This document consists of 18 pages, of which this is page Number 1.
The index to Exhibits is on Page 18
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 JULY 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
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 September 1, 1998, 12,812,876 shares of the Registrant's common stock
were outstanding.
-1-
LANDEC CORPORATION
FORM 10-Q For the Quarter Ended July 31, 1998
INDEX
Page
Facing sheet 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
a) Consolidated condensed balance sheets as of July 31,
1998 and October 31, 1997 3
b) Consolidated statements of operations for the three
and nine months ended July 31, 1998 and 1997 4
c) Consolidated statements of cash flows for the nine
months ended July 31, 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 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults in Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits 16
b) Reports on Form 8-K 16
Signature 17
Index to Exhibits 18
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
July 31, October 31,
1998 1997
--------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,997 $ 5,163
Short-term investments 2,461 9,506
Restricted investment -- 8,837
Accounts receivable, net 2,152 2,162
Inventory 4,527 2,652
Prepaid expenses and other current assets 1,532 1,720
--------- -----------
Total Current Assets 16,669 30,040
Property and equipment, net 7,214 5,023
Intangible assets, net 14,538 14,985
Other assets 45 112
--------- -----------
$ 38,466 $ 50,160
--------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 920 $ 642
Accrued compensation 872 836
Other accrued liabilities 876 1,520
Payable related to acquisition of
Dock Resins Corporation -- 9,189
Deferred revenue 49 2,326
Current portion of long term debt 12 6
--------- -----------
Total Current Liabilities 2,729 14,519
Non-current portion of long term debt 27 26
Shareholders' Equity:
Preferred stock -- --
Common stock 75,982 75,679
Notes receivable from shareholders -- (8)
Deferred compensation (114) (198)
Accumulated deficit (40,158) (39,858)
--------- -----------
Total Shareholders' Equity 35,710 35,615
--------- -----------
$ 38,466 $ 50,160
--------- -----------
SEE ACCOMPANYING NOTES.
-3-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended July 31, Nine months Ended July 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
Product sales $ 4,932 $ 4,095 $ 26,625 $ 4,835
---------- ---------- ---------- ----------
License fees -- -- 500 --
Research and development revenues 342 212 1,129 671
---------- ---------- ---------- ----------
Total revenues 5,274 4,307 28,254 5,506
Operating costs and expenses:
Cost of product sales 3,251 2,714 17,159 3,269
Research and development 1,387 1,370 4,022 3,316
Selling, general and administrative 2,235 1,327 7,780 2,892
Purchase of in-process research and
development -- -- -- 3,022
---------- ---------- ---------- ----------
Total operating costs and expenses 6,873 5,411 28,961 12,499
---------- ---------- ---------- ----------
Operating loss (1,599) (1,104) (707) (6,993)
Interest income 155 421 619 1,352
Interest expense (7) (159) (112) (181)
---------- ---------- ---------- ----------
Loss from continuing operations before
provision for income taxes (1,451) (842) (200) (5,822)
Income tax benefit (expense) 137 -- (91) --
---------- ---------- ---------- ----------
Loss from continuing
operations (1,314) (842) (291) (5,822)
Loss from discontinued
QuickCast operation -- (172) -- (1,059)
---------- ---------- ---------- ----------
Net loss $ (1,314) $ (1,014) $ (291) $ (6,881)
---------- ---------- ---------- ----------
Net loss per share:
Continuing operations $ (0.10) $ (0.07) $ (0.02) $ (0.53)
Discontinued operations -- (0.02) -- (0.10)
---------- ---------- ---------- ----------
Total net loss per share $ (0.10) $ (0.09) $ (0.02) $ (0.63)
---------- ---------- ---------- ----------
Shares used in computation
of net loss per share: 12,781 11,226 12,738 10,938
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES.
