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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
COMMISSION FILE NUMBER: 0-4136
</TABLE>
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LIFECORE BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-0948334
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
</TABLE>
3515 LYMAN BOULEVARD
CHASKA, MINNESOTA 55318-3051
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 368-4300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.01 STATED VALUE)
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $95,000,000 at August 28, 1995 when the last sale
price of such stock, as reported by the Nasdaq National Market, was $12.25.
The number of shares outstanding of the Registrant's Common Stock, $.01
stated value, as of August 28, 1995 was 7,985,292 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
GENERAL
Lifecore Biomedical, Inc. ("Lifecore" or the "Company") develops,
manufactures and markets surgically implantable materials and devices through
its two divisions, the Hyaluronate Division and the Oral Restorative Division.
The Company's Hyaluronate Division is principally involved in the
development and manufacture of products utilizing hyaluronate, a
naturally-occurring carbohydrate which moisturizes or lubricates the soft
tissues of the body. Due to its widespread presence in body tissues and its high
degree of biocompatibility, the Company believes that hyaluronate can be used
for a wide variety of medical applications. The Company produces hyaluronate
synthetically through a proprietary fermentation process. Currently, the primary
commercial use for the Company's hyaluronate is as a component in ophthalmic
surgical solutions for cataract surgery. The Company is involved in a major
development project with Ethicon, Inc., a wholly owned subsidiary of Johnson &
Johnson ("Ethicon"), for a product to reduce the incidence of post-surgical
adhesions. Lifecore is pursuing the development of several other synthesized
versions of hyaluronate through its strategic alliances with a number of
corporate partners for a variety of veterinary, drug delivery, wound care and
urology applications. The Company also leverages its specialized hyaluronate
manufacturing skills to produce non-hyaluronate products for medical
applications.
The Company's Oral Restorative Division designs and markets a comprehensive
line of titanium-based dental implants for the replacement of lost or extracted
teeth. In May 1992, the Company acquired the Sustain Dental Implant System from
Bio-Interfaces, Inc. ("BII") and subsequently, in July 1993, acquired Implant
Support Systems, Inc. ("ISS"), the manufacturer of the Restore Dental Implant
System and the ISS line of compatible components. The Company has enhanced and
expanded these product lines since their acquisition. The Oral Restorative
Division also manufactures and markets synthetic bone graft substitute products
for the restoration of bone tissue deterioration resulting from periodontal
disease and tooth loss. This Division's products are marketed in the United
States through the Company's direct sales force, in Italy through the Company's
subsidiary, Lifecore Biomedical SpA, and in other countries through
distributors.
HYALURONATE DIVISION
BACKGROUND
Hyaluronate is a critical, naturally-occurring carbohydrate component of the
physiological fluids that lubricate, moisturize or otherwise protect the body's
soft tissues. Due to its widespread presence in tissues and its high degree of
biocompatibility, the Company believes that hyaluronate can be used for a wide
variety of medical applications.
Hyaluronate (also referred to as hyaluronan, hyaluronic acid and sodium
hyaluronate) was first demonstrated to have commercial medical utility as a
viscoelastic (elastic yet fluid) solution in cataract surgery. In this
application, its use for coating and lubricating during the implantation of
intraocular lenses dramatically improved then existing surgical success rates.
An ophthalmic hyaluronate product, produced by extraction from rooster comb
tissue, initially became commercially available in the United States in 1981.
Hyaluronate-based products, produced both by rooster comb extraction and by
fermentation processes such as the Company's, have since gained widespread
acceptance among ophthalmologists and are currently used in the majority of
cataract procedures in the United States.
Other hyaluronate applications currently being investigated include general
surgery (prevention of post-surgical adhesions), cardiovascular (coating of
catheters), drug delivery (as a vehicle to carry
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antibiotics and wound healing agents), orthopedic (treatment of traumatic
arthritis), urology (treatment of interstitial cystitis) and veterinary (storage
of fertilized embryos for artificial insemination; orthopedics). The Company
believes that the use of hyaluronate for post-surgical adhesion prevention
currently represents the most significant potential application for hyaluronate.
STRATEGY
The Company intends to use its proprietary large scale fermentation process
to be a leader in the development of hyaluronate based products for multiple
applications. The Company's strategies for achieving this goal are as follows:
- ESTABLISH STRATEGIC ALLIANCES WITH MARKET LEADERS. The Company will
continue to develop applications for products with partners which have
strong marketing, sales and distribution capabilities to end-user markets.
The Company currently has established relationships with Alcon
Laboratories, Inc. ("Alcon"), Ethicon and Chiron Vision, Inc., market
leaders in the fields of ophthalmics and surgical products.
- EXPAND MEDICAL APPLICATIONS FOR HYALURONATE. The Company is currently
pursuing a broad range of applications in general surgery, veterinary,
drug delivery, wound care and urology. Due to the growing knowledge of the
unique characteristics of hyaluronate, the Company intends to continue to
identify and pursue further uses for hyaluronate in medical applications.
- MAINTAIN FLEXIBILITY IN PRODUCT DEVELOPMENT AND SUPPLY RELATIONSHIPS. The
Company's vertically integrated development and manufacturing capabilities
allow it to establish a variety of relationships with large corporate
partners, ranging from its role as a supplier of raw materials to the
development of its own proprietary finished aseptically packaged products.
- LEVERAGE SPECIALIZED HYALURONATE MANUFACTURING SKILLS. The Company uses
its viscous fluid handling and aseptic packaging skills gained in
producing hyaluronate to manufacture non-hyaluronate products for new
customers.
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HYALURONATE DIVISION PRODUCTS
The following chart summarizes the principal products and development
projects of the Hyaluronate Division, along with their applications and the
companies with which the Company has related strategic alliances:
<TABLE>
<CAPTION>
APPLICATION STRATEGIC ALLIANCE MARKET STATUS*
<S> <C> <C> <C>
GENERAL SURGERY
- ----------------------------
Lubricoat-TM- 0.5% Ferric Lifecore's proprietary product Adhesion Human clinical trials
Hyaluronate Gel under development; Ethicon has prevention commenced in May 1995
exclusive marketing rights
OPHTHALMIC
- ----------------------------
Viscoat-Registered Trademark- Lifecore supplies proprietary Cataract surgery Commercial sales since
Ophthalmic Viscoelastic hyaluronate powder for 1983
Solution inclusion in Alcon
Laboratories' Viscoat
viscoelastic solution
Amvisc-Registered Trademark- Lifecore supplies viscoelastic Cataract surgery Lifecore export
and Amvisc solution syringes to Chiron shipments to commence
Plus-Registered Trademark- Vision, Inc., which owns in fourth quarter 1995;
Ophthalmic Solutions rights to, and markets, Chiron's PMA supplement
products in progress
Lurocoat-Registered Trademark- Lifecore's proprietary Cataract surgery IDE approved
Ophthalmic Solution viscoelastic solution
syringes; negotiating private
label relationships
Ophthalmic gel Lifecore supplies syringes of Refractive surgery Storz preparing IDE
non-hyaluronate gel to Storz application
Ophthalmics, Inc., which owns
rights to, and will market,
product
Caprogel-TM- Topical Lifecore to supply syringes of Ocular bleeding Orphan Medical's human
Aminocaproic Acid aminocaproic acid to Orphan (hyphema) clinical trials
Medical, Inc., which owns commenced in 1994
rights to, and will market,
product
OTHER APPLICATIONS
- ----------------------------
MAP-5-TM- Embryo Lifecore supplies hyaluronate Veterinary Commercial sales since
Cryopreservation Solution solution in vials to artificial 1994
Vetrepharm, Inc., which owns insemination
rights to, and markets,
product
Cystistat-TM- Urological Lifecore supplies proprietary Urological Bioniche's human
Irrigation Solution hyaluronate powder for irrigation clinical trials
inclusion in Bioniche's commenced in Canada in
Cystistat product 1995
</TABLE>
* For many of the products or projects listed above, government regulatory
approvals and significant development work are required before commercial
sales can commence in the United States or elsewhere. See "Government
Regulation." No assurance can been given that such products will be
successfully developed or marketed.
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ADHESION PREVENTION DEVELOPMENT PROJECT WITH ETHICON
The Company is developing a hyaluronate product, Lubricoat-TM- 0.5% Ferric
Hyaluronate Gel, for potential application in reducing the incidence of
post-surgical adhesions. Ethicon has world-wide, exclusive distribution rights
for Lubricoat Gel.
Following surgical procedures, fibrous tissue, or adhesions, commonly form
as part of the body's natural healing process resulting from trauma to tissues
or organs during surgery. Particularly with respect to abdominal,
cardiovascular, orthopedic, reproductive tract, and thoracic surgeries, these
adhesions may cause internal complications that can require costly follow-up
surgical intervention. For example, adhesions following reproductive tract
surgery can cause infertility, while adhesions following abdominal surgery can
cause life threatening bowel obstructions.
Of the approximately 20 million surgical procedures estimated by government
sources to be performed annually in the United States, the Company believes that
there are at least eight million procedures where patients could benefit from
the use of an anti-adhesion product. The Company believes an equal or greater
number of surgical procedures are performed outside the United States. The
Company is initially focusing on the development of Lubricoat Gel for use in
abdominal surgeries, due to the frequency and severity of resulting adhesions.
Industry sources indicate that 5.7 million abdominal procedures are performed in
the United States each year. The reported incidence of resulting adhesions
ranges from 35 to 90 percent.
In 1989, the Company began working with Ethicon on anti-adhesion products
being developed by Ethicon using the Company's Tenalure-TM- Sodium Hyaluronate
formulation. Starting in 1990, Ethicon conducted a series of human clinical
studies with Tenalure hyaluronate, designed to demonstrate the effectiveness of
a hyaluronate solution in the reduction of post-surgical adhesions. These
double-blinded, placebo-controlled, multi-center studies involved over 300
patients. In these clinical studies, Tenalure hyaluronate demonstrated the
ability to reduce the incidence of adhesions, but the degree of adhesion
reduction fell short of Ethicon's efficacy goals. Tenalure hyaluronate was
observed to have a greater effect in areas where the hyaluronate pooled after
the completion of surgery. With that knowledge, the companies re-formulated
Tenalure hyaluronate into a second generation product, Lubricoat Gel, designed
to coat and remain in contact with tissues for a longer time after surgery. This
reformulation involved the ionic cross-linking of hyaluronate with an iron
compound to enhance coating properties. The companies then tested Lubricoat Gel
in animal models designed to pose a greater adhesion challenge by employing a
more severe surgical wound than the studies using Tenalure hyaluronate. The
results of the animal trials using Lubricoat Gel showed significant improvement
over those of Tenalure hyaluronate.
In order to accelerate development of the anti-adhesion project, the
companies, at that time, decided to shift responsibility for completion of this
project to Lifecore. Lifecore subsequently completed the preclinical studies and
submitted an application to the United States Food and Drug Administration
("FDA") for an Investigational Device Exemption ("IDE") to begin human clinical
trials to evaluate the safety and efficacy of Lubricoat Gel. In April 1995, the
FDA approved the IDE. The first phase of human clinical trials, involving
approximately 25 patients, commenced in May 1995 and is expected to be completed
by late 1995. Assuming successful completion of the first phase, and following
consultation with the FDA regarding the design of the subsequent pivotal trial,
the Company expects to begin the pivotal trial in late 1995 or early 1996. The
pivotal phase is expected to involve up to 200 patients in a blinded study at
multiple clinical sites. If the pivotal trial is successful, a Pre-Market
Approval ("PMA") will be required from the FDA prior to commercialization. There
can be no assurance that the results of these clinical trials will be positive
or that a PMA will be obtained. See "Government Regulation."
To carry out the shift of responsibility for development of this project to
Lifecore, the Company and Ethicon entered into a Conveyance, License,
Development and Supply Agreement (the "Ethicon Agreement") in August 1994. The
Ethicon Agreement transferred to the Company the intellectual property developed
to date from the anti-adhesion project, including pending patent rights and data
5
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from research, product development, clinical safety and efficacy, and marketing
evaluations. The Company assumed responsibility for continuing the development
project, including conducting human clinical trials with Lubricoat Gel.
Furthermore, the Company granted Ethicon exclusive world-wide marketing rights
to Lubricoat Gel for post-surgical adhesion prevention and orthopedic
applications in return for an exclusive supply contract through 2008 with
provisions for renewal. The Company currently receives certain technical support
from Ethicon for a specified annual fee under the provisions of an associated
consulting agreement. Under this agreement, the primary Ethicon scientist
responsible for supervising the anti-adhesion project since its inception
dedicates 100% of his time to the project as a consultant and reports directly
to Lifecore management.
Concurrently with the execution of the Ethicon Agreement, Johnson & Johnson
Development Corporation ("JJDC"), an affiliate of Ethicon, purchased 757,396
unregistered shares of the Company's Common Stock for $4 million in total
consideration, including $2.6 million in cash and $1.4 million in conversion of
previous product advances. In addition, another affiliate of Johnson & Johnson
has provided lease financing for certain of the Company's equipment, which is
primarily related to the Lubricoat Gel project.
OPHTHALMIC APPLICATIONS
CATARACT SURGERY. Currently, the primary commercial application for the
Company's hyaluronate is in cataract surgery. During the process of cataract
surgery, hyaluronate in a viscoelastic solution is used to coat and lubricate
the anterior chamber of the eye during the implantation of an intraocular lens.
These solutions have been shown to reduce surgical trauma and thereby contribute
to more rapid recovery with fewer complications than were experienced prior to
the use of viscoelastics. The Company currently sells hyaluronate for this
application to two customers, Alcon and Chiron Vision, Inc., a subsidiary of
Chiron Corporation ("Chiron Vision"). Lifecore also is developing its own
proprietary product, Lurocoat-Registered Trademark- Ophthalmic Solution, for
this application. The Company believes Alcon and Chiron Vision are the two
leading producers of ophthalmic surgical products in the world, and are two of
the three leading producers of viscoelastic solutions in the world.
Hyaluronate based products are used in the majority of cataract surgeries in
the United States. The Company estimates that the world-wide market for
hyaluronate for cataract surgery, on a patient cost basis, is approximately $160
million per year and is relatively stable. However, the market share of products
using fermented hyaluronate has increased relative to the market share of
products using hyaluronate extracted from rooster combs.
Alcon purchases the Company's hyaluronate for inclusion in
Viscoat-Registered Trademark- Ophthalmic Viscoelastic Solution, which is used
during cataract surgery. The Company's relationship with Alcon and its
predecessors commenced in 1983, when the Company's hyaluronate was specified as
a raw material component of the Viscoat product, which the FDA approved in 1986.
Until 1990, Alcon's predecessors had the exclusive rights to purchase the
Company's hyaluronate for ophthalmic applications. In 1990, the arrangement with
Alcon became non-exclusive. Since that time, sales of hyaluronate to Alcon have
continued to be made pursuant to supply agreements. The current Alcon supply
agreement, as renewed in November 1994, is for a term of four years through
December 31, 1998. The agreement contains minimum purchase requirements
totalling $10.4 million, consisting of $3.2 million in calendar year 1995 and
$2.4 million in each of calendar years 1996 through 1998. At the time the
agreement was renewed, the Company received a $6.3 million cash advance from
Alcon against future purchases.
In December 1994, the Company entered into a supply agreement with Chiron
Vision. Under the agreement, the Company has been selling its hyaluronate to
Chiron Vision in packaged syringes in connection with two of Chiron Vision's
ophthalmic viscoelastic surgical products, Amvisc-Registered Trademark- and
Amvisc Plus-Registered Trademark- Ophthalmic Solutions. The Company has
validated its manufacturing facility to produce these products, and Chiron
Vision is in the process of supplementing its FDA filings to seek approval of
the Company's facility for these products. The sale by Chiron Vision in the
United States of Amvisc and Amvisc Plus syringes supplied by the Company is
dependent upon such FDA approval. In August 1995, the Company received orders
from Chiron Vision for shipments of finished products to
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Europe commencing in fourth quarter 1995. The Company had not anticipated
commercial sales of these products until 1997. The Company believes this
acceleration was due to Chiron Vision's strategic acceleration of plans for
these products and the Company's receipt of ISO 9001 certification.
The Company is in the process of independently developing its own
viscoelastic solution, Lurocoat Solution, and has received an IDE from the FDA
to clinically evaluate that product for ophthalmic surgical use. The Company is
currently negotiating private label agreements with potential distributors
outside the United States. Clinical evaluation is not expected to begin until
private label agreements have been completed.
NON-HYALURONATE OPHTHALMIC APPLICATIONS
In its work with hyaluronate, the Company developed specialized skills in
filling syringes and vials with materials that, due to their perishable nature
or complex viscous handling properties, often could not be sterilized and
required rigorous aseptic manufacturing and packaging protocols. The Company is
leveraging these skills to initiate development projects for the manufacture of
non-hyaluronate products in the areas of refractive surgery and hyphema.
REFRACTIVE SURGERY. The Company is developing a manufacturing process with
Storz Ophthalmics, Inc., a subsidiary of American Home Products, Inc. ("Storz"),
to produce a non-hyaluronate gel product currently under development for use in
refractive surgery for myopia (near-sightedness). Industry sources estimate that
the current world-wide refractive surgery market, on a patient cost basis,
exceeds $900 million.
The current refractive surgery procedure for correcting myopia involves a
surgical incision of the cornea which weakens and relaxes the outer curvature
and achieves a corresponding correction of the eye's focusing mechanism. This
approach permanently weakens the eye, reduces long-term visual acuity due to
corneal scarring, has limited effectiveness with astigmatism, and can be
painful. Storz is developing a gel to be injected into the peripheral region of
the cornea, between the inner and outer layers, thereby changing the corneal
curvature to achieve vision correction without weakening the eye's structure.
Other potential advantages of this approach are the opportunity for reversing
the procedure, as well as using repeat injections to adjust the vision
correction over the patient's lifetime. In June 1995, the Company began
providing process development, manufacturing scale-up, validation and clinical
trial samples to Storz for the gel product. Storz must successfully complete
clinical trials and receive a PMA from the FDA prior to commercial sales of its
product in the United States. If successfully developed, the Company expects to
continue to provide manufacturing services to Storz.
TREATMENT OF OCULAR HYPHEMA. In January 1995, the Company signed an
agreement with Orphan Medical, Inc. ("OMI") to provide OMI's Caprogel-TM-
Topical Aminocaproic Acid in aseptically packaged syringes. Caprogel is a
non-hyaluronate product for the topical treatment of ocular hyphema (internal
bleeding of the eye), which can lead to retinal damage and blindness.
Aminocaproic acid has been administered in other areas of the body to alleviate
the side effects of bleeding, but has not been successfully developed for the
eye. OMI received orphan drug status from the FDA in 1994 and is proceeding with
its development. Orphan drug status entitles a manufacturer to exclusive
marketing rights for certain products that serve a limited patient population.
The Company is providing contract product development and aseptic packaging for
Caprogel and expects that a subsequent commercial supply phase with a three-year
term will commence upon OMI's commercial introduction of Caprogel. The Company
believes that the world-wide market for ocular hyphema applications, on a
patient cost basis, is approximately $125 million.
OTHER APPLICATIONS
The Hyaluronate Division undertakes its own product development activities
for both hyaluronate based and non-hyaluronate based applications, as well as on
a contract basis with certain clients. The majority of outside projects are
initiated by a client to demonstrate that the Company's
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hyaluronate is suitable for a particular medical application. Suitability is
often measured by detailed specifications for product characteristics such as
purity, stability, viscosity, and molecular weight, as well as efficacy for a
particular medical application.
The Company currently manufactures Vetrepharm, Inc.'s MAP-5-TM- Embryo
Cryopreservation Solution, an aseptically packaged hyaluronate solution, for the
cryopreservation of fertilized animal embryos. MAP-5 Solution is used to
preserve the embryos for transportation to local veterinarians for use in
artificial insemination. Sales to Vetrepharm, Inc. have been made since 1994
pursuant to annual purchase orders which specify the quantity and unit price.
One current area of development involves the use of hyaluronate for
urological irrigation applications. Hyaluronate is being investigated for its
ability to treat an intermittent urination disorder, interstitial cystitis.
Bioniche, Inc., a Canadian medical company, commenced human clinical trials in
1995 for regulatory approval in Canada for Cystistat-TM- Urological Irrigation
Solution, a solution containing the Company's hyaluronate. This product would
require FDA approval prior to commercialization in the United States.
Another area of development activity involves the potential use of
hyaluronate in various drug delivery vehicles. Independent studies conducted by
organizations other than the Company have yielded animal and human data that
indicate hyaluronate has the potential to enhance the delivery of antibiotics,
pain killers, chemotherapeutic agents, and other drugs. For example, a drug
delivery project is being conducted by Johnson & Johnson Medical, Inc., a
subsidiary of Johnson & Johnson, to evaluate Lifecore's hyaluronate as a drug
delivery vehicle to enhance topical wound healing.
There can be no assurance that products which are currently under
development by the Company or others will be successfully developed or, if so
developed, will be successfully and profitably marketed.
ORAL RESTORATIVE DIVISION
BACKGROUND
Dental implants are increasingly used to replace missing or extracted teeth
and to serve as supports for dentures, crowns, and bridges. In comparison to
conventional restorative procedures, dental implants are surgically placed
directly into the jawbone in a manner simulating the anchoring of a tooth by its
root. This better maintains underlying bone structure and provides superior
fixation of restorations, minimizing loosening of fixtures against surrounding
teeth and gingiva. Typically constructed of titanium in a cylindrical or
flattened shape, dental implants generally are categorized by shape and method
of implantation. For example, the threaded cylinder implant is screwed into the
jawbone, while an alternate form, the press-fit cylinder, is placed into a
precision-drilled hole with a friction fit. Additionally, various implant styles
may be spray-coated with hydroxylapatite or metal to enhance bone fixation. The
Company believes the current dental implant market is approximately $110 million
in the United States and $275 million world-wide.
Bone graft substitute products are used for the restoration of bone
deterioration resulting from periodontal disease and tooth loss. Historically,
when bone was needed to fill holes or restore bone loss in a patient, the only
available sources have been bone from cadavers, live donor bone or autologous
bone (from another part of the patient's body). These sources have limitations
related to quality and convenience. The Company has developed a patented process
for the synthetic production of hydroxylapatite, the major inorganic constitute
of natural bone. The Company's hydroxylapatite products provide surgeons with a
readily available synthetic bone substitute of consistent quality at a
competitive cost for periodontal and oral surgery applications. While the
current market for these products is limited (approximately $5 million annually
in the United States), the market is expected to expand with the development of
new products, such as the Company's Capset-TM- Calcium Sulfate Bone Graft
Barrier, for additional applications.
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STRATEGY
The Company intends to be a leader in the oral restorative surgical products
industry. The Company's strategies for achieving this goal are as follows:
- Acquire, enhance, and expand a broad line of dental implants and related
support products.
- Employ aggressive quality control and materials resource planning
techniques to achieve higher efficiencies, resulting in cost-competitive
products.
- Establish an advanced direct sales and marketing network, emphasizing the
integration of information systems technology with superior customer
service.
ORAL RESTORATIVE DIVISION PRODUCTS
The following chart summarizes the principal products of the Company's Oral
Restorative Division:
<TABLE>
<S> <C> <C>
PRODUCT MARKET STATUS
Sustain-Registered Trademark- Replacement of lost or Commercial sales
and extracted teeth
Restore-Registered Trademark-
Dental Implant Systems
Implant Support Systems Precision oral restorative Commercial sales
components compatible with
implants
Repair of jawbone structure Commercial sales
Orthomatrix-Registered Trademark-
Non-resorbable Hydroxylapatite
Bone
Graft Substitute
Hapset-Registered Trademark- Repair of jawbone structure Commercial sales
Hydroxylapatite Bone Graft
Plaster
Capset-TM- Calcium Sulfate Bone Cap for bone graft materials 510(k) granted
Graft Barrier
</TABLE>
IMPLANT PRODUCTS
The Company offers two dental implant systems, the Restore Close Tolerance
Dental Implant System and the Sustain Dental Implant System. The Restore System
is based on a classic threaded titanium implant design that pioneered the
commercialization of these devices in general oral restorative surgery. In July
1993, the Company acquired this system in connection with its acquisition of
Implant Support Systems, Inc., a manufacturer of dental implant products. The
Company has since enhanced and expanded the original ISS line into a broad range
of implant options, marketed under the Restore System name. Included in the ISS
acquisition was a line of dental implant prosthetic components that the Company
continues to market under the Implant Support Systems brand. These components
are compatible and interchangeable with several other dental implant
manufacturers' systems, as well as miscellaneous dental implant support
products, permitting the Company to market its products to dental offices that
currently use competitors' implant systems.
The Sustain System is based on a newer innovative design that embraces a
press-fit cylinder format with an added "bone-like" hydroxylapatite coating. In
May 1992, the Company acquired the Sustain System from Bio-Interfaces, Inc.
after serving as an exclusive distributor for the Sustain System since 1990. The
Sustain System is complemented by a proprietary drilling system and a complete
line of prosthetic components.
Lifecore has enhanced and expanded both of these lines, creating new
products with a combination of innovative features from both systems. This gives
the Company one of the broadest lines in the oral restorative industry, offering
practitioners maximum flexibility in choice of treatment modalities with over
800 products.
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BONE GRAFT SUBSTITUTE PRODUCTS
The Company offers three bone graft substitute materials which address
varying degrees of resorbability. The Company's
Orthomatrix-Registered Trademark- Non-resorbable Hydroxylapatite Bone Graft
Substitute is a non-resorbable bone graft substitute used in jawbone repair.
Hapset-Registered Trademark- Hydroxylapatite Bone Graft Plaster is a moldable,
partially resorbable form of hydroxylapatite that can be contoured into
desirable shapes prior to or during implantation. Hapset Plaster is a
combination of the Company's hydroxylapatite and a proprietary form of calcium
sulfate which has been patented by United States Gypsum Company ("USG"). Under a
license agreement with USG, the Company pays a royalty to USG based on certain
sales of Hapset Plaster. The Company has also entered into a supply agreement
under which USG furnishes its calcium sulfate to the Company for world-wide use
in Hapset Plaster.
The Company recently obtained FDA 510(k) clearance of Capset Barrier, a bone
graft barrier that is fully resorbable and also made from proprietary calcium
sulfate supplied by USG. Capset Barrier serves as a cap placed over the site of
a bone defect to inhibit the migration of bone graft materials used in the
underlying repair.
PRODUCT DEVELOPMENT
The Oral Restorative Division is also involved in product development
activities to improve existing components and packaging and to add new
components to the dental implant systems. These development activities enhance
the suitability and ease of use of the products for specific surgical
applications and reflect changing trends in dental implant technology. In
addition, the Division hopes to expand the market for its family of bone graft
substitutes. There can be no assurance, however, that products which are
currently under development by the Company will be successfully developed, or if
so developed, will be successfully and profitably marketed.
SALES AND MARKETING
HYALURONATE DIVISION PRODUCTS
The Company generally markets and distributes its hyaluronate products to
end-users through corporate partners. The Company sells hyaluronate to these
partners in a variety of forms, including powders, gels and solutions which are
packaged either in bulk jars, vials, or syringes. The Company sells its
ophthalmic grade hyaluronate powder to Alcon for Alcon's Viscoat solution and
has commenced the supply of Chiron Vision's Amvisc and Amvisc Plus products with
purchase orders that call for shipments to Europe beginning in fourth quarter
1995. In addition, the Company manufactures and packages a non-hyaluronate
ophthalmic gel for Storz pursuant to a development agreement and anticipates
entering into a supply relationship upon the completion of successful clinical
testing. The Company also sells vials of hyaluronate solution for embryo
cryopreservation to Vetrepharm, Inc.
The Company has an agreement with Ethicon for exclusive distribution of
Lubricoat Gel. The Company believes that Ethicon is the worldwide market leader
in the area of surgical products and has one of the largest marketing and sales
forces in the industry. Commercialization of Lubricoat Gel is dependent on
completion of clinical trials, receipt of FDA marketing approval, successful
manufacturing of commercial quantities, and the efforts of Ethicon to develop
the market for the product. No assurance can be given that any or all of these
conditions will be met.
The Company also sells various forms of medical grade hyaluronate directly
to third parties for development and evaluation of new applications to be
marketed and distributed through those companies' distribution systems or a
jointly developed distribution system.
ORAL RESTORATIVE DIVISION PRODUCTS
The Company is focused on expanding its product line in the Oral Restorative
Division, improving product quality, and developing an appropriate
infrastructure to support sales growth. Management of the Company believes that
the dental implant market is highly specialized and that its sales force must
have extensive knowledge about the products. The products are marketed to oral
surgeons, periodontists, implantologists, prosthodontists, general dental
practitioners, and dental laboratories. Accordingly, the Company believes that
for proper distribution of these products, it must maintain a
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<PAGE>
direct sales force in major markets in the United States. The Company believes
that its sales force offers better customer service and a higher level of
quality and regulatory control than could be achieved through an independent
distributor network in the United States. The Company employs thirteen direct
salespersons in the United States and four U.S.-based salespersons dedicated to
international sales. The Oral Restorative Division products are marketed
internationally through 18 distributors. In addition, the products are marketed
in Italy through its subsidiary, Lifecore Biomedical SpA, which currently
utilizes five sales agents.
