<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
---------------
<TABLE>
<CAPTION>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
COMMISSION FILE NUMBER: 0-4136
</TABLE>
------------------------
LIFECORE BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0948334
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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)
------------------------
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 $182,192,000 at August 15, 1997 when the last sale
price of such stock, as reported by the Nasdaq National Market, was $15.13.
The number of shares outstanding of the Registrant's Common Stock, $.01 stated
value, as of August 15, 1997 was 12,223,722 shares.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement to be filed with the Commission within 120 days after the
end of the Registrant's fiscal year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Lifecore Biomedical, Inc. ("Lifecore" or the "Company") develops,
manufactures and markets medical and surgical devices through its two divisions,
the Hyaluronate Division and the Oral Restorative Division. Further information
about Lifecore can be obtained from Lifecore's internet site at
www.lifecore.com.
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. The Hyaluronate Division's primary development project
involves LUBRICOAT-Registered Trademark-0.5% Ferric Hyaluronate Gel ("LUBRICOAT
Gel"), the Company's second generation product for potential application in
reducing the incidence of postsurgical adhesions. LUBRICOAT Gel is intended to
reduce the incidence of fibrous tissue adhesions, which commonly form as part of
the body's natural healing process when tissues or organs are subject to
accidental or surgical trauma. Particularly with respect to abdominal,
cardiovascular, orthopedic, reproductive, and thoracic surgeries, these
adhesions may cause internal complications that often require costly
postsurgical intervention. Industry sources recently estimated the annual cost
of treating adhesion complications in the lower abdomen, a common site for the
occurrence of adhesions, at $2 billion in the United States.
The Company produces hyaluronate 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. Lifecore is
pursuing the development of several other applications of hyaluronate through
its strategic alliances with a number of corporate partners for a variety of
veterinary, drug delivery and wound care applications. The Company also is
leveraging its specialized hyaluronate manufacturing skills to develop and
manufacture non-hyaluronate products for medical applications.
The Company's Oral Restorative Division 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, 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 tissue regeneration products for the restoration of
bone deterioration resulting from periodontal disease and tooth loss. In May
1997, Lifecore acquired the TefGen-Registered Trademark- product line from
Bridger Biomed, Inc. ("Bridger"). The acquisition expanded and complemented the
growing line of tissue regenerative products by adding a nonresorbable membrane
to address the current clinical practice referred to as guided tissue
regeneration. In June 1997, Lifecore expanded its tissue regeneration business
to include soft tissue applications with the addition of AlloDerm-Registered
Trademark- Dermal Graft, which the Company will distribute on an exclusive basis
to the U.S. dental market for LifeCell Corporation ("LifeCell"). 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.
2
<PAGE>
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 of tissues during the
implantation of intraocular lenses dramatically improved the 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 world.
Other hyaluronate applications currently being investigated by Lifecore or
its partners include general surgery (prevention of postsurgical adhesions),
catheter guide-wire coatings, drug delivery (as a vehicle to carry wound healing
agents), and veterinary (storage of fertilized embryos; orthopedics). The
Company believes that the use of hyaluronate for postsurgical 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. Elements of the Company's strategy include the following:
- ESTABLISH STRATEGIC ALLIANCES WITH MARKET LEADERS. The Company will
continue to develop applications for products with partners who have
strong marketing, sales and distribution capabilities to end-user markets.
The Company currently has established relationships with Alcon
Laboratories, Inc., an indirect subsidiary of Nestle S.A. ("Alcon"),
Chiron Vision, Inc., a subsidiary of Chiron Corporation ("Chiron Vision"),
Ethicon, Inc., a wholly-owned subsidiary of Johnson & Johnson ("Ethicon"),
Johnson & Johnson Medical Ltd., a wholly-owned subsidiary of Johnson &
Johnson ("JJML"), Mentor Ophthalmics Inc. ("Mentor"), and Storz
Ophthalmics, Inc., a subsidiary of American Home Products, Inc. ("Storz"),
market leaders in the ophthalmics and surgical products fields.
- EXPAND MEDICAL APPLICATIONS FOR HYALURONATE. The Company is currently
pursuing a broad range of applications in general surgery, veterinary,
drug delivery and wound care. 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. The Company's role in these relationships extends from supplier
3
<PAGE>
of raw materials to manufacturer of aseptically-packaged products. In
addition, the Company may develop its own proprietary products.
- LEVERAGE SPECIALIZED HYALURONATE MANUFACTURING SKILLS. The Company is
using its viscous fluid handling and aseptic packaging experience gained
in producing hyaluronate to develop and manufacture non-hyaluronate
products for new customers.
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 Lifecore has related strategic alliances:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRODUCT STRATEGIC ALLIANCE MARKET STATUS*
- ---------------------------- ---------------------------------------- -------------------- -------------------------
<S> <C> <C> <C>
GENERAL SURGERY
LUBRICOAT-Registered Lifecore's proprietary product under Adhesion prevention Pivotal human clinical
Trademark- 0.5% Ferric development; Ethicon has exclusive trials commenced in March
Hyaluronate Gel worldwide marketing rights 1996
- -------------------------------------------------------------------------------------------------------------------------
OPHTHALMIC
Viscoat-Registered Lifecore supplies proprietary Cataract surgery Commercial sales since
Trademark- Ophthalmic hyaluronate powder for inclusion in 1983
Viscoelastic Solution Alcon Laboratories' Viscoat viscoelastic
solution
Amvisc-Registered Trademark- Lifecore supplies viscoelastic solution Cataract surgery Lifecore export shipments
and Amvisc Plus-Registered syringes to Chiron Vision, Inc., which commenced in December
Trademark- Ophthalmic markets the products 1995; Chiron's PMA
Solutions supplement for U.S. sales
has been filed
Lurocoat-Registered Lifecore supplies its proprietary Cataract surgery Human clinical trials to
Trademark- Ophthalmic viscoelastic syringes to Mentor begin in fiscal 1998;
Solution Ophthalmics, Inc., which will market Lifecore export shipments
product exclusively in U.S. and Canada commenced in June 1997
and on a non-exclusive basis
elsewhere.The product is also supplied
on a non-exclusive basis to several
other ophthalmic companies
Polyethylene Oxide (PEO) Lifecore supplies syringes of PEO to Refractive surgery Storz commenced human
Ophthalmic gel Storz Ophthalmics, Inc., which owns clinical trials in 1997
rights to market the product
Caprogel-TM- Topical Lifecore supplies syringes of Ocular bleeding Orphan Medical's human
Aminocaproic Acid aminocaproic acid to Orphan Medical, (hyphema) clinical trials commenced
Inc., which owns rights to market the in 1994
product
- -------------------------------------------------------------------------------------------------------------------------
WOUND MANAGEMENT
Wound healing agent Lifecore supplies hyaluronate powder to Wound management Pre-clinical trials
Johnson & Johnson Medical Ltd. for use commenced in fiscal 1997
in delivery vehicle and process
development services
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRODUCT STRATEGIC ALLIANCE MARKET STATUS*
- ---------------------------- ---------------------------------------- -------------------- -------------------------
<S> <C> <C> <C>
OTHER APPLICATIONS
MAP-5-TM- Embryo Lifecore supplies hyaluronate solution Veterinary Commercial sales since
Cryopreservation Solution in vials to Vetrepharm, Inc., which cryopreservation 1994
markets the product
- -------------------------------------------------------------------------------------------------------------------------
</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 be given that such products will be
successfully developed or marketed.
ADHESION PREVENTION DEVELOPMENT PROJECT WITH ETHICON
The Company is developing a hyaluronate product, LUBRICOAT Gel, for
potential application in reducing the incidence of postsurgical adhesions.
Ethicon has worldwide, 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 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.
Industry sources recently estimated the annual cost of treating adhesion
complications in the lower abdomen, a common site for the occurrence of
adhesions, at $2 billion in the United States. The Company believes that a
significant share of this market can be captured by skilled market distribution
of a product with low toxicity, easy application, high procedural flexibility,
broad effectiveness, and appropriate pricing.
In 1989, the Company began working with Ethicon on anti-adhesion products
being developed by Ethicon using the Company's Tenalure-Registered Trademark-
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 postsurgical
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 reformulated
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
5
<PAGE>
("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. A pilot human clinical trial, involving 23 female patients
undergoing peritoneal cavity surgery with preservation of fertility, was
completed at a single United States clinical center in December 1995. Patients
were randomly selected to receive either LUBRICOAT Gel or a control solution
applied in a final step prior to completion of surgery. The primary goals of the
pilot study were the preliminary assessment of the safety of LUBRICOAT Gel and
an evaluation of the experimental clinical protocol. A secondary goal was the
preliminary assessment of the effectiveness of LUBRICOAT Gel in reducing
postsurgical adhesions by second-look laparoscopy. This laparoscopy is a
standard surgical practice with fertility patients, which requires a follow-up
evaluation of the patients' internal abdominal anatomy. The laparoscopy enabled
clinicians to gather data visually comparing postsurgical adhesions in the two
patient treatment groups. Analysis of the pilot clinical data indicated that
patients who received LUBRICOAT Gel experienced a 45% lower incidence of a broad
range of adhesions than control patients (p LESS THAN 0.02). Further, the study
showed that when adhesions did occur, those of the LUBRICOAT Gel patient group
were significantly less extensive and less severe than those of the control
group (p LESS THAN 0.01). Finally, physicians using the test material indicated
that it was easily incorporated into current clinical procedures.
Based on these results, the Company initiated a pivotal human clinical trial
in March 1996. The pivotal trial is expected to involve up to 200 patients in a
blinded study at approximately twelve clinical sites in the United States and
five clinical sites in Europe. These patients will undergo a similar randomized
treatment protocol and be evaluated for adhesion formation at 24 abdominal and
pelvic sites by second-look laparoscopy. If the pivotal trial confirms the
statistical significance observed in the pilot trial, the Company will be in a
position to apply for a Pre-Market Approval ("PMA"), which it expects to do in
1998. There can be no assurance that the results of the pivotal trial will be
positive, that the Company will submit a PMA application, or that a PMA will be
approved by FDA. See "Government Regulation."
In August 1994 when responsibility for development of this project was
shifted to Lifecore, the Company and Ethicon entered into a Conveyance, License,
Development and Supply Agreement (the "Ethicon Agreement") to carry out the
shift of responsibility. The Ethicon Agreement transferred to the Company the
intellectual property developed to date from the anti-adhesion project,
including pending patent rights and data 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 worldwide marketing rights to LUBRICOAT Gel for postsurgical
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 reports directly to Lifecore management.
6
<PAGE>
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 six customers, including Alcon, Chiron Vision and Mentor. Alcon
and Chiron Vision are two of the leading producers of ophthalmic surgical
products in the world. In February 1996, the Company entered into a private
label manufacturing agreement with Mentor to supply the Lurocoat solution on an
exclusive basis in the United States and Canada and on a non-exclusive basis
elsewhere for use in ophthalmic surgery. The Company also has three other
agreements to supply Lurocoat solution under private label relationships outside
the United States and Canada for this application.
Hyaluronate based products are used in the majority of cataract surgeries in
the world. The Company estimates that the worldwide 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 received clearance from
the FDA 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 for export 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 has filed a PMA supplement with the FDA to allow the Company to
manufacture these products for U.S. sale. The sale by Chiron Vision in the
United States of Amvisc and Amvisc Plus syringes supplied by the Company is
dependent upon such FDA clearance. In December 1995, Chiron Vision commenced
shipments of finished products to Europe.
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 in the U.S. The
Company has entered into a multi-year private label manufacturing agreement with
Mentor, under which the Company will manufacture the Lurocoat product in
syringes under Mentor's trade name for sale on an exclusive basis in the United
States and Canada, and on a non-exclusive basis in other parts of the world.
United States clinical trials, funded by Mentor, are expected to commence in
fiscal 1998. The Company received CE marking for Lurocoat solution during fiscal
year 1997. The Company
7
<PAGE>
also has three other private label agreements to supply Lurocoat solution to
others outside the United States and Canada. Export shipments of Lurocoat
solution began in fiscal year 1997.
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, to produce a polyethylene oxide ("PEO") ophthalmic gel product currently
under development for use in refractive surgery for myopia (near-sightedness).
Industry sources estimate that the current worldwide refractive surgery market,
on a patient cost basis, exceeds $900 million.
The current refractive surgery procedures for correcting myopia involve
surgical revision of the cornea which, in one type of surgery, weakens and
relaxes the outer curvature to achieve a corresponding correction of the eye's
focusing mechanism, and in the other type of surgery, causes the cornea to be
surgically "flapped" to allow laser sculpting of the underlying layer. Both
current surgical approaches are performed within the central region of the
cornea, which is the eye's primary visual field. Storz is developing a
polyethylene oxide ophthalmic 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 or
compromising the primary visual field. 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 may 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, upon FDA approval, to exclusive marketing rights for certain
products that serve a limited patient population. The Company is providing
contract process development and aseptic packaging for Caprogel and expects
that a subsequent commercial supply phase with a three-year term may commence
upon OMI's commercial introduction of Caprogel. Industry sources estimate
that the worldwide market for ocular hyphema involves 70,000 cases each year.
8
<PAGE>
WOUND MANAGEMENT
Johnson & Johnson Medical, Ltd. ("JJML") is developing a product that
utilizes the Company's hyaluronate and process development expertise to produce
a drug delivery vehicle to enhance topical wound healing. During fiscal 1997,
JJML entered pre-clinical trials with this product.
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 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. Sales to
Vetrepharm, Inc. have been made since 1994 pursuant to annual purchase orders
which specify the quantity and unit price.
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 similar to the JJML
opportunity outlined above.
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 $350 million
on a manufacturers' sales basis.
Bone graft substitutes are used for the restoration of hard and soft tissues
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
9
<PAGE>
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 bone substitute products is limited (approximately $5
million annually in the United States), the addition of hard tissue
regeneration products has expanded the market to approximately $25 million in
the United States. The Company's TefGen-Registered Trademark- Regenerative
Membrane and Capset-TM- Calcium Sulfate Bone Graft Barrier address this
market opportunity. Similarly, a market for soft tissue regenerative products
has developed to address the area of soft tissue replacement in adding to or
replacing gingival tissue. The estimated U.S. market potential for a soft
tissue regenerative product is approximately $50 million. AlloDerm-Registered
Trademark- Dermal Graft addresses this market opportunity.
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:
- Develop a broad line of dental implants and related dental surgery support
products which facilitate the transition from competitive systems to a
Lifecore system.
- Develop and deliver unique educational programs and materials aimed at
participating dentists and their staffs to facilitate the conversion from
traditional dental treatment options to those involving dental implant and
tissue regeneration therapy.
- Develop and implement innovative cooperative marketing programs with
participating dentists for the purpose of creating increased awareness of
dental implant and tissue regeneration therapy among their client base and
the public in general.
10
<PAGE>
ORAL RESTORATIVE DIVISION PRODUCTS
The following chart summarizes the principal products of the Company's Oral
Restorative Division:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRODUCT MARKET STATUS*
- -------------------------------------- ---------------------------------------------------- --------------------
<S> <C> <C>
Sustain-Registered Trademark- and Replacement of lost or extracted teeth Commercial sales
Restore-Registered Trademark- Dental
Implant Systems
- ------------------------------------------------------------------------------------------------------------------
Implant Support Systems Precision oral restorative components compatible Commercial sales
with implants
- ------------------------------------------------------------------------------------------------------------------
Capset-TM- Calcium Sulfate Bone Graft For use with natural and synthetic bone graft Commercial sales
Barrier materials as a resorbable barrier cap and/or binding
agent
- ------------------------------------------------------------------------------------------------------------------
TefGen-Registered Trademark- Nonresorbable membrane for guided tissue Commercial sales
Regenerative Membrane regeneration
- ------------------------------------------------------------------------------------------------------------------
Hapset-Registered Trademark- Repair of jawbone structure Commercial sales
Hydroxylapatite Bone Graft Plaster
- ------------------------------------------------------------------------------------------------------------------
Orthomatrix-Registered Trademark- Graft Substitute Repair of jawbone structure Commercial sales
Non-resorbable Hydroxylapatite Bone
- ------------------------------------------------------------------------------------------------------------------
AlloDerm-Registered Trademark- Dermal For use in gingival tissue replacement or Commercial sales
Graft augmentation surgery
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
IMPLANT PRODUCTS
The Company offers two dental implant systems, the Restore 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 implant design 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 both
threaded and press-fit cylinder format with added "bone-like" hydroxylapatite.
In May 1992, the Company acquired the basic 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 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
1,100 products.
11
<PAGE>
BONE AND SOFT TISSUE REGENERATION PRODUCTS
The Company offers five products which address various bone and tissue
regeneration procedures.
CAPSET-TM- Calcium Sulfate Bone Graft Barrier received 510(k) clearance and
was introduced to the market in 1995. The product is based on a calcium sulfate
plaster technology developed by and licensed from the U.S. Gypsum Corporation.
The business unit of U.S. Gypsum that supplied Lifecore with the raw material
and exclusive license rights to its dental use was purchased during the
Company's fiscal year 1997 by Wright Medical, Inc., an orthopedic products
manufacturer based in Memphis, Tennessee. Wright Medical and Lifecore have
agreed to maintain the technology and license agreement. CAPSET Barrier allows
the clinician to more efficiently use demineralized freeze-dried bone grafts to
restore missing bone, particularly in periodontal defects, without resorting to
more elaborate treatment techniques or no treatment at all.
TefGen-Registered Trademark- Regenerative Membrane technology was acquired
by the Company from Bridger Biomed, Inc. in May 1997. This non-resorbable
membrane is based on NANO POROUS PTFE BIOMATERIALS ("nPTFE"); competitive with
the market's leading product produced by W.L. Gore. TefGen Regenerative Membrane
allows the dental surgeon to cover a treated defect in bone and prevent the
invasion of soft tissue while the slower growing bone tissue below has time to
establish itself.
HAPSET-Registered Trademark- Hydroxylapatite Bone Graft Plaster is a
moldable, partially resorbable form of hydroxylapatite graft substitute that can
be contoured to bone defect during surgery. It consists of the Company's
hydroxylapatite particle in a carrier of the same calcium sulfate plaster used
for CAPSET.
ORTHOMATRIX-Registered Trademark- Non-resorbable Hydroxylapatite Bone Graft
Substitute is a calcium phosphate particle that can be used in place of
freeze-dried allograft bone or the patient's own bone in defects where permanent
graft presence is desired.
AlloDerm-Registered Trademark- Dermal Graft is freeze-dried and chemically
processed human donor skin that can be used as a substitute for soft tissue
grafts taken from the roof of the patient's mouth. In June 1997, Lifecore
entered into an exclusive U.S. sales and distribution agreement with LifeCell
Corporation to market and distribute AlloDerm Dermal Graft in the dental market.
The product provides soft tissue for adding or replacing gingival tissue without
the second site surgery and patient discomfort associated with palatal (roof of
mouth) harvesting of graft tissue.
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. 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.
12
<PAGE>
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 products with shipments to
Europe in December 1995. Mentor Ophthalmics, Inc. will provide exclusive
marketing of the Lurocoat viscoelastic for ophthalmic surgery in the United
States and Canada and non-exclusive marketing in other areas. Supply of Lurocoat
viscoelastic to Mentor began in June 1997 for marketing outside the United
States. The Company also has three other private label agreements to supply
Lurocoat viscoelastic to others outside the United States and Canada. In
addition, the Company manufactures and packages a PEO ophthalmic gel for Storz
pursuant to a development agreement and may enter into a supply relationship
upon the completion of successful clinical testing. The Company also sells vials
of hyaluronate solution for veterinary 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 direct sales force
in the United States. The Company believes that because of their high level of
experience, its sales force offers better customer service, technical support
and regulatory control than could be achieved through an independent distributor
network in the United States. The Company employs eighteen individuals dedicated
to sales in the United States and five U.S.-based salespersons dedicated to
international sales. The Oral Restorative Division products are marketed
internationally through 25 distributors. In addition, the products are marketed
in Italy through its subsidiary, Lifecore Biomedical SpA, which currently
utilizes eight 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.
13
<PAGE>
A new cooperative marketing venture, with certain key implant practioners,
is being tested as a means to advertise direct to the consumer in target
markets. Industry estimates indicate a need for replacement of approximately 100
million teeth in the adult population of the United States. That represents a
potential market for implant companies such as Lifecore of approximately $30
billion.
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 a 66,000 square foot facility primarily for the Company's
proprietary hyaluronate manufacturing process. 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. The Company believes it has
adequate current fermentation manufacturing capacity to meet these needs.
The Company 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.
In anticipation of significant commercial demand for hyaluronate products,
specifically LUBRICOAT Gel, the Company is expanding its warehouse and
distribution capabilities and its aseptic formulation and packaging facilities
for finished products. The scale-up of the aseptic operations requires the
purchase and validation of additional equipment and training of additional
personnel. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
The Company's facility was designed to meet applicable regulatory
requirements and has been cleared 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
14
<PAGE>
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. 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 and quality control functions
related to the implant devices and components and performs its own finished
packaging.
The Company purchases raw 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. The key
raw material for CAPSET Barrier is supplied exclusively by Wright Medical, and
the Company believes such supplier is able to provide adequate amounts of the
raw materials for such product. The Company utilizes supply agreements with
Bridger Biomed, Inc. to supply the TefGen product line and LifeCell Corporation
to supply the AlloDerm Dermal Graft product line.
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. Several companies
are pursuing anti-adhesion product development, including Anika Research, Inc.,
Biomatrix, Inc., Focal, Genzyme Corporation, Gliatech, Osteotech and W.L. Gore &
Associates, Inc. Genzyme is developing several hyaluronate-based formulations
for surgical anti-adhesion applications, which would directly compete with the
Company's LUBRICOAT Gel product, if and when approved for marketing by the FDA.
Genzyme has begun to market one of those products, Seprafilm-TM- bioresorbable
membrane. A second product, in the form of a gel, is in development. If the
products obtain commercial acceptance, the Company's prospects for LUBRICOAT
Gel, if and when approved, may be adversely affected.
In addition to Genzyme, several companies produce hyaluronate through a
fermentation process, including Bio-Technology General Corporation, Kyowa Hakko,
Nippon, Seikagaku, and Miles Laboratories. Genzyme 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. 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
15
<PAGE>
primarily include Anika Research, Inc., Biomatrix, Inc., Chesapeake
Biological Labs, Fidia SpA, and Pharmacia & Upjohn. 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.
ORAL RESTORATIVE PRODUCTS
The dental implant market is also highly competitive. Major market
competitors include Sulzer Calcitek, Inc., Paragon (Core-Vent), Implant
Innovations, Inc., Nobel Biocare AB and Steri-Oss. A number of these competitors
are established companies with dominant market shares. The Company believes that
competition in the dental implant market is based primarily on product
performance and quality, strong sales support, and education.
The Company believes that its broad product line facilitates the conversion
of existing implant users to a Lifecore system. In addition, the Company has
developed several innovative education and marketing support programs which are
designed to increase the client's implant business. The Company believes it has
established a strong reputation for quality products due to its stringent design
and inspection criteria. No assurance can be given, however, that the Company
can effectively compete with manufacturers of dental implant systems having
larger, more established client bases.
The market for the Company's tissue regeneration products is also
competitive. The major competitors include Guidor AB (Guidor), Implant
Innovations, Inc., W. L. Gore (GORE-TEX), and Sulzer Calcitek Inc. (Biomend).
While the Company believes its product line and experienced sales representation
are an advantage in this area, no assurance can be given that it can gain
significant market share from its more established competitors.
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 and use of LUBRICOAT Gel, with applications filed in the United
States, Australia, Brazil, Canada, Europe, Greece, and Japan. Subsequently, the
patent has been issued in Australia, Greece, and the United States. The Company
also has a United States patent covering the
16
<PAGE>
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 Wright Medical and the University of North Carolina. In conjunction with
the purchase of the TefGen product line, the Company obtained the rights to
the patent for composition, manufacture and use of the nPTFE material.
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 current or anticipated
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 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 which, in some cases, requires a PMA, and by
foreign countries, which regulate the products as medical devices or drugs.
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
17
<PAGE>
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 what is
called a "predicate device," i.e., a legally marketed Class I or Class II
medical device or 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 or
distributor to submit a PMA 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 generally requires
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 as Class III devices and require
PMAs for them or reclassify them into Class II or Class I. It is not known when
the FDA will make this decision or whether it will require PMAs for all, some or
none of these implants. The Company
18
<PAGE>
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 and believes it will have appropriate data to meet FDA
requirements. The Company's TefGen product line is a Class II device. CAPSET
Barrier, HAPSET Plaster and ORTHOMATRIX Bone Graft Substitute have received
market clearance through 510(k) Notifications but are unclassified. Alloderm
Dermal Graft is regulated as a banked human tissue.
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, on terms
acceptable to the Company for the purpose of actually marketing the products, 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 an $8.0 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. There can be no assurance that
the Company will have sufficient resources to satisfy product claims if they
exceed available insurance coverage.
EMPLOYEES
As of July 31, 1997, the Company employed 156 persons on a full-time basis,
one part-time employee and nine 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.
19
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The following sets forth the names of the executive officers of Lifecore, in
addition to information about their positions with Lifecore, their periods of
service in such capacities, and their business experience for at least the past
five years. There are no family relationships among them. 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.
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.
DENNIS J. ALLINGHAM. Mr. Allingham has been Vice President and Chief
Financial Officer of the Company since February 1996. Mr. Allingham has also
been General Manager of the Hyaluronate Division since November 1996. From June
1995 until January 1996, Mr. Allingham served as Senior Vice President and Chief
Financial Officer of Premier Salons International, Inc., a leading private hair
salon chain in North America. From June 1993 until May 1995, Mr. Allingham
served as Executive Vice President, Chief Financial Officer and director of
TitleWave Stores, Inc., a leading chain retailer of home entertainment software.
From July 1992 until May 1993, Mr. Allingham was a management financial
consultant. From June 1980 until June 1992, Mr. Allingham held various positions
with Krelitz Industries, Inc., a wholesale distributor of pharmaceutical and
healthcare products, most recently serving as Executive Vice President, Chief
Operating Officer, Chief Financial Officer and director.
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.
ITEM 2. PROPERTIES
The Company's operations are all conducted in its 66,000 square foot
building in Chaska, Minnesota. At June 30, 1997, the Company is in the process
of expanding its building in Chaska by approximately 32,000 square feet. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation".
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 1997 and
1996 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>
1997
First Quarter.............................................................. $16 $22 1/8
Second Quarter............................................................. 15 1/8 20
Third Quarter.............................................................. 14 5/8 19 5/8
Fourth Quarter............................................................. 11 1/2 16 1/8
1996
First Quarter.............................................................. $ 7 3/8 $13 1/2
Second Quarter............................................................. 9 5/8 18 3/4
Third Quarter.............................................................. 15 1/2 18 11/16
Fourth Quarter............................................................. 16 21 1/4
</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 C to Consolidated Financial
Statements.
At July 31, 1997, the Company had 726 shareholders of record.
21
<PAGE>
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, 1997 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,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................................................. $ 7,485 $ 10,430 $ 10,018 $ 14,063 $ 18,913
Costs of goods sold........................................ 3,767 6,004 7,900 9,173 9,052
--------- --------- --------- --------- ---------
Gross profit............................................... 3,718 4,426 2,118 4,890 9,861
Operating expenses
Research and development................................. 1,706 1,072 1,381 2,699 3,703
Marketing and sales...................................... 2,764 2,645 3,038 4,356 5,464
General and administrative............................... 2,198 2,100 2,382 2,861 2,986
Insurance proceeds, net.................................. -- -- -- (754) --
Manufacturing relocation................................. 1,331 -- -- -- --
--------- --------- --------- --------- ---------
7,999 5,817 6,801 9,162 12,153
--------- --------- --------- --------- ---------
Loss from operations....................................... (4,281) (1,391) (4,683) (4,272) (2,292)
Other income (expense)..................................... 554 (1,406) (532) 272 1,259
--------- --------- --------- --------- ---------
Net loss................................................... $ (3,727) $ (2,797) $ (5,215) $ (4,000) $ (1,033)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per common share.................................. $ (.53) $ (.39) $ (.66) $ (.40) $ (.08)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding........................ 7,048 7,176 7,880 10,114 12,179
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 7,756 $ 3,618 $ 3,987 $ 22,207 $ 26,848
Total assets............................................... 23,786 24,063 25,522 64,429 65,509
Long-term obligations...................................... 7,398 9,051 7,888 7,193 7,596
Shareholders' equity....................................... 13,453 11,328 10,188 52,152 52,096
</TABLE>
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, manufactures and markets medical and surgical devices
through its Hyaluronate and the Oral Restorative Divisions.
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 extends through December 31,
1998. The agreement contains minimum purchase requirements totaling $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
in 1994, the Company received a $6.3 million cash advance from Alcon against
future purchases. During fiscal year 1997, the remaining portion of the $6.3
million advance on product purchases from Alcon was fully utilized. See
"Liquidity and Capital Resources" and Note D to Consolidated Financial
Statements.
The Company's Oral Restorative Division markets a comprehensive line of
titanium-based dental implants for tooth replacement therapy. 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. The Oral
Restorative Division also markets other products for the regeneration of bone
and soft tissue. The 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 increased $4,850,000 or 34% in fiscal 1997 from fiscal
1996, due to a $1,530,000 increase in sales to hyaluronate customers and a
$3,320,000 increase in sales to oral restorative customers.
Hyaluronate sales increased to $7,115,000 in fiscal 1997 from $5,585,000 in
fiscal 1996. Sales to Alcon were $3,204,000, $2,861,000 and $3,182,000 for
fiscal years 1997, 1996 and 1995. In fiscal years 1996 and 1995, sales to Alcon
were at contract minimums. In fiscal year 1997, Alcon purchased above its
contract minimum. Net sales to hyaluronate customers other than Alcon increased
$1,187,000, or 44%, in fiscal 1997 from fiscal 1996. This increase was led
mainly by sales to Chiron Vision which increased by 54% in fiscal 1997 from
fiscal 1996. Hyaluronate sales increased to $5,585,000 in fiscal 1996 from
$5,223,000 in fiscal 1995. The decrease in hyaluronate sales to Alcon from
fiscal 1995 to fiscal 1996 was a result of Alcon purchasing only the required
minimum purchases. Net sales to other hyaluronate customers increased $683,000
or 33% in fiscal 1996 from fiscal 1995.
