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, 1998
-----------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission File Number O-4136
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Lifecore Biomedical, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0948334
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3515 Lyman Boulevard
Chaska, Minnesota 55318
- ------------------------------- ----------
(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, 1999 was 12,409,872 shares.
1
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Operations for Three
Months and Six Months Ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for
Six Months Ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. Other Information
Item 6. a. Exhibit Index 16
b. Reports on Form 8-K 16
SIGNATURES 17
2
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1998 1998
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 661,000 $ 2,092,000
Short-term investments -- 3,953,000
Accounts receivable 5,609,000 4,609,000
Inventories 13,729,000 12,918,000
Prepaid expenses 603,000 503,000
------------- -------------
20,602,000 24,075,000
Property, plant and equipment
Land, building and equipment 40,811,000 39,840,000
Less accumulated depreciation (8,281,000) (6,948,000)
------------- -------------
32,530,000 32,892,000
Other assets
Intangibles 5,524,000 5,786,000
Security deposits 869,000 848,000
Inventories 4,970,000 2,775,000
Other 519,000 572,000
------------- -------------
11,882,000 9,981,000
------------- -------------
$ 65,014,000 $ 66,948,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 1,333,000 $ 1,733,000
Line of credit 593,000 --
Accounts payable 1,754,000 3,783,000
Accrued compensation 459,000 804,000
Accrued expenses 588,000 671,000
------------- -------------
4,727,000 6,991,000
Long-term obligations 6,591,000 6,658,000
Shareholders' equity 53,696,000 53,299,000
------------- -------------
$ 65,014,000 $ 66,948,000
------------- -------------
------------- -------------
See accompanying notes to condensed consolidated financial statements.
3
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended December 31, Six months ended December 31,
----------------------------------- ------------------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
Net sales $ 6,881,000 $ 6,258,000 $ 12,386,000 $ 11,472,000
Cost of goods sold 2,692,000 2,838,000 5,029,000 5,365,000
------------ ------------ ------------ ------------
Gross profit 4,189,000 3,420,000 7,357,000 6,107,000
Operating expenses
Research and development 917,000 1,140,000 2,026,000 2,484,000
Marketing and sales 1,842,000 1,852,000 3,481,000 3,582,000
General and administrative 810,000 849,000 1,708,000 1,606,000
------------ ------------ ------------ ------------
3,569,000 3,841,000 7,215,000 7,672,000
------------ ------------ ------------ ------------
Operating income (loss) 620,000 (421,000) 142,000 (1,565,000)
Other income (expense)
Interest income 31,000 253,000 165,000 548,000
Interest expense (201,000) (7,000) (449,000) (61,000)
------------ ------------ ------------ ------------
(170,000) 246,000 (284,000) 487,000
------------ ------------ ------------ ------------
Net income (loss) $ 450,000 $ (175,000) $ (142,000) $ (1,078,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per share
Basic $ .04 $ (.01) $ (.01) $ (.09)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted $ .04 $ (.01) $ (.01) $ (.09)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average
shares outstanding
Basic 12,402,230 12,239,438 12,382,335 12,232,232
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted 12,470,147 12,239,438 12,382,335 12,232,232
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements.
4
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
December 31,
-----------------------------------
1998 1997
------------ ------------
Net cash used in operating activities $ (5,097,000) $ (2,457,000)
Cash flows from investing activities:
Purchases of property, plant and equipment (971,000) (5,956,000)
Purchases of investments (2,485,000) (2,984,000)
Maturities of investments 6,438,000 11,652,000
Purchases of intangibles (25,000) (24,000)
Other 44,000 207,000
------------ ------------
Net cash provided from investing activities 3,001,000 2,895,000
Cash flows from financing activities:
Payment of long-term obligations (467,000) (61,000)
Net advances on line of credit 593,000 --
Proceeds from stock issuance 539,000 292,000
------------ ------------
Net cash provided from financing activities 665,000 231,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,431,000) 669,000
Cash and cash equivalents at beginning of period 2,092,000 1,371,000
------------ ------------
Cash and cash equivalents at end of period $ 661,000 $ 2,040,000
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 453,000 $ 353,000
See accompanying notes to condensed consolidated financial statements.
