicable
regulatory requirements can, among other things, result in fines, injunctions,
civil penalties, suspensions or withdrawal of regulatory approvals, product
recalls, product seizures, including cessation of manufacturing and sales,
operating restrictions and criminal prosecution. See "Business--FDA and Other
Government Regulations."
LIMITED SALES OR MARKETING EXPERIENCE
The Company has only limited experience marketing and selling its products.
While the Company intends to distribute certain of its products through its
corporate partners and other distributors, the Company intends to sell certain
other products through a direct sales force. Establishing sufficient marketing
and sales capability may require significant resources. There can be no
assurance that the Company will be able to recruit and retain skilled sales
management, direct salespersons or distributors, or that the Company's sales
efforts will be successful. The Company recently changed its distribution
approach with respect to the QuickCast product line in the United States to
include several national distributors. To the extent that the Company enters
into distribution arrangements for the sale of its products, the Company will
be dependent on the efforts of third parties. There can be no assurance that
such efforts will be successful. See "--Dependence on Collaborative Partners"
and "Business--Sales and Marketing."
INTERNATIONAL OPERATIONS AND SALES
For the year ended October 31, 1995 and for the six months ended April 30,
1996, approximately 73% and 61%, 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
will continue to account for a significant portion of its total revenues. A
number of risks are inherent in international transactions. International
sales and operations may be limited or disrupted by the regulatory approval
process, government controls, export license requirements, political
instability, price controls, trade restrictions, changes in tariffs or
difficulties in staffing and managing international operations. Foreign
regulatory agencies have or may establish product standards different from
those in the United States, and any inability to obtain foreign regulatory
approvals on a timely basis could have an adverse effect on the Company's
international business and its financial condition and results of operations.
While the Company's foreign sales are priced in dollars, fluctuations in
currency exchange rates may reduce the demand for the Company's products by
increasing the price of the Company's products in the currency of the
countries to which the products are sold. There can be no assurance that
regulatory, geopolitical and other factors will not adversely impact the
Company's operations in the future or require the Company to modify its
current business practices.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations have varied significantly from quarter
to quarter. Quarterly operating results will depend upon several factors,
including the timing and amount of expenses associated with expanding the
Company's operations, the timing of collaborative agreements with, and
performance of, potential partners, the timing of regulatory approvals and new
product introductions, the mix between pilot production of new products and
full-scale manufacturing of existing products and the mix between domestic and
export sales. In addition, the Company cannot predict rates of licensing fees
and royalties received from its partners or ordering rates by its
distributors, some of which place infrequent stocking orders, while others
order at regular intervals. As a result of these and other factors, the
Company expects to continue to experience significant fluctuations in
quarterly operating results, and there can be no assurance that the Company
will become or remain consistently profitable in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 filed against the
13
Company to date, if any such claims were made and adverse judgments obtained,
they could have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company has taken and
intends to continue to take what it believes are appropriate precautions to
minimize exposure to product liability claims, there can be no assurance that
it will avoid significant liability. The Company currently maintains product
liability insurance in the amount of $1.0 million per claim with an annual
aggregate limit of $2.0 million. There can be no assurance that such coverage
is adequate or will continue to be available at an acceptable cost, if at all.
A product liability claim, product recall or other claim with respect to
uninsured liabilities or in excess of insured liabilities could have a
material adverse effect on the Company's business, operating results and
financial condition.
HAZARDOUS MATERIALS
The Company's activities involve the controlled use of hazardous materials
and chemicals. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, and while the Company
has never received any notice or complaint alleging any violation of such laws
or regulations, risk of accidental contamination from, improper disposal of or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that
result, and any such liability could exceed the resources of the Company,
which could have a material adverse effect on the Company's business,
operating results and financial condition. Environmental protection has been
an area of substantial concern in recent years, and regulation of activities
involving the use and disposal of potentially hazardous materials has
increased. There can be no assurance that such regulation will not increase in
the future or that the Company will not be required to incur significant costs
to comply with environmental laws and regulations in the future.
DEPENDENCE UPON KEY PERSONNEL
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of services of certain key employees could have
a material adverse effect on the Company. In addition, the Company believes
that its future success will depend in large part upon its ability to attract
and retain highly skilled scientific, managerial, manufacturing and marketing
personnel. The Company faces competition in hiring such personnel from other
companies, research and academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful
in hiring or retaining the personnel it requires for operating its business.
The Company has key person life insurance in the amount of $1.0 million on
each of the lives of Gary T. Steele, the Company's President and Chief
Executive Officer, and Dr. Ray F. Stewart, the Company's founder and Vice
President, Technology. However, the loss of services of one or more members of
the research or management group or the inability to hire additional personnel
and develop expertise as needed could have a material adverse effect on the
Company's business, operating results and financial condition. The Company
does not have employment agreements with any of its employees.
CONTROL BY EXISTING OFFICERS AND DIRECTORS
Upon completion of this offering, the Company's officers and directors, and
their affiliates, will beneficially own approximately 26.5% of the outstanding
Common Stock (approximately 25.8% of the outstanding Common Stock assuming
exercise in full of the Underwriters' over-allotment option). As a result,
these shareholders acting together would be able to exert considerable
influence over the election of the Company's directors and the outcome of most
corporate actions requiring shareholder approval, such as certain amendments
to the Company's Articles of Incorporation or Bylaws. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change of
control of the Company and consequently could affect the market price of the
Common Stock. See "Management--Executive Officers and Directors" and
"Principal and Selling Shareholders."
14
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws require that any action
required or permitted to be taken by shareholders of the Company must be
effected at a duly called annual or special meeting of shareholders of the
Company and may not be effected by written consent. In addition, the Company's
charter documents will eliminate cumulative voting and provide that the
Company's Board of Directors be divided into two classes, each of which serves
for a staggered two-year term, which may make it more difficult for a third
party to gain control of the Company's Board of Directors. Moreover, the Board
of Directors has the authority, without action by, or consent of, the
shareholders, to fix the rights and preferences of and issue shares of
Preferred Stock. These and other charter provisions may discourage certain
types of transactions involving an actual or potential change in control of
the Company, including transactions in which the shareholders might otherwise
receive a premium for their shares over then current prices, and may limit the
ability of the shareholders to approve transactions that they may deem to be
in their best interests. See "Management," "Principal and Selling
Shareholders," "Description of Capital Stock--Preferred Stock" and "--
California Anti-Takeover Effects."
DILUTION
The existing shareholders of the Company acquired their shares of Common
Stock at an average cost substantially below the offering price set forth on
the cover page of this Prospectus. Accordingly, investors in this offering
will suffer an immediate dilution in pro forma net tangible book value per
share of the Common Stock of $15.44. See "Dilution."
VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors
such as announcements of technological innovations, the attainment of (or
failure to attain) milestones in the commercialization of the Company's
technology, new products, new patents or changes in existing patents, or
development of new collaborative arrangements by the Company, its competitors
or other parties, as well as government regulations, investor perception of
the Company, fluctuations in the Company's operating results and general
market conditions in the industry. These factors may cause the market price of
the 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 Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the Common
Stock and adversely affect the Company's ability to raise capital in the
capital markets at a time and on terms favorable to the Company. See "Shares
Eligible for Future Sale." The number of shares of Common Stock available for
sale in the public market is limited by restrictions under the Securities Act
of 1933, as amended (the "Securities Act"), and lock-up agreements entered
into in connection with the Company's initial public offering (the "IPO
Lockup") and additional lock-up agreements entered into in connection with
this offering (the "Additional Lockup") under which certain holders of such
shares have agreed not to sell or otherwise dispose of any of their shares
prior to August 15, 1996 and 90 days after the date of this offering,
respectively, without the prior written consent of Smith Barney Inc. However,
Smith Barney Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to such lock-up
agreements. As a result of these restrictions, based on shares outstanding and
options granted as of April 30, 1996, the shares of Common Stock listed below
will be eligible for future sale in the public market.
15
In addition to the 2,400,000 shares sold in this offering and the 3,220,000
shares sold in the initial public offering, 36,074 shares of Common Stock held
by current shareholders and 21,578 shares of Common Stock issuable upon
exercise of currently outstanding options will be eligible for sale in the
public market on the date of this offering without restriction pursuant to
Rules 144 and 701 under the Securities Act. Beginning on August 15, 1996, upon
expiration of the IPO Lockup, an additional 479,788 shares of Common Stock and
300,354 shares of Common Stock issuable upon exercise of currently outstanding
options will be eligible for sale pursuant to Rules 144 and 701. Beginning 90
days after the date of this Prospectus, upon expiration of the Additional
Lockup, an additional 5,360,011 shares of Common Stock and 608,251 shares of
Common Stock issuable upon exercise of currently outstanding options will be
eligible for sale pursuant to Rules 144 and 701. In connection with this
offering all directors and officers, the Selling Shareholders and certain
other shareholders of the Company, holding in the aggregate 5,726,166 shares
of Common Stock outstanding prior to this offering, have entered into the
Additional Lockup and agreed with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock for a period of 90 days after the date
of this Prospectus without the prior written consent of Smith Barney Inc.
The holders of approximately 5,621,078 shares of Common Stock (including
shares issuable upon exercise of a warrant on a net issuance basis at an
assumed public offering price of $20.25 per share and excluding the shares of
Common Stock offered by the Selling Shareholders hereby) are entitled to
certain registration rights with respect to such shares. Such holders have
waived their registration rights with respect to such shares in this offering.
If such holders, by exercising their registration rights, cause a large number
of shares to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Common Stock. In addition,
the Company has registered the shares of Common Stock reserved for issuance
under the Company's 1988 Incentive Stock Option Plan, 1995 Directors' Stock
Option Plan and 1995 Employee Stock Purchase Plan. See "Shares Eligible for
Future Sale."
16
THE COMPANY
The Company was incorporated in California on October 31, 1986. The
Company's principal executive offices are located at 3603 Haven Avenue, Menlo
Park, California 94025 and its telephone number is (415) 306-1650.
USE OF PROCEEDS
The net proceeds from the sale of the 1,200,000 shares of Common Stock
offered by the Company hereby, after deducting underwriting discounts and
commissions and estimated expenses payable by the Company in connection with
this offering, are estimated to be approximately $22.6 million, assuming a
public offering price of $20.25 per share.
The Company anticipates using the net proceeds for capital expenditures,
increasing manufacturing capability, working capital and other general
corporate purposes. A portion of the net proceeds may also be used for the
acquisition of complementary businesses or products, although the Company has
not entered into any definitive agreement or letter of intent with respect to
any such transactions and is not in any negotiations with respect to any
written or oral agreements, understandings or agreements regarding such
transactions.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds of this offering in interest-bearing
securities of investment grade. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1 and 3 of Notes to
Consolidated Financial Statements.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the development and growth
of its business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded over-the-counter on the Nasdaq National Market
under the symbol "LNDC." The Common Stock was initially offered to the public
on February 15, 1996 at a price of $12.00 per share. The following table sets
forth for the periods indicated during 1996 the high and low closing sale
prices of the Common Stock as reported by the Nasdaq National Market.
HIGH LOW
------ ------
Second Quarter (from February 15, 1996)........................... $19.00 $12.50
Third Quarter (through July 1, 1996).............................. $20.75 $16.25
On July 1, 1996, the last sale price of the Common Stock as reported by
Nasdaq was $20.25 per share. As of April 30, 1996, there were approximately
115 holders of record of 10,662,028 shares of outstanding Common Stock.
17
CAPITALIZATION
The following table sets forth the capitalization and cash position of the
Company at April 30, 1996 and as adjusted to reflect the sale of the 1,200,000
shares of Common Stock offered by the Company hereby (at an assumed public
offering price of $20.25 per share) after deducting underwriting discounts and
commissions and estimated offering expenses. This table should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto included elsewhere in this Prospectus.
APRIL 30, 1996
----------------------
ACTUAL AS ADJUSTED
-------- ------------
(IN THOUSANDS)
Cash, cash equivalents and short-term investments....... $ 39,206 $ 61,830
======== ========
Noncurrent portion of capital lease obligations......... $ 448 $ 448
Shareholders' equity:
Preferred Stock, $.001 par value, 2,000,000 shares
authorized; no shares issued or outstanding........... -- --
Common Stock, $.001 par value, 50,000,000 shares
authorized; 10,662,028 shares issued and outstanding,
actual and 11,862,028 shares issued and outstanding,
as adjusted (1)....................................... 68,147 90,771
Notes receivable from shareholders...................... (12) (12)
Deferred compensation................................... (368) (368)
Accumulated deficit..................................... (28,655) (28,655)
-------- --------
Total shareholders' equity............................. 39,112 61,736
-------- --------
Total capitalization.................................. $ 39,560 $ 62,184
======== ========
- --------
(1) Excludes as of April 30, 1996, 111,787 shares of Common Stock issuable
upon exercise of outstanding warrants at an exercise price of $4.31 per
share and on a net issuance basis at an assumed public offering price of
$20.25 per share, 1,191,158 shares issuable upon exercise of outstanding
options at a weighted average exercise price of $0.99 per share and
502,741 shares available for future issuance under the Company's stock
plans. See "Management--Stock Plans" and Notes 5 and 6 of Notes to
Consolidated Financial Statements.
18
DILUTION
The pro forma net tangible book value of the Company at April 30, 1996 was
$41.1 million, or $3.41 per share of Common Stock. "Pro forma net tangible
book value per share" is determined by dividing the pro forma net tangible
book value (total tangible assets including the proceeds from the assumed
exercise of all outstanding stock options and warrants less total liabilities)
of the Company at April 30, 1996 by the number of shares of Common Stock
outstanding assuming exercise of all outstanding stock options and warrants at
April 30, 1996. Dilution per share represents the difference between the
amount per share paid by purchasers of Common Stock in this offering and the
pro forma net tangible book value per share of Common Stock immediately after
this offering. Without taking into account any changes in pro forma net
tangible book value after April 30, 1996, other than to give effect to the
sale of the 1,200,000 shares of Common Stock offered by the Company hereby
(and after deduction of underwriting discounts and commissions and estimated
offering expenses), the adjusted pro forma net tangible book value of the
Company at April 30, 1996 would have been $63.7 million, or $4.81 per share.
This represents an immediate dilution in net tangible book value of $15.44 per
share to new investors purchasing shares in this offering and an immediate
increase in net tangible book value of $1.40 per share to existing
shareholders. The following table illustrates this per share dilution:
Assumed public offering price per share............................ $20.25
Pro forma net tangible book value per share adjusted for the
impact of stock options and warrants at April 30, 1996........... $3.41
Increase per share attributable to new investors (1).............. 1.40
-----
Pro forma net tangible book value per share after offering......... 4.81
------
Dilution per share to new investors (2)............................ $15.44
======
- --------
(1) After deduction of underwriting discounts and commissions and estimated
offering expenses.
(2) Determined by subtracting the adjusted pro forma net tangible book value
per share after the offering from the amount of cash paid by a new
investor for a share of Common Stock.
19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of October 31,
1994 and 1995 and for each of the three years in the period ended October 31,
1995 have been derived from the consolidated financial statements of the
Company, which have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere in this Prospectus. The consolidated statements of
operations data for the years ended October 31, 1991 and 1992 and the balance
sheet data at October 31, 1991, 1992 and 1993 are derived from audited
consolidated financial statements not included in this Prospectus. The
selected consolidated financial data set forth below as of April 30, 1996 and
for the six-month periods ended April 30, 1995 and 1996 have been derived from
the unaudited financial statements of the Company, have been prepared on a
basis consistent with the audited consolidated financial statements and, in
the opinion of the management of the Company, include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
financial condition and results of operations for the periods presented. The
results of operations for the six-month period ended April 30, 1996 are not
necessarily indicative of the results to be expected for any subsequent period
or the full year. The selected consolidated financial data set forth below
should be read in conjunction with the consolidated financial statements of
the Company and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
SIX MONTHS
YEAR ENDED OCTOBER 31, ENDED APRIL 30,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Product sales.......... $ -- $ -- $ -- $ 335 $ 601 $ 441 $ 412
License fees........... -- 475 350 400 2,650 650 600
Research and
development revenues.. 808 811 821 965 796 389 682
------- ------- ------- ------- ------- ------- -------
Total revenues........ 808 1,286 1,171 1,700 4,047 1,480 1,694
Operating costs and
expenses:
Cost of product sales.. -- -- -- 897 987 652 539
Research and
development............ 2,570 2,846 3,740 3,283 3,715 1,776 1,898
Selling, general and
administrative........ 836 987 1,598 2,067 2,236 1,045 1,224
------- ------- ------- ------- ------- ------- -------
Total operating costs
and expenses......... 3,406 3,833 5,338 6,247 6,938 3,473 3,661
------- ------- ------- ------- ------- ------- -------
Operating loss.......... (2,598) (2,547) (4,167) (4,547) (2,891) (1,993) (1,967)
Net interest income..... 54 119 51 192 132 70 452
------- ------- ------- ------- ------- ------- -------
Net loss................ $(2,544) $(2,428) $(4,116) $(4,355) $(2,759) $(1,923) $(1,515)
======= ======= ======= ======= ======= ======= =======
Supplemental net loss
per share (1).......... $ (.38) $ (.27) $ (.17)
======= ======= =======
Shares used in
computation of
supplemental net loss
per share (1).......... 7,175 7,060 8,709
======= ======= =======
OCTOBER 31,
----------------------------------------------
APRIL
30,
1991 1992 1993 1994 1995 1996
------- ------- -------- -------- -------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 4,024 $ 1,975 $ 9,772 $ 5,706 $ 5,549 $39,206
Total assets............ 5,078 2,786 11,253 7,521 7,347 41,124
Redeemable convertible
preferred stock........ 10,968 11,881 25,567 27,656 31,276 --
Accumulated deficit..... (6,483) (9,804) (15,213) (21,658) (26,538) (28,655)
Total shareholders'
equity (net capital
deficiency)............ $(6,453) $(9,766) $(15,159) $(21,584) $(26,429) $39,112
- --------
(1) Computed on a supplemental basis as described in Note 1 of Notes to
Consolidated Financial Statements.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains trend analysis and other forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1933, as amended.
Actual results could differ materially from those projected in the forward
looking statements as a result of the factors described in this Prospectus,
particularly under "Risk Factors." The following discussion should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Prospectus:
OVERVIEW
Since its inception in October 1986, the Company has been primarily engaged
in the research and development of its Intelimer technology and related
products. The Company launched its first product line, QuickCast splints and
casts, in April 1994. The Company launched its second product line, breathable
membranes for the fresh-cut produce packaging market, in September 1995. To
date, the Company has recognized $1.3 million in total QuickCast product and
breathable membrane sales. The balance of revenues as of April 30, 1996 have
resulted from license fees, collaborative arrangements and Small Business
Innovative Research ("SBIR") government grants. The Company has been
unprofitable since its inception and expects to incur additional losses,
primarily due to the continuation of its research and development activities
and expenditures necessary to further develop its manufacturing and marketing
capabilities. From inception through April 30, 1996, the Company's accumulated
deficit was $28.7 million.
RESULTS OF OPERATIONS
Six Months Ended April 30, 1995 Compared to Six Months Ended April 30, 1996
Total revenues were $1.7 million during the six months ended April 30, 1996
compared to $1.5 million during the same period in 1995. Revenue from product
sales for the first six months in fiscal year 1996 decreased to $412,000 from
$441,000 during the same period in 1995 due to a decrease in sales of
QuickCast products which more than offset the increase in sales of the
breathable membrane products. Revenue from license fees for the first six
months in fiscal year 1996 decreased to $600,000 from $650,000 during the same
period in 1995. Revenue from research and development funding for the first
six months in fiscal year 1996 increased to $682,000 from $389,000 during the
same period in 1995 due to an increase in research and development contracts
in fiscal year 1996. In March of 1996, the Company and BFGoodrich decided to
alter their research and development collaboration in the industrial latent
curing area by removing the exclusivity restrictions. Pursuant to this
alteration, BFGoodrich is no longer obligated to fund the Company's research
and development which could result in a short-term reduction in research and
development revenues that may be offset by other contract revenues.
