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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
COMMISSION FILE NUMBER: 0-4136
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LIFECORE BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0948334
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3515 LYMAN BOULEVARD
CHASKA, MINNESOTA 55318-3051
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 368-4300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.01 STATED VALUE)
(Title of Class)
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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 the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K./X/
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $205,859,000 at August 9, 1996 when the last
sale price of such stock, as reported by the Nasdaq National Market, was $17.31.
The number of shares outstanding of the Registrant's Common Stock, $.01
stated value, as of August 9, 1996 was 12,128,696 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement to be filed with the Commission within 120 days after the
end of the Registrant's fiscal year.
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1
PART I
ITEM 1. BUSINESS
GENERAL
Lifecore Biomedical, Inc. ("Lifecore" or the "Company") develops,
manufactures and markets medical and surgical devices through its two divisions,
the Hyaluronate Division and the Oral Restorative Division.
The Company's Hyaluronate Division is principally involved in the
development and manufacture of products utilizing hyaluronate, a
naturally-occurring carbohydrate which moisturizes or lubricates the soft
tissues of the body. The Hyaluronate Division's primary development project
involves LUBRICOAT-Registered Trademark- 0.5% Ferric Hyaluronate Gel ("LUBRICOAT
Gel"), the Company's second generation product for potential application in
reducing the incidence of postsurgical adhesions. LUBRICOAT Gel is intended to
reduce the incidence of fibrous tissue adhesions, which commonly form as part of
the body's natural healing process when tissues or organs are subject to
accidental or surgical trauma. Particularly with respect to abdominal,
cardiovascular, orthopedic, reproductive, and thoracic surgeries, these
adhesions may cause internal complications that often require costly
postsurgical intervention. Industry sources estimate the cost of treating
adhesion complications in the lower abdomen, a common site for the occurrence of
adhesions, at $2 billion per year in the United States.
The Company produces hyaluronate synthetically through a proprietary
fermentation process. Currently, the primary commercial use for the Company's
hyaluronate is as a component in ophthalmic surgical solutions for cataract
surgery. Lifecore is pursuing the development of several other synthesized
versions of hyaluronate through its strategic alliances with a number of
corporate partners for a variety of veterinary, drug delivery and wound care
applications. The Company also leverages its specialized hyaluronate
manufacturing skills to produce non-hyaluronate products for medical
applications.
The Company's Oral Restorative Division markets a comprehensive line of
titanium-based dental implants for the replacement of lost or extracted teeth.
In May 1992, the Company acquired the Sustain Dental Implant System from
Bio-Interfaces, Inc. ("BII") and subsequently, in July 1993, acquired Implant
Support Systems, Inc. ("ISS"), the manufacturer of the Restore Dental Implant
System and the ISS line of compatible components. The Company has enhanced and
expanded these product lines since their acquisition. The Oral Restorative
Division also manufactures and markets synthetic bone graft substitute products
for the restoration of bone tissue deterioration resulting from periodontal
disease and tooth loss. This Division's products are marketed in the United
States through the Company's direct sales force, in Italy through the Company's
subsidiary, Lifecore Biomedical SpA, and in other countries through
distributors.
HYALURONATE DIVISION
BACKGROUND
Hyaluronate is a critical, naturally-occurring carbohydrate component of
the physiological fluids that lubricate, moisturize or otherwise protect the
body's soft tissues. Due to its widespread presence in tissues and its high
degree of biocompatibility, the Company believes that hyaluronate can be used
for a wide variety of medical applications.
2
Hyaluronate (also referred to as hyaluronan, hyaluronic acid and sodium
hyaluronate) was first demonstrated to have commercial medical utility as a
viscoelastic (elastic yet fluid) solution in cataract surgery. In this
application, its use for coating and lubricating during the implantation of
intraocular lenses dramatically improved then existing surgical success rates.
An ophthalmic hyaluronate product, produced by extraction from rooster comb
tissue, initially became commercially available in the United States in 1981.
Hyaluronate-based products, produced both by rooster comb extraction and by
fermentation processes such as the Company's, have since gained widespread
acceptance among ophthalmologists and are currently used in the majority of
cataract procedures in the United States.
Other hyaluronate applications currently being investigated by Lifecore or
its partners include general surgery (prevention of postsurgical adhesions),
catheter coatings, drug delivery (as a vehicle to carry wound healing agents),
and veterinary (storage of fertilized embryos; orthopedics). The Company
believes that the use of hyaluronate for postsurgical adhesion prevention
currently represents the most significant potential application for hyaluronate.
STRATEGY
The Company intends to use its proprietary large scale fermentation process
to be a leader in the development of hyaluronate-based products for multiple
applications. Elements of the Company's strategy include the following:
- ESTABLISH STRATEGIC ALLIANCES WITH MARKET LEADERS. The Company will
continue to develop applications for products with partners which have strong
marketing, sales and distribution capabilities to end-user markets. The Company
currently has established relationships with Alcon Laboratories, Inc., an
indirect subsidiary of Nestle S.A. ("Alcon"), Chiron Vision, Inc., a subsidiary
of Chiron Corporation ("Chiron Vision"), Ethicon, Inc., a wholly-owned
subsidiary of Johnson & Johnson ("Ethicon"), Mentor Ophthalmics, Inc. and Storz
Ophthalmics, Inc., a subsidiary of American Home Products, Inc. ("Storz"),
market leaders in the ophthalmics and surgical products fields.
- EXPAND MEDICAL APPLICATIONS FOR HYALURONATE. The Company is currently
pursuing a broad range of applications in general surgery, veterinary, drug
delivery and wound care. Due to the growing knowledge of the unique
characteristics of hyaluronate, the Company intends to continue to identify and
pursue further uses for hyaluronate in medical applications.
- MAINTAIN FLEXIBILITY IN PRODUCT DEVELOPMENT AND SUPPLY RELATIONSHIPS.
The Company's vertically integrated development and manufacturing capabilities
allow it to establish a variety of relationships with large corporate partners.
The Company's role in these relationships extends from supplier of raw materials
to manufacturer of aseptically-packaged products. In addition, the Company may
develop its own proprietary products.
- LEVERAGE SPECIALIZED HYALURONATE MANUFACTURING SKILLS. The Company
uses its viscous fluid handling and aseptic packaging experience gained in
producing hyaluronate to manufacture non-hyaluronate products for new customers.
3
HYALURONATE DIVISION PRODUCTS
The following chart summarizes the principal products and development
projects of the Hyaluronate Division, along with their applications and the
companies with which Lifecore has related strategic alliances:
APPLICATION STRATEGIC ALLIANCE MARKET STATUS*
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GENERAL SURGERY
LUBRICOAT-Registered Lifecore's proprietary Adhesion Pivotal
Trademark- 0.5% product under prevention human
Ferric Hyaluronate development; Ethicon clinical
Gel has exclusive worldwide trials
marketing rights commenced in
March 1996
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OPHTHALMIC
Viscoat- Lifecore supplies Cataract Commercial
Registered proprietary hyaluronate surgery sales since
Trademark- powder for inclusion in 1983
Ophthalmic Alcon Laboratories'
Viscoelastic Viscoat viscoelastic
Solution solution
Amvisc- Lifecore supplies Cataract Lifecore
Registered viscoelastic solution surgery export
Trademark- and syringes to Chiron shipments
Amvisc Plus- Vision, Inc., which commenced in
Registered owns rights to, and December
Trademark- markets, products 1995;
Ophthalmic Chiron's PMA
Solutions supplement
in progress
Lurocoat- Lifecore supplies its Cataract IDE human
Registered proprietary surgery clinical
Trademark- viscoelastic syringes trials in
Ophthalmic to Mentor Ophthalmics, 1997; 1997
Solution Inc., which will market export
product exclusively in shipments
U.S. and Canada and on pending CE
a non-exclusive basis Mark
elsewhere approval
Ophthalmic gel Lifecore supplies Refractive Storz
syringes of surgery preparing
non-hyaluronate gel to IDE
Storz Ophthalmics, Inc., application
which owns rights to,
and will market,
product
Caprogel-TM- Lifecore supplies Ocular Orphan
Topical syringes of bleeding Medical's
Aminocaproic aminocaproic acid to (hyphema) human
Acid Orphan Medical, Inc., clinical
which owns rights to, trials
and will market, commenced in
product 1994
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OTHER APPLICATIONS
MAP-5-TM- Lifecore supplies Veterinary Commercial
Embryo hyaluronate solution in cryo- sales since
Cryopreservation vials to Vetrepharm, Inc., preservation 1994
Solution which owns rights to, and
markets, product
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* For many of the products or projects listed above, government regulatory
approvals and significant development work are required before commercial sales
can commence in the United States or elsewhere. See "Government Regulation." No
assurance can be given that such products will be successfully developed or
marketed.
ADHESION PREVENTION DEVELOPMENT PROJECT WITH ETHICON
The Company is developing a hyaluronate product, LUBRICOAT Gel, for
potential application in reducing the incidence of postsurgical adhesions.
Ethicon has worldwide, exclusive distribution rights for LUBRICOAT Gel.
4
Following surgical procedures, fibrous tissue, or adhesions, commonly form
as part of the body's natural healing process resulting from trauma to tissues
or organs during surgery. Particularly with respect to abdominal,
cardiovascular, orthopedic, reproductive and thoracic surgeries, these adhesions
may cause internal complications that can require costly follow-up surgical
intervention. For example, adhesions following reproductive tract surgery can
cause infertility, while adhesions following abdominal surgery can cause life
threatening bowel obstructions.
Industry sources estimate the cost of treating adhesion complications in
the lower abdomen, a common site for the occurrence of adhesions, at $2 billion
per year in the United States. The Company believes that a significant share of
this market can be captured only by skilled market distribution of a product
with low toxicity, easy application, high procedural flexibility, broad
effectiveness, and appropriate pricing.
In 1989, the Company began working with Ethicon on anti-adhesion products
being developed by Ethicon using the Company's Tenalure-Registered Trademark-
Sodium Hyaluronate formulation. Starting in 1990, Ethicon conducted a series of
human clinical studies with Tenalure hyaluronate, designed to demonstrate the
effectiveness of a hyaluronate solution in the reduction of postsurgical
adhesions. These double-blinded, placebo-controlled, multi-center studies
involved over 300 patients. In these clinical studies, Tenalure hyaluronate
demonstrated the ability to reduce the incidence of adhesions, but the degree of
adhesion reduction fell short of Ethicon's efficacy goals. Tenalure hyaluronate
was observed to have a greater effect in areas where the hyaluronate pooled
after the completion of surgery. With that knowledge, the companies reformulated
Tenalure hyaluronate into a second generation product, LUBRICOAT Gel, designed
to coat and remain in contact with tissues for a longer time after surgery. This
reformulation involved the ionic cross-linking of hyaluronate with an iron
compound to enhance coating properties. The companies then tested LUBRICOAT Gel
in animal models designed to pose a greater adhesion challenge by employing a
more severe surgical wound than the studies using Tenalure hyaluronate. The
results of the animal trials using LUBRICOAT Gel showed significant improvement
over those of Tenalure hyaluronate.
In order to accelerate development of the anti-adhesion project, the
companies, at that time, decided to shift responsibility for completion of this
project to Lifecore. Lifecore subsequently completed the preclinical studies and
submitted an application to the United States Food and Drug Administration
("FDA") for an Investigational Device Exemption ("IDE") to begin human clinical
trials to evaluate the safety and efficacy of LUBRICOAT Gel. In April 1995, the
FDA approved the IDE. A pilot human clinical trial, involving 20 female
patients undergoing peritoneal cavity surgery with preservation of fertility,
was completed at a single United States clinical center in December 1995.
Patients were randomly selected to receive either LUBRICOAT Gel or a control
solution applied in a final step prior to completion of surgery. The primary
goals of the pilot study were the preliminary assessment of the safety of
LUBRICOAT Gel and an evaluation of the experimental clinical protocol. A
secondary goal was the preliminary assessment of the effectiveness of LUBRICOAT
Gel in reducing postsurgical adhesions by second-look laparoscopy. This
laparoscopy is a standard surgical practice with fertility patients, which
requires a follow-up evaluation of the patients' internal abdominal anatomy.
The laparoscopy enabled clinicians to gather data visually comparing
postsurgical adhesions in the two patient treatment groups. Analysis of the
pilot clinical data indicated that patients who received LUBRICOAT Gel
experienced a statistically significant reduction in the number, extent and
severity of adhesions, when compared with patients from the control surgical
treatment group.
5
Based on these results, the Company initiated a pivotal human clinical
trial in March 1996. The pivotal trial is expected to involve up to 200
patients in a blinded study at approximately twelve clinical sites in the United
States and Europe. These patients will undergo a similar randomized treatment
protocol and be evaluated for adhesion formation at 24 abdominal and pelvic
sites by second-look laparoscopy. If the pivotal trial confirms the statistical
significance observed in the pilot trial, the Company will be in a position to
apply for a Pre-Market Approval ("PMA"), which it expects to do in 1997. There
can be no assurance that the results of the pivotal trial will be positive, that
the Company will submit a PMA application, or that a PMA will be approved by
FDA. See "Government Regulation."
In August 1994 when responsibility for development of this project was
shifted to Lifecore, the Company and Ethicon entered into a Conveyance, License,
Development and Supply Agreement (the "Ethicon Agreement") to carry out the
shift of responsibility. The Ethicon Agreement transferred to the Company the
intellectual property developed to date from the anti-adhesion project,
including pending patent rights and data from research, product development,
clinical safety and efficacy, and marketing evaluations. The Company assumed
responsibility for continuing the development project, including conducting
human clinical trials with LUBRICOAT Gel. Furthermore, the Company granted
Ethicon exclusive worldwide marketing rights to LUBRICOAT Gel for postsurgical
adhesion prevention and orthopedic applications in return for an exclusive
supply contract through 2008 with provisions for renewal. The Company currently
receives certain technical support from Ethicon for a specified annual fee under
the provisions of an associated consulting agreement. Under this agreement, the
primary Ethicon scientist responsible for supervising the anti-adhesion project
since its inception reports directly to Lifecore management.
OPHTHALMIC APPLICATIONS
CATARACT SURGERY. Currently, the primary commercial application for the
Company's hyaluronate is in cataract surgery. During the process of cataract
surgery, hyaluronate in a viscoelastic solution is used to coat and lubricate
the anterior chamber of the eye during the implantation of an intraocular lens.
These solutions have been shown to reduce surgical trauma and thereby contribute
to more rapid recovery with fewer complications than were experienced prior to
the use of viscoelastics. The Company currently sells hyaluronate for this
application to two customers, Alcon and Chiron Vision. Alcon and Chiron Vision
are two of the leading producers of ophthalmic surgical products in the world.
