UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1996
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number O-4136
Lifecore Biomedical, Inc.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0948334
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3515 Lyman Boulevard
Chaska, Minnesota 55318
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 612-368-4300
Indicate by checkmark 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
--- ---
The number of shares outstanding of the registrant's Common Stock, $.01 per
value, as of January 15, 1997 was 12,194,823 shares.
1
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
December 31, 1996 and June 30, 1996 3
Consolidated Condensed Statements of Operations for Three
Months and Six Months Ended December 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows for
Six Months Ended December 31, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-12
PART II. Other Information
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1996 1996
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 1,440,000 $ 3,264,000
Short-term investments 20,876,000 14,947,000
Accounts receivable 2,972,000 2,326,000
Inventories 6,540,000 5,954,000
Prepaid expenses 1,136,000 800,000
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32,964,000 27,291,000
Property, plant and equipment
Land, building and equipment 13,990,000 13,670,000
Less accumulated depreciation (4,899,000) (5,009,000)
------------ ------------
9,091,000 8,661,000
Other assets
Intangibles 4,086,000 4,268,000
Long-term investments 11,967,000 20,137,000
Security deposits 806,000 788,000
Inventory 2,286,000 2,014,000
Other 1,231,000 1,270,000
------------ ------------
20,376,000 28,477,000
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$ 62,431,000 $ 64,429,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Current maturities of long-term obligations $ 247,000 $ 698,000
Accounts payable 1,053,000 1,156,000
Accrued compensation 624,000 548,000
Accrued expenses 779,000 730,000
Customers' deposits 1,079,000 1,952,000
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3,782,000 5,084,000
Long-term obligations 7,070,000 7,193,000
Shareholders' equity 51,579,000 52,152,000
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$ 62,431,000 $ 64,429,000
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See accompanying notes to consolidated condensed financial statements.
3
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended December 31, Six months ended December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
Net sales $ 4,684,000 $ 3,274,000 $ 8,252,000 $ 6,003,000
Cost of goods sold 2,511,000 2,115,000 4,609,000 4,105,000
------------ ------------ ------------ ------------
Gross profit 2,173,000 1,159,000 3,643,000 1,898,000
Operating expenses
Research and development 850,000 639,000 1,536,000 1,022,000
Marketing and sales 1,465,000 1,185,000 2,577,000 2,117,000
General and administrative 759,000 773,000 1,484,000 1,335,000
------------ ------------ ------------ ------------
3,074,000 2,597,000 5,597,000 4,474,000
------------ ------------ ------------ ------------
Loss from operations (901,000) (1,438,000) (1,954,000) (2,576,000)
Other income (expense)
Interest income 537,000 246,000 1,092,000 314,000
Interest expense (179,000) (214,000) (335,000) (421,000)
------------ ------------ ------------ ------------
358,000 32,000 757,000 (107,000)
------------ ------------ ------------ ------------
Net loss $ (543,000) $ (1,406,000) $ (1,197,000) $ (2,683,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common share $ (.04) $ (.14) $ (.10) $ (.30)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average
shares outstanding 12,180,372 9,965,553 12,153,791 8,973,886
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes to consolidated condensed financial statements.
4
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
December 31,
--------------------------------
1996 1996
--------------- --------------
Net cash used in operating activities $ (3,286,000) $ (4,612,000)
Cash flows from investing activities:
Purchases of property, plant and equipment (836,000) (441,000)
Purchases of investments (7,756,000) (16,487,000)
Maturities of investments 9,934,000 --
Purchases of intangibles (5,000) (10,000)
Other 76,000 (278,000)
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Net cash (used in) provided from investing activities 1,413,000 (17,216,000)
Cash flows from financing activities:
Payment of deposit to bond trustee (38,000) (35,000)
Payments of long-term obligations (86,000) (980,000)
Proceeds from stock issuance 173,000 23,192,000
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Net cash provided from financing activities 49,000 22,177,000
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Net increase (decrease) in cash and cash equivalents (1,824,000) 349,000
Cash and cash equivalents at beginning of period 3,264,000 2,726,000
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Cash and cash equivalents at end of period $ 1,440,000 $ 3,075,000
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Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest
$ 356,000 $ 409,000
See accompanying notes to consolidated condensed financial statements.
5
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
December 31, 1996
NOTE A - FINANCIAL INFORMATION
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.
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with Regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate.
In the opinion of management, the unaudited consolidated condensed financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position as of December 31, 1996, and
the results of operations for the three month and six month periods ended
December 31, 1996 and 1995, and cash flows for the six month periods ended
December 31, 1996 and 1995. The results of operations for the six months ended
December 31, 1996 are not necessarily indicative of the results for the full
year or of the results for any future periods.
In preparation of the Company's consolidated financial statements, management is
required to make estimates and assumptions that effect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
6
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONT.)
