UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                FOR THE FISCAL QUARTER ENDED APRIL 30, 1998, or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

               For the Transition period from _____ to _________.

                        Commission file number:  0-27446

                                 LANDEC CORPORATION
             (Exact name of registrant as specified in its charter)

              CALIFORNIA                                94-3025618
    (State or other jurisdiction of                    (IRS Employer
    incorporation or organization)                 Identification Number)

                                 3603 HAVEN AVENUE
                            MENLO PARK, CALIFORNIA 94025
                      (Address of principal executive offices)

                Registrant's telephone number, including area code:
                                   (650) 306-1650

     Indicate by check mark whether the registrant (1) has filed all
     reports required to be filed by Section 13 or 15(d) of the Securities
     Exchange Act of 1934 during the preceding 12 months (or for such
     shorter period that the registrant was required to file such reports),
     and (2) has been subject to such filing requirements for at least the
     past 90 days.

                                Yes   X        No      
                                    -----         -----

     As of June 5, 1998, 12,790,143 shares of the Registrant's common stock were
outstanding.


                                     -1-


                              LANDEC CORPORATION

                FORM 10-Q For the Quarter Ended April 30, 1998
INDEX Page Facing sheet 1 Index 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements: a) Consolidated condensed balance sheets as of April 30, 1998 and October 31, 1997 3 b) Consolidated statements of operations for the three and six months ended April 30, 1998 and 1997 4 c) Consolidated statements of cash flows for the six months ended April 30, 1998 and 1997 5 d) Notes to consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults in Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K a) Exhibits 18 b) Reports on Form 8-K 18 Signature 19 Index to Exhibits 20
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LANDEC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
April 30, October 31, 1998 1997 --------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 10,934 $ 5,163 Short-term investments 1,985 9,506 Restricted investment -- 8,837 Accounts receivable, net 2,443 2,162 Inventory 3,232 2,652 Prepaid expenses and other current assets 1,229 1,720 -------- -------- Total Current Assets 19,823 30,040 Property and equipment, net 5,829 5,023 Intangible assets, net 14,807 14,985 Other assets 54 112 -------- -------- $ 40,513 $ 50,160 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 844 $ 642 Accrued compensation 958 836 Other accrued liabilities 1,545 1,520 Payable related to acquisition of Dock Resins Corporation -- 9,189 Deferred revenue 324 2,326 Current portion of long term debt 12 6 -------- -------- Total Current Liabilities 3,683 14,519 Non-current portion of long term debt 30 26 Shareholders' Equity: Preferred stock -- -- Common stock 75,787 75,679 Notes receivable from shareholders -- (8) Deferred compensation (142) (198) Accumulated deficit (38,845) (39,858) -------- -------- Total Shareholders' Equity 36,800 35,615 -------- -------- $ 40,513 $ 50,160 -------- -------- -------- --------
SEE ACCOMPANYING NOTES. -3- LANDEC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended April 30, Six Months Ended April 30, 1998 1997 1998 1997 ------- ------- ------- ------- Revenues: Product sales $17,499 $ 662 $21,693 $ 740 License fees -- -- 500 -- Research and development revenues 422 242 787 459 ------- ------- ------- ------- Total revenues 17,921 904 22,980 1,199 Operating costs and expenses: Cost of product sales 10,763 442 13,908 555 Research and development 1,425 1,030 2,635 1,946 Selling, general and administrative 3,085 945 5,545 1,565 Purchase of in-process research and development -- 3,022 -- 3,022 ------- ------- ------- ------- Total operating costs and expenses 15,273 5,439 22,088 7,088 ------- ------- ------- ------- Operating profit (loss) 2,648 (4,535) 892 (5,889) Interest income 212 438 464 931 Interest expense (23) (10) (105) (22) ------- ------- ------- ------- Income (loss) from continuing operations before provision for income taxes 2,837 (4,107) 1,251 (4,980) Provision for income taxes (228) -- (228) -- ------- ------- ------- ------- Income (loss) from continuing operations 2,609 (4,107) 1,023 (4,980) Loss from discontinued QuickCast operation -- (465) -- (887) ------- ------- ------- ------- Net income (loss) $ 2,609 $(4,572) $ 1,023 $(5,867) ------- ------- ------- ------- ------- ------- ------- ------- Basic net income (loss) per share: Continuing operations $ 0.20 $ (0.38) $ 0.08 $ (0.46) Discontinued operations -- (0.04) -- (0.08) ------- ------- ------- ------- Total basic net income (loss) per share $ 0.20 $ (0.42) $ 0.08 $ (0.54) ------- ------- ------- ------- ------- ------- ------- ------- Diluted net income (loss) per share: Continuing operations $ 0.18 $ (0.38) $ 0.07 $ (0.46) Discontinued operations -- (0.04) -- (0.08) ------- ------- ------- ------- Total diluted net income (loss) per share $ 0.18 $ (0.42) $ 0.07 $ (0.54) ------- ------- ------- ------- ------- ------- ------- ------- Shares used in computation of net income (loss) per share: Basic 12,728 10,829 12,717 10,794 ------- ------- ------- ------- ------- ------- ------- ------- Diluted 13,734 10,829 13,487 10,794 ------- ------- ------- ------- ------- ------- ------- -------
