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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
COMMISSION FILE NUMBER: 0-4136
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LIFECORE BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0948334
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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)
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this FORM 10-K.|X|
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $119,000,000 at August 16, 1999 when the
last sale price of such stock, as reported by the Nasdaq National Market, was
$9.75.
The number of shares outstanding of the Registrant's Common Stock, $.01
stated value, as of August 16, 1999 was 12,417,604 shares.
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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.
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1
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PART I
ITEM 1. BUSINESS
GENERAL
Lifecore Biomedical, Inc. ("Lifecore" or the "Company") develops,
manufactures and markets surgical devices through two divisions, the Hyaluronate
Division and the Oral Restorative Division. Further information about Lifecore
can be obtained from Lifecore's Internet website at www.lifecore.com. The
Company was incorporated in the State of Minnesota in 1965.
The Company's Hyaluronate Division is principally involved in the
development and manufacture of products utilizing hyaluronate, a naturally
occurring carbohydrate that moisturizes or lubricates the soft tissues of the
body. The Hyaluronate Division's primary development project involves a version
of Lifecore's patented ferric hyaluronate technology, INTERGEL-TM- Adhesion
Prevention Solution ("INTERGEL Solution"). INTERGEL Solution is a
second-generation product with potential application in reducing the incidence
of post-surgical adhesions. INTERGEL Solution 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 post-surgical intervention.
Government sources recently estimated the annual cost of treatment of adhesion
complications in the female lower abdomen alone, a common site for the
occurrence of adhesions, at $2 billion in the United States. Since June 1998,
the Company's exclusive worldwide marketing partner, the Gynecare Division of
Ethicon, Inc., a Johnson & Johnson Company, has been marketing INTERGEL Solution
in Europe.
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 and for
veterinary applications. Lifecore is pursuing other applications of hyaluronate
through corporate partners for drug delivery and wound care applications. The
Company also is leveraging its hyaluronate manufacturing skills to provide
specialized contract aseptic manufacturing services.
The Company's Oral Restorative Division markets a comprehensive line
of titanium-based dental implants for replacement of lost or extracted teeth.
Through various acquisitions, the Company acquired the SUSTAIN-Registered
Trademark- Dental Implant System, the RESTORE-Registered Trademark- Dental
Implant System, and the Implant Support Systems ("ISS") line of compatible
components. The Company has substantially enhanced and expanded these product
lines since their acquisition. In July 1999, the Company received 510(k)
marketing clearance from the United States Food and Drug Administration
("FDA") to introduce the STAGE-1-TM- Single Stage Implant System. That system
is expected to be introduced for commercial sale in conjunction with the fall
1999 professional meetings. The Oral Restorative Division also manufactures
and markets tissue regeneration products for the restoration of soft tissue
and bone resulting from deterioration due to periodontal disease and tooth
loss. In May 1997, Lifecore acquired the TefGen Regenerative Membrane-TM-from
Bridger Biomed, Inc. ("Bridger"). The acquisition expanded and complemented
the Company's growing line of tissue regenerative products by adding a
nonresorbable membrane to address a 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 distributes
on an exclusive basis to the U.S. dental market for LifeCell Corporation
("LifeCell"). Effective July 1, 1999, the Company expanded its exclusive
distribution rights to include several markets outside the U.S. The Oral
Restorative Division's products are marketed in the U.S. through the
Company's direct sales force; in Italy through the Company's subsidiary,
Lifecore Biomedical SpA; and through 23 international distributors in 35
countries.
HYALURONATE DIVISION
BACKGROUND
Hyaluronate is a critical, naturally occurring carbohydrate component
of 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 or 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 tissues during the implantation
of intraocular lenses dramatically improved the existing surgical success rates.
The first
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commercial ophthalmic hyaluronate product produced by extraction from
rooster comb tissue, 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 in ophthalmology and are currently used in the majority of cataract
extraction procedures in the world.
Other hyaluronate applications currently being investigated by Lifecore
or its partners include post-surgical prevention of adhesions, catheter
guide-wire coatings and drug delivery (as a vehicle to carry wound management
agents). The Company believes that the use of hyaluronate for the prevention of
post-surgical adhesions currently represents the most significant potential
application for hyaluronate.
STRATEGY
The Company intends to use its proprietary 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"), Bausch & Lomb Surgical, a division
of Bausch & Lomb, Inc. ("Bausch & Lomb"), the Gynecare Division of Ethicon,
Inc., a Johnson & Johnson Company ("Ethicon"), IOLTECH Laboratories ("IOLTECH"),
Johnson & Johnson Medical, Ltd., a wholly-owned subsidiary of Johnson & Johnson
("JJML"), and Rayner Intraocular Lenses Limited. ("Rayner"), market leaders in
the ophthalmics and surgical products fields.
- EXPAND MEDICAL APPLICATIONS FOR HYALURONATE. The Company is
currently pursuing abdominal surgery, veterinary, drug delivery and wound care
opportunities. 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 of raw materials to manufacturer of aseptically-packaged finished
products. In addition, the Company may develop its own proprietary products.
- LEVERAGE HYALURONATE MANUFACTURING SKILLS. The Company is using
its viscous fluid handling and aseptic packaging experience gained in producing
hyaluronate to provide specialized contract aseptic manufacturing services.
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HYALURONATE DIVISION PRODUCTS
The following chart summarizes the principal products and development
projects of the Hyaluronate Division, along with their applications and the
companies with which Lifecore has related strategic alliances:
<TABLE>
<CAPTION>
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PRODUCT STRATEGIC ALLIANCE MARKET STATUS*
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<S> <C> <C> <C>
GENERAL SURGERY
INTERGEL-TM- Adhesion Lifecore's proprietary product under Adhesion Pending U.S. FDA
Prevention Solution development; the Gynecare Division of prevention Pre-Market Approval,
Ethicon has exclusive worldwide marketing marketed by the
rights for adhesion prevention Gynecare Division of
applications and orthopedics Ethicon in Europe for
abdominal applications
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OPHTHALMIC
Viscoat-Registered Trademark- Lifecore supplies proprietary hyaluronate Cataract surgery Commercial sales
Opthalmic powder for inclusion in Alcon since 1983
Viscoelastic Solution Laboratories' viscoelastic solution
Amvisc-Registered Trademark- Lifecore supplies finished syringes to Cataract Surgery Lifecore export
and Amvisc Plus-Registered Bausch & Lomb, who markets the products shipments commenced
Trademark-Opthalmic Solutions in December 1995;
U.S. sales pending
Bausch & Lomb PMA
supplement approval
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LUROCOAT-Registered Trademark- Lifecore supplies its proprietary product Cataract surgery Lifecore export
Ophtalmic to IOLTECH and Rayner, for marketing on a shipments commenced
Solution non-exclusive basis outside the U.S. in June 1997
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WOUND MANAGEMENT Lifecore supplies process development Wound management JJML commenced
Wound healing agent services and hyaluronate powder to clinical trials in
Johnson & Johnson Medical, Ltd. for use 1997
as a delivery vehicle
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OTHER APPLICATIONS
MAP-5-TM- Embryo Lifecore supplies hyaluronate in vials Veterinary Commercial sales
Cryopreservation Solution to Vetrepharm, Inc., who markets the cryopreservation, since 1994
product traumatic
arthritis
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</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 product using a version of its patented
ferric hyaluronate technology, INTERGEL Solution, for potential application in
reducing the incidence of post-surgical adhesions. The Gynecare Divison of
Ethicon, Inc., has worldwide, exclusive distribution rights for INTERGEL
Solution.
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,
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reproductive and thoracic surgeries, these adhesions may cause internal
complications that require costly additional surgical intervention. For
example, adhesions following abdominal surgery can cause infertility, life
threatening bowel obstructions, or complicate subsequent surgical
interventions. The Company believes that successful penetration of this
market will require a product with low toxicity, easy application, high
procedural flexibility, broad effectiveness and appropriate pricing.
LAPAROTOMY. Prior to 1994 Lifecore and Ethicon were jointly developing
an anti-adhesion project. However, in 1994, Lifecore assumed responsibility for
completion of this project. Lifecore subsequently completed the pre-clinical
studies and submitted an application to the FDA for an Investigational Device
Exemption ("IDE") to begin human clinical trials to evaluate the safety and
efficacy of INTERGEL Solution. 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 INTERGEL Solution or a control solution applied in a final step prior to
completion of surgery by laparotomy (conventional, or open surgery). The primary
goals of the pilot study were the preliminary assessment of the safety of
INTERGEL Solution and an evaluation of the experimental clinical protocol. A
secondary goal was the preliminary assessment of the effectiveness of INTERGEL
Solution in reducing post-surgical adhesions by second-look laparoscopy.
Second-look laparoscopy is a standard surgical practice with fertility patients,
and consists of a less invasive follow-up evaluation of the patients' internal
abdominal anatomy using microsurgical technology. The laparoscopy enabled
clinicians to gather data comparing post-surgical adhesions in the two patient
treatment groups. Analysis of the pilot clinical data indicated that patients
who received INTERGEL Solution experienced a 45% lower incidence of a broad
range of adhesions than control patients (p < 0.02). Further, the study showed
that when adhesions did occur, those of the INTERGEL Solution patient group were
significantly less extensive and less severe than those of the control group
(p < 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. That study was completed in December 1998. It involved over
250 patients in a blinded study at approximately twelve clinical sites in the
United States and five clinical sites in Europe. These patients undergo a
similar randomized treatment protocol and are evaluated for adhesion formation
at 24 abdominal and pelvic sites by second-look laparoscopy. Initial evaluations
of the pivotal trial confirm the trend of statistical significance observed in
the pilot trial. The Company submitted an application for FDA Pre-Market
Approval ("PMA") in March 1999, which was accepted by the FDA in May 1999 for
expedited review. There can be no assurance that the results of the pivotal
trial will be accepted by the FDA as sufficient to grant the Company a PMA. See
"Government Regulation."
LAPAROSCOPY. Subsequently, the Company began a second series of human
clinical trials to evaluate INTERGEL Solution as an adjunct in less invasive,
microsurgical procedures. Since laparoscopic procedures are rapidly becoming a
preferred surgical interventional method, the Company wished to ensure the
utility of INTERGEL Solution under the more physically restrictive demands of
laparoscopic techniques in comparison to laparotomy techniques. A pilot trial
has been completed showing results similar to that of the product in the pilot
laparotomy trial. The FDA has subsequently allowed the expansion of patient
enrollment in that trial to test for clinical significance in an ongoing
multi-center evaluation.
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 INTERGEL Solution. Furthermore, the Company granted
Ethicon exclusive worldwide marketing rights to INTERGEL Solution for
post-surgical adhesion prevention and certain orthopedic applications in return
for an exclusive supply contract through 2008 with provisions for renewal. The
Company currently receives certain technical support in return 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.