23
<PAGE>
Oral restorative product sales increased 39% to $11,798,000 in fiscal 1997
from $8,478,000 in fiscal 1996. This increase primarily reflects the continued
market acceptance of the Company's implant products, the effects of increased
sales and marketing activities in the domestic market, and increased sales
internationally through an expanded distributor network and at Lifecore
Biomedical SpA. Oral restorative product sales increased 77% to $8,478,000 in
fiscal 1996 from $4,795,000 in fiscal 1995. The increase in oral restorative
product sales in fiscal 1996 was a result of increased marketing and sales
activities in the domestic market, the introduction of CAPSET Barrier, sales
from Lifecore Biomedical SpA which was in operation for the entire fiscal year
1996, and higher sales levels internationally.
COST OF GOODS SOLD. Cost of goods sold, as a percentage of net sales,
decreased to 48% for fiscal year 1997 from 65% for fiscal year 1996. The
decrease resulted from fixed expenses being spread over increased product sales
and the expanded utilization of the Company's aseptic and hyaluronate production
capacity. Cost of goods sold, as a percentage of net sales, decreased to 65% for
fiscal 1996 from 79% for fiscal 1995. The decrease in fiscal 1996 resulted from
two main factors. First, fixed expenses were spread over increased product
sales. Second, direct charges for idle capacity relating to the Company's
manufacturing facility of hyaluronate products were lower than in the prior
year. These improvements were partially offset by the negative impact incurred
for the scale-up of aseptic ophthalmic syringe products. Cost of goods sold, as
a percentage of net sales for the oral restorative products, decreased to 40% in
fiscal 1997 from 46% in fiscal 1996 and 49% in fiscal 1995. The decreases
resulted principally from spreading fixed expenses over increased oral
restorative product sales in fiscal 1996 and 1997. Lower raw material costs as a
result of the ability to purchase in larger quantities further contributed to
the decrease in cost of goods sold.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$1,004,000 or 37% in fiscal 1997 from fiscal 1996. The increase in fiscal 1997
was principally a result of costs associated with human clinical trials on
LUBRICOAT Gel. Activity on other products in development was higher in fiscal
1997 than in fiscal 1996 which accounted for the remainder of the increase.
There was an increase of $1,318,000 or 95% in fiscal 1996 from fiscal 1995 as a
result of the LUBRICOAT Gel human clinical trials and increased activity on
other development projects.
MARKETING AND SALES. Marketing and sales expenses increased by $1,108,000
or 25% in fiscal 1997 from fiscal 1996. The increase in expenses mainly occurred
in the Oral Restorative Division. The components of this increase in fiscal 1997
were $417,000 for increased advertising and marketing costs, $363,000 due to
higher compensation costs for expanded sales personnel and commissions on an
increased sales base, $137,000 from Lifecore Biomedical SpA for increased sales
personnel and expanded marketing efforts, and a general increase in telephone,
travel and entertainment expenses. Marketing and sales expenses increased
$1,318,000 or 43% in fiscal 1996 from fiscal 1995. The principal components of
the increase in fiscal 1996 were $595,000 related to compensation costs,
primarily associated with additional sales personnel, $171,000 related to
advertising and sales literature costs, primarily resulting from a new product
catalog issued in the fall of 1995, increased travel and related expenses from
the additional sales personnel added in late fiscal 1995 and early fiscal 1996,
and expenses related to the direct sales personnel at Lifecore Biomedical SpA,
which has been in operation since April 1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $125,000 or 4% in fiscal 1997 from fiscal 1996 and increased $479,000 or 20%
in fiscal 1996 from fiscal 1995. The increase in fiscal 1997 resulted mainly
from higher personnel related costs, including salaries, health
24
<PAGE>
insurance, recruiting and relocation expenses. The fiscal 1996 increase was
due to higher personnel related costs and to a lesser extent a full year of
expenses from Lifecore Biomedical SpA.
INSURANCE PROCEEDS, NET. In May 1996, the Company received net proceeds of
$754,000 on an insurance claim for product that was damaged in production as a
result of an equipment failure.
OTHER INCOME (EXPENSE). Interest expense was lower in fiscal 1997 compared
to fiscal 1996 due to a lower amount of debt outstanding and the capitalization
of interest expense in conjunction with the facility expansion project. Interest
income was greater in fiscal 1997 compared to fiscal 1996 as a result of a
higher average amount of cash to invest than in fiscal 1996. Interest expense
decreased in fiscal 1996 from fiscal 1995 due to a lower average debt
outstanding during fiscal 1996. Interest income increased in fiscal 1996 from
fiscal 1995 as a result of having additional cash available to invest from the
proceeds received from the public stock offering completed in the second quarter
of fiscal 1996 and the offshore stock offering in the fourth quarter of fiscal
1996.
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 $2,311,000 or 29% in fiscal 1997 from fiscal 1996 principally due to
building of hyaluronate inventory levels in anticipation of the demand for
LUBRICOAT Gel.
The Company has had significant operating cash flow deficits for the last
three fiscal years. As the Hyaluronate Division's sales continue to increase,
the Company's direct charges associated with excess plant capacity are
decreasing; however, research and development costs for LUBRICOAT Gel, marketing
and sales expenses for the oral restorative products, and personnel costs are
increasing. Obligations under a promissory note in connection with the TefGen
product line acquisition total $800,000 for fiscal 1998 and $800,000 for fiscal
1999. These payments may be made in cash or the Company's common stock at the
Company's option. During the third quarter of fiscal 1997, the Company satisfied
its lease commitment with Johnson & Johnson Finance Corporation by purchasing
the equipment subject to the lease. The Company paid approximately $5.1 million
in exchange for the specialized production equipment which Lifecore was
utilizing under the operating lease. The lease termination is expected to
favorably impact ongoing financial operating costs.
The loan agreement between the Company and the holder of the industrial
development revenue bonds issued to finance the Company's Chaska facility was
amended in July 1997 to waive the fixed charge coverage ratio and the cash flow
coverage ratio through June 30, 1998. With respect to certain of these
covenants, the Company anticipates that it will be required to obtain further
waivers for fiscal 1999. There can be no assurance that future waivers will be
granted to the Company.
The Company is in the process of expanding its manufacturing and
distribution capabilities at its Chaska, Minnesota location. This expansion
includes building and equipment expenditures for warehouse and distribution
capabilities and to scale-up aseptic-packaging facilities for finished products.
Construction-in-progress and advance deposits relating to the expansion of
approximately $5,265,000 were incurred through June 30, 1997. The Company has
signed contracts with an architect, a process engineering firm
25
<PAGE>
and a construction company for the expansion project. The contracts provide
for the expansion to be completed in phases. The contracts may be terminated
at any time at minimal cost to the Company. The Company anticipates that
approximately $13-15 million will be expended in fiscal year 1998 to
complete the expansion project. Funding will result from the redemption of
investments, which at June 30, 1997 aggregate in excess of $20 million.
In fiscal 1996, the Company completed public offerings of its Common Stock,
providing net proceeds of approximately $45 million. The Company intends to use
the net proceeds to expand its warehouse and distribution capabilities, to
accelerate the scale-up of aseptic-packaging facilities in anticipation of
significant commercial demand for finished hyaluronate products, for working
capital, and for possible future redemption of all or a portion of the
outstanding industrial development revenue bonds. The Company believes these
capital resources are sufficient to meet the Company's needs through fiscal
1998, including its fixed obligations and anticipated operating cash flow
deficits.
The Company exercised its option under the ISS note payable to make the
final principal payment due December 15, 1996 in the form of the Company's
common stock. To satisfy the $450,000 amount due, 29,108 shares of common stock
were issued under the formula described in the note.
The Company's ability to generate positive cash flow from operations and
achieve profitability is dependent upon the continued expansion of revenue
from its hyaluronate and oral restorative businesses. Growth in the
Hyaluronate Division is unpredictable due to the complex governmental
regulatory environment for new medical products and the early stage of
certain of these markets. Similarly, expansion of the Company's Oral
Restorative Division sales is also dependent upon increased revenue from new
and existing customers, as well as successfully competing in a more mature
market. In the short term, the Company expects its cash requirements to
significantly exceed the cash generated from anticipated operations due to
the capital expeditures outlined above. No assurance can be given that the
Company will attain and maintain positive cash flow before its capital
resources are exhausted. While the Company's capital resources appear
adequate today, unforeseen events, prior to achieving and maintaining
positive cash flow, could require additional financing. If additional
financing is necessary, no assurance can be given that such financing will be
available and, if available, will be on terms favorable to the Company and
its shareholders.
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-K,
in the Letter to Shareholders contained in the Annual Report to Shareholders, in
future filings by the Company with the Securities and Exchange Commission and in
the Company's press releases and oral statements made with the approval of
authorized executive officers, if the statements are not historical or current
facts, should be considered "forward-looking statements" made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The following important factors, among others, in some cases have
affected and in the future could affect the Company's actual results and could
cause its actual financial performance to differ materially from that expressed
in any forward-looking statement: (i) uncertainty of successful development of
the Company's LUBRICOAT Gel, including the necessary PMA from the FDA, and of
26
<PAGE>
other new hyaluronate products; (ii) the Company's reliance on corporate
partners to develop new products on a timely basis and to market the Company's
existing and new hyaluronate products effectively; (iii) possible limitations on
the Company's ability to meet anticipated significant commercial demand for
LUBRICOAT Gel product on a timely basis; and (iv) intense competition in the
markets for the Company's principal products. The foregoing list should not be
construed as exhaustive, and the Company disclaims any obligation subsequently
to revise any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1997
Net sales.............................................. $ 3,568,000 $ 4,684,000 $ 4,611,000 $ 6,050,000
Gross profit........................................... 1,470,000 2,173,000 2,858,000 3,360,000
Net income (loss)...................................... (654,000) (543,000) 27,000 137,000
Net income (loss) per share............................ $ (.05) $ (.04) $ -- $ .01
Weighted average shares outstanding.................... 12,131,046 12,180,372 12,180,648 12,221,082
Year ended June 30, 1996
Net sales.............................................. $ 2,729,000 $ 3,274,000 $ 3,673,000 $ 4,387,000
Gross profit........................................... 739,000 1,159,000 1,433,000 1,559,000
Net loss............................................... (1,278,000) (1,406,000) (946,000) (370,000)
Net loss per share..................................... $ (.16) $ (.14) $ (.09) $ (.03)
Weighted average shares outstanding.................... 7,982,218 9,965,553 9,991,045 11,933,814
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning director nominees is set forth in the section
entitled "Election of Directors" in the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders to be held November 13, 1997, which is
incorporated herein by reference. See also "Executive Officers of the
Registrant" in Item 1 above.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth in the section
entitled "Executive Compensation" in the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain owners and management is set forth in the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for its 1997 Annual Meeting of
Shareholders which is incorporated herein by reference.
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
(a) Documents filed as a part of the report:
1. Consolidated Financial Statements
<TABLE>
<CAPTION>
FORM 10-K
PAGE REFERENCE
-------------------
<S> <C>
Report of Independent Certified Public Accountants....................... F-1
Consolidated Balance Sheets--June 30, 1996 and 1997...................... F-2
Consolidated Statements of Operations--years ended June 30, 1995, 1996
and 1997............................................................... F-4
Consolidated Statements of Cash Flows--years ended June 30, 1995, 1996
and 1997............................................................... F-5
Consolidated Statements of Shareholders' Equity--years ended June 30,
1995, 1996 and 1997.................................................... F-6
Notes to Consolidated Financial Statements............................... F-7 through F-20
</TABLE>
2. Consolidated Financial Statement Schedules
<TABLE>
<CAPTION>
FORM 10-K
PAGE REFERENCE
-------------------
<S> <C>
Schedule II - Valuation and Qualifying Accounts.......................... S-1
</TABLE>
(b) Reports on Form 8-K
None.
(c) Exhibits and Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<C> <S>
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)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 19(a) to
Amendment No. 1 on Form 8, dated July 13, 1988, to Form 10-Q for the quarter ended December
31, 1987), as amended by Amendment No. 2, filed herewith
3.2 Amended Bylaws, (incorporated by reference to Exhibit 3.2 to Form 10-K/A for the year ended
June 30, 1995)
3.3 Form of Rights Agreement, dated as of May 23, 1996, between the Company and Norwest Bank
Minnesota, National Association (incorporated by reference to Exhibit 1 to the Company's Form
8-A Registration Statement dated May 31, 1996)
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2
Registration Statement [File No. 33-12970])
10.1 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 (incorporated by reference to exhibit 10.1
to Form 10-K for the year ended June 30, 1995), as amended on July 8, 1996, (incorporated by
reference to exhibit 10.1 to Form 10-K for the year ended June 30, 1996), as amended on July
1, 1997, filed herewith
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)
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
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<C> <S>
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 (incorporated by reference to Exhibit 10.6 to Form 10-K for
the year ended June 30, 1995)
10.7 Form of Indemnification Agreement entered into between the Company and directors and officers
(incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended June 30, 1995)
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), as amended by Amendment No. 2, filed herewith
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)
10.14 1996 Stock Option Plan (incorporated by reference to Exhibit 4.1 to S-8 Registration Statement
[File No. 333-18515])
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
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<C> <S>
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 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, Inc.
(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 (now Chiron Vision) (pursuant to Rule 24b-2, certain portions of this Exhibit have
been omitted and filed separately with the Commission) (incorporated by reference to Exhibit
10.20 to Form 10-K for the year ended June 30, 1995)
10.21 Standard Form of Agreement Between Owner and Construction Manager dated June 1, 1996 between
Lifecore Biomedical, Inc. and Marshall Contractors, Inc., filed herewith
10.22 General Conditions of the Contract for Construction relating to the Standard Form of Agreement
Between Owner and Construction Manager dated June 1, 1996 between Lifecore Biomedical, Inc.
and Marshall Contractors, Inc., filed herewith
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
</TABLE>
32
<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.
LIFECORE BIOMEDICAL, INC.
Dated: August 28, 1997
By: /s/ JAMES W. BRACKE
------------------------------------------
James W. Bracke, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE 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.
Dated: August 28, 1997 By /s/ DENNIS J. ALLINGHAM
--------------------------------------
Dennis J. Allingham
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Dated: August 28, 1997 By /s/ JAMES W. BRACKE
--------------------------------------
James W. Bracke, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER),
SECRETARY AND DIRECTOR
Dated: August 28, 1997 By /s/ ORWIN L. CARTER
--------------------------------------
Orwin L. Carter
DIRECTOR
Dated: August 28, 1997 By /s/ JOAN L. GARDNER
--------------------------------------
Joan L. Gardner
DIRECTOR
Dated: August 28, 1997 By /s/ THOMAS H. GARRETT
--------------------------------------
Thomas H. Garrett
DIRECTOR
Dated: August 28, 1997 By /s/ JOHN C. HEINMILLER
--------------------------------------
John C. Heinmiller
DIRECTOR
Dated: August 28, 1997 By /s/ DONALD W. LARSON
--------------------------------------
Donald W. Larson
DIRECTOR
Dated: August 28, 1997 By /s/ RICHARD W. PERKINS
--------------------------------------
Richard W. Perkins
DIRECTOR
Dated: August 28, 1997 By /s/ MARK T. SELLNOW
--------------------------------------
Mark T. Sellnow
CONTROLLER (PRINCIPAL ACCOUNTING
OFFICER)
33
<PAGE>
(This page has been left blank intentionally.)
<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, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1997. 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
We have also audited Schedule II of Lifecore Biomedical, Inc. and
Subsidiaries for each of the three years in the period ended June 30, 1997. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 1, 1997
F-1
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
ASSETS
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (note A2)............. $ 3,264,000 $ 1,371,000
Short-term investments (note A3)................ 14,947,000 16,630,000
Accounts receivable, less allowances (notes A4
and A9)....................................... 2,326,000 4,792,000
Inventories (note A5)........................... 5,954,000 8,440,000
Prepaid expenses................................ 800,000 1,432,000
------------ ------------
Total current assets........................ 27,291,000 32,665,000
PROPERTY, PLANT AND EQUIPMENT--AT COST (notes A6,
C, E and H)
Land............................................ 249,000 249,000
Building........................................ 6,848,000 7,977,000
Equipment....................................... 5,167,000 9,492,000
Land and building improvements.................. 1,406,000 1,510,000
------------ ------------
13,670,000 19,228,000
Less accumulated depreciation................... (5,009,000) (5,483,000)
------------ ------------
8,661,000 13,745,000
Construction-in-progress and advance deposits... -- 5,265,000
------------ ------------
8,661,000 19,010,000
OTHER ASSETS
Intangibles (notes A7 and B).................... 4,268,000 6,306,000
Long-term investments (note A3)................. 20,137,000 3,960,000
Security deposits (note C)...................... 788,000 786,000
Inventories (note A5)........................... 2,014,000 1,839,000
Other (note A8)................................. 1,270,000 943,000
------------ ------------
28,477,000 13,834,000
------------ ------------
$ 64,429,000 $ 65,509,000
------------ ------------
------------ ------------
</TABLE>
F-2
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations
(note C)...................................... $ 698,000 $ 918,000
Accounts payable (note H)....................... 1,156,000 3,613,000
Accrued compensation............................ 548,000 638,000
Accrued expenses................................ 730,000 648,000
Customers' deposits (note D).................... 1,952,000 --
------------ ------------
Total current liabilities................... 5,084,000 5,817,000
LONG-TERM OBLIGATIONS (note C).................... 7,193,000 7,596,000
COMMITMENTS AND CONTINGENCIES (notes D, E, H, K
and M).......................................... -- --
SHAREHOLDERS' EQUITY (notes B, C, G and K)
Preferred stock--authorized, 25,000,000 shares
of $1.00 stated value; none issued............ -- --
Preferred stock, Series A Junior
Participating--authorized, 500,000 shares of
$1.00 par value; none issued.................. -- --
Common stock--authorized, 50,000,000 shares of
$.01 stated value; issued and outstanding,
12,121,971 and 12,222,722 shares at June 30,
1996 and 1997................................. 121,000 122,000
Additional paid-in capital...................... 83,139,000 84,115,000
Accumulated deficit............................. (31,108,000) (32,141,000)
------------ ------------
52,152,000 52,096,000
------------ ------------
$ 64,429,000 $ 65,509,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (notes A9 and J).......................................... $ 10,018,000 $ 14,063,000 $ 18,913,000
Cost of goods sold.................................................. 7,900,000 9,173,000 9,052,000
------------- ------------- -------------
Gross profit.................................................... 2,118,000 4,890,000 9,861,000
Operating expenses
Research and development.......................................... 1,381,000 2,699,000 3,703,000
Marketing and sales............................................... 3,038,000 4,356,000 5,464,000
General and administrative........................................ 2,382,000 2,861,000 2,986,000
Insurance proceeds, net (note L).................................. -- (754,000) --
------------- ------------- -------------
6,801,000 9,162,000 12,153,000
------------- ------------- -------------
Loss from operations............................................ (4,683,000) (4,272,000) (2,292,000)
Other income (expense)
Interest expense.................................................. (854,000) (814,000) (641,000)
Interest income................................................... 322,000 1,086,000 1,900,000
------------- ------------- -------------
(532,000) 272,000 1,259,000
------------- ------------- -------------
NET LOSS........................................................ $ (5,215,000) $ (4,000,000) $ (1,033,000)
------------- ------------- -------------
------------- ------------- -------------
Net loss per common share (notes A10 and A11)................... $ (.66) $ (.40) $ (.08)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding.......................... 7,879,538 10,114,149 12,179,008
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (5,215,000) $ (4,000,000) $ (1,033,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 939,000 1,015,000 1,406,000
Allowance for doubtful accounts................................. 141,000 67,000 --
Changes in operating assets and liabilities
Accounts receivable........................................... (357,000) (795,000) (2,466,000)
Inventories................................................... (862,000) (1,810,000) (2,311,000)
Prepaid expenses.............................................. (142,000) (396,000) (632,000)
Accounts payable.............................................. 171,000 410,000 2,457,000
Accrued liabilities........................................... 101,000 457,000 8,000
Customers' deposits........................................... 3,320,000 (2,788,000) (1,952,000)
------------- -------------- --------------
Total adjustments........................................... 3,311,000 (3,840,000) (3,490,000)
------------- -------------- --------------
Net cash used in operating activities............................. (1,904,000) (7,840,000) (4,523,000)
Cash flows from investing activities:
Purchases of property, plant and equipment...................... (449,000) (1,147,000) (11,338,000)
Purchases of intangibles........................................ (51,000) (33,000) (840,000)
Purchases of investments........................................ -- (67,832,000) (11,379,000)
Maturities of investments....................................... -- 32,748,000 25,844,000
Decrease (increase) in security deposits........................ (97,000) 234,000 2,000
Decrease (increase) in other assets............................. (130,000) (420,000) 341,000
------------- -------------- --------------
Net cash provided by (used in) investing activities............... (727,000) (36,450,000) 2,630,000
------------- -------------- --------------
Cash flows from financing activities:
Payments of long-term obligations............................... (993,000) (1,136,000) (527,000)
Proceeds from issuance of common stock.......................... 3,985,000 45,305,000 --
Proceeds from stock options exercised........................... 90,000 659,000 527,000
------------- -------------- --------------
Net cash provided by financing activities......................... 3,082,000 44,828,000 --
------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents.............. 451,000 538,000 (1,893,000)
Cash and cash equivalents at beginning of year.................... 2,275,000 2,726,000 3,264,000
------------- -------------- --------------
Cash and cash equivalents at end of year.......................... $ 2,726,000 $ 3,264,000 $ 1,371,000
------------- -------------- --------------
------------- -------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................................... $ 835,000 $ 784,000 $ 737,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<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 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
(note K)............................................ 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)
Exercise of stock options and employee stock purchase
savings plan, net of 628 shares surrendered in
payment............................................. 119,804 1,000 658,000 --
Proceeds from sale of common stock
(note G)............................................ 4,030,000 40,000 45,265,000 --
Net loss for the year ended June 30, 1996............. -- -- -- (4,000,000)
------------ ---------- ------------- --------------
Balances at June 30, 1996............................... 12,121,971 121,000 83,139,000 (31,108,000)
Exercise of stock options and employee stock purchase
savings plan, net of 1,588 shares surrendered in
payment............................................. 71,643 1,000 545,000 --
Issuance of common stock issued as payment of debt
(note C)............................................ 29,108 -- 431,000 --
Net loss for the year ended June 30, 1997............. -- -- -- (1,033,000)
------------ ---------- ------------- --------------
Balances at June 30, 1997............................... 12,222,722 $ 122,000 $ 84,115,000 $ (32,141,000)
------------ ---------- ------------- --------------
------------ ---------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<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, and
markets surgically implantable materials and devices through its two divisions,
the Hyaluronate Division and the Oral Restorative Division. The Hyaluronate
Division's manufacturing facility is located in Chaska, Minnesota and markets
its products through OEM and contract manufacturing alliances in the fields of
ophthalmology, veterinary and wound care management. The Oral Restorative
Division markets its products through direct sales in the United States and
Italy and through distributors in other foreign countries. In April 1995, the
Company began direct sales operations in Italy through a newly formed
subsidiary, Lifecore Biomedical SpA, in Verona, Italy.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
A summary of significant accounting policies consistently 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, 1996 and
1997, principally all of the Company's cash and cash equivalents are invested in
a money market fund.
F-7
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
3. INVESTMENTS
The Company has invested its excess cash in commercial paper, government
agencies and medium term corporate notes. These investments are classified as
held-to-maturity given the Company's intent and ability to hold the securities
to maturity and are carried at amortized cost. Investments that have maturities
of less than one year have been classified as short-term investments.
At June 30, 1996 and 1997, amortized cost approximates fair value of
held-to-maturity investments which consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Short-term investments:
Medium term corporate notes.................................. $ -- $ 12,800,000
Commercial paper............................................. 12,447,000 2,627,000
U.S. Government Agencies..................................... 2,500,000 1,203,000
------------- -------------
14,947,000 16,630,000
Long-term investments:
U.S. Government Agencies..................................... 1,242,000 --
Medium term corporate notes.................................. 18,895,000 3,960,000
------------- -------------
20,137,000 3,960,000
------------- -------------
$ 35,084,000 $ 20,590,000
------------- -------------
------------- -------------
</TABLE>
4. 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 $286,000
at June 30, 1996 and 1997.
F-8
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory not expected to be consumed within one year is classified as a
long-term asset. Inventories consist of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
Raw materials.................................................... $ 2,632,000 $ 2,819,000
Work-in-process.................................................. 82,000 205,000
Finished goods................................................... 5,254,000 7,255,000
------------ -------------
$ 7,968,000 $ 10,279,000
------------ -------------
------------ -------------
</TABLE>
6. 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.
Depreciation expense was approximately $559,000, $628,000 and $990,000 for
the years ended June 30, 1995, 1996 and 1997. 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>
7. 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, the goodwill related to the July 1993 acquisition of Implant Support
Systems, Inc., and the cost of the technology and regulatory rights related to
the TefGen Regenerative Membrane product line acquired in May 1997.
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 $1,256,000 and $1,647,000 at June 30, 1996 and
1997.
F-9
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. 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,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Patents............................................................... $ 160,000 $ 169,000
Trademarks............................................................ 59,000 61,000
---------- ----------
219,000 230,000
Less accumulated amortization......................................... (83,000) (97,000)
---------- ----------
$ 136,000 $ 133,000
---------- ----------
---------- ----------
</TABLE>
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 further processing 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.
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement No.
128 "Earnings Per Share", which is effective for financial statements issued
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed.
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive
Income" and Statement No. 131 "Disclosures about Segments of an Enterprise
and Related Information" which are effective for fiscal year 1999. Statement
No. 130 will require the Company to display an amount representing total
comprehensive income, as defined by the statement, as part of the Company's
basic financial statements. Comprehensive income will include items such as
unrealized gains or losses on certain investment securities and foreign
currency items. Statement No. 131 will require the Company to disclose
F-10
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial and other information about its business segments, their products
and services, geographic areas, major customers, revenues, profits, assets
and other information.
The adoption of these statements is not expected to have a material effect
on the consolidated financial statements of the Company.
NOTE B--ACQUISITION OF TEFGEN PRODUCT LINE
In May 1997, the Company acquired the technology and regulatory rights in
the TefGen product line from Bridger Biomed, Inc. As consideration for the
$2,400,000 acquisition price, the Company paid $800,000 in cash and issued a
note payable for $1,600,000. The note bears interest at 6% per annum with
principal payments of $800,000 plus interest due annually in May 1998 and 1999.
The principal payments may be made in cash or the Company's common stock at the
Company's option. If the Company chooses its common stock as the form of
payment, the note holder has certain registration rights. The note is secured by
the purchased assets. The cost of the technology and regulatory rights is being
amortized on a straight-line basis over 15 years.
NOTE C--LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Industrial development revenue bonds.............................. $ 6,825,000 $ 6,749,000
Note payable...................................................... 450,000 1,600,000
Real estate special assessments................................... 207,000 165,000
Deferred lease payments........................................... 409,000 --
------------ ------------
7,891,000 8,514,000
Less current maturities........................................... (698,000) (918,000)
------------ ------------
$ 7,193,000 $ 7,596,000
------------ ------------
------------ ------------
</TABLE>
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 1996 through 2021. The payments are required to be made monthly to a
sinking fund. At June 30, 1997, the Company has approximately $700,000 on
deposit with the bond trustee to cover the reserve fund requirement. The Company
has the right to redeem the
F-11
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--LONG-TERM OBLIGATIONS (CONTINUED)
bonds commencing September 1, 1998 upon the payment of the outstanding
principal balance plus accrued interest and a premium. The premium is 8% of
the principal amount during the year commencing September 1, 1998 and
declines during subsequent years.
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. The
fixed charges coverage and cash flow coverage requirements have been waived by
the bondholder through fiscal 1998. The debt to net worth ratio covenant has the
effect of restricting the payment of cash dividends or repurchases of common
stock.
NOTE PAYABLE
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. The note, as
amended, required interest to be paid quarterly at 5% with principal payments of
$700,000 paid during fiscal 1995, $850,000 paid in October 1995 and $450,000
which was paid on December 15, 1996. The Company exercised its option under the
ISS note payable to make the final principal payment due December 15, 1996 in
the form of the Company's common stock. To satisfy the $450,000 amount due,
29,108 shares of common stock were issued under the formula described in the
note.
In May 1997, the Company issued a note payable for $1,600,000 as part of the
consideration paid to the seller of the TefGen product line (see Note B).
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 special assessments. The special assessments bear
interest at 8.5% with principal and interest payments due semi-annually through
2001.
DEFERRED LEASE PAYMENTS
The Company had recorded deferred lease payments to reflect the expense on a
straight-line basis for lease payments due under its equipment leases. In
February 1997, the Company purchased the equipment subject to the leases (see
Note E).
F-12
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--LONG-TERM OBLIGATIONS (CONTINUED)
At June 30, 1996 and 1997, the carrying amounts of long-term obligations
approximate the fair value of these obligations. The aggregate minimum annual
principal payments of long-term obligations for the years ending June 30 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 918,000
1999........................................................ 933,000
2000........................................................ 143,000
2001........................................................ 139,000
2002........................................................ 120,000
Thereafter.................................................. 6,261,000
-----------
$ 8,514,000
-----------
-----------
</TABLE>
At June 30, 1997, the Company capitalized $87,000 of interest expense in
conjunction with the facility expansion at its Chaska, Minnesota location.
NOTE D--CUSTOMERS' DEPOSITS
In November 1994, Lifecore renewed its current supply contract with Alcon
Laboratories, Inc., an indirect subsidiary of Nestle S.A. ("Alcon") through
December of 1998. The agreement contains minimum annual purchase requirements
totaling $10,400,000 for calendar years 1995 through 1998. Lifecore received a
$6,300,000 cash advance from Alcon against future contract purchases. Product
has been delivered in quantities sufficient to fully utilize the cash advance as
of June 30, 1997.
