þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period endedMarch 31,September 30, 2005
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _______________ to _____________
___
Minnesota | 41-0948334 | |
(State or other jurisdiction of | (IRS Employer Identification No.) | |
incorporation or organization) | ||
3515 Lyman Boulevard | ||
Chaska, Minnesota | 55318 | |
(Address of principal executive | (Zip Code) | |
offices) |
1
March 31, | June 30, | September 30, | June 30, | |||||||||||||
2005 | 2004 | 2005 | 2005 | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 14,779,000 | $ | 8,553,000 | $ | 18,504,000 | $ | 18,508,000 | ||||||||
Accounts receivable, less allowances | 9,497,000 | 8,626,000 | 9,739,000 | 10,171,000 | ||||||||||||
Inventories | 9,854,000 | 9,491,000 | 11,234,000 | 9,456,000 | ||||||||||||
Deferred income taxes | 4,560,000 | 4,190,000 | ||||||||||||||
Prepaid expenses | 887,000 | 705,000 | 1,026,000 | 780,000 | ||||||||||||
Total current assets | 35,017,000 | 27,375,000 | 45,063,000 | 43,105,000 | ||||||||||||
Property, plant and equipment | ||||||||||||||||
Land, building and equipment | 46,511,000 | 45,398,000 | 47,877,000 | 47,400,000 | ||||||||||||
Less accumulated depreciation | (23,699,000 | ) | (22,200,000 | ) | (24,657,000 | ) | (24,211,000 | ) | ||||||||
22,812,000 | 23,198,000 | 23,220,000 | 23,189,000 | |||||||||||||
Other Assets | ||||||||||||||||
Intangibles | 4,496,000 | 4,513,000 | 5,270,000 | 4,799,000 | ||||||||||||
Security deposits | 7,000 | 837,000 | ||||||||||||||
Inventories | 2,812,000 | 3,891,000 | 2,265,000 | 2,409,000 | ||||||||||||
Deferred income taxes | 5,207,000 | 6,062,000 | ||||||||||||||
Other | 618,000 | 504,000 | 343,000 | 302,000 | ||||||||||||
7,933,000 | 9,745,000 | 13,085,000 | 13,572,000 | |||||||||||||
$ | 65,762,000 | $ | 60,318,000 | $ | 81,368,000 | $ | 79,866,000 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Current maturities of long-term obligations | $ | 277,000 | $ | 177,000 | $ | 285,000 | $ | 285,000 | ||||||||
Accounts payable | 1,941,000 | 2,467,000 | 3,443,000 | 3,418,000 | ||||||||||||
Accrued compensation | 1,299,000 | 1,362,000 | 1,355,000 | 1,920,000 | ||||||||||||
Accrued expenses | 1,659,000 | 1,677,000 | 1,396,000 | 1,293,000 | ||||||||||||
Total current liabilities | 5,176,000 | 5,683,000 | 6,479,000 | 6,916,000 | ||||||||||||
Long-term obligations | 5,166,000 | 5,809,000 | 5,019,000 | 5,089,000 | ||||||||||||
Shareholders’ equity | 55,420,000 | 48,826,000 | 69,870,000 | 67,861,000 | ||||||||||||
$ | 65,762,000 | $ | 60,318,000 | $ | 81,368,000 | $ | 79,866,000 | |||||||||
2
Three months ended March 31, | Nine months ended March 31, | Three months ended September 30, | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
Net sales | $ | 14,134,000 | $ | 12,537,000 | $ | 40,422,000 | $ | 34,042,000 | $ | 13,425,000 | $ | 12,305,000 | ||||||||||||
Cost of goods sold | 5,474,000 | 5,585,000 | 15,790,000 | 15,217,000 | 5,063,000 | 5,096,000 | ||||||||||||||||||
Gross profit | 8,660,000 | 6,952,000 | 24,632,000 | 18,825,000 | 8,362,000 | 7,209,000 | ||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Research and development | 1,235,000 | 1,032,000 | 3,254,000 | 3,536,000 | 999,000 | 848,000 | ||||||||||||||||||
