SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 31, 1998
or
/ / 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 0-27976
GalaGen Inc.
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Delaware 41-1719104
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1275 Red Fox Road
Arden Hills, Minnesota 55112-6943
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(Address of principal executive offices) (Zip code)
(651) 634-4230
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 Common Stock held by
non-affiliates of the registrant as of March 18, 1999 was $12,847,863
based on the closing sale price for the Common Stock on that date as
reported by The Nasdaq Stock Market. For purposes of determining such
aggregate market value, all officers, and directors of the registrant
are considered to be affiliates of the registrant, as well as
stockholders holding 10% or more of the outstanding Common Stock as
reflected on Schedules 13D or 13G filed with the registrant. This
number is provided only for the purpose of this report on Form 10-K
and does not represent an admission by either the registrant or any
such person as to the status of such person.
As of March 18, 1999 the registrant had 8,948,446 shares of
Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the annual
meeting of stockholders to be held on May 12, 1999 and the Annual Report to
Stockholders for the year ended December 31, 1998 are incorporated by
reference in Parts II, III and IV of this Annual Report on Form 10-K. (The
Compensation Committee Report and the stock performance graph contained in
the registrant's Proxy Statement are expressly not incorporated by reference
in this Form 10-K).
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business" and "Item 2. Properties" and incorporated by
reference under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements
within the meaning of the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Risk Factors" below
beginning on page 13 of this Annual Report on Form 10-K, that could cause
actual results to differ materially from those projected. Because actual
results may differ, readers are cautioned not to place undue reliance on
these forward-looking statements. Certain forward-looking statements are
indicated below by an asterisk.
INTRODUCTION
GalaGen Inc. ("GalaGen" or the "Company"), was incorporated in 1992 as a
successor to a wholly-owned subsidiary of Land O'Lakes, Inc. ("Land O'Lakes")
that was incorporated in 1987. GalaGen's mission is to become the leading
presence in foods, beverages and dietary supplements that help enhance the
immune system.* To accomplish this mission, the Company is focusing its
efforts on channels that demand immune-enhancing benefits in certain segments
of the consumer food and beverage product markets and in certain segments of
the clinical nutrition products markets, as described below.
A critical factor for success of the Company is its immune-enhancing
ingredient which is derived from colostrum, the highly nutritious first milk
from a dairy cow after its calf is born, which has been branded
Proventra-TM- Brand Natural Immune Components ("Proventra"). The primary
immune-enhancing components of Proventra are antibodies, which are proteins
that enhance the body's immune system to protect against harmful pathogens.
Secondary immune-enhancing components of Proventra providing further disease
resistance are proteins, such as lactoferrin, and multiple vitamins and
minerals.
The Company believes it is in a position of strategic advantage with its
ingredient, Proventra*, as follows:
ACCESS TO COLOSTRUM. The Company has agreements with Land O'Lakes
which provide the Company with access to the Land O'Lakes dairy system.
This dairy system has approximately 750,000 cows, from which the Company
receives its supply of colostrum. These cows are located primarily in the
upper Midwest and both the East and West coasts.
PROPRIETARY MANUFACTURING PROCEDURES. The Company has patented,
proprietary manufacturing processes that are used to concentrate antibodies
from the colostrum. Standard dairy processing techniques destroy the
activity of most of the antibodies present in milk and colostrum, whereas
the Company's processing retains the antibody's effectiveness.
INGREDIENT PATENT PROTECTION. GalaGen holds exclusive patent licenses
that prevent potential competitors from combining antibodies with fibers or
antibodies with active cultures. The licenses
2
provide the Company with a high degree of competitive insulation in
addition to establishing the Company as an innovator.*
ABILITY TO ADDRESS MULTIPLE HEALTH CONDITIONS. Using its proprietary
immunization technologies, including the use of immune system stimulating
adjuvants, the Company can produce antibodies in the cow that target
specific pathogens that may cause problems in the human gastrointestinal
("GI") tract, including bacteria and their toxins, parasites, fungi and
viruses. This technology increases by many fold a dairy cow's natural
production of these targeted antibodies in its colostrum and can be
utilized to enhance the body's normal response to conditions like yeast
infections in women, tooth decay and diarrhea.
The Company is developing, in conjunction with strategic partners, a
portfolio of proprietary consumer and clinical nutritional food and beverage
products which will incorporate Proventra. Additionally, the Company is
supplying Proventra as an ingredient to food companies for incorporation into
dietary supplements or other similar products. These products will target
needs of both consumers and healthcare professionals.
In December 1998, the Company acquired Nutrition Medical, Inc.'s
("NMI") developed line of critical care enteral nutrition products and
formulas. The products were recently introduced by NMI and are being sold to
the hospital and home healthcare industries. GalaGen purchased substantially
all of NMI's critical care enteral nutrition products and formulas, all
related inventory and certain other assets, including the existing customer
base of over 500 hospitals and home healthcare facilities. The sales and
marketing group from NMI joined the Company to provide continuity in
operations and an essential marketing base. The Company is researching ways
in which to incorporate certain of its immune-enhancing ingredients into
selected products acquired from NMI to provide additional proprietary
protection and added benefits that are not currently available in that market
segment.* Additionally, Glutasorb-TM-, one of the acquired products, is
enriched with glutamine, an amino acid important for the support of the
immune system.
BACKGROUND
IMMUNE-ENHANCING TECHNOLOGY
Passive immunity consists of using antibodies produced by one individual
or animal to provide immune protection in another individual. Dairy cows
provide antibodies to their calves through the colostrum, which is the milk
produced during the first several days of lactation. The concentration of
antibodies in colostrum is many times higher than the normal concentration in
milk. Through their natural exposure to the environment, cows have developed
antibodies that recognize and bind to many human pathogens. Clinical studies
performed by GalaGen and others have proven that the antibodies are not
destroyed by passage through the gastrointestinal tract, and they remain
functionally active against these undesirable organisms.
FUNCTIONAL FOODS AND NUTRACEUTICALS
The Company believes that its immune-enhancing technology lends itself
to the creation of food products or dietary supplements, for both consumer
and clinical food and beverage markets, with health claims, often called
"functional foods" or "nutraceuticals".* The Company further believes that
the inclusion of Proventra in functional foods or nutraceuticals, along with
including other components such as active cultures and dietary soluble fiber
for which the Company has licensed certain patents, provide important
benefits and competitive advantages, including (i) a unique immune-enhancing
system, (ii) a fit with consumer needs, and (iii) a safe, proven means to
enhance the body's natural resistance.*
Functional foods and nutraceuticals have been defined as foods which
provide benefits beyond their nutritional value. While there is not a
regulatory definition for the terms "functional food" or "nutraceutical",
these terms are widely used in the marketplace. The Company believes that
the enactment by Congress of the Nutrition Labeling and Education Act
("NLEA") in 1990 and the Dietary Supplement Health and Education
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Act ("DSHEA") in 1994 enabled the regulatory process for marketing foods or
dietary supplements. NLEA permits certain health claims related to the
food's ability to reduce the risk of certain diseases. DSHEA permits such
products to bear "structure-function" claims related to how the product
affects the structure or function of the body, and such claims do not require
Food and Drug Administration ("FDA") review or approval, but must be
supported by scientific evidence. The Company believes that the incorporation
of Proventra in foods or dietary supplements would add benefits to these
products, particularly since there is a significant amount of scientific data
to support the benefits of colostrum.*
According to Frost & Sullivan, a competitive-market analysis firm, the
market for nutraceutical or functional food beverages, into which the
Company's Proventra could be incorporated, now exceeds $20 billion. The
Company believes that this significant market size is due to a number of
factors, including (i) increased interest in healthier lifestyles, (ii) the
publication of research findings supporting the positive health effects of
certain nutritional supplements and (iii) the aging of the "Baby Boom"
generation combined with the tendency of consumers to purchase more
nutritional supplements as they age.*
CRITICAL CARE PRODUCTS
Critically ill or severely injured patients are often unlikely to
consume adequate nutrients, which can exacerbate a patient's condition, cause
complications and prolong hospital stays. Total enteral nutrition delivers,
often via specialized pumps, formulations of protein, carbohydrates, fat and
vitamins via feeding tubes directly into the patient's intestinal tract.
Unless nearly all of the intestinal tract is missing or nonfunctional, most
patients can be fed via this enteral route. One application of enteral
nutrition is in the treatment of critical care patients. The largest single
category of total enteral nutrition products used in critical care are
products that contain unique protein sources referred to as "elemental."
Unlike long-term care formulas that contain "whole protein," which must be
digested before it can be absorbed and utilized by the patient, elemental
formulas contain predigested protein that offers immediately available
nutrition because little or no digestion is required. All of the Company's
recently acquired critical care nutrition products are elemental formulas.
The critical care nutrition formula market is currently dominated by a small
number of established manufacturers of national brands, each of which focuses
on particular segments of the market. These manufacturers include Ross
Laboratories, a division of Abbott Laboratories ("Ross Laboratories"), Mead
Johnson Nutritionals, a Bristol-Myers Squibb Company ("Mead Johnson"),
Novartis, formerly known as Sandoz Corp. ("Novartis"), Nestle Ltd ("Nestle"),
formerly known as Clintec Nutrition Co., and McGaw, Inc. ("McGaw").
Meanwhile, the United States health care system has been under pressure to
control costs. As a result, the medical community and consumers have come to
accept lower cost-effective drugs and private label over-the-counter
products, and the market for these products has grown rapidly. The Company
believes it is the only company that has addressed the critical care medical
nutrition market with lower cost alternatives to established brands.* The
Company is researching ways in which to incorporate certain of its
immune-enhancing ingredients into selected products acquired from NMI to
provide additional proprietary protection and added benefits that are not
currently available in that market segment.* The Company sells its critical
care nutrition formulas under its NMI label.