Cost of product sales consists of material, labor and overhead. Cost of
product sales for the six months ended April 30, 1996 was $539,000 compared to
$652,000 during the same period in 1995, a decrease of 17%. Cost of product
sales as a percentage of product sales decreased to 131% for the first six
months of fiscal year 1996 from 148% during the same period in 1995. This
decrease in the cost of product sales was primarily the result of the ramp-up
and increased volume of the breathable membrane product sales. The Company
experienced negative gross margins for its products sales due to the early
stage of commercialization of the Company's products and related product
start-up costs. The Company anticipates that if revenues from product sales
increase, gross margins will improve as the fixed portion of cost of product
sales will be allocated over higher sales. Improvements in gross margins due
to increased products sales, if any, may be offset in the future if the
Company increases the fixed portion of cost of product sales. Due to the early
stage of commercialization, however, the Company is unable to predict with any
certainty future gross margins.
Research and development expenses during the six months ended April 30, 1996
were $1.9 million compared to $1.8 million during the same period in 1995, an
increase of 7%. Research and development expenses increased primarily as a
result of increased development costs in the Company's latent curing products.
In future periods, the Company expects that spending for research and
development will continue to increase in absolute dollars, although it may
vary as a percentage of total revenues. In addition, accelerating certain
programs could increase the Company's losses in the near term.
21
Selling, general and administrative expenses during the six months ended
April 30, 1996 were $1.2 million compared to $1.0 million during the same
period in 1995, an increase of 17%. Selling, general and administrative
expenses increased primarily as a result of increased sales and marketing
expenses and the additional administrative costs associated with supporting a
public company. Selling, general and administrative expenses consist primarily
of sales and marketing expenses associated with the Company's product sales,
business development expenses, staff and administrative expenses. Sales and
marketing expenses during the six months ended April 30, 1996 increased to
$583,000 compared to $436,000 during the same period in 1995. The increase in
sales and marketing expenses was attributable to the costs to support the
market introduction of the breathable membrane products launched in late
fiscal year 1995 and the cost of launching two new national U.S. distributors
for the QuickCast products in the second quarter of fiscal year 1996. The
Company expects that selling, general and administrative spending will
increase in future periods, although it may vary as a percentage of total
revenues.
Net interest income during the six months ended April 30, 1996 was $452,000,
as compared to $70,000 for the comparable period in 1995. Net interest income
increased due to interest income from the initial public offering proceeds.
Fiscal Year Ended October 31, 1995 Compared to Fiscal Year Ended October 31,
1994
Total revenues were $4.0 million for fiscal year 1995 compared to $1.7
million for fiscal year 1994, an increase of 138%. Licenses fees increased to
$2.6 million for fiscal year 1995 from $400,000 for fiscal year 1994, and
revenues from research and development funding increased to $796,000 for
fiscal year 1995 from $680,000 for fiscal year 1994. In consideration for the
license fees and research and development funding received from its corporate
partners, the Company granted back certain licenses and product rights. See
"Business--Corporate Collaborations." The Company received no revenues from
SBIR government grant funding for fiscal year 1995 compared to $285,000 for
fiscal year 1994. Revenues from product sales increased to $601,000 for fiscal
year 1995 from $335,000 for fiscal year 1994 primarily due to increased sales
volume for QuickCast products and a small increase in their average selling
prices. The Company believes that if it is able to successfully commercialize
its products, revenues from product sales will constitute a greater percentage
of total revenues. The Company does not anticipate receiving any further SBIR
government grants.
Cost of product sales were $987,000 for fiscal year 1995 compared to
$897,000 for fiscal year 1994, an increase of 10%. Cost of product sales as a
percentage of product sales decreased to 164% in fiscal year 1995 from 268% in
fiscal year 1994. This decrease was primarily the result of increased volumes
and manufacturing efficiencies for the QuickCast products. The Company
experienced negative gross margins for its product sales due to the early
stage of commercialization of the Company's products and related product
start-up costs. Cost of product sales did not increase at the same or similar
rate as revenues from product sales due to these start-up costs, fiscal year
1995 being the first full year of product sales and increased volumes and
manufacturing efficiencies.
Research and development expenses were $3.7 million for fiscal year 1995
compared to $3.3 million for fiscal year 1994, an increase of 13%. The
Company's research and development expenses are primarily dedicated to the
development, process scale-up and intellectual protection of its enabling
side-chain crystallizable polymer technology, which is the basis of the
Company's products. Research and development expenses increased primarily as a
result of increased process development costs associated with the launch of
the Company's breathable membrane products and development of the PORT
ophthalmic device, which were offset by a decline in development expenses
associated with the QuickCast product line launched in fiscal year 1994.
Selling, general and administrative expenses were $2.2 million for fiscal
year 1995 compared to $2.1 million for fiscal year 1994, an increase of 8%.
Selling, general and administrative expenses consist primarily of sales and
marketing expenses associated with the Company's product sales, business
development expenses, staff and administrative expenses. Sales and marketing
expenses increased to $905,000 for fiscal year 1995 from $823,000 for fiscal
year 1994, primarily due to marketing and sales activities for the QuickCast
product line. The Company
22
generally incurs less sales and marketing expenses for product sales through
its marketing partners such as Smith & Nephew. However, sales to such partners
generally have a lower average sales price.
Net interest income was $132,000 for fiscal year 1995 compared to $192,000
for fiscal year 1994, a decrease of 31%. The decrease resulted primarily from
interest expense of $42,000 associated with the convertible promissory notes
issued in March 1995.
Fiscal Year Ended October 31, 1994 Compared to Fiscal Year Ended October 31,
1993
Total revenues were $1.7 million for fiscal year 1994 compared to $1.2
million for fiscal year 1993, an increase of 45%. License fees increased to
$400,000 for fiscal year 1994 from $350,000 for fiscal year 1993. Revenues
from research and development funding increased to $680,000 for fiscal year
1994 from $407,000 for fiscal year 1993. Revenues from government grant
funding decreased to $285,000 for fiscal year 1994 from $414,000 for fiscal
year 1993. The launch of the QuickCast product line resulted in first revenues
from product sales in fiscal year 1994.
Cost of product sales was $897,000 for fiscal year 1994, the first year of
the Company's product sales. The Company experienced negative gross margins
for its product sales due to the early stage of commercialization of the
Company's products and related product start-up costs.
Research and development expenses were $3.3 million for fiscal year 1994
compared to $3.7 million for fiscal year 1993, a decrease of 12%. The decrease
was primarily due to a reduction of development costs associated with the
Company's PORT ophthalmic device and a reduction of materials costs.
Selling, general and administrative expenses were $2.1 million for fiscal
year 1994 compared to $1.6 million for fiscal year 1993, an increase of 29%.
The increase was primarily due to an increase in sales and marketing expenses
to $823,000 for fiscal year 1994 from $379,000 for fiscal year 1993,
associated with the launch of the QuickCast product line.
Net interest income was $192,000 for fiscal year 1994 compared to $51,000
for fiscal year 1993, an increase of 276%. The increase resulted from the
investment of net proceeds from the Company's private placement of Series D
Preferred Stock in June 1993.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Company's initial public offering, the Company financed its
operations primarily through private sales of its equity securities, issuances
of convertible debt, equipment lease financings and license and development
fees. Through April 30, 1996, the Company has received net offering proceeds
of approximately $23.8 million from private sales of equity securities,
$700,000 from the issuance of convertible notes in March 1995 and $1.1 million
from lease financing. In its initial public offering in February 1996, the
Company received proceeds of approximately $35 million net of underwriting
discounts and commissions, and issuance costs.
The Company believes that existing cash, cash equivalent and short-term
investments, which totalled $39.2 million at April 30, 1996, together with the
net proceeds of approximately $22.6 million from this offering, will be
sufficient to finance its capital requirements through at least fiscal 1997.
The foregoing is a forward-looking statement, however, and the Company's
future capital requirements will depend on numerous factors, including the
progress of its research and development programs; the development of
commercial scale manufacturing capabilities; the development of marketing,
sales and distribution capabilities; the ability of the Company to maintain
existing collaborative arrangements and establish and maintain new
collaborative arrangements; payments received under research and development
agreements; the costs involved in preparing, filing, prosecuting, defending
and enforcing intellectual property rights; complying with regulatory
requirements; competing technological and market developments; the
effectiveness of product commercialization activities and arrangements; and
other factors. If the proceeds of this offering, together with the Company's
currently available funds and internally generated cash flow, are not
sufficient to satisfy its financing needs, the Company would be
23
required to seek additional funding through other arrangements with
collaborative partners, through bank borrowings and through public or private
sales of its securities, including equity securities. The Company has no
credit facility or other committed sources of capital. There can be no
assurance that additional funds, if required, will be available to the Company
on favorable terms. See "Risk Factors--Financing Requirements and Access to
Capital."
The Company has not generated taxable income to date. At October 31, 1995,
the net operating losses available to offset future taxable income for federal
income tax purposes were approximately $15.6 million. Because the Company has
experienced ownership changes, future utilization of the carryforwards may be
limited in any one fiscal year pursuant to Internal Revenue Code regulations.
The carryforwards expire at various dates beginning in 2001 through 2010 if
not utilized. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce
federal income tax liabilities.
24
BUSINESS
GENERAL
Landec designs, develops, manufactures and sells temperature-activated
polymer products for a variety of industrial, medical and agricultural
applications. The Company's products are based on its proprietary Intelimer
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. The Company believes its enabling Intelimer
technology provides for differentiated, high-value products that address a
wide variety of applications in large, commercial markets.
The Company has launched and is marketing its first two product lines. The
first product line, QuickCast splints and casts, was launched in the United
States in mid-1994 and in Europe and selected Asian countries through its
partner Smith & Nephew in the fall of 1994. The Company introduced its second
product line, breathable membranes for use in fresh-cut produce packaging, in
the fall of 1995. The Company has entered into a non-exclusive supply
agreement with fresh-cut salad market leader Fresh Express.
The Company is developing and intends to launch additional products during
1996 and 1997. Products under development include: latent curing catalyst
systems for use with industrial coatings, adhesives, sealants and composites;
temperature-activated, pressure-sensitive adhesives; PORT ophthalmic devices
for the treatment of dry eye; and Intellicoat agricultural seed coatings. The
Company is developing products in collaboration with or for sale to Smith &
Nephew, Physician Sales & Service, North Coast Medical, Fresh Express,
Printpack, Hitachi Chemical, BFGoodrich and Nitta.
TECHNOLOGY OVERVIEW
Polymers are important and versatile materials found in many of the products
of modern life. Man-made polymers include nylon fibers used in carpeting and
clothing, coatings such as paints and finishes, plastics such as polyethylene,
and elastomers used in automobile tires and latex gloves. Natural polymers
include cellulose and natural rubber. Historically, synthetic polymers have
been designed and developed primarily for improved mechanical and physical
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 over the last 40 years have allowed these materials to
replace wood, metal and natural fibers in many applications. More recently,
scientists have focused their efforts on identifying and developing
sophisticated polymers with novel properties for a variety of commercial
applications.
25
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 1(degrees)C to
2(degrees)C. These changes can be designed to occur at relatively low
temperatures (0(degrees)C to 100(degrees)C) that fall within temperature
ranges compatible with most biological applications. Figure 1 illustrates the
effect of temperature on Intelimer materials as compared to typical polymers.
Effect of Temperature on Intelimer Materials vs. Typical Polymar
[GRAPH SHOWING ABRUPT CHANGE IN PROPERTIES (ADHESIVE VERSUS NON-ADHESIVE,
PERMEABLE VERSUS INPERMEABLE, VISCOUS VERSUS SOLID) OF INTELIMER MATERIALS
AROUNG A PRE-SET TEMPERATURE POINT COMPARED TO TYPICAL POLYMERS, APEARS HERE]
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 0(degrees)C to 100(degrees)C
by varying the length of the side chains. The reversible transitions between
crystalline and amorphous states are illustrated in Figure 2 below.
Intelimer Materials Temperature Switch
[SCHEMATIC SHOWING REVERSIBILITY BETWEEN CRYSTALLINE STRUCTURE (NON-ADHESIVE,
IMPERMEABLE, SOLID) AND AMORPHOUS STRUCTURE (ADHESIVE, PERMEABLE, VISCOUS)
DEPENDING UPON TEMPERATURE APPEARS HERE]
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
26
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 of 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 plugs.
BUSINESS STRATEGY
Landec's objective is to become the leader in temperature-activated
specialty polymer products by capitalizing on its enabling Intelimer
technology. The principal elements of Landec's strategy to achieve this
objective are (i) to select commercially attractive product opportunities,
(ii) to leverage established distribution channels through distribution
agreements or corporate partnerships with market leaders and (iii) to fully
exploit the Intelimer technology by retaining an economic interest in joint
ventures, spinouts and other vehicles created by the Company to develop non-
core applications of the Company's technology.
Product Selection
The Company believes that its Intelimer technology has the potential to
reach a broad range of markets beyond the current scope of the Company's
resources. As a result, the Company seeks to commercialize selected Intelimer-
based products that exhibit the following characteristics:
Large, Established, Growing Markets. The Company focuses on supplying
products to established, growing markets with a minimum of $500 million to $2
billion in annual, world-wide sales and the potential to further expand due to
Landec's products.
Attractive Margins/Low Capital Intensity. Landec develops products that it
believes can generate attractive margins when competitively priced. In
addition, the Company generally focuses on products which can be developed,
manufactured and marketed without large capital investments.
Significant Unmet Market Needs. Landec seeks to use its temperature switch
technology to develop differentiated products that address significant market
needs not fulfilled by existing products on the market. The Company intends to
develop new products with substantial functional benefits relative to existing
products that are designed to gain market acceptance more readily and to be
sold at attractive price levels.
Strong Proprietary Position. Landec seeks to develop products that fall
within, and can expand, the Company's proprietary position. Currently, Landec
has eight issued patents and numerous additional patent applications relating
to methods, compositions and applications of Landec's Intelimer technology,
three of which have been issued notices of allowance. In addition, the Company
has developed considerable technological know-how, trade secrets and
registered trademarks in order to establish a broad proprietary position in
the market.
Minimal Regulatory Risk. Landec generally selects products that are not
likely to undergo lengthy regulatory review processes that could both increase
costs and substantially delay commercialization. For example, the Company
intends to develop medical products that it believes can obtain FDA clearance
through the 510(k) notification process, rather than products that must be
submitted under the substantially longer PMA process.
Established Distribution Channels
With respect to product commercialization, Landec's strategy is to establish
distribution arrangements or corporate partnerships with market leaders. The
Company currently is collaborating with or selling products to Hitachi
Chemical, BFGoodrich and Nitta in the industrial polymers area and has
distribution agreements with
27
Smith & Nephew, Physician Sales & Service and North Coast Medical in the
splint and casting area. In certain highly focused markets, such as the fresh-
cut produce market, Landec may market products through its own sales force.
The Company believes that this approach will allow it to focus its resources
on further development of products based on its Intelimer materials while
leveraging the established sales and marketing organizations of its partners.
Joint Ventures and Spinouts
Another aspect of Landec's strategy is to fully exploit the commercial
applications of the Company's Intelimer technology by retaining an economic
interest in spinouts, joint ventures and other vehicles created by the Company
to develop non-core applications of the Company's technology. For instance,
the Company believes that its seed coating business represents a large
commercial opportunity that will require substantial management time to
develop. Therefore, Landec may consider spinning out and establishing a
management team dedicated to that business. The Company believes that
commercialization of certain products outside of Landec will enable the
Company to better leverage its resources and more successfully exploit the
potential of its internal programs while retaining an economic interest in
Intelimer-based products.
PRODUCTS
The Company is developing products based on its Intelimer technology in
three product areas: industrial membranes and polymers, medical devices and
agricultural seed coatings. The Company currently has two product lines on the
market and expects to introduce additional product lines during 1996 and 1997.
The following table sets forth the Company's current product areas, their
principal applications, the attribute of the Intelimer materials utilized by
the product, the commercial status of the products and corporate partners.
INTELIMER
MATERIALS CORPORATE
PRODUCT AREA PRINCIPAL APPLICATIONS ATTRIBUTE STATUS PARTNERS
------------ ---------------------- --------- ------ ---------
Industrial Membranes
and Polymers
Breathable Membranes Fresh-cut Produce Permeability On Market Fresh Express
Packaging Permeability In Development Printpack
Latent Curing Catalyst Epoxy and Other Permeability Field Trials BFGoodrich
Systems Thermosets Hitachi Chemical
Adhesives Industrial Uses Adhesion In Development Hitachi Chemical
Nitta
Medical Uses Adhesion In Development Nitta
Medical Devices
QuickCast Orthopedics Splints and Casts Viscosity On Market Smith & Nephew
Physician Sales
& Service
North Coast Medical
PORT Ophthalmic Dry Eye Viscosity Clinical Trials --
Devices Contact Lens Wear Viscosity In Development --
Agricultural Seed
Coatings
Intellicoat Coatings Corn, Soybean, Canola, Permeability Field Trials --
Cotton and Sugarbeet
- --------------------------------------------------------------------------------
INDUSTRIAL MEMBRANES AND POLYMERS
The Company's main focus is on industrial applications for its Intelimer
materials. To date, these products consist of breathable membranes, latent
curing catalyst systems and adhesives.
28
Breathable Membranes
Landec began marketing its Intelimer-based breathable membranes for use in
fresh-cut produce packaging in September 1995. Certain types of fresh-cut
produce can spoil or discolor rapidly when packaged in conventional materials
and therefore are not widely available for commercial sale. The Company
believes its breathable membranes facilitate the packaging of these types of
produce.
Fresh-cut produce is pre-washed, cut and packaged in a form that is ready to
use by the consumer and is thus typically sold at premium price levels.
According to the International Fresh Cut Produce Association ("IFPA"), sales
of fresh-cut salads were $82 million in 1989 and increased to $600 million in
1994. The Company believes that this growth has been driven by consumer demand
and willingness to pay for convenience. In addition, many institutional food
suppliers purchase fresh-cut produce due to its greater convenience and
uniform quality relative to produce prepared at the point of sale.
Although fresh-cut produce companies have had success in the salad market,
the industry has been slow to expand to other fresh-cut vegetables or fruits
due to limitations in the conventional materials used to package the cut
produce. After harvesting, vegetables and fruits continue to respire,
consuming oxygen and releasing carbon dioxide. Too much or too little oxygen
can result in premature spoilage and decay and/or the growth of harmful
bacteria. Conventional packaging films used today, such as polyethylene and
polypropylene, can be made somewhat permeable to oxygen and carbon dioxide,
but often do not allow for the optimal atmospheric needs of the produce. In
addition to having poor permeability characteristics, these current packages
often have less than desirable strength, clarity, aesthetics and durability.
These shortcomings have not significantly hindered the growth in the fresh-cut
salad market because lettuce, unlike many other vegetables and fruits,
respires relatively slowly and can tolerate less than optimal packaging.
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 a wide variety of fruits and vegetables that can automatically
adjust the transmission rates of oxygen and carbon dioxide. Today's
conventional packaging films are not able to adjust to meet the varying needs
of different vegetables and fruits. To mirror the growth experienced in the
fresh-cut salad market, the markets for high respiring vegetables and fruits
such as broccoli, cauliflower, melons and stone fruit (peaches, apricots,
nectarines) require a better packaging solution.
The respiration rate of fresh-cut produce also varies with fluctuations in
temperature. As temperature increases, fresh-cut produce generally respires at
a higher rate, which speeds up the decaying process, reduces the shelf life of
the produce and increases the potential for the growth of harmful bacteria. As
fresh-cut produce is transported from the processing plant through multiple
distribution steps to the food service or retail store location, and finally
to the ultimate consumer, temperatures can fluctuate significantly. Therefore,
managing the "cold-chain," or the refrigerated environment, throughout the
distribution process presents a significant challenge and cost factor. The
Company believes that conventional food packaging films are unable to adjust
to changes in temperature that exist in the fresh-cut produce distribution
process.
Using its Intelimer technology, Landec has developed and is developing
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 standard bag. This highly permeable window acts as a breathable "valve"
supplying most, if not all, of the gas transmission properties of the entire
package. These membranes can be designed with the following characteristics:
. Super Permeability. Landec's breathable membranes are designed to permit
transmission of oxygen and carbon dioxide at several thousand times the rate
of conventional packaging films. These higher permeability levels facilitate
the packaging of many types of fresh-cut produce.
. Ability to Selectively Transmit Oxygen and Carbon Dioxide. Landec's
breathable membranes are designed to selectively permit the transmission of
oxygen and carbon dioxide at two separate rates that can create a more optimal
environment for the produce.