5
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
NOTE A - FINANCIAL INFORMATION
Lifecore Biomedical, Inc. (the "Company" or "Lifecore"), develops, manufactures,
and markets surgically implantable materials and devices through its two
divisions, the Hyaluronate Division and the Oral Restorative Division at its
facility in Chaska, Minnesota. The Hyaluronate Division 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 condensed consolidated 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 condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations. Results of operations for the interim periods are not necessarily
indicative of the results to be expected 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.
NOTE B - INVESTMENTS
The Company has invested its excess cash in commercial paper 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 December 31, 1998 and June 30,
1998, amortized cost approximates fair value of held-to-maturity investments
which consist of the following:
December 31, June 30,
1998 1998
------------- ----------
(Unaudited)
Short-term investments:
Medium term corporate notes $ -- $3,953,000
------------- ----------
$ -- $3,953,000
------------- ----------
------------- ----------
6
NOTE C - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories not expected to be consumed within one year are classified
as a long-term asset. Finished good inventories include hyaluronic acid,
packaged aseptic and oral restorative products. Inventories consist of the
following:
December 31, June 30,
1998 1998
------------- -------------
(Unaudited)
Raw materials $ 4,028,000 $ 4,236,000
Work in progress 95,000 204,000
Finished goods 14,576,000 11,253,000
------------- -------------
$ 18,699,000 $ 15,693,000
------------- -------------
------------- -------------
NOTE D - 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. These documents include product
specifications, methods and techniques, technology, know-how and certain
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. If the product is
successfully developed and the Company receives clearance from the United States
Food and Drug Administration ("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 has completed the expansion of its manufacturing and distribution
capabilities at its Chaska, Minnesota location. The expansion included building
and equipment expenditures for warehouse and distribution capabilities, and
aseptic-packaging facilities for finished products. At June 30, 1998, the
expansion assets were placed in service. At June 30, 1998, firm purchase
commitments related to the expansion of approximately $1,770,000 were recorded
in accounts payable.
7
NOTE F - CAPITALIZED INTEREST
During the three-and six-month periods ended December 31, 1997, $192,000 and
$345,000 of interest was capitalized in conjunction with the facility expansion
project.
NOTE G - LINE OF CREDIT
On December 28, 1998, the Company renewed its agreement with a bank for a
$5,000,000 line of credit. The agreement allows for advances against eligible
accounts receivable and inventories, subject to a borrowing base certificate.
Interest is accrued at the prime rate, which was 7.75% at December 31, 1998. The
agreement is for a three-year term with a maturity of December 28, 2001. At
December 31, 1998, there was $593,000 outstanding under this line of credit.
NOTE H - NOTE PAYABLE ON ACQUISITION OF TEFGEN MEMBRANE PRODUCT LINE
In May 1997, the Company acquired the technology and regulatory rights in the
TefGen membrane product line from Bridger Biomed, Inc. As consideration for the
$2,400,000 acquisition price, the Company paid $800,000 in cash and issued a
note payable for $1,600,000. The note, as amended, bears interest at 6% per
annum with a principal payment of $400,000 plus interest made in July 1998 and a
principal payment of $1,200,000 plus interest due in May 1999. 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 Company exercised its option to make
the July 1998 principal payment of $400,000 plus interest in the form of the
Company's common stock, and accordingly, 28,413 shares of common stock were
issued in July 1998 under the formula described in the note. The note is secured
by the purchased assets. The cost of the technology and regulatory rights is
being amortized on a straight-line basis over 15 years.
NOTE I - NET INCOME (LOSS) PER SHARE
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 December 31, 1998, 67,917 shares of common stock
equivalents were included in the computation of diluted net income per share.
For the three months ended December 31, 1997 and the six months ended December
31, 1998 and 1997, the Company reported net losses and as such, no common share
equivalents were included in the computation of diluted net loss per share.
However, if the Company would have reported net income in the three months ended
December 31, 1997 and the six months ended December 31, 1998 and 1997, the
common share equivalents that would have been included in the computation of
diluted net income per share were 473,425, 72,059 and 321,410, respectively.