Business Strategy
GalaGen has determined to focus on two market segments to optimally
capitalize on its immune-enhancing capabilities: (i) nutritional consumer
food and beverage products and (ii) clinical nutrition products. The former
emphasis will yield products containing Proventra, and other immune
components, in grocery and health food stores. The latter will yield
products for hospitals, nursing homes and home healthcare that may contain
Proventra or other immune-enhancing ingredients. The Company will utilize
relationships and collaborations with strategic partners to deliver these
products to the marketplace.*
To advance the introduction of GalaGen's Proventra or other
immune-enhancing ingredients into the two market segments, the Company has
recently entered into several strategic partner agreements, including the
following:
4
CONSUMER FOOD AND BEVERAGE PRODUCTS
GENERAL NUTRITION CORPORATION
In December 1998, the Company entered into an agreement with General
Nutrition Corporation ("GNC"). Under this agreement, GalaGen and GNC will
develop and market a range of immune-boosting dietary supplements and sports
nutrition formulas for specialized retail and mass-market retail channels
using certain proprietary formulations of Proventra. The Company will sell
its Proventra to General Nutrition Products, Inc. ("GNP"), the manufacturing
company of GNC, for incorporation into the products for exclusive
distribution and retail marketing in North America by GNC, its affiliates,
franchisees and certain other stores in mass market channels. The agreement
calls for GNC to maintain minimum sales requirements for both the specialty
retail and mass market channels for exclusivity to continue. The first
products are targeted for launch in the second half of 1999, following the
initial product development phase of the collaboration.*
TROPICANA
In March 1999, the Company entered into an agreement with Tropicana
Products, Inc., a division of PepsiCo Inc. Under the agreement, the two
companies will explore development of nutritious beverages for the
health-conscious consumer.
LAND O'LAKES
In April 1998, GalaGen entered into an agreement with Land O'Lakes to
develop and introduce into market a line of yogurt products incorporating
Proventra. Products developed under this arrangement will leverage Land
O'Lakes strength as a dairy producer and marketer. The first products are
targeted for a second half 1999 test market launch.*
LIFEWAY FOODS, INC.
In December 1997, the Company assisted in introducing Basics Plus-TM-, a
dietary supplement product, in conjunction with its marketing and
manufacturing partner, Lifeway Foods, Inc. It contains active kefir
cultures, which are cultures that contain beneficial bacteria strains, and
GalaGen's Proventra. Basics Plus is the first dairy-based dietary supplement
sold in the United States in the refrigerated section of health food stores
and grocery stores. The product was featured in the February 1998 issue of
DAIRY FOODS MAGAZINE and has gained recognition as an industry breakthrough.
DAIRY FOODS MAGAZINE named Basics Plus the top new dairy product in 1998 for
the Functional Foods category (November 1998 issue).
RHONE-POULENC / RHODIA
In June 1998, GalaGen announced a nutritional products collaboration
with Rhodia, Inc., a $6 billion Rhone-Poulenc spin-off. The two companies are
exploring the possible development and marketing of a patent-protected
combination of ingredients for use in nutritional products positioned for the
nutraceutical and functional foods markets. Under this arrangement, products
will contain GalaGen's Proventra and Rhodia's proprietary active cultures.
CLINICAL NUTRITION PRODUCTS
CRITICAL CARE PRODUCTS (NMI)
In September 1998, the Company entered into an asset purchase agreement
with NMI to acquire NMI's developed line of critical care enteral nutrition
products and formulas. The products were recently introduced by NMI and are
being sold to the hospital and home healthcare industries. The asset purchase
agreement was closed in December 1998. GalaGen purchased substantially all of
NMI's critical care enteral nutrition products and formulas, all related
inventory and certain other assets, including the existing customer
5
base of over 500 hospitals and home healthcare facilities. The sales and
marketing group from NMI joined the Company to provide continuity in
operations and an essential marketing base. The Company will continue to
have all products associated with this asset purchase manufactured by outside
parties.
Critical care nutrition formulas are used by hospitals and other health
care providers to feed critically ill patients who cannot consume adequate
nutrients orally and consequently require specialized feeding via tubes into
the intestinal tract. The use of critical care nutrition formulas often
continues at home or in a nursing home after a patient is discharged from the
hospital. The Company's strategy is to focus on the development and sale of a
core line of critical care formulas for patients who do not metabolize foods
well and are most likely in intensive care units. Certain unique ingredients
are combined to meet the special nutritional requirements of specific patient
populations. The Company markets its critical care and disease specific
nutrition products to hospitals and other health care providers as cost
effective alternatives to the established products offered by brand name
manufacturers.
The Company is selling nine nutrition products for critical care, liver
failure and moderately stressed patients. Most products contain elemental
protein sources, which contain predigested protein that offers immediately
available nutrition. The first proprietary critical care formula, Glutasorb,
was launched by NMI in February 1998. This formula is the first high
glutamine, ready-to-use liquid elemental diet available in the United States
and, as such, has no specific competing branded product. The following chart
provides information regarding each of the Company's critical care nutrition
products.
DATE
PRODUCT NAME INTRODUCED PRODUCT DESCRIPTION
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L-Emental-TM- May 1994 A 100% free amino acid-based elemental nutrition
formula for gastrointestinal ("GI") impaired or
critically ill patients
L-Emental Hepatic-TM- June 1996 A 100% free amino acid and calorie supplement for the
dietary management of chronic liver disease
patients.
L-Emental Pediatric-TM- June 1996 A 100% free amino acid elemental diet for GI impaired
children ages 1 to 10
Pro-Peptide Unflavored-TM- November 1994 A ready-to-use, isotonic, peptide-based diet for GI
impaired patients
Pro-Peptide VHN-TM- November 1995 A high nitrogen, isotonic, peptide-based diet for GI
impaired and critically impaired patients who
require high protein levels
Pro-Peptide Vanilla-TM- November 1995 Vanilla flavored ready-to-use, peptide-based diet for
GI impaired patients who require an oral product
Pro-Peptide For Kids-TM- May 1997 Vanilla flavored ready-to-use, peptide-based diet for
children ages 1 to 10 who are GI impaired
Glutasorb-TM- February 1998 Ready-to-use, high glutamine, amino acid-peptide based
product for patients who have severe catabolic
illness, GI dysfunction, surgery and trauma
Nitro Pro-TM- July 1998 A ready-to-use high-protein tube feeding product for
moderately stressed patients
With the exception of Glutasorb, the Company generally establishes
target prices for its critical care and disease specific nutrition products
that are below the selling prices of competing established brand name
products. To maintain or increase the gross margin of the products, the
Company is researching ways in which to incorporate certain of its
immune-enhancing ingredients into certain products listed above to provide
additional proprietary protection and added benefits that are not currently
available in that market segment.* Additional products that the Company may
introduce would include proprietary immune-enhancing features.*
6
AMERICAN HOME PRODUCTS - WYETH AYERST
In October 1998, the Company entered into a collaboration and license
agreement and a manufacturing and supply agreement with Wyeth-Ayerst, a
division of American Home Products Corporation. The two companies will
develop and commercialize a proprietary ingredient with unique antibacterial
properties for use in pediatric formula and other nutritional products. The
companies will collaborate during the research and development phase of the
product, which will be funded by Wyeth-Ayerst. Additionally, Wyeth-Ayerst
will have financial and oversight responsibilities for all clinical trials
and regulatory compliance related to the use of the ingredient in pediatric
formula products. Wyeth-Ayerst will have worldwide rights to the use of the
ingredient in its pediatric formula and other nutritional products. GalaGen
will retain certain rights to manufacture the ingredient and has the right to
request a sublicense from Wyeth-Ayerst to develop and commercialize
non-pediatric formula nutritional products. GalaGen will also receive
licensing and milestone payments.
HORMEL-AMERICAN INSTITUTIONAL PRODUCTS
In March 1999, the Company announced that it entered into a licensing and
distribution agreement with American Institutional Products, Inc. (AIP), a
subsidiary of Hormel Foods Corporation. Under the agreement, AIP has
exclusively licensed the manufacturing and distribution rights for a new,
clinically tested, cultured dairy beverage developed by GalaGen to improve
the gastrointestinal health of patients in hospitals and nursing homes. The
product will incorporate Proventra and includes an ingredient combination
that is patented. A test market for the product in the Upper Midwest is
scheduled to begin in mid 1999.*
MANUFACTURING SYSTEM
PROVENTRA MANUFACTURING
The Company's manufacturing system produces antibodies for nutritional
products. The Company's system has been designed to access very large
numbers of cows in commercial milking herds, organize them into discrete
product-specific groups and, if needed, immunize them with specific antigens
to heighten the natural production of targeted antibodies in their colostrum,
collect the colostrum and concentrate the antibodies using proprietary
processes. These processes preserve the essential antibody activity and
other immune-enhancing components while reducing unnecessary components,
including microbial contaminants. Modern dairy cows, having been bred for
high volume milk production, produce colostrum in quantities far greater than
their calves can consume. After the calf fulfills its colostrum needs, this
surplus colostrum can then be collected by the Company.
Standard dairy processing techniques destroy the activity of most of the
antibodies present in milk and colostrum and render them inactive. The
proprietary processes used by the Company to concentrate antibodies have been
developed by the Company through many years of research and development.
This work has resulted in processes that use well-tested and efficient dairy
manufacturing techniques, including pasteurization, that have been modified
to preserve the biological activity of the antibodies. The Company has two
patents that have been issued for these processes. The Company is supporting
its proprietary antibody processing system with a quality control system
designed to regulate, monitor and review the processing system. The Company
has obtained Kosher certification for the natural immune components found in
Proventra. Additionally, the Company has obtained the appropriate license
from the Minnesota Department of Agriculture.