The Company's marketing activities are designed to support its direct sales
force and include advertising and product publicity in trade journals, direct
mail catalogs, newsletters, continuing education programs, telemarketing, and
attendance at trade shows and professional association meetings.
MANUFACTURING
The commercial production of hyaluronate by the Company requires
fermentation, separation and purification capabilities, and aseptic packaging of
product in a variety of formats. In addition, the production of the Lubricoat
Gel formulation requires high volume precision mixing of viscous fluids.
The Company produces its hyaluronate through a proprietary process of
fermentation. Until the introduction of the Company's medical grade hyaluronate,
the only commercial source for medical hyaluronate was through an animal
rendering process of extraction from rooster combs. The Company believed that
the rooster comb extraction method would not be capable of producing large
quantities of hyaluronate in an efficient manner if the use of medical grade
hyaluronate greatly increased. Consequently, the Company developed its
proprietary fermentation process for hyaluronate using existing knowledge of
other successful fermentation manufacturing processes. The Company believes that
the fermentation manufacturing approach is superior to rooster comb extraction
because of greater efficiency, flexibility, and better economies of scale in
producing large commercial quantities.
The Company has invested approximately $9 million in the construction of a
66,000 square foot facility primarily for the Company's proprietary hyaluronate
manufacturing process. The Company currently uses only a fraction of its
fermentation manufacturing capacity. The Company has purposely built excess
capacity because it believes that the potential applications for hyaluronate, if
substantiated, could require significant volumes of product. In addition,
several corporate partners have required that the Company validate its
manufacturing capability to fulfill forecasted production requirements by
creating additional capacity and periodically operating at higher capacity
levels. Lifecore believes its flexible, expandable capacity has been a critical
factor in attracting strategic relationships.
The Company's modular facility provides versatility in the simultaneous
manufacturing of various types of finished products. Currently the Company
supplies several different formulations of hyaluronate (e.g., varied molecular
weight fractions) in powders, solutions and gels, and in a variety of finished
packages, including bulk jars, vials and syringes. The Hyaluronate Division is
continuously conducting development work relating to the techniques utilized in
hyaluronate manufacturing. Such development activity is designed to improve
production efficiencies and expand the Company's capabilities to achieve a wider
range of hyaluronate product specifications. The Company's specialized fluid
handling and aseptic packaging capabilities also provide the opportunity for the
Company to offer contract packaging for other technically challenging
non-hyaluronate fluids.
The Company's facility was designed to meet applicable regulatory
requirements and has been approved by the FDA for the manufacture of both drug
and device products. The FDA periodically inspects the Company's manufacturing
systems, and requires conformance to the FDA's Good Manufacturing Practices
("GMP") regulations. In addition, the Company's corporate partners are required
by the FDA to conduct intensive regulatory audits of its facilities. The Company
also regularly contracts with independent regulatory consultants to conduct
audits of the Company's operations.
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The Company has received certification of conformance to ISO 9001 Standards and
Medical Device Directives, as well as the COMMISSION EUROPEEN (CE) Mark of
Conformity from TUV Product Services of Munich, Germany. These approvals
represent international symbols of quality system assurance and compliance with
applicable European Medical Device Directives, which greatly assist in the
marketing of the Company's products in the European Union.
The Company uses outside metal finishing vendors to produce its finished
dental implant devices and related components. The Company conducts its own
inspection of vendors and quality assurance functions related to the implant
devices and components and performs its own finished packaging.
The Company purchases materials for its production of hyaluronate and
hydroxylapatite from outside vendors. While these materials are available from a
variety of sources, the Company principally uses limited sources for some of its
key materials to better monitor quality and achieve cost efficiencies. Raw
materials for the Company's bone graft products are supplied exclusively by
United States Gypsum Company, and the Company believes such supplier is able to
provide adequate amounts of the raw materials for such product.
COMPETITION
The competitors of the Company include major chemical, dental, medical, and
pharmaceutical companies, as well as smaller specialized firms. Many of these
companies have significantly greater financial, manufacturing, marketing, and
research and development resources than the Company.
HYALURONATE PRODUCTS
A number of companies produce hyaluronate products and thus directly or
indirectly compete with Lifecore or its corporate partners. Genzyme Corporation
currently sells a high molecular weight hyaluronate which is manufactured
through a fermentation process to the Company's ophthalmic customer, Alcon, for
use in its Provisc-Registered Trademark- solution. Genzyme is developing several
hyaluronate based formulations for surgical anti-adhesion applications and has
received export approval to market an anti-adhesion product in certain European
countries. If Genzyme receives a PMA and the product obtains commercial
acceptance, the Company's prospects for Lubricoat Gel, if and when approved, may
be adversely affected. In addition, there are other companies working on the
development of competitive anti-adhesion products.
In addition to Genzyme, several companies produce hyaluronate through a
fermentation process, including Bio-Technology General Corporation, Kyowa Hakko,
Nippon, and Miles Laboratories. The Company believes that it and Genzyme are the
only fermentation manufacturers with the current capability to produce large
commercial quantities of medical grade hyaluronate under GMP conditions. In
addition, several companies manufacture hyaluronate by using rooster comb
extraction methods. These companies primarily include Anika Research, Inc.,
Biomatrix, Inc., Chesapeake Biological Labs, Fidia SpA, and Kabi Pharmacia AB.
The Company believes that its patented fermentation process may offer production
and regulatory advantages over the traditional rooster comb extraction method.
The Company's competitors have filed or obtained patents covering aspects of
fermentation production or uses of hyaluronate. These patents may cover the same
applications as the Company's. Although there can be no assurance, the Company
believes that it does not infringe the patents of its competitors. See "Patents
and Proprietary Rights."
The Company believes that competition in the ophthalmic and medical grade
hyaluronate market is primarily based on product performance and manufacturing
capacity, as well as product development capabilities. Future competition may be
based on the existence of established supply relationships, regulatory
approvals, intellectual property, and product price. After a manufacturer has
taken a product through the FDA marketing approval process, a change in
suppliers can involve significant cost and delay because significant
manufacturing issues may be encountered and supplemental FDA review may be
required.
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ORAL RESTORATIVE PRODUCTS
The dental implant market is also highly competitive. Major market
competitors include Calcitek, Inc. (a subsidiary of Intermedics, Inc.),
Dentsply, Inc., Implant Innovations, Inc., Interpore, Inc., Nobelpharma AB and
Steri-Oss (a Bausch & Lomb Company). A number of these competitors are
established companies with dominant market shares. The Company believes that
competition in the dental implant market is primarily based on product
performance, supply of a broad product line, field sales support, customer
service, innovation and price.
The Company believes that its primary advantage is in an expanding product
line of over 800 products centered around the Restore and Sustain Systems that
address the breadth of current and developing dental implant treatment
modalities. In addition, to ensure quality, the Company distinguishes itself
from its competitors by inspecting all critical tolerances on every implant.
Also, the FDA has in recent years increased its scrutiny of dental implant
products. The Company believes its internal regulatory capabilities enhance its
ability to deal with the regulatory process, which may give the Company a
competitive advantage. No assurance can be given, however, that the Company can
effectively compete with manufacturers of dental implant systems having larger,
established distribution networks.
The market for the Company's bone graft substitute products is also
competitive. The major competitors include synthetic product manufacturers such
as Calcitek, Inc., Interpore, Inc., Ceramed Corporation and Miter, Inc., as well
as natural bone tissue banks, such as Pacific Coast Tissue Bank. The Company
believes that competition in this market is primarily based on product
performance and price.
PATENTS AND PROPRIETARY RIGHTS
The Company pursues a policy of obtaining patent protection for patentable
subject matter in its proprietary technology. In May 1985, the Company received
a United States patent covering certain aspects of its hyaluronate fermentation
process. The Company has also licensed a 1991 patent for the recombinant DNA
encoding of hyaluronate synthase, exclusively in the United States and non-
exclusively outside the United States. In August 1994, in connection with the
Ethicon Agreement, the Company was assigned a pending patent covering the
composition of Lubricoat Gel, with applications filed in the United States,
Australia, Brazil, Canada, Europe, Greece, and Japan. The patent has issued in
Australia. The Company also has a United States patent covering the processes
used in the manufacture of hydroxylapatite and a second patent covering the
hydroxylapatite product produced by that process. The Company also licenses
patented technology used in the production of hydroxylapatite from USG.
The Company believes that patent protection is significant to its business.
However, if other manufacturers were to infringe on its patents, there can be no
assurance that the Company would be successful in challenging, or would have
adequate resources to challenge, such infringement. The Company also relies upon
trade secrets, proprietary know-how and continuing technological innovation to
develop and maintain its competitive position. There can be no assurance that
others will not obtain or independently develop technologies which are the same
as or similar to the Company's technologies. The Company pursues a policy of
requiring employees, temporary staff, consultants and customers (which have
access to some of its proprietary information) to sign confidentiality
agreements. There can be no assurance that the Company will be able to
adequately protect its proprietary technology through patents or other means.
The Company is aware that one or more of its competitors have obtained, or
are attempting to obtain, patents covering fermentation and other processes for
producing hyaluronate. Other patents have been, or may be, issued in the future
in product areas of interest to the Company. Although the Company is not aware
of any claims that its products infringe on patents held by others, no assurance
can be given that there will not be an infringement claim against the Company in
the future. The costs of any Company involvement in legal proceedings could be
substantial, both in terms of legal costs and the time spent by management of
the Company in connection with such proceedings. It is also possible
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that the Company, to manufacture and market some of its products, may be
required to obtain additional licenses, which may require the payment of initial
fees, minimum annual royalty fees and ongoing royalties on net sales. There can
be no assurance that the Company would be able to license technology developed
by others, on favorable terms or at all, that may be necessary for the
manufacture and marketing of its products.
GOVERNMENT REGULATION
Government regulation in the United States and other countries is a
significant factor in the marketing of the Company's products and in the
Company's ongoing research and development activities. The Company's products
are subject to extensive and rigorous regulation by the FDA, which regulates the
products as medical devices, and by foreign countries, which regulate the
products as medical devices or drugs and which, in some cases, require a PMA.
Under the Federal Food, Drug, and Cosmetic Act ("FDC Act"), the FDA regulates
clinical testing, manufacturing, labeling, distribution, sale, and promotion of
medical devices in the United States.
Following the enactment of the Medical Device Amendments of 1976 to the FDC
Act, the FDA classified medical devices in commercial distribution at the time
of enactment ("old devices") into one of three classes -- Class I, II, or III.
This classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of medical devices. Class I devices are those whose
safety and effectiveness can reasonably be ensured through general controls,
such as labeling, premarket notification (the "510(k) Notification"), and
adherence to FDA-mandated current GMP requirements for devices. Class II devices
are those whose safety and effectiveness can reasonably be ensured through the
use of special controls, such as performance standards, post-market
surveillance, patient registries, and FDA guidelines. Class III devices are
devices that must receive a PMA from the FDA to ensure their safety and
effectiveness. Ordinarily, a PMA requires the performance of at least two
independent, statistically significant clinical trials that demonstrate the
device's safety and effectiveness. Class III devices are generally
life-sustaining, life-supporting, or implantable devices, and also include most
devices that were not on the market before May 28, 1976 ("new devices") and for
which the FDA has not made a finding of substantial equivalence based upon a
510(k) Notification. An old Class III device does not require a PMA unless and
until the FDA issues a regulation requiring submission of a PMA application for
the device.
The FDA invariably requires clinical data for a PMA application and has the
authority to require such data for a 510(k) Notification. If clinical data are
necessary, the manufacturer or distributor is ordinarily required to obtain an
IDE authorizing the conduct of human studies. Once in effect, an IDE permits
evaluation of devices under controlled clinical conditions. After a clinical
evaluation process, the resulting data may be included in a PMA application or a
510(k) Notification. The PMA may be approved, or the 510(k) Notification cleared
by the FDA, only after a review process which may include requests for
additional data, sometimes requiring further studies.
If a manufacturer or distributor of medical devices can establish to the
FDA's satisfaction that a new device is substantially equivalent to a legally
marketed Class I or Class II medical device or to a legally marketed Class III
device for which the FDA has not required a PMA, the manufacturer or distributor
may market the new device. In the 510(k) Notification, a manufacturer or
distributor makes a claim of substantial equivalence, which the FDA may require
to be supported by various types of information, including data from clinical
studies, showing that the new device is as safe and effective for its intended
use as the predicate device.
Following submission of the 510(k) Notification, the manufacturer or
distributor may not place the new device into commercial distribution until an
order is issued by the FDA finding the new device to be substantially
equivalent. The FDA has no specific time limit by which it must respond to a
510(k) Notification. The 510(k) Notification process can take up to eighteen
months or more. The FDA may agree with the manufacturer or distributor that the
new device is substantially equivalent to a predicate device, and allow the new
device to be marketed in the United States. The FDA may, however, determine that
the new device is not substantially equivalent and require the manufacturer
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<PAGE>
or distributor to submit a PMA application or require further information, such
as additional test data, including data from clinical studies before it is able
to make a determination regarding substantial equivalence. Although the PMA
process is significantly more complex, time-consuming, and expensive than the
510(k) Notification process, the latter process can also be expensive and
substantially delay the market introduction of a product.
Hyaluronate products are generally Class III devices. In cases where the
Company is supplying hyaluronate to a corporate partner as a raw material or
producing a finished product under a license for the partner, the corporate
partner will be responsible for obtaining the appropriate FDA clearance or
approval. Export of the Company's hyaluronate products requires FDA's
permission, in the form of an export permit, and the approval of the importing
country.
The Sustain System and the Restore System, along with other dental implants,
are categorized as old Class III devices and are eligible for marketing through
510(k) Notifications. The FDA, however, has proposed to require PMAs for dental
implants, and by law must confirm such implants and require PMAs for them or
reclassify them into Class II or Class I. The FDA is expected to make this
decision by December 1, 1995. The Company began clinical trials of its Sustain
System under an IDE in 1990 in anticipation of the possibility that the FDA
would require submission of PMAs for dental implants. The Company's bone graft
products are Class II devices.
Other regulatory requirements are placed on a medical device's manufacture
and the quality control procedures in place, such as the FDA's device GMP
regulations. Manufacturing facilities are subject to periodic inspections by the
FDA to ensure compliance with device GMP requirements. The Company's facility is
subject to inspections as both a device and a drug manufacturing operation.
Other applicable FDA requirements include the medical device reporting
regulation, which requires that the Company provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of its
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur.
If the Company is not in compliance with FDA requirements, the FDA or the
federal government can order a recall, detain the Company's devices, withdraw or
limit 510(k) Notification clearances or PMA approvals, institute proceedings to
seize the Company's devices, prohibit marketing and sales of the Company's
devices, and assess civil money penalties and impose criminal sanctions against
the Company, its officers, or its employees.
There can be no assurance that any of the Company's clinical studies will
show safety or effectiveness; that 510(k) Notifications or PMA applications will
be submitted or, if submitted, accepted for filing; that any of the Company's
products that require clearance of a 510(k) Notification or approval of a PMA
application will obtain such clearance or approval on a timely basis, or at all;
or that following any such clearance or approval previously unknown problems
will not result in restrictions on the marketing of the products or withdrawal
of clearance or approval.
PRODUCT LIABILITY
Product liability claims may be asserted with respect to the Company's
products. In addition, the Company may be subject to claims for products of its
customers which incorporate Lifecore's materials. The Company maintains product
liability insurance coverage of $1.0 million per claim, with an aggregate
maximum of $2.0 million. The Company also carries a $2.0 million umbrella
insurance policy which also covers product liability claims. Lifecore Biomedical
SpA also carries product liability insurance in the amount of $1.0 million per
claim with an aggregate maximum of $2.0 million. The Company carries product
liability insurance for all of its products. However, there can be no assurance
that the Company will have sufficient resources to satisfy product claims if
they exceed available insurance coverage.
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EMPLOYEES
As of July 31, 1995, the Company employed 114 persons on a full-time basis,
one part-time employee and 13 temporary employees. None of the Company's
employees is represented by a labor organization, and the Company has never
experienced a work stoppage or interruption due to labor disputes. Management
believes its relations with employees are good.
ITEM 2. PROPERTIES
The Company's operations are all conducted in its 66,000 square foot
building in Chaska, Minnesota. The facility was financed primarily from the
proceeds of the sale of $7 million in industrial development revenue bonds
issued by the City of Chaska.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol LCBM. The following table sets forth for each quarter of fiscal 1995 and
1994 the range of high and low closing sale prices of the Common Stock on the
Nasdaq National Market. These quotations represent prices between dealers and do
not include retail mark-ups, markdowns or commissions and may not represent
actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR LOW HIGH
- ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
1995
First Quarter............................................................... $ 4 3/4 $ 6
Second Quarter.............................................................. 3 3/8 5 1/2
Third Quarter............................................................... 3 3/4 6 3/8
Fourth Quarter.............................................................. 4 7/8 8 7/8
1994
First Quarter............................................................... $ 6 1/4 $ 8 1/2
Second Quarter.............................................................. 7 1/4 10 7/8
Third Quarter............................................................... 6 5/8 10 1/8
Fourth Quarter.............................................................. 3 7/8 7 7/8
</TABLE>
The Company has not paid cash dividends on its Common Stock and does not
plan to pay cash dividends in the near future. The Company expects to retain any
future earnings to finance its business. The Company has a loan agreement which
restricts its ability to pay dividends. See Note D to Consolidated Financial
Statements.
At August 28, 1995, the Company had 886 shareholders of record.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
The following sets forth selected historical financial data with respect to
the Company and its subsidiaries. The data given below as of and for the five
years ended June 30, 1995 has been derived from the Company's Consolidated
Financial Statements audited by Grant Thornton LLP, independent certified public
accountants. Such data should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.............................................. $ 5,884 $ 4,482 $ 7,485 $ 10,430 $ 10,018
Costs of goods sold.................................... 3,401 3,267 3,767 6,004 7,900
--------- --------- --------- --------- ---------
Gross profit........................................... 2,483 1,215 3,718 4,426 2,118
Operating expenses
Research and development............................. 622 1,555 1,706 1,072 1,381
Marketing and sales.................................. 1,853 2,579 2,764 2,645 3,038
General and administrative........................... 1,411 1,715 2,198 2,100 2,382
Write-down of building and equipment................. 1,200 -- -- -- --
Manufacturing relocation............................. -- 714 1,331 -- --
--------- --------- --------- --------- ---------
5,086 6,563 7,999 5,817 6,801
--------- --------- --------- --------- ---------
Loss from operations................................... (2,603) (5,348) (4,281) (1,391) (4,683)
Other income (expense)................................. 34 45 554 (1,406) (532)
--------- --------- --------- --------- ---------
Net loss............................................... $ (2,569) $ (5,303) $ (3,727) $ (2,797) $ (5,215)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per common share.............................. $ (.49) $ (.81) $ (.53) $ (.39) $ (.66)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding.................... 5,227 6,539 7,048 7,176 7,880
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
AS OF JUNE 30,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 2,203 $ 9,568 $ 7,756 $ 3,618 $ 3,987
Total assets........................................... 15,744 27,807 23,786 24,063 25,522
Long-term obligations.................................. 7,748 8,136 7,398 9,051 7,888
Shareholders' equity................................... 4,500 15,029 13,453 11,328 10,188
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, manufactures and markets surgically implantable
materials and devices through its two divisions, the Hyaluronate Division and
the Oral Restorative Division.
The Company has a number of relationships with corporate partners relating
to the development and marketing of hyaluronate based products for a variety of
medical applications, as well as certain non-hyaluronate based applications that
utilize the Company's specialized manufacturing capabilities. Currently, the
primary commercial application for the Company's hyaluronate is as a component
in an ophthalmic surgical product marketed by Alcon for cataract surgery. Sales
to Alcon are made under a supply agreement which, as most recently renewed in
November 1994, has a term through December 31, 1998. The agreement contains
minimum purchase requirements totalling $10.4 million, consisting of $3.2
million in calendar year 1995 and $2.4 million in each of calendar years 1996
through 1998. At the time the agreement was renewed, the Company received a $6.3
million cash advance from Alcon against future purchases. This advance covers
Alcon's payment for $3.2 million in hyaluronate shipments ordered for calendar
1995 and will be applied to shipments subsequent to calendar 1995 until fully
utilized.
The Company has other products and applications for hyaluronate under
various stages of development, as well as a number of non-hyaluronate products
under development for which the Company provides manufacturing services.
Currently, the Company's major development project involves Lubricoat Gel, a
hyaluronate based surgical anti-adhesion product. For a product under
development with a corporate partner the Company may realize revenues as it
ships hyaluronate powder or hyaluronate in finished packages to these corporate
partners for development, evaluation and testing.
The Company's Oral Restorative Division designs and markets a comprehensive
line of titanium-based dental implants for the replacement of lost or extracted
teeth. In May 1992, the Company acquired the Sustain System from BII and
subsequently, in July 1993, acquired ISS, the manufacturer of the Restore System
and the ISS line of compatible components. The Company has enhanced and expanded
these product lines since their acquisition. The Oral Restorative Division also
manufactures and markets synthetic bone graft substitute products for the
restoration of bone tissue deterioration resulting from periodontal disease and
tooth loss. This Division's products are marketed in the United States through
the Company's direct sales force, in Italy through the Company's subsidiary,
Lifecore Biomedical SpA, and in other countries through distributors.
RESULTS OF OPERATIONS
NET SALES. Net sales decreased $412,000 or 4% in fiscal 1995 from fiscal
1994, due to a $1,680,000 decrease in sales of hyaluronate products, partially
offset by a $1,268,000 increase in sales of oral restorative products.
Hyaluronate sales decreased to $5,223,000 in fiscal 1995 from $6,903,000 in
fiscal 1994 due to a decrease in sales to Alcon in fiscal 1995. Sales to Alcon
were $3,182,000, $5,996,000 and $5,094,000 for fiscal years 1995, 1994 and 1993.
Sales to Alcon in late fiscal 1993 and early fiscal 1994 were favorably impacted
when the Company was required to produce large quantities of hyaluronate to
validate its Chaska facility. Alcon agreed to purchase a majority of the
hyaluronate inventory produced as a result of this validation process. The
Company believes that these purchases exceeded Alcon's inventory requirements in
these periods. Thus, sales to Alcon since late fiscal 1994 have been at contract
minimums. The required minimum purchase under the Alcon agreement for the last
six months of calendar 1995 is $1,580,000, and the required contract minimum for
calendar 1996 is $2,418,000; as a result, sales to Alcon are expected to decline
further in fiscal 1996. Net sales to other hyaluronate customers increased
$1,134,000 or 125% in fiscal 1995 from fiscal 1994.
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<PAGE>
Oral restorative product sales increased 36% to $4,795,000 in fiscal 1995
from $3,527,000 in fiscal 1994. The increase in oral restorative product sales
primarily reflected the expanding product lines and the effect of increased
marketing and sales activities.
Net sales increased $2,945,000 or 39% in fiscal 1994 from fiscal 1993. The
sales increase was due to a $1,319,000 increase in sales of hyaluronate products
and a $1,626,000 increase in sales of oral restorative products. The increase in
sales of hyaluronate products was primarily attributable to a $900,000 increase
in the quantity of hyaluronate sold to Alcon, principally in the first two
quarters of fiscal 1994. Oral restorative product sales increased 86% to
$3,527,000 in fiscal 1994 from $1,901,000 in fiscal 1993, reflecting the broader
product line resulting from the July 1993 ISS acquisition and an increase in
unit sales of the Sustain System.
COST OF GOODS SOLD. Cost of goods sold, as a percentage of net sales,
increased to 79% for fiscal 1995 from 58% for fiscal 1994 and 50% for fiscal
1993. The increases resulted principally from direct charges for idle capacity
relating to hyaluronate products, resulting from the lower utilization of the
Company's manufacturing facility in the second half of fiscal 1994 and
throughout fiscal 1995. In the fourth quarter of fiscal 1993 and the first two
quarters of fiscal 1994, the Company had produced hyaluronate in large
quantities to validate its facility, resulting in higher levels of inventory in
fiscal 1994 and leading to lower production levels in the second half of fiscal
1994 and throughout fiscal 1995. The anticipated level of utilization of the
Company's manufacturing capacity will continue to cause direct charges for idle
capacity through at least fiscal 1996. Cost of goods sold, as a percentage of
net sales for oral restorative products, decreased to 49% in fiscal 1995 from
68% in fiscal 1994 and 75% in fiscal 1993. The decreases resulted principally
from spreading fixed expenses over increased oral restorative product sales in
fiscal 1994 and 1995, as well as from lower material costs.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$309,000 or 29% in fiscal 1995 from fiscal 1994 and decreased $634,000 or 37% in
fiscal 1994 from fiscal 1993. The increase in fiscal 1995 reflected the
assumption by the Company in August 1994 of the research and development of
Lubricoat Gel, which was previously the responsibility of Ethicon. Research and
development expenses decreased in fiscal 1994 principally because of higher
costs in fiscal 1993 connected with initial human clinical trials on the Sustain
Dental Implant System. Research and development expenses are expected to
increase in 1996 due principally to the funding of human clinical trials for
Lubricoat Gel.
MARKETING AND SALES. Marketing and sales expenses are primarily costs
incurred by the Company in support of its Oral Restorative Division. Marketing
and sales expenses increased $393,000 or 15% in fiscal 1995 from fiscal 1994 and
decreased $119,000 or 4% in fiscal 1994 from fiscal 1993. The major components
of the increase in fiscal 1995 were $281,000 related to compensation costs,
primarily associated with additional sales personnel, and $40,000 related to
increased advertising and sales literature costs. The decrease in marketing and
sales expenses in fiscal 1994 resulted principally from a decrease of $105,000
in advertising and sales literature costs. The timing of advertising and sales
literature costs can be expected to cause marketing and sales expenses to
fluctuate from period to period. Marketing and sales expenses are expected to
increase in fiscal 1996 due principally to the further addition of sales
personnel, costs associated with updated sales literature, and a full year of
expenses related to the direct sales force at Lifecore Biomedical SpA, which has
been in operation since April 1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$282,000 or 13% in fiscal 1995 from fiscal 1994 and decreased $98,000 or 4% in
fiscal 1994 from fiscal 1993. These fluctuations principally resulted from a
litigation expense accrual recorded in fiscal 1993 and reversed in fiscal 1994.
In fiscal 1993, a class action lawsuit was filed in which allegations of
securities law violations were made against the Company. At that time, an
accrual for legal expenses was recorded in anticipation of the defense of the
lawsuit. In early fiscal 1994, the lawsuit was dismissed, and the accrual was
reversed, reducing general and administrative expense significantly in fiscal
1994. As a result, general and administrative expenses were lower in fiscal 1994
than in fiscal 1993 or 1995. The
20
<PAGE>
increase in fiscal 1995 also resulted from an increase in bad debt expense
relating to the account of a single customer. Without the fluctuations resulting
from the litigation expense accrual and the increased bad debt expense, general
and administrative expenses would have been relatively unchanged over these
periods.
MANUFACTURING RELOCATION. Manufacturing relocation costs in fiscal 1993
reflect the expenses, principally related to the installation and validation of
new equipment, incurred by the Company to relocate its manufacturing capability
to its newly constructed Chaska, Minnesota facility.
OTHER INCOME (EXPENSE). In December 1993, the Company sold the building
which served as a manufacturing facility prior to the present Chaska location.
The sale resulted in a gain of $274,000 in fiscal 1994.
During fiscal 1994, the Company invested its excess cash in a fund rated AAA
by Standard and Poors. The fund invested in various bonds and other obligations
issued or guaranteed as to payment of principal and interest by the U.S.
government. Included in the investments of the fund were mortgage-related
securities and their derivatives, such as interest-only and principal-only
securities and inverse floating rate securities. During the first quarter of
calendar 1994, the fund's value declined and, in April 1994, the Company sold
its investment and realized a loss of $1,047,000. Prior to fiscal 1994, the
Company's investment in the same fund had yielded gains in excess of the fiscal
1994 loss.
Interest expense increased in fiscal 1995 from fiscal 1994 and in fiscal
1994 from fiscal 1993 due to the debt related to the acquisition of the ISS
dental implant business. Interest income increased in fiscal 1995 from fiscal
1994 and decreased in fiscal 1994 from fiscal 1993. The increase in interest
income in fiscal 1995 reflected the additional cash available to invest from the
August 1994 sale of stock to Johnson & Johnson Development Corporation and the
November 1994 cash advance received from Alcon. The decrease in fiscal 1994
interest income reflected lower levels of cash available to invest.
LIQUIDITY AND CAPITAL RESOURCES
Inventories consist mainly of finished hyaluronate and oral restorative
products and related raw materials. The portion of finished hyaluronate
inventory that is not expected to be consumed within the next twelve months is
classified as long-term. The finished hyaluronate inventory is maintained in a
frozen state and has a shelf life in excess of five years. Total inventory
increased $862,000 or 16% in fiscal 1995 from fiscal 1994 principally due to
expansion of the oral restorative product inventory.
The Company incurred losses in each of the three years in the period ended
June 30, 1995, reflecting the significant costs incurred in validating and
operating the Company's facilities, research and development and marketing.