In February 1996, the Company entered into a private label manufacturing
agreement with Mentor Ophthalmics, Inc. to supply the Lurocoat solution on an
exclusive basis in the United States and Canada and on a non-exclusive basis,
elsewhere for use in ophthalmic surgery, and is currently negotiating other
private label relationships outside the United States and Canada for this
application.
Hyaluronate based products are used in the majority of cataract surgeries
in the United States. The Company estimates that the worldwide market for
hyaluronate for cataract surgery, on a patient cost basis, is approximately
$160 million per year and is relatively stable. However, the market share of
products using fermented hyaluronate has increased relative to the market share
of products using hyaluronate extracted from rooster combs.
Alcon purchases the Company's hyaluronate for inclusion in Viscoat-
Registered Trademark- Ophthalmic Viscoelastic Solution, which is used during
cataract surgery. The Company's relationship with Alcon and its predecessors
commenced in 1983, when the Company's hyaluronate was specified as a raw
material component of the Viscoat product, which received clearance from the FDA
in 1986. Until 1990, Alcon's predecessors had the exclusive rights to purchase
the Company's hyaluronate for ophthalmic applications.
6
In 1990, the arrangement with Alcon became non-exclusive. Since that time, sales
of hyaluronate to Alcon have continued to be made pursuant to supply agreements.
The current Alcon supply agreement, as renewed in November 1994, is for a term
of four years through December 31, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In December 1994, the Company entered into a supply agreement with Chiron
Vision. Under the agreement, the Company has been selling its hyaluronate to
Chiron Vision in packaged syringes in connection with two of Chiron Vision's
ophthalmic viscoelastic surgical products, Amvisc-Registered Trademark- and
Amvisc Plus-Registered Trademark- Ophthalmic Solutions. The Company has
validated its manufacturing facility to produce these products, and Chiron
Vision is in the process of supplementing its FDA filings to utilize the
Company's facility for these products. The sale by Chiron Vision in the United
States of Amvisc and Amvisc Plus syringes supplied by the Company is dependent
upon such FDA clearance. In December 1995, Chiron Vision commenced shipments of
finished products to Europe.
The Company is in the process of independently developing its own
viscoelastic solution, Lurocoat Solution, and has received an IDE from the FDA
to clinically evaluate that product for ophthalmic surgical use. The Company
has entered into a multi-year private label manufacturing agreement with Mentor
Ophthalmics, Inc. ("Mentor"), under which the Company will manufacture the
Lurocoat product in syringes under Mentor's trade name for sale on an exclusive
basis in the United States and Canada, and on a non-exclusive basis in other
parts of the world. United States clinical trials, funded by Mentor, and export
shipments are expected to commence in 1997. The Company is currently
negotiating other private label agreements with other potential purchasers
outside the United States and Canada.
NON-HYALURONATE OPHTHALMIC APPLICATIONS
In its work with hyaluronate, the Company developed specialized skills in
filling syringes and vials with materials that, due to their perishable nature
or complex viscous handling properties, often could not be sterilized and
required rigorous aseptic manufacturing and packaging protocols. The Company is
leveraging these skills to initiate development projects for the manufacture of
non-hyaluronate products in the areas of refractive surgery and hyphema.
REFRACTIVE SURGERY. The Company is developing a manufacturing process with
Storz Ophthalmics, Inc., a subsidiary of American Home Products, Inc. ("Storz"),
to produce a non-hyaluronate gel product currently under development for use in
refractive surgery for myopia (near-sightedness). Industry sources estimate that
the current worldwide refractive surgery market, on a patient cost basis,
exceeds $900 million.
The current refractive surgery procedure for correcting myopia involves a
surgical incision of the cornea which weakens and relaxes the outer curvature
and achieves a corresponding correction of the eye's focusing mechanism. This
approach permanently weakens the eye, reduces long-term visual acuity due to
corneal scarring, has limited effectiveness with astigmatism, and can be
painful. Storz is developing a gel to be injected into the peripheral region of
the cornea, between the inner and outer layers, thereby changing the corneal
curvature to achieve vision correction without weakening the eye's structure.
Other potential advantages of this approach are the opportunity for reversing
the procedure, as well as using repeat injections to adjust the vision
correction over the patient's lifetime. In June 1995, the Company began
providing process development, manufacturing scale-up, validation and clinical
trial samples to Storz for the gel product. Storz must successfully complete
clinical trials and receive a PMA
7
from the FDA prior to commercial sales of its product in the United States. If
successfully developed, the Company expects to continue to provide manufacturing
services to Storz.
TREATMENT OF OCULAR HYPHEMA. In January 1995, the Company signed an
agreement with Orphan Medical, Inc. ("OMI") to provide OMI's Caprogel-TM-
Topical Aminocaproic Acid in aseptically packaged syringes. Caprogel is a
non-hyaluronate product for the topical treatment of ocular hyphema (internal
bleeding of the eye), which can lead to retinal damage and blindness.
Aminocaproic acid has been administered in other areas of the body to alleviate
the side effects of bleeding, but has not been successfully developed for the
eye. OMI received orphan drug status from the FDA in 1994 and is proceeding with
its development. Orphan drug status entitles a manufacturer to exclusive
marketing rights for certain products that serve a limited patient population.
The Company is providing contract product development and aseptic packaging for
Caprogel and expects that a subsequent commercial supply phase with a three-year
term will commence upon OMI's commercial introduction of Caprogel. Industry
sources estimate that the worldwide market for ocular hyphema involves 70,000
cases each year.
OTHER APPLICATIONS
The Hyaluronate Division undertakes its own product development activities
for both hyaluronate based and non-hyaluronate based applications, as well as on
a contract basis with certain clients. The majority of outside projects are
initiated by a client to demonstrate that the Company's hyaluronate is suitable
for a particular medical application. Suitability is often measured by detailed
specifications for product characteristics such as purity, stability, viscosity,
and molecular weight, as well as efficacy for a particular medical application.
The Company currently manufactures Vetrepharm, Inc.'s MAP-5-TM- Embryo
Cryopreservation Solution, an aseptically-packaged hyaluronate solution, for the
cryopreservation of fertilized animal embryos. MAP-5 Solution is used to
preserve the embryos for transportation to local veterinarians. Sales to
Vetrepharm, Inc. have been made since 1994 pursuant to annual purchase orders
which specify the quantity and unit price.
Another area of development activity involves the potential use of
hyaluronate in various drug delivery vehicles. Independent studies conducted by
organizations other than the Company have yielded animal and human data that
indicate hyaluronate has the potential to enhance the delivery of antibiotics,
pain killers, chemotherapeutic agents, and other drugs. For example, a drug
delivery project is being conducted by Johnson & Johnson Medical, Inc., a
subsidiary of Johnson & Johnson, to evaluate Lifecore's hyaluronate as a drug
delivery vehicle to enhance topical wound healing.
There can be no assurance that products which are currently under
development by the Company or others will be successfully developed or, if so
developed, will be successfully and profitably marketed.
8
ORAL RESTORATIVE DIVISION
BACKGROUND
Dental implants are increasingly used to replace missing or extracted teeth
and to serve as supports for dentures, crowns, and bridges. In comparison to
conventional restorative procedures, dental implants are surgically placed
directly into the jawbone in a manner simulating the anchoring of a tooth by its
root. This better maintains underlying bone structure and provides superior
fixation of restorations, minimizing loosening of fixtures against surrounding
teeth and gingiva. Typically constructed of titanium in a cylindrical or
flattened shape, dental implants generally are categorized by shape and method
of implantation. For example, the threaded cylinder implant is screwed into the
jawbone, while an alternate form, the press-fit cylinder, is placed into a
precision-drilled hole with a friction fit. Additionally, various implant styles
may be spray coated with hydroxylapatite or metal to enhance bone fixation. The
Company believes the current dental implant market is approximately $350
million.
Bone graft substitute products are used for the restoration of bone
deterioration resulting from periodontal disease and tooth loss. Historically,
when bone was needed to fill holes or restore bone loss in a patient, the only
available sources have been bone from cadavers, live donor bone or autologous
bone (from another part of the patient's body). These sources have limitations
related to quality and convenience. The Company has developed a patented process
for the synthetic production of hydroxylapatite, the major inorganic constitute
of natural bone. The Company's hydroxylapatite products provide surgeons with a
readily available synthetic bone substitute of consistent quality at a
competitive cost for periodontal and oral surgery applications. While the
current market for bone graft substitute products is limited (approximately $5
million annually in the United States), the addition of bone graft
treatment-site membranes for guided tissue regeneration has expanded the market
to approximately $25 million in the United States. The Company's Capset-TM-
Calcium Sulfate Bone Graft Barrier addresses this market opportunity.
STRATEGY
The Company intends to be a leader in the oral restorative surgical
products industry. The Company's strategies for achieving this goal are as
follows:
- Acquire, enhance, and expand a broad line of dental implants and
related support products.
- Employ aggressive quality control and materials resource planning
techniques to achieve higher efficiencies, resulting in
cost-competitive products.
- Establish an advanced direct sales and marketing network, emphasizing
the integration of information systems technology with advanced
customer service programs.
9
ORAL RESTORATIVE DIVISION PRODUCTS
The following chart summarizes the principal products of the Company's Oral
Restorative Division:
PRODUCT MARKET STATUS
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Sustain-Registered Replacement of lost or Commercial sales
Trademark- and extracted teeth
Restore-Registered
Trademark- Dental
Implant Systems
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Implant Support Precision oral restorative Commercial sales
Systems components compatible with
implants
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Orthomatrix- Repair of jawbone structure Commercial sales
Registered
Trademark-
Non-resorbable
Hydroxylapatite Bone
Graft Substitute
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Hapset-Registered Repair of jawbone structure Commercial sales
Trademark-
Hydroxylapatite Bone
Graft Plaster
- - --------------------------------------------------------------------------------
Capset-TM- Calcium For use with natural and Commercial sales
Sulfate Bone synthetic bone graft
Graft Barrier materials as a resorbable
barrier cap and/or binding
agent
- - --------------------------------------------------------------------------------
IMPLANT PRODUCTS
The Company offers two dental implant systems, the Restore Close Tolerance
Dental Implant System and the Sustain Dental Implant System. The Restore System
is based on a classic threaded titanium implant design that pioneered the
commercialization of these devices in general oral restorative surgery. In
July 1993, the Company acquired this system in connection with its acquisition
of Implant Support Systems, Inc., a manufacturer of dental implant products. The
Company has since enhanced and expanded the original ISS line into a broad range
of implant options, marketed under the Restore System name. Included in the ISS
acquisition was a line of dental implant prosthetic components that the Company
continues to market under the Implant Support Systems brand. These components
are compatible and interchangeable with several other dental implant
manufacturers' systems, as well as miscellaneous dental implant support
products, permitting the Company to market its products to dental offices that
currently use competitors' implant systems.
The Sustain System is based on a newer innovative design that embraces both
threaded and press-fit cylinder format with an added "bone-like" hydroxylapatite
coating. In May 1992, the Company acquired the Sustain System from
Bio-Interfaces, Inc. after serving as an exclusive distributor for the Sustain
System since 1990. The Sustain System is complemented by a complete line of
prosthetic components.
10
Lifecore has enhanced and expanded both of these lines, creating new
products with a combination of innovative features from both systems. This gives
the Company one of the broadest lines in the oral restorative industry, offering
practitioners maximum flexibility in choice of treatment modalities with over
1,100 products.
BONE GRAFT SUBSTITUTE PRODUCTS
The Company offers three bone graft substitute materials which address
varying degrees of resorbability. The Company's Orthomatrix-Registered
Trademark- Non-resorbable Hydroxylapatite Bone Graft Substitute is a
non-resorbable bone graft substitute used in jawbone repair. Hapset-Registered
Trademark- Hydroxylapatite Bone Graft Plaster is a moldable, partially
resorbable form of hydroxylapatite that can be contoured into desirable shapes
prior to or during implantation. Hapset Plaster is a combination of the
Company's hydroxylapatite and a proprietary form of calcium sulfate which has
been patented by United States Gypsum Company ("USG"). Under a license agreement
with USG, the Company pays a royalty to USG based on certain sales of Hapset
Plaster. The Company has also entered into a supply agreement under which USG
furnishes its calcium sulfate to the Company on an exclusive basis for worldwide
oral restorative use, including use in Hapset Plaster.
The Company introduced Capset Barrier to the market in October 1995. This
fully resorbable product made from proprietary calcium sulfate supplied by USG
has two marketing indications. The first is as a barrier to localize bone graft
materials and separate the healing of hard and soft tissues. The second is as a
binding agent with other natural and synthetic bone graft materials to
facilitate retention in bone defects.
PRODUCT DEVELOPMENT
The Oral Restorative Division is also involved in product development
activities to improve existing components and packaging and to add new
components to the dental implant systems. These development activities enhance
the suitability and ease of use of the products for specific surgical
applications and reflect changing trends in dental implant technology. There can
be no assurance, however, that products which are currently under development by
the Company will be successfully developed, or if so developed, will be
successfully and profitably marketed.
SALES AND MARKETING
HYALURONATE DIVISION PRODUCTS
The Company generally markets and distributes its hyaluronate products to
end-users through corporate partners. The Company sells hyaluronate to these
partners in a variety of forms, including powders, gels and solutions which are
packaged either in bulk jars, vials, or syringes. The Company sells its
ophthalmic grade hyaluronate powder to Alcon for Alcon's Viscoat solution and
has commenced the supply of Chiron Vision's Amvisc products with shipments to
Europe in December 1995. Mentor Ophthalmics, Inc. will provide exclusive
marketing of the Lurocoat viscoelastic for ophthalmic surgery in the United
States and Canada and non-exclusive marketing in other areas. In addition, the
Company manufactures and packages a non-hyaluronate ophthalmic gel for Storz
pursuant to a development agreement and anticipates entering into a supply
relationship upon the completion of successful clinical testing. The Company
also sells vials of hyaluronate solution for veterinary embryo cryopreservation
to Vetrepharm, Inc.
11
The Company has an agreement with Ethicon for exclusive distribution of
LUBRICOAT Gel. The Company believes that Ethicon is the worldwide market leader
in the area of surgical products and has one of the largest marketing and sales
forces in the industry. Commercialization of LUBRICOAT Gel is dependent on
completion of clinical trials, receipt of FDA marketing approval, successful
manufacturing of commercial quantities, and the efforts of Ethicon to develop
the market for the product. No assurance can be given that any or all of these
conditions will be met.
The Company also sells various forms of medical grade hyaluronate directly
to third parties for development and evaluation of new applications to be
marketed and distributed through those companies' distribution systems or a
jointly developed distribution system.