Marketing and sales | 3,661,000 | 3,555,000 | 10,713,000 | 10,029,000 | 4,009,000 | 3,215,000 | ||||||||||||||||||
General and administrative | 1,660,000 | 1,513,000 | 4,706,000 | 4,764,000 | 1,787,000 | 1,467,000 | ||||||||||||||||||
Restructuring charges | — | 940,000 | — | 940,000 | ||||||||||||||||||||
6,556,000 | 7,040,000 | 18,673,000 | 19,269,000 | 6,795,000 | 5,530,000 | |||||||||||||||||||
Operating income (loss) | 2,104,000 | (88,000 | ) | 5,959,000 | (444,000 | ) | ||||||||||||||||||
Operating income | 1,567,000 | 1,679,000 | ||||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||
Interest income | 67,000 | 32,000 | 109,000 | 44,000 | 135,000 | 10,000 | ||||||||||||||||||
Interest expense | (53,000 | ) | (173,000 | ) | (221,000 | ) | (482,000 | ) | (56,000 | ) | (113,000 | ) | ||||||||||||
Bond retirement expense | — | — | (290,000 | ) | — | — | (290,000 | ) | ||||||||||||||||
Currency transaction gains | 122,000 | 193,000 | 320,000 | 591,000 | ||||||||||||||||||||
Currency transaction gains (losses) | (24,000 | ) | 85,000 | |||||||||||||||||||||
Other | (3,000 | ) | (13,000 | ) | 249,000 | (4,000 | ) | (14,000 | ) | 2,000 | ||||||||||||||
133,000 | 39,000 | 167,000 | 149,000 | 41,000 | (306,000 | ) | ||||||||||||||||||
Income (loss) before income taxes | 2,237,000 | (49,000 | ) | 6,126,000 | (295,000 | ) | ||||||||||||||||||
Income before income taxes | 1,608,000 | 1,373,000 | ||||||||||||||||||||||
Provision for income taxes | 129,000 | — | 359,000 | — | ||||||||||||||||||||
Income tax expense | 563,000 | 94,000 | ||||||||||||||||||||||
Net income (loss) | $ | 2,108,000 | $ | (49,000 | ) | $ | 5,767,000 | $ | (295,000 | ) | ||||||||||||||
Net income | $ | 1,045,000 | $ | 1,279,000 | ||||||||||||||||||||
Net income (loss) per share | ||||||||||||||||||||||||
Net income per share | ||||||||||||||||||||||||
Basic | $ | 0.16 | $ | (0.00 | ) | $ | 0.45 | $ | (0.02 | ) | $ | 0.08 | $ | 0.10 | ||||||||||
Diluted | $ | 0.15 | $ | (0.00 | ) | $ | 0.43 | $ | (0.02 | ) | $ | 0.08 | $ | 0.10 | ||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||
Basic | 12,993,379 | 12,898,331 | 12,957,033 | 12,892,822 | 13,059,567 | 12,932,606 | ||||||||||||||||||
Diluted | 13,670,465 | 12,898,331 | 13,279,991 | 12,892,822 | 13,460,056 | 12,965,549 | ||||||||||||||||||
3
Nine months ended March 31, | Three months ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 5,767,000 | $ | (295,000 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Net income | $ | 1,045,000 | $ | 1,279,000 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 1,523,000 | 1,969,000 | 473,000 | 523,000 | ||||||||||||
Allowance for doubtful accounts | 333,000 | (28,000 | ) | 10,000 | 139,000 | |||||||||||
Deferred income taxes | 485,000 | — | ||||||||||||||
Stock compensation | 106,000 | — | 230,000 | — | ||||||||||||
Accumulated currency translation adjustment | 65,000 | (427,000 | ) | 28,000 | 92,000 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||||||||||
Accounts receivable | (1,204,000 | ) | 305,000 | 140,000 | 78,000 | |||||||||||
Inventories | 716,000 | 473,000 | (1,533,000 | ) | (354,000 | ) | ||||||||||