29
. Temperature Responsiveness. Landec is developing breathable membranes that
can be designed to increase or decrease in permeability in response to
environmental temperature changes. The Company is developing breathable
membranes with permeability characteristics tailored to mimic the changes in
respiration rate that are brought on by changes in temperature for specific
vegetables and fruits.
Landec launched its first breathable membrane, a label for fresh-cut
broccoli packages, in September 1995. This membrane incorporates super
permeability and selective oxygen and carbon-dioxide transmission
capabilities, but not temperature responsiveness. The Company launched a
second breathable membrane for fresh-cut cauliflower in June 1996. The Company
intends to introduce additional membranes tailored for different types of
vegetables during 1996. Future membranes may incorporate temperature
responsiveness.
The Company believes it can facilitate the packaging of high respiring
produce such as broccoli, cauliflower and fruit with its breathable membranes,
thus addressing currently unmet market needs. These breathable membranes also
enable producers to select packaging films that are more cost effective,
easier to process (e.g. stronger, clearer, printable) and more aesthetically
pleasing to consumers. With the proprietary Intelimer polymer temperature
switch, Landec's breathable membranes could also provide protection against
breaks in the cold chain, thereby extending shelf life and product quality and
protecting against the growth of harmful bacteria.
Landec believes that growth of the overall produce market will be driven by
increasing demand for the convenience of fresh-cut produce as well as by
expansion of the number of produce products that may be effectively packaged.
The Company believes that in the future its breathable membranes may be useful
for packaging a wide range of fresh-cut produce products. According to the
IFPA, sales of fresh-cut produce, which in 1994 represented 9% of the total
produce market, are projected to increase to 25% of the total produce market
by 1999. Potential opportunities for using Landec's technology outside of the
fresh-cut produce market exist in cut flowers and in other food products.
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 is initially purchasing Landec's breathable membranes for fresh-
cut produce sold to the institutional food service market. In June 1996,
Landec entered into a co-development and marketing agreement with Printpack,
which specializes in flexible packaging for the food industry. Under this
agreement, Landec and Printpack will focus on developing integrated
membrane/film products for low cost, high-throughput, fresh-cut produce market
applications such as retail packaging using Landec's proprietary membrane
technology and Printpack's large-scale printing and film covering expertise.
Landec manufactures its breathable membranes in-house and intends to market
breathable membranes to the limited number of large fresh-cut produce
suppliers through its own sales force.
Latent Curing Catalyst Systems
The Company is developing and currently conducting field trials of a
catalyst system incorporating its Intelimer polymer technology for industrial
thermoset applications. Thermosets are plastics that, through a curing
process, undergo a chemical reaction to form a structure that cannot be
reshaped through heating. For example, epoxy glue is a thermoset. The majority
of thermosets are configured in "two-package" systems in which one or more
resins are packaged separately from a curing agent catalyst. When the catalyst
is mixed with the resin, the thermoset materials cure, or "set." The period of
time after the two components are mixed until the mixture has doubled in
viscosity is referred to as its "pot life."
Epoxies, polyurethanes and unsaturated polyesters represent three
significant classes of thermosets. According to the January 1995 edition of
Modern Plastics, a trade publication, the U.S. market in 1994 for epoxy,
polyurethane and unsaturated polyester thermoset products was 0.6 billion
pounds, 3.8 billion pounds and 1.5 billion pounds, respectively, and the
Company believes that the world-wide market size is approximately double the
U.S. market size. Because of their hardness and corrosion resistant
properties, epoxy thermosets are
30
widely used in surface coatings for industrial primers and maintenance
finishes, in fiber-reinforced composites for printed circuit boards and in
high performance adhesives in value-added automotive and aerospace
applications. Polyurethane thermosets consist of a variety of flexible and
rigid foam materials essential for inplace insulation (e.g., for refrigeration
applications), molded automobile bumpers, mattresses and furniture cushions
and automotive seating. Polyurethane coatings are also used for abrasion
resistance in floor finishing and durability in transportation and aerospace
applications. Unsaturated polyesters, a third thermoset category, are fast-
curing with excellent hardness characteristics and are primarily used as
fiberglass-reinforced composites. Principal applications for unsaturated
polyesters are housing construction (shower modules, bathtub and sink
constructions), marine construction (boats) and transportation products (truck
bodies and panels and automotive trim).
Two-package thermoset systems suffer from a number of drawbacks. These
systems require extensive mixing equipment to ensure proper mixing ratios to
provide expected product performance at the time of use. The thermoset resins
and catalysts must be kept in separate packages until the time of use to
prevent them from pre-reacting with each other. A finite pot life results in
significant waste when the thermoset reacts or cures prior to application.
Two-package thermoset systems frequently result in limited control of reaction
time (the time between the initiation and completion of the curing process)
causing incomplete mold fills and waste. While a limited number of currently
available single package thermoset systems offer the potential for addressing
many of these drawbacks, these systems 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 Company is developing catalyst systems based on its Intelimer technology
for use in one-package thermoset systems. These systems can incorporate
catalysts, accelerators and curing agents in a way that prevents interaction
by these agents with the resin while the polymer is in its impermeable state.
This characteristic allows all components of the Intelimer thermoset to be
pre-mixed and have a longer shelf life. For example, some Landec thermoset
systems are storage-stable for up to one year. Landec's one-package system can
be designed with a pre-set temperature switch to correspond with elevated
temperatures applied during standard manufacturing processes. When the
thermoset is exposed to the pre-set switch temperature, the Intelimer polymer
abruptly changes to its permeable state, exposing the catalyst to the resin
and initiating the curing process. In addition, the Intelimer polymer can be
designed to change state over a predetermined temperature range in order to
achieve a desired reaction time.
The Company believes that its thermoset catalyst systems will eliminate the
need for costly on-site mixing equipment and, because thermosets can be pre-
mixed by the manufacturer, will minimize sub-optimal product performance due
to incorrect component mixing ratios. Furthermore, since the thermosets will
not cure until exposed to elevated temperatures, pot life should be extended,
resulting in significantly reduced waste and labor expense. The Company
believes that the ability to control reaction time also provides advantages
over existing thermoset systems.
Landec is targeting epoxies for its first thermoset catalyst system because
epoxies are typically used in high-value industrial applications, such as in
the electronic, aerospace and automotive industries. In addition, epoxies are
generally used in applications involving elevated temperature curing;
consequently, curing an epoxy thermoset using the Company's product would not
add steps to the end-user's production process. The Company believes that this
product will also have broad applicability for use with polyurethane and
unsaturated polyester thermosets.
The Company's thermoset catalyst systems address the different drawbacks of
existing epoxy, polyurethane and unsaturated polyester thermoset systems.
Shelf life is the most significant limitation for epoxy systems. Polyurethane
systems are often used in applications for which reaction time is critical.
Currently available unsaturated polyester systems exhibit significant
drawbacks in both shelf life and pot life. The Company believes its one-
package catalyst systems address the main limitations in each of these types
of thermoset systems.
31
THERMOSET MARKET OPPORTUNITY
1994 U.S.
AREA MARKET (LBS.)* TYPICAL APPLICATION LANDEC BENEFITS
---- -------------- ------------------- ---------------
Epoxies 602 million Adhesives and coatings . Improved shelf life
for electronics, auto . Pre-mixed formulas
and aerospace . Lower cost of labor and waste
Polyurethanes 3,755 million Foams for auto, . Controlled reaction times
aerospace and furniture . Better mold filling
coatings, adhesives and . Lower cost of labor and waste
elastomers
Unsaturated 1,496 million Composites and molded . Improved pot life
Polyesters products for auto, boat . Lower cost of labor and waste
and construction
* Source: Modern Plastics, January 1995
- --------------------------------------------------------------------------------
Landec has entered into licensing and distribution agreements for one-
package thermoset catalyst systems with Hitachi Chemical and BFGoodrich. Both
of these companies are large specialty chemical companies with strengths in
the electronics, automotive and aerospace markets for thermoset systems.
BFGoodrich has in the past and Hitachi Chemical is currently sponsoring
research and development activities with respect to Intelimer technology. The
Company's agreements with these companies contemplate that both Hitachi
Chemical and BFGoodrich, upon successful completion of field testing, will
purchase materials from Landec for resale or for incorporation into fully
formulated products. Landec has retained manufacturing rights in both of these
collaborations, and has granted exclusive marketing rights in Asia to Hitachi
Chemical and non-exclusive marketing rights in the United States and other
territories outside of Asia to BFGoodrich. See "--Corporate Collaborations."
Adhesives
Landec is utilizing its Intelimer technology to develop temperature-
activated, pressure-sensitive adhesive ("PSA") materials for industrial
applications. PSA materials are used for applications such as adhering the
component parts of silicon devices, applying automotive side moldings and
trim, assembling appliances and adhering labels to various surfaces. According
to Adhesives Age, the U.S. market for PSA industrial tape products was $2.7
billion in 1994. Typically, the removal of PSA materials damages or tears the
adhered surface and leaves a resin residue. To avoid tearing or resin residue,
traditional removal methods involve the use of toxic solvents and/or labor-
intensive washing steps.
The Company is developing PSA materials based on its Intelimer technology
that have demonstrated the capability to have adhesion levels reduced by over
70% with cooling or heating. This capability can be used in a wide variety of
applications to adhere metals, woods, composites and plastics to surfaces and
then easily remove these materials with changes in temperature. For example,
two surfaces that are adhered together using Landec's PSA materials during a
silicon wafer mounting process for the production of electronic components can
be easily separated without toxic solvents or multiple washing steps by
running the bonded parts through a heating or cooling process.
Landec's PSA materials are currently in development. The Company entered
into a non-exclusive license agreement with Hitachi Chemical in October 1994
and a co-exclusive license agreement with Nitta, a specialty materials
company, in March 1995. These agreements provide Hitachi Chemical and Nitta
with the right to manufacture and distribute Landec's adhesive products for
industrial applications in Asia in exchange for license fees and royalties on
future product sales. Landec has retained manufacturing and distribution
rights elsewhere in the world. First commercial sales are expected to build on
the strength of Landec's partners in the electronics
32
and automotive industries. The Company believes that additional growth
opportunities for Landec's adhesives technology exist in medical applications.
In February 1996 the Company expanded its relationship with Nitta to include
exclusive rights for adhesive medical applications in Asia in return for
license fees, research and development payments and royalties on product
sales.
MEDICAL PRODUCTS
In addition to industrial applications, the Company is currently developing
or commercializing medical products based on its Intelimer technology. These
products consist of QuickCast splints and casts and PORT ophthalmic devices.
QuickCast Splints and Casts
Landec has developed and is currently marketing splints and casts
incorporating its Intelimer polymer technology. According to Frost & Sullivan,
a market research organization, the U.S. market for orthopedic soft goods and
cast room products was estimated to be approximately $818 million in 1994. The
growth in the market for orthopedic soft goods and cast room products is being
driven by a number of factors, including an increase in participation in
sports and recreational activities and the aging of the U.S. population. In
addition, the trend towards managed care has increased the need for cost-
effective treatment. Managed care has also resulted in occupational and
physical therapists, primary care physicians and other non-specialists
performing an increasing range of procedures, including the treatment of
selected orthopedic injuries. The Company believes the simplicity of the
application of its QuickCast splints and casts is especially attractive to
non-specialists.
Traditional casting and splinting methods suffer from several drawbacks.
Casts made from plaster of Paris or synthetic cast tape generally require
specialized training. In addition, these casts require a "cast room," as the
preparation and application of plaster of Paris or synthetic cast tape is
messy. Traditional casts must also be cut off and replaced as the muscles in
the casted limb atrophy or as a particular therapy procedure requires a new
cast position. Splints using conventional thermoplastic sheets must be cut to
conform to varying limb sizes. The nature of the materials used in traditional
casts and splints make them difficult to properly conform to the patient's
anatomy, resulting in the possibility of an incorrect cast or splint fit. In
addition, the application of casts and splints are usually performed by two
different groups of specialists. Casts are generally applied by orthopedic
surgeons while splints are typically applied by occupational and physical
therapists.
The Company's QuickCast splints and casts shrink to fit injured limbs upon
the application of heat from a hair dryer. These splints and casts are made
from an elastic fiberglass mesh coated with Landec's temperature-activated
materials. This material is made into pre-formed tubular devices that are
placed on injured hands, wrists and arms. The heat from the hair dryer softens
the polymer and allows the device to relax and conform to the patient's
anatomy in approximately two minutes. QuickCast splints and casts are pliable
when warm, allowing the clinician to mold and form the splint or cast and to
reshrink or reposition the splints or casts as needed. Upon removal of the
heat, the products cool and harden. The Company believes that QuickCast
splints and casts provide the following advantages over traditional methods:
. Help ensure a proper therapeutic cast or splint fit
. Allow for easy removal of the splint or cast using scissors, as compared
to the necessity of sawing off a plaster of Paris or synthetic cast
. Allow for reheating, remolding or reshrinking to change the shape or
position of the device as required by therapy or to accommodate a
reduction in limb size due to muscle atrophy, reducing the wasteful
discarding of casts and splints that can increase overall treatment
costs
. Enable primary care physicians and other non-specialists to perform both
splinting and casting
. Permit easy conversion of QuickCast casts to splints
33
. Allow the cast to be applied in any exam room, physician office or
rehabilitation facility or at the patient's bedside, thus eliminating
the need for a special "cast room"
The QuickCast products received 510(k) clearance by the FDA in February
1994, and the Company commenced sales of QuickCast products to regional U.S.
orthopedic distributors in April 1994. In early 1996, Landec entered into an
exclusive distribution relationship with Physician Sales & Service in the area
of orthopedic and primary care physicians sales. PSS has over 700 sales
representatives in 50 states. In addition, in early 1996, Landec entered into
a non-exclusive distribution relationship with North Coast Medical, a large
distributor of medical products to occupational and physical therapists. The
addition of these distribution partners broadens the market access for the
Company's QuickCast products. Outside of the United States, Smith & Nephew is
the exclusive distributor of Landec's heat-shrinkable casting and splinting
products in approximately 25 countries. The Company's products are distributed
by Smith & Nephew under the Dynacast*Rapide label. In addition, QuickCast
products are sold through independent distributors in approximately nine other
countries.
Landec received the 1995 R&D 100 Award in recognition of QuickCast's
innovative features and benefits. This award is given annually by R&D Magazine
to selected companies with new products that represent significant new
innovations in America. Landec is working with leaders in orthopedics, primary
care and rehabilitation to assist the Company in developing new product and
application ideas. In early 1996, Landec introduced several QuickCast products
for lower leg fractures and sprains, which complement the Company's existing
QuickCast product line for upper extremity fractures and sprains.
PORT Ophthalmic Device
Landec is developing a PORT (Punctal Occlusion for the Retention of Tears)
ophthalmic device that is designed to allow the eye to retain its natural tear
fluids. The Company is targeting patients with a condition known as dry eye
for the first PORT application. In patients suffering from dry eye, either the
lacrimal gland produces an insufficient volume of tears or the lacrimal
drainage duct clears the tears too quickly from the eye. Either condition may
result in blurred vision, intolerance to bright light, grittiness, redness,
burning and, in some cases, damage to the corneal surface.
Dry eye syndrome is a common yet poorly diagnosed condition that is
estimated to affect 30 million Americans, primarily patients over 50 years of
age. According to the American Academy of Ophthalmology, approximately 25% of
the general population suffers from dry eye syndrome at some time.
Approximately 7.5 million cases can be classified as severe or moderate.
Landec is initially targeting this market. According to the Dry Eye and Tear
Research Center, approximately 175,000 dry eye patients in the United States
undergo some type of corrective procedure each year. The Company believes that
the opportunity for dry eye products will expand due to factors such as
increased physician awareness of dry eye, an aging population, poor air
quality, improved and standardized diagnostic techniques, and recent changes
allowing reimbursement for punctum plug procedures and products.
Existing methods for treating dry eye have significant drawbacks. Silicone
punctum plugs often do not provide complete obstruction of the drainage duct
and may not conform to the contours of a particular patient's drainage duct.
In addition, punctum plugs either must be inserted deep into the drainage duct
or rest at the top of the drainage duct, where they are susceptible to coming
loose. Collagen plugs and artificial tear solutions offer only temporary
relief. Laser surgery, which is used to close the drainage duct, is expensive
and difficult to reverse.
Using the PORT product, a physician introduces Intelimer polymer into the
lacrimal drainage duct in a fluid state where it quickly solidifies into a
form-fitting, solid plug. Occlusion of the lacrimal drainage duct allows the
patient to retain tear fluid. The Company has developed an applicator
containing sterile, solid Intelimer material that will transform into a
flowable, viscous state when heated slightly above body temperature. A
physician activates the battery powered PORT applicator that heats the
Intelimer material, inserts the applicator tip directly into the locally
anesthetized punctal eye opening of the lacrimal drainage duct and dispenses
the Intelimer
34
material. This entire treatment can be completed on an out-patient basis in
five to ten minutes. Subsequently, if the physician believes that occlusion is
no longer necessary, the PORT plug can be removed using a warm saline flush,
which activates the temperature switch, causing the polymer to return to its
viscous state and be flushed from the patient's drainage duct.
The Company has conducted animal tests to assess the safety of PORT plugs to
treat dry eye patients by intentionally obstructing the eye's lacrimal
drainage duct. The Company received approval from the FDA in August 1995 to
begin human clinical trials of its PORT plugs and such trials were initiated
in September 1995 and a pilot study was completed in March 1996. Further
clinical studies will be required and upon completion, the Company anticipates
filing for 510(k) clearance with the FDA. The Company is currently in
discussions regarding marketing rights with selected leading ophthalmic
companies. The Company intends to retain manufacturing rights with respect to
the PORT applicator.
The Company believes 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.
AGRICULTURAL SEED COATINGS
Landec has developed and is conducting its fourth year of field trials of
its Intellicoat seed coating, an Intelimer-based agricultural material
designed to increase crop yields and extend the crop planting window. These
coatings are initially being applied to corn and soybean seeds. According to
the U.S. Agricultural Statistics Board, the total planted acreage in 1994 in
the United States was 79.2 million for corn and 61.9 million for soybean.
Currently, farmers are required to guess the proper time to plant seeds. If
the seeds are planted too early, they may rot or suffer chilling injury due to
the absorption of water at cold soil temperatures. If they are planted too
late, the growing season may end prior to the plants reaching full maturity.
In either case, the resulting crop yields are suboptimal. Moreover, the
planting window can be fairly brief, requiring the farmer to focus almost
exclusively on planting during this time. Seeds also germinate at different
times due to variations in absorption of water, thus providing for variations
in the growth rate of the crops.
The Company's Intellicoat seed coating prevents planted seeds from absorbing
water when the ground temperature is below the coating's pre-set switch
temperature. Intellicoat seed coatings are designed to enable coated seeds to
be planted early without risk of chilling damage caused by the absorption of
water at cold soil temperatures. As spring advances and soil temperatures rise
to the pre-determined switch temperature, the polymer's permeability increases
and the coated seeds absorb water and begin to germinate. The Company believes
that Intellicoat seed coatings provide the following advantages:
. More flexible timing for planting
. Avoidance of chilling injury
. Uniform germination and crop growth
. Protection against harmful fungi
As a result, the Company believes that Intellicoat seed coatings offer the
potential for significant improvements in crop yields.
In the seed industry, yield increases of 4% to 5% are considered significant
because of their impact on per acre profitability. Field trials of Intellicoat
seed coatings on corn and soybean crops during the past three years have
resulted in yield increases of as much as 5% to 20%. The Company plans to
initially develop seed coating products for corn and soybean markets for
distribution through regional seed companies in the United States in parallel
with continued field evaluations with global seed companies. The Company
believes that an additional
35
one to two years of field trials will be needed to support initiation of
commercial sales to global seed companies. In addition, Intellicoat seed
coatings are being independently tested by seed companies and universities.
Future crops under consideration include canola, cotton, sugarbeet and other
vegetables.
CORPORATE COLLABORATIONS
The Company believes its technology has commercial potential in a wide range
of industrial, medical and agricultural applications. In order to exploit
these opportunities, the Company has entered into collaborative corporate
agreements for product development and/or distribution in certain fields. The
Company is currently engaged in discussions with potential new collaborative
partners.