ORAL RESTORATIVE DIVISION PRODUCTS
The Company is focused on expanding its product line in the Oral
Restorative Division, improving product quality, and developing an appropriate
infrastructure to support sales growth. Management of the Company believes that
the dental implant market is highly specialized and that its sales force must
have extensive knowledge about the products. The products are marketed to oral
surgeons, periodontists, implantologists, prosthodontists, general dental
practitioners, and dental laboratories. Accordingly, the Company believes that
for proper distribution of these products, it must maintain a direct sales force
in major markets in the United States. The Company believes that its sales force
offers better customer service and a higher level of quality and regulatory
control than could be achieved through an independent distributor network in the
United States. The Company employs twelve direct salespersons in the United
States and four U.S.-based salespersons dedicated to international sales. The
Oral Restorative Division products are marketed internationally through 21
distributors. In addition, the products are marketed in Italy through its
subsidiary, Lifecore Biomedical SpA, which currently utilizes eight sales
agents.
The Company's marketing activities are designed to support its direct sales
force and include advertising and product publicity in trade journals, direct
mail catalogs, newsletters, continuing education programs, telemarketing, and
attendance at trade shows and professional association meetings.
MANUFACTURING
The commercial production of hyaluronate by the Company requires
fermentation, separation and purification capabilities, and aseptic packaging of
product in a variety of formats. In addition, the production of the LUBRICOAT
Gel formulation requires high volume precision mixing of viscous fluids.
The Company produces its hyaluronate through a proprietary process of
fermentation. Until the introduction of the Company's medical grade hyaluronate,
the only commercial source for medical hyaluronate was through an animal
rendering process of extraction from rooster combs. The Company believed that
the rooster comb extraction method would not be capable of producing large
quantities of hyaluronate in an efficient manner if the use of medical grade
hyaluronate greatly increased. Consequently, the Company developed its
proprietary fermentation process for hyaluronate using existing knowledge of
other successful fermentation manufacturing processes. The Company believes that
the fermentation manufacturing approach is superior to rooster comb extraction
because of greater efficiency, flexibility, and better economies of scale in
producing large commercial quantities.
12
The Company has invested approximately $9 million in the construction of a
66,000 square foot facility primarily for the Company's proprietary hyaluronate
manufacturing process. The Company currently uses only a fraction of its
fermentation manufacturing capacity. The Company has purposely built excess
capacity because it believes that the potential applications for hyaluronate, if
substantiated, could require significant volumes of product. In addition,
several corporate partners have required that the Company validate its
manufacturing capability to fulfill forecasted production requirements by
creating additional capacity and periodically operating at higher capacity
levels. Lifecore believes its flexible, expandable capacity has been a critical
factor in forming strategic alliances.
The Company's modular facility provides versatility in the simultaneous
manufacturing of various types of finished products. Currently, the Company
supplies several different formulations of hyaluronate (e.g., varied molecular
weight fractions) in powders, solutions and gels, and in a variety of finished
packages, including bulk jars, vials and syringes. The Hyaluronate Division is
continuously conducting development work relating to the techniques utilized in
hyaluronate manufacturing. Such development activity is designed to improve
production efficiencies and expand the Company's capabilities to achieve a wider
range of hyaluronate product specifications. The Company's specialized fluid
handling and aseptic packaging capabilities also provide the opportunity for the
Company to offer contract packaging for other technically challenging
non-hyaluronate fluids.
In anticipation of significant commercial demand for hyaluronate products,
specifically LUBRICOAT Gel, the Company intends to expand its warehouse and
distribution capabilities and its aseptic-packaging facilities for finished
products. The scale-up of the aseptic operations would require the purchase and
validation of additional equipment and training of additional personnel.
The Company's facility was designed to meet applicable regulatory
requirements and has been approved by the FDA for the manufacture of both drug
and device products. The FDA periodically inspects the Company's manufacturing
systems, and requires conformance to the FDA's Good Manufacturing Practices
("GMP") regulations. In addition, the Company's corporate partners are required
by the FDA to conduct intensive regulatory audits of its facilities. The Company
also regularly contracts with independent regulatory consultants to conduct
audits of the Company's operations. The Company has received certification of
conformance to ISO 9001 Standards and Medical Device Directives, as well as the
COMMISSION EUROPEEN (CE) Mark of Conformity from TUV Product Services of Munich,
Germany. These approvals represent international symbols of quality system
assurance and compliance with applicable European Medical Device Directives,
which greatly assist in the marketing of the Company's products in the European
Union.
The Company uses outside metal finishing vendors to produce its finished
dental implant devices and related components. The Company conducts its own
inspection of vendors and quality assurance functions related to the implant
devices and components and performs its own finished packaging.
The Company purchases materials for its production of hyaluronate and
hydroxylapatite from outside vendors. While these materials are available from a
variety of sources, the Company principally uses limited sources for some of its
key materials to better monitor quality and achieve cost efficiencies. Raw
materials for the Company's bone graft products are supplied exclusively by
United States Gypsum Company, and the Company believes such supplier is able to
provide adequate amounts of the raw materials for such product.
13
COMPETITION
The competitors of the Company include major chemical, dental, medical, and
pharmaceutical companies, as well as smaller specialized firms. Many of these
companies have significantly greater financial, manufacturing, marketing, and
research and development resources than the Company.
HYALURONATE PRODUCTS
A number of companies produce hyaluronate products and thus directly or
indirectly compete with Lifecore or its corporate partners. Several companies
are pursuing anti-adhesion product development, including Anika Research, Inc.,
Biomatrix, Inc., Focal, Genzyme Corporation, Gliatech, Osteotech and W.L. Gore &
Associates, Inc. Genzyme is developing several hyaluronate-based formulations
for surgical anti-adhesion applications, which would directly compete with the
Company's LUBRICOAT Gel product, if and when approved for marketing by the FDA.
Genzyme has begun to market one of those products in certain European countries.
The FDA approved Genzyme's PMA application to market Seprafilm-TM- bioresorbable
membrane in August 1996. If the product obtains commercial acceptance, the
Company's prospects for LUBRICOAT Gel, if and when approved, may be adversely
affected.
In addition to Genzyme, several companies produce hyaluronate through a
fermentation process, including Bio-Technology General Corporation, Kyowa
Hakko, Nippon, Seikagaku, and Miles Laboratories. Genzyme currently sells a
high molecular weight hyaluronate which is manufactured through a
fermentation process to the Company's ophthalmic customer, Alcon, for use in
its Provisc-Registered Trademark- solution. The Company believes that it and
Genzyme are theonly fermentation manufacturers with the current capability to
produce large commercial quantities of medical grade hyaluronate under GMP
conditions. In addition, several companies manufacture hyaluronate by using
rooster comb extraction methods. These companies primarily include Anika
Research, Inc., Biomatrix, Inc., Chesapeake Biological Labs, Fidia SpA, and
Pharmacia & Upjohn. The Company believes that its patented fermentation
process may offer production and regulatory advantages over the traditional
rooster comb extraction method. The Company's competitors have filed or
obtained patents covering aspects of fermentation production or uses of
hyaluronate. These patents may cover the same applications as the Company's.
Although there can be no assurance, the Company believes that it does not
infringe the patents of its competitors. See "Patents and Proprietary Rights."
The Company believes that competition in the ophthalmic and medical grade
hyaluronate market is primarily based on product performance and manufacturing
capacity, as well as product development capabilities. Future competition may be
based on the existence of established supply relationships, regulatory
approvals, intellectual property, and product price. After a manufacturer has
taken a product through the FDA marketing approval process, a change in
suppliers can involve significant cost and delay because significant
manufacturing issues may be encountered and supplemental FDA review may be
required.
ORAL RESTORATIVE PRODUCTS
The dental implant market is also highly competitive. Major market
competitors include Calcitek, Inc. (a subsidiary of Intermedics, Inc.), Degussa
AG, Dentsply, Inc., Implant Innovations, Inc., Interpore, Inc., Nobel Biocare AB
and Steri-Oss. A number of these competitors are established companies with
dominant market shares. The Company believes that competition in the dental
implant market is primarily based on product performance, supply of a broad
product line, field sales support, customer service, innovation and price.
14
The Company believes that its primary advantage is in an expanding product
line of over 1,100 products centered around the Restore and Sustain Systems that
address the breadth of current and developing dental implant treatment
modalities. In addition, to ensure quality, the Company distinguishes itself
from its competitors by inspecting all critical tolerances on every implant.
Also, the FDA has in recent years increased its scrutiny of dental implant
products. The Company believes its internal regulatory capabilities enhance its
ability to deal with the regulatory process, which may give the Company a
competitive advantage. No assurance can be given, however, that the Company can
effectively compete with manufacturers of dental implant systems having larger,
established distribution networks.
The market for the Company's bone graft substitute products is also
competitive. The major competitors include synthetic product manufacturers such
as Calcitek, Inc., Interpore, Inc., Ceramed Corporation and Miter, Inc., as well
as natural bone tissue banks, such as Pacific Coast Tissue Bank. The Company
believes that competition in this market is primarily based on product
performance and price.
PATENTS AND PROPRIETARY RIGHTS
The Company pursues a policy of obtaining patent protection for patentable
subject matter in its proprietary technology. In May 1985, the Company received
a United States patent covering certain aspects of its hyaluronate fermentation
process. The Company has also licensed a 1991 patent for the recombinant DNA
encoding of hyaluronate synthase, exclusively in the United States and
non-exclusively outside the United States. In August 1994, in connection with
the Ethicon Agreement, the Company was assigned a pending patent covering the
composition and use of LUBRICOAT Gel, with applications filed in the United
States, Australia, Brazil, Canada, Europe, Greece, and Japan. Subsequently, the
patent has been issued in Australia, Greece, and the United States. The Company
also has a United States patent covering the processes used in the manufacture
of hydroxylapatite and a second patent covering the hydroxylapatite product
produced by that process. The Company also licenses patented technology used in
the production of hydroxylapatite from USG and the University of North Carolina.
The Company believes that patent protection is significant to its business.
However, if other manufacturers were to infringe on its patents, there can be no
assurance that the Company would be successful in challenging, or would have
adequate resources to challenge, such infringement. The Company also relies upon
trade secrets, proprietary know-how and continuing technological innovation to
develop and maintain its competitive position. There can be no assurance that
others will not obtain or independently develop technologies which are the same
as or similar to the Company's technologies. The Company pursues a policy of
requiring employees, temporary staff, consultants and customers (which have
access to some of its proprietary information) to sign confidentiality
agreements. There can be no assurance that the Company will be able to
adequately protect its proprietary technology through patents or other means.
The Company is aware that one or more of its competitors have obtained, or
are attempting to obtain, patents covering fermentation and other processes for
producing hyaluronate. Other patents have been, or may be, issued in the future
in product areas of interest to the Company. Although the Company is not aware
of any claims that its current or anticipated products infringe on patents held
by others, no assurance can be given that there will not be an infringement
claim against the Company in the future. The costs of any Company involvement in
legal proceedings could be substantial, both in terms of legal costs and the
time spent by management of the Company in connection with such proceedings. It
is also possible that the Company, to manufacture and market some of its
products, may be required to obtain
15
additional licenses, which may require the payment of initial fees, minimum
annual royalty fees and ongoing royalties on net sales. There can be no
assurance that the Company would be able to license technology developed by
others, on favorable terms or at all, that may be necessary for the manufacture
and marketing of its products.
GOVERNMENT REGULATION
Government regulation in the United States and other countries is a
significant factor in the marketing of the Company's products and in the
Company's ongoing research and development activities. The Company's products
are subject to extensive and rigorous regulation by the FDA, which regulates the
products as medical devices and which, in some cases, requires a PMA, and by
foreign countries, which regulate the products as medical devices or drugs.
Under the Federal Food, Drug, and Cosmetic Act ("FDC Act"), the FDA regulates
clinical testing, manufacturing, labeling, distribution, sale, and promotion of
medical devices in the United States.
Following the enactment of the Medical Device Amendments of 1976 to the FDC
Act, the FDA classified medical devices in commercial distribution at the time
of enactment ("old devices") into one of three classes - Class I, II, or III.
This classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of medical devices. Class I devices are those whose
safety and effectiveness can reasonably be ensured through general controls,
such as labeling, premarket notification (the "510(k) Notification"), and
adherence to FDA-mandated current GMP requirements for devices. Class II devices
are those whose safety and effectiveness can reasonably be ensured through the
use of special controls, such as performance standards, post-market
surveillance, patient registries, and FDA guidelines. Class III devices are
devices that must receive a PMA from the FDA to ensure their safety and
effectiveness. Ordinarily, a PMA requires the performance of at least two
independent, statistically significant clinical trials that demonstrate the
device's safety and effectiveness. Class III devices are generally
life-sustaining, life-supporting, or implantable devices, and also include most
devices that were not on the market before May 28, 1976 ("new devices") and for
which the FDA has not made a finding of substantial equivalence based upon a
510(k) Notification. An old Class III device does not require a PMA unless and
until the FDA issues a regulation requiring submission of a PMA application for
the device.
The FDA invariably requires clinical data for a PMA application and has the
authority to require such data for a 510(k) Notification. If clinical data are
necessary, the manufacturer or distributor is ordinarily required to obtain an
IDE authorizing the conduct of human studies. Once in effect, an IDE permits
evaluation of devices under controlled clinical conditions. After a clinical
evaluation process, the resulting data may be included in a PMA application or a
510(k) Notification. The PMA may be approved, or the 510(k) Notification cleared
by the FDA, only after a review process which may include requests for
additional data, sometimes requiring further studies.
If a manufacturer or distributor of medical devices can establish to the
FDA's satisfaction that a new device is substantially equivalent to what is
called a "predicate device," i.e., a legally marketed Class I or Class II
medical device or a legally marketed Class III device for which the FDA has not
required a PMA, the manufacturer or distributor may market the new device. In
the 510(k) Notification, a manufacturer or distributor makes a claim of
substantial equivalence, which the FDA may require to be supported by various
types of information, including data from clinical studies, showing that the new
device is as safe and effective for its intended use as the predicate device.
16
Following submission of the 510(k) Notification, the manufacturer or
distributor may not place the new device into commercial distribution until an
order is issued by the FDA finding the new device to be substantially
equivalent. The FDA has no specific time limit by which it must respond to a
510(k) Notification. The 510(k) Notification process can take up to eighteen
months or more. The FDA may agree with the manufacturer or distributor that the
new device is substantially equivalent to a predicate device, and allow the new
device to be marketed in the United States. The FDA may, however, determine that
the new device is not substantially equivalent and require the manufacturer or
distributor to submit a PMA or require further information, such as additional
test data, including data from clinical studies, before it is able to make a
determination regarding substantial equivalence. Although the PMA process is
significantly more complex, time-consuming, and expensive than the 510(k)
Notification process, the latter process can also be expensive and substantially
delay the market introduction of a product.