Historically, the Company has financed its operations with debt and lease
obligations and the sale of its Common Stock. In August 1994, the Company
received $2,600,000 in cash as part of the consideration for its Common Stock
sold to Johnson & Johnson Development Corporation. The Company has conserved its
cash resources by negotiating amendments to certain of its financial
obligations. Beginning in 1991, the Company and Johnson & Johnson Finance
Corporation entered into an operating lease agreement (the "JJFC Lease") for
$7,900,000 of equipment. Under the terms of the agreement and subsequent
amendments, lease payments were deferred until April 1994. In addition, in
October 1992, the Company issued its Common Stock as the form of payment to
satisfy $2,050,000 in notes payable in connection with the Company's acquisition
of BII's Sustain Dental Implant System. In connection with the terms of the
agreements with the note holder, the Company satisfied the $2,050,000 obligation
and received $521,000 in cash as settlement of the value assigned to the Common
Stock. The loan agreement between the Company and the holder of the industrial
development revenue bonds utilized to finance the Company's Chaska facility was
amended in July 1995 to waive the fixed charge coverage ratio, the cash flow
coverage ratio, the minimum current ratio and the maximum debt to net worth
limitation through June 30, 1996. With respect to certain of these covenants,
the Company anticipates that it will be required to obtain further waivers
21
<PAGE>
in fiscal 1997. There can be no assurance that future waivers will be available.
If waivers cannot be obtained and these obligations are accelerated, the Company
may require additional financing. See Note D to the Consolidated Financial
Statements.
The Company has had significant operating cash flow deficits for the last
three fiscal years, and it continues to have significant fixed obligations in
future periods. Obligations under the JJFC Lease and other leases, the
industrial development revenue bonds and the ISS note total $3,016,000 for
fiscal 1996 and $2,445,000 for fiscal 1997. In addition, the Company received a
$6.3 million advance on product purchases from Alcon in November 1994, which the
Company used for working capital in fiscal 1995. In fiscal 1995, the Company
shipped $1.6 million of products due under this advance to Alcon. Accordingly,
the remaining $4.7 million of product shipments due to Alcon in fiscal 1996 and
1997 will not generate additional cash. The Company from time to time has
obtained other cash advances and has also obtained permission from its corporate
partners to defer scheduled payments for cash management purposes. While the
Company expects to make such requests in the future, there can be no assurance
that its requests will be granted.
Due to the Company's fixed obligations and anticipated operating cash flow
deficits through fiscal 1997, the Company expects its cash requirements to
significantly exceed the cash generated from anticipated operations. In light of
its losses and the level of cash on hand and outstanding obligations at June 30,
1995, the Company's independent auditors have issued an opinion, indicating that
there is substantial doubt about the Company's ability to fund its projected
losses and fixed obligations and, therefore, to continue as a going concern
without additional financing. In August 1995, the Company filed a registration
statement with respect to a proposed public offering of Common Stock. Management
believes that the net proceeds of the offering and its capital resources will be
sufficient to meet its needs through fiscal 1997. Due to the uncertainties
involved in development, regulatory approval and market acceptance of its new
products and adequate growth in its existing products, no assurance can be given
that these resources will be sufficient to allow the Company to attain and
maintain positive cash flow. If the Company exhausts the net proceeds of the
offering prior to achieving and maintaining positive cash flow, additional
financing will be necessary. If additional financing is needed, no assurance can
be given that such financing will be available and, if available, will be on
terms favorable to the Company and its shareholders. See Notes B and O to the
Company's Consolidated Financial Statements.
The Company's ability to generate positive cash flow from operations and
achieve profitability is dependent upon the continued expansion of revenue from
its hyaluronate and oral restorative businesses. In the Hyaluronate Division,
future revenue growth is unpredictable due to the complex governmental
regulatory environment for new medical products and the early stage of certain
of these markets. Similarly, expansion of the Company's Oral Restorative
Division revenues is also dependent on increased revenue from new and existing
customers, as well as successfully attending to market competition issues
commensurate with that more mature field. Current or future regulatory approval
requirements also affect the timing of future new products in the Oral
Restorative Division. As a result of these factors, the Company does not
currently anticipate commercial sales sufficient to generate positive cash flow
through fiscal 1997.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements are listed under Item 14 of this
report.
Summarized unaudited quarterly financial data for 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Year ended June 30, 1995
Net sales....................................... $ 1,842,000 $ 2,189,000 $ 2,885,000 $ 3,102,000
Gross profit.................................... 102,000 629,000 683,000 704,000
Net loss........................................ (1,658,000) (1,141,000) (1,137,000) (1,279,000)
Net loss per share.............................. $ (.22) $ (.14) $ (.14) $ (.16)
Weighted average shares outstanding............. 7,632,015 7,953,206 7,962,294 7,970,935
Year ended June 30, 1994
Net sales....................................... $ 3,367,000 $ 3,165,000 $ 1,770,000 $ 2,128,000
Gross profit.................................... 1,827,000 1,768,000 683,000 148,000
Net earnings (loss)............................. 356,000 217,000 (776,000) (2,594,000)
Net earnings (loss) per share................... $ .05 $ .03 $ (.11) $ (.36)
Weighted average shares outstanding............. 7,155,938 7,161,267 7,174,200 7,195,615
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the names of the executive officers and directors
of Lifecore, in addition to certain other information regarding such
individuals:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
James W. Bracke, Ph.D..................... 48 President, Chief Executive Officer, Secretary and Director
Brian J. Kane............................. 42 Vice President of New Business Development
Mark J. McKoskey.......................... 44 Vice President and General Manager, Oral Restorative Division
Colleen M. Olson.......................... 42 Vice President of Corporate Administrative Operations
Nancy J. Teasdale......................... 39 Vice President and General Manager, Hyaluronate Division
Orwin L. Carter........................... 53 Director
Joan L. Gardner........................... 50 Director
John C. Heinmiller........................ 41 Director
Robert P. Hickey.......................... 49 Director
Donald W. Larson.......................... 66 Director
Richard W. Perkins........................ 64 Director
</TABLE>
JAMES W. BRACKE, PH.D. Dr. Bracke was appointed President and Chief
Executive Officer and a director in August 1983 and Secretary in March 1995. He
joined the Company in February 1981 as Senior Research Scientist. The Company
has an employment agreement with Dr. Bracke that extends through June 1998. Dr.
Bracke's employment agreement prohibits him from competing with the Company for
three years after termination of employment. In the event of termination upon a
change in control of the Company, the employment agreement provides that Dr.
Bracke will receive a sum equal to 300% of his base salary.
BRIAN J. KANE. Mr. Kane has been Vice President of New Business Development
for the Company since July 1991. He joined the Company as Vice President of
Marketing in June 1986.
MARK J. MCKOSKEY. Mr. McKoskey has been Vice President and General Manager
of the Oral Restorative Division since July 1994. He became Vice President of
Operations in June 1990. He joined the Company in June 1985 as engineering
manager.
COLLEEN M. OLSON. Ms. Olson has been Vice President of Corporate
Administrative Operations of the Company since May 1991. Prior to that time, she
was Vice President of Human Resources and Administration from June 1990 to May
1991, and Director of Human Resources and Administration from October 1984 to
June 1990. She joined the Company in January 1980 as Office Manager.
NANCY J. TEASDALE. Ms. Teasdale has been Vice President and General Manager
of the Hyaluronate Division since September 1994. She joined the Company in
August 1991 as Manager of Quality Assurance. From January 1989 through July
1991, she was Manager of Quality Assurance and Technical Support for Michael
Foods, Inc., a diversified food processor.
ORWIN L. CARTER. Dr. Carter is currently a private consultant to the
diagnostic device industry. From December 1989 through September 1994, he served
as President and Chief Executive Officer of INCSTAR Corporation. He then served
as Chairman until March 1995. INCSTAR Corporation manufactures and markets test
kits and related products used by major hospitals, clinical reference
laboratories and researchers involved in diagnosing and treating immunological
conditions. He has been a director of the Company since 1989 and is also a
director of Theragenics Corporation.
24
<PAGE>
JOAN L. GARDNER. Ms. Gardner has had a career in community service. She is
currently serving on the Board of Children's Health Care, the newly merged
entity of Saint Paul Children's Hospital and Minneapolis Children's Medical
Center, and chairs its Quality Committee. She formerly chaired the Boards of
Trustees of the Biomedical Research Institute and The Children's Hospital
Incorporated and served on the board of the National Association of Children's
Hospitals and Related Institutes and chaired its Education Council. Ms. Gardner
joined the Company's Board in November 1992.
JOHN C. HEINMILLER. Mr. Heinmiller is currently Vice President of Finance
and Administration and a director of Daig Corporation, which designs,
manufactures and markets medical devices for cardiovascular applications. He was
Vice President of Finance and Chief Financial Officer of the Company from
October 1991 to February 1995. Prior to October 1991, Mr. Heinmiller was an
employee of Grant Thornton LLP, a national CPA firm and he was a partner of that
firm from 1986 to 1991. He became a director of the Company in November 1994.
ROBERT P. HICKEY. Mr. Hickey has been President of Roberts Healthcare
Resources, a consulting firm focused on management support to small companies
and venture funds, since 1994. From 1975 to 1994, he was with Johnson & Johnson
Companies in various capacities, most recently as Vice President of Marketing
and a director of Ethicon, Inc. He has been a director of Lifecore since January
1995.
DONALD W. LARSON. Mr. Larson is a self-employed business publisher and
editor. He has been editor and publisher of BUSINESS NEWSLETTER since 1980.
Prior to 1980, he was editor and publisher of the magazine CORPORATE REPORT
MINNESOTA. He has been a director of the Company since 1983.
RICHARD W. PERKINS. Mr. Perkins is President, Chief Executive Officer and a
director of Perkins Capital Management, Inc., Wayzata, Minnesota, where he has
held those positions since January 1985. Mr. Perkins is a director of the
following public companies: Atrix International, Inc., Bio-Vascular, Inc., Celox
Corporation, Children's Broadcasting Corporation, CNS, Inc., Discus Acquisition
Corporation, Eagle Pacific Industries, Inc., Garment Graphics, Inc., and Nortech
Systems, Inc. He has been a director of Lifecore since 1983.
All executive officers named are elected or appointed by the Board of
Directors for a term of office from the time of election or appointment until
the next annual meeting of directors (held following the annual meeting of
shareholders) and until their respective successors are elected and have
qualified. Pursuant to the Company's Articles of Incorporation, the Board of
Directors is divided into three classes of directors, with each director serving
a three-year term. Each year only one class of directors is subject to a
shareholder vote, and approximately one-third of the directors (presently, two
directors in each of two classes and three directors in one class) belong to
each class.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer. No other executive officers of the Company had cash
compensation that exceeded $100,000, based on salary earned during fiscal 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------
NAME AND FISCAL ------------------------ STOCK
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(1)
- --------------------------------------------------------------------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
James W. Bracke...................................................... 1995 $ 189,073 -- 10,000
President and Chief 1994 188,171 -- 25,000
Executive Officer 1993 153,116 -- 5,000
<FN>
- ------------------------
(1) Number of shares of common stock purchasable under option grants.
</TABLE>
25
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the Chief
Executive Officer, concerning stock options granted to that individual during
the last fiscal year:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
OPTIONS EXERCISE OR APPRECIATION FOR
GRANTED TO BASE PRICE OPTION TERM(4)
OPTIONS EMPLOYEES IN PER EXPIRATION --------------------
NAME GRANTED LAST YEAR SHARE(2) DATE(3) 5% 10%
- ----------------------------------------- ------------ ------------- ----------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James W. Bracke.......................... 10,000(1) 6.0 $ 3.88 Oct. 19, 2004 $ 24,370 $ 61,758
<FN>
- ------------------------
(1) Exercisable in cumulative 25% annual installments commencing one year from
date of grant (October 19, 1994), with full vesting occurring on the fourth
anniversary date.
(2) All options were granted at the market value of the Company's common stock
based upon the last reported price on date preceding the date of grant. The
exercise price and tax withholding obligations related to exercise may be
paid by delivery of already owned shares or by offset of the underlying
shares, subject to certain conditions.
(3) All options have a ten year term, subject to termination of employment.
(4) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the common stock, overall stock
market conditions, as well as the optionholder's continued employment
through the vesting period. The amounts reflected in this table may not
necessarily be achieved.
</TABLE>
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth information with respect to the Chief
Executive Officer, concerning the exercise of options during the last fiscal
year and unexercised options held as of the end of the fiscal year:
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
OPTIONS
NUMBER OF UNEXERCISED AT
SHARES OPTIONS AT YEAR-END YEAR-END(2)
ACQUIRED ON VALUE -------------------------- -----------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE
- --------------------------------------------- ------------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
James W. Bracke.............................. -- -- 67,250 30,417 $ 37,085
<CAPTION>
NAME UNEXERCISABLE
- --------------------------------------------- -------------
<S> <C>
James W. Bracke.............................. $ 55,000
<FN>
- ------------------------
(1) Market value on the date of exercise of shares covered by options
exercised, less option exercise price.
(2) The closing price for the Company's common stock on June 30, 1995 was
$7.75. Value is calculated on the basis of the difference between the
option exercise price and $7.75 multiplied by the number of shares of
common stock underlying the options.
</TABLE>
EMPLOYMENT AND SEVERANCE AGREEMENT. Dr. James W. Bracke, the President,
Chief Executive Officer, Secretary and a Director of the Company, entered into
an Employment Agreement with the Company dated June 1, 1991, as amended on
August 14, 1995, which provides for a term of employment through June 30, 1998
and contains customary confidential disclosure and non-compete provisions. The
Agreement provides for a severance payment equal to 300% of Dr. Bracke's base
salary paid during the year preceding a termination which is made as a result of
a merger or acquisition of the Company or as a result of a change in control of
the Company. Dr. Bracke's base salary is currently $183,000 per year and,
accordingly, in the event the severance provision of his Employment Agreement
were triggered by a merger, acquisition or change in control, the Company or its
successor would be obligated to pay him approximately $549,000.
REMUNERATION OF DIRECTORS. Directors who are not officers of the Company
receive a fee of $500 per month.
26
<PAGE>
The 1990 Stock Plan (the "1990 Plan") provides for the automatic granting of
a defined number of options to non-employee directors. Such options are granted
to each person who is not an employee of the Company and who (i) was serving as
a director on the date the 1990 Plan was approved by shareholders, or (ii) was
elected a director (whether by vote of shareholders or directors) subsequent to
September 27, 1990 and who was not serving as a director at such date. Each such
person automatically receives, as of the date of such election, a non-qualified
option to purchase 10,000 shares of common stock with the option price equal to
the fair market value of the Company's common stock on such date. The options
have ten-year terms and are exercisable, as to one-third of the shares subject
to the option, beginning one year after the date of option grant; as to the
second third, beginning two years after the date of option grant; and as to the
last third, beginning three years after the date of option grant. At the third
anniversary date of an option grant, a non-employee director who continues to
serve as a member of the Board shall automatically be granted an option to
purchase an additional 10,000 shares of stock with the option price equal to the
fair market value of the Company's common stock on such date. Any vested portion
of these options will not expire upon termination of service as a director. No
stock appreciation rights may be granted in connection with options to
non-employee directors. Under the 1990 Plan, the maximum number of shares as to
which options may be granted to all non-employee directors is 200,000 shares,
and the maximum number of shares as to which options may be granted to any one
non-employee director is 20,000 shares. Pursuant to the automatic grant feature
of the 1990 Plan, Mr. Hickey was granted an option to purchase 10,000 shares at
$3.875 on January 2, 1995 and Mr. Heinmiller was granted an option to purchase
10,000 shares at $5.25 on March 23, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of August 28, 1995, the number and
percentage of outstanding shares of Common Stock beneficially owned by: (i) each
person who is known by the Company to be the beneficial owner of more than 5% of
its outstanding Common Stock, (ii) each director of the Company, and (iii) all
directors and officers of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF
BENEFICIAL OWNER SHARES PERCENT(1)
- --------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Johnson & Johnson Development Corporation
One Johnson & Johnson Plaza
New Brunswick, NJ 08933.............................................................. 757,396(2) 9.5%
Perkins Capital Management, Inc.
730 East Lake Street
Wayzata, MN 55391.................................................................... 588,760(3) 7.4
James W. Bracke, Ph.D.................................................................. 195,280(4) 2.4
Orwin L. Carter, Ph.D.................................................................. 23,666(5) *
Joan L. Gardner........................................................................ 14,750(6) *
John C. Heinmiller..................................................................... 2,000 *
Robert P. Hickey....................................................................... -- --
Donald W. Larson....................................................................... 29,966(7) *
Richard W. Perkins..................................................................... 70,666(8) *
Directors and officers as a group (11 persons)......................................... 473,332(9) 5.8
<FN>
- ------------------------
* Indicates less than one percent.
(1) Based on 7,985,292 shares outstanding as of August 28, 1995.
(2) Based upon the content of a statement filed as of August 8, 1994 pursuant
to Section 13(g) of the Exchange Act.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
(3) Based upon the content of a statement filed as of July 31, 1995 pursuant to
Section 13(g) of the Securities Exchange Act of 1934. Excludes shares
beneficially owned by Richard W. Perkins, the controlling shareholder of
Perkins Capital Management, Inc. and a director of the Company.
(4) Includes 61,391 shares held by Dr. Bracke's wife, 50,056 shares held
jointly by Dr. Bracke and his wife, 7,000 shares held by Dr. Bracke's
children and 76,833 shares which Dr. Bracke has the right to purchase
pursuant to stock options which are or will become exercisable within sixty
days of the date hereof.
(5) Includes 22,666 shares which Dr. Carter has the right to purchase pursuant
to stock options which are or will become exercisable within sixty days of
the date hereof.
(6) Includes 4,250 shares held by a partnership in which Ms. Gardner is a
partner and 10,000 shares which Ms. Gardner has the right to purchase
pursuant to stock options which are or will become exercisable within sixty
days of the date hereof.
(7) Includes 19,666 shares which Mr. Larson has the right to purchase pursuant
to stock options which are or will become exercisable within sixty days of
the date hereof.
(8) Includes 45,000 shares held by various trusts of which Mr. Perkins is the
sole trustee, 6,000 shares held by a foundation created by Mr. Perkins and
19,666 shares which Mr. Perkins has the right to purchase pursuant to stock
options which are or will become exercisable within sixty days of the date
hereof. Excludes 588,760 shares held for the accounts of clients of Perkins
Capital Management, Inc. ("PCM"), a registered investment advisor of which
Mr. Perkins is the controlling shareholder. PCM has the right to sell the
shares but does not have voting power over the shares. Mr. Perkins and PCM
disclaim beneficial interest in the shares held for the account of PCM
clients.
(9) Includes 251,783 shares which certain directors and officers have the right
to purchase pursuant to stock options which are or will become exercisable
within sixty days of the date hereof.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Documents filed as a part of the report:
1. Consolidated Financial Statements
<CAPTION>
FORM 10-K PAGE
REFERENCE
----------------
<S> <C> <C>
Report of Independent Certified Public Accountants................... F-1
Consolidated Balance Sheets -- June 30, 1994 and 1995................ F-2
Consolidated Statements of Operations -- years ended June 30, 1993,
1994 and 1995........................................................ F-3
Consolidated Statements of Cash Flows -- years ended June 30, 1993,
1994 and 1995........................................................ F-4
Consolidated Statements of Shareholders' Equity -- years ended June
30, 1993, 1994, and 1995............................................. F-5
Notes to Consolidated Financial Statements........................... F-6 through F-15
2. Consolidated Financial Statement Schedules
<CAPTION>
FORM 10-K
DESCRIPTION PAGE REFERENCE
- -------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Schedule II -- Valuation and Qualifying Accounts..................... S-1
(b) Reports on Form 8-K
None.
(c) Exhibits and Exhibit Index
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------
<S> <C> <C> <C>
2.1 Stock Purchase Agreement between ISS and Lifecore dated July 28, 1993 (includes $2 million 5% Promissory
Note dated July 28, 1993 as Exhibit A and Security Agreement as Exhibit B) (Pursuant to Rule 24b-2,
certain portions of this Exhibit have been deleted and filed separately with the Commission)
(incorporated by reference to Exhibit 2.1 to Form 8-K dated July 8, 1993)
3.1 Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 19(a) to Amendment
No. 1 on Form 8, dated July 13, 1988, to Form 10-Q Report for the quarter ended December 31, 1987)
3.2 Amended Bylaws, filed herewith
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration
Statement [File No. 33-12970])
10.1 Loan Agreement dated as of September 1, 1990 between the City of Chaska and the Company (incorporated by
reference from Exhibit 4.2 to the Registrant's Form 10-K for the year ended June 30, 1990, as amended on
Form 8 dated October 12, 1990) as amended on June 10, 1991 and July 24, 1991 (incorporated by reference
from Exhibit 10.2 to the Registrant's Amendment No. 1 to Form 1991 S-2 Registration Statement [File No.
33-41291]) as amended on August 3, 1992 (incorporated by reference to Exhibit 10.1 to Form 10-K for the
year ended June 30, 1992) as amended on July 28, 1994 (incorporated by reference to Exhibit 10.1 to Form
10-K for the year ended June 30, 1994), as amended on July 27, 1995, filed herewith
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
10.2 Trust Indenture dated as of September 1, 1990 from the City of Chaska to Norwest Bank Minnesota, N.A.,
as Trustee (incorporated by reference from Exhibit 4.3 to the Registrant's Form 10-K for the year ended
June 30, 1990, as amended on Form 8 dated October 12, 1990)
<S> <C> <C> <C>
10.3 Combination Mortgage, Security Agreement and Fixture Financing Statement dated as of September 1, 1990
from the Company to Norwest Bank Minnesota, N.A., as Trustee (incorporated by reference from Exhibit 4.4
to the Registrant's Form 10-K for the year ended June 30, 1990, as amended on Form 8 dated October 12,
1990)
10.4 Contract for Private Redevelopment dated as of September 1, 1990 between the Company and Chaska Economic
Development Authority (incorporated by reference from Exhibit 4.5 to the Registrant's Form 10-K for the
year ended June 30, 1990, as amended on Form 8 dated October 12, 1990)
10.5 Hyaluronate Purchase Agreement dated March 28, 1990 between the Company and Alcon (Incorporated by
reference to Exhibit 10 to Form 8-K dated April 10, 1990, as amended on Form 8 dated May 23, 1990) as
amended on July 17, 1992, (Certain information has been deleted from this exhibit and filed separately
with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule
24b-2) (incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended June 30, 1992)
10.6 Employment Agreement dated June 10, 1991 with James W. Bracke (incorporated by reference to Exhibit
10.11 to 1991 S-2 Registration Statement [File No. 33-41291]), as amended by letter agreement dated on
August 14, 1995, filed herewith
10.7 Form of Indemnification Agreement entered into between the Company and directors and officers, filed
herewith
10.8 1987 Stock Option Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration Statement [File
No. 33-26065])
10.9 1987 Employee Stock Purchase Savings Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration
Statement [File No. 33-19288])
10.10 1990 Employee Stock Purchase Savings Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration
Statement [File No. 33-32984])
10.11 1990 Stock Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration Statement [File No.
33-38914]) as amended by Amendment No. 1 (incorporated by reference to Exhibit 10.13 to Form 10-K for
the year ended June 30, 1994)
10.12 Conveyance, License, Development and Supply Agreement dated August 8, 1994 between Lifecore Biomedical,
Inc. and Ethicon, Inc. (pursuant to Rule 24b-2, certain portions of this Exhibit have been omitted and
filed separately with the Commission), (incorporated by reference to Exhibit 10.14 to Form 10-K for the
year ended June 30, 1994)
10.13 Equipment Lease dated May 28, 1991 between the Registrant and Johnson & Johnson Finance Corporation
(incorporated herein by reference from Exhibit 10.20 to 1991 S-2 Registration Statement [File No.
33-12970]) as amended in May 1992 (incorporated by reference to Exhibit 10.15 to Form 10-K for the year
ended June 30, 1992) as amended in January 1993 (incorporated by reference to Exhibit 10.15 to Form 10-K
for the year ended June 30, 1993) as amended in January 1994 and March 1994 (incorporated by reference
to Exhibit 10.15 to Form 10-Q for the quarter ended March 31, 1994)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
10.14 Master Lease, Supplement to Master Lease and Assignment of Time/Savings Account between Norwest
Equipment Finance, Inc., and the Registrant dated June 28, 1991 (incorporated by reference to Exhibit
10.21 to Form 10-K for the year ended June 30, 1991)
<S> <C> <C> <C>
10.15 Amendment No. 2 to Hyaluronate Purchase Agreement dated December 4, 1992 between Lifecore Biomedical,
Inc. and Alcon Surgical, Inc. (pursuant to Rule 24b-2, certain portions of this Exhibit have been
omitted and filed separately with the Commission) (incorporated by reference to Exhibit 28 to Form 8-K
dated December 4, 1992)
10.16 Amendment No. 3 to Hyaluronate Purchase Agreement dated May 12, 1993 Between Lifecore Biomedical, Inc.
and Alcon Surgical, Inc., filed herewith (pursuant to Rule 24b-2, certain portions of this Exhibit have
been omitted and filed separately with the Commission) (incorporated by reference to Exhibit 10.18 to
Form 10-K for the year ended June 30, 1993 as amended on Form 10-K/A dated December 15, 1994)
10.17 Letter Agreement dated October 28, 1992 between the Company and Bio-Interfaces (incorporated by
reference to Exhibit 28.1 to Form 8-K dated October 5, 1992)
10.18 Stock Purchase Agreement dated August 8, 1994 between Lifecore Biomedical, Inc. and Johnson and Johnson
Development Corporation, (incorporated by reference to Exhibit 10.20 to Form 10-K for the year ended
June 30, 1994)
10.19 Amendment No. 4 to Hyaluronate Purchase Agreement dated November 29, 1994, between Lifecore Biomedical,
Inc. and Alcon Laboratories, Inc. (pursuant to Rule 24b-2, certain portions of this Exhibit have been
omitted and filed separately with the Commission) (incorporated by reference to Exhibit 10.21 to Form
10-Q for the quarter ended December 31, 1994)
10.20 Supply Agreement dated December 7, 1994 between Lifecore Biomedical, Inc. and IOLAB Corporation
(pursuant to Rule 24b-2, certain portions of this Exhibit have been omitted and filed separately with
the Commission), filed herewith
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
</TABLE>
31
<PAGE>
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.
Dated: August 30, 1995
LIFECORE BIOMEDICAL, INC.
By /s/ JAMES W. BRACKE
-----------------------------------
James W. Bracke, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE AND
FINANCIAL OFFICER) AND SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in capacities and on the dates indicated.
(POWER OF ATTORNEY)
Each person whose signature appears below constitutes and appoints James W.
Bracke, Ph.D. and Mark T. Sellnow as such person's true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for such person and in such person's name, place and stead,
in any and all capacities, to sign any of all amendments to this Annual Report
on Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact and agents, each acting alone, or such
person's substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
<TABLE>
<C> <S> <C>
President and Chief Executive
By /S/ JAMES W. BRACKE Officer (principal executive
-------------------------------- and financial officer) and Dated: August 30, 1995
James W. Bracke, Ph.D. Secretary and Director
By: /S/ JOAN L. GARDNER
-------------------------------- Director Dated: August 30, 1995
Joan L. Gardner
By /S/ DONALD W. LARSON
-------------------------------- Director Dated: August 30, 1995
Donald W. Larson
By /S/ RICHARD W. PERKINS
-------------------------------- Director Dated: August 30, 1995
Richard W. Perkins
</TABLE>
32
<PAGE>
<TABLE>
<C> <S> <C>
By /S/ ORWIN L. CARTER
-------------------------------- Director Dated: August 30, 1995
Orwin L. Carter, Ph.D.
By /S/ JOHN C. HEINMILLER
-------------------------------- Director Dated: August 30, 1995
John C. Heinmiller
By /S/ ROBERT P. HICKEY
-------------------------------- Director Dated: August 30, 1995
Robert P. Hickey
By /S/ MARK T. SELLNOW
-------------------------------- Controller (principal Dated: August 30, 1995
Mark T. Sellnow accounting officer)
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Lifecore Biomedical, Inc.
