This document consists of 20 pages, of which this is page number 1.
The index to Exhibits is on Page 19.
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, 1999, 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 3, 1999, 13,332,294 shares of the Registrant's common
stock were outstanding.
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LANDEC CORPORATION
FORM 10-Q For the Quarter Ended July 31, 1999
INDEX
Page
Facing sheet 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. a) Consolidated condensed balance sheets as of July 31, 1999
and October 31, 1998 3
b) Consolidated statements of operations for the three
months and nine months ended July 31, 1999 and 1998 4
c) Consolidated statements of cash flows for the nine
months ended July 31, 1999 and 1998 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
a) Exhibits 17
b) Reports on Form 8-K 17
Signature 18
Index to Exhibits 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
July 31, October 31,
1999 1998
ASSETS ------------ -------------
Current Assets:
Cash and cash equivalents $ 4,256 $ 9,185
Short-term investments -- 992
Accounts receivable, net 2,782 2,808
Inventories 7,637 4,676
Prepaid expenses and other current assets 1,959 2,122
------------ ------------
Total Current Assets 16,634 19,783
Property and equipment, net 9,956 8,280
Intangible assets, net 13,793 14,255
Other assets 38 38
------------ ------------
$ 40,421 $ 42,356
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,287 $ 1,399
Accrued compensation 1,032 1,017
Other accrued liabilities 1,129 942
Deferred revenue 16 2,499
Current portion of long term debt 115 156
------------ ------------
Total Current Liabilities 3,579 6,013
Long term debt 2,633 2,655
Shareholders' Equity:
Preferred stock -- --
Common stock 77,185 76,821
Notes receivable from shareholders -- (291)
Deferred compensation -- (86)
Accumulated deficit (42,976) (42,756)
------------ ------------
Total Shareholders' Equity 34,209 33,688
------------ ------------
$ 40,421 $ 42,356
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES.
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LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended July 31, Nine Months Ended July 31,
1999 1998 1999 1998
-------------- -------------- ------------- ---------------
Revenues:
Product sales $ 5,409 $ 4,932 $ 28,713 $ 26,625
License fees -- -- 750 500
Research and development revenues 121 342 482 1,129
-------------- -------------- ------------- ---------------
Total revenues 5,530 5,274 29,945 28,254
Operating costs and expenses:
Cost of product sales 3,588 3,251 17,673 17,159
Research and development 1,433 1,387 4,359 4,022
Selling, general and administrative 2,525 2,235 8,249 7,780
-------------- -------------- ------------- ---------------
Total operating costs and expenses 7,546 6,873 30,281 28,961
-------------- -------------- ------------- ---------------
Operating loss (2,016) (1,599) (336) (707)
Interest income 69 155 322 619
Interest expense (64) (7) (183) (112)
-------------- -------------- ------------- ---------------
Loss before provision for income taxes (2,011) (1,451) (197) (200)
Income tax benefit (expense) (16) 137 (20) (91)
-------------- -------------- ------------- ---------------
Net loss $ (2,027) $ (1,314) $ (217) $ (291)
-------------- -------------- ------------- ---------------
-------------- -------------- ------------- ---------------
Basic and diluted net loss per share $ (0.15) $ (0.10) $ (0.02) $ (0.02)
-------------- -------------- ------------- ---------------
-------------- -------------- ------------- ---------------
Shares used in computation of net loss per share 13,294 12,781 13,252 12,738
-------------- -------------- ------------- ---------------
-------------- -------------- ------------- ---------------
SEE ACCOMPANYING NOTES.