Options to purchase 1,488,568 and 233,500 shares of common stock with a weighted
average exercise price of $15.71 and $20.24 were outstanding at December 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 on such dates.
8
NOTE J - NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income includes
certain changes in equity that were excluded from net earnings. The adoption of
this statement did not impact the Company's consolidated financial statements;
historically, there have been no differences between net earnings and
comprehensive income.
The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
about Segments of and Enterprise and Related Information." This statement
requires companies to disclose financial and other information about its
business segments as part of their consolidated financial statements. The
Company will include the required business segment disclosures in its June 30,
1999 Annual Report.
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 ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1997
(Unaudited) HYALURONATE ORAL RESTORATIVE
DIVISION DIVISION
------------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales $ 2,291,000 $ 2,262,000 $ 4,590,000 $ 3,996,000
Cost of goods sold 1,010,000 1,220,000 1,682,000 1,618,000
----------- ----------- ----------- -----------
Gross profit 1,281,000 1,042,000 2,908,000 2,378,000
Operating expenses
Research and development 799,000 1,008,000 118,000 132,000
Marketing and sales 23,000 50,000 1,819,000 1,802,000
General and administrative 325,000 357,000 485,000 492,000
----------- ----------- ----------- -----------
1,147,000 1,415,000 2,422,000 2,426,000
----------- ----------- ----------- -----------
Operating income (loss) $ 134,000 $ (373,000) $ 486,000 $ (48,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
CONSOLIDATED
------------------------------
1998 1997
----------- -----------
Net sales $ 6,881,000 $ 6,258,000
Cost of goods sold 2,692,000 2,838,000
----------- -----------
Gross profit 4,189,000 3,420,000
Operating expenses
Research and development 917,000 1,140,000
Marketing and sales 1,842,000 1,852,000
General and administrative 810,000 849,000
----------- -----------
3,569,000 3,841,000
----------- -----------
Operating income (loss) $ 620,000 $ (421,000)
----------- -----------
----------- -----------
Net sales for the quarter ended December 31, 1998 increased $623,000 or 10% as
compared to the same quarter of last fiscal year. Hyaluronate product sales for
the current quarter increased $29,000 as compared to the same quarter of last
fiscal year. The sales increase was from higher ophthalmic revenues offset by
lower product development revenues compared to the prior year. Oral restorative
product sales for the current quarter increased 15% compared to the same quarter
of last fiscal year. This increase is from the tissue regeneration and implant
product lines. Oral restorative product sales increased in the domestic market,
but were flat in the international market when compared with the same quarter of
last fiscal year.
Consolidated gross margin increased to 61% for the current quarter from 55% for
the same quarter of last fiscal year. The gross margin for the Hyaluronate
Division increased to 56% from 46% due to the expanded utilization of the
Company's aseptic and hyaluronate production capacity. The gross margin for the
Oral Restorative Division increased to 63% for the current quarter from 60% for
the same quarter of last fiscal year. The increase is the result of a focus on
improved sales margins and, to a lesser extent, the leveraging of overhead costs
over a greater sales base.
Research and development expenses decreased $223,000 or 20% for the current
quarter as compared to the same quarter of last fiscal year. The decrease
resulted principally from decreased costs associated with human clinical trials
on INTERGEL-TM- Adhesion Prevention Solution as the study enrollment has ended
for the laparotomy trial, but continues for the laparoscopy trial.
Marketing and sales expenses decreased slightly for the current quarter as
compared to the same quarter of last fiscal year. Advertising and marketing
expenses were higher a year ago due to the introduction of the tissue
regeneration products. This decrease was partially offset by higher compensation
costs for
10
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION - (CONT.)
additional sales personnel and commissions on an increased oral restorative
sales base for the current quarter.
General and administrative expenses decreased 5% for the current quarter as
compared to the same quarter last fiscal year. The year ago period included
outside professional services related to Year 2000.