To date, the Company has entered into collaborative arrangements with
Hitachi Chemical and BFGoodrich in connection with its latent curing catalyst
systems, Fresh Express and Printpack in connection with its breathable
membrane products, Nitta and Hitachi Chemical in connection with its
industrial adhesive products and Smith & Nephew, Physician Sales & Service and
North Coast Medical in connection with its QuickCast orthopedic products. The
Company is dependent on its corporate partners to develop, test, manufacture
and/or market certain of its products. Although the Company believes that its
partners in these collaborations have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within the control of the
Company.
A significant portion of Landec's revenues to date have been derived from
commercial research and development collaborations and license agreements. In
fiscal year 1995, development funding from these collaborative arrangements
comprised approximately 85% of the Company's total revenues and in the six
months ended April 30, 1996, comprised approximately 76% of the Company's
total revenues. Development funding and license fees from and product sales to
Hitachi Chemical, BFGoodrich, Nitta and Smith & Nephew represented
approximately 91% and 69% of the Company's revenues for fiscal year 1995 and
for the six months ended April 30, 1996, respectively. Moreover, research and
development revenue and license fees from Hitachi Chemical, BFGoodrich and
Nitta each accounted for more than 10% of the Company's revenues for fiscal
year 1995 and for the six months ended April 30, 1996.
There can be no assurance that such partners will perform their obligations
as expected or that the Company will derive any additional revenue from such
arrangements. There can be no assurance that the Company's partners will pay
any additional option or license fees to the Company or that they will develop
and market any products under the agreements. Moreover, certain of the
collaborative agreements provide that they may be terminated at the discretion
of the corporate partner, and certain of the collaborative agreements provide
for termination under certain circumstances. There can be no assurance that
the partners will not pursue existing or alternative technologies in
preference to the Company's technology. Furthermore, there can be no assurance
that the Company will be able to negotiate additional collaborative
arrangements in the future on acceptable terms, if at all, or that such
collaborative arrangements will be successful. To the extent that the Company
chooses not to or is unable to establish such arrangements, it would
experience increased capital requirements to undertake research, development,
manufacture, marketing or sale of its current and future products in such
markets. There can be no assurance that the Company will be able to
independently develop, manufacture, market, or sell its current and future
products in the absence of such collaborative agreements. See "Risk Factors--
Dependence on Collaborative Partners."
Hitachi Chemical. The Company has entered into two separate collaborations
with Hitachi Chemical in the areas of industrial adhesives and latent curing.
On October 1, 1994, the Company entered into a non-exclusive license agreement
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.
36
On August 10, 1995, the Company entered into the second collaboration with
Hitachi Chemical in the latent curing area. The agreement provides Hitachi
Chemical with an exclusive license to use and sell Landec's catalyst systems
in industrial latent curing products in certain Asian countries. Landec is
entitled to be the exclusive supplier of Intelimer catalyst systems to Hitachi
Chemical for at least seven years. 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 is entitled to receive research and development funding over
three years and future royalties based on net sales by Hitachi Chemical of the
licensed products. Any fees paid to the Company are non-refundable. This
agreement is terminable at Hitachi Chemical's option. In conjunction with this
agreement, Hitachi Chemical purchased Series E Preferred Stock for $1.5
million, which converted to Common Stock on the Company's initial public
offering.
BFGoodrich. On October 13, 1993, the Company entered into a collaboration
with BFGoodrich. On March 29, 1996, the Company and BFGoodrich decided to
alter their license, development and manufacturing agreement to a non-
exclusive agreement. The agreement provides BFGoodrich with a non-exclusive
worldwide (excluding Asia) license to use and sell Landec's catalyst systems
in industrial latent curing products. Landec is entitled to be the exclusive
supplier of Intelimer catalyst systems to BFGoodrich during the term of the
agreement. BFGoodrich must meet certain requirements to maintain non-exclusive
rights to fields of use. Landec received an up-front license payment upon
signing and additional license fees upon achieving certain milestones. Under
the agreement, development was funded by BFGoodrich for several years and such
funding was terminated as a result of such alteration. The Company is also
entitled to receive future royalties based on net sales by BFGoodrich of the
licensed products. Fees paid to the Company were non-refundable. This
agreement is terminable at BFGoodrich's option.
Nitta. On March 14, 1995, the Company entered into a license agreement with
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. 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 is
entitled to receive research and development payments and royalties under this
agreement. Any fees paid to the Company are non-refundable.
Fresh Express. On January 18, 1995, the Company entered into a non-exclusive
supply agreement with Fresh Express. Fresh Express collaborates with the
Company in biological product testing. Fresh Express has the right to become a
non-exclusive customer for certain future products.
Printpack. On June 21, 1996, the Company entered into an exclusive co-
development and marketing agreement with Printpack. Under the agreement,
Landec and Printpack will focus on developing integrated membrane film
products for low cost, high-throughput, fresh-cut product market applications,
such as retail packaging, using Landec's proprietary breathable membrane
technology and Printpack's large-scale printing and film converting expertise.
Smith & Nephew. On September 30, 1994, the Company entered into an exclusive
distribution agreement with Smith & Nephew for QuickCast products in certain
European and Pacific Rim countries, Canada and South Africa. Products
distributed under this agreement are sold under Smith & Nephew's
"Dynacast*Rapide" tradename. Under the agreement, minimum purchase levels for
the first three years of the agreement must be met to maintain exclusivity.
The agreement is renewable after the initial three-year term at Smith &
Nephew's option if it has met certain purchase levels.
Physician Sales & Service. On March 18, 1996, the Company entered into a
distribution agreement with Physician Sales & Service for QuickCast orthopedic
and splinting products. Under the agreement, Physician Sales & Service is
granted exclusive rights to distribute such products in the United States to
primary care physicians and co-exclusive rights to distribute such products in
the United States to orthopedic surgeons, cast technicians and physician
assistants. There are more than 83,000 primary care physicians in the United
States.
37
North Coast Medical. On January 3, 1996, the Company entered into a
distribution agreement with North Coast Medical for QuickCast orthopedic and
splinting products. Under the agreement, North Coast Medical is granted non-
exclusive rights to distribute such products in the United States to the
occupational and physical therapy market.
SALES AND MARKETING
The Company's products fall into two groups: those intended to be marketed
and sold by the Company and those expected to be marketed by distributors and
corporate partners. The Company intends to provide technical support for all
of its products, irrespective of the sales and marketing channel of a
particular product. With respect to the Company's breathable membrane
products, the Company has entered into a non-exclusive supply agreement with
Fresh Express. Since there are a limited number of suppliers of fresh-cut
produce, the Company believes that a small sales force can successfully
introduce these products in this concentrated marketplace. The Company intends
to develop its internal sales capacity as more products progress toward
commercialization. The Company's other commercially available products,
QuickCast splints and casts, are sold in the United States through the
Company's national distribution partners, Physician Sales & Service and North
Coast Medical, and in certain countries worldwide through Smith & Nephew.
MANUFACTURING
Landec intends to manufacture its own products whenever possible, as it
believes that there is considerable manufacturing margin opportunity in its
products. In addition, the Company believes that know-how and trade secrets
can be better maintained through Landec retaining manufacturing capability in-
house.
The Company currently manufactures its QuickCast and breathable membrane
products at its facilities in Menlo Park, California. The manufacturing
process for the Company's initial breathable membrane products is comprised of
polymer manufacturing, membrane coating and label conversion. Portions of this
process are done at the Company on pilot-scale equipment while the remainder
is performed by a third-party manufacturer. As volume increases, the Company
plans to have the entire process completed by third party manufacturers.
Manufacture of the Company's QuickCast products is performed by the Company.
Components and new materials for QuickCast are purchased from vendors.
QuickCast products and breathable membranes are required to be manufactured
under Good Manufacturing Practices as required by the FDA and California
Department of Health Services.
Many of the raw materials used in manufacturing certain of the Company's
products are currently purchased from a single source, such as certain
monomers to synthesize Intelimer polymers and substrate materials for the
Company's breathable membrane products. The Company believes, however, that it
currently has adequate inventories and that additional sources of supply are
available. Upon an increase in manufacturing capability, the Company may enter
into alternative supply arrangements. To date, the Company has not experienced
difficulty acquiring these materials for the manufacture of its products.
However, no assurance can be given that interruptions in supplies will not
occur in the future, that the Company could obtain substitute vendors or that
the Company will be able to procure comparable raw materials at similar prices
and terms within a reasonable time. Any such interruption of supply could have
a material adverse effect on the Company's ability to manufacture its products
and, consequently, could materially and adversely affect the Company's
business, operating results and financial condition.
The Company intends to build or acquire large-scale polymer manufacturing
facilities by 1998. In the interim, the Company believes that its current
facilities and readily available additional facilities will meet its
manufacturing needs. The Company believes that by 1998, in-house polymer
manufacturing capability will be necessary to support its polymer
requirements. Polymer manufacturing facilities will be separate from the
QuickCast and breathable membrane manufacturing facilities.
38
Production in commercial-scale quantities may involve technical challenges
for the Company. Establishing its own manufacturing capabilities would require
significant scale-up expenses and additions to facilities and personnel. There
can be no assurance that the Company will be able to develop commercial-scale
manufacturing capabilities at acceptable costs or enter into agreements with
third parties with respect to these activities.
RESEARCH AND DEVELOPMENT
Landec is focusing its research and development resources both on existing
and new applications of its Intelimer technology. Examples of research and
development for product line extensions include QuickCast products for the
lower extremities, additional breathable membranes for other vegetables and
fruits and flowers and new catalyst systems for latent curing products. Landec
is focusing additional research on new product forms such as composites,
films, and laminates. The Company intends to periodically seek funds for
applied materials research programs from U.S. government agencies such as the
National Institutes of Health, as well as from commercial entities. To date,
much of Landec's research has been funded by the U.S. Government and corporate
partners. Landec has 23 employees in research and development (eight of whom
have Ph.D.'s) with experience in polymer, analytical and formulation chemistry
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, medical and agricultural companies is
expected to be intense. In addition, the nature of the Company's collaborative
arrangements may result in its corporate partners becoming competitors of the
Company. Many of these competitors have substantially greater financial and
technical resources and production and marketing capabilities than the
Company, and many 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.
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 eight
U.S. patents with expiration dates ranging from 2007 to 2012 and has filed
applications for additional U.S. patents, three of which have been issued
notices of allowance, 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 if patents are issued to the Company, 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 also will 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, the Company received a letter in
January 1996 alleging that the Company's breathable membrane product infringes
patents of another party. The Company has investigated this matter and
believes that its breathable membrane product does not infringe the specified
patents of such party. The Company has received an opinion
39
of patent counsel that the breathable membrane product does not infringe any
valid claims of such patents. If the Company were determined to be infringing
any third-party patent, the Company could be required to pay damages, alter
its products or processes, obtain licenses or cease certain activities. 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 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.
FDA AND OTHER GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial regulation
in the United States and foreign countries.
Medical Products. The Company's medical products are subject to stringent
government regulation in the United States and other countries. In the United
States, the Food, Drug, and Cosmetic Act, as amended ("FDC Act"), and other
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of such
products. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution.
The regulatory process is lengthy, expensive and uncertain. Prior to
commercial sale in the United States, most medical devices, including the
Company's products, must be cleared or approved by the FDA. Securing FDA
approvals and clearances may require the submission of extensive clinical data
and supporting information to the FDA.
Under the FDC Act, medical devices are classified into one of three classes
(i.e., class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Safety and effectiveness can
reasonably be assured for class I devices through general controls (e.g.,
labeling, premarket notification and adherence to Good Manufacturing
Practices) and for class II devices through the use of general and special
controls (e.g., performance standards, postmarket surveillance, patient
registries and FDA guidelines). Generally, class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
40
effectiveness (e.g., life-sustaining, life-supporting and implantable devices
or new devices which have been found not to be substantially equivalent to
legally marketed devices.)
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a PMA. A 510(k) clearance will be granted if the submitted
data establishes that the proposed device is "substantially equivalent" to a
legally marketed class I or class II medical device, or to a class III medical
device for which the FDA has not called for PMAs. It generally takes from four
to 12 months from submission to obtain 510(k) premarket clearance, although it
may take longer. The FDA may determine that the proposed device is not
substantially equivalent, or that additional clinical data are needed before a
substantial equivalence determination can be made. Modifications or
enhancements to products that are cleared through the 510(k) process that
could significantly affect safety or effectiveness or effect a major change in
the intended use of the device require new 510(k) submissions. The Company is
also required to adhere to FDA Good Manufacturing Practices and similar
regulation in other countries, which include testing, control and
documentation requirements enforced by periodic inspections.
The Company's QuickCast products have received clearance through the 510(k)
process and the Company intends to obtain clearance for its medical products
pursuant to Section 510(k) of the FDC Act whenever possible. The Company plans
to seek 510(k) clearance for its PORT ophthalmic device. The Company is
conducting clinical trials under an Investigational Device Exemption ("IDE")
that is granted by the FDA to permit testing of a device in a limited number
of human beings in clinical trials conducted at a restricted group of clinical
sites. The Company has completed a pilot clinical study and anticipates
additional clinical studies with an expanded patient population. No assurance
can be given that the necessary clearances for its products will be obtained
by the Company on a timely basis, if at all, or that extensive clinical data
and supporting information or a PMA application will not be required. FDA
clearance is subject to continual review, and later discovery of previously
unknown problems may result in restrictions on a product's marketing or
withdrawal of the product from the market.
The Company understands that the FDA has recently been requiring a more
rigorous demonstration of substantial equivalence in connection with 510(k)
notifications and that in many cases the time periods required for product
approvals have increased. If additional data is requested by the FDA, it could
delay the Company's market introduction of its products. There can be no
assurance that the FDA will not require additional data or that the Company
will receive marketing clearance from the FDA for any of its products.
If a product is found to be not substantially equivalent to a legally
marketed device or if it is a class III device for which the FDA has called
for PMAs, a premarket approval application must be filed with the FDA. To
obtain a PMA, a device must undergo extensive clinical trials to establish its
safety and effectiveness. The PMA process can be expensive, uncertain and
lengthy, typically requiring several years, with no guarantee of ultimate
approval. Determination by the FDA that any of the Company's products or
applications are subject to the PMA process could have a material adverse
effect on the Company's business.
Food Packaging Products. The Company's food packaging products are also
subject to regulation under the FDC Act. The manufacture of food packaging
materials is subject to Good Manufacturing Practices regulations. In addition,
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 ("GRAS"). 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
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 breathable membrane products are food additives, the Company may be
required to submit a food additive petition. The food additive petition
process is lengthy,
41
expensive and uncertain. A determination by the FDA that a food additive
petition is necessary would have a material adverse effect on 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 uncertain, and may require additional studies by the Company. There can be
no assurance that future products will not be regulated as pesticides. In
addition, the Company believes that its Intellicoat seed coatings will not
become a component of the agricultural products which are produced from the
seeds to which the coatings are applied and therefore are not subject to
regulation by the FDA as a food additive. While the Company believes that it
will be able to obtain approval from such agencies to distribute its products,
there can be no assurance that the Company will obtain necessary approvals
without substantial expense or delay, if at all.
Polymer Manufacture. The Company's manufacture of polymers is subject to
regulation by the EPA under the Toxic Substances Control Act ("TSCA").
Pursuant to TSCA, manufacturers of new chemical substances are required to
provide pre-manufacturing notice ("PMN") to the EPA which can then require
extensive testing to establish the safety of a new chemical or limit or
prohibit the manufacture, use or distribution of such chemical. The EPA has
promulgated an exemption from PMN requirements for certain polymers which it
believes are of low concern due to their lack of reactivity and their
molecular structure. To date, the Company's polymers have qualified for the
exemption and the Company believes any future polymers it plans to develop
will also qualify. No assurance can be given that future products will qualify
for the exemption or that additional studies or restrictions will not be
required by the EPA.
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
might 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 April 30, 1996, Landec had 45 full-time employees, of whom 33 were
dedicated to research, development, manufacturing, quality control and
regulatory affairs and 12 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.
FACILITIES
Landec leases and occupies approximately 25,000 square feet of office,
laboratory and manufacturing space in Menlo Park, California. Of these
facilities, approximately 21,000 square feet are leased through December 1997
with two three-year renewal options. The remaining warehouse space is
subleased through December 1996. The Company intends to lease an additional
4,800 square feet for warehouse and manufacturing space during the second half
of 1996. The Company believes that it will require additional space in 1998.
42
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 breathable membrane product infringes patents of another party.
The Company received a similar letter in January 1996. The Company has
investigated this matter and believes that its breathable membrane product
does not infringe the specified patents of such party. The Company has
received an opinion of patent counsel that the breathable membrane product
does not infringe any valid claims of such patents. If the Company were
determined to be infringing any third-party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities.
43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of April 30, 1996:
NAME AGE POSITION
- ---- --- -------------------------------------------
Gary T. Steele................. 47 President, Chief Executive Officer and
Chairman of the Board of Directors
David D. Taft, Ph.D............ 58 Chief Operating Officer
Ray F. Stewart, Ph.D........... 42 Vice President, Research and Technology and
Director
Joy T. Fry..................... 36 Vice President, Finance and Administration
and Chief Financial Officer
Steven P. James................ 38 Vice President, General Manager of Membrane
Products
Larry Greene................... 41 Vice President, General Manager of
QuickCast
Mitchell J. Blutt, M.D......... 38 Director
Kirby L. Cramer (2)............ 59 Director
Richard Dulude................. 63 Director
Stephen E. Halprin (1)......... 58 Director
Richard S. Schneider, Ph.D. 55 Director
(1)(2).........................
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Gary T. Steele has served as President, Chief Executive Officer and a
director since September 1991 and as Chairman of the Board of Directors since
January 1996. Mr. Steele has over 15 years of experience in the biotechnology,
instrumentation and medical fields. From 1985 to 1991, Mr. Steele was
President and Chief Executive Officer of Molecular Devices Corporation, a
bioanalytical instrumentation company with product sales in 22 countries. From
1981 to 1985, Mr. Steele was Vice President, Product Development and Business
Development at Genentech, Inc., a biomedical company focusing on
pharmaceutical drug development. Mr. Steele has also worked with McKinsey and
Co. and Shell Oil Company. Mr. Steele received a B.S. from Georgia Institute
of Technology and an M.B.A. from Stanford University.
David D. Taft, Ph.D. has served as Chief Operating Officer since May 1993.
Dr. Taft was also a director of the Company from June 1990 through December
1995. From February 1986 to April 1993, Dr. Taft was Vice President and Group
Manager of the Manufacturing Group at Raychem Corporation. From July 1983 to
January 1986, Dr. Taft was Group Manager of the Telecom Group at Raychem
Corporation and was appointed to the position of Vice President in October
1994. Dr. Taft has over 25 years of experience in the specialty chemical
industry in research and development, sales and marketing, manufacturing and
general management. Prior to joining Raychem Corporation, Dr. Taft was
Executive Vice President of the Chemical Products Division and a Director of
Henkel Corporation, a chemical manufacturing company. Dr. Taft was also an
executive with General Mills Chemicals. Dr. Taft received an A.B. from Kenyon
College and a Ph.D. in Organic Chemistry from Michigan State University and
has over 25 patents in the field of chemistry.
Ray F. Stewart, Ph.D. is the founder of the Company and has served as Vice
President, Research and Technology and a director since the Company's
inception in 1986. Dr. Stewart has over 16 years of experience in the
materials industry. Prior to founding Landec, Dr. Stewart worked at Raychem
Corporation. While at Raychem Corporation from 1979 to 1986, Dr. Stewart
managed development efforts in the areas of adhesives, plastic electrodes,
sensors and synthetic polymer chemistry, and led the development and
commercialization of several new product lines. Dr. Stewart received a B.S.
from Northern Arizona University and a Ph.D. in organic chemistry from the
University of Minnesota.
44
Steven P. James has served as Vice President and General Manager of Membrane
Products since September 1995. From 1990 to 1995, Mr. James served as Vice
President of Business Development for Landec. From 1986 to 1990, Mr. James was
Director, Marketing and Business Development at Scios Nova, Inc., a publicly-
held biopharmaceutical company specializing in human protein therapeutics and
drug delivery systems. Prior to joining Scios Nova, Mr. James held a variety
of positions in product planning, sales and marketing within the
Pharmaceutical and International Divisions of Eli Lilly and Company. Mr. James
received a B.A. from Brown University and an M.B.A. from the Kellogg School of
Northwestern University.
Joy T. Fry has served as Vice President, Finance and Administration and
Chief Financial Officer since December 1992. From February until December
1992, Ms. Fry served as Controller and Director of Administration for Landec.