Construction of the Company's manufacturing facility within the existing
Land O'Lakes manufacturing complex in Arden Hills, Minnesota was completed in
1996. Land O'Lakes has guaranteed the equipment leases associated with the
manufacturing facility. The Company believes that the capacity of this
facility will be adequate for the production of Proventra for nutritional
products, either for sale or product
7
development requirements, through 2000 and believes that contract
manufacturers would be available to increase its production capacity quickly,
if required.*
CRITICAL CARE PRODUCT MANUFACTURING
All of the Company's critical care products acquired from NMI are
manufactured by third parties. These toll manufacturers are subject to FDA
regulatory requirements for food and medical food production, and the
Company's products undergo quality control testing during and after the
production process. By using third party manufacturers, the Company is better
able to introduce new products that require differing manufacturing
processes and maintain a favorable fixed cost structure. Critical care
nutrition products are shipped from the manufacturer to the Company's
distribution facility in Arden Hills, Minnesota. The Company believes that
there are several manufacturers in the United States that could manufacture
the critical care products and that it is not dependent upon one single
manufacturer for its product supply.*
MARKETING, RESEARCH AND RELATIONSHIPS
MARKETING
FUNCTIONAL FOOD AND NUTRACEUTICAL PRODUCTS
To exploit Proventra as broadly as possible in human applications, the
Company's consumer and clinical products strategy, except for those critical
care products acquired from NMI, is to enter into strategic relationships
with food companies to develop products that incorporate Proventra and/or
other immune combinations and/or to sell Proventra to food companies as an
ingredient.* The Company does not anticipate that it will manufacture,
market or distribute any final food product, but will rely upon
collaborations with larger companies to accomplish these goals.*
CRITICAL CARE PRODUCTS
The Company employs its own inside sales personnel to market its
critical care nutrition products. These sales personnel target, via
telephone, the appropriate departments of hospitals, nursing homes and home
health care organizations. This approach reduces the Company's selling costs
by eliminating travel expenses and allowing its sales personnel to contact
and service a larger number of potential and actual customers. The Company
also uses direct mail and trade shows to further promote its products. In
addition, the Veteran's Administration and state and county hospitals have
annual bids for clinical nutrition products, and the Company actively
participates in these bids.
RESEARCH
FUNCTIONAL FOOD AND NUTRACEUTICAL PRODUCTS
The Company's product development strategy is to pursue its own research
programs internally and to complement such programs by establishing
relationships with key external medical, academic, governmental and major
research organizations. Specifically, the Company intends to continue
complementing its extensive immune-enhancing technology base by acquiring
access to additional proprietary technology and patents in the areas of
antibodies, vaccine, molecular biology, and processing and manufacturing
technology.* The Company also may seek collaborative arrangements for
commercialization of its Proventra-based products.* The Company spent
$1.9 million, $3.8 million and $5.3 million for product development in fiscal
years 1998, 1997 and 1996, respectively. The expenses incurred in 1996, 1997
and a portion of 1998 relate to the Company's pharmaceutical program, which
has been discontinued.
8
CRITICAL CARE PRODUCTS
As part of NMI, the product development process began with a
determination that a market opportunity existed with respect to a particular
product. NMI then contracted with an outside laboratory to analyze the
ingredients of the competitor's product and to formulate its version of the
product. Certain members of NMI's scientific advisory board consulted with
the contractors during the development process. The Company anticipates that
any future product development may generally follow this procedure, but
anticipates that any new products will incorporate immune-enhancing benefits
to make a product proprietary and have unique features not currently
available in the market so as to maintain or increase gross margins.* The
Company's critical care, disease specific and intact protein nutrition
formulas are not required to undergo clinical testing or obtain FDA approval
for such products, though they are subject to certain FDA guidelines.
LAND O'LAKES RELATIONSHIP
The Company believes that the Company's existing relationship with Land
O'Lakes provides it with certain advantages over existing and potential
competitors.* Land O'Lakes made significant advances in the development and
commercialization of antibody products for treating and preventing diseases
in animals. This technology provides the Company with a solid foundation on
which to base its efforts to develop similar products for human use.
Under a supply agreement with Land O'Lakes, the Company agreed to
purchase all of its commercial requirements for colostrum from Land O'Lakes
through May 7, 2002, subject to Land O'Lakes' option to renew the supply
agreement for an additional ten-year period. The Company must provide
program specifications to Land O'Lakes prior to commencing each of its
commercial programs and Land O'Lakes must notify the Company within a
specified period whether it will supply according to the agreement. If Land
O'Lakes does not confirm during that period that it will supply colostrum
according to the specifications, then the Company has the right to obtain the
colostrum from alternative sources. Commercial production of Proventra could
be delayed if Land O'Lakes does not elect to supply according to the supply
agreement and the Company is required to locate an alternate supplier.
When the Company was formed, it signed a letter of intent with Land
O'Lakes to develop strategic relationships focused on the development of
functional food products. In March 1998, the Company and Land O'Lakes signed
an amended and restated license agreement (the "Restated License") in which
the Company has significantly broadened its rights to develop and market
functional foods. Under the Restated License, the Company can use, improve,
exploit, license or share existing Procor Technology, Inc. (the Company's
predecessor, "Procor") technology, Procor technology improvements and new
technologies, as defined, in all areas of functional foods except under
certain "reserved food product" and "first refusal food product" categories,
as defined. If the Company intends to engage in manufacturing or marketing
any "first refusal food product", the Company must give Land O'Lakes notice
of its intent, in which case Land O'Lakes can negotiate with the Company, in
good faith and within a defined period of time, to undertake any part of the
manufacturing or marketing areas. If the Company intends to engage in
manufacturing or marketing any "reserved food product", the Company must give
Land O'Lakes notice of its intent and must only work with Land O'Lakes to
undertake the manufacturing or marketing of such products. In the original
license agreement with Land O'Lakes, the Company retained rights to pursue
the development of infant formula products containing polyclonal antibody
technology.
In March 1997, Land O'Lakes granted the Company a license (the "Kefir
License") to use existing antibody technology and future improvements in the
development, formulation, manufacture, marketing, distribution and sale of
kefir-based products, as defined in the Kefir License. In consideration of
granting the Kefir License, Land O'Lakes will receive a royalty based on food
components or ingredients sold by the Company to be included in any
kefir-based product and on net receipts from any kefir-based finished product
sold by the Company.
9
PROPRIETARY RIGHTS AND PATENTS
FUNCTIONAL FOOD AND NUTRACEUTICAL PRODUCTS
The Company's policy is to protect its proprietary technology as trade
secrets and by filing patent applications on technology for which the Company
believes patent protection is available and is in the best interest of the
Company. The Company also relies upon know-how, continuing technological
innovations and licensing opportunities to develop and maintain its
competitive position.
The Company believes that certain of its process improvements are more
valuable as trade secrets than as patented processes, where the process
improvements would have to be publicly disclosed. The Company relies on
trade secrets and proprietary know-how it developed while manufacturing
antibody products as Procor. The Company believes that substantial barriers
exist for competitors desiring to commercialize antibodies derived from milk
or colostrum that have the features that the Company's antibodies, or
Proventra, have*; however, there can be no assurance that other companies
will not develop production processes or initiate relationships with other
large dairy cooperatives to develop a similar procurement system. The
Company seeks to protect trade secrets and know-how through confidentiality
agreements with employees, consultants and other parties. These agreements
provide that all confidential information developed or made known during the
course of the relationship with the Company is to be kept confidential and
not disclosed to third parties, except in specific circumstances. No
assurance can be given that such agreements will provide meaningful
protection for the Company's unpatented trade secrets or provide adequate
remedies in the event of unauthorized use of such information. Neither can
assurance be given that others will not independently develop substantially
equivalent proprietary information and technology or otherwise gain access to
the Company's trade secrets or disclose such technology.
The Company has been issued four patents from the United States Patent &
Trademark Office. Two patents cover significant processes in its core
manufacturing technology for antibodies for microfiltering milk and colostrum
that reduces contaminants while improving yield. The third patent covers the
therapeutic use of CLOSTRIDIUM DIFFICILE specific bovine antibodies for the
treatment of C. DIFFICILE related diseases such as diarrhea. The fourth
patent covers a vaccine composition for generating specific, high titer
antibodies against CRYPTOSPORIDIUM PARVUM. The Company also has three United
States patent applications pending and has acquired licenses to a number of
patents or patent applications of others. The Company's United States patent
applications are in the area of bovine antibody technology and product
applications. The Company believes that useful, new and unobvious antibody
formulations also may be patentable in support of its immune-enhancing
strategy.* Furthermore, in some cases, patent coverage may be available for
the vaccines or antigens used to provoke the immunological response which
produces the antibodies. The Company has also obtained sole licenses for
enabling patents from Metagenics, Inc relating to the combination of
antibodies and soluble fibers, and antibodies and active cultures for use in
the fields of dietary supplements and medical foods. Metagenics, Inc. retains
the right to use these patents for its own products. The Company has also
acquired a patent from Biotest Pharma GmbH for an alternative antibody
processing technology. The Company's strategy is to pursue patent protection
for each of its products where possible, including their components, as well
as for certain process and formulation improvements, although the Company may
not be successful in achieving broad patent protection for its technology.
The Company has become aware of several patents that may relate to its
antibody technology. In 1991, the Company became aware of one such issued
patent. Land O'Lakes engaged outside patent counsel to review the patent and
such counsel rendered its written opinion to Land O'Lakes that the patent is
not infringed by the Company's technology. The Company engaged its own
outside patent counsel to review the patent and such counsel rendered its
independent opinion that the patent is not infringed by the Company's
technology and that, in any event, the patent would be invalid if it were
interpreted broadly enough so as to cover the Company's technology. While
the Company does not regard the patent as a threat to its business*, there
can be no assurance that the holder of the patent will not pursue litigation
which could be costly to the Company.
10
CRITICAL CARE PRODUCTS
The Company is in the process of registering its existing trademarks,
for the products acquired from NMI, with the United States Patent & Trademark
Office. As part of NMI, the products were not registered but instead relied
on NMI's common law trademark rights. The lack of such registration may
impair the ability of the Company to successfully register the trademarks or
to prosecute successfully an infringement action against other users of these
trademarks. There can be no assurance that the Company's marks do not or will
not violate the proprietary rights of others, that the Company's proprietary
rights in the marks would be upheld if challenged, or that the Company would
not be prevented from using its marks, any of which could have an adverse
effect on the Company.* In addition, there can be no assurance that the
Company will have the financial resources necessary to enforce or defend its
trademarks.*
GOVERNMENT REGULATION
FUNCTIONAL FOOD AND NUTRACEUTICAL PRODUCTS
GENERAL
The formulation, manufacturing, processing, packaging, labeling,
advertising, distribution and sale of nutritional supplements such as those
being developed by the Company are subject to regulation by one or more
federal agencies, principally the FDA and the Federal Trade Commission (the
"FTC"), and to a lesser extent the Consumer Product Safety Commission and the
United States Department of Agriculture. These activities are also regulated
by various governmental agencies for the states and localities in which the
Company's products are sold, as well as by governmental agencies in certain
foreign countries in which the Company's products are sold. Among other
matters, regulation of the Company by the FDA and FTC is concerned with
claims made with respect to a product which refer to the value of the product
in treating or preventing disease or other adverse health conditions.
