UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 1998
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[ ] 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
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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 55318-3051
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 612-368-4300
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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
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The number of shares outstanding of the registrant's Common Stock, $.01 per
value, as of April 15, 1998 was 12,318,159 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
March 31, 1998 and June 30, 1997 3
Consolidated Condensed Statements of Operations for Three
Months and Nine Months Ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for
Nine Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1998 1997
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ASSETS
Current assets
Cash and cash equivalents $ 1,948,000 $ 1,371,000
Short-term investments 7,928,000 16,630,000
Accounts receivable 5,328,000 4,792,000
Inventories 11,637,000 8,440,000
Prepaid expenses 709,000 1,432,000
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27,550,000 32,665,000
Property, plant and equipment
Land, building and equipment 20,341,000 19,228,000
Less accumulated depreciation (6,690,000) (5,483,000)
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13,651,000 13,745,000
Construction-in-progress 14,427,000 5,265,000
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28,078,000 19,010,000
Other assets
Intangibles 5,918,000 6,306,000
Long-term investments -- 3,960,000
Security deposits 774,000 786,000
Inventory 2,164,000 1,839,000
Other 673,000 943,000
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9,529,000 13,834,000
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$ 65,157,000 $ 65,509,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term
obligations $ 923,000 $ 918,000
Accounts payable 2,809,000 3,613,000
Accrued compensation 613,000 638,000
Accrued expenses 431,000 648,000
Customers' deposits 108,000 --
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4,884,000 5,817,000
Long-term obligations 7,509,000 7,596,000
Shareholders' equity 52,764,000 52,096,000
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$ 65,157,000 $ 65,509,000
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See accompanying notes to consolidated condensed financial statements.
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31, Nine months ended March 31,
------------------------------- -------------------------------
1998 1997 1998 1997
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Net sales $ 7,512,000 $ 4,611,000 $ 18,984,000 $ 12,863,000
Cost of goods sold 3,195,000 1,753,000 8,570,000 6,362,000
------------- ------------- ------------- -------------
Gross profit 4,317,000 2,858,000 10,414,000 6,501,000
Operating expenses
Research and development 1,170,000 972,000 3,655,000 2,508,000
Marketing and sales 1,559,000 1,440,000 5,141,000 4,017,000
General and administrative 949,000 668,000 2,554,000 2,152,000
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3,678,000 3,080,000 11,350,000 8,677,000
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Operating income (loss) 639,000 (222,000) (936,000) (2,176,000)
Other income (expense)
Interest income 208,000 436,000 756,000 1,528,000
Interest expense (41,000) (187,000) (101,000) (522,000)
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167,000 249,000 655,000 1,006,000
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Net income (loss) $ 806,000 $ 27,000 $ (281,000) $ (1,170,000)
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Net income (loss) per share
Basic $ .07 $ -- $ (.02) $ (.10)
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Diluted $ .06 $ -- $ (.02) $ (.10)
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Weighted average
shares outstanding
Basic 12,274,096 12,180,648 12,251,686 12,165,035
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Diluted 12,686,287 12,529,710 12,251,686 12,165,035
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See accompanying notes to consolidated condensed financial statements.
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
March 31,
-------------------------------
1998 1997
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Net cash used in operating activities $ (2,925,000) $ (4,641,000)
Cash flows from investing activities:
Purchases of property, plant and
equipment (10,276,000) (7,407,000)
Purchases of investments (2,984,000) (9,220,000)
Maturities of investments 15,639,000 18,941,000
Purchases of intangibles (24,000) (5,000)
Decrease in security deposits 12,000 14,000
Other 278,000 406,000
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Net cash provided from investing activities 2,645,000 2,729,000
Cash flows from financing activities:
Payment of deposit to bond trustee (60,000) (56,000)
Payments of long-term obligations (21,000) (431,000)
Proceeds from stock issuance 938,000 513,000
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Net cash provided from financing activities 857,000 26,000
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Net increase (decrease) in cash and cash
equivalents 577,000 (1,886,000)
Cash and cash equivalents at beginning of
period 1,371,000 3,264,000
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Cash and cash equivalents at end of period $ 1,948,000 $ 1,378,000
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Supplemental disclosure of cash flow
information:
Cash paid during the period:
Interest $ 522,000 $ 517,000
Income taxes 10,000 9,000
See accompanying notes to consolidated condensed financial statements.
5
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1998
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.
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 to make the information presented not misleading.
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 March 31, 1998, and the
results of operations and cash flows for the three- and nine-month periods ended
March 31, 1998 and 1997. The results of operations for the nine months ended
March 31, 1998 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 affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1998
NOTE B - INVESTMENTS
The Company has invested its excess cash 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 March
31, 1998 and June 30, 1997, amortized cost approximates fair value of held-to-
maturity investments which consist of the following:
March 31, June 30,
1998 1997
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(Unaudited)
Short-term investments:
Commercial paper $ 7,928,000 $ 2,627,000
Medium term corporate notes -- 12,800,000
U.S. Government Agencies -- 1,203,000
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7,928,000 16,630,000
Long-term investments:
Medium term corporate notes -- 3,960,000
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-- 3,960,000
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$ 7,928,000 $ 20,590,000
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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:
March 31, June 30,
1998 1997
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(Unaudited)
Raw materials $ 3,942,000 $ 2,819,000
Work-in-process 281,000 205,000
Finished goods 9,578,000 7,255,000
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$ 13,801,000 $ 10,279,000
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1998
NOTE D - AGREEMENTS
In 1994, Lifecore and Ethicon, Inc. ("Ethicon"), a subsidiary of Johnson &
Johnson, Inc., 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.