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 the form of a viscoelastic solution, is used to coat
and lubricate the anterior chamber of the eye during intraocular lens
implantation. 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 several customers, including Alcon, Bausch &
Lomb, IOLTECH and Rayner. Alcon and Bausch & Lomb are two of the leading
producers of ophthalmic surgical products in the world. The Company also has
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agreements to supply its LUROCOAT Solution under private label relationships
outside the United States and Canada to IOLTECH and Rayner.
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. The market share of products using fermented hyaluronate is
increasing 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 marketing
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
December 1998, is for a term of two years through December 31, 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In December 1994 the Company entered into a supply agreement with
Bausch & Lomb. Under the agreement, the Company has been selling its
hyaluronate to Bausch & Lomb for export in packaged syringes in connection
with two of Bausch & Lomb'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 Bausch & Lomb is in the process of obtaining a PMA
supplement with the FDA to allow the Company to manufacture these products
for U.S. sale. The sale by Bausch & Lomb in the United States of Amvisc and
Amvisc Plus syringes supplied by the Company is dependent upon FDA approval
of such supplement. In December 1995 Bausch & Lomb commenced shipments of
finished products supplied by the Company to Europe.
The Company has developed its own viscoelastic solution, LUROCOAT
Solution. The Company received CE marking for LUROCOAT Solution during fiscal
year 1997. The Company has private label agreements to supply LUROCOAT Solution
to IOLTECH and Rayner outside the United States and Canada. Export shipments of
LUROCOAT Solution began in fiscal year 1997.
OTHER APPLICATIONS
In its work with hyaluronate, the Company developed specialized
packaging skills with materials that, due to their perishable nature or complex
viscous handling properties, cannot be sterilized in a conventional manner and
require rigorous aseptic manufacturing and packaging protocols. The Company is
leveraging these skills to initiate non-ophthalmic development projects for the
manufacture of hyaluronate and non-hyaluronate products in other medical areas.
One such application is the use of hyaluronate as a drug delivery
vehicle for a product being developed by Johnson & Johnson Medical, Ltd.
("JJML"). JJML is developing a product that utilizes the Company's hyaluronate
and process development expertise to produce a drug delivery vehicle that
enhances topical wound healing. During fiscal 1997, JJML entered pre-clinical
trials with this product.
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.
There can be no assurance that products currently under development by
the Company or others will be successfully developed or, if so developed, will
be successfully and profitably marketed.
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ORAL RESTORATIVE DIVISION
BACKGROUND
Dental implants are increasingly accepted as a replacement for
missing or extracted teeth and 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 cylindrical screw
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. To further enhance bone
fixations, various implant styles may be spray coated with hydroxylapatite,
metal or grit blasted to create a roughened surface. The Company believes the
current worldwide dental implant market is approximately $500 million
annually.
Bone graft substitutes are used for the restoration of hard tissue
that has deteriorated due to periodontal disease and tooth loss.
Historically, bone needed to fill holes or restore bone loss in a patient was
only available from cadavers, live donor bone or autologous bone (from
another part of the patient's body). These sources have limitations related
to quality and convenience. The Company has developed a patented process for
the synthetic production of hydroxylapatite, the major inorganic constitute
of natural bone. The Company's hydroxylapatite products provide surgeons with
a readily available synthetic bone substitute of consistent quality at a
competitive cost for periodontal and oral surgery applications. While the
current market for synthetic bone substitute products is limited
(approximately $10 million annually in the United States), the addition of
supplemental hard tissue regeneration products has expanded the market to
approximately $25 million annually in the United States. In addition, the
market for dental purchases of freeze dried donor bone is estimated to be
approximately $10 million annually in the U.S. The Company's TefGen
Regenerative Membrane and CAPSET-Registered Trademark- Calcium Sulfate Bone
Graft Barrier products 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 annually. 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 broad-based 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 cooperative marketing programs with
clinician referral groups for the purpose of creating
increased awareness of dental implant and tissue regeneration
therapy, thereby expanding the clinician's practice.
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ORAL RESTORATIVE DIVISION PRODUCTS
The following chart summarizes the principal products of the Company's Oral
Restorative Division:
<TABLE>
<CAPTION>
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PRODUCT MARKET STATUS
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<S> <C> <C>
SUSTAIN-Registered Trademark- Replacement of lost or extracted teeth Commercial sales
and RESTORE-Registered Trademark-
Dental Implant Systems
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STAGE-1-TM- Single Stage Implant One-stage surgical procedure with self-tapping 510(k) approval,
System implant design for easier placement and Morse commercial sales to begin
taper prosthetic connection in September 1999
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SuperCAT-TM- Super Self-Tapping Faster and more efficient implant installation Commercial sales
Implant to reduce surgical time
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Implant Support Systems Precision oral restorative components compatible Commercial sales
with implants
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CAPSET-Registered Trademark- Calcium For use with natural and synthetic bone graft Commercial sales
Sulfate Bone Graft Barrier materials as a resorbable barrier cap and/or
binding agent
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CAPSET-Registered Trademark- Repair of multiple periodontal bone defects Commercial sales
SlowSet-TM- Barrier
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TefGen Regenerative Membrane-TM- Nonresorbable membrane for guided tissue Commercial sales
regeneration
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HAPSET-Registered Trademark- Repair of jawbone structure requiring a Commercial sales
Hydroxylapatite Bone Graft Plaster non-resorbable bone matrix
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AlloDerm-Registered Trademark- For use in gingival tissue replacement or Commercial sales
Dermal Graft augmentation surgery, including gingival
recession defects
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</TABLE>
IMPLANT PRODUCTS
The Company offers the RESTORE Dental Implant System, the SUSTAIN
Dental Implant System and the STAGE-1 Single Stage 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 formats 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, like the RESTORE System, is complemented
by a complete line of prosthetic components.
The STAGE-1 Single Stage Implant System is the Company's newest implant
line. It has been designed to allow for a one-stage surgical procedure. The
STAGE-1 System uses a self-tapping implant design for easier placement and
includes the reliable Morse taper prosthetic connection. The Company received
510(k) marketing clearance in July 1999 for this product. Commercial sales are
expected to begin with the fall 1999 professional meetings.
Lifecore has enhanced and expanded its product lines, creating numerous
new products with a combination of innovative features from its existing
systems. This gives the Company one of the broadest lines in the oral
restorative industry and offers practitioners maximum flexibility in choice of
treatment modalities with over 1,100 products.
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BONE AND SOFT TISSUE REGENERATION PRODUCTS
The Company offers five products which address various bone and tissue
regeneration procedures.
CAPSET Barrier received 510(k) clearance and was introduced to the
market in 1995. CAPSET-Registered Trademark- SlowSet-TM- Barrier was introduced
in July 1999. These products are based on a calcium sulfate plaster
technology developed by and licensed from Wright Medical, Inc., an orthopedic
product manufacturer based in Memphis, Tennessee. CAPSET Barrier and CAPSET
SlowSet Barrier allow 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 Regenerative Membrane technology was acquired by the Company
from Bridger Biomed, Inc. in May 1997. This non-resorbable membrane is based
on nanoporous 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 underneath 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 fill a bone defect during surgery. It consists of the
Company's hydroxylapatite particle in a carrier of the same calcium sulfate
plaster used in CAPSET Barrier.
AlloDerm-Registered Trademark- Acellular Dermal Graft is
freeze-dried, 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. distribution agreement
with LifeCell Corporation to market and distribute AlloDerm Graft in the
dental market. Effective July 1, 1999, the Company expanded its exclusive
distribution rights to include several markets outside the U.S. 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.
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 packaged
in bulk or single-application units. The Company sells its ophthalmic grade
hyaluronate powder to Alcon for Viscoat solution and supplies Bausch & Lomb's
Amvisc products for sale in Europe. The Company has private label agreements to
supply LUROCOAT Solution to IOLTECH and Rayner outside the United States and
Canada. The Company also sells hyaluronate solution for veterinary embryo
cryopreservation to Vetrepharm, Inc.
The Company has an agreement with the Gynecare Division of Ethicon for
exclusive distribution of INTERGEL Solution. 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
INTERGEL Solution is dependent on completion of additional clinical trials,
receipt of FDA marketing clearance, 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.
9
<PAGE>
ORAL RESTORATIVE DIVISION PRODUCTS
The Company is focused on expanding its oral restorative product line,
improving product quality, and developing increased sales and marketing support.
The dental implant market is highly specialized. Products are marketed to oral
surgeons, periodontists, implantologists, prosthodontists, general dental
practitioners and dental laboratories. Accordingly, management believes it must
maintain a highly experienced direct sales force in the United States for proper
distribution of these products. The Company believes that 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 twenty-one 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 twenty-three
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. 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 $20-30 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 INTERGEL
Solution 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. In addition, changing regulatory requirements
make medical use of animal extracts increasingly problematic. 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, a more
favorable long-term regulatory environment, and better economies of scale in
producing large commercial quantities.
The Company's recently expanded 110,000 square foot facility is used
primarily for the proprietary hyaluronate manufacturing process. The Company has
been building hyaluronate inventory levels in anticipation of the demand for
INTERGEL Solution, once the product receives PMA marketing clearance from the
FDA for sales in the U.S. The Company believes that the current inventory
on-hand, together with its manufacturing capacity, will be sufficient to allow
it to meet the needs of its current customers for the foreseeable future.
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 bulk and individual use
finished packages. 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 INTERGEL Solution, the Company has expanded 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 device
and pharmaceutical products. The FDA periodically inspects the Company's
manufacturing
10
<PAGE>
systems, and requires conformance to the FDA's Quality Systems Regulations
("QSR"). In addition, the Company's corporate partners are required by the
FDA to conduct intensive regulatory audits of the 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 EUROPEAN (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 dental
implant devices and related components. The Company inspects vendors' quality
assurance and control functions, and performs its own finished packaging related
to the implant product lines.
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 products 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 Regeneratvive
Membrane 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 Alliance
Pharmaceuticals, Inc., Anika Therapeutics, Inc., Biomatrix, Inc., Focal, Inc.,
Genzyme Corporation ("Genzyme"), Gliatech, Inc., Life Medical Sciences,
Osteotech, and W.L. Gore & Associates, Inc. Genzyme is developing
hyaluronate-based formulations for surgical anti-adhesion applications which
could compete with the Company's INTERGEL Solution product, if and when cleared
for marketing by the FDA. If the products obtain commercial acceptance the
Company's prospects for INTERGEL Solution, 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 fermentation version of hyaluronate to the Company's
ophthalmic customer, Alcon, for use in its Provisc-Registered Trademark-
solution. In addition, several companies manufacture hyaluronate by using
rooster comb extraction methods. These companies primarily include Anika
Therapeutics, 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.