From 1987 to 1992, Ms. Fry was Controller of the Network Adapter Division and
Corporate Planning Manager at 3Com Corporation, a publicly-held network
computing company. Prior to joining 3Com Corporation, Ms. Fry was a Manager
with Arthur Young & Company. Ms. Fry is a Certified Public Accountant and
received a B.B.A. from the University of Hawaii.
Larry Greene has served as Vice President and General Manager of Landec's
QuickCast business since September 1995. From 1993 to 1995, Mr. Greene served
as Vice President of Product Development for Landec and from 1987 to 1993 he
held a variety of product development and commercial development positions for
the Company. Prior to joining Landec, Mr. Greene was Manager of the Asia
Pacific Region for Zoecon Corporation, a manufacturer of consumer and animal
healthcare products, where he was responsible for product development,
marketing and technology licensing in Japan, Taiwan, Korea and China. Mr.
Greene received a B.S. and M.S. in Chemistry from Colorado State University.
Dr. Mitchell J. Blutt has served as a director since June 1993. Dr. Blutt is
the Executive Partner of Chase Capital Partners and an Adjunct Assistant
Professor of Medicine at The New York Hospital-Cornell Medical Center. He also
serves as a director of Hanger Orthopedic Group, Collegiate Health Care,
Innotech Corporation, InteCare, Inc., Urohealth Corporation, Senior Psychology
Services Corporation, General Medical Corporation, UtiliMed, Inc., Medical
Arts Press, Inc. and ASC Network Corporation. Dr. Blutt received a B.A. and
M.D. from the University of Pennsylvania, and an M.B.A. from the Wharton
School, University of Pennsylvania.
Kirby L. Cramer has served as a director since December 1994. Since April
1987, Mr. Cramer has been Chairman Emeritus of Hazleton Laboratories
Corporation and a director of a number of medical and financial companies. He
also serves as a director of Inmunex Corporation, Advanced Technology
Laboratories, International Technology Corporation, Applied Bioscience
International, Unilab Corporation, Northwestern Trust and Commerce Bank of
Washington. Mr. Cramer received a B.A. from Northwestern University and an
M.B.A. from the University of Washington.
Richard Dulude has served as a director since May 1996. Mr. Dulude retired
as Vice Chairman of Corning Inc. in 1993 after a 36 year career in which he
held various general management positions in Corning's telecommunications,
materials, consumer and international businesses, including positions as
Chairman and CEO of SIECOR Corporation and Chairman and CEO of Corning-Vitro
Corporation. Mr. Dulude is currently a director of Raychem Corporation, AMBAC,
Inc., Welch Allyn, Inc. and HCIA, Inc., and on the Board of Trustees of
Syracuse University. Mr. Dulude received a B.S. from Syracuse University.
Stephen E. Halprin has served as a director since April 1988. Since 1971,
Mr. Halprin has been a general partner of OSCCO Ventures, has been an active
member of the venture community since 1968 and is a director of a number of
technology based companies. Mr. Halprin received a B.S. from the Massachusetts
Institute of Technology and an M.B.A. from Stanford University.
45
Richard S. Schneider, Ph.D. has served as a director since September 1990.
Since October 1990, Dr. Schneider has been a general partner of Domain
Associates. Dr. Schneider has over 25 years of product development experience
in the fields of medical devices and biotechnology. Prior to his pursuing a
career in venture capital, Dr. Schneider was Vice President of Product
Development at Syva/Syntex Corporation and President of Biomedical Consulting
Associates. He is also a director of a number of private life science
companies and is a member of the Board of Directors of Imagyn Medical, Inc.
and Fusion Medical Technologies, Inc. Dr. Schneider received a Ph.D. in
chemistry from the University of Wisconsin, Madison.
----------------
The Company's Board of Directors approved an amendment to its Articles of
Incorporation that provides for a classified Board of Directors consisting of
two classes with the directors in each class serving staggered two-year terms.
The Class I directors are Messrs. Halprin, Schneider and Stewart, whose
current terms will end in fiscal 1997 and the Class II directors are Messrs.
Blutt, Cramer, Dulude and Steele, whose current terms will end in 1998. At
each annual meeting of the shareholders of the Company, the successors to the
class of directors whose term expires at such meeting will be elected to hold
office for a term expiring at the annual meeting of shareholders held in the
second year following the year of their election. See "Description of Capital
Stock-- California Anti--Takeover Law and Certain Charter Provisions."
The Company's executive officers are appointed by and serve at the
discretion of the Board of Directors.
There are currently two standing committees of the Board of Directors: the
Compensation Committee and the Audit Committee. The Compensation Committee has
responsibility for reviewing the performance of the officers of the Company
and making recommendations to the Board concerning salaries and incentive
compensation for such officers. The Compensation Committee currently consists
of Mr. Cramer and Dr. Schneider. The Audit Committee has responsibility for
reviewing the Company's financial statements and significant audit and
accounting practices with the Company's independent auditors and making
recommendations to the Board of Directors with respect thereto. The Audit
Committee currently consists of Mr. Halprin and Dr. Schneider.
Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors and committees thereof.
In December 1993, Dr. Blutt, Mr. Halprin and Dr. Schneider each received
options to purchase 3,478 shares of Common Stock at an exercise price of $0.58
per share. In December 1994, Mr. Cramer received an option to purchase 10,434
shares of Common Stock at an exercise price of $0.86 per share. In May 1995,
Dr. Blutt, Mr. Halprin and Dr. Schneider each received options to purchase an
additional 3,478 shares of Common Stock at an exercise price of $0.86 per
share. In September 1995, Mr. Cramer received an option for 26,086 shares of
the Company's Common Stock at an exercise price of $1.44 per share. All such
options are fully vested. In January 1996, Dr. Blutt, Mr. Halprin, Mr. Cramer
and Dr. Schneider each received fully vested options to purchase 5,000 shares
of Common Stock at an exercise price of $9.34 per share under the Directors'
Plan. In May 1996, Mr. Dulude received a fully vested option to purchase
20,000 shares of Common Stock at an exercise price of $19.00 per share under
the Directors' Plan. The Company's Directors' Plan provides for formula-based
grants of options to non-employee directors which, subject to shareholder
approval, are fully vested on grant. See "--Stock Plans." In May 1996, Mr.
Dulude also received an option to purchase 4,000 shares of Common Stock at an
exercise price of $19.00 per share in connection with Mr. Dulude's consulting
agreement with the Company. Such option becomes exercisable at the rate of
1/24th of the shares subject to the option per month after the date of grant
and is subject to Mr. Dulude's continuous service as a consultant. See
"Certain Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, Mr. Steele was a member of the Compensation Committee, as well
as an employee of the Company, serving as Chief Executive Officer and
President of the Company.
46
EXECUTIVE COMPENSATION
The following table shows the compensation received in the fiscal year ended
October 31, 1995 by the Company's President and Chief Executive Officer and by
the Company's other four most highly compensated executive officers who earned
in excess of $100,000, (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------------ ---------------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- --------------------------- --------- -------- ---------------------
Gary T. Steele
Chief Executive Officer and
President............................ $219,423 $15,050 34,782
David D. Taft
Chief Operating Officer.............. 188,061 50 31,304
Ray F. Stewart
Vice President, Technology........... 129,000 50 13,913
Steven P. James
Vice President, General Manager
of Membrane Products................. 121,615 50 41,739
Joy T. Fry
Vice President, Finance and
Administration and Chief Financial
Officer.............................. 109,041 50 24,347
STOCK OPTION GRANTS
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers for the fiscal year ended October
31, 1995.
INDIVIDUAL GRANTS(1)
------------------------------------------- -------------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE EXPIRATION 10-YEAR OPTION TERM($)(2)
NAME GRANTED(#) FISCAL YEAR $/SHARE DATE 5% 10%
- ---- ---------- ------------ -------- ---------- -------------- ----------------
Gary T. Steele.......... 34,782 10% $1.44 9/11/05 $ 629,902 $ 1,032,330
David D. Taft........... 17,391 5 .86 2/13/05 325,038 526,252
13,913 4 1.44 9/11/05 251,964 412,938
Ray F. Stewart.......... 13,913 4 1.44 9/11/05 251,964 412,938
Steven P. James......... 13,913 4 .86 12/12/04 260,034 421,007
13,913 4 .86 4/26/05 260,034 421,007
13,913 4 1.44 9/11/05 251,964 412,938
Joy T. Fry.............. 6,956 2 .86 12/12/04 130,008 210,489
17,391 5 1.44 9/11/05 314,951 516,165
(1) Consist of stock options granted pursuant to the Company's 1988 Stock
Option Plan. Each option becomes exercisable at a rate of 25% at the end
of one year following the date of grant and approximately 2% per month
thereafter, as long as the optionee remains an employee with, consultant
to or director of the Company. The maximum term of each option granted is
ten years from the date of grant. The exercise price is equal to the fair
market value of the stock on the grant date as determined by the Board of
Directors.
(2) Assumes a value of $12.00 for each share of Common Stock (the Company's
initial public offering price) on the date of grant. Potential gains are
net of the exercise price but before taxes associated with
47
the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of the Company, overall
market conditions and the option holders' continued employment through the
vesting period. This table does not take into account any appreciation in
the price of the Common Stock from the date of grant to the date of this
Prospectus, other than the columns reflecting assumed rates of appreciation
of 5% and 10%.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers
certain information concerning options exercised during the fiscal year ended
October 31, 1995 and the number of shares subject to both exercisable and
unexercisable stock options as of October 31, 1995. Also reported are values
for "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding options and the assumed public
offering price for this offering.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 10/31/95(#) 10/31/95 ($)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Gary T. Steele ............. 248,188 47,463 $2,832,988 $508,564
David D. Taft............... 101,304 72,608 1,156,892 812,349
Ray F. Stewart.............. 4,058 16,811 45,206 179,205
Steven P. James............. 14,893 47,713 170,078 525,125
Joy T. Fry.................. 34,674 34,888 395,977 381,518
- --------
(1) Calculated by determining the difference between the Company's initial
public offering price of $12.00 for each share of Common Stock underlying
the option and the exercise price of the Named Executive Officer's option.
In determining the fair market value of the Common Stock, the Board of
Directors considered various factors including the Company's financial
condition and business prospects, its operating results, the absence of a
market for the Common Stock and the risks normally associated with high
technology companies.
STOCK PLANS
1988 Stock Option Plan
The Company's 1988 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors in May 1988 and approved by the shareholders in July 1988.
The total number of shares of Common Stock reserved for issuance under the
Option Plan is 1,574,161 shares. As of April 30, 1996, options to purchase a
total of 80,262 shares of Common Stock had been exercised, options to purchase
a total of 1,171,158 shares at a weighted average exercise price of $0.85 per
share were outstanding, and 322,741 shares remained available for future
option grants.
The purposes of the Option Plan are to attract the best available personnel
to the Company, to give employees, officers, directors and consultants of the
Company or its subsidiaries a greater personal stake in the success of the
business, and to provide such persons with added incentive to continue and
advance in their employment or service to the Company. The Option Plan
provides for the granting to employees (including officers and employee
directors) of "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and for the
granting to employees (including officers and employee directors) and
consultants of nonstatutory stock options. However, to the extent an optionee
has the right in any calendar year to exercise for the first time one or more
incentive stock options for shares having an aggregate fair market value
(under all plans of the Company and determined for each share as of the date
the option to purchase the share was granted) in excess of $100,000, any
option with a value in excess of such amount will be treated as a nonstatutory
stock option.
The Option Plan may be administered by the Board of Directors or a committee
of the Board (the "Administrator"). The Administrator determines the terms of
options granted under the Option Plan, including the number of shares subject
to an option, exercise price, term and exercisability. The exercise price of
all incentive stock options granted under the Option Plan must be at least
equal to the fair market value of the Common Stock of the Company on the date
of grant. The exercise price of all nonstatutory stock options must equal at
least 85% of the fair market value of the Common Stock on the date of grant.
The exercise price of any
48
stock option granted to an optionee who owns stock representing more than 10%
of the voting power of the Company's outstanding capital stock must equal at
least 110% of the fair market value of the Common Stock on the date of grant.
Payment of the exercise price may be made in cash, check, promissory notes,
Common Stock of the Company, or any combination of the foregoing or other
consideration determined by the Board.
The Board determines the term of options. The term of an incentive stock
option may not exceed 10 years from the date of grant. The term of a
nonstatutory stock option may not exceed 10 years and one day from the date of
grant. No option may be transferred by the optionee other than by will or the
laws of descent or distribution. Each option may be exercised during the
lifetime of the optionee only by such optionee. The Board determines when
options become exercisable. Options granted to each employee under the Option
Plan generally become exercisable in installments as to 14th of the total
number of shares subject to the options at the end of the first year from the
date of grant and 148th of the total number of shares subject to the options
for each month thereafter.
If the Company consolidates or merges with or into another corporation, then
each option shall be assumed or an equivalent option substituted by the
successor corporation unless the Board, in its discretion, decides to
accelerate the vesting of such option. The acceleration of vesting of options
in the event of a merger or other similar event may be seen as an anti-
takeover provision and may have the effect of discouraging a proposal for a
merger, takeover attempt or other effort to gain control of the Company. The
Board has the authority to amend or terminate the Option Plan as long as such
action does not adversely affect any outstanding option; however, certain
amendments require approval of the shareholders of the Company. If not
terminated earlier, the Option Plan will terminate in July 1998.
1995 Employee Stock Purchase Plan. The Company's 1995 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
December 1995 and approved by the shareholders in January 1996. A total of
300,000 shares of Common Stock has been reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section
423 of the Code, will be implemented by a series of offering periods of twelve
(12) months duration with new offering periods other than the first offering
period commencing on or about January 1 and July 1 of each year. Each offering
period will consist of two consecutive purchase periods of six months duration
with the last day of such period being designated a purchase date. The initial
offering period commenced on the effective date of the Company's initial
public offering (February 12, 1996) and continues through December 31, 1996,
with the first purchase date occurring on June 30, 1996, and subsequent
purchase dates to occur every six (6) months thereafter. The Purchase Plan may
be administered by the Board of Directors or by a committee appointed by the
Board. Employees (including officers and employee directors) of the Company,
or of any majority-owned subsidiary designated by the Board, are eligible to
participate if they are employed by the Company or any such subsidiary for at
least 20 hours per week and more than five months per year. The Purchase Plan
permits eligible employees to purchase Common Stock through payroll
deductions, 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. If the
fair market value of the Common Stock on a purchase date is less than the fair
market value at the beginning of the offering period, a new 12 month offering
period will automatically begin on the first business day following the
purchase date with a new fair market value. Employees may end their
participation in the offering at any time during the offering period, and an
employee's participation ends automatically upon termination of employment
with the Company. The Purchase Plan provides that in the event of a merger of
the Company with or into another corporation or a sale of substantially all of
the Company's assets, each right to purchase stock under the plan will be
assumed or an equivalent right substituted by the successor corporation,
unless the Board of Directors shortens the offering period so that an
employee's right to purchase stock under the plan will be exercised
automatically prior to the merger or sale of assets. The Board of Directors
has the power to amend or terminate the Purchase Plan as long as such action
does not adversely affect any outstanding rights to purchase stock thereunder.
If not terminated earlier, the Purchase Plan will have a term of ten years.
1995 Directors' Stock Option Plan. The 1995 Directors' Stock Option Plan
(the "Directors' Plan") was adopted by the Board of Directors in December 1995
and approved by the shareholders in January 1996. In June
49
1996, the Board of Directors adopted certain amendments to the Directors' Plan
to provide for full vesting on each option grant, which are subject to
approval by the shareholders. A total of 200,000 shares of Common Stock has
been reserved for issuance under the Directors' Plan. The Directors' Plan
provides for the grant of nonstatutory stock options to nonemployee directors
of the Company. As of April 30, 1996, options to purchase a total of 20,000
shares of Common Stock at a weighted average exercise price of $9.34 per share
were outstanding and 180,000 shares remain available for future option grants.
The Directors' Plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by
the Board of Directors. The Directors' Plan provides that each person who
becomes a nonemployee director of the Company as of the effective date of this
plan, who has not previously been granted an option under any stock option
plan of the Company, shall be granted a nonstatutory stock option to purchase
20,000 shares of Common Stock (the "First Option") 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 at which such non-employee
director is elected, each nonemployee director (including directors who were
not eligible for a First Option) shall be granted an additional option to
purchase 5,000 shares of Common Stock (a "Subsequent Option") 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 Directors' Plan
provides that the First Option and each Subsequent Option shall be fully
vested on grant. The exercise price of all stock options granted under the
Directors' Plan is equal to the fair market value of a share of the Company's
Common Stock on the date of grant of the option. Options granted under the
Directors' Plan have a term of ten years. In the event of certain corporate
transactions, including a merger of the Company in which the Company is not
the surviving corporation or a sale of substantially all of the Company's
assets, each nonemployee director shall have either (i) a reasonable time
within which to exercise the option, including any part of the option that
would not otherwise be exercisable, prior to the effectiveness of such
transaction, at the end of which time the option shall terminate or (ii) the
right to exercise the option, including any part of the option that would not
otherwise be exercisable or receive a substitute option with comparable terms,
as to an equivalent number of shares of stock of the corporation succeeding
the Company or acquiring its business by reason of such transaction. The Board
of Directors may amend or terminate the Directors' Plan; provided, however,
that no such action may adversely affect any outstanding option, and the
provisions regarding the grant of options under the plan may be amended only
once in any six-month period, other than to comport with changes in the
Employee Retirement Income Security Act of 1974, as amended or Code, or the
rules thereunder. If not terminated earlier, the Directors' Plan will have a
term of ten years.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. Such
limitation of liability has no effect on the availability of equitable
remedies, such as injunctive relief or rescission.
The Company's Bylaws include provisions whereby the directors, officers and
other agents of the Company are to be indemnified against certain liabilities
to the fullest extent permitted by the California Corporations Code. The
Company has entered into indemnification agreements with each of its current
directors and officers which provide for indemnification of, and advancement
of expenses to, such persons to the greatest extent permitted by the
California Corporations Code, including by reason of action or inaction
occurring in the past and circumstances in which indemnification and the
advancement of expenses are discretionary under California law. It is the
opinion of the staff of the Securities and Exchange Commission that
indemnification provisions such as those contained in these agreements have no
effect on a director's or officer's liability under the federal securities
laws.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of
any threatened litigation or proceeding which may result in a claim for such
indemnification. The Company has also obtained directors' and officers'
liability insurance.
50
CERTAIN TRANSACTIONS
In June 1993, shares of the Company's Series D Preferred Stock, which were
converted on a one-for-one basis into Common Stock upon the Company's initial
public offering in February 1996, were sold at a price of $3.9675 per share to
investors that included, among others, 5% shareholders, directors and entities
associated with directors: Biotechnology Investments Limited, 94,518 shares;
Chemical Venture Capital Associates, L.P., 1,329,552 shares; Domain Partners
II, L.P., 189,036 shares; EG&G Venture Partners, 192,664 shares; H&Q
Healthcare Investors, 210,040 shares; H&Q Life Sciences Investors, 105,020
shares; INVESCO Financial Strategic Portfolios, Inc. Health Services
Portfolio, 378,072 shares; OSCCO II, 50,409 shares; OSCCO III, L.P., 100,819
shares; U.S. Bancorp Capital Corporation, 12,602 shares.
In March 1995, H&Q Healthcare Investors and H&Q Life Sciences Investors
loaned an aggregate of $700,000 to the Company. The notes payable were
converted into 176,432 shares of Common Stock at $3.9675 per share upon the
Company's initial public offering in February 1996.
Holders of shares of Common Stock, which were issued upon conversion of
Preferred Stock upon the Company's initial public offering, and the holder of
a warrant exercisable for shares of Common Stock are entitled to certain
registration rights. See "Description of Capital Stock--Registration Rights of
Certain Holders."
In May 1996, the Company entered into a two-year consulting agreement with
Richard Dulude, a director of the Company, pursuant to which Mr. Dulude will
render consulting services to the Company and will receive $30,000 per year.
The agreement is terminable by either party on thirty days' written notice. In
addition, under such agreement, the Company granted Mr. Dulude an option to
purchase 4,000 shares of Common Stock at an exercise price of $19.00 per
share, which option is exercisable at the rate of 1/24th of the shares subject
to the option per month after the date of grant and is subject to Mr. Dulude's
continuous service as a consultant.
