<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------ -------------
Commission File Number O-4136
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Lifecore Biomedical, Inc.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0948334
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3515 Lyman Boulevard
Chaska, Minnesota 55318
- ------------------------------ ----------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 612-368-4300
------------
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
The number of shares outstanding of the registrant's Common Stock, $.01 per
value, as of October 15, 1998 was 12,374,422 shares.
1
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
September 30, 1998 and June 30, 1998 3
Consolidated Condensed Statements of Operations for Three
Months Ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for
Three Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. Other Information
Item 6. a. Exhibit Index 14
b. Reports on Form 8-K 14
SIGNATURES 15
2
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 851,000 $ 2,092,000
Short-term investments 1,498,000 3,953,000
Accounts receivable 4,884,000 4,609,000
Inventories 12,369,000 12,918,000
Prepaid expenses 587,000 503,000
------------- -----------
20,189,000 24,075,000
Property, plant and equipment
Land, building and equipment 40,688,000 39,840,000
Less accumulated depreciation (7,614,000) (6,948,000)
------------- -----------
33,074,000 32,892,000
Other assets
Intangibles 5,655,000 5,786,000
Security deposits 857,000 848,000
Inventories 4,777,000 2,775,000
Other 552,000 572,000
------------- -----------
11,841,000 9,981,000
------------- -----------
$65,104,000 $66,948,000
------------- -----------
------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 1,333,000 $ 1,733,000
Accounts payable 2,586,000 3,783,000
Accrued compensation 774,000 804,000
Accrued expenses 708,000 671,000
------------- -----------
5,401,000 6,991,000
Long-term obligations 6,636,000 6,658,000
Shareholders' equity 53,067,000 53,299,000
------------- -----------
$65,104,000 $66,948,000
------------- -----------
------------- -----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales $5,505,000 $5,214,000
Cost of goods sold 2,337,000 2,527,000
---------- ----------
Gross profit 3,168,000 2,687,000
Operating expenses
Research and development 1,109,000 1,344,000
Marketing and sales 1,639,000 1,730,000
General and administrative 898,000 757,000
---------- ----------
3,646,000 3,831,000
---------- ----------
Loss from operations (478,000) (1,144,000)
Other income (expense)
Interest income 133,000 295,000
Interest expense (248,000) (54,000)
---------- ----------
(115,000) 241,000
---------- ----------
Net loss $ (593,000) $ (903,000)
---------- ----------
Net loss per common share
Basic $ (.05) $ (.07)
---------- ----------
Diluted $ (.05) $ (.07)
---------- ----------
Weighted average shares outstanding
Basic 12,362,441 12,225,025
---------- ----------
Diluted 12,362,441 12,225,025
---------- ----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net cash used in operating activities $(2,791,000) $(1,534,000)
Cash flows from investing activities:
Purchases of property, plant and equipment (849,000) (3,280,000)
Purchases of investments (498,000) (991,000)
Maturities of investments 2,953,000 6,653,000
Purchases of intangibles (18,000) (14,000)
Other 23,000 173,000
------------ ------------
Net cash provided from investing activities 1,611,000 2,541,000
Cash flows form financing activities:
Payments of long-term obligations (422,000) (20,000)
Proceeds from stock issuance 361,000 70,000
------------ ------------
Net cash (used in) provided from financing activities (61,000) 50,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,241,000) 1,057,000
Cash and cash equivalents at beginning of period 2,092,000 1,371,000
------------ ------------
Cash and cash equivalents at end of period $ 851,000 $2,428,000
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 270,000 $ 173,000
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1998
NOTE A - FINANCIAL INFORMATION
Lifecore Biomedical, Inc. (the "Company" or "Lifecore"), develops, manufactures,
and markets surgically implantable materials and devices through its two
divisions, the Hyaluronate Division and the Oral Restorative Division. The
Hyaluronate Division's manufacturing facility is located in Chaska, Minnesota
and markets its products through OEM and contract manufacturing alliances in the
fields of ophthalmology, veterinary and wound care management. The Oral
Restorative Division markets its products through direct sales in the United
States and Italy and through distributors in other foreign countries.
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with Regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading.