11
<PAGE>
ORAL RESTORATIVE PRODUCTS
The dental implant market is also highly competitive. Major market
competitors include Sulzer Calcitek, Inc., Paragon, Implant Innovations, Inc.,
Strauman AG and Nobel Biocare AB. 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 competitive 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 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 INTERGEL Solution, with applications filed
in the United States, Australia, Brazil, Canada, Europe, Greece, and Japan.
Subsequently, the patent has been issued in Australia, Canada, Greece, Japan,
and the United States. The Company also has a United States patent covering the
processes used in the manufacture of hydroxylapatite and a second patent
covering the hydroxylapatite product produced by that process. The Company also
licenses patented technology used in the production of hydroxylapatite from
Wright Medical and the University of North Carolina. In conjunction with the
purchase of the TefGen Regerative Membrane 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
12
<PAGE>
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 QSR
requirements for devices. Class II devices are those whose safety and
effectiveness can reasonably be ensured through the use of special controls,
such as performance standards, post-market surveillance, patient registries,
and FDA guidelines. Class III devices are devices that must receive a PMA
from the FDA to ensure their safety and effectiveness. Ordinarily, a PMA
requires the performance of at least two independent, statistically
significant clinical trials that demonstrate the device's safety and
effectiveness. Class III devices are generally life-sustaining,
life-supporting, or implantable devices, and also include most devices that
were not on the market before May 28, 1976 ("new devices") and for which the
FDA has not made a finding of substantial equivalence based upon a 510(k)
Notification. An old Class III device does not require a PMA unless and until
the FDA issues a regulation requiring submission of a PMA application for the
device.
The FDA invariably requires clinical data for a PMA application and has
the authority to require such data for a 510(k) Notification. If clinical data
are necessary, the manufacturer or distributor is ordinarily required to obtain
an IDE authorizing the conduct of human studies. Once in effect, an IDE permits
evaluation of devices under controlled clinical conditions. After a clinical
evaluation process, the resulting data may be included in a PMA application or a
510(k) Notification. The PMA may be approved, or the 510(k) Notification cleared
by the FDA, only after a review process which may include requests for
additional data, sometimes requiring further studies.
If a manufacturer or distributor of medical devices can establish to
the FDA's satisfaction that a new device is substantially equivalent to 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 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 Regenerative Membrane product line is a Class II device. CAPSET
Barrier and HAPSET Plaster have
13
<PAGE>
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 QSR regulations. Manufacturing facilities are subject to periodic
inspections by the FDA to ensure compliance with device QSR 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 a $10.0 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, 1999, the Company employed 170 persons on a full-time
basis, one part-time employee and eight 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.
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 has been President and Chief
Executive Officer and a director since August 1983 and Secretary since March
1995. He joined the Company in February 1981 as Senior Research Scientist.
DENNIS J. ALLINGHAM. Mr. Allingham was appointed Executive Vice
President in November 1997. He has been Chief Financial Officer of the Company
since January 1996. Mr. Allingham has also been General Manager of the
Hyaluronate Division since November 1996 and General Manager of the Oral
Restorative Division since November 1997. From June 1995 until January 1996, Mr.
Allingham served as Senior Vice President and Chief Financial Officer of Premier
Salons International, Inc., a leading
14
<PAGE>
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.
BRIAN J. KANE. Mr. Kane was appointed Vice President of New Business
Development and Marketing in December 1997. He had 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.
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 110,000 square foot
building in Chaska, Minnesota. The Company completed its facility expansion
during fiscal 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation".
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
<PAGE>
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
1999 and 1998 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>
1999
First Quarter........................................ $ 7 1/4 $ 17
Second Quarter....................................... 5 3/4 10 3/8
Third Quarter........................................ 8 9/16 14 1/2
Fourth Quarter....................................... 8 3/16 13 1/16
1998
First Quarter........................................ $ 12 1/2 $ 18 3/4
Second Quarter....................................... 17 7/8 26 1/4
Third Quarter........................................ 18 23 3/8
Fourth Quarter....................................... 15 5/8 23 3/8
</TABLE>
The Company has not paid cash dividends on its Common Stock and does
not plan to pay cash dividends in the near future. The Company expects to retain
any future earnings to finance its business. The Company has a loan agreement
that restricts its ability to pay dividends. See Note D to Consolidated
Financial Statements.
At July 31, 1999, the Company had 675 shareholders of record.
16
<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, 1999 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,
---------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.......................................... $ 27,321 $ 25,570 $ 18,913 $ 14,063 $ 10,018
Costs of goods sold................................ 10,768 10,941 9,052 9,173 7,900
-------- -------- -------- -------- --------
Gross profit....................................... 16,553 14,629 9,861 4,890 2,118
Operating Expenses
Research and development......................... 3,557 4,940 3,703 2,699 1,381
Marketing and sales.............................. 7,164 6,889 5,464 4,356 3,038
General and administrative....................... 3,534 3,345 2,986 2,861 2,382
Insurance proceeds, net.......................... - - - (754) -
-------- -------- -------- -------- --------
14,255 15,174 12,153 9,162 6,801
-------- -------- -------- -------- --------
Income (loss) from operations...................... 2,298 (545) (2,292) (4,272) (4,683)
Other income (expense)............................. (722) 778 1,259 272 (532)
-------- -------- -------- -------- --------
Net income (loss).................................. $ 1,576 $ 233 $ (1,033) $ (4,000) $ (5,215)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) per common share
Basic...................................... $ .13 $ .02 $ (.08) $ (.40) $ (.66)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted.................................... $ .13 $ .02 $ (.08) $ (.40) $ (.66)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common and common equivalent
shares outstanding
Basic...................................... 12,398 12,269 12,179 10,114 7,880
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted.................................... 12,508 12,568 12,179 10,114 7,880
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital............................ $ 16,649 $ 17,084 $ 26,848 $ 22,207 $ 3,987
Total assets............................... 68,797 66,948 65,509 64,429 25,522
Long-term obligations...................... 6,720 6,658 7,596 7,193 7,888
Shareholders' equity....................... 55,471 53,299 52,096 52,152 10,188
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, manufactures and markets 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
17
<PAGE>
hyaluronate is as a component in ophthalmic surgical products marketed by
Alcon and Bausch & Lomb for cataract surgery. Sales to Alcon are made under a
supply agreement which extends through December 31, 2000. The agreement
contains minimum purchase requirements totaling $2.5 million in each of
calendar years 1999 and 2000. Currently, the Company supplies Bausch & Lomb
with aseptically packaged syringes according to purchase orders. Bausch &
Lomb is marketing the Company's product in Europe and is awaiting approval
from the FDA on its PMA supplement in order to begin sales of the Company's
product in the United States. Initial sales of INTERGEL Solution occurred
during fiscal 1998, as Ethicon began marketing INTERGEL Solution in Europe.
Sales of INTERGEL Solution in the United States are dependent upon Pre-Market
Approval by the FDA.
The Company's Oral Restorative Division markets a comprehensive line of
titanium-based dental implants for tooth replacement therapy. 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
YEAR ENDED JUNE 30, 1999 COMPARED WITH YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
HYALURONATE ORAL RESTORATIVE
DIVISION DIVISION CONSOLIDATED
--------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 8,190,000 $ 9,720,000 $ 19,131,000 $ 15,850,000 $ 27,321,000 $ 25,570,000
Cost of goods sold 3,495,000 4,637,000 7,273,000 6,304,000 10,768,000 10,941,000
----------- ----------- ------------ ------------ ------------ ------------
Gross profit 4,695,000 5,083,000 11,858,000 9,546,000 16,553,000 14,629,000
Operating expenses
Research and development 2,937,000 4,441,000 620,000 499,000 3,557,000 4,940,000
Marketing and sales 108,000 187,000 7,056,000 6,702,000 7,164,000 6,889,000
General and administrative 1,438,000 1,373,000 2,096,000 1,972,000 3,534,000 3,345,000
----------- ----------- ------------ ------------ ------------ ------------
4,483,000 6,001,000 9,772,000 9,173,000 14,255,000 15,174,000
----------- ----------- ------------ ------------ ------------ ------------
Operating income (loss) $ 212,000 $ (918,000) $ 2,086,000 $ 373,000 $ 2,298,000 $ (545,000)
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
</TABLE>
NET SALES. Net sales increased $1,751,000 or 7% in fiscal 1999 from
fiscal 1998. Hyaluronate Division sales decreased $1,530,000 while the Oral
Restorative Division sales increased $3,281,000 or 21%.
The decrease in hyaluronate sales was due to lower sales of its
ophthalmic products in fiscal 1999 compared to fiscal 1998. Sales to Alcon were
$2,740,000 in fiscal 1999 compared with $4,761,000 for fiscal 1998. The decrease
in ophthalmic product sales was partially offset by a 39% increase in sales to
other Hyaluronate Division customers in fiscal 1999 compared to fiscal 1998.
Oral Restorative sales increased 21% to $19,131,000 in fiscal 1999 from
$15,850,000 in fiscal 1998. The increase primarily reflects the continued market
acceptance of the Company's implant products which increased by 18% and the
expanded product offerings in the tissue regeneration product line which
increased 40% in fiscal 1999 from fiscal 1998.
GROSS PROFIT. Consolidated gross profit, as a percentage of net sales,
increased to 61% in fiscal 1999 from 57% in fiscal 1998. Hyaluronate Division
gross profit increased to 57% in fiscal 1999 from 52% in fiscal 1998. The
increase resulted from the expanded utilization of the Company's aseptic and
hyaluronate production capacity. Oral Restorative Division gross profit was 62%
in fiscal 1999 and 60% in fiscal 1998. The increase in the gross profit was
principally from spreading fixed expenses over increased oral restorative
product sales and a slight change in the product mix to higher margin implants.
18
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$1,383,000 or 28% in fiscal 1999 from fiscal 1998. The decrease in fiscal 1999
was principally due to timing of costs associated with human clinical trials on
INTERGEL Solution as the study enrollment has ended for the laparotomy trial,
but continues for the laparoscopy trial.
MARKETING AND SALES. Marketing and sales expenses increased by $275,000
or 4% in fiscal 1999 from fiscal 1998. The increase in expenses occurred in the
Oral Restorative Division. The increase in fiscal 1999 was due to higher
compensation costs for additional sales and marketing personnel, higher sales
commissions on an increased sales base and increased seminar expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $189,000 or 6% in fiscal 1999 from fiscal 1998. The increase
resulted from higher personnel related costs, including salaries and rising
health insurance costs.