Hyaluronate products are generally Class III devices. In cases where the
Company is supplying hyaluronate to a corporate partner as a raw material or
producing a finished product under a license for the partner, the corporate
partner will be responsible for obtaining the appropriate FDA clearance or
approval. Export of the Company's hyaluronate products generally requires FDA's
permission, in the form of an export permit, and the approval of the importing
country.
The Sustain System and the Restore System, along with other dental
implants, are categorized as old Class III devices and are eligible for
marketing through 510(k) Notifications. The FDA, however, has proposed to
require PMAs for dental implants, and by law must confirm such implants as
Class III devices and require PMAs for them or reclassify them into Class II or
Class I. It is not known when the FDA will make this decision or whether it will
require PMAs for all, some or none of these implants. The Company began clinical
trials of its Sustain System under an IDE in 1990 in anticipation of the
possibility that the FDA would require submission of PMAs for dental implants
and believes it will have appropriate data to meet FDA requirements. The
Company's bone graft products are Class II devices.
Other regulatory requirements are placed on a medical device's manufacture
and the quality control procedures in place, such as the FDA's device GMP
regulations. Manufacturing facilities are subject to periodic inspections by the
FDA to ensure compliance with device GMP requirements. The Company's facility is
subject to inspections as both a device and a drug manufacturing operation.
Other applicable FDA requirements include the medical device reporting
regulation, which requires that the Company provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of its
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur.
If the Company is not in compliance with FDA requirements, the FDA or the
federal government can order a recall, detain the Company's devices, withdraw or
limit 510(k) Notification clearances or PMA approvals, institute proceedings to
seize the Company's devices, prohibit marketing and sales of the Company's
devices, and assess civil money penalties and impose criminal sanctions against
the Company, its officers, or its employees.
There can be no assurance that any of the Company's clinical studies will
show safety or effectiveness; that 510(k) Notifications or PMA applications will
be submitted or, if submitted, accepted for filing; that any of the Company's
products that require clearance of a 510(k) Notification or approval of a PMA
application will obtain such clearance or approval on a timely basis, on terms
acceptable to the Company for the purpose of actually marketing the products, or
at all; or that following any such clearance or approval previously unknown
problems will not result in restrictions on the marketing of the products or
withdrawal of clearance or approval.
17
PRODUCT LIABILITY
Product liability claims may be asserted with respect to the Company's
products. In addition, the Company may be subject to claims for products of its
customers which incorporate Lifecore's materials. The Company maintains product
liability insurance coverage of $1.0 million per claim, with an aggregate
maximum of $2.0 million. The Company also carries an $8.0 million umbrella
insurance policy which also covers product liability claims. Lifecore Biomedical
SpA also carries product liability insurance in the amount of $1.0 million per
claim with an aggregate maximum of $2.0 million. The Company carries product
liability insurance for all of its products. However, there can be no assurance
that the Company will have sufficient resources to satisfy product claims if
they exceed available insurance coverage.
EMPLOYEES
As of July 31, 1996, the Company employed 135 persons on a full-time basis,
one part-time employee and 13 temporary employees. None of the Company's
employees is represented by a labor organization, and the Company has never
experienced a work stoppage or interruption due to labor disputes. Management
believes its relations with employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The following sets forth the names of the executive officers of Lifecore,
in addition to information about their positions with Lifecore, their periods of
service in such capacities, and their business experience for at least the past
five years. There are no family relationships among them. All executive officers
named are elected or appointed by the Board of Directors for a term of office
from the time of election or appointment until the next annual meeting of
directors (held following the annual meeting of shareholders) and until their
respective successors are elected and have qualified.
JAMES W. BRACKE, PH.D. Dr. Bracke was appointed President and Chief
Executive Officer and a director in August 1983 and Secretary in March 1995. He
joined the Company in February 1981 as Senior Research Scientist.
DENNIS J. ALLINGHAM. Mr. Allingham has been Vice President and Chief
Financial Officer of the Company since February 1996. From June 1995 until
January 1996, Mr. Allingham served as Senior Vice President and Chief Financial
Officer of Premier Salons International, Inc., the largest private hair salon
chain in North America. From June 1993 until May 1995, Mr. Allingham served as
Executive Vice President, Chief Financial Officer and director of TitleWave
Stores, Inc., a leading chain retailer of home entertainment software. From July
1992 until May 1993, Mr. Allingham was a management financial consultant. From
June 1980 until June 1992, Mr. Allingham held various positions with Krelitz
Industries, Inc., a wholesale distributor of pharmaceutical and healthcare
products, most recently serving as Executive Vice President, Chief Operating
Officer, Chief Financial Officer and director.
BRIAN J. KANE. Mr. Kane has been Vice President of New Business Development
for the Company since July 1991. He joined the Company as Vice President of
Marketing in June 1986.
MARK J. MCKOSKEY. Mr. McKoskey has been Vice President and General Manager
of the Oral Restorative Division since July 1994. He became Vice President of
Operations in June 1990. He joined the Company in June 1985 as Engineering
Manager.
18
COLLEEN M. OLSON. Ms. Olson has been Vice President of Corporate
Administrative Operations of the Company since May 1991. Prior to that time, she
was Vice President of Human Resources and Administration from June 1990 to May
1991, and Director of Human Resources and Administration from October 1984 to
June 1990. She joined the Company in January 1980 as Office Manager.
NANCY J. TEASDALE. Ms. Teasdale has been Vice President and General Manager
of the Hyaluronate Division since September 1994. She joined the Company in
August 1991 as Manager of Quality Assurance. From January 1989 through July
1991, she was Manager of Quality Assurance and Technical Support for Michael
Foods, Inc., a diversified food processor.
ITEM 2. PROPERTIES
The Company's operations are all conducted in its 66,000 square foot
building in Chaska, Minnesota. The facility was financed primarily from the
proceeds of the sale of $7 million in industrial development revenue bonds
issued by the City of Chaska.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol LCBM. The following table sets forth for each quarter of fiscal 1996
and 1995 the range of high and low closing sale prices of the Common Stock on
the Nasdaq National Market. These quotations represent prices between dealers
and do not include retail mark-ups, markdowns or commissions and may not
represent actual transactions.
FISCAL YEAR LOW HIGH
----------- --- ----
1996
First Quarter....................................... $7 3/8 $13 1/2
Second Quarter...................................... 9 5/8 18 3/4
Third Quarter....................................... 15 1/2 18 11/16
Fourth Quarter...................................... 16 21 1/4
1995
First Quarter....................................... $4 3/4 $ 6
Second Quarter...................................... 3 3/8 5 1/2
Third Quarter....................................... 3 3/4 6 3/8
Fourth Quarter...................................... 4 7/8 8 7/8
The Company has not paid cash dividends on its Common Stock and does not
plan to pay cash dividends in the near future. The Company expects to retain any
future earnings to finance its business. The Company has a loan agreement which
restricts its ability to pay dividends. See Note C to Consolidated Financial
Statements.
At July 31, 1996, the Company had 770 shareholders of record.
20
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
The following sets forth selected historical financial data with respect to
the Company and its subsidiaries. The data given below as of and for the five
years ended June 30, 1996 has been derived from the Company's Consolidated
Financial Statements audited by Grant Thornton LLP, independent certified public
accountants. Such data should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEARS ENDED JUNE 30,
----------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- ---------- --------- -------
STATEMENTS OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . . . . . . . . . $ 4,482 $ 7,485 $10,430 $10,018 $14,063
Costs of goods sold. . . . . . . . . . . . . . . 3,267 3,767 6,004 7,900 9,173
---------- --------- --------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . 1,215 3,718 4,426 2,118 4,890
Operating expenses
Research and development . . . . . . . . . . 1,555 1,706 1,072 1,381 2,699
Marketing and sales. . . . . . . . . . . . . 2,579 2,764 2,645 3,038 4,356
General and administrative . . . . . . . . . 1,715 2,198 2,100 2,382 2,861
Insurance proceeds, net. . . . . . . . . . . - - - - (754)
Manufacturing relocation . . . . . . . . . . 714 1,331 - - -
---------- --------- --------- -------- --------
6,563 7,999 5,817 6,801 9,162
---------- --------- --------- -------- --------
Loss from operations . . . . . . . . . . . . . . (5,348) (4,281) (1,391) (4,683) (4,272)
Other income (expense) . . . . . . . . . . . . . 45 554 (1,406) (532) 272
---------- --------- --------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . $ (5,303) $(3,727) $(2,797) $(5,215) $(4,000)
---------- --------- --------- -------- --------
---------- --------- --------- -------- --------
Net loss per common share. . . . . . . . . . . . $ (.81) $ (.53) $ (.39) $ (.66) $ (.40)
---------- --------- --------- -------- --------
---------- --------- --------- -------- --------
Weighted average shares outstanding. . . . . . . 6,539 7,048 7,176 7,880 10,114
---------- --------- --------- -------- --------
---------- --------- --------- -------- --------
AS OF JUNE 30,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . . . . . $ 9,568 $ 7,756 $ 3,618 $ 3,987 $ 22,207
Total assets . . . . . . . . . . . . . . . . . . 27,807 23,786 24,063 25,522 64,429
Long-term obligations. . . . . . . . . . . . . . 8,136 7,398 9,051 7,888 7,193
Shareholders' equity . . . . . . . . . . . . . . 15,029 13,453 11,328 10,188 52,152
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, manufactures and markets medical and surgical devices
through its two divisions, the Hyaluronate Division and the Oral Restorative
Division.
The Company has a number of relationships with corporate partners relating
to the development and marketing of hyaluronate based products for a variety of
medical applications, as well as certain non-hyaluronate based applications that
utilize the Company's specialized manufacturing capabilities. Currently, the
primary commercial application for the Company's hyaluronate is as a component
in an ophthalmic surgical product marketed by Alcon for cataract surgery. Sales
to Alcon are made under a supply agreement which, as most recently renewed in
November 1994, has a term through December 31, 1998. The agreement contains
minimum purchase requirements totalling $10.4 million, consisting of
$3.2 million in calendar year 1995 and $2.4 million in each of calendar years
1996 through 1998. At the time the agreement was renewed, the Company received a
$6.3 million cash advance from Alcon against future purchases. This advance
covered Alcon's payment for $3.2 million in hyaluronate shipments ordered for
calendar 1995 and the balance is being applied to shipments subsequent to
calendar 1995 until it is fully utilized. See "Liquidity and Capital Resources"
and Note D to Consolidated Financial Statements.
The Company's Oral Restorative Division markets a comprehensive line of
titanium-based dental implants for the replacement of lost or extracted teeth.
In May 1992, the Company acquired the Sustain System from BII and subsequently,
in July 1993, acquired ISS, the manufacturer of the Restore System and the ISS
line of compatible components. The Company has enhanced and expanded these
product lines since their acquisition. The Oral Restorative Division also
manufactures and markets synthetic bone graft substitute products for the
restoration of bone tissue deterioration resulting from periodontal disease and
tooth loss. This Division's products are marketed in the United States through
the Company's direct sales force, in Italy through the Company's subsidiary,
Lifecore Biomedical SpA, and in other countries through distributors.
RESULTS OF OPERATIONS
NET SALES. Net sales increased $4,045,000 or 40% in fiscal 1996 from
fiscal 1995, due to a $362,000 increase in sales to hyaluronate customers and a
$3,683,000 increase in sales to oral restorative customers.
Hyaluronate sales increased to $5,585,000 in fiscal 1996 from $5,223,000 in
fiscal 1995. Sales to Alcon were $2,861,000, $3,182,000 and $5,996,000 for
fiscal years 1996, 1995 and 1994. Sales to Alcon in early fiscal 1994 were
favorably impacted when the Company was required to produce large quantities of
hyaluronate to validate its Chaska facility. Alcon agreed to purchase a majority
of the hyaluronate inventory produced as a result of this validation process.
The Company believes that these purchases exceeded Alcon's inventory
requirements in this period. Thus, sales to Alcon since late fiscal 1994 have
been at contract minimums. The required minimum purchase under the Alcon
agreement for calendar 1997 is $2,418,000; as a result, sales to Alcon are
expected to decline further in fiscal 1997. Net sales to other hyaluronate
customers increased $683,000 or 33% in fiscal 1996 from fiscal 1995.
22
Oral restorative product sales increased 77% to $8,478,000 in fiscal 1996
from $4,795,000 in fiscal 1995. The increase in oral restorative products sales
was a result of increased marketing and sales activities in the domestic market,
the introduction of Capset Barrier, sales from Lifecore Biomedical SpA which was
in operation for the entire fiscal year 1996, and higher sales levels
internationally.
Net sales decreased $412,000 or 4% in fiscal 1995 from fiscal 1994, due to
a $1,680,000 decrease in sales to hyaluronate customers, partially offset by a
$1,268,000 increase in sales to oral restorative customers. Hyaluronate sales
decreased to $5,223,000 in fiscal 1995 from $6,903,000 in fiscal 1994 due to a
decrease in sales to Alcon in fiscal 1995 for the reason set forth above. Net
sales to other hyaluronate customers increased $1,134,000 or 125% in fiscal 1995
from fiscal 1994.
Oral restorative product sales increased 36% to $4,795,000 in fiscal 1995
from $3,527,000 in fiscal 1994. The increase in oral restorative product sales
primarily reflected the expanding product lines and the effect of increased
marketing and sales activities.
COST OF GOODS SOLD. Cost of goods sold, as a percentage of net sales,
decreased to 65% for fiscal 1996 from 79% for fiscal 1995. The decrease
resulted from two main factors. First, fixed expenses were spread over
increased product sales. Second, continuing direct charges for idle capacity
relating to the Company's manufacturing facility for hyaluronate products were
lower than in the prior year. These improvements were partially offset by the
negative impact incurred for the scale-up of aseptic ophthalmic syringe
products. Cost of goods sold, as a percentage of net sales, increased to 79%
for fiscal 1995 from 58% for fiscal 1994. The increase resulted principally
from direct charges for idle capacity relating to hyaluronate products,
resulting from the lower utilization of the Company's manufacturing facility
throughout fiscal 1995 and in the second half of fiscal 1994. In the first two
quarters of fiscal 1994 and the fourth quarter of fiscal 1993, the Company had
produced hyaluronate in large quantities to validate its facility, resulting in
higher levels of inventory in fiscal 1994 and leading to lower production levels
in the second half of fiscal 1994 and throughout fiscal 1995. Direct charges
for idle capacity related to the utilization of the Company's hyaluronate
manufacturing capacity are expected to continue to decline in fiscal 1997. Cost
of goods sold, as a percentage of net sales for oral restorative products,
decreased to 46% in fiscal 1996 from 49% in fiscal 1995 and 68% in fiscal 1994.