These documents include product specifications, methods and techniques,
technology, know-how and certain patent applications which have subsequently
become issued patents. Lifecore has assumed responsibility for continuing
the anti-adhesion development project, including conducting human clinical
trials on INTERGEL-TM- Adhesion Prevention Solution (formerly known as
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.
The Company has made and continues to make a significant investment in the
development and testing of INTERGEL-TM- Adhesion Prevention Solution, 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 E - COMMITMENTS
The Company is in the process of expanding its manufacturing and distribution
capabilities at its Chaska, Minnesota location. This expansion includes
building and equipment expenditures for warehouse and distribution capabilities
and to expand aseptic-packaging facilities for finished products. Construction-
in-progress relating to the expansion of approximately $14,427,000 was incurred
through March 31, 1998. The Company has signed contracts with an architect, a
process engineering firm and a construction company for the expansion project.
The contracts provide for the expansion to be completed in phases. The
contracts may be terminated at any time at minimal cost to the Company. At
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1998
NOTE E - COMMITMENTS (continued)
March 31, 1998 and June 30, 1997, firm purchase commitments of approximately
$1,237,000 and $2,161,000, respectively, were recorded in accounts payable.
NOTE F - CAPITALIZED INTEREST
During the three months and nine months ended March 31, 1998, $173,000 and
$518,000, respectively, of interest has been capitalized in conjunction with the
facility expansion project.
NOTE G - LINE OF CREDIT
On January 15, 1998, the Company entered into a $5,000,000 Credit Agreement and
Revolving Credit Note with a bank. The agreement allows for advances against
eligible securities and eligible accounts receivable, subject to a borrowing
base certificate. Interest is accrued at either the prime rate or the
Eurodollar Rate plus a basis point adjustment as defined in the Credit
Agreement. The Revolving Credit Note matures on October 31, 1998. At March
31, 1998, there were no amounts outstanding under this line of credit.
NOTE H - NET INCOME (LOSS) PER SHARE
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 - "Earnings per Share". As required by Statement No. 128,
all current and prior year income (loss) per share data have been restated to
conform to the provisions of Statement No. 128.
The Company's basic net income (loss) per share amounts have been computed by
dividing net income (loss) by the weighted average number of outstanding common
shares. The Company's diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of outstanding common
shares and common share equivalents relating to stock options, when dilutive.
For the three months ended March 31, 1998 and 1997, 412,191 and 349,062 shares
of common stock equivalents were included in the computation of diluted net
income per share. For the nine months ended March 31, 1998 and 1997, the
Company reported net losses and as such, no common share equivalents were
included in the computation of
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1998
NOTE H - NET INCOME (LOSS) PER SHARE (continued)
diluted net loss per share. However, if the Company would have reported net
income in the nine months ended March 31, 1998 and 1997, the common share
equivalents that would have been included in the computation of diluted net
income per share were 337,564 and 333,598, respectively.
Options to purchase 273,000 and 52,000 shares of common stock with a weighted
average exercise price of $20.10 and $18.73 were outstanding at March 31, 1998
and 1997, respectively, but were excluded from the computation of common share
equivalents because their exercise prices were greater than the average market
price of the common shares.
NOTE I - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130 "Reporting Comprehensive Income" and Statement No. 131 "Disclosures
about Segments of an Enterprise and Related Information" which are effective for
fiscal year 1999. Statement No. 130 will require the Company to display an
amount representing comprehensive income, as defined by the statement, as part
of the Company's basic financial statements. Comprehensive income will include
items such as unrealized gains or losses on certain investment securities and
foreign currency items. Statement No. 131 will require the Company to disclose
financial and other information about its business segments, their products and
services, geographic areas, major customers, revenues, profits, assets and other
information.
The adoption of these statements is not expected to have a material effect on
the consolidated financial statements of the Company.
10
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED MARCH 31, 1997
Net sales for the three- and nine-month periods ended March 31, 1998 increased
$2,901,000 and $6,121,000, respectively, an increase of 63% and 48%,
respectively, compared with the same periods of last fiscal year. Hyaluronate
product sales increased 124% and 68% for the three-month and nine-month periods
ended March 31, 1998 as compared to the periods of last fiscal year primarily
from increased sales to ophthalmic and veterinary customers. Sales to Alcon for
the three and nine month periods ended March 31, 1998 were above the same
periods of last fiscal year. Oral restorative product sales for the three-month
and nine-month periods ended March 31, 1998 increased 34% and 37%, respectively,
compared to the same periods of last fiscal year. This increase is a result of
the introduction of new tissue regeneration products, increased market awareness
in the domestic market and expanded distribution networks in international
markets.