OTHER INCOME (EXPENSE). Interest expense was higher in fiscal 1999
compared to 1998 mainly from the capitalization of interest in conjunction with
the facility expansion project in fiscal 1998 of $691,000 and from interest
expense on the usage of the line of credit.
YEAR ENDED JUNE 30, 1998 COMPARED WITH YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HYALURONATE ORAL RESTORATIVE
DIVISION DIVISION CONSOLIDATED
------------------------- --------------------------- --------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 9,720,000 $ 7,115,000 $ 15,850,000 $ 11,798,000 $ 25,570,000 $ 18,913,000
Cost of goods sold 4,637,000 4,313,000 6,304,000 4,739,000 10,941,000 9,052,000
----------- ----------- ------------ ------------ ------------ ------------
Gross profit 5,083,000 2,802,000 9,546,000 7,059,000 14,629,000 9,861,000
Operating expenses
Research and development 4,441,000 3,227,000 499,000 476,000 4,940,000 3,703,000
Marketing and sales 187,000 161,000 6,702,000 5,303,000 6,889,000 5,464,000
General and administrative 1,373,000 1,291,000 1,972,000 1,695,000 3,345,000 2,986,000
----------- ----------- ------------ ------------ ------------ ------------
6,001,000 4,679,000 9,173,000 7,474,000 15,174,000 12,153,000
----------- ----------- ------------ ------------ ------------ ------------
Operating income (loss) $ (918,000) $(1,877,000) $ 373,000 $ (415,000) $ (545,000) $ (2,292,000)
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
</TABLE>
NET SALES. Net sales increased $6,657,000 or 35% in fiscal 1998 from
fiscal 1997, due to a $2,605,000 increase in sales to hyaluronate customers and
a $4,052,000 increase in sales to oral restorative customers.
Hyaluronate sales increased to $9,720,000 in fiscal 1998 from
$7,115,000 in fiscal 1997. Sales to Alcon were $4,761,000 and $3,204,000 for
fiscal years 1998 and 1997. In fiscal years 1998 and 1997, Alcon purchased above
its contract minimum. Net sales to hyaluronate customers other than Alcon
increased $1,048,000 or 27% in fiscal 1998 from fiscal 1997. This increase was
led mainly by initial sales of INTERGEL Solution to Ethicon and general
increases in other areas. Sales to Bausch & Lomb were comparable in fiscal 1998
and fiscal 1997.
Oral Restorative sales increased 34% to $15,850,000 in fiscal 1998 from
$11,798,000 in fiscal 1997. The increase primarily reflects the continued market
acceptance of the Company's implant products which increased by 26% and the
expanded product offerings in the tissue regeneration product line which
increased 109% in fiscal 1998 from fiscal 1997.
GROSS PROFIT. Gross profit, as a percentage of net sales, increased to
57% in fiscal 1998 from 52% in fiscal 1997. The increase resulted from expenses
being spread over increased product sales and the expanded utilization of the
Company's aseptic and hyaluronate production capacity. Gross profit, as a
percentage of net sales for the oral restorative products, was 60% in fiscal
1998 and fiscal 1997. Gross profit as a percent of net sales for the oral
restorative products in fiscal 1998, exclusive of Alloderm
19
<PAGE>
Dermal Graft, increased by 2 percentage points. However, this increase was
offset by a lower gross profit margin from Alloderm Dermal Graft, which was
introduced in fiscal 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$1,237,000 or 33% in fiscal 1998 from fiscal 1997. The increase in fiscal 1998
was principally a result of costs associated with human clinical trials on
INTERGEL Solution.
MARKETING AND SALES. Marketing and sales expenses increased by
$1,425,000 or 26% in fiscal 1998 from fiscal 1997. The increase in expenses
mainly occurred in the Oral Restorative Division. The components of the increase
in fiscal 1998 were higher compensation costs for additional sales personnel and
commissions on an increased sales base, increased advertising and marketing
costs, higher travel and entertainment expenses due to expanded sales personnel,
and a general increase in other areas.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $359,000 or 12% in fiscal 1998 from fiscal 1997. The increase
resulted from higher personnel related costs and the amortization of the TefGen
Regenerative Membrane product line purchase that occurred in May 1997.
OTHER INCOME (EXPENSE). Interest expense was lower in fiscal 1998
compared to fiscal 1997 due to the capitalization of interest expense in
conjunction with the facility expansion project. Interest income was lower in
fiscal 1999 compared to fiscal 1998 as a result of a lower average amount of
cash to invest than in fiscal 1998. Interest income was lower in fiscal 1998
compared to fiscal 1997 as a result of a lower average amount of cash to invest
than in fiscal 1997.
For information regarding the Company's international sales and
identifiable assets of each of its two business segments, see Note J to
Consolidate Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Inventories consist mainly of finished hyaluronate powder 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 $6,074,000 or 39% in fiscal 1999 from fiscal 1998
principally due to building of hyaluronate inventory levels in anticipation of
the demand for INTERGEL Solution.
The Company has had significant operating cash flow deficits for the
last three fiscal years. As the Hyaluronate Division's sales continue to
increase, the Company's direct charges associated with excess plant capacity are
decreasing; however, research and development costs for INTERGEL Solution,
marketing and sales expenses for the oral restorative products, and personnel
costs are increasing. Obligations under a promissory note in connection with the
TefGen Regenerative Membrane product line acquisition total $1,200,000. The
Company is currently involved in a dispute with a third party and Bridger
Biomed, Inc. The remaining principal amount of the note is payable contingent
upon the resolution of the dispute. The remaining amount may be paid in cash or
the Company's common stock at the Company's option.
The loan agreement between the Company and the holder of the industrial
development revenue bonds issued to finance the Company's Chaska, Minnesota
facility was amended in June 1999 to waive the fixed charge coverage ratio and
the cash flow coverage ratio through June 30, 2000. With respect to certain of
these covenants, the Company may be required to obtain further waivers for
fiscal 2001. There can be no assurance that future waivers will be granted to
the Company.
The Company has an agreement with a bank for a $5,000,000 line of
credit. The agreement allows for advances against eligible accounts receivable
and inventories, subject to a borrowing base certificate. Interest is accrued at
the prime rate, which was 7.75% at June 30, 1999. The agreement has a maturity
date of December 28, 2001. The terms of the agreement require the Company to
comply with various financial covenants. At June 30, 1999, the Company was in
compliance with all covenants.
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 to scale-up aseptic-packaging facilities for finished products.
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.
20
<PAGE>
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 ongoing profitability is dependent upon the continued expansion of
revenue from its hyaluronate and oral restorative businesses. Growth in the
Hyaluronate Division is unpredictable due to the complex governmental regulatory
environment for new medical products and the early stage of certain of these
markets. Similarly, expansion of the Company's Oral Restorative Division sales
is also dependent upon increased revenue from new and existing customers, as
well as successfully competing in a more mature market. With the completion of
the facility expansion, the Company expects its cash generated from anticipated
operations and the availability of the line of credit to satisfy cash flow needs
in the near term. No assurance can be given that the Company will attain and
maintain positive cash flow before its capital resources are exhausted. While
the Company's capital resources appear adequate today, unforeseen events, prior
to achieving and maintaining positive cash flow, could require additional
financing. If additional financing is necessary, no assurance can be given that
such financing will be available and, if available, will be on terms favorable
to the Company and its shareholders.
YEAR 2000 ISSUE
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 believes that it is fully Year 2000
compliant. The cost associated with the assessment and any modifications that
were necessary were 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 communicated with these parties to learn how they addressed the Year
2000 issue and evaluate any likely impact on the Company. The Company requested
commitment dates from the various parties as to their Year 2000 readiness and
delivery of compliant software and other products. 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 costs for the Company. While it is impossible to
evaluate every aspect of Year 2000 compliance, we believe that either of two
events would be our most likely Year 2000 worst case scenario. The first would
be from one or more of our sole or limited source suppliers to fail to be Year
2000 compliant or to have its business negatively impacted by Year 2000 issues
of others. The second would be delays in receiving orders or payments from
customers due to Year 2000 problems they experience. 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's contingency plans
include having several backup generators on site to handle any potential power
failures and a general plant shut down for a two week period on either side of
January 1, 2000 to ensure that there is no product in process over that time
period. Other miscellaneous plans for areas that are considered less critical
have also been developed.
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.
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.
Such statements include future product development, the results of clinical
trials, FDA clearances and the related timing of such, the potential size of the
markets for the Company's products and future product introductions. 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
21
<PAGE>
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 INTERGEL Solution, including the
necessary PMA from the FDA, and of 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 INTERGEL Solution on a timely
basis; (iv) the successful market introduction of the STAGE-1 Single Stage
Implant System, (v) intense competition in the markets for the Company's
principal products and (vi) other factors discussed in the risk factors filed
as Exhibit 99 to this Form 10-K. 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 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds and
highly rated corporate debt securities. All investments are held-to-maturity.
The market risk on such investments is minimal.
All receivables from sales to foreign customers are denominated in U.S.
Dollars. Transactions at the Company's foreign subsidiary, Lifecore Biomedical
SpA, are in Italian Lire. The market risk on the Company's foreign operations is
minimal.
At June 30, 1999, all of the Company's outstanding long-term debt carry
interest at a fixed rate. There is no material market risk relating to the
Company's long-term debt.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements are listed under Item 14 of this
report.