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LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended July 31,
1999 1998
------------ ------------
Cash flows from operating activities:
Net income $ (217) $ (291)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 1,562 1,454
Amortization of deferred compensation 86 84
Loss on sale of equipment 60 --
Changes in current assets and liabilities:
Accounts receivable 26 10
Inventory (2,961) (1,875)
Prepaid expenses and other current assets 163 188
Accounts payable (112) 278
Accrued compensation 15 36
Other accrued liabilities 187 (644)
Deferred revenue (2,483) (2,277)
------------ ------------
Total adjustments (3,457) (2,746)
------------ ------------
Net cash used in operating activities (3,674) (3,037)
------------ ------------
Cash flows from investing activities:
Increase (decrease) in other assets -- 67
Purchases of property and equipment (2,458) (2,808)
Proceeds from sale of equipment 15 --
Acquisition costs related to earn-out provisions (393) (390)
Purchases of available-for-sale securities -- (5,003)
Sale of available-for-sale securities -- 4,805
Maturities of available-for-sale securities 989 7,234
------------ ------------
Net cash provided by (used in) investing activities: (1,847) 3,905
------------ ------------
Cash flows from financing activities:
Maturity of restricted investment -- 8,837
Proceeds from sale of common stock 364 303
Repayment of notes receivable from shareholders 291 8
Payment of payable related to acquisition -- (9,189)
Proceeds from issuance of long term debt -- 29
Payments of long term debt (63) (22)
------------ ------------
Net cash provided by (used in) financing activities 592 (34)
------------ ------------
Net increase (decrease) in cash and cash equivalents (4,929) 834
Cash and cash equivalents at beginning of period 9,185 5,163
------------ ------------
Cash and cash equivalents at end of period $ 4,256 $ 5,997
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES.
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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, 1999, 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,
1998.
The results of operations for the nine month period ended July 31, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ended October 31, 1999. For instance, due to the cyclical nature of
the corn seed industry, a significant portion of Fielder's Choice Hybrids'
("Fielder's Choice") revenues and profits will be concentrated over a few months
during the spring planting season (generally during the Company's second fiscal
quarter).
2. 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,
1999 1998
------------------ ------------------
Raw materials................. $ 1,084 $ 663
Work in process............... 396 228
Finished goods................ 6,157 3,785
------------------ ------------------
$ 7,637 $ 4,676
------------------ ------------------
------------------ ------------------
3. LICENSING OF PORT-TM- TECHNOLOGY
In December 1997, the Company licensed the rights to worldwide
manufacturing, marketing and distribution of the PORT ophthalmic devices to
Alcon Laboratories, Inc. ("Alcon") in exchange for an upfront license fee of
$500,000 in cash, and future license revenue, research and development revenue
and royalties on the sale of commercial products. During the first nine months
ended July 31, 1999, the Company received an additional cash payment of $1.0
million ($750,000 net of related costs) upon meeting a certain milestone and
recognized $385,000 in research and development revenues associated with this
arrangement.
-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, 1998.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. These forward-looking statements 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, 1998. The Company undertakes no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.
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-Registered Trademark-
splints and casts in April 1994; Intellipac-Registered Trademark- breathable
membranes for the fresh-cut produce packaging market in September 1995; and
Intelimer Polymer Systems for the industrial high performance materials
market in June 1997.
Management has implemented a focused strategy of building strong,
vertically integrated businesses in three industries: Food Technology and
Packaging, Industrial High Performance Materials and Agricultural Seed
Technology and Distribution. As part of this strategy, the Company has completed
several strategic transactions. In April 1997, the Company acquired Dock Resins
Corporation ("Dock Resins") and incorporated it into its Industrial High
Performance Materials business. Dock Resins is primarily engaged in the
manufacturing and marketing of specialty acrylics and other polymers. In
September 1997, Intellicoat Corporation ("Intellicoat"), the Company's
subsidiary focused on Agricultural Seed Technology and Distribution, acquired
Fielder's Choice, a direct marketer of hybrid corn seed. To remain focused on
the three core businesses, during 1997 the Company licensed two of its
healthcare products: in August 1997, the Company sold its QuickCast product line
to Bissell Healthcare Corporation ("Bissell") and in December 1997, the Company
licensed the rights to worldwide manufacturing, marketing and distribution of
the PORT ophthalmic devices to Alcon.
The Company has been unprofitable during each fiscal year since its
inception and expects to incur additional losses, primarily due to the
continuation of its research and development activities, charges related to
acquisitions, and expenditures necessary to further develop its manufacturing
and marketing capabilities. From inception through July 31, 1999, the Company's
accumulated deficit was $43.0 million.
RESULTS OF OPERATIONS
Total revenues were $5.5 million for the third quarter of fiscal
year 1999 compared to $5.3 million for the third quarter of fiscal year 1998.
Revenues from product sales increased to $5.4 million in the third quarter of
fiscal year 1999 from $4.9 million in the third quarter of fiscal year 1998
due principally to increased product sales from the Intellipac breathable
membrane products which increased from $800,000 in the third quarter of
fiscal year 1998 to $1.1 million in the third quarter of fiscal year 1999.