The Company has entered into an Indemnification Agreement with each of its
executive officers and directors.
For a description of compensation of officers and directors of the Company
and the eligibility of officers and directors of the Company to participate in
the Company's employee benefit plans, "Management--Director Compensation" and
"--Executive Compensation."
For a description of limitations of liability and certain indemnification
arrangements with respect to the Company's directors and officers, see
"Management--Limitation on Directors' Liabilities and Indemnification."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy requiring all
future transactions, including loans, between the Company and its officers,
directors, principal shareholders and affiliates to be approved by a majority
of the Board of Directors based on its determination that the terms of any
such transactions are no less favorable to the Company than could be obtained
from unaffiliated third parties.
51
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of April 30, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered here by (i) each
person who is known by the Company to be the beneficial owner of more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers, (iv) all directors and officers as a group and (v)
each of the Selling Shareholders.
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER TO OFFERING(1) NUMBER OF OFFERING(1)
- ------------------------------------ ----------------- SHARES BEING ----------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
--------- ------- ------------ ----------- ----------
Chase Capital Partners 1,341,508 12.57% 316,161 1,025,347 8.64%
(2)......................
380 Madison Avenue, 12th
Floor
New York, NY 10128
Domain Partners II, 805,907 7.55 0 805,907 6.79
L.P.(3)..................
One Palmer Square, Suite
515
Princeton, NJ 08542
EG&G Venture Partners..... 629,820 5.91 149,768 480,052 4.05
700 E. El Camino Road,
Suite 270
Mountain View, CA 94040
Raychem Ventures, Inc. 624,363 5.86 148,471 475,892 4.01
(4)......................
300 Constitution Drive
Menlo Park, CA 94025
OSCCO II (5).............. 600,340 5.62 139,915 460,425 3.88
One First Street, Suite
15
Los Altos, CA 94022
Shaw Venture Partners IV, 431,610 4.05 102,635 328,975 2.77
L.P. ....................
400 S.W. Sixth Avenue,
#1100
Portland, OR 97204
Aspen Ventures Partners, 361,542 3.39 85,973 275,569 2.32
L.P. ....................
1198 Jefferson Way
Laguna Beach, Ca. 92651
Ray F. Stewart, Ph.D...... 285,216 2.67 0 285,216 2.40
Gary T. Steele............ 251,086 2.30 0 251,086 2.07
David D. Taft, Ph.D....... 122,317 1.13 0 122,317 1.02
Steven P. James........... 43,506 * 0 43,506 *
Joy T. Fry................ 42,641 * 0 42,641 *
Mitchell J. Blutt, M.D. 1,341,508 12.57 316,161 1,025,347 8.64
(2)......................
Kirby L. Cramer........... 41,520 * 0 41,520 *
Richard Dulude 24,000 * 0 24,000 *
Stephen E. Halprin (5).... 600,340 5.62 139,915 460,425 3.88
Richard S. Schneider, 805,907 7.55 0 805,907 6.79
Ph.D. (6)................
All directors and
executive officers as a
group (11 persons)
(2)(3)(4)(5)(6)(7)....... 3,607,092 33.73 495,017 3,112,075 26.16
OTHER SELLING SHAREHOLDERS
York Life Insurance
Company.................. 252,048 2.36 59,936 192,112 1.62
Old Court Limited (8)..... 396,975 3.73 94,399 302,576 2.55
Oppenheimer & Co., Inc. .. 146,663 1.38 34,867 111,787 *
6 shareholders
beneficially owning less
than 1% of the Company's
Common Stock............. 285,401 2.68 67,866 217,535 1.83
52
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of April 30, 1996
are deemed outstanding. Such shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of each other
person. The persons named in this table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them, subject to community property laws where applicable and
except as indicated in the other footnotes to this table.
(2) Consists of 1,329,552 shares held by Chase Capital Partners and 11,956
shares issuable upon exercise of outstanding options exercisable by
Mitchell J. Blutt and Chase Venture Capital Associates, L.P. within 60
days of April 30, 1996. Dr. Blutt, the Executive Partner of Chase Capital
Partners, the general partner of Chase Venture Capital Associates, L.P.,
is a director of the Company. Dr. Blutt disclaims beneficial ownership of
shares held by Chase Capital Partners and Chase Venture Capital
Associates, L.P. except to the extent of his pecuniary interest in such
shares.
(3) Includes 3,478 shares issuable upon exercise of outstanding options
exercisable by Domain Associates within 60 days of April 30, 1996 and
8,478 shares issuable upon exercise of outstanding options exercisable by
Richard Schneider, a director of the Company and a general partner of the
general partner of Domain Partners II, L.P. and a general partner of
Domain Associates. Dr. Schneider disclaims beneficial ownership of shares
held by Domain Partners II, L.P. and Domain Associates except to the
extent of his pecuniary interest in such shares.
(4) Includes 36,613 shares held by Raychem International Manufacturing
Corporation.
(5) Consists of 487,565 shares held by OSCCO II, 100,819 shares held by OSCCO
III, L.P., 6,956 shares issuable upon exercise of outstanding options
exercisable by OSCCO III within 60 days of April 30, 1996 and 5,000 shares
issuable upon exercise of outstanding options exercisable by Stephen
Halprin. Mr. Halprin, a general partner of the general partner of OSCCO II
and OSCCO III, L.P., is a director of the Company. Mr. Halprin disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest in such shares.
(6) Consists of 805,907 shares held by Domain Partners II, L.P. and options
exercisable within 60 days of April 30, 1996 by Domain Associates and
Richard S. Schneider as set forth in Footnote 3 above. Dr. Schneider, a
director of the Company, is a general partner of the general partner of
Domain Partners II, L.P. and a general partner of Domain Associates. Dr.
Schneider disclaims beneficial ownership of shares held by Domain Partners
II, L.P. and Domain Associates except to the extent of his pecuniary
interest in such shares.
(7) Includes an aggregate of shares held by officers and directors which are
issuable upon exercise of options exercisable within 60 days of April 30,
1996.
(8) Consists of 302,457 shares held by Old Court Limited and 94,518 shares
held by Biotechnology Investments Limited, an affiliated investment fund.
53
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $.001 par value, of
which 11,862,028 shares will be outstanding as of April 30, 1996 (assuming no
exercise of the Underwriter's over-allotment), and 2,000,000 shares of
Preferred Stock, $.001 par value, none of which will be outstanding. At April
30, 1996, there were 10,662,028 shares of Common Stock outstanding held of
record by 115 holders. The following description of the capital stock of the
Company and certain provisions of the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation") and Bylaws is a summary and
is qualified in its entirety by the provisions of the Articles of
Incorporation and Bylaws, copies of which were filed as exhibits to the
Company's Registration Statement at the time of its initial public offering.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Shareholders have
the right to cumulate their votes in the election of directors. Subject to
preferences that may be applicable to any outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
for the payment of dividends. See "Dividend Policy." Holders of Common Stock
have no preemptive rights and no right to convert their Common Stock into any
other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are,
and all shares of Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to determine the
powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon any wholly unissued series of
undesignated Preferred Stock and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action
by the shareholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders and may adversely affect the voting and
other rights of the holders of Common Stock. At present, the Company has no
plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of approximately 5,621,078 shares of Common Stock (including
shares issuable upon exercise of a warrant on a net issuance basis at an
assumed public offering price of $20.25 per share and excluding the shares of
Common Stock offered by the Selling Shareholders hereby) (the "Registrable
Securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between the Company and the holders
of Registrable Securities. Subject to certain limitations in the agreement,
the holders of at least 50% of the Registrable Securities may require, on two
occasions at any time after six months from the effective date of this
offering, that the Company use its best efforts to register the Registrable
Securities for public resale. If the Company registers any of its Common Stock
either for its own account or for the account of other security holders, the
holders of Registrable Securities are entitled to include their shares of
Common Stock in the registration. A holder's right to include shares in an
underwritten registration is subject to the ability of the underwriters to
limit the number of shares included in the offering. Any holder of Registrable
Securities may also require the Company, on no more than two occasions over
any twelve-month period, to register all or a portion of their Registrable
Securities on Form S-3 when use of such form becomes available to the Company,
provided, among other limitations, that the proposed aggregate selling price,
net of underwriting discounts and commissions, is at least $3,000,000. All
fees, costs and expenses of such registrations, including those incurred with
respect to the first two registrations on Form S-3, must be borne by the
Company and all selling expenses (including underwriting discounts, selling
commissions and stock transfer taxes) relating to Registrable Securities must
be borne by the holders of the securities being registered.
54
CALIFORNIA ANTI-TAKEOVER EFFECTS
Certain provisions of law, and the Company's Articles of Incorporation and
Bylaws, could make more difficult the acquisition of the Company by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent
officers and directors. These provisions include: (i) authorization of the
issuance of up to 2,000,000 shares of Preferred Stock, with such
characteristics, and potential effects on the acquisition of the Company, as
are described in "Preferred Stock" above; (ii) elimination of cumulative
voting; and (iii) elimination of shareholder action by written consent. The
Company's Articles of Incorporation also provide that, for as long as the
Company has a class of stock registered pursuant to the Exchange Act,
shareholder action can be taken only at an annual or special meeting of
shareholders and may not be taken by written consent. In addition, upon
qualification of the Company as a "listed corporation," as defined in Section
301.5(d) of the California Corporations Code, cumulative voting will be
eliminated and the Board of Directors be divided into two classes of
directors, serving staggered two-year terms. The terms of the Class I and
Class II directors expire at the 1997 and 1998 annual meetings, respectively.
At each annual meeting, one class of directors will be elected for a two-year
term. See "Management." These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Company. The Company believes that the benefits of increased
protection of the Company's potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure the Company
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation. Its address is 1745 Gardena Avenue, Glendale, CA 91204, and its
telephone number is (818) 502-1404.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
11,862,028 shares of Common Stock, (assuming no exercise of the Underwriters'
over-allotment option or outstanding options after April 30, 1996). Of these
shares, 5,620,000 shares (including shares sold in this offering) will be
freely tradable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act. The remaining 6,242,028 shares
outstanding upon completion of this offering and held by the existing
shareholders will be "restricted securities" as that term is defined under
Rule 144 (the "Restricted Shares"). Sales of Restricted Shares in the public
market, or the availability of such shares for sale, could adversely affect
the market price of the Common Stock.
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. In
addition, the number of shares of Common Stock available for sale in the
public market is limited by lock-up agreements entered into in connection with
the Company's initial public offering (the "IPO Lockup") and additional lock-
up agreements entered into in connection with this offering (the "Additional
Lockup") under which certain holders of such shares have agreed not to sell or
otherwise dispose of any of their shares prior to August 15, 1996 and 90 days
after the date of this offering, respectively, without the prior written
consent of Smith Barney Inc. However, Smith Barney Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to such lock-up agreements. As a result of these
restrictions, based on shares outstanding and options granted as of April 30,
1996, the shares of Common Stock listed below will be eligible for future sale
in the public market.
In addition to the 2,400,000 shares sold in this offering and the 3,220,000
shares sold in the initial public offering, 36,074 shares of Common Stock held
by current shareholders and 21,578 shares of Common Stock issuable upon
exercise of currently outstanding options will be eligible for sale in the
public market on the date
55
of this offering without restriction pursuant to Rules 144 and 701 under the
Securities Act. Beginning on August 15, 1996, upon expiration of the IPO
Lockup, an additional 479,788 shares of Common Stock and 300,354 shares of
Common Stock issuable upon exercise of currently outstanding options will be
eligible for sale pursuant to Rules 144 and 701. Beginning 90 days after the
date of this Prospectus, upon expiration of the Additional Lockup, an
additional 5,360,011 shares of Common Stock and 608,251 shares of Common Stock
issuable upon exercise of currently outstanding options will be eligible for
sale pursuant to Rules 144 and 701. In connection with this offering all
directors and officers, the Selling Shareholders and certain other
shareholders of the Company, holding in the aggregate 5,726,166 shares of
Common Stock outstanding prior to this offering, have entered into the
Additional Lockup and agreed with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock for a period of 90 days after the date
of this Prospectus without the prior written consent of Smith Barney Inc.
Upon completion of this offering, the holders of 5,621,078 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect
to the registration of such shares under the Securities Act. See "Description
of Capital Stock-Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least two years would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the number
of shares of Common Stock then outstanding or the average weekly trading
volume of the Common Stock as reported through the Nasdaq National Market
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an "affiliate" of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned for at least three years the shares
proposed to be sold, would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above.
Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Exchange Act, in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirements, contained in Rule 144. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Exchange Act, along with the shares acquired upon exercise of such
options (including exercises after the date of this Prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this Prospectus, may be sold by persons other than Affiliates subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its two-year minimum holding period requirements.
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or enter into any swap or similar agreement that transfers,
in whole or in part, the economic risk of ownership of the Common Stock, prior
to August 15, 1996, without the prior written consent of Smith Barney, Inc.,
subject to certain limited exceptions.
In June 1996, the Company filed a registration statement under the
Securities Act covering approximately 1,996,000 shares of Common Stock subject
to outstanding options or reserved for issuance under the Company's stock
plans. Accordingly, shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates and the
lapsing of the Company's repurchase options, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
56
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Shareholders have agreed
to sell to such Underwriter, shares of Common Stock which equal the number of
shares set forth opposite the name of such Underwriter below.
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
Smith Barney Inc......................................................
Lehman Brothers Inc...................................................
Montgomery Securities.................................................
---------
Total............................................................... 2,400,000
=========
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. ("Smith Barney"), Lehman
Brothers Inc. ("Lehman") and Montgomery Securities ("Montgomery") are acting
as Representatives, propose initially to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to other Underwriters or to certain other dealers.
The Company has granted to the Underwriters an option exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
360,000 additional shares of Common Stock at the public offering price set
forth on the cover page hereof less underwriting discounts and commissions.
The Underwriters may exercise such option to purchase additional shares solely
for the purpose of covering over-allotments, if any, incurred in connection
with the sale of the shares offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares in such table.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company and its directors, officers, the Selling Shareholders and
certain other stockholders, holding in the aggregate 5,726,166 shares of
Common Stock outstanding prior to this offering, have agreed that, for a
period of 90 days after the date of this Prospectus, they will not, without
the prior written consent of Smith Barney, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for any shares of Common Stock except, in
the case of the Company, in certain limited circumstances.
57
The Underwriters and certain selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in
the Common Stock in accordance with Rule 10b-6A under the Exchange Act. Rule
10b-6A permits, upon the satisfaction of certain conditions, underwriters and
selling group members participating in a distribution that are also market
makers in the security being distributed to engage in limited market making
transactions during the period when Rule 10b-6 under the Exchange Act would
otherwise prohibit such activity. In general, under Rule 10b-6A, any
Underwriter or selling group member engaged in passive market making in the
Common Stock (i) may not effect transactions in, or display bids for, the
Common Stock at a price that exceeds the highest bid for the Common Stock
displayed by a market maker that is not participating in the distribution of
the Common Stock, (ii) may not have net daily purchases of the Common Stock
that exceeds 30% of its average daily trading volume in such stock for the two
full consecutive calendar months immediately preceding the filing date of the
registration statement of which this Prospectus forms a part and (iii) must
identify its bids as bids made by a passive market maker.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by its counsel, Venture Law Group, A Professional Corporation, 2800
Sand Hill Road, Menlo Park, California 94025. Certain legal matters will be
passed upon for the Underwriters by Dewey Ballantine, 1301 Avenue of the
Americas, New York, New York 10019. As of the date of this Prospectus, members
of Venture Law Group, including Tae Hea Nahm, the Company's Secretary,
beneficially own 5,771 shares of the Common Stock and options to purchase
3,478 shares.
EXPERTS
The audited consolidated financial statements and schedule of the Company
for each of the three years in the period ended October 31, 1995, included in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Statements relating to patent matters in this Prospectus under the captions
"Risk Factors--Patents and Proprietary Rights" and "Business" have been
reviewed and approved by Sheldon & Mak, patent counsel to the Company, and
have been included herein in reliance upon the review and approval by such
firm as experts in patent law.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information can be inspected and
copied at the public reference facilities of the Commission located at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1204,
Washington, D.C. 20549, and at the regional offices of the Commission located
at Seven World Trade Center, 13th Floor, New York, New York, 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois, 60661. Copies of all or
any part of such materials may be obtained from the Public Reference Section
of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the prescribed fees. The Company's
Common Stock is listed on the Nasdaq Stock Market's National Market, and
material filed by the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
58
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the Company and the Common Stock offered hereby. The Registration Statement,
including exhibits and schedules filed therewith, may be inspected without
charge at the offices of the Commission, or obtained at prescribed rates from
the public reference facilities maintained by the Commission at the addresses
set forth above.
59
LANDEC CORPORATION
INDEX
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Audited Consolidated Financial Statements..................................
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred
Stock and Shareholders' Equity (Net Capital Deficiency)................... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
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, 1994 and 1995, 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, 1995. Our audits also included
the financial schedule listed in the Index at Item 16(b). 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, 1994 and 1995 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1995 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,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
December 1, 1995
F-2
LANDEC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OCTOBER 31,
------------------ APRIL 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................... $ 2,411 $ 3,585 $ 20,181
Short-term investments...................... 3,295 1,964 19,025
Accounts receivable, less allowance for
doubtful accounts of $18, $32 and $32 at
October 31, 1994 and 1995 and April 30,
1996 (unaudited), respectively............. 185 53 63
Inventory................................... 200 488 508
Prepaid expenses and other current assets... 99 115 237
-------- -------- --------
Total current assets...................... 6,190 6,205 40,014
Property and equipment, net................. 1,209 993 987
Other assets................................ 122 149 123
-------- -------- --------
$7,521 $ 7,347 $ 41,124
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Convertible notes payable................... $ -- $ 700 $ --
Accounts payable............................ 344 291 298
Accrued compensation........................ 209 302 326
Other accrued liabilities................... 192 281 423
Current portion of capital lease
obligations................................ 165 239 213
Deferred revenue............................ -- 129 304
-------- -------- --------
Total current liabilities................. 910 1,942 1,564
Noncurrent portion of capital lease
obligations.................................. 539 558 448
Commitments
Redeemable convertible preferred stock at
accreted value; 6,484,692 and 6,674,415
shares issued and outstanding at October 31,
1994 and 1995, respectively (none at April
30, 1996 (unaudited)); aggregate liquidation
preference of $32,299 at October 31, 1995.... 27,656 31,276 --
Shareholders' equity (net capital deficiency):
Preferred stock, $.001 par value; 2,000,000
shares authorized, issuable in series; all
series designated represent redeemable
convertible preferred stock shown above -- -- --
Common stock, $.001 par value; 50,000,000
shares authorized; 539,884, 547,678 and
10,662,028 (unaudited) shares outstanding at
October 31, 1994 and 1995 and April 30, 1996,
respectively................................. 97 536 68,147
Notes receivable from shareholders............ (23) (20) (12)
Deferred compensation......................... -- (407) (368)
Accumulated deficit........................... (21,658) (26,538) (28,655)
-------- -------- --------
Total shareholders' equity (net capital
deficiency).................................. (21,584) (26,429) 39,112
-------- -------- --------
$ 7,521 $ 7,347 $ 41,124
======== ======== ========
See accompanying notes.
F-3
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30,
------------------------- ----------------------------
1993 1994 1995 1995 1996
------- ------- ------- ------------- -------------
(UNAUDITED)
Revenues:
Product sales......... $ -- $ 335 $ 601 $ 441 $ 412
License fees.......... 350 400 2,650 650 600
Research and
development revenues. 821 965 796 389 682
------- ------- ------- ------------- -------------
Total revenues...... 1,171 1,700 4,047 1,480 1,694
Operating costs and
expenses:
Cost of product sales. -- 897 987 652 539
Research and
development.......... 3,740 3,283 3,715 1,776 1,898
Selling, general and
administrative....... 1,598 2,067 2,236 1,045 1,224
------- ------- ------- ------------- -------------
Total operating
costs and expenses. 5,338 6,247 6,938 3,473 3,661
------- ------- ------- ------------- -------------
Operating loss.......... (4,167) (4,547) (2,891) (1,993) (1,967)
Interest income......... 154 273 282 133 506
Interest expense........ (103) (81) (150) (63) (54)
------- ------- ------- ------------- -------------
Net loss................ $(4,116) $(4,355) $(2,759) $ (1,923) $ (1,515)
======= ======= ======= ============= =============
Supplemental net loss
per share.............. $ (0.38) $ (0.27) $ (0.17)
======= ============= =============
Shares used in
computation of
supplemental net loss
per share.............. 7,175 7,060 8,709
======= ============= =============
See accompanying notes.