Summarized unaudited quarterly financial data for 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999
Net sales................................... $ 5,505,000 $ 6,881,000 $ 6,849,000 $ 8,086,000
Gross profit................................ 3,168,000 4,189,000 4,168,000 5,028,000
Net income (loss)........................... (593,000) 450,000 570,000 1,149,000
Net income (loss) per share
Basic............................... $ (.05) $ .04 $ .05 $ .09
Diluted............................. $ (.05) $ .04 $ .05 $ .09
Weighted average common and common
equivalent shares outstanding
Basic............................... 12,362,441 12,402,230 12,405,051 12,415,204
Diluted............................. 12,362,441 12,470,147 12,531,751 12,533,497
Year ended June 30, 1998
Net sales................................... $ 5,214,000 $ 6,258,000 $ 7,512,000 $ 6,586,000
Gross profit................................ 2,687,000 3,420,000 4,317,000 4,205,000
Net income (loss)........................... (903,000) (175,000) 806,000 505,000
Net income (loss) per share
Basic............................... $ (.07) $ (.01) $ .07 $ .04
Diluted............................. $ (.07) $ (.01) $ .06 $ .04
Weighted average common and common
equivalent shares outstanding
Basic............................... 12,225,025 12,239,438 12,274,096 12,319,705
Diluted............................. 12,225,025 12,239,438 12,686,287 12,595,930
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning director nominees is set forth in the section
entitled "Election of Directors" in the Company's Proxy Statement for its 1999
Annual Meeting of Shareholders to be held November 18, 1999, 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 1999 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 1999 Annual Meeting of
Shareholders which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as 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, 1999 and 1998.................................. F-2
Consolidated Statements of Operations - years ended June 30, 1999,
1998 and 1997......................................................................... F-4
Consolidated Statements of Cash Flows - years ended June 30, 1999,
1998 and 1997......................................................................... F-5
Consolidated Statements of Shareholders' Equity - years ended
June 30, 1999, 1998 and 1997.......................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7 through F-18
2. Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts....................................... S-1
(b) Reports on Form 8-K
None
(c) Exhibits and Exhibit Index
Description
-----------
2.1 Stock Purchase Agreement between ISS and Lifecore dated July 28,
1993 (includes $2 million 5% Promissory Note dated July 28, 1993 as
Exhibit A and Security Agreement as Exhibit B) (Pursuant to Rule
24b-2, certain portions of this Exhibit have been deleted and filed
separately with the Commission) (incorporated by reference to
Exhibit 2.1 to Form 8-K dated July 8, 1993)
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated July
13, 1988, to Form 10-Q 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])
25
<PAGE>
<CAPTION>
Description
-----------
<S> <C>
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 (incorporated by reference to Exhibit 10.1 to Form 10-K for
the year ended June 30, 1997), as amended on June 5, 1998,
(incorporated by reference to Exhibit 10.1 to Form 10-K for the year
ended June 30, 1998), as amended on June 10, 1999, 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 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), as amended by letter
agreement dated November 14, 1996 (incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarter ended December 31, 1997)
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
(incorporated by reference to Exhibit 10.11 to Form 10-K for the
year ended June 30, 1997)
26
<PAGE>
<CAPTION>
Description
-----------
<S> <C>
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 1996 Stock Option Plan (incorporated by reference to Exhibit 4.1 to
S-8 Registration Statement [File No. 333-18515])
10.14 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)
10.15 Amendment No. 3 to Hyaluronate Purchase Agreement dated May 12, 1993
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 10.18 to Form 10-K for the year ended June 30, 1993 as
amended on Form 10-K/A dated December 15, 1994)
10.16 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)
10.17 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)
10.18 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)
10.19 Supply Agreement dated December 7, 1994 between Lifecore Biomedical,
Inc. and IOLAB Corporation (now Bausch & Lomb Surgical) (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)
10.20 Standard Form of Agreement Between Owner and Construction Manager
dated June 1, 1996 between Lifecore Biomedical, Inc. and Marshall
Contractors, Inc., (incorporated by reference to Exhibit 10.21 to
Form 10-K for the year ended June 30, 1997)
10.21 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., (incorporated by reference to Exhibit 10.22 to
Form 10-K for the year ended June 30, 1997)
10.22 Credit and Security Agreement, dated December 28, 1998, between the
U.S. Bank National Association and the Company, (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended
December 31, 1998)
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
99 Risk Factors
</TABLE>
27
<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 31, 1999 By /s/ JAMES W. BRACKE
----------------------------------
James W. Bracke, Ph.D.
PRESIDENT, 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 31, 1999 By /s/ DENNIS J. ALLINGHAM
---------------------------------
Dennis J. Allingham
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Dated: August 31, 1999 By /s/ JAMES W. BRACKE
---------------------------------
James W. Bracke, Ph.D.
PRESIDENT, CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER),
SECRETARY AND DIRECTOR
Dated: August 31, 1999 By /s/ ORWIN L. CARTER
---------------------------------
Orwin L. Carter
DIRECTOR
Dated: August 31, 1999 By /s/ JOAN L. GARDNER
---------------------------------
Joan L. Gardner
DIRECTOR
Dated: August 31, 1999 By /s/ THOMAS H. GARRETT
---------------------------------
Thomas H. Garrett
DIRECTOR
Dated: August 31, 1999 By /s/ JOHN C. HEINMILLER
---------------------------------
John C. Heinmiller
DIRECTOR
Dated: August 31, 1999 By /s/ DONALD W. LARSON
---------------------------------
Donald W. Larson
DIRECTOR
Dated: August 31, 1999 By /s/ RICHARD W. PERKINS
---------------------------------
Richard W. Perkins
DIRECTOR
Dated: August 31, 1999 By /s/ MARK T. SELLNOW
---------------------------------
Mark T. Sellnow
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
28
<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, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years
in the period ended June 30, 1999. 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, 1999 and 1998, and
the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended June 30, 1999, 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, 1999.
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
July 30, 1999
F-1
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents....................................................... $ 544,000 $ 2,092,000
Short-term investments.......................................................... -- 3,953,000
Accounts receivable, less allowances............................................ 6,773,000 4,609,000
Inventories..................................................................... 15,446,000 12,918,000
Prepaid expenses................................................................ 492,000 503,000
------------ ------------
Total current assets......................................................... 23,255,000 24,075,000
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land............................................................................ 249,000 249,000
Building........................................................................ 23,890,000 23,667,000
Equipment....................................................................... 13,942,000 12,703,000
Land and building improvements.................................................. 3,356,000 3,221,000
------------ ------------
41,437,000 39,840,000
Less accumulated depreciation................................................... (9,454,000) (6,948,000)
------------ ------------
31,983,000 32,892,000
OTHER ASSETS
Intangibles..................................................................... 5,951,000 5,786,000
Security deposits............................................................... 841,000 848,000
Inventories..................................................................... 6,321,000 2,775,000
Other........................................................................... 446,000 572,000
------------ ------------
13,559,000 9,981,000
------------ ------------
$ 68,797,000 $ 66,948,000
------------ ------------
------------ ------------
</TABLE>
F-2
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations..................................... $ 1,458,000 $ 1,733,000
Advance on line of credit....................................................... 1,883,000 --
Accounts payable................................................................ 1,613,000 3,783,000
Accrued compensation............................................................ 777,000 804,000
Accrued expenses................................................................ 875,000 671,000
------------ -------------
Total current liabilities.................................................... 6,606,000 6,991,000
LONG-TERM OBLIGATIONS............................................................. 6,720,000 6,658,000
COMMITMENTS AND CONTINGENCIES..................................................... -- --
SHAREHOLDERS' EQUITY
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, 12,416,729 and 12,321,709
shares at June 30, 1999 and 1998............................................. 124,000 123,000
Additional paid-in capital...................................................... 85,679,000 85,084,000
Accumulated deficit............................................................. (30,332,000) (31,908,000)
------------ -------------
55,471,000 53,299,000
------------ -------------
$ 68,797,000 $ 66,948,000
------------ -------------
------------ -------------
</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>
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Net sales................................................. $ 27,321,000 $ 25,570,000 $ 18,913,000
Cost of goods sold........................................ 10,768,000 10,941,000 9,052,000
------------ ------------- ------------
Gross profit............................................ 16,553,000 14,629,000 9,861,000
Operating expenses
Research and development................................ 3,557,000 4,940,000 3,703,000
Marketing and sales..................................... 7,164,000 6,889,000 5,464,000
General and administrative.............................. 3,534,000 3,345,000 2,986,000
------------ ------------- ------------
14,255,000 15,174,000 12,153,000
------------ ------------- ------------
Operating income (loss).............................. 2,298,000 (545,000) (2,292,000)
Other income (expense)
Interest income......................................... 190,000 900,000 1,900,000
Interest expense........................................ (912,000) (122,000) (641,000)
------------ ------------- ------------
(722,000) 778,000 1,259,000
------------ ------------- ------------
NET INCOME (LOSS)......................................... $ 1,576,000 $ 233,000 $ (1,033,000)
------------ ------------- ------------
------------ ------------- ------------
Net income (loss) per common share
Basic............................................ $ .13 $ .02 $ (.08)
------------ ------------- ------------
------------ ------------- ------------
Diluted.......................................... $ .13 $ .02 $ (.08)
------------ ------------- ------------
------------ ------------- ------------
Weighted average common and common equivalent shares
outstanding
Basic............................................ 12,398,010 12,268,644 12,179,008
------------ ------------- ------------
------------ ------------- ------------
Diluted.......................................... 12,508,069 12,568,215 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>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 1,576,000 $ 233,000 $ (1,033,000)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization................................ 3,104,000 2,013,000 1,406,000
Allowance for doubtful accounts.............................. 26,000 60,000 --
Changes in operating assets and liabilities
Accounts receivable...................................... (2,523,000) 123,000 (2,466,000)
Inventories.............................................. (6,074,000) (5,414,000) (2,311,000)
Prepaid expenses......................................... 11,000 929,000 (632,000)
Accounts payable......................................... (2,170,000) 170,000 2,457,000
Accrued liabilities...................................... 242,000 189,000 8,000
Customers' deposits...................................... -- -- (1,952,000)
------------ ------------- -------------
Total adjustments..................................... (7,384,000) (1,930,000) (3,490,000)
------------ ------------- -------------
Net cash used in operating activities......................... (5,808,000) (1,697,000) (4,523,000)
Cash flows from investing activities:
Purchases of property, plant and equipment................... (1,610,000) (15,347,000) (11,338,000)
Purchases of intangibles..................................... (97,000) (28,000) (840,000)
Purchases of investments..................................... (2,485,000) (3,976,000) (11,379,000)
Maturities of investments.................................... 6,438,000 20,613,000 25,844,000
Decrease (increase) in security deposits..................... 7,000 (62,000) 2,000
Decrease in other assets..................................... 126,000 371,000 341,000
------------ ------------- -------------
Net cash provided by investing activities..................... 2,379,000 1,571,000 2,630,000
Cash flows from financing activities:
Payments of long-term obligations............................ (133,000) (123,000) (527,000)
Advance on line of credit.................................... 1,883,000 -- --
Proceeds from stock options exercised........................ 131,000 970,000 527,000
------------ ------------- -------------
Net cash provided by financing activities..................... 1,881,000 847,000 --
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents.......... (1,548,000) 721,000 (1,893,000)
Cash and cash equivalents at beginning of year................ 2,092,000 1,371,000 3,264,000
------------ ------------- -------------
Cash and cash equivalents at end of year...................... $ 544,000 $ 2,092,000 $ 1,371,000
------------ ------------- -------------
------------ ------------- -------------
Supplemental disclosure of cash flow information: Cash paid
during the year for:
Interest................................................. $ 726,000 $ 710,000 $ 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 July 1, 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....................... 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)
Exercise of stock options and
employee stock purchase savings
plan, net of 1,419 shares
surrendered in payment................ 98,987 1,000 969,000 --
Net income for the year ended
June 30, 1998......................... -- -- -- 233,000
---------- --------- ----------- -------------
Balances at June 30, 1998.................. 12,321,709 123,000 85,084,000 (31,908,000)
Exercise of stock options and
employee stock purchase savings
plan.................................. 66,607 1,000 345,000 --
Issuance of common stock issued as
payment of debt....................... 28,413 -- 250,000
Net income for the year ended
June 30, 1999......................... -- -- -- 1,576,000
---------- --------- ----------- -------------
Balances at June 30, 1999.................. 12,416,729 $ 124,000 $ 85,679,000 $ (30,332,000)
---------- --------- ------------ -------------
---------- --------- ------------ -------------
</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"), manufactures biomaterials
and surgical devices for use in various surgical markets and provides
specialized contract aseptic manufacturing services through its two divisions,
the Hyaluronate Division and the Oral Restorative Division. The Company's
manufacturing facility is located in Chaska, Minnesota. The Hyaluronate Division
markets its products through OEM and contract manufacturing alliances in the
fields of general surgery, ophthalmology, veterinary and wound 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 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 periods. 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
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,
1998, principally all of the Company's cash and cash equivalents were invested
in a money market fund.