The decreases resulted principally from spreading fixed expenses over increased
oral restorative product sales in fiscal 1995 and 1996, as well as from lower
material costs.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$1,318,000 or 95% in fiscal 1996 from fiscal 1995 and increased $309,000 or 29%
in fiscal 1995 from fiscal 1994. The increase in fiscal 1996 resulted
principally from the costs associated with human clinical trials on LUBRICOAT
Gel which began in late fiscal 1995 and continued throughout fiscal 1996.
Activity on other products in development was higher in fiscal 1996 than in
fiscal 1995 which accounted for the remainder of the increase. The increase in
fiscal 1995 reflected the assumption by the Company in August 1994 of the
research and development for LUBRICOAT Gel, which was previously the
responsibility of Ethicon. Research and development expenses are expected to
increase in 1997 due principally to the continued funding of human clinical
trials for LUBRICOAT Gel.
MARKETING AND SALES. Marketing and sales expenses are primarily costs
incurred by the Company in support of its Oral Restorative Division. Marketing
and sales expenses increased $1,318,000 or 43% in fiscal 1996 from fiscal 1995
and increased $393,000 or 15% in fiscal 1995 from fiscal 1994. The principal
components of the increase in fiscal 1996 were $595,000 related to compensation
costs, primarily associated with additional sales personnel, $171,000 related to
advertising and sales literature
23
costs, primarily resulting from a new product catalog issued in the fall of
1995, increased travel and related expenses from the additional sales staff
added in late fiscal 1995 and early fiscal 1996, and expenses related to the
direct sales force at Lifecore Biomedical SpA, which has been in operation since
April 1995. The major components of the increase in fiscal 1995 were $281,000
related to compensation costs, primarily associated with additional sales
personnel, and $40,000 related to increased advertising and sales literature
costs. The timing of advertising and sales literature costs can be expected to
cause marketing and sales expenses to fluctuate from period to period. Marketing
and sales expenses are expected to increase in fiscal 1997 due principally to
the further addition of sales personnel and costs associated with updated sales
literature.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$479,000 or 20% in fiscal 1996 from fiscal 1995 and increased $282,000 or 13% in
fiscal 1995 from fiscal 1994. The increase in fiscal 1996 resulted mainly from
higher personnel related costs and to a lessor extent a full year of expenses
from Lifecore Biomedical SpA. The fluctuation in fiscal 1995 resulted from a
litigation expense accrual recorded in fiscal 1993 and reversed in fiscal 1994
and an increase in bad debt expense relating to the account of a single
customer. Without the fluctuations resulting from the litigation expense accrual
and the increased bad debt expense, general and administrative expenses would
have been relatively unchanged from fiscal 1994 to fiscal 1995.
INSURANCE PROCEEDS, NET. In May 1996, the Company received net proceeds of
$754,000 on an insurance claim for product that was damaged in production as a
result of an equipment failure.
OTHER INCOME (EXPENSE). Interest expense decreased in fiscal 1996 from
fiscal 1995 due to a lower average debt outstanding during fiscal 1996.
Interest expense increased in fiscal 1995 from fiscal 1994 due to the debt
related to the acquisition of the ISS dental implant business. Interest income
increased in fiscal 1996 from fiscal 1995 and increased in fiscal 1995 from
fiscal 1994. The increase in fiscal 1996 reflected the effect of having
additional cash available to invest as a result of the proceeds received from
the public stock offering completed in fall 1995 and the offshore stock offering
in April 1996. The increase in interest income in fiscal 1995 reflected the
effect of having additional cash available to invest from the August 1994 sale
of stock to Johnson & Johnson Development Corporation and the November 1994 cash
advance received from Alcon.
During fiscal 1994, the Company invested its excess cash in a fund rated
AAA by Standard and Poors. The fund invested in various bonds and other
obligations issued or guaranteed as to payment of principal and interest by the
U.S. government. Included in the investments of the fund were mortgage-related
securities and their derivatives, such as interest-only and principal-only
securities and inverse floating rate securities. During the first quarter of
calendar 1994, the fund's value declined and, in April 1994, the Company sold
its investment and realized a loss of $1,047,000. Prior to fiscal 1994, the
Company's investment in the same fund had yielded gains in excess of the fiscal
1994 loss.
In December 1993, the Company sold the building which served as a
manufacturing facility prior to the present Chaska location. The sale resulted
in a gain of $274,000 in fiscal 1994.
24
LIQUIDITY AND CAPITAL RESOURCES
Inventories consist mainly of finished hyaluronate and oral restorative
products and related raw materials. The portion of finished hyaluronate
inventory that is not expected to be consumed within the next twelve months is
classified as long-term. The finished hyaluronate inventory is maintained in a
frozen state and has a shelf life in excess of five years. Total inventory
increased $1,810,000 or 29% in fiscal 1996 from fiscal 1995 principally due to
expansion of the oral restorative product inventory.
The Company has had significant operating cash flow deficits for the last
three fiscal years. As the Hyaluronate Division's sales continue to increase,
the Company's direct charges associated with excess plant capacity are
decreasing; however, research and development costs for LUBRICOAT Gel, marketing
and sales expenses for the oral restorative products, and personnel costs are
increasing. In addition, the Company will have significant fixed obligations in
future periods. Obligations under the equipment lease, the industrial
development revenue bonds and the ISS note total $2,518,000 for fiscal 1997 and
$2,073,000 for fiscal 1998. In addition, the Company received a $6.3 million
advance on product purchases from Alcon in November 1994, which the Company used
for working capital in fiscal 1995. In fiscal 1995 and fiscal 1996, the Company
shipped $4.4 million of products due under this advance to Alcon. Accordingly,
$1.9 million of product shipments due to Alcon in fiscal 1997 will not generate
additional cash. The Company from time to time has obtained other cash advances
and has also obtained permission from its corporate partners to defer scheduled
payments for cash management purposes. If the Company were to make such requests
in the future, there can be no assurance that its requests would be granted.
The loan agreement between the Company and the holder of the industrial
development revenue bonds issued to finance the Company's Chaska facility was
amended in July 1996 to waive the fixed charge coverage ratio and the cash flow
coverage ratio through June 30, 1997. With respect to certain of these
covenants, the Company anticipates that it will be required to obtain further
waivers for fiscal 1998. There can be no assurance that future waivers will be
granted to the Company.
In the second quarter of fiscal 1996, the Company completed a public
offering of its Common Stock, providing net proceeds of approximately $23
million. In the fourth quarter of fiscal 1996, the Company completed an
offshore stock offering providing net proceeds of approximately $22 million.
The Company intends to use net proceeds of these offerings to expand its
warehouse and distribution capabilities, to accelerate the scale-up of aseptic-
packaging facilities in anticipation of significant commercial demand for
finished hyaluronate products, for working capital, and for possible future
redemption of all or a portion of the outstanding industrial development revenue
bonds. The Company believes these capital resources are sufficient to meet the
Company's needs through fiscal 1998, including its fixed obligations and
anticipated operating cash flow deficits.
The Company's ability to generate positive cash flow from operations and
achieve profitability is dependent upon the continued expansion of revenue from
its hyaluronate and oral restorative businesses. Growth in the Hyaluronate
Division is unpredictable due to the complex governmental regulatory environment
for new medical products and the early stage of certain of these markets.
Similarly, expansion of the Company's Oral Restorative Division sales is also
dependent upon increased revenue from new and existing customers, as well as
successfully competing in a more mature market. In the short term, the Company
expects its cash requirements to significantly exceed the cash generated from
anticipated operations. No assurance can be given that the Company will attain
and maintain positive cash flow before its capital resources are exhausted.
While the Company's capital resources,
25
including the proceeds from this offering, appear adequate today, unforeseen
events, prior to achieving and maintaining positive cash flow, could require
additional financing. If additional financing is necessary, no assurance can be
given that such financing will be available and, if available, will be on terms
favorable to the Company and its shareholders.
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-K,
in the Letter to Shareholders contained in the Annual Report to Shareholders, in
future filings by the Company with the Securities and Exchange Commission and in
the Company's press releases and oral statements made with the approval of
authorized executive officers, if the statements are not historical or current
facts, should be considered "forward-looking statements" made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The following important factors, among others, in some cases
have affected and in the future could affect the Company's actual results and
could cause its actual financial performance to differ materially from that
expressed in any forward-looking statement: (i) uncertainty of successful
development of the Company's LUBRICOAT Gel, including the necessary PMA from the
FDA, and of other new hyaluronate products; (ii) the Company's reliance on
corporate partners to develop new products on a timely basis and to market the
Company's existing and new hyaluronate products effectively; (iii) possible
limitations on the Company's ability to meet anticipated significant commercial
demand for LUBRICOAT Gel product on a timely basis; and (iv) intense competition
in the markets for the Company's principal products. The foregoing list should
not be construed as exhaustive, and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements are listed under Item 14 of this
report.
Summarized unaudited quarterly financial data for 1996 and 1995 is as
follows:
Quarter
------------------------------------------------------
First Second Third Fourth
----------- ----------- ------------ ------------
Year ended June 30, 1996
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 2,729,000 $ 3,274,000 $ 3,673,000 $ 4,387,000
Gross profit . . . . . . . . . . . . . . . . . . . . . 739,000 1,159,000 1,433,000 1,559,000
Net loss . . . . . . . . . . . . . . . . . . . . . . . (1,278,000) (1,406,000) (946,000) (370,000)
Net loss per share . . . . . . . . . . . . . . . . . . $ (.16) $ (.14) $ (.09) $ (.03)
Weighted average shares outstanding. . . . . . . . . . 7,982,218 9,965,553 9,991,045 11,933,814
Year ended June 30, 1995
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 1,842,000 $ 2,189,000 $ 2,885,000 $ 3,102,000
Gross profit . . . . . . . . . . . . . . . . . . . . . 102,000 629,000 683,000 704,000
Net loss . . . . . . . . . . . . . . . . . . . . . . . (1,658,000) (1,141,000) (1,137,000) (1,279,000)
Net loss per share . . . . . . . . . . . . . . . . . . $ (.22) $ (.14) $ (.14) $ (.16)
Weighted average shares outstanding. . . . . . . . . . 7,632,015 7,953,206 7,962,294 7,970,935
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning director nominees is set forth in the section
entitled "Election of Directors" in the Company's Proxy Statement for its 1996
Annual Meeting of Shareholders to be held November 14, 1996, which is
incorporated herein by reference. See also "Executive Officers of the
Registrant" in Item 1 above.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth in the section
entitled "Executive Compensation" in the Company's Proxy Statement for its 1996
Annual Meeting of Shareholders which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain owners and management is set forth in the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for its 1996 Annual Meeting of
Shareholders which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report:
1. Consolidated Financial Statements
Form 10-K
Page reference
--------------
Report of Independent Certified Public Accountants . . . . . . F-1
Consolidated Balance Sheets - June 30, 1995 and 1996 . . . . . F-2
Consolidated Statements of Operations - years ended
June 30, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows - years ended
June 30, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Shareholders' Equity - years
ended June 30, 1994, 1995 and 1996 . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . F-7 through F-20
2. Consolidated Financial Statement Schedules
Description Form 10-K
- - ----------- Page Reference
--------------
Schedule II - Valuation and Qualifying Accounts. . . . . . . . S-1
(b) Reports on Form 8-K
On June 7, 1996, the Company filed a report on Form 8-K disclosing the
adoption of a Shareholder Rights Plan.
(c) Exhibits and Exhibit Index
Exhibit
Number Description
- - -------- -----------
2.1 Stock Purchase Agreement between ISS and Lifecore dated July 28, 1993
(includes $2 million 5% Promissory Note dated July 28, 1993 as Exhibit
A and Security Agreement as Exhibit B) (Pursuant to Rule 24b-2,
certain portions of this Exhibit have been deleted and filed
separately with the Commission) (incorporated by reference to Exhibit
2.1 to Form 8-K dated July 8, 1993)
29
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)
3.2 Amended Bylaws, (incorporated by reference to Exhibit 3.2 to Form 10-
K/A for the year ended June 30, 1995)
3.3 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to 1987 S-2 Registration Statement [File No. 33-12970])
4.1 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)
10.1 Loan Agreement dated as of September 1, 1990 between the City of
Chaska and the Company (incorporated by reference from Exhibit 4.2 to
the Registrant's Form 10-K for the year ended June 30, 1990, as
amended on Form 8 dated October 12, 1990) as amended on June 10, 1991
and July 24, 1991 (incorporated by reference from Exhibit 10.2 to the
Registrant's Amendment No. 1 to Form 1991 S-2 Registration Statement
[File No. 33-41291]) as amended on August 3, 1992 (incorporated by
reference to Exhibit 10.1 to Form 10-K for the year ended June 30,
1992) as amended on July 28, 1994 (incorporated by reference to
Exhibit 10.1 to Form 10-K for the year ended June 30, 1994), as
amended on July 27, 1995 (incorporated by reference to exhibit 10.1 to
Form 10-K for the year ended June 30, 1995), as amended on July 8,
1996, filed herewith
10.2 Trust Indenture dated as of September 1, 1990 from the City of Chaska
to Norwest Bank Minnesota, N.A., as Trustee (incorporated by reference
from Exhibit 4.3 to the Registrant's Form 10-K for the year ended
June 30, 1990, as amended on Form 8 dated October 12, 1990)
10.3 Combination Mortgage, Security Agreement and Fixture Financing
Statement dated as of September 1, 1990 from the Company to Norwest
Bank Minnesota, N.A., as Trustee (incorporated by reference from
Exhibit 4.4 to the Registrant's Form 10-K for the year ended June 30,
1990, as amended on Form 8 dated October 12, 1990)
10.4 Contract for Private Redevelopment dated as of September 1, 1990
between the Company and Chaska Economic Development Authority
(incorporated by reference from Exhibit 4.5 to the Registrant's Form
10-K for the year ended June 30, 1990, as amended on Form 8 dated
October 12, 1990)
30
10.5 Hyaluronate Purchase Agreement dated March 28, 1990 between the
Company and Alcon (incorporated by reference to Exhibit 10 to Form 8-K
dated April 10, 1990, as amended on Form 8 dated May 23, 1990) as
amended on July 17, 1992, (Certain information has been deleted from
this exhibit and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment under
Rule 24b-2) (incorporated by reference to Exhibit 10.5 to Form 10-K
for the year ended June 30, 1992)
10.6 Employment Agreement dated June 10, 1991 with James W. Bracke
(incorporated by reference to Exhibit 10.11 to 1991 S-2 Registration
Statement [File No. 33-41291]), as amended by letter agreement dated
on August 14, 1995 (incorporated by reference to Exhibit 10.6 to Form
10-K for the year ended June 30, 1995)
10.7 Form of Indemnification Agreement entered into between the Company and
directors and officers (incorporated by reference to Exhibit 10.7 to
Form 10-K for the year ended June 30, 1995)
10.8 1987 Stock Option Plan (incorporated by reference to Exhibit 4(a) to
S-8 Registration Statement [File No. 33-26065])
10.9 1987 Employee Stock Purchase Savings Plan (incorporated by reference
to Exhibit 4(a) to S-8 Registration Statement [File No. 33-19288])
10.10 1990 Employee Stock Purchase Savings Plan (incorporated by reference
to Exhibit 4(a) to S-8 Registration Statement [File No. 33-32984])
10.11 1990 Stock Plan (incorporated by reference to Exhibit 4(a) to S-8
Registration Statement [File No. 33-38914]) as amended by Amendment
No. 1 (incorporated by reference to Exhibit 10.13 to Form 10-K for the
year ended June 30, 1994)
10.12 Conveyance, License, Development and Supply Agreement dated August 8,
1994 between Lifecore Biomedical, Inc. and Ethicon, Inc. (pursuant to
Rule 24b-2, certain portions of this Exhibit have been omitted and
filed separately with the Commission) (incorporated by reference to
Exhibit 10.14 to Form 10-K for the year ended June 30, 1994)
10.13 Equipment Lease dated May 28, 1991 between the Registrant and
Johnson & Johnson Finance Corporation (incorporated herein by
reference from Exhibit 10.20 to 1991 S-2 Registration Statement [File
No. 33-12970]) as amended in May 1992 (incorporated by reference to
Exhibit 10.15 to Form 10-K for the year ended June 30, 1992) as
amended in January 1993 (incorporated by reference to Exhibit 10.15 to
Form 10-K for the year ended June 30, 1993) as amended in January 1994
and March 1994 (incorporated by reference to Exhibit 10.15 to Form
10-Q for the quarter ended March 31, 1994)
31
10.14 Master Lease, Supplement to Master Lease and Assignment of
Time/Savings Account between Norwest Equipment Finance, Inc., and the
Registrant dated June 28, 1991 (incorporated by reference to Exhibit
10.21 to Form 10-K for the year ended June 30, 1991)
10.15 Amendment No. 2 to Hyaluronate Purchase Agreement dated December 4,
1992 between Lifecore Biomedical, Inc. and Alcon Surgical, Inc.