Prepaid expenses | (182,000 | ) | 89,000 | (245,000 | ) | (219,000 | ) | |||||||||
Accounts payable | (526,000 | ) | (96,000 | ) | 13,000 | (573,000 | ) | |||||||||
Accrued liabilities | (81,000 | ) | 1,516,000 | (474,000 | ) | (275,000 | ) | |||||||||
Net cash provided by operating activities | 6,517,000 | 3,506,000 | 172,000 | 690,000 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property, plant and equipment | (1,113,000 | ) | (353,000 | ) | (445,000 | ) | (493,000 | ) | ||||||||
Acquisitions, net of cash acquired | (322,000 | ) | — | |||||||||||||
Refunds of security deposits | 830,000 | 4,000 | — | 830,000 | ||||||||||||
Other | (121,000 | ) | 243,000 | |||||||||||||
Increase in other assets | (45,000 | ) | (81,000 | ) | ||||||||||||
Net cash used in investing activities | (404,000 | ) | (106,000 | ) | ||||||||||||
Net cash provided by (used in) investing activities | (812,000 | ) | 256,000 | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Payments on long-term obligations | (187,000 | ) | (103,000 | ) | (70,000 | ) | (23,000 | ) | ||||||||
Issuance of industrial revenue bonds | 5,630,000 | — | — | 5,630,000 | ||||||||||||
Retirement of industrial revenue bonds | (5,986,000 | ) | — | — | (5,986,000 | ) | ||||||||||
Proceeds from stock issuance | 656,000 | 85,000 | ||||||||||||||
Proceeds from stock options exercised | 706,000 | 6,000 | ||||||||||||||
Net cash provided by (used in) financing activities | 113,000 | (18,000 | ) | 636,000 | (373,000 | ) | ||||||||||
Net increase in cash and cash equivalents | 6,226,000 | 3,382,000 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | (4,000 | ) | 573,000 | |||||||||||||
Cash and cash equivalents at beginning of period | 8,553,000 | 4,211,000 | 18,508,000 | 8,553,000 | ||||||||||||
Cash and cash equivalents at end of period | $ | 14,779,000 | $ | 7,593,000 | $ | 18,504,000 | $ | 9,126,000 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 271,000 | $ | 486,000 | $ | 56,000 | $ | 156,000 | ||||||||
Taxes | 347,000 | 76,000 | 21,000 | 68,000 |
4
March 31,
March 31, | June 30, | |||||||
2005 | 2004 | |||||||
Raw materials | $ | 3,191,000 | $ | 2,756,000 | ||||
Work in progress | 306,000 | 416,000 | ||||||
Finished goods | 9,169,000 | 10,210,000 | ||||||
$ | 12,666,000 | $ | 13,382,000 | |||||
September 30, | June 30, | |||||||
2005 | 2005 | |||||||
Raw materials | $ | 4,351,000 | $ | 3,102,000 | ||||
Work-in-process | 554,000 | 426,000 | ||||||
Finished goods-current | 6,329,000 | 5,928,000 | ||||||
11,234,000 | 9,456,000 | |||||||
Finished goods-long term | 2,265,000 | 2,409,000 | ||||||
$ | 13,499,000 | $ | 11,865,000 | |||||
5
March 31,
March 31, | June 30, | September 30, | June 30, | |||||||||||||
2005 | 2004 | 2005 | 2005 | |||||||||||||
Goodwill | $ | 4,352,000 | $ | 4,352,000 | $ | 4,847,000 | $ | 4,352,000 | ||||||||
Patents | 387,000 | 387,000 | 387,000 | 387,000 | ||||||||||||
Distribution rights and licenses | 350,000 | 350,000 | ||||||||||||||
Accumulated amortization | (243,000 | ) | (226,000 | ) | (314,000 | ) | (290,000 | ) | ||||||||
$ | 4,496,000 | $ | 4,513,000 | $ | 5,270,000 | $ | 4,799,000 | |||||||||
On November 17, 2004, the
6
March 31,