SEE ACCOMPANYING NOTES. -4- LANDEC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Six Months Ended April 30, 1998 1997 -------- -------- Cash flows from operating activities: Net income (loss) from continuing operations $ 1,023 $ (4,980) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 964 268 Amortization of deferred compensation 56 56 Write-off of purchased in-process research and development -- 3,022 Loss from discontinued operations -- (887) Changes in current assets and liabilities (net of effects of Dock Resins acquisition in April, 1997): Accounts receivable (281) (69) Inventories (580) 91 Prepaid expenses and other current assets 491 (63) Accounts payable 202 (177) Accrued compensation 122 114 Other accrued liabilities (353) (71) Deferred revenue (2,002) 125 ------- -------- Total adjustments (1,381) (2,409) ------- -------- Net cash used in operating activities (358) (2,571) ------- -------- Cash flows from investing activities: Purchases of property and equipment (1,214) (675) Decrease in other assets 58 1 Acquisition of Dock Resins, net of cash acquired -- (3,230) Purchases of available-for-sale securities (2,079) (14,404) Sale of available-for-sale securities 2,856 4,041 Maturities of available-for-sale securities 6,734 13,550 ------- -------- Net cash provided by (used in) investing activities: 6,355 (717) ------- -------- Cash flows from financing activities: Proceeds from sale of restricted investment 8,837 -- Purchase of restricted investment -- (8,837) Proceeds from sale of common stock 108 94 Proceeds from repayment of notes receivable 8 -- Payment of payable related to acquisition (9,189) -- Proceeds from issuance of long term debt 29 -- Payments on long term debt (19) (111) ------- -------- Net cash used in financing activities (226) (8,854) ------- -------- Net increase (decrease) in cash and cash equivalents 5,771 (12,142) Cash and cash equivalents at beginning of period 5,163 14,185 ------- -------- Cash and cash equivalents at end of period $10,934 $ 2,043 ------- -------- ------- --------
SEE ACCOMPANYING NOTES. -5- LANDEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Landec Corporation (the "Company" or "Landec") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, and cash flows at April 30, 1998, and for all periods presented, have been made. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying financial data should be reviewed in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997. The results of operations for the three and six month periods ended April 30, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ended October 31, 1998. For instance, due to the cyclical nature of the corn seed industry, a significant portion of Fielder's Choice Hybrids' ("Fielder's Choice", a division of Intellicoat Corporation, a subsidiary of the Company) revenues and profits will be concentrated over a few months during the spring planting season (generally during the Company's second fiscal quarter). 2. RECLASSIFICATIONS Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation. 3. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and consisted of the following:
APRIL 30, OCTOBER 31, 1998 1997 --------- ----------- Raw materials $ 709 $ 617 Work in process 544 152 Finished goods 1,979 1,883 ------ ------ $3,232 $2,652 ------ ------ ------ ------
-6- 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share amounts)
Three Months Ended April 30, Six Months Ended April 30, 1998 1997 1998 1997 ------- ------- ------- ------- Numerator: Net income (loss) from continuing operations for basic earnings per share $ 2,609 $(4,107) $ 1,023 $(4,980) Less: Minority interest in income of subsidiary (134) -- (40) -- ------- ------- ------- ------- Net income (loss) from continuing operations for diluted earnings per share $ 2,475 $(4,107) $ 983 $(4,980) Denominator: Weighted average shares for basic income (loss) per share 12,728 10,829 12,717 10,794 Effect of dilutive securities: Stock Options 969 -- 750 -- Warrants 37 -- 20 -- ------- ------- ------- ------- Total dilutive common shares 1,006 -- 770 -- Weighted average shares for diluted income (loss) per share 13,734 10,829 13,487 10,794 Basic income (loss) per share from continuing operations $ 0.20 $ (0.38) $ 0.08 $ (0.46) Diluted income (loss) per share from continuing operations $ 0.18 $ (0.38) $ 0.07 $ (0.46)
5. LICENSING OF PORT-TM- TECHNOLOGY In December 1997, the Company licensed the rights to worldwide manufacturing, marketing and distribution of the PORT-TM- ophthalmic devices to Alcon Laboratories, Inc. ("Alcon") in exchange for $500,000 in cash, and future license revenue, research and development revenue and royalties on the sale of commercial products. For the six months ended April 30, 1998, the Company recognized $500,000 in license revenues and $289,000 in research and development revenues associated with this arrangement. 6. COMMITMENTS In December 1997, Dock Resins Corporation ("Dock Resins"), a wholly owned subsidiary of the Company, entered into a loan and security agreement which provides a $1,250,000 working capital line of credit and a $2,750,000 term loan to finance capital expenditures. Borrowings under the loan agreement are collateralized by substantially all of Dock Resins' assets. As of April 30, 1998, no amounts had been borrowed against this line of credit. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in Part I--Item 1 of this Form 10-Q and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997. Except for the historical information contained herein, the matters discussed in this report are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this report and, in particular the factors described below under "Additional Factors That May Affect Future Results," and those mentioned in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997. OVERVIEW Since its inception in October 1986, the Company has been primarily engaged in the research and development of its Intelimer-Registered Trademark- technology and related products. The Company has launched three product lines from this core development -- QuickCast-TM- splints and casts, in April 1994; Intellipac-Registered Trademark- breathable membranes for the fresh-cut produce packaging market, in September 1995; and Intelimer Polymer Systems for the industrial specialties market in June 1997. As part of an effort to focus and build on three strategic businesses -- Food Products, Industrial Specialties and Agriculture -- the Company has recently completed several strategic transactions. In April 1997, the Company acquired Dock Resins, which is primarily engaged in the manufacturing and marketing of specialty acrylics and other polymers. In September 1997, Intellicoat Corporation ("Intellicoat"), a subsidiary of the Company, acquired Fielder's Choice, a direct marketer of hybrid seed corn. In August 1997, the Company sold its QuickCast product line to Bissell Healthcare Corporation of Bolingbrook, Illinois. In December 1997, the Company licensed the rights to worldwide manufacturing, marketing and distribution of the PORT ophthalmic devices to Alcon. With the exception of the current quarter, 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, charges related to acquisitions, and expenditures necessary to further develop its manufacturing and marketing capabilities. From inception through April 30, 1998, the Company's accumulated deficit was $38.8 million. RESULTS OF OPERATIONS The Company's results of operations reflect only