| LANDEC CORP \CA\ Item 1A Risk Factors Landec desires to take advantage of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under the Securities Exchange Act of 1934 |
| Specifically, Landec wishes to alert readers that the following important factors, as well as other factors including, without limitation, those described elsewhere in this report, could in the future affect, and in the past have affected, Landec’s actual results and could cause Landec’s results for future periods to differ materially from those expressed in any forward-looking statements made by or on behalf of Landec |
| Landec assumes no obligation to update such forward-looking statements |
| Our Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock Price to Decline In the past, our results of operations have fluctuated significantly from quarter to quarter and are expected to continue to fluctuate in the future |
| Historically, our direct marketer of hybrid corn seed, Landec Ag, has been the primary source of these fluctuations, as its revenues and profits are concentrated over a few months during the spring planting season (generally during our third and fourth fiscal quarters) |
| In addition, Apio can be heavily affected by seasonal and weather factors which have impacted quarterly results, such as the high cost of sourcing product in December 2003, January 2004 and March/ April 2005 due to a shortage of essential value-added produce items |
| Our earnings may also fluctuate based on our ability to collect accounts receivables from customers and note receivables from growers and on price fluctuations in the fresh vegetables and fruits markets |
| Other factors that affect our food and/or agricultural operations include: • the seasonality of our supplies; • our ability to process produce during critical harvest periods; • the timing and effects of ripening; • the degree of perishability; • the effectiveness of worldwide distribution systems; • total worldwide industry volumes; • the seasonality of consumer demand; 14 _________________________________________________________________ [68]Table of Contents • foreign currency fluctuations; and • foreign importation restrictions and foreign political risks |
| As a result of these and other factors, we expect to continue to experience fluctuations in quarterly operating results |
| We May Not Be Able to Achieve Acceptance of Our New Products in the Marketplace Our success in generating significant sales of our products will depend in part on the ability of us and our partners and licensees to achieve market acceptance of our new products and technology |
| The extent to which, and rate at which, we achieve market acceptance and penetration of our current and future products is a function of many variables including, but not limited to: • price; • safety; • efficacy; • reliability; • conversion costs; • marketing and sales efforts; and • general economic conditions affecting purchasing patterns |
| We may not be able to develop and introduce new products and technologies in a timely manner or new products and technologies may not gain market acceptance |
| We are in the early stage of product commercialization of certain Intelimer-based specialty packaging, Intellicoat seed coatings and other Intelimer polymer products and many of our potential products are in development |
| We believe that our future growth will depend in large part on our ability to develop and market new products in our target markets and in new markets |
| In particular, we expect that our ability to compete effectively with existing food products, agricultural, industrial and medical companies will depend substantially on successfully developing, commercializing, achieving market acceptance of and reducing the cost of producing our products |
| In addition, commercial applications of our temperature switch polymer technology are relatively new and evolving |
| Our failure to develop new products or the failure of our new products to achieve market acceptance would have a material adverse effect on our business, results of operations and financial condition |
| We Face Strong Competition in the Marketplace Competitors may 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 us or that would render our technology and products obsolete and non-competitive |
| We operate in highly competitive and rapidly evolving fields, and new developments are expected to continue at a rapid pace |
| Competition from large food products, agricultural, industrial and medical companies is expected to be intense |
| In addition, the nature of our collaborative arrangements may result in our corporate partners and licensees becoming our competitors |
| Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than we do, and may have substantially greater experience in conducting clinical and field trials, obtaining regulatory approvals and manufacturing and marketing commercial products |
| We Have a Concentration of Manufacturing in One Location for Apio and May Have to Depend on Third Parties to Manufacture Our Products Any disruptions in our primary manufacturing operation at Apio’s facility in Guadalupe, California would reduce our ability to sell our products and would have a material adverse effect on our financial results |
| Additionally, we may need to consider seeking collaborative arrangements with other companies to manufacture our products |
| If we become dependent upon third parties for the manufacture of our products, our profit 15 _________________________________________________________________ [69]Table of Contents margins and our ability to develop and deliver those products on a timely basis may be affected |