December 31, 1996
NOTE B - 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 completed in
the fourth quarter of fiscal 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.
December 31, June 30,
1996 1996
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(Unaudited)
Short-term investments:
Commercial paper (maturing January
1997 through November 1997) $ 18,655,000 $ 12,447,000
U.S. Government Agencies (maturing
July 1997 through August 1997) 2,221,000 2,500,000
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20,876,000 14,947,000
Long-term Investments:
U.S. Government Agencies
(maturing July 1997) -- 1,242,000
Medium term corporate notes (maturing
February 1998 through October 1998) 11,967,000 18,895,000
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11,967,000 20,137,000
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$ 32,843,000 $ 35,084,000
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NOTE C - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory not expected to be consumed within one year is classified as
a long-term asset. Inventories consist of the following:
December 31, June 30,
1996 1996
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(Unaudited)
Raw materials $ 2,737,000 $ 2,632,000
Work in progress 62,000 82,000
Finished goods 6,027,000 5,254,000
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$ 8,826,000 $ 7,968,000
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7
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONT.)
December 31, 1996
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 1998. The agreement contains minimum annual purchase requirements
totaling $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, Lifecore 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 - OFFERINGS OF COMMON STOCK
In October 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.
In November 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.
In April 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.
NOTE F - AGREEMENTS
In 1994, Lifecore and Ethicon, Inc. ("Ethicon"), a subsidiary of Johnson &
Johnson, entered into a Conveyance, License, Development and Supply Agreement
(the "Ethicon 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.
8
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONT.)
December 31, 1996
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-Registered Trademark- 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.
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 clearance to market the product for
commercial application. However, even if the product is successfully developed
and the Company receives clearance 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 G - NOTE PAYABLE
The Company exercised its option under the ISS note payable to make the final
principal payment due December 15, 1996 in the form of the Company's common
stock. To satisfy the $450,000 amount due, 29,108 shares of common stock were
issued under the formula contained in the note payable agreement. Subsequent to
the issuance of the common stock, the Company filed a registration statement on
Form S-3.
NOTE H - 1996 STOCK PLAN
On November 14, 1996, the shareholders adopted the 1996 Stock Plan (the "1996
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 1996 Plan. A total of 3,000,000 shares of common stock are
reserved for issuance under the 1996 Plan. Options will be granted under the
1996 Plan at exercise prices which are determined by a committee appointed by
the Board of Directors. 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. The Company filed a registration statement on Form S-8. A total
of 620,000 options are outstanding under the 1996 Plan, with 124,000 options
exercisable at $16.88 at December 31, 1996.
9
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS AND
SIX MONTHS ENDED DECEMBER 31, 1995
Net sales for the three months and six months ended December 31, 1996 increased
$1,410,000 and $2,249,000, respectively, an increase of 43% and 37%,
respectively, compared with the same periods of last fiscal year. Hyaluronate
product sales for the three-month and six-month periods ended December 31, 1996
increased 39% and 13%, respectively, compared with the same periods of last
fiscal year. The increases in hyaluronate product sales were primarily
attributable to product revenues from Chiron Vision and the timing of product
development related revenues. These increases were partially offset by sales to
Alcon at contract minimums during the three-month and six-month periods ended
December 31, 1996. These minimums by contract were lower than the same period
of last fiscal year. Oral restorative product sales for the three-month and
six-month periods ended December 31, 1996 increased 46% and 56%, respectively,
compared with the same periods of last fiscal year. The increase in oral
restorative product sales is a result of increased marketing and sales
activities in the domestic market and expanded distribution networks in
international markets, including Italy, where the Company's subsidiary, Lifecore
Biomedical SpA, is located.
Cost of goods sold, as a percentage of net sales, decreased to 54% and 56%,
respectively, for the three-month and six-month periods ended December 31, 1996
from 65% and 68%, respectively, for the same periods of last fiscal year. The
decrease resulted principally from spreading fixed expenses over increased
product sales and to a lesser extent, lower direct charges for idle capacity
related to hyaluronate products resulting from a higher utilization of the
Company's manufacturing facility. Further, the three month period ended
December 31, 1995 included period costs incurred for the scale-up of an aseptic
ophthalmic syringe product.
Research and development expenses increased $211,000, or 33%, for the current
quarter as compared to the same quarter of last fiscal year and $514,000, or
50%, for the six months ended December 31, 1996 as compared with the same period
of last fiscal year. There were two principal reasons for the increase. First,
costs associated with human clinical trials on LUBRICOAT Gel increased as
compared to the same period of last fiscal year. Second, personnel related
costs have increased as compared to the same period of last fiscal year.
10
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONT.)