-4-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine months Ended July 31,
1998 1997
----------- ------------
Cash flows from operating activities:
Net loss from continuing operations $ (291) $ (5,822)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 1,454 587
Amortization of deferred compensation 84 85
Write-off of purchased in-process
research and development -- 3,022
Loss from discontinued operations -- (1,059)
Changes in current assets and
liabilities (net of effects of Dock
Resins Corporation acquisition in April 1997):
Accounts receivable 10 (341)
Inventories (1,875) 261
Prepaid expenses and other current assets 188 (274)
Accounts payable 278 (496)
Accrued compensation 36 97
Other accrued liabilities (644) 140
Deferred revenue (2,277) (62)
----------- --------
Total adjustments (2,746) 1,960
----------- --------
Net cash used in operating activities (3,037) (3,862)
----------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,808) (1,043)
Increase (decrease) in other assets 67 (68)
Acquisition costs, net of cash acquired (390) (3,230)
Purchases of available-for-sale securities (5,003) (14,607)
Sale of available-for-sale securities 4,805 4,041
Maturities of available-for-sale securities 7,234 21,603
----------- --------
Net cash provided by (used in) investing activities: 3,905 6,696
----------- --------
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 303 150
Proceeds from repayment of notes receivable 8 --
Payment of payable to Dock Resins Corporation (9,189) (423)
Proceeds from issuance of long term debt 29 --
Payments on long term debt (22) (169)
----------- --------
Net cash used in financing activities (34) (9,279)
----------- --------
Net increase (decrease) in cash and cash equivalents 834 (6,445)
Cash and cash equivalents at beginning of period 5,163 14,185
----------- --------
Cash and cash equivalents at end of period $ 5,997 $ 7,740
----------- --------
----------- --------
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 July 31, 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 nine month periods ended July
31, 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).
1. 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:
JULY 31, OCTOBER 31,
1998 1997
--------- ----------
Raw materials $ 700 $ 617
Work in process 619 152
Finished goods 3,208 1,883
--------- ----------
$ 4,527 $ 2,652
--------- ----------
--------- ----------
4. 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 nine months ended July 31, 1998, the Company
recognized $500,000 in license revenues and $452,000 in research and development
revenues associated with this arrangement.
5. 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 July 31,
1998, no amounts had been borrowed against this agreement.
-6-
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.
Management has recently implemented a focused strategy of building strong,
vertically integrated businesses in three industries: Food Packaging,
Industrial High Performance Materials and Agricultural Seed and Distribution.
As part of this strategy, the Company has completed several strategic
transactions. In April 1997, the Company acquired Dock Resins and incorporated
it into its Industrial High Performance Materials business. Dock Resins is
primarily engaged in the manufacturing and marketing of specialty acrylics and
other polymers. In September 1997, Intellicoat Corporation ("Intellicoat"), a
subsidiary of the Company focused on Agricultural Seed and Distribution,
acquired Fielder's Choice, a direct marketer of hybrid seed corn. To remain
focused on the three core businesses, the Company licensed two of its healthcare
products. 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 second quarter of fiscal year 1998, 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 July 31, 1998, the Company's accumulated deficit was $40.2 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 $5.3 million for the third quarter of fiscal year 1998
compared to $4.3 million for the third quarter of fiscal year 1997. Revenues
from product sales increased to $4.9 million in the third quarter of fiscal year
1998 from $4.1 million in the third quarter of fiscal year 1997 due primarily to
product sales of $413,000 from Fielder's Choice, which the Company did not
acquire until the fourth quarter of fiscal year 1997. Also contributing to the
increase was Intellipac breathable membrane product sales which increased from
$465,000 in the third quarter of fiscal year 1997 to $800,000 in the third
quarter of fiscal year 1998, due primarily to an increase in unit sales.