| Failures by third parties may impair our ability to deliver products on a timely basis and impair our competitive position |
| We may not be able to continue to successfully operate our manufacturing operations at acceptable costs, with acceptable yields, and retain adequately trained personnel |
| Our Dependence on Single-Source Suppliers and Service Providers May Cause Disruption in Our Operations Should Any Supplier Fail to Deliver Materials We may experience difficulty acquiring materials or services for the manufacture of our products or we may not be able to obtain substitute vendors |
| We may not be able to procure comparable materials or hybrid corn varieties at similar prices and terms within a reasonable time |
| Several services that are provided to Apio are obtained from a single provider |
| Several of the raw materials we use to manufacture our products are currently purchased from a single source, including some monomers used to synthesize Intelimer polymers and substrate materials for our breathable membrane products |
| In addition, a majority of the hybrid corn varieties sold by Landec Ag are grown under contract by a single seed producer |
| Any interruption of our relationship with single-source suppliers or service providers could delay product shipments and materially harm our business |
| We May Be Unable to Adequately Protect Our Intellectual Property Rights We may receive notices from third parties, including some of our competitors, claiming infringement by our products of patent and other proprietary rights |
| Regardless of their merit, responding to any such claim could be time-consuming, result in costly litigation and require us to enter royalty and licensing agreements which may not be offered or available on terms acceptable to us |
| If a successful claim is made against us and we fail to develop or license a substitute technology, we could be required to alter our products or processes and our business, results of operations or financial position could be materially adversely affected |
| Our success depends in large part on our ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties |
| Any pending patent applications we file may not be approved and we may not be able to develop additional proprietary products that are patentable |
| Any patents issued to us may not provide us with competitive advantages or may be challenged by third parties |
| Patents held by others may prevent the commercialization of products incorporating our technology |
| Furthermore, others may independently develop similar products, duplicate our products or design around our patents |
| Our Operations Are Subject to Regulations that Directly Impact Our Business Our food packaging products are subject to regulation under the Food, Drug and Cosmetic Act (the “FDC Act”) |
| Under the FDC Act, any substance that when used as intended may reasonably be expected to become, directly or indirectly, a component or otherwise affect the characteristics of any food may be regulated as a food additive unless the substance is generally recognized as safe |
| We believe that food packaging materials are generally not considered food additives by the FDA because these products are not expected to become components of food under their expected conditions of use |
| We consider our breathable membrane product to be a food packaging material not subject to regulation or approval by the FDA We have not received any communication from the FDA concerning our breathable membrane product |
| If the FDA were to determine that our breathable membrane products are food additives, we may be required to submit a food additive petition for approval by the FDA The food additive petition process is lengthy, expensive and uncertain |
| A determination by the FDA that a food additive petition is necessary would have a material adverse effect on our business, operating results and financial condition |
| Federal, state and local regulations impose various environmental controls on the use, storage, discharge or disposal of toxic, volatile or otherwise hazardous chemicals and gases used in some of the manufacturing processes |
| Our failure to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations could subject us to substantial liability or could cause our manufacturing operations to be suspended and changes in environmental regulations may impose the need for additional capital equipment or other requirements |
| 16 _________________________________________________________________ [70]Table of Contents Our agricultural operations are subject to a variety of environmental laws including, the Food Quality Protection Act of 1966, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Comprehensive Environmental Response, Compensation and Liability Act |
| Compliance with these laws and related regulations is an ongoing process |
| Environmental concerns are, however, inherent in most agricultural operations, including those we conduct |
| Moreover, it is possible that future developments, such as increasingly strict environmental laws and enforcement policies could result in increased compliance costs |
| The Company is subject to the Perishable Agricultural Commodities Act (“PACA”) law |
| PACA regulates fair trade standards in the fresh produce industry and governs all the products sold by Apio |
| Our failure to comply with the PACA requirements could among other things, result in civil penalties, suspension or revocation of a license to sell produce, and in the most egregious cases, criminal prosecution, which could have a material adverse effect on our business |