The increase in Intellipac breathable membranes revenues was primarily due to
the introduction of various new products and increased volumes for existing
products. Revenues from research and development funding were $121,000 for
the third quarter of fiscal year 1999 compared to $342,000 for the third
quarter of fiscal year 1998. The decrease in research and development
revenues was primarily due to the completion of research and development
arrangements with Hitachi Chemical in July 1998 and Nitta Corporation in
December 1998. For the first nine months of fiscal year 1999, total revenues
were $29.9 million compared to $28.3 million during
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the same period in 1998. Revenues from product sales for the first nine
months of fiscal year 1999 increased to $28.7 million from $26.6 million
during the same period in 1998 due principally to increased product sales
from Fielder's Choice and Intellipac breathable membrane products which
increased from $13.3 million and $2.0 million, respectively, in the first
nine months of fiscal year 1998 to $15.2 million and $3.1 million,
respectively, during the same period in fiscal year 1999. The increase in
Fielder's Choice revenue was primarily due to increased per unit sales
prices, and the increase in Intellipac breathable membrane revenues was due
primarily to the introduction of various new products and increased volumes
for existing products. These increases were partially offset by a decrease in
Industrial High Performance Materials product sales from $11.3 million during
the first nine months of fiscal year 1998 to $10.2 million during the same
period in fiscal year 1999. This decrease is a result of the overall weakness
in the chemical industry during the first six months of fiscal year 1999.
Revenues from license fees were $750,000 for the first nine months of fiscal
year 1999 compared to $500,000 during the same period in 1998. The increase
in license fees was due to a payment received from Alcon in fiscal year 1999
upon meeting a certain milestone 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 1999 decreased to $482,000 from $1.1 million during the
same period in 1998. The decrease in research and development revenues was
primarily due to the completion of research and development arrangements with
Hitachi Chemical and Nitta Corporation.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $3.6 million for the third quarter of fiscal year 1999
compared to $3.3 million for the third quarter of fiscal year 1998. Cost of
product sales as a percentage of product sales remained the same at 66% in the
third quarter of fiscal years 1999 and 1998. Cost of product sales for the first
nine months of fiscal year 1999 was $17.7 million compared to $17.2 million
during the same period in 1998. Cost of product sales as a percentage of product
sales decreased to 62% for the first nine months of fiscal year 1999 from 64%
during the same period in 1998. The decrease in the cost of product sales as a
percentage or product sales for the first nine months of fiscal year 1999,
compared to the same period in 1998, was primarily the result of higher average
selling prices of Fielder's Choice products and reduction in material costs in
the Industrial High Performance Materials and Intellipac products. The Company
anticipates that this trend will continue if sales volumes continue to increase
in the Intellipac breathable membrane products. However, the longer-term trend
is unpredictable due to the early stage of commercialization of several of the
Company's products.
Research and development expenses were $1.4 million for the third
quarter of fiscal years 1999 and 1998. For the first nine months of fiscal year
1999 research and development expenses were $4.4 million compared to $4.0
million during the same period in fiscal year 1998, an increase of 10%. The
Company's research and development expenses consist primarily of expenses
involved in product development process scale-up, and patent activities related
to the Company's side chain crystallizable polymer technology and research and
development expenses related to Dock Resins' products. The increase in research
and development expenses during the nine month period ended July 31, 1999
compared to the same period of fiscal year 1998 was primarily due to development
costs in the Intellicoat-TM- seed coatings and Intellipac breathable membrane
product areas and scale-up costs of products associated with Intelimer Polymer
Systems. 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 $2.5 million for the
third quarter of fiscal year 1999 compared to $2.2 million for the third quarter
of fiscal year 1998, an increase of 13%. For the first nine months of fiscal
year 1999 selling, general and administrative expenses were $8.2 million
compared to $7.8 million during the same period in 1998, an increase of 6%.
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. Specifically, sales
and marketing expenses increased to $1.3 million for the third quarter of fiscal
year 1999 from $1.2 million for the third quarter of fiscal year 1998. For the
first nine months of fiscal year 1999 sales and marketing expenses increased to
$4.5 million compared to $4.1 million during the same period in 1998. The
increase in sales and marketing expenses for the three and nine month periods
ended July 31, 1999 compared to the same periods of fiscal year 1998 was
principally due to increased marketing efforts at Fielder's Choice. The Company
expects that total selling, general and administrative spending for existing and
newly acquired products will continue to increase in absolute dollars in future
periods, although it may vary as a percentage of total revenues.