In the opinion of management, the unaudited consolidated condensed financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 1998, and the results of operations and cash flows for the three month
periods ended September 30, 1998 and 1997. The results of operations for the
three months ended September 30, 1998 are not necessarily indicative of the
results for the full year or of the results for any future periods.
In preparation of the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
NOTE B - INVESTMENTS
The Company has invested its excess cash in commercial paper and medium term
corporate notes. These investments are classified as held-to-maturity given the
Company's intent and ability to hold the securities to maturity and are carried
at amortized cost. Investments that have maturities of less than one year have
been classified as short-term investments. At September 30, 1998 and June 30,
1998, amortized cost approximates fair value of held-to-maturity investments
which consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
----------- -----------
<S> <C> <C>
(Unaudited)
Short-term investments:
Medium term corporate notes $1,000,000 $3,953,000
Commercial paper 498,000 -
----------- -----------
$1,498,000 $3,953,000
----------- -----------
----------- -----------
</TABLE>
6
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONT.)
September 30, 1998
NOTE C - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories not expected to be consumed within one year are classified
as a long-term asset. Finished good inventories include hyaluronic acid,
packaged aseptic and oral restorative products. Inventories consist of the
following:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
----------- -----------
<S> <C> <C>
(Unaudited)
Raw materials $ 4,080,000 $ 4,236,000
Work in progress 289,000 204,000
Finished goods 12,777,000 11,253,000
----------- -----------
$17,146,000 $15,693,000
----------- -----------
----------- -----------
</TABLE>
NOTE D - AGREEMENTS
In 1994, Lifecore and Ethicon, Inc. ("Ethicon"), a subsidiary of Johnson &
Johnson, entered into a Conveyance, License, Development and Supply Agreement
(the "Ethicon Agreement"). Under the terms of the Ethicon Agreement, Ethicon
transferred to Lifecore its ownership in certain technology related to research
and development previously conducted on the Company's sodium hyaluronate
material. The technology transferred to Lifecore includes written technical
documents related to Ethicon's research and development of a product to inhibit
the formation of surgical adhesions. These documents include product
specifications, methods and techniques, technology, know-how and certain
patents. Lifecore has assumed responsibility for continuing the anti-adhesion
development project including conducting human clinical trials on INTERGEL-TM-
Adhesion Prevention Solution (formerly known as LUBRICOAT Gel), a second
generation hyaluronate-based product. Lifecore has granted Ethicon exclusive
worldwide marketing rights through 2008 to the products developed by Lifecore
within defined fields of use.
The Company has made and continues to make a significant investment in the
development and testing of INTERGEL-TM- Adhesion Prevention Solution, a product
designed to reduce the incidence of postsurgical adhesions. The product is
currently undergoing human clinical trials to develop the data necessary to
apply to the United States Food and Drug Administration ("FDA") for clearance to
market the product for commercial application. However, even if the product is
successfully developed and the Company receives clearance from the FDA, there
can be no assurance that it will receive market acceptance. Failure to achieve
significant sales of the product could have a material adverse effect on future
prospects for the Company's operations.
NOTE E - COMMITMENTS
The Company has completed the expansion of its manufacturing and distribution
capabilities at its Chaska, Minnesota location. The expansion included building
and equipment expenditures for warehouse and distribution capabilities, and
aseptic-packaging facilities for finished products. At June 30, 1998, the
expansion assets were placed in service. At June 30, 1998, firm purchase
commitments related to the expansion of approximately $1,770,000 were recorded
in accounts payable.
7
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONT.)
September 30, 1998
NOTE F - CAPITALIZED INTEREST
At September 30, 1997, $153,000 of interest was capitalized in conjunction with
the facility expansion project.
NOTE G - LINE OF CREDIT
On January 15, 1998, the Company entered into a $5,000,000 Credit Agreement and
Revolving Credit Note with a bank. The agreement allows for advances against
eligible securities and eligible accounts receivable, subject to a borrowing
base certificate. Interest is accrued at either the prime rate or the
Eurodollar Rate plus a basis point adjustment as defined in the Credit
Agreement. The effective interest rate at September 30, 1998 was 7.43%. The
Revolving Credit Note matures on December 31, 1998. At September 30, 1998,
there were no amounts outstanding under this line of credit.