NOTE E--OPERATING LEASES
The Company leased equipment under an operating lease with Johnson & Johnson
Finance Corporation ("JJFC"), an affiliate of the Company's customers, Ethicon,
Inc. and Johnson & Johnson Medical, Ltd.. JJFC is also an affiliate of Johnson &
Johnson Development Corporation, a shareholder of the Company (see Note K). In
February 1997, the Company satisfied this lease commitment by purchasing the
equipment subject to the lease. The purchase price of the equipment was
approximately $5.1 million. Additionally, the Company had entered into operating
leases with a financial institution for approximately $900,000 of furniture and
fixtures. During the year ended June 30, 1996, the Company purchased from the
financial institution the furniture and fixtures subject to the operating
leases. Operating lease expense was approximately $1,911,000, $1,825,000 and
$665,000 for the years ended June 30, 1995, 1996 and 1997.
F-13
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--INCOME TAXES
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. Deferred tax assets
(liabilities) consist of the following at June 30:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward............................. $ 9,106,000 $ 9,855,000
Capital loss carryforward................................... 377,000 377,000
Tax credit carryforward..................................... 263,000 289,000
Inventories................................................. 1,281,000 989,000
Other....................................................... 246,000 263,000
-------------- --------------
Total deferred tax assets................................. 11,273,000 11,773,000
Deferred tax liabilities
Deferred lease payments..................................... (230,000) --
Depreciation................................................ (517,000) (752,000)
-------------- --------------
Total deferred tax liabilities............................ (747,000) (752,000)
-------------- --------------
Net deferred tax asset before valuation allowance............. 10,526,000 11,021,000
Valuation allowance........................................... (10,526,000) (11,021,000)
-------------- --------------
Net deferred tax asset........................................ $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The deferred tax asset valuation allowance increased $495,000 during 1997,
since these benefits may not be realized.
At June 30, 1997, the Company had approximately $27,700,000 of net operating
loss carryforwards for tax reporting purposes, which expire in 1999 through 2012
and income tax credit carryforwards of approximately $289,000 which expire in
1998 through 2007.
NOTE G--SHAREHOLDERS' EQUITY
OFFERINGS OF COMMON STOCK
On October 18, 1995, the Company received net proceeds of approximately
$19,852,000 from the sale of 2,200,000 shares of its common stock through a
public offering. On November 16, 1995, the Company received net proceeds of
approximately $3,010,000 when the underwriters purchased an additional 330,000
shares of common stock related to the over-allotment option.
F-14
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--SHAREHOLDERS' EQUITY (CONTINUED)
On April 11, 1996, the Company completed the sale of 1,500,000 shares of its
common stock and received net proceeds of approximately $22,443,000 through a
Regulation S offering to qualified investors outside the United States.
STOCK OPTION PLANS
The Company has three 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 1987 Plan. 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 1990
Plan. In November 1993, the 1990 Plan was amended to provide for a total of
1,000,000 shares of common stock reserved for issuance under the 1990 Plan.
In November 1996, the shareholders adopted the 1996 Stock Plan (the "1996
Plan") to provide for options to be granted to certain eligible employees,
non-employee members of the Board of Directors and other non-employee persons
as defined in the 1996 Plan. A total of 3,000,000 shares of common stock are
reserved for issuance under the 1996 Plan. Options will be granted under all
plans at exercise prices which are determined by a committee as appointed by
the Board of Directors. Options granted to date under all plans 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 1987, 1990 and 1996 Stock Plans during the
three years ended June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Outstanding at July 1, 1994.................................... 562,517 $ 7.97
Granted...................................................... 164,500 5.24
Exercised.................................................... (8,473) 4.24
Canceled..................................................... (89,125) 10.19
---------- ------
Outstanding at June 30, 1995................................... 629,419 7.00
Granted...................................................... 181,500 12.45
Exercised.................................................... (98,257) 5.59
Canceled..................................................... (30,417) 8.82
---------- ------
Outstanding at June 30, 1996................................... 682,245 8.74
Granted...................................................... 876,168 16.74
Exercised.................................................... (63,507) 6.82
Canceled..................................................... (45,625) 9.67
---------- ------
Outstanding at June 30, 1997................................... 1,449,281 $ 13.63
---------- ------
---------- ------
</TABLE>
F-15
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Options exercisable at June 30:
1995......................................................... 337,818 $ 7.81
1996......................................................... 331,520 8.10
1997......................................................... 529,745 10.49
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable stock options:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE
- ---------------- ----------- ------------------------- -----------------
<S> <C> <C> <C>
$ 2.63 - 3.94 85,833 4.9 years $ 3.48
4.00 - 5.91 103,330 6.6 years 5.53
6.13 - 8.86 93,075 6.6 years 7.00
9.13 - 13.29 210,375 7.1 years 10.65
13.38 - 19.93 950,668 9.0 years 16.70
20.00 - 20.25 6,000 9.2 years 20.02
-----------
1,449,281
-----------
-----------
</TABLE>
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- ---------------- ----------- -----------------
<S> <C> <C>
$ 2.63 - 3.94 74,916 $ 3.43
4.00 - 5.91 76,796 5.60
6.13 - 8.86 62,575 6.96
9.13 - 13.29 114,833 10.34
13.38 - 19.93 200,500 16.19
20.00 - 20.25 125 20.25
-----------
529,745
-----------
-----------
</TABLE>
The weighted average fair value of options granted in 1996 and 1997 was
$8.53 and $11.80 per share. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996 and 1997: no
dividend yield; risk-free rate of return of 6%; volatility of 74.5% and 72.8%;
and an average term of 5.9 years and 6.4 years. The Company's 1996 and 1997
proforma net loss and net loss per share would have been $4,234,000 and
$2,768,000 or $.42 and $.23 per share had the fair value method been used for
valuing options granted during 1996 and 1997. These effects may not be
representative of the future effects of applying the fair value method.
F-16
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--SHAREHOLDERS' EQUITY (CONTINUED)
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. Since inception of the ESPSP a total of 87,931 shares
have been issued, including 10,609 shares for approximately $54,000 in 1995,
21,725 shares for approximately $111,000 during 1996 and 9,374 shares for
approximately $142,000 during 1997. At June 30, 1997, the Company had 62,069
shares reserved for future issuance under the ESPSP.
SHAREHOLDER RIGHTS PLAN
In May 1996 the Board of Directors unanimously adopted a shareholder rights
plan designed to ensure that all of the Company's shareholders receive fair and
equal treatment in the event of any proposal to acquire the Company. The Board
declared a distribution of one Right for each share of common stock outstanding
on June 15, 1996. Each Right entitles the holder to purchase 1/100th of a share
of a new series of Junior Participating Preferred Stock of Lifecore at an
initial exercise price of $110.00. Initially, the Rights will be attached to the
common stock and will not be exercisable. They become exercisable only following
the acquisition by a person or group, without the prior consent of the Company's
Board of Directors, of 15 percent or more of the Company's voting stock, or
following the announcement of a tender offer or exchange offer to acquire an
interest of 15 percent or more.
In the event that the Rights become exercisable, each Right will entitle the
holder to purchase, at the exercise price, common stock with a market value
equal to twice the exercise price and, should the Company be acquired, each
Right would entitle the holder to purchase, at the exercise price, common stock
of the acquiring company with a market value equal to twice the exercise price.
Rights owned by the acquiring person would become void. In certain specified
instances, the Rights may be redeemed by the Company. If not redeemed, they
would expire on June 15, 2006.
NOTE H--COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AGREEMENTS
The Company is in the process of expanding its manufacturing and
distribution capabilities at its Chaska, Minnesota location. This expansion
includes building and equipment expenditures for warehouse and distribution
capabilities and to expand aseptic-packaging facilities for finished products.
Construction-in-progress and advance deposits relating to the expansion of
approximately $5,265,000 were incurred through June 30, 1997. The Company has
signed contracts with an architect, a process engineering firm
F-17
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--COMMITMENTS AND CONTINGENCIES (CONTINUED)
and a construction company for the expansion project. The contracts provide
for the expansion to be completed in phases. The contracts may be terminated
at any time at minimal cost to the Company. At June 30, 1997, firm purchase
commitments of approximately $2,161,000 have been recorded in accounts
payable.
ROYALTY AGREEMENTS
The Company has entered into agreements which provide for royalty payments
based on a percentage of net sales of certain products. Royalty expense under
these agreements was $78,000 and $153,000 for the years ended June 30, 1996 and
1997. Royalty expense for 1995 was not material.
SEVERANCE AGREEMENTS
The Company has an agreement with each officer that provides 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, 1997 is approximately $1,260,000.
NOTE I--EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing plan for eligible employees.
Contributions by the Company are determined by the Board of Directors. There
have been no Company contributions since the inception
of the plan.
NOTE J--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 customers
pursuant to supply agreements between the Company and its customers. Currently,
Alcon is a major customer of the Company. Sales to Alcon were 32%, 20% and 17%
of total sales in 1995, 1996 and 1997.
The Company's Oral Restorative Division markets products throughout the
United States and Italy directly to clinicians and dental laboratories through a
direct sales force and primarily through distributorship arrangements in foreign
locations.
Sales to customers located principally in Europe accounted for 20%, 25% and
28% of total Company sales during the years ended June 30, 1995, 1996 and 1997.
The operations of the Company's
F-18
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SEGMENT INFORMATION (CONTINUED)
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,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales
Hyaluronate products.......................... $ 5,223,000 $ 5,585,000 $ 7,115,000
Oral restorative products..................... 4,795,000 8,478,000 11,798,000
------------- ------------- -------------
$ 10,018,000 $ 14,063,000 $ 18,913,000
------------- ------------- -------------
------------- ------------- -------------
Loss from operations
Hyaluronate products.......................... $ (3,309,000) $ (3,472,000) $ (1,877,000)
Oral restorative products..................... (1,374,000) (800,000) (415,000)
------------- ------------- -------------
$ (4,683,000) $ (4,272,000) $ (2,292,000)
------------- ------------- -------------
------------- ------------- -------------
Capital expenditures
Hyaluronate products.......................... $ 395,000 $ 798,000 $ 11,112,000
Oral restorative products..................... 54,000 349,000 226,000
------------- ------------- -------------
$ 449,000 $ 1,147,000 $ 11,338,000
------------- ------------- -------------
------------- ------------- -------------
Depreciation and amortization expense
Hyaluronate products.......................... $ 554,000 $ 561,000 $ 878,000
Oral restorative products..................... 385,000 454,000 528,000
------------- ------------- -------------
$ 939,000 $ 1,015,000 $ 1,406,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Identifiable assets
Hyaluronate products......................................... $ 14,144,000 $ 27,576,000
Oral restorative products.................................... 11,937,000 15,972,000
General corporate............................................ 38,348,000 21,961,000
------------- -------------
$ 64,429,000 $ 65,509,000
------------- -------------
------------- -------------
</TABLE>
F-19
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K--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 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
postsurgical 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 LUBRICOAT Gel, a second generation
hyaluronate-based product. Lifecore has granted Ethicon exclusive worldwide
marketing rights through 2008 to the products developed by Lifecore within
defined fields of use.
Under the terms of the Stock Purchase Agreement, JJDC purchased 757,396
unregistered shares of Lifecore common stock for total consideration of $4.0
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.
The Company has made and continues to make a significant investment in the
development and testing of LUBRICOAT Gel, a product designed to reduce the
incidence of postsurgical adhesions. The product is currently undergoing human
clinical trials to develop the data necessary to apply to the United States Food
and Drug Administration ("FDA") for approval to market the product for
commercial application. However, even if the product is successfully developed
and the Company receives approval from the FDA, there can be no assurance that
it will receive market acceptance. Failure to achieve significant sales of the
product could have a material adverse effect on future prospects for the
Company's operations.
NOTE L--INSURANCE PROCEEDS
In May 1996, the Company received net proceeds of $754,000 on an insurance
claim for product that was damaged in production as a result of an equipment
failure.
NOTE M--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.
F-20
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
COLUMN B COLUMN C
---------- ----------------------------- COLUMN E
COLUMN A BALANCE AT CHARGED TO COLUMN D --------------
- ---------------------------------------- BEGINNING COSTS AND CHARGED TO OTHER ------------- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------------- ---------- ---------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997
Accounts receivable allowance......... $ 286,000 $ 56,000 $-- $(56,000)(A) $286,000
Year ended June 30, 1996
Accounts receivable allowance......... 219,000 77,000 -- (10,000)(A) 286,000
Year ended June 30, 1995
Accounts receivable allowance......... 78,000 152,000 -- (11,000)(A) 219,000
</TABLE>
- ------------------------
(A) Deductions represent accounts receivable balances written-off during the
year.
S-1
<PAGE>
Exhibit 3.1
ARTICLES OF AMENDMENT OF
DIAGNOSTIC, INC.
(Name changed herein to LifeCore Biomedical, Inc.)
I, the undersigned Thomas H. Garrett III, the Secretary of DIAGNOSTIC,
Inc., a corporation subject to the provisions of Chapter 302A, Minnesota
Statues, known as the Minnesota Business Corporations Act, do hereby certify
that the resolution hereinafter set forth was adopted by unanimous written
authorization pursuant to Section 302A.441, Minnesota Statutes, effective
December 1, 1986 and that the restated articles of incorporation created by such
resolution supersede the original articles and all amendments thereto:
NOW, THEREFORE, BE IT RESOLVED, that the corporation's Articles of
Incorporation be, and they hereby are, amended and restated in their entirety to
read as follows:
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
DIAGNOSTIC, INC.
[name changed herein to LifeCore Biomedical, Inc.]
I.
The name of this corporation is LifeCore Biomedical, Inc.
II.
The purposes for which this corporation is organized are as follows:
a. General business purposes.
b. To do everything necessary, proper, advisable or convenient for
the accomplishment of the purposes hereinabove set forth, and to do all
other things incidental thereto or connected therewith, which are not
forbidden by the laws under which this corporation is organized, by other
laws, or by these Articles of Incorporation.
c. To carry out the purposes hereinabove set forth in any state,
territory, district or possession of the United States, or in any foreign
country, to the extent that such purposes are not forbidden by law, and to
limit in any certificate for application to do business the purposes or
purpose which the corporation proposes to carry on therein to such extent
as are not forbidden by law thereof.
<PAGE>
III.
The duration of this corporation is perpetual.
IV.
The address of the registered office of this corporation is 315 Twenty-
Seventh Avenue Southeast, Minneapolis, Minnesota 55414.
V.
The authorized capital stock of this corporation shall be Twenty-five
Million (25,000,000) shares of common stock of the par value of One Cent ($0.01)
per share (the "Common Stock") and Twenty-five Million (25,000,000) shares of
preferred stock of the par value of One Dollar ($1.00) per share (the "Preferred
Stock"). The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of the shares of each class of stock
shall be as follows:
SECTION 1. GENERAL.
(a) No holder of capital stock in the corporation shall be entitled
to any cumulative voting rights.
(b) No holder of capital stock of the corporation shall have any
preferential, preemptive or other rights of subscription to any shares of
any class of capital stock of the corporation allotted or sold or to be
allotted or sold now or hereafter authorized, or to any obligations
convertible into the capital stock of the corporation of any class, or any
right of subscription to any part thereof.
SECTION 2. COMMON STOCK. Subject to all of the rights of the Preferred
Stock, and except as may be expressly provided with respect to the Preferred
Stock herein, by law or by the Board of Directors pursuant to this Article V:
(a) The holders of the Common Stock shall be entitled to receive when
and as declared by the Board of Directors, out of earnings or surplus
legally available therefor, dividends, payable either in cash, in property,
or in shares of the capital stock of the corporation.
(b) The Common Stock may be allotted for such consideration and as
and when the Board of Directors shall determine, and, under and pursuant to
the laws of the State of Minnesota, the Board of Directors shall have the
power to fix or alter, from time to time, in respect to shares then
unallotted, any or all of the following: the dividend rate, the redemption
price, the liquidation price, the conversion rights and the sinking or
2
<PAGE>
purchase fund rights of shares of any class, or of any series of any class,
or the number of shares constituting any series of any class. The Board of
Directors shall also have the power to fix the terms, provisions and
conditions of options to purchase or subscribe for shares of any class or
classes, including the price and conversion basis thereof. The Board of
Directors shall also have the power to issue shares of stock of the
corporation for assets of other business enterprises, as it may from time
to time deem expedient.
SECTION 3. PREFERRED STOCK. The Preferred Stock may be issued from time
to time by the Board of Directors as shares of one or more series. Subject to
the provisions hereof and the limitations prescribed by law, the Board of
Directors is expressly authorized by adopting resolutions providing for the
issuance of shares of any particular series and, if and to the extent from time
to time required by law, by filing with the Minnesota Secretary of State a
statement with respect to the adoption of the resolutions pursuant to the
Minnesota Business Corporation Act (or other law hereafter in effect relating to
the same or substantially similar subject matter), to establish the number of
shares to be included in each such series and to fix the designation and
relative powers, preferences and rights and the qualifications and limitations
or restrictions thereof relating to the shares of each such series. The
authority of the Board of Directors with respect to each series shall include,
but not be limited to, determination of the following:
(a) the distinctive serial designation of such series and the number
of shares constituting such series, provided that the aggregate number of
shares constituting all series of Preferred Stock shall not exceed Twenty-
five Million (25,000,000);
(b) the annual dividend rate on shares of such series, if any,
whether dividends shall be cumulative and, if so, from which date or dates;
(c) whether the shares of such series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or dates
upon and after which such shares shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(d) the obligation, if any, of the corporation to retire shares of
such series pursuant to a sinking fund;
(e) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if so,
the terms and conditions of such conversion or exchange, including the
price or prices or the rate or rates of conversion or exchange and the
terms of adjustment, if any;
(f) whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of
such voting rights;
3
<PAGE>
(g) the rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation;
and
(h) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative.
VI.
SECTION 1. The management and conduct of the business and affairs of the
corporation shall be vested in a Board of Directors which 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.
SECTION 2. 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 or any decrease in 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.
SECTION 3. 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 of all the outstanding shares of
Voting Stock (as hereinafter defined), voting together as a single class.
SECTION 4. The Board of Directors shall have the authority to accept or
reject subscriptions for capital stock and may grant options to purchase or
subscribe for capital stock. The Board of Directors shall, from time to time,
fix ad determine the consideration for which the corporation shall issue and
sell its capital stock, and also the dividends to be paid by the corporation
upon the capital stock. The Board of Directors shall have authority to fix the
terms and conditions of rights to convert any securities of this corporation
into shares and to authorize the issuance of such conversion rights.
4
<PAGE>
SECTION 5. The Board of Directors shall have the authority to issue bonds,
debentures or other securities convertible into capital stock or other
securities of any class, or bearer warrants or other evidences of optional
rights to purchase and/or subscribe to capital stock or other securities of any
class, upon such terms, in such manner, and under such conditions as may be
fixed by resolution of the Board prior to the issue thereof.
SECTION 6. The Board of Directors shall have the authority to make and
alter the Bylaws, subject to the power of the shareholders to change or repeal
the Bylaws.
SECTION 7. A quorum for any meeting of shareholders to transact business
of this corporation, except as otherwise specifically provided herein or by law,
shall be the presence in person or by proxy of the holders of twenty percent
(20%) of the shares of Voting Stock of the corporation outstanding and of record
on the record date set for such meeting.
SECTION 8. Notwithstanding any other provision of these Articles of
Incorporation or of law which might otherwise permit a lesser vote or not vote,
but in addition to any affirmative vote of the holders of any particular class
of Voting Stock required by law or these Articles of Incorporation, the
affirmative vote of at lest two-third of the votes entitled to be cast by
holders of all the outstanding shares of Voting Stock (as hereinafter defined),
voting together as a single class, shall be required to alter, amend or repeal
this Article VI.
SECTION 9. The term "Voting Stock" as used in this Article shall mean all
authorized and issued capital stock of this corporation entitled to vote
generally in the election of directors of the corporation.
VII.
Any action required or permitted to be taken at a meeting of the Board of
Directors of this corporation not needing approval by shareholders under
Minnesota Statutes, Chapter 302A, 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.
VIII.
Except as otherwise provided in Article VI, any provisions contained in
these Articles of Incorporation may be amended solely the affirmative vote of
the holders of a majority of the stock entitled to vote.
5
<PAGE>
IN WITNESS WHEREOF, I have subscribed my name this 5th day of December,
1986.
/s/ Thomas H. Garrett III
-------------------------------------------------
Thomas H. Garrett III
Secretary
6
<PAGE>
LIFECORE BIOMEDICAL, INC.
ARTICLES OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
The undersigned President of LifeCore Biomedical, Inc., a Corporation
formed pursuant to Minnesota Statutes, in order to amend the Articles of
Incorporation of LifeCore Biomedical, Inc. hereby states as follows:
The following resolution was adopted by action of the shareholders of
LifeCore Biomedical, Inc. at the Annual Meeting of Shareholders held on November
12, 1987 in accordance with Minnesota Statutes, Chapters 302A.131 and 302A.437:
RESOLVED, That Article IX of the Articles of Incorporation of this
Corporation be, and it hereby is, adopted to read as follows:
Article IX
No director of this Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
shareholders; (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; (iii)
under Sections 302A.559 and 80A.23 of the Minnesota Statutes; (iv) for
any transactions from which the director derived any improper personal
benefit; (v) for any act or omission occurring prior to the date when
this provision becomes effective.
The provisions of this Article IX shall not be deemed to limit or
preclude indemnification of a director by the Corporation for any
liability of a director which has not been eliminated by the
provisions of this Article.
If the Minnesota Statutes hereafter are amended to authorize the
further elimination or limitation of the liability of directors, then
the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Minnesota Statutes.
IN WITNESS WHEREOF, I have hereunder set my hand this 13th day of July
1988.
/s/ James W. Bracke, Ph.D.
-------------------------------------------------
James W. Bracke, Ph.D.
President
7
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
LIFECORE BIOMEDICAL, INC.
I, the undersigned, James W. Bracke, the President of LifeCore Biomedical,
Inc., a corporation subject to the provisions of Chapter 302A of the Minnesota
Statutes, known as the Minnesota Business Corporation Act, do hereby certify
that the resolution hereinafter set forth was duly adopted by the affirmative
vote of a majority of the shareholders present and entitled to vote at the
Annual Meeting of the Shareholders held on November 14, 1996, pursuant to which
the shareholders of the Corporation approved an increase in the number of
authorized shares of common stock from 25,000,000 shares to 50,000,000 shares,
as follows:
RESOLVED, that the first sentence of Article V of the Articles of
Incorporation of the Company be amended to read as follows:
"ARTICLE V
The authorized capital stock of this corporation shall
be Fifty Million (50,000,000) shares of Common Stock of the
par value of One Cent ($.01) per share (the "Common Stock")
and Twenty-five Million (25,000,000) shares of preferred
stock of the par value of One Dollar ($1.00) per share (the
"Preferred Stock")."
IN WITNESS WHEREOF, I have hereunto set my hand this 25th day of November,
1996.
/s/ James W. Bracke
--------------------------------------------
James W. Bracke, President
8
<PAGE>
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 the current terms of
Sections 6.09(a)(i) and 6.09(d)(i) of the Loan Agreement and the modification
of Sections 6.09(a)(i) and (ii) and 6.09(d)(i) and (ii) of the Loan
Agreement, as amended by the Waiver and Amendment Agreement dated August 3,
1992, as further amended by the Waiver and Amendment Agreement dated July 28,
1994, as further amended by the Waiver and Amendment Agreement dated July 27,
1995 and as further amended by the Waiver and Amendment Agreement dated
July 8, 1996;
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) 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, 1998, 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, 1999 ("Fiscal 1999"), 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 purposes of computing the Cash Flow
Coverage Ratio for any of the first three quarters of Fiscal 1999, 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.
(2) 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, 1998, Borrower shall not be subject to a minimum Fixed
Charges Coverage Ratio.
<PAGE>
(ii) For each Fiscal Year commencing with Fiscal 1999, 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 quarters of Fiscal 1999, 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.
(3) Borrower agrees that, through July 1, 1998, it will make advance payments
of cash into the Bond Fund established pursuant Section 5.01 of the
Indenture. 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.
(4) 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 1st day of July, 1997.
LIFECORE BIOMEDICAL, INC. NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Trustee
Signature /s/ James W. Bracke Signature /s/ Paula Hecht
---------------------- ----------------------
Print James W. Bracke Print Paula Hecht
------------------------- ------------------------
Title President & CEO Title Corporate Trust Officer
------------------------- ------------------------
PUTNAM MANAGED MUNICIPAL MINNESOTA TAX EXEMPT INCOME
INCOME TRUST FUND II
Signature /s/ Richard P. Wyke Signature /s/ Leslie J. Burke
---------------------- ---------------------
Print Richard P. Wyke Print Leslie J. Burke
------------------------ -----------------------
Title V.P. Title Vice President
------------------------ -----------------------
PUTNAM TAX FREE HIGH
YIELD FUND
Signature /s/ Triet Nguyen
----------------------
Print Triet Nguyen
-------------------------
Title Sr. VP
-------------------------
<PAGE>
Exhibit 10.11
AMENDMENT NUMBER 2 TO LIFECORE BIOMEDICAL, INC. 1990 STOCK PLAN
RESOLVED, that the 1990 Stock Plan be amended as follows:
a. Subparagraph (l) of Section 1 shall be amended to read as follows:
"1. 'NON-EMPLOYEE DIRECTOR' means a 'Non-Employee Director' within the
meaning of Rule 16b-3(b)(3) under the Securities and Exchange Act of
1934."
b. The first paragraph of Section 2 shall be amended to read as follows:
"The Plan shall be administered by the Board of Directors or by a
Committee of not less than two directors, all of whom are Non-Employee
Directors, who shall be appointed by the Board of Directors of the Company
and who shall serve at the pleasure of the Board."
c. Section 5(k) of the 1990 Stock Plan shall be amended to add the following
as the last sentence to such section:
"Subject to shareholder approval of the 1996 Stock Plan, no further
Options shall be granted pursuant to this Section 5(k) after September 19,
1996."
<PAGE>
- -------------------------------------------------------------------------------
AIA DOCUMENT A131/CMC AND AGC DOCUMENT 566
STANDARD FORM OF AGREEMENT BETWEEN
OWNER AND CONSTRUCTION MANAGER
WHERE THE CONSTRUCTION MANAGER IS ALSO THE CONSTRUCTOR; AND WHERE THE BASIS
OF PAYMENT IS THE COST OF THE WORK PLUS A FEE AND THERE IS NO GUARANTEE OF
COST.
1994 EDITION
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION WITH AN
ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION
THE 1987 EDITION OF AIA DOCUMENT A201, GENERAL CONDITIONS OF THE CONTRACT
FOR CONSTRUCTION, IS REFERRED TO HEREIN.
THIS AGREEMENT REQUIRES MODIFICATION IF OTHER GENERAL CONDITIONS ARE
UTILIZED.
- -------------------------------------------------------------------------------
AGREEMENT
made as of the 1st day of June in the year of 1996
(IN WORDS, INDICATE DAY, MONTH AND YEAR)
BETWEEN the Owner: Lifecore Biomedical, Inc.
(NAME AND ADDRESS) 3515 Lyman Blvd.
Chaska, MN 55318-3051
and
the Construction Manager: Marshall Contractors, Inc.
(NAME AND ADDRESS) 2690 Perimeter Center East
Atlanta, GA 30346
The Project is:
(NAME, ADDRESS AND BRIEF DESCRIPTION) Phase 1-C:
Phase 2-A:
Phase 2-B:
Phase 2-C:
Lifecore headquarters in Chaska, MN
The Architect is: Facility Planning & Resources
(NAME AND ADDRESS) 2101 Greentree Road
Pittsburgh, PA 15220
The Owner and Construction Manager agree as set forth below.
- -------------------------------------------------------------------------------
THIS DOCUMENT IS MODIFIED FROM THE AIA DOCUMENT 131/CMC AND AGC DOCUMENT 566-
1991 EDITION -AIA @1991-AGC@1991
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
ARTICLE 1 GENERAL PROVISIONS
1.1 Relationship of Parties
1.2 General Conditions
1.3 Contract Sum, Contract Time and Changes in the Work
ARTICLE 2 CONSTRUCTION MANAGER'S RESPONSIBILITIES
2.1 Preconstruction Phase
2.2 Control Estimate and Contract Time
2.3 Construction Phase
2.4 Professional Services
2.5 Unsafe Materials
ARTICLE 3 OWNER'S RESPONSIBILITIES
3.1 Information and Services
3.2 Owner's Designated Representative
3.3 Architect
3.4 Legal Requirements
ARTICLE 4 COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE SERVICES
4.1 Compensation
4.2 Payments
ARTICLE 5 COMPENSATION FOR CONSTRUCTION PHASE SERVICES
5.1 Compensation
5.2 Change in the Work
ARTICLE 6 COST OF THE WORK FOR CONSTRUCTION PHASE
6.1 Costs To Be Reimbursed
6.2 Costs Not To Be Reimbursed
6.3 Discounts, Rebates and Refunds
6.4 Accounting Records
ARTICLE 7 CONSTRUCTION PHASE PAYMENTS
7.1 Progress Payments
7.2 Final Payment
ARTICLE 8 INSURANCE AND BONDS
8.1 Insurance Required of the Construction Manager
8.2 Insurance Required of the Owner
8.3 Performance Bond and Payment Bond
ARTICLE 9 MISCELLANEOUS PROVISIONS
9.1 Dispute Resolution for the Preconstruction Phase
9.2 Dispute Resolution for the Construction Phase
9.3 Other Provisions
ARTICLE 10 TERMINATION OR SUSPENSION
10.1 Termination Prior to the Owner's Approval of the Control Estimate
10.2 Termination Subsequent to the Owner's Approval of the Control
Estimate
10.3 Notice of Termination
10.4 Suspension
ARTICLE 11 OTHER CONDITIONS AND SERVICES
2
<PAGE>
STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONSTRUCTION
MANAGER WHERE THE CONSTRUCTION MANAGER IS ALSO THE CONSTRUCTOR
ARTICLE 1
GENERAL PROVISIONS
1.1 RELATIONSHIP OF PARTIES
The Construction Manager accepts the relationship of trust and confidence
established with the Owner by this Agreement, and covenants with the Owner to
furnish the Construction Manager's reasonable skill and judgment and to
cooperate with the Architect in furthering the interests of the Owner. The
Construction Manager shall furnish construction administration and management
services and use the Construction Manager's best efforts to perform the Project
in an expeditious and economical manner consistent with the interests of the
Owner. The Owner shall endeavor to promote harmony and cooperation among the
Owner, Architect, Construction Manager and other persons or entities employed by
the Owner for the Project.