We have audited the accompanying consolidated balance sheets of Lifecore
Biomedical, Inc. (a Minnesota corporation) and Subsidiaries as of June 30, 1995
and 1994, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lifecore
Biomedical, Inc. and Subsidiaries as of June 30, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1995, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes B and O to the consolidated financial statements, the Company has incurred
annual operating losses, and cash on hand at June 30, 1995 is not sufficient to
allow the Company to fund its projected losses from operations and fixed debt
and lease obligations through June 30, 1996. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Notes B and O. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have also audited Schedule II of Lifecore Biomedical, Inc. and
Subsidiaries for each of the three years in the period ended June 30, 1995. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Minneapolis, Minnesota
July 31, 1995 (except for Note O, as to
which the date is August 30, 1995)
F-1
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
ASSETS
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (note A2)............................................ $ 2,275,000 $ 2,726,000
Accounts receivable, less allowances (notes A3 and A9)......................... 1,382,000 1,598,000
Inventories (note A4).......................................................... 3,383,000 4,753,000
Prepaid expenses............................................................... 262,000 404,000
-------------- --------------
Total current assets......................................................... 7,302,000 9,481,000
PROPERTY, PLANT AND EQUIPMENT -- AT COST
(notes A5 and D)
Land........................................................................... 249,000 249,000
Building....................................................................... 6,711,000 6,711,000
Equipment...................................................................... 3,969,000 4,418,000
Land and building improvements................................................. 1,406,000 1,406,000
-------------- --------------
12,335,000 12,784,000
Less accumulated depreciation.................................................. (4,088,000) (4,642,000)
-------------- --------------
8,247,000 8,142,000
OTHER ASSETS
Intangibles (notes A6 and C)................................................... 4,997,000 4,634,000
Security deposits (note D)..................................................... 925,000 1,022,000
Inventories (note A4).......................................................... 1,913,000 1,405,000
Other (note A7)................................................................ 679,000 838,000
-------------- --------------
8,514,000 7,899,000
-------------- --------------
$ 24,063,000 $ 25,522,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations (note D)........................... $ 969,000 $ 1,139,000
Accounts payable............................................................... 575,000 746,000
Accrued compensation........................................................... 314,000 417,000
Accrued expenses............................................................... 406,000 404,000
Customers' deposits (notes E and M)............................................ 1,420,000 2,788,000
-------------- --------------
Total current liabilities.................................................... 3,684,000 5,494,000
LONG-TERM OBLIGATIONS (note D)................................................... 9,051,000 7,888,000
CUSTOMERS' DEPOSITS (notes E and M).............................................. -- 1,952,000
COMMITMENTS AND CONTINGENCIES (notes E, F, J and M).............................. -- --
SHAREHOLDERS' EQUITY (notes C, H, I and M)
Preferred stock -- authorized, 25,000,000 shares of $1.00 stated value; none
issued........................................................................ -- --
Common stock -- authorized, 25,000,000 shares of $.01 stated value; issued and
outstanding, 7,195,689 and 7,972,167 shares at June 30, 1994 and 1995,
respectively.................................................................. 72,000 80,000
Additional paid-in capital..................................................... 33,149,000 37,216,000
Accumulated deficit............................................................ (21,893,000) (27,108,000)
-------------- --------------
11,328,000 10,188,000
-------------- --------------
$ 24,063,000 $ 25,522,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales (notes A9 and L)....................................... $ 7,485,000 $ 10,430,000 $ 10,018,000
Cost of goods sold............................................... 3,767,000 6,004,000 7,900,000
-------------- -------------- --------------
Gross profit................................................. 3,718,000 4,426,000 2,118,000
Operating expenses
Research and development....................................... 1,706,000 1,072,000 1,381,000
Marketing and sales............................................ 2,764,000 2,645,000 3,038,000
General and administrative..................................... 2,198,000 2,100,000 2,382,000
Manufacturing relocation....................................... 1,331,000 -- --
-------------- -------------- --------------
7,999,000 5,817,000 6,801,000
-------------- -------------- --------------
Loss from operations......................................... (4,281,000) (1,391,000) (4,683,000)
Other income (expense)
Gain on sale of building....................................... -- 274,000 --
Gain (loss) on sale of short-term investments.................. 838,000 (1,047,000) --
Interest expense............................................... (805,000) (835,000) (854,000)
Interest income................................................ 521,000 202,000 322,000
-------------- -------------- --------------
554,000 (1,406,000) (532,000)
-------------- -------------- --------------
NET LOSS..................................................... $ (3,727,000) $ (2,797,000) $ (5,215,000)
-------------- -------------- --------------
-------------- -------------- --------------
Net loss per common share (note A10)......................... $ (.53) $ (.39) $ (.66)
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding.............................. 7,048,474 7,175,674 7,879,538
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................................................. $(3,727,000) $(2,797,000) $(5,215,000)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization........................................................... 874,000 943,000 939,000
Allowance for doubtful accounts......................................................... 11,000 23,000 141,000
Loss (gain) on short-term investments................................................... (838,000) 1,047,000 --
Gain on sale of building................................................................ -- (274,000) --
Deferred rent........................................................................... -- 966,000 --
Changes in operating assets and liabilities
Accounts receivable................................................................... 206,000 (669,000) (357,000)
Inventories........................................................................... (553,000) (2,408,000) (862,000)
Prepaid expenses...................................................................... (69,000) (87,000) (142,000)
Other assets.......................................................................... (673,000) -- --
Accounts payable...................................................................... 1,000 163,000 171,000
Accrued liabilities................................................................... 696,000 (146,000) 101,000
Customers' deposits................................................................... -- (106,000) 3,320,000
----------- ----------- -----------
Total adjustments................................................................... (345,000) (548,000) 3,311,000
----------- ----------- -----------
Net cash used in operating activities....................................................... (4,072,000) (3,345,000) (1,904,000)
Cash flows from investing activities:
Proceeds from sale of building............................................................ -- 435,000 --
Purchases of property, plant and equipment................................................ (261,000) (395,000) (449,000)
Purchases of intangibles.................................................................. (182,000) (44,000) (51,000)
Purchases of short-term investments....................................................... (541,000) (5,063,000) --
Sales of short-term investments........................................................... 9,863,000 4,016,000 --
Increase in security deposits............................................................. (10,000) (10,000) (97,000)
Business acquisition, net of cash acquired................................................ -- (754,000) --
Decrease (increase) in other assets....................................................... 67,000 47,000 (130,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities......................................... 8,936,000 (1,768,000) (727,000)
Cash flows from financing activities:
Payments of long-term obligations......................................................... (405,000) (176,000) (993,000)
Proceeds from issuance of common stock.................................................... -- -- 3,985,000
Proceeds from stock options exercised..................................................... 101,000 151,000 90,000
Excess value received from common stock issued for payment of debt........................ -- 521,000 --
----------- ----------- -----------
Net cash provided by (used in) financing activities......................................... (304,000) 496,000 3,082,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........................................ 4,560,000 (4,617,000) 451,000
Cash and cash equivalents at beginning of year.............................................. 2,332,000 6,892,000 2,275,000
----------- ----------- -----------
Cash and cash equivalents at end of year.................................................... $ 6,892,000 $ 2,275,000 $ 2,726,000
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................................................ $ 805,000 $ 810,000 $ 835,000
Liabilities assumed in business acquisition............................................. -- 219,000 --
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During 1993, the Company issued 330,000 shares of its common stock as
payment of certain notes payable (see note I).
During 1994, the Company issued a $2,000,000 note payable relating to the
acquisition of Implant Support Systems, Inc. (see note C).
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED
ISSUED AMOUNT CAPITAL DEFICIT
----------- --------- -------------- ---------------
<S> <C> <C> <C> <C>
Balances at July 1, 1992............................... 6,805,572 $ 68,000 $ 30,330,000 $ (15,369,000)
Exercise of stock options and employee stock purchase
savings plan........................................ 19,166 -- 101,000 --
Issuance of common stock as payment of debt (note
I).................................................. 330,000 4,000 2,046,000 --
Net loss for the year ended June 30, 1993............ -- -- -- (3,727,000)
----------- --------- -------------- ---------------
Balances at June 30, 1993.............................. 7,154,738 72,000 32,477,000 (19,096,000)
Exercise of stock options and employee stock purchase
savings plan, net of 5,888 shares surrendered in
payment............................................. 40,951 -- 151,000 --
Excess value received from common stock issued for
payment of debt (note I)............................ -- -- 521,000 --
Net loss for the year ended June 30, 1994............ -- -- -- (2,797,000)
----------- --------- -------------- ---------------
Balances at June 30, 1994.............................. 7,195,689 72,000 33,149,000 (21,893,000)
Exercise of stock options and employee stock purchase
savings plan........................................ 19,082 -- 90,000 --
Proceeds from sale of common stock................... 757,396 8,000 3,977,000 --
Net loss for the year ended June 30, 1995............ -- -- -- (5,215,000)
----------- --------- -------------- ---------------
Balances at June 30, 1995.............................. 7,972,167 $ 80,000 $ 37,216,000 $ (27,108,000)
----------- --------- -------------- ---------------
----------- --------- -------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lifecore Biomedical, Inc. ("the Company"), develops, manufactures, or
markets sterile medical products for a variety of surgical and pharmaceutical
applications through direct sales, OEM or contract manufacturing alliances. The
Company's products currently have applications in the fields of dentistry,
ophthalmology, veterinary and wound care management. In April 1995, the Company
began direct sales operations in Italy through a newly formed subsidiary,
Lifecore Biomedical SpA, in Verona, Italy.
A summary of significant accounting policies applied in the preparation of
the financial statements follows:
1. CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Implant Support Systems, Inc. and Lifecore
Biomedical SpA. All intercompany balances and transactions have been eliminated
in consolidation.
2. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents. At June 30, 1995 and
1994, principally all of the Company's cash and cash equivalents are invested in
a money market fund.
The Company implemented Financial Accounting Standards Board (FASB)
Statement of Financial Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" effective July 1, 1993. The effect of adopting this
statement did not have a material impact on the consolidated financial
statements.
3. ACCOUNTS RECEIVABLE
The Company grants credit to customers in the normal course of business, but
generally does not require collateral or any other security to support amounts
due. The Company's customers are located primarily throughout the United States
and Europe. Management performs on-going credit evaluations of its customers.
The Company maintains allowances for potential credit losses which were $78,000
and $219,000 at June 30, 1994 and 1995.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company's reserve for obsolescence and rework was $332,000 and
$307,000 at June 30, 1994 and 1995. Inventory not expected to be consumed within
one year is classified as a long-term asset. Inventories consist of the
following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Raw materials..................................... $1,235,000 $1,551,000
Work-in-process................................... 100,000 95,000
Finished goods.................................... 3,961,000 4,512,000
---------- ----------
$5,296,000 $6,158,000
---------- ----------
---------- ----------
</TABLE>
F-6
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. DEPRECIATION
Depreciation is provided in amounts sufficient to charge the cost of
depreciable assets to operations over their estimated service lives principally
on a straight-line method for financial reporting purposes and on straight-line
and accelerated methods for income tax reporting purposes. Lives used in
straight-line depreciation for financial reporting purposes are as follows:
<TABLE>
<CAPTION>
NUMBER OF
YEARS
---------
<S> <C>
Building.......................................... 18-25
Equipment......................................... 3-15
Land and building improvements.................... 18
</TABLE>
6. INTANGIBLES
Intangibles consist primarily of the cost of the technology and regulatory
rights related to the Sustain Dental Implant System product line acquired in May
1992 and the goodwill related to the July 1993 acquisition of Implant Support
Systems, Inc.
On an ongoing basis, the Company reviews the valuation and amortization of
intangibles to determine possible impairment by comparing the carrying value to
projected undiscounted future cash flows of the related assets. The cost of the
technology and regulatory rights and the goodwill are being amortized on the
straight-line method over 15 years, their estimated useful lives. Accumulated
amortization of intangibles was $527,000 and $891,000 at June 30, 1994 and 1995.
7. OTHER ASSETS
Included within other assets are costs incurred to register patents and
trademarks which are capitalized as incurred. Amortization of these costs
commences when the related patent or trademark is granted. The costs are
amortized over the estimated useful life of the patent or trademark, not to
exceed 17 years. Patents and trademarks consist of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Patents............................................................. $ 104,000 $ 134,000
Trademarks.......................................................... 32,000 53,000
----------- -----------
136,000 187,000
Less amortization................................................... (60,000) (71,000)
----------- -----------
$ 76,000 $ 116,000
----------- -----------
----------- -----------
</TABLE>
8. INCOME TAXES
The Company follows the liability method of computing deferred taxes. The
liability method provides that deferred tax assets and liabilities are recorded
based on the difference between the tax basis of assets and liabilities and
their carrying amounts for financial reporting purposes.
9. REVENUE RECOGNITION AND PRODUCT WARRANTY
The Company recognizes revenue when product is shipped or otherwise accepted
by the customer. Under the terms of a contract covering sales of ophthalmic
hyaluronate, the Company's product is under warranty against non-compliance with
product specifications. A provision is made for the estimated cost of replacing
or re-working any product not complying with the warranted product
specifications.
10. NET LOSS PER COMMON SHARE
Net loss per common share is based upon the weighted average outstanding
common shares.
F-7
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No. 107
"Disclosures about Fair Value of Financial Instruments." The FASB has also
issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." The adoption of these standards is not
expected to have a material effect on the consolidated financial statements of
the Company.
NOTE B -- GOING CONCERN
Cash on hand at June 30, 1995 is not sufficient to allow the Company to fund
its anticipated losses from operations and fixed debt and lease obligations
through June 30, 1996. Therefore, the Company will require additional financing.
Management plans to raise a substantial amount of equity through a proposed
public offering of the Company's common stock which is expected to be completed
in late 1995 (see Note O). In the event the proposed offering is not completed,
management believes it would have alternative sources of financing available and
believes the Company will be successful in obtaining the necessary funds to
continue the operations of the business through June 30, 1996.
NOTE C -- ACQUISITION OF IMPLANT SUPPORT SYSTEMS, INC.
On July 28, 1993, the Company acquired all of the outstanding shares of
common stock of Implant Support Systems, Inc. ("ISS"). The Company paid $682,000
in cash, issued a $2,000,000 note payable and assumed certain liabilities. The
payment terms of the note payable were amended in September 1994. This note as
amended bears interest at 5% payable quarterly beginning October 15, 1993 with
principal payments of $700,000 paid during fiscal 1995, $850,000 due October 15,
1995 and $450,000 due December 15, 1996. The principal payments may be made in
cash or the Company's common stock at the Company's option. If the Company
chooses its common stock as the form of payment, the note holder has certain
registration rights. The note is secured by the assets of ISS. The acquired
goodwill of approximately $2,754,000 is being amortized on a straight-line basis
over 15 years.
At the time of the acquisition, the Company also entered into a six-month
consulting agreement and a three-year non-compete agreement with the former
owner of ISS and entered into a six-month consulting agreement and an
eighteen-month non-compete agreement with one of ISS' employees. These
agreements provide for aggregate compensation of $125,000 in fiscal 1995 and
$120,000 in fiscal 1996.
Consolidated results of operations on a pro forma basis, as if the
acquisition of ISS had occurred on July 1, 1993, would not be materially
different than the reported consolidated results for the year ended June 30,
1994.
NOTE D -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Industrial development revenue bonds.......................... $ 6,954,000 $ 6,895,000
Note payable.................................................. 2,000,000 1,300,000
Real estate special assessments............................... 399,000 294,000
Deferred lease payments....................................... 667,000 538,000
-------------- --------------
10,020,000 9,027,000
Less current maturities....................................... (969,000) (1,139,000)
-------------- --------------
$ 9,051,000 $ 7,888,000
-------------- --------------
-------------- --------------
</TABLE>
F-8
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- LONG-TERM OBLIGATIONS (CONTINUED)
INDUSTRIAL DEVELOPMENT REVENUE BONDS
On September 28, 1990, the Company completed a $7,000,000 transaction to
finance its manufacturing and administrative facility through the issuance of
30-year industrial development revenue bonds by the municipality where the
facility is located. The bonds are collateralized by a first mortgage on the
facility and bear interest at 10.25%. The Company is required to make debt
service payments on the bonds of approximately $775,000 per year for fiscal
years 1995 through 2021. The payments are required to be made monthly to a
sinking fund. At June 30, 1995, the Company has approximately $700,000 on
deposit with the bond trustee to cover the reserve fund requirement.
The terms of the loan agreement require the Company to comply with various
financial covenants including minimum current ratio, fixed charges coverage and
cash flow coverage requirements and maximum debt to net worth limitation. These
covenants have been waived by the bondholder through fiscal 1996. The debt to
net worth ratio covenant has the effect of restricting the payment of cash
dividends or repurchases of common stock.
NOTE PAYABLE
In July 1993, the Company issued its promissory note payable as part of the
consideration paid to the seller of Implant Support Systems, Inc. (see Note C).
REAL ESTATE SPECIAL ASSESSMENTS
In connection with special land improvements added during and after the
construction of the Company's manufacturing and administrative facility the
property has been assessed a total of $869,000 in special assessments. The
special assessments bear interest at 8.5% with principal and interest payments
due semi-annually. Approximately $164,000 of the total is due over a five year
term with the balance due over a ten year term.
DEFERRED RENT
The Company has recorded deferred rent to reflect the expense on a
straight-line basis for rent due under its equipment leases (see Note F).
At June 30, 1995, aggregate minimum annual principal payments of long-term
obligations for the years ending June 30 are as follows:
<TABLE>
<S> <C>
1996................................................ $1,139,000
1997................................................ 698,000
1998................................................ 253,000
1999................................................ 263,000
2000................................................ 165,000
Thereafter.......................................... 6,509,000
----------
$9,027,000
----------
----------
</TABLE>
NOTE E -- CUSTOMERS' DEPOSITS
In November 1994, Lifecore renewed its current supply contract with Alcon
Laboratories, Inc., an indirect subsidiary of Nestle S.A. ("Alcon") through
December of 1998. The agreement contains minimum annual purchase requirements
totalling $10,400,000 for calendar years 1995 through 1998. Lifecore received a
$6,300,000 cash advance from Alcon against future contract purchases.
Approximately $1,952,000 of the cash advance is classified as long-term as it is
expected to be realized during the fiscal year ended June 30, 1997.
F-9
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- CUSTOMERS' DEPOSITS (CONTINUED)
As security for the cash advance, the Company granted Alcon a right to
accelerate delivery of certain finished hyaluronate inventory. The amount of
inventory that is subject to acceleration is limited to the amount purchasable
by the outstanding cash advance based upon the contract price.
NOTE F -- OPERATING LEASES
In May 1991, the Company entered into an operating lease agreement with
Johnson & Johnson Finance Corporation ("JJFC"), an affiliate of the Company's
customers, Ethicon, Inc. and Johnson & Johnson Medical, Inc. JJFC is also an
affiliate of Johnson & Johnson Development Corporation who is a shareholder of
the Company (see Note M). From May 1991 to March 1993 equipment subject to the
lease was installed and validated at the Company's Chaska facility. The Company
began recording operating lease expense on a straight line basis in April 1993.
Minimum monthly lease payments of $152,000 commenced in April 1994 for a term of
66 months. At the end of this initial lease term, the Company has the option to
either renew for an additional 18 month period or purchase the leased equipment
at a predetermined fair value. Additionally, the Company has entered into 60
month operating leases with a financial institution for approximately $900,000
of furniture and fixtures. Operating lease expense was approximately $572,000,
$1,774,000 and $1,911,000 for the years ended June 30, 1993, 1994 and 1995. At
June 30, 1995, the future aggregate minimum annual lease payments due under
these operating leases for the years ending June 30 are as follows:
<TABLE>
<S> <C>
1996................................................ $2,007,000
1997................................................ 1,877,000
1998................................................ 1,824,000
1999................................................ 1,820,000
2000................................................ 304,000
----------
$7,832,000
----------
----------
</TABLE>
F-10
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES
The Company implemented Financial Accounting Standards Board Statement of
Financial Standards No. 109, "Accounting for Income Taxes" effective July 1,
1993. Under the new standard, deferred tax assets and liabilities represent the
tax effects, based on current tax law, of future deductible or taxable amounts
attributable to events that have been recognized in the financial statements. In
connection with this implementation, the Company recorded a net deferred tax
asset of $6,604,000 and a valuation allowance of $6,604,000 as of July 1, 1993.
Deferred tax assets (liabilities) consist of the following at June 30:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward............................. $ 6,762,000 $ 8,064,000
Capital loss carryforward................................... 377,000 377,000
Tax credit carryforward..................................... 248,000 253,000
Inventories................................................. 798,000 1,200,000
Other....................................................... 107,000 178,000
-------------- --------------
Total deferred tax assets................................... 8,292,000 10,072,000
Deferred tax liabilities
Deferred lease payments..................................... (720,000) (572,000)
Depreciation................................................ (430,000) (528,000)
-------------- --------------
Total deferred tax liability................................ (1,150,000) (1,100,000)
-------------- --------------
Net deferred tax asset before valuation allowance............. 7,142,000 8,972,000
Valuation allowance........................................... (7,142,000) (8,972,000)
-------------- --------------
Net deferred tax asset........................................ $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The deferred tax asset valuation allowance increased $1,830,000 during 1995,
since these benefits may not be realized.
At June 30, 1995, the Company had approximately $22,800,000 of net operating
loss carryforwards for tax reporting purposes, which expire in 1999 through 2010
and income tax credit carryforwards of approximately $253,000 which expire in
1996 through 2007.
NOTE H -- STOCK OPTIONS
STOCK OPTION PLANS
In November 1987, the shareholders adopted the 1987 Stock Plan (the "1987
Plan") to provide for options to be granted to certain eligible salaried
employees and non-employee members of the Board of Directors. A total of 300,000
shares of common stock are reserved for issuance under the Plan. All outstanding
options under two prior plans were exchanged for options under the 1987 Plan.
All future options granted under the 1987 Plan will be granted at an exercise
price equal to the fair market value of the common stock at the date of grant.
Each grant awarded specifies the period for which the options are exercisable
and provides that the options shall expire at the end of such period.
F-11
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- STOCK OPTIONS (CONTINUED)
Option transactions under the 1987 Plan during the three years ended June
30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF
1987 PLAN SHARES OPTION PRICE RANGE
- ------------------------------------------------------------------------ ----------- ------------------
<S> <C> <C>
Outstanding at July 1, 1992............................................. 90,650 $ 3.13 - 4.50
Exercised............................................................. (12,850) 3.13 - 4.50
-----------
Outstanding at June 30, 1993............................................ 77,800 3.13 - 4.50
Exercised............................................................. (11,475) 3.13 - 4.50
Cancelled............................................................. (4,100) 4.50
-----------
Outstanding at June 30, 1994............................................ 62,225 3.13 - 4.50
Exercised............................................................. (7,223) 3.13 - 4.50
Cancelled............................................................. (500) 4.50
-----------
Outstanding at June 30, 1995............................................ 54,502 $ 3.13 - 3.81
-----------
-----------
</TABLE>
Under the 1987 Plan, options to purchase an aggregate of 54,502 shares were
exercisable at June 30, 1995.
In November 1990, the shareholders adopted the 1990 Stock Plan (the "1990
Plan") to provide for options to be granted to certain eligible employees,
non-employee members of the Board of Directors and other non-employee persons as
defined in the Plan. In November 1993, the 1990 Plan was amended to provide a
total of 1,000,000 shares of common stock reserved for issuance under the 1990
Plan. Options will be granted under the 1990 Plan at exercise prices which are
determined by a committee as appointed by the Board of Directors. Options
granted to date under the 1990 Plan have been at fair market value. Each grant
awarded specifies the period for which the options are exercisable and provides
that the options shall expire at the end of such period.
Option transactions under the 1990 Plan during the three years ended June
30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF
1990 PLAN SHARES OPTION PRICE RANGE
- ------------------------------------------------------------------------ ----------- ------------------
<S> <C> <C>
Outstanding at July 1, 1992............................................. 285,000 $ 2.63 - 19.00
Granted............................................................... 151,000 3.75 - 17.25
Exercised............................................................. (4,200) 9.88
Cancelled............................................................. (10,750) 9.50 - 9.88
-----------
Outstanding at June 30, 1993............................................ 421,050 2.63 - 19.00
Granted............................................................... 145,000 4.25 - 10.88
Exercised............................................................. (18,208) 2.63 - 7.38
Cancelled............................................................. (47,550) 5.00 - 11.25
-----------
Outstanding at June 30, 1994............................................ 500,292 2.63 - 19.00
Granted............................................................... 164,500 3.63 - 8.25
Exercised............................................................. (1,250) 5.75
Cancelled............................................................. (88,625) 3.88 - 16.88
-----------
Outstanding at June 30, 1995............................................ 574,917 $ 2.63 - 19.00
-----------
-----------
</TABLE>
F-12
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- STOCK OPTIONS (CONTINUED)
Under the 1990 Plan, options to purchase an aggregate of 283,316 shares were
exercisable at June 30, 1995.
EMPLOYEE STOCK PURCHASE SAVINGS PLAN
The 1990 Employee Stock Purchase Savings Plan ("ESPSP") provides for the
purchase by eligible employees of Company common stock at a price equal to 85%
of the market price on either the anniversary date of such plan's commencement
or the termination date of the plan, whichever is lower. Participants may
authorize payroll deductions up to 10% of their base salary during the plan year
to purchase the stock. During the three years ended June 30, 1995 a total of
29,881 shares had been issued, including 2,116 shares for approximately $12,000
in 1993, 17,156 shares for approximately $103,000 in 1994 and 10,609 shares for
approximately $54,000 during 1995. At June 30, 1995, the Company had
approximately 93,000 shares reserved for future issuance under the ESPSP.
NOTE I -- SETTLEMENT OF COMMON STOCK VALUATION
In October 1992, the Company issued a total of 330,000 shares of its common
stock to satisfy certain notes payable. Pursuant to the agreement with the note
holder, the valuation of the 330,000 shares of common stock in excess of the
outstanding principal balances was to be returned to Lifecore provided such
value was realized from sales of the common stock. In October 1993, the
remaining shares were sold and $521,000 of cash was returned to Lifecore.
NOTE J -- COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENTS
The Company has entered into an agreement which provides for royalty
payments based on a percentage of net sales of certain products of its Oral
Restorative Division. Total royalty expense under these agreements for the three
years ended June 30, 1995 has not been material.
SEVERANCE AGREEMENTS
The Company has employment agreements with certain officers that provide
severance pay benefits if there is a change in control of the Company (as
defined) and the officer is involuntarily terminated (as defined). The maximum
contingent liability under these agreements at June 30, 1995 is approximately
$918,000.
NOTE K -- EMPLOYEE BENEFIT PLAN
Effective October 1, 1988, the Company established a 401(k) profit sharing
plan for eligible employees not covered by collective bargaining agreements.
Contributions by the Company are determined by the Board of Directors. There
have been no Company contributions since the inception of the plan.
NOTE L -- SEGMENT INFORMATION
The Company's two business segments are the manufacturing, marketing and
selling of products containing hyaluronate (the "Hyaluronate Division") and oral
restorative products (the "Oral Restorative Division").
Currently, products containing hyaluronate are sold primarily to OEM
customers pursuant to supply agreements between the Company and its customers.
Currently, Alcon is a major customer of the Company. Sales to Alcon were 68%,
57% and 32% of total sales in 1993, 1994 and 1995. Accounts receivable from
Alcon represented 44% of receivables at June 30, 1994 (see Note E).
F-13
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- SEGMENT INFORMATION (CONTINUED)
The Company's Oral Restorative Division markets products throughout the
United States directly to clinicians through a direct sales force and primarily
through distributorship arrangements in foreign locations.
Sales to customers located principally in Europe accounted for 10%, 16% and
20% of total Company sales during the years ended June 30, 1993, 1994 and 1995.
As of, and for, the period from inception to June 30, 1995, the operations of
the Company's Italian subsidiary, Lifecore Biomedical SpA, have not been
material to the consolidated financial statements.
Segment information for the Company is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales
Hyaluronate products................................. $ 5,584,000 $ 6,903,000 $ 5,223,000
Oral restorative products............................ 1,901,000 3,527,000 4,795,000
-------------- -------------- --------------
$ 7,485,000 $ 10,430,000 $ 10,018,000
-------------- -------------- --------------
-------------- -------------- --------------
Profit (loss) from operations
Hyaluronate products................................. $ (699,000) $ 960,000 $ (3,309,000)
Oral restorative products............................ (3,582,000) (2,351,000) (1,374,000)
-------------- -------------- --------------
$ (4,281,000) $ (1,391,000) $ (4,683,000)
-------------- -------------- --------------
-------------- -------------- --------------
Capital expenditures
Hyaluronate products................................. $ 261,000 $ 360,000 $ 395,000
Oral restorative products............................ -- 35,000 54,000
-------------- -------------- --------------
$ 261,000 $ 395,000 $ 449,000
-------------- -------------- --------------
-------------- -------------- --------------
Depreciation and amortization expense
Hyaluronate products................................. $ 676,000 $ 588,000 $ 554,000
Oral restorative products............................ 198,000 355,000 385,000
-------------- -------------- --------------
$ 874,000 $ 943,000 $ 939,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Identifiable assets
Hyaluronate products................................................. $ 16,542,000 $ 16,404,000
Oral restorative products............................................ 7,521,000 9,118,000
-------------- --------------
$ 24,063,000 $ 25,522,000
-------------- --------------
-------------- --------------
</TABLE>
NOTE M -- AGREEMENTS
On August 8, 1994, Lifecore and Ethicon entered into a Conveyance, License,
Development and Supply Agreement (the "Ethicon Agreement"). At the same time,
Lifecore, Ethicon and Johnson & Johnson Development Corporation ("JJDC"), a
subsidiary of Johnson & Johnson, entered into a Stock Purchase Agreement.
Under the terms of the Ethicon Agreement, Ethicon transferred to Lifecore
its ownership in certain technology related to research and development
previously conducted on the Company's sodium hyaluronate material. The
technology transferred to Lifecore includes written technical documents related
to Ethicon's research and development of a product to inhibit the formation of
F-14
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- AGREEMENTS (CONTINUED)
surgical adhesions. These documents include product specifications, methods and
techniques, technology, know-how and certain patent applications. Lifecore has
assumed responsibility for continuing the anti-adhesion development project
including conducting human clinical trials on a second generation hyaluronate
based product. Lifecore has granted Ethicon exclusive world-wide marketing
rights through 2008 to the products developed by Lifecore within defined fields
of use.
Under the terms of the Stock Purchase Agreement, JJDC purchased 757,396
unregistered shares of Lifecore common stock for total consideration of $4
million consisting of $2.6 million cash and $1.4 million conversion of a
customer deposit from Ethicon held by Lifecore. Lifecore granted JJDC certain
registration rights which provide JJDC the option of having up to one half of
the shares registered on, or after, June 30, 1995 and the remaining shares
registered on, or after, June 30, 1996.