Federal agencies, primarily the FDA and FTC, have a variety of remedies
and processes available to them, including initiating investigations, issuing
warning letters and cease and desist orders, requiring corrective labels or
advertising, requiring consumer redress (for example, requiring that a
company offer to repurchase products previously sold to consumers), seeking
injunctive relief or product seizure and imposing civil penalties or
commencing criminal prosecution. In addition, certain state agencies have
similar authority, as well as the authority to prohibit or restrict the
manufacture or sale of products within their jurisdiction. These federal and
state agencies have in the past used these remedies in regulating
participants in the nutritional products industry, including the imposition
by federal agencies of civil penalties in the millions of dollars against a
few industry participants. There can be no assurance that the regulatory
environment in which the Company operates will not change or that such
regulatory environment, or any specific action taken against the Company,
will not result in a material adverse effect on the Company's business,
financial condition or results of operations.* In addition, increased sales
and publicity of nutritional supplements may result in increased regulatory
scrutiny of the nutritional supplements industry.
DIETARY SUPPLEMENT HEALTH AND EDUCATION ACT
DSHEA was enacted in October 1994, amending the Food, Drug and Cosmetic
Act. The Company believes this law is generally favorable to the dietary
supplement industry.* DSHEA establishes a new statutory class of "dietary
supplements," which includes vitamins, minerals, herbs, amino acids and other
nutritional supplements for human use to supplement the diet and includes in
such class all dietary ingredients
11
on the market as of October 15, 1994. Such class of nutritional supplements
will not require the submission by the manufacturer or distributor of
evidence of a history of use or other evidence of safety establishing that
the supplement will reasonably be expected to be safe, but a nutritional
supplement which contains a dietary ingredient which was not on the market as
of October 15, 1994 does require such submission of evidence of a history of
use or other evidence of safety. Among other things, this law prevents the
further regulation of dietary ingredients as "food additives" and allows the
use of statements of nutritional support on product labels. DSHEA allows the
use of "structure/function" claims on the label of a product, which may allow
the Company to communicate advantages of Proventra without the expenses
associated with FDA clinical trials.* The law requires companies to file
label claim information with FDA within 30 days after initiating marketing of
a product, and FDA may respond with a "courtesy letter" commenting on the
claims if it believes they are not appropriate.
OTHER REGULATORY REQUIREMENTS
The Company is also subject to regulation by the Occupational Safety and
Health Administration, the Environmental Protection Agency and the Minnesota
Environmental Quality Board and to regulation under the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, among others, and
other regulations, and may in the future be subject to other federal, state
and local statutes or regulations. The Company is unable to predict whether
any agency will adopt any regulation which would have a material adverse
effect on the Company.
CRITICAL CARE PRODUCTS
The Company's products purchased from NMI are subject to government
regulation. The Company's current critical care products are regulated as
food and medical food by the FDA and are subject to labeling requirements,
current good manufacturing practice regulations and certain other regulations
designed to ensure the safety of the products. Claims made by the Company in
labeling and advertising its products are subject to regulation by the FDA,
the FTC and various state agencies under their general authority to prevent
false, misleading and deceptive trade practices. These regulations involve
more stringent tracking, testing and documentation standards. Failure to
comply with FDA requirements can result in adverse regulatory action,
including injunctions, civil or criminal penalties, product recalls or the
relabeling, reformulation or possible termination of certain products.
COMPETITION
FUNCTIONAL FOOD AND NUTRACEUTICAL PRODUCTS
The nutritional products area is highly fragmented and competitive with
many large nationally known manufacturers and many smaller manufacturers and
marketers of nutritional products. The Company has licensed patents from
Metagenics regarding the incorporation of antibodies combined with active
cultures and antibodies combined with soluble fiber. Many of the nutritional
products the Company anticipates developing, in conjunction with a strategic
partner, will be covered by these patents. Potential competitors, however,
could be larger than the Company, have greater access to capital and may be
better able to withstand volatile market conditions. Moreover, because the
nutritional products industry generally has low barriers to entry, additional
competitors could enter the market at any time. In that regard, although the
nutritional products industry to date has been characterized by many
relatively small participants, national or international companies (which may
include food or pharmaceutical companies or other suppliers to the mass
markets) may seek to enter or to increase their presence in this industry,
which would have a material adverse effect on the Company's competitive
position.
The Company has assessed the factors that may make it competitive in
this environment and believes that its central strength is that the products
it will develop in conjunction with various partners will be unique, distinct
and proprietary in the marketplace.* This distinction is made by offering in
its products direct immune enhancing benefits that include Proventra and a
combination of other key ingredients, such as active
12
cultures and soluble fiber, currently not available in the market. Such
products will also be subject to patent protection.* Another strength
includes proprietary technologies that can enhance Proventra by offering
immune protection against specific common disease-causing pathogens.*
Additionally, the Company's collaborative relationships offer financial,
production, sales and distribution synergies beyond those of GalaGen itself
which allow the Company to compete more effectively.*
COLOSTRUM MANUFACTURERS
The Company knows of certain colostrum manufacturers, including New
Zealand Dairy and La Belle, Inc., which supply colostrum in dried or liquid
form. These competitors are larger than the Company, have greater access to
capital and may be better able to withstand volatile market conditions.
Potential competitors could also be larger than the Company, have greater
access to capital and may be better able to withstand volatile market
conditions. The colostrum market requires access to a substantial number of
dairy cows to be commercially successful. The Company has assessed the
factors that may make it competitive in this environment and believe that its
central strengths are: (i) its access to 750,000 dairy cows in the Land
O'Lakes system, (ii) its ability to pasteurize, and/or certify Kosher,
colostrum while still maintaining the effectiveness of the immune-enhancing
components, namely antibodies, which the Company believes no competitor
offers, and (iii) additionally, its ability to enhance Proventra by offering
immune protection against targeted pathogens.*
CRITICAL CARE PRODUCTS
Competition in the critical care nutrition products market primarily
consists of five companies that have established brands in the specialty
markets in which the Company has chosen to compete. These companies,
Novartis, Mead Johnson, Nestle, Ross Laboratories and McGaw, each market
their specialty products through sales personnel who generally use
traditional in-person sales calls rather than the telemarketing approach
historically employed by the Company. Novartis, Mead Johnson, Nestle, Ross
Laboratories and McGaw are all larger than the Company, have greater access
to capital and are likely to be better able to withstand volatile market
conditions. Although the Company believes it is the only company currently
offering low cost alternatives to the established brands, other companies may
enter this market.*
EMPLOYEES
At December 31, 1998, the Company had 19 employees, eight of whom came
from NMI when the Company acquired certain assets of NMI and are in the
sales, marketing and quality control areas. Two employees have Ph.D.
degrees, and one of whom also has an M.D. degree. Five employees are
currently working in product development, including the clinical regulatory
area. The Company believes its employee relationships are good.
RISK FACTORS
Certain statements made in this Annual Report on Form 10-K, including those
indicated by an asterisk above, are forward-looking statements based on our
current expectations, assumptions, estimates and projections about our
business and our industry. These forward-looking statements involve risks
and uncertainties. Our business, financial condition and results of
operations could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, as more fully
described below and elsewhere in this Form 10-K. You should consider
carefully the risks and uncertainties described below, which are not the only
ones facing our Company. Additional risks and uncertainties also may impair
our business operations. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
13
GENERAL
WE MAY NOT EVER ACHIEVE A PROFITABLE LEVEL OF OPERATIONS.
Our ability to achieve profitable operations depends in large part on:
- entering into agreements to develop products and establish markets for
those products; and
- making the transition from a research company to an operating and
marketing company.
We cannot be sure we will be successful in ever achieving either result.
We have experienced significant operating losses in each year since our
inception in 1987. We have an accumulated deficit of more than $57 million
as of December 31, 1998. We may continue to lose money in the future.
IF WE CANNOT OBTAIN CONTINUING FUNDING, WE MAY BE UNABLE TO IMPLEMENT
OUR BUSINESS PLANS.
If we cannot find adequate funding, we may have to delay or eliminate
some of our product development plans. We may be required to grant licenses
to others to establish markets for products or technologies that we would
otherwise seek to market ourselves.
Our cash requirements for working capital depend on numerous factors.
These factors include:
- our spending on marketing activities, including clinical marketing
trials;
- our progress in finding partners to help us develop products and
market those products;
- the willingness and ability of our partners to provide funding for our
activities;
- our spending on product development programs;
- the rate of technological advances in the production of our products;
- our spending on facilities, equipment and personnel to make our
products; and
- the status of competitive products.
Our long-term ability to continue funding our planned operations depends
on our ability to obtain additional funds through:
- product revenues;
- equity or debt financing;
- finding partners to help us develop products and market those
products;
- license agreements; or
- other financing sources.
Because of our significant long-term capital requirements, we may seek
to raise funds when conditions are favorable. We may do so even if we do not
have an immediate need for the capital at the time we raise it. If we have
not raised funds prior to when our needs for funding become immediate, we may
be forced to raise funds when conditions are unfavorable. This could result
in significant dilution of our current stockholders.
IF WE DO NOT ACHIEVE A PROFITABLE LEVEL OF OPERATIONS AND CANNOT FIND
FUNDING IN THE FUTURE, WE COULD EVENTUALLY BECOME INSOLVENT OR BANKRUPT.
If we do not achieve a profitable level of operations and we do not
obtain funding necessary from some source other than operations, we could
eventually deplete our cash reserves and become insolvent or bankrupt.
THE RELATIVELY LOW LEVEL OF TRADING IN OUR COMMON STOCK MAY MAKE IT
HIGHLY VOLATILE.
While our Common Stock has been traded on the Nasdaq National Market
since our initial public offering, the volume of shares of Common Stock
traded on that market has been relatively small. Given the small volume of
shares traded, market fluctuations may have a particularly adverse effect on
the market price of our Common Stock. We cannot be sure of the liquidity of
the market for the Common Stock or the price at which any sales may occur.
The volume of trading in our
14
Common Stock in the future will depend upon the number of holders of the
Common Stock, the interest of securities dealers in maintaining a market in
the Common Stock and other factors beyond our control. The market price of
our Common Stock could be subject to significant fluctuations in response to:
- our operating results;
- the operating results of our competitors or other biotechnology
companies;
- technological developments;
- government regulations;
- the status of our proprietary rights to potential products;
- litigation;
- public safety concerns; and
- other factors.