continuing operations of the Company. The results of the discontinued QuickCast operation are discussed separately in the respective sections. Total revenues were $17.9 million for the second quarter of fiscal year 1998 compared to $904,000 for the second quarter of fiscal year 1997. Revenues from product sales increased to $17.5 million in the second quarter of fiscal year 1998 from $662,000 in the second quarter of fiscal year 1997 due primarily to product sales of $12.9 million and $4.2 million from Fielder's Choice and Dock Resins, respectively. Also contributing to the increase was Intellipac breathable membrane product sales which increased from $147,000 in the second quarter of fiscal year 1997 to $422,000 in the second quarter of fiscal year 1998, due primarily to an increase in unit sales. Product sales for the discontinued QuickCast product line for the second quarter of fiscal year 1997 were $105,000 which was included in the loss from discontinued operations. Revenues from research and development funding were $422,000 for the second quarter of fiscal year 1998 compared to $242,000 for the second quarter of fiscal year 1997. The increase in research and development revenues was primarily due to an agreement the Company entered into in December 1997 with Alcon for the funding of the PORT program. For the first six months of fiscal year 1998 total revenues were $23.0 million compared to $1.2 million during the same period in 1997. Revenue from product sales for the first six months of fiscal year 1998 increased to $21.7 million from $740,000 during the same period in 1997 due principally to product sales of $12.9 million and $7.6 million from Fielder's Choice and Dock Resins, respectively. Also contributing to the increase was the Intellipac breathable membrane product sales which increased to $1.2 million for the first six months of fiscal year 1998 from $225,000 for the first six months of fiscal year 1997 due primarily to an increase in unit sales. Product sales for the discontinued QuickCast product line for the first six months of -8- fiscal year 1997 were $200,000 which was included in the loss from discontinued operations. Revenues from license fees were $500,000 for the first six months of fiscal year 1998 compared to none during the same period in 1997. The increase in license fees was due to an upfront payment received from Alcon in exchange for the license rights to worldwide manufacturing, marketing and distribution of the PORT ophthalmic devices. Revenues from research and development funding for the first six months of fiscal year 1998 increased to $787,000 from $459,000 during the same period in 1997. The increase in research and development revenues was primarily due to the agreement with Alcon for the funding of the PORT program. Cost of product sales consists of material, labor and overhead. Cost of product sales was $10.8 million for the second quarter of fiscal year 1998 compared to $442,000 for the second quarter of fiscal year 1997. Cost of product sales as a percentage of product sales decreased to 62% in the second quarter of fiscal year 1998 from 67% in the second quarter of fiscal year 1997. Cost of product sales for the first six months of fiscal year 1998 was $13.9 million compared to $555,000 during the same period in 1997. Cost of product sales as a percentage of product sales decreased to 64% for the first six months of fiscal year 1998 from 75% during the same period in 1997. These decreases in the cost of product sales as a percentage of product sales were primarily the result of higher margins resulting from product sales of the Fielder's Choice products. Cost of product sales for the discontinued QuickCast product line for the second quarter and for the first six months of fiscal year 1997 were $192,000 and $388,000, respectively and were included in the loss from discontinued operations. The Company anticipates that gross margins as a percentage of revenue will fluctuate from quarter to quarter due to the seasonal nature of the Company's agriculture product line and will probably decrease during the second half of fiscal year 1998 due to Fielder's Choice recognizing virtually all of its revenue and profits during the first six months of fiscal year 1998. Research and development expenses were $1.4 million for the second quarter of fiscal year 1998 compared to $1.0 million for the second quarter of fiscal year 1997, an increase of 38%. For the first six months of fiscal year 1998 research and development expenses were $2.6 million compared to $1.9 million during the same period in 1997, an increase of 35%. The Company's research and development expenses consist primarily of expenses involved in the development, process scale-up and efforts to protect intellectual property content of the Company's enabling side chain crystallizable polymer technology and research and development expenses related to Dock Resins' products. The increase in research and development expenses for the three and six month periods ended April 30, 1998 compared to the same periods of fiscal year 1997 was primarily due to the addition of development costs related to Dock Resins, which was acquired in April 1997. In future periods, the Company expects that spending for research and development will continue to increase in absolute dollars, although it may vary as a percentage of total revenues. Selling, general and administrative expenses were $3.1 million for the second quarter of fiscal year 1998 compared to $945,000 for the second quarter of fiscal year 1997, an increase of 226%. For the first six months of fiscal year 1998 selling, general and administrative expenses were $5.5 million compared to $1.6 million during the same period in 1997, an increase of 254%. Selling, general and administrative expenses consist primarily of sales and marketing expenses associated with the Company's product sales, business development expenses, and staff and administrative expenses. The increase in selling, general and administrative expenses for the three and six month periods ended April 30, 1998 compared to the same periods of fiscal year 1997 was primarily due to the addition of selling, general and administrative costs related to the acquisitions of Dock Resins in April, 1997 and Fielder's Choice in September, 1997. Sales and marketing expenses increased to $2.0 million for the second quarter of fiscal year 1998 from $372,000 for the second quarter of fiscal year 1997. For the first six months of fiscal year 1998 sales and marketing expenses increased to $3.4 million compared to $594,000 during the same