BASED COMPENSATION – (continued)
Three months ended | ||||
September 30, 2004 | ||||
Reported net income | $ | 1,279,000 | ||
Stock-based employee compensation determined under the fair value based method, net of related tax effects | (207,000 | ) | ||
Pro forma net income | $ | 1,072,000 | ||
Income per common equivalent share: | ||||
Basic — as reported | $ | 0.10 | ||
Diluted — as reported | $ | 0.10 | ||
Basic — pro forma | $ | 0.08 | ||
Diluted — pro forma | $ | 0.08 |
Three Months Ended | ||||||||
September 30, | ||||||||
2005 | 2004 | |||||||
Risk-free interest rate | 4.27 | % | 3.9 | % | ||||
Expected volatility | 69.5 | % | 69.6 | % | ||||
Expected life (in years) | 5.6 | 5.4 | ||||||
Dividend yield | — | — |
7
Number of | Weighted Average | |||||||
Shares | Exercise Price | |||||||
Outstanding at June 30, 2005 | 1,720,706 | $ | 10.19 | |||||
Granted | 41,300 | 10.86 | ||||||
Exercised | (101,100 | ) | 7.00 | |||||
Canceled | (12,750 | ) | 9.35 | |||||
Outstanding at September 30, 2005 | 1,648,156 | $ | 10.41 | |||||
Number of | Weighted Average | |||||||
Shares | Exercise Price | |||||||
Options exercisable at September 30, 2005 | 1,309,856 | $10.83 |
Options Outstanding | |||||||||||||||||||||||
Range of | Number | Weighted Average Remaining | Weighted Average | ||||||||||||||||||||
Exercise Price | Outstanding | Contractual Life | Exercise Price | ||||||||||||||||||||
$ | 3.55 | — | 5.82 | 87,750 | 6.27 years | $ | 5.23 | ||||||||||||||||
5.83 | — | 8.75 | 708,563 | 6.79 years | 7.29 | ||||||||||||||||||
8.76 | — | 13.12 | 394,800 | 6.48 years | 10.15 | ||||||||||||||||||
13.13 | — | 19.68 | 426,043 | 2.34 years | 16.09 | ||||||||||||||||||
19.69 | — | 23.38 | 31,000 | 2.26 years | 21.55 | ||||||||||||||||||
1,648,156 | $ | 10.41 | |||||||||||||||||||||
8
Options Exercisable | |||||||||||||||||||
Range of | Number | Weighted Average | |||||||||||||||||
Exercise Price | Exercisable | Exercise Price | |||||||||||||||||
$ | 3.55 | — | 5.82 | 65,125 | $ | 5.35 | |||||||||||||
5.83 | — | 8.75 | 551,938 | 7.23 | |||||||||||||||
8.76 | — | 13.12 | 242,750 | 10.13 | |||||||||||||||
13.13 | — | 19.68 | 424,043 | 16.10 | |||||||||||||||
19.69 | — | 23.38 | 26,000 | 21.58 | |||||||||||||||
1,309,856 | $ | 10.83 | |||||||||||||||||
Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income (loss), as reported | $ | 2,108,000 | $ | (49,000 | ) | $ | 5,767,000 | $ | (295,000 | ) | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value method for awards, net of related tax effects (no tax effect in 2005 and 2004) | (312,000 | ) | (10,000 | ) | (710,000 | ) | (127,000 | ) | ||||||||
Pro forma net income (loss) | $ | 1,796,000 | $ | (59,000 | ) | $ | 5,057,000 | $ | (422,000 | ) | ||||||
Net income (loss) per common equivalent share: | ||||||||||||||||
Basic — as reported | $ | 0.16 | $ | (0.00 | ) | $ | 0.45 | $ | (0.02 | ) | ||||||
Diluted — as reported | $ | 0.15 | $ | (0.00 | ) | $ | 0.43 | $ | (0.02 | ) | ||||||
Basic — pro-forma | $ | 0.14 | $ | (0.00 | ) | $ | 0.39 | $ | (0.03 | ) | ||||||
Diluted — pro-forma | $ | 0.13 | $ | (0.00 | ) | $ | 0.38 | $ | (0.03 | ) |
NOTE F – ACCUMULATED OTHER COMPREHENSIVE INCOME
79
March 31,