Other income (expense) decreased $416,000 for the current quarter as compared to
the same quarter of last fiscal year. The $222,000 decrease in interest income
results from a lower average amount of cash to invest than in the same quarter
of last fiscal year. Interest expense increased $194,000 for the current quarter
principally due to capitalization of interest expense associated with the
facility expansion project in the quarter a year ago. The facility expansion was
complete as of June 30, 1998 and thus, no interest was capitalized during the
current quarter.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1997
(Unaudited) Hyaluronate Oral Restorative
Division Division
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 3,580,000 $ 4,209,000 $ 8,806,000 $ 7,263,000
Cost of goods sold 1,688,000 2,314,000 3,341,000 3,051,000
------------ ------------ ------------ ------------
Gross profit 1,892,000 1,895,000 5,465,000 4,212,000
Operating expenses
Research and development 1,807,000 2,232,000 219,000 252,000
Marketing and sales 51,000 88,000 3,430,000 3,494,000
General and administrative 711,000 658,000 997,000 948,000
------------ ------------ ------------ ------------
2,569,000 2,978,000 4,646,000 4,694,000
------------ ------------ ------------ ------------
Operating income (loss) $ (677,000) $ (1,083,000) $ 819,000 $ (482,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Consolidated
--------------------------------
1998 1997
------------ ------------
Net sales $ 12,386,000 $ 11,472,000
Cost of goods sold 5,029,000 5,365,000
------------ ------------
Gross profit 7,357,000 6,107,000
Operating expenses
Research and development 2,026,000 2,484,000
Marketing and sales 3,481,000 3,582,000
General and administrative 1,708,000 1,606,000
------------ ------------
7,215,000 7,672,000
------------ ------------
Operating income (loss) $ 142,000 $ (1,565,000)
------------ ------------
------------ ------------
Net sales for the six months ended December 31, 1998 increased $914,000 or 8% as
compared to the same period of last fiscal year. Hyaluronate product sales for
the period decreased $629,000 as compared to the same period of last fiscal
year. The sales decrease was the result of lower ophthalmic revenues compared to
the same period of last fiscal year, offset by sales of INTERGEL-TM- Solution in
the first quarter of fiscal year 1999. Oral restorative product sales for the
current period increased 21% compared to the same period of last fiscal year.
This increase is from the tissue regeneration and implant product lines. Oral
restorative product sales increased in both the domestic and the international
markets when compared with the same period of last fiscal year.
Consolidated gross margin increased to 59% for the current period from 53% for
the same period of last fiscal year. The gross margin for the Hyaluronate
Division increased to 53% from 45% due to the expanded utilization of the
Company's aseptic and hyaluronate production capacity. The gross margin for the
Oral Restorative Division increased to 62% for the current period from 58% for
the same period of last
11
fiscal year. The increase is the result of a focus on improved sales margins
and, to a lesser extent, the leveraging of overhead costs over a greater
sales base.
Research and development expenses decreased $458,000 or 18% for the current
period as compared to the same period of last fiscal year. The decrease resulted
principally from decreased costs associated with human clinical trials on
INTERGEL-TM- Adhesion Prevention Solution as the study enrollment has ended for
the laparotomy trial, but continues for the laparoscopy trial.
Marketing and sales expenses decreased $101,000 or 3% for the current period as
compared to the same period of last fiscal year. Advertising and marketing
expenses were higher a year ago due to the introduction of the tissue
regeneration products. This decrease was partially offset by higher compensation
costs for additional sales personnel and commissions on an increased oral
restorative sales base for the current period.
General and administrative expenses increased $102,000 or 6% for the current
period as compared to the same period last fiscal year. The increase is
principally from higher personnel related costs and expenses from outside
professional services.
Other income (expense) decreased $771,000 for the current period as compared to
the same period of last fiscal year. The $383,000 decrease in interest income
results from a lower average amount of cash to invest than in the same period of
last fiscal year. Interest expense increased $388,000 for the current period
principally due to capitalization of interest expense associated with the
facility expansion project in the period a year ago. The facility expansion was
complete as of June 30, 1998 and thus, no interest was capitalized during the
current period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Annual Report on Form 10-K for the year ended June 30, 1998
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
1998 Form 10-K.
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 during
the current period as compared to the same period of a year ago principally due
to building of hyaluronate inventory levels in anticipation of the demand for
INTERGEL Solution.