(pursuant to Rule 24b-2, certain portions of this Exhibit have been
omitted and filed separately with the Commission) (incorporated by
reference to Exhibit 28 to Form 8-K dated December 4, 1992)
10.16 Amendment No. 3 to Hyaluronate Purchase Agreement dated May 12, 1993
Between Lifecore Biomedical, Inc. and Alcon Surgical, Inc. (pursuant
to Rule 24b-2, certain portions of this Exhibit have been omitted and
filed separately with the Commission) (incorporated by reference to
Exhibit 10.18 to Form 10-K for the year ended June 30, 1993 as amended
on Form 10-K/A dated December 15, 1994)
10.17 Letter Agreement dated October 28, 1992 between the Company and
Bio-Interfaces, Inc. (incorporated by reference to Exhibit 28.1 to
Form 8-K dated October 5, 1992)
10.18 Stock Purchase Agreement dated August 8, 1994 between Lifecore
Biomedical, Inc. and Johnson and Johnson Development Corporation,
(incorporated by reference to Exhibit 10.20 to Form 10-K for the year
ended June 30, 1994)
10.19 Amendment No. 4 to Hyaluronate Purchase Agreement dated November 29,
1994, between Lifecore Biomedical, Inc. and Alcon Laboratories, Inc.
(pursuant to Rule 24b-2, certain portions of this Exhibit have been
omitted and filed separately with the Commission) (incorporated by
reference to Exhibit 10.21 to Form 10-Q for the quarter ended
December 31, 1994)
10.20 Supply Agreement dated December 7, 1994 between Lifecore
Biomedical, Inc. and IOLAB Corporation (pursuant to Rule 24b-2,
certain portions of this Exhibit have been omitted and filed
separately with the Commission) (incorporated by reference to Exhibit
10.20 to Form 10-K for the year ended June 30, 1995)
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
___________
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LIFECORE BIOMEDICAL, INC.
Dated: September 5, 1996 By /s/ JAMES W. BRACKE
-------------------------------------
James W. Bracke, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AND SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in capacities and on the dates indicated.
Dated: September 5, 1996 By /s/ DENNIS J. ALLINGHAM
-------------------------------------
Dennis J. Allingham
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Dated: September 5, 1996 By /s/ JAMES W. BRACKE
-------------------------------------
James W. Bracke, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER),
SECRETARY AND DIRECTOR
Dated: September 5, 1996 By /s/ ORWIN L. CARTER
-------------------------------------
Orwin L. Carter
DIRECTOR
Dated: September 5, 1996 By /s/ JOAN L. GARDNER
-------------------------------------
Joan L. Gardner
DIRECTOR
Dated: September 5, 1996 By /s/ THOMAS H. GARRETT
-------------------------------------
Thomas H. Garrett
DIRECTOR
Dated: September 5, 1996 By /s/ JOHN C. HEINMILLER
-------------------------------------
John C. Heinmiller
DIRECTOR
Dated: September 5, 1996 By /s/ DONALD W. LARSON
-------------------------------------
Donald W. Larson
DIRECTOR
Dated: September 5, 1996 By /s/ RICHARD W. PERKINS
-------------------------------------
Richard W. Perkins
DIRECTOR
Dated: September 5, 1996 By /s/ MARK T. SELLNOW
-------------------------------------
Mark T. Sellnow
CONTROLLER (PRINCIPAL ACCOUNTING
OFFICER)
33
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Lifecore Biomedical, Inc.
We have audited the accompanying consolidated balance sheets of Lifecore
Biomedical, Inc. (a Minnesota corporation) and Subsidiaries as of June 30, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lifecore
Biomedical, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
We have also audited Schedule II of Lifecore Biomedical, Inc. and
Subsidiaries for each of the three years in the period ended June 30, 1996. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ GRANT THORNTON
Minneapolis, Minnesota
July 31, 1996
F - 1
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
ASSETS
CURRENT ASSET 1995 1996
----------- ------------
Cash and cash equivalents (note A2) . . . $ 2,726,000 $ 3,264,000
Short-term investments (note A3). . . . . -- 14,947,000
Accounts receivable, less allowances
(notes A4 and A9). . . . . . . . . . . . 1,598,000 2,326,000
Inventories (note A5) . . . . . . . . . . 4,753,000 5,954,000
Prepaid expenses. . . . . . . . . . . . . 404,000 800,000
------------ --------------
Total current assets. . . . . . . . . . 9,481,000 27,291,000
PROPERTY, PLANT AND EQUIPMENT - AT COST
(notes A6 and C)
Land. . . . . . . . . . . . . . . . . . . 249,000 249,000
Building. . . . . . . . . . . . . . . . . 6,711,000 6,848,000
Equipment . . . . . . . . . . . . . . . . 4,418,000 5,167,000
Land and building improvements. . . . . . 1,406,000 1,406,000
------------ --------------
12,784,000 13,670,000
Less accumulated depreciation . . . . . . (4,642,000) (5,009,000)
------------ --------------
8,142,000 8,661,000
OTHER ASSETS
Intangibles (notes A7 and B). . . . . . . 4,634,000 4,268,000
Long-term investments(note A3). . . . . . -- 20,137,000
Security deposits (note C). . . . . . . . 1,022,000 788,000
Inventories (note A5) . . . . . . . . . . 1,405,000 2,014,000
Other (note A8) . . . . . . . . . . . . . 838,000 1,270,000
------------ --------------
7,899,000 28,477,000
------------ --------------
$ 25,522,000 $ 64,429,000
------------ --------------
------------ --------------
F - 2
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES 1995 1996
----------- ----------
Current maturities of long-term
obligations (note C) . . . . . . . . . . $ 1,139,000 $ 698,000
Accounts payable. . . . . . . . . . . . . 746,000 1,156,000
Accrued compensation. . . . . . . . . . . 417,000 548,000
Accrued expenses. . . . . . . . . . . . . 404,000 730,000
Customers' deposits (note D). . . . . . . 2,788,000 1,952,000
------------- -----------
Total current liabilities . . . . . . . 5,494,000 5,084,000
LONG-TERM OBLIGATIONS (note C) . . . . . . . . 7,888,000 7,193,000
CUSTOMERS' DEPOSITS (note D) . . . . . . . . . 1,952,000 --
COMMITMENTS AND CONTINGENCIES (notes D, E, I, L
and N) . . . . . . . . . . . . . . . . . . . . -- --
SHAREHOLDERS' EQUITY (notes B, G, H, and L)
Preferred stock - authorized,
25,000,000 shares of $1.00 stated
value; none issued. . . . . . . . . . . -- --
Preferred stock, Series A Junior
Participating - authorized, 500,000
shares of $1.00 par value; none issued. -- --
Common stock - authorized, 25,000,000
shares of $.01 stated value; issued and
outstanding, 7,972,167 and 12,121,971
shares at June 30, 1995 and 1996,
respectively. . . . . . . . . . . . . . 80,000 121,000
Additional paid-in capital. . . . . . . . 37,216,000 83,139,000
Accumulated deficit . . . . . . . . . . . (27,108,000) (31,108,000)
------------- -----------
10,188,000 52,152,000
------------- -----------
$ 25,522,000 $ 64,429,000
------------- -----------
------------- -----------
The accompanying notes are an integral part of these statements.
F-3
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
1994 1995 1996
------------ ------------ ------------
Net sales (notes A9 and K) . . . . . . . . $ 10,430,000 $ 10,018,000 $ 14,063,000
Cost of goods sold . . . . . . . . . . . . 6,004,000 7,900,000 9,173,000
------------ ------------ ------------
Gross profit . . . . . . . . . . . . . . 4,426,000 2,118,000 4,890,000
Operating expenses
Research and development . . . . . . . . 1,072,000 1,381,000 2,699,000
Marketing and sales. . . . . . . . . . . 2,645,000 3,038,000 4,356,000
General and administrative . . . . . . . 2,100,000 2,382,000 2,861,000
Insurance proceeds, net (note M) . . . . -- -- (754,000)
------------ ------------ ------------
5,817,000 6,801,000 9,162,000
------------ ------------ ------------
Loss from operations . . . . . . . . . . (1,391,000) (4,683,000) (4,272,000)
Other income (expense)
Gain on sale of building . . . . . . . . 274,000 -- --
Loss on sale of short-term investments . (1,047,000) -- --
Interest expense . . . . . . . . . . . . (835,000) (854,000) (814,000)
Interest income. . . . . . . . . . . . . 202,000 322,000 1,086,000
------------ ------------ ------------
(1,406,000) (532,000) 272,000
------------ ------------ ------------
NET LOSS . . . . . . . . . . . . . . . . $ (2,797,000) $ (5,215,000) $ (4,000,000)
------------ ------------ ------------
------------ ------------ ------------
Net loss per common share (note A10) . . $ (.39) $ (.66) $ (.40)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding. . . . 7,175,674 7,879,538 10,114,149
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-4
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
1994 1995 1996
----------- ----------- -----------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,797,000) $(5,215,000) $(4,000,000)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization . . . . . . . . . . . . . . . . . 943,000 939,000 1,015,000
Allowance for doubtful accounts. . . . . . . . . . . . . . . . . 23,000 141,000 67,000
Loss on sale on short-term investments . . . . . . . . . . . . . 1,047,000 -- --
Gain on sale of building . . . . . . . . . . . . . . . . . . . . (274,000) -- --
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . 966,000 -- --
Changes in operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . (669,000) (357,000) (795,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . (2,408,000) (862,000) (1,810,000)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . (87,000) (142,000) (396,000)
Accounts payable . . . . . . . . . . . . . . . . . . . . . 163,000 171,000 410,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . (146,000) 101,000 457,000
Customers' deposits. . . . . . . . . . . . . . . . . . . . (106,000) 3,320,000 (2,788,000)
----------- ----------- -----------
Total adjustments. . . . . . . . . . . . . . . . . . . . (548,000) 3,311,000 (3,840,000)
----------- ----------- -----------
Net cash used in operating activities. . . . . . . . . . . . . . . (3,345,000) (1,904,000) (7,840,000)
Cash flows from investing activities:
Proceeds from sale of building . . . . . . . . . . . . . . . . . 435,000 -- --
Purchases of property, plant and equipment . . . . . . . . . . . (395,000) (449,000) (1,147,000)
Purchases of intangibles . . . . . . . . . . . . . . . . . . . . (44,000) (51,000) (33,000)
Purchases of investments . . . . . . . . . . . . . . . . . . . . (5,063,000) -- (67,832,000)
Sales of investments . . . . . . . . . . . . . . . . . . . . . . 4,016,000 -- --
Maturities of investments. . . . . . . . . . . . . . . . . . . . -- -- 32,748,000
Increase (decrease) in security deposits . . . . . . . . . . . . (10,000) (97,000) 234,000
Business acquisition, net of cash acquired . . . . . . . . . . . (754,000) -- --
Decrease (increase) in other assets. . . . . . . . . . . . . . . 47,000 (130,000) (420,000)
----------- ----------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . . (1,768,000) (727,000) (36,450,000)
Cash flows from financing activities:
Payments of long-term obligations. . . . . . . . . . . . . . . . (176,000) (993,000) (1,136,000)
Proceeds from issuance of common stock . . . . . . . . . . . . . -- 3,985,000 45,305,000
Proceeds from stock options exercised. . . . . . . . . . . . . . 151,000 90,000 659,000
Excess value received from common stock issued
for payment of debt . . . . . . . . . . . . . . . . . . . . . 521,000 -- --
----------- ----------- -----------
Net cash provided by financing activities. . . . . . . . . . . . . 496,000 3,082,000 44,828,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . (4,617,000) 451,000 538,000
Cash and cash equivalents at beginning of year . . . . . . . . . . 6,892,000 2,275,000 2,726,000
----------- ----------- -----------
Cash and cash equivalents at end of year . . . . . . . . . . . . . $ 2,275,000 $ 2,726,000 $ 3,264,000
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 810,000 $ 835,000 $ 784,000
Liabilities assumed in business acquisition. . . . . . . . . 219,000 -- --
The accompanying notes are an integral part of these statements.