Three months ended March 31, | Nine months ended March 31, | Three months ended September 30, | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
Net sales | ||||||||||||||||||||||||
Hyaluronan products | $ | 5,026,000 | $ | 4,475,000 | $ | 14,173,000 | $ | 11,578,000 | $ | 4,661,000 | $ | 4,644,000 | ||||||||||||
Oral restorative products | 9,108,000 | 8,062,000 | 26,249,000 | 22,464,000 | 8,764,000 | 7,661,000 | ||||||||||||||||||
$ | 14,134,000 | $ | 12,537,000 | $ | 40,422,000 | $ | 34,042,000 | $ | 13,425,000 | $ | 12,305,000 | |||||||||||||
Income (loss) from operations | ||||||||||||||||||||||||
Income from operations | ||||||||||||||||||||||||
Hyaluronan products | $ | 1,020,000 | $ | (233,000 | ) | $ | 3,192,000 | $ | (869,000 | ) | $ | 1,116,000 | $ | 1,319,000 | ||||||||||
Oral restorative products | 1,084,000 | 145,000 | 2,767,000 | 425,000 | 451,000 | 360,000 | ||||||||||||||||||
$ | 2,104,000 | $ | (88,000 | ) | $ | 5,959,000 | $ | (444,000 | ) | $ | 1,567,000 | $ | 1,679,000 | |||||||||||
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151,Inventory Costs(“SFAS 151”). The provisions of this statement become effective forACQUISITION OF BARDO-BIOTECH SAS
In December 2004, the FASB issued SFAS 123R,Share-Based Payment, (“SFAS 123R”). This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instrumentsprivately-owned distributor of the company or that are based onCompany’s Oral Restorative products located in Beauzelle, France. The transaction was treated for accounting purposes as a purchase and accordingly the fair valueCompany included the operating results of Bardo-Biotech SAS in the financial statements from August 1, 2005.
810
March 31,
911
quarterly or upon a triggering event.
1012
13
14
Hyaluronan | Oral Restorative | Hyaluronan | Oral Restorative | |||||||||||||||||||||||||||||||||||||||||||||
Division | Division | Consolidated | Division | Division | Consolidated | |||||||||||||||||||||||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||||||||||||||
Net sales | $ | 5,026,000 | $ | 4,475,000 | $ | 9,108,000 | $ | 8,062,000 | $ | 14,134,000 | $ | 12,537,000 | $ | 4,661,000 | $ | 4,644,000 | $ | 8,764,000 | $ | 7,661,000 | $ | 13,425,000 | $ | 12,305,000 | ||||||||||||||||||||||||
Cost of goods sold | 2,309,000 | 2,715,000 | 3,165,000 | 2,870,000 | 5,474,000 | 5,585,000 | 2,052,000 | 2,093,000 | 3,011,000 | 3,003,000 | 5,063,000 | 5,096,000 | ||||||||||||||||||||||||||||||||||||
Gross profit | 2,717,000 | 1,760,000 | 5,943,000 | 5,192,000 | 8,660,000 | 6,952,000 | 2,609,000 | 2,551,000 | 5,753,000 | 4,658,000 | 8,362,000 | 7,209,000 | ||||||||||||||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 952,000 | 761,000 | 283,000 | 271,000 | 1,235,000 | 1,032,000 | 607,000 | 604,000 | 392,000 | 244,000 | 999,000 | 848,000 | ||||||||||||||||||||||||||||||||||||
Marketing and sales | 133,000 | 133,000 | 3,528,000 | 3,422,000 | 3,661,000 | 3,555,000 | 176,000 | 92,000 | 3,833,000 | 3,123,000 | 4,009,000 | 3,215,000 | ||||||||||||||||||||||||||||||||||||
General and administrative | 612,000 | 576,000 | 1,048,000 | 937,000 | 1,660,000 | 1,513,000 | 710,000 | 536,000 | 1,077,000 | 931,000 | 1,787,000 | 1,467,000 | ||||||||||||||||||||||||||||||||||||