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, 1998, short-term investments consisted of medium term
corporate notes with an amortized cost of $3,953,000, which approximated fair
value.
F-7
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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. Management performs on-going credit evaluations of its
customers. The Company's customers are located primarily throughout the United
States, Europe, and South America. Accounts receivable balances from customers
located in Europe and South America were 32% and 42% of total receivables at
June 30, 1999 and 1998. The Company maintains allowances for potential credit
losses which were $372,000 and $346,000 at June 30, 1999 and 1998.
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventories consist mainly of finished hyaluronate powder,
aseptic units and oral restorative products and related raw materials. The
portion of finished hyaluronate powder inventory not expected to be consumed
within the next twelve months is classified as a long-term asset. The finished
hyaluronate inventory is maintained in a frozen state and has a shelf life in
excess of five years. Inventories consist of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Raw materials ......................... $ 3,847,000 $ 4,236,000
Work-in-process ......................... 185,000 204,000
Finished goods ......................... 17,735,000 11,253,000
------------ ------------
$ 21,767,000 $ 15,693,000
------------ ------------
------------ ------------
</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 $2,519,000, $1,465,000 and $990,000 for the years ended June
30, 1999, 1998 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>
F-8
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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., the cost of the technology and regulatory rights
related to the TefGen Regenerative Membrane product line acquired in May 1997
and the cost of acquiring the customer list from a former distributor in Spain
in April 1999.
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. The cost of
the customer list is being amortized on the straight-line method over 5 years.
Accumulated amortization of intangibles was $2,946,000 and $2,175,000 at June
30, 1999 and 1998.
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,
--------------------------
1999 1998
---------- -----------
<S> <C> <C>
Patents and trademarks............................... $ 300,000 $ 254,000
Less accumulated amortization........................ (126,000) (111,000)
---------- ----------
$ 174,000 $ 143,000
---------- ----------
---------- ----------
</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 INCOME (LOSS) PER COMMON SHARE
The Company's basic net income (loss) per share amounts have been
computed by dividing net income (loss) by the weighted average number of
outstanding common shares. The Company's diluted net income (loss) per share is
computed by dividing net income (loss) by the weighted average number of
outstanding common shares and common share equivalents relating to stock
options, when dilutive. For the fiscal years ended June 30, 1999 and 1998,
110,059 and 299,571 shares of common stock equivalents were included in the
computation of diluted net income per share. For the fiscal year ended June 30,
1997, the common share equivalents that would have been included in the
computation of diluted net income per share were 267,480, had net income been
achieved.
F-9
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Options to purchase 1,359,943, 283,125 and 55,000 shares of common
stock with a weighted average exercise price of $16.53, $20.03 and $18.57 were
outstanding at June 30, 1999, 1998, and 1997, but were excluded from the
computation of common share equivalents because their exercise prices were
greater than the average market price of the common shares.
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
The Company adopted Financial Accounting Standards Board Statement No.
130 "Reporting Comprehensive Income" during fiscal year 1999. Statement No. 130
requires 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 includes items such as unrealized gains or
losses on certain investment securities and foreign currency items.
Because the Company historically has not experienced material
transactions that would be included in comprehensive income, the adoption of
this standard did not have a material effect on the consolidated financial
statements.
NOTE B - ACQUISITION OF TEFGEN REGENERATIVE MEMBRANE PRODUCT LINE
In May 1997, the Company acquired the technology and regulatory rights
in the TefGen Regenerative 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 that
was due in July 1998 and a principal payment of $1,200,000 plus interest due at
a future date. 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 Company is currently involved in a
dispute with a third party and Bridger Biomed, Inc. The remaining principal
amount of the note is payable contingent upon the resolution of the dispute. The
entire $1,200,000 remaining note balance has been recorded in current maturities
due to the uncertainty of the timing of the payment. 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 - LINE OF CREDIT
The Company has an agreement with a bank for a $5,000,000 line of
credit. The agreement allows for advances against eligible accounts receivable
and inventories, subject to a borrowing base certificate. Interest is accrued at
the prime rate which was 7.75% at June 30, 1999. The agreement has a maturity
date of December 28, 2001. At June 30, 1999, there was $1,883,000 outstanding
under this line of credit. The terms of the agreement require the Company to
comply with various financial covenants including minimum net worth, capital
expenditure limitations and an interest coverage ratio. At June 30, 1999, the
Company was in compliance with all covenants.
F-10
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Industrial development revenue bonds.................................. $ 6,579,000 $ 6,669,000
Notes payable......................................................... 1,520,000 1,600,000
Other................................................................. 79,000 122,000
------------ ------------
8,178,000 8,391,000
Less current maturities............................................... (1,458,000) (1,733,000)
------------ ------------
$ 6,720,000 $ 6,658,000
------------ ------------
------------ ------------
</TABLE>
INDUSTRIAL DEVELOPMENT REVENUE BONDS
In 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 through 2021. The payments are
required to be made monthly to a sinking fund. At June 30, 1999 and 1998, 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 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 2000. The debt to net worth ratio
covenant has the effect of restricting the payment of cash dividends or
repurchases of common stock.
NOTES PAYABLE
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 Regenerative Membrane
product line (see Note B).
In April 1999, the Company issued a non-interest bearing note payable
in the amount of $375,000 to a former distributor in exchange for a customer
list. Payments of $125,000 are due in March 2000, 2001 and 2002. The Company is
using an effective interest rate of 8% to impute interest on the note payable.
F-11
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG-TERM OBLIGATIONS - (CONTINUED)
At June 30, 1999 and 1998, 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>
2000.................................... $ 1,458,000
2001.................................... 252,000
2002.................................... 219,000
2003.................................... 135,000
2004.................................... 145,000
Thereafter.............................. 5,969,000
-----------
$ 8,178,000
-----------
-----------
</TABLE>
During the years ended June 30, 1998 and 1997, the Company capitalized
$691,000 and $87,000 of interest expense in conjunction with the facility
expansion at its Chaska, Minnesota location.
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. ("Ethicon") 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. Operating lease expense was
approximately $665,000 for the year ended June 30, 1997.
F-12
<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>
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward.................................... $ 9,572,000 $ 9,719,000
Capital loss carryforward.......................................... -- 377,000
Tax credit carryforward............................................ 428,000 426,000
Inventories........................................................ 883,000 981,000
Other.............................................................. 289,000 304,000
------------ -------------
Total deferred tax assets.......................................... 11,172,000 11,807,000
Deferred tax liabilities
Depreciation....................................................... (1,430,000) (1,042,000)
------------ -------------
Total deferred tax liabilities..................................... (1,430,000) (1,042,000)
------------ -------------
Net deferred tax asset before valuation allowance.................... 9,742,000 10,765,000
Valuation allowance.................................................. (9,742,000) (10,765,000)
------------ -------------
Net deferred tax asset............................................... $ -- $ --
------------ -------------
------------ -------------
</TABLE>
The deferred tax asset valuation allowance decreased $1,023,000 during
1999, from the realization of these benefits and the expiration of the capital
loss carryforward. At June 30, 1999, the Company had net operating loss
carryforwards of approximately $26,900,000 for tax reporting purposes, which
expire as follows:
<TABLE>
<S> <C>
2000.................... $ 2,084,000
2001..................... 2,022,000
2002..................... 1,641,000
2003..................... 557,000
2004..................... 659,000
2005 - 2012.............. 19,937,000
</TABLE>
The Company also has general business credit carryforwards of
approximately $254,000, which expire in 2000 through 2012.
Differences between income tax expense (benefit) and amounts derived by
applying the statutory federal income tax rate to income (loss) before income
taxes are as follows for fiscal years ending June 30:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
U.S. federal statutory rate........... 34.0% 34.0% (34.0)%
Change in valuation allowance......... (34.0) (34.0) 34.0
----- ----- -----
-- -- --
----- ----- -----
----- ----- -----
</TABLE>
F-13
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - SHAREHOLDERS' EQUITY
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, 1999 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ----------------
<S> <C> <C>
Outstanding at July 1, 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
Granted................................................. 334,000 19.24
Exercised............................................... (89,225) 9.24
Canceled................................................ (53,000) 15.98
--------- -------
Outstanding at June 30, 1998.............................. 1,641,056 14.83
Granted................................................ 332,000 9.23
Exercised.............................................. (61,680) 4.88
Canceled............................................... (48,375) 15.78
--------- -------
Outstanding at June 30, 1999.............................. 1,863,001 $ 14.12
--------- -------
--------- -------
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options exercisable at June 30:
1999................................................... 998,668 $ 13.79
1998................................................... 762,723 12.28
1997................................................... 529,745 10.49
</TABLE>
F-14
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - SHAREHOLDERS' EQUITY - CONTINUED
The following tables summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
RANGE OF NUMBER WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE
--------------- ----------- -------------------------- -------------------------
<S> <C> <C> <C>
$ 2.63 - 3.94 53,733 2.5 years $ 3.39
3.95 - 5.91 73,275 4.7 years 5.49
5.92 - 8.86 272,000 8.4 years 8.26
8.87 - 13.29 295,050 6.7 years 10.64
13.30 - 19.93 1,057,693 7.1 years 16.98
19.94 - 24.00 111,250 7.6 years 21.39
---------
1,863,001
---------
---------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
---------------- ------------------- ----------------
<S> <C> <C>
$ 2.63 - 3.94 53,733 $ 3.39
3.95 - 5.91 73,275 5.49
5.92 - 8.86 57,375 7.15
8.87 - 13.29 165,050 10.61
13.30 - 19.93 602,735 16.64
19.94 - 24.00 46,500 21.32
-------
998,668
-------
-------
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and
1997 was $6.10, $12.61 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 1999, 1998
and 1997: no dividend yield; risk-free rate of return of 6%; volatility of
66.4%, 66.2% and 72.8%; and an average term of 6.0 years, 6.0 years and 6.4
years. The Company's 1999 proforma net income and basic net income per share
would have been $199,000 and $.02 and the 1998 and 1997 proforma net loss and
basic net loss per share would have been $1,559,000 and $2,768,000 or $.13 and
$.23 per share had the fair value method been used for valuing options granted
during 1999, 1998 and 1997. These effects may not be representative of the
future effects of applying the fair value method.