-8-
Net interest income for the three and nine month periods ended July 31,
1999 were $5,000 and $139,000, respectively, compared to $148,000 and $507,000
for the same periods of fiscal year 1998. These decreases in net interest income
were due principally to less cash being available for investing.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1999 the Company had cash, cash equivalents and
short-term investments of $4.3 million, a net decrease of $5.9 million from
$10.2 million as of October 31, 1998. This decrease was primarily due to cash
used in operations of $3.7 million and the purchase of $2.5 million of property,
plant and equipment partially offset by cash provided by financing activities of
$592,000 from the sale of common stock and repayment of notes receivable from
shareholders. The cash used in operations was primarily comprised of planned
purchases of Fielder's Choice corn seed inventory to support next year's growing
season and a reduction of deferred revenue resulting from the shipment of
Fielder's Choice corn seed during the second and third quarters of fiscal year
1999.
During the first nine months of fiscal year 1999, the Company incurred
building improvement and equipment upgrade expenditures at Dock Resins to expand
capacity, and purchased quality assurance equipment to support the development
of Intellipac and Intellicoat products. These expenditures represented the
majority of the $2.5 million of property and equipment purchased during the
first nine months of fiscal year 1999.
The Company is currently in the process of establishing a credit
facility to be used to fund the expansion of the manufacturing capabilities of
Intellicoat seed coating products and Intellipac breathable membrane products.
The Company believes that this facility, along with existing cash and cash
equivalents, will be sufficient to finance the Company's 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 establish and maintain
new collaborative and licensing arrangements; the decision to pursue additional
acquisition opportunities; 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 any new credit facility and
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 of
$217,000 for the nine months ended July 31, 1999. The Company's accumulated
deficit as of July 31, 1999 totaled $43.0 million. The Company may incur
additional losses in the future. The amount of future net losses is highly
uncertain and there can be no assurance that the Company will be able to reach
or sustain profitability for an entire fiscal year.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. In the past, the Company's
results of operations have varied significantly from quarter to quarter and such
fluctuations are expected to continue in the future. Due to the seasonal nature
of the corn seed industry, a significant portion of Fielder's Choice revenues
and profits will be concentrated
-9-
over a few months during the spring planting season (generally during the
Company's second quarter). Further, the Company's principal customers in its
Food Technology and Packaging segment are heavily affected by seasonal and
weather factors, which could affect their purchases of the Company's products.
In addition, quarterly operating results will depend upon several factors,
including the timing and amount of expenses associated with expanding the
Company's operations, the timing of collaborative agreements with, and
performance of, potential partners, the timing of regulatory approvals and new
product introductions, the mix between pilot production of new products and
full-scale manufacturing of existing products and the mix between domestic and
export sales. The Company also cannot predict rates of licensing fees and
royalties received from its partners. As a result of these and other factors,
the Company expects to continue to experience significant fluctuations in
quarterly operating results, and there can be no assurance that the Company will
be profitable in the future.
UNCERTAINTY RELATING TO INTEGRATION OF NEW BUSINESS ACQUISITIONS. The
successful combination of the Company and Dock Resins and Intellicoat and
Fielder's Choice has required and will continue to require substantial effort
from each organization. The diversion of the attention of management and any
difficulties encountered in the transition process could have a material adverse
effect on the Company's ability to realize the anticipated benefits of the
acquisitions. The successful combination of the companies also requires
coordination of their research and development, manufacturing, and sales and
marketing efforts. In addition, the process of combining the organizations could
cause the interruption of, or a loss of momentum in, the Company's activities.
There can be no assurance that the Company will be able to retain key
management, technical, sales and customer support personnel of Dock Resins and
Fielder's Choice, or that the Company will realize the anticipated benefits of
the acquisitions, and the failure to do so would have a material adverse effect
on the Company's business, operating results and financial condition.
EARLY COMMERCIALIZATION OF CERTAIN PRODUCTS; DEPENDENCE ON NEW PRODUCTS
AND TECHNOLOGIES; UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early
stage of product commercialization of certain Intelimer polymer products and
many of its potential products are in development. The Company believes that its
future success will depend in large part on its ability to develop and market
new products in its target markets and in new markets. In particular, the
Company expects that its ability to compete effectively with existing food
products, industrial, agricultural and medical companies will depend
substantially on successfully developing, commercializing, achieving market
acceptance of and reducing the cost of producing the Company's products. In
addition, commercial applications of the Company's temperature switch polymer
technology are relatively new and evolving. There can be no assurance that the
Company will be able to successfully develop, commercialize, achieve market
acceptance of or reduce the costs of producing the Company's new products, or
that the Company's competitors will not develop competing technologies that are
less expensive or otherwise superior to those of the Company. There can be no
assurance that the Company will be able to develop and introduce new products
and technologies in a timely manner or that new products and technologies will
gain market acceptance. The failure to develop and successfully market new
products would have a material adverse effect on the Company's business,
operating results and financial condition.