Some of these factors are unrelated to our operating performance and
beyond our control.
GALAGEN AND THE OWNERS OF SHARES OF OUR COMMON STOCK MAY HAVE DIFFICULTY
IN SELLING THOSE SHARES IN THE FUTURE IF OUR COMMON STOCK IS REMOVED FROM
LISTING ON THE NASDAQ NATIONAL MARKET.
We must meet specific requirements for our shares to continue to be
listed on the Nasdaq National Market. Although we were meeting all of those
requirement as of December 31, 1998, we cannot be sure that we will continue
to meet them in the future. If we fail to meet the continued listing
requirements, or fail to file a plan acceptable to Nasdaq for meeting those
requirements, Nasdaq may remove our Common Stock from listing on the National
Market. We cannot be sure that our Common Stock will continue to be listed
on the National Market. If in the future our Common Stock fails to qualify
for continued listing on the National Market, we would apply to have its
listing transferred to the Nasdaq SmallCap Market. If the listing of our
Common Stock is transferred from the National Market to the SmallCap Market,
it may be more difficult for owners of our Common Stock to sell it through
brokers. Additionally, we may have more difficulty raising funds through the
sale of our Common Stock or securities convertible into Common Stock.
If trading privileges in our Common Stock on the Nasdaq National Market
were terminated, we would be required to demonstrate compliance with the
applicable requirements for initial inclusion of a security on the Nasdaq
National Market before our Common Stock would be listed again on that
exchange. The requirements for initial inclusion are more stringent than
those for continued listing.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT EXCEED OUR INSURANCE
COVERAGE.
Our business involves exposure to potential product liability risks that
are inherent in the production, manufacture and distribution of consumer and
clinical food products that are designed to be ingested. The successful
assertion or settlement of any uninsured claim, a significant number of
insured claims or a claim exceeding our insurance coverage could have a
material adverse effect on our business and financial condition. We cannot
be sure that we will be able to obtain product liability insurance on
acceptable terms or that provides adequate protection. Furthermore, we cannot
be sure that we will be able to secure increased insurance coverage as the
markets for our products increase.
15
IF WE RELY ON INACCURATE MARKET INFORMATION, WE COULD MAKE DECISION THAT
HAS A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.
Because we are currently developing our products and markets for those
products, we are particularly reliant on market data. If that data is
inaccurate, we may commit resources to product development and marketing
efforts that do not become profitable. Product development and marketing
efforts that do not become profitable may have a material adverse effect on
our business and financial condition. We have obtained market and related
data from a competitive-market analysis firm. We have not independently
verified the accuracy of that information. In any event, the methodology
typically used in compiling market and related data makes it subject to
inherent uncertainties and estimations. As a result, we cannot be sure as to
the accuracy or completeness of our market information.
INADEQUATE PROVENTRA PRODUCTION COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS AND FINANCIAL CONDITION.
Given our limited experience in manufacturing Proventra, we cannot be
sure that we will be successful in producing Proventra of acceptable quality
on a commercial scale and at acceptable costs in our manufacturing facility.
If we cannot, our business and financial condition could be materially
adversely affected. Our production of Proventra will be regulated by the
Minnesota Department of Agriculture. We believe that our current
manufacturing facility will meet the anticipated requirements for the
production of Proventra for use in consumer and clinical nutritional products
through the year 2000. Further, we believe that contract manufacturers would
be available to increase our Proventra production capacity quickly, if
required. However, until we begin producing Proventra on a commercial scale,
we cannot be sure that our production capabilities will be adequate.
FAILURE OF OUR COLLABORATIONS TO DEVELOP AND MARKET PRODUCTS CONTAINING
PROVENTRA COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL
CONDITION.
We are relying on collaborations with larger more establish companies to
develop and market products containing Proventra. Our collaborators'
inability to bring products to market could have a material adverse effect on
our business and financial condition. We anticipate that products containing
Proventra will be introduced in particular markets in the last half of 1999
through collaborations we have established with other companies. However,
introduction of these products to test markets on schedule depends on our
ability and our collaborators' ability to accomplish the following:
- finalize market research;
- finalize product development;
- establish product manufacturing;
- initiate marketing, sales and distribution activities related to such
products; and
- provide the funding necessary to accomplish such activities.
DELAYS OR HIGH COSTS IN PRODUCT DEVELOPMENT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.
If we, or our strategic partners cannot obtain accurate marketing data,
or to develop a product responsive to the needs identified by that data, our
business and financial condition could be materially adversely affected. The
amount of time it will take us, together with our strategic partner, to
develop consumer and clinical nutrition products and the associated costs of
developing those products depends on, among other things, the results of our
market research for consumer and clinical products. It also depends on our
discussions with certain end users or purchasers of the potential products.
Market research and discussions may give us indications of potential
customers, what types of products they may desire and what clinical
information is necessary for effective marketing and sales.
16
RISKS SPECIFIC TO FUNCTIONAL FOOD AND NUTRACEUTICAL PRODUCTS
PUBLIC MISPERCEPTION THAT OUR PRODUCTS MAY NOT BE SAFE COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.
We are highly dependent upon consumers' perception of the safety and
quality of our products as well as of similar products distributed by other
companies. Thus, for example, the publication of reports asserting that such
products may be harmful could have a material adverse effect on our business
and financial condition, regardless of whether such reports are
scientifically supported and regardless of whether the alleged harmful
effects would be present at the dosages recommended for such products.
INNOVATIVE INGREDIENTS MAY PRODUCE UNWANTED EFFECTS AND EXPOSE US TO
PRODUCT LIABILITY CLAIMS OR LOSS OF CONSUMER CONFIDENCE.
If we develop products with innovative ingredients that over time are
shown to produce unwanted effects, we could be exposed to product liability
claims and lose consumer confidence, which could have a material adverse
effect on our business and financial condition. Some of our future products
may contain innovative ingredients or combinations of ingredients that do not
have a long history of human consumption. While we believe all of our
products will be safe when taken as we direct, there is little long-term
experience with human consumption of certain of these innovative product
ingredients or combinations thereof in concentrated form. Although we
perform research and/or test the formulation and production of our products,
we will sponsor only limited clinical studies or rely on other outside
published data.
IF LARGER COMPANIES WITH GREATER ACCESS TO CAPITAL AND PRODUCT MARKETS
ENTER OUR SEGMENT OF THE NUTRITIONAL PRODUCTS MARKET, WE MAY BE MATERIALLY
ADVERSELY AFFECTED.
Because the nutritional products industry generally has low barriers to
entry, additional competitors could enter the market at any time. Potential
competitors could be larger than we are, have greater access to capital than
we do and may be better able to withstand volatile market conditions than we
are. Although the nutritional products industry to date has been
characterized by many relatively small participants, national or
international companies (which may include pharmaceutical companies or other
suppliers to mass merchandisers) may seek to enter or to increase their
presence in this industry or to consolidate it. Increased competition in the
industry could have a material adverse effect on our business and financial
condition.
OUR FAILURE TO OBTAIN NECESSARY APPROVALS OR OTHERWISE COMPLY WITH
GOVERNMENT REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
AND FINANCIAL CONDITION.
Our current and potential functional foods and nutraceutical products
may become subject to governmental regulation in the future. The burden of
such regulation could add materially to the costs and risks of our
development and marketing efforts. There can be no assurance that we could
obtain the required approvals or comply with new regulations if our products
are subject to additional governmental regulation in the future.
Some of our products in development may be subject to regulation by one
or more federal agencies, principally the Food and Drug Administration and
the Federal Trade Commission, and to a lesser extent the Consumer Product
Safety Commission and the United States Department of Agriculture regarding
the formulation, manufacturing, processing, packaging, labeling, advertising,
distribution and sale of nutritional supplements. These activities are also
regulated by various governmental agencies for the states and localities in
which the Company's products are sold, as well as by governmental agencies in
certain foreign countries in which the Company's products are sold. Among
other matters, regulation of the Company by the FDA and FTC is concerned with
claims made with respect to a product which refer to the value of the product
in treating or preventing disease or other adverse health conditions.
17
RISKS SPECIFIC TO CRITICAL CARE NUTRITION PRODUCTS
IF WE DO NOT INCREASE THE SALES VOLUME OF OUR CRITICAL CARE NUTRITION
PRODUCTS, OUR BUSINESS AND FINANCIAL CONDITION MAY BE MATERIALLY ADVERSELY
AFFECTED.
Increasing the sales of our critical care nutrition products is an
important part of our business strategy. If we are not successful in
obtaining these sales increases, our business and financial condition may be
materially adversely affected. We acquired our current critical care enteral
nutrition products from Nutrition Medical on December 23, 1998. Our ability
to increase sales levels of the acquired critical care enteral nutrition
products will depend on our ability to successfully complete certain clinical
marketing studies and on our ability to effectively execute our operating
sales and marketing plans. We cannot be sure that we will succeed in
increasing the sales of these products.
IF OUR MARKETING EFFORTS DO NOT GENERATE THE NAME RECOGNITION FOR OUR
COMPANY AND OUR CRITICAL CARE PRODUCTS NECESSARY TO SIGNIFICANTLY ENHANCE
REVENUES, OUR BUSINESS AND FINANCIAL CONDITION MAY BE MATERIALLY ADVERSELY
AFFECTED
We cannot be sure that our marketing efforts will achieve the name
recognition of our company and of our critical care nutrition products
necessary to significantly enhance revenues. If they do not, our business
and financial condition could be materially adversely affected. Our
products, with the exception of Glutasorb, are designed to be substantially
equivalent to existing branded competitive products. Although we believe
that the quality and efficacy of our critical care nutrition products are
comparable to branded competitive products, no independent comparison between
our critical care nutrition products and competitive products has been
completed. We cannot be sure that the efficacy or quality of our critical
care nutrition products is, or will be, comparable to branded competitive
products. Furthermore, our name and our products are relatively unknown to
large segments of our target markets.
PRICE REDUCTIONS BY COMPETITORS COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS AND FINANCIAL CONDITION.
Much of our marketing strategy for our critical care nutrition products
is focused on the price advantage of our critical care nutrition products.
If a competitor reduces or eliminates the price advantage of our products, we
cannot be sure that we will be able to compete successfully with the
competitor, or operate profitably under such conditions. If we could not,
our business and financial condition could be materially adversely affected.