| Adverse Weather Conditions and Other Acts of God May Cause Substantial Decreases in Our Sales and/or Increases in Our Costs Our Food Products and Agricultural Seed Technology businesses are subject to weather conditions that affect commodity prices, crop yields, and decisions by growers regarding crops to be planted |
| Crop diseases and severe conditions, particularly weather conditions such as floods, droughts, frosts, windstorms, earthquakes and hurricanes, may adversely affect the supply of vegetables and fruits used in our business, which could reduce the sales volumes and/or increase the unit production costs |
| Because a significant portion of the costs are fixed and contracted in advance of each operating year, volume declines due to production interruptions or other factors could result in increases in unit production costs which could result in substantial losses and weaken our financial condition |
| We Depend on Strategic Partners and Licenses for Future Development Our strategy for development, clinical and field testing, manufacture, commercialization and marketing for some of our current and future products includes entering into various collaborations with corporate partners, licensees and others |
| We are dependent on our corporate partners to develop, test, manufacture and/or market some of our products |
| Although we believe that our 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 our control |
| Our partners may not perform their obligations as expected or we may not derive any additional revenue from the arrangements |
| Our partners may not pay any additional option or license fees to us or may not develop, market or pay any royalty fees related to products under the agreements |
| Moreover, some of the collaborative agreements provide that they may be terminated at the discretion of the corporate partner, and some of the collaborative agreements provide for termination under other circumstances |
| Our partners may pursue existing or alternative technologies in preference to our technology |
| Furthermore, we may not be able to negotiate additional collaborative arrangements in the future on acceptable terms, if at all, and our collaborative arrangements may not be successful |
| Both Domestic and Foreign Government Regulations Can Have an Adverse Effect on Our Business Operations Our products and operations are subject to governmental regulation in the United States and foreign countries |
| The manufacture of our products is subject to periodic inspection by regulatory authorities |
| We may not be able to obtain necessary regulatory approvals on a timely basis or at all |
| Delays in receipt of or failure to receive approvals or loss of previously received approvals would have a material adverse effect on our business, financial condition and results of operations |
| Although we have no reason to believe that we will not be able to comply with all applicable regulations regarding the manufacture and sale of our products and polymer materials, regulations are always subject to change and depend heavily on administrative interpretations and the country in which the products are sold |
| Future changes in regulations or interpretations relating to matters 17 _________________________________________________________________ [71]Table of Contents such as safe working conditions, laboratory and manufacturing practices, environmental controls, and disposal of hazardous or potentially hazardous substances may adversely affect our business |
| We are subject to USDA rules and regulations concerning the safety of the food products handled and sold by Apio, and the facilities in which they are packed and processed |
| Failure to comply with the applicable regulatory requirements can, among other things, result in: • fines, injunctions, civil penalties, and suspensions, • withdrawal of regulatory approvals, • product recalls and product seizures, including cessation of manufacturing and sales, • operating restrictions, and • criminal prosecution |
| We may be required to incur significant costs to comply with the laws and regulations in the future which may have a material adverse effect on our business, operating results and financial condition |
| Our International Operations and Sales May Expose Our Business to Additional Risks For the fiscal year ended May 28, 2006, approximately 22prca of our total revenues were derived from product sales to international customers |
| A number of risks are inherent in international transactions |
| International sales and operations may be limited or disrupted by any of the following: • regulatory approval process, • government controls, • export license requirements, • political instability, • price controls, • trade restrictions, • changes in tariffs, or • difficulties in staffing and managing international operations |
| Foreign regulatory agencies have or may establish product standards different from those in the United States, and any inability to obtain foreign regulatory approvals on a timely basis could have a material adverse effect on our international business, and our financial condition and results of operations |
| While our foreign sales are currently priced in dollars, fluctuations in currency exchange rates may reduce the demand for our products by increasing the price of our products in the currency of the countries to which the products are sold |