period in 1997. The increase in sales and marketing expenses for the three and six month periods ended April 30, 1998 compared to the same periods of fiscal year 1997 was primarily attributable to the addition of sales and marketing costs related to the acquisitions of Dock Resins in April, 1997 and Fielder's Choice in September, 1997. Sales and marketing costs for the discontinued QuickCast product line for the second quarter and for the first six months of fiscal year 1997 were $371,000 and $684,000 respectively and were included in the loss from discontinued operations. In future periods, the Company expects total selling, general and administrative spending will continue to increase in absolute dollars, while it may vary as a percentage of total revenues. -9- Net interest income for the three and six month periods ended April 30, 1998 were $189,000 and $359,000, respectively, compared to $428,000 and $909,000 for the same periods of fiscal year 1997. These decreases in net interest income were due principally to less cash being available for investing. LIQUIDITY AND CAPITAL RESOURCES As of April 30, 1998 the Company had unrestricted cash, cash equivalents and short-term investments of $12.9 million, a net decrease of $1.8 million from $14.7 million as of October 31, 1997. This decrease was primarily due to cash used in operations of $358,000 for the first six months of fiscal year 1998 and the purchase of $1.2 million of property and equipment. Although the Company reduced the cash used in operations during the first six months of fiscal year 1998 as compared to the same period during 1997, there can be no assurance that the Company will continue to do so in future periods. In particular, because of the seasonal nature of some of the Company's lines of business, the Company expects its operating results to fluctuate substantially from quarter to quarter. See "Quarterly Fluctuations in Operating Results". During the first six months of fiscal year 1998, the Company purchased seed processing equipment and computer hardware and software and incurred building improvement expenditures to support the development of Intellicoat products, incurred leasehold improvement expenditures at its Menlo Park location to upgrade existing facilities and incurred building improvement expenditures at Dock Resins to expand capacity. These expenditures represented the majority of the $1.2 million of property and equipment purchased during the first six months of fiscal year 1998. The Company believes that existing cash, cash equivalents and short-term investments will be sufficient to finance its operational and capital requirements through at least the next twelve months. The Company's future capital requirements, however, will depend on numerous factors, including the progress of its research and development programs; the development of commercial scale manufacturing capabilities; the development of marketing, sales and distribution capabilities; the ability of the Company to maintain existing collaborative and licensing arrangements and establish and maintain new collaborative and licensing arrangements; the assimilation and integration of Dock Resins and Fielder's Choice into Landec and Intellicoat, respectively; the timing and amount, if any, of payments received under licensing and research and development agreements; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the ability to comply with regulatory requirements; the emergence of competitive technology and market forces; the effectiveness of product commercialization activities and arrangements; and other factors. If the Company's currently available funds, together with the internally generated cash flow from operations, are not sufficient to satisfy its financing needs, the Company would be required to seek additional funding through other arrangements with collaborative partners, bank borrowings and public or private sales of its securities. There can be no assurance that additional funds, if required, will be available to the Company on favorable terms if at all. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS The Company desires to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, the Company wishes to alert readers that the following important factors, as well as other factors including, without limitation, those described elsewhere in this Report, could in the future affect, and in the past have affected, the Company's actual results and could cause the Company's results for future periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. The Company assumes no obligation to update such forward-looking statements. HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. As a result of the seasonal nature of Fielder's Choice's business, which results in most of its revenues and profits being concentrated during the Company's second fiscal quarter, the Company realized net income of $1.0 million for the first six months of fiscal year 1998. However, since its inception, the Company has incurred net losses in each fiscal year, and the Company's accumulated deficit as of April 30, 1998 totaled $38.8 million. The Company may incur additional losses in the future. The amount of future net losses is highly uncertain and there can be no assurance that the Company will be able to sustain profitability or reach profitability for an entire fiscal year. -10- QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. In the past, the Company's results of operations have varied significantly from quarter to quarter and such fluctuations are expected to continue in the future. Quarterly operating results will depend upon several factors, including the timing and amount of expenses associated with expanding the Company's operations, the timing of collaborative agreements with, and performance of, potential partners, the timing of regulatory approvals and new product introductions, the mix between pilot production of new products and full-scale manufacturing of existing products and the mix between domestic and export sales. The Company also cannot predict rates of licensing fees and royalties received from its partners. In addition, due to the cyclical nature of the corn seed industry, a significant portion of Fielder's Choice revenues and profits will be concentrated over a few months during the spring planting season (generally during the Company's second quarter). 