Restructuring charges | — | 523,000 | — | 417,000 | — | 940,000 | ||||||||||||||||||||||||||||||||||||||||||
1,697,000 | 1,993,000 | 4,859,000 | 5,047,000 | 6,556,000 | 7,040,000 | 1,493,000 | 1,232,000 | 5,302,000 | 4,298,000 | 6,795,000 | 5,530,000 | |||||||||||||||||||||||||||||||||||||
Operating income (loss) | $ | 1,020,000 | $ | (233,000 | ) | $ | 1,084,000 | $ | 145,000 | $ | 2,104,000 | $ | (88,000 | ) | ||||||||||||||||||||||||||||||||||
Operating income | $ | 1,116,000 | $ | 1,319,000 | $ | 451,000 | $ | 360,000 | $ | 1,567,000 | $ | 1,679,000 | ||||||||||||||||||||||||||||||||||||
15
Consolidated gross margin increasedThe increase was due mainly to 61% for the current quarter from 55% for the same quarter of last fiscal year. The gross margin for the Hyaluronan Division increased to 54%, from a gross margin of 39%, due to a favorable product mix and decreased unused manufacturing capacity chargescosts associated with increased production. The gross margin for the Oral Restorative Division was 65% fortiming of tradeshows, the current quarter compared to 64% forexpansion of the same quarter of last fiscal year.
11
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
Researchoral restorative’s domestic sales force, and developmentinternational operations.
Marketingadoption of SFAS 123R and sales expenses increased $106,000 or 3%higher insurance costs.
General and administrative expensesConsolidated Statements of Operations, increased $147,000 or 10%$347,000 for the current quarter as compared to the same quarter of last fiscal year. The increase is due to higher insurance expenses, costs associated with Sarbanes-Oxley complianceno bond retirement expense of $290,000 and an increase in the allowanceinterest income of $125,000 resulting from a higher cash balance, offset by decreases in currency transaction gains realized on Euro denominated intercompany transactions of $110,000.
In the same quarter of last fiscal year, restructuring charges of $940,000 were recorded as part of a 10% workforce reduction.
Other income as shown on the Condensed Consolidated Statements of Operations, increasedtaxes.Provision for income taxes was $563,000 and $94,000 for the current quarter as comparedthree months ended September 30, 2005 and 2004, respectively. The effective rate for the prior year period was significantly lower than the comparable 2005 period due to recognizing a tax benefit for a partial release in the samedeferred tax asset valuation allowance for the net operating losses utilized in 2004. The full domestic valuation allowance was fully reversed in the fourth quarter of last fiscal year. Net interest expense decreased $155,000 fromAs a result the third quartercompany’s statement of a year ago. This was due toearnings will reflect more normal tax charges though out fiscal 2006 and beyond. However, with the refinancingexception of the Company’s industrial revenue bondsAlternative Minimum Tax and certain state taxes, the company will not use cash for domestic income taxes until their net operating losses are fully realized on their tax returns. We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes.”
Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004:
Hyaluronan | Oral Restorative | |||||||||||||||||||||||
Division | Division | Consolidated | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
Net sales | $ | 14,173,000 | $ | 11,578,000 | $ | 26,249,000 | $ | 22,464,000 | $ | 40,422,000 | $ | 34,042,000 | ||||||||||||
Cost of goods sold | 6,486,000 | 6,987,000 | 9,304,000 | 8,230,000 | 15,790,000 | 15,217,000 | ||||||||||||||||||
Gross profit | 7,687,000 | 4,591,000 | 16,945,000 | 14,234,000 | 24,632,000 | 18,825,000 | ||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Research and development | 2,451,000 | 2,755,000 | 803,000 | 781,000 | 3,254,000 | 3,536,000 | ||||||||||||||||||
Marketing and sales | 375,000 | 396,000 | 10,338,000 | 9,633,000 | 10,713,000 | 10,029,000 | ||||||||||||||||||
General and administrative | 1,669,000 | 1,786,000 | 3,037,000 | 2,978,000 | 4,706,000 | 4,764,000 | ||||||||||||||||||
Restructuring charges | — | 523,000 | — | 417,000 | — | 940,000 | ||||||||||||||||||
4,495,000 | 5,460,000 | 14,178,000 | 13,809,000 | 18,673,000 | 19,269,000 | |||||||||||||||||||
Operating income (loss) | $ | 3,192,000 | $ | (869,000 | ) | $ | 2,767,000 | $ | 425,000 | $ | 5,959,000 | $ | (444,000 | ) | ||||||||||
Net sales for the nine months ended March 31, 2005 increased $6,380,000 or 19% as compared to the same period of last fiscal year. Hyaluronan product sales for the current period increased $2,595,000 or 22% as compared to the same period of last fiscal year due to increased ophthalmic and orthopedic sales. Oral restorative product sales for the current period increased $3,785,000 or 17% compared to the same period of last fiscal year. Domestic sales increased 22% and international sales increased 12% as compared to the same period of last fiscal year. Favorable foreign currency comparisons increased international sales by $406,000 over the same period of last fiscal year.
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Consolidated gross margin increased to 61% for the current period from 55% for the same period of last fiscal year. The gross margin for the Hyaluronan Division increased to 54% for the current period from a gross margin of 40% for the same period of last fiscal year due to a favorable product mix and lower unused manufacturing capacity charges associated with increased production. The gross margin for the Oral Restorative Division increased to 65% for the current period from 63% for the same quarter of last fiscal year. The gross margin increase is due to operating leverage afforded by the higher sales volume.
Research and development expenses decreased $282,000 or 8% in the current period as compared to the same period of last fiscal year. The decrease is primarily due to reduced consulting and professional fees associated with the Company’s adhesion prevention product.
Marketing and sales expenses increased $684,000 or 7% in the current period as compared to the same period of last fiscal year due to increased costs associated with expansion of oral restorative’s domestic sales force and international operations.
General and administrative expenses decreased $58,000 or 1% for the current period as compared to the same period of last fiscal year. The decrease resulted from the workforce reduction in the third quarter of fiscal 2004 and lower legal expenses offset by expense increases for insurance, Sarbanes-Oxley compliance and the allowance for uncollectible accounts.
In the same period of last fiscal year, restructuring charges of $940,000 were recorded as part of a 10% workforce reduction.
Other income, as shown on the Condensed Consolidated Statements of Operations, increased $18,000 for the current period as compared to the same period of last fiscal year. The increase is due to a one-time pretax gain of $250,000 recorded in the second quarter in conjunction with the Company securing the worldwide marketing rights to its anti-adhesion product. Also, net interest expense decreased $326,000 from the same period of a year ago. This is due to the refinancing of the Company’s industrial revenue bonds in the first quarter which reduced the Company’s interest rate by more than six percentage points and interest income has increased due to both higher cash balances and interest rates. Offsetting the impact of the above was a reduction in currency transaction gains of $271,000 from the same period a year ago and bond retirement expense of $290,000 recorded in the first quarter of the current fiscal year resulting from the refinancing of industrial revenue bonds.
On November 17, 2004,costs associated with expanding the sales force.