F-5
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
--------------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED
ISSUED AMOUNT CAPITAL DEFICIT
------------ ------------ ------------ ------------
Balances at July 1, 1993 . . . . . . . . . . . . 7,154,738 $72,000 $32,477,000 $(19,096,000)
Exercise of stock options and
employee stock purchase savings
plan, net of 5,888 shares
surrendered in payment . . . . . . . . . . . 40,951 -- 151,000 --
Excess value received from common
stock issued for payment of debt
(note H) . . . . . . . . . . . . . . . . . . -- -- 521,000 --
Net loss for the year ended
June 30, 1994 . . . . . . . . . . . . . . . -- -- -- (2,797,000)
------------ ------------ ------------ ------------
Balances at June 30, 1994. . . . . . . . . . . . 7,195,689 72,000 33,149,000 (21,893,000)
Exercise of stock options and
employee stock purchase
savings plan . . . . . . . . . . . . . . . . 19,082 -- 90,000 --
Proceeds from sale of common stock (note L) . 757,396 8,000 3,977,000 --
Net loss for the year ended
June 30, 1995 . . . . . . . . . . . . . . . -- -- -- (5,215,000)
------------ ------------ ------------ ------------
Balances at June 30, 1995 . . . . . . . . . . . 7,972,167 80,000 37,216,000 (27,108,000)
Exercise of stock options and
employee stock purchase savings
plan, net of 628 shares
surrendered in payment . . . . . . . . . . . 119,804 1,000 658,000 --
Proceeds from sale of common stock
(note G) . . . . . . . . . . . . . . . . . . 4,030,000 40,000 45,265,000 --
Net loss for the year ended
June 30, 1996. . . . . . . . . . . . . . . . -- -- -- (4,000,000)
------------ ------------ ------------ ------------
Balances at June 30, 1996 12,121,971 $ 121,000 $ 83,139,000 $(31,108,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-6
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lifecore Biomedical, Inc. ("the Company"), develops, manufactures, and
markets surgically implantable materials and devices through its two divisions,
the Hyaluronate Division and the Oral Restorative Division. The Hyaluronate
Division's manufacturing facility is located in Chaska, Minnesota and markets
its products through OEM and contract manufacturing alliances in the fields of
ophthalmology, veterinary and wound care management. The Oral Restorative
Division markets its products through direct sales in the United States and
Italy and through distributors in other foreign countries. In April 1995, the
Company began direct sales operations in Italy through a newly formed
subsidiary, Lifecore Biomedical SpA, in Verona, Italy.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
A summary of significant accounting policies consistently applied in the
preparation of the financial statements follows:
1. CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Implant Support Systems, Inc. and Lifecore
Biomedical SpA. All intercompany balances and transactions have been eliminated
in consolidation.
2. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents. At June 30, 1996 and
1995, principally all of the Company's cash and cash equivalents are invested in
a money market fund.
F-7
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
3. INVESTMENTS
The Company has invested its excess cash from the public offering completed
in the second quarter of fiscal 1996 and the offshore stock offering in April
1996 in commercial paper, government agencies and medium term corporate notes.
These investments are classified as held-to-maturity given the Company's intent
and ability to hold the securities to maturity and are carried at amortized
cost. Investments that have maturities of less than one year have been
classified as short-term investments.
At June 30, 1996, amortized cost approximates fair value of
held-to-maturity investments which consist of the following:
Short-term investments:
Commercial paper (maturing August 1996 through June 1997). . . $12,447,000
U.S. Government Agencies (maturing November 1996). . . . . . . 2,500,000
-----------
14,947,000
Long-term investments:
U.S. Government Agencies (maturing July 1997). . . . . . . . . 1,242,000
Medium term corporate notes (maturing July 1997
through October 1998) . . . . . . . . . . . . . . . . . 18,895,000
-----------
20,137,000
-----------
$35,084,000
-----------
-----------
4. ACCOUNTS RECEIVABLE
The Company grants credit to customers in the normal course of business,
but generally does not require collateral or any other security to support
amounts due. The Company's customers are located primarily throughout the United
States and Europe. Management performs on-going credit evaluations of its
customers. The Company maintains allowances for potential credit losses which
were $219,000 and $286,000 at June 30, 1995 and 1996.
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company's reserve for obsolescence and rework was $307,000 and
$751,000 at June 30, 1995 and 1996. Inventory not expected to be consumed within
one year is classified as a long-term asset. Inventories consist of the
following:
AS OF JUNE 30,
--------------------------
1995 1996
----------- -----------
Raw materials . . . . . . . $1,551,000 $2,632,000
Work-in-process . . . . . . 95,000 82,000
Finished goods. . . . . . . 4,512,000 5,254,000
----------- -----------
$6,158,000 $7,968,000
----------- -----------
----------- -----------
F-8
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
6. DEPRECIATION
Depreciation is provided in amounts sufficient to charge the cost of
depreciable assets to operations over their estimated service lives principally
on a straight-line method for financial reporting purposes and on straight-line
and accelerated methods for income tax reporting purposes. Depreciation expense
was approximately $569,000, $559,000 and $628,000 for the years ended June 30,
1994, 1995 and 1996. Lives used in straight-line depreciation for financial
reporting purposes are as follows:
NUMBER OF
YEARS
---------
Building . . . . . . . . . . . . . . . . . . . 18-25
Equipment. . . . . . . . . . . . . . . . . . . 3-15
Land and building improvements . . . . . . . . 18
7. INTANGIBLES
Intangibles consist primarily of the cost of the technology and regulatory
rights related to the Sustain Dental Implant System product line acquired in May
1992 and the goodwill related to the July 1993 acquisition of Implant Support
Systems, Inc.
On an ongoing basis, the Company reviews the valuation and amortization of
intangibles to determine possible impairment by comparing the carrying value to
projected undiscounted future cash flows of the related assets. The cost of the
technology and regulatory rights and the goodwill are being amortized on the
straight-line method over 15 years, their estimated useful lives. Accumulated
amortization of intangibles was $891,000 and $1,256,000 at June 30, 1995 and
1996.
8. OTHER ASSETS
Included within other assets are costs incurred to register patents and
trademarks which are capitalized as incurred. Amortization of these costs
commences when the related patent or trademark is granted. The costs are
amortized over the estimated useful life of the patent or trademark, not to
exceed 17 years. Patents and trademarks consist of the following:
AS OF JUNE 30,
------------------------
1995 1996
--------- ---------
Patents. . . . . . . . . . . . $ 134,000 $ 160,000
Trademarks . . . . . . . . . . 53,000 59,000
--------- ---------
187,000 219,000
Less amortization. . . . . . . (71,000) (83,000)
--------- ---------
$ 116,000 $ 136,000
--------- ---------
--------- ---------
F-9
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
9. REVENUE RECOGNITION AND PRODUCT WARRANTY
The Company recognizes revenue when product is shipped or otherwise
accepted by the customer. Under the terms of a contract covering sales of
ophthalmic hyaluronate, the Company's product is under warranty against
non-compliance with product specifications. A provision is made for the
estimated cost of replacing or further processing any product not complying with
the warranted product specifications.
10. NET LOSS PER COMMON SHARE
Net loss per common share is based upon the weighted average outstanding
common shares.
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of."
The FASB has also issued Statement No. 123 "Accounting for Stock-Based
Compensation." Under this Statement, the Company must either adopt the fair
value-based method of accounting for employee stock options or continue to
account for employee stock options using the intrinsic value-based method.
Management intends to continue with the intrinsic value-based method which,
under the new standard, will require additional disclosure.
The adoption of these standards is not expected to have a material effect
on the consolidated financial statements of the Company. The Company will be
required to adopt both Statements at the beginning of fiscal 1997.
NOTE B - ACQUISITION OF IMPLANT SUPPORT SYSTEMS, INC.
On July 28, 1993, the Company acquired all of the outstanding shares of
common stock of Implant Support Systems, Inc. ("ISS"). The Company paid $682,000
in cash, issued a $2,000,000 note payable and assumed certain liabilities. The
payment terms of the note payable were amended in September 1994. This note as
amended bears interest at 5% payable quarterly beginning October 15, 1993 with
principal payments of $700,000 paid during fiscal 1995, $850,000 paid in October
1995 and $450,000 due December 15, 1996. The principal payments may be made in
cash or the Company's common stock at the Company's option. If the Company
chooses its common stock as the form of payment, the note holder has certain
registration rights. The note is secured by the assets of ISS. The acquired
goodwill of approximately $2,754,000 is being amortized on a straight-line basis
over 15 years.
F-10
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE B - ACQUISITION OF IMPLANT SUPPORT SYSTEMS, INC. - (CONTINUED)
At the time of the acquisition, the Company also entered into a six-month
consulting agreement and a three-year non-compete agreement with the former
owner of ISS and entered into a six-month consulting agreement and an
eighteen-month non-compete agreement with one of ISS' employees. These
agreements provided for aggregate compensation of $125,000 in fiscal 1995 and
$120,000 in fiscal 1996.
Consolidated results of operations on a pro forma basis, as if the
acquisition of ISS had occurred on July 1, 1993, would not be materially
different than the reported consolidated results for the year ended June 30,
1994.
NOTE C - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
AS OF JUNE 30,
--------------------------
1995 1996
----------- -----------
Industrial development revenue bonds . . $ 6,895,000 $ 6,825,000
Note payable . . . . . . . . . . . . . . 1,300,000 450,000
Real estate special assessments . . . . 294,000 207,000
Deferred lease payments . . . . . . . . 538,000 409,000
----------- -----------
9,027,000 7,891,000
Less current maturities . . . . . . . . (1,139,000) (698,000)
----------- -----------
$ 7,888,000 $ 7,193,000
----------- -----------
----------- -----------
INDUSTRIAL DEVELOPMENT REVENUE BONDS
On September 28, 1990, the Company completed a $7,000,000 transaction to
finance its manufacturing and administrative facility through the issuance of
30-year industrial development revenue bonds by the municipality where the
facility is located. The bonds are collateralized by a first mortgage on the
facility and bear interest at 10.25%. The Company is required to make debt
service payments on the bonds of approximately $775,000 per year for fiscal
years 1996 through 2021. The payments are required to be made monthly to a
sinking fund. At June 30, 1996, the Company has approximately $700,000 on
deposit with the bond trustee to cover the reserve fund requirement. The
Company has the right to redeem the bonds commencing September 1, 1998 upon the
payment of the outstanding principal balance plus accrued interest and a
premium. The premium is 8% of the principal amount during the year commencing
September 1, 1998 and declines during subsequent years.
The terms of the loan agreement require the Company to comply with various
financial covenants including minimum current ratio, fixed charges coverage and
cash flow coverage requirements and maximum debt to net worth limitation. The
fixed charges coverage and cash flow coverage requirements have been waived by
the bondholder through fiscal 1997. The debt to net worth ratio covenant has the
effect of restricting the payment of cash dividends or repurchases of common
stock.
F-11
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE C - LONG-TERM OBLIGATIONS - (CONTINUED)
NOTE PAYABLE
In July 1993, the Company issued its promissory note payable as part of the
consideration paid to the seller of Implant Support Systems, Inc. (see Note B).
REAL ESTATE SPECIAL ASSESSMENTS
In connection with special land improvements added during and after the
construction of the Company's manufacturing and administrative facility the
property has been assessed a total of $869,000 in special assessments. The
special assessments bear interest at 8.5% with principal and interest payments
due semi-annually through 2001.
DEFERRED LEASE PAYMENTS
The Company has recorded deferred lease payments to reflect the expense on
a straight-line basis for lease payments due under its equipment leases (see
Note E).
At June 30, 1996 and 1995, the carrying amounts of long-term obligations
approximate the fair value of these obligations. The aggregate minimum annual
principal payments of long-term obligations for the years ending June 30 are as
follows:
1997 . . . . . . . . . . . . . . . . . . $ 698,000
1998 . . . . . . . . . . . . . . . . . . 253,000
1999 . . . . . . . . . . . . . . . . . . 263,000
2000 . . . . . . . . . . . . . . . . . . 165,000
2001 . . . . . . . . . . . . . . . . . . 139,000
Thereafter . . . . . . . . . . . . . . . 6,373,000
-----------
$ 7,891,000
-----------
-----------
F-12
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE D - CUSTOMERS' DEPOSITS
In November 1994, Lifecore renewed its current supply contract with Alcon
Laboratories, Inc., an indirect subsidiary of Nestle S.A. ("Alcon") through
December of 1998. The agreement contains minimum annual purchase requirements
totalling $10,400,000 for calendar years 1995 through 1998. Lifecore received a
$6,300,000 cash advance from Alcon against future contract purchases. The
remaining cash advance is classified as short-term as it is expected to be
realized during the fiscal year ended June 30, 1997.
As security for the cash advance, the Company granted Alcon a right to
accelerate delivery of certain finished hyaluronate inventory. The amount of
inventory that is subject to acceleration is limited to the amount purchasable
by the outstanding cash advance based upon the contract price.
NOTE E - OPERATING LEASES
The Company leases equipment under an operating lease with Johnson &
Johnson Finance Corporation ("JJFC"), an affiliate of the Company's customers,
Ethicon, Inc. and Johnson & Johnson Medical, Inc. JJFC is also an affiliate of
Johnson & Johnson Development Corporation, a shareholder of the Company (see
Note L). From May 1991 to March 1993 equipment subject to the lease was
installed and validated at the Company's Chaska facility. The Company began
recording operating lease expense on a straight line basis in April 1993.
Minimum monthly lease payments of $152,000 commenced in April 1994 for a term of
66 months. At the end of this initial lease term, the Company has the option to
either renew for an additional 18 month period or purchase the leased equipment
at a predetermined fair value. Additionally, the Company had entered into
operating leases with a financial institution for approximately $900,000 of
furniture and fixtures. During the year ended June 30, 1996, the Company
purchased from the financial institution the furniture and fixtures subject to
the operating leases. Operating lease expense was approximately $1,774,000,
$1,911,000 and $1,825,000 for the years ended June 30, 1994, 1995 and 1996. At
June 30, 1996, the future aggregate minimum annual lease payments due under
these operating leases for the years ending June 30 are as follows:
1997 . . . . . . . . . . . . . . . . . . $ 1,820,000
1998 . . . . . . . . . . . . . . . . . . 1,820,000
1999 . . . . . . . . . . . . . . . . . . 1,820,000
2000 . . . . . . . . . . . . . . . . . . 303,000
2001 . . . . . . . . . . . . . . . . . . --
-----------
$ 5,763,000
-----------
-----------
F-13
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE F - INCOME TAXES
Deferred tax assets and liabilities represent the tax effects, based on
current tax law, of future deductible or taxable amounts attributable to events
that have been recognized in the financial statements. Deferred tax assets
(liabilities) consist of the following at June 30:
1995 1996
------------ ------------
Deferred tax assets
Net operating loss carryforward . . . . . . . . . . . . $ 8,064,000 $ 9,106,000
Capital loss carryforward . . . . . . . . . . . . . . . 377,000 377,000
Tax credit carryforward . . . . . . . . . . . . . . . . 253,000 263,000
Inventories . . . . . . . . . . . . . . . . . . . . . . 1,200,000 1,281,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . 178,000 246,000
------------ ------------
Total deferred tax assets . . . . . . . . . . . . . . . 10,072,000 11,273,000
Deferred tax liabilities
Deferred lease payments . . . . . . . . . . . . . . . . (572,000) (230,000)
Depreciation. . . . . . . . . . . . . . . . . . . . . . (528,000) (517,000)
------------ ------------
Total deferred tax liabilities. . . . . . . . . . . . . (1,100,000) (747,000)
------------ ------------
Net deferred tax asset before valuation allowance . . . . 8,972,000 10,526,000
Valuation allowance . . . . . . . . . . . . . . . . . . . (8,972,000) (10,526,000)
------------ ------------
Net deferred tax asset. . . . . . . . . . . . . . . . . . $ -- $ --
------------ ------------
------------ ------------
The deferred tax asset valuation allowance increased $1,554,000 during
1996, since these benefits may not be realized.