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 remain profitable in the future. UNCERTAINTY RELATING TO INTEGRATION OF NEW BUSINESS ACQUISITIONS. The successful combination of the Company and Dock Resins and Intellicoat and Fielder's Choice will require substantial effort from each organization. The diversion of the attention of management and any difficulties encountered in the transition process could have a material adverse effect on the Company's ability to realize the anticipated benefits of the acquisitions. The successful combination of the companies will also require coordination of their research and development, manufacturing, and sales and marketing efforts. In addition, the process of combining the organizations could cause the interruption of, or a loss of momentum in, the Company's activities. There can be no assurance that the Company will be able to retain key management, technical, sales and customer support personnel of Dock Resins and Fielder's Choice, or that the Company will realize the anticipated benefits of the acquisitions, and the failure to do so would have a material adverse effect on the Company's business, operating results and financial condition. EARLY COMMERCIALIZATION; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES; UNCERTAINTY OF MARKET ACCEPTANCE. While the Company recently commenced marketing certain of its Intelimer polymer products, it is in the early stage of product commercialization of these products and many of its potential products are in development. The Company believes that its future success will depend in large part on its ability to develop and market new products in its target markets and in new markets. In particular, the Company expects that its ability to compete effectively with existing food products, industrial, agricultural and medical companies will depend substantially on successfully developing, commercializing, achieving market acceptance of and reducing the cost of producing the Company's products. In addition, commercial applications of the Company's temperature switch polymer technology are relatively new and evolving. There can be no assurance that the Company will be able to successfully develop, commercialize, achieve market acceptance of or reduce the costs of producing the Company's products, or that the Company's competitors will not develop competing technologies that are less expensive or otherwise superior to those of the Company. There can be no assurance that the Company will be able to develop and introduce new products and technologies in a timely manner or that new products and technologies will gain market acceptance. The failure to develop and successfully market new products would have a material adverse effect on the Company's business, operating results and financial condition. The success of the Company in generating significant sales of its products will depend in part on the ability of the Company and its partners and licensees to achieve market acceptance of the Company's 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 would have a material adverse effect on the Company's business, operating results and financial condition. COMPETITION AND TECHNOLOGICAL CHANGE. The Company operates in highly competitive and rapidly evolving fields, and new developments are expected to continue at a rapid pace. Competition from large food products, industrial, agricultural and medical companies is expected to be intense. In addition, the nature of the Company's collaborative arrangements may result in its corporate partners and licensees becoming competitors of the Company. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company, and may have substantially greater experience in conducting clinical and field trials, obtaining regulatory approvals and manufacturing and marketing commercial products. There can be no assurance that these competitors will not -11- succeed in developing alternative technologies and products that are more effective, easier to use or less expensive than those which have been or are being developed by the Company or that would render the Company's technology and products obsolete and non-competitive. LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. The Company's success is dependent in part upon its ability to manufacture its products in commercial quantities in compliance with regulatory requirements and at acceptable costs. There can be no assurance that the Company will be able to achieve this. The Company has experienced negative gross margins on certain of its products sold. Although the Company believes Dock Resins will provide Landec with practical knowledge in the scale-up of Intelimer polymer products, production in commercial-scale quantities may involve technical challenges for the Company. The Company anticipates that a substantial portion of the Company's products will be manufactured in the Linden, New Jersey facility acquired in the purchase of Dock Resins. The Company's reliance on this facility involves a number of potential risks, including the absence of adequate capacity, the unavailability of, or interruption in access to, certain process technologies and reduced control over delivery schedules, and low manufacturing yields and high manufacturing costs. The Company may also need to consider seeking collaborative arrangements with other companies to manufacture certain of its products. If the Company becomes dependent upon third parties for the manufacture of its products, then the Company's profit margins and its ability to develop and deliver such products on a timely basis may be adversely affected. Moreover, there can be no assurance that such parties will adequately perform and any failures by third parties may delay the submission of products for regulatory approval, impair the Company's ability to deliver products on a timely basis, or otherwise impair the Company's competitive position. The occurrence of any of these factors could have a material adverse effect on the Company's business, operating results and financial condition. The manufacture of the Company's products will be subject to periodic inspection by regulatory authorities. There can be no assurance that the Company will be able to obtain necessary regulatory approvals on a timely basis or at all. Delays in receipt of or failure to receive such approvals or loss of previously received approvals would have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON SINGLE SOURCE SUPPLIERS. Many of the raw materials used in manufacturing certain of the Company's products are currently purchased from a single source, including certain monomers used to synthesize Intelimer polymers and substrate materials for the Company's Intellipac breathable membrane products. In addition, virtually all of the hybrid corn