NOTE H - NOTE PAYABLE ON ACQUISITION OF TEFGEN MEMBRANE PRODUCT LINE
In May 1997, the Company acquired the technology and regulatory rights in the
TefGen membrane product line from Bridger Biomed, Inc. As consideration for the
$2,400,000 acquisition price, the Company paid $800,000 in cash and issued a
note payable for $1,600,000. The note, as amended, bears interest at 6% per
annum with a principal payment of $400,000 plus interest due in July 1998 and a
principal payment of $1,200,000 plus interest due in May 1999. The principal
payments may be made in cash or the Company's common stock at the Company's
option. If the Company chooses its common stock as the form of payment, the
note holder has certain registration rights. The Company exercised its option
to make the July 1998 principal payment of $400,000 plus interest in the form of
the Company's common stock. To satisfy the $400,000 amount plus interest due,
28,413 shares of common stock were issued in July 1998 under the formula
described in the note. The note is secured by the purchased assets. The cost
of the technology and regulatory rights is being amortized on a straight-line
basis over 15 years.
NOTE I - NET INCOME (LOSS) PER SHARE
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 - "Earnings per Share". As required by Statement No. 128,
all current and prior year income (loss) per share data have been restated to
conform to the provisions of Statement No. 128.
The Company's basic net income (loss) per share amounts have been computed by
dividing net income (loss) by the weighted average number of outstanding common
shares. The Company's diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of outstanding common
shares and common share equivalents relating to stock options, when dilutive.
For the three months ended September 30, 1998 and 1997, the Company reported net
losses and as such, no common share equivalents were included in the computation
of diluted net loss per share. However, if the Company would have reported net
income in the three months ended September 30, 1998 and 1997, the common share
equivalents that would have been included in the computation of diluted net
income per share were 104,913 and 218,047, respectively.
Options to purchase 1,265,068 and 886,918 shares of common stock with a weighted
average exercise price of $16.99 and $16.89 were outstanding at September 30,
1998 and 1997, respectively, but were
8
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONT.)
September 30, 1998
excluded from the computation of common share equivalents because their
exercise prices were greater than the average market price of the common
shares on such dates.
NOTE J - NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income includes
certain changes in equity that were excluded from net earnings. The adoption of
this statement did not impact the Company's consolidated financial statements;
historically there have been no differences between net earnings and
comprehensive income.
The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
about Segments of and Enterprise and Related Information." This statement
requires companies to disclose financial and other information about its
business segments as part of their consolidated financial statements. The
Company will include the required business segment disclosures in the June 30,
1999 Annual Report.
9
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
(Unaudited) HYALURONATE ORAL RESTORATIVE
DIVISION DIVISION CONSOLIDATED
---------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,289,000 $1,947,000 $4,216,000 $3,267,000 $5,505,000 $5,214,000
Cost of goods sold 678,000 1,094,000 1,659,000 1,433,000 2,337,000 2,527,000
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 611,000 853,000 2,557,000 1,834,000 3,168,000 2,687,000
Operating expenses
Research and development 1,008,000 1,224,000 101,000 120,000 1,109,000 1,344,000
Marketing and sales 28,000 38,000 1,611,000 1,692,000 1,639,000 1,730,000
General and administrative 386,000 301,000 512,000 456,000 898,000 757,000
---------- ---------- ---------- ---------- ---------- ----------
1,422,000 1,563,000 2,224,000 2,268,000 3,646,000 3,831,000
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations $(811,000) $(710,000) $333,000 $(434,000) $(478,000) $(1,144,000)
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
Net sales for the quarter ended September 30, 1998 increased $291,000 or 6% as
compared to the same quarter of last fiscal year. Hyaluronate product sales for
the current quarter decreased $658,000 as compared to the same quarter of last
fiscal year. The sales decrease was the result of a missed hyaluronate powder
shipment due to Hurricane Georges. This decrease was partially offset by sales
of INTERGEL-TM- Solution. Oral restorative product sales for the current
quarter increased 29% compared to the same quarter of last fiscal year. This
increase reflects a 55% increase in sales of tissue regeneration products and a
26% increase in implant product line sales. Oral restorative product sales
increased in the domestic and the international markets.