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 103,089 shares have been issued, including 4,227 shares for approximately
$37,000 in 1999, 10,931 shares for approximately $168,000 in 1998 and 9,374
shares for approximately $142,000 during 1997. At June 30, 1999, the Company had
46,911 shares reserved for future issuance under the ESPSP.
F - 15
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - SHAREHOLDERS' EQUITY - CONTINUED
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 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 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 $256,000, $191,000 and $153,000 for the years ended
June 30, 1999, 1998 and 1997.
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, 1999 is approximately $1,298,000.
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.
F-16
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - SEGMENT INFORMATION
The Company adopted Financial Accounting Standards Board Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" during
fiscal year 1999. Statement No. 131 requires the Company to disclose financial
and other information about its business segments, their products and services,
geographic areas, major customers, revenues, profits, assets, and other
information.
The Company operates two business segments. The Hyaluronate Division
manufactures, markets and sells products containing hyaluronate and provides
contract aseptic packaging services. The Oral Restorative Division produces and
markets various oral restorative products in the area of implant dentistry.
Currently, products containing hyaluronate are sold primarily to customers
pursuant to supply agreements. Sales to Alcon under such agreements were 10%,
19% and 17% of total sales in 1999, 1998 and 1997. The Company's Oral
Restorative Division markets products directly to clinicians and dental
laboratories in the United States and Italy and primarily through
distributorship arrangements in other foreign locations. Sales to customers
located principally in Europe and South America accounted for 36%, 35% and 35%
of total Company sales during the years ended June 30, 1999, 1998 and 1997. The
operations of the Company's Italian subsidiary, Lifecore Biomedical SpA, have
not been material to the consolidated financial statements.
Segment information for the Company is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales
Hyaluronate products.................................... $ 8,190,000 $ 9,720,000 $ 7,115,000
Oral restorative products............................... 19,131,000 15,850,000 11,798,000
------------ ------------ ------------
$ 27,321,000 $ 25,570,000 $ 18,913,000
------------ ------------ ------------
------------ ------------ ------------
Income (loss) from operations
Hyaluronate products.................................... $ 212,000 $ (918,000) $ (1,877,000)
Oral restorative products............................... 2,086,000 373,000 (415,000)
------------ ------------ ------------
$ 2,298,000 $ (545,000) $ (2,292,000)
------------ ------------ ------------
------------ ------------ ------------
Capital expenditures
Hyaluronate products.................................... $ 1,373,000 $ 15,070,000 $ 11,112,000
Oral restorative products............................... 237,000 277,000 226,000
------------ ------------ ------------
$ 1,610,000 $ 15,347,000 $ 11,338,000
------------ ------------ ------------
------------ ------------ ------------
Depreciation and amortization expense
Hyaluronate products.................................... $ 2,281,000 $ 1,343,000 $ 878,000
Oral restorative products............................... 823,000 670,000 528,000
------------ ------------ ------------
$ 3,104,000 $ 2,013,000 $ 1,406,000
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
AS OF JUNE 30,
-----------------------------
1999 1998
--------------- ------------
<S> <C> <C>
Identifiable assets
Hyaluronate products.................................... $ 48,279,000 $ 45,159,000
Oral restorative products............................... 19,975,000 15,744,000
General corporate....................................... 543,000 6,045,000
--------------- ------------
$ 68,797,000 $ 66,948,000
--------------- ------------
--------------- ------------
</TABLE>
F-17
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - AGREEMENTS
Lifecore and Ethicon have entered into a Conveyance, License,
Development and Supply Agreement (the "Ethicon Agreement"). Additionally,
Lifecore, Ethicon and JJDC, a subsidiary of Johnson & Johnson, have 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 INTERGEL-TM- Adhesion Prevention
Solution (formerly called 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
registration rights for these shares.
The Company has made and continues to make a significant investment in
the development and testing of INTERGEL 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 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 - LEGAL PROCEEDINGS
The Company is subject to various legal proceedings in the normal
course of business. Management believes that these proceedings will not have a
material adverse effect on the consolidated financial statements.
NOTE M - RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
F-18
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- --------------- ------------------------------- -------------- ----------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- -------------- -------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1999
Accounts receivable
allowance..................... $ 346,000 $ 63,000 $ -- $ (37,000) (A) $ 372,000
Year ended June 30, 1998
Accounts receivable
allowance..................... 286,000 63,000 -- (3,000) (A) 346,000
Year ended June 30, 1997
Accounts receivable
allowance..................... 286,000 56,000 -- (56,000) (A) 286,000
</TABLE>
- -------------
(A) Deductions represent accounts receivable balances written-off during the
year.
S-1
<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, as further amended by the Waiver and Amendment Agreement dated July
8, 1996, as further amended by the Waiver and Amendment Agreement dated July
1, 1997 and as further amended by the Waiver and Amendment Agreement dated
June 5, 1998.
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, 2000, 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, 2001 ("Fiscal 2001"), 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 2001, 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:
<PAGE>
Section 6.09 (d) FIXED CHARGES COVERAGE TEST. (i) For the Fiscal
Year ending June 30, 2000, Borrower shall not be subject to a minimum Fixed
Charges Coverage Ratio.
(ii) For each Fiscal Year commencing with Fiscal 2001, 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 2001, 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, 2000, 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 10th day of June, 1999.
LIFECORE BIOMEDICAL, INC. NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Trustee
Signature /s/ James W. Bracke Signature /s/ Martha Kantorowicz
------------------------- ---------------------------
Print James W. Bracke Print Martha Kantorowicz
------------------------- ---------------------------
Title President & CEO Title Corporate Trust Officer
------------------------- ---------------------------
PUTNAM MANAGED MUNICIPAL MINNESOTA TAX EXEMPT INCOME FUND II
INCOME TRUST
Signature /s/ Blacke Anderson Signature /s/ Blacke Anderson
------------------------- ---------------------------
Print Blake Anderson Print Blake Anderson
------------------------- ---------------------------
Title VP & MD Title VP & MD
------------------------- ---------------------------
PUTNAM TAX FREE HIGH
YIELD FUND
Signature /s/ Blacke Anderson
-------------------------
Print Blake Anderson
----------------------------
Title VP & MD
----------------------------
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated July 30, 1999, 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, 1999. We hereby consent to the incorporation by reference of said report in
the Registration Statements of Lifecore Biomedical, Inc. and subsidiaries on
Forms 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) and Form S-3 (File
No. 333-60987, effective August 21, 1998).
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 31, 1999
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 544,000
<SECURITIES> 0
<RECEIVABLES> 7,145,000
<ALLOWANCES> 372,000
<INVENTORY> 21,767,000
<CURRENT-ASSETS> 23,255,000
<PP&E> 41,437,000
<DEPRECIATION> 9,454,000
<TOTAL-ASSETS> 68,797,000
<CURRENT-LIABILITIES> 6,606,000
<BONDS> 6,720,000
0
0
<COMMON> 124,000
<OTHER-SE> 55,347,000
<TOTAL-LIABILITY-AND-EQUITY> 68,797,000
<SALES> 27,321,000
<TOTAL-REVENUES> 27,321,000
<CGS> 10,768,000
<TOTAL-COSTS> 25,023,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 912,000
<INCOME-PRETAX> 1,576,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,576,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,576,000
<EPS-BASIC> .13
<EPS-DILUTED> .13
</TABLE>
<PAGE>
Exhibit 99
RISK FACTORS
LACK OF PROFITABILITY; POSSIBLE NEED FOR FUTURE FINANCING
The Company has experienced losses since 1990 and incurred a loss of
$1,033,000 in fiscal 1997. For the period from fiscal 1990 through the first
half of fiscal 1994, the losses were attributable to the significant costs
incurred in validating and operating the Company's facilities, research and
development, and marketing. The losses in the second half of fiscal 1994 and the
full fiscal 1995 and 1996 resulted principally from direct charges associated
with excess plant capacity, research and development costs for INTERGEL Adhesion
Prevention Solution ("INTERGEL Solution"), and sales and marketing expenses
related to the expanded product offerings of the Company's Oral Restorative
Division. The Company had income of approximately $1,576,000 and $233,000 for
the years ended June 30, 1999 and 1998. As the Hyaluronate Division increases
production to meet current and future requirements, the Company's direct charges
associated with excess plant capacity will decrease; however, research and
development costs for INTERGEL Solution, sales and marketing expenses for the
oral restorative products, and personnel costs are increasing.
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. The Company expects its
future cash requirements to be covered by cash generated from anticipated
operations. No assurance can be given that the Company will attain and maintain
positive cash flow before its capital resources are exhausted. The Company has
received waivers through fiscal 2000 with respect to certain covenants in the
industrial development revenue bonds used to finance its facility. There can be
no assurance that waivers will continue to be granted to the Company after
fiscal 2000 and thus, such bonds may be required to be redeemed before maturity.
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.
UNCERTAINTY OF SUCCESSFUL DEVELOPMENT OF NEW HYALURONATE PRODUCTS
A significant amount of the Company's anticipated growth is dependent
on its ability to develop, manufacture and market new product applications for
hyaluronate. Such formulations must be developed, tested and, in most cases,
approved for use by appropriate government agencies. Once approved as products,
they must be manufactured in commercial quantities and marketed successfully.
Each of these steps involves significant amounts of time and expense. There can
be no assurance that any of these products, if and when fully developed and
tested, will perform in accordance with the Company's expectations, that
necessary regulatory approvals will be obtained in a timely manner, if at all,
or that these products can be successfully and profitably produced and marketed.
The Company has made a significant investment in the development of a
hyaluronate product to reduce the incidence of post-surgical adhesions. Clinical
testing of the first generation of this product indicated a need for further
development. Additional work led to an Investigational Device Exemption ("IDE")
application, which was approved in April 1995 by the United States Food and Drug
Administration (the "FDA"). A pilot human clinical trial on a second-generation
product, INTERGEL Solution, was completed at a single United States clinical
center in December 1995. Based on the results of the pilot study, the Company
initiated a pivotal human clinical trial in March 1996. The Company's ability to
make commercial sales of INTERGEL Solution in the United States is dependent
upon its receipt of Pre-Market Approval ("PMA") from the FDA. There can be no
assurance that the Company's pivotal clinical trial will confirm the statistical
significance observed in the pilot trial, or that the PMA will be approved by
the FDA within the Company's timetable, or at all. Furthermore, even if INTERGEL
Solution is successfully developed and the Company receives a PMA, there can be
no assurance that it will receive market acceptance. Failure to achieve
significant sales of INTERGEL Solution would have a material adverse effect on
future prospects for the Company's operations.