Product sales for the discontinued QuickCast product line for the third quarter
of fiscal year 1997 through the measurement date of June 12, 1997 were $41,000,
which was included in the loss from discontinued operations. Revenues from
research and development funding were $342,000 for the third quarter of fiscal
year 1998 compared to $212,000 for the third quarter of
-7-
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 nine months of fiscal
year 1998, total revenues were $28.3 million compared to $5.5 million during the
same period in 1997. Revenue from product sales for the first nine months of
fiscal year 1998 increased to $26.6 million from $4.8 million during the same
period in 1997 due primarily to product sales of $13.3 million and $11.3 million
from Fielder's Choice and Dock Resins, respectively. Also contributing to the
increase was sales of the Intellipac breathable membrane product, which
increased to $2.0 million for the first nine months of fiscal year 1998 from
$689,000 for the first nine months of fiscal year 1997 due primarily to an
increase in unit sales. Product sales for the discontinued QuickCast product
line for the first nine months of fiscal year 1997 through the measurement date
of June 12, 1997, were $241,000 which was included in the loss from discontinued
operations. Revenues from license fees were $500,000 for the first nine months
of fiscal year 1998 compared to none during the same period of fiscal year 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 nine months of fiscal year 1998 increased to
$1.1 million from $671,000 during the same period of fiscal year 1997. The
increase in research and development revenues was primarily due to the agreement
with Alcon for the funding of the PORT program.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $3.3 million for the third quarter of fiscal year 1998
compared to $2.7 million for the third quarter of fiscal year 1997. Cost of
product sales as a percentage of product sales remained unchanged at 66% for the
third quarter of fiscal years 1998 and 1997. Cost of product sales for the
first nine months of fiscal year 1998 was $17.2 million compared to $3.3 million
during the same period in 1997. Cost of product sales as a percentage of
product sales decreased to 64% for the first nine months of fiscal year 1998
from 68% 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 third quarter
and for the first nine months of fiscal year 1997 through the measurement date
of June 12, 1997 were $74,000 and $462,000, 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 among other
factors and will likely decrease during the fourth quarter of fiscal year 1998
due to Fielder's Choice recognizing all of its revenue and profits during the
first nine months of fiscal year 1998.
Research and development expenses remained unchanged at $1.4 million for
the third quarter of fiscal years 1998 and 1997. For the first nine months of
fiscal year 1998, research and development expenses were $4.0 million compared
to $3.3 million during the same period in 1997, an increase of 21%. The
increase in research and development expenses for the nine month period ended
July 31, 1998 compared to the same period of fiscal year 1997 was primarily due
to a full nine months of research and development costs incurred by Dock Resins
in fiscal year 1998 (which the Company acquired in April 1997), and increased
costs for the Intellipac breathable membrane products. 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. 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 $2.2 million for the
third quarter of fiscal year 1998 compared to $1.3 million for the third quarter
of fiscal year 1997, an increase of 68%. For the first nine months of fiscal
year 1998 selling, general and administrative expenses were $7.8 million
compared to $2.9 million during the same period of fiscal year 1997, an increase
of 169%. 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 nine
month periods ended July 31, 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 $1.4
million for the third quarter of fiscal year 1998 from $489,000 for the third
quarter of fiscal year 1997. For the first nine months of fiscal year 1998,
sales and marketing expenses increased to $4.7 million compared to $1.1 million
during the same period in 1997. The increase in sales and marketing expenses
for the three and nine month periods ended July 31, 1998 compared to the same
periods of fiscal year 1997 was primarily
-8-
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 third quarter and for the first nine months of fiscal year 1997 through the
measurement date of June 12, 1997 were $138,000 and $823,000, 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, although it may vary as a percentage of total
revenues.
Net interest income for the three and nine month periods ended July 31,
1998 were $148,000 and $507,000, respectively, compared to $262,000 and $1.2
million 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 July 31, 1998 the Company had unrestricted cash, cash equivalents and
short-term investments of $8.5 million, a net decrease of $6.2 million from
$14.7 million as of October 31, 1997. This decrease was primarily due to cash
used in operations of $3.0 million for the first nine months of fiscal year
1998, of which $2.2 million was used by Fielder's Choice to purchase seed
inventory to be used during the 1999 selling season, and to purchase $2.8
million of property and equipment. Although the Company reduced the cash used
in operations during the first nine 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.