Consolidated gross margin increased to 58% for the current quarter from 52% for
the same quarter of last fiscal year. The gross margin for the Hyaluronate
Division increased to 47% from 44% due to the expanded utilization of the
Company's aseptic and hyaluronate production capacity. The gross margin for the
Oral Restorative Division increased to 61% for the current quarter from 56% for
the same quarter of last fiscal year. The increase is the result of a focus on
improved sales margins and to a lessor extent, the leveraging of overhead costs
over a greater sales base.
Research and development expenses decreased $235,000 or 17% for the current
quarter as compared to the same quarter of last fiscal year. The decrease
resulted principally from decreased costs associated with human clinical trials
on INTERGEL-TM- Adhesion Prevention Solution as the study enrollment is
approaching the end.
Marketing and sales expenses decreased $91,000 or 5% for the current quarter as
compared to the same quarter of last fiscal year. Advertising and marketing
expenses were higher a year ago due to the introduction of the tissue
regeneration products. This decrease was partially offset by higher
10
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONT.)
compensation costs for additional sales personnel and commissions on an
increased oral restorative sales base for the current quarter.
General and administrative expenses increased $141,000 or 19% for the current
quarter as compared to the same quarter last fiscal year. The increase is
principally from higher personnel related costs and expenses from outside
professional services.
Other income (expense) decreased $356,000 for the current quarter as compared to
the same quarter of last fiscal year. The $162,000 decrease in interest income
results from a lower average amount of cash to invest than in the same quarter
of last fiscal year. Interest expense increased $194,000 for the current
quarter principally due to capitalization of interest expense associated with
the facility expansion project in the quarter a year ago. The facility
expansion was complete as of June 30, 1998 and thus, no interest was capitalized
during the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Annual Report on Form 10-K for the year ended June 30, 1998
contains a detailed discussion of Lifecore's liquidity and capital resources.
In conjunction with this Quarterly Report on Form 10-Q, investors should read
the 1998 Form 10-K.
The Company has had significant operating cash flow deficits for the last three
fiscal years. As the Hyaluronate Division's production levels increase, its
related production efficiencies increase. However, marketing and sales expenses
for the oral restorative products are expected to continue at a high level, and
personnel costs have increased. The ongoing research and development costs for
INTERGEL-TM- Adhesion Prevention Solution will continue throughout this fiscal
year, but the costs should be at a lower rate than the previous year. During
fiscal 1998 and 1997, the Company expanded its manufacturing and distribution
capabilities at its Chaska, Minnesota location. The expansion included building
and equipment expenditures for warehouse and distribution capabilities and
scale-up of aseptic-packaging facilities for finished products. The cost of the
expansion totaled approximately $19 million and was completed in June 1998. The
expansion was funded from the proceeds of investment maturities. This expansion
provides future capacity, but increases the level of fixed charges to be
absorbed by operations.
On January 15, 1998, the Company entered into a $5,000,000 Credit Agreement and
Revolving Credit Note with a bank. The agreement allows for advances against
eligible securities and eligible accounts receivable, subject to a borrowing
base certificate. Interest is accrued at either the prime rate or the
Eurodollar Rate plus a basis point adjustment as defined in the Credit
Agreement. The Revolving Credit Note matures on December 31, 1998.
The Company's ability to generate positive cash flow from operations and achieve
profitability is dependent upon the continued expansion of revenue from its
hyaluronate and oral restorative businesses. Growth in the Hyaluronate Division
is unpredictable due to the complex governmental regulatory environment for new
medical products and the early stage of certain of these markets. Similarly,
expansion of the Company's Oral Restorative Division sales is also dependent
upon increased revenue from new and existing customers, as well as successfully
competing in a more mature market. With the completion of the facility
expansion, the Company expects its cash generated from anticipated operations
and the availability of the line of credit to satisfy cash flow needs in the
near term. No assurance can be given that the Company will attain and maintain
positive cash flow before its capital resources are exhausted. While the
Company's capital resources appear adequate today, unforeseen events, prior to
11
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONT.)
achieving and maintaining positive cash flow, could require additional
financing. If additional financing is necessary, no assurance can be given that
such financing will be available and, if available, will be on terms favorable
to the Company and its shareholders.