F-4
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
------------------------------------------------------------------
REDEEMABLE NOTES TOTAL
CONVERTIBLE RECEIVABLE SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK FROM SALE OF DEFERRED ACCUMU- EQUITY (NET
------------------- ------------------- COMMON COMPEN- LATED CAPITAL
SHARES AMOUNT SHARES AMOUNT STOCK SATION DEFICIT DEFICIENCY)
---------- ------- ---------- ------- ------------ -------- -------- -------------
Balances at October 31,
1992 ................... 3,138,764 $11,882 516,798 $ 79 $(41) $ -- $ (9,804) $ (9,766)
Issuance of Series D
redeemable convertible
preferred stock for cash
at $3.97 per share (net
of issuance costs of
$883)................... 3,345,928 12,392 -- -- -- -- -- --
Accretion of redemption
price differential on
redeemable convertible
preferred stock......... -- 1,293 -- -- -- -- (1,293) (1,293)
Issuance of warrant to
purchase common stock... -- -- -- 5 -- -- -- 5
Return of common stock
and cancellation and
repayment of notes
receivable.............. -- -- (978) (1) 9 -- -- 8
Issuance of common stock
at $0.58 per share...... -- -- 5,797 3 -- -- -- 3
Net loss................ -- -- -- -- -- -- (4,116) (4,116)
---------- ------- ---------- ------- ---- ----- -------- --------
Balances at October 31,
1993.................... 6,484,692 25,567 521,617 86 (32) -- (15,213) (15,159)
Return of common stock
and cancellation and
repayment of notes
receivable.............. -- -- (2,433) (1) 9 -- -- 8
Issuance of common stock
at $0.58 per share...... -- -- 20,700 12 -- -- -- 12
Accretion of redemption
price differential on
redeemable convertible
preferred stock......... -- 2,089 -- -- -- -- (2,090) (2,090)
Net loss................ -- -- -- -- -- -- (4,355) (4,355)
---------- ------- ---------- ------- ---- ----- -------- --------
Balances at October 31,
1994.................... 6,484,692 27,656 539,884 97 (23) -- (21,658) (21,584)
Issuance of Series E
redeemable convertible
preferred stock for cash
at $7.91 per share...... 189,723 1,500 -- -- -- -- -- --
Issuance of common stock
at $0.58 to $0.86 per
share................... -- -- 7,968 5 -- -- -- 5
Return of common stock
and cancellation and
repayment of notes
receivable.............. -- -- (174) -- 3 -- -- 3
Accretion of redemption
price differential on
redeemable convertible
preferred stock......... -- 2,120 -- -- -- -- (2,120) (2,120)
Deferred compensation
related to grant of
stock options........... -- -- -- 434 -- (434) -- --
Amortization of deferred
compensation............ -- -- -- -- -- 27 -- 27
Unrealized loss on
available-for-sale
securities.............. -- -- -- -- -- -- (1) (1)
Net loss................ -- -- -- -- -- -- (2,759) (2,759)
---------- ------- ---------- ------- ---- ----- -------- --------
Balances 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
expenses (unaudited).... -- -- 3,220,000 35,035 -- -- -- 35,035
Accretion of redemption
price differential on
redeemable convertible
preferred stock
(unaudited)............. -- 556 -- -- -- -- (556) (556)
Conversion of Series B,
C, D and E redeemable
convertible preferred
stock (unaudited)....... (6,674,415) (31,832) 6,674,415 31,832 -- -- -- 31,832
Conversion of
convertible notes
payable (unaudited)..... -- -- 176,432 700 -- -- -- 700
Issuance of common stock
at $0.58 to $0.86 per
share (unaudited)....... -- -- 43,503 27 -- -- -- 27
Repayment of notes
receivable (unaudited).. -- -- -- -- 8 -- 8
Deferred compensation
related to grant of
stock options........... -- -- -- 17 -- (17) -- --
Amortization of deferred
compensation
(unaudited)............. -- -- -- -- -- 56 -- 56
Unrealized loss on
available-for-sale
securities (unaudited).. -- -- -- -- -- -- (46) (46)
Net loss (unaudited).... -- -- -- -- -- -- (1,515) (1,515)
---------- ------- ---------- ------- ---- ----- -------- --------
Balance at April 30,
1996 (unaudited)........ -- $ -- 10,662,028 $68,147 $(12) $(368) $(28,655) $ 39,112
========== ======= ========== ======= ==== ===== ======== ========
See accompanying notes.
F-5
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
SIX MONTHS
YEAR ENDED OCTOBER 31, ENDED APRIL 30,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
Cash flows from operating
activities:
Net loss......................... $(4,116) $(4,355) $(2,759) $(1,923) $(1,515)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 363 362 378 195 195
Loss on disposal of fixed
assets......................... -- 17 25 24 --
Amortization of deferred
compensation................... -- -- 27 -- 56
Changes in assets and
liabilities:
Accounts receivable........... (79) 2 132 69 (10)
Inventory..................... -- (200) (288) (206) (20)
Prepaid expenses and other
current assets............... (227) 155 (16) 27 (122)
Accounts payable.............. 173 25 (53) (74) 7
Accrued compensation.......... 26 55 93 (1) 24
Other accrued liabilities..... 49 49 89 86 142
Deferred revenue.............. (50) -- 129 131 175
------- ------- ------- ------- -------
Total adjustments........... 255 465 516 251 447
------- ------- ------- ------- -------
Net cash used in operating
activities...................... (3,861) (3,890) (2,243) (1,672) (1,068)
------- ------- ------- ------- -------
Cash flows from investing
activities:
Purchases of property and
equipment....................... (632) (84) (48) (25) (189)
Decrease (increase) in other
assets.......................... 18 (70) (28) (12) 26
Purchases of available-for-sale
securities...................... -- (8,188) (6,470) (3,960) (20,108)
Maturities of available-for-sale
securities...................... 1,300 4,893 7,800 5,300 3,000
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities............ 686 (3,449) 1,254 1,303 (17,271)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Proceeds from sale of common
stock, net of repurchases....... 3 10 5 3 35,062
Proceeds from sale of warrant.... 5 -- -- -- --
Proceeds from sale of preferred
stock........................... 12,392 -- 1,500 -- --
Proceeds from repayment of notes
receivable...................... 8 9 3 2 9
Payments on capital lease
obligations..................... (136) (223) (183) (86) (136)
Proceeds from issuance of
convertible notes payable....... -- -- 700 700 --
Proceeds from capital lease
financing of prior year capital
expenditures.................... -- 182 138 138 --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities............ 12,272 (22) 2,163 757 34,935
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents............ 9,097 (7,361) 1,174 388 16,596
Cash and cash equivalents at
beginning of period............. 675 9,772 2,411 2,411 3,585
------- ------- ------- ------- -------
Cash and cash equivalents at end
of period....................... $ 9,772 $ 2,411 $ 3,585 $ 2,799 $20,181
======= ======= ======= ======= =======
Supplemental disclosure of cash
flows information:
Cash paid during the period for
interest........................ $ 104 $ 94 $ 108 $ 56 $ 54
======= ======= ======= ======= =======
Supplemental schedule of noncash
investing and financing
activities:
Equipment acquired under capital
leases.......................... $ 112 $ 516 $ 154 $ 0 $ 0
======= ======= ======= ======= =======
See accompanying notes.
F-6
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Landec Corporation (the "Company") was incorporated in the State of
California on October 31, 1986 for the purpose of designing, developing,
manufacturing and selling temperature-activated polymer and membrane products
for a variety of industrial, medical and agricultural applications.
The consolidated financial statements comprise the accounts of Landec
Corporation and its wholly owned subsidiary, Intellicoat, which was
incorporated in March 1995. There were no significant intercompany
transactions or balances to be eliminated at October 31, 1995 or April 30,
1996.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial information at April 30, 1996 and for the
six-month periods ended April 30, 1995 and 1996 have not been audited but, in
the opinion of the management of the Company, includes all adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the Company's financial position at such
date and the operating results and cash flows for those periods. The results
of operations for the six-month period ended April 30, 1996 are not
necessarily indicative of the results to be expected for any subsequent period
or the full year.
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.
Upon completion of the initial public offering all 6,674,415 outstanding
shares of redeemable convertible preferred stock and $700,000 of notes payable
were automatically converted into 6,674,415 and 176,432 shares of common stock
respectively.
In March 1996, the underwriters exercised their overallotment option to
purchase 420,000 shares of common stock for $12.00 per share. The Company
received an additional $4.7 million in offering proceeds, after deducting
underwriting discounts, commissions and expenses.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Effective November 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities," the cumulative effect of which was immaterial
to the Company's accumulated deficit.
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, 1995 and April 30, 1996, 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. The Company records all highly liquid securities with three
months or less from date of purchase to maturity as cash equivalents. All
other available-for-sale securities are recorded as short-term investments.
Unrealized gains and losses are reported in shareholders' equity. The cost of
debt securities is adjusted for amortization of premiums and discounts to
F-7
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
maturity. This amortization is included in interest income. Realized gains and
losses on available-for-sale securities are included in interest income. The
cost of securities sold is based on the specific identification method.
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. As of October 31, 1994 and 1995 and April 30, 1996, inventories
consisted of (in thousands):
OCTOBER
31, APRI 30,
--------- --------
1994 1995 1996
---- ---- --------
Raw materials ............................................ $122 $169 $119
Work in process........................................... 62 208 210
Finished goods............................................ 16 111 179
---- ---- ----
$200 $488 $508
==== ==== ====
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares (stock options,
convertible notes payable and preferred stock) issued during the 12-month
period prior to the initial filing of the proposed offering at prices below
the assumed public offering price have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method for stock options).
Historical net loss per share information is as follows (in thousands,
except per share data):
SIX MONTHS
YEAR ENDED OCTOBER ENDED APRIL
31, 30,
---------------------- --------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
Net loss per share .................... $(3.55) $(3.75) $(2.33) $(1.63) $(0.32)
Shares used in computing net loss per
share................................. 1,159 1,162 1,182 1,181 4,713
Supplemental per share data is provided to show the calculation on a
consistent basis for the periods presented. It has been computed as described
above, but excludes the antidilutive effect of common equivalent shares from
stock options and warrants issued at prices substantially below the public
offering price during the 12-month period prior to the initial filing of the
public offering, and also gives retroactive effect from the date of issuance
to the conversion of preferred stock and promissory notes which automatically
converted to common shares upon the closing of the Company's initial public
offering.
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,
F-8
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
nonrefundable terms and no significant future obligations are recognized upon
inception of the agreements. Product sales are recognized upon shipment.
Revenues from customers representing 10% or more of total revenue during
fiscal 1993, 1994, 1995, and the six months ended April 30, 1996 are as
follows:
SIX-MONTHS ENDED
1993 1994 1995 APRIL 30, 1996
---- ---- ---- ----------------
Customer:
A 0% 15% 53% 15%
B 13% 21% 18% 11%
C 0% 0% 11% 42%
D 23% 6% 9% 2%
E 13% 12% 2% 0%
F 0% 12% 2% 3%
G 11% 14% 0% 0%
H 22% 5% 0% 0%
I 13% 0% 0% 0%
J 0% 0% 0% 14%
Export sales were approximately $79,000 for the six months ended April 30,
1996 and $143,000 and $378,000 in the years ended October 31, 1994 and 1995,
respectively (none in 1993).
RESEARCH AND DEVELOPMENT EXPENSES
Costs related to both research contracts and Company-funded research are
included in research and development expenses. Research and development costs
approximated the associated revenues for the three years ended October 31,
1995 and the six months ended April 30, 1996.
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful lives of three to
five years. 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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified in the balance sheet to
conform with current year presentation.
2. 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 latent curing.
On October 1, 1994, the Company entered into a non-exclusive
F-9
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
license agreement 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 latent curing area. The agreement provides Hitachi
Chemical with an exclusive license to use and sell Landec's catalyst systems
in industrial latent curing products in certain Asian countries. 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 is entitled to receive
research and development funding over three years and future royalties based
on net sales by Hitachi Chemical of the licensed products. Any fees paid to
the Company are non-refundable. This agreement is terminable at Hitachi
Chemical's option. In conjunction with this agreement, Hitachi Chemical
purchased 189,723 shares of Series E Preferred Stock for $1.5 million which
were converted to 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 Landec's catalyst systems in industrial latent curing
products. Landec is entitled to be the exclusive supplier of Intelimer
catalyst systems to BFGoodrich for at least seven years. Landec received an
up-front license payment upon signing and additional license fees upon
achieving certain 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 1996. The Company is also
entitled to receive future royalties based on net sales by BFGoodrich of the
licensed products. Any fees paid to the Company are non-refundable. This
agreement is terminable at BFGoodrich's option.
Nitta. On March 14, 1995, the Company entered into a license agreement with
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. In March 1996, this agreement was expanded to provide Nitta
an exclusive license in the medical adhesives area in Asia. The Company
received an upfront license fee and is entitled to future royalties on Nitta's
net sales.
The Company has also entered into several other collaborative arrangements,
principally to support research and development for its breathable membrane
and opthalmic product as well as other technologies being pursued by the
Company. Under the terms of these agreements, the Company generally receives
research and development funding and rights to future royalties from product
sales, in exchange for granting certain technology or marketing rights to an
eventual product.
F-10
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities (in thousands):
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
OCTOBER 31, 1995
----------------
U.S. government and agency
obligations ........................ $ 4,959 $-- $ (1) $ 4,958
======= ==== ==== =======
Amounts included in:
Cash equivalents..................... $ 2,994 $-- $ -- $ 2,994
Short-term investments............... 1,965 (1) 1,964
------- ---- ---- -------
Total securities..................... $ 4,959 $-- $ (1) $ 4,958
======= ==== ==== =======
APRIL 30, 1996 (UNAUDITED)
--------------------------
U.S. government and agency
obligations ........................ $19,212 $-- $(20) $19,192
Corporate debt securities............ 17,319 (26) 17,293
------- ---- ---- -------
Total securities..................... $36,531 $-- $(46) $36,485
======= ==== ==== =======
Amounts included in:
Cash equivalents..................... $17,460 $-- $ -- $17,460
Short-term investments............... 19,071 (46) 19,025
------- ---- ---- -------
Total securities..................... $36,531 $-- $(46) $36,485
======= ==== ==== =======
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
OCTOBER 31,
--------------- APRIL 30,
1994 1995 1996
------- ------ -----------
(UNAUDITED)
Laboratory and manufacturing equipment............. $ 1,421 $1,530 $1,637
Computer equipment................................. 223 261 290
Furniture and fixtures............................. 134 134 158
Leasehold improvements............................. 985 986 986
------- ------ ------
2,763 2,911 3,071
Less accumulated depreciation and amortization..... (1,554) (1,918) (2,084)
------- ------ ------
$ 1,209 $ 993 $ 987
======= ====== ======
Property and equipment includes approximately $1,275,000, $1,551,000 and
$974,000 recorded under capital leases at October 31, 1994 and 1995 and April
30, 1996, respectively. Accumulated amortization related to leased assets
total approximately $661,000, $832,000 and $420,000 at October 31, 1994 and
1995 and April 30, 1996, respectively.
F-11
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS
The following table describes information with respect to the various series
of redeemable convertible preferred stock ("Preferred Stock") outstanding as
of October 31, 1995:
ISSUANCE LIQUIDATION
SHARES PRICE PREFERENCE
SHARES ISSUED AND PER (INCLUDING
AUTHORIZED OUTSTANDING SHARE ACCRETION)
---------- ----------- -------- -----------
Series B ........................... 756,027 754,278 $2.73 $ 3,497,578
Series B-a.......................... 756,027 -- -- --
Series C............................ 2,469,565 2,384,486 $3.31 11,208,654
Series C-a.......................... 2,469,565 -- -- --
Series D............................ 3,478,260 3,345,928 $3.97 16,062,764
Series E............................ 1,739,130 189,723 $7.91 1,530,122
Undesignated series................. 18,382 -- -- --
---------- --------- -----------
11,686,956 6,674,415 $32,299,118
========== ========= ===========
During fiscal 1988, the Series A preferred stock was converted into Series B
preferred stock.
The holders of the Series B, C, D and E preferred stock are entitled to
receive noncumulative dividends, when and if declared by the Board of
Directors, out of legally available assets at a rate of 9% of the issuance
price, or $0.247, $0.299, $0.357 and $0.713 per share, respectively, per
annum. No dividends have been declared or paid by the Company.
Each share of Preferred Stock may be converted at the option of the holder
into one share of common stock, subject to adjustments for dilution. The
Preferred Stock will be automatically converted into common stock upon
consummation of an underwritten public offering. The holders of Preferred
Stock are entitled to one vote for each share of common stock into which the
Preferred Stock is convertible.
The Series B, C, D and E preferred shareholders have liquidation preferences
equal to the sum of the initial issuance price ($2.73, $3.31, $3.97 and $7.91,
respectively), plus all dividends declared and unpaid. In addition, subject to
distributions to active contributors to the Company, as determined by the
Compensation Committee of the Board of Directors, Series B, C, D and E
preferred shareholders have liquidation preferences accreted at 9% of the
initial issuance price per annum (calculated on a monthly basis) since the
date of issuance of each series. After payment of these liquidation
preferences, the remaining assets will be distributed to the holders of the
common stock and the Preferred Stock on an as-converted basis.
The outstanding Series B and C preferred shares will convert automatically
into Series B-a and C-a preferred shares, respectively, in the event the
holders decline to participate in a new equity financing made at a lesser
price per share. Other than the elimination of antidilution rights, the Series
B-a and C-a shares will have rights identical to the converted Series B and C
shares.
At any time after July 26, 2002, upon the election of at least a majority of
the outstanding shares of Preferred Stock, the Company will be required to
redeem, at the sum of the initial issuance price ($2.73, $3.31, $3.97 and
$7.91, respectively), plus accretion at 9% of the initial issuance price per
annum (calculated on a monthly basis) since the date of issuance of each
series, plus any accrued and unpaid dividends. The difference between the
issuance price and the redemption price is being accreted at the annual rate
of 9% for each series of
F-12
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
Preferred Stock. As of October 31, 1995, the Company had accreted $1,437,429,
$3,324,896, $2,787,752 and $30,121 of the redemption differential for Series
B, C, D and E, respectively.
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. The warrants expire five
years from the date of issuance. No warrants have been exercised as of April
30, 1996.
In connection with the Company's initial public offering, the 6,674,415
outstanding shares of redeemable convertible preferred stock were converted
into 6,674,415 shares of common stock (see Note 1).
6. SHAREHOLDERS' EQUITY
COMMON STOCK, STOCK PURCHASE PLAN AND STOCK OPTION PLAN
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
has 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 offering. The Board also
approved the adoption of the 1995 Employee Stock Purchase Plan and the 1995
Directors' Stock Option Plan, which authorizes the issuance of 300,000 and
200,000 shares, respectively, under the plans. On January 26, 1996,
shareholder approval was obtained for the above actions. The Articles of
Incorporation have been filed with and approved by the California Secretary of
State.
The Company has a Stock Purchase Plan for issuance of common stock to
employees and consultants. The price of the shares to be purchased and the
terms of payment are determined by the Company's Board of Directors, provided
that such price cannot be less than the fair market value on the date of the
grant. Shares purchased under the plan vest over a period of four years; the
Company may repurchase any unvested shares in the event of termination of
employment. In addition, vested shares are subject to a right of first refusal
by the Company in the event the holder offers those shares for sale to a third
party prior to the establishment of a public market for the Company's shares.
As of April 30, 1996, 143,965 shares of common stock had been purchased under
the plan at prices ranging from $0.29 to $0.58 per share, of which no shares
were subject to repurchase. The Plan was terminated in December 1995.
The Company has established a Stock Option Plan under which the Board of
Directors may grant incentive stock options or nonqualified stock options to
its employees and outside consultants. As of April 30, 1996, the Company had
reserved 1,574,161 shares of common stock for future 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.