RELIANCE ON MARKETING AND DEVELOPMENT SUPPORT FROM CORPORATE PARTNERS
The Company has historically developed, manufactured, and marketed its
Hyaluronate Division products through long-term strategic alliances with
corporate partners. In the case of such relationships, the speed and other
aspects of the development project are sometimes outside of the Company's
control, as the other party to the relationship often has priorities that differ
from those of the Company. Thus, the timing of commercialization of the
Company's products under development may be subject to unanticipated delays.
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Further, the Company currently has limited direct sales capabilities in
the Hyaluronate Division and generally relies upon its corporate partners for
marketing and distribution to end-users. The market success of the Company's
hyaluronate products generally will depend upon the size and skill of the
marketing organizations of the Company's corporate partners, as well as the
level of priority assigned to the marketing of the Company's products by these
entities, which may differ from the Company's. Should one or more of the
Company's strategic alliances fail to develop or market products as planned, the
Company's business may be adversely affected. No assurance can be given that the
Company will be able to negotiate acceptable strategic alliances in the future
or that current strategic alliances will continue beyond the terms of existing
agreements.
The development contracts into which the Company enters with corporate
partners are long-term agreements that are subject to development milestones,
product specifications, and other terms. Consequently, future agreement often is
required regarding the course and nature of continued development activities.
Contractual issues requiring resolution between the parties have arisen in the
past and are expected to arise in the ordinary course of the Company's future
development activities. There can be no assurance that all such issues will be
successfully resolved.
LIMITED DIRECT SALES AND MARKETING RESOURCES
The Oral Restorative Division markets its products through a direct
sales force and a distribution network. Continued growth of the Company's
revenues from oral restorative products will depend on the ability of this sales
and distribution network to increase the Company's market share by convincing
practitioners to use the Company's products over competing established products.
No assurance can be given that the sales and distribution network will be
successful in increasing or maintaining the Company's market share or sales
levels. Failure to increase the market share of these products would adversely
affect the Company's results of operations and financial condition.
COMPETITION
Lifecore is engaged in very competitive segments of the human health
care products industry. Competitors of the Hyaluronate and Oral Restorative
Divisions in the United States and elsewhere are numerous and include major
chemical, dental, medical, and pharmaceutical companies, as well as smaller
specialized firms. Many of these competitors have substantially greater capital
resources, marketing experience, and research and development resources than the
Company. These companies may succeed in developing products that are more
effective than any that have been or may be developed by Lifecore and may also
prove to be more successful than Lifecore in producing and marketing these
products. In addition, the Oral Restorative Division is competing against a
number of large established competitors. In order to increase sales, the
Division must gain market share from its competitors. There can be no assurance
that Lifecore will be able to continue to compete successfully against these
competitors.
The Company's primary development project involves INTERGEL Solution
for its potential application in reducing the incidence of post-surgical
adhesions. Several companies are pursuing anti-adhesion product development,
including Alliance Pharmaceuticals, Inc., Anika Therapeutics, Inc., Biomatrix,
Inc., Focal, Inc., Genzyme Corporation ("Genzyme"), Gliatech, Inc., Life Medical
Sciences, Inc., Osteotech and W.L. Gore & Associates, Inc. Genzyme also sells an
ophthalmic hyaluronate component to Alcon Laboratories, Inc. ("Alcon"), the
Company's largest customer.
In addition, negative announcements regarding any competitor's products
may have a negative impact on the public's perception of the market potential
for all similar products, including the Company's products. There can be no
assurance that product introductions by present or future competitors or future
technological or health care innovations will not render Lifecore's products and
processes obsolete.
PROTECTION OF PROPRIETARY TECHNOLOGY
Lifecore's success depends, to a large extent, on its ability to
maintain a competitive technological position in its product areas. While
certain of Lifecore's patents have been allowed or issued, there can be no
assurance that, to the extent issued, the Company's patents will effectively
protect its proprietary technology. 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.
Lifecore also relies upon trade secrets, proprietary know-how and continuing
technological innovation to develop and maintain its
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competitive position. There can be no assurance that others will not
independently develop such know-how or otherwise obtain access to the
Company's technology. While Lifecore's employees, temporary staff,
consultants and corporate partners with access to proprietary information are
required to enter into confidentiality agreements, there can be no assurance
that these agreements will provide the Company with adequate protection from
loss of proprietary technology or know-how.
Under current law, patent applications in the United States are
maintained in secrecy until patents are issued, and patent applications in
foreign countries are maintained in secrecy for a period after filing. The right
to a device patent in the United States is attributable to the first to invent
the device, not the first to file a patent application. Accordingly, the Company
cannot be sure that its products or technologies do not infringe patents that
may be granted in the future pursuant to pending patent applications. The
Company has not received any notices alleging, and is not aware of, any
infringement by the Company of any other entity's patents relating to the
Company's current or anticipated products. There can be no assurance, however,
that its products do not infringe any patents or proprietary rights of third
parties. In the event that any relevant claims of third-party patents are upheld
as valid and enforceable, the Company could be prevented from selling its
products or could be required to obtain licenses from the owners of such patents
or be required to redesign its products or processes to avoid infringement.
There can be no assurance that such licenses would be available or, if
available, would be on terms acceptable to the Company or that the Company would
be successful in any attempt to redesign its products or processes to avoid
infringement. The Company's failure to obtain these licenses or to redesign its
products or processes would have a material adverse effect on the Company's
business, financial condition, and results of operations.
LACK OF REGULATORY APPROVALS; REGULATION OF EXISTING PRODUCTS
The Company's products under development are considered to be medical
devices and, therefore, they require clearance or approval by the FDA before
commercial sales can be made in the United States. The products also require
approvals of foreign government agencies before sales may be made in many other
countries. The process of obtaining these clearances or approvals varies
according to the nature and use of the product. It can involve lengthy and
detailed laboratory and clinical testing, sampling activities and other costly
and time-consuming procedures. There can be no assurance that any of the
required clearances or approvals will be granted on a timely basis, if at all.
In addition, most of the existing products being sold by the Company
and its customers are subject to continued regulation by the FDA, various state
agencies and foreign regulatory agencies which regulate manufacturing, labeling
and record keeping procedures for such products. Marketing clearances or
approvals by these agencies can be withdrawn due to failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
clearance or approval. These agencies can also limit or prevent the manufacture
or distribution of the Company's products. A determination that the Company is
in violation of such regulations could lead to the imposition of civil
penalties, including fines, product recalls or product seizures, injunctions,
and, in extreme cases, criminal sanctions.
POSSIBLE LIMITATIONS ON ABILITY TO MANUFACTURE PRODUCTS
The Company has designed its modular facility to permit the production
of hyaluronate at levels exceeding current levels of production. However, in the
event of a sudden increase in demand for any of the Company's hyaluronate
products, the Company will be required to scale-up operations, including the
acquisition and validation of additional equipment and training of additional
personnel. No assurance can be given that the Company will be able to adequately
meet any such demands on a timely basis.
RISK OF INTERRUPTION OF MANUFACTURING
The Company's manufacturing requires extensive specialized equipment.
In addition, the Company manufactures its hyaluronate products at one facility.
Although the Company has contingency plans in effect for certain natural
disasters, as well as other unforeseen events that could damage the Company's
facilities or equipment, no assurance can be given that any such events will not
materially interrupt the Company's business. In the event of such an occurrence,
the Company has business interruption insurance to cover lost revenues and
profits. However, such insurance would not compensate the Company for the loss
of opportunity and potential adverse impact on relations with existing customers
created by an inability to produce its products.
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DEPENDENCE ON MANAGEMENT
The Company's success depends in large part upon the services of its
executive officers. The executive officers consist of Dr. James W. Bracke,
President and Chief Executive Officer; Dennis J. Allingham, Executive Vice
President and Chief Financial Officer; Brian J. Kane, Vice President of New
Business Development and Marketing; and Colleen M. Olson, Vice President of
Corporate Administrative Operations. The loss of any one of these individuals
may have a material adverse effect on the Company's business and operations. Dr.
Bracke has an employment agreement with the Company which extends through
November 2000. Although the Company is the owner and beneficiary of a life
insurance policy covering Dr. Bracke, there can be no assurance that the
proceeds of such policy will be sufficient to compensate the Company for the
loss of his services. The Company does not have employment agreements or life
insurance on the other officers.
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The manufacture and sale of the Company's products entails a risk of
product liability claims. In addition to product liability exposure for its own
products, 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 for all of its products. The Company also carries a $10.0 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. However, there can
be no assurance that the Company will have sufficient resources if claims exceed
available insurance coverage. While the Company has not experienced any product
liability claims to date, a product liability claim, or other claim with respect
to uninsured liabilities or in excess of insured liabilities, could have a
material adverse effect on the business, financial condition and results of
operations of the Company. In addition, there can be no assurance that insurance
will continue to be available to the Company and that, if available, the
insurance will continue to be on commercially acceptable terms.
POSSIBLE VOLATILITY OF SHARE PRICE
Market prices in the United States for securities of medical technology
companies can be highly volatile, and the trading price of the Company's Common
Stock could be subject to significant fluctuations in response to quarterly
variations in operating results, announcements of the status or results of
development projects or technological innovations by the Company or its
competitors, government regulation and other events or factors. The volatility
in market prices may be unrelated to the operating performance of particular
companies. These market fluctuations have in the past materially adversely
affected the market price of the Company's Common Stock, and may have such an
effect in the future.
ANTI-TAKEOVER CONSIDERATIONS
The Board of Directors of the Company has the authority, without any
action by the shareholders, to fix the rights and preferences of any shares of
the Company's Preferred Stock to be issued from time to time. Pursuant to the
Company's Articles of Incorporation, the Board of Directors is divided into
three classes of directors, with each director serving a three-year term. Each
year only one class of directors is subject to a shareholder vote, and
approximately one-third of the directors belongs to each class. A shareholder
desiring to control the Board of Directors must participate in two elections of
directors to obtain majority representation on the Board of Directors. In
addition, as a Minnesota corporation, the Company is subject to certain
anti-takeover provisions of the Minnesota Business Corporation Act. All of these
factors could have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Company's Common Stock at a
premium over the then prevailing market price of the Common Stock, and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock.
NO DIVIDENDS
The Company has never paid or declared a dividend on its capital stock
and does not anticipate doing so for the foreseeable future.