1.2 GENERAL CONDITIONS
For the Construction Phase, the General Conditions of the Contract shall be the
1987 Edition of AIA Document A201, General Conditions of the Contract for
Construction, as modified by the parties, which is incorporated herein by
reference and attached hereto as Exhibit "A" and which shall apply except as
specifically noted in this Agreement. For the Preconstruction Phase, including
Preconstruction Phase activities which proceed concurrently with the
Construction Phase, AIA Document A201 shall not apply except as specifically
provided in this Agreement. If anything in AIA Document A201 is inconsistent
with or is modified by this Agreement, this Agreement shall govern.
Modifications of AIA Document A201 by this Agreement shall not apply to
Subcontractors except as provided in Paragraph 2.5 of this Agreement. The term
"Contractor" as used in AIA Document A201 shall mean the Construction Manager.
1.3 CONTRACT SUM, CONTRACT TIME AND CHANGES IN THE WORK
The Contract Sum is the total Cost of the Work as described in Article 6,
plus the Construction Manager's Fee as set forth in Article 5. The Contract
Time is the duration from the date of commencement of the Construction Phase
until the date of Substantial Completion. Changes in the Work shall be
governed by Paragraph 5.2 of this Agreement and not by Article 7 of AIA
Document A201. If, however, the Contract Time has been established in
accordance with Clause 2.2.4.5 of this Agreement, adjustments to the Contract
Time shall be made in accordance with Article 7 of AIA Document A201.
ARTICLE 2
CONSTRUCTION MANAGER'S RESPONSIBILITIES
The Construction Manager shall perform the services described in this Article.
The services to be provided under Paragraphs 2.1 and 2.2 constitute the
Preconstruction Phase services. The Construction Phase may commence before the
Preconstruction Phase is completed, in which case both phases will proceed
concurrently.
2.1 PRECONSTRUCTION PHASE
2.1.1 PRELIMINARY EVALUATION
The Construction Manager shall provide a preliminary evaluation of the Owner's
program, Project budget and schedule requirements, each in terms of the other.
2.1.2 CONSULTATION
The Construction Manager with the Architect shall jointly schedule and attend
regular meetings with the Owner and Architect. The Construction Manager shall
consult with the Owner and Architect regarding site use and improvements, and
the selection of materials, building systems and equipment. The Construction
Manager shall provide recommendations on construction feasibility; actions
designed to minimize adverse effects of labor or material shortages; time
requirements for procurement, installation and construction completion; and
factors related to construction cost including estimates of alternative designs
or materials, preliminary budgets and possible economies.
2.1.3 PRELIMINARY PROJECT SCHEDULE
When Project requirements described in Subparagraph 3.1.1 have been sufficiently
identified, the Construction Manager shall prepare, and periodically update, a
preliminary Project schedule for the Architect's review and the Owner's approval
of the portion of the preliminary Project schedule relating to the performance
of the Architect's services. The Construction Manager shall coordinate and
integrate the preliminary Project schedule with the services and activities of
the Owner, Architect and Construction Manager. As design proceeds, the
preliminary Project schedule shall be updated to indicate proposed activity
sequences and durations, milestone dates for receipt and approval of pertinent
information, submittal of the Control Estimate, preparation and processing of
shop drawings and samples, delivery of materials or equipment requiring
long-lead time procurement, Owner's occupancy requirements showing portions of
the Project having occupancy priority, and estimated date of Substantial
Completion. If preliminary Project schedule updates indicate that previously
approved schedules may not be met, the Construction Manager shall make
appropriate recommendations to the Owner and Architect.
2.1.4 PHASED CONSTRUCTION
The Construction Manager shall make recommendations to the Owner and Architect
regarding the phased issuance of Drawings and Specifications to facilitate
phased construction of the Work, if such phased construction is appropriate for
the Project, taking into consideration such factors as economies, time of
performance, availability of labor and materials, and provisions for temporary
facilities.
2.1.5 PRELIMINARY COST ESTIMATES
2.1.5.1 When the Owner has sufficiently identified the Project requirements and
the Architect has prepared other basic design criteria, the Construction manager
shall prepare, for the review of the Architect and approval of the Owner, a
preliminary cost estimate utilizing area, volume or similar conceptual
estimating techniques.
3
<PAGE>
2.1.5.2 When Schematic Design Documents have been prepared by the Architect and
approved by the Owner, the Construction Manager shall prepare for the review of
the Architect and approval of the Owner, a more detailed estimate with
supporting data. During the preparation of the Design Development Documents,
the Construction Manager shall update and refine this estimate at appropriate
intervals agreed to by the Owner, Architect and Construction Manager.
2.1.5.3 When Design Development Documents have been prepared by the Architect
and approved by the Owner, the Construction Manger shall prepare a detailed
estimate with supporting data for review by the Architect and approval by the
Owner. During the preparation of the Construction Documents, the Construction
Manager shall update and refine this estimate at appropriate intervals agreed to
by the Owner, Architect and Construction Manger.
2.1.5.4 If any estimate submitted to the Owner exceeds previously approved
estimates or the Owner's budget, the Construction Manager shall make appropriate
recommendations to the Owner and Architect.
2.1.6 SUBCONTRACTORS AND SUPPLIERS
The Construction Manager shall seek to develop subcontractor interest in the
Project and shall furnish to the Owner and Architect for their information a
list of possible subcontractors, including suppliers who are to furnish
materials or equipment fabricated to a special design, from whom proposals will
be requested for each principal portion of the Work. The Architect will
promptly reply in writing to the Construction Manager if the Architect or Owner
know of any objection to such subcontractor or supplier. The receipt of such
list shall not require the Owner or Architect to investigate the qualifications
of proposed subcontractors or suppliers, nor shall it waive the right of the
Owner or Architect later to object to or reject any proposed subcontractor or
supplier.
2.1.7 LONG-LEAD TIME ITEMS
The Construction Manager shall recommend to the Owner and Architect a
schedule for procurement of long-lead time items which will constitute part
of the Work as required to meet the Project schedule. Upon the Owner's
approval of the Control Estimate, all contracts for such items shall be
assigned by the Owner to the Construction Manager, who shall accept
responsibility for such items as if procured by the Construction Manager.
The Construction Manager shall expedite the delivery of long-lead time items.
2.1.8 EXTENT OF RESPONSIBILITY
The Construction Manager agrees to exercise reasonable skill and judgment in
the preparation of schedules and estimates, but does not warrant or guarantee
any schedules or estimates or line items within such estimates, even though
approved by the Owner, including the Control Estimate and the estimated date
of Substantial Completion, except as otherwise provided under Clause 2.2.4.5.
The recommendations and advice of the Construction Manager concerning design
alternatives shall be subject to the review and approval of the Owner and the
Owner's professional consultants. It is not the Construction Manager's
responsibility to ascertain that the Drawings and Specifications are in
accordance with applicable laws, statutes, ordinances, building codes, rules
and regulations. However, if the Construction Manager recognizes that
portions of the Drawings and Specifications are at variance, the Construction
Manager shall promptly notify the Architect and Owner in writing.
2.1.9 EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION
The Construction Manager shall comply with applicable laws, regulations and
special requirements of the Contract Documents regarding equal employment
opportunity and affirmative action programs.
2.2 CONTROL ESTIMATE AND CONTRACT TIME
2.2.1 In accordance with the preliminary Project schedule established in
Subparagraph 2.1.3, the Construction Manager shall prepare and submit to the
Owner in writing a Control Estimate using current information to update the
most recently prepared Preliminary Estimate. The Control Estimate shall be
the sum of the then-estimated Cost of the Work and the Construction Manager's
Fee, and is the estimate against which actual costs will be measured.
2.2.2 The Construction Manager shall develop and implement a detailed
system of cost control that will provide the Owner with timely information as
to the anticipated total Cost of the Work. The cost control system shall
compare the Control Estimate with the actual cost for activities in progress
and estimates for uncompleted tasks and proposed changes. This information
shall be reported to the Owner in writing at mutually agreeable intervals.
2.2.3 As the Drawings and Specifications may not be finished at the time
the Control Estimate is prepared, the Construction Manager shall provide in
the Control Estimate for further development of the Drawings and
Specifications of the Architect that is consistent with the Contract
Documents and reasonably inferable therefrom. Such further development does
not include such things as changes in scope, systems, kinds and quality of
materials, finishes or equipment.
2.2.4 The Control Estimate shall include:
.1 A list of the Drawing and Specifications, including all addenda thereto
and the Conditions of the Contract.
.2 A list of the clarifications and assumptions made by the Construction
Manager in the preparation of the Control Estimate to supplement the
information contained in the Drawings and Specifications.
.3 A statement of the estimated Cost of the work organized by trade
categories or systems, and the Construction Manager's fee.
.4 A statement of the actual or estimated date of commencement of the
Construction Phase and the estimated date of Substantial Completion,
with a schedule of the construction documents issuance dates upon which
the estimated date of Substantial Completion is based.
.5 A statement as to whether or not the duration from the stated date of
commencement of the Construction Phase to the estimated date of
Substantial Completion shall become the Contract Time and be subject to
the provisions of Article 8 of AIA Document A201.
2.2.5 The Construction Manager shall meet with the Owner and Architect to
review the Control Estimate. In the event that the Owner or Architect
discover any inconsistencies or inaccuracies in the information presented,
they shall promptly notify the Construction Manager, who shall make
appropriate adjustments to the Control Estimate. When the Control Estimate
is acceptable to the Owner, the Owner shall approve it in writing.
4
<PAGE>
2.2.6 Upon the Owner's approval of the Control Estimate, the Contract
Documents shall consist of (1) this Agreement, (2) AIA Document A201 and
other documents referred to in this Agreement, (3) the documents enumerated
in Clause 2.2.4 with the adjustments described in Clause 2.2.5, and (4)
Modifications issued subsequent to the Owner's approval of the Control
Estimate. If anything in the other Contract Documents is inconsistent with
this Agreement, this Agreement shall govern.
2.2.7 The Owner shall authorize and cause the Architect to revise the
Drawings and Specifications to the extent necessary to reflect the agreed
upon assumptions and clarifications on which the Control Estimate is based.
Such revised Drawings and Specifications shall be furnished to the
Construction Manager in accordance with schedules agreed to by the Owner,
Architect, and Construction Manager. The Construction Manager shall promptly
notify the Architect and Owner if such revised Drawings and Specifications
are inconsistent with the agreed upon assumptions and clarifications.
2.3 CONSTRUCTION PHASE
2.3.1 GENERAL
2.3.1.1 The Construction Phase shall commence on the earlier of:
.1 the Owner's approval of the Control Estimate and issuance of a Notice
to Proceed; or
.2 the Owner's first authorization to the Construction Manager to award a
subcontract, or to undertake a portion of the Work with the
Construction Manager's own forces, or to issue a purchase order for
materials or equipment required for the Work.
2.3.1.2 For purposes of Subparagraph 8.1.2 of AIA Document A201, the date
of commencement of the Work shall mean the date of commencement of the
Construction Phase.
2.3.1.3 Prior to the Owner's approval of the Construction Manager's Control
Estimate and issuance of a Notice to Proceed, the Construction Manager shall
not incur any cost to be reimbursed as part of the Cost of the Work, except
as the Owner may specifically authorize in writing.
2.3.2 ADMINISTRATION
2.3.2.1 Those portions of the Work that the Construction Manager does not
customarily perform with the Construction Manager's own personnel shall be
performed under subcontracts or by other appropriate agreements with the
Construction Manager. The Construction Manager shall obtain bids from
Subcontractors and from suppliers of materials or equipment fabricated to a
special design for the Work from the list previously reviewed and, after
analyzing such bids, shall deliver such bids to the Owner and Architect. The
Owner will then determine, with the advice of the Construction Manager and
subject to the reasonable objection of the Architect, which bids will be
accepted. The Owner may designate specific persons or entities from whom the
Construction Manager shall obtain bids. The Construction Manager shall not
be required to contract with anyone to whom the Construction Manager has
reasonable objection.
2.3.2.2 Subcontracts and agreements with suppliers furnishing materials or
equipment fabricated to a special design shall conform to the payment
provisions of Subparagraphs 7.1.8 and 7.1.9 and shall not be awarded on the
basis of cost plus a fee without the prior consent of the Owner.
2.3.2.3 The Construction Manager shall schedule and conduct meetings at
which the Owner, Architect, Construction Manager and appropriate
Subcontractors can discuss the status of the Work. The Construction Manager
shall prepare and promptly distribute meeting minutes.
2.3.2.4 Promptly after the Owner's approval of the Control Estimate, the
Construction Manager shall prepare a schedule in accordance with Paragraph
3.10 of AIA Document A201, and the following requirements: The construction
schedule shall be in a detailed precedence-style critical path method (CPM)
or primavera type format satisfactory to the Owner and the Architect which
shall also: (1) provide a graphic representation of all activities and events
that will occur during performance of the Work; (2) identify each phase of
construction and occupancy; and (3) set forth dates that are critical in
ensuring the timely and orderly completion of the Work in accordance with the
requirements of the Contract Documents and Exhibit "B". Upon review and
acceptance by the Owner and the Architect, the construction schedule shall be
deemed part of the Contract Documents and attached to the Agreement as
Exhibit B. If not accepted, the construction schedule shall be promptly
revised by the Contractor in accordance with the recommendations of the Owner
and the Architect and re-submitted for acceptance. The Contractor shall
monitor the progress of the Work for conformance with the requirements of the
construction schedule and shall promptly advise the Owner of any delays or
potential delays. The accepted construction schedule shall be updated to
reflect actual conditions as set forth in General Conditions, Paragraph
3.10.1 or, if requested by Owner. In the event any progress report indicates
any delays, the Contractor shall propose an affirmative plan to correct the
delay, including overtime and/or additional labor, if necessary. In no event
shall any progress report constitute an adjustment in the Contract Time, any
Milestone Date or the Contract Sum unless any such adjustment is agreed to by
the Owner and authorized pursuant to Change Order.
2.3.2.5 The Construction Manager shall provide monthly written reports to
the Owner and Architect on the progress of the entire Work. The Construction
Manager shall maintain a daily log containing a record of weather,
Subcontractors working on the site, number of workers, Work accomplished,
problems encountered and other similar relevant data as the Owner may
reasonably require. The log shall be available to the Owner and Architect.
2.4 PROFESSIONAL SERVICES
The Construction Manager shall not be required to provide professional
services which constitute the practice of architecture or engineering, unless
such services are specifically required by the Contract Documents for a
portion of the Work or unless the Construction Manager has specifically
agreed in writing to provide such services. In such event, the Construction
Manager shall cause such services to be performed by appropriately licensed
professionals.
2.5 UNSAFE MATERIALS
In addition to the provisions of Paragraph 10.1 in AIA Document A201, if
reasonable precautions will be inadequate to prevent foreseeable bodily
injury or death to persons resulting from a material or substance encountered
but not created on the site by the Construction Manager, the Construction
Manager shall, upon recognizing the condition, immediately stop work in the
affected area and report the condition to the Owner and Architect in writing.
The Owner, Construction Manager and Architect shall then proceed in the same
manner described in Subparagraph 10.1.2 of AIA Document A201. The Owner
shall be responsible for obtaining the
5
<PAGE>
services of a licensed laboratory to verify the presence or absence of the
material of substance reported by the Construction Manager and, in the event
such material or substance is found to be present, to verify that it has been
rendered harmless.
ARTICLE 3
---------
OWNER'S RESPONSIBILITIES
3.1 INFORMATION AND SERVICES
3.1.1 The Owner shall provide full information in a timely manner
regarding the requirements of the Project, including a program which sets
forth the Owner's objectives, constraints and criteria, including space
requirements and relationships, flexibility and expandability requirements,
special equipment and systems, and site requirements.
3.1.2 The Owner, upon written request from the Construction Manager,
shall furnish evidence of Project financing prior to the start of the
Construction Phase. Furnishing of such evidence shall be a condition
precedent to commencement of the Work.
3.1.3 The Owner shall establish and update an overall budget for the
Project, based on consultation with the Construction Manager and Architect,
which shall include contingencies for changes in the Work and other costs
which are the responsibility of the Owner.
3.1.4 STRUCTURAL AND ENVIRONMENTAL TESTS, SURVEYS AND REPORTS
In the Preconstruction Phase, the Owner shall furnish the following with
reasonable promptness and at the Owner's expense:
3.1.4.1 Reports, surveys, drawings and tests concerning the conditions of
the site which are required by law.
3.1.4.2 Surveys describing physical characteristics, legal limitations and
utility locations for the site of the Project, and a written legal
description of the site. The surveys and legal information shall include, as
applicable, grades and lines of streets, alleys, pavements and adjoining
property and structures; adjacent drainage; rights-of-way, restrictions,
easements, encroachments, zoning, deed restrictions, boundaries and contours
of the site; locations, dimensions and necessary data pertaining to existing
buildings, other improvements and trees; and information concerning available
utility services and lines, both public and private, above and below grade,
including inverts and depths. All information on the survey shall be
referenced to a project benchmark.
3.1.4.3 The services of a geotechnical engineer when such services are
requested by the Construction Manager. Such services may include but are not
limited to test borings, test pits, determinations of soil bearing values,
percolation tests, evaluations of hazardous materials, ground corrosion and
resistivity tests, including necessary operations for anticipating subsoil
conditions, with reports and appropriate professional recommendations.
3.1.4.4 Structural, mechanical, chemical, air and water pollution tests,
tests for hazardous materials, and other laboratory and environmental tests,
inspections and reports which are required by law.
3.1.4.5 The services of other consultants when such services are reasonably
required by the scope of the Project and are requested by the Construction
Manager.
The Construction Manager shall be entitled to rely upon the accuracy of such
information, reports, surveys, drawings and tests described in Clauses
3.1.4.1 through 3.1.4.5, except to the extent that the Construction Manager
knows of any inaccuracy.
3.2 OWNER'S DESIGNATED REPRESENTATIVE
The Owner's representative is Robert McCollough, who shall have express
authority to bind the Owner with respect to all matters requiring the Owner's
approval or authorization. This representative shall have the authority to
make decisions on behalf of the Owner concerning estimates and schedules,
construction budgets, and changes in the Work, and shall render such
decisions promptly and furnish information expeditiously, so as to avoid the
unreasonable delay in the services or Work of the Construction Manager. The
Owner may designate another or additional representatives upon written notice
to Construction Manager.
3.3 ARCHITECT
The Owner shall retain an Architect to provide Basic Services, including
normal structural, mechanical, electrical engineering services, other than
cost estimating services, described in the edition of AIA Document B141
current as of the date of this Agreement. The Owner shall authorize and
cause the Architect to provide those Additional Services described in AIA
Document B141 requested by the Construction Manager which must necessarily be
provided by the Architect for the Preconstruction and Construction Phases of
the Work. Such services shall be provided in accordance with timely
schedules agreed to by the Owner, Architect and Construction Manager. Upon
request of the Construction Manager, the Owner shall furnish to the
Construction Manager a copy of the Owner's Agreement with the Architect, from
which compensation provisions may be deleted.
ARTICLE 4
<PAGE>
COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE SERVICES
The Owner shall compensate and make payments to the Construction Manager for
Preconstruction Phase services as follows:
4.1 COMPENSATION
4.1.1 For the services described in Paragraphs 2.1 and 2.2, the Construction
Manager's compensation shall be calculated as follows:
At actual cost for personnel included in the Cost of the Work as
defined herein, plus reimbursable costs as set forth in Article 6, plus
a fee equal to % of the sum of such costs.
4.1.2 Compensation for Preconstruction Phase Services shall be equitably
adjusted if such services extend beyond two years from the date of this
Agreement or if the originally contemplated scope of services is significantly
modified.
4.2 PAYMENTS
4.2.1 Payments shall be made monthly following presentation of the
Construction Manager's invoice and, where applicable, shall be in proportion to
services performed.
4.2.2 Payments are due and payable thirty (30) days from the date the
Construction Manager's invoice is received by the Owner. Amounts unpaid after
the date on which payment is due will bear interest of eight percent (8%) per
annum.
ARTICLE 5
---------
COMPENSATION FOR CONSTRUCTION PHASE SERVICES
The Owner shall compensate the Construction Manager for Construction Phase
services as follows:
5.1 COMPENSATION
5.1.1 For the Construction Manager's performance of the Work as described in
Paragraph 2.3, the Owner shall pay the Construction Manager in current funds the
Contract Sum consisting of the Cost of the Work as defined in Article 6 and the
Construction Manager's Fee determined as follows: A Fee equal to % of the Cost
of the Work.
5.2 CHANGES IN THE WORK
5.2.1 The Owner may, without invalidating the Contract, order changes in the
Work within the general scope of the Contract consisting of additions, deletions
or other revisions. The Architect may make minor changes in the Work as
provided in Paragraph 7.4 of AIA Document A201.
5.2.2 Increased costs for the items set forth in Article 6 which result from
changes in the Work shall become part of the Cost of the Work, and the
Construction Manager's Fee shall be adjusted if provided in Paragraph 5.1.
5.2.3 If the Construction Manager receives any drawings, specifications,
interpretations or instructions from the Owner or Architect which are
inconsistent with the Contract Documents, or encounters unanticipated
conditions, any of which will result in a significant change in the cost, scope
or estimated date of Substantial Completion in comparison with the Control
Estimate, the Construction Manager shall promptly notify the Owner and Architect
in writing and shall not proceed with the affected work until further written
instructions are received from the Owner and Architect.
ARTICLE 6
---------
COST OF THE WORK FOR CONSTRUCTION PHASE
6.1 COSTS TO BE REIMBURSED
6.1.1 The term "Cost of the Work" shall mean costs necessarily incurred by
the Construction Manager in the proper performance of the Work. Such costs
shall be at rates not higher than those customarily paid at the place of the
Project except with prior consent to the Owner. The Cost of the Work shall
include only the items set forth in this Article 6.
6.1.2 LABOR COSTS
.1 Wages of construction workers directly employed by the Construction
Manager to perform the construction of the Work at the site or, with
the Owner's agreement, at off-site workshops.
.2 Wages or salaries of the Construction Manager's supervisory and
administrative personnel when stationed at the site with the Owner's
agreement at actual cost.
.3 Wages and salaries of the Construction Manager's supervisory or
administrative personnel engaged, at factories, workshops or on the
road, in expediting the production or transportation of materials or
equipment required for the Work, and estimating, safety supervision,
purchasing, scheduling and cost engineering staff located in
Construction Manager's home office, but only for that portion of their
time required for the Work, at actual cost.
.4 Costs paid or incurred by the Construction Manager for taxes,
insurance, contributions, assessments and benefits required by law or
collective bargaining agreements, and, for personnel not covered by
such agreements, customary benefits such as sick leave,
7
<PAGE>
medical and health benefits, holidays, vacations and pensions, provided
that such costs are based on wages and salaries included in the Cost of
the Work under Clause 6.1.2.1.
6.1.3 SUBCONTRACT COSTS
Payments made by the Construction Manager to Subcontractors in accordance with
the requirements of the subcontracts.
6.1.4 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED
CONSTRUCTION
.1 Costs, including transportation, of materials and equipment
incorporated or to be incorporated in the completed construction.
.2 Costs of materials described in the preceding Clause 6.1.4.1 in excess
of those actually installed but required to provide reasonable
allowance for waste and for spoilage. Unused excess materials, if any,
shall be handed over to the Owner at the completion of the Work or, at
the Owner's option, shall be sold by the Construction Manager; amounts
realized, if any, from such sales shall be credited to the Owner as a
deduction from the Cost of the Work.
6.1.5 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITIES AND
RELATED ITEMS
.1 Costs, including transportation, installation, maintenance,
dismantling and removal of materials, supplies, temporary facilities,
machinery, equipment, and hand tools not customarily owned by the
construction workers, which are provided by the Construction Manager
at the site and fully consumed in the performance of the Work; and cost
less salvage value on such items if not fully consumed, whether sold to
others or retained by the Construction Manager. Cost for items
previously used by the Construction Manager shall mean fair market
value.
.2 Rental charges for temporary facilities, machinery, equipment, and
hand tools not customarily owned by the construction workers, which are
provided by the Construction Manager at the site, whether rented from
the Construction Manager or others, and costs of transportation,
installation, minor repairs and replacements, dismantling and removal
thereof. Rates and quantities of equipment rented shall be subject to
the Owner's prior approval. Rental charges for Contractor-owned
equipment shall not exceed 75% of the then current monthly rate set
forth in the Rental Blue Book for Construction Equipment published by
the Equipment Guide Book Company.
.3 Costs of removal of debris from the site.
.4 Reproduction costs, costs of telegrams, facsimile transmissions and
long-distance telephone calls, postage and express delivery charges,
telephone at the site and reasonable petty cash expenses of the site
office.
.5 That portion of the reasonable travel and subsistence expenses of the
Construction Manager's personnel incurred while traveling in discharge
of duties connected with the Work.
6.1.6 MISCELLANEOUS COSTS
.1 That portion directly attributable to this Contract of premiums for
insurance required of Construction Manager pursuant to the Contract
Documents and the deductible portion of any losses under the Builder's
Risk Insurance (not to exceed $5,000 per loss).
.2 Sales, use or similar taxes imposed by a governmental authority which
are related to the Work and for which the Construction Manager is
liable.
.3 Fees and assessments for the building permit and for other permits,
licenses and inspections for which the Construction Manager is required
by the Contract Documents to pay.
.4 Fees of testing laboratories for tests required by the Contract
Documents, except those related to nonconforming Work other than that
for which payment is permitted by Clause 6.1.8.2.
.5 Royalties and license fees paid for the use of a particular design,
process or product required by the Contract Documents; the cost of
defending suits or claims for infringement of patent or other
intellectual property rights arising from such requirement by the
Contract Documents; payments made in accordance with legal judgments
against the Construction Manager resulting from such suits or claims
and payments of settlements made with the Owner's consent; provided,
however, that such costs of legal defenses, judgment and settlements
shall not be included in the calculation of the Construction Manager's
Fee and provided that such royalties, fees and costs are not excluded
by the last sentence of Subparagraph 3.17.1 of AIA Document A201 or
other provisions of the Contract Documents.
.6 Data processing costs related to the Work.
.7 Deposits lost for causes other than the Construction Manager's
negligence or failure to fulfill a specific responsibility to the Owner
set forth in this Agreement.
.8 With the Owner's prior written permission, legal, mediation and
arbitration costs, other than those arising from disputes between the
Owner and Construction Manager, reasonably incurred by the Construction
Manager in the performance of the Work.
.9 Expenses incurred in accordance with the Construction Manager's
standard personnel policy for relocation and temporary living
allowances of personnel required for the Work, in case it is necessary
to relocate such personnel from distant locations.
6.1.7 OTHER COSTS
.1 Other costs incurred in the performance of the Work if and to the
extent approved in advance in writing by the Owner.
8
<PAGE>
6.1.8 EMERGENCIES AND REPAIRS TO DAMAGED OR NONCONFORMING WORK
The Cost of the Work shall also include costs described in Subparagraph 6.1.1
which are incurred by the Construction Manager:
.1 In taking action to prevent threatened damage, injury or loss in case
of an emergency affecting the safety of persons and property, as
provided in Paragraph 10.3 of AIA Document A201.
.2 In repairing or correcting damaged or nonconforming Work executed by
the Construction Manager or the Construction Manager's Subcontractors
or suppliers, provided that such damaged or nonconforming Work was not
caused by the negligence or failure to comply with the requirements of
the Contract Documents of the Construction Manager or the Construction
Manager's foremen, engineers or superintendents, or other supervisory,
administrative or managerial personnel of the Construction Manager, or
the failure of the Construction Manager's personnel to supervise
adequately the Work of the Subcontractors or suppliers, and only to the
extent that the cost of repair or correction is not recoverable by the
Construction Manager from insurance, Subcontractors or suppliers.
6.1.9 The costs described in Subparagraphs 6.1.1 through 6.1.8 shall be
included in the Cost of the Work, notwithstanding any provision of AIA Document
A201 or other Conditions of the Contract which may require the Construction
Manager to pay such costs, unless such costs are excluded by the provisions of
Paragraph 6.2.
6.2 COSTS NOT TO BE REIMBURSED
6.2.1 The Cost of the Work shall not include:
.1 Salaries and other compensation of the Construction Manager's
personnel stationed at the Construction Manager's principal office or
offices other than the site office, except as specifically provided in
Clauses 6.1.2.1 through 6.1.2.3.
.2 Expenses of the Construction Manager's principal office and offices
other than the site office except as specifically provided in Paragraph
6.1.
.3 Overhead and general expenses, except as may be expressly included in
Paragraph 6.1.
.4 The Construction Manager's capital expenses, including interest on the
Construction Manager's capital employed for the Work.
.5 Rental costs of machinery and equipment, except as specifically
provided in Subparagraph 6.1.5.2.
.6 Except as provided in Clause 6.1.8.2, costs due to the negligence of
the Construction Manager or to the failure of the Construction Manager
to comply with the Contract Documents.
.7 Costs incurred in the performance of Preconstruction Phase Services.
.8 Except as provided in Clause 6.1.7.1, any cost not specifically and
expressly described in Paragraph 6.1.