Marketing and sales expenses increased $280,000, or 24%, for the current quarter
as compared to the same quarter of last fiscal year and $460,000, or 22%, for
the six months ended December 31, 1996 as compared with the same period of last
fiscal year. The increase reflected compensation costs from additional sales
personnel, increased advertising and sales literature costs, and expenses from
the expanded direct sales force at Lifecore Biomedical SpA.
General and administrative expenses decreased $14,000, or 2%, for the current
quarter as compared to the same quarter of last fiscal year and increased
$149,000, or 11%, for the six months ended December 31, 1996 as compared with
the same period of last fiscal year. The quarter ended December 31, 1995
included certain incentive payments which, when excluded, would have increased
general and administrative expenses for the quarter ended December 31, 1996 as
compared to the quarter ended December 31, 1995. The increase in general and
administrative expenses during the six months ended December 31, 1996 reflects
additional personnel and related costs.
Other income (expense) for the three months and six months ended December 31,
1996 increased $326,000 and $864,000, respectively, compared with the same
periods of last fiscal year. The increase in interest income reflected the
effect of having additional cash available to invest as a result of the proceeds
received from the public stock offering completed in the second quarter of
fiscal 1996 and the offshore stock offering completed in the fourth quarter of
fiscal 1996. Interest expense decreased due to the lower average debt
outstanding as a result of scheduled debt payments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Annual Report on Form 10-K for the year ended June 30, 1996
contains a detailed discussion of Lifecore's liquidity and capital resources.
In conjunction with this Quarterly Report on Form 10-Q, investors should read
the 1996 Form 10-K.
The Company has had significant operating cash flow deficits for the last three
fiscal years. As the Hyaluronate Division's production increases, the Company's
direct charges associated with excess plant capacity will decrease; however,
research and development costs for LUBRICOAT Gel, marketing and sales expenses
for the oral restorative products, and personnel costs are increasing.
Approximately $1.9 million
11
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONT.)
of product shipments due to Alcon in fiscal 1997 will not generate additional
cash as the customer deposit from November 1994 is reduced to zero. In
addition, the Company will have significant fixed obligations in future periods
associated with the equipment lease and the industrial development revenue bonds
which total $1,034,000 for the remainder of fiscal 1997 and $2,073,000 for
fiscal 1998.
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 a Regulation S offering to
qualified investors outside the United States providing net proceeds of
approximately $22 million. The Company intends to use the 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 exercised its option under the ISS note payable to make the final
principal payment due December 15, 1996 in the form of the Company's common
stock. To satisfy the $450,000 amount due, 29,108 shares of common stock were
issued under the formula described in the note payable. Subsequent to the
issuance of the common stock, the Company filed a registration statement on Form
S-3.
Please refer to the Management's Discussion and Analysis section of the Annual
Report on Form 10-K for the year ended June 30, 1996 for a cautionary statement
on important factors to consider in evaluating the forward-looking statements
included in this Form 10-Q.
12
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 2. Changes in Securities
On December 15, 1996, the Company issued 29,108 shares of common
stock to the holder of the ISS note payable in payment of the
final principal payment of $450,000. The issuance was exempt
pursuant to Section 4(2) under the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
On November 14, 1996, the Company held its Annual Meeting of
Shareholders. At the meeting, the shareholders elected as
directors James W. Bracke (with 9,881,739 affirmative votes, and
359,762 negative votes), Joan L. Gardner (with 9,797,027
affirmative votes, and 444,474 negative votes) and Thomas H.
Garrett (with 9,808,047 affirmative votes, and 433,454 negative
votes).
In addition, the shareholders approved an amendment to the
Company's Articles of Incorporation increasing the total number
of authorized shares of the Company's common stock, par value
$.01 per share, from 25,000,000 to 50,000,000 shares (with
8,555,928 affirmative votes, 476,522 negative votes, 30,705 votes
abstained and 1,178,346 broker non-votes).
The shareholders also approved the adoption of the Company's
1996 Stock Plan (with 3,220,103 affirmative votes, 3,052,657
negative votes, 33,724 votes abstained and 3,935,017 broker
non-votes).
The shareholders also ratified the appointment of Grant
Thornton LLP as the Company's independent public accountants for
fiscal year 1997 (with 10,195,922 affirmative votes, 15,621
negative votes and 29,958 votes abstained).
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits and Exhibit Index
10.1 1996 Stock Plan (incorporated by reference to Exhibit 4.1 to
S-8 Registration Statement [File No. 333-18515])
27 Financial Data Schedule
b. Reports on Form 8-K
None
13
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFECORE BIOMEDICAL, INC.
Dated: January 23, 1997 /s/ James W. Bracke
------------------------
James W. Bracke
President & Chief Executive Officer
Dated: January 23, 1997 /s/ Dennis J. Allingham
------------------------
Dennis J. Allingham
Vice President & Chief Financial
Officer (Principal Financial Officer)
14