<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997
REGISTRATION NUMBER 333-37123
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LIFECELL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<C> <C>
DELAWARE 76-0172936
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
J. DONALD PAYNE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
LIFECELL CORPORATION
3606 RESEARCH FOREST DRIVE 3606 RESEARCH FOREST DRIVE
THE WOODLANDS, TEXAS 77381 THE WOODLANDS, TEXAS 77381
281/367-5368 281/367-5368
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of registrant's telephone number, including area
principal executive offices) code, of agent for service)
</TABLE>
Copies to:
<TABLE>
<C> <C>
ROBERT E. WILSON RODD M. SCHREIBER
FULBRIGHT & JAWORSKI L.L.P. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
1301 MCKINNEY, SUITE 5100 333 WEST WACKER DRIVE
HOUSTON, TEXAS 77010-3095 CHICAGO, ILLINOIS 60606
713/651-5151 312/407-0700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(i)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] -------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1997
PROSPECTUS
4,500,000 SHARES
[LIFECELL CORPORATION LOGO]
COMMON STOCK
Of the 4,500,000 shares of Common Stock offered hereby, 4,000,000 shares
are being sold by LifeCell Corporation ("LifeCell" or the "Company") and 500,000
shares are being sold by certain selling stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any of the proceeds from
the sale of shares of Common Stock by the Selling Stockholders. See "Security
Ownership of Certain Beneficial Owners, Management and Selling Stockholders."
The Company's Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "LIFC." The Company has applied for quotation of the Common Stock on
the Nasdaq National Market under the symbol "LIFC." See "Risk Factors -- No
Assurance of Nasdaq National Market Listing." On November 17, 1997, the last
reported sale price of the Common Stock on the Nasdaq SmallCap Market was $5.75
per share. See "Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)................... $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $700,000.
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to an aggregate of 675,000 additional shares of Common Stock on
the same terms and conditions set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Selling Stockholders will be $ , $ and $ ,
respectively. See "Underwriting."
---------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about , 1997.
---------------------
Vector Securities International, Inc. Gruntal & Co., L.L.C.
, 1997
<PAGE> 3
[Anatomical human figure with schematic drawings of applications of products and
products under development]
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE
COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING".
LifeCell(R) and AlloDerm(R) are registered trademarks of the Company.
ThromboSol(TM) and XenoDerm(TM) are trademarks of the Company.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus, including information under "Risk Factors". Except as
otherwise noted, the information contained in this Prospectus, including
financial information, share and per share data, assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting". Prospective investors
should consider carefully the information set forth under the heading "Risk
Factors". Special Note: Certain statements set forth below constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. See "Special Note Regarding Forward-Looking Statements".
THE COMPANY
LifeCell Corporation ("LifeCell" or the "Company") is a bio-engineering
company engaged in the development and commercialization of tissue regeneration
and cell preservation products. The Company's patented tissue processing and
cell preservation technologies serve as platforms for a broad range of potential
products addressing significant clinical needs in multiple markets. The
Company's first commercial product is AlloDerm(R) acellular dermal graft
("AlloDerm"), a tissue graft consisting of an extracellular tissue matrix that
retains the essential biochemical and structural composition of human dermis.
The Company believes that AlloDerm is the only commercial tissue transplant
product that promotes normal human soft tissue regeneration. AlloDerm currently
is being marketed in the United States and internationally for use in certain
reconstructive plastic, dental and burn surgery applications. The Company
estimates that AlloDerm has been transplanted in over 20,000 patients. LifeCell
also is developing several additional products, including injectable AlloDerm,
composite skin grafts, heart valves, vascular grafts and ThromboSol(TM) platelet
storage solution ("ThromboSol").
The Company's product development programs have been generated from the
following proprietary technologies: (i) a method for producing an extracellular
tissue matrix by removing antigenic cellular elements while stabilizing the
matrix against damage; (ii) a method for cell preservation that protects cells
during prolonged storage; and (iii) a method for freeze-drying biological cells
and tissues without the damaging effects of ice crystals. LifeCell's tissue
processing technology removes cells that would be the target of rejection upon
transplantation while preserving the essential biochemical and structural
composition of the extracellular tissue matrix. This process is designed to
create an acellular tissue that is not rejected by the body, functions as a
natural template or scaffold into which a patient's own cells will migrate
following transplantation and promotes normal soft tissue regeneration. The
Company believes its tissue processing technology offers a number of other key
benefits, including multiple product applications, safety, prolonged shelf-life
and high compatibility with other technologies.
AlloDerm is an extracellular matrix tissue graft processed from donated
human skin. Following transplant, the AlloDerm graft becomes repopulated with
the patient's own cells and is revascularized (i.e., blood supply is restored),
becoming engrafted into the patient. As a result of its ability to promote the
regeneration of normal human soft tissue, AlloDerm has multiple product
applications. AlloDerm currently is used in certain reconstructive plastic,
dental and burn surgery applications. The Company estimates, based on the most
recently published industry data, that each year in the United States there are
approximately 1.0 million reconstructive plastic surgery procedures, 480,000
dental soft tissue grafts, 230,000 dental bone-related grafts and more than
20,000 burn patients requiring skin grafts.
LifeCell markets AlloDerm to hospital-based surgeons in domestic and
selected international markets. In the United States, LifeCell utilizes its own
direct sales force, supplemented with a network of regional specialty
distributors. In addition, in June 1997, LifeCell entered into an agreement with
Lifecore Biomedical, Inc. ("Lifecore") for the exclusive distribution of
AlloDerm for dental applications in the United States. LifeCell also is
developing an international network of distributors to market AlloDerm for
multiple applications in markets outside the United States.
3
<PAGE> 5
The Company currently is evaluating the use of AlloDerm in additional
applications and is developing new products based on its technology platforms.
LifeCell is conducting research on the use of AlloDerm in urological disorders,
neurosurgery, orthopedic surgery and general surgery. In addition, LifeCell is
developing an injectable form of AlloDerm for use in a number of potential
applications, including urological, dermatological and reconstructive surgery.
If successfully developed, an injectable form of AlloDerm would allow for
delivery of the product through the use of a syringe, rather than a surgical
incision, thereby creating additional market opportunities. LifeCell also is
conducting research on the use of its technologies in other product
opportunities, including composite skin grafts, heart valves, vascular grafts,
venous valves, nerve connective tissue and ThromboSol.
LifeCell was incorporated in January 1992 under Delaware law for the
purpose of merging with its predecessor, a Delaware corporation incorporated in
January 1986. The merger of the two corporations occurred in January 1992.
LifeCell's executive offices, production facilities and research facilities are
located at 3606 Research Forest Drive, The Woodlands, Texas 77381, and its
telephone number is 281/367-5368.
RECENT DEVELOPMENTS
On November 4, 1997, Integra (Artificial Skin) Corporation ("Integra"), a
subsidiary of Integra LifeSciences Corporation, and the Massachusetts Institute
of Technology ("MIT") filed a lawsuit in the United States District Court for
the District of Massachusetts, alleging that the Company infringes two patents
licensed by MIT to Integra (the "Integra Patents"). The lawsuit seeks injuctive
relief, an accounting of revenues, enhanced monetary damages and attorneys'
fees. On November 14, 1997, LifeCell responded to the complaint denying the
infringement claims and asserting certain affirmative defenses and
counterclaims. See "Risk Factors -- Patent Infringement Lawsuit", "Risk Factors
- --Dependence on Patents and Proprietary Rights" and "Business -- Legal
Proceedings".
4
<PAGE> 6
THE OFFERING
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<S> <C>
Common Stock offered by:
The Company..................................... 4,000,000 shares
The Selling Stockholders........................ 500,000 shares
Common Stock to be outstanding after the 14,998,106 shares(1)(2)
Offering........................................
Use of proceeds by the Company.................... To fund further development, sales and marketing
of AlloDerm; to fund new product research and
development; and for working capital and general
corporate purposes.
Nasdaq SmallCap Market symbol..................... LIFC
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales................................ $ -- $ 21 $ 94 $ 742 $ 2,012 $ 1,410 $ 3,238
Research funded by others.................... 239 377 723 1,065 934 660 779
------- ------- ------- ------- ------- ------- -------
Total revenues........................... 239 398 817 1,807 2,946 2,070 4,017
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of goods sold........................... -- 207 516 925 1,281 900 1,705
Research and development..................... 1,594 2,096 2,086 2,170 1,589 1,210 1,668
Selling, general and administrative.......... 1,371 1,748 2,109 2,898 4,301 2,896 5,580
------- ------- ------- ------- ------- ------- -------
Total costs and expenses................. 2,965 4,051 4,711 5,993 7,171 5,006 8,953
------- ------- ------- ------- ------- ------- -------
Loss from operations........................... (2,726) (3,653) (3,894) (4,186) (4,225) (2,936) (4,936)
Interest income and other, net............... 162 224 167 281 135 56 320
------- ------- ------- ------- ------- ------- -------
Net loss....................................... $(2,564) $(3,429) $(3,727) $(3,905) $(4,090) $(2,880) $(4,616)
======= ======= ======= ======= ======= ======= =======
Loss per common share(3)....................... $ (0.70) $ (0.80) $ (0.90) $ (1.10) $ (1.14) $ (0.82) $ (0.86)
======= ======= ======= ======= ======= ======= =======
Shares used in computing loss per common
share........................................ 3,643 4,277 4,294 4,313 4,543 4,452 6,304
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30, 1997
---------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(4)
-------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments............... $ 6,528 $ 3,443 $ 7,032 $ 3,015 $ 10,748 $ 5,536 $ 26,226
Working capital.................. 6,770 3,433 6,613 2,888 10,885 6,131 26,888
Total assets..................... 7,413 4,260 7,997 4,376 12,890 8,812 29,435
Deferred credit.................. -- -- 1,500 1,500 1,500 1,500 1,500
Accumulated deficit.............. (13,189) (16,619) (20,678) (24,775) (29,311) (34,709) (34,709)
Total stockholders' equity....... 7,152 4,046 5,743 2,094 10,197 5,914 26,604
</TABLE>
- ---------------
(1) Based upon shares outstanding at November 17, 1997. Includes approximately
3,991,161 shares of Common Stock issuable upon conversion of the Company's
Series B Preferred Stock, par value $.001 per share (the "Series B Preferred
Stock"). The shares of Series B Preferred Stock will remain outstanding
after the Offering, but may be converted at any time at the option of the
holder thereof and will automatically convert into shares of Common Stock
under certain circumstances. See "Risk Factors -- Rights of Holders of
Series B Preferred Stock" and "Description of Capital Stock -- Series B
Preferred Stock".
(2) Based upon shares outstanding at November 17, 1997. Excludes (i) an
aggregate of 1,380,320 shares reserved for issuance upon exercise of stock
options outstanding at November 17, 1997 with a weighted average exercise
price of $3.75 per share; (ii) an aggregate of 3,183,478 shares reserved for
issuance upon exercise of warrants outstanding at November 17, 1997 with a
weighted average exercise price of $4.26 per share; (iii) 260,870 shares
(estimated using a market price of $5.75 per share) issuable upon conversion
of a $1.5 million licensing fee by Medtronic, Inc. under certain conditions
and subject to certain limitations, at the then-current market price; and
(iv) an aggregate of 1,034,231 shares reserved for issuance upon exercise of
options available for future grant under the Company's Amended and Restated
1992 Stock Option Plan and Second Amended and Restated 1993 Non-Employee
Director Stock Option Plan, as amended. See "Description of Capital Stock".
(3) Includes effect of accounting treatment of preferred stock and warrant
exercise inducement of $(0.03), $(0.19) and $(0.24) for the years ended
December 31, 1994, 1995 and 1996, and $(0.18) and $(0.13) for the nine
months ended September 30, 1996 and 1997, respectively.
(4) As adjusted to reflect the receipt of the net proceeds from the sale of the
4,000,000 shares of Common Stock offered by the Company hereby (assuming a
public offering price of $5.75 per share). See "Use of Proceeds" and
"Description of Capital Stock".
5
<PAGE> 7
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. SPECIAL NOTE: CERTAIN
STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS".
HISTORY OF OPERATING LOSSES; SUBSTANTIAL ACCUMULATED EARNINGS
DEFICIT. Since its inception in 1986, the Company has generated only limited
revenues from product sales and has incurred substantial losses, including
losses of approximately $3.7 million, $3.9 million and $4.1 million for the
years ended December 31, 1994, 1995, and 1996, respectively, and $4.6 million
for the nine months ended September 30, 1997. At September 30, 1997, the Company
had an accumulated deficit of approximately $34.7 million. The Company expects
to incur additional operating losses as well as negative cash flow from
operations at least into 1998 as it continues to use substantial resources to
expand its marketing efforts with respect to AlloDerm and to expand its product
development programs. There can be no assurance that the Company will ever
become profitable. The Company's ability to increase revenues and achieve
profitability and positive cash flows from operations will depend on increased
market acceptance and sales of AlloDerm and commercialization of products under
development. There can be no assurance that the Company will be successful in
expanding AlloDerm sales or that the Company's development efforts will result
in commercially available products, that the Company will obtain required
regulatory clearances or approvals for any new products in a timely manner, or
at all, that the Company will be successful in introducing any new products or
that any new products will achieve a significant level of market acceptance. The
development and commercialization of new products will require additional
development, sales and marketing, manufacturing and other expenditures. The
required level and timing of such expenditures will affect the Company's ability
to achieve profitability and positive cash flows from operations. There can be
no assurance that the Company will ever achieve higher levels of revenues or a
profitable level of operations or that profitability, if achieved, can be
sustained on an ongoing basis. See "-- No Assurance of Additional Necessary
Capital", "-- Uncertainty of Market Acceptance" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL. The Company intends to expend
substantial funds for product research and development, expansion of sales and
marketing activities, expansion of manufacturing capacity, product education
efforts, and other working capital and general corporate purposes. Although the
Company believes that the net proceeds of the Offering, together with its
existing resources and anticipated cash flows from operations, will be
sufficient to satisfy its capital needs for at least 24 months following the
Offering, there can be no assurance that the Company will not require additional
financing before that time. The Company's actual liquidity and capital
requirements will depend upon numerous factors, including the costs and progress
of the Company's research and development efforts; the number and types of
product development programs undertaken; the costs and timing of expansion of
sales and marketing activities; the costs and timing of expansion of
manufacturing capacity; the amount of revenues from sales of the Company's
existing and new products; changes in, termination of, and the success of,
existing and new distribution arrangements; the cost of maintaining, enforcing
and defending patents and other intellectual property rights, including the cost
of defending the lawsuit relating to the Integra Patents; competing
technological and market developments; developments related to regulatory and
third-party reimbursement matters; and other factors. In the event that
additional financing is needed, the Company may seek to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve significant restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. Failure to raise capital when needed could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that such financing, if
required, will be available on terms satisfactory to the Company, if at all. If
adequate funds are not available, the Company expects it will be required to
delay, scale back or eliminate one or more of its product development programs.
See "-- Patent Infringement Lawsuit" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
6
<PAGE> 8
GOVERNMENT REGULATION -- ALLODERM. In July 1997, the United States Food and
Drug Administration (the "FDA") published a final rule, to become effective in
January 1998, regulating "human tissue". The rule clarifies and modifies an
earlier interim rule and defines human tissue as any tissue derived from a human
body which is (i) intended for administration to another human for the
diagnosis, cure, mitigation, treatment or prevention of any condition or disease
and (ii) recovered, processed, stored or distributed by methods not intended to
change tissue function or characteristics. The FDA definition excludes, among
other things, tissue that currently is regulated as a human drug, biological
product or medical device and excludes kidney, liver, heart, lung, pancreas or
any other vascularized human organ. Unlike certain drugs, biologicals and
medical devices, human tissue is not subject to premarket notification or
approval by the FDA.
In September 1996, the Company received a letter from the FDA to the effect
that AlloDerm intended for use for replacement or repair of damaged or
inadequate integumental tissue is human tissue within the meaning of the interim
final rule. This FDA position reversed the preliminary agency determination that
AlloDerm should be regulated under the medical device authorities. The
provisions of the interim rule relied upon by the FDA in the September 1996
letter were unchanged in the final rule. Consequently, AlloDerm is not subject
to premarket notification or approval by the FDA and the Company may promote and
sell AlloDerm for use in the treatment of wounds, such as third-degree burns, in
periodontal surgical procedures, such as free-gingival grafting and guided
tissue regeneration, and in plastic and reconstructive surgery procedures, such
as contracture release grafting and scar revision. The agency also informed the
Company that this decision applies only to AlloDerm when it is intended for use
in transplantation, and the regulatory status of the product when it is promoted
for other uses, such as a void filler for soft tissue, for cosmetic augmentation
or as a wound healing agent (the "Additional Indications"), would need to be
determined by the FDA on a case-by-case basis.