6.3 DISCOUNTS, REBATES AND REFUNDS
6.3.1 Cash discounts obtained on payments made by the Construction Manager
shall accrue to the Owner if (1) before making the payment, the Construction
Manager included them in an Application for Payment and received payment
therefor from the Owner, or (2) the Owner has deposited funds with the
Construction Manager with which to make payments; otherwise, cash discounts
shall accrue to the Construction Manager. Trade discounts, rebates, refunds and
amounts received from sales of surplus materials and equipment shall accrue to
the Owner, and the Construction Manager shall make provisions so that they can
be secured.
6.3.2 Amounts which accrue to the Owner in accordance with the provisions of
Subparagraph 6.3.1 shall be credited to the Owner as a deduction from the Cost
of the Work.
6.4 ACCOUNTING RECORDS
6.4.1 The Construction Manager shall keep full and detailed accounts and
exercise such controls as may be necessary for proper financial management under
this Contract; the accounting and control systems shall be satisfactory to the
Owner. At any time, upon reasonable notice, the Owner and the Owner's
accountants shall be afforded access to the Construction Manager's records,
books, correspondence, instructions, drawings, receipts, subcontracts, purchase
orders, vouchers, memoranda and other data relating to this Project, and the
Construction Manager shall preserve these for a period of three years after
final payment, or for such longer period as may be required by law.
ARTICLE 7
---------
CONSTRUCTION PHASE PAYMENTS
7.1 PROGRESS PAYMENTS
7.1.1 Based upon Applications for Payment submitted to the Architect by the
Construction Manager and Certificates for Payment issued by the Architect, the
Owner shall make progress payments on account of the Contract Sum to the
Construction Manager as provided below and elsewhere in the Contract Documents.
7.1.2 The period covered by each Application for Payment shall be one
calendar month ending on the last day of the month.
7.1.3 Provided an Application for Payment is received by the Architect not
later than the 15th day of a month, the Owner shall make payment to the
Construction Manager not later than the 15th day of the following month. If an
Application for Payment is received by the
9
<PAGE>
Architect after the application date fixed above, payment shall be made by
the Owner not later than forty-five days after the Architect receives the
Application for Payment.
7.1.4 With each Application for Payment, the Construction Manager shall
submit payrolls, petty cash accounts, receipted invoices or invoices with check
vouchers attached, and any other evidence required by the Owner to demonstrate
that cash disbursements already made by the Construction Manager on account of
the Cost of the Work equal or exceed (1) progress payments already received by
the Construction Manager; less (2) that portion of those payments attributable
to the Construction Manager's Fee; plus (3) payrolls for the period covered by
the present Application for Payment.
7.1.5 Applications for Payment shall show the Cost of the Work actually
incurred by the Construction Manager through the end of the period covered by
the Application for Payment and for which the Construction Manager has made or
intends to make actual payment prior to the next Application for Payment.
7.1.6 Subject to other provisions of the Contract Documents, the amount of
each progress payment shall be computed as follows:
.1 Take the Cost of the Work as described in Subparagraph 7.1.5.
.2 Add the Construction Manager's Fee, less retainage of ten percent
(10%). The Construction Manager's Fee shall be computed upon the Cost
of the Work described in the preceding Clause 7.1.6.1 at the rate
stated in Paragraph 5.1 or, if the Construction Manager's Fee is
stated as a fixed sum in that Paragraph, an amount which bears the same
ratio to that fixed-sum Fee as the Cost of the Work in the preceding
Clause bears to a reasonable estimate of the probable Cost of the Work
upon its completion.
.3 Subtract the aggregate of previous payments made by the Owner.
.4 Subtract the shortfall, if any, indicated by the Construction Manager
in the documentation required by Subparagraph 7.1.4 or to substantiate
prior Applications for Payment or resulting from errors subsequently
discovered by the Owner's accountants in such documentation.
.5 Subtract amounts, if any, for which the Architect has withheld or
withdrawn a Certificate for Payment as provided in the Contract
Documents.
7.1.7 Additional retainage, if any, shall be as follows:
Ten percent to Substantial Completion, except as otherwise agreed to
by Owner. Five percent to Final Completion.
7.1.8 Except with the Owner's prior approval, payments to Subcontractors
included in the Construction Manager's Applications for Payment shall not exceed
an amount for each Subcontractor calculated as follows:
.1 Take that portion of the Subcontract Sum properly allocable to
completed Work as determined by multiplying the percentage
completion of each portion of the Subcontractor's Work by the share
of the total Subcontract Sum allocated to that portion in the
Subcontractor's schedule of values, less retainage of ten percent
(10%). Pending final determination of amounts to be paid to the
Subcontractor for changes in the Work, amounts not in dispute may be
included as provided in Subparagraph 7.3.7 of AIA Document A201 even
thought the Subcontract Sum has not yet been adjusted by Change
Order.
.2 Add that portion of the Subcontract Sum properly allocable to
materials and equipment delivered and suitably stored at the site
for subsequent incorporation in the Work or, if approved in advance
by the Owner, suitably stored off the site at a location agreed upon
in writing, less retainage of ten percent (10%).
.3 Subtract the aggregate of previous payments made by the Construction
Manager to the Subcontractor.
.4 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment by the Owner to the Construction
Manager for reasons which are the fault of the Subcontractor.
.5 Add, upon Substantial Completion of the entire Work of the
Construction Manager, a sum sufficient to increase the total
payments to the Subcontractor to ninety-five percent (95%) of the
Subcontract Sum, less amounts, if any, for incomplete Work and
unsettled claims; and, if final completion of the entire Work is
thereafter materially delayed through no fault of the Subcontractor,
add any additional amounts payable on account of Work of the
Subcontractor in accordance with Subparagraph 9.10.3 of AIA Document
A201.
The Subcontract Sum is the total amount stipulated in the
subcontract to be paid by the Construction Manager to the
Subcontractor for the Subcontractor's performance of the subcontract.
7.1.9 Except with the Owner's prior written approval, the Construction
Manager shall not make advance payments to suppliers for materials or equipment
which have not been delivered and stored at the site.
7.1.10 In taking action on the Construction Manager's Applications for
Payment, the Architect shall be entitled to rely on the accuracy and
completeness of the information furnished by the Construction Manager and shall
not be deemed to represent that the Architect has made a detailed examination,
audit or arithmetic verification of the documentation submitted in accordance
with Subparagraph 7.1.4 or other supporting data; that the Architect has made
exhaustive or continuous on-site inspections, or that the Architect has made
examinations to ascertain how or for what purposes the Construction Manager has
used amounts previously paid on account of the Contract. Such examinations,
audits and verifications, if required by the Owner, will be performed by the
Owner's accountants acting in the sole interest of the Owner.
10
<PAGE>
7.2 FINAL PAYMENT
7.2.1 Final payment shall be made by the Owner to the Construction Manager
when (1) the Contract has been fully performed by the Construction Manager,
except for the Construction Manager's responsibility to correct nonconforming
Work, as provided in Subparagraph 12.2.2 of AIA Document A201, and to satisfy
other requirements, if any, which necessarily survive final payment; (2) a final
Application for Payment and a final accounting for the Cost of the Work have
been submitted by the Construction Manager and reviewed by the Owner's
accountants; (3) the Construction Manager shall have complied with all of the
requirements of Paragraph 9.10 of the General Conditions; and (4) a final
Certificate for Payment has then been issued by the Architect; such final
payment shall be made by the Owner not more than 30 days after the issuance of
the Architect's final Certificate for Payment, or as follows:
7.2.2 The amount of the final payment shall be calculated as follows:
.1 Take the sum of the Cost of the Work substantiated by the
Construction Manager's final accounting and the Construction
Manager's Fee.
.2 Subtract amounts, if any, for which the Architect withholds, in
whole or in part, a final Certificate for Payment as provided in
Subparagraph 9.5.1 of AIA Document A201 or other provisions of the
Contract Documents.
.3 Subtract the aggregate of previous payments made by the Owner. If
the aggregate of previous payment made by the Owner exceeds the
amount due the Construction Manager, the Construction Manager shall
reimburse the difference to the Owner.
7.2.3 The Owner's accountants will review and report in writing on the
Construction Manager's final accounting within 60 days after delivery of the
final accounting to the Architect by the Construction Manager. Based upon such
Cost of the Work as the Owner's accountants report to be substantiated by the
Construction Manager's final accounting, and provided the other conditions of
Subparagraph 7.2.1 have been met, the Architect will, within seven days after
receipt of the written report of the Owner's accountants, either issue to the
Owner a final Certificate for Payment with a copy to the Construction Manager,
or notify the Construction Manager and Owner in writing of the Architect's
reasons for withholding a certificate as provided in Subparagraph 9.5.1 of AIA
Document A201. The time periods stated in this Paragraph 7.2 supersede those
stated in Subparagraph 9.4.1 of AIA Document A201.
7.2.4 If the Owner's accountants report the Cost of the Work as
substantiated by the Construction Manager's final accounting to be less than
claimed by the Construction Manager, the Construction Manager shall be entitled
to proceed in accordance with Article 9 without a further decision of the
Architect. Unless agreed to otherwise, a demand for mediation or arbitration of
the disputed amount shall be made by the Construction Manager within 60 days
after the Construction Manager's receipt of a copy of the Architect's final
Certificate for Payment. Failure to make such demand within this 60-day period
shall result in the substantiated amount reported by the Owner's accountants
becoming binding on the Construction Manager. Pending a final resolution of
the disputed amount, the Owner shall pay the Construction Manager the amount
certified in the Architect's final Certificate for Payment.
7.2.5 If, subsequent to final payment and at the Owner's request, the
Construction Manager incurs costs described in Paragraph 6.1 and not excluded by
Paragraph 6.2 (1) to correct nonconforming Work, or (2) arising from the
resolution of disputes, the Owner shall reimburse the Construction Manager such
costs and the Construction Manager's Fee, if any, related thereto on the same
basis as if such costs had been incurred prior to final payment.
ARTICLE 8
---------
INSURANCE AND BONDS
8.1 INSURANCE REQUIRED OF THE CONSTRUCTION MANAGER
During both the Preconstruction and Construction phases of the Project and prior
to commencing any Work or services hereunder, the Construction Manager shall
purchase, maintain and pay for insurance as set forth in Paragraph 11.1 of AIA
Document A201. Such insurance shall be written for not less than the following
limits, or greater if required by law:
8.1.1 Workers' Compensation: Statutory Limits
Employer's Liability $1,000,000 Bodily Injury by Accident
$1,000,000 Bodily Injury by Disease
$1,000,000 Each Employee
8.1.2 Commercial General Liability, including coverage for
Premises-Operations, Independent Contractors' Protective, Products-Completed
Operations, Contractual Liability, Personal Injury, and Broad Form Property
Damage (including coverage for Explosion, Collapse and Underground hazards):
11
<PAGE>
$15,000,000 Each Occurrence
$15,000,000 General Aggregate
$15,000,000 Personal and
Advertising Injury
$15,000,000 Products-Completed
Operations Aggregate
.1 The policy shall be endorsed to have the General Aggregate apply to
this Project only.
.2 Products and Completed Operations insurance shall be maintained for a
minimum period of at least (Two) years after either 90 days following
Substantial Completion or final payment, whichever is earlier.
.3 The Contractual Liability insurance shall include coverage sufficient
to meet the obligations in AIA Document A201 under Paragraph 3.18.
8.1.3 Comprehensive Automobile Liability (owned, non-owned and hired
vehicles) for bodily injury and property damage:
$15,000,000 Each Accident
8.1.4 Employer's Liability, Commercial General Liability and Comprehensive
Automobile Liability insurance may be arranged under single policies for full
minimum limits requires, or by a combination of underlying policies with the
balance provided by an Excess or Umbrella Liability policy.
8.1.5 All such coverages required above shall be maintained by responsible
insurance carriers authorized and licensed to do business in the State of
Minnesota with an A.M. Best Rating of A or better, and acceptable to Owner.
Construction Manager shall endorse its Commercial General Liability,
Comprehensive Automobile Liability and Umbrella/Excess Liability policies
(required by this Article) to add as additional insureds the Owner, Architect,
Clark, Richardson & Biskup and their agents, employees, consultants and
subcontractors or, at its option, shall provide a separate Owners' and
Contractor's Protective policy, in a form satisfactory to Owner, which affords
the equivalent coverages and limits to the aforesaid as insureds. Such
insurance afforded shall be primary insurance and not excess over or
contributing with any insurance purchased or maintained by the Owner or other
additional insureds, or insureds.
8.2 PERFORMANCE BOND AND PAYMENT BOND
8.2.1 The Construction Manager shall not furnish bonds covering faithful
performance of the Contract and payment of obligations arising thereunder.
12
<PAGE>
ARTICLE 9
---------
MISCELLANEOUS PROVISIONS
9.1 DISPUTE RESOLUTIONS FOR THE PRECONSTRUCTION PHASE
9.1.1 Claims, disputes or other matters in question between the parties to
this Agreement which arise prior to the commencement of the
Construction Phase or which relate solely to the Preconstruction
Phase services of the Construction Manager or to the Owner's
obligations to the Construction Manager during the Preconstruction
Phase, shall be resolved by mediation or by arbitration. Prior to
arbitration, the parties shall endeavor to reach settlement by
mediation.
9.1.2 Any mediation conducted pursuant to this Paragraph 9.1 shall be
held in accordance with the Construction Industry Mediation Rules of
the American Arbitration Association currently in effect, unless the
parties mutually agree otherwise. Demand for mediation shall be
filed in writing with the other party to this Agreement and with the
American Arbitration Association. Any demand for mediation shall be
made within a reasonable time after the claim, dispute or other
matter in question has arisen. In no event shall the demand for
mediation be made after the date when institution of legal or
equitable proceedings based upon such claim, dispute or other matter
in question would be barred by the applicable statute of limitations.
9.1.3 Any claim, dispute or other matter in question not resolved by
mediation shall be decided by arbitration in accordance with the
Construction Industry Arbitration Rules of the American Arbitration
Association currently in effect, unless the parties mutually agree
otherwise. Arbitration proceedings shall be held in Minneapolis,
Minnesota.
9.1.4 Demand for arbitration shall be filed in writing with the other
party to this Agreement and with the American Arbitration
Association. A demand for arbitration may be made concurrent with a
demand for mediation and shall be made within a reasonable time
after the claim, dispute or other matter in question has arisen. In
no event shall the demand for arbitration be made after the date
when institution of legal or equitable proceedings based upon such
claim, dispute or other matter in question would be barred by the
applicable statute of limitations.
9.1.5 In the event of an arbitration between the Owner and any third
party, that involves an issue that is or could be the subject of a
dispute between the Owner and the Construction Manager under this
Agreement, the Owner, at its option, may join the Construction
Manager as a party to such arbitration. The foregoing agreement to
arbitrate shall be specifically enforceable under applicable law in
any court having jurisdiction thereof.
9.1.6 The award rendered by the arbitrator or arbitrators shall be final,
and judgment may be entered upon it in accordance with applicable
law in any court having jurisdiction thereof.
9.2 DISPUTE RESOLUTION FOR THE CONSTRUCTION PHASE
9.2.1 Any other claim, dispute or other matter in question arising out of
or related to this Agreement or breach thereof shall be settled in
accordance with Article 4 of AIA Document A201, except that in
addition to and prior to arbitration, the parties shall endeavor to
reach settlement by mediation in accordance with the Construction
Industry Mediation Rules of the American Arbitration Association
currently in effect, unless the parties mutually agree otherwise.
Any mediation arising under this Paragraph shall be conducted in
accordance with the provisions of Subparagraphs 9.1.2 and 9.1.3.
9.3 OTHER PROVISIONS
9.3.1 Unless otherwise noted, the terms used in this Agreement shall have
the same meaning as those in the 1987 edition of AIA Document A201,
General Conditions of the Contract for Construction.
9.3.2 EXTENT OF CONTRACT
This Contract, which includes this Agreement and the other documents
incorporated herein by reference, represents the entire and integrated
agreement between the Owner and the Construction Manager and supersedes all
prior negotiations, representations or agreements, either written or oral.
This Agreement may be amended only by written instrument signed by both the
Owner and Construction Manager. If anything in any document incorporated into
this Agreement is inconsistent with this Agreement, this Agreement shall
govern.
9.3.3 OWNERSHIP AND USE OF DOCUMENTS
The Drawings, Specifications and other documents prepared by the Architect,
and copies thereof furnished to the Construction Manager, are for use solely
with respect to this Project. They are not to be used by the Construction
Manager, Subcontractors, Sub-subcontractors or suppliers on other projects,
or for additions to this Project outside the scope of the Work, without the
specific written consent of the Owner and Architect. The Construction
Manager, Subcontractors, Sub-subcontractors and suppliers are granted a
limited license to use and reproduce applicable portions of the Drawings,
Specifications and other documents prepared by the Architect appropriate to
and for use in the execution of their Work under the Contract Documents.
9.3.4 GOVERNING LAW
The Contract shall be governed by the law of Minnesota.
9.3.5 ASSIGNMENT
The Owner and Construction Manager respectively bind themselves, their
partners, successors, assigns and legal representatives to the other party
hereto and to partners, successors, assigns and legal representatives of such
other party in respect to covenants, agreements and obligations contained in
the Contract Documents. Neither party to the Contract shall assign the
Contract as a whole without written consent of the other. If either party
attempts to make such an assignment without such consent, that party shall
nevertheless remain legally responsible for all obligations under the
Contract.
ARTICLE 10
----------
TERMINATION OR SUSPENSION
10.1 TERMINATION PRIOR TO THE OWNER'S APPROVAL OF THE CONTROL ESTIMATE
10.1.1 Prior to the Owner's approval of the Control Estimate, the Owner may
terminate this Contract at any time without cause, and the
Construction Manager may terminate this Contract for any of the
reason described in Subparagraph 14.1.1 of AIA document A201. The
provisions of Article 14 of AIA Document A201 do not otherwise apply
to this Paragraph 10.1.
10.1.2 If the Owner or Construction Manager terminates this Contract
pursuant to this Paragraph 10.1 prior to commencement of
13
<PAGE>
the Construction Phase, the Construction Manager shall be equitably
compensated for Preconstruction Phase Services performed prior to
receipt of notice of termination; provided, however, that the
compensation for such services shall not exceed the compensation set
forth in Subparagraph 4.1.1.
10.1.3 If the Owner or Construction Manger terminates this Contract
pursuant to this Paragraph 10.1 after commencement of the
Construction Phase, and prior to the Owner's approval of the Control
Estimate, the Construction Manager shall, in addition to the
compensation provided in Subparagraph 10.1.2, be paid an amount
calculated as follows:
.1 Take the Cost of the Work incurred by Construction Manager.
.2 Add the Construction Manager's Fee computed upon the Cost of the
Work to the date of termination at the rate stated in Paragraph 5.1
or, if the Construction Manager's Fee is stated as a fixed sum in
that Paragraph, an amount which bears the same ratio to that
fixed-sum Fee as the Cost of the Work at the time of termination
bears to a reasonable estimate of the probable Cost of the Work upon
its completion.
.3 Subtract the aggregate of previous payments made by the Owner on
account of the Construction Phase.
The Owner shall also pay the Construction Manger fair compensation, either by
purchase or rental at the election of the Owner, for any equipment owned by
the Construction Manager which the Owner elects to retain and which is not
otherwise included in the Cost of the Work under Clause 10.1.3.1. To the
extent that the Owner elects to take legal assignment of subcontracts and
purchase orders (including rental agreements), the Construction Manager
shall, as a condition of receiving the payment referred to in this Article
10, execute and deliver all such papers and take all such steps, including
the legal assignment of such subcontracts and other contractual rights of the
Construction Manager, as the Owner may require for the purpose of fully
vesting in the Owner the rights and benefits of the Construction Manager
under such subcontracts or purchase orders.
Subcontracts, purchase orders and rental agreements entered into by the
Construction Manager and the Owner's written approval prior to the Owner's
approval of the Control Estimate shall contain provisions permitting
assignment to the Owner as described above. If the Owner accepts such
assignment, the Owner shall reimburse or indemnify the Construction Manager
with respect to all costs arising under the subcontract, purchase order or
rental agreement, except those which would not have been reimbursable as Cost
of the Work if the contract had not been terminated. If the Owner elects not
to accept the assignment of any subcontract, purchase order or rental
agreement which would have constituted a Cost of the Work had this agreement
not been terminated, the Construction Manager shall terminate such
subcontract, purchase order or rental agreement and the Owner shall pay the
Construction Manager the costs necessarily incurred by the Construction
Manager by reason of such termination.
10.2 TERMINATION SUBSEQUENT TO THE OWNER'S APPROVAL OF THE CONTROL ESTIMATE
10.2.1 Subsequent to the Owner's approval of the Control Estimate, the
Contract may be terminated as provided in Sub-paragraphs 14.1.1 and
14.2.1 of AIA Document A201. The provisions of Article 14 of AIA
Document A201 do not otherwise apply to this Paragraph 10.2.
10.2.2 In the event of such termination by the Owner, the amount payable to
the Construction Manager shall not exceed the amount the
Construction Manager would have been entitled to receive pursuant to
Subparagraphs 10.1.2 and 10.1.3 of this Agreement, less any
compensation that may be awarded to the Owner pursuant to Paragraph
9.2.
10.2.3 In the event of such termination by the Construction Manager, the
amount payable to the Construction Manager shall be in accordance
with Subparagraphs 10.1.2 and 10.1.3 of this Agreement, except that
the Construction Manager's Fee shall be calculated as if the Work
had been fully completed by the Construction Manager, including a
reasonable estimate of the Cost of the Work for Work not actually
completed.
10.2.4 In addition to the Owner's right to terminate this Agreement for
cause as provided in Subparagraph 14.2.1 of AIA document A201, the
Owner may terminate this Agreement without cause; in such case, the
Construction Manager shall be paid as provided in Subparagraph
10.2.3.
10.3 NOTICE OF TERMINATION
10.3.1 The party seeking termination shall give the other party seven days'
written notice.
10.4 SUSPENSION
The Work may be suspended by the Owner as provided in Article 14 of AIA
Document A201; in such case, the associated increase in costs shall become
part of the Cost of Work, and the Construction Manager's Fee shall be
adjusted in accordance with Paragraph 5.1.
14
<PAGE>
ARTICLE 11
----------
OTHER CONDITIONS AND SERVICES
11.1 CONFIDENTIAL AND PROPRIETARY INFORMATION
Construction Manager acknowledges that in connection with the performance of
the services and Work hereunder, Owner may disclose to Construction Manager
certain confidential and proprietary business information. Construction
Manager agrees to hold in confidence and not to disclose (1) internally, to
any affiliate or business group not directly involved in the performance,
management, or oversight of the Work hereunder, and (2) externally, to any
person or entity, any proprietary business information disclosed to it by
Owner. Proprietary business information shall include financial and
operations information, business and manufacturing systems or procedures and
any other material designated as "confidential" by Owner. Construction
Manager shall take all steps necessary to assure adherence to the provisions
of this paragraph 11.1 by its employees, officers and directors.
Confidential information shall not include (1) information that was in the
public domain prior to the effective date of this Agreement or prior to
disclosure; (2) information which becomes part of the public domain by
publication or otherwise, but not due to any unauthorized act or omission of the
receiving party hereunder; (3) information within the prior knowledge of the
receiving party; or (4) information received from a third party under no
obligation of confidentiality with respect thereto.
11.2 LIMITATION OF LIABILITY
Construction Manager's liability to Owner for consequential, incidental, special
or indirect damages, including, without limitation, loss of use of the Project
or Owner's existing property, loss of profits, interest, product or business
interruption, increased cost of operations and maintenance, or staffing needs
shall not exceed the sum of Five Million Dollars ($5,000,000.00).
This Agreement entered into as of the day and year first written above.
LIFECORE BIOMEDICAL, INC. MARSHALL CONTRACTORS, INC.
By: /S/ DENNIS J. ALLINGHAM By: /S/ THOMAS BRADY
------------------------------- ------------------------------
VICE PRESIDENT & CFO
Date: 7/2/97 Date: JUNE 16, 1997
----------------------------- -----------------------------
ATTEST: /S/ ROBERT D. MCCOLLOUGH ATTEST: /S/ M.L. PHILLIPS
--------------------------- ---------------------------
/S/ RAM
---------------------------
RAM
15
<PAGE>
- -------------------------------------------------------------------------------
AIA DOCUMENT A201
GENERAL CONDITIONS OF THE CONTRACT
FOR CONSTRUCTION
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION
WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS MODIFICATION
- -------------------------------------------------------------------------------
1987 EDITION
TABLE OF ARTICLES
1 GENERAL PROVISIONS 8 TIME
2 OWNER 9 PAYMENTS AND COMPLETION
3 CONTRACTOR 10 PROTECTION OF PERSONS AND
PROPERTY
4 ADMINISTRATION OF THE
CONTRACT 11 INSURANCE AND BONDS
5 SUBCONTRACTORS 12 UNCOVERING AND
CORRECTION OF WORK
6 CONSTRUCTION BY OWNER OR
BY SEPARATE CONTRACTORS 13 MISCELLANEOUS PROVISIONS
7 CHANGES IN THE WORK 14 TERMINATION OR SUSPENSION
OF THE CONTRACT
EXHIBIT A
<PAGE>
GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION
ARTICLE 1
GENERAL PROVISIONS
1.1 BASIC DEFINITIONS
1.1.1 THE CONTRACT DOCUMENTS. The Contract Documents consist of the
Agreement between Owner and Contractor (hereinafter the Agreement), Conditions
of the Contract (General, Supplementary and other Conditions), Drawings,
Specifications, addenda issued prior to execution of the Contract, other
documents listed in the Agreement and Modifications issued after execution of
the Contract. A Modification is (1) a written amendment to the Contract signed
by both parties, (2) a Change Order, (2) a Construction Change Directive or (4)
a written order for a minor change in the Work issued by the Architect. Unless
specifically enumerated in the Agreement, the Contract Documents do not include
other documents such as bidding requirements (advertisement or invitation to
bid, Instructions to Bidders, sample forms, the Contractor's bid or portions of
addenda relating to bidding requirements).
1.1.2 THE CONTRACT. The Contract Documents form the Contract for
Construction. The Contract represents the entire and integrated agreement
between the parties hereto and supersedes prior negotiations, representations or
agreements, either written or oral. The Contract may be amended or modified only
by a Modification. The Contract Documents shall not be construed to create a
contractual relationship of any kind (1) between the Architect and Contractor,
(2) between the Owner and a Subcontractor or Sub-subcontractor or (3) between
any persons or entities other than the Owner and Contractor. The Architect
shall, however, be entitled to performance and enforcement of obligations under
the Contract intended to facilitate performance of the Architect's duties.
1.1.3 THE WORK. The term "Work" means the construction and services required
by the Contract Documents, and reasonably inferable therefrom as necessary to
produce the intended results, whether completed or partially completed, and
includes all other labor, materials, equipment and services provided, or to be
provided by the Contractor to fulfill the Contractor's obligations. The Work
may constitute the whole or a part of the Project.
1.1.4 THE PROJECT. The Project is the construction of which the Work
performed under the Contract Documents may be the whole or a part and which may
include construction by the Owner or by separate contractors.
1.1.5 THE DRAWINGS. The Drawings are the graphic and pictorial portions of
the Contract Documents, wherever located and whenever issued, showing the
design, location and dimensions of the Work, generally including plans,
elevations, sections, details, schedules and diagrams.
1.1.6 THE SPECIFICATIONS. The Specifications are that portion of the
Contract Documents consisting of the written requirements for materials,
equipment, construction systems, standards and workmanship for the Work, and
performance of related services.
1.1.7 THE PROJECT MANUAL. The Project Manual is the volume usually
assembled for the Work which may include the bidding requirements, sample forms,
Conditions of the Contract and Specifications.
1.2 EXECUTION, CORRELATION AND INTENT
1
<PAGE>
1.2.1 The Contract Documents shall be signed by the Owner and Contractor as
provided in the Agreement. If either the Owner or Contractor or both do not
sign all the Contract Documents, the Architect shall identify such unsigned
Documents upon request.
1.2.2 Execution of the Contract by the Contractor is a representation that
the Contractor has visited the site, become familiar with local conditions under
which the Work is to be performed and correlated personal observations with
requirements of the Contract Documents.
1.2.3 The intent of the Contract Documents is to include all items necessary
for the proper execution and completion of the Work by the Contractor. The
Contract Documents are complementary, and what is required by one shall be as
binding as if required by all; performance by the Contractor shall be required
only to the extent consistent with the Contract Documents and reasonably
inferable from them as being necessary to produce the intended results.
1.2.4 Organization of the Specifications into divisions, sections and
articles, and arrangement of Drawings shall not control the Contractor in
dividing the Work among Subcontractors or in establishing the extent of Work to
be performed by any trade.
1.2.5 Unless otherwise stated in the Contract Documents, words which have
well-known technical or construction industry meanings are used in the Contract
Documents in accordance with such recognized meanings.
1.3 OWNERSHIP AND USE OF ARCHITECT'S DRAWINGS, SPECIFICATIONS AND OTHER
DOCUMENTS.
1.3.1 The Drawings, Specifications and other documents prepared or
provided by the Architect shall be the property of the Owner. The Contractor
may retain one contract record set. Neither the Contractor nor any
Subcontractor, Sub-subcontractor or material or equipment supplier shall own
or claim a copyright in the Drawing, Specifications and other documents
prepared by the Architect, and the Owner shall retain all common law,
statutory and other reserved rights, in addition to the copyright. All
copies of them, except the Contractor's record set, shall be returned or
suitably accounted for to the Owner, on request, upon completion of the Work.
The Drawings, Specifications and other documents prepared by the Architect,
and copies thereof furnished to the Contractor, are for use solely with
respect to this Project. They are not to be used by the Contractor or any
Subcontractor or Sub-contractor or material or equipment supplier on other
projects or for additions to this Project outside the scope of the Work
without the specific written consent of the Owner. The Contractor,
Subcontractors, Sub-subcontractors and material or equipment suppliers are
granted a limited license to use and reproduce applicable portions of the
Drawing, Specifications and other documents prepared by the Architect
appropriate to and for use in the execution of their Work under the Contract
Documents. All copies made under this license shall bear the statutory
copyright notice, if any, shown on the Drawings, Specifications and other
documents prepared by the Architect. Submittal or distribution to meet
official regulatory requirements or for other purposes in connection with
this Project is not to be construed as publication in derogation of the
Owner's copyright or other reserved rights.