NOTE N -- LEGAL PROCEEDINGS
The Company is subject to various legal proceedings in the normal course of
business. Management believes that these proceedings will not have a material
adverse effect on the consolidated financial statements.
NOTE O -- SUBSEQUENT EVENT
On August 30, 1995, the Company filed a registration statement with the
Securities and Exchange Commission to register 2,200,000 shares of Common Stock,
excluding up to 330,000 shares pursuant to the underwriters' over-allotment
option. These shares are expected to be offered to the public in an offering
which is planned for completion in the fourth quarter of calendar 1995. If
completed, management believes that the proceeds from this public offering will
enable the Company to meet its financial obligations and continue as a going
concern during fiscal 1996.
NOTE P -- RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform to the 1995 presentation.
F-15
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C
------------------------
COLUMN B
----------- ADDITIONS COLUMN E
BALANCE ------------------------ -----------
COLUMN A AT CHARGED TO CHARGED TO COLUMN D BALANCE
- ------------------------------------ BEGINNING COSTS AND OTHER ---------- AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------ ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1995
Accounts receivable allowance..... $ 78,000 $ 152,000 $ -- $ (11,000 (A) $ 219,000
Inventory reserve................. 332,000 -- -- (25,000 (B) 307,000
Year ended June 30, 1994
Accounts receivable allowance....... 55,000 31,000 -- (8,000 (A) 78,000
Inventory reserve................. 72,000 260,000 -- -- 332,000
Year ended June 30, 1993
Accounts receivable allowance..... 44,000 17,000 -- (6,000 (A) 55,000
Inventory reserve................. 72,000 -- -- -- 72,000
<FN>
- ------------------------
(A) Deductions represent accounts receivable balances written-off during the
year.
(B) Deductions represent utilization of the reserve through inventory
written-off during the year.
</TABLE>
S-1
<PAGE>
EXHIBIT 3.2
AMENDED BYLAWS
OF
LIFECORE BIOMEDICAL, INC.
ARTICLE I
SHAREHOLDERS
SECTION 1. The shareholders of this Corporation shall hold
an annual meeting in each calendar year at such time and place,
within or without the State of Minnesota, as may be designated by
the Board of Directors, for the purpose of electing directors,
and for the transaction only of such other business as is
properly brought before the meeting in accordance with these
Bylaws; provided, however, that the interval between two
consecutive annual meetings shall not be more than fourteen (14)
months nor less than ten (10) months. A notice setting out the
time and place of the annual meeting shall be mailed by the
secretary of the Corporation, or his delegate, postage prepaid,
to each shareholder of record at his address as it appears on the
records of the Corporation, or, if no such address appears, at
his last known place of residence, at least ten (10) days prior
to said annual meeting, but any shareholder may waive such annual
notice by a signed waiver in writing.
SECTION 2. At the annual meeting, the shareholders shall
elect directors of the Corporation and shall transact such other
business as may properly come before them. To be properly
brought before the meeting, business must be of a nature that is
appropriate for consideration at an annual meeting and must be
(i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors,
or (ii) otherwise properly brought before the meeting by or at
the direction of the Board of Directors, or (iii) otherwise
properly brought before the meeting by a shareholder. In
addition to any other applicable requirements, for business to be
properly brought before the annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to
the secretary of the Corporation. To be timely, each such notice
must be given, either by personal delivery or by United States
mail, postage prepaid, to the secretary of the Corporation, not
less than fifty (50) days nor more than seventy-five (75) days
prior to the meeting; provided, however, that in the event less
than sixty (60) days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by
the shareholder to be timely must be so received not later than
the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such
public disclosure was made, whichever first occurs. Each such
notice to the secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (w) a
brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business
<PAGE>
at the annual meeting; (x) the name and address of record of the
shareholder proposing such business; (y) the class or series (if
any) and number of shares of the Corporation which are owned by
the shareholder; and (z) any material interest of the shareholder
in such business. Notwithstanding anything in these Bylaws to
the contrary, no business shall be transacted at the annual
meeting except in accordance with the procedures set forth in
this Article; provided, however, that nothing in this Article
shall be deemed to preclude discussion by any shareholder of any
business properly brought before the annual meeting in accordance
with these Bylaws.
SECTION 3. A special meeting of the shareholders may be
called at any time by the chief executive officer or chief
financial officer of the Corporation, and shall be called by the
president or the secretary upon the request in writing, or by
vote of, two or more directors or upon the request in writing of
shareholders of record owning one-tenth of the outstanding shares
of common stock. Such meeting shall be called by mailing a
notice thereof as above provided in the case of the annual
meeting of shareholders, which notice shall state the purpose or
purposes of the meeting.
SECTION 4. At any shareholders' meeting, each shareholder
shall be entitled to one (1) vote for each share of common stock
standing in his name on the books of the Corporation as of the
record date. Any shareholder may vote either in person or by
proxy. The presence in person or by proxy of the holders of
twenty percent (20%) of the shares of common stock entitled to
vote at any shareholders' meeting shall constitute a quorum for
the transaction of business. If no quorum is present at any
meeting, the shareholders present in person or by proxy may
adjourn the meeting to such future time as they shall agree upon
without further notice other than by announcement at the meeting
at which such adjournment is taken.
SECTION 5. At any shareholders meeting for which there is a
quorum present, the shareholders may conduct such business as may
be on the agenda or otherwise proposed for such meeting, or any
part of such business in the case of an adjournment. All or any
part of the business not conducted at the initial meeting of
shareholders may be conducted at any adjournments thereof,
including any specific proposals on the agenda for such initial
meeting for which there was no final disposition. A meeting of
the shareholders at which there is a quorum can be adjourned as
to all or part of the matters to be considered at the meeting
upon motion by the person presiding at such meeting and by a
majority vote of shares represented in person or by proxy at such
meeting. Such adjournment shall be until a specific time and
place, and the time and place for the reconvened meeting shall be
announced at the meeting and reflected in the minutes thereof.
2
<PAGE>
In addition, if the adjourned date is less than ten (10)
days after the date of the meeting at which an adjournment
proposal was passed, a public announcement shall be made by the
Corporation as to the time and place for the reconvened meeting;
or, if the adjourned date for the reconvened meeting is ten (10)
days or more after the date of the meeting at which the
adjournment proposal was passed, notice of the time and place of
the reconvened meeting shall be sent by first class mail to all
shareholders of record at least ten (10) days prior to such
reconvened meeting.
ARTICLE II
DIRECTORS
SECTION 1. The Board of Directors shall have the general
management and control of all business and affairs of the
Corporation and shall exercise all the powers that may be
exercised or performed by the Corporation under the statutes, its
Articles of Incorporation and its Bylaws.
SECTION 2.
(a) The Board of Directors shall consist of such number of
directors, not less than three, the exact number to be fixed from
time to time solely by resolution of the Board of Directors,
acting by not less than a majority of the directors then in
office.
(b) The Board of Directors shall be divided into three
classes, with the term of office of one class expiring each year.
Each class of directors shall hold office for a three-year term.
In the case of any vacancy on the Board of Directors, including
a vacancy created by an increase in the number of directors, the
vacancy shall be filled by election of the Board of Directors
with the director so elected to serve for the remainder of the
term of the director being replaced or, in the case of an
additional director, for the remainder of the term of the class
to which the director has been assigned. All directors shall
continue in office until the election and qualification of their
respective successors in office. When the number of directors is
changed, any newly created directorships shall be so assigned
among the classes by a majority of the directors then in office,
though less than a quorum, as to make all classes as nearly equal
in number as possible. No decrease in the number of directors
shall have the effect of shortening the term of any incumbent
director.
(c) Any director or directors may be removed from office at
any time, but only for cause and only by the affirmative vote of
at least two-thirds of the votes entitled to be cast by holders
3
<PAGE>
of all the outstanding shares of voting stock (as defined in
Article VI of the Corporation's Articles of Incorporation),
voting together as a single class.
(d) In the event that the Board of Directors increases the
number of directors or fills a vacancy on the Board in accordance
with the provisions of paragraph (b) of this Section 2, the Board
of Directors shall give written notice to the shareholders of the
Corporation of any increase in the number of directors and of
pertinent information regarding any director so elected by the
Board to fill a vacancy. Such written notice shall be effected
by inclusion of such information in the next mailing to
shareholders of the Corporation following any such increase in
the number of directors or election of a director to fill a
vacancy by the Board.
SECTION 3. Subject to the rights of holders of any class or
series of stock having a preference over the common shares as to
dividends or upon liquidation, nominations for the election of
directors may be made by the Board of Directors or a committee to
be appointed by the Board of Directors or by any shareholder
entitled to vote generally in the election of directors.
However, any shareholder entitled to vote generally in the
election of directors may nominate one or more persons for
election as directors at a meeting only if written notice of such
shareholder's intent to make such nomination or nominations has
been given, either by personal delivery or by United States mail,
postage prepaid, to the secretary of the Corporation not less
than fifty (50) nor more than seventy-five (75) days prior to the
meeting; provided, however, that in the event less than sixty
(60) days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which
such notice of the date of meeting was mailed or such public
disclosure was made, whichever first occurs. Each such notice to
the secretary shall set forth: (i) the name and address of record
of the shareholder who intends to make the nomination; (ii) a
representation that the shareholder is a holder of record of
shares of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (iii) the
name, age, business and residence addresses, and principal
occupation or employment of each nominee; (iv) a description of
all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are
to be made by the shareholder; (v) such other information
regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to
the proxy rules of the Securities and Exchange Commission; and
(vi) the consent of each nominee to serve as a director of the
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Corporation if so elected. The Corporation may require any
proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as a director of
the Corporation. The presiding officer of the meeting may, if
the facts warrant, determine that a nomination was not made in
accordance with the foregoing procedure and, if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
SECTION 4. The Board of Directors may meet regularly at
such time and place as it shall fix by resolution, and no notice
of regular meetings shall be required. Special meetings of the
Board of Directors may be called by the chairman of the board,
the president or by any majority of directors by giving at least
twenty-four (24) hours' notice to each of the other directors by
mail, telephone, telegraph, or in person.
SECTION 5. A majority of the directors shall constitute a
quorum for the transaction of business. Any act which might have
been taken at a meeting of the Board of Directors and requiring
approval by shareholders under Minnesota Statutes, Chapter 302A,
may be taken without a meeting if authorized in a writing signed
by all of the directors, and any such action shall be as valid
and effective in all respects as if taken by the Board at a
regular meeting. If shareholder approval is not so required by
Minnesota Statutes, Chapter 302A, such act which might have been
taken at a meeting of the Board of Directors may be taken in
written action signed by the number of directors that would be
required to take such action at a meeting of the Board of
Directors of which all such directors were present.
SECTION 6. The Board of Directors shall fix and change, as
it may from time to time determine, the compensation to be paid
all officers of the Corporation.
SECTION 7. The Board of Directors may, by unanimous
affirmative action of the entire Board of Directors, designate
two (2) or more of their number to constitute an Executive
Committee which, to the extent determined by the Board, shall
have and exercise the authority of the Board in the management of
the business of the Corporation. Such Executive Committee shall
act only in the interval between meetings of the Board and shall
be subject at all times to the control and direction of the
Board.
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ARTICLE III
OFFICERS
SECTION 1. The officers of this Corporation shall be a
president, a treasurer, a secretary and such vice presidents and
other officers as may from time to time be elected by the Board
of Directors. All officers shall be elected by the Board of
Directors and shall serve at the pleasure of the Board of
Directors. Any two (2) of the offices, except those of the
president and vice president, may be held by the same person.
SECTION 2. The president may fix and change, as he may from
time to time determine, the compensation to be paid the employees
of the Corporation. The president shall be a director, but shall
hold office until his successor is elected notwithstanding an
earlier termination of his office as director.
SECTION 3. The vice president, or executive vice president
if there is more than one, shall perform the duties and assume
the responsibilities of the president in the absence or inability
to act of the president. In case of death, resignation or
permanent disability of the president, the executive vice
president shall act as president until the Board of Directors
designates such new president. A vice president who is not a
director shall not succeed to the office of president.
SECTION 4. The secretary shall keep a record of the minutes
of the proceedings of meetings of directors and of shareholders,
and shall give notice of such meetings as required in these
Bylaws or by the Board of Directors.
SECTION 5. The treasurer shall keep accounts of all monies
and other assets of the Corporation received or disbursed, shall
deposit all monies and valuables in the name of and to the credit
of the Corporation in such banks or depositories or with such
custodians as may be authorized to receive the same by these
Bylaws and by the Board of Directors, and shall render such
accounts thereof as may be required by the Board of Directors,
the president or the shareholders.
SECTION 6. The Board of Directors may appoint one or more
of its members to serve as its agent or to provide services and
have such other powers and perform such other duties as may be,
from time to time, assigned by the Board of Directors or the
president. The Board may authorize one of its members to hold
the nominal title of "Chairman of the Board." If a Chairman of
the Board is appointed, he shall not have the status of an
officer of the Corporation.
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ARTICLE IV
OFFICE
The principal office of the Corporation shall be in the
State of Minnesota. The Corporation may also have an office or
offices in such other places and in such other states as the
Board of Directors may from time to time authorize and establish.
ARTICLE V
CORPORATE SEAL; STOCK CERTIFICATES
SECTION 1. The seal of the Corporation shall be a circular
embossed seal, having inscribed thereon the following words:
LIFECORE BIOMEDICAL, INC.
Corporate Seal
Minnesota
SECTION 2. Stock certificates issued by the Corporation
shall be signed by any two (2) officers. When a certificate is
signed by a transfer agent or registrar, the signature of any
such officer may be facsimiled, engraved or printed.
ARTICLE VI
CLOSING OF STOCK RECORDS
OR FIXING OF RECORD DATE
The Board of Directors shall have power to close the stock
records of the Corporation for a period not to exceed sixty (60)
days preceding the date of any meeting of shareholders, or the
date for payment of any dividend, or the date for the allotment
of rights, or the date when any change or conversion or exchange
of capital stock shall go into effect, or for a period not
exceeding sixty (60) days in connection with obtaining the
consent of shareholders for any purpose; provided, however, that
in lieu of closing the stock records, the Board of Directors may
fix in advance a date not exceeding sixty (60) days preceding the
date of any meeting of shareholders, or the date for the payment
of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock
shall go into effect, or a date in connection with obtaining such
consent of shareholders, or for the determination of shareholders
entitled to receive payment of any such dividend or to receive
any such allotment of rights or to exercise rights in respect of
any such change, conversion or exchange of capital stock, or to
give any such consent, as the case may be, and in such case only
such shareholders as shall be shareholders of record on the date
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so fixed shall be entitled to such notice of and to attend such
meeting, or to receive payment of such dividend, or to receive
such allotment of rights, or to exercise any rights, or to give
such consent, as the case may be, notwithstanding the transfer of
any stock on the books of the Corporation after any such record
date fixed as aforesaid.
ARTICLE VII
INDEMNIFICATION
SECTION 1. Any person who at any time shall serve or shall
have served as a director, officer, employee or in some other
official capacity at the request of the Corporation, or of any
other enterprise at the request of the Corporation, and the
heirs, executors and administrators of such person shall be
indemnified by the Corporation, in accordance with and to the
fullest extent permitted by the Minnesota Business Corporation
Act as it may be amended from time to time.
SECTION 2. Nothing in this Article VII shall be construed
to limit the ability of the Board of Directors, to the extent
permitted by applicable law, to indemnify any person or entity
not described in this Article VII as determined by the Board of
Directors in its discretion. Furthermore, the Board of Directors
may authorize written agreements between the Corporation and
persons, whether or not described in this Article VII, to grant
contractual rights to such persons as permitted by law.
ARTICLE VIII
ADOPTION AND AMENDMENT OF BYLAWS
SECTION 1. The Board of Directors may alter or amend these
Bylaws and may make or adopt additional Bylaws subject to the
power of the shareholders to change or repeal the Bylaws, except
that the Board of Directors shall not make or alter any Bylaws
fixing their qualifications, classifications or term of office,
or producing their number.
SECTION 2. The shareholders may alter or amend these Bylaws
and may make or adopt additional Bylaws by a majority vote at any
annual meeting of the shareholders or at any special meeting
called for that purpose, except as may be provided by Article VI
or any other provisions of the Articles of Incorporation of the
Corporation.
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The undersigned Secretary of Lifecore Biomedical, Inc.
hereby certifies that the foregoing Amended Bylaws were adopted
as the complete Amended Bylaws of the Corporation by the Board of
Directors of said Corporation on this 17th day of November, 1994.
/s/ John C. Heinmiller
____________________________
John C. Heinmiller
Secretary
9
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EXHIBIT 10.1
WAIVER AND AMENDMENT AGREEMENT
WHEREAS, the City of Chaska, Minnesota (the "Municipality")
and Lifecore Biomedical, Inc., a Minnesota corporation (the
"Borrower") entered into a certain Loan Agreement dated as of
September 1, 1990 (the "Loan Agreement"), which agreement was
assigned by the Municipality to Norwest Bank Minnesota, National
Association, as Trustee (the "Trustee") pursuant to a Trust
Indenture dated as of September 1, 1990 (the "Indenture") in
connection with the issuance and sale by the Municipality of its
Industrial Development Revenue Bonds (LifeCore Biomedical, Inc.
Project), Series 1990 (the "Bonds"). Terms not defined herein
shall have the meanings set forth in the Indenture;
WHEREAS, the Borrower has requested the waiver of certain
requirements of Section 3.05 of the Loan Agreement and of the
current terms of Sections 6.09(a)(i), 6.09(b), 6.09(c) and
6.09(d)(i) of the Loan Agreement and the modification of Sections
6.09(a)(i) and (ii), 6.09(b), 6.09(c) and 6.09(d)(i) and (ii) of
the Loan Agreement, as amended by the Waiver and Amendment
Agreement dated August 3, 1992 and as further amended by the
Waiver and Amendment Agreement dated July 28, 1994;
WHEREAS, the registered owners of all of the outstanding
Bonds (herein the "Bondholders") are willing to agree to the
request of the Borrower and direct the Trustee to consent thereto
based on the Borrower's agreements set forth herein;
NOW, THEREFORE, the parties hereto hereby agree as follows:
(1) The Trustee has received a Certificate of Completion of the
Project Manager pursuant to Section 3.05 of the Loan
Agreement as to completion of the Project and related
matters. The requirements that the Borrower also deliver a
separate certificate of the Independent Engineer pursuant to
Section 3.05 of the Loan Agreement and complete the items
listed in clauses (a), (b) and (c) of Section 3.05 of the
Loan Agreement are hereby waived.
(2) Compliance with the current provisions of Section 6.09(a)(i)
of the Loan Agreement is hereby waived and Sections
6.09(a)(i) and (ii) of the Loan Agreement are hereby amended
to read as follows:
Section 6.09 (a) CASH FLOW COVERAGE TEST. (i) For the
Fiscal Year ending June 30, 1996, Borrower shall not be subject
to a minimum Cash Flow Coverage Ratio.
(ii) For each Fiscal Year commencing with the Fiscal Year
ending June 30, 1997 ("Fiscal 1997"), the Borrower will, for the
twelve-month period ending at each fiscal quarter, maintain a
minimum Cash Flow Coverage Ratio of 2.00:1. At the Borrower's
option, for purpose of computing the Cash Flow Coverage Ratio for
any of the first three fiscal quarters of Fiscal 1997, the
Borrower shall be permitted to base such calculation either upon
Consolidated Adjusted Net Income for the preceding twelve-month
period or upon the Consolidated Adjusted Net Income for the
preceding six-month period, multiplied by two.
<PAGE>
(3) Compliance with the current provisions of Section 6.09(b) of
the Loan Agreement is hereby waived and Section 6.09(b) of
the Loan Agreement is hereby amended to read as follows:
Section 6.09 (b) LEVERAGE TEST. Borrower shall at all
times and at the end of each fiscal quarter maintain the
following maximum ratio of Consolidated Long Term Debt to
Consolidated Net Worth during the following Fiscal Years:
1997 and thereafter .50:1
(4) Compliance with the current provisions of Section 6.09(c) of
the Loan Agreement is hereby waived and Section 6.09(c) of
the Loan Agreement is hereby amended to read as follows:
Section 6.09 (c) CURRENT RATIO. Through June 30, 1996,
Borrower shall not be subject to a minimum ratio of Consolidated
Current Assets to Consolidated Current Liabilities (the "Current
Ratio"). For each fiscal year commencing with Fiscal 1997, the
Borrower shall at all times and at the end of each fiscal quarter
maintain a Current Ratio of not less than 2.00:1.
(5) Compliance with the current provisions of Section 6.09(d)(i)
of the Loan Agreement is hereby waived and Sections
6.09(d)(i) and (ii) of the Loan Agreement are hereby amended
to read as follows:
Section 6.09 (d) FIXED CHARGES COVERAGE TEST. (i) For the
Fiscal Year ending June 30, 1996, Borrower shall not be subject
to a minimum Fixed Charges Coverage Ratio.
(ii) For each Fiscal Year commencing with Fiscal 1997, the
Borrower will, for the twelve-month period ending at each fiscal
quarter, maintain a minimum Fixed Charges Coverage Ratio of
1.30:1. At the Borrower's option, for purposes of computing the
Fixed Charges Coverage Ratio for any of the first three fiscal
quarters of Fiscal 1997, the Borrower shall be permitted to base
such calculation either upon Consolidated Adjusted Net Income
plus rental payments on operating leases for the preceding
twelve-month period or upon the Consolidated Adjusted Net Income
plus rental payments on operating leases for the preceding six-
month period, multiplied by two.
(6) Borrower agrees that, through July 1, 1996, it will make
advance payments of cash into the Bond Fund established
pursuant Section 5.01 of the Indenture, as described in this
paragraph 6. At all times during this period, Borrower
shall have made advance payments in a sufficient amount to
satisfy the next two monthly payments payable by Borrower
pursuant to the Loan Agreement. The parties acknowledge
that Borrower may, at its option, obtain such cash through
the issuance and sale from time to time of Common Stock,
$.01 par value, of Borrower pursuant to an effective
registration statement.
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<PAGE>
(7) The Bondholders hereby direct the Trustee, as assignee of
the Loan Agreement by the Municipality, to consent to the
foregoing pursuant to Article XII.
IN WITNESS WHEREOF, the parties have caused this agreement
to be signed on their behalf as of this 27th day of July,
1995.
LIFECORE BIOMEDICAL, INC. NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Trustee
/s/ James W. Bracke /s/ Patricia A. Fischer
By______________________________ By______________________________
President & CEO Vice President
Its___________________________ Its___________________________
PUTNAM MANAGED MUNICIPAL PUTNAM MUNICIPAL INCOME FUND
INCOME TRUST
/s/ Howard Manning /s/ Triet M. Nguyen
By______________________________ By______________________________
S.V.P. S.V.P
Its___________________________ Its___________________________
PUTNAM TAX FREE HIGH
YIELD FUND
/s/ Triet M. Nguyen
By_______________________________
S.V.P.
Its___________________________
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EXHIBIT 10.6
LIFECORE BIOMEDICAL, INC.
3515 Lyman Boulevard
Chaska, Minnesota 55318
August 14, 1995
James W. Bracke, Ph.D.
3947 Huntington Drive
Minnetonka, MN 55343
Dear Jim:
Reference is made to the Employment Agreement as of June 1,
1991 between Lifecore Biomedical, Inc. (the "Company"), a
Minnesota corporation, and James W. Bracke ("Employee"). The
Company and Employee hereby agree to amend the Agreement as
follows:
A. Paragraph 3 of the Agreement is hereby amended and restated
as follows:
3. TERM. The term of this agreement shall extend
through June 30, 1998, subject to the provisions
of Section 5 and Section 16 hereof.
B. Paragraph 5 of the Agreement is hereby amended and restated
as follows:
5. RENEWAL. If Employee remains in the employment of
Company after the expiration of the term of this
Agreement specified in Section 3, the term of this
Agreement shall automatically be extended for
successive one-year terms, unless either party to
this Agreement gives written notice to the other
party at least 30 days prior to the end of such
term of such party's intention not to renew the
term of this Agreement.
If these terms are acceptable to you, please indicate by
signing this letter in the space indicated below.
Very truly yours,
LIFECORE BIOMEDICAL, INC.
/s/ Thomas H. Garrett
By____________________________
Assistant Secretary
Its_________________________
Agreed and accepted this
14th day of August, 1995.
/s/ James W. Bracke
____________________________________
James W. Bracke, Ph.D.
<PAGE>
EXHIBIT 10.7
INDEMNIFICATION AGREEMENT
THIS AGREEMENT, is made and entered into as of this _____
day of November 1994 by and between LIFECORE BIOMEDICAL, INC., a
Minnesota corporation (the "Company"), and _____________________
(the "Indemnified Party").
WITNESSETH:
WHEREAS, Indemnified Party, in the course of his or her
current and future service to the Company, may be made a party to
a legal action or other proceeding resulting in personal economic
loss to Indemnified Party; and
WHEREAS, the Company desires to retain the current and
future services of Indemnified Party and to reimburse Indemnified
Party for personal economic losses of Indemnified Party resulting
from the performance of Indemnified Party's duties; and
WHEREAS, the indemnification and advancement of expenses
provisions of the Bylaws of the Company are subject to reduction
or elimination at any time without the consent of Indemnified
Party, and the Company desires to provide indemnification to
Indemnified Party to the fullest extent permitted by law despite
any such change in the Bylaws or subsequent action by the
Company's Board of Directors or other person(s) charged with a
determination of whether indemnification or expense advances
should be granted; and
WHEREAS, the Board of Directors has considered the
advantages and disadvantages of such agreements to the Company,
including the possibility that the Company's financial ability to
honor the Indemnification Agreements might present a hardship to
the Company; and the Board of Directors has concluded that the
adoption of such agreements with members of the Board of
Directors and the executive officers of the Company is in the
best interests of the Company;
NOW, THEREFORE, in consideration of the continued services
of the Indemnified Party to the Company, Company and Indemnified
Party agree as follows:
1. INDEMNIFICATION. The Company agrees to indemnify the
Indemnified Party both during and after the time that such
Indemnified Party shall have served the Company as a director,
officer or employee, or of any other enterprise at the request of
the Company, and the heirs, executors and administrators of such
Indemnified Party shall also be indemnified by the Company, all
in accordance with and to the fullest extent permitted by
Minnesota Statutes, Section 302A.521, as it may be amended from
time to time.
<PAGE>
2. AMENDMENTS. Any amendments to the Articles of
Incorporation or Bylaws of the Company which reduce or eliminate
indemnification rights of persons thereunder shall have no effect
with respect to this Agreement, and thereafter Indemnified Party
shall continue to have all of the rights and benefits of this
Agreement despite any such amendments. However, if the Articles
of Incorporation or Bylaws of the Company, or the Minnesota
Statutes, are amended to provide for greater indemnification
rights or privileges, this Agreement shall not be construed so as
to limit Indemnified Party's rights and privileges to the terms
hereof and Indemnified Party shall be entitled to the full
benefit of any such additional rights and privileges. Further-
more, to the extent that the Minnesota Statutes or other
applicable law now or hereafter establishes that indemnification
cannot be made by the Company according to this Agreement in any
respect, this Agreement shall be interpreted as being
simultaneously amended to provide indemnification hereunder to
the fullest extent permitted by law.
3. ADVANCES. The Company agrees to make payments or
reimbursements to the Indemnified Party for the reasonable
expenses, including attorneys' fees and disbursements, incurred
by the Indemnified Party in advance of the final disposition of
any proceeding to which the Indemnified Party is or is threatened
to be made a party. The Company's obligation to make such
advances shall be subject only to receipt by the Company of a
written affirmation by the Indemnified Party of a good faith
belief that the criteria for indemnification set forth in the
Company's Articles of Incorporation or Bylaws, or the Minnesota
Statutes, have been satisfied, together with a written
undertaking by the Indemnified Party to repay all amounts so paid
or reimbursed by the Company, if it is ultimately determined that
the criteria for indemnification have not been satisfied. The
Company agrees that the undertaking set forth above need not be
secured and shall be accepted without reference to financial
ability on the part of the Indemnified Party or such Indemnified
Party's estate, heirs, executors or administrators financial
ability to make the repayment. The Company further agrees, in
those instances where a determination of eligibility for
indemnification or reimbursement of expenses in advance of the
final disposition of a proceeding shall be made, that the person
or persons making such determination shall, to the extent
permissible in accordance with law, be instructed to resolve
doubts or uncertainties with respect to the making of such
determination in favor of the Indemnified Party, thereby carrying
out the intent of the Company's Articles of Incorporation, Bylaws
and this Agreement as of the date hereof that the Indemnified
Party be accorded the benefits of the Company's indemnification
promise to the fullest extent permitted by law.
4. NOTICE. The Company agrees to provide the Indemnified
Party with prompt notice of any proposal to amend, modify or
eliminate the provisions of the Company's Articles of
Incorporation or Bylaws relating to indemnification or the
elimination or limitation of the Indemnified Party's personal
2
<PAGE>
liability. The Company further agrees that in the event any such
amendments are adopted, copies of same will be provided to the
Indemnified Party and the Indemnified Party shall be given an
opportunity to resign his or her position with the Company prior
to a change in the Company's Articles of Incorporation or Bylaws.