While the Company's marketing efforts had not previously focused on the
Additional Indications, as a follow-up to its September 1996 letter, the FDA
informed the Company that AlloDerm for Additional Indications would have to be
formally presented to the FDA to determine if, with these indications, AlloDerm
would continue to fall within the scope of the interim rule for human tissue and
thus not require premarket clearance as a medical device. The Company was asked
to indicate what changes in advertisement and promotion it would make for
AlloDerm. The Company responded to the FDA letter in October 1996, and informed
the agency that the Company believes that the distinctions drawn regarding the
definition of transplantation and human tissue and between integumental tissue
and all other tissue in the September 1996 letter were fairly novel and ones for
which the Company would require clarification from the FDA as it goes forward.
The Company believes that AlloDerm, when used for cosmetic augmentation and as a
void filler, may still qualify as human tissue. Similarly, the Company advised
the FDA that since almost every replacement or repair of damaged or inadequate
tissue involves a cosmetic aspect, the Company believes that many cosmetic uses
of AlloDerm are within the purview of human tissue.
Nevertheless, the Company informed the FDA that it intends to follow the
agency's decision and, until this matter is clarified on a case-by-case basis,
will not promote AlloDerm for the Additional Indications. There can be no
assurance that the FDA will not finally conclude that use of AlloDerm for the
Additional Indications should be regulated as a medical device and require a
510(k) premarket notification or premarket approval application for AlloDerm for
such indications. If the FDA were to conclude definitively that the Company is
required to obtain agency clearance of a 510(k) notification or approval of a
premarket approval application for AlloDerm for the Additional Indications, the
FDA may require the Company to conduct laboratory testing and preclinical and
clinical studies of AlloDerm to support a marketing application. Testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and any required laboratory testing or preclinical or
clinical studies that the Company would be required to conduct could take
several years to complete. There can be no assurance that any required testing
could be completed successfully, or that if successfully completed, would
provide sufficient data and information to enable the FDA to determine, on a
timely basis, if at all, that when AlloDerm is used for the Additional
Indications, it is substantially equivalent to a legally marketed predicate
device or is safe and effective for the Additional Indications and to permit the
product to be marketed for such uses. Failure of the Company to receive any
required FDA clearance or approval of AlloDerm for the Additional Indications on
a timely basis would preclude promotion of AlloDerm for the Additional
Indications and could have a
7
<PAGE> 9
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Government Regulation -- Proposed Products" and
"Business -- Government Regulation".
In October 1997, the FDA inspected LifeCell's facilities. No Form 483
Notice of Observations was left with the Company, although the agency did take
copies of numerous documents relating to the AlloDerm production process and
promotional material relating to AlloDerm. Notwithstanding the fact that no Form
483 was received, there can be no assurance that the FDA will not raise
regulatory issues with respect to the documents taken for review.
In February 1997, the FDA issued a comprehensive "proposed approach" to the
regulation of cellular and tissue-based products, other than human tissue for
transplantation. The FDA proposal sets forth a tiered approach to cell and
tissue regulation that ranges from no regulatory requirements for cells or
tissue that are removed and transplanted into the same patient in a single
surgical procedure to full premarket approval requirements for biologics and
medical devices that raise potential health, safety or efficacy concerns.
Although the FDA has notified the Company that AlloDerm is not now subject to
premarket notification or approval, there can be no assurance that the FDA will
not impose additional or different regulatory requirements on AlloDerm after the
agency finalizes its approach to the regulation of cellular and tissue-based
products.
Human tissue is regulated by the FDA in a manner the agency has deemed
necessary to protect the public health from the transmission of various
infectious diseases, including human immunodeficiency virus ("HIV") infection,
syphilis and hepatitis infection, through transplantation of tissue from donors
with or at risk of these diseases. Under the FDA regulations, all facilities
engaged in the procurement, processing, storage or distribution of human tissue
intended for transplant are required to assure that certain infectious disease
testing and donor screening is performed and that records documenting such
testing for each tissue are available for inspection by the FDA. The regulations
also provide authority for the FDA to conduct inspections of human tissue
facilities and to detain, recall or destroy tissue for which appropriate
documentation is not available. Although the Company believes that it conducts
its operations in compliance in all material respects with such requirements, no
assurances may be given in such regard. Non-compliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to authorize the marketing of new products or to allow the Company to
enter into supply contracts and criminal prosecution.
The National Organ Transplant Act ("NOTA") prohibits the acquisition,
receipt or transfer of certain human organs, including skin, for "valuable
consideration". NOTA permits the payment of reasonable expenses associated with
the removal, transportation, processing, preservation, quality control and
storage of human tissue and skin. NOTA may be interpreted to limit the prices
that LifeCell may charge for processing and transporting its human tissue
products. This could result in limited revenues which could adversely affect
LifeCell's business, financial condition and results of operations. See
"Business -- Government Regulation".
PATENT INFRINGEMENT LAWSUIT. On November 4, 1997, Integra and MIT filed a
lawsuit in the United States District Court for the District of Massachusetts,
alleging that the Company infringes the Integra Patents. The lawsuit seeks
injunctive relief, an accounting of revenues, enhanced monetary damages and
attorneys' fees. On November 14, 1997, LifeCell responded to the complaint
denying the infringement claims and asserting certain affirmative defenses and
counterclaims. The Company has received an opinion from its patent counsel to
the effect that the intended uses of AlloDerm do not infringe the Integra
Patents. This opinion represents only the reasoned professional judgment of the
Company's patent counsel and is not binding on any court or third party. Patent
litigation involves complex legal and factual questions. As a result, the
outcome of such litigation is inherently unpredictable, and there can be no
assurance that the result of this proceeding will be favorable to the Company or
that it will not have a material adverse effect on the Company's business,
operating results or financial condition. If it is determined that the Company
is infringing the Integra Patents, the court could issue an injunction
prohibiting the Company from making, using or selling its AlloDerm product for
some or all of its intended uses. Such injunction could also extend to the
Company's other potential products under development. In addition, the court
could assess significant damages and attorneys' fees against the Company, which
would have a material adverse effect on the Company's business, operating
results and financial condition and otherwise affect the ability of the Company
to continue as a viable enterprise. In addition, an adverse determination in
this proceeding could require the Com-
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pany to seek licenses from Integra, which may not be available on reasonable
terms, if at all. Regardless of the outcome, defending such claims could involve
significant costs and diversion of management resources, which could have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business -- Legal Proceedings".
GOVERNMENT REGULATION -- PROPOSED PRODUCTS. Many if not all of LifeCell's
products under development will require regulatory approval or clearance prior
to commercialization. Human therapeutic products are subject to rigorous
preclinical and clinical testing as a condition of approval by the FDA and by
similar regulatory authorities in foreign countries. The lengthy process of
obtaining these approvals and clearances and the ongoing process of compliance
with applicable federal statutes and regulations will require the expenditure of
substantial resources, and there can be no assurance that FDA or foreign
approvals will be obtained for any of the Company's proposed products.
LifeCell's proposed xenograft heart valve and other xenograft tissue
transplantation products will be subject to regulation as medical devices. The
Company's proposed blood cell preservation products will be subject to
regulation as biologics. Such products require FDA premarket clearance or
approval prior to commercialization in the United States. To obtain FDA approval
for these products, the Company must submit proof of their safety and efficacy.
Testing, preparation of necessary applications and processing of those
applications by the FDA is expensive and time consuming. There can be no
assurance that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA clearances that could delay or preclude the Company from
marketing any product it may develop. The FDA may also place conditions on
clearances that could restrict commercial applications of such products. Product
marketing approvals or clearances may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
Delays imposed by the governmental clearance process may materially reduce the
period during which the Company has the exclusive right to commercialize
patented products.
Products marketed by LifeCell pursuant to FDA or foreign approval will be
subject to pervasive and continuing regulation. In the United States, devices
and biologics must be manufactured in registered establishments and must be
produced in accordance with the FDA's "Quality System" regulation for medical
devices or "Good Manufacturing Practices" ("GMP") regulations for biologics.
Manufacturing facilities and processes are subject to periodic FDA inspection.
Labeling and promotional activities are also subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The export of devices and
biologics is also subject to regulation and may require FDA approval. From time
to time, the FDA may modify such requirements, imposing additional or different
requirements. Failure to comply with any applicable FDA requirements could
result in civil and criminal enforcement actions and other penalties. In
addition, there can be no assurance that the various states in which LifeCell's
products are sold will not impose additional regulatory requirements or
marketing impediments.
NOTA prohibits the acquisition, receipt or transfer of certain human
organs, including heart valves and vascular grafts, for "valuable
consideration", which could affect the commercialization of certain of the
Company's proposed human tissue products. See "-- Government
Regulation -- AlloDerm" and "Business -- Government Regulation".
FOREIGN REGULATORY STATUS OF ALLODERM. The regulation of AlloDerm outside
the United States varies by country. Certain countries regulate AlloDerm as a
pharmaceutical product, requiring extensive filings and regulatory approvals to
market the product. Certain countries classify AlloDerm as a transplant tissue
but may restrict its import or sale. Other countries have no applicable
regulations regarding the import or sale of products similar to AlloDerm,
creating uncertainty regarding the import or sale of the product. The inability
to classify AlloDerm as a medical device has restricted LifeCell's ability to
obtain an appropriate regulatory designation for the product for Western Europe,
which would provide a clearer marketing path in the European Union. There can be
no assurance that the various foreign countries in which LifeCell's products are
sold will not impose additional regulatory requirements.
AlloDerm currently is being marketed in certain foreign countries, and
LifeCell is pursuing clearance to market AlloDerm in additional countries. There
can be no assurance that the uncertainty
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of regulations in each country will not delay or impede the marketing of
AlloDerm or impede the ability of LifeCell to negotiate distribution
arrangements on favorable terms.
Certain foreign countries have laws similar to NOTA. These laws may
restrict the amount that the Company can charge for AlloDerm and may restrict
the importation or distribution of AlloDerm to licensed not-for-profit
organizations. See "Business -- Government Regulation".
UNCERTAINTY OF MARKET ACCEPTANCE. Much of the Company's ability to increase
revenues and to achieve profitability and positive cash flow will depend on
expanding the use and market penetration of its AlloDerm product and the
successful introduction of its products in development. Products based on the
Company's technologies represent new methods of treatment. Physicians will not
use the Company's products unless they determine that the clinical benefits to
the patient are greater than those available from competing products or
therapies. Even if the advantage of the Company's products is established as
clinically significant, physicians may not elect to use such products for any
number of reasons. As such, there can be no assurance that any of the Company's
AlloDerm products or products under development will gain any significant degree
of market acceptance among physicians, health care payors and patients. Broad
market acceptance of the Company's products may require the training of numerous
physicians and clinicians, as well as conducting or sponsoring clinical studies
to demonstrate the benefits of such products. The amount of time required to
complete such training and studies could result in a delay or dampening of such
market acceptance. Moreover, health care payors' approval of reimbursement for
the Company's products in development will be an important factor in
establishing market acceptance. See "-- Limited Third-Party Reimbursement".
DELAYED OR UNSUCCESSFUL PRODUCT DEVELOPMENT. The Company's growth and
profitability will depend, in part, upon its ability to complete development of
and successfully introduce new products. The Company may be required to
undertake time-consuming and costly development activities and seek regulatory
clearance or approval for new products. Although the Company has conducted
animal studies on many of its products under development which indicate that the
product may be feasible for a particular application, there can be no assurance
that the results obtained from expanded studies will be consistent with earlier
trial results or be sufficient for the Company to obtain any required regulatory
approvals or clearances. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, that regulatory clearance or
approval of these or any new products will be granted on a timely basis, if
ever, or that the new products will adequately meet the requirements of the
applicable market or achieve market acceptance. The completion of the
development of any of the Company's products under development remains subject
to all the risks associated with the commercialization of new products based on
innovative technologies, including unanticipated technical or other problems,
manufacturing difficulties and the possible insufficiency of the funds allocated
for the completion of such development, which could result in a change in the
design, delay in the development or the abandonment of such products.
Consequently, there can be no assurance that any of the Company's products under
development will be successfully developed or manufactured or, if developed and
manufactured, that such products will meet price or performance objectives, be
developed on a timely basis or prove to be as effective as competing products.
The inability to complete successfully the development of a product or
application, or a determination by the Company, for financial, technical or
other reasons, not to complete development of any product or application,
particularly in instances in which the Company has made significant capital
expenditures, could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL. The success of LifeCell will be
dependent largely on the efforts of Paul M. Frison, Chairman of the Board,
President and Chief Executive Officer of the Company, and Stephen A. Livesey,
M.D., Ph.D., Executive Vice President, Chief Science Officer and a director of
the Company. The loss of either person's services would have a material adverse
effect on LifeCell's business, financial condition and results of operations.
LifeCell has obtained "keyman" life insurance on Mr. Frison and Dr. Livesey of
$1.0 million and $3.0 million, respectively. Dr. Livesey, a citizen of
Australia, has applied for permanent residence status in the United States.
There can be no assurance that he will be able to obtain such status. The
Company does not have employment agreements with any of its employees. Further,
the success of LifeCell is also dependent upon its ability to hire and retain
qualified operating, marketing and technical personnel. The competition for
qualified personnel in the biomedical industry is intense and, accordingly,
there can be no assurance that LifeCell will be able to hire or retain such
personnel. See "Management".
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DEPENDENCE ON CORPORATE COLLABORATORS. The Company expects to rely in the
future on corporate collaborative partners for the development and
commercialization of certain products and to conduct certain clinical trials,
obtain regulatory approvals and manufacture and market any resulting products.
Although the Company believes that any such collaborative partners would have an
economic motivation to commercialize any products that might result from such
arrangements, the amount and timing of resources devoted to these activities by
such parties could depend on the achievement of technical and research goals by
the Company and generally would be controlled by such partners. Moreover,
collaborative arrangements generally provide that they may be terminated by the
collaborator prior to their expiration under circumstances that also may be
outside the control of the Company. Any eventual sale of products may depend
further on the successful completion of arrangements with other partners,
licensees or distributors in each territory. There can be no assurance that the
Company will be successful in establishing any such collaborative arrangements
on acceptable terms, if at all, or that any such future collaborator would be
successful in commercializing any resulting products. In 1994, LifeCell entered
into a license and development agreement with Medtronic, Inc. ("Medtronic") to
develop jointly the Company's heart valve products. Pursuant to the agreement,
Medtronic paid LifeCell an initial $1.5 million license fee, funds costs of
research and development under a mutually agreed upon budget, including clinical
trials, if any, and will pay royalties of up to an aggregate of $25.0 million on
sales of products covered by the agreement. There can be no assurance that
Medtronic will perform its obligations under the agreement, will not reduce
committed funding for the Company's heart valve development program, will not
terminate the agreement, that Medtronic or LifeCell will successfully develop or
market any products under the agreement or that LifeCell will ever receive
royalties under the agreement. Furthermore, there can be no assurance that
Medtronic or future collaborators will not pursue existing or alternative
technologies in preference to potential products being developed in
collaboration with the Company. See "Business -- Corporate Alliance".
DEPENDENCE ON DISTRIBUTOR SALES. Sales to distributors constitute a
significant portion of the Company's revenues. The Company has only recently
entered into certain of its current distribution arrangements. The Company may
be required to enter into additional distribution arrangements to achieve broad
distribution of AlloDerm or any future products. There can be no assurance that
the Company will be able to maintain its current distributor arrangements or, in
the event of termination of any of these arrangements, that a new distributor
will be found, or that the Company will be able to enter into and maintain
arrangements with additional distributors on acceptable terms, or on a timely
basis, if ever. There can be no assurance that these distributors will devote
the resources necessary to provide effective sales and marketing support to the
Company or market the Company's products at prices that can achieve market
acceptance. In addition, the Company's distributors may give higher priority to
the products of other medical suppliers or their own products, thus reducing
their efforts to sell the Company's products. If any of the Company's
distributors becomes unwilling or unable to promote, market and sell the
Company's products, the Company's business, financial condition and results of
operations could be materially adversely affected. The Company has engaged
Lifecore as the exclusive distributor for AlloDerm for dental applications in
the United States, and other distributors also may be granted exclusive
distribution rights. To the extent any exclusive distributor fails adequately to
promote, market and sell the Company's products, the Company may not be able to
secure a replacement distributor until after the term of the distribution
contract is complete or until such contract can otherwise be terminated. See
"Business -- Marketing".