1.4 CAPITALIZATION
1.4.1 Terms capitalized in these General Conditions include those which are
(1) specifically defined, (2) the titles of numbered articles and identified
references to Paragraphs, Subparagraphs and Clauses in the document or (3) the
titles of other documents published by the American Institute of Architects.
2
<PAGE>
1.5 INTERPRETATION
1.5.1 In the interest of brevity the Contract Documents frequently omit
modifying words such as "all" and "any" and articles such as "the" and "an,"
but the fact that a modifier or an article is absent from one statement and
appears in another is not intended to affect the interpretation of either
statement.
ARTICLE 2
OWNER
2.1 DEFINITION
2.1.1 The Owner is the person or entity identified as such in the Agreement
and is referred to throughout the Contract Documents as if singular in number.
The term "Owner" means the Owner or the Owner's authorized representative.
2.1.2 The Owner upon reasonable written request shall furnish to the
Contractor in writing information which is necessary and relevant for the
Contractor to evaluate, give notice of or enforce mechanic's lien rights. Such
information shall include a correct statement of the record legal title to the
property on which the Project is located, usually referred to as the site, and
the Owner's interest therein at the time of execution of the Agreement and,
within five days after any change, information of such change in title, recorded
or unrecorded.
2.2 INFORMATION AND SERVICES REQUIRED OF THE OWNER
2.2.1 The Owner shall, at the request of the Contractor, prior to execution
of the Agreement, furnish to the Contractor reasonable evidence that financial
arrangements have been made to fulfill the Owner's obligations under the
Contract.
2.2.2 The Owner shall furnish surveys describing physical characteristics,
legal limitations and utility locations for the site of the Project, and a legal
description of the site.
2.2.3 Except for permits and fees which are the responsibility of the
Contractor under the Contract Documents, the Owner shall secure and pay for
necessary approvals, easements, assessments and charges required for
construction, use or occupancy of permanent structures or for permanent changes
in existing facilities.
2.2.4 Information or services under the Owner's control shall be furnished
by the Owner with reasonable promptness to avoid delay in orderly progress of
the Work.
2.2.5 Unless otherwise provided in the Contract Documents, the Contractor
will be furnished, free of charge, such copies of Drawings and Project Manuals
as are reasonably necessary for execution of the Work.
2.2.6 The foregoing are in addition to other duties and responsibilities of
the Owner enumerated herein and especially those in respect to Article 6
(Construction by Owner or by Separate Contractors), Article 9 (Payments and
Completion) and Article 11 (Insurance and Bonds).
2.3 OWNER'S RIGHT TO STOP THE WORK
3
<PAGE>
2.3.1 If the Contractor fails to correct Work which is not in accordance
with the requirements of the Contract Documents as required by Paragraph 12.2 or
persistently fails to carry out Work in accordance with the Contract Documents,
the Owner, by written order signed personally or by an agent specifically so
empowered by the Owner in writing, may order the Contractor to stop the Work, or
any portion thereof, until the cause for such order has been eliminated;
however, the right of the Owner to stop the Work shall not give rise to a duty
on the part of the Owner to exercise this right for the benefit of the
Contractor or any other person or entity, except to the extent required by
Subparagraph 6.1.3.
2.4 OWNER'S RIGHT TO CARRY OUT THE WORK
2.4.1 If the Contractor defaults or neglects to carry out the Work in
accordance with the Contract Documents and fails within a seven-day period after
receipt of written notice from the Owner to commence and continue correction of
such default or neglect with diligence and promptness, the Owner may, without
prejudice to other remedies the Owner may have, correct such deficiencies. In
such case an appropriate Change Order shall be issued deducting from payments
then or thereafter due the Contractor the cost of correcting such deficiencies,
including compensation for the Architect's additional services and expenses made
necessary by such default, neglect or failure. Such action by the Owner and
amounts charged to the Contractor are both subject to prior approval of the
Architect. If payments then or thereafter due the Contractor are not sufficient
to cover such amounts, the Contractor shall pay the difference to the Owner.
2.5 EXTENT OF OWNER RIGHTS
2.5.1 The rights stated in this Article 2 and elsewhere in the Contract
Documents are cumulative and not in limitation of any rights of the Owner (1)
granted in the Contract Documents, (2) at law or (3) in equity.
2.5.2 In no event shall the Owner have control over, charge of, or any
responsibility for construction means, methods, techniques, sequences or
procedures or for safety precautions and programs in connection with the Work,
notwithstanding any of the rights and authority granted the Owner in the
Contract Documents.
ARTICLE 3
CONTRACTOR
3.1 DEFINITION
3.1.1 The Contractor is the person or entity identified as such in the
Agreement and is referred to throughout the Contract Documents as if singular in
number. The term "Contractor" means the Contractor or the Contractor's
authorized representative.
3.2 REVIEW OF CONTRACT DOCUMENTS AND FIELD CONDITIONS BY CONTRACTOR
3.2.1 The Contractor shall carefully study and compare the Contract
Documents with each other and with information furnished by the Owner pursuant
to Subparagraph 2.2.2 and shall at once report to the Architect errors,
inconsistencies or omissions discovered. The Contractor shall not be liable to
the Owner or Architect for damage resulting from errors, inconsistencies or
omissions in the Contract Documents unless the Contractor recognized such error,
consistency or omission and knowingly failed to report it to the Architect. If
the Contractor performs any construction activity knowing it involves a
recognized error, inconsistency or omission in the Contract Documents without
such notice to the Architect, the Contractor shall assume
4
<PAGE>
appropriate responsibility for such performance and shall bear an appropriate
amount of the attributable costs for correction.
3.2.2 The Contractor shall take field measurements and verify field
conditions and shall carefully compare such field measurements and conditions
and other information known to the Contractor with the Contract Documents before
commencing activities. Errors, inconsistencies or omissions discovered shall be
reported to the Architect at once.
3.2.3 The Contractor shall perform the Work in accordance with the Contract
Documents and submittals approved pursuant to Paragraph 3.12.
3.3 SUPERVISION AND CONSTRUCTION PROCEDURES
3.3.1 The Contractor shall supervise and direct the Work, using the
Contractor's best skill and attention. The Contractor shall be solely
responsible for and have control over construction means, methods, techniques,
sequences and procedures and for coordinating all portions of the Work under the
Contract, unless Contract Documents give other specific instructions concerning
these matters.
3.3.2 The Contractor shall be responsible to the Owner for acts and
omissions of the Contractor's employees, Subcontractors and their agents and
employees, and any entity or other persons performing portions of the Work.
3.3.3 The Contractor shall not be relieved of obligations to perform the
Work in accordance with the Contract Documents either by activities or duties of
the Architect in the Architect's administration of the Contract, or by tests,
inspections or approvals required or performed by persons other than the
Contractor.
3.3.4 The Contractor shall be responsible for inspection of portions of Work
already performed under this Contract to determine that such portions are in
proper condition to receive subsequent Work.
3.4 LABOR AND MATERIALS
3.4.1 Unless otherwise provided in the Contract Documents, the Contractor
shall provide and pay for labor, materials, equipment, tools, construction
equipment and machinery, water, heat, utilities, transportation, and other
facilities and services necessary for proper execution and completion of the
Work, whether temporary or permanent and whether or not incorporated or to be
incorporated in the Work.
3.4.2 The Contractor shall enforce strict discipline and good order among
the Contractor's employees and other persons carrying out the Contract. The
Contractor shall not permit employment of unfit persons not skilled in tasks
assigned to them.
3.5 WARRANTY
3.5.1 The Contractor warrants to the Owner and Architect that materials and
equipment furnished under the Contract will be of good quality and new unless
otherwise required or permitted by the Contract Documents, that the Work will be
free from defects not inherent in the quality required or permitted, and that
the Work will conform with the requirements of the Contract Documents. Work not
conforming to these requirements, including substitutions not properly approved
and authorized, may be considered defective. The Contractor's warranty excludes
remedy for damage or defect caused by abuse, modifications not executed by the
5
<PAGE>
Contractor, improper or insufficient maintenance, improper operation, or normal
wear and tear under normal usage. If required by the Architect, the Contractor
shall furnish satisfactory evidence as to the kind and quality of material and
equipment.
3.5.2 The Contractor agrees to assign to the Owner at the time of final
completion of the Work, any and all manufacturer's warranties relating to
materials and labor used in the Work and further agrees to perform the Work in
such manner so as to preserve any and all such manufacturer's warranties.
3.6 TAXES
3.6.1 The Contractor shall pay sales, consumer, use and similar taxes for
the Work or portions thereof provided by the Contractor which are legally
enacted when bids are received or negotiations concluded, whether or not yet
effective or merely scheduled to go into effect.
3.7 PERMITS, FEES AND NOTICES
3.7.1 Unless otherwise provided in the Contract Documents, the Contractor
shall secure and pay for the building permit and other permits and governmental
fees, licenses and inspections necessary for proper execution and completion of
the Work which are customarily secured after execution of the Contract and which
are legally required when bids are received or negotiations concluded.
3.7.2 The Contractor shall comply with and give notices required by laws,
ordinances, rules, regulations and lawful orders of public authorities bearing
on performance of the Work.
3.7.3 It is not the Contractor's responsibility to ascertain that the
Contract Documents are in accordance with applicable laws, statutes, ordinances,
building codes, and rules and regulations. However, if the Contractor observes
that portions of the Contract Documents are at variance therewith, the
Contractor shall promptly notify the Architect and Owner in writing, and
necessary changes shall be accomplished by appropriate Modification.
3.7.4 If the Contractor performs Work knowing it to be contrary to laws,
statutes, ordinances, building codes, and rules and regulations without such
notice to the Architect and Owner, the Contractor shall assume full
responsibility for such Work and shall bear the attributable costs.
3.8 ALLOWANCES
3.8.1 The Contractor shall include in the Contract Sum all allowances stated
in the Contract Documents. Items covered by allowances shall be supplied for
such amounts and by such persons or entities as the Owner may direct, but the
Contractor shall not be required to employ persons or entities against which the
Contractor makes reasonable objection.
3.8.2 Unless otherwise provided in the Contract Documents:
.1 materials and equipment under an allowance shall be selected
promptly by the Owner to avoid delay in the Work;
.2 allowances shall cover the cost to the Contractor of materials
and equipment delivered at the site and all required taxes,
less applicable trade discounts;
6
<PAGE>
.3 Contractor's costs for unloading and handling at the site,
labor, installation costs, overhead, profit and other expenses
contemplated for stated allowance amounts shall be included in
the Contract Sum and not in the allowances;
.4 whenever costs are more than or less than allowances, the
Contract Sum shall be adjusted accordingly by Change Order.
The amount of the Change Order shall reflect (1) the difference
between actual costs and the allowances under Clause 3.8.2.2
and (2) changes in Contractor's costs under Clause 3.8.2.3.
3.9 SUPERINTENDENT
3.9.1 The Contractor shall employ a competent superintendent and necessary
assistants who shall be in attendance at the Project site during performance of
the Work. The superintendent shall represent the Contractor, and communications
given to the superintendent shall be as binding as if given to the Contractor.
Important communications shall be confirmed in writing. Other communications
shall be similarly confirmed on written request in each case.
3.10 CONTRACTOR'S CONSTRUCTION SCHEDULES
3.10.1 The Contractor, promptly after being awarded the Contract, shall
prepare and submit for the Owner's and Architect's information a Contractor's
construction schedule for the Work. The schedule shall not exceed time limits
current under the Contract Documents, shall be revised at appropriate intervals
as required by the conditions of the Work and Project, shall be related to the
entire Project to the extent required by the Contract Documents, and shall
provide for expeditious and practicable execution of the Work.
3.10.2 The Contractor shall prepare and keep current, for the Architect's
approval, a schedule of submittals which is coordinated with the Contractor's
construction schedule and allows the Architect reasonable time to review
submittals.
3.10.3 The Contractor shall conform to the most recent schedules.
3.11 DOCUMENTS AND SAMPLES AT THE SITE
3.11.1 The Contractor shall maintain at the site for the Owner one record
copy of the Drawings, Specifications, addenda, Change Orders and other
Modifications, in good order and marked currently to record changes and
selections made during construction, and in addition approved Shop Drawings,
Product Data, Samples and similar required submittals. These shall be available
to the Architect and shall be delivered to the Architect for submittal to the
Owner upon completion of the Work.
3.12 SHOP DRAWINGS, PRODUCT DATA AND SAMPLES
3.12.1 Shop Drawings are drawings, diagrams, schedules and other data
specially prepared for the Work by the Contractor or a Subcontractor,
Sub-subcontractor, manufacturer, supplier or distributor to illustrate some
portion of the Work.
3.12.2 Product Data are illustrations, standard schedules, performance
charts, instructions, brochures, diagrams and other information furnished by the
Contractor to illustrate materials or equipment for some portion of the
Work.
7
<PAGE>
3.12.3 Samples are physical examples which illustrate materials,
equipment or workmanship and establish standards by which the Work will be
judged.
3.12.4 Shop Drawings, Product Data, Samples and similar submittals are not
Contract Documents. The purpose of their submittal is to demonstrate for those
portions of the Work for which submittals are required the way the Contractor
proposes to conform to the information given and the design concept expressed in
the Contract Documents. Review by the Architect is subject to the limitations
of Subparagraph 4.2.7.
3.12.5 The Contractor shall review, approve and submit to the Architect Shop
Drawings, Product Data, Samples and similar submittals required by the Contract
Documents with reasonable promptness and in such sequence as to cause no delay
in the Work or in the activities of the Owner or of separate contractors.
Submittals made by the Contractor which are not required by the Contract
Documents may be returned without action.
3.12.6 The Contractor shall perform no portion of the Work requiring
submittal and review of Shop Drawings, Product Data, Samples or similar
submittals until the respective submittal has been approved by the Architect.
Such Work shall be in accordance with approved submittals.
3.12.7 By approving and submitting Shop Drawings, Product Data, Samples and
similar submittals, the Contractor represents that the Contractor has determined
and verified materials, field measurements and field construction criteria
related thereto, or will do so, and has checked and coordinated the information
contained within such submittals with the requirements of the Work and of the
Contract Documents.
3.12.8 The Contractor shall not be relieved of responsibility for deviations
from requirements of the Contract Documents by the Architect's approval of Shop
Drawings, Product Data, Samples or similar submittals unless the Contractor has
specifically informed the Architect in writing of such deviation at the time of
submittal and the Architect has given written approval to the specific
deviation. The Contractor shall not be relieved of responsibility for errors or
omissions in Shop Drawings, Product Data, Samples or similar submittals by the
Architect's approval thereof.
3.12.9 The Contractor shall direct specific attention, in writing or on
resubmitted Shop Drawings, Product Data, Samples or similar submittals, to
revisions other than those requested by the Architect on previous submittals.
3.12.10 Informational submittals upon which the Architect is not expected to
take responsive action may be so identified in the Contract Documents.
3.12.11 When professional certification of performance criteria of materials,
systems or equipment is required by the Contract Documents, the Architect shall
be entitled to rely upon the accuracy and completeness of such calculations and
certifications.
3.13 USE OF SITE
3.13.1 The Contractor shall confine operations at the site to areas permitted
by law, ordinances, permits and the Contract Documents and shall not
unreasonably encumber the site with materials or equipment.
3.14 CUTTING AND PATCHING
8
<PAGE>
3.14.1 The Contractor shall be responsible for the cutting, fitting or
patching required to complete the Work or to make its parts fit together
properly.
3.14.2 The Contractor shall not damage or endanger a portion of the Work or
fully or partially completed construction of the Owner or separate contractors
by cutting, patching, or otherwise altering such construction or by excavation.
The Contractor shall not cut or otherwise alter such construction by the Owner
or a separate Contractor except with written consent of the Owner and of such
separate contractor; such consent shall not be unreasonably withheld. The
Contractor shall not unreasonably withhold from the Owner or a separate
contractor the Contractor's consent to cutting or otherwise altering the Work.
3.15 CLEANING UP
3.15.1 The Contractor shall keep the premises and surrounding area free from
accumulation of waste materials or rubbish caused by operations under the
Contract. At completion of the Work the Contractor shall remove from and about
the Project waste materials, rubbish, the Contractor's tools, construction
equipment, machinery and surplus materials.
3.15.2 If the Contractor fails to clean up as provided in the Contract
Documents, the Owner may do so and the cost thereof shall be charged to the
Contractor.
3.16 ACCESS TO WORK
3.16.1 The Contractor shall provide the Owner and Architect access to the
Work in preparation and progress wherever located.
3.17 ROYALTIES AND PATENTS
3.17.1 The Contractor shall pay all royalties and license fees. The
Contractor shall defend suits or claims for infringement of patent rights and
shall hold the Owner and Architect harmless from loss on account thereof, but
shall not be responsible for such defense or loss when a particular design,
process or product of a particular manufacturer or manufacturers is required by
the Contract Documents. However, if the Contractor has reason to believe that
the required design, process or product is an infringement of a patent, the
Contractor shall be responsible for such loss unless such information is
promptly furnished to the Architect
3.18 INDEMNIFICATION
3.18.1 To the fullest extent permitted by law, the Contractor shall indemnify
and hold harmless the Owner, Architect, Architect's consultants, and agents and
employees of any of them from and against claims, damages, losses and expenses,
including but not limited to attorneys' fees, arising out of or resulting from
performance of the Work, provided that such claim, damage, loss or expense is
attributable to bodily injury, sickness, disease or death, or to injury to or
destruction of tangible property (other than the Work itself) including loss of
use resulting therefrom, caused in whole or in part by negligent acts or
omissions of the Contractor, a Subcontractor, anyone directly or indirectly
employed by them or anyone for whose acts they may be liable, regardless of
whether or not such claim, damage, loss or expense is caused in part by a party
indemnified hereunder. Such obligation shall not be construed to negate,
abridge, or reduce other rights or obligations of indemnity which would
otherwise exist as to a party or person described in this Paragraph 3.18.
9
<PAGE>
3.18.2 In claims against any person or entity indemnified under this
Paragraph 3.18 by an employee of the Contractor, a Subcontractor, anyone
directly or indirectly employed by them or anyone for whose acts they may be
liable, the indemnification obligation under this Paragraph 3.18 shall not be
limited by a limitation on amount or type of damages, compensation or benefits
payable by or for the Contractor or a Subcontractor under workers' compensation
acts, disability benefit acts or other employee benefit acts.
3.18.3 Contractor shall procure, maintain and pay for such general liability,
contractual liability and employer's liability insurances (including
endorsements) as will insure the provisions of this Paragraph 3.18 and any other
contractual indemnities assumed by Contractor in the Contract Documents, to the
fullest extent insurable, but not less than the coverages and limits specified
in Article 8 of the Agreement.
ARTICLE 4
ADMINISTRATION OF THE CONTRACT
4.1 ARCHITECT
4.1.1 The Architect is the person lawfully licensed to practice architecture
or an entity lawfully practicing architecture identified as such in the
Agreement and is referred to throughout the Contract Documents as if singular in
number. The term "Architect" means the Architect or the Architect's authorized
representative.
4.1.2 Duties, responsibilities and limitations of authority of the Architect
as set forth in the Contract Documents shall not be restricted, modified or
extended without written consent of the Owner, Contractor and Architect.
Consent shall not be unreasonably withheld.
4.1.3 In case of termination of employment of the Architect, the Owner shall
appoint an architect against whom the Contractor makes no reasonable objection
and whose status under the Contract Documents shall be that of the former
architect.
4.1.4 Disputes arising under Subparagraphs 4.1.2 and 4.1.3 shall be subject
to arbitration.
4.2 ARCHITECT'S ADMINISTRATION OF THE CONTRACT
4.2.1 The Architect will provide administration of the Contract as described
in the Contract Documents, and will be the Owner's representative (1) during
construction, (2) until final payment is due and (3) with the Owner's
concurrence, from time to time during the correction period described in
Paragraph 12.2. The Architect will advise and consult with the Owner. The
Architect will have authority to act on behalf of the Owner only to the extent
provided in the Contract Documents, unless otherwise modified by written
instrument in accordance with other provisions of the Contract.
4.2.2 The Architect will visit the site at intervals appropriate to the
stage of construction to become generally familiar with the progress and quality
of the completed Work and to determine in general if the Work is being performed
in a manner indicating that the Work, when completed, will be in accordance with
the Contract Documents. However, the Architect will not be required to make
exhaustive or continuous on-site inspections to check quality or quantity of the
Work. On the basis of on-site observations as an architect, the Architect will
keep the Owner informed of progress of the Work, and will endeavor to guard the
Owner against defects and deficiencies in the Work.
10
<PAGE>
4.2.3 The Architect will not have control over or charge of and will not be
responsible for construction means, methods, techniques, sequences or
procedures, or for safety precautions and programs in connection with the Work,
since these are solely the Contractor's responsibility as provided in Paragraph
3.3. The Architect will not be responsible for the Contractor's failure to
carry out the Work in accordance with the Contract Documents. The Architect
will not have control over or charge of and will not be responsible for acts or
omissions of the Contractor, Subcontractors, or their agents or employees, or of
any other persons performing portions of the Work.
4.2.4 Communications Facilitating Contract Administration. Except as
otherwise provided in the Contract Documents or when direct communications have
been specially authorized, the Owner and Contractor shall endeavor to
communicate through the Architect. Communications by and with the Architect's
consultants shall be through the Architect. Communications by and with
Subcontractors and material suppliers shall be through the Contractor.
Communications by and with separate contractors shall be through the Owner.
4.2.5 Based on the Architect's observations and evaluations of the
Contractor's Applications for Payment, the Architect will review and certify the
amounts due the Contractor and will issue Certificates for Payment in such
amounts.
4.2.6 The Architect will have authority to reject Work which does not
conform to the Contract Documents. Whenever the Architect considers it
necessary or advisable for implementation of the intent of the Contract
Documents, the Architect will have authority to require additional inspection or
testing of the Work in accordance with Subparagraphs 13.5.2 and 13.5.3, whether
or not such Work is fabricated, installed or completed. However, neither this
authority of the Architect nor a decision made in good faith either to exercise
or not to exercise such authority shall give rise to a duty or responsibility of
the Architect to the Contractor, Subcontractors, material and equipment
suppliers, their agents or employees, or other persons performing portions of
the Work.
4.2.7 The Architect will review and approve or take other appropriate action
upon the Contractor's submittals such as Shop Drawings, Product Data and
Samples, but only for the limited purpose of checking for conformance with
information given and the design concept expressed in the Contract Documents.
The Architect's action will be taken with such reasonable promptness as to cause
no delay in the Work or in the activities of the Owner, Contractor or separate
contractors. Review of such submittals is not conducted for the purpose of
determining the accuracy and completeness of other details such as dimensions
and quantities, or for substantiating instructions for installation or
performance of equipment or systems, all of which remain the responsibility of
the Contractor as required by the Contract Documents. The Architect's review of
the Contractor's submittals shall not relieve the Contractor of the obligations
under Paragraphs 3.3, 3.5, and 3.12. The Architect's review shall not
constitute approval of safety precautions or, unless otherwise specifically
stated by the Architect, of any construction means, methods, techniques,
sequences or procedures. The Architect's approval of a specific item shall not
indicate approval of an assembly of which the item is a component.
4.2.8 The Architect will prepare Change Orders and Construction Change
Directives, and may authorize minor changes in the Work as provided in Paragraph
7.4.
4.2.9 The Architect will conduct inspections to determine the date or dates
of Substantial Completion and the date of final completion, will receive and
forward to the Owner for the Owner's review and records written warranties and
related documents required by the Contract and assembled by the Contractor, and
will issue a final Certificate for Payment upon compliance with the requirements
of the Contract Documents.
11
<PAGE>
4.2.10 If the Owner and Architect agree, the Architect will provide one or
more project representatives to assist in carrying out the Architect's
responsibilities at the site. The duties, responsibilities and limitations
of Authority of such project representatives shall be as set forth in an
exhibit to be incorporated in the Contract Documents.
4.2.11 The Architect will interpret and decide matters concerning performance
under and requirements of the Contract Documents on written request of either
the Owner or Contractor. The Architect's response to such requests will be made
with reasonable promptness and within any time limits agreed upon. If no
agreement is made concerning the time within which interpretations required of
the Architect shall be furnished in compliance with this Paragraph 4.2, then
delay shall not be recognized on account of failure by the Architect to furnish
such interpretations until 15 days after written request is made for them.
4.2.12 Interpretations and decisions of the Architect will be consistent with
the intent of and reasonably inferable from the Contract Documents and will be
in writing or in the form of drawings. When making such interpretations and
decisions, the Architect will endeavor to secure faithful performance by both
Owner and Contractor will not show partiality to either and will not be liable
for results of interpretations or decisions so rendered in good faith.
4.2.13 The Architect's decisions on matters relating to aesthetic effect will
be final if consistent with the intent expressed in the Contract Documents.
4.3 CLAIMS AND DISPUTES
4.3.1 Definition. A Claim is a demand or assertion by one of the parties
seeking, as a matter of right, adjustment or interpretation of Contract terms,
payment of money, extension of time or other relief with respect to the terms of
the Contract. The term "Claim" also includes other disputes and matters in
question between the Owner and Contractor arising out of or relating to the
Contract. Claims must be made by written notice. The responsibility to
substantiate Claims shall rest with the party making the Claim.
4.3.2 DECISION OF ARCHITECT. Claims, including those alleging an error or
omission by the Architect, shall be referred initially to the Architect for
action as provided in Paragraph 4.4. A decision by the Architect, as provided
in Subparagraph 4.4., shall be required as a condition precedent to arbitration
or litigation of a Claim between the Contractor and Owner as to all such matters
arising prior to the date final payment is due, regardless of (1) whether such
matters relate to execution and progress of the Work or (2) the extent to which
the Work has been completed. The decision by the Architect in response to a
Claim shall not be a condition precedent to arbitration or litigation in the
event (1) the position of Architect is vacant, (2) the Architect has not
received evidence or has failed to render a decision within agreed time limits,
(3) the Architect has failed to take action required under Subparagraph 4.4.4
within 30 days after the Claim is made, (4) 45 days have passed after the Claim
has been referred to the Architect or (5) the Claim relates to a mechanic's
lien.
4.3.3 TIME LIMITS ON CLAIMS. Claims by either party must be made within 21
days after occurrence of the event giving rise to such Claim or within 21 days
after the claimant first recognizes the condition giving rise to the Claim,
whichever is later. Claims must be made by written notice. An additional Claim
made after the initial Claim has been implemented by Change Order will not be
considered unless submitted in a timely manner.
12
<PAGE>
4.3.4 CONTINUING CONTRACT PERFORMANCE. Pending final resolution of a Claim
including arbitration, unless otherwise agreed in writing the Contractor shall
proceed diligently with performance of the Contract and the Owner shall continue
to make payments in accordance with the Contract Documents.
4.3.5 WAIVER OF CLAIMS: FINAL PAYMENT. The making of final payment shall
constitute a waiver of Claims by the Owner except those arising from:
.1 liens, Claims, security interests or encumbrances arising out
of the Contract and unsettled;
.2 failure of the Work to comply with the requirements of the
Contract Documents; or
.3 terms of special warranties required by the Contract Documents.
4.3.6 CLAIMS FOR CONCEALED OR UNKNOWN CONDITIONS. If conditions are
encountered at the site which are (1) subsurface or otherwise concealed physical
conditions which differ materially from those indicated in the Contract
Documents or (2) unknown physical conditions of an unusual nature, which differ
materially from those ordinarily found to exist and generally recognized as
inherent in construction activities of the character provided for in the
Contract Documents, then notice by the observing party shall be given to the
other party promptly before conditions are disturbed and in no event later than
21 days after first observance of the conditions. The Architect will promptly
investigate such conditions and, if they differ materially and cause an increase
or decrease in the Contractor's cost of, or time required for, performance of
any part of the Work, will recommend an equitable adjustment in the Contract Sum
or Contract Time, or both. If the Architect determines that the conditions at
the site are not materially different from those indicated in the Contract
Documents and that no change in the terms of the Contract is justified, the
Architect shall so notify the Owner and Contractor in writing, stating the
reasons. If the Owner and Contractor cannot agree on an adjustment in the
Contract Sum or Contract Time, the adjustment shall be referred to the Architect
for initial determination, subject to further proceedings pursuant to Paragraph
4.4.
4.3.7 CLAIMS FOR ADDITIONAL COST. If the Contractor wishes to make Claim
for an increase in the Contract Sum, written notice as provided herein shall be
given before proceeding to execute the Work. Prior notice is not required for
Claims relating to an emergency endangering life or property arising under
Paragraph 10.3. If the Contractor believes additional cost is involved for
reasons including but not limited to (1) a written interpretation from the
Architect, (2) an order by the Owner to stop the Work where the Contractor was
not at fault, (3) a written order for a minor change in the Work issued by the
Architect, (4) failure of payment by the Owner, (5) termination of the Contract
by the Owner, (6) Owner's suspension or (7) other reasonable grounds, Claim
shall be filed in accordance with the procedures established herein.
4.3.8 CLAIMS FOR ADDITIONAL TIME
4.3.8.1 If the Contractor wishes to make Claim for an increase in the Contract
Time, written notice as provided herein shall be given. The Contractor's Claim
shall include an estimate of cost and of probable effect of delay on progress of
the Work. In the case of a continuing delay only one Claim is necessary.
4.3.8.2 If adverse weather conditions are the basis for a Claim for additional
time, such Claim shall be documented by data substantiating that weather
conditions were abnormal for the period of time and could not have been
reasonably anticipated, and that weather conditions had an adverse effect on the
scheduled construction.
13
<PAGE>
4.3.9 INJURY OR DAMAGE TO PERSON OR PROPERTY. If either party to the
Contract suffers injury or damage to person or property because of an act or
omission of the other party, or any of the other party's employees or agents,
or of others for whose acts such party is legally liable, written notice of
such injury or damage, whether or not insured, shall be given to the other
party within a reasonable time not exceeding 21 days after first observance.