We believe that the principal advantage of our critical care nutrition
products, with the exception of Glutasorb, is cost effectiveness. Because
these products were only recently acquired, we have not yet experienced any
competitor lowering its prices to offset any price advantage we may have. We
are aware that while the products were owned by NMI, at least one competitor
in the critical care nutrition products market lowered prices to various
customers of some branded products to levels that offset all or part of the
price advantage held by NMI. We believe that any selective price reductions
by a competitor may result in lost sales of our competing products.
IF THE CONTRACT MANUFACTURERS THAT PRODUCE OUR PRODUCTS CANNOT DO SO
ADEQUATELY, OUR BUSINESS AND FINANCIAL CONDITION MAY BE MATERIALLY ADVERSELY
AFFECTED
We rely on contract manufacturers to produce our critical care nutrition
products according to our specifications. Any interruption in supply from
these manufacturers of any of our products could have a material adverse
effect on our business and financial condition. We cannot be sure that
contract manufacturers will consistently supply adequate quantities of our
products on a timely basis or that the quality of such products will be
consistently maintained. We also rely on these manufacturers to comply with
all applicable government regulations and manufacturing guidelines. We
cannot be sure these contract manufacturers will consistently comply with
government regulations. In the event of a sale of a defective product, we
would be
18
exposed to product liability claims and could lose customer confidence. In
addition, minimum quantity order requirements imposed by manufacturers may
result in excess inventory levels, requiring additional working capital and
increasing exposure to losses from inventory obsolescence.
BECAUSE THE WAY WE DISTRIBUTE OUR PRODUCTS MAY RESULT IN A RELATIVELY
SMALL NUMBER OF CUSTOMERS, THE LOSS OF PARTICULAR CUSTOMERS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.
Our critical care nutrition product sales may become concentrated with a
few large distributors and certain customers. We cannot be sure that orders
from such customers will continue or that our future orders will not
significantly decline, which could have a material adverse effect on our
business and financial condition.
WE MAY BECOME INVOLVED IN LITIGATION WITH COMPETITORS THAT MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.
Companies in the private label industry are commonly the subject of
claims and lawsuits brought by brand name competitors alleging that the
private label products have formulas, labeling or packaging similar to
competing brand name products. Such litigation may require the commitment of
substantial management time and legal fees. Accordingly, such litigation may
have a material adverse effect on our business and financial condition.
Certain of the critical care nutrition products we acquired from Nutrition
Medical were the subject of a lawsuit alleging patent infringement. The suit
was favorably resolved before we acquired the products. Similar claims may
be made against us by competitors in the future. Competitors may also
respond to our marketing strategy by more aggressively seeking patents on
their products to limit our future product development efforts. If similar
infringement allegations are made against us in the future, some of our
current and future products may need to be reformulated or repackaged in
order for us to continue to market products that are comparable to
competitors' patented products. We may be unable to effectively reformulate
certain of our products. Furthermore, we cannot be sure that a reformulated
product would be viewed by customers to be essentially equivalent to the
patented product. Moreover, we cannot be sure that any future lawsuits could
be satisfactorily settled by reformulating, relabeling or repackaging a
product.
DIRECT COMPETITION FROM LARGER COMPANIES WITH SIGNIFICANT FINANCIAL
RESOURCES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL
CONDITION.
Our competitors in the critical care nutrition products market are
established companies with significant financial resources that sell branded
products that have achieved a high level of customer awareness. If we are not
able to compete successfully or operate profitably in this market, our
business and financial condition could be materially adversely affected.
Other companies may also enter this market.
IF WE CANNOT ENFORCE, FOR ANY REASON, THE TRADEMARKS THAT WE ACQUIRED
FROM NUTRITION MEDICAL, OUR BUSINESS AND FINANCIAL CONDITION MAY BE
MATERIALLY ADVERSELY AFFECTED.
We cannot be sure that the trademarks we acquired from Nutrition Medical
do not or will not violate the proprietary rights of others. Nor can we be
sure that our proprietary rights in the marks would be upheld if challenged.
If we were prevented from using the marks for any reason, our business and
financial condition may be materially adversely affected. In addition, we
cannot be sure that we will have the financial resources necessary to enforce
or defend our trademarks, which could also have a material adverse effect on
our business and financial condition. We are in the process of registering
existing trademarks for the products acquired from Nutrition Medical with the
United States Patent & Trademark Office. As part of Nutrition Medical, the
products were not registered. Instead Nutrition Medical relied on common law
trademark rights. The lack of such registration may impair the ability of the
Company to successfully register the trademarks or to prosecute successfully
an infringement action against other users of these trademarks.
19
OUR FAILURE TO OBTAIN NECESSARY APPROVALS OR OTHERWISE COMPLY WITH
GOVERNMENT REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
AND FINANCIAL CONDITION.
Our critical care products and potential critical care products are, or
will be, subject to government regulation. Our current products are
regulated as food and medical food by the FDA and are subject to certain
labeling requirements, current good manufacturing practice regulations and
certain other regulations designed to ensure the safety of the products.
Our current and potential products may become subject to further
governmental regulation in the future. The burden of such regulation could
add materially to the costs and risks of our development and marketing
efforts. There can be no assurance that we could obtain the required
approvals or comply with new regulations if our products are subject to
additional governmental regulation in the future.
Claims we make in labeling and advertising our products are subject to
regulation by the FDA, the FTC and various state agencies under their general
authority to prevent false, misleading and deceptive trade practices. These
regulations involve stringent tracking, testing and documentation standards.
Failure to comply with such requirements can result in adverse regulatory
action, including injunctions, civil or criminal penalties, product recalls
or the relabeling, reformulation or possible termination of certain products.
20
ITEM 2. PROPERTIES
The Company leases approximately 5,500 square feet of administrative,
laboratory, and manufacturing space at the Land O'Lakes corporate office
located in Arden Hills, Minnesota. In addition, the Company rents, on an
as-needed basis, public warehouse space to store inventory. Management
believes that the Company's facilities are suitable and adequate for current
office, research, manufacturing and storage requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM X. EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of the Company are:
NAME AGE POSITION
- ---- --- --------
Robert A. Hoerr, M.D., Ph.D. 49 Chairman of the Board of Directors
and Chief Executive Officer
Henry J. Cardello 47 President and Director
Eileen F. Bostwick, Ph.D. 48 Vice President, Research and
Development
Michael E. Cady 46 Vice President, Manufacturing and
Engineering
Gregg A. Waldon 38 Vice President, Chief Financial
Officer, Secretary and Treasurer
ROBERT A. HOERR, M.D., PH.D., was named President and Chief Operating
Officer of the Company in February 1994, became President and Chief Executive
Officer in September 1994 and became Chairman of the Board and Chief
Executive Officer in November 1998. He served as Vice President, Medical and
Regulatory Affairs of the Company from January 1993 to December 1993 and
Senior Vice President from December 1993 to February 1994. Dr. Hoerr was
Director of Medical Affairs for Sandoz Nutrition Corporation, a
research-based nutrition company, from March 1990 to January 1993. From 1986
to 1990, Dr. Hoerr was Research Scientist and Assistant Program Director at
the Clinical Research Center, Massachusetts Institute of Technology ("MIT").
Dr. Hoerr received his A.B. in Biology from Indiana University, his M.D. from
Indiana University School of Medicine and his Ph.D. in Nutritional
Biochemistry and Metabolism from MIT.
HENRY J. CARDELLO, has served as President since January 1999. Mr.
Cardello has been advising the Company since April 1998 through Marketing
Ventures of America, Inc. ("MVA"), a consumer-marketing firm that specializes
in commercializing consumer-based products, of which he has been Chairman and
President since July 1987. Prior to July 1987, Mr. Cardello was President of
Sunkist Soft Drinks, Inc., a unit of Cadbury Schweppes, Vice President of
Marketing for Cadbury's Canada Dry business and Director of Marketing for
Coca-Cola USA. Additionally, Mr. Cardello has held several brand management
positions with Anheuser-Busch and General Mills, Inc. Mr. Cardello received
his B.S. degree in engineering from Lehigh University and his M.B.A. from The
Wharton Graduate School of Business.
EILEEN F. BOSTWICK, PH.D., has served as Manager of Research and
Development since July 1992, Director of Research and Development since
September 1993 and Vice President of Research and Development since March
1997. Dr. Bostwick joined the Company's predecessor, Procor Technologies,
Inc. ("Procor") in 1988 as Immunology Group Leader. Prior thereto, Dr.
Bostwick was a Senior Immunologist in the Biotechnology Section at Minnesota
Mining & Manufacturing. Dr. Bostwick received her B.S. and M.S. degrees from
Michigan State University in Dairy Science, and her Ph.D. in immunology and
physiology from the University of Minnesota.
21
MICHAEL E. CADY has served as Vice President, Manufacturing and
Engineering of the Company since July 1992. From January 1988 to July 1992,
Mr. Cady served as Director of Operations for Procor. From 1979 to 1988, Mr.
Cady held engineering and planning positions within several operating groups
at Land O'Lakes. Mr. Cady was a member of the Land O'Lakes group that
evaluated and implemented the polyclonal antibody technology used as a basis
for the Company's manufacturing process. Prior to joining Land O'Lakes Mr.
Cady was an engineer at Swift & Company, a food processing company. Mr. Cady
received his B.S. in Engineering from the University of Iowa and earned his
M.B.A. from the University of St. Thomas in 1985.
GREGG A. WALDON served as Controller of the Company from April 1992 to
September 1992, and was elected Treasurer in September 1992, Secretary in
March 1993, Vice President in December 1993 and Chief Financial Officer in
November 1994. From April 1989 to April 1992, Mr. Waldon served as an Audit
Manager with Price Waterhouse LLP, a public accounting firm, in its Middle
Market and Emerging Growth Practice in Minneapolis, Minnesota and from 1986
to 1989 was Senior/Staff accountant with Price Waterhouse. Mr. Waldon is
resigning from the Company effective March 31, 1999.