DEPENDENCE ON CERTAIN SOURCES OF MATERIALS. The Company's business will be
dependent on the availability of donated human skin, cardiovascular tissue and
other tissues. A finite supply of donated skin is available. Although the
Company has established what it believes to be adequate sources of donated human
skin to satisfy the expected demand for AlloDerm, there can be no assurance that
the availability of donated human skin and cardiovascular tissue will be
sufficient to meet LifeCell's demand for such materials. Any significant
interruption in supply of such tissue would likely have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Sources of Materials".
The Company acquires donated human skin from various non-profit
organizations which procure skin and other donated human tissue. The procurement
of skin generally constitutes a small portion of the operating funds for such
non-profit organizations. The development of products that replace the need for
donated tissue, such as the development of synthetic bone substitutes to replace
allograft bone procured by the organizations, could threaten the existence of
the non-profit organizations and,
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therefore, adversely affect the supply of donated human skin to LifeCell or
increase the required payments from LifeCell.
The Company has performed limited activities to develop products using
porcine dermis and other animal tissues as a substitute for donated human skin.
If successfully developed, animal tissue could replace the need for human tissue
as a raw material. There can be no assurance that such animal tissue products
can be successfully developed, that such development and required regulatory
approvals could result in timely replacement of human tissue used by LifeCell in
the event of a reduced supply of human tissue or that the cost of such animal
tissue would not materially adversely affect the business, financial condition
and results of operations of the Company.
Donors of organs and tissues, including donated human skin, have various
motivations. Although LifeCell does not promote the use of AlloDerm for cosmetic
applications, AlloDerm has been used by surgeons in a variety of applications
that may be considered "cosmetic". Knowledge of such use by potential donors
could impact their willingness to donate skin for such uses. See "-- Product
Liability and Insurance" and "Business -- Sources of Materials".
TECHNOLOGICAL CHANGE AND COMPETITION. The biomedical field is undergoing
rapid and significant technological change. LifeCell's success depends upon its
ability to develop and commercialize efficient and effective products based on
its technology. There are many companies and academic institutions that are
capable of developing products based on similar technology, and that have
developed and are capable of developing products based on other technologies,
which are or may be competitive with LifeCell's products. Many of these
companies and academic institutions are well-established, have substantially
greater financial and other resources, research and development capabilities and
more experience in conducting clinical trials, obtaining regulatory approvals,
manufacturing and marketing than LifeCell. These companies and academic
institutions may succeed in developing competing products that are more
effective than LifeCell's products, or that receive government approvals more
quickly than LifeCell's products, which may render the Company's products or
technology uncompetitive, uneconomical or obsolete. See
"Business -- Competition".
MANAGEMENT DISCRETION IN USE OF PROCEEDS. The Company's management, subject
to approval of the Board of Directors, will have broad discretion as to the
allocation of a significant portion (approximately 26%) of the net proceeds to
the Company of the Offering. As a result of such discretion, the Company's
management could allocate the net proceeds to the Company of the Offering for
uses that the stockholders may not deem desirable. In addition, there can be no
assurance that the proceeds can or will be invested to yield an acceptable
return. See "Use of Proceeds".
LIMITED THIRD-PARTY REIMBURSEMENT. Generally, hospitals, physicians and
other health care providers purchase products, such as the products being sold
or developed by LifeCell, for use in providing care to their patients. These
parties typically rely on third-party payors, including Medicare, Medicaid,
private health insurance and managed care plans, to reimburse all or part of the
costs of acquiring those products and costs associated with the medical
procedures performed with those products. Cost control measures adopted by
third-party payors in recent years have had and may continue to have a
significant effect on the purchasing practices of many health care providers,
generally causing them to be more selective in the purchase of medical products.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. The Company believes that certain third-party payors
provide reimbursement for medical procedures at a specified rate without
additional reimbursement for products, such as those being sold or developed by
LifeCell, used in such procedures. There can be no assurance that adequate
third-party payor reimbursement will be available for the Company to maintain
price levels sufficient for realization of an appropriate return on its
investment in developing new products. In addition, government and other
third-party payors continue to refuse, in some cases, to provide any coverage
for uses of approved products for indications for which the FDA has not granted
marketing approval. Many uses of AlloDerm have not been granted such marketing
approval and there can be no assurance that any such uses will be approved.
Further, certain of the Company's products are used in medical procedures that
typically are not covered by third-party payors, such as "cosmetic" procedures,
or for which patients sometimes do not obtain coverage, such as dental
procedures. These and future changes in third-party payor reimbursement
practices regarding the procedures performed with LifeCell's products could
adversely affect the market acceptance of LifeCell's products. See
"Business -- Government Regulation".
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. LifeCell's ability to compete
effectively with other companies is materially dependent upon the proprietary
nature of its technologies. LifeCell relies
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<PAGE> 14
primarily on patents and trade secrets to protect its technologies. LifeCell
currently licenses the exclusive right to nine United States patents and related
foreign patents and non-exclusive rights to one patent. In addition, LifeCell
has been issued three United States utility patents, one United States design
patent and has five pending United States patent applications. There can be no
assurance that LifeCell will obtain any additional patents or other protection,
that the patents currently applied for will be granted, that, if the patents
currently applied for are granted, the claims allowed will be sufficient to
protect LifeCell's technology, or that existing patents or proprietary rights
owned by or licensed to LifeCell will provide significant commercial benefits.
Further, there can be no assurance that any patents or proprietary rights owned
by or licensed to LifeCell will not be challenged, invalidated, circumvented, or
rendered unenforceable based on, among other things, subsequently discovered
prior art, lack of entitlement to the priority of an earlier, related
application or failure to comply with the written description, best mode,
enablement or other applicable requirements. The invalidation, circumvention or
unenforceability of key patents or proprietary rights owned by or licensed to
LifeCell could have a material adverse effect on LifeCell and on its business,
financial condition and results of operations.
LifeCell's success will depend in part on its ability to maintain and
obtain patent protection for its technology both in the United States and other
countries. Other companies and research and academic institutions may have
developed technologies, filed patent applications or received patents on various
technologies that may be related to LifeCell's business. Some of these patent
applications, patents or technologies may conflict with LifeCell's patent
applications, patents or technologies. Any such conflict could invalidate or
limit the scope of LifeCell's patents or could result in denial of LifeCell's
patent applications. In addition, if patents that cover LifeCell's activities
are issued to other companies, there can be no assurance that LifeCell would be
able to obtain licenses to such patents at a reasonable cost, if at all, or be
able to develop or obtain alternative technology. Any of the foregoing matters
could have a material adverse effect on LifeCell and on its business prospects.
In addition, the Company may be required to obtain a license under one or
more patents prior to commercializing any heart valve or vascular product, if
developed. There can be no assurance that such a license will be available, or
if available, that a license will be granted on terms which are commercially
acceptable to the Company.
On November 4, 1997, Integra and MIT filed a lawsuit in the United States
District Court for the District of Massachusetts, alleging that the Company
infringes the Integra Patents. The lawsuit seeks injunctive relief, an
accounting of revenues, enhanced monetary damages and attorneys' fees. On
November 14, 1997, LifeCell responded to the complaint denying the infringement
claims and asserting certain affirmative defenses and counterclaims. The outcome
of such litigation is inherently unpredictable, and there can be no assurance
that the result of this proceeding will be favorable to the Company or that it
will not have a material adverse effect on the Company's business, operating
results or financial condition. In addition, no assurances may be given that the
Company's existing or proposed products or processes may not be the subject of
additional infringement claims. Any successful patent infringement claim
relating to any patent could have a material adverse effect on the Company. See
"-- Patent Infringement Lawsuit".
There can be no assurance that LifeCell will not be required to resort to
litigation to protect its patented technologies or other proprietary rights or
that the Company will not be the subject of additional patent litigation to
defend its existing or proposed products or processes against claims of patent
infringement or other intellectual property claims. Any of such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
LifeCell also has applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by United States patents
or proprietary rights owned by or licensed to LifeCell may differ from that of
their foreign counterparts.
LifeCell may decide for business reasons to retain certain knowledge that
it considers proprietary as confidential and elect to protect such information
as a trade secret, as business confidential information or as know-how. In that
event, LifeCell must rely upon trade secrets, know-how and continuing
technological innovation to maintain its competitive position. There can be no
assurance that others
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<PAGE> 15
will not independently develop substantially equivalent proprietary information
or otherwise gain access to or disclose such information. The independent
development or disclosure of LifeCell's trade secrets could have a material
adverse effect on LifeCell and on its business prospects. See "Business --
Patents, Proprietary Information and Trademarks".
PRODUCT LIABILITY AND INSURANCE. The Company's business exposes it to
potential product liability risks which are inherent in the testing,
manufacturing and marketing of medical products. Although the Company has
product liability insurance coverage with an aggregate limit of $5.0 million and
a per occurrence limit of $3.0 million, there can be no assurance that such
insurance will provide adequate coverage against potential liabilities, that
adequate product liability insurance will continue to be available in the future
or that it can be maintained on acceptable terms. The obligation to pay any
product liability claim in excess of whatever insurance the Company is able to
acquire could have a material adverse effect on the business, financial
condition and results of operations of the Company.
The Company uses donated human skin as the raw material for AlloDerm. The
non-profit organizations that supply such skin are required to follow FDA
regulations and guidelines published by the American Association of Tissue Banks
(the "AATB") to screen donors for potential disease transmission. Such
procedures include donor testing for certain viruses, including HIV. The
Company's manufacturing process also has been demonstrated to inactivate
concentrated suspensions of HIV in tissue. While the Company believes such
procedures are adequate to reduce the threat of disease transmission, there can
be no assurance that its AlloDerm product will not be associated with
transmission of disease or that a patient otherwise infected with disease would
not erroneously assert a claim that the use of AlloDerm resulted in the disease
transmission. Any such transmission or alleged transmission could have a
material adverse effect on the Company's ability to manufacture or market its
products or could otherwise have a material adverse effect on the Company's
business, financial condition or results of operations. See "-- Dependence on
Certain Sources of Materials".
LIMITATION ON THE USE OF NET OPERATING LOSSES AND RESEARCH AND DEVELOPMENT
TAX CREDITS. As of December 31, 1996, LifeCell had accumulated net operating
loss ("NOL") carryforwards for federal income tax purposes of approximately
$26.1 million and research and development tax credits of approximately $385,000
since its inception, and may continue to incur NOL carryforwards. United States
tax laws provide for an annual limitation on the use of NOL carryforwards
following certain ownership changes and also limit the time during which NOL and
tax credit carryforwards may be applied against future taxable income and tax
liabilities. The sale of Common Stock in the Offering is expected to result in
an ownership change for federal income tax purposes. The Company estimates that
the amount of its NOL carryforwards and the credits available to offset taxable
income subsequent to the Offering will be approximately $4.0 million per year on
a cumulative basis. Accordingly, if LifeCell generates taxable income in any
year in excess of the then cumulative limitation, the Company may be required to
pay federal income taxes even though it has unexpired NOL carryforwards.
DISPOSAL OF HAZARDOUS MATERIALS. LifeCell's research and development and
processing techniques generate waste that is classified as hazardous by the
United States Environmental Protection Agency and the Texas Natural Resources
Commission. LifeCell segregates such waste and disposes of it through a licensed
hazardous waste transporter. Although LifeCell believes it is currently in
compliance in all material respects with applicable environmental regulations,
its failure to comply fully with any such regulations could result in the
imposition of penalties, fines or sanctions that could have a material adverse
effect on LifeCell's business, financial condition and results of operations.
See "Business -- Government Regulation".
SHARES AVAILABLE FOR FUTURE SALE. Sales of shares of Common Stock in the
public market following the Offering or the perception that such sales could
occur could have an adverse effect on the market price of the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. Upon completion of the Offering, the Company will have
11,006,945 shares of Common Stock outstanding. Substantially all of these shares
are available for immediate sale in the public market pursuant to effective
registration statements or exemptions from registration under the Securities Act
of 1933, as amended (the "Securities Act"). As of November 17, 1997, an
additional approximately 3,991,161 shares of Common Stock are issuable upon
conversion of the Series B Preferred Stock (the "Series B Conversion Shares").
The resale of the Series B Conversion Shares is covered by an effective
registration statement under the Securities Act and the Series B Conversion
Shares are, therefore, available for immediate resale in the public market upon
conversion. There are
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<PAGE> 16
also outstanding stock options and warrants to purchase an aggregate of
4,563,798 shares of Common Stock at various exercise prices per share.
Substantially all of such shares are available for immediate sale in the public
market upon exercise pursuant to effective registration statements under the
Securities Act. In addition, in the event that Medtronic terminates funding of
the Company's heart valve program, Medtronic may convert its $1.5 million
license fee into newly issued shares of Common Stock at the then-current market
price (260,870 shares, assuming a market price of $5.75 per share), subject to
certain limitations and conditions. The Company's officers and directors and
certain stockholders, including the Selling Stockholders, who immediately after
the Offering will hold in the aggregate approximately 2,018,133 of the
outstanding shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option), 3,991,161 shares of Common Stock issuable on conversion
of the Series B Preferred Stock and options or warrants to purchase an aggregate
of 3,937,338 shares of Common Stock, have agreed not to transfer, sell, contract
to sell or grant any option, right or warrant to purchase or otherwise dispose
of any of such shares of Common Stock or any securities exchangeable for shares
of Common Stock for 90 days after the date of this Prospectus without the prior
written consent of Vector Securities International, Inc. Commencing 91 days from
the date of this Prospectus, substantially all of the shares subject to such
lock-up agreements will be available for immediate sale in the public market.
Vector Securities International, Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the shares subject to such
lock-up agreements.
IMMEDIATE AND SUBSTANTIAL DILUTION; OUTSTANDING WARRANTS AND
OPTIONS. Because the offering price will be substantially higher than the book
value per share of the Common Stock, purchasers of shares of Common Stock in the
Offering will incur immediate and substantial dilution of $4.00 per share, or
70% of the public offering price (assuming a public offering price of $5.75 per
share). In addition, investors purchasing shares in the Offering will incur
additional dilution to the extent that outstanding stock options and warrants
are exercised. See "Dilution".
DIVIDENDS. LifeCell has not paid a cash dividend to the holders of its
Common Stock and does not anticipate paying cash dividends to the holders of its
Common Stock in the foreseeable future. Under the General Corporation Law of the
State of Delaware, a company's board of directors may declare and pay dividends
only out of surplus or current net profits. See "Dividend Policy".
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the shares of
Common Stock, like that of the common stock of many other medical products and
high technology companies, has in the past been, and is likely in the future to
continue to be, highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new commercial
products by the Company or competitors, government regulation, developments in
or disputes regarding patent or other proprietary rights, economic and other
external factors and general market conditions may have a significant effect on
the market price of the Common Stock. Moreover, the stock market has from time
to time experienced extreme price and volume fluctuations which have
particularly affected the market prices for medical products and high technology
companies and which have often been unrelated to the operating performance of
such companies. These broad market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of Common
Stock.
NO ASSURANCE OF NASDAQ NATIONAL MARKET LISTING. The Common Stock currently
is listed on The Nasdaq SmallCap Market, and the Company has applied for listing
of the Common Stock on The Nasdaq National Market. No assurances may be given
that The Nasdaq Stock Market, Inc. ("Nasdaq") will approve the Company's
application. The failure to obtain listing of the Common Stock on The Nasdaq
National Market could adversely affect the liquidity of such shares and the
amount that could be realized on a sale thereof. In the event Nasdaq approves
the Company's application, the Company would be required to continue to meet
certain minimum financial and capitalization thresholds in order to continue
being listed on that market. The Company currently is subject to similar
continuing listing requirements for The Nasdaq SmallCap Market. Prior to the
closing of its private placement of Series B Preferred Stock in November 1996,
the Company failed to meet certain minimum capital and surplus requirements
necessary to qualify for continued listing on The Nasdaq SmallCap Market. In
connection with the closing of the private placement, Nasdaq waived the
Company's prior non-compliance with that requirement. Although the Company
believes it will be able to meet any applicable maintenance requirements, no
assurances may be given in this regard. Any failure to
15
<PAGE> 17
maintain listing of the Common Stock on The Nasdaq National Market or on The
Nasdaq SmallCap Market would adversely affect the liquidity of the shares of
Common Stock.