Moreover, the Company shall provide notice to the Indemnified
Party in the event a change is adopted in the Minnesota Statutes
or other applicable law relating to indemnification or the
elimination or limitation of a director's personal liability.
Any notice referenced above will be provided to the Indemnified
Party whether or not he or she is then serving as a member of the
Company's Board of Directors.
5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and shall inure to any and all successors, assigns, heirs,
estates, representatives and administrators of the parties
hereto.
6. NO AMENDMENTS. This Agreement may not be amended,
modified or terminated except by the express written consent
thereto by both parties hereto.
7. OTHER AGREEMENTS. This Agreement is supplementary to
and not exclusive of other agreements between the Company and
Indemnified Party which may exist now or in the future, to the
extent such agreements are not inconsistent herewith.
8. SURVIVAL. The rights of Indemnified Party under this
Agreement shall survive and continue in effect after the
termination of services to the Company by Indemnified Party,
whether by death, retirement or otherwise.
9. SAVINGS. If any provision or application of this
Agreement is held unlawful or unenforceable in any respect, such
illegality or unenforceability shall not affect other provisions
or applications which can be given effect, and this Agreement
shall be construed as if the unlawful or unenforceable provision
or application had never been contained herein or prescribed
hereby.
10. GOVERNING LAW. This Agreement shall be interpreted and
governed by the laws of the State of Minnesota.
IN WITNESS WHEREOF, the undersigned parties have executed
this Agreement as of the date set forth above.
LIFECORE BIOMEDICAL, INC.
By_________________________
Its: President
___________________________
Indemnified Party
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EXHIBIT 10.20
Certain portions of this Exhibit have been deleted and filed separately with
the Commission pursuant to Rule 24b-2. (Spaces corresponding to deleted
portions appear in brackets with asterisks.)
SUPPLY AGREEMENT
This Agreement, made and entered into as of December 7, 1994
between Lifecore Biomedical, Inc., a Minnesota corporation
("LBI") and IOLAB Corporation, a California corporation
("IOLAB").
BACKGROUND
1. LBI has developed a method for manufacturing sodium
hyaluronate by its proprietary Harvest Precipitate Process.
2. IOLAB is engaged in the sale of ophthalmic surgical
viscoelastic products, including products sold under the
trademarks AMVISC and AMVISC Plus.
3. IOLAB wishes to obtain sodium hyaluronate having a
range of molecular weights manufactured by LBI's proprietary
Harvest Precipitate Process for use by IOLAB in its AMVISC and
AMVISC Plus products.
4. IOLAB will contribute to the funding required by LBI to
scale up and validate its manufacturing capability to produce
sodium hyaluronate of the molecular weight desired by IOLAB by
LBI's proprietary Harvest Precipitate Process and in return shall
be [*CONFIDENTIAL TREATMENT REQUESTED*]. In addition, IOLAB
shall receive certain exclusive rights with respect to the use of
sodium hyaluronate manufactured by LBI's proprietary Harvest
Precipitate Process in ophthalmic surgical viscoelastic products.
NOW, THEREFORE, in consideration of the above premises and
other good and valuable consideration, the parties agree as
follows:
1. DEFINITIONS.
1.1 "AFFILIATE" shall mean a person or entity
controlling, controlled by or under common control with a party
to this Agreement. The "control" of a person shall mean direct
or indirect ownership of 50% or more of the outstanding voting
stock of a corporate person or 49% or more of the voting interest
in a non-corporate person.
1.2 "AMVISC POWDER" shall mean sodium hyaluronate
which is produced by LBI's proprietary Harvest Precipitate
Process, and conforms to the specifications set forth on Exhibit
A.
1.3 "AMVISC PLUS POWDER" shall mean sodium hyaluronate
which is produced by LBI's proprietary Harvest Precipitate
Process, and conforms to the specifications set forth on Exhibit B.
<PAGE>
1.4 "AMVISC SYRINGES" shall mean packaged syringes for
ophthalmic surgical use containing AMVISC Powder produced by LBI
and conforming to the specifications described on Exhibit C.
1.5 "AMVISC PLUS SYRINGES" shall mean packaged
syringes for ophthalmic surgical use containing AMVISC Plus
Powder produced by LBI and conforming to the specifications on
Exhibit D.
1.6 "DISCOUNT OPTION" shall have the meaning set forth
in Section 5.2.
1.7 "ESCROW AGENT" shall have the meaning set forth in
Section 10.
1.8 "FDA" shall mean the U.S. Food and Drug
Administration.
1.9 "FDA SITE CHANGE APPROVAL" shall mean finished
manufacturing site change approval from the FDA for the use of HA
Powder for IOLAB's AMVISC and AMVISC PLUS products.
1.10 "FIELD OF USE" shall mean any use of AMVISC Powder
or AMVISC Plus Powder, as applicable, in a viscoelastic product
which is used in ophthalmic surgery.
1.11 "HA POWDER" shall mean AMVISC Powder and AMVISC
Plus Powder, collectively.
1.12 "HA PRODUCTS" shall mean HA Powder and IOLAB
Syringes, collectively.
1.13 "HARVEST PRECIPITATE PROCESS" shall mean that
certain LBI proprietary process for the manufacture of sodium
hyaluronate described on Exhibit E and improvements and
modifications thereto.
1.14 "IOLAB SYRINGES" shall mean AMVISC Syringes and
AMVISC Plus syringes, collectively.
1.15 "MAJOR COUNTRY" shall have the meaning set forth
in Section 4.1.
1.16 "MANUFACTURING MILESTONE" shall have the meaning
set forth in Section 2.2.1.
1.17 "ON TIME BONUS" shall have the meaning set forth
in Section 5.4.
1.18 "PERCENTAGE TIMELY DELIVERED" shall have the
meaning set forth in Section 5.4.
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1.19 "PPI" shall have the meaning set forth in Section
5.3.
1.20 "PROCESS DESCRIPTION" shall have the meaning set
forth in Section 10.
1.21 "QUARTERLY FORECAST" shall have the meaning set
forth in Section 6.1.
1.22 "REGULATORY APPROVAL" shall mean with respect to
any country, the receipt of all regulatory agency approvals
required for the marketing and sale of any IOLAB Syringe and that
LBI's manufacturing process and facilities conform to any
applicable regulatory requirements of such country.
1.23 "TARGET DELIVERY DATE" shall have the meaning set
forth in Section 6.2.
2. MANUFACTURING SCALE-UP AND VALIDATION. LBI will scale
up and validate its manufacturing processes so as to enable LBI
to manufacture commercial quantities of HA Powder and IOLAB
Syringes.
2.1 $75,000 PAYMENT. IOLAB shall contribute $75,000
to the cost of this effort. $37,500 of this amount has been
previously paid by IOLAB to LBI. The remaining $37,500 shall be
paid to LBI within 30 days after LBI has produced and invoiced
IOLAB for the [*CONFIDENTIAL TREATMENT REQUESTED*] grams of
AMVISC Powder described in Section 3.2.
2.2 [*CONFIDENTIAL TREATMENT REQUESTED*] Payment. In
addition, IOLAB shall reimburse LBI for up to [*CONFIDENTIAL
TREATMENT REQUESTED*] of the costs incurred by LBI to validate
LBI's commercial syringe manufacturing process for the
manufacture of IOLAB syringes (estimated according to the tactics
outlined in LBI's June 7, 1993 proposal to be [*CONFIDENTIAL
TREATMENT REQUESTED*] exclusive of the actual product
qualification and stability runs). In no event shall IOLAB be
responsible to reimburse LBI for any such costs in excess of
[*CONFIDENTIAL TREATMENT REQUESTED*] without the prior written
consent of IOLAB.
2.2.1 LBI shall not invoice IOLAB for nor will
IOLAB be obligated to reimburse LBI for any amounts described in
Section 2.2 unless and until LBI has produced three consecutive
stability-sized batches ([*CONFIDENTIAL TREATMENT REQUESTED*])
for each of AMVISC Syringes and AMVISC Plus Syringes (the
"Manufacturing Milestone"). Any such invoice shall be
accompanied by supporting documentation.
2.2.2 IOLAB will pay LBI $25,000 for producing
each stability sized batch ([*CONFIDENTIAL TREATMENT REQUESTED*])
of any IOLAB Syringe (the number of which shall be determined by
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<PAGE>
IOLAB), whether such batch is produced in conjunction with
achieving the Manufacturing Milestone or requested by IOLAB for
validation, product qualification or other purposes. IOLAB will
not unreasonably withhold information from LBI which would delay
or preclude LBI from attaining the Manufacturing Milestone.
2.2.3 IOLAB shall pay LBI all amounts due LBI
under Section 2.2 (including amounts due under Section 2.2.2)
within 30 days after LBI achieves the Manufacturing Milestone and
has invoiced IOLAB for such amounts.
3. SUPPLY AND PURCHASE OF HA POWDER AND IOLAB SYRINGES.
3.1 SUPPLY AND PURCHASE. LBI agrees to supply and
IOLAB agrees to purchase HA Powder and IOLAB Syringes during the
term of this Agreement at the prices and on such other terms and
conditions as are set forth in this Agreement.
3.2 INITIAL [*CONFIDENTIAL TREATMENT REQUESTED*] GRAMS
OF AMVISC POWDER. Concurrently with the execution of this
Agreement, IOLAB shall deliver to LBI a purchase order for the
purchase of [*CONFIDENTIAL TREATMENT REQUESTED*] grams of AMVISC
Powder at a price of $[*CONFIDENTIAL TREATMENT REQUESTED*] per
gram, for a total cost of $600,000. LBI shall invoice IOLAB for
this $600,000 when LBI has produced [*CONFIDENTIAL TREATMENT
REQUESTED*] grams of AMVISC Powder which meet the specifications
on Exhibit A and shall, as directed by IOLAB, either ship such
AMVISC Powder to IOLAB or move it to an IOLAB reserve inventory
held at LBI for use by LBI in manufacturing AMVISC Syringes.
IOLAB shall pay this invoice within 30 days of the date of such
invoice.
3.2.1 If additional processing of these
[*CONFIDENTIAL TREATMENT REQUESTED*] grams of AMVISC Powder is
necessary to lower the molecular weight to the molecular weight
required for AMVISC Plus Powder, LBI's invoice shall be
accompanied by a statement certifying that LBI will be able to
process such AMVISC Powder to meet the specifications for AMVISC
Plus Powder set forth on Exhibit B. LBI shall perform any such
additional processing at no additional cost to IOLAB or, at LBI's
option and expense, LBI shall process a replacement batch
containing [*CONFIDENTIAL TREATMENT REQUESTED*] grams which meet
such AMVISC Plus Powder specifications. In the event LBI does
not achieve the Manufacturing Milestone within eight months from
the date of this Supply Agreement, then LBI shall, unless IOLAB
otherwise agrees in writing, within ten (10) days thereof, refund
to IOLAB $200,000 of the $600,000 paid by IOLAB for these
[*CONFIDENTIAL TREATMENT REQUESTED*] grams of AMVISC Powder. In
the event LBI is unable to achieve the Manufacturing Milestone
within such eight month period solely by reason of a force
majeure event described in Section 16, such one year period shall
be extended up to an additional ninety (90) days if LBI shall
have used diligent efforts to avoid such
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<PAGE>
occurrence and minimize its duration and has given prompt written
notice of such occurrence to IOLAB.
3.2.2 To the extent that any of such
[*CONFIDENTIAL TREATMENT REQUESTED*] grams of AMVISC Powder are
designated by IOLAB for use in LBI's manufacturing of IOLAB
Syringes and so long as IOLAB has not exercised its Discount
Option, the price of any such IOLAB Syringes shall be reduced by
$[*CONFIDENTIAL TREATMENT REQUESTED*] for each gram of such
AMVISC Powder which is used by LBI in the manufacturing of any
such IOLAB Syringes. If IOLAB exercises its Discount Option,
then IOLAB shall not be entitled to this reduction in the price
of any such IOLAB Syringes.
3.2.3 The price to be paid by IOLAB for such
[*CONFIDENTIAL TREATMENT REQUESTED*] grams of AMVISC Powder under
this section 3.2 is not subject to change as a result of IOLAB's
exercise of its option under Section 3.4 for exclusivity as to
AMVISC Plus Powder or as a result of the volume price scale
contained in Schedule II.
3.3 EXCLUSIVITY GRANT AS TO AMVISC POWDER. LBI hereby
grants IOLAB the exclusive, worldwide right to use AMVISC Powder
in the Field of Use and agrees that it shall not, directly or
indirectly, supply (or assist others to supply) AMVISC Powder to
any other party for use in the Field of Use during the term of
this Agreement.
3.4 EXCLUSIVITY OPTION AS TO AMVISC PLUS POWDER. LBI
hereby grants IOLAB an option to obtain the right to the
exclusive, worldwide use of AMVISC Plus Powder in the Field of
Use. If IOLAB exercises this option in accordance with the terms
of this Section 3.4, LBI shall not, directly or indirectly,
thereafter supply (or assist others to supply) AMVISC Plus Powder
to any other party for use in the Field of Use during the term of
this Agreement.
3.4.1 IOLAB must exercise this option by
written notice received by LBI prior to March 31, 1995. If IOLAB
does not so exercise this option, it shall terminate and be of no
further force or effect.
3.4.2 If IOLAB so exercises this option, the
price which it shall pay for AMVISC PLUS Syringes thereafter,
shall be determined by reference to the Exclusive category of
prices on Schedule I.
3.5 PROHIBITED USE. IOLAB shall not use any AMVISC
Plus Powder which it purchases from LBI at a Non-Exclusive price
under Schedule II for the manufacture of AMVISC Syringes.
3.6 IOLAB'S PERSONNEL. IOLAB shall have the right at
any time, and from time to time, upon at least 5 days prior notice
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<PAGE>
to LBI, to place personnel in LBI's manufacturing facility
at IOLAB's cost and expense. Except to the extent necessary for
the transfer of manufacturing responsibilities as provided for in
Section 10, IOLAB personnel will not have access to certain
processes relating to proprietary know-how. LBI shall however,
provide office space for such personnel. No more than 2 of
IOLAB's personnel shall be placed in such facility at any one
time, except that such number may be increased to not more than 5
for special projects or in anticipation of the transfer of
manufacturing responsibilities as provided for herein, provided
that such placement of personnel (exceeding two) shall be
effected in a manner that will not unreasonably impair or
interrupt LBI's ongoing operations. IOLAB personnel shall have
access to the open portion of LBI's drug master files. The
closed portions of such files may be reviewed on IOLAB's behalf
by third party consultants, subject to any such consultant
signing an appropriate confidentiality agreement.
4. MINIMUM PURCHASES.
4.1 MINIMUMS FOR MAJOR COUNTRIES. Commencing with the
calendar year after the calendar year during which IOLAB receives
Regulatory Approval in any "Major Country", but in no event
earlier than the calendar year 1997, IOLAB shall purchase IOLAB
Syringes from LBI in an annual quantity equal to at least
[*CONFIDENTIAL TREATMENT REQUESTED*] of the aggregate number of
viscoelastic syringes for ophthalmic surgical use sold by IOLAB
and its Affiliates in all countries where such Regulatory
Approval has been obtained provided, however, that this provision
shall not become applicable to other countries until the calendar
year following the calendar year in which Regulatory Approval was
obtained in such country. In determining the annual quantity to
be purchased hereunder only approved put-ups should be taken into
account. If, for example only LBI's AMVISC has received
Regulatory Approval, IOLAB sales of AMVISC PLUS put-ups would not
be included in the calculation. For purposes of this Agreement,
the term "Major Countries" shall mean the United States, Canada,
France, Spain, Australia, Germany, Italy, Norway, Sweden,
Belgium, the Netherlands, South Africa and the United Kingdom.
In addition, IOLAB shall not be responsible to LBI for a failure
to purchase such minimum number of units of HA Products to the
extent such failure resulted from the failure (for any reason
whatsoever, including events described in Section 16) of LBI to
supply HA Products in a timely manner.
4.1.1 IOLAB shall use reasonable business
efforts to obtain, as soon as possible, Regulatory Approval for
the sale of LBI manufactured IOLAB syringes in the United States
and in all other Major Countries, except where IOLAB, based on a
reasonable assessment consistent with its normal business
practices, determines that the seeking of such approval would be
- -unduly expensive or burdensome. IOLAB shall seek such Regulatory
6
<PAGE>
Approvals in such other countries as it may from time to time
deem appropriate. Notwithstanding anything contained in this
Agreement, IOLAB shall have no obligations with respect to the
failure of LBI's manufacturing facility or process to comply with
regulatory requirements.
4.1.2 IOLAB shall periodically submit a
written report to LBI which describes: (i) the countries in which
IOLAB and its Affiliates have applied for Regulatory Approval for
AMVISC Syringes or AMVISC Plus Syringes; (ii) the countries where
such Regulatory Approval has been obtained; (iii) the countries
in which IOLAB and its Affiliates have initiated significant
marketing efforts for the sale of AMVISC Syringes or AMVISC Plus
Syringes; and (iv) the number of units of all viscoelastic
syringes, AMVISC Syringes, and AMVISC Plus Syringes sold during
the preceding calendar year by IOLAB and its Affiliates in each
country where Regulatory Approval has been obtained. The first
such periodic report shall be provided to LBI on or before June
30 of the calendar year following the calendar year in which
IOLAB has received Regulatory Approval in any of the Major
Countries, and IOLAB shall continue to submit such written
reports to LBI on or before-every June 30 thereafter, provided,
however, that commencing with calendar year 1997 such reports
shall be submitted on or before March 31 of each year.
4.1.3 LBI shall be entitled (no more often
than once each calendar year and within 90 days of its receipt of
any report referred to in Section 4.1.2 above) to have an
independent certified public accountant inspect the books and
records of IOLAB to determine whether IOLAB has purchased the
minimum quantity of IOLAB Syringes which IOLAB is to purchase in
accordance with Section 4.1. To facilitate any such audit, IOLAB
shall provide the auditors selected by LBI, on a timely basis,
with a full and accurate description of IOLAB's records as they
relate to that audit and shall advise such auditors of its
accounting practices to the extent necessary to perform such
audit. IOLAB shall also identify, segregate and make readily
available to such auditor, all such source documents as may be
reasonably necessary for the auditor to make an accurate
examination and audit. In the event such audit determines that
the aggregate number of viscoelastic syringes for ophthalmic
surgical uses sold by IOLAB and its Affiliates in all applicable
countries during the year being audited was greater than the s@,-
of such syringes previously reported by IOLAB to LBI, the
provisions of Section 4.2 shall apply. IOLAB shall promptly
reimburse LBI for the cost reasonably incurred for such auditor
in the event such audit reveals that IOLAB has purchased less
than 95% of the minimum quantity required.
4.2 PURCHASE SHORTFALL. In the event that IOLAB's
purchases in any calendar year fail to meet the minimum
requirements set forth in Section 4.1. IOLAB, upon written notice
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<PAGE>
from LBI given within 60 days of the receipt by LBI of the report
referred to in Section 4.1.2, shall be deemed, on the last day of
such calendar year, to provide an order for the purchase of the
balance of the units needed to meet such minimum requirements,
with shipment of such units to be made by LBI within 90 days from
the date of such notice. The product sizes of any HA Product
shall be in the same proportion as specified in the Quarterly
Forecast for the last quarter of the calendar year. In any such
event, IOLAB shall be obligated to pay for such units shipped by
LBI on the same terms and conditions as if such units had been
purchased by IOLAB on the last day of such calendar year. All
such shipments made in accordance with this Section 4.2 shall not
be counted in the determination of whether IOLAB has met its
minimum purchase obligations for the year in which such shipment
were actually made.
4.3 FDA SITE CHANGE APPROVAL. IOLAB shall use
reasonable efforts to obtain, as soon as practicable, FDA Site
Change Approval for LBI's Minnesota facility. In the event IOLAB
obtains such approval and the aggregate purchases of IOLAB
Syringes by IOLAB from LBI for the calendar year following the
calendar year in which such approval was received (but in any
event not sooner than the 1997 calendar year), or any year
thereafter, is less than [*CONFIDENTIAL TREATMENT REQUESTED*]
units, then LBI may, at any time during the sixty days following
the end of any such calendar year by written notice to IOLAB,
terminate the exclusive rights granted IOLAB under Section 3.3
and, if applicable, Section 3.4. In the event LBI elects to so
terminate the exclusive rights granted IOLAB, this Agreement
shall remain in full force and effect thereafter, except that (i)
IOLAB's right to use AMVISC Powder and AMVISC Plus Powder in the
Field of Use shall thereafter be non-exclusive, for the remainder
of the term of this Agreement; (ii) the provisions of Section 4.1
shall no longer be applicable and (iii) the non-exclusive prices
shall become applicable. In no event, however, shall LBI utilize
any trademark of IOLAB or any trademark confusingly similar
thereto.
5. PRICE, DISCOUNT OPTION, AND PAYMENT.
5.1 PRICES. The price to be paid by IOLAB for HA
Powder and IOLAB Syringes shall be based on the quantity of HA
Powder and IOLAB Syringes, respectively, purchased by IOLAB
during each calendar year in accordance with the prices set forth
on Schedule I with respect to IOLAB Syringes and on Schedule II
with respect to HA Powder. The prices in effect for a particular
calendar year shall be the prices set forth on Schedule I and II
to which IOLAB is entitled if IOLAB purchases the total quantity
of IOLAB Syringes or HA Powder, as the case may be, described in
the annual forecast referred to in Section 6.1. In the event a
Quarterly Forecast referred to in Section 6.1 would indicate a
change in either of such prices is appropriate based on the new
volume levels, the pricing shall be changed at the beginning of
such quarter. Within 30 days of the end of each calendar year
the parties shall compute
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the difference between the unit price of the quantity of products
actually sold and the unit price provided for on the appropriate
pricing Schedule based on the actual volumes purchased in such
year and the difference (multiplied by the applicable volume)
shall be paid by IOLAB or LBI to the other, as the case may be,
provided, however, IOLAB shall not be responsible to pay any
such adjustment to LBI to the extent such adjustment was
caused by LBI's failure to deliver (including a failure to
deliver for reasons of force majeure) the forecasted quantities.
5.1.1 The Price for AMVISC Syringes shall,
except as provided for in Section 4.3, always be the Exclusive
price (either with the Discount option or without the Discount
Option, as applicable) on Schedule I.
5.1.2 Unless IOLAB elects the Discount Option
in accordance with the terms of Section 5.2, the prices which
IOLAB shall pay LBI under Schedule I for all HA Powder and all
IOLAB Syringes purchased by IOLAB, from and after the date on
which IOLAB declines the Discount Option; shall be reduced by
[*CONFIDENTIAL TREATMENT REQUESTED*] until IOLAB has, in this
manner, received discounts aggregating the sum of [*CONFIDENTIAL
TREATMENT REQUESTED*], less any portion of the $75,000 described
in Section 2.1 which is not paid to LBI by IOLAB. If IOLAB
elects the Discount Option, IOLAB shall not be entitled to
receive this [*CONFIDENTIAL TREATMENT REQUESTED*] discount on any
HA Powder or IOLAB Syringes purchased by IOLAB after that date.
5.2 IOLAB'S DISCOUNT OPTION. IOLAB may, at any time
prior to the expiration of 180 days after the date on which LBI
achieves the Manufacturing Milestone, elect to thereafter
purchase IOLAB Syringes at the discount option prices set forth
on Schedule I (the "Discount option") rather than without the
Discount Option.
5.3 PRICE INCREASES. Effective as of the first day of
the second calendar year following the calendar year during which
IOLAB receives FDA Site Change Approval, but in no-event earlier
than January 1, 1998, and as of the first day of each calendar
year thereafter, all of the prices set forth on Schedule I for
IOLAB Syringes shall be increased by the amount of the percentage
increase in the United States Producer Price Index for Finished
Goods (the "PPI") during the immediately preceding calendar year.
Effective as of the first day of the second calendar year
following the calendar year during which IOLAB receives approval
from the FDA for the use of HA Powder in AMVISC Syringes or
AMVISC Plus Syringes, and as of the first day of each calendar
year thereafter, all of the prices set forth on Schedule II for
HA Powder shall be increased by the percentage increase in the
PPI during the immediately preceding calendar year.
5.4 DELIVERY DISCOUNT. Included in all prices set
forth on Schedules I and II is an "on time bonus" of [*CONFIDENTIAL
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<PAGE>
TREATMENT REQUESTED*] per unit. As an incentive for LBI
to deliver HA Products in a timely manner, LBI shall be
entitled to receive such on time bonus of [*CONFIDENTIAL
TREATMENT REQUESTED*] per unit of HA Products, which (i) comply
with LBI's warranties set forth in section 8.1 and (ii) are
delivered to a carrier at LBI's plant before the end of the
calendar quarter scheduled for delivery. LBI shall not be
entitled to such on time bonus in respect of any unit of HA
Product delivered to IOLAB as a replacement for an HA Product
which failed to comply with (i) above and was returned to LBI or
destroyed unless such substitute product is delivered to the
carrier before the end of the first month following the calendar
quarter in which such HA Product was scheduled for delivery.
Such on time bonus shall be reduced in proportion to the
percentage of purchase orders timely delivered in a calendar
quarter as follows:
Percentage Timely Delivered Bonus
---------------------------------------
100% or more $[CONFIDENTIAL
97- 99.99% TREATMENT
95 - 96.9% REQUESTED*]
less than 95%
As used herein the term "Percentage Timely Delivered" means a
percentage determined by dividing (a) the number of units
delivered to IOLAB in a calendar quarter (which shall be extended
120 additional days in the event an event of force majeure
described in Section 16 has resulted in a late delivery), by (b)
the number of units scheduled for delivery in such calendar
quarter pursuant to purchase orders provided by IOLAB pursuant to
and in compliance with Section 6.2. In the event the order for a
quarter is greater than [*CONFIDENTIAL TREATMENT REQUESTED*] of
the amount ordered in the prior quarter (whether or not such
amount was actually delivered) the above percentages utilized to
determine the earned portion of the on time bonus shall be
measured against [*CONFIDENTIAL TREATMENT REQUESTED*] of the
amount ordered in the prior quarter in lieu of the amount
actually ordered.
5.5 PAYMENT. IOLAB shall pay LBI for each shipment of
HA Products within thirty (30) days of invoice. Any payment
received more than thirty days after the date of the invoice will
be subject to a service charge of 1 % per month.
6. PURCHASE ORDERS AND FORECASTS.
6.1 FORECASTS. IOLAB shall furnish LBI with a written
general order forecast for each Product on or before each
November 1 for the following calendar year (on November 1, 1996
for calendar year 1997), such forecast to be broken down by
quarters and shall be updated if there is a material change in
any information on which the forecast is based. At least 60 days
in advance of each quarter, IOLAB shall advise LBI in writing of
its forecast for such quarter (the "Quarterly Forecast") setting
forth the expected order
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<PAGE>
date(s), quantity for each order, the "put-up" mix of units
and expected shipping date(s). LBI shall have thirty (30)
days after receipt of each such Quarterly Forecast to object
in writing that it is unable to manufacture the quantities
specified and shall provide demonstrable evidence that the
production cycle cannot accommodate the quantities specified.
Failure to object shall be deemed to constitute acceptance
of the Quarterly Forecast. If LBI so objects to a Quarterly
Forecast, the parties shall negotiate in good faith to
resolve their differences.
6.1.1 IOLAB shall, subject to the provisions of
Sections 4.1 and 16, be required to purchase from LBI during each
quarterly period not less than [*CONFIDENTIAL TREATMENT
REQUESTED*] of the number of units of each HA Product (but not
size) contained in the Quarterly Forecast. If, subject to the
provisions of Section 10.10, within 60 days prior to the end of
any quarterly period, LBI shall not have received orders from
IOLAB for at least [*CONFIDENTIAL TREATMENT REQUESTED*] of the
number of units of each HA Product (but not size) contained in
the applicable Quarterly Forecast, LBI shall notify IOLAB of such
fact. If, within 30 days prior to the end of such quarterly
period, LBI shall not have received orders from IOLAB for
delivery during such quarterly period of at least [*CONFIDENTIAL
TREATMENT REQUESTED*] of the number of units of each HA Product
(but not size) contained in the applicable Quarterly Forecast and
LBI and IOLAB shall not have reached a mutually acceptable
agreement with respect to such shortfall, LBI may ship such
number of units as shall equal the difference between the number
of units of each HA Product ordered by IOLAB for delivery during
such quarterly period as of the date 30 days prior to the end of
the quarterly period and the number of units of each HA Product
equaling [*CONFIDENTIAL TREATMENT REQUESTED*] of IOLAB's
Quarterly Forecast. The product sizes for any HA Product shall
be in the same proportion as specified in the Quarterly Forecast.
In any such event, IOLAB shall be obligated to pay for such units
shipped by LBI but not ordered by IOLAB on the same terms and
conditions as if such units had been ordered by IOLAB on the date
30 days prior to the end of the quarterly period.
6.2 ORDERS. IOLAB shall issue firm, noncancelable purchase
orders for HA Products to LBI from time to time, which orders
shall be consistent, to the extent practicable, with the
applicable Quarterly Forecast. LBI agrees to fill such orders
for HA Products submitted by IOLAB up to the amount stated in the
applicable Quarterly Forecast. IOLAB shall place orders such
that the scheduled delivery date indicated in a Purchase Order
(the "Target Delivery Date") is at least 60 days from the date of
the placement of the order. LBI shall use reasonable efforts to
fill all orders for HA Products in excess of the quantity stated
in the Quarterly Forecast. If IOLAB provides LBI with a change
order less than 60 days prior to the Target Delivery Date, LBI
shall not be obligated to accept such change order unless LBI and
IOLAB shall have first reached mutual agreement as to the
additional amount, if any, which
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<PAGE>
will be paid by IOLAB to LBI to offset any increased
incremental costs (including materials, labor and variable
overhead) incurred by LBI in order to comply with the change
order.