Officers of the Company are chosen by and serve at the discretion of the
Board of Directors. There are no family relationships among any of the
directors, officers or key employees of the Company.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Incorporated herein by reference is the information appearing under the
heading "Market For Registrant's Common Equity and Related Stockholder
Matters" in the Company's Annual Report to Stockholders for the year ended
December 31, 1998 (the "1998 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference is the information appearing under the
heading "Selected Financial Data" in the 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference is the information appearing under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the 1998 Annual Report.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference is the information appearing under the
heading "Quantitative and Qualitative Disclosures About Market Risk" in the
1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference is the information appearing under the
headings "Balance Sheets", "Statements of Operations", "Statement of Changes
in Stockholders' Equity", "Statements of Cash Flows", "Notes to Financial
Statements" and "Report of Independent Auditors" in the 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information appearing under the
headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement for the
annual meeting of stockholders to be held on May 12, 1999 (the "Proxy
Statement"). See also Part I hereof under the heading "Item X. Executive
Officers of Registrant".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the
headings "Report of the Compensation Committee", "Executive Compensation" and
"Comparative Stock Performance" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the
heading "Security Ownership of Principal Stockholders and Management" in the
Company's Proxy Statement.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the
heading "Certain Relationships and Related Transactions" in the Company's
Proxy Statement.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements:
The consolidated financial statements of the Company are
incorporated herein by reference from the information appearing under
the headings "Balance Sheets", "Statements of Operations", "Statement
of Changes in Stockholders' Equity", "Statements of Cash Flows",
"Notes to Financial Statements" and "Report of Independent Auditors"
in the 1998 Annual Report.
2. Financial Statement Schedules:
The following consolidated financial statement schedules of the
Company are included in Item 14(d):
Schedule II Valuation and Qualifying Accounts
(b) Reports on Form 8-K
The Company filed a report on 8K, dated December 23, 1998,
relating to the purchase of certain critical care enteral products,
related inventory and certain fixed assets from NMI.
(c) Exhibits:
The following exhibits are filed as part of this Annual Report on Form
10-K for the year ended December 31, 1998.
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
3.2 Restated Certificate of Incorporation of the Incorporated By
Company.(3) Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen Common Stock Certificate.(1) Incorporated By
Reference
4.6 Form of Common Stock Warrant to purchase shares of Incorporated By
Common Stock of the Company, issued in connection with Reference
the sale of Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Incorporated By
Convertible Preferred Stock of the Company issued to Reference
Chiron Corporation, dated March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Incorporated By
Convertible Preferred Stock of the Company issued to Reference
Chiron Corporation, dated March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Incorporated By
Convertible Preferred Stock of the Company issued to Reference
Chiron Corporation, dated March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Incorporated By
Convertible Preferred Stock of the Company issued to Reference
Chiron Corporation,
25
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
dated March 29, 1995.(1)
4.11 Warrant to purchase 18,250 shares of Common Stock of Incorporated By
the Company issued to IAI Investment Funds VI, Inc. Reference
(IAI Emerging Growth Fund), dated January 30, 1996.(1)
4.12 Warrant to purchase 6,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds IV, Inc. (IAI Reference
Regional Fund), dated January 30, 1996.(1)
4.13 Warrant to purchase 25,000 shares of Common Stock of Incorporated By
the Company issued to John Pappajohn, dated February 2, Reference
1996.(1)
4.14 Warrant to purchase 25,000 shares of Common Stock of Incorporated By
the Company issued to Edgewater Private Equity Fund, Reference
L.P., dated February 2, 1996.(1)
4.15 Warrant to purchase 10,000 shares of Common Stock of Incorporated By
the Company issued to Joseph Giamenco, dated Reference
February 2, 1996.(1)
4.16 Warrant to purchase 25,000 shares of Common Stock of Incorporated By
the Company issued to Gus A. Chafoulias, dated Reference
February 2, 1996.(1)
4.17 Warrant to purchase 25,000 shares of Common Stock of Incorporated By
the Company issued to JIBS Equities, dated February 2, Reference
1996.(1)
4.18 Warrant to purchase 25,000 shares of Common Stock of Incorporated By
the Company issued to Land O'Lakes, Inc., dated Reference
February 2, 1996.(1)
4.19 6% Convertible Debenture Purchase Agreement dated Incorporated By
November 18, 1997 among the Company and the Purchasers Reference
named therein.(8)
4.20 Registration Rights Agreement dated November 18, 1997 Incorporated By
among the Company and the Holders named therein.(9) Reference
4.21 6% Convertible Debenture due May 18, 1999 issued to CPR Incorporated By
(USA) Inc. dated November 18, 1997.(10) Reference
4.22 6% Convertible Debenture due May 18, 1999 issued to Incorporated By
Libertyview Plus Fund dated November 18, 1997.(11) Reference
4.23 6% Convertible Debenture due May 18, 1999 issued to Incorporated By
Libertyview Fund, LLC dated November 18, 1997.(12) Reference
4.24 Stock Purchase Warrant issued to CPR (USA) Inc. dated Incorporated By
November 18, 1997.(13) Reference
4.25 Stock Purchase Warrant issued to Libertyview Plus Fund Incorporated By
dated November 18, 1997.(14) Reference
4.26 Stock Purchase Warrant issued to Libertyview Fund, LLC Incorporated By
dated November 18, 1997.(15) Reference
4.27 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(16) Reference
26
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
4.28 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(17) Reference
4.29 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(18) Reference
4.30 Warrant issued to Henry J. Cardello dated as of April Incorporated By
13, 1998.(20) Reference
4.31 Warrant issued to Henry J. Cardello dated as of April Incorporated By
30, 1998.(20) Reference
4.32 Warrant issued to Henry J. Cardello dated as of June 19, Incorporated By
1998.(20) Reference
4.33 Warrant issued to William Young and Rebecca Young dated Electronic
as of August 12, 1998. Transmission
4.34 Warrant issued to Henry J. Cardello dated as of Electronic
September 30, 1998. Transmission
4.35 Warrant issued to American Home Products Corporation Electronic
dated as of October 15, 1998. Transmission
#10.1 License Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
#10.2 Royalty Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
#10.3 Supply Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
10.4 Master Services Agreement between the Company and Land Incorporated By
O'Lakes dated May 7, 1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended.(5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Company Incorporated By
and Chiron Corporation dated March 20, 1995.(1) Reference
#10.8 License and Collaboration Agreement between the Company Incorporated By
and Chiron Corporation dated March 20, 1995.(1) Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended.(2) Incorporated By
Reference
10.10 Credit Agreement between the Company and Norwest Bank Incorporated By
Minnesota, N.A., dated as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Incorporated By
Leasing Corporation, dated June 5, 1996.(2) Reference
10.12 Master Equipment Lease between the Company and Cargill Incorporated By
Leasing Corporation, dated June 6, 1996.(2) Reference
10.13 Agreement for Progress Payments between the Company and Incorporated By
Cargill Leasing Corporation, dated June 6, 1996.(2) Reference
27
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
10.14 Agreement for Lease between the Company and Land Incorporated By
O'Lakes, dated June 3, 1996.(2) Reference
*10.15 Letter agreement with John G. Watson dated September 14, Incorporated By
1996.(3) Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Incorporated By
Inc. dated November 1, 1996.(4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated Incorporated By
December 27, 1996.(4) Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated Incorporated By
January 15, 1997.(4) Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Incorporated By
Compensation Plan.(4) Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Incorporated By
Compensation Plan.(4) Reference
*10.21 GalaGen Inc. 1997 Incentive Plan.(6) Incorporated By
Reference
10.22 Master Loan and Security Agreement with TransAmerica Incorporated By
Business Credit Corporation dated June 8, 1997.(7) Reference
10.23 Amended and Restated License Agreement between the Incorporated By
Company and Land O'Lakes dated March 11, 1998.(19) Reference
#10.24 License Agreement between the Company and Metagenics, Incorporated By
Inc. dated April 7, 1998.(20) Reference
10.25 Marketing Agreement between the Company and Nutrition Incorporated By
Medical, Inc., dated September 1, 1998.(21) Reference
10.26 Asset Purchase Agreement between the Company and Incorporated By
Nutrition Medical, Inc., dated September 1, 1998.(21) Reference
*10.27 Letter agreement with John G. Watson dated September 16, Incorporated By
1998.(21) Reference
10.28 Asset Purchase Agreement Amendment 1 between the Company Incorporated By
and Nutrition Medical, Inc., dated October 28, Reference
1998.(22)
10.29 Asset Purchase Agreement Amendment 2 between the Company Incorporated By
and Nutrition Medical, Inc., dated December 23, Reference
1998.(23)
##10.30 Collaboration and License Agreement between the Company Electronic
and American Home Products Corporation acting through Transmission
its Wyeth-Ayerst Laboratories Division, dated October
15, 1998
##10.31 Manufacturing and Supply Agreement between the Company Electronic
and American Home Products Corporation acting through Transmission
its Wyeth-Ayerst Laboratories Division dated October 15,
1998.
##10.32 Product Development Collaboration, Manufacturing and Electronic
Supply, and Retail Marketing Agreement between the Transmission
Company and
28
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
General Nutrition Corporation, dated December 22, 1998
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
13.1 1998 Annual Report to Stockholders Electronic
Transmission
23.1 Consent of Ernst & Young LLP. Electronic
Transmission
27.1 Financial Data Schedule for Year Ended December 31, Electronic
1998. Transmission
27.2 Restated Financial Data Schedule for Quarter ended March Incorporated By
31, 1996.(19) Reference
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to Appendix A to the Company's 1997
Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 (File No. 0-27976).
(8) Incorporated herein by reference to Exhibit No. 4.4 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(9) Incorporated herein by reference to Exhibit No. 4.5 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(10) Incorporated herein by reference to Exhibit No. 4.6 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(11) Incorporated herein by reference to Exhibit No. 4.7 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(12) Incorporated herein by reference to Exhibit No. 4.8 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(13) Incorporated herein by reference to Exhibit No. 4.9 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(14) Incorporated herein by reference to Exhibit No. 4.10 to the Company's
Registration Statement on Form S-3(Registration No. 333-41151).
29
(15) Incorporated herein by reference to Exhibit No. 4.11 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(16) Incorporated herein by reference to Exhibit No. 4.12 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(17) Incorporated herein by reference to Exhibit No. 4.13 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(18) Incorporated herein by reference to Exhibit No. 4.14 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(19) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1997 (File No. 0-27976).
(20) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1998 (File No. 0-27976).
(21) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended September
30, 1998 (File No. 0-27976).