| Regulatory, geopolitical and other factors may adversely impact our operations in the future or require us to modify our current business practices |
| Cancellations or Delays of Orders by Our Customers May Adversely Affect Our Business During fiscal year 2006, sales to our top five customers accounted for approximately 46prca of our revenues, with our largest customers, Costco Wholesale Corp |
| and Sam’s Club, accounting for approximately 16prca and 14prca, respectively, of our revenues |
| We expect that, for the foreseeable future, a limited number of customers may continue to account for a substantial portion of our net revenues |
| We may experience changes in the composition of our customer base as we have experienced in the past |
| We do not have long-term purchase agreements with any of our customers |
| The reduction, delay or cancellation of orders from one or more major customers for any reason or the loss of one or more of our major customers could materially and adversely affect our business, operating results and financial condition |
| In addition, since some of the products processed by Apio at its Guadalupe, California facility are sole sourced to its customers, our operating results could be adversely affected if one or more of our major customers were to develop other sources of supply |
| Our current 18 _________________________________________________________________ [72]Table of Contents customers may not continue to place orders, orders by existing customers may be canceled or may not continue at the levels of previous periods or we may not be able to obtain orders from new customers |
| Our Sale of Some Products May Increase Our Exposure to Product Liability Claims The testing, manufacturing, marketing, and sale of the products we develop involve an inherent risk of allegations of product liability |
| If any of our products were determined or alleged to be contaminated or defective or to have caused a harmful accident to an end-customer, we could incur substantial costs in responding to complaints or litigation regarding our products and our product brand image could be materially damaged |
| Either event may have a material adverse effect on our business, operating results and financial condition |
| Although we have taken and intend to continue to take what we believe are appropriate precautions to minimize exposure to product liability claims, we may not be able to avoid significant liability |
| We currently maintain product liability insurance |
| While we believe the coverage and limits are consistent with industry standards, our coverage may not be adequate or may not 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 our business, operating results and financial condition |
| Our Stock Price May Fluctuate in Accordance with Market Conditions The following events may cause the market price of our common stock to fluctuate significantly: • technological innovations applicable to our products, • our attainment of (or failure to attain) milestones in the commercialization of our technology, • our development of new products or the development of new products by our competitors, • new patents or changes in existing patents applicable to our products, • our acquisition of new businesses or the sale or disposal of a part of our businesses, • development of new collaborative arrangements by us, our competitors or other parties, • changes in government regulations applicable to our business, • changes in investor perception of our business, • fluctuations in our operating results and • changes in the general market conditions in our industry |
| These broad fluctuations may adversely affect the market price of our common stock |
| Since We Order Cartons and Film for Our Products from Suppliers in Advance of Receipt of Customer Orders for Such Products, We Could Face a Material Inventory Risk As part of our inventory planning, we enter into negotiated orders with vendors of cartons and film used for packing our products in advance of receiving customer orders for such products |
| Accordingly, we face the risk of ordering too many cartons and film since orders are generally based on forecasts of customer orders rather than actual orders |
| If we cannot change or be released from the orders, we may incur costs as a result of inadequately predicting cartons and film orders in advance of customer orders |
| Because of this, we may have an oversupply of cartons and film and face the risk of not being able to sell such inventory and our anticipated reserves for losses may be inadequate if we have misjudged the demand for our products |
| Our business and operating results could be adversely affected as a result of these increased costs |
| 19 _________________________________________________________________ [73]Table of Contents Our Seed Products May Fail to Germinate Properly and We May Be Subject to Claims for Reimbursement or Damages for Losses from Customers Who Use Such Products Farmers plant seed products sold by Landec Ag with the expectation that they will germinate under normal growing conditions |
| If our seed products do not germinate at the appropriate time or fail to germinate at all, our customers may incur significant crop losses and seek reimbursement or bring claims against us for such damages |
| Although insurance is generally available to cover such claims, the costs for premiums of such policies are prohibitively expensive and we currently do not maintain such insurance |
| Any claims brought for failure of our seed products to properly germinate could materially and adversely affect our operating and financial results |