YEAR 2000 COMPLIANCE
With the assistance of a consulting firm, the Company has completed an
assessment of Year 2000 compliance for its critical operating and application
systems. Through this assessment, no major issues were discovered. The Company
expects to be fully Year 2000 compliant by December 31, 1998. The cost
associated with the assessment and any modifications necessary was less than
$50,000.
Ultimately, the potential impact of the Year 2000 issue will depend not only on
the actions taken by the Company, but also on the way in which the Year 2000
issue is addressed by customers, vendors, service providers, utilities,
governmental agencies and other entities with which the Company does business.
The Company is communicating with these parties to learn how they are addressing
the Year 2000 issue and to evaluate any likely impact on the Company. The
Company has requested commitment dates from the various parties as to their Year
2000 readiness and delivery of compliant software and other products. This
process will continue throughout fiscal 1999. The Year 2000 efforts of third
parties are not within the Company's control, however, and their failure to
respond to Year 2000 issues successfully could result in business disruption and
increased operating cost for the Company. At the present time, it is not
possible to determine whether any such events are likely to occur, or to
quantify any potential negative impact they may have on the Company's future
results of operations and financial condition. The Company expects to assess
its need for contingency plans during 1999.
The foregoing discussion regarding the Year 2000 Project's timing,
effectiveness, implementation, and cost, contains forward-looking statements,
which are based on management's best estimates derived using assumptions. These
forward-looking statements involve inherent risks and uncertainties, and actual
results could differ materially from those contemplated by such statements.
Factors that might cause material differences include, but are not limited too,
the availability of key Year 2000 personnel, the Company's ability to locate and
correct all relevant computer codes, the readiness of third parties, and the
Company's ability to respond to unforeseen Year 2000 complications. Such
material differences could result in, among other things, business disruption,
operational problems, financial loss, legal liability and similar risks.
Certain statements in this Form 10-Q are forward-looking statements as defined
in the Private Securities Litigation Reform Act of 1995. Such statements imply
continued financial improvement. Because of numerous risks and uncertainties in
Lifecore's business activity, actual results may differ materially from those
implied. Investors are referred to a more detailed discussion of those risks
presented in Management's Discussion and Analysis of Financial Condition and
Results of Operations section in the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.
12
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market funds and highly rated
corporate debt securities. All investments are held-to-maturity. The market
risk on such investments is minimal. Receivables from sales to foreign
customers are denominated in U.S. Dollars. If the currencies of these countries
were to fall significantly against the U.S. Dollar, there can be no assurance
that such companies would be able to repay the receivables in full.
Transactions at the Company's foreign subsidiary, Lifecore Biomedical SpA, are
in lire. The Company has historically had minimal exposure to changes in
foreign currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. The Company's
outstanding long-term debt carries interest at a fixed rate. There is no
material market risk relating to the Company's long-term debt.
13
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits and Exhibit Index
3.1 Restated Articles of Incorporation, as amended (incorporated
by reference to Exhibit 19(a) to Amendment No. 1 on Form 8,
dated July 13, 1988, to Form 10-Q for the quarter ended
December 31, 1987), as amended by Amendment No. 2,
(incorporated by reference to Exhibit 3.1 to Form 10-K for the
year ended June 30, 1997)
3.2 Amended Bylaws, (incorporated by reference to Exhibit 3.2 to
Form 10-K/A for the year ended June 30, 1995)
3.3 Form of Rights Agreement, dated as of May 23, 1996, between
the Company and Norwest Bank Minnesota, National Association
(incorporated by reference to Exhibit 1 to the Company's Form
8-A Registration Statement dated May 31, 1996)
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to 1987 S-2 Registration Statement
[File No. 33-12970])
10.1 Second Amendment to Credit Agreement dated November 9, 1998 by
and between the Company and U.S. Bank National Association,
filed herewith
27 Financial Data Schedule
b. Reports on Form 8-K
None
14
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFECORE BIOMEDICAL, INC.