POSSIBLE ANTI-TAKEOVER EFFECTS. Certain provisions of LifeCell's Restated
Certificate of Incorporation, as amended (the "Restated Certificate of
Incorporation") and Amended and Restated By-laws (the "By-laws") and Section 203
of the Delaware General Corporation Law may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of the
Company, including transactions in which stockholders might otherwise receive a
premium for their shares over the current market prices. In addition, these
provisions may limit the ability of stockholders to approve transactions that
they may deem to be in their best interests. For example, provisions contained
in the Restated Certificate of Incorporation and By-laws include authorized
blank check preferred stock, the denial of cumulative voting, limitation of the
persons who may call a special meeting of the stockholders and advance notice
requirement for election to the Board of Directors. See "Description of Capital
Stock".
RIGHTS OF HOLDERS OF SERIES B PREFERRED STOCK. As of September 30, 1997,
there were 124,036 shares of Series B Preferred Stock outstanding. Such shares
are convertible at any time at the option of the holders thereof and
automatically under certain circumstances into approximately 4,001,161 shares of
Common Stock. On all matters submitted to a vote of the stockholders of the
Company, each share of Series B Preferred Stock entitles the holder thereof to
one vote for each share of Common Stock into which such share of Series B
Preferred Stock is then convertible. The holders of the shares of Series B
Preferred Stock have the right to elect up to three directors of the Company. In
the event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of shares of Series B Preferred Stock will
be entitled to receive out of the assets of the Company available for
distribution to stockholders, before any distribution of assets is made to
holders of Common Stock, an amount equal to $100.00 per share of Series B
Preferred Stock. After payment of the full amount of any liquidating
distribution to which they are entitled, the holders of shares of Series B
Preferred Stock will be entitled to share ratably (treating all then issued and
outstanding shares of Series B Preferred Stock as if such shares had been
converted into Common Stock) in any further distribution of assets by the
Company to the holders of Common Stock. Holders of the Series B Preferred Stock
are entitled to receive dividends through September 30, 2001. The Company may at
its option pay such dividends in additional shares of Series B Preferred Stock.
See "Description of Capital Stock -- Series B Preferred Stock".
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus, including, without limitation,
statements regarding the Company's financial position, business strategy,
products, products under development, markets, budgets and plans and objectives
of management for future operations, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements") are
disclosed under "Risk Factors" and elsewhere in this Prospectus, including,
without limitation, in conjunction with the forward-looking statements included
in this Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on its behalf, are expressly
qualified in their entirety by the Cautionary Statements.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$20.7 million, based on an assumed public offering price of $5.75 per share and
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company. The Company will not receive any of
the proceeds from the sale of shares of Common Stock by the Selling
Stockholders.
The Company currently intends to use the net proceeds to the Company of the
Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
APPLICATION OF NET PROCEEDS APPROXIMATE AMOUNT OF NET PROCEEDS
--------------------------- ------------------ ----------------------
(IN MILLIONS)
<S> <C> <C>
Expanded sales and marketing of AlloDerm(1)... $ 8.5 41.1%
New product research and development(2)....... 6.9 33.3%
Working capital and general corporate
purposes(3)................................. 5.3 25.6%
------ ------
Total............................... $20.7 100.0%
====== ======
</TABLE>
- ---------------
(1) Includes funding of additional clinical studies to demonstrate the benefits
of AlloDerm over current therapies, increasing domestic and international
advertising and promotional programs to increase surgeon awareness of
AlloDerm (such as training workshops and educational seminars on the uses of
AlloDerm), hiring additional United States technical sales representatives
to market AlloDerm and expanding international sales and distribution
activities.
(2) Includes funding of animal and clinical studies to expand the uses of
AlloDerm into new applications, such as neurosurgery and orthopedic surgery,
funding the development of and animal and clinical studies for injectable
forms of AlloDerm and funding the development of and animal and clinical
studies for heart valves, vascular grafts, venous valves, tendons, cartilage
and nerve connective tissue products and blood cell transfusion products.
(3) The Company's management, subject to approval by the Board of Directors,
will have broad discretion with respect to the proceeds designated for
working capital and general corporate purposes. The Company feels that such
discretion is necessary to allow management to determine the best
allocation, as particular needs arise, of such proceeds. Presently, the
Company's management believes that such proceeds will be used, among other
purposes, to further research and development of existing and new products
and to expand sales and marketing of existing and new products.
Pending application of the net proceeds, the net proceeds to the Company of
the Offering will be invested in short-term, interest bearing, investment grade
securities.
The actual amount expended and timing of the use of net proceeds to the
Company of the Offering for each purpose may vary significantly depending upon
many factors, including the number and type of products the Company seeks to
develop, the success of these development efforts, the costs and timing of
expansion of sales and marketing activities, the extent to which the Company's
existing and new products gain market acceptance, costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and other
intellectual property rights (including the cost of defending the lawsuit
relating to the Integra Patents), costs related to regulatory and third-party
reimbursement matters and other factors. The Company's management will retain
broad discretion as to the allocation of the net proceeds of the Offering. See
"Risk Factors -- Patent Infringement Lawsuit" and "Risk Factors -- Management
Discretion in Use of Proceeds".
17
<PAGE> 19
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed on the Nasdaq SmallCap Market under
the symbol "LIFC". On November 17, 1997, the last reported sale price for the
Company's Common Stock on The Nasdaq SmallCap Market was $5.75 per share. The
Company has applied for listing of the Common Stock on The Nasdaq National
Market under the symbol "LIFC". See "Risk Factors -- No Assurance of Nasdaq
National Market Listing". The following table sets forth the high and low sales
prices for the Company's Common Stock for the periods indicated, as reported by
The Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
First Quarter............................................. $4.00 $1.63
Second Quarter............................................ 5.50 2.13
Third Quarter............................................. 4.75 3.38
Fourth Quarter............................................ 4.00 2.00
1996
First Quarter............................................. $6.00 $2.25
Second Quarter............................................ 5.00 3.75
Third Quarter............................................. 5.88 3.09
Fourth Quarter............................................ 4.25 2.88
1997
First Quarter............................................. $8.88 $3.06
Second Quarter............................................ 7.13 4.63
Third Quarter............................................. 8.38 4.81
Fourth Quarter (through November 17, 1997)................ 8.25 4.75
</TABLE>
As of September 30, 1997, there were approximately 250 holders of record of
shares of Common Stock and 51 holders of record of shares of Series B Preferred
Stock.
DIVIDEND POLICY
LifeCell has not paid a cash dividend to holders of shares of Common Stock
and does not anticipate paying cash dividends to the holders of its Common Stock
in the foreseeable future.
Pursuant to the terms of the Company's Series A Preferred Stock, on (i)
December 6, 1996, the Company paid a per share dividend of $1.60 in shares of
Common Stock to the holders of the Series A Preferred Stock; (ii) March 26,
1997, the Company paid a per share dividend of $0.50 in shares of Common Stock
to such security holders; and (iii) March 26, 1997, the Company paid a per share
dividend of $0.25 in cash to such security holders. Also on March 26, 1997, in
accordance with the terms of the Series A Preferred Stock, the Company redeemed
all of the outstanding shares of the Series A Preferred Stock through the
conversion of such shares into shares of Common Stock. Accordingly, no further
dividends are payable in respect of the Series A Preferred Stock.
On February 15, 1997, May 15, 1997, August 15, 1997 and November 17, 1997,
the Company paid a per share dividend in shares of its Series B Preferred Stock
equivalent to $1.17, $2.41, $1.50 and $1.51, respectively, to the holders of
shares of Series B Preferred Stock. The Series B Preferred Stock bears dividends
per share at the annual rate of the greater of (i) $6.00 (subject to adjustment
in certain events) and (ii) the per annum rate of dividends per share paid, if
applicable, by the Company, on the Common Stock. The dividends may be paid, at
the Company's option, in cash or shares of Series B Preferred Stock or in a
combination of cash and shares of Series B Preferred Stock. Dividends accrue and
are paid quarterly. See "Description of Capital Stock -- Series B Preferred
Stock".
Under the General Corporation Law of the State of Delaware, a corporation's
board of directors may declare and pay dividends only out of surplus, including
additional paid in capital, or current net profits.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1997 and such capitalization as adjusted to give effect to the
issuance and sale of 4,000,000 shares of Common Stock offered by the Company
hereby at an assumed offering price of $5.75 per share and receipt of the net
proceeds therefrom. This table should be read in conjunction with the Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus. See also "Use of Proceeds".
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
AS
ACTUAL ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred credit(1).......................................... $ 1,500 $ 1,500
Stockholders' equity:
Series B Preferred Stock, $.001 par value; 182,205
authorized, 124,036 issued and outstanding, actual and
as adjusted; and accrued dividends of 1,837 shares..... -- --
Common Stock, $.001 par value; 25,000,000 shares
authorized; 6,990,917 shares issued and outstanding,
actual; 10,990,917 issued and outstanding, as
adjusted(2)............................................ 7 11
Warrants outstanding to purchase 3,189,507 shares of
Common Stock........................................... 416 416
Additional paid-in capital................................ 40,200 60,886
Accumulated deficit....................................... (34,709) (34,709)
-------- --------
Total stockholders' equity........................ 5,914 26,604
-------- --------
Total capitalization.............................. $ 7,414 $ 28,104
======== ========
</TABLE>
- ---------------------
(1) Represents a licensing fee paid by Medtronic for the development of heart
valve products. This fee will be recorded as revenue upon FDA approval of a
heart valve product. In the event of termination of the license and
development agreement between the Company and Medtronic, Medtronic may
convert the license fee into shares of Common Stock at the then-current
market price, subject to certain limitations and conditions. See
"Description of Capital Stock".
(2) Excludes (i) an aggregate of 4,001,161 shares of Common Stock issuable upon
conversion of shares of Series B Preferred Stock, outstanding at September
30, 1997; (ii) an aggregate of 1,380,320 shares reserved for issuance upon
exercise of stock options outstanding at September 30, 1997 with a weighted
average exercise price of $3.75 per share; (iii) an aggregate of 3,189,507
shares reserved for issuance upon exercise of warrants outstanding at
September 30, 1997 with a weighted average exercise price of $4.26 per
share; (iv) 260,870 shares (estimated using a market price of $5.75 per
share) issuable upon conversion of a $1.5 million licensing fee by Medtronic
under certain conditions and subject to certain limitations, at the
then-current market price; and (v) an aggregate of 1,034,231 shares reserved
for issuance upon exercise of options available for future grant under the
Company's Amended and Restated 1992 Stock Option Plan and Second Amended and
Restated 1993 Non-Employee Director Stock Option Plan, as amended. See
"Description of Capital Stock".
19
<PAGE> 21
DILUTION
The net tangible book value of the Company at September 30, 1997 was
approximately $5.5 million, or $0.50 per share on a pro forma basis, assuming
conversion of the Series B Preferred Stock. Pro forma net tangible book value
per share is equal to the Company's net tangible assets (tangible assets of the
Company less total liabilities) divided by the number of shares of Common Stock
outstanding, assuming conversion of the Series B Preferred Stock into 4,001,161
shares of Common Stock. Without taking into account any other changes in net
tangible book value after September 30, 1997 other than to give effect to the
sale of 4,000,000 shares of Common Stock by the Company in the Offering at an
assumed offering price of $5.75 per share and the receipt of the net proceeds
therefrom, the pro forma net tangible book value as of September 30, 1997 would
have been approximately $26.2 million, or $1.75 per share. This represents an
immediate increase in pro forma net tangible book value of $1.25 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $4.00 per share to new investors. The following table illustrates the
pro forma per share dilution to new investors in the Offering:
<TABLE>
<S> <C> <C>
Offering price per share.................................... $5.75
Pro forma net tangible book value per share at September
30, 1997............................................... $0.50
Increase attributable to new investors.................... 1.25
-----
Pro forma net tangible book value per share after the
Offering.................................................. 1.75
-----
Dilution per share to new investors......................... $4.00
=====
Percentage dilution per share to new investors.............. 70%
=====
</TABLE>
The foregoing calculations assume the conversion of the Series B Preferred
Stock into 4,001,161 shares of Common Stock and exclude (i) an aggregate of
1,380,320 shares reserved for issuance upon exercise of stock options
outstanding at September 30, 1997 with a weighted average exercise price of
$3.75 per share; (ii) an aggregate of 3,189,507 shares reserved for issuance
upon exercise of warrants outstanding at September 30, 1997 with a weighted
average exercise price of $4.26 per share; (iii) 260,870 shares (estimated using
a market price of $5.75 per share) issuable upon conversion of a $1.5 million
licensing fee by Medtronic under certain conditions and subject to certain
limitations, at the then-current market price; and (iv) an aggregate of
1,034,231 shares reserved for issuance upon exercise of options available for
future grant under the Company's Amended and Restated 1992 Stock Option Plan and
Second Amended and Restated 1993 Non-Employee Director Stock Option Plan, as
amended. See "Description of Capital Stock".
20
<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus. The statement of operations data set forth below for the years
ended December 31, 1994, 1995 and 1996 and the balance sheet data as of December
31, 1995 and 1996 are derived from financial statements of the Company that have
been audited by Arthur Andersen LLP, independent public accountants, which are
included elsewhere in this Prospectus, and are qualified by reference to such
Financial Statements and Notes thereto. The statement of operations data for the
fiscal years ended December 31, 1992 and 1993 and the balance sheet data as of
December 31, 1992, 1993 and 1994 are derived from financial statements of the
Company that have been audited by Arthur Andersen LLP and are not included
herein. Also set forth below are certain selected financial data of LifeCell for
the nine months ended September 30, 1996 and 1997, derived from the Company's
unaudited financial statements, which, in the opinion of management, include all
adjustments (consisting only of normal recurring entries) that the Company
considers necessary for a fair presentation of such data. Results for interim
periods are not necessarily indicative of the results that may be expected for
the full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales....................... $ -- $ 21 $ 94 $ 742 $ 2,012 $ 1,410 $ 3,238
Research funded by others........... 239 377 723 1,065 934 660 779
------- ------- ------- ------- ------- ------- -------
Total revenues................. 239 398 817 1,807 2,946 2,070 4,017
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of goods sold.................. -- 207 516 925 1,281 900 1,705
Funded research and development..... 239 377 723 1,065 934 660 779
Proprietary research and
development....................... 1,355 1,719 1,363 1,105 655 550 889
General and administrative.......... 1,166 1,479 1,381 1,423 1,911 1,196 2,007
Selling and marketing............... 205 269 728 1,475 2,390 1,700 3,573
------- ------- ------- ------- ------- ------- -------
Total costs and expenses....... 2,965 4,051 4,711 5,993 7,171 5,006 8,953
------- ------- ------- ------- ------- ------- -------
Loss from operations.................. (2,726) (3,653) (3,894) (4,186) (4,225) (2,936) (4,936)
Interest income and other, net...... 162 224 167 281 135 56 320
------- ------- ------- ------- ------- ------- -------
Net loss.............................. $(2,564) $(3,429) $(3,727) $(3,905) $(4,090) $(2,880) $(4,616)
======= ======= ======= ======= ======= ======= =======
Loss per common share(1).............. $ (0.70) $ (0.80) $ (0.90) $ (1.10) $ (1.14) $ (0.82) $ (0.86)
======= ======= ======= ======= ======= ======= =======
Shares used in computing loss per
common share........................ 3,643 4,277 4,294 4,313 4,543 4,452 6,304
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------- AT SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 3,939 $ 426 $ 1,877 $ 3,015 $ 10,748 $ 5,536
Short-term investments............ 2,589 3,017 5,155 -- -- --
Working capital................... 6,770 3,433 6,613 2,888 10,885 6,131
Total assets...................... 7,413 4,260 7,997 4,376 12,890 8,812
Deferred credit................... -- -- 1,500 1,500 1,500 1,500
Accumulated deficit............... (13,189) (16,619) (20,678) (24,775) (29,311) (34,709)
Total stockholders' equity........ 7,152 4,046 5,743 2,094 10,197 5,914
</TABLE>
- ---------------
(1) Includes effect of accounting treatment of preferred stock and warrant
exercise inducement of $(0.03), $(0.19) and $(0.24) for the years ended
December 31, 1994, 1995 and 1996, and $(0.18) and $(0.13) for the nine
months ended September 30, 1996 and 1997, respectively.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of operations and financial condition of LifeCell
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Prospectus. Special Note: Certain statements set
forth below constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. See
"Special Note Regarding Forward-Looking Statements".
GENERAL AND BACKGROUND
LifeCell is a bio-engineering company engaged in the development and
commercialization of tissue regeneration and cell preservation products. The
Company's patented tissue processing and cell preservation technologies serve as
platforms for a broad range of potential products addressing significant
clinical needs in multiple markets. The Company's first commercial product is
AlloDerm, a tissue graft consisting of an extracellular tissue matrix that
retains the essential biochemical and structural composition of human dermis.