| Recently Enacted Changes in Securities Laws and Regulations Have and Will Continue to Increase Our Costs The Sarbanes-Oxley Act of 2002 (the “Act”) that became law in July 2002 required changes in some of our corporate governance, public disclosure and compliance practices |
| In addition, Nasdaq has made revisions to its requirements for companies, such as Landec, that are listed on The NASDAQ Global Market |
| These developments have increased our legal and financial compliance costs |
| These changes could make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| These developments could make it more difficult for us to attract and retain qualified members for our board of directors, particularly to serve on our audit committee |
| Our Controlling Shareholders Exert Significant Influence over Corporate Events that May Conflict with the Interests of Other Shareholders Our executive officers and directors and their affiliates own or control approximately 23prca of our common stock (including options exercisable within 60 days) |
| Accordingly, these officers, directors and shareholders may have the ability to exert significant influence over the election of our Board of Directors, the approval of amendments to our articles and bylaws and the approval of mergers or other business combination transactions requiring shareholder approval |
| This concentration of ownership may have the effect of delaying or preventing a merger or other business combination transaction, even if the transaction or amendments would be beneficial to our other shareholders |
| In addition, our controlling shareholders may approve amendments to our articles or bylaws to implement anti-takeover or management friendly provisions that may not be beneficial to our other shareholders |
| We May Be Exposed to Employment Related Claims and Costs that Could Materially Adversely Affect Our Business We have been subject in the past, and may be in the future, to claims by employees based on allegations of discrimination, negligence, harassment and inadvertent employment of illegal aliens or unlicensed personnel, and we may be subject to payment of workers’ compensation claims and other similar claims |
| We could incur substantial costs and our management could spend a significant amount of time responding to such complaints or litigation regarding employee claims, which may have a material adverse effect on our business, operating results and financial condition |
| We Are Dependent on Our Key Employees and if One or More of Them Were to Leave, We Could Experience Difficulties in Replacing Them and Our Operating Results Could Suffer The success of our business depends to a significant extent upon the continued service and performance of a relatively small number of key senior management, technical, sales, and marketing personnel |
| The loss of any of our key personnel would likely harm our business |
| In addition, competition for senior level personnel with knowledge and experience in our different lines of business is intense |
| If any of our key personnel were to leave, we would need to devote substantial resources and management attention to replace them |
| As a result, 20 _________________________________________________________________ [74]Table of Contents management attention may be diverted from managing our business, and we may need to pay higher compensation to replace these employees |
| We May Issue Preferred Stock with Preferential Rights that Could Affect Your Rights Our Board of Directors has the authority, without further approval of our shareholders, to fix the rights and preferences, and to issue shares, of preferred stock |
| In November 1999, we issued and sold shares of Series A Convertible Preferred Stock and in October 2001 we issued and sold shares of Series B Convertible Preferred Stock |
| The Series A Convertible Preferred Stock was converted into 1cmam666cmam670 shares of Common Stock on November 19, 2002 and the Series B Convertible Preferred Stock was converted into 1cmam744cmam102 shares of Common Stock on May 7, 2004 |
| The issuance of new shares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding stock, and the holders of such preferred stock could have voting, dividend, liquidation and other rights superior to those of holders of our Common Stock |
| We Have Never Paid any Dividends on Our Common Stock We have not paid any cash dividends on our Common Stock since inception and do not expect to do so in the foreseeable future |
| Any dividends may be subject to preferential dividends payable on any preferred stock we may issue |
| Our Profitability Could Be Materially And Adversely Affected if it Is Determined that the Book Value of Goodwill is Higher than Fair Value Our balance sheet includes an amount designated as “goodwill” that represents a portion of our assets and our shareholders’ equity |
| Goodwill arises when an acquirer pays more for a business than the fair value of the tangible and separately measurable intangible net assets |
| Under Statement of Financial Accounting Standards Nodtta 142 “Goodwill and Other Intangible Assets”, beginning in fiscal year 2002, the amortization of goodwill has been replaced with an “impairment test” which requires that we compare the fair value of goodwill to its book value at least annually and more frequently if circumstances indicate a possible impairment |
| If we determine at any time in the future that the book value of goodwill is higher than fair value then the difference must be written-off, which could materially and adversely affect our profitability |