The success of the Company in generating significant sales of its
products will depend in part on the ability of the Company and its partners and
licensees to achieve market acceptance of the Company's new products and
technology. The extent to which, and rate at which, market acceptance and
penetration are achieved by the Company's current and future products are a
function of many variables including, but not limited to, price, safety,
efficacy, reliability, conversion costs and marketing and sales efforts, as well
as general economic conditions affecting purchasing patterns. There can be no
assurance that markets for the Company's new products will develop or that the
Company's new products and technology will be accepted and adopted. The failure
of the Company's new products to achieve market acceptance would have a material
adverse effect on the Company's business, operating results and financial
condition.
COMPETITION AND TECHNOLOGICAL CHANGE. The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food products, industrial,
agricultural and medical companies is expected to be intense. In addition, the
nature of the Company's collaborative arrangements may result in its corporate
partners and licensees becoming competitors of the Company. Many of these
competitors have substantially greater financial and technical resources and
production and marketing capabilities than the Company, and may have
substantially greater experience in conducting clinical
-10-
and field trials, obtaining regulatory approvals and manufacturing and marketing
commercial products. There can be no assurance that these competitors will not
succeed in developing alternative technologies and products that are more
effective, easier to use or less expensive than those which have been or are
being developed by the Company or that would render the Company's technology and
products obsolete and non-competitive.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. The
Company's success is dependent in part upon its ability to manufacture its
products in commercial quantities in compliance with regulatory requirements and
at acceptable costs. There can be no assurance that the Company will be able to
achieve this. Although the Company believes Dock Resins will provide Landec with
practical knowledge in the scale-up of Intelimer polymer products, production in
commercial-scale quantities may involve technical challenges for the Company.
The Company anticipates that a portion of the Company's products will be
manufactured in the Linden, New Jersey facility acquired in the purchase of Dock
Resins. The Company's reliance on this facility involves a number of potential
risks, including the absence of adequate capacity, the unavailability of, or
interruption in access to, certain process technologies and reduced control over
delivery schedules, and low manufacturing yields and high manufacturing costs.
The Company may also need to consider seeking collaborative arrangements with
other companies to manufacture certain of its products. If the Company becomes
dependent upon third parties for the manufacture of its products, then the
Company's profit margins and its ability to develop and deliver such products on
a timely basis may be adversely affected. Moreover, there can be no assurance
that such parties will adequately perform and any failures by third parties may
impair the Company's ability to deliver products on a timely basis, impair the
Company's competitive position, or may delay the submission of products for
regulatory approval. The occurrence of any of these factors could have a
material adverse effect on the Company's business, operating results and
financial condition. The manufacture of the Company's products will be subject
to periodic inspection by regulatory authorities. There can be no assurance that
the Company will be able to obtain necessary regulatory approvals on a timely
basis or at all. Delays in receipt of or failure to receive such approvals or
loss of previously received approvals would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS. Many of the raw materials used
in manufacturing certain of the Company's products are currently purchased from
a single source, including certain monomers used to synthesize Intelimer
polymers and substrate materials for the Company's Intellipac breathable
membrane products. In addition, virtually all of the hybrid corn varieties sold
by Fielder's Choice are purchased from a single source. Upon manufacturing
scale-up and increases in hybrid corn sales, the Company may enter into
alternative supply arrangements. Although to date the Company has not
experienced difficulty acquiring materials for the manufacture of its products
nor has Fielder's Choice experienced difficulty in acquiring hybrid corn
varieties, no 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,
1999, sales to the Company's top five customers accounted for approximately 46%
and 24%, respectively, of the Company's product sales with the top customer
accounting for 18% and 9%, 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 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.