The Company believes that AlloDerm is the only commercial tissue transplant
product that promotes normal human soft tissue regeneration. AlloDerm currently
is being marketed in the United States and internationally for use in
reconstructive plastic, dental and burn surgery. The Company estimates that
AlloDerm has been transplanted in over 20,000 patients. LifeCell also is
developing several additional products, including injectable AlloDerm, composite
skin grafts, heart valves, vascular grafts and ThromboSol.
LifeCell was organized in 1986 and, since its inception, has been financed
through the public and private sale of equity securities, through product sales,
through a corporate alliance with Medtronic and through the receipt of
government grants and contracts.
LifeCell began the sale of AlloDerm grafts as a dermal replacement in the
grafting of third-degree burns in December 1993 and commenced commercial
activities in 1994. LifeCell commenced the sale of AlloDerm for periodontal
surgery in September 1995 and for reconstructive plastic surgery in November
1995. To date, proceeds from the sale of AlloDerm products have not been
sufficient to fund in full the Company's operating activities.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 and 1996
The net loss for the nine months ended September 30, 1997 increased 60% to
approximately $4.6 million compared to approximately $2.9 million for the same
period of 1996. The increase was principally attributable to higher costs
associated with the Company's increased marketing activities for its AlloDerm
products and the development of the infrastructure to administer its increased
activities. This investment in increased marketing activities was partially
offset by a rise in product sales as discussed further below.
Total revenues for the nine months ended September 30, 1997 increased 94%
to approximately $4.0 million compared to approximately $2.1 million for the
same period of 1996. Approximately $1.8 million of such increase was
attributable to increases in sales of products, which were the result of
expanded sales and marketing activities and increased distribution activities
during the 1997 period. The remaining $120,000 increase in revenues was the
result of increased research activities under funding arrangements; amounts
recognized as revenues under such cost-reimbursement arrangements are for
expenses incurred during the periods.
Cost of goods sold for the nine months ended September 30, 1997 was
approximately $1.7 million, with a gross margin of approximately 47%. The gross
margin for the nine months ended September 30, 1996 was approximately 36%. The
increase in gross margin is principally attributable to the implementation of
certain production efficiencies and the allocation of fixed costs to higher
volumes of products
22
<PAGE> 24
produced in 1997 as well as an increase in sales of certain higher-margin
AlloDerm products and the price of certain AlloDerm products.
Research and development expenses for the nine months ended September 30,
1997 increased 38% to approximately $1.7 million compared to approximately $1.2
million for the comparable period in 1996. Of such increase, approximately
$120,000 was attributable to increased activities related to research funded by
others. Such activities increased in 1997 as a result of the receipt during 1996
of three contracts with government agencies to fund research and development
activities. The remaining $340,000 increase in research and development expense
is attributable to increased production of products for clinical and research
activities as well as higher allocations of resources to certain proprietary
research and development programs.
General and administrative expenses during the nine months ended September
30, 1997 increased 68% to approximately $2.0 million compared to approximately
$1.2 million for the same period of 1996. Such increase is principally
attributable to increased staff levels, recruiting fees and other professional
fees related to the Company's expansion of the infrastructure to support its
increased sales activities.
Selling and marketing expenses increased 110% to approximately $3.6 million
during the nine months ended September 30, 1997 compared to approximately $1.7
million for the same period of 1996. The increase was primarily attributable to
increased promotional activities as well as the addition of sales personnel
related to AlloDerm marketing.
Interest income and other, net increased 471% to approximately $320,000
during the nine months ended September 30, 1997 compared to approximately
$56,000 for the same period of 1996. The increase was principally attributable
to higher funds available for investment during the current period as a result
of the sale of Series B Preferred Stock in November 1996.
Years Ended December 31, 1996 and 1995
Total revenues for 1996 increased 63% to approximately $2.9 million
compared to approximately $1.8 million for 1995. As a result of increased
marketing activities, expansion of distribution channels and expanded uses of
the Company's AlloDerm product, product sales for the year increased 171% to
$2.0 million from $742,000 for 1995. Revenues for research funded by others
decreased 12% from $1.1 million in 1995 to $934,000 in 1996 principally as a
result of certain non-recurring revenue received by LifeCell in the first
quarter of 1995 under the Medtronic agreement and the timing of planned
activities performed by LifeCell related to the progress of the project. The
corporate alliance revenue is recorded based on the costs of the work performed
under the agreement. During 1996, the Company recognized $387,000 in revenue
from its government grants and contracts, or an increase of $148,000 over 1995,
as a result of additional governmental awards received during 1996 for the
Company's ThromboSol and keratinocyte development programs.
Total costs and expenses for 1996 increased 20% to $7.2 million compared to
$6.0 million for the same period of the prior year principally as a result of
expanded sales and marketing activities for the Company's products and costs
related to such expanded activities. Cost of goods sold for 1996 increased 38%
to $1.3 million compared to $925,000 in the same period of 1995. This increase
was due to an increase in product sales and the shift from the development to
the processing of AlloDerm, consistent with taking a product to market.
Total research and development expenses decreased 27% to $1.6 million in
1996 from $2.2 million in 1995. The cost of funded research and development
declined 12% from $1.1 million in 1995 to $934,000 in 1996 as a result of the
timing of planned activities as well as the funding available, as such costs are
reimbursed by others. Other research and development expenses decreased 41% to
$655,000 for 1996 from $1.1 million in 1995 primarily due to the shift in the
Company's focus from the development of AlloDerm to processing.
General and administrative expenses increased 34% to $1.9 million in 1996
from $1.4 million in 1995 principally as a result of expanded administrative
activities as the Company increased its product
23
<PAGE> 25
sales and marketing activities as well as certain administrative expenses
recognized in conjunction with its 1996 financing activities and non-cash
charges related to the reissuance of certain stock options.
Selling and marketing expenses increased 62% to $2.4 million for 1996 from
$1.5 million in 1995 primarily due to the addition of sales personnel and
promotional activities related to AlloDerm marketing and expanded distribution
activities.
Interest income and other, net decreased 52% to $135,000 for 1996 compared
to $281,000 for 1995 as a result of the decrease in funds available for
investment prior to the receipt of funds from the sale of Series B Preferred
Stock in November 1996, as well as lower interest rates in 1996.
Years Ended December 31, 1995 and 1994
Total revenues for 1995 increased 121% to $1.8 million compared to
approximately $817,000 for 1994. This increase was primarily due to increased
product sales and increased revenues from research funded by others. Product
sales increased 689% to $742,000 in 1995 from $94,000 in 1994, due to greater
market acceptance of AlloDerm and additional sales efforts. Revenues from
research funded by others increased 47% to $1.1 million in 1995 from $723,000 in
1994. Funding under the corporate alliance with Medtronic increased 130% to
$825,000 in 1995 from $358,000 in 1994 due to a full year of activity in 1995
and increased heart valve development activities. In 1995, revenues from
research funded by others included amounts recorded from one Small Business
Innovative Research ("SBIR") contract of approximately $239,000, compared to
$364,000 from two SBIR contracts in 1994. During 1995, research and development
contracts and grants revenue consisted of $239,000 pursuant to the second year
of a 1993 award of a Phase II $740,000 SBIR contract from the United States Army
for the prolonged storage of platelets.
Cost of goods sold for product sales increased 79% to $925,000 compared to
$516,000 for 1994 while product revenues increased $648,000 during 1995 as
compared to 1994. During 1994, the "start up" phase of manufacturing was still
underway and the Company had excess capacity. This resulted in higher amounts of
unabsorbed overhead costs in 1994 than in 1995.
Research and development expenses increased 4% to $2.2 million in 1995 from
$2.1 million in 1994 as a result of higher funding levels for research funded by
others partially offset by a decrease in AlloDerm-related expenses classified as
research and development. Proprietary research and development expenses
decreased 19% to $1.1 million in 1995 from $1.4 million in 1994 primarily as a
result of the transfer of certain AlloDerm-related activities from proprietary
research and development to processing (cost of goods sold) in 1995. These costs
previously were recorded in research and development expenses.
General and administrative expenses remained relatively consistent with the
prior year increasing only 3% for 1995 as compared to 1994.
Selling and marketing expenses increased 103% to $1.5 million in 1995 from
$728,000 in 1994 primarily due to the addition of sales personnel, increased
promotional activities related to AlloDerm and commercial introduction of the
AlloDerm graft in the periodontal surgery market.
Interest income and other, net increased 68% to $281,000 in 1995 from
$167,000 in 1994 due to an increase in average funds available for investment in
1995 as compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, LifeCell's principal sources of funds have been equity
offerings, product sales, external funding of research activities and interest
on investments. LifeCell has historically funded research and development
activities for products other than AlloDerm primarily with external funds from
its corporate alliance with Medtronic and government grants. In April 1996,
LifeCell was awarded a $613,000 contract from the United States Navy related to
the development of ThromboSol.
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<PAGE> 26
In August 1996, LifeCell was awarded a two-year $300,000 National Science
Foundation Phase II grant related to its keratinocytes program. In December
1996, LifeCell was awarded a two-year contract of approximately $1.1 million
from the United States Army to support the development of vascular graft and
other products.
In 1994, LifeCell entered into an agreement with Medtronic pursuant to
which Medtronic paid LifeCell a license fee of $1.5 million and agreed, subject
to certain rights to terminate at Medtronic's discretion, to fund certain costs
of the research and development of LifeCell's proprietary tissue processing
technology in the field of heart valves. Through September 30, 1997, LifeCell
has recognized approximately $1.9 million in revenues for development funding,
excluding the initial license fee, for this program. The budgeted funding for
the remainder of 1997 is approximately $27,000, which represents one-half of the
expected research cost.
LifeCell expects to incur substantial expenses in connection with its
efforts to expand sales and marketing of AlloDerm, develop expanded uses for
AlloDerm, conduct the Company's product development programs (including costs of
clinical studies), prepare and make any required regulatory filings, introduce
products, participate in technical seminars and support ongoing administrative
and research and development activities and may incur substantial expenses in
connection with defending the lawsuit relating to the Integra Patents. The
Company currently intends to fund these activities from its existing cash
resources, sales of products, research and development funding received from
others and the net proceeds to the Company of the Offering. While the Company
believes that its existing available funds, together with the net proceeds to
the Company of the Offering, will be sufficient to meet its present operating
and capital requirements for the next 24 months, there can be no assurance that
such sources of funds will be sufficient to meet these future expenses. If
adequate funds are not available, the Company expects it will be required to
delay, scale back or eliminate one or more of its product development programs.
The Company's need for additional financing will be principally dependent on the
degree of market acceptance achieved by the Company's products and the extent to
which the Company can achieve substantial growth in product sales during 1998
and 1999, as well as the extent to which the Company may decide to expand its
product development efforts. There can be no assurance that the Company will be
able to obtain any such additional financing on acceptable terms, if at all. See
"Risk Factors -- No Assurance of Additional Necessary Capital".
LifeCell has had losses since its inception and therefore has not been
subject to federal income taxes. As of December 31, 1996, LifeCell had net
operating loss (NOL) and research and development tax credit carryforwards for
income tax purposes of approximately $26.1 million and $385,000, respectively,
available to reduce future income tax and tax liabilities. Federal tax laws
provide for a limitation on the use of NOL and tax credit carryforwards
following certain ownership changes that could limit LifeCell's ability to use
its NOL and tax credit carryforwards. The sale of Common Stock in the Offering
is expected to result in an ownership change for federal income tax purposes.
The Company estimates that the amount of NOL carryforwards and the credits
available to offset taxable income subsequent to the Offering will be
approximately $4.0 million per year on a cumulative basis. Accordingly, if
LifeCell generates taxable income in any year in excess of its then cumulative
limitation, the Company may be required to pay federal income taxes even though
it has unexpired NOL carryforwards. See "Risk Factors -- Limitation on the Use
of Net Operating Losses and Research and Development Tax Credits".
On November 4, 1997, Integra and MIT filed a lawsuit against the Company
alleging that the use of AlloDerm infringes the Integra Patents. Although the
Company denies the allegations of patent infringement, there can be no assurance
as to the outcome of this matter or as to the effect, if any, that the outcome
may have on the Company's business, financial condition or results of
operations. See "Risk Factors -- Patent Infringement Lawsuit" and "Risk
Factors -- Dependence on Patents and Proprietary Rights".
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BUSINESS
GENERAL
LifeCell is a bio-engineering company engaged in the development and
commercialization of tissue regeneration and cell preservation products. The
Company's patented tissue processing and cell preservation technologies serve as
platforms for a broad range of potential products addressing significant
clinical needs in multiple markets. The Company's first commercial product is
AlloDerm, a tissue graft consisting of an extracellular tissue matrix that
retains the essential biochemical and structural composition of human dermis.
The Company believes that AlloDerm is the only commercial tissue transplant
product that promotes normal human soft tissue regeneration. AlloDerm currently
is being marketed in the United States and internationally for use in certain
reconstructive plastic, dental and burn surgery applications. The Company
estimates that AlloDerm has been transplanted in over 20,000 patients. LifeCell
also is developing several additional products, including injectable AlloDerm,
composite skin grafts, heart valves, vascular grafts and ThromboSol.
The Company's product development programs have been generated from the
following proprietary technologies: (i) a method for producing an extracellular
tissue matrix by removing antigenic cellular elements while stabilizing the
matrix against damage; (ii) a method for cell preservation that protects cells
during prolonged storage; and (iii) a method for freeze-drying biological cells
and tissues without the damaging effects of ice crystals. LifeCell's tissue
processing technology removes cells that would be the target of rejection upon
transplantation while preserving the essential biochemical and structural
composition of the extracellular tissue matrix. This process is designed to
create an acellular tissue that is not rejected by the body, functions as a
natural template or scaffold into which a patient's own cells will migrate
following transplantation and promotes normal soft tissue regeneration. The
Company believes its tissue processing technology offers a number of other key
benefits, including multiple product applications, safety, prolonged shelf-life
and high compatibility with other technologies.
AlloDerm is an extracellular matrix tissue graft processed from donated
human skin. Following transplant, the AlloDerm graft becomes repopulated with
the patient's own cells and is revascularized (i.e., blood supply is restored),
becoming engrafted into the patient. As a result of its ability to promote the
regeneration of normal human soft tissue, AlloDerm has multiple product
applications. AlloDerm currently is used in certain reconstructive plastic,
dental and burn surgery applications. The Company estimates, based on the most
recently published industry data from various sources, that each year in the
United States there are approximately 1.0 million reconstructive plastic surgery
procedures, 480,000 dental soft tissue grafts, 230,000 dental bone-related
grafts and more than 20,000 burn patients requiring skin grafts.
LifeCell markets AlloDerm to hospital-based surgeons in domestic and
selected international markets. In the United States, LifeCell utilizes its own
direct sales force, supplemented with a network of regional specialty
distributors. In addition, in June 1997, LifeCell entered into an agreement with
Lifecore for the exclusive distribution of AlloDerm for dental applications in
the United States. LifeCell also is developing an international network of
distributors to market AlloDerm for multiple applications in markets outside the
United States.
The Company currently is evaluating the use of AlloDerm in additional
applications and is developing new products based on its technology platforms.
LifeCell is conducting research on the use of AlloDerm in urological disorders,
neurosurgery, orthopedic surgery and general surgery. In addition, LifeCell is
developing an injectable form of AlloDerm for use in multiple potential
applications, including urological, dermatological and reconstructive surgery.
If successfully developed, an injectable form of AlloDerm would allow for
delivery of the product through the use of a syringe, rather than a surgical
incision, thereby creating additional market opportunities. LifeCell also is
conducting research on the use of its technologies in other product
opportunities, including composite skin grafts, heart valves, vascular grafts,
venous valves, nerve connective tissue and ThromboSol.
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LifeCell's strategy is to be a leader in the research, development, sales
and marketing of tissue regeneration and cell preservation products. The primary
elements of the Company's business strategy include (i) expanding penetration of
AlloDerm into current target markets, (ii) expanding the use of AlloDerm into
new applications and (iii) leveraging the Company's technology platforms to
develop new products.
TECHNOLOGY
The Company's product development programs have been generated from the
following proprietary technologies: (i) a method for producing an extracellular
tissue matrix by removing antigenic cellular elements while stabilizing the
matrix against damage; (ii) a method for cell preservation by manipulating cells
through signal transduction (i.e., manipulation of cellular metabolism) to
protect cells during prolonged storage; and (iii) a method for freeze-drying
biological cells and tissues without the damaging effects of ice crystals.