Dated: November 10, 1998 /s/ James W. Bracke
-------------------------------
James W. Bracke
President & Chief Executive
Officer
Dated: November 10, 1998 /s/ Dennis J. Allingham
-------------------------------
Dennis J. Allingham
Executive Vice President
& Chief Financial Officer
(Principal Financial Officer)
15
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT ("Agreement") is made and
entered into to be effective as of November 9, 1998, by and between LIFECORE
BIOMEDICAL, INC., a Minnesota corporation ("Borrower") and U.S. BANK NATIONAL
ASSOCIATION, a national banking association formerly known as First Bank
National Association (the "Lender"), whose address is 300 Prairie Center
Drive, Eden Prairie, Minnesota 55344.
RECITALS
FIRST: The Lender and the Borrower are parties to a Credit Agreement
dated January 15, 1998, as amended by a First Amendment to Credit Agreement
dated June 30, 1998 (together, the "Credit Agreement"), pursuant to which
Borrower is indebted to Lender under a revolving line of credit evidenced by
that certain Revolving Credit Note (the "Note") dated January 15, 1998,
delivered by the Borrower to the Lender pursuant to the terms of the Credit
Agreement in the original principal amount of Five Million Dollars
($5,000,000) (the "Revolving Credit Loan").
SECOND: All indebtedness, liabilities and other obligations of the
Borrower to the Lender, including without limitation the Credit Agreement and
the Note, are secured by (i) security interests in assets of the Borrower
granted pursuant to a Security Agreement dated January 15, 1998 executed by
the Borrower in favor of the Lender (the "Security Agreement") and (ii) a
Custodial Pledge and Security Agreement dated January 15, 1998 executed by
the Borrower in favor of the Lender (the "Custodial Pledge and Security
Agreement").
THIRD: The Borrower has requested that the Lender extend the maturity
date of the Revolving Credit Loan and the Lender has indicated its
willingness to grant such request of the Borrower, SUBJECT, HOWEVER, to the
terms and conditions contained herein.
NOW THEREFORE, in consideration of the loans and advances made pursuant
to the Credit Agreement and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
1. CERTAIN DEFINED TERMS.
Capitalized terms used in this Agreement and defined in the Credit
Agreement but not otherwise defined in this Agreement shall have the
meanings ascribed to such terms under the Credit Agreement.
2. AMENDMENT TO CREDIT AGREEMENT.
A. The Credit Agreement is amended as follows:
<PAGE>
(1) SECTION 1 of the Credit Agreement is hereby amended by inserting
in alphabetical order the following new defined term:
"CURRENT RATIO" means, at any date, the ratio of the
Borrower's Current Assets to its Current Liabilities.
(2) The definition of the term "Lender" set forth in Section 1 of the
Credit Agreement is hereby deleted and replaced to read in its
entirety as follows:
"LENDER" means U.S. Bank National Association, a national
banking association, its successors and assigns.
(3) The definition of the term "Termination Date" set forth in
Section 1 of the Credit Agreement is hereby deleted and replaced
to read in its entirety as follows:
"TERMINATION DATE" means the earlier of (a) December 31,
1998; or (b) the date upon which the obligation of the
Lender to make Advances is terminated pursuant to SECTION 2.
(4) Section 5.13 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
5.13 CURRENT RATIO. Maintain as of September 30, 1998,
December 31, 1998 and the end of each quarterly period
thereafter, a Current Ratio of at least 3.0 to 1.0.
B. Except as amended hereby, the Credit Agreement shall remain in full
force and effect.
3. NOTE MODIFICATION.
A. The Note is modified as follows:
(1) The date on which all amounts outstanding under the Note shall be
due and payable is modified to December 31, 1998. Accordingly,
all references in the Note to its scheduled maturity date shall
hereafter be deemed to refer to the date of December 31, 1998.
(2) All references in the Note to the Credit Agreement shall
hereafter be deemed to refer to the Credit Agreement as amended
and modified pursuant to this Agreement, and as may be further
amended, modified, supplemented, restated or replaced pursuant to
written agreement between the Lender and the Borrower.
B. Except as amended hereby, the Note shall continue in full force and
effect, and in accordance with its terms as originally executed.