-11-
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, in
January 1996, the Company received a letter alleging that its Intellipac
breathable membrane product infringes patents of another party. The Company has
investigated this matter and believes that its Intellipac breathable membrane
product does not infringe the specified patents of such party. The Company has
received an opinion of patent counsel that the Intellipac breathable membrane
product does not infringe any valid claims of such patents. No additional
correspondence, other than the initial letter, has been received. If the Company
were determined to be infringing any third-party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. Litigation, which could result in substantial costs
to and diversion of effort by the Company, may also be necessary to enforce any
patents issued or licensed to the Company or to determine the scope and validity
of third-party proprietary rights. Any such litigation or interference
proceeding, regardless of outcome, could be expensive and time consuming and
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology and, consequently, could have a material adverse
effect on the Company's business, operating results and financial condition.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various environmental controls on the use, storage, discharge or disposal of
toxic, volatile or otherwise hazardous chemicals and gases used in certain
manufacturing processes, including those utilized by Dock Resins. As a result of
historic off-site disposal practices, Dock Resins was recently involved in two
actions seeking to compel the generators of hazardous waste to remediate
hazardous waste sites. Dock Resins has been informed by its counsel that it is a
DE MINIMIS generator to these sites, and that its financial exposure in these
sites is not material to the Company's financial position. These matters have
been settled on terms consistent with the above. In addition, the New Jersey
Industrial Site Recovery Act ("ISRA") requires an investigation and remediation
of any industrial establishment, like Dock Resins, which changes ownership. This
statute was activated by the Company's acquisition of Dock Resins. Dock Resins
has completed its investigation of the site, delineated the limited areas of
concern on the site, and completed the bulk of the active remediation required
under the statute. The costs associated with this effort are being borne by the
former owner of Dock Resins, and counsel has advised Dock Resins and the Company
that funds of the former owner required by ISRA to be set aside for this effort
are sufficient to guarantee the successful completion of remedial activities at
the site. In most cases, the Company believes its liability will be limited to
sharing clean-up or other remedial costs with other potentially responsible
parties. Any failure by the Company to control the use of, or to restrict
adequately the discharge of, hazardous substances under present or future
regulations could subject it to substantial liability or could cause its
manufacturing operations to be suspended and could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that changes in environmental regulations will not
impose the need for additional capital equipment or other requirements.
LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited
experience marketing and selling its Intelimer polymer products. While Dock
Resins will provide consultation and in some cases direct marketing support for
Landec's Intelimer polymer products, establishing sufficient marketing and sales
capability will require significant resources. The Company intends to distribute
certain of its products through its corporate partners and other distributors
and to sell certain other products through a direct sales force. There can be no
assurance that the Company will be able to recruit and retain skilled sales
management, direct salespersons or distributors, or that the Company's sales and
marketing efforts will be successful. To the extent that the Company has or will
enter into distribution or other collaborative arrangements for the sale of its
products, the Company will be dependent on the efforts of third parties. There
can be no assurance that such sales and marketing efforts will be successful and
any failure in such efforts could have a material adverse effect on the
Company's business, operating results and financial condition.
-12-
DEPENDENCE ON COLLABORATIVE PARTNERS AND LICENSEES. The Company's
strategy for the development, clinical and field testing, manufacture,
commercialization and marketing of certain of its current and future products
includes entering into various collaborations with corporate partners, licensees
and others. To date, the Company has entered into collaborative arrangements
with The BFGoodrich Company and Hitachi Chemical in connection with its
Intelimer Polymer Systems; Fresh Express Farms and Apio, Inc. in connection with
its Intellipac breathable membrane products; Bissell in connection with the
QuickCast splints and casts; Alcon in connection with the PORT ophthalmic
devices; and Nitta Corporation and Hitachi Chemical in connection with its
adhesive products. The Company is dependent on its corporate partners to
develop, test, manufacture and/or market certain of its products. Although the
Company believes that its partners in these collaborations have an economic
motivation to succeed in performing their contractual responsibilities, the
amount and timing of resources to be devoted to these activities are not within
the control of the Company. There can be no assurance that such partners will
perform their obligations as expected or that the Company will derive any
additional revenue from such arrangements. There can be no assurance that the
Company's partners will pay any additional option or license fees to the Company
or that they will develop, market or pay any royalty fees related to products
under the agreements. Moreover, certain of the collaborative agreements provide
that they may be terminated at the discretion of the corporate partner, and
certain of the collaborative agreements provide for termination under certain
other circumstances. In addition, there can be no assurance as to the amount of
royalties, if any, on future sales of QuickCast and PORT products as the Company
no longer has control over the sales of such products since the sale of the
QuickCast and the license of the PORT product lines.