Tissue Processing Technology
LifeCell's tissue processing technology removes antigenic cells from the
tissue matrix to eliminate the potential for rejection of the transplanted
tissue. The Company's tissue processing technology also stabilizes the tissue
matrix to preserve its natural structure and biochemical properties that promote
cell repopulation and freeze-dries the tissue matrix without ice crystal damage
to allow for extended storage.
Soft tissue contains a complex, three-dimensional skeletal structure
consisting of multiple forms of collagen, elastin, proteoglycans, other
proteins, growth factors and vascular channels (the "tissue matrix"). Together,
the tissue matrix and the cells that populate it form the soft tissues of the
body, such as dermis, heart valves, blood vessels and other tissue types. As
part of the body's natural remodeling process, certain cells actively break down
and replace the tissue matrix on a continual basis. The tissue matrix itself,
however, cannot be regenerated by the body in the event that a large portion of
it is destroyed or lost as a result of trauma or surgery. The only method of
replacing large sections of the tissue matrix is through transplantation.
Soft tissue transplants from one part of the patient's body to another
(autograft) generally are successful; however, the procedure results in the
creation of an additional wound site. Historically, the ability to transplant
tissue from one person to another (allograft) has been limited because the
donor's cells within the transplanted tissue may trigger an immune response,
resulting in rejection of the transplanted tissue. The Company believes that
previous attempts to remove cells from soft tissue grafts before performing an
allograft transplant have resulted in disruption or damage of the tissue matrix,
causing an inflammatory response and rejection of the tissue following
transplantation.
LifeCell believes its tissue processing technology may offer some or all of
the following important benefits, depending on the specific application:
Natural Tissue Regeneration. Tissue grafts produced with LifeCell's
tissue processing technology retain the structural and biochemical
properties that stimulate natural cell repopulation and normal soft tissue
regeneration. In addition, the Company's clinical studies with dermis and
preliminary animal studies with heart valve leaflets and vascular grafts
processed with the Company's technology indicate that such tissues can be
remodeled by the recipient's own cells and may eventually become the
recipient's own tissue.
Multiple Potential Applications. The Company believes that its tissue
processing technologies may have the potential to generate additional
products with multiple applications. In addition to the current commercial
applications of AlloDerm (i.e., reconstructive plastic, dental and burn
surgery), the Company believes that AlloDerm may provide additional
benefits in neurosurgery, urological surgery and orthopedic surgery. The
Company also is evaluating the applicability of its technologies to other
tissues, including heart valves, blood vessels, nerves and tendons. The
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<PAGE> 29
Company currently is conducting animal studies with heart valves and
vascular grafts processed with the Company's technology. LifeCell has
conducted certain cross-species studies that indicate its tissue processing
technology also may potentially allow for transplantation of animal tissues
into humans.
Safety. The Company's tissue processing technology is designed to
produce products that will revascularize and integrate into the body's own
tissues. The patient's immune cells also are able to penetrate into the
transplanted tissue and thus aid in preventing infections. In contrast,
certain synthetic implants do not allow penetration of the patient's immune
cells, thereby compromising the body's natural ability to fight infections.
Prolonged Shelf-Life. The Company's proprietary tissue processing
technology allows extended storage and ease of transportation of products.
For example, AlloDerm can be stored at refrigerated temperatures for up to
two years. In contrast, most traditional allograft tissues require special
methods of storage and transportation.
Compatibility with Other Technologies. Several types of tissues
processed with the Company's technology retain important biochemical sites
(proteoglycans) which bind growth factors that can stimulate tissue
regeneration. As a result, the Company believes it may be possible to
utilize its technology to develop tissue-based delivery vehicles for these
factors.
Cell Preservation Technology
Blood cells circulating within the body are exposed to multiple factors
which maintain their stability and prevent activation. When blood cells are
removed from the body for storage, these stabilizing influences are absent,
resulting in the destabilization and irreversible activation of the cells. These
damaging events currently limit the shelf-life of transfusable red blood cells
to 42 days under refrigeration and blood platelets to five days at room
temperature.
LifeCell's cell preservation technology mimics the stabilizing influences
that are present in the body through manipulation of signal transduction
mechanisms that control cellular metabolism, combined with either low
temperature storage or patented freeze-drying technology. If successfully
implemented, LifeCell's cell preservation technology could result in multiple
products for the preservation of directly transfusable blood cells with extended
shelf-life which could be stored in a manner consistent with current blood
banking practices.
STRATEGY
LifeCell's objective is to be a leader in the research, development, sales
and marketing of tissue regeneration and cell preservation products. The Company
currently is focusing primarily on the broad commercialization of its first
product, AlloDerm, which the Company estimates has been used to treat over
20,000 patients since its commercial introduction in 1994. The Company's
strategy includes the following principal elements:
Expanding Penetration of AlloDerm into Current Target Markets
The Company intends to expand the penetration of its AlloDerm products into
certain target markets. The Company currently markets AlloDerm for use in
reconstructive plastic, dental and burn surgery in domestic and selected
international markets through its own sales force and through distributors. The
Company intends to increase the penetration of AlloDerm into these markets by
(i) conducting additional clinical studies to demonstrate the benefits of
AlloDerm compared to other current therapies, (ii) facilitating the publication
by surgeons of additional papers in leading scientific journals describing the
uses and benefits of AlloDerm, (iii) hiring additional sales and marketing
personnel to call on a broader audience of hospital-based surgeons, (iv)
establishing additional distribution relationships with leading suppliers of
medical products, both for domestic and selected
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international markets and (v) increasing direct mail and advertising campaigns,
sponsoring educational and training workshops on the use of AlloDerm and
participating in trade shows.
Expanding the Use of AlloDerm into New Applications
LifeCell intends to leverage its relationships with leading surgeons and
other physicians and its hospital-based sales force to identify and promote new
applications of AlloDerm. LifeCell intends to focus initially on new markets
that are synergistic with its current hospital surgeon-focused distribution
strategy, including neurosurgery, urological surgery, orthopedic surgery and
general surgery. The Company currently is planning or conducting research,
developmental and clinical activities to evaluate the use of AlloDerm in these
applications. The Company also is targeting leading surgeons in each of these
fields to conduct clinical studies with AlloDerm and to publish scientific and
clinical articles to generate awareness of the applications of the product.
Leveraging Technology Platforms to Develop New Products
The Company plans to leverage its tissue processing and cell preservation
technology platforms to develop new products. The Company currently is
developing an injectable form of AlloDerm that it believes may be useful in the
treatment of urinary incontinence as well as in dermatological and
reconstructive applications. In addition, the Company intends to apply its
tissue processing technology in the development of products based on other
tissues, including heart valves, vascular grafts, tendons, cartilage and nerve
connective tissues. The Company also is utilizing its proprietary cell
preservation technology to extend the shelf-life of transfusable platelets and
red blood cells. LifeCell plans to establish collaborative out-licensing
arrangements with appropriate partners to fund the development and
commercialization of certain of these products.
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PRODUCTS AND PRODUCT DEVELOPMENT ACTIVITIES
The following table sets forth information about AlloDerm and the Company's
products under development.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
CURRENT USES OF ALLODERM APPLICATIONS(1) STATUS(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconstructive Plastic Surgery Soft tissue repair and replacement Commercial
Dental Surgery Gingival grafts Commercial
Burns Dermal grafts Commercial
- ------------------------------------------------------------------------------------------------------
POTENTIAL USES OF ALLODERM APPLICATIONS(1) STATUS(2)
- ------------------------------------------------------------------------------------------------------
Neurosurgery Duraplasty Development
Urological Surgery Bladder sling Development
Bladder wall extension
General Surgery Abdominal wall closure Development
Prevention of surgical adhesions
Orthopedic Surgery Capsular ligament reinforcement Development
- ------------------------------------------------------------------------------------------------------
POTENTIAL PRODUCTS APPLICATIONS(1) STATUS(2)
- ------------------------------------------------------------------------------------------------------
Injectable AlloDerm Urinary incontinence Preclinical
Revision of acne scars
Composite Skin Grafts Treatment of third-degree burns Preclinical
XenoDerm Soft tissue repair and augmentation Preclinical
ThromboSol Platelet storage solution Preclinical
Heart Valves Heart valve replacement Research
Vascular Grafts Coronary or below-knee peripheral Research
bypass
Venous Valves Chronic venous insufficiency Research
Venous stasis ulcers
Nerve Connective Tissue Nerve regeneration Research
Red Blood Cell Preservation Extended storage of red blood cells Research
- ------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) LifeCell markets AlloDerm for the repair or replacement of damaged or
inadequate integumental tissue. LifeCell may not promote AlloDerm for
certain uses without FDA approval. Products other than AlloDerm may require
separate filings with and approvals of the FDA. See "-- Government
Regulation".
(2) "Research" denotes a project in which proof-of-concept has not yet been
established. "Preclinical" denotes a project in which animal studies have
been conducted, implemented or are planned. "Development" denotes a project
in which proof-of-concept has been established through in vitro or
early-stage animal studies or post-market clinical use and the Company is
conducting or intends to conduct further animal studies and clinical
studies. "Commercial" indicates applications in which surgeons currently are
using the product. However, commercial does not necessarily denote that all
factors, such as long-term efficacy, have been determined.
AlloDerm Products
AlloDerm is an extracellular tissue matrix graft processed from donated
human (cadaveric) skin. The Company believes that AlloDerm is the only
transplant tissue product on the market today that promotes the regeneration of
normal human soft tissue. Following transplant, the AlloDerm graft becomes
repopulated with the patient's own cells and is revascularized (i.e., blood
supply is restored), becoming engrafted into the patient. As a result of its
ability to promote the regeneration of normal human soft tissue, AlloDerm has
multiple surgical applications. AlloDerm currently is used in reconstructive
plastic, dental and burn surgery. The Company believes AlloDerm may be used in
additional applications and is conducting activities to extend the use of
AlloDerm to urological surgery, neurosurgery, orthopedic surgery and general
surgery.
LifeCell obtains donated human skin from unaffiliated tissue banks in the
United States. LifeCell requires that the tissue banks supplying the Company
with tissue comply with the FDA's human
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tissue regulations. In addition, the Company requires supplying tissue banks to
comply with procedural guidelines outlined by the AATB. Microbiological and
other quality assurance testing is conducted by LifeCell before AlloDerm tissue
products are released for shipment. See "-- Government Regulation".
LifeCell has established what it believes to be adequate sources of donated
skin tissue at acceptable costs to satisfy the foreseeable demand for AlloDerm
tissue products. However, there can be no assurance that the future availability
of donated human skin will be sufficient to meet LifeCell's demand for such
materials. AlloDerm is shipped at ambient temperature by overnight delivery
services and has a two-year refrigerated shelf-life. See "-- Sources of
Materials".
On November 4, 1997, Integra and MIT filed a lawsuit in the United States
District Court for the District of Massachusetts, alleging that the Company
infringes the Integra Patents. The lawsuit seeks injunctive relief, an
accounting of revenues, enhanced monetary damages and attorneys' fees. On
November 14, 1997, LifeCell responded to the complaint denying the infringement
claims and asserting certain affirmative defenses and counterclaims. The outcome
of such litigation is inherently unpredictable, and there can be no assurance
that the result of this proceeding will be favorable to the Company or that it
will not have a material adverse effect on the Company's business, operating
results or financial condition. See "-- Legal Proceedings".
Reconstructive Plastic Surgery. In November 1995, LifeCell began marketing
AlloDerm to reconstructive plastic surgeons. Such surgeons currently use or
potentially may use AlloDerm generally as a soft tissue implant to repair or
replace tissue deficits, as an interpositional graft for tissue closure or
repair, as a graft or implant for scar revision, as a protective sheath covering
nerves and tendons and as a sling to support tissue following nerve or muscle
damage. Also, the Company believes that AlloDerm has additional uses in
reconstructive surgery related to oncological procedures.
Based on industry sources, the Company estimates that there are
approximately 1.0 million reconstructive plastic surgical procedures performed
annually in the United States in which AlloDerm could be used. Competitive
products include synthetic materials, bovine collagen injections and autologous
tissue. The Company believes AlloDerm generally has advantages over synthetic
material because AlloDerm fully integrates into the patient and because certain
synthetic materials are susceptible to infection, mobility and occasional
extrusion. The Company also believes AlloDerm generally has advantages over
bovine collagen, which tends to be resorbed after two to 12 months, requiring
reapplication. The use of autologous tissue requires additional surgery,
creating a separate wound and trauma to the patient.
Dental Surgery. LifeCell began marketing AlloDerm to dental surgeons in
September 1995. The Company has an agreement, effective June 1997, with Lifecore
for the exclusive distribution in the United States of AlloDerm for use in
dental applications. Dental surgeons use AlloDerm tissue in free-gingival
grafting and as a subepithelial connective tissue graft, procedures used to
increase the amount of attached gum tissue supporting the teeth. Until the
development of AlloDerm, these procedures could only be performed with
autologous tissue excised from the roof of the patient's mouth and then
transplanted to the gum or, to a limited extent, with freeze-dried allograft
skin. The Company believes that AlloDerm provides significant clinical benefits
for this procedure by eliminating the need for an autograft and by avoiding scar
formation often associated with freeze-dried allograft skin. In clinical case
studies performed by periodontists, AlloDerm grafts functioned comparably to
autografts, spared the patient the pain and discomfort associated with the
excision of the autograft and reduced surgical time.
AlloDerm tissue products also are used as barrier membranes in guided bone
regeneration. In this function, the AlloDerm tissue serves as a barrier over
allograft bone grafts, which are used to restore a degenerated jaw bone and
surrounding gingival tissue. AlloDerm tissue products also are used to repair
soft tissue defects of the gum.
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According to the most recently published data from the American Dental
Association, there were approximately 480,000 soft tissue grafts and 230,000
bone-related grafts performed in 1990 in the United States. Competitive
procedures use autologous tissue as well as synthetic material. The Company
believes that AlloDerm has advantages over autologous tissue because of the
reduced trauma to the patient, and over certain non-resorbable synthetic
materials because it integrates into the patient and does not require a separate
procedure for removal.
Burns. During 1994, LifeCell began commercial sales of AlloDerm for use in
the treatment of third-degree and deep second-degree burns requiring skin
grafting. The Company estimates that approximately 75,000 people are
hospitalized each year in the United States due to burns and that more than
20,000 of such patients are admitted with major burns requiring skin grafts.
Skin is the body's largest organ and is the first line of defense against
invasion of foreign substances. It contains two functional layers, the upper
surface consisting primarily of cells (epidermis) and an underlying foundational
layer of extracellular matrix proteins and collagen (dermis). The epidermis
functions as a water barrier and maintains hydration. The dermis provides other
important skin properties including tensile strength, durability and elasticity.
Dermis, like many other tissues of the body, is not capable of regenerating
itself. Currently, third-degree and deep second-degree burns are treated with
split-thickness skin autografts taken from uninjured areas of the patient's
body. The use of AlloDerm with ultra-thin split-thickness skin autografts has
produced comparable results to normal autografts while reducing donor site
trauma.
Other Potential Applications of AlloDerm. During 1997, the use of AlloDerm
as dura mater (the protective lining between the brain and skull) replacement
was developed by an independent hospital through a clinical evaluation in
approximately 50 neurosurgery patients. The Company currently is conducting
animal studies for the use of AlloDerm to repair or replace damaged dura mater.
Presently, surgeons primarily use autologous tissue, allograft dura mater
or bovine pericardium as a replacement for damaged dura. The use of bovine
products and allograft dura mater have declined because of concerns over disease
transmission. The Company believes that AlloDerm may be preferred over allograft
dura mater because certain neurological diseases, such as Creutzfeld Jacob
Disease, have not been documented to occur in dermis, the source material for
AlloDerm. The Company believes that AlloDerm also may be preferable to
autologous tissue because of the elimination of donor site trauma.
The FDA currently regulates allograft dura mater as a medical device and
the product is subject to premarket notification requirements. The Company
believes, however, that the use of AlloDerm as a dura mater replacement falls
within the FDA classification of "human tissue" intended for transplantation.
There can be no assurance that the FDA would agree that AlloDerm should be
regulated as human tissue (rather than as a medical device or biologic) when it
is used as a dura mater replacement. If the FDA were to decide that the product,
when intended for use as dura mater replacement, is a device, the Company would
attempt to obtain FDA clearance or approval to market AlloDerm for this intended
use. See "-- Government Regulation".
The Company believes that AlloDerm also may be used as a bladder or
urethral sling to treat certain forms of urinary incontinence and as a surgical
material to expand bladder walls. Currently, autologous tissue (fascia),
allograft tissue and synthetic materials are used for bladder sling procedures
and autologous tissue is used to expand bladder walls. If successfully
developed, AlloDerm in such applications could offer several advantages because
of the product's ability to promote normal soft tissue regeneration and to
eliminate donor site trauma.