The notice shall provide sufficient detail to enable the other party to
investigate the matter. If a Claim for additional cost or time related to
this Claim is to be asserted, it shall be filed as provided in Subparagraphs
4.3.7 or 4.3.8.
4.4 RESOLUTION OF CLAIMS AND DISPUTES
4.4.1 The Architect will review Claims and take one or more of the following
preliminary actions within ten days of receipt of a Claim: (I) request
additional supporting data from the claimant, (2) submit a schedule to the
parties indicating when the Architect expects to take action, (3) reject the
Claim in whole or in part, stating reasons for rejection, (4) recommend approval
of the Claim by the other party or (5) suggest a compromise. The Architect may
also, but is not obligated to, notify the surety, if any, of the nature and
amount of the Claim.
4.4.2 If a Claim has been resolved, the Architect will prepare or obtain
appropriate documentation.
4.4.3 If a Claim has not been resolved, the party making the Claim shall,
within a reasonable time after receipt of the Architect's preliminary response,
take one or more of the following actions: (1) submit additional supporting data
requested by the Architect, (2) modify the initial Claim or (3) notify the
Architect that the initial Claim stands.
4.4.4 If a Claim has not been resolved after consideration of the
foregoing and of further evidence presented by the parties or requested by
the Architect, the Architect will notify the parties in writing that the
Architect's decision will be made within seven days, which decision shall be
final and binding on the parties but subject to arbitration. Upon expiration
of such time period, the Architect will render to the parties the Architect's
written decision relative to the Claim, including any change in the Contract
Sum or Contract Time or both. If there is a surety and there appears to be a
possibility of a Contractor's default, the Architect may, but is not
obligated to notify the surety and request the surety's assistance in
resolving the controversy.
4.5 ARBITRATION
4.5.1 CONTROVERSIES AND CLAIMS SUBJECT TO ARBITRATION. Any controversy or
Claim arising out of or related to the Contract, or the breach thereof, shall be
settled by arbitration in accordance with the Construction Industry Arbitration
Rules of the American Arbitration Association, and judgment upon the award
rendered by the arbitrator or arbitrators may be entered in any court having
jurisdiction thereof, except controversies or claims relating to aesthetic
effect and except those waived as provided for in Subparagraph 4.3.5. Such
controversies or claims upon which the Architect has given notice and rendered a
decision as provided in Subparagraph 4.4.4 shall be subject to arbitration upon
written demand of either party. Arbitration may be commenced when 45 days have
passed after a claim has been referred to the Architect as provided in Paragraph
4.3 and no decision has been rendered.
4.5.2 RULES AND NOTICES FOR ARBITRATION. Claims between the Owner and
Contractor not resolved under Paragraph 4.4 shall, if subject to arbitration
under Subparagraph 4.5.1, be decided by arbitration in accordance with the
Construction Industry Arbitration Rules of the American Arbitration Association
currently in effect, unless the parties mutually agree otherwise. Notice of
demand for arbitration shall be filed in writing with the
14
<PAGE>
other party to the Agreement between the Owner and Contractor and with the
American Arbitration Association, and a copy shall be filed with the
Architect.
4.5.3 CONTRACT PERFORMANCE DURING ARBITRATION. During arbitration
proceedings, the Owner and Contractor shall comply with Subparagraph 4.3.4.
4.5.4 WHEN ARBITRATION MAY BE DEMANDED. Demand for arbitration of any Claim
may not be made until the earlier of (1) the date on which the Architect has
rendered a final written decision on the Claim, (2) the tenth day after the
parties have presented evidence to the Architect or have been given reasonable
opportunity to do so, if the Architect has not rendered a final written decision
by that date, or (3) any of the five events described in Subparagraph 4.3.2.
4.5.4.1 When a written decision of the Architect states that (1) the decision
is final but subject to arbitration and (2) a demand for arbitration of a Claim
covered by such decision must be made within 30 days after the date on which the
party making the demand receives the final written decision, then failure to
demand arbitration within said 30 days' period shall result in the Architect's
decision becoming final and binding upon the Owner and Contractor. If the
Architect renders a decision after arbitration proceedings have been initiated,
such decision may be entered as evidence, but shall not supersede arbitration
proceedings unless the decision is acceptable to all parties concerned.
4.5.4.2 A demand for arbitration shall be made within the time limits
specified in Subparagraphs 4.5.1 and 4.5.4 in no event shall it be made after
the date when institution of legal or equitable proceedings based on such Claim
would be barred by the applicable statute of limitations as determined pursuant
to Paragraph 13.7.
4.5.5 (INTENTIONALLY OMITTED)
4.5.6 CLAIMS AND TIMELY ASSERTION OF CLAIMS. A party who files a notice of
demand for arbitration must assert in the demand all Claims then known to that
party on which arbitration is permitted to be demanded. When a party fails to
include a Claim through oversight, inadvertence or excusable neglect or when a
Claim has matured or been acquired subsequently, the arbitrator or arbitrators
may permit amendment.
4.5.7 JUDGMENT ON FINAL AWARD. The award rendered by the arbitrator or
arbitrators shall be final, and judgment may be entered upon it in accordance
with applicable law in any court having jurisdiction thereof.
ARTICLE 5
SUBCONTRACTORS
5.1 DEFINITIONS
5.1.1 A Subcontractor is a person or entity who has a direct contract with
the Contractor to perform a portion of the Work at the site. The term
"Subcontractor" is referred to throughout the Contract Documents as if singular
in number and means a Subcontractor or an authorized representative of the
Subcontractor. The term "Subcontractor" does not include a separate contractor
or subcontractors of a separate contractor.
5.1.2 A Sub-subcontractor is a person or entity who has a direct or indirect
contract with a Subcontractor to perform a portion of the Work at the site. The
term "Sub-subcontractor" is referred to throughout the
15
<PAGE>
Contract Documents as if singular in number and means a Sub-subcontractor or
an authorized representative of the Sub-subcontractor.
5.2 AWARD OF SUBCONTRACTS AND OTHER CONTRACTS FOR PORTIONS OF THE WORK
5.2.1 Unless otherwise stated in the Contract Documents or the bidding
requirements, the Contractor, as soon as practicable after award of the
Contract, shall furnish in writing to the Owner through the Architect the names
of persons or entities (including those who are to furnish materials or
equipment fabricated to a special design) proposed for each principal portion of
the Work. The Architect will promptly reply to the Contractor in writing
stating whether or not the Owner or the Architect, after due investigation, has
reasonable objection to any such proposed person or entity. Failure of the Owner
or Architect to reply promptly shall constitute notice of no reasonable
objection.
5.2.2 The Contractor shall not contract with a proposed person or entity to
whom the Owner or Architect has made reasonable and timely objection. The
Contractor shall not be required to contract with anyone to whom the Contractor
has made reasonable objection.
5.2.3 If the Owner or Architect has reasonable objection to a person or
entity proposed by the contractor, the Contractor shall propose another to whom
the Owner or Architect has no reasonable objection. The Contract Sum shall be
increased or decreased by the difference in cost occasioned by such change and
an appropriate Change Order shall be issued. However, no increase in the
Contract Sum shall be allowed for such change unless the Contractor has acted
promptly and responsively in submitting names as required.
5.2.4 The Contractor shall not change a Subcontractor, person or entity
previously selected if the Owner or Architect makes reasonable objection to such
change.
5.3 SUBCONTRACTUAL RELATIONS
5.3.1 By appropriate agreement, written where legally required for validity,
the Contractor shall require each Subcontractor, to the extent of the Work to be
performed by the Subcontractor, to be bound to the Contractor by terms of the
Contract Documents, and to assume toward the Contractor all the obligations and
responsibilities which the Contractor, by these Documents, assumes toward the
Owner and Architect. Each subcontract agreement shall preserve and protect the
rights of the Owner and Architect under the Contract Documents with respect to
the Work to be performed by the Subcontractor so that subcontracting thereof
will not prejudice such rights, remedies, and redress against the Contractor
that the Contractor, by the Contract Documents, has against the Owner. Where
appropriate, the Contractor shall require each Subcontractor to enter into
similar agreements with Sub-subcontractors. The Contractor shall make available
to each proposed Subcontractor, prior to the execution of the subcontract
agreement, copies of the Contract Documents to which the Subcontractor will be
bound, and, upon written request of the Subcontractor, identify to the
Subcontractor terms and conditions of the proposed subcontract agreement which
may be at variance with the Contract Documents. Subcontractors shall similarly
make copies of applicable portions of such documents available to their
respective proposed Sub-subcontractors.
5.4 SUSPENSION OF WORK
5.4.1 If the Work has been suspended for more than 30 days, the
Subcontractor's compensation shall be equitably adjusted.
16
<PAGE>
ARTICLE 6
CONSTRUCTION BY OWNER OR BY SEPARATE CONTRACTORS
6.1 OWNER'S RIGHT TO PERFORM CONSTRUCTION AND TO AWARD SEPARATE CONTRACTS
6.1.1 The Owner reserves the right to perform construction or operations
related to the Project with the Owner's own forces, and to award separate
contracts in connection with other portions of the Project or other construction
or operations on the site under Conditions of the Contract identical or
substantially similar to these including those portions related to insurance and
waiver of subrogation. If the Contractor claims that delay or additional cost
is involved because of such action by the Owner, the Contractor shall make such
Claim as provided elsewhere in the Contract Documents.
6.1.2 When separate contracts are awarded for different portions of the
Project or other construction or operations on the site, the term "Contractor"
in the Contract Documents in each case shall mean the Contractor who executes
each separate Owner-Contractor Agreement.
6.1.3 The Owner shall provide for coordination of the activities of the
owner's own forces and of each separate contractor with the Work of the
Contractor, who shall cooperate with them. The Contractor shall participate
with other separate contractors and the Owner in reviewing their construction
schedules when directed to do so. The Contractor shall make any revisions to
the construction schedule and Contract Sum deemed necessary after a joint review
and mutual agreement. The construction schedules shall then constitute the
schedules to be used by the Contractor, separate contractors and the Owner until
subsequently revised.
6.1.4 Unless otherwise provided in the Contract Documents, when the Owner
performs construction or operations related to the Project with the Owner's own
forces, the Owner shall be deemed to be subject to the same obligations and to
have the same rights which apply to the Contractor under the Conditions of that
Contract, including, without excluding others, those stated in Article 3, this
Article 6 and Articles 10, 11 and 12.
6.2 MUTUAL RESPONSIBILITY
6.2.1 The Contractor shall afford the Owner and separate contractors
reasonable opportunity for introduction and storage of their materials and
equipment and performance of their activities and shall connect and coordinate
the Contractor's construction and operations with theirs as required by the
Contract Documents.
6.2.2 If part of the Contractor's Work depends for proper execution or
results upon construction or operations by the Owner or a separate contractor,
the Contractor shall, prior to proceeding with that portion of the Work,
promptly report to the Architect apparent discrepancies or defects in such other
construction that would render it unsuitable for such proper execution and
results. Failure of the Contractor so to report shall constitute an
acknowledgment that the Owner's or separate contractors' completed or partially
completed construction is fit and proper to receive the Contractor's Work,
except as to defects not then reasonably discoverable.
6.2.3 Costs caused by delays or by improperly timed activities or defective
construction shall be borne by the party responsible therefor.
17
<PAGE>
6.2.4 The Contractor shall promptly remedy damage wrongfully caused by the
Contractor to completed or partially completed construction or to property of
the Owner or separate contractors as provided in Subparagraph 10.2.5.
6.2.5 Claims and other disputes and matters in question between the
Contractor and a separate contractor shall be subject to the provisions of
Paragraph 4.3 provided the separate contractor has reciprocal obligations.
6.2.6 The Owner and each separate contractor shall have the same
responsibilities for cutting and patching as are described for the Contractor in
Paragraph 3.14.
6.3 OWNER'S RIGHT TO CLEAN UP
6.3.1 If a dispute arises among the Contractor, separate contractors and the
Owner as to the responsibility under their respective contracts for maintaining
the premises and surrounding area free from waste materials and rubbish as
described in Paragraph 3.15, the Owner may clean up and allocate the cost among
those responsible as the Architect determines to be just.
ARTICLE 7
CHANGES IN THE WORK
7.1 CHANGES
7.1.1 Changes in the Work may be accomplished after execution of the
Contract, and without invalidating the Contract, by Change Order, Construction
Change Directive or order for a minor change in the Work, subject to the
limitations stated in this Article 7 and elsewhere in the Contract Documents.
7.1.2 A Change Order shall be based upon agreement among the Owner,
Contractor and Architect; a Construction Change Directive requires agreement by
the Owner and Architect and may or may not be agreed to by the Contractor; an
order for a minor change in the Work may be issued by the Architect alone.
7.1.3 Changes in the Work shall be performed under applicable provisions of
the Contract Documents, and the Contractor shall proceed promptly, unless
otherwise provided in the Change Order, Construction Change Directive or order
for a minor change in the Work.
7.1.4 If unit prices are stated in the Contract Documents or subsequently
agreed upon, and if quantities originally contemplated are so changed in a
proposed Change Order or Construction Change Directive that application of such
unit prices to quantities of Work proposed will cause substantial inequity to
the Owner or Contractor, the applicable unit prices shall be equitably adjusted.
7.2 CHANGE ORDERS
7.2.1 A Change Order is a written instrument prepared by the Architect and
signed by the Owner, Contractor, and Architect stating their agreement upon all
of the following:
.1 a change in the Work;
.2 the amount of the adjustment in the Contract Sum, if any; and
18
<PAGE>
.3 the extent of the adjustment in the Contract Time, if any.
7.2.2 Methods used in determining adjustments to the Contract Sum may
include those listed in Subparagraph 7.3.3.
7.3 CONSTRUCTION CHANGE DIRECTIVES
7.3.1 A Construction Change Directive is a written order prepared by the
Architect and signed by the Owner and Architect, directing a change in the Work
and stating a proposed basis for adjustment, if any, in the Contract Sum or
Contract Time, or both. The Owner may by Construction Change Directive, without
invalidating the Contract, order changes in the Work within the general scope of
the Contract consisting of additions, deletions, or other revisions, the
Contract Sum and Contract Time being adjusted accordingly.
7.3.2 A Construction Change Directive shall be used in the absence of total
agreement on the terms of a Change Order.
7.3.3 If the Construction Change Directive provides for an adjustment to the
Contract sum, the adjustment shall be based on one of the following methods:
.1 mutual acceptance of a lump sum properly itemized and supported
by sufficient substantiating data to permit evaluation;
.2 unit prices stated in the Contract Documents or subsequently
agreed upon;
.3 cost to be determined in a manner agreed upon by the parties
and a mutually acceptable fixed or percentage fee; or
.4 as provided in Subparagraph 7.3.6.
7.3.4 Upon receipt of a Construction Change Directive, the Contractor shall
promptly proceed with the change in the Work involved and advise the Architect
of the Contractor's agreement or disagreement with the method, if any, provided
in the Construction Change Directive for determining the proposed adjustment in
the Contract Sum or Contract Time.
7.3.5 A Construction Change Directive signed by the Contractor indicates the
agreement of the Contractor therewith, including adjustment in Contract Sum and
Contract Time or the method for determining them. Such agreement shall be
effective immediately and shall recorded as a Change Order.
7.3.6 If the Contractor does not respond promptly or disagrees with the
method for adjustment in the Contract Sum, the method and the adjustment shall
be determined by the Architect on the basis of reasonable expenditures and
savings of those performing the Work attributable to the change, including, in
case of an increase in the Contract Sum, a reasonable allowance for overhead and
profit. In such case, and also under Clause 7.3.3.3, the Contractor shall keep
and present, in such form as the Architect may prescribe, an itemized accounting
together with appropriate supporting data. Unless otherwise provided in the
Contract Documents, costs for the purposes of this Subparagraph 7.3.6 shall be
limited to the following:
19
<PAGE>
.1 costs of labor, including social security, old age and
unemployment insurance, fringe benefits required by agreement
or custom, and workers' or workmen's compensation insurance;
.2 costs of materials, supplies and equipment, including cost of
transportation, whether incorporated or consumed;
.3 rental costs of machinery and equipment, exclusive of hand
tools, whether rented from the Contractor or others;
.4 costs of premiums for all bonds and insurance, permit fees, and
sales, use or similar taxes related to the Work; and
.5 additional costs of supervision and field office personnel
directly attributable to the change.
7.3.7 Pending final determination of cost to the Owner, amounts not in
dispute shall be included in Applications for Payment. The amount of credit to
be allowed by the Contractor to the Owner for a deletion or change which results
in a net decrease in the Contract Sum shall be actual net cost as confirmed by
the Architect. When both additions and credits covering related Work or
substitutions are involved in a change, the allowance for overhead and profit
shall be figured on the basis of net increase, if any, with respect to that
change.
7.3.8 If the Owner and Contractor do not agree with the adjustment in
Contract Time or the method for determining it, the adjustment in Contract Time
or the method for determining it, the adjustment or the method shall be referred
to the Architect for determination.
7.3.9 When the Owner and Contractor agree with the determination made by the
Architect concerning the adjustments in the Contract Sum and Contract time, or
otherwise reach agreement upon the adjustments, such agreement shall be
effective immediately and shall be recorded by preparation and execution of an
appropriate Change Order.
7.4 MINOR CHANGES IN THE WORK
7.4.1 The Architect will have authority to order minor changes in the Work
not involving adjustment in the Contract Sum or extension of the Contract Time
and not inconsistent with the intent of the Contract Documents. Such changes
shall be effected by written order and shall be binding on the Owner and
Contractor. The Contractor shall carry out such written orders promptly.
ARTICLE 8
TIME
8.1 DEFINITIONS
8.1.1 Unless otherwise provided, Contract Time is the period of time,
including authorized adjustments, allotted in the Contract Documents for
Substantial Completion of the Work.
20
<PAGE>
8.1.2 The date of commencement of the Work is the date established in the
Agreement. The date shall not be postponed by the failure to act of the
Contractor or of persons or entities for whom the Contractor is responsible.
8.1.3 The date of Substantial Completion is the date certified by the
Architect in accordance with Paragraph 9.8.
8.1.4 The term "day" as used in the Contract Documents shall mean calendar
day unless otherwise specifically defined.
8.2 PROGRESS AND COMPLETION
8.2.1 Time limits stated in the Contract Documents are of the essence of the
Contract. By executing the Agreement the Contractor confirms that the Contract
Time is a reasonable period for performing the Work.
8.2.2 The Contractor shall not knowingly, except by agreement or instruction
of the Owner in writing, prematurely commence operations on the site or
elsewhere prior to the effective date of insurance required by Article 11 to be
furnished by the Contractor. The date of commencement of the Work shall not be
changed by the effective date of such insurance. Unless the date of
commencement is established by a notice to proceed given by the Owner, the
Contractor shall notify the Owner in writing not less than five days or other
agreed period before commencing the Work to permit the timely filing of
mortgages, mechanic's liens, and other security interests.
8.2.3 The Contractor shall proceed expeditiously with adequate forces and
shall achieve Substantial Completion within the Contract time.
8.3 DELAYS AND EXTENSIONS OF TIME
8.3.1 If the Contractor is delayed at any time in progress of the Work by an
act or neglect of the Owner or Architect, or of an employee of either, or of a
separate contractor employed by the Owner, or by changes ordered in the Work, or
by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or
other causes beyond the Contractor's control, or by delay authorized by the
Owner pending arbitration, or by other causes which the Architect determines may
justify delay, then the Contract Time shall be extended by Change Order for such
reasonable time as the Architect may determine.
8.3.2 Claims relating to time shall be made in accordance with applicable
provisions of Paragraph 4.3.
8.3.3 This Paragraph 8.3 does not preclude recovery of damages for delay by
either party under other provisions of the Contract Documents.
ARTICLE 9
PAYMENTS AND COMPLETION
9.1 CONTRACT SUM
9.1.1 The Contract Sum is stated in the Agreement and, including authorized
adjustments, is the total amount payable by the Owner to the Contractor for
performance of the Work under the Contract Documents.
21
<PAGE>
9.2 SCHEDULE OF VALUES
9.2.1 Before the first Application for Payment, the Contractor shall submit
to the Architect a schedule of values allocated to various portions of the Work,
prepared in such form and supported by such data to substantiate its accuracy as
the Architect may require. This schedule, unless objected to by the Architect,
shall be used as a basis for reviewing the Contractor's Applications for
Payment.
9.3 APPLICATIONS FOR PAYMENT
9.3.1 At least ten days before the date established for each progress
payment, the Contractor shall submit to the Architect an itemized Application
for Payment for operations completed in accordance with the schedule of values.
Such application shall be notarized, if required, and supported by such data
substantiating the Contractor's right to payment as the Owner or Architect may
require, such as copies of requisitions from Subcontractors and material
suppliers, and reflecting retainage if provided for elsewhere in the Contract
Documents.
9.3.1.1 Such applications may include requests for payment on account of
changes in the Work which have been properly authorized by Construction Change
Directives but not yet included in Change Orders.
9.3.2 Unless otherwise provided in the Contract Documents, payments shall be
made on account of materials and equipment delivered and suitably stored at the
site for subsequent incorporation in the work. If approved in advance by the
Owner, payment may similarly be made for materials and equipment suitably stored
off the site at a location agreed upon in writing. Payment for materials and
equipment stored on or off the site shall be conditioned upon compliance by the
Contractor with procedures satisfactory to the Owner to establish the Owner's
title to such materials and equipment or otherwise protect the Owner's interest,
and shall include applicable insurance, storage and transportation to the site
for such materials and equipment stored off the site.
9.3.3 The Contractor warrants that title to all Work covered by an
Application for Payment will pass to the Owner no later than the time of
payment. The Contractor further warrants that upon submittal of an
Application for Payment all Work for which Certificates for Payment have been
previously issued and payments received from the Owner shall, to the best of
the Contractor's knowledge, information, and belief, be free and clear of
liens, claims, security interests or encumbrances in favor of the Contractor,
Subcontractors, material suppliers, or other persons or entities making a
claim by reason of having provided labor materials and equipment relating to
the Work.
9.4 CERTIFICATES FOR PAYMENT
9.4.1 The Architect will, within seven days after receipt of the
Contractor's Application for Payment, either issue to the Owner a Certificate
for Payment, with a copy to the Contractor, for such amount as the Architect
determines is properly due, or notify the Contractor and Owner in writing of the
Architect's reasons for withholding certification in whole or in part as
provided in Subparagraph 9.5.1.
9.4.2 The issuance of a Certificate for Payment will constitute a
representation by the Architect to the Owner, based on the Architect's
observations at the site and the data comprising the Application for Payment,
that the Work has progressed to the point indicated and that, to the best of the
Architect's knowledge, information and belief, quality of the Work is in
accordance with the Contract Documents. The foregoing representations are
subject to an evaluation of the Work for conformance with the Contract Documents
upon
22
<PAGE>
Substantial Completion, to results of subsequent tests and inspections, to
minor deviations from the Contract Documents correctable prior to completion and
to specific qualifications expressed by the Architect. The issuance of a
Certificate for Payment will further constitute a representation that the
Contractor is entitled to payment in the amount certified. However, the
issuance of a Certificate for Payment will not be a representation that the
Architect has (1) made exhaustive or continuous on-site inspections to check the
quality or quantity of the Work, (2) reviewed construction means, methods,
techniques, sequences or procedures, (3) reviewed copies of requisitions
received from Subcontractors and material suppliers and other data requested by
the Owner to substantiate the Contractor's right to payment or (4) made
examination to ascertain how or for what purpose the Contractor has used money
previously paid on account of the Contract Sum.
9.5 DECISIONS TO WITHHOLD CERTIFICATION
9.5.1 The Architect may decide not to certify payment and may withhold a
Certificate for Payment in whole or in part, to the extent reasonably necessary
to protect the Owner, if in the Architect's opinion the representations to the
Owner required by Subparagraph 9.4.2 cannot be made. If the Architect is unable
to certify payment in the amount of the Application, the Architect will notify
the Contractor and Owner as provided in Subparagraph 9.4.1. If the Contractor
and Architect cannot agree on a revised amount, the Architect will promptly
issue a Certificate for Payment for the amount for which the Architect is able
to make such representations to the Owner. The Architect may also decide not to
certify payment or, because of subsequently discovered evidence or subsequent
observations, may nullify the whole or a part of a Certificate for Payment
previously issued, to such extent as may be necessary in the Architect's opinion
to protect the Owner from loss because of:
.1 defective Work not remedied;
.2 third party claims filed or reasonable evidence indicating
probable filing of such claims;
.3 failure of the Contractor to make payments properly to
Subcontractors or for labor, materials, or equipment;
.4 reasonable evidence that the Work cannot be completed for the
unpaid balance of the Contract Sum;
.5 damage to the Owner or another contractor;
.6 reasonable evidence that the Work will not be completed within
the Contract Time, and that the unpaid balance would not be
adequate to cover actual or liquidated damages for the
anticipated delay; or
.7 persistent failure to carry out the Work in accordance with the
Contract Documents.
9.5.2 When the above reason for withholding certification are removed,
certification will be made for amounts previously withheld.
9.6 PROGRESS PAYMENTS
23
<PAGE>
9.6.1 After the Architect has issued a Certificate for Payment, the Owner
shall make payment in the manner and within the time provided in the Contract
Documents, and shall so notify the Architect.
9.6.2 The Contractor shall promptly pay each Subcontractor, upon receipt of
payment from the Owner, out of the amount paid to the Contractor on account of
such Subcontractor's portion of the Work, the amount to which said Subcontractor
is entitled, reflecting percentages actually retained from payments to the
Contractor on account of such Subcontractor's portion of the Work. The
Contractor shall, by appropriate agreement with each Subcontractor, require each
Subcontractor to make payments to Sub-subcontractors in similar manner.
9.6.3 The Architect will, on request, furnish to a Subcontractor, if
practicable, information regarding percentages of completion or amounts applied
for by the Contractor and action taken thereon by the Architect and Owner on
account of portions of the Work done by such Subcontractor.
9.6.4 Neither the Owner nor Architect shall have an obligation to pay or to
see to the payment of money to a Subcontractor except as may otherwise be
required by law.
9.6.5 Payment to material suppliers shall be treated in a manner similar to
that provided in Subparagraphs 9.6.2, 9.6.3 and 9.6.4.
9.6.6 A Certificate for Payment, a progress payment, or partial or entire
use or occupancy of the Project by the Owner shall not constitute acceptance of
Work not in accordance with the Contract Documents.
9.7 FAILURE OF PAYMENT
9.7.1 If the Architect does not issue a Certificate for Payment, through no
fault of the Contractor, within seven days after receipt of the Contractor's
Application for Payment, or if the Owner does not pay the Contractor within
seven days after the date established in the Contract Documents the amount
certified by the Architect or awarded by arbitration, then the Contractor may,
upon seven additional days' written notice to the Owner and Architect, stop the
Work until payment of the amount owing has been received. The Contract Time
shall be extended appropriately and the Contract Sum shall be increased by the
amount of the Contractor's reasonable costs of shut-down, delay and start-up,
which shall be accomplished as provided in Article 7.
9.8 SUBSTANTIAL COMPLETION
9.8.1 Substantial Completion is the stage in the progress of the Work when
the Work or designated portion thereof is sufficiently complete in accordance
with the Contract Documents so the Owner can occupy or utilize the Work for its
intended use.
9.8.2 When the Contractor considers that the Work, or a portion thereof
which the Owner agrees to accept separately, is substantially complete, the
Contractor shall prepare and submit to the Architect a comprehensive list of
items to be completed or corrected. The Contractor shall proceed promptly to
complete and correct items on the list. Failure to include an item on such list
does not alter the responsibility of the Contractor to complete all Work in
accordance with the Contract Documents. Upon receipt of the Contractor's list,
the Architect will make an inspection to determine whether the Work or
designated portion thereof is substantially complete. If the Architect's
inspection discloses any item, whether or not included on the Contractor's list,
which is not in accordance with the requirements of the Contract Documents, the
Contractor shall, before issuance of the Certificate of Substantial Completion,
complete or correct such item upon notification by the
24
<PAGE>
Architect. The Contractor shall then submit a request for another inspection
by the Architect to determine Substantial completion. When the Work or
designated portion thereof is substantially complete, the Architect will
prepare a Certificate of Substantial Completion which shall establish the
date of Substantial Completion, shall establish responsibilities of the Owner
and Contractor for security, maintenance, heat, utilities, damage to the Work
and insurance, and shall fix the time within which the Contractor shall
finish all items on the list accompanying the Certificate. Warranties
required by the Contract Documents shall commence on the date of Substantial
Completion of the Work or designated portion thereof unless otherwise
provided in the Certificate of Substantial Completion. The Certificate of
Substantial Completion shall be submitted to the Owner and Contractor for
their written acceptance of responsibilities assigned to them in such
Certificate.
9.8.3 Upon Substantial Completion of the Work or designated portion thereof
and upon application by the Contractor and certification by the Architect, the
Owner shall make payment, reflecting adjustment in retainage, if any, for such
Work or portion thereof as provided in the Contract Documents.
9.9 PARTIAL OCCUPANCY OR USE
9.9.1 The Owner may occupy or use any completed or partially completed
portion of the Work at any stage when such portion is designated by separate
agreement with the Contractor, provided such occupancy or use is consented to by
the insurer as required under Subparagraph 11.3.11 and authorized by public
authorities having jurisdiction over the Work. Such partial occupancy or use
may commence whether or not the portion is substantially complete, provided the
Owner and Contractor have accepted in writing the responsibilities assigned to
each of them for payments, retainage, if any, security, maintenance, heat,
utilities, damage to the Work and insurance, and have agreed in writing
concerning the period for correction of the Work and commencement of warranties
required by the Contract Documents. When the Contractor considers a portion
substantially complete, the Contractor shall prepare and submit a list to the
Architect as provided under Subparagraph 9.8.2. Consent of the Contractor to
partial occupancy or use shall not be unreasonably withheld. The stage of the
progress of the Work shall be determined by written agreement between the Owner
and Contractor or, if no agreement is reached, by decision of the Architect.