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, manufacturing, 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.
GOVERNMENT REGULATION. The Company's products and operations are
subject to governmental regulation in the United States and foreign countries.
Although Landec has no reason to believe that it will not 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.
INTERNATIONAL OPERATIONS AND SALES. In the third quarter of fiscal
years 1999 and 1998, approximately 3% and 7%, respectively, of the Company's
total revenues were derived from product sales to and collaborative agreements
with international customers, and the Company expects that international
revenues, although down on a percentage basis from historical levels, will
continue to be an important component of its total revenues. The Company has
recently entered into agreements with European distributors to sell certain
products in the Industrial High Performance Materials market. A number of risks
are inherent in international transactions. International sales and operations
may be limited or disrupted by the regulatory approval process, government
controls, export license requirements, political instability, price controls,
trade restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies have or may establish
product standards different from those in the United States, and any inability
to obtain foreign regulatory approvals on a timely basis could have a material
adverse effect on the Company's international business and its financial
condition and results of
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operations. While the Company's foreign sales are currently priced in dollars,
fluctuations in currency exchange rates, such as those recently experienced in
many Asian countries which comprise a part of the territories of certain of the
Company's collaborative partners, may reduce the demand for the Company's
products by increasing the price of the Company's products in the currency of
the countries to which the products are sold. There can be no assurance that
regulatory, geopolitical and other factors will not adversely impact the
Company's operations in the future or require the Company to modify its current
business practices.
PRODUCT LIABILITY EXPOSURE AND AVAILABILITY OF INSURANCE. The testing,
manufacturing, marketing, and sale of the products being developed by the
Company involve an inherent risk of allegations of product liability. While no
product liability claims have been made against the Company to date, if any such
claims were made and adverse judgments obtained, they could have a material
adverse effect on the Company's business, operating results and financial
condition. Although the Company has taken and intends to continue to take what
it believes are appropriate precautions to minimize exposure to product
liability claims, there can be no assurance that it will avoid significant
liability. The Company currently maintains medical and non-medical product
liability insurance with limits in the amount of $4.0 million per occurrence and
$5.0 million in the annual aggregate. There can be no assurance that such
coverage is adequate or will continue to be available at an acceptable cost, if
at all. A product liability claim, product recall or other claim with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the Company's business, operating results and financial
condition.
POSSIBLE VOLATILITY OF STOCK PRICE. Factors such as announcements of
technological innovations, the attainment of (or failure to attain) milestones
in the commercialization of the Company's technology, new products, new patents
or changes in existing patents, the acquisition of new businesses or the sale or
disposal of a part of the Company's businesses, or development of new
collaborative arrangements by the Company, its competitors or other parties, as
well as government regulations, investor perception of the Company, fluctuations
in the Company's operating results and general market conditions in the industry
may cause the market price of the Company's Common Stock to fluctuate
significantly. In addition, the stock market in general has recently experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of technology companies and which have been unrelated to the
operating performance of such companies. These broad fluctuations may adversely
affect the market price of the Company's Common Stock.
IMPACT OF YEAR 2000. The Year 2000 issue concerns the potential
inability of computer applications, other information technology systems, and
certain software-based "embedded" control systems to recognize and process
properly date-sensitive information as the Year 2000 approaches and beyond. The
Company could suffer material adverse impacts on its operations and financial
results if the applications and systems used by the Company, or by third parties
with whom the Company does business, do not accurately or adequately process or
manage dates or other information as a result of the Year 2000 issue. The
Company has completed a review of its financial accounting and inventory
tracking systems and concluded that they are not materially affected by the Year
2000 issue.
The Company also uses a variety of other software applications,
business information systems, accounting subsystems, process control systems and
related software, communication devices, and networking and other operating
systems. The Company has completed its inventory of all such systems and has
begun testing, upgrading, replacing, or otherwise modifying these systems to
adequately address the Year 2000 issue. The Company believes it will be able to
timely modify or replace its affected systems to prevent any material
detrimental effects on operations and financial results. The Company anticipates
this work will continue, with appropriate testing, remediation and/or
replacement taking place during the second half of 1999. Possible risks of this
process include, but are not limited to, the ability of the Company's personnel
and outside vendors to adequately and timely identify and resolve all critical
Year 2000 issues. The Company can give no assurance that all critical Year 2000
issues will be resolved in a timely manner or that potentially unresolved issues
would not have a material adverse impact on the results of operations.