The Company has been advised by a small number of surgeons that AlloDerm
also has been used to reinforce the capsular ligament surrounding certain
joints. Based on preliminary results of these procedures reported to the Company
by these surgeons, the Company intends to explore the use of AlloDerm to repair
several defects associated with joints. These procedures may include capsular
ligament reinforcement, ligament repair, and articular and meniscal cartilage
repair.
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The Company also intends to evaluate the use of AlloDerm as a general
surgical material for additional uses such as abdominal wall closure in hernia
surgery, as a barrier to prevent surgical adhesions and as an alternative to
synthetic materials in certain endoscopic surgical procedures.
FDA Status of AlloDerm. The FDA has notified the Company that the use of
AlloDerm for replacement or repair of damaged or inadequate integumental tissue
is "human tissue" within the meaning of the human tissue for transplantation
regulations. However, it is unclear whether the FDA would agree that the
following indications for which AlloDerm has been used by physicians (and for
which the Company may want to promote AlloDerm in the future) is human tissue or
whether the FDA would regulate AlloDerm under its medical device authorities for
these indications: (i) graft for guided bone regeneration; (ii) neurosurgery;
(iii) oncological reconstruction; (iv) urological applications; (v) certain
orthopedic surgeries; and (vi) general surgeries. In addition, further
discussion with the FDA is required to determine the level of regulation that
may be applied with regard to the promotion and marketing of injectable
AlloDerm, vascular grafts, composite skin grafts, venous valves and nerve
connective tissue. There can be no assurance that the FDA will not require the
submission of premarket approval applications supported by extensive clinical
data for these products. See "-- Government Regulation".
Injectable AlloDerm
LifeCell currently is developing an injectable form of AlloDerm (AlloDerm
reduced to the size necessary for needle injection) for use in multiple
applications, including urological, dermatological and reconstructive
applications. The Company has conducted preliminary animal studies to evaluate
an injectable form of AlloDerm. Based on these studies, the Company intends to
conduct broader animal and clinical studies to further evaluate this potential
product. If successfully developed, an injectable form of AlloDerm would allow
for delivery of the product through the use of a syringe, rather than a surgical
incision, thereby creating additional market opportunities.
The Company believes that one of the principal urological uses of
injectable AlloDerm may be for the treatment of urethral sphincter deficiency, a
common cause of urinary incontinence. A variety of treatments exist for urethral
sphincter deficiency, including injecting bovine collagen to bulk the sphincter
muscle. Based on an independent market research report, the Company estimates
that there were approximately 118,000 injections of bovine collagen in 1996 to
treat urinary incontinence for 33,000 individuals in the United States.
Additionally, certain dermatological procedures, such as the revision of acne
scars, wrinkle filling and lip augmentation, use bovine collagen injections.
According to such research report, there were approximately 178,000 dermal
implants in 1996 in the United States. One of the disadvantages of bovine
collagen has been its limited persistence over time due to resorption, generally
requiring additional injections after two to 12 months. The Company believes
that AlloDerm may potentially persist longer than bovine collagen, possibly
reducing the requirement for patients to have multiple injections.
The regulatory status of injectable forms of AlloDerm in the United States
is uncertain. Although the Company believes that this form of AlloDerm should be
classified as human tissue intended for transplantation, there can be no such
assurance. If the product is classified as a device by the FDA, extensive delays
may be encountered before the time, if ever, that the product may be
commercially distributed. See "-- Government Regulation".
Composite Skin Grafts
LifeCell currently is developing a method for constructing a composite,
bi-layered tissue product containing an AlloDerm dermal layer and an epidermis
consisting of keratinocytes (epidermal cells) isolated from the patient. If
successfully developed, a composite skin graft product would effectively
eliminate the requirement of taking an autologous skin graft from burn patients
and possibly may be useful in the treatment of chronic ulcers. Preliminary
animal studies conducted by the Company indicate the ability of the composite
skin product to achieve wound closure.
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XenoDerm
LifeCell is developing XenoDerm(TM) processed porcine dermis, which is
processed in a manner similar to AlloDerm to remove the cells that are targets
for rejection and to preserve the dermal matrix. LifeCell believes that, if
successfully developed, XenoDerm tissue products would have the advantage of a
potentially increased raw material supply and could facilitate regulatory
approval in and distribution to certain international markets. See "-- Sources
of Materials" and "-- Government Regulation".
Preliminary animal studies conducted by LifeCell indicate that XenoDerm
tissue does not cause a significant immune response when transplanted
cross-species. Preliminary animal studies conducted by unaffiliated laboratories
have shown that XenoDerm tissue is potentially as effective as AlloDerm tissue
in treating full-thickness skin loss.
Non-viable animal to human transplants are classified by the FDA as
devices, requiring regulatory approval prior to commercialization. See
"-- Government Regulation".
Heart Valves
In 1994, LifeCell and Medtronic entered into a license and development
agreement for the development and potential commercialization of xenograft heart
valves processed with LifeCell's technology. See "-- Corporate Alliance". If
successfully developed, the porcine heart valve would be surgically implanted to
replace human heart valves that have become defective through disease or aging
and that may not otherwise be repaired.
Based on an independent market research report, the Company estimates that
there are approximately 80,000 heart valve replacement procedures performed each
year in the United States, of which 45,000 are mechanical heart valves, 30,000
are animal tissue valves and 5,000 are human donor valves. Animal tissue heart
valves on the market today generally are subject to progressive calcification,
which hardens the valve and prevents it from functioning properly, requiring
replacement seven to 12 years after transplantation. Mechanical heart valves are
more durable, often lasting the lifetime of the patient, but lack the blood flow
dynamics of tissue valves and require the patient to remain on anticoagulants
for life to prevent strokes. Human donor valves are used in a limited number of
the procedures because of limited availability of donated valves suitable for
transplantation.
Based on early-stage research, the Company believes that it may be possible
to develop porcine heart valves based on the same technology that the Company
uses to produce AlloDerm tissue products. The Company would process porcine
heart valves to remove the cells that would be recognized by the body as foreign
while substantially maintaining the structure and biochemistry of the valve
matrix. By making the transplanted heart valves non-immunogenic, LifeCell
believes that such a valve could become less susceptible to calcification than
other tissue valves and could become part of the recipient's body.
Preliminary animal studies conducted by LifeCell have shown that the
LifeCell heart valve leaflets transplanted in the thoracic descending aorta
became repopulated with the recipient's own cells and were not rejected by the
recipient. Other animal studies conducted by LifeCell have shown that the valves
do not undergo significant calcification. An extensive FDA approval process
would be required for xenograft heart valves which could significantly delay or
prevent product entry into this market. See "-- Government Regulation".
Other Potential Tissue Products
LifeCell is conducting animal studies to evaluate small-diameter vascular
graft products for potential use in cardiovascular and vascular surgery. If
successfully developed, a vascular graft would potentially be used in coronary
artery bypass procedures or used to restore peripheral blood circulation in
patients with vascular insufficiency, such as below-knee bypass procedures.
Approximately 200,000 coronary artery bypass procedures are performed annually
in the United States, according to an independent market research report.
LifeCell currently is using allograft blood vessels for this development, but
may extend the technology to xenografts.
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As part of the Company's agreement with Medtronic for the development of
heart valves, LifeCell granted Medtronic certain rights of first refusal to
evaluate technology and negotiate license and development agreements for
vascular graft products utilizing LifeCell's technology. See "-- Corporate
Alliance".
LifeCell also currently is conducting preliminary research to determine the
feasibility of developing venous valve products for the treatment of chronic
venous insufficiency and venous stasis ulcers. LifeCell expects such products to
be allograft venous valves developed using its patented technology. If
successfully developed, such grafts would restore the normal function of certain
venous valves in the leg and provide a treatment for or reduce the development
of venous stasis ulcers. According to industry sources, approximately seven
million people in the United States suffer from chronic venous insufficiency and
approximately 500,000 people in the United States are treated annually for
venous stasis ulcers.
LifeCell also is conducting research for the development of nerve matrix
grafts using the Company's proprietary technology. If successfully developed,
such products would provide the template for nerve regeneration following
trauma. The Company's research program will seek to determine whether nerve
tissue processed with the Company's technology to preserve significant
biochemical or other matrix-based characteristics will enhance or promote the
regeneration of nerves.
There can be no assurance that any of the AlloDerm product applications or
other products under development will be successfully developed or manufactured,
or if developed or manufactured, that such products will receive regulatory
clearance or approval, meet price or performance objectives, be developed on a
timely basis or prove to be as effective or as well received as competing
products. See "Risk Factors -- Delayed or Unsuccessful Product Development".
Blood Cell Preservation
LifeCell is developing ThromboSol platelet storage solution to extend the
shelf-life of transfusable platelets, and other methods to extend the shelf-life
of red blood cells, white blood cells and stem cells.
ThromboSol. LifeCell is developing ThromboSol, a proprietary biochemical
formulation designed to protect transfusable platelets from damage during
storage at low temperatures. The expected use of the product would be by blood
banks to extend the shelf-life of transfusable platelets, thereby increasing the
supply of available platelets, as well as to store autologous platelets in
advance for individuals expecting to undergo surgery or chemotherapy. There were
approximately 8.3 million platelet units transfused in the United States in
1992, according to an industry survey.
Platelets are blood cells that control clotting. Untreated platelets are
sensitive to storage at low temperatures and cannot be effectively refrigerated.
Presently, platelets are stored at room temperature and, due to the risk of
microbial contamination, have a limited shelf-life of three to five days.
LifeCell has shown in laboratory tests that the addition of ThromboSol solution
preserves the functional aspects of refrigerated platelets for up to 10 days and
frozen platelets for more than six months.
LifeCell initiated preliminary toxicity studies for ThromboSol platelet
storage solution in late 1994 and began preclinical animal studies in 1995. An
application for a physician-sponsored Investigational New Drug ("IND") to
conduct a pilot clinical study currently is pending with the FDA. LifeCell
intends to license this product to major pharmaceutical and other companies
after conducting initial feasibility clinical studies. Other companies are
developing products to inactivate bacterial or viral contaminants in donated
platelets. The successful development of such products could affect the demand
for products developed by LifeCell.
Red Blood Cells. LifeCell is conducting research to develop procedures to
freeze or freeze-dry red blood cells. Such technology would be used by blood
banks for long-term storage of donated units of red blood cells, extending the
available blood supply, and for storage of autologous red blood cells for
individuals expecting to require blood transfusions as part of planned surgery.
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Approximately 13 million units of blood are donated each year in the United
States. Red blood cells currently may be stored up to 42 days under
refrigeration. Current procedures to freeze red blood cells require the use of
cryoprotectant solutions that are toxic to the recipient and must be removed by
washing the cells prior to transfusion. This removal procedure is
labor-intensive and requires the immediate transfusion of the thawed blood. The
Company believes that the successful development of non-toxic low temperature
methods of storage could simplify the use of frozen blood and potentially allow
widespread storage of autologous blood.
Numerous companies are attempting to develop blood substitute products and
others are developing technologies to inactivate bacterial or viral contaminants
in donated blood. Successful development of these products could affect the
demand for any products developed by LifeCell. Any product developed will
require extensive regulatory approvals, including approval of an IND by the FDA
to conduct clinical trials. See "-- Government Regulation".
There can be no assurance that any of the products under development will
be successfully developed or manufactured, or if developed or manufactured, that
such products will receive regulatory clearance or approval, meet price or
performance objectives, be developed on a timely basis or prove to be as
effective or as well received as competing products. See "Risk
Factors -- Delayed or Unsuccessful Product Development".
CORPORATE ALLIANCE
In 1994, LifeCell entered into a license and development agreement with
Medtronic to develop jointly the Company's heart valve products. Pursuant to the
agreement, Medtronic paid LifeCell an initial $1.5 million license fee. The
agreement also provides that Medtronic will fund costs of research and
development under a mutually agreed upon budget, including clinical trials,
receive the exclusive right to market any resulting commercial products and pay
LifeCell royalties on sales of products covered by the agreement. LifeCell's
research and development funding by Medtronic in 1994, 1995 and 1996 and for the
nine months ended September 30, 1997 was approximately $358,000, $825,000,
$546,000 and $171,000, respectively. The budgeted funding for the remainder of
1997 is approximately $27,000, which represents approximately one-half of the
expected research costs relating to heart valves. Royalties payable to LifeCell
under the agreement are limited to an aggregate maximum of $25.0 million.
Medtronic may terminate the agreement at any time if in its sole business
judgment it deems the development and commercialization of products thereunder
not to be in its best interests or otherwise to be imprudent. In such event, and
if the agreement is terminated under certain other circumstances, Medtronic has
the option to convert the $1.5 million license fee into shares of Common Stock,
subject to certain limitations, at the market price at the time of conversion.
See "Description of Capital Stock -- Medtronic Rights".
The Company may be required to obtain a license under one or more patents
prior to commercializing any heart valve or vascular product, if developed.
There can be no assurance that such a license will be available, or if
available, that a license will be granted on terms which are commercially
acceptable to the Company.
In 1994, Medtronic also invested $500,000 in LifeCell by purchasing
approximately 64,000 shares of Common Stock in exchange for rights of first
refusal to negotiate licenses for LifeCell's vascular graft products.
Medtronic's rights of first refusal expire on December 31, 1998.
MARKETING
The Company currently distributes AlloDerm in the United States for most
surgical applications through the Company's network of direct technical sales
representatives and regional specialty distributors. Dental applications of
AlloDerm in the United States are marketed through LifeCell's exclusive United
States distributor, Lifecore. The Company currently intends to develop and
commercialize additional tissue products processed from cardiovascular,
neurological and other tissues in conjunction with corporate partners.
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LifeCell has a sales and marketing staff consisting of a vice president of
sales and marketing, a director of international sales and marketing, a director
of national accounts, a marketing manager, a dental sales manager, 12 field
technical sales representatives, a clinical specialist, two marketing
coordinators and an international customer service assistant. The field
technical sales representatives and clinical specialist are responsible for
interacting with surgeons, primarily plastic surgeons and burn surgeons, and
educating them regarding the use and anticipated benefit of AlloDerm tissue
grafts. LifeCell also participates in national and international conferences and
trade shows, participates in or funds certain educational symposia or fellowship
programs and advertises in industry trade publications.
The Company has 14 regional specialty distributors in the United States
with approximately 50 sales representatives.
The Company currently is seeking foreign regulatory approvals where
necessary to import AlloDerm into significant foreign markets and is developing
a network of country-based distributors. The Company currently has appointed
distributors in Canada, the United Kingdom, Italy, Sweden, The Netherlands,
Belgium and South Africa. The Company also has engaged distributors for Korea,
Taiwan, Brazil, Mexico, Spain and Switzerland, but formal approvals to import
products have not yet been received. The Company currently is seeking regulatory
approval in France to import AlloDerm, but has not yet engaged a distributor.
The Company expects to conduct clinical trials in Germany to seek approval to
import AlloDerm. See "Risk Factors -- Foreign Regulatory Status of AlloDerm".
SOURCES OF MATERIALS
LifeCell pays a procurement fee to and obtains allograft skin and other
tissues from unaffiliated tissue banks in the United States. LifeCell is
expanding its current procurement of skin and other tissues to include any of
approximately 150 tissue banks, including approximately 36 skin banks.
Procurement of certain human organs and tissue for transplantation is subject to
the restrictions of NOTA, which prohibits purchase and sale of human organs and
related tissue for "valuable consideration". See "-- Government Regulation".
Pursuant to contractual arrangements, LifeCell reimburses tissue banks for
recovering and shipping to LifeCell donated human skin suitable for processing
into AlloDerm. In obtaining such tissues, LifeCell competes with treatment
centers that use donated skin for temporary wound dressings.
The Company has established what it believes to be adequate sources of
donor skin at acceptable costs to satisfy the foreseeable demand for AlloDerm
tissue products. Although to date the Company has not experienced any material
difficulty in procuring adequate supplies of donor skin, there can be no
assurance that the future availability of donated human skin will be sufficient
to meet LifeCell's demand for such materials. Any supply shortage of available
tissues in the future would have a material adverse effect on LifeCell's
business financial condition and results of operations. See "Risk
Factors -- Dependence on Certain Sources of Materials".
The Company currently does not have procurement arrangements for other
tissues related to products under development, and does not intend to develop
such arrangements until such time as the products approach commercialization.