F-13
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Activity under all Stock Option Plans is as follows:
OUTSTANDING OPTIONS
-----------------------
OPTIONS AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
----------------- --------- ------------
Balance at October 31, 1992 ......... 33,051 444,654 $ 0.58
Additional shares reserved......... 398,510 -- --
Options granted.................... (281,372) 281,372 $ 0.58
Options exercised.................. -- (5,797) $ 0.58
Options canceled................... 14,218 (14,218) $ 0.58
-------- --------- ------------
Balance at October 31, 1993.......... 164,407 706,011 $ 0.58
Additional shares reserved......... 347,826 -- --
Options granted.................... (188,145) 188,145 $0.58-$ 0.86
Options exercised.................. -- (20,700) $ 0.58
Options canceled................... 50,448 (50,448) $0.58-$ 0.86
-------- --------- ------------
Balance at October 31, 1994.......... 374,536 823,008 $0.58-$ 0.86
Additional shares reserved......... 347,826 -- --
Options granted.................... (410,570) 410,570 $0.86-$ 1.44
Options exercised.................. -- (7,968) $0.58-$ 0.86
Options canceled................... 13,691 (13,691) $0.58-$ 0.86
-------- --------- ------------
Balance at October 31, 1995.......... 325,483 1,211,919 $0.58-$ 1.44
Additional shares reserved
(unaudited)....................... 200,000 -- --
Options granted (unaudited)........ (29,834) 29,834 $3.59-$17.75
Options exercised (unaudited)...... -- (43,503) $0.58-$ 0.86
Options canceled (unaudited)....... 7,092 (7,092) $0.58-$ 1.44
-------- --------- ------------
Balance at April 30, 1996
(unaudited)......................... 502,741 1,191,158 $0.58-$17.75
======== ========= ============
At October 31, 1995 and April 30, 1996, options to purchase 602,991 and
670,496 common shares were vested, respectively. No options have been
exercised prior to being vested.
For options granted through April 30, 1996, the Company recognized an
aggregate of $451,100 as deferred compensation for the excess of the deemed
value for accounting purposes of the common stock issuable 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.
7. NOTES PAYABLE
In March 1995, the Company issued notes payable to two current investors for
$700,000. The notes and accrued interest are payable upon demand of the
holder, and in no event later than three years from the date of issuance. The
notes bear interest at a rate of 10% per annum. The notes and accrued interest
automatically convert into preferred stock of the Company should a preferred
stock financing, excluding sales of equity to a corporate partner or existing
investors, be completed during the period in which these notes are
outstanding. Upon the reorganization of the Company or upon the completion of
an initial public offering of the Company's equity, the principal value of the
notes will convert into common stock at $3.97 per share and any accrued
interest will be forgiven.
In connection with the Company's initial public offering the notes payable
were converted into 176,432 shares of common stock (see Note 1).
F-14
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED.)
8. INCOME TAXES
As of October 31, 1995, the Company had net operating loss carryforwards of
approximately $15,600,000 for federal income tax purposes. The net operating
loss carryforwards will expire at various dates beginning in 2001 through
2010, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986.
Significant components of the Company's deferred tax assets are as follows:
YEARS ENDED
OCTOBER 31,
----------------
1994 1995
------- -------
(IN THOUSANDS)
Deferred tax assets:
Capitalized research costs.................................. $ 4,900 $ 5,500
Net operating loss carryforwards............................ 700 800
Research credit carryforwards............................... 200 1,400
Other....................................................... 700 --
Total deferred tax assets..................................... 6,500 7,700
------- -------
Valuation allowance........................................... (6,500) (7,700)
------- -------
Net deferred tax assets....................................... $ -- $ --
======= =======
The valuation allowance increased by $1,400,000 during the year ended
October 31, 1994.
9. COMMITMENTS
LEASES
The Company leases office and laboratory space and certain equipment. Rent
expense for the years ended October 31, 1993, 1994 and 1995 was approximately
$274,000, $328,000 and $349,000, respectively.
During 1994, the Company arranged for a lease line of credit of $2,000,000
to purchase capital assets. The lease term under this line of credit is 48
months. The interest rate on these leases is based on a lease rate factor and
approximates 15% per annum. Amounts outstanding under the capital leases are
collateralized by the underlying property and equipment. The Company had
$1,026,438 available under the line at October 31, 1995. Future minimum lease
obligations as of October 31, 1995 under all leases are as follows (in
thousands):
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
1996 $338 $335
1997 294 343
1998 269 59
1999 93
---- ----
Total minimum lease payments.................... 994 $737
====
Less amount representing interest............... (197)
----
Present value of future lease payments.......... 797
Less current portion............................ (239)
----
Noncurrent obligations under capital lease...... $558
====
F-15
LANDEC(R) DEVELOPMENT AND MANUFACTURING.
[PICTURE OF PRODUCT APPEARS HERE]
Coating Seeds.
[PICTURE OF PRODUCTION APPEARS HERE]
Making Breathable Membrane Products.
[PHOTO OF PRODUCT APPEARS HERE]
Assembling PORT Ophthalmic Device Prototypes.
[PICTURE OF AWARD APPEARS HERE]
1995 R&D 100 Award designating Landec's QuickCast(TM) as one of the most
innovative products in America.
[PICTURE OF PRODUCTION APPEARS HERE]
Synthesizing Intelimer(R) Polymers.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES
OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
The Company............................................................... 17
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Price Range of Common Stock............................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Consolidated Financial Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 25
Management................................................................ 44
Certain Transactions...................................................... 51
Principal and Selling Shareholders........................................ 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 57
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,400,000 SHARES
[LOGO]
COMMON STOCK
--------
PROSPECTUS
, 1996
--------
SMITH BARNEY INC.
LEHMAN BROTHERS
MONTGOMERY SECURITIES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
AMOUNT TO
BE PAID
---------
Registration Fee................................................... 17,429
NASD Filing Fee.................................................... 6,089
Nasdaq National Market Listing Fee................................. 1,000
Printing........................................................... *
Legal Fees and Expenses............................................ *
Accounting Fees and Expenses....................................... *
Blue Sky Fees and Expenses......................................... *
Directors' and officers' insurance................................. *
Transfer Agent and Registrar Fees.................................. *
Miscellaneous...................................................... *
--------
Total............................................................ $400,000
========
- --------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code authorizes a court, a
corporation's Board of Directors, independent legal counsel or shareholders to
authorize the corporation to indemnify directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities (including reimbursement for expenses incurred) arising under
the Securities Act. The Company's Bylaws provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by
California law. The Company has entered into indemnification agreements with
its directors containing provisions which are in some respects broader than
the specific indemnification provisions contained in the California
Corporations Code. The indemnification agreements may require the Company,
among other things, to indemnify its directors against certain liabilities
that may arise by reason of their status or service as directors (other than
liabilities arising from willful misconduct of culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' insurance if available on
reasonable terms. Article IV of the Registrant's Seventh Amended and Restated
Articles of Incorporation (Exhibit 3.1 hereto) provides for indemnification of
its directors and officers to the maximum extent permitted by the California
Corporations Code and Section 6 of Article VI of the Registrant's Bylaws
(Exhibit 3.3 hereto) provides for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the California
Corporations Code. In addition, the Registrant has entered into
Indemnification Agreements (Exhibit 10.1 hereto) with its directors and
officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since June 1, 1993, the Registrant issued and sold the following
unregistered securities:
(1) In June 1993, the Registrant issued 3,345,928 shares of Series D
Preferred Stock for an aggregate purchase price of $13,275,012 to 26
investors.
(2) In March 1995, the Registrant issued convertible promissory notes to
one institutional investor convertible into 176,432 shares of Common Stock
at $3.97 per share upon closing of this offering.
II-1
(3) In August 1995, the Registrant issued 189,723 shares of Series E
Preferred Stock for an aggregate purchase price of $1,500,001 to one
corporate investor.
(6) On February 12, 1996, the effective date of the Company's initial
public offering, the Company effected a one-for-2.875 reverse split of its
outstanding Common Stock and Preferred Stock.
(b) There were no underwritten offerings employed or commissions paid to any
person in connection with any of the transactions set forth in Item 15(a),
except in connection with the sale of Series D Preferred Stock as described in
Item (3). The Registrant engaged Oppenheimer & Co., Inc. as placement agent
for a consideration of approximately $678,000 and warrants to purchase 186,349
shares of Common Stock.
Except for the matters described in Item (5), for which exemptions from
registration were claimed under Section 2(3) of the Securities Act on the
basis that such transactions did not involve a "sale" of securities, the
issuances of the securities set forth in Item 15(a) were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of such
Act as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intentions
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 where
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant. In addition, the issuances described in Items (1) and
(2) were deemed to be exempt from registration under the Securities Act in
reliance upon Rule 701 promulgated under such Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
1.1+ Form of Underwriting Agreement.
3.1(1) Amended and Restated Bylaws of Registrant.
3.2(2) Ninth Amended and Restated Articles of Incorporation of Registrant.
4.1(3) Form of Common Stock Certificate.
5.1+ Opinion of Venture Law Group, a Professional Corporation.
10.1(3) Form of Indemnification Agreement.
10.2(3) 1988 Stock Option Plan and form of Option Agreements.
10.3(3) 1995 Employee Stock Purchase Plan and form of Subscription Agreement.
10.4+ 1995 Directors' Stock Option Plan, as amended, and form of Option
Agreement.
10.5(3) Investors' Rights Agreement dated as of August 10, 1995 among the
Registrant and certain security holders of the Registrant.
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.
10.7(3) Agreement dated as of July 29, 1995 between the Registrant and the
BFGoodrich Company.
10.8(3) License and Development Agreement dated as of August 10, 1995 between
the Registrant and Hitachi Chemical Company, Ltd.
10.9(3) Technical License Agreement dated October 1, 1994 between the
Registrant and Hitachi Chemical Co., Ltd.
10.10(3) Agreement dated March 14, 1995 between the Registrant and Nitta
Corporation.
10.11(3) Note Purchase Agreement dated March 27, 1995 between the Registrant
and H&Q Healthcare Investors and H&Q Life Sciences Investors, as
amended by a Notice of Conversion dated December 20, 1995.
10.12(4) Agreement dated February 26, 1996 between the Registrant and Nitta
Corporation.
10.13(4) Letter dated March 29, 1996 regarding the Agreement dated as of July
29, 1995 between the Registrant and BFGoodrich Company.
10.14 Consulting Agreement dated May 1, 1996 between the Registrant and
Richard Dulude.
II-2
11.1 Calculation of Loss Per Share.
23.1 Consent of Independent Auditors (see page II-5).
23.2 Consent of Counsel (included in Exhibit 5.1).
23.3 Consent of Sheldon & Mak (see page II-6).
24.1 Power of Attorney (see page II-4).
27.1 Report of Independent Auditors (see page F-2).
- --------
+To be filed by amendment.
(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-Q filed for the quarter ended April 30, 1996.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions referenced in
Item 14 of this Registration Statement or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Menlo Park, State of
California, on July 3, 1996.
LANDEC CORPORATION
/s/ Joy T. Fry
By____________________________________
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 Registration
Statement (including post-effective amendments), and any and all Registration
Statements filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, in connection with or related to the offering contemplated by this
Registration Statement and its amendments, if any, 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 Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURES TITLE DATE
/s/ Gary T. Steele President and Chief June 29, 1996
- ------------------------------------ Executive Officer
GARY T. STEELE (Principal
Executive Officer)
/s/ Joy T. Fry Vice President of June 30, 1996
- ------------------------------------ Finance and
JOY T. FRY Administration and
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
/s/ Mitchell J. Blutt Director June 30, 1996
- ------------------------------------
MITCHELL J. BLUTT
/s/ Kirby L. Cramer Director June 30, 1996
- ------------------------------------
KIRBY L. CRAMER
/s/ Richard S. Dulude Director June 30, 1996
- ------------------------------------
RICHARD S. DULUDE
/s/ Stephen E. Halprin Director June 30, 1996
- ------------------------------------
STEPHEN E. HALPRIN
/s/ Richard S. Schneider Director June 30, 1996
- ------------------------------------
RICHARD S. SCHNEIDER
/s/ Ray F. Stewart Director June 30, 1996
- ------------------------------------
RAY F. STEWART
II-4
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated December 1,
1995, in the Registration Statement and the related Prospectus of Landec
Corporation, for the registration of 2,760,000 shares of its Common Stock.
We also consent to the addition of the schedule listed in the accompanying
index under Item 16(b) to the financial statements covered by our report
mentioned in the preceding paragraph.
ERNST & YOUNG LLP
Palo Alto, California
July 3, 1996
II-5
[Sheldon & Mak letterhead]
July 1, 1996
To the Board of Directors and
Shareholders of Landec Corporation
LANDEC CORPORATION
3603 Haven Avenue
Menlo Park, California 94025
Attention: Ray Stewart
We consent to the reference to our firm under the heading "Experts" in the
prospectus constituting part of this Registration Statement on Form S-1 and
amendments thereto.
We further consent to the incorporation by reference of this consent
pursuant to Rule 439(b) under the Securities Act of 1993, as amended (the
"Securities Act"), into any subsequent registration statement for the same
offering that may be filed pursuant to Rule 462(b) under the Securities Act.
SHELDON & MAK, INC.
/s/ Jeffrey G. Sheldon
By___________________________________
JEFFREY G. SHELDON, PRESIDENT
II-6
LANDEC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
SCHEDULE II
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------
Year ended October 31, 1993
Allowance for doubtful accounts..... $-- $-- $-- $--
Year ended October 31, 1994
Allowance for doubtful accounts..... $-- $18 $-- $18
Year ended October 31, 1995
Allowance for doubtful accounts..... $18 $14 $-- $32
Six-Months ended April 30, 1996
Allowance for doubtful accounts..... $32 $-- $-- $32
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT TITLE NUMBER
------- ------------- ----------
1.1+ Form of Underwriting Agreement.
3.1(1) Amended and Restated Bylaws of Registrant.
Ninth Amended and Restated Articles of Incorporation of
3.2(2) Registrant.
4.1(3) Form of Common Stock Certificate.
Opinion of Venture Law Group, a Professional
5.1+ Corporation.
10.1(3) Form of Indemnification Agreement.
10.2(3) 1988 Stock Option Plan and form of Option Agreements.
1995 Employee Stock Purchase Plan and form of
10.3(3) Subscription Agreement.
1995 Directors' Stock Option Plan, as amended, and form
10.4+ of Option Agreement.
10.5(3) Investors' Rights Agreement dated as of August 10, 1995
among the Registrant and certain security holders of the
Registrant.
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.
10.7(3) Agreement dated as of July 29, 1995 between the
Registrant and the BFGoodrich Company.
10.8(3) License and Development Agreement dated as of August 10,
1995 between the Registrant and Hitachi Chemical
Company, Ltd.
10.9(3) Technical License Agreement dated October 1, 1994
between the Registrant and Hitachi Chemical Co., Ltd.
Agreement dated March 14, 1995 between the Registrant
10.10(3) and Nitta Corporation.
10.11(3) Note Purchase Agreement dated March 27, 1995 between the
Registrant and H&Q Healthcare Investors and H&Q Life
Sciences Investors, as amended by a Notice of Conversion
dated December 20, 1995.
Agreement dated February 26, 1996 between the Registrant
10.12(4) and Nitta Corporation.
10.13(4) Letter dated March 29, 1996 regarding the Agreement
dated as of July 29, 1995 between the Registrant and
BFGoodrich Company.
Consulting Agreement dated May 1, 1996 between the
10.14 Registrant and Richard Dulude.
11.1 Calculation of Loss Per Share.
23.1 Consent of Independent Auditors (see page II-5).
23.2 Consent of Counsel (included in Exhibit 5.1).
23.3 Consent of Sheldon & Mak (see page II-6).
24.1 Power of Attorney (see page II-4).
27.1 Report of Independent Auditors (see page F-2).
- --------
+To be filed by amendment.
(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 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-Q filed for the quarter ended April 30, 1996.
EXHIBIT 10.14
LANDEC CORPORATION
CONSULTING AGREEMENT
Richard Dulude
507 Welch Road
Corning, NY 14830
Dear Dick:
1. Landec Corporation, a California corporation, (the "Company") wishes
to obtain your services as a consultant beginning May 1, 1996 on projects agreed
by you and the Company in writing. This letter will constitute an agreement
between you and the Company and contains all the terms and conditions relating
to the services you are to provide.
2. During this agreement you will make yourself available to provide up
to three (3) full days of consulting services to the Company per year, which may
be increased upon our mutual consent.
3. You will provide Landec with the following services: (i) advising
the Company regarding potential U.S. commercial activities for the Company's
industrial products, (ii) advising the Company regarding its European partner
strategy and (iii) other areas by mutual agreement.
4. As consideration for your services and other obligations, you will
receive in cash $30,000 per year to be paid at the end of the earlier of the
second year or the termination of this agreement. As additional consideration,
you will be granted a nonstatutory stock option to purchase 4,000 shares of the
Company's Common Stock at fair market value on the date of grant, which will
vest at the rate of 1/24th of the shares per month. Vesting of the option will
continue until this agreement is terminated. The stock option will be subject to
a right of first refusal of the Company with respect to transfers of the
underlying Common Stock and will have a term of ten years. The stock option will
be in the form of the Company's standard option agreement which will be signed
by you and the Company.
5. The term of this agreement shall be two (2) years. However, either
party may terminate this agreement at any time for any reason upon thirty (30)
days written notice. At the end of such two year period, the parties will
discuss extending the term of this agreement.
6. You will be reimbursed for reasonable travel and other out-of-pocket
expenses incurred by you at the request of the Company in connection with your
services under this agreement, provided that you provide the Company with
receipts for such expenses.
7. Your relationship with the Company will be that of an independent
contractor and not that of an employee. You will not be eligible for any
employee benefits, nor will the Company make deductions from payments made to
you for taxes, which will be your responsibility. You will have no authority to
enter into contracts which bind the Company or create obligations on the part of
the Company without the express prior authorization of the Company.
8. You will keep in confidence and will not disclose or make available
to third parties or make any use of any information or documents relating to our
services under this agreement or to the products, methods of manufacture, trade
secrets, processes, business or affairs or confidential or proprietary
information of the Company (other than information in the public domain through
no fault of your own), except with the prior written consent of the Company or
to the extent necessary in performing tasks assigned to you by the Company. Upon
termination of this agreement you will return to Company all documents, and
other materials related to the services provided hereunder or furnished to you
by the Company. Your obligations under this Paragraph 8 will terminate five (5)
years after termination of this agreement.
9. Any amendment to this agreement must be in writing signed by you and
the Company.
10. All notices, requests and other communications called for by this
agreement will be deemed to have been given if made in writing and mailed,
postage prepaid, if to you at the address set forth above and if to the Company
at 3603 Haven Avenue, Menlo Park, California 94025, or to such other addresses
as either party specifies to the other.
11. The validity, performance and construction of this agreement will be
governed by the laws of the State of California.
12. Your obligations under paragraph 8 will survive termination of this
agreement. This agreement supersedes any prior consulting or other agreements
between you and the Company with respect to the subject matter hereof.
If this agreement is satisfactory, you should execute and return the
original and one copy to us, retaining the third copy for your file.
Dated as of: May 1, 1996
Very truly yours,
/s/ Gary T. Steele
Gary T. Steele
CEO and President
AGREED AND ACCEPTED:
/s/ Richard Dulude
- --------------------
Richard Dulude
EXHIBIT 11.1
LANDEC CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS
ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
Net loss.......................... $(4,116) $(4,355) $(2,759) $(1,923) $(1,515)
Shares used in calculating net
loss per share:
Weighted average share of common
stock outstanding.............. 519 522 542 541 4,713
SEC Staff Accounting Bulletin
Topic 4D....................... 640 640 640 640 --
------- ------- ------- ------- -------
Total shares used in calculating
net loss per share............... 1,159 1,162 1,182 1,181 4,713
======= ======= ======= ======= =======
Net loss per share................ $ (3.55) $ (3.75) $ (2.33) $ (1.63) $ (0.32)
======= ======= ======= ======= =======
Shares used in calculating
supplemental net loss per share:
Weighted average shares of
common stock outstanding....... 542 541 4,713
Weighted average shares of the
assumed conversion of preferred
stock and promissory notes from
the date of issuance........... 6,633 6,519 3,996
------- ------- -------
Total shares used in calculating
supplemental net loss per share.. 7,175 7,060 8,709
======= ======= =======
Supplemental net loss per share... $ (0.38) $ (0.27) $ (0.17)
======= ======= =======