The Company has certain key relationships with customers, vendors and
outside service providers. Failure by the Company's key customers, vendors and
outside service providers to adequately address the Year 2000 issue could have a
material adverse impact on the Company's operations and financial results. The
Company is currently assessing the Year 2000 readiness of these key customers
and suppliers and, at this time, cannot determine what the
-14-
impact of this assessment will be on the Company. The Company is primarily
relying upon the voluntary disclosures from third parties for this review of
their Year 2000 readiness. This assessment includes, but is not limited to,
soliciting responses from each of these parties concerning their Year 2000
readiness and reviewing public documents filed by many of these parties.
Management expects to complete the assessment of these key suppliers during the
second half of 1999.
Since the Company anticipates that its affected systems will be
remediated or replaced to timely address the Year 2000 issue and is currently
focusing its resources in those areas, the Company has not yet developed any
other contingency plans regarding the Year 2000 issue for its internal systems.
However, the Company intends to develop contingency plans if at a later date
management determines that any of its systems will not be Year 2000 compliant
and that such noncompliance would be expected to have a material adverse impact
on the Company's operations or financial results. Many of the identified risks
from key customers, vendors and outside service providers are both general and
speculative in nature, such as possible power or telecommunication failures,
breakdowns in transportation systems, inability to process financial
transactions, and similar events affecting general business services. The
Company has not developed any contingency plans for these general risks, is not
currently able to ascertain the likelihood that any of these risks will actually
occur, and has not otherwise analyzed or identified possible "worst case"
scenarios relating to Year 2000 issues. Once the Company has completed its
assessment of Year 2000 readiness of key customers, vendors and outside service
providers, management intends to develop contingency plans to mitigate material
known detrimental effects that may be caused by their Year 2000 noncompliance.
However, it is unlikely that any contingency plan would mitigate the adverse
impact to the financial condition or operations of the Company of any
catastrophic event due to the Year 2000 issue that leads to a prolonged
disruption of essential services.
Management believes that total Year 2000 costs will not exceed $50,000,
most of which will be incurred in fiscal year 1999. The costs associated with
this effort are incremental to the Company. As of July 31, 1999, the Company has
not incurred any external costs related to the Year 2000 issue. In addition to
the costs mentioned above, the Company's capital spending for upgrading certain
non-information systems to enhance the capabilities of those systems will be
accelerated, in part, due to the Year 2000 issue. The total estimated increase
in capital spending for these systems is anticipated to be under $200,000. As of
July 31, 1999 the Company has incurred $75,000 of capital expenditures
associated with replacing non-compliant equipment. The Company's current
estimates of the amount of time and costs necessary to remediate and test its
computer systems are based on the facts and circumstances existing at this time.
The estimates were made using assumptions of future events including the
continued availability of certain resources, Year 2000 readiness plans,
implementation success by key third party vendors, and other factors. New
developments may occur that could increase the Company's estimates of the amount
of time and costs necessary to modify and test its various information and
non-information systems. These potential developments include but are not
limited to the availability and increased cost of personnel trained in this area
of expertise, the ability to locate and correct all relevant computer codes and
equipment, and any unanticipated Year 2000 problems from key customers, vendors,
and outside service providers.
INTRODUCTION OF THE EURO. On January 1, 1999, certain member states of
the European Economic Community fixed their respective currencies to a new
currency, commonly known as the "Euro". During the three years beginning on
January 1, 1999, business in these countries will be conducted both in the
existing national currency, as well as the Euro. Companies operating in or
conducting business in these countries will need to ensure that their financial
and other software systems are capable of processing transactions and properly
handling the existing currencies and the Euro. Based on the current level of
direct European business conducted by the Company, and also because the Company
expects that any transactions in Europe in the near future will be priced in
U.S. dollars, the Company does not expect that introduction and use of the Euro
will materially affect the Company's business. The Company will continue to
evaluate the impact over time of the introduction of the Euro. However, if the
Company encounters unexpected opportunities or difficulties in Europe, the
Company's business could be adversely affected, including the inability to bill
customers and to pay suppliers for transactions denominated in the Euro and the
inability to properly record transactions denominated in the Euro in the
Company's financial statements.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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Not applicable.
-16-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 July 31, 1999.
______________________________
(+) filed herewith
-17-
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 13, 1999
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LANDEC CORPORATION
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
27.1 Financial Data Schedule 20
-19-