varieties sold by Fielder's Choice are purchased from a single source. Upon manufacturing scale-up and increases in hybrid corn sales, the Company may enter into alternative supply arrangements. Although to date the Company has not experienced difficulty acquiring materials for the manufacture of its products nor has Fielder's Choice experienced difficulty in acquiring hybrid corn varieties, no assurance can be given that interruptions in supplies will not occur in the future, that the Company will be able to obtain substitute vendors, or that the Company will be able to procure comparable materials or hybrid corn varieties at similar prices and terms, or at all, within a reasonable time. Any such interruption of supply could have a material adverse effect on the Company's ability to manufacture and distribute its products and, consequently, could materially and adversely affect the Company's business, operating results and financial condition. CUSTOMER CONCENTRATION. For the three and six months ended April 30, 1998, sales to the Company's top five customers accounted for approximately 12% and 20%, respectively, of the Company's product sales with the top customer accounting for 6% and 9%, respectively of the Company's product sales. The Company expects that for the foreseeable future a limited number of customers may account for a substantial portion of its net revenues. The Company may experience changes in the composition of its customer base as Dock Resins and Fielder's Choice have experienced in the past. The Company does not have long-term purchase agreements with any of its customers. The reduction, delay or cancellation of orders from one or more major customers for any reason or the loss of one or more of such major customers could materially and adversely affect the Company's business, operating results and financial condition. In addition, since the products manufactured in the Linden, New Jersey facility are often sole sourced to its customers, the Company's operating results could be materially and adversely affected if one or more of its major customers were to develop other sources of supply. There can be no assurance that the Company's current customers will continue to place orders, that orders by existing customers will not be canceled or will continue at the levels of previous periods or that the Company will be able to obtain orders from new customers. PATENTS AND PROPRIETARY RIGHTS. The Company's success depends in large part on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. There can be no assurance that any pending patent applications will be approved, that the Company will develop additional proprietary -12- products that are patentable, that any patents issued to the Company will provide the Company with competitive advantages or will not be challenged by any third parties or that the patents of others will not prevent the commercialization of products incorporating the Company's technology. The Company has received, and may in the future receive, from third parties, including some of its competitors, notices claiming that it is infringing third party patents or other proprietary rights. For example, the Company has received a letter alleging that its Intellipac breathable membrane product infringes patents of another party. The Company has investigated this matter and believes that its Intellipac breathable membrane product does not infringe the specified patents of such party. The Company has received an opinion of patent counsel that the Intellipac breathable membrane product does not infringe any valid claims of such patents. If the Company were determined to be infringing any third-party patent, the Company could be required to pay damages, alter its products or processes, obtain licenses or cease certain activities. If the Company is required to obtain any licenses, there can be no assurance that the Company will be able to do so on commercially favorable terms, if at all. Litigation, which could result in substantial costs to and diversion of effort by the Company, may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of third-party proprietary rights. Any such litigation or interference proceeding, regardless of outcome, could be expensive and time consuming and could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the Company to cease using such technology and, consequently, could have a material adverse effect on the Company's business, operating results and financial condition. GOVERNMENT REGULATION. The Company's products and operations are subject to substantial regulation in the United States and foreign countries. Although Landec believes that it will be able to comply with all applicable regulations regarding the manufacture and sale of its products and polymer materials, such regulations are always subject to change and depend heavily on administrative interpretations and the country in which the products are sold. There can be no assurance that future changes in regulations or interpretations relating to such matters as safe working conditions, laboratory and manufacturing practices, environmental controls, and disposal of hazardous or potentially hazardous substances will not adversely effect the Company's business. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect on the Company's business, operating results and financial condition. Failure to comply with the applicable regulatory requirements can, among other things, result in fines, injunctions, civil penalties, suspensions or withdrawal of regulatory approvals, product recalls, product seizures, including cessation of manufacturing and sales, operating restrictions and criminal prosecution. ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose various environmental controls on the discharge or disposal of toxic, volatile or otherwise hazardous chemicals and gases used in certain manufacturing processes. Dock Resins is involved in various investigations and proceedings conducted by the federal Environmental Protection Agency and certain state environmental agencies regarding disposal of waste materials and the remediation of its Linden, New Jersey facility. Although the factual situations and the progress of each of these matters differ, the Company believes certain escrowed funds will prove adequate to account for any resultant liability, including any New Jersey Industrial Site Recovery Act remediation regarding its Linden, New Jersey facility. In most cases, the Company believes its liability will be limited to sharing clean-up or other remedial costs with other potentially responsible parties. Any failure by the Company to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations could subject it to substantial liability or could cause its manufacturing operations to be suspended and could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that changes in environmental regulations will not impose the need for additional capital equipment or other requirements. LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited experience marketing and selling its Intelimer polymer products. While Dock Resins will provide consultation and in some cases direct marketing support for Landec's Intelimer polymer products, establishing sufficient marketing and sales capability will require significant resources. The Company intends to distribute certain of its products through its corporate partners and other distributors and to sell certain other products through a direct sales force. There can be no assurance that the Company will be able to recruit and retain skilled sales management, direct salespersons or distributors, or that the Company's sales and marketing efforts will be successful. To the extent that the Company has or will enter into distribution or other collaborative arrangements for the sale of its products, the Company will be dependent on the efforts of third parties. There can be no assurance that such sales and marketing efforts will be successful and any failure in such efforts could have a material adverse effect on the Company's business, operating results and financial condition. -13- DEPENDENCE ON COLLABORATIVE PARTNERS AND LICENSEES. The Company's strategy for the development, clinical and field testing, manufacture, commercialization and marketing of certain of its current and future products includes entering into various collaborations with corporate partners, licensees and others. To date, the Company has entered into collaborative arrangements with The BFGoodrich Company and Hitachi Chemical in connection with its Intelimer Polymer Systems; Fresh Express Farms, Apio, Inc., Roplast Industries, Inc. and PrintPack, Inc. in connection with its Intellipac breathable membrane products; and Nitta Corporation and Hitachi Chemical in connection with its adhesive products. The Company is dependent on its corporate partners to develop, test, manufacture and/or market certain of its products. Although the Company believes that its partners in these collaborations have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted to these activities are not within the control of the Company. There can be no assurance that such partners will perform their obligations as expected or that the Company will derive any additional revenue from such arrangements. There can be no assurance that the Company's partners will pay any additional option or license fees to the Company or that they will develop and market 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 other circumstances. In addition, there can be no assurance as to the amount of royalties, if any, on future sales of QuickCast and PORT products as the Company no longer has control over the sales of such products since the sale of the QuickCast and the license of the PORT product lines. There can be no assurance that the Company's partners will not pursue existing or alternative technologies in preference to the Company's technology. Furthermore, there can be no assurance that the Company will be able to negotiate additional collaborative arrangements in the future on acceptable terms, if at all, or that such collaborative arrangements will be successful. To the extent that the Company chooses not to or is unable to establish such arrangements, it would experience increased capital requirements to undertake research, development, manufacture, marketing or sale of its current and future products. There can be no assurance that the Company will be able to independently develop, manufacture, market, or sell its current and future products in the absence of such collaborative agreements and failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. INTERNATIONAL OPERATIONS AND SALES. In the second quarters of the fiscal years 1998 and 1997, approximately 2% and 22%, respectively, of the Company's total revenues were derived from product sales to and collaborative agreements with international customers, and the Company expects that international revenues, although down from historical levels, will continue to be an important component of its total revenues. A number of risks are inherent in international transactions. International sales and operations may be limited or disrupted by the regulatory approval process, government controls, export license requirements, political instability, price controls, trade restrictions, changes in tariffs or difficulties in staffing and managing international operations. Foreign regulatory agencies have or may establish product standards different from those in the United States, and any inability to obtain foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's international business and its financial condition and results of operations. While the Company's foreign sales are currently priced in dollars, fluctuations in currency exchange rates, such as those recently experienced in many Asian countries which comprise a part of the territories of certain of the Company's collaborative partners, may reduce the demand for the Company's products by increasing the price of the Company's products in the currency of the countries to which the products are sold. There can be no assurance that regulatory, geopolitical and other factors will not adversely impact the Company's operations in the future or require the Company to modify its current business practices. PRODUCT LIABILITY EXPOSURE AND AVAILABILITY OF INSURANCE. The testing, manufacturing, marketing, and sale of the products being developed by the Company involve an inherent risk of allegations of product liability. While no product liability claims have been made against the Company to date, if any such claims were made and adverse judgments obtained, they could have a material adverse effect on the Company's business, operating results and financial condition. Although the Company has taken and intends to continue to take what it believes are appropriate precautions to minimize exposure to product liability claims, there can be no assurance that it will avoid significant liability. The Company currently maintains medical and non-medical product liability insurance in the minimum amount of $4.0 million per occurrence with a minimum annual aggregate limit of $5.0 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. -14- POSSIBLE VOLATILITY OF STOCK PRICE. Factors such as announcements of technological innovations, the attainment of (or failure to attain) milestones in the commercialization of the Company's technology, new products, new patents or changes in existing patents, the acquisition of new businesses or the sale or disposal of a part of the Company's businesses, or development of new, collaborative arrangements by the Company, its competitors or other parties, as well as government regulations, investor perception of the Company, fluctuations in the Company's operating results and general market conditions in the industry may cause the market price of the Company's Common Stock to fluctuate significantly. In addition, the stock market in general has recently experienced extreme price and volume fluctuations, which have particularly affected the market prices of technology companies and which have been unrelated to the operating performance of such companies. These broad fluctuations may adversely effect the market price of the Company's Common Stock. IMPACT OF YEAR 2000. The Company is in the process of performing its assessment of the impact of year 2000 on its operations. Management is in the process of formalizing its assessment procedures and developing a plan to address identified issues. The Company has evaluated its financial and accounting and inventory tracking systems and concluded that they are not materially affected by the year 2000. The extent, if any, of the impact of the year 2000 on other systems and equipment is unknown. A corporate-wide inventory of computer applications is being performed and is expected to be completed by the end of fiscal year 1998 after which the Company will attempt to remedy any issues. The Company has also begun communications with its facilities managers to determine the impact on building security and related equipment. There can be no assurance that all third parties will address the year 2000 issue in a timely fashion if at all. Any year 2000 compliance problems of either the Company, its suppliers, its manufacturers, its collaborative partners and licensees or its customers could have a material adverse effect on the Company's business, operating results and financial condition. -15- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In connection with its initial public offering in 1996, the Company filed a Registration Statement on Form S-1, SEC File No. 33-80723 (the "Registration Statement"), which was declared effective by the Commission on February 12, 1996. Pursuant to the Registration Statement, the Company registered 3,220,000 shares of its Common Stock, $0.001 par value per share, for its own account. The offering commenced on February 15, 1996 and did not terminate until all of the registered shares had been sold. The aggregate offering price of the registered shares was $38,640,000. The managing underwriters of the offering were Smith Barney and Lehman Brothers. From February 1, 1996 to April 30, 1998, the Company incurred the following expenses in connection with the offering: Underwriting discounts and commissions $2,705,000 Other expenses 900,000 ---------- Total Expenses $3,605,000 ----------
All of such expenses were direct or indirect payments to others. The net offering proceeds to the Company after deducting the total expenses above were $35,035,000. From February 1, 1996 to April 30, 1998, the Company used such net offering proceeds, in direct or indirect payments to others, as follows: Purchase and installment of machinery and equipment $ 2,900,000 Repayment of indebtedness $ 600,000 Acquisitions of other businesses $17,300,000 Working capital $ 5,100,000 ----------- Total $25,900,000
Each of such amounts is a reasonable estimate of the application of the net offering proceeds. This use of proceeds does not represent a material change in the use of proceeds described in the prospectus of the Registration Statement. ITEM 3. DEFAULTS IN SENIOR SECURITIES None -16- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Shareholders held on April 15, 1998 the following proposals were adopted by the margins indicated:
Number of Shares Voted For Withheld --------- --------- 1. Four Class II directors were elected by the margins indicated to serve until the next even numbered year Annual Meeting (2000) during which their successors will be elected and qualified: Gary T. Steele 10,526,148 18,711 Kirby L. Cramer 10,525,448 19,411 Richard Dulude 10,525,448 19,411 Damion E. Wicker M.D. 10,526,148 18,711 The three Class I directors were not up for election at the Annual Meeting. These three Class I directors, Ray F. Stewart, Stephen E. Halprin, and Richard S. Schneider, Ph.D., will serve as Class I directors until the next odd-numbered Annual Meeting (1999), when their successors will be elected and qualified.
Voted Voted Broker For Against Abstain Non-Votes ----- ------- ------- --------- 2. To approve an amendment to 7,233,969 1,374,698 13,033 1,923,159 the Company's 1996 Stock Option Plan to increase the number of shares of Common Stock reserved for issuance by 750,000 shares. 3. To approve amendments to 7,152,411 1,486,394 13,392 1,892,665 the Company's 1995 Directors' Stock Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 200,000 shares, to change the subsequent option grants made to each nonemployee director to 5,000 for the 1997 Annual Meeting and to 10,000 shares annually thereafter and to reprice the exercise price of all options previously granted under the 1995 Directors' Stock Option Plan. 4. To ratify the appointment 10,527,872 11,001 5,986 0 of Ernst & Young LLP as independent public accountants of the Company for the fiscal year ending October 31, 1998.
-17- ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) There were no reports on Form 8-K filed during the quarter ended April 30, 1998. -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LANDEC CORPORATION By: /s/ JOY T. FRY ------------------------------------------ Joy T. Fry Vice President, Finance and Administration and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer) Date: June 11, 1998 -19- LANDEC CORPORATION INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER EXHIBIT NUMBERED PAGE - ------- ------- ------------- 27.1 Financial Data Schedule 21
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5 1,000 6-MOS OCT-31-1998 NOV-01-1997 APR-30-1998 10,934 1,985 2,509 (66) 3,232 19,823 8,772 (2,943) 40,513 3,683 0 0 0 75,787 (38,987) 40,513 21,693 22,980 13,908 16,543 0 0 105 1,251 228 1,023 0 0 0 1,023 .08 .07