During the first nine 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 and equipment improvement
expenditures at Dock Resins to expand capacity. These expenditures represented
the majority of the $2.8 million of property and equipment purchased during the
first nine 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. The Company has
incurred net losses in each fiscal year since its inception, including a loss
from continuing operations of $291,000 for the nine months ended July 31, 1998.
The
-9-
Company's accumulated deficit as of July 31, 1998 totaled $40.2 million. The
Company may incur additional losses in the future. The amount of future net
losses is highly uncertain and there can be no assurance that the Company will
be able to reach or sustain profitability for an entire fiscal year.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. In the past, the Company's
results of operations have varied significantly from quarter to quarter and such
fluctuations are expected to continue in the future. Due to the 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). In addition, quarterly
operating results will depend upon several factors, including the timing and
amount of expenses associated with expanding the Company's operations, the
timing of collaborative agreements with, and performance of, potential partners,
the timing of regulatory approvals and new product introductions, the mix
between pilot production of new products and full-scale manufacturing of
existing products and the mix between domestic and export sales. The Company
also cannot predict rates of licensing fees and royalties received from its
partners. As a result of these and other factors, the Company expects to
continue to experience significant fluctuations in quarterly operating results,
and there can be no assurance that the Company will be profitable in the future.
UNCERTAINTY RELATING TO INTEGRATION OF NEW BUSINESS ACQUISITIONS. The
successful combination of the Company and Dock Resins and Intellicoat and
Fielder's Choice has required and will continue to require substantial effort
from each organization. The diversion of the attention of management and any
difficulties encountered in the transition process could have a material adverse
effect on the Company's ability to realize the anticipated benefits of the
acquisitions. The successful combination of the companies also requires
coordination of their research and development, manufacturing, and sales and
marketing efforts. In addition, the process of combining the organizations
could cause the interruption of, or a loss of momentum in, the Company's
activities. There can be no assurance that the Company will be able to retain
key management, technical, sales and customer support personnel of Dock Resins
and Fielder's Choice, or that the Company will realize the anticipated benefits
of the acquisitions, and the failure to do so would have a material adverse
effect on the Company's business, operating results and financial condition.
EARLY COMMERCIALIZATION OF CERTAIN PRODUCTS; DEPENDENCE ON NEW PRODUCTS AND
TECHNOLOGIES; UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early
stage of product commercialization of certain Intelimer polymer products and
many of its potential products are in development. The Company believes that
its future success will depend in large part on its ability to develop and
market new products in its target markets and in new markets. In particular,
the Company expects that its ability to compete effectively with existing food
products, industrial, agricultural and medical companies will depend
substantially on successfully developing, commercializing, achieving market
acceptance of and reducing the cost of producing the Company's products. In
addition, commercial applications of the Company's temperature switch polymer
technology are relatively new and evolving. There can be no assurance that the
Company will be able to successfully develop, commercialize, achieve market
acceptance of or reduce the costs of producing the Company's 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
-10-
arrangements may result in its corporate partners and licensees becoming
competitors of the Company. Many of these competitors have substantially
greater financial and technical resources and production and marketing
capabilities than the Company, and may have substantially greater experience in
conducting clinical and field trials, obtaining regulatory approvals and
manufacturing and marketing commercial products. There can be no assurance that
these competitors will not succeed in developing alternative technologies and
products that are more effective, easier to use or less expensive than those
which have been or are being developed by the Company or that would render the
Company's technology and products obsolete and non-competitive.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. The
Company's success is dependent in part upon its ability to manufacture its
products in commercial quantities in compliance with regulatory requirements and
at acceptable costs. There can be no assurance that the Company will be able to
achieve this. 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 portion of the Company's products
will be manufactured in the Linden, New Jersey facility acquired in the purchase
of Dock Resins. The Company's reliance on this facility involves a number of
potential risks, including the absence of adequate capacity, the unavailability
of, or interruption in access to, certain process technologies and reduced
control over delivery schedules, and low manufacturing yields and high
manufacturing costs. The Company may also need to consider seeking
collaborative arrangements with other companies to manufacture certain of its
products. If the Company becomes dependent upon third parties for the
manufacture of its products, then the Company's profit margins and its ability
to develop and deliver such products on a timely basis may be adversely
affected. Moreover, there can be no assurance that such parties will adequately