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
On August 19, 2004, the Company issued variable rate industrial revenue bonds. The proceeds from these bonds were used to retire the existing 10.25% fixed rate industrial revenue bonds on September 1, 2004. The aggregate principal amount of the new bonds is $5,630,000, and the bonds will bear interest at a variable rate set weekly by the bond remarketing agent (2.28%(2.75% as of March 31,September 30, 2005). In addition, the Company will paypays an annual remarketing fee equal to .125% and an annual letter of credit fee of 1.0%. The bonds are collateralized by a bank letter of credit which is secured by a first mortgage on the facility. The Company is required to make monthly principal and interest payments to a sinking fund. The terms of the agreement require the Company to comply with various financial covenants including minimum tangible net worth, liabilities to tangible net worth ratio and net income (loss). As of March 31,September 30, 2005 and June 30, 2005, the Company was in compliance with all covenants.
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151,Inventory Costs(“SFAS 151”).
In December 2004, the FASB issued SFAS 123R,Share-Based Payment, (“SFAS 123R”). This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS 123R will be effective for all annual periods beginning after June 15, 2005. The Company will adopt this standard July 1, 2005. Management believes it will have a significant impact due to the Company’s use of options as employee incentives but has not yet determined the impact on earnings.
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ETHICON is defending Lifecore in all of these lawsuits. Under the above-listed lawsuits.
terms of Lifecore’s Conveyance, License, Development and Supply Agreement dated August 8, 1994 with ETHICON, ETHICON is obligated to indemnify and hold Lifecore harmless from all claims related to the sale and use of INTERGEL Solution, unless it is ultimately determined that a plaintiff’s injuries were caused by a breach of Lifecore’s limited contractual warranty to ETHICON under that agreement. Lifecore believes that ETHICON will be obligated to fully indemnify Lifecore in connection with all of the pending claims relating to INTERGEL Solution.
1. Heather Dunne, letter dated October 9, 20032. Margery LeRoux, letter dated September 9, 20033. Kenna Schaller, letter dated July 10, 20034. Julia Smith, letter dated May 10, 20045. Mrs. Piccinini Chiara, letter dated January 5, 2005
lawsuits. ETHICON is responding to the above-listed claim letters on behalf of Lifecore. In addition to the above-listed claim letters, Lifecore has received a claim letter on behalf of Melody Whitfield, dated October 2, 2003, relating to injuries unrelated to INTERGEL Solution suffered in a second-look surgery as part of a clinical trial. Whitfield is seeking $195,000 in damages. Lifecore has not received any response to its letter dated February 19, 2004 disputing her claim. ETHICON has denied Lifecore’s tender of defense of Whitfield’s claim.
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3.1 | Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated July 13, 1988, to Form 10-Q for the quarter ended December 31, 1987), as amended by Amendment No. 2 (incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended June 30, 1997) | |||
3.2 | Amended Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K/A for the year ended June 30, 1995) | |||
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration Statement [File No. 33-12970]) | ||||
4.2 | Form of Rights Agreement, dated as of May 23, 1996, between the Company and Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit 1 to the Company’s Form 8-A Registration Statement dated May 31, 1996) | |||
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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LIFECORE BIOMEDICAL, INC. | ||
By: | ||
Dated: | /s/ Dennis J. Allingham | |
Dennis J. Allingham | ||
President, Chief Executive Officer, Secretary and Director | ||
(duly authorized officer) | ||
Dated: | /s/ David M. Noel | |
David M. Noel | ||
Vice President of Finance and Chief Financial Officer | ||
(principal financial and accounting officer) |
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3.1 | Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated July 13, 1988, to Form 10-Q for the quarter ended December 31, 1987), as amended by Amendment No. 2 (incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended June 30, 1997) | |||
3.2 | Amended Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K/A for the year ended June 30, 1995) | |||
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration Statement [File No. 33-12970]) | ||||
4.2 | Form of Rights Agreement, dated as of May 23, 1996, between the Company and Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit 1 to the Company’s Form 8-A Registration Statement dated May 31, 1996) | |||
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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