At June 30, 1996, the Company had approximately $25,600,000 of net
operating loss carryforwards for tax reporting purposes, which expire in 1999
through 2011 and income tax credit carryforwards of approximately $263,000 which
expire in 1997 through 2007.
F-14
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE G - SHAREHOLDERS' EQUITY
OFFERINGS OF COMMON STOCK
On October 18, 1995, the Company received net proceeds of approximately
$19,852,000 from the sale of 2,200,000 shares of its common stock through a
public offering. On November 16, 1995, the Company received net proceeds of
approximately $3,010,000 when the underwriters purchased an additional 330,000
shares of common stock related to the over-allotment option.
On April 11, 1996, the Company completed the sale of 1,500,000 shares of
its common stock and received net proceeds of approximately $22,443,000 through
a Regulation S offering to qualified investors outside the United States.
STOCK OPTION PLANS
In November 1987, the shareholders adopted the 1987 Stock Plan (the "1987
Plan") to provide for options to be granted to certain eligible salaried
employees and non-employee members of the Board of Directors. A total of 300,000
shares of common stock are reserved for issuance under the Plan. All outstanding
options under two prior plans were exchanged for options under the 1987 Plan.
All future options granted under the 1987 Plan will be granted at an exercise
price equal to the fair market value of the common stock at the date of grant.
Each grant awarded specifies the period for which the options are exercisable
and provides that the options shall expire at the end of such period.
Option transactions under the 1987 Plan during the three years ended
June 30, 1996 are summarized as follows:
NUMBER OF
1987 PLAN SHARES OPTION PRICE RANGE
- - --------- ---------- ------------------
Outstanding at July 1, 1993 . . . . . . . . 77,800 $ 3.13 - 4.50
Exercised. . . . . . . . . . . . . . . . . (11,475) 3.13 - 4.50
Cancelled. . . . . . . . . . . . . . . . . (4,100) 4.50
---------
Outstanding at June 30, 1994. . . . . . . . 62,225 3.13 - 4.50
Exercised. . . . . . . . . . . . . . . . . (7,223) 3.13 - 4.50
Cancelled. . . . . . . . . . . . . . . . . (500) 4.50
---------
Outstanding at June 30, 1995. . . . . . . . 54,502 3.13 - 3.81
Exercised. . . . . . . . . . . . . . . . . (42,502) 3.13 - 3.81
---------
Outstanding at June 30, 1996. . . . . . . . 12,000 $ 3.63
---------
---------
The remaining options were exercisable at June 30, 1996.
F-15
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE G - SHAREHOLDERS' EQUITY - (CONTINUED)
In November 1990, the shareholders adopted the 1990 Stock Plan (the "1990
Plan") to provide for options to be granted to certain eligible employees,
non-employee members of the Board of Directors and other non-employee persons as
defined in the Plan. In November 1993, the 1990 Plan was amended to provide a
total of 1,000,000 shares of common stock reserved for issuance under the 1990
Plan. Options will be granted under the 1990 Plan at exercise prices which are
determined by a committee as appointed by the Board of Directors. Options
granted to date under the 1990 Plan have been at fair market value. Each grant
awarded specifies the period for which the options are exercisable and provides
that the options shall expire at the end of such period.
Option transactions under the 1990 Plan during the three years ended June
30, 1996 are summarized as follows:
NUMBER OF
1990 PLAN SHARES OPTION PRICE RANGE
- - --------- ---------- ------------------
Outstanding at July 1, 1993 . . . . . . . . 421,050 $ 2.63 - 19.00
Granted. . . . . . . . . . . . . . . . . . 145,000 4.25 - 10.88
Exercised. . . . . . . . . . . . . . . . . (18,208) 2.63 - 7.38
Cancelled. . . . . . . . . . . . . . . . . (47,550) 5.00 - 11.25
---------
Outstanding at June 30, 1994. . . . . . . . 500,292 2.63 - 19.00
Granted. . . . . . . . . . . . . . . . . . 164,500 3.63 - 8.25
Exercised. . . . . . . . . . . . . . . . . (1,250) 5.75
Cancelled. . . . . . . . . . . . . . . . . (88,625) 3.88 - 16.88
---------
Outstanding at June 30, 1995. . . . . . . . 574,917 2.63 - 19.00
Granted. . . . . . . . . . . . . . . . . . 181,500 7.56 - 20.25
Exercised. . . . . . . . . . . . . . . . . (55,755) 3.50 - 11.25
Cancelled. . . . . . . . . . . . . . . . . (30,417) 5.25 - 17.25
---------
Outstanding at June 30, 1996. . . . . . . . 670,245 $ 2.63 - 20.25
---------
---------
Under the 1990 Plan, options to purchase an aggregate of 319,520
shares were exercisable at June 30, 1996.
EMPLOYEE STOCK PURCHASE SAVINGS PLAN
The 1990 Employee Stock Purchase Savings Plan ("ESPSP") provides for the
purchase by eligible employees of Company common stock at a price equal to 85%
of the market price on either the anniversary date of such plan's commencement
or the termination date of the plan, whichever is lower. Participants may
authorize payroll deductions up to 10% of their base salary during the plan year
to purchase the stock. Since inception of the ESPSP a total of 78,557 shares had
been issued, including 17,156 shares for approximately $103,000 in 1994, 10,609
shares for approximately $54,000 in 1995 and 21,725 shares for approximately
$111,000 during 1996. At June 30, 1996, the Company had 71,443 shares reserved
for future issuance under the ESPSP.
F-16
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE G - SHAREHOLDERS' EQUITY - (CONTINUED)
SHAREHOLDER RIGHTS PLAN
In May 1996 the Board of Directors unanimously adopted a shareholder rights
plan designed to ensure that all of the Company's shareholders receive fair and
equal treatment in the event of any proposal to acquire the Company. The Board
declared a distribution of one Right for each share of common stock outstanding
on June 15, 1996. Each Right entitles the holder to purchase 1/100th of a share
of a new series of Junior Participating Preferred Stock of Lifecore at an
initial exercise price of $110.00. Initially, the Rights will be attached to
the common stock and will not be exercisable. They become exercisable only
following the acquisition by a person or group, without the prior consent of the
Company's Board of Directors, of 15 percent or more of the Company's voting
stock, or following the announcement of a tender offer or exchange offer to
acquire an interest of 15 percent or more.
In the event that the Rights become exercisable, each Right will entitle
the holder to purchase, at the exercise price, common stock with a market value
equal to twice the exercise price and, should the Company be acquired, each
Right would entitle the holder to purchase, at the exercise price, common stock
of the acquiring company with a market value equal to twice the exercise price.
Rights owned by the acquiring person would become void. In certain specified
instances, the Rights may be redeemed by the Company. If not redeemed, they
would expire on June 15, 2006.
NOTE H - SETTLEMENT OF COMMON STOCK VALUATION
In October 1992, the Company issued a total of 330,000 shares of its common
stock to satisfy certain notes payable. Pursuant to the agreement with the note
holder, the valuation of the 330,000 shares of common stock in excess of the
outstanding principal balances was to be returned to Lifecore provided such
value was realized from sales of the common stock. In October 1993, the
remaining shares were sold and $521,000 of cash was returned to Lifecore.
NOTE I - COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENTS
The Company has entered into agreements which provide for royalty payments
based on a percentage of net sales of certain products. Total royalty expense
under these agreements for the year ended June 30, 1996 was $78,000. Total
royalty expense for 1994 and 1995 was not material.
SEVERANCE AGREEMENTS
The Company has employment agreements with certain officers that provide
severance pay benefits if there is a change in control of the Company (as
defined) and the officer is involuntarily terminated (as defined). The maximum
contingent liability under these agreements at June 30, 1996 is approximately
$1,123,000.
F-17
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE J - EMPLOYEE BENEFIT PLAN
Effective October 1, 1988, the Company established a 401(k) profit sharing
plan for eligible employees. Contributions by the Company are determined by the
Board of Directors. There have been no Company contributions since the inception
of the plan.
NOTE K - SEGMENT INFORMATION
The Company's two business segments are the manufacturing, marketing and
selling of products containing hyaluronate (the "Hyaluronate Division") and oral
restorative products (the "Oral Restorative Division").
Currently, products containing hyaluronate are sold primarily to OEM
customers pursuant to supply agreements between the Company and its customers.
Currently, Alcon is a major customer of the Company. Sales to Alcon were 57%,
32% and 20% of total sales in 1994, 1995 and 1996.
The Company's Oral Restorative Division markets products throughout the
United States directly to clinicians through a direct sales force and primarily
through distributorship arrangements in foreign locations.
F-18
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE K - SEGMENT INFORMATION - (CONTINUED)
Sales to customers located principally in Europe accounted for 16%, 20% and
25% of total Company sales during the years ended June 30, 1994, 1995 and 1996.
The operations of the Company's Italian subsidiary, Lifecore Biomedical SpA,
have not been material to the consolidated financial statements.
Segment information for the Company is as follows:
YEARS ENDED JUNE 30,
----------------------------------------------------
1994 1995 1996
------------ ------------ ------------
Net sales
Hyaluronate products . . . . . . . . . . . $ 6,903,000 $ 5,223,000 $ 5,585,000
Oral restorative products. . . . . . . . . 3,527,000 4,795,000 8,478,000
------------ ------------ ------------
$ 10,430,000 $ 10,018,000 $ 14,063,000
------------ ------------ ------------
------------ ------------ ------------
Profit (loss) from operations
Hyaluronate products . . . . . . . . . . . $ 960,000 $ (3,309,000) $ (3,472,000)
Oral restorative products. . . . . . . . . (2,351,000) (1,374,000) (800,000)
------------ ------------ ------------
$ (1,391,000) $ (4,683,000) $ (4,272,000)
------------ ------------ ------------
------------ ------------ ------------
Capital expenditures
Hyaluronate products . . . . . . . . . . . $ 360,000 $ 395,000 $ 798,000
Oral restorative products. . . . . . . . . 35,000 54,000 349,000
------------ ------------ ------------
$ 395,000 $ 449,000 $ 1,147,000
------------ ------------ ------------
------------ ------------ ------------
Depreciation and amortization expense
Hyaluronate products . . . . . . . . . . . $ 588,000 $ 554,000 $ 561,000
Oral restorative products. . . . . . . . . 355,000 385,000 453,000
------------ ------------ ------------
$ 943,000 $ 939,000 $ 1,014,000
------------ ------------ ------------
------------ ------------ ------------
AS OF JUNE 30,
--------------------------------
1995 1996
------------ ------------
Identifiable assets
Hyaluronate products . . . . . . . . . . . . . . . . . . $ 13,678,000 $ 14,144,000
Oral restorative products. . . . . . . . . . . . . . . . 9,118,000 11,937,000
General corporate. . . . . . . . . . . . . . . . . . . . 2,726,000 38,348,000
------------ ------------
$ 25,522,000 $ 64,429,000
------------ ------------
------------ ------------
F-19
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE L - AGREEMENTS
On August 8, 1994, Lifecore and Ethicon entered into a Conveyance,
License, Development and Supply Agreement (the "Ethicon Agreement"). At the same
time, Lifecore, Ethicon and JJDC, a subsidiary of Johnson & Johnson, entered
into a Stock Purchase Agreement.
Under the terms of the Ethicon Agreement, Ethicon transferred to Lifecore
its ownership in certain technology related to research and development
previously conducted on the Company's sodium hyaluronate material. The
technology transferred to Lifecore includes written technical documents related
to Ethicon's research and development of a product to inhibit the formation of
surgical adhesions. These documents include product specifications, methods and
techniques, technology, know-how and certain patent applications. Lifecore has
assumed responsibility for continuing the anti-adhesion development project
including conducting human clinical trials on LUBRICOAT Gel, a second generation
hyaluronate-based product. Lifecore has granted Ethicon exclusive worldwide
marketing rights through 2008 to the products developed by Lifecore within
defined fields of use.
Under the terms of the Stock Purchase Agreement, JJDC purchased 757,396
unregistered shares of Lifecore common stock for total consideration of $4.0
million consisting of $2.6 million cash and $1.4 million conversion of a
customer deposit from Ethicon held by Lifecore. Lifecore granted JJDC certain
registration rights which provide JJDC the option of having up to one half of
the shares registered on, or after, June 30, 1995 and the remaining shares
registered on, or after, June 30, 1996.
The Company has made and continues to make a significant investment in the
development and testing of LUBRICOAT Gel, a product designed to reduce the
incidence of postsurgical adhesions. The product is currently undergoing human
clinical trials to develop the data necessary to apply to the United States Food
and Drug Administration ("FDA") for approval to market the product for
commercial application. However, even if the product is successfully developed
and the Company receives approval from the FDA, there can be no assurance that
it will receive market acceptance. Failure to achieve significant sales of the
product could have a material adverse effect on future prospects for the
Company's operations.
NOTE M - INSURANCE PROCEEDS
In May 1996, the Company received net proceeds of $754,000 on an insurance
claim for product that was damaged in production as a result of an equipment
failure.
NOTE N - LEGAL PROCEEDINGS
The Company is subject to various legal proceedings in the normal course of
business. Management believes that these proceedings will not have a material
adverse effect on the consolidated financial statements.
F-20
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - -------- ----------- ------------------------ ------------- ------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- - ----------- ----------- ---------- ---------- ------------- ------------
Year ended June 30, 1996
Accounts receivable
allowance. . . . . . . . . . . $ 219,000 77,000 -- $ (10,000)(A) $ 286,000
Inventory reserve. . . . . . . . 307,000 475,000 -- (31,000)(B) 751,000
Year ended June 30, 1995
Accounts receivable
allowance. . . . . . . . . . . 78,000 152,000 -- (11,000)(A) 219,000
Inventory reserve. . . . . . . . 332,000 -- -- (25,000)(B) 307,000
Year ended June 30, 1994
Accounts receivable
allowance. . . . . . . . . . . 55,000 31,000 -- (8,000)(A) 78,000
Inventory reserve. . . . . . . . 72,000 260,000 -- -- 332,000
- - ----------------
(A) Deductions represent accounts receivable balances written-off during the
year.
(B) Deductions represent utilization of the reserve through inventory
written-off during the year.
S-1