perform and any failures by third parties may impair the Company's ability to
deliver products on a timely basis, impair the Company's competitive position,
or may delay the submission of products for regulatory approval. The occurrence
of any of these factors could have a material adverse effect on the Company's
business, operating results and financial condition. The manufacture of the
Company's products will be subject to periodic inspection by regulatory
authorities. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals on a timely basis or at all. Delays in receipt
of or failure to receive such approvals or loss of previously received approvals
would have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS. Many of the raw materials used in
manufacturing certain of the Company's products are currently purchased from a
single source, including certain monomers used to synthesize Intelimer polymers
and substrate materials for the Company's Intellipac breathable membrane
products. In addition, virtually all of the hybrid corn varieties sold by
Fielder's Choice are purchased from a single source. Upon manufacturing
scale-up and increases in hybrid corn sales, the Company may enter into
alternative supply arrangements. Although to date the Company has not
experienced difficulty acquiring materials for the manufacture of its products
nor has Fielder's Choice experienced difficulty in acquiring hybrid corn
varieties, no 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 nine months ended July 31, 1998,
sales to the Company's top five customers accounted for approximately 44% and
24%, respectively, of the Company's product sales with the top customer
accounting for 18% and 11%, respectively of the Company's product sales. The
Company expects that for the foreseeable future a limited number of customers
may continue to account for a substantial portion of its net revenues. The
Company may experience changes in the composition of its customer base as Dock
Resins and Fielder's Choice have experienced in the past. The Company does not
have long-term purchase agreements with any of its customers. The reduction,
delay or cancellation of orders from one or more major customers for any reason
or the loss of one or more of such major customers could materially and
adversely affect the Company's business, operating results and financial
condition. In addition, since the products manufactured in the Linden, New
Jersey facility are often sole sourced to its customers, the Company's operating
results could be materially and adversely affected if one or more of its major
customers were to develop other sources of supply. There can be no assurance
that the Company's current customers will continue to place orders, that
-11-
orders by existing customers will not be canceled or will continue at the levels
of previous periods or that the Company will be able to obtain orders from new
customers.
PATENTS AND PROPRIETARY RIGHTS. The Company's success depends in large
part on its ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of third parties. There
can be no assurance that any pending patent applications will be approved, that
the Company will develop additional proprietary products that are patentable,
that any patents issued to the Company will provide the Company with competitive
advantages or will not be challenged by any third parties or that the patents of
others will not prevent the commercialization of products incorporating the
Company's technology. The Company has received, and may in the future receive,
from third parties, including some of its competitors, notices claiming that it
is infringing third party patents or other proprietary rights. For example, the
Company has received a letter alleging that its Intellipac breathable membrane
product infringes patents of another party. The Company has investigated this
matter and believes that its Intellipac breathable membrane product does not
infringe the specified patents of such party. The Company has received an
opinion of patent counsel that the Intellipac breathable membrane product does
not infringe any valid claims of such patents. 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 affect the Company's business. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect on the Company's business,
operating results and financial condition. Failure to comply with the
applicable regulatory requirements can, among other things, result in fines,
injunctions, civil penalties, suspensions or withdrawal of regulatory approvals,
product recalls, 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
-12-
resources. The Company intends to distribute certain of its products through
its corporate partners and other distributors and to sell certain other products
through a direct sales force. There can be no assurance that the Company will
be able to recruit and retain skilled sales management, direct salespersons or
distributors, or that the Company's sales and marketing efforts will be
successful. To the extent that the Company has or will enter into distribution
or other collaborative arrangements for the sale of its products, the Company
will be dependent on the efforts of third parties. There can be no assurance
that such sales and marketing efforts will be successful and any failure in such
efforts could have a material adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE ON COLLABORATIVE PARTNERS AND LICENSEES. The Company's
strategy for the development, clinical and field testing, manufacture,
commercialization and marketing of certain of its current and future products
includes entering into various collaborations with corporate partners, licensees
and others. To date, the Company has entered into collaborative arrangements
with The BFGoodrich Company and Hitachi Chemical in connection with its
Intelimer Polymer Systems; Fresh Express Farms, 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 third quarters of the fiscal
years 1998 and 1997, approximately 7% and 4%, 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
-13-
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.