Cost of goods sold as a percentage of net sales was 43% and 45%, respectively,
for the three-month and nine-month periods ended March 31, 1998 compared to 38%
and 49% for the same periods last fiscal year. The increase for the three-month
period is the result of fluctuations in product mix. The decrease for the nine-
month period resulted from spreading fixed expenses over increased product sales
and from efficiencies gained in hyaluronate aseptic and fermentation production.
Research and development expenses increased $198,000, or 20%, for the current
quarter as compared to the same quarter of last fiscal year and $1,147,000, or
46%, for the nine months ended March 31, 1998 as compared with the same period
of last fiscal year. The increase is attributed to costs associated with the
INTERGEL-TM- Adhesion Prevention Solution project, including human clinical
trials, personnel and process validation costs.
Marketing and sales expenses increased $119,000, or 8%, for the current quarter
as compared to the same quarter of last fiscal year and $1,124,000, or 28%, for
the nine months ended March 31, 1998 as compared with the same period of last
fiscal year. The increases are principally attributed to the expansion of the
oral restorative domestic sales force and increased marketing efforts for the
tissue regeneration and implant product lines.
General and administrative expenses increased $281,000, or 42%, for the current
quarter as compared to the same quarter of last fiscal year and $402,000, or
19%, for
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
the nine months ended March 31, 1998. The increases were primarily caused by
higher personnel related expenses, outside professional services and
amortization of the TefGen product line which was purchased in May 1997.
Other income (expense) for the three and nine months ended March 31, 1998
decreased $82,000 and $351,000, respectively, compared with the same periods of
last fiscal year. The decrease in interest income is primarily a result of the
utilization of cash and investments to fund current operations and the facility
expansion. The decrease in interest expense is a result of the capitalization
of interest associated with the facility expansion.
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 - "Earnings per Share". As required by Statement No. 128, all
current and prior year income (loss) per share data have been restated to
conform to the provision of Statement No. 128.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Annual Report on Form 10-K for the year ended June 30, 1997
contains a detailed discussion of the Company's liquidity and capital resources.
In conjunction with this Quarterly Report on Form 10-Q, investors should read
the 1997 Form 10-K.
The Company has had significant operating cash flow deficits for the last three
fiscal years. As the Hyaluronate Division's production levels increase, its
related production efficiencies increase. However, research and development
costs for INTERGEL-TM- Adhesion Prevention Solution, marketing and sales
expenses for the oral restorative products, and personnel costs have increased.
The Company is in the process of expanding its manufacturing and distribution
capabilities at its Chaska, Minnesota location. This facility expansion
includes building and equipment expenditures for warehouse and distribution
capabilities and scale-up of aseptic-packaging facilities for finished products.
Construction-in-progress related to the facility expansion of approximately
$14,427,000 were incurred through March 31, 1998. The Company has signed
contracts with an architect, a process engineering firm and a construction
company for the expansion project. The contracts provide for the expansion to
be completed in phases. The contracts may be terminated at any time at minimal
cost to the Company. Lifecore anticipates that approximately $4 million will be
expended in the remainder of fiscal year 1998 to complete the expansion project.
Funding will be provided from the redemption of investments, which at March 31,
1998 aggregate approximately $8 million.
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
On January 15, 1998, the Company entered into a $5,000,000 Credit Agreement and
Revolving Credit Note with a bank. The agreement allows for advances against
eligible securities and eligible accounts receivable, subject to a borrowing
base certificate. Interest is accrued at either the prime rate or the
Eurodollar Rate plus a basis point adjustment as defined in the Credit
Agreement. The Revolving Credit Note matures on October 31, 1998.
Management has initiated a review of the Company's computer systems and
applications to ensure that they will function properly in the year 2000. An
outside consulting firm has been engaged to manage the review process.
Management expects that all systems will be compliant by June 30, 1998.
Certain statements in this Form 10-Q are forward-looking statements as defined
in the private Securities Litigation Reform Act of 1995. Such statements imply
continued financial improvement. Because of numerous risks and uncertainties in
Lifecore's business activity, actual results may differ materially from those
implied. Investors are referred to a more detailed discussion of those risks
presented in Management's Discussion and Analysis of Financial Condition and
Results of Operations section in the Company's Annual Report on Form 10-K for
the year ended June 30, 1997.
13
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits and Exhibit Index
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated
July 13, 1988, to Form 10-Q for the quarter ended December 31,
1987), as amended by Amendment No. 2 (incorporated by
reference to Exhibit 3.1 to Form 10-K for the year ended June
30, 1997)
3.2 Amended Bylaws, (incorporated by reference to Exhibit 3.2 to Form
10-K/A for the year ended June 30, 1995)
3.3 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)
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to 1987 S-2 Registration Statement [File No.
33-12970])
27 Financial Data Schedule
b. Reports on Form 8-K
None
14
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
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: April 27, 1998 /s/ James W. Bracke
--------------------------------
James W. Bracke
President & Chief Executive Officer
Dated: April 27, 1998 /s/ Dennis J. Allingham
--------------------------------
Dennis J. Allingham
Executive Vice President & Chief
Financial Officer
(Principal Financial Officer)
15