9.9.2 Immediately prior to such partial occupancy or use, the Owner,
Contractor, and Architect shall jointly inspect the area to be occupied or
portion of the Work to be used in order to determine and record the condition of
the Work.
9.9.3 Unless otherwise agreed upon, partial occupancy or use of a portion or
portions of the Work shall not constitute acceptance of the Work not complying
with the requirements of the Contract Documents.
9.10 FINAL COMPLETION AND FINAL PAYMENT
9.10.1 Upon receipt of written notice that the Work is ready for final
inspection and acceptance and upon receipt of a final Application for Payment,
the Architect will promptly make such inspection and, when the Architect finds
the Work acceptable under the Contract Documents and the Contract fully
performed, the Architect will promptly issue a final Certificate for Payment
stating that to the best of the Architect's knowledge, information and belief,
and on the basis of the Architect's observations and inspections, the Work has
been completed in accordance with terms and conditions of the Contract Documents
and that the entire balance found to be due the Contractor and noted in said
final Certificate is due and payable. The Architect's final Certificate for
Payment will constitute a further representation that conditions listed in
Subparagraph 9.10.2 as precedent to the Contractor's being entitled to final
payment have been fulfilled.
25
<PAGE>
9.10.2 Neither final payment nor any remaining retained percentage shall
become due until the Contractor submits to the Architect (1) an affidavit that
payrolls, bills for materials and equipment, and other indebtedness connected
with the Work for which the Owner or the Owner's property might be responsible
or encumbered (less amounts withheld by Owner) have been paid or otherwise
satisfied, (2) a certificate evidencing that insurance required by the Contract
Documents to remain in force after final payment is currently in effect and will
not be canceled or allowed to expire until at least 30 days' prior written
notice has been given to the Owner, (3) a written statement that the Contractor
knows of no substantial reason that the insurance will not be renewable to cover
the period required by the Contract Documents, (4) final lien waivers from all
Subcontractors and suppliers in a form satisfactory to Owner, (5) consent of
surety, if any, to final payment and (6), if required by the Owner, other data
establishing payment or satisfaction of obligations, such as receipts, releases
and waivers of liens, claims, security interests or encumbrances arising out of
the Contract, to the extent and in such form as may be designated by the Owner.
If a Subcontractor refuses to furnish a release or waiver required by the Owner,
the Contractor may furnish a bond satisfactory to the Owner to indemnify the
Owner against such lien. If such lien remains unsatisfied after payments are
made, the Contractor shall refund to the Owner all money that the Owner may be
compelled to pay in discharging such lien, including all costs and reasonable
attorneys' fees.
9.10.3 If, after Substantial Completion of the Work, final completion thereof
is materially delayed through no fault of the Contractor or by issuance of
Change Orders affecting final completion, and the Owner so confirms, the Owner
shall, upon application by the Contractor and certification by the Architect,
and without terminating the Contract, make payment of the balance due for that
portion of the Work fully completed and accepted. If the remaining balance of
the Work not fully completed or corrected is less than retainage stipulated in
the Contract Documents, and if bonds have been furnished, the written consent of
surety to payment of the balance due for that portion of the Work fully
completed and accepted shall be submitted by the Contractor to the Architect
prior to certification of such payment. Such payment shall be made under terms
and conditions governing final payment, except that it shall not constitute a
waiver of claims. The making of final payment shall constitute a waiver of
claims by the Owner as provided in Subparagraph 4.3.5.
9.10.4 Acceptance of final payment by the Contractor, a Subcontractor or
material supplier shall constitute a waiver of claims by that payee except those
previously made in writing and identified by that payee as unsettled at the time
of final Application for Payment. Such waivers shall be in addition to the
waiver described in Subparagraph 4.3.5.
ARTICLE 10
PROTECTION OF PERSONS AND PROPERTY
10.1 SAFETY PRECAUTIONS AND PROGRAMS
10.1.1 The Contractor shall be responsible for initiating, maintaining and
supervising all safety precautions and programs in connection with the
performance of the Contract.
10.1.2 In the event the Contractor encounters on the site material reasonably
believed to be asbestos or polychlorinated biphenyl (PCB) which has not been
rendered harmless, the Contractor shall immediately stop work in the area
affected and report the condition to the Owner and Architect in writing. The
Work in the affected area shall not thereafter be resumed except by written
agreement of the Owner and Contractor if in fact the material is asbestos or
polychlorinated biphenyl (PCB) and has not been rendered harmless. The Work in
the affected area shall be resumed in the absence of asbestos or polychlorinated
biphenyl (PCB), or when it has been rendered harmless, by written agreement of
the Owner and Contractor, or in accordance with final
26
<PAGE>
determination by the Architect on which arbitration has not been demanded, or
by arbitration under Article 4. The term "rendered harmless" shall be
interpreted to mean that levels of asbestos and polychlorinated biphenyls are
less than any applicable exposure standards set forth in OSHA regulations.
In no event, however, shall the Owner have any responsibility for any
substance or material that is brought to the Project site by the Contractor,
any Subcontractor, any materialman or supplier or any entity for whom any of
them is responsible. The Contractor agrees not to use any fill or other
materials to be incorporated into the Work which are hazardous, toxic or
comprised of any items that are hazardous or toxic.
10.1.3 The Contractor shall not be required pursuant to Article 7 to perform
without consent any Work relating to asbestos or polychlorinated biphenyl (PCB).
10.1.4 To the fullest extent permitted by law, the Owner shall indemnify and
hold harmless the Contractor, Architect, Architect's consultants and agents and
employees of any of them from and against claims, damages, losses and expenses,
including but not limited to attorneys' fees, arising out of or resulting from
performance of the Work in the affected area if in fact the material is asbestos
or polychlorinated biphenyl (PCB) and has not been rendered harmless, provided
that such claim, damage, loss or expense is attributable to bodily injury,
sickness, disease or death, or to injury to or destruction of tangible property
(other than the Work itself) including loss of use resulting therefrom, but only
to the extent caused in whole or in part by negligent acts or omissions of the
Owner, anyone directly or indirectly employed by the Owner or anyone for whose
acts the Owner may be liable, regardless of whether or not such claim, damage,
loss or expense is caused in part by a party indemnified hereunder. Such
obligation shall not be construed to negate, abridge, or reduce other rights or
obligations of indemnity which would otherwise exist as to a party or person
described in this Subparagraph 10.1.4.
10.2 SAFETY OF PERSONS AND PROPERTY
10.2.1 The Contractor shall take reasonable precautions for safety of, and
shall provide reasonable protection to prevent damage, injury, or loss to:
.1 employees on the Work and other persons who may be affected
thereby;
.2 the Work and materials and equipment to be incorporated
therein, whether in storage on or off the site, under care,
custody or control of the Contractor or the Contractor's
Subcontractors or Sub-subcontractors; and
.3 other property at the site or adjacent thereto, such as trees,
shrubs, lawns, walks, pavements, roadways, structures and
utilities not designated for removal, relocation or replacement
in the course of construction.
10.2.2 The Contractor shall give notices and comply with applicable laws,
ordinances, rules, regulations and lawful orders of public authorities bearing
on safety of persons or property or their protection from damage, injury, or
loss.
10.2.3 The Contractor shall erect and maintain, as required by existing
conditions and performance of the Contract, reasonable safeguards for safety and
protection, including posting danger signs and other warnings against hazards,
promulgating safety regulations and notifying owners and users of adjacent sites
and utilities.
27
<PAGE>
10.2.4 When use or storage of explosives or other hazardous materials or
equipment or unusual methods are necessary for execution of the Work, the
Contractor shall exercise utmost care and carry on such activities under
supervision of properly qualified personnel.
10.2.5 The Contractor shall promptly remedy damage and loss (other than
damage or loss insured under property insurance required by the Contract
Documents) to property referred to in Clauses 10.2.1.2 and 10.2.1.3 caused in
whole or in part by the Contractor, a Subcontractor, a Sub-subcontractor, or
anyone directly or indirectly employed by any of them, or by anyone for whose
acts they may be liable and for which the Contractor is responsible under
Clauses 10.2.1.2 and 10.2.1.3, except damage or loss attributable to acts or
omissions of the Owner or Architect or anyone directly or indirectly employed by
either of them, or by anyone for whose acts either of them may be liable, and
not attributable to the fault or negligence of the Contractor. The foregoing
obligations of the Contractor are in addition to the Contractor's obligations
under Paragraph 3.18.
10.2.6 The Contractor shall designate a responsible member of the
Contractor's organization at the site whose duty shall be prevention of
accidents. This person shall be the Contractor's superintendent unless
otherwise designated by the Contractor in writing to the Owner and Architect.
10.2.7 The Contractor shall not load or permit any part of the construction
or site to be loaded so as to endanger its safety.
10.3 EMERGENCIES
10.3.1 In an emergency affecting safety of persons or property, the
Contractor shall act, at the Contractor's discretion, to prevent threatened
damage, injury or loss. Additional compensation or extension of time claimed by
the Contractor on account of an emergency shall be determined as provided in
Paragraph 4.3 and Article 7.
ARTICLE 11
INSURANCE AND BONDS
11.1 CONTRACTOR'S LIABILITY INSURANCE
11.1.1 The Contractor shall purchase from and maintain in a company or
companies lawfully authorized to do business in the jurisdiction in which the
Project is located such insurance as will protect the Contractor from claims set
forth below which may arise out of or result from the Contractor's operations
under the Contract for which the Contractor may be legally liable, whether such
operations be by the Contractor or by a Subcontractor or by anyone directly or
indirectly employed by any of them, or by anyone for whose acts any of them may
be liable:
.1 claims under workers' or workmen's compensation, disability
benefit and other similar employee benefit acts which are
applicable to the Work to be performed;
.2 claims for damages because of bodily injury, occupational
sickness or disease, or death of the Contractor's employees:
.3 claims for damages because of bodily injury, sickness or
disease, or death of any person other than the Contractor's
employees:
28
<PAGE>
.4 claims for damages insured by usual personal injury liability
coverage which are sustained by (1) by a person as a result of
an offense directly or indirectly related to employment of such
person by the Contractor, or (2) by another person;
.5 claims for damages, other than to the work itself, because of
injury to or destruction of tangible property, including loss
of use resulting therefrom:
.6 claims for damages because of bodily injury, death of a person
or property damage arising out of ownership, maintenance or use
of a motor vehicle; and
.7 claims involving contractual liability insurance applicable to
the Contractor's obligations under Paragraph 3.18.
11.1.2 The insurance required by Subparagraph 11.1.1 shall be written for
not less than limits of liability specified in the Contract Documents or
required by law, whichever coverage is greater. Coverages, whether written
on an occurrence or claims-made basis, shall be maintained without
interruption from date of commencement of the work until date of final
payment and termination of any coverage required to be maintained after final
payment.
11.1.3 Certificates of Insurance acceptable to the Owner shall be filed
with the Owner prior to commencement of the Work. These Certificates and the
insurance policies required by this Paragraph 11.1 shall contain a provision
that coverages afforded under the policies will not be canceled or allowed to
expire until at least 60 days' prior written notice has been given to the
Owner. If any of the foregoing insurance coverages are required to remain in
force after final payment and are reasonably available, an additional
certificate evidencing continuation of such coverage shall be submitted with
the final Application for Payment as required by Subparagraph 9.10.2.
Information concerning reduction of coverage shall be furnished by the
Contractor with reasonable promptness in accordance with the Contractor's
information and belief.
11.2 OWNER'S LIABILITY INSURANCE
11.2.1 The Owner shall be responsible for purchasing and maintaining the
Owner's usual liability insurance. Optionally, the Owner may purchase and
maintain other insurance for self-protection against claims which may arise from
operations under the Contract. The Contractor shall not be responsible for
purchasing and maintaining this optional Owner's liability insurance unless
specifically required by the Contract Documents.
11.3 PROPERTY INSURANCE
11.3.1 The Contractor shall purchase and maintain, in a company or companies
lawfully authorized to do business in the jurisdiction in which the Project is
located, property insurance in the amount of the initial Contract Sum, as well
as subsequent modifications thereto for the entire Work at the site on a
replacement cost basis without voluntary deductibles. Such property insurance
shall be maintained, unless otherwise provided in the Contract Documents or
otherwise agreed in writing by all persons and entities who are beneficiaries of
such insurance, until final payment has been made as provided in Paragraph 9.10
or until no person or entity other than the Owner has an insurable interest in
the property required by this Paragraph 11.3 to be covered, whichever is
earlier. This insurance shall include interests of the Owner, the Architect,
the Contractor, Subcontractors and Sub-subcontractors in the Work.
29
<PAGE>
11.3.1.1 Property insurance shall be on an all-risk policy form and shall
insure against the perils of fire and extended coverage and physical loss or
damage, including without duplication of coverage, theft, vandalism, malicious
mischief, collapse, falsework, temporary buildings and debris removal, including
demolition occasioned by enforcement of any applicable legal requirements, and
shall cover reasonable compensation for Architect's services and expenses
required as a result of such insured loss.
11.3.1.2 If the property insurance requires minimum deductibles the Contractor
shall be reimbursed for costs not covered because of such deductibles, subject
to the provisions of the Agreement.
11.3.1.3 This property insurance shall cover portions of the Work stored off
the site after written approval of the Owner at the value established in the
approval, and also portions of the Work in transit.
11.3.2 The Contractor shall purchase and maintain insurance, which shall
specifically cover all systems and equipment which are a part of the Work,
during installation, start-up, hot and cold testing and until final acceptance
by the Owner; this insurance shall include interests of the Owner, Contractor,
Subcontractors and Sub-subcontractors in the Work, and the Owner and Contractor
shall be named insureds.
11.3.3 Before an exposure to loss may occur, the Contractor shall file with
the Owner a copy of each policy that includes insurance coverages required by
this Paragraph 11.3. Each policy shall contain all generally applicable
conditions, definitions, exclusions and endorsements related to this Project.
Each policy shall contain a provision that the policy will not be canceled or
allowed to expire until at least 60 days' prior written notice has been given to
the Owner.
11.3.4 Waivers of Subrogation. The Owner and Contractor waive all rights
against (1) each other and any of their subcontractors, sub-subcontractors,
agents and employees, each of the other, and (2) the Architect, Architect's
consultants, separate contractors described in Article 6, if any, and any of
their subcontractors, sub-subcontractors, agents and employees, for damages
caused by fire or other perils to the extent covered by property insurance
obtained pursuant to this Paragraph 11.3, or other property insurance applicable
to the Work, except such rights as they have to proceeds of such insurance held
by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall
require of the Architect, Architect's consultants, separate contractors
described in Article 6, if any, and the subcontractors, sub-subcontractors,
agents and employees of any of them, by appropriate agreements, written where
legally required for validity, similar waivers each in favor of other parties
enumerated herein. The policies shall provide such waiver of subrogation by
endorsement or otherwise. A waiver of subrogation shall be effective as to a
person or entity even though that person or entity would otherwise have a duty
of indemnification, contractual or otherwise, did not pay the insurance premium
directly or indirectly, and whether or not the person or entity had an insurable
interest in the property damaged.
11.3.5 A loss insured under the property insurance shall be adjusted by the
Owner and made payable to the Owner for the insureds, as their interests may
appear, subject to requirements of any applicable mortgagee clause and of
Subparagraph 11.3.10. The Contractor shall pay Subcontractors their just shares
of insurance proceeds received by the Contractor, and by appropriate agreements,
written where legally required for validity, shall require Subcontractors to
make payments to their Sub-subcontractors in similar manner.
11.3.6 If requested in writing by any party in interest, the Owner shall
deposit in a separate account proceeds so received, which the Owner shall
distribute in accordance with such agreement as the parties in
30
<PAGE>
interest may reach, or in accordance with an arbitration award in which case the
procedure shall be as provided in Paragraph 4.5. If after such loss no other
special agreement is made, replacement of damaged property shall be covered by
appropriate Change Order.
11.3.7 The Owner shall have power to adjust and settle a loss with insurers
unless one of the parties in interest shall object in writing within five days
after occurrence of loss to the Owner's exercise of this power; if such
objection be made, arbitrators shall be chosen as provided in Paragraph 4.5.
The Owner shall, in that case, make settlement with insurers in accordance with
directions of such arbitrators. If distribution of insurance proceeds by
arbitration is required, the arbitrators will direct such distribution.
11.3.8 Partial occupancy or use in accordance with Paragraph 9.9 shall not
commence until the insurance company or companies providing property insurance
have consented to such partial occupancy or use by endorsement or otherwise.
The Owner and the Contractor shall take reasonable steps to obtain consent of
the insurance company or companies and shall, without mutual written consent,
take no action with respect to partial occupancy or use that would cause
cancellation, lapse or reduction of insurance.
11.4 PERFORMANCE BOND AND PAYMENT BOND
11.4.1 The Owner shall have the right to require the Contractor to furnish
bonds covering faithful performance of the Contract and payment of obligations
arising thereunder as stipulated in bidding requirements or specifically
required in the Contract Documents on the date of execution of the Contract.
11.4.2 Upon the request of any person or entity appearing to be a potential
beneficiary of bonds covering payment of obligations arising under the Contract,
the Contractor shall promptly furnish a copy of the bonds or shall permit a copy
to be made.
ARTICLE 12
UNCOVERING AND CORRECTION OF WORK
12.1 UNCOVERING OF WORK
12.1.1 If a portion of the Work is covered contrary to the Architect's
request or to requirements specifically expressed in the Contract Documents, it
must, if required in writing by the Architect, be uncovered for the Architect's
observation, and be replaced at the Contractor's expense without change in the
Contract Time.
12.1.2 If a portion of the Work has been covered which the Architect has not
specifically requested to observe prior to its being covered, the Architect may
request to see such Work and it shall be uncovered by the Contractor. If such
Work is in accordance with the Contract Documents, costs of uncovering and
replacement shall, by appropriate Change Order be charged to the Owner. If such
Work is not in accordance with the Contract Documents, the Contractor shall pay
such costs unless the condition was caused by the Owner or a separate contractor
in which event the Owner shall be responsible for payment of such costs.
31
<PAGE>
12.2 CORRECTION OF WORK
12.2.1 The Contractor shall promptly correct Work rejected by the Architect
or failing to conform to the requirements of the Contract Documents, whether
observed before or after Substantial Completion and whether or not fabricated,
installed or completed. The Contractor shall bear costs of correcting such
rejected Work, including additional testing and inspections and compensation for
the Architect's services and expenses made necessary thereby.
12.2.2 If, within one year after the date of Substantial Completion of the
Work or designated portion thereof, or after the date for commencement of
warranties established under Subparagraph 9.9.1, or by terms of an applicable
special warranty required by the Contract Documents, any of the Work is found to
be not in accordance with the requirements of the Contract Documents, the
Contractor shall correct it promptly after receipt of written notice from the
Owner to do so unless the Owner has previously given the Contractor a written
acceptance of such condition. This period of one year shall be extended with
respect to portions of Work first performed after Substantial Completion by the
period of time between Substantial Completion and the actual performance of the
Work. This obligation under this Subparagraph 12.2.2 shall survive acceptance
of the Work under the Contract and termination of the Contract. The Owner shall
give such notice promptly after discovery of the condition.
12.2.3 The Contractor shall remove from the site portions of the Work which
are not in accordance with the requirements of the Contract Documents and are
neither corrected by the Contractor nor accepted by the Owner.
12.2.4 If the Contractor fails to correct nonconforming Work within a
reasonable time, the Owner may correct it in accordance with Paragraph 2.4. If
the Contractor does not proceed with correction of such nonconforming Work
within a reasonable time fixed by written notice from the Architect, the Owner
may remove it and store the salvable materials or equipment at the Contractor's
expense. If the Contractor does not pay costs of such removal and storage
within ten days after written notice, the Owner may upon ten additional days'
written notice sell such materials and equipment at auction or at private sale
and shall account for the proceeds thereof, after deducting costs and damages
that should have been borne by the Contractor, including compensation for the
Architect's services and expenses made necessary thereby. If such proceeds of
sale do not cover costs which the Contractor should have borne, the Contract Sum
shall be reduced by the deficiency. If payments then or thereafter due the
Contractor are not sufficient to cover such amount, the Contractor shall pay the
difference to the Owner.
12.2.5 The Contractor shall bear the cost of correcting destroyed or damaged
construction, whether completed or partially completed, of the Owner or separate
contractors caused by the Contractor's correction or removal of Work which is
not in accordance with the requirements of the Contract Documents.
12.2.6 Nothing contained in this Paragraph 12.2 shall be construed to
establish a period of limitation with respect to other obligations which the
Contractor might have under the Contract Documents. Establishment of the time
period of one year as described in Subparagraph 12.2.2 relates only to the
specific obligation of the Contractor to correct the Work, and has no
relationship to the time within which the obligation to comply with the Contract
Documents may be sought to be enforced, nor the time within which proceedings
may be commenced to establish the Contractor's liability with respect to the
Contractor's obligations other than specifically to correct the Work.
12.3 ACCEPTANCE OF NONCONFORMING WORK
32
<PAGE>
12.3.1 If the Owner prefers to accept Work which is not in accordance with the
requirements of the Contract Documents, the Owner may do so instead of requiring
its removal and correction, in which case, the Contract Sum will be reduced as
appropriate and equitable. Such adjustment shall be effected whether or not
final payment has been made.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 GOVERNING LAW
13.1.1 The Contract shall be governed by the law of the place where the
Project is located.
13.2 SUCCESSORS AND ASSIGNS
13.2.1 The Owner and Contractor respectively bind themselves, their partners,
successors, assigns and legal representatives to the other party hereto and to
partners, successors, assigns and legal representatives of such other party in
respect to covenants, agreements, and obligations contained in the Contract
Documents. Neither party to the contract shall assign the Contract as a whole
without written consent of the other. If either party attempts to make such an
assignment without such consent, that party shall nevertheless remain legally
responsible for all obligations under the Contract.
13.3 WRITTEN NOTICE
13.3.1 Written notice shall be deemed to have been duly served if delivered
in person to the individual or a member of the firm or entity or to an officer
of the corporation for which it was intended, or if delivered at or sent by
registered or certified mail to the last business address known to the party
giving notice.
13.4 RIGHTS AND REMEDIES
13.4.1 Duties and obligations imposed by the Contract Documents and rights
and remedies available thereunder shall be in addition to and not a limitation
of duties, obligations, rights, and remedies otherwise imposed or available by
law.
13.4.2 No action or failure to act by the Owner, Architect or Contractor
shall constitute a waiver of a right or duty afforded them under the Contract,
nor shall such action or failure to act constitute approval of or acquiescence
in a breach thereunder, except as may be specifically agreed in writing.
13.5 TESTS AND INSPECTIONS
13.5.1 Tests, inspections and approvals of portions of the Work required by
the Contract Documents or by laws, ordinances, rules, regulations or orders of
public authorities having jurisdiction shall be made at an appropriate time.
Unless otherwise provided, the Contractor shall make arrangements for such
tests, inspections, and approvals with an independent testing laboratory or
entity acceptable to the Owner, or with the appropriate public authority, and
shall bear all related costs of tests, inspections, and approvals. The
Contractor shall give the Architect timely notice of when and where tests and
inspections are to be made so the Architect may observe such procedures. The
Owner shall bear costs of tests, inspections or approvals which do not become
requirements until after bids are received or negotiations concluded.
33
<PAGE>
13.5.2 If the Architect, Owner or public authorities having jurisdiction
determine that portions of the Work require additional testing, inspection or
approval not included under Subparagraph 13.5.1, the Architect will, upon
written authorization from the Owner, instruct the Contractor to make
arrangements for such additional testing, inspection or approval by an entity
acceptable to the Owner, and the Contractor shall give timely notice to the
Architect of when and where tests and inspections are to be made so the
Architect may observe such procedures. The Owner shall bear such costs except
as provided in Subparagraph 13.5.3.
13.5.3 If such procedures for testing, inspection, or approval under
Subparagraphs 13.5.1 and 13.5.2 reveal failure of the portions of the Work to
comply with requirements established by the Contract documents, the Contractor
shall bear all costs made necessary by such failure including those of repeated
procedures and compensation for the Architect's services and expenses.
13.5.4 Required certificates of testing, inspection or approval shall, unless
otherwise required by the Contract Documents, be secured by the Contractor and
promptly delivered to the Architect.
13.5.5 If the Architect is to observe tests, inspections or approvals
required by the Contract Documents, the Architect will do so promptly and, where
practicable, at the normal place of testing.
13.5.6 Tests or inspections conducted pursuant to the Contract Documents
shall be made promptly to avoid unreasonable delay in the Work.
13.6 INTEREST
13.6.1 Payments due and unpaid under the Contract Documents shall bear
interest from the date payment is due at such rate as the parties agree upon
writing or, in the absence thereof, at the legal rate prevailing from time to
time at the place where the Project is located.
ARTICLE 14
TERMINATION OR SUSPENSION OF THE CONTRACT
14.1 TERMINATION BY THE CONTRACTOR
14.1.1 The Contractor may terminate the Contract if the Work is stopped for a
period of 30 days through no act or fault of the Contractor or a Subcontractor,
Sub-subcontractor or their agents or employees or any other persons performing
portions of the Work under contract with the Contractor, for any of the
following reasons:
.1 issuance of an order of a court or other public authority having
jurisdiction;
.2 an act of government, such as a declaration of national
emergency, making material unavailable;
.3 because the Architect has not issued a Certificate for Payment
and has not notified the Contractor of the reason for
withholding certification as provided in Subparagraph 9.4.1, or
because the Owner has not made payment on a Certificate for
Payment within the time stated in the Contract Documents;
34
<PAGE>
.4 if repeated suspensions, delays or interruptions by the Owner
as described in Paragraph 14.3 constitute in the aggregate more
than 100 percent of the total number of days scheduled for
completion, or 60 days in any 365-day period, whichever is
less; or
.5 the Owner has failed to furnish to the Contractor promptly,
upon the Contractor's request, reasonable evidence as required
by Subparagraph 2.2.1.
14.1.2 If one of the above reasons exists, the Contractor may, upon seven
additional days' written notice to the Owner and Architect, terminate the
Contract and recover from the Owner payment for Work executed and for proven
loss with respect to materials, equipment, tools, and construction equipment and
machinery, including reasonable overhead, profit and damages.
14.1.3 If the Work is stopped for a period of 60 days through no act or fault
of the Contractor or a Subcontractor or their agents or employees or any other
persons performing portions of the Work under contract with the Contractor
because the owner has persistently failed to fulfill the Owner's obligations
under the Contract Documents with respect to matters important to the progress
of the Work, the Contractor may, upon seven additional days' written notice to
the Owner and the Architect, terminate the Contract and recover from the Owner
as provided in Subparagraph 14.1.2.
14.2 TERMINATION BY THE OWNER FOR CAUSE
14.2.1 The Owner may terminate the Contract if the Contractor:
.1 persistently or repeatedly refuses or fails to supply enough
properly skilled workers or proper materials;
.2 fails to make payment to Subcontractors for materials or labor
in accordance with the respective agreements between the
Contractor and the Subcontractors;
.3 persistently disregards laws, ordinances, or rules, regulations
or orders of a public authority having jurisdiction; or
.4 otherwise is guilty of substantial breach of a provision of the
Contract Documents.
14.2.2 When any of the above reasons exist, the Owner, upon certification by
the Architect that sufficient cause exists to justify such action, may without
prejudice to any other rights or remedies of the Owner and after giving the
Contractor and the Contractor's surety, if any, seven days' written notice,
terminate employment of the Contractor and may, subject to any prior rights of
the surety:
.1 take possession of the site and of all materials, equipment,
tools, and construction equipment and machinery thereon owned
by the Contractor;
.2 accept assignment of subcontracts pursuant to Paragraph 5.4; and
.3 finish the Work by whatever reasonable method the Owner may deem
expedient.
14.2.3 When the Owner terminates the Contract for one of the reasons stated
in Subparagraph 14.2.1, the Contractor shall not be entitled to receive further
payment until the Work is finished.
35
<PAGE>
14.2.4 If the unpaid balance of the Contract Sum exceeds costs of finishing
the Work, including compensation for the Architect's services and expenses
made necessary thereby, such excess shall be paid to the Contractor. If such
costs exceed the unpaid balance, the Contractor shall pay the difference to
the Owner. The amount to be paid to the Contractor or Owner, as the case may
be, shall be certified by the Architect, upon application, and this
obligation for payment shall survive termination of the Contract.
14.3 SUSPENSION BY THE OWNER FOR CONVENIENCE
14.3.1 The Owner may, without cause, order the Contractor in writing to
suspend, delay or interrupt the Work in whole or in part for such period of time
as the Owner may determine.
14.3.2 An adjustment shall be made for increases in the cost of performance
of the Contract, including profit on the increased cost of performance, caused
by suspension, delay or interruption. No adjustment shall be made to the
extent:
.1 that performance is, was or would have been so suspended,
delayed or interrupted by another cause for which the
Contractor is responsible; or
.2 that an equitable adjustment is made or denied under another
provision of this Contract.
14.3.3 Adjustments made in the cost of performance may have a mutually agreed
fixed or percentage fee.
36
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 1, 1997, 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, 1997. 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, File No.
33-38914, effective September 26, 1994 and File No. 333-18515, effective
December 20, 1996).
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 1, 1997
<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
TWELVE MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,371,000
<SECURITIES> 20,590,000
<RECEIVABLES> 5,078,000
<ALLOWANCES> 268,000
<INVENTORY> 10,279,000
<CURRENT-ASSETS> 32,665,000
<PP&E> 24,493,000
<DEPRECIATION> 5,483,000
<TOTAL-ASSETS> 65,509,000
<CURRENT-LIABILITIES> 5,817,000
<BONDS> 7,596,000
0
0
<COMMON> 122,000
<OTHER-SE> 51,974,000
<TOTAL-LIABILITY-AND-EQUITY> 65,509,000
<SALES> 18,913,000
<TOTAL-REVENUES> 18,913,000
<CGS> 9,052,000
<TOTAL-COSTS> 12,153,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 641,000
<INCOME-PRETAX> (1,033,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,033,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,033,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