POSSIBLE VOLATILITY OF STOCK PRICE. Factors such as announcements of
technological innovations, the attainment of (or failure to attain) milestones
in the commercialization of the Company's technology, new products, new patents
or changes in existing patents, the acquisition of new businesses or the sale or
disposal of a part of the Company's businesses, or development of new,
collaborative arrangements by the Company, its competitors or other parties, as
well as government regulations, investor perception of the Company, fluctuations
in the Company's operating results and general market conditions in the industry
may cause the market price of the Company's Common Stock to fluctuate
significantly. In addition, the stock market in general has recently
experienced extreme price and volume fluctuations, which have particularly
affected the market prices of technology companies and which have been unrelated
to the operating performance of such companies. These broad fluctuations may
adversely affect the market price of the Company's Common Stock.
IMPACT OF YEAR 2000. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. Therefore, any of such
computer systems and software products that recognize a date code field of "00"
as the year 1900 rather than the year 2000 could result in errors or system
failures. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to resolve the potential impact of this
misinterpretation and the resulting errors or system failures and to make such
systems, equipment and software Year 2000 compliant. 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. Failure of the Company's internal computer
systems or of such third-party equipment or software, or of systems maintained
by the Company's suppliers, to operate properly with regard to the year 2000 and
thereafter could require the Company to incur unanticipated expenses to remedy
any problems, which could have a material adverse effect on the Company's
business, operating results and financial condition. Furthermore, the
purchasing patterns of customers or potential customers may be affected by the
Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase the Company's products, which could have a
material adverse effect on the Company's business, operating results and
financial condition. In order to assure that this does not occur, the Company
plans to devote all resources required to resolve any significant Year 2000
issues in a timely manner.
-14-
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 July 31, 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 July 31, 1998, the Company
used such net offering proceeds, in direct or indirect payments to others, as
follows:
Purchase and installment of machinery and equipment $ 4,500,000
Repayment of indebtedness $ 600,000
Acquisitions of other businesses $17,700,000
Working capital $ 7,500,000
-----------
Total $30,300,000
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
-15-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission has recently amended Rule 14a-4(c)
(1) promulgated under the Securities and Exchange Act of 1934, as amended. As
amended, Rule 14a-4(c) (1) provides that if a proponent fails to notify the
Company of a proposal at least 45 days prior to the month and day of mailing of
the prior year's proxy statement, then management would be allowed to use its
discretionary voting authority when the proposal is raised at the Annual
Meeting, without any discussion of the matter in the proxy statement. The proxy
statement for the Company's 1998 Annual Meeting of Shareholders was mailed to
shareholders on February 27, 1998. Accordingly, if a proponent does not notify
the Company on or before January 13, 1999 of a proposal for the 1999 Annual
Meeting of Shareholders, management may use its discretionary voting authority
to vote on such proposal, even if the matter is not discussed in the proxy
statement for the 1999 Annual Meeting of Shareholders.
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 July
31, 1998.
-16-
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: September 14, 1998
-17-
LANDEC CORPORATION
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------ ------- -------------
27.1 Financial Data Schedule 19f
-18-
5
1,000
9-MOS
OCT-31-1998
NOV-01-1997
JUL-31-1998
5,997
2,461
2,212
(60)
4,527
16,669
10,366
(3,152)
38,466
2,729
0
0
0
75,982
(40,272)
38,466
26,625
28,254
17,159
21,181
0
0
112
(200)
91
(291)
0
0
0
(291)
(0.02)
(0.02)