(22) Incorporated herein by reference to Exhibit No. 2.2 to the Company's
Report on Form 8-K, dated December 23, 1998 (File No. 0-27976).
(23) Incorporated herein by reference to Exhibit No. 2.3 to the Company's
Report on Form 8-K, dated December 23, 1998 (File No. 0-27976).
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
# Contains portions for which confidential treatment has been granted
to the Company.
## Contains portions of which confidential treatment has been applied
for by the Company.
(d) Valuation and Qualifying Accounts:
Balance at Charged to Balance at end
beginning of Costs and of period
period Expenses Deductions
Year Ended December 31, 1998:
Allowance for returns and doubtful accounts - $14,020 - $14,020
----------- ----------- ---------- --------------
Total - $14,020 - $14,020
----------- ----------- ---------- --------------
Year Ended December 31, 1997:
Total - - - -
----------- ----------- ---------- --------------
Year Ended December 31, 1996:
Total - - - -
----------- ----------- ---------- --------------
30
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, on
March 31, 1999.
GALAGEN INC.
By /s/ Robert A. Hoerr
-----------------------------------
Robert A. Hoerr, M.D., Ph.D.
Chief Executive Officer
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 the capacities indicated on March 31, 1999.
/s/ Robert A. Hoerr
-----------------------------------------------------
Robert A. Hoerr, Chairman and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ Gregg A. Waldon
-----------------------------------------------------
Gregg A. Waldon, Vice President, Chief Financial
Officer, Treasurer and Secretary (Principal Financial
Officer and Principal Accounting Officer)
/s/ Henry J. Cardello
-----------------------------------------------------
Henry J. Cardello, President and Director
/s/ Ronald O. Ostby
-----------------------------------------------------
Ronald O. Ostby, Director
/s/ R. David Spreng
-----------------------------------------------------
R. David Spreng, Director
/s/ Winston R. Wallin
-----------------------------------------------------
Winston R. Wallin, Director
31
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
3.2 Restated Certificate of Incorporation of the Company.(3) Incorporated By
Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen Common Stock Certificate.(1) Incorporated By
Reference
4.6 Form of Common Stock Warrant to purchase shares of Common Incorporated By
Stock of the Company, issued in connection with the sale Reference
of Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Incorporated By
Convertible Preferred Stock of the Company issued to Reference
Chiron Corporation, dated March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Incorporated By
Convertible Preferred Stock of the Company issued to Reference
Chiron Corporation, dated March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Incorporated By
Convertible Preferred Stock of the Company issued to Reference
Chiron Corporation, dated March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Incorporated By
Convertible Preferred Stock of the Company issued to Reference
Chiron Corporation, dated March 29, 1995.(1)
4.11 Warrant to purchase 18,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds VI, Inc. (IAI Reference
Emerging Growth Fund), dated January 30, 1996.(1)
4.12 Warrant to purchase 6,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds IV, Inc. (IAI Reference
Regional Fund), dated January 30, 1996.(1)
4.13 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to John Pappajohn, dated February 2, Reference
1996.(1)
4.14 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Edgewater Private Equity Fund, L.P., Reference
dated February 2, 1996.(1)
4.15 Warrant to purchase 10,000 shares of Common Stock of the Incorporated By
Company issued to Joseph Giamenco, dated February 2, Reference
1996.(1)
4.16 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Gus A. Chafoulias, dated February 2, Reference
1996.(1)
4.17 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to JIBS Equities, dated February 2, Reference
1996.(1)
4.18 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Land O'Lakes, Inc., dated February 2, Reference
1996.(1)
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
4.19 6% Convertible Debenture Purchase Agreement dated Incorporated By
November 18, 1997 among the Company and the Purchasers Reference
named therein.(8)
4.20 Registration Rights Agreement dated November 18, 1997 Incorporated By
among the Company and the Holders named therein.(9) Reference
4.21 6% Convertible Debenture due May 18, 1999 issued to CPR Incorporated By
(USA) Inc. dated November 18, 1997.(10) Reference
4.22 6% Convertible Debenture due May 18, 1999 issued to Incorporated By
Libertyview Plus Fund dated November 18, 1997.(11) Reference
4.23 6% Convertible Debenture due May 18, 1999 issued to Incorporated By
Libertyview Fund, LLC dated November 18, 1997.(12) Reference
4.24 Stock Purchase Warrant issued to CPR (USA) Inc. dated Incorporated By
November 18, 1997.(13) Reference
4.25 Stock Purchase Warrant issued to Libertyview Plus Fund Incorporated By
dated November 18, 1997.(14) Reference
4.26 Stock Purchase Warrant issued to Libertyview Fund, LLC Incorporated By
dated November 18, 1997.(15) Reference
4.27 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(16) Reference
4.28 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(17) Reference
4.29 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(18) Reference
4.30 Warrant issued to Henry J. Cardello dated as of April 13, Incorporated By
1998. (20) Reference
4.31 Warrant issued to Henry J. Cardello dated as of April 30, Incorporated By
1998. (20) Reference
4.32 Warrant issued to Henry J. Cardello dated as of June 19, Incorporated By
1998. (20) Reference
4.33 Warrant issued to William Young and Rebecca Young dated Electronic
as of August 12, 1998. Transmission
4.34 Warrant issued to Henry J. Cardello dated as of September Electronic
30, 1998. Transmission
4.35 Warrant issued to American Home Products Corporation Electronic
dated as of October 15, 1998. Transmission
#10.1 License Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
#10.2 Royalty Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
#10.3 Supply Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
10.4 Master Services Agreement between the Company and Land Incorporated By
O'Lakes dated May 7, 1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended. (5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Company Incorporated By
and Chiron Corporation dated March 20, 1995.(1) Reference
#10.8 License and Collaboration Agreement between the Company Incorporated By
and Chiron Corporation dated March 20, 1995.(1) Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended.(2) Incorporated By
Reference
10.10 Credit Agreement between the Company and Norwest Bank Incorporated By
Minnesota, N.A., dated as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Leasing Incorporated By
Corporation, dated June 5, 1996. (2) Reference
10.12 Master Equipment Lease between the Company and Cargill Incorporated By
Leasing Corporation, dated June 6, 1996. (2) Reference
10.13 Agreement for Progress Payments between the Company and Incorporated By
Cargill Leasing Corporation, dated June 6, 1996. (2) Reference
10.14 Agreement for Lease between the Company and Land O'Lakes, Incorporated By
dated June 3, 1996. (2) Reference
*10.15 Letter agreement with John G. Watson dated September 14, Incorporated By
1996. (3) Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Inc. Incorporated By
dated November 1, 1996. (4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated Incorporated By
December 27, 1996. (4) Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated Incorporated By
January 15, 1997. (4) Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Incorporated By
Compensation Plan. (4) Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Incorporated By
Compensation Plan. (4) Reference
*10.21 GalaGen Inc. 1997 Incentive Plan. (6) Incorporated By
Reference
10.22 Master Loan and Security Agreement with TransAmerica Incorporated By
Business Credit Corporation dated June 8, 1997. (7) Reference
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
10.23 Amended and Restated License Agreement between the Incorporated By
Company and Land O'Lakes dated March 11, 1998. (19) Reference
#10.24 License Agreement between the Company and Metagenics, Incorporated By
Inc. dated April 7, 1998. (20) Reference
10.25 Marketing Agreement between the Company and Nutrition Incorporated By
Medical, Inc., dated September 1, 1998. (21) Reference
10.26 Asset Purchase Agreement between the Company and Incorporated By
Nutrition Medical, Inc., dated September 1, 1998.(21) Reference
*10.27 Letter agreement with John G. Watson dated September 16, Incorporated By
1998.(21) Reference
10.28 Asset Purchase Agreement Amendment 1 between the Company Incorporated By
and Nutrition Medical, Inc., dated October 28, 1998.(22) Reference
10.29 Asset Purchase Agreement Amendment 2 between the Company Incorporated By
and Nutrition Medical, Inc., dated December 23, Reference
1998.(23)
##10.30 Collaboration and License Agreement between the Company Electronic
and American Home Products Corporation acting through its Transmission
Wyeth-Ayerst Laboratories Division, dated October 15,
1998
##10.31 Manufacturing and Supply Agreement between the Company Electronic
and American Home Products Corporation acting through its Transmission
Wyeth-Ayerst Laboratories Division dated October 15,
1998.
##10.32 Product Development Collaboration, Manufacturing and Electronic
Supply, and Retail Marketing Agreement between the Transmission
Company and General Nutrition Corporation, dated December
22, 1998
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
13.1 1998 Annual Report to Stockholders Electronic
Transmission
23.1 Consent of Ernst & Young LLP. Electronic
Transmission
27.1 Financial Data Schedule for Year Ended December 31, 1998. Electronic
Transmission
27.2 Restated Financial Data Schedule for Quarter ended March Incorporated By
31, 1996. (19) Reference
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to Appendix A to the Company's 1997
Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 (File No. 0-27976).
(8) Incorporated herein by reference to Exhibit No. 4.4 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(9) Incorporated herein by reference to Exhibit No. 4.5 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(10) Incorporated herein by reference to Exhibit No. 4.6 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(11) Incorporated herein by reference to Exhibit No. 4.7 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(12) Incorporated herein by reference to Exhibit No. 4.8 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(13) Incorporated herein by reference to Exhibit No. 4.9 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(14) Incorporated herein by reference to Exhibit No. 4.10 to the Company's
Registration Statement on Form S-3(Registration No. 333-41151).
(15) Incorporated herein by reference to Exhibit No. 4.11 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(16) Incorporated herein by reference to Exhibit No. 4.12 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(17) Incorporated herein by reference to Exhibit No. 4.13 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(18) Incorporated herein by reference to Exhibit No. 4.14 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(19) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1997 (File No. 0-27976).
(20) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1998 (File No. 0-27976).
(21) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended September
30, 1998 (File No. 0-27976).
(22) Incorporated herein by reference to Exhibit No. 2.2 to the Company's
Report on Form 8-K, dated December 23, 1998 (File No. 0-27976).
(23) Incorporated herein by reference to Exhibit No. 2.3 to the Company's
Report on Form 8-K, dated December 23, 1998 (File No. 0-27976).
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
# Contains portions for which confidential treatment has been granted to
the Company.
## Contains portions of which confidential treatment has been applied for
by the Company.