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, marketing and sales expenses
for the oral restorative products are expected to continue at a high level, and
personnel costs have increased. The ongoing research and development costs for
INTERGEL-TM- Adhesion Prevention Solution will continue throughout this fiscal
year, but the costs should be at a lower rate than the previous year. During
fiscal 1998 and 1997, the Company expanded its manufacturing and distribution
capabilities at its Chaska, Minnesota location. The expansion included building
and equipment expenditures for warehouse and distribution capabilities and
scale-up of aseptic-packaging facilities for finished products. The cost of the
expansion totaled approximately $19 million and was completed in June
12
1998. The expansion was funded from the proceeds of investment maturities.
This expansion provides future capacity, but increases the level of fixed
charges to be absorbed by operations.
On December 28, 1998, the Company renewed its agreement with a bank for a
$5,000,000 line of credit. The agreement allows for advances against eligible
accounts receivable and inventories, subject to a borrowing base certificate.
Interest is accrued at the prime rate. The line of credit matures on December
28, 2001.
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. With the completion of the facility
expansion, the Company expects its cash generated from anticipated operations
and the availability of the line of credit to satisfy cash flow needs in the
near term. 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 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.
YEAR 2000 COMPLIANCE
With the assistance of a consulting firm, the Company has completed an
assessment of Year 2000 compliance for its critical operating and application
systems. Through this assessment, no major issues were discovered. The Company
expects to be fully Year 2000 compliant by December 31, 1999. The cost
associated with the assessment and any modifications necessary was less than
$50,000.
Ultimately, the potential impact of the Year 2000 issue will depend not only on
the actions taken by the Company, but also on the way in which the Year 2000
issue is addressed by customers, vendors, service providers, utilities,
governmental agencies and other entities with which the Company does business.
The Company is communicating with these parties to learn how they are addressing
the Year 2000 issue and to evaluate any likely impact on the Company. The
Company has requested commitment dates from the various parties as to their Year
2000 readiness and delivery of compliant software and other products. This
process will continue throughout fiscal 1999. The Year 2000 efforts of third
parties are not within the Company's control, however, and their failure to
respond to Year 2000 issues successfully could result in business disruption and
increased operating cost for the Company. At the present time, it is not
possible to determine whether any such events are likely to occur, or to
quantify any potential negative impact they may have on the Company's future
results of operations and financial condition. The Company expects to assess its
need for contingency plans during 1999.
The foregoing discussion regarding the Year 2000 Project's timing,
effectiveness, implementation, and cost, contains forward-looking statements,
which are based on management's best estimates derived using assumptions. These
forward-looking statements involve inherent risks and uncertainties, and actual
results could differ materially from those contemplated by such statements.
Factors that might cause material differences include, but are not limited too,
the availability of key Year 2000 personnel, the Company's ability to locate and
correct all relevant computer codes, the readiness of third parties, and the
13
Company's ability to respond to unforeseen Year 2000 complications. Such
material differences could result in, among other things, business disruption,
operational problems, financial loss, legal liability and similar risks.
CAUTIONARY STATEMENT
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, 1998.
14
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds and highly
rated corporate debt securities. All investments are held-to-maturity. The
market risk on such investments is minimal.
All receivables from sales to foreign customers are denominated in U.S. Dollars.
Transactions at the Company's foreign subsidiary, Lifecore Biomedical SpA, are
in Italian Lire. The market risk on the Company's foreign operations is minimal.
At December 31, 1998, all of the Company's outstanding long-term debt carry
interest at a fixed rate. There is no material market risk relating to the
Company's long-term debt.
15
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])
10.1 Credit and Security Agreement, dated December 28, 1998, between
U.S. Bank National Association and the Company, filed herewith
27 Financial Data Schedule
b. Reports on Form 8-K
None
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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 29, 1999 /s/ James W. Bracke
---------------------------------------
James W. Bracke
President & Chief Executive Officer
Dated: January 29, 1999 /s/ Dennis J. Allingham
---------------------------------------
Dennis J. Allingham
Executive Vice President
& Chief Financial Officer
(Principal Financial Officer)
17