GOVERNMENT REGULATION
Government regulation, both domestic and foreign, is a significant factor
in the manufacture and marketing of LifeCell's current and developing products.
In the United States, the Company's currently marketed human skin allograft and
AlloDerm products are subject to regulation by the FDA. The United States Food,
Drug and Cosmetics Act (the "FDC Act"), the Public Health Service Act (the "PHS
Act") and other federal statutes and regulations govern or influence the
testing, manufacture, labeling, storage, record keeping, approval, advertising
and promotion of such products. Non-compliance with applicable requirements can
result in fines, injunctions, civil penalties, recall or seizure of
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products, total or partial suspension of production, refusal of the government
to authorize the marketing of new products or to allow the Company to enter into
supply contracts and criminal prosecution.
In July 1997, the FDA published a final rule, to become effective in
January 1998, regulating "human tissue". The rule clarifies and modifies an
earlier interim rule and defines human tissue as any tissue derived from a human
body which is (i) intended for administration to another human for the
diagnosis, cure, mitigation, treatment or prevention of any condition or disease
and (ii) recovered, processed, stored or distributed by methods not intended to
change tissue function or characteristics. The FDA definition excludes, among
other things, tissue that currently is regulated as a human drug, biological
product or medical device and excludes kidney, liver, heart, lung, pancreas or
any other vascularized human organ. Human tissue is regulated by the FDA in a
manner the agency has deemed necessary to protect the public health from the
transmission of HIV infection and hepatitis infection through transplantation of
tissue from donors with or at risk of these diseases. Unlike certain drugs,
biologicals and medical devices, human tissue is not subject to premarket
notification or approval by the FDA.
The Company was advised by the FDA on two occasions in 1995 that AlloDerm,
when sold for use in periodontal applications, would be regulated as a medical
device. After discussions with the agency, the Company received a letter from
the FDA in September 1996 to the effect that AlloDerm intended for use for
replacement or repair of damaged or inadequate integumental tissue, including
gingival dermis, is human tissue within the meaning of the interim final rule.
Consequently, the Company may promote and sell AlloDerm without FDA premarket
notification or FDA approval for use in the treatment of wounds, such as
third-degree burns, in periodontal surgical procedures, such as free-gingival
grafting and guided tissue regeneration, and in plastic and reconstructive
surgery procedures, such as contracture release grafting and scar revision. The
agency also informed the Company that this decision applies only to AlloDerm
when it is intended for use in transplantation, and the regulatory status of the
product when it is promoted for other uses, such as the Additional Indications,
would need to be determined by the FDA on a case-by-case basis.
While the Company's marketing efforts had not previously focused on the
Additional Indications, as a follow-up to its September 1996 letter, the FDA
informed the Company that AlloDerm for Additional Indications would have to be
formally presented to the FDA to determine if, with these indications, AlloDerm
would continue to fall within the scope of the interim rule for human tissue and
thus not require premarket clearance. The Company was asked to indicate what
changes in advertisement and promotion it would make for AlloDerm. The Company
responded to the FDA letter in October 1996, and informed the agency that the
Company believes that the distinctions drawn regarding the definition of
transplantation and human tissue and between integumental tissue and all other
tissue in the September 1996 opinion were fairly novel and ones for which the
Company would require clarification from the FDA as it goes forward. The Company
believes that AlloDerm, when used for augmentation and as a void filler, still
qualifies as human tissue. Similarly, the Company advised the FDA that since
almost every replacement or repair of damaged or inadequate tissue involves a
cosmetic aspect, the Company believes that many cosmetic uses of AlloDerm are
within the purview of human tissue.
Nevertheless, the Company informed the FDA that it intends to follow the
agency's decision and, until this matter is clarified on a case-by-case basis,
will not promote AlloDerm for the Additional Indications. There can be no
assurance that the FDA will not finally conclude that use of AlloDerm for the
Additional Indications should be regulated as a medical device and require a
510(k) premarket notification or premarket approval application for AlloDerm for
such indications. If the FDA were to conclude definitively that the Company is
required to obtain agency clearance of a 510(k) notification or approval of a
premarket approval application for AlloDerm for the Additional Indications, the
FDA may require the Company to conduct laboratory testing and preclinical and
clinical studies of AlloDerm to support a marketing application. Testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and any required laboratory testing or preclinical or
clinical studies that the Company would be required to conduct could take
several years
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to complete. There can be no assurance that any required testing could be
completed successfully, or that if successfully completed, would provide
sufficient data and information to enable the FDA to determine, on a timely
basis, if at all, that when AlloDerm is used for the Additional Indications, it
is substantially equivalent to a legally marketed predicate device or is safe
and effective for the Additional Indications and permit the product to be
marketed for such uses. Failure of the Company to receive any required FDA
clearance or approval of AlloDerm for the Additional Indications on a timely
basis would preclude promotion of AlloDerm for the Additional Indications and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Government
Regulation -- AlloDerm".
The Company and the FDA have agreed that AlloDerm intended for use for
replacement or repair of damaged or inadequate integumental tissue, including
gingival dermis, is human tissue within the meaning of the human tissue for
transplantation regulation. However, it is unclear whether the FDA would agree
that the following indications for which AlloDerm has been used by physicians
(and for which the Company may want to promote AlloDerm in the future) is human
tissue or whether the FDA would regulate AlloDerm under its medical device
authorities for these indications: (i) graft for guided bone regeneration; (ii)
neurosurgery; (iii) oncological reconstruction; (iv) urological applications;
(v) certain orthopedic surgeries; and (vi) general surgeries. In addition,
further discussion with the FDA is required to determine the level of regulation
that may be applied with regard to the promotion and marketing of injectable
AlloDerm for various indications, vascular grafts, composite skin grafts, venous
valves and processed nerve connective tissue. There can be no assurance that the
FDA will not require the submission of premarket approval applications for these
products supported by extensive clinical data.
In October 1997, the FDA inspected LifeCell's facilities. No Form 483
Notice of Observations was left with the Company, although the agency did take
copies of numerous documents relating to the AlloDerm production process and
promotional material relating to AlloDerm. Notwithstanding the fact that no Form
483 was received, there can be no assurance that the FDA will not raise
regulatory issues with respect to the documents taken for review.
In February 1997, the FDA issued a comprehensive "proposed approach" to the
regulation of cellular and tissue-based products, other than human tissue for
transplantation. The FDA proposal sets forth a tiered approach to cell and
tissue regulation that ranges from no regulatory requirements for cells or
tissue that are removed and transplanted into the same patient in a single
surgical procedure to full premarket approval requirements for biologics and
medical devices that raise potential health, safety or efficacy concerns.
Although the FDA has notified the Company that AlloDerm is not now subject to
premarket notification or approval, there can be no assurance that the FDA will
not impose additional or different regulatory requirements on AlloDerm after the
agency finalizes its approach to the regulation of cellular and tissue-based
products.
The FDA's final human tissue regulation requires establishments engaged in
the procurement, processing, and distribution of human tissue to conduct and
maintain records of tissue donor screening procedures and blood testing. In
addition, tissue processing establishments are periodically inspected by the FDA
to ensure compliance with these requirements. LifeCell believes that the
Company's operations substantially comply with the requirements of the FDA's
final human tissue regulation.
LifeCell requires that the tissue banks supplying the Company with tissue
comply with the FDA's human tissue regulation. In addition, the Company requires
supplying tissue banks to comply with procedural guidelines outlined by the
AATB. The FDA has stated that it will propose additional requirements for human
tissue. Additional requirements could include registration of tissue banking
establishments and tissue listing with the FDA. Other requirements may include
donor-recipient tracking, Good Tissue Practices and clinical evaluation of
tissues that are determined to have undergone other than "minimal manipulation".
If significant additional regulatory requirements were to be
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established, the Company could incur significant additional costs in order to
comply with such requirements.
LifeCell's proposed xenograft heart valve product and other xenograft
tissue transplantation products, including XenoDerm tissue and xenograft
vascular conduits, likely will be subject to regulation by the FDA as medical
devices. LifeCell's proposed blood cell preservation products, including
ThromboSol platelet storage solution, will be subject to regulation as
biologics. Accordingly, such products will require FDA premarket approval or
clearance prior to commercialization. To obtain FDA approval or clearance for
these products, the Company must submit proof of the safety and efficacy of
these products. In most cases, this entails extensive pre-clinical and clinical
testing performed in accordance with the FDA's regulations. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and time consuming and will take several years to complete.
There is no assurance that the FDA will act favorably or quickly in making such
reviews, and significant difficulties or costs may be encountered by the Company
in its efforts to obtain the FDA approvals or clearances that could delay or
preclude the Company from marketing any product it may develop. The FDA also may
require post-market testing and surveillance to monitor the effects of approved
products and may place conditions on approvals that could restrict commercial
applications of such products. Product marketing approvals or clearances may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. In addition, delays imposed by the
governmental approval process may materially reduce the period during which the
Company may have the exclusive right to commercialize patented products.
The FDA reviews medical devices for marketing approval or clearance through
two different procedures, the 510(k) premarket notification process and the
premarket approval process, which is significantly more complex, costly and time
consuming than the 501(k) clearance procedure. LifeCell will need to pursue one
of these routes with respect to each product determined to be a medical device.
The determination of which process will be required for any particular product
will depend in part upon how the FDA has regulated similar products by the time
LifeCell is ready to pursue its own approvals or clearances.
Under the 510(k) premarket notification procedure, the applicant or
"sponsor" submits an application containing data that demonstrates the
"substantial equivalence" of the product to a device marketed prior to the
enactment of the Medical Device Amendments of 1976 or to a device legally
marketed thereafter pursuant to a 510(k). The FDA may require a 510(k) applicant
to submit additional, and possibly extensive, clinical data establishing the
safety and effectiveness of the product for each proposed indication. Prior to
conducting the necessary clinical trials, an applicant may be required to submit
an investigational device exemption ("IDE") protocol to the FDA for approval. An
IDE application typically contains data from laboratory and animal testing
demonstrating that the product is sufficiently safe for study in humans as well
as a description of the proposed study methods and protocol. Clinical studies
must be conducted according to a written protocol and pursuant to the approval
and oversight of one or more Institutional Review Boards. In addition, clinical
investigators must adhere to good clinical practices. The FDA may order the
temporary or permanent discontinuation of a clinical trial at any time for
non-compliance with its regulations, because of safety issues or for other
reasons. The collection of data and preparation of a 510(k) application can be
costly and time consuming, and a 510(k) applicant may not market the product
until a favorable decision is received from the FDA. The FDA review of a 510(k)
premarket notification can take anywhere from a few months to several years.
There can be no assurance that marketing clearance ultimately will be obtained
for any of LifeCell's products that are the subject of 510(k) premarket
notifications.
The PMA process is significantly more complex, costly and time consuming
than the 510(k) clearance procedure. To obtain premarket approval, the applicant
is required to submit extensive preclinical and clinical data to the FDA. An IDE
will be required to conduct the clinical trials. Upon completion and analysis of
clinical studies, the applicant assembles and submits a PMA application setting
forth the preclinical, clinical, manufacturing and other data. Typically, the
FDA will also inspect the manufacturing facility for compliance with the Quality
System regulation. FDA review and ap-
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proval of a PMA can take several years. There can be no assurance that PMA
approvals will be obtained for any of LifeCell's proposed products.
With respect to LifeCell's proposed biological blood cell preservation
products, the Company or its contracted designee must obtain both a product
license and an establishment license from the FDA prior to marketing. A product
license application ("PLA") and establishment license application ("ELA") must
be submitted and supported by extensive data, including preclinical and clinical
data that demonstrate that the manufactured product meets prescribed standards
of safety and efficacy. Before conducting the required clinical testing of a
biological product, an applicant must submit an investigational new drug
application to the FDA, containing preclinical data demonstrating the safety of
the product for human investigational use, information about the manufacturing
processes and procedures and the proposed clinical protocol. Clinical trials of
biological products typically are conducted in three sequential phases, but may
overlap. Phase I trials test the product in a small number of healthy subjects,
primarily to determine its safety and tolerance at one or more doses. In Phase
II, in addition to safety, the efficacy, optimal dose and side effects of the
product are evaluated in a patient population somewhat larger than the Phase I
trial. Phase III involves further safety and efficacy testing on an expanded
patient population at geographically dispersed test sites. All clinical studies
must be conducted in accordance with FDA approved protocol and are subject to
the approval and monitoring of one or more Institutional Review Boards. In
addition, clinical investigators must adhere to good clinical practices.
Completion of all three phases of clinical studies may take several years, and
the FDA may temporarily or permanently suspend a clinical study at any time.
Upon completion and analysis of clinical trials, the applicant assembles and
submits a PLA and an ELA. The ELA contains a complete description of the
manufacturing process. Before the licenses can be granted, the Company or its
designee must undergo a successful establishment inspection. FDA review and
approval of a biological product can take several years. There can be no
assurance that LifeCell will obtain the required approvals for any of its
proposed biological products.
All products marketed by LifeCell pursuant to the above-described approvals
and clearances will be subject to pervasive and continuing regulation by the
FDA. Products must be manufactured in registered establishments and must be
produced in accordance with Good Manufacturing Practices ("GMP") regulations.
There are post-marketing surveillance and reporting requirements. Manufacturing
facilities and processes are subject to periodic FDA inspection. Labeling and
promotional activities are also subject to FDA scrutiny and, in certain
instances, by the Federal Trade Commission. The export of devices and biologics
is also subject to regulation and may require prior FDA clearance. From time to
time, the FDA may modify such regulations and impose additional or different
requirements. It is impossible to predict how such revisions would affect the
Company's operations. Failure to comply with any applicable FDA requirements
could result in civil and criminal enforcement actions and penalties.
Sales of medical devices and biological products outside the United States
are subject to foreign regulatory requirements that vary widely from country to
country. Approval of a product by comparable regulatory authorities of foreign
countries must be obtained prior to commercialization of the product in those
countries. Certain countries regulate AlloDerm as a pharmaceutical product,
requiring extensive filings and regulatory approvals to market the product.
Certain countries classify AlloDerm as "human tissue" but may restrict its
import or sale. Other countries have no applicable regulations regarding the
import or sale of products similar to AlloDerm, creating uncertainty regarding
the import or sale of the product. The inability to classify AlloDerm as a
medical device has restricted LifeCell's ability to obtain an appropriate
regulatory designation for the product for Western Europe, which would provide a
clearer marketing path in the European Union. The time required to obtain
foreign approvals may be longer or shorter than that required for FDA approval
and there can be no assurance that approvals would be obtained for any of the
Company's products. AlloDerm currently is being marketed in certain foreign
countries, and LifeCell is actively pursuing clearance to market AlloDerm in
additional countries. There can be no assurance that the uncertainty of
regulations
41
<PAGE> 43
in each country will not delay or impede the marketing of AlloDerm or impede the
ability of LifeCell to negotiate distribution arrangements on favorable terms.
In addition, NOTA prohibits the acquisition, receipt or transfer of certain
human organs, including skin and heart valves and vascular conduits for
"valuable consideration", but permits the payment of reasonable expenses
associated with the removal, transportation, processing, preservation, quality
control and storage of human tissue and skin. Assuming that NOTA applies to
LifeCell's products, it may be interpreted to limit the prices that LifeCell may
charge for processing and transporting such human tissue products. LifeCell
includes in its AlloDerm pricing structure certain of its educational costs
associated with the processing and transportation of human tissue. Although
LifeCell believes that recovery of educational costs is permitted under NOTA, a
future inability of LifeCell to pass these costs on to purchasers of its
products could adversely affect LifeCell's business and prospects. Assuming that
NOTA applies to LifeCell's products, LifeCell intends to comply with NOTA, but
there can be no assurance that the government will not adopt interpretations of
NOTA that would adversely affect LifeCell's pricing structure or otherwise call
into question one or more aspects of LifeCell's method of operation. Certain
foreign countries have laws similar to NOTA. These laws may restrict the amount
that the Company can charge for AlloDerm, and may restrict the importation or
distribution of AlloDerm to licensed not-for-profit organizations.
LifeCell also is subject to various federal, state and local laws,
regulations and recommendations relating to such matters as safe working
conditions, laboratory and manufacturing practices, and the use, handling and
disposal of hazardous or potentially hazardous substances used and produced in
connection with LifeCell's research and development work. See "-- Environmental
Matters". Although LifeCell believes it is in compliance in all material
respects with these laws and regulations, there can be no assurance that the
Company will not incur significant additional costs to comply with environmental
laws or regulations in the future.
RESEARCH AND DEVELOPMENT
LifeCell has historically funded the development of its tissue products
(other than AlloDerm) and blood cell preservation products primarily through
external sources, including