6.3 TERMS. All sales of HA Product by LBI to IOLAB
hereunder shall be subject to the provisions of this Agreement
and shall not be subject to the terms and conditions contained in
any purchase order of IOLAB or confirmation of LBI, except
insofar as such purchase order or confirmation establishes the
quantity and shipment dates for each HA Product involved.
7. SHIPMENT.
7.1 DELIVERY AND INSPECTION. LBI shall be responsible
for delivering the HA Products to a carrier specified by IOLAB,
F.O.B. LBI's plant. IOLAB shall have the right to inspect all HA
Products delivered by LBI and to reject after discussion with LBI
(by batch, lot or Unit) any HA Products which fail to conform to
the purchase order therefor or the-current product
specifications, which failure to conform is determined not to be
due to damage to the HA Products caused subsequent to delivery of
the HA Products to a carrier at LBI's plant. IOLAB shall notify
LBI and confirm in writing if any nonconforming HA Products are
rejected and shall hold the rejected HA Products until receipt of
LBI's written instructions for the disposal or return to LBI of
the rejected HA Products, which written instruction shall be
given promptly by LBI. IOLAB shall be entitled to receive a
refund of the purchase price (including the "on time bonus"
referred to in Section 5.4), or any portion thereof actually paid
to LBI for the rejected HA Products (plus applicable freight).
The costs of any agreed upon reworking by IOLAB of nonconforming
HA Products shall be borne by LBI. Any HA Products not rejected
within (60) days after LBI's delivery to IOLAB shall be deemed to
be accepted by IOLAB.
7.2 F.O.B. SHIPMENT. All HA Products sold by LBI to
IOLAB hereunder will be shipped by LBI F.O.B. LBI's loading dock
at Chaska, Minnesota. IOLAB shall assume title and all risk of
loss for the HA Products and will pay all freight, shipping,
insurance, forwarding and handling charges, taxes, storage and
other shipping and transportation charges and duties relating to
the shipment and delivery of all HA Products after they are
delivered by LBI F.O.B. Chaska, Minnesota.
8. WARRANTIES AND INDEMNITIES
8.1 WARRANTIES BY LBI. LBI represents and warrants to
IOLAB with respect to the sale of HA Products as follows:
8.1.1 at the time of delivery to a carrier at
LBI's plant, (i) all HA Products shall conform to the current
product specifications and shall have been manufactured in
accordance with the current:manufacturing processes (as
either may
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<PAGE>
be revised from time to time by mutual agreement of LBI and
IOLAB), (ii) the production of such HA Products shall conform
the GMP standards published by the FDA and, if
applicable, the International Standards Organization Rules
9,000 et seq. in effect at the time of such production and
applicable to the HA Products, (iii) no Product shall be
"adulterated" or "misbranded" within the meaning of Section
5.01 of the Federal Food Drug and Cosmetic Act, as amended
(21 U.S.C. Section 351) and (iv) LBI's manufacturing process and
facilities shall conform to the applicable regulatory
requirements of the United States, and any other country
where such HA Products are to be sold; and
8.1.2 none of the raw materials, equipment or
processes used by LBI to manufacture the HA Products in
accordance with the current product specifications and current
manufacturing processes in any country where Regulatory Approval
has been obtained infringes, violates or breaches any United
States or applicable foreign patent (except U.S- Patent No.
4,141,973 and/or patents as to which LBI has a valid license, or
covenant against suit from the patent owner), trade secret or
proprietary information based upon the manufacture of such HA
Products, except that LBI shall have no liability to IOLAB
hereunder with respect to any patent, trade secret or other
proprietary information claim based upon (i) use, sale or
disposition of HA Products where such HA Products would not be
infringing except for changes to current product specifications
or current manufacturing processes requested by IOLAB, (ii) use
of AMVISC or AMVISC PLUS other than as specified by the current
AMVISC and AMVISC PLUS product inserts, (iii) use, sale or
disposition of HA Products by IOLAB in combination with devices
or products not purchased hereunder whereas such HA Products
would not themselves be infringing, (iv) use, sale or disposition
of HA Products by IOLAB in or for an application or environment
for which such HA Products were not approved by the FDA, (v)
modifications of HA Products by IOLAB, (vi) any claims of
infringement of patents, trade secrets, or other proprietary
information in which IOLAB or any Affiliate or customer of IOLAB
has an interest or license or (vii) U.S. Patent No. 4,141,973.
Notwithstanding anything contained in this Section 8.1, LBI makes
no representations or warranties with respect to HA supplied by
IOLAB for packaging by LBI except to the extent such HA became
contaminated or otherwise defective as the result of the
negligent act or omission of LBI in the handling or processing of
such HA or finished product.
8.1.3 IOLAB may have its representatives
inspect LBI's production facility and records from time to time
to verify compliance with Section 8.1.1 above. Such inspections
shall be made on reasonable notice to LBI, and shall be limited
to one per year unless IOLAB has reason to believe a problem
exists.
8.1.4 In the event any infringement claim is
threatened or asserted against LBI with respect to any HA
Product,
13
<PAGE>
LBI may elect, on thirty (30) days' advance notice in writing
to IOLAB, to discontinue the manufacture and sale of any such
HA Product to IOLAB, provided that it shall have first
delivered to IOLAB evidence that a law suit has been commenced
against LBI. Notwithstanding such election, LBI shall be
obligated to continue the manufacture and sale of such HA
Product if IOLAB agrees in writing within such thirty (30) day
period to indemnify LBI in respect of all damages arising from
such infringement from and after the date of the election by
LBI. In the event IOLAB does not agree to indemnify LBI as
provided for above and LBI discontinues the manufacture and
sale of any such HA Product pursuant to this Section 8.1.4, LBI
shall, at the election of IOLAB made within 90 days of the date
LBI has ceased manufacturing such HA Product, grant to IOLAB a
license as provided for in Section 10 and Exhibit F and shall
cooperate with IOLAB in the establishment of a manufacturing
facility as provided for therein. Notwithstanding the
limitations contained in Section.10.1, following the expiration
of the term of this. Agreement (or any extensions thereof) such
license shall continue indefinitely on a nonexclusive basis.
8.2 INDEMNIFICATION BY LBI. Subject to the
limitations set forth in this Section 8, LBI hereby indemnifies
and agrees to defend and hold IOLAB, including its officers and
directors, harmless against and from any and all damages,
liabilities, costs and expenses, including without limitation
reasonable attorney's fees, arising out of or in any way
connected with any claim or claims of breach of LBI's warranties
in Section 8.1. The provisions of Sections 8.1 and 8.2, state the
entire liability of LBI with respect to infringement of patents,
trade secrets and other proprietary information by the
manufacture, use, sale or disposition of the HA Products.
8.3 INDEMNIFICATION BY IOLAB. Subject to the
limitations set forth in Section 8, IOLAB hereby indemnifies and
agrees to defend and hold LBI harmless against and from any and
all damages, liabilities, costs and expenses, including without
limitation reasonable attorney's fees, arising out of or in any
way connected with any claim or claims (other than claims arising
as the result of a breach by LBI of the warranties contained in
Section 8.1), that (i) the sale or use of any HA Products
manufactured by LBI and used, sold or otherwise disposed of by
IOLAB infringes the rights of any third party in any United
States or foreign patent, or trade secret or other proprietary
information or (ii) any process used by LBI to manufacture HA
Products infringes rights of any third party in any United States
or foreign patent as a result of changes to the current
manufacturing processes requested by IOLAB.
8.4 PRODUCT RECALLS. If any of the HA Products are
subjected to a recall by any governmental agency, or in the event
IOLAB, after notification to and consultation with LBI, elects to
make such a recall based on IOLAB's good faith belief that the HA
14
<PAGE>
Products were not in conformity with LBI's warranties, LBI shall
reimburse IOLAB for its actual out-of-pocket costs in connection
therewith, including without limitation the replacement of
recalled batches of the HA Product. However, if it is
established that the HA Product became nonconforming as a result
of actions or omissions on the part of IOLAB, or if following a
recall at IOLAB's election, it is determined that the HA Products
were not in fact in breach of LBI's warranties, IOLAB shall hold
LBI harmless and shall bear all costs and expenses in connection
with such recall.
8.5 LIMITATION. THE PROVISIONS OF THE FOREGOING
WARRANTIES ARE IN LIEU OF ANY OTHER WARRANTY, WHETHER EXPRESS OR
IMPLIED, WRITTEN OR ORAL AND LBI HEREBY EXPRESSLY DISCLAIMS ALL
IMPLIED WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT IN
RESPECT OF PRODUCT RECALLS OR THIRD PARTY CLAIMS AS PROVIDED FOR
IN THIS SECTION 8, NO PARTY SHALL IN ANY EVENT BE LIABLE TO THE
OTHER FOR INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING
OUT OF THE SALE AND PURCHASE OF THE HA PRODUCTS, INCLUDING BUT
NOT LIMITED TO LOSS OF PROFITS.
8.6 RESPONSIBILITY FOR THIRD PARTY CLAIMS. In order
to distribute between themselves the responsibility for the
handling and expense of bodily injury or property damage claims
by third parties arising out of the sale, possession or use of
the HA Products, the parties agree as follows:
8.6.1 LBI shall be liable for and shall
indemnify and hold IOLAB harmless against any liability, damage
or loss and from any claims, suits, proceedings, demands,
recoveries or expenses asserted by any third party who suffers
personal injury or property damage in connection with the
possession or use of a Product manufactured by LBI arising out
of, based on, or caused by the failure of such HA Products to
conform with LBI's warranties contained in Section 8.1.
8.6.2 Except as to matters as to which LBI is
responsible under Section 8.6.1 above, IOLAB shall be liable for
and shall indemnify and hold LBI harmless against any liability,
damages or loss from any claims, suits, proceedings, demands,
recoveries or expenses asserted by any third party who suffers
personal injury or property damage in connection with the sale,
possession or use of HA Products manufactured by LBI, including
without limitation, statements, representations, warranties or
advertisements made by IOLAB, its Affiliates, their employees,
agents or representatives concerning any HA Product which exceed
or differ in meaning from the warranties set forth in Section
8.7 NOTICE OF CLAIMS. The indemnities in sections
8.2, 8.3 and 8.6 are subject to the requirement that the party
seeking indemnification ("Indemnitee") shall promptly provide the
other party ("Indemnitor") with written notice of such claim
for which
15
<PAGE>
indemnification is sought, and the Indemnitee shall provide its
reasonable cooperation, information and assistance in
connection therewith. The Indemnitor shall, after consultation
with the Indemnitee, have the sole control and authority with
respect to the defense, settlement or compromise of such claims.
8.8 SURVIVAL. Notwithstanding anything to the contrary
contained herein, the provisions of Section 8 shall survive the
expiration or termination of this Agreement.
9. [INTENTIONALLY OMITTED]
10. UNAVAILABILITY OF SUPPLY/CONTINGENT LICENSE.
10.1 CONTINGENT LICENSE. If (i) LBI fails, during any
two (2) consecutive calendar quarters (which, in the event such
failure is due to an event of force majeure under Section 16,
shall be three (3) consecutive calendar quarters) to deliver to
IOLAB, at least 70% of the aggregate quantity of all HA Products
which LBI has agreed to deliver to IOLAB and (ii) LBI does not,
within thirty (30) days thereafter, make arrangements with a
third party to manufacture and supply those HA Products to IOLAB
on the same terms and conditions as set forth in this Agreement,
and (iii) IOLAB still desires to receive HA Products from LBI,
then, if IOLAB so requests within sixty (60) days after the
expiration of said thirty (30) day period, LBI shall grant to
IOLAB a license, for the unexpired term of this Agreement or any
extensions thereof, under LBI's patents and manufacturing knowhow
to the extent necessary for IOLAB to manufacture or have
manufactured HA Products for use solely in the Field of Use;
provided, however, that LBI shall reserve and retain all of its
rights with respect to the patents and manufacturing know-how.
Such license shall be an exclusive license with respect to Amvisc
Powder and Amvisc Syringes but shall be a non-exclusive license
with respect to Amvisc Plus Powder and Amvisc Plus Syringes
unless IOLAB then possesses an exclusive right ' under Section
3.4 to use Amvisc Plus Powder in the Field of Use, in which
latter event this license shall be an exclusive license with
respect to Amvisc Plus Powder and Anvisc Plus Syringes.
10.2 LIMITATIONS. IOLAB may not authorize third
parties to manufacture any HA Products on its behalf, or
otherwise sublicense the license granted it under this Section
10, without the prior written consent of LBI, unless such party
has agreed to be bound by the confidentiality provisions of
Section 13 hereof and the limitations contained in this section
10.The license granted IOLAB under this Section 10 shall not
entitle IOLAB to utilize such license to manufacture or market
HA. Powder other than for use in IOLAB Syringes or to
manufacture or market IOLAB Syringes for use in any field other
than the Field of Use.
16
<PAGE>
10.3 PROCEDURE. If IOLAB desires to obtain such
license, IOLAB must so notify LBI within sixty (60) days after
the end of the period described in clause (i) of Section 10.1
above. In that event, this license shall become effective on the
date of such notice from IOLAB or the expiration of the period
allowed LBI under clause (ii) of Section 10.1 to make
arrangements with a third party manufacturer to supply HA
Products to IOLAB, whichever occurs later. Any license granted
to IOLAB under this Section 10 shall be subject to the terms and
conditions set forth in this Agreement and the additional terms
and conditions set forth on Exhibit F.
10.4 ESCROW. Prior to the end of the calendar quarter
following the calendar quarter during which IOLAB receives the
FDA Site Change Approval described in Section 4.3, LBI shall
deposit with [*CONFIDENTIAL TREATMENT REQUESTED*], who shall act
as escrow agent, (the "Escrow Agent") a description of LBI's
process for the manufacture of HA Powder and IOLAB syringes
(including a lyophilized sample of the strain of streptococcus
pyogenes used in that process) in sufficiently clear and detailed
terms that it can be readily followed and carried out by a
trained scientist (the "Process Description"). This description
shall include the Good Manufacturing Practice procedures
applicable to HA Powder and IOLAB Syringes. Should, LBI change
or otherwise modify the process, LBI shall promptly amend the
Process Description held in escrow to include such changes or
modification. The Escrow Agent shall hold the Process
Description and release the same only in accordance with the
terms of the escrow agreement set forth in Exhibit G.
10.5 COOPERATION OF LBI. In order to insure an orderly
transition with respect to the transfer of manufacturing
responsibility to IOLAB, as provided for above, LBI shall fully
cooperate in the transfer of manufacturing know-how to IOLAB or a
third party designated by IOLAB as provided for herein and
subject to the applicable confidentiality requirements. LBI
shall also make available to IOLAB all know-how and technical
information then in LBI's possession or at its free disposal
relating to the manufacture of the HA Products and shall provide
reasonable assistance to IOLAB in the establishment of a
manufacturing facility. Costs for travel and time required by
LBI's personnel to assist in the transfer and the establishment
of a manufacturing facility shall be borne by LBI until such time
as the transfer has been successfully completed. In order to
have been successfully completed, IOLAB, with the assistance of
LBI, shall have produced three successive lots of acceptable HA
Product.
11. GMP AND DUALITY ASSURANCE. Prior to the date when
IOLAB submits a Pre-Market Approval supplement to the FDA
requesting FDA Site Change Approval to LBI's premises, LBI shall
certify to IOLAB that its facility complies with FDA Good
Manufacturing Practices and shall have in addition, by that date,
passed a Johnson & Johnson corporate quality assurance audit. In
that audit, LBI will not be expected to meet any standards which
are different from
17
<PAGE>
those which Johnson & Johnson generally expects of its own
facilities and other suppliers. IOLAB will provide reasonable
assistance to LBI to aid LBI in complying with FDA Good
Manufacturing Practices and Johnson & Johnson's quality
assurance requirements. LBI will devote reasonable efforts to
working with IOLAB quality assurance personnel to develop a
program to advance LBI towards ISO 9000 and CEM Mark
certification. LBI shall meet such certifications by January
1, 1997.
12. PRODUCT IDENTIFICATION.
12.1 LABELS. All HA Product labels may, at IOLAB's
election, identify LBI as the manufacturer of the Product. IOLAB
shall not, however, be required to utilize LBI's name on product
labeling or in connection with the sale, marketing or
distribution of the HA Products.
12.2 TRADEMARKS AND TRADE NAMES OF IOLAB. IOLAB's
Parent is the owner of (i) the U.S. registration of the trademark
"AMVISC" and "AMVISC PLUS," and (ii) any IIAMVISCII trademark or
trademark containing the word "AMVISC" which is now registered or
is hereafter registered in the Territory (hereinafter the
"Proprietary Trademarks").
12.2.1 Except as permitted by Section 12.1,
IOLAB shall not use LBI's name in connection with any business
conducted by the IOLAB.
12.2.2 LBI acknowledges the exclusive right,
title and interest in the Proprietary Marks by IOLAB and its
Parent and/or Affiliates.
12.2.3 LBI agrees that it will not use on other
products sold by it any mark which is likely to be similar to or
confused with the Proprietary Marks.
13. CONFIDENTIALITY. Each party agrees to keep
confidential and not to disclose to any other person or entity,
any and all technical and other information marked "Confidential"
or "Proprietary" (or if disclosed other than in documentary form
which is designated as "Confidential") made available to it by
the opposite party. Upon request, or in the event of the
expiration or other termination of this Agreement, each party
shall promptly return all such confidential and proprietary
information to the opposite party. Each party agrees not to use
any such confidential or proprietary information of the opposite
party for any purpose other than this Agreement. Notwithstanding
the above, the parties agree that data or other information
disclosed pursuant to this Agreement shall not be deemed to be
confidential or proprietary information of the disclosing party
if: (a) at the time of disclosure it was, in its entirety in a
unified form, in the public domain or subsequently so becomes a
part of the public domain
18
<PAGE>
through any means other than the breach of the receiving
party's obligations under this Agreement; (b) was known to the
receiving party in its entirety in a unified form at the time
of disclosure, as evidenced by its written records kept in the
ordinary course of business; (c) is at any time disclosed in
its entirety in a unified form to the receiving party by any
third party who has the right to do so and who does not impose
any restriction upon the receiving party regarding the use of
such information or the maintenance of its confidentiality;-or
(d) to the extent disclosure is required pursuant to legal
process or as by law.
14. TERM. The term of this Agreement shall commence as of
the date hereof and, unless terminated earlier in accordance with
its terms, shall continue through December 31, 2000. If either
party desires that this Agreement be extended thereafter, it
shall so advise the opposite party by June 30, 1997. If both
parties desire to extend the term of this Agreement, they shall
endeavor to determine whether they can reach agreement on the
terms and conditions of any'-such extension prior to December 31,
1997. In the absence, for any reason, of such an agreement, this
Agreement shall not be so extended. In the event IOLAB receives
a license from LBI pursuant to the provisions of Section 10, the
applicable provisions, if any, of Sections 3.3, 3.4, 12.2, 13 and
17 this Agreement shall be extended during the term of such
license.
15. TERMINATION.
15.1 TERMINATION OF AGREEMENT. This Agreement may be
terminated as follows:
15.1.1 By one party in the event the other
substantially fails to perform or otherwise substantially
breaches any of its material obligations under this Agreement by
giving notice of its intent to terminate and stating the grounds
therefor. The party receiving the notice shall have sixty (60)
days from the date of receipt thereof, subject to the provisions
of Section 17.3, to cure the failure or breach. In the event
such breach is cured, the notice shall be of no effect. In the
event it is not cured, this Agreement shall without further
action, terminate at the end of such sixty (60) day period,
PROVIDED, HOWEVER, if the failure to perform or other breach is
due to circumstances referred to in Section 16 and such party is
making all reasonable efforts to perform or cure such breach as
provided in such Section 16, this Section 15.1.1 shall not apply
unless or until the failure to perform or other breach shall have
lasted continuously for one hundred twenty (120) days from the
initial receipt of notice of breach.
15.1.2 By one party in the event the other
party shall at any time become insolvent or make a general
assignment for the benefit of creditors, or if a petition in
bankruptcy, or any reorganization shall be commenced by, against
or in respect of such
19
<PAGE>
other party and shall remain undismissed for more than sixty
(60) days.
15.2 RIGHTS UPON TERMINATION. In the event of the
termination or expiration of this Agreement:
15.2.1 Acceptance by LBI of any orders from
IOLAB after termination of this Agreement shall not constitute a
renewal of this Agreement or a waiver of the right of LBI to
treat this Agreement as terminated.
15.2.2 The parties expressly agree that the
notice periods under this Agreement with respect to the
termination of this Agreement are reasonable under the
contemplated circumstances.
15.2.3 LBI shall deliver, and IOLAB shall
accept and pay for, all HA Products ordered by IOLAB under
purchase orders issued by it and accepted by LBI prior to the
date of termination. Termination shall not relieve and release
either party from its obligations to make any other payment which
may be owing to the other party under the terms of this Agreement
or from any other liability with either may have to the other
arising out of this Agreement or the breach of this Agreement.
16. FORCE MAJEURE. Notwithstanding anything to the
contrary in this Agreement, neither party shall be under any
liability to the other hereunder on account of any loss, damage
or delay occasioned or caused by delay in performance or non-
performance of any obligation under this Agreement due to
strikes, lockouts or other labor difficulties or any other causes
beyond the control of the party failing to perform, including but
not limited to riots, fire, insurrection, war (whether declared
or not), acts of God, embargoes, failure of carriers, inability
to obtain or delay in obtaining raw materials or transportation
facilities, water contamination, act or order of any court,
government or governmental authority (including but not limited
to any withdrawal or suspension of approval by a governmental
authority pertaining to any HA Product).
17. GENERAL.
17.1 SEVERABILITY. In the event any provision of this
Agreement shall be held to be invalid, illegal or unenforceable,
in any respect by a court or administrative body of competent
jurisdiction, then unless otherwise agreed, this Agreement shall
continue in full force and effect except for that provision which
shall be deemed to be excised from this Agreement.
17.2 AMENDMENT. No amendment or modification of this
Agreement shall be binding unless it is in writing and signed by
the parties hereto.
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<PAGE>
17.3 ARBITRATION. Excepting only actions and claims
relating to actions commenced by a third party against LBI or
IOLAB (including without limitation, for injuries caused by a
Product or in respect of trademark or patent infringement claims)
all disputes arising out of or in connection with this Agreement
(or the license contained as Exhibit E), its interpretation, or
its termination, shall be finally settled by arbitration before
one arbitrator in accordance with the rules of the American
Arbitration Association and the provisions of this Agreement, and
judgment upon any award rendered by such arbitrator may be
entered in any court having jurisdiction thereof. All such
arbitration proceedings shall be conducted in Chicago, Illinois.
Such arbitrator shall be a partner in a firm of attorneys in
Chicago, Illinois having at least 40 partners and shall have 10
years' experience in the field of corporation, business or
commercial law. The arbitrator shall permit and facilitate
discovery, which will be conducted in accordance with the Federal
Rules of Civil Procedure, taking into account the needs of the
parties and the desirability of making discovery expeditious and
cost effective. The arbitrator will set a discovery schedule
with which the parties will comply and attend depositions if
requested by either party. As to any dispute being arbitrated
hereunder, the running of the time period contained in Section
15.1.1, as to which a party must cure a breach, shall be
suspended as to the subject matter of the dispute until such
arbitration is finally settled.
17.4 GOVERNING LAW AND VENUE. This Agreement shall be
governed and construed under the internal laws of the State of
Minnesota, including without limitation, the Uniform Commercial
Code as adopted by the State of Minnesota. It is the intention
of the parties that the choice of law rules of the State of
Minnesota shall not apply, but that all conflicts or
controversies arising under or related to this Agreement shall be
governed by the procedural rules and substantive law of the State
of Minnesota.
17.5 PUBLICITY AND DISCLOSURE. In the absence of
specific written agreement between the parties, neither party
shall originate any publicity, news release or other public
announcement, written or oral, whether to the public press, to
stockholders or otherwise, relating to this Agreement, to any
amendment hereto as to performance hereunder, save only such
announcement as in the opinion of legal counsel to the party
making such announcement is required by law or practice to be
made. The party making any such announcement shall give the
other party an opportunity to review the form of the announcement
before it is made. Routine factual references to this Agreement
and the arrangements hereunder without undue frequency and
without emphasis shall be allowed in the usual course of business
provided that notice of such use is given to the other party.
LBI shall not use the name of IOLAB or any of its Affiliates for
advertising or promotional claims without the prior written
consent of IOLAB.
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<PAGE>
17.6 REPRESENTATIONS. Each of the parties hereto
agrees (i) that no representation or promise not expressly
contained in this Agreement has been made by the other party
hereto-or by any of its agents,,employees, representatives.or
attorneys; (ii) that this Agreement is not being entered into on
the basis of, or in reliance on, any promise or representation,
expressed or implied, covering the subject matter hereof, other
than those expressly set forth in this Agreement; and (iii) that
each party has had the opportunity to be represented by counsel
of its own choice in this matter, including the negotiations
which preceded the execution of this Agreement. Notwithstanding
the above, LBI represents and warrants to IOLAB that it is not a
party to any agreement which would prevent LBI from performing
its obligations hereunder or from granting any of the licenses
contemplated herein.
17.7 ENTIRE AGREEMENT. This Agreement represents the
entire agreement between the parties relating to the matters
described in this Agreement and supersedes all prior discussions,
negotiations, understandings and agreements relating to these
matters; there are no oral promises, representations or
warranties.
17.8 WAIVER OF BREACH. The waiver or failure of either
party to enforce the terms of this Agreement in one instance
shall not constitute a waiver of said party's rights under this
Agreement with respect to other violations. No waiver of any of
the terms of this Agreement shall be binding unless it is in
writing.
17.9 SURVIVAL. All representations or warranties made
in this Agreement and all terms and provisions hereof intended to
be observed and performed after the termination hereof, shall
survive such termination and continue, thereafter, in full force
and effect, including without limitation, the provisions relating
to confidentiality and product warranties.
17.10 ASSIGNMENT. Each party, in its sole
discretion, may assign this Agreement or sublicense or transfer
all or a portion of its rights under this Agreement to any of ifs
Affiliates, or designate or cause any Affiliate to have the
benefit of all or a portion of its rights hereunder; provided,
however, that any such party shall remain liable for the
performance by its Affiliate of the obligations of the Affiliate
under this Agreement. Also, either party may assign this
Agreement to a party purchasing substantially all of the assets
of the operations of such party relating to its manufacture or
sale of HA Products. Except as otherwise provided in this
Section 17.10, neither party shall assign this Agreement or any
part thereof to any third party without the written consent of
the other party. This Agreement shall inure to the benefit of,
be binding upon, and be enforceable against the parties hereto,
their permitted successors and assigns.
22
<PAGE>
17.11 NOTICES. All notices and replies thereto
required hereunder shall be in writing, properly addressed to the
other party, signed by the party giving notice, and may be
17.10 ASSIGNMENT. Each party, in its sole discretion,
may assign this Agreement or sublicense or transfer all or a
portion of its rights under this Agreement to any of its
Affiliates., or designate or cause any Affiliate to have the
benefit of all or a portion of its rights hereunder; provided,
however, that any such party shall remain liable for the
performance by its Affiliate of the obligations of the Affiliate
under this Agreement. Also, either party may assign this
Agreement to a party purchasing substantially all of the assets
of the operations of such party relating to its manufacture or
sale of HA Products. Except as otherwise provided in this
Section 17.10, neither party shall assign this Agreement or any
part thereof to any third party without the written consent of
the other party. This Agreement shall inure to the benefit of,
be binding upon, and be enforceable against the parties hereto,
their permitted successors and assigns.
17.11 NOTICES. All notices and replies thereto
required hereunder shall be in writing, properly addressed to the
other party, signed by the party giving notice, and may be
delivered by hand or sent by telex, facsimile transaction Or
registered mail, return receipt requested. Notices shall be
effective upon receipt. Notices sent by mail shall be deemed
received on the date of receipt indicated by the return
verification provided by the U.S. Postal Service. Notices sent
by telex or facsimile transaction shall be deemed received the
day on which sent and shall be conclusively presumed to have been
received in the event that the sender's copy of the telex or
facsimile transaction contains the "answer back" of the other
party's telex or facsimile transaction. Notice shall be given,
mailed or sent to the parties at the following addresses, or at
such other address as may be given by proper notice.
(a) IF TO MANUFACTURER:
Lifecore Biomedical, Inc.
3515 Lyman Boulevard
Chaska, MN 55318
Attention: Mr. John Heinmiller
(b) IF TO IOLAB:
IOLAB Corporation
500 IOLAB Drive
Claremont, CA 91711
Attention: President
With a copy to:
23
<PAGE>
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
Attention: Office of General Counsel
Any party hereto may designate any other address for notices
given it hereunder by written notice to the other party given at
least ten (10) days prior to the effective date of such change.
24
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
LIFECORE BIOMEDICAL, INC.
/s/ James W. Bracke
By: _______________________________
President and CEO
Its: ______________________________
IOLAB CORPORATION
/s/ Robert Deretta
By: _______________________________
Its: ______________________________
25
<PAGE>
SCHEDULE I - IOLAB Syringe
Prices
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
EXCLUSIVE NON-EXCLUSIVE
---------------------------------- ----------------------------------------
CALENDAR ANNUAL WITHOUT WITH WITHOUT WITH
YEAR SYRINGES DISCOUNT DISCOUNT DISCOUNT DISCOUNT
PURCHASED* OPTION OPTION OPTION OPTION
- ---------------------------------------------------------------------------------------------------------------
.50 ml .85 ml .50 ml .85 ml .50 ml .85 ml .50 ml .85 ml
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996/97 0- ** $ ** $ ** $ ** $ ** $ ** $ ** $ ** $ **
** + ** ** ** ** ** ** ** **
- ----------------------------------------------------------------------------------------------------------------
1998 0- ** ** ** ** ** ** ** ** **
** + ** ** ** ** ** ** ** **
- ----------------------------------------------------------------------------------------------------------------
1999 0- ** ** ** ** ** ** ** ** **
** + ** ** ** ** ** ** ** **
- ----------------------------------------------------------------------------------------------------------------
2000 0- ** ** ** ** ** ** ** ** **
** + ** ** ** ** ** ** ** **
- ----------------------------------------------------------------------------------------------------------------
<FN>
* Annual Exclusive and Non-Exclusive (in aggregate) Syringes Purchased.
** CONFIDENTIAL TREATMENT REQUESTED
</TABLE>
26
<PAGE>
SCHEDULE II - HA Powder
Prices
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
ANNUAL GRAMS PURCHASED EXCLUSIVE PRICE PER GRAM NON-EXCLUSIVE PRICE PER GRAM
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
0 - ** $ ** $ **
- -----------------------------------------------------------------------------------------------------------------
** - ** ** **
- -----------------------------------------------------------------------------------------------------------------
** + ** **
- -----------------------------------------------------------------------------------------------------------------
<FN>
** CONFIDENTIAL TREATMENT REQUESTED
</TABLE>
27
<PAGE>
EXHIBIT A
AMVISC-REGISTERED TRADEMARK- POWDER SPECIFICATIONS
AMVISC POWDER SHALL MEET THE FOLLOWING CRITERIA:
- - Bioburden **
- - E.coli, Salmonella, Pseudomonas aeruginosa, **
& Heat resisting spores
- - Endotoxin **
- - Biological safety testing (Rabbit): **
- - Chemical analysis test results for:
- Appearance **
- Odor **
- Loss on drying **
- NaHA (on dry basis) **
- pH, 10mg/g **
- Molecular weight **
- Kinematic viscosity at 1 sec(-1), 25DEG.C **
for 10 mg/ml solution
- Protein (on dry basis) **
- Acetate **
- Nucleic acid, 10 mg/ml solution **
- UV analysis **
- Identity **
- Arsenic **
- Lead **
- Mercury **
** CONFIDENTIAL TREATMENT REQUESTED
A-1
<PAGE>
EXHIBIT B
AMVISC-REGISTERED TRADEMARK- PLUS POWDER SPECIFICATIONS
AMVISC PLUS POWDER SHALL MEET THE FOLLOWING CRITERIA:
- - Bioburden **
- - E.coli, Salmonella, Pseudomonas aeruginosa, **
& Heat resisting spores:
- - Endotoxin **
- - Biological safety testing (Rabbit): **
- - Chemical analysis test results for:
- Appearance **
- Odor **
- Loss on drying **
- NAHA (on dry basis) **
- pH, 10mg/g **
- Molecular weight **
- Kinematic viscosity at 1 sec(-1), 25DEG.C **
for 14 mg/ml solution **
- Protein (on dry basis) **
- Acetate **
- Nucleic acid, 10 mg/ml solution **
- UV analysis **
- Identity **
- Arsenic **
- Lead **
- Mercury **
** CONFIDENTIAL TREATMENT REQUESTED
B-1
<PAGE>
EXHIBIT C
AMVISC-REGISTERED TRADEMARK- PRODUCT SPECIFICATIONS
AMVISC SHALL MEET THE FOLLOWING CRITERIA:
- - Appearance: **
- - Rabbit inflammatory activity: **
- - USP Sterility Test results: **
- - USP Pyrogen Test results: **
- - Volume: **
- 0.25 ml **
- 0.50 ml **
- 0.80 ml **
- - Chemical analysis test results for:
- pH **
- Kinematic viscosity at 1 sec(-1), 25DEG.C **
- Sodium hyaluronate **
- Molecular weight **
- Osmolality **
- Protein concentration **
- UV analysis **
- Sodium chloride **
- EtO residuals:
- EtO **
- Chlorohydrin **
- Particulates **
**
**
- Identity **
** CONFIDENTIAL TREATMENT REQUESTED
GENERAL REQUIREMENTS
UNIT CARTON
Material: Chipboard .020" (+/- .001") solid bleached sulfate
Dimensions (folded): 7"(L) x 3 1/4"(W) x 1 1/4"(D) (+/- 1/8")
Printed 2 colors: PMS 199 red and PMS 295 blue on white (color
variation allowed between PMS 198-200 and
PMS 294-206 respectively)
Label copy: Legibly printed per IOLAB approved art-work
Embossed with lot number and expiration date
C-1
<PAGE>
INSERT
Material: 20-50# smooth white stock
Dimensions (unfolded): 8 1/2"(L) x 5 3/4"(W) (+/- 1/16")
Printed 2 sides: Black and white
Label copy: Legibly printed per IOLAB approved art-work
SYRINGE/POUCH ASSEMBLY
Pouch: Tyvek 1073B with polyethylene/mylar structure
- - Dimensions: 6 3/4"(L)(+/-1/8") x 3 1/8"(W) (+/- 1/16")
Bar seal 3/8" +/- 1/8"
- - Printed 1 color: PMS 295 blue on white (color variation
allowed between PMS 294-296)
- - Pouch seal intact with no voids or delamination
- - Syringe/pouch assembly free of foreign fibers and particles
larger than .15 mm(2)
- - Syringe/pouch assembly EtO sterilized
SYRINGE ASSEMBLY: 2.25 ml SCF luer-lock hypak syringe barrel and
E-Z grip tip cap assembly (Becton Dickinson products CD8269,
CD8267, and CD8639), plunger rod (ribbed) 2.25 ml (Becton
Dickinson CD8897), plunger stopper (4416/50 West gray butyl
rubber with silicone hypak rubber stoppers, Becton Dickinson
CD7686) and label
- - Syringe aseptically filled with filtration sterilized AMVISC
solution
- - Fill size, expiration date, and lot number on syringe label
- - Solution free of visible particles (at 2OX) or yellow
discoloration (visual)
- - Syringe/Pouch assembly free of fibers and particles sufficient
to meet release test specifications
- - Assembly free of manufacturing defects (cracked/broken syringe,
leakage)
CANNULA: Shall meet the following criteria:
- - USP Sterility Test
- - Non pyrogenic USP
CANNULA/POUCH ASSEMBLY
POUCH: Tyvek 1059B with clear medical grade mylar/polyethylene
- - Label must be legible and state "sterile", "single use", the
lot number, and "Distributed by IOLAB Corporation, Claremont, CA 91711"
C-2
<PAGE>
CANNULA ASSEMBLY: Blunt angled 27-gauge stainless tube with
crimped aluminum mount and polypropylene luer-lock hub (PSI/Eye
Co, Inc., Cat. No. 4002-8)
- - Sheath: 2-Part; heat-staked together; polypropylene
PACKAGING
Complete AMVISC assemblies packed in suitable corrugated
containers constructed to ensure clean acceptable delivery.
Shipping containers legibly marked with a) product lot number, b)
quantity, c) IOLAB part number, d) expiration date reflecting a
minimum shelf life of 12 months remaining upon shipping.
REFRIGERATION
- - Refrigerate during manufacture and storage: Temperature range
must be 2 - 8DEG.C.
- - Refrigerate during transportation: 3 Chart recorders for each
load (placed in front, rear, and middle of vehicle), 2 chart
recorders must be operational to provide QA records.
- - Air freight deliveries must be via a next-day service: Chart
recorder(s) are required.
CERTIFICATE OF ANALYSIS must be furnished for each Amvisc lot and
must verify the above product specifications.
C-3
<PAGE>
EXHIBIT D
AMVISC-REGISTERED TRADEMARK- PLUS PRODUCT SPECIFICATIONS
AMVISC PLUS SHALL MEET THE FOLLOWING CRITERIA:
- - Appearance: **
- - Rabbit inflammatory activity: **
- - USP Sterility Test results: **
- - USP Pyrogen Test results: **
- - Volume: **
- 0.25 ml **
- 0.50 ml **
- 0.80 ml **
- - Chemical analysis test results for:
- pH **
- Kinematic viscosity at 1 sec(-1), 25DEG.C **
- Sodium hyaluronate **
- Molecular weight **
- Osmolality **
- Protein concentration **
- UV analysis **
- Sodium chloride **
- EtO residuals:
- EtO **
- Chlorohydrin **
- Particulates- **
**
**
- Identity **
** CONFIDENTIAL TREATMENT REQUESTED
GENERAL REQUIREMENTS
UNIT CARTON
Material: Chipboard .020" (+/- .001") solid bleached sulfate
Dimensions (folded): 7"(L) x 3 1/4" (W) x 1 1/4"(D) (+/- 1/8")
Printed 2 colors: PMS 199 red and PMS 295 blue on white (color
variation allowed between PMS 198-200 and
PMS 294-206 respectively)
Label copy: Legibly printed per IOLAB approved art-work
Embossed with lot number and expiration date
D-1
<PAGE>
INSERT
Material: 20-50# smooth white stock
Dimensions (unfolded): 8 1/2"(L) x 5 3/4"(W)(+/- 16")
Printed 2 sides: Black and white
Label copy: Legibly printed per IOLAB approved art-work
SYRINGE/POUCH ASSEMBLY
POUCH: Tyvek 1073B with polyethylene/mylar structure
- - Dimensions: 6 3/4"(L)(+/-1/8") x 3-1/8"(W) (+/- 1/16")
Bar seal 3/8" +/- 1/8"
- - Printed 1 color: PMS 295 blue on white (color variation
allowed between PMS 294-296)
- - Pouch seal intact with no voids or delamination
- - Syringe/pouch assembly free of foreign fibers and particles
larger than .15 mm(2)
- - Syringe/pouch assembly EtO sterilized
SYRINGE ASSEMBLY: 2.25 ml SCF luer-lock hypak syringe barrel and
E-Z grip tip cap assembly (Becton Dickinson products CD8269,
CD8267, and CD8639), plunger rod (ribbed) 2.25 ml (Becton
Dickinson CD8897), plunger stopper (4416/50 West gray butyl
rubber with silicone hypak rubber stoppers, Becton Dickinson
CD7686) and label
- - Syringe aseptically filled with filtration sterlized AMVISC
PLUS solution
- - Fill size, expiration date, and lot number on syringe label
- - Solution free of visible particles (at 2OX) or yellow
discoloration (visual)
- - Syringe/Pouch assembly free of fibers and particles sufficient
to meet release test specifications
- - Assembly free of manufacturing defects (cracked/broken syringe,
leakage)
CANNULA: Shall meet the following criteria:
- - USP Sterility Test
- - Non pyrogenic USP
CANNULA/POUCH ASSEMBLY
POUCH: Tyvek 1059B with clear medical grade mylar/polyethylene
- - Label must be legible and state "sterile", "single use", the
lot number, and "Distributed by IOLAB Corporation, Claremont, CA 91711".
D-2
<PAGE>
CANNULA ASSEMBLY: Blunt angled 27-gauge stainless tube with
crimped aluminum mount and polypropylene luer-lock hub (PSI/Eye
Co, Inc., Cat. No. 4002-8)
- - Sheath: 2-Part; heat-staked together; polypropylene
PACKAGING
Complete AMVISC PLUS assemblies packed in suitable corrugated
containers constructed to ensure clean acceptable delivery.
Shipping containers legibly marked with a) product lot number, b)
quantity, c) IOLAB part number, d) expiration date reflecting a
minimum shelf life of 12 months remaining upon shipping.
REFRIGERATION
- - Refrigerate during manufacture and storage: Temperature range
must be 2 - 8DEG.C.
- - Refrigerate during transportation: 3 Chart recorders for each
load (placed in front, rear, and middle of vehicle), 2 chart
recorders must be operational to provide QA records.
- - Air freight deliveries must be via a next-day service: Chart
recorder(s) are required.
CERTIFICATE OF ANALYSIS must be furnished for each Amvisc Plus
lot and must verify the above product specifications.
D-3
<PAGE>
EXHIBIT E
HARVEST PRECIPITATE PROCESS
FLOW DIAGRAM
12/1/94
-------------------------------
MEDIA PREPARATION
-------------------------------
INOCULATION AND FERMENTATION
-------------------------------
[*CONFIDENTIAL TREATMENT
REQUESTED*]
-------------------------------
[*CONFIDENTIAL TREATMENT
REQUESTED*]
-------------------------------
[*CONFIDENTIAL TREATMENT
REQUESTED*]
-------------------------------
[*CONFIDENTIAL TREATMENT
REQUESTED*]
-------------------------------
DRYING
-------------------------------
TESTING
-------------------------------
E-1
<PAGE>
EXHIBIT F TO SUPPLY AGREEMENT
BETWEEN LBI AND IOLAB
Terms and Conditions
of Contingent License Under Section 10
1. INDEMNIFICATION OF LBI. Notwithstanding anything
contained in the Supply Agreement (the "Agreement") to the
contrary, IOLAB shall indemnify and hold LBI harmless against any
and all claims, damages, costs (including reasonable attorney's
fees), judgments and awards relating to HA Products arising after
the date on which IOLAB commences manufacture of any HA Product
including, without limitation, allegations of patent
infringement.
2. COMPUTATION OF ROYALTY. In consideration of the grant
of license under Section 10 of the Agreement, IOLAB shall pay to
LBI a royalty of [*CONFIDENTIAL TREATMENT REQUESTED*] of the Net
Sales Price of all HA Products sold by IOLAB and by its
Affiliates (the "Earned Royalty") which has been manufactured for
or by IOLAB under this license. Notwithstanding the above, IOLAB
shall not be obligated to pay any royalty for the first year
after it has sold product manufactured for or by it under this
license.
3. PAYMENT OF ROYALTY. Within 90 days after the end of
each calendar year quarter following the end of the two year
period referred to in Section 2 above, and thereafter during the
term of the license granted under Section 10 of the Agreement,
IOLAB shall (a) furnish LBI with a written report listing the
quantity and Net Sales Price of all HA Products which were
manufactured for or by IOLAB under this license and sold by IOLAB
and its Affiliates to customers who are not Affiliates during
said quarter; and (b) pay to LBI the Earned Royalty owing to LBI
with respect to HA Products sold by IOLAB and its Affiliates
during said quarter. The term "Net Sales Price" shall mean the
gross invoice or billing price of all HA Products which were
manufactured for or by IOLAB under this license and sold by or
under the authority of IOLAB or any of its Affiliates to any non-
Affiliate with no deductions except for: (1) the actual cost of
any freight, shipping and insurance charges, if stated separately
on IOLAB's or its Affiliate's invoice; (2) trade, quantity and
cash discounts, if any, actually allowed; (3) any sales tax
applicable to the sale of HA Products provided such sales tax is
actually paid by IOLAB or its Affiliate and is shown separately
from the price of any such product; and (4) such credits or
allowances, if any, given or made because of the rejection or
return of any HA Products previously delivered to a non-Affiliate
customer by IOLAB or its Affiliate.
4. ROYALTY AUDIT.
4.1 IOLAB shall maintain true and accurate records in
such manner and detail as to permit the verification of all
royalties paid and all royalties due under this license. These
1
<PAGE>
records will be made available during ordinary business hours for
inspection and copying at IOLAB's ordinary place of business by
authorized representatives of LBI. IOLAB shall retain such
records with respect to each applicable calendar year during the
term of this license for at least 2 years.
4.2 LBI shall be entitled to (no more often than once
each calendar year) have an independent certified public
accountant inspect the books and records of IOLAB to determine
whether IOLAB has paid LBI all royalties due LBI under this
license. To facilitate any such audit, IOLAB shall provide the
auditors selected by LBI, on a timely basis, with a full and
accurate description of IOLAB's accounting practices and records
as they relate to that audit. IOLAB shall also identify,
segregate and make readily available to such auditor, all such
source documents as may be reasonably necessary for the auditor
to make an accurate examination and audit. In the event such
audit determines that additional royalties are due LBI, IOLAB
shall promptly pay the same to LBI, together with interest at the
then current reference rate of First Bank, National Association
plus 1%. In addition, if the amount of any such underpayment is
more than 5%, IOLAB shall reimburse LBI for all costs of its
auditor incurred by LBI in conjunction with such audit. If
agreement cannot be reached by IOLAB and LBI as to the amount, if
any, of any royalty deficiency due LBI, and LBI seeks relief
through arbitration, then in the event LBI is awarded 50% or more
of the amount claimed by it, IOLAB shall pay all reasonable
attorney's fees and costs incurred by LBI in connection with such
arbitration. If LBI is awarded less than 5% of the amount
claimed by it, LBI shall pay such fees and costs of IOLAB to
IOLAB.
5. FOREIGN SALES. All royalties due LBI shall be paid to
LBI in U.S. dollars and shall be calculated at the rate of
exchange (as reported in the Wall Street Journal for that day),
prevailing on the day on which payment is made, if timely made,
but if payment is delinquent, then the rate of exchange as so
reported shall be the rate on the last day when payment could
have been timely made. All taxes, assessment and charges of any
nature assessed or imposed by any entity or government other than
the U.S. or any state or local government in the U.S., on account
of any payments accruing to LBI under this Agreement, shall be
paid by IOLAB.
6. ASSIGNMENT. This Agreement shall be assigned with any
assignment of the Supply Agreement.
END OF EXHIBIT F
2
<PAGE>
EXHIBIT G
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is made and entered
into this 7th day of December, 1994, by and among LifeCore
Biomedical, Inc. (hereinafter "LBI"), IOLAB Corporation
(hereinafter "IOLAB") and [*CONFIDENTIAL TREATMENT REQUESTED*]
(hereinafter "Escrow Holder").
R E C I T A L S
A. LBI and IOLAB have entered into a Supply Agreement
dated December 7, 1994 (the "Agreement") pursuant to which LBI,
among other things, will manufacture and supply IOLAB with HA
Products (as defined in the Agreement).
B. Under the terms of the Agreement, LBI is required to
place a description of LBI's process for the manufacture of HA
Powder (including a lyophilized sample of the strain of
streptococcus pyogenes used in said process) in sufficiently
clear and detailed terms that can be readily followed and carried
out by a trained scientist, said description shall include the
Good Manufacturing Practice Procedures applicable to HA Products,
(the "Process Description") in escrow.
C. LBI and IOLAB desire that Escrow Holder act as escrow
holder for the Process, and Escrow Holder is willing to act as
escrow holder for the Process Description on the terms and
subject to the conditions set forth below.
G-1
<PAGE>
THE PARTIES AGREE AS FOLLOWS:
1. DEPOSIT BY LBI
1.1 DEPOSIT OF PROCESS DESCRIPTION. LBI has deposited in
escrow with Escrow Holder a sealed envelope containing a copy of
the Process Description to be held subject to the terms and
conditions of this Agreement. Furthermore, LBI agrees to
maintain with the Escrow Holder, a lyophilized sample of LBI's
strain of streptococcus pyogenes, which is currently used in
LBI's fermentation process for the manufacture of Hyaluronic
Acid. LBI agrees to replace this deposit with the Escrow Holder
on an annual basis.
1.2 REPRESENTATION. LBI represents and warrants that the
Process Description sets forth the true and complete process for
manufacturing HA Products which is sufficiently clear and
detailed that it can be readily followed and carried out by a
trained scientist.
1.3 CUSTODY; ACCESS. Escrow Holder agrees to accept
deposit of the Process Description and to act as its custodian
until the escrow is terminated, pursuant to the terms of this
Agreement. Except as otherwise provided in this Agreement,
Escrow Holder shall not permit (i) any party access to the
Process Description except as may be necessary for Escrow Holder
to perform its functions hereunder, and (ii) any copies to be
made of the Process Description deposited with Escrow Holder.
Escrow Holder shall not open the sealed envelope containing the
Process Description, except upon receipt of mutual written
instructions by all parties.
G-2
<PAGE>
2. ESCROW RELEASE
2.1 EVENTS OF RELEASE. Escrow Holder shall release and
deliver the Process Description to IOLAB only (i) upon the
written instructions of LBI, or (ii) if IOLAB concurrently
notifies Escrow Holder and LBI that IOLAB, in accordance with the
terms of Section 10 of the Agreement, is entitled to and has
elected to receive a license from LBI for the manufacture of HA
Products and is therefore entitled to obtain the Process
Description from the Escrow Holder and LBI does not object in the
manner described in Section 2.2, to the release of the Process
Description.
2.2 OBJECTION TO RELEASE. If notification is received by
Escrow Holder from IOLAB as provided in Section 2.1, Escrow
Holder shall distribute the Process Description to IOLAB ten (10)
business days after receipt of such notice unless, during said
ten (10) day period, LBI notifies the Escrow Holder, in writing,
that IOLAB is not entitled to obtain a release of the Process
Description. If the matter is submitted to litigation, LBI and
IOLAB agree that the Escrow Holder shall not be a party to such
litigation proceedings.
2.3 LICENSE TO USE PROCESS DESCRIPTION. If the Process
Description is released and delivered to IOLAB, LBI shall retain
title to the Process Description and IOLAB shall have a license
to use such Process Description subject to the terms and
conditions of the Agreement.
3. ESCROW TERMINATION
The escrow shall be deemed terminated upon the earliest to
occur of the following events:
G-3
<PAGE>
(i) mutual written agreement of the parties;
(ii) delivery of the Process Description to IOLAB in
accordance with the terms of Section 2;
(iii) termination of LBI's obligation to provide HA
Products to IOLAB pursuant to the Agreement.
The parties agree that if the escrow is terminated pursuant
to (i) above, the Process Description will be delivered to
whichever party is designated in the agreement, and that if the
escrow is terminated pursuant to (iii) above, the Process
Description will be delivered to LBI.
4. ESCROW HOLDER
4.1 FEES. In consideration for performing its function as
escrow holder, Escrow Holder shall be paid a $200. hourly charge
for any duties required in connection with this Agreement not to
exceed $500. per year; provided that if Escrow Holder is required
to perform any additional or extraordinary services as a result
of being escrow holder, including intervention in any litigation
proceeding, Escrow Holder shall receive reasonable additional
compensation for such services and be reimbursed for costs
incurred, including reasonable attorneys' fees. IOLAB and LBI
each agree to pay one-half of such sums to Escrow Holder.
4.2 LIABILITY. Escrow Holder shall carry out its duties
under this Agreement to the best of its abilities and shall be
liable only for its gross negligence or willful misconduct.
Escrow Holder assumes no liability except that expressed in this
Agreement and shall have no responsibility for any action taken
in good faith
G-4
<PAGE>
in reliance upon receipt of any instrument or other writing
believed by Escrow Holder to be genuine and to be properly
signed or presented. In case any property deposited under this
Agreement shall be attached, garnished, or shall be stayed or
enjoined by an order of court, or if any other judgment or
decree shall be made or entered by a court or arbitrator
affecting such property, or any part thereof or any act of
Escrow Holder, Escrow Holder is hereby authorized in its own
discretion to obey and comply with all writs, orders,
judgments, or decrees so entered or issued by a court or
arbitrator, without the necessity of inquiry whether such court
or arbitrator had jurisdiction; and if Escrow Holder obeys or
complies with any such writ, order, judgment or decree, Escrow
Holder shall not be liable to any of the parties hereto or to
any other person, firm or corporation by reason of such
compliance.
4.3 INDEMNITY. The other parties to this Agreement shall
indemnify and hold Escrow Holder harmless from all costs,
expenses, damages, losses, attorneys' fees, liabilities, and
judgments which Escrow Holder may incur or suffer by reason of
performance of Escrow Holder's duties under this Agreement. In
the event of any arbitration or litigation in respect of this
Agreement or in the event Escrow Holder commences an interpleader
action with respect to any property in its possession or
otherwise related to this Agreement, Escrow Holder shall have the
right to reimburse from any funds deposited in the interpleader
action to cover any expenses incurred hereunder, including
without limitation reasonable attorneys' fees and costs incurred
in connection with the
G-5
<PAGE>
performance of its duties as Escrow Holder or in connection
with institution of any such interpleader action. LBI and
IOLAB jointly and severally promise to pay and reimburse Escrow
Holder for all costs, expenses, damages, losses, attorneys'
fees, liabilities or judgment incurred or suffered by Escrow
Holder which are not recovered in accordance with the terms of
this Section 4.3 or set off against funds deposited in escrow
or in such interpleader action.
4.4 RESIGNATION. Escrow Holder may resign at any time by
giving written notice to the other parties, and in such event,
upon delivery of all property held in escrow hereunder to such
successor escrow holder as is designated by LBI and IOLAB, Escrow
Holder shall be absolved from any and all liabilities. In the
event that no such successor escrow holder is so designated
within five business days after such notice of resignation is
given or that any demand is made by any party which is not
assented to by the other parties and to which such party has no
right to make independent of such other parties, Escrow Holder
may at its option be relieved from all liability to any and all
parties to this Agreement by depositing all of the property
relating to this Agreement in its possession or control with any
United States banking institution with assets in excess of
$100,000,000 and with an office in Minneapolis, Minnesota.
Receipt by such banking institution shall discharge Escrow Holder
from all liability to any party, and the same may be pleaded as a
bar to any action brought by any party to the Agreement.
G-6
<PAGE>
4.5 SUCCESSOR ESCROW HOLDERS. LBI and IOLAB shall have the
right at any time by mutual agreement to remove the Escrow Holder
and appoint a successor.
5. MISCELLANEOUS
5.1 NOTICES. All notices and replies thereto required
hereunder shall be in writing, properly addressed to the other
party, signed by the party giving notice, and may be delivered by
hand or sent by telex, facsimile transaction or registered mail,
return receipt requested. Notices shall be effective upon
receipt. Notices sent by mail shall be deemed received on the
date of receipt indicated by the return verification provided by
the U.S. Postal Service. Notices sent by telex or facsimile
transaction shall be deemed received the day on which sent and
shall be conclusively presumed to have been received in the event
that the sender's copy of the telex or facsimile transaction
contains the "answer back" of the other party's telex or
facsimile transaction. Notice shall be given, mailed or sent to
the parties at the following addresses, or at such other address
as may be given by proper notice.
If to LBI:
Lifecore Biomedical, Inc.
3515 Layman Boulevard
Chaska, Minnesota 55318
Attn: John Heinmiller
If to IOLAB:
IOLAB, Inc.
500 IOLAB Drive
Claremont, CA 91711
Attention: President
G-7
<PAGE>
with a copy to:
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Attention: Office of General Counsel
If to Escrow Holder:
[*CONFIDENTIAL TREATMENT REQUESTED*]
5.2 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all
of which when taken together shall constitute one and the same
instrument.
5.3 ENTIRE AGREEMENT AND MODIFICATION. This Agreement
constitutes and contains the entire agreement of the parties and
supersedes any and all prior negotiations, correspondence,
understandings and agreements between the parties respecting the
subject matter thereof. This Agreement may only be amended by a
written instrument signed by LBI and IOLAB. This Agreement shall
be assigned with any assignment of the Supply Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto
duly authorized on the day and year first above written.
[*CONFIDENTIAL TREATMENT REQUESTED*] LIFECORE BIOMEDICAL, INC.
/s/ /s/ James W. Bracke
By __________________________________ By __________________________
IOLAB CORPORATION
/s/ Robert Deretta
By __________________________
G-8
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated July 31, 1995 (except for Note O as to which
the date is August 30, 1995), accompanying the consolidated financial
statements and schedule included in the Annual Report of Lifecore Biomedical,
Inc. and Subsidiaries on Form 10-K for the year ended June 30, 1995. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of Lifecore Biomedical, Inc. and Subsidiaries on Form
S-8 (File No. 33-19288, effective December 23, 1987; File No. 33-26065,
effective February 18, 1988; File No. 33-32984, effective January 12, 1990;
File No. 33-38914, effective February 8, 1991 and File No. 33-38914
effective date September 26, 1994).
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 30, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LIFECORE
BIOMEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 2,726,000
<SECURITIES> 0
<RECEIVABLES> 1,817,000
<ALLOWANCES> 219,000
<INVENTORY> 6,158,000
<CURRENT-ASSETS> 9,481,000
<PP&E> 12,784,000
<DEPRECIATION> 4,642,000
<TOTAL-ASSETS> 25,522,000
<CURRENT-LIABILITIES> 5,494,000
<BONDS> 7,888,000
<COMMON> 80,000
0
0
<OTHER-SE> 10,108,000
<TOTAL-LIABILITY-AND-EQUITY> 25,522,000
<SALES> 10,018,000
<TOTAL-REVENUES> 10,018,000
<CGS> 7,900,000
<TOTAL-COSTS> 6,801,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 854,000
<INCOME-PRETAX> (5,215,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,215,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,215,000)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> (.66)
</TABLE>