-2-
<PAGE>
4. REAFFIRMATION OF SECURITY AGREEMENT AND CUSTODIAL PLEDGE AND SECURITY
AGREEMENT.
The Borrower reaffirms that the Security Agreement and the Custodial Pledge
and Security Agreement shall continue in full force and effect and shall be
entitled to all priorities existing under the Security Agreement and the
Custodial Pledge and Security Agreement as of the date first executed and
delivered and the security interests created thereby are hereby renewed and
extended to secure payment of the Obligations (as defined therein),
expressly including, but not limited to, the Credit Agreement and the Note,
both as amended hereby.
5. CONDITIONS TO EFFECTIVENESS.
This Agreement and its effectiveness are contingent upon the payment by
the Borrower to the Lender of all attorneys fees incurred by the Lender
in the negotiation, preparation and execution of this Agreement, and all
out-of-pocket costs incurred by the Lender in connection therewith, as well
as receipt by the Lender of the following, each to be in form and
substance satisfactory to the Lender in its sole discretion, unless
otherwise agreed in writing by the Lender:
A. This Agreement duly executed by the Borrower;
B. Evidence of authorization by the Borrower's Board of Directors of the
Borrower's execution of and performance under this Agreement; and
C. Such other items as the Lender may reasonably request.
6. MISCELLANEOUS.
A. The Borrower acknowledges and agrees that, as of November 6, 1998, no
principal or interest is outstanding under the Note and that the Note
and the Credit Agreement, both as amended and modified hereby, are
each the legal, valid, and binding obligations of the Borrower
enforceable against the Borrower in accordance with their terms and
are not subject to any defense, counterclaim, or right of offset.
B. All capitalized terms used herein and defined in the Credit Agreement
but not otherwise defined herein shall have the meanings ascribed to
such terms in the Credit Agreement.
C. All references in the Credit Agreement or any other of the Loan
Documents to the Credit Agreement or the Note shall hereafter be
deemed to refer to the Credit Agreement or the Note as the case may
be, both as amended by this Agreement and as may be further amended,
modified, restated or replaced pursuant to written agreement signed by
the Lender.
-3-
<PAGE>
D. The parties acknowledge that the security interests created and
evidenced by the Security Agreement and the Custodial Pledge and
Security Agreement are valid and subsisting and further acknowledge
and agree that there are no offsets, claims or defenses to the Note,
the Credit Agreement, the Security Agreement or the Custodial Pledge
and Security Agreement.
E. This Agreement is delivered in and shall in all respects be construed
according to the laws of the State of Minnesota.
F. This Agreement and each and every part hereof shall be binding upon
the parties hereto and their successors and assigns and shall inure to
the benefit of each and every future holder of the Notes including any
successors and assigns of the Lender.
G. This Agreement may be executed in any number of counterparts with the
same effect as if all parties hereto had signed the same document.
All such counterparts shall be construed together and shall constitute
one instrument, but in making proof hereof it shall only be necessary
to produce one such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the date and year first above written.
LIFECORE BIOMEDICAL, INC.,
a Minnesota corporation
By: /s/ Dennis J. Allingham
--------------------------------------
Name: Dennis J. Allingham
Title: Executive Vice President and Chief
Financial Officer
U.S. BANK NATIONAL ASSOCIATION,
a national banking association
By: /s/ Therese L. Knutson
--------------------------------------
Name: Therese L. Knutson
Title: Vice President
-4-
<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
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 851,000
<SECURITIES> 1,498,000
<RECEIVABLES> 5,244,000
<ALLOWANCES> 360,000
<INVENTORY> 17,146,000
<CURRENT-ASSETS> 20,189,000
<PP&E> 40,688,000
<DEPRECIATION> 7,614,000
<TOTAL-ASSETS> 65,104,000
<CURRENT-LIABILITIES> 5,401,000
<BONDS> 6,636,000
0
0
<COMMON> 124,000
<OTHER-SE> 52,943,000
<TOTAL-LIABILITY-AND-EQUITY> 65,104,000
<SALES> 5,505,000
<TOTAL-REVENUES> 5,505,000
<CGS> 2,337,000
<TOTAL-COSTS> 5,983,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 248,000
<INCOME-PRETAX> (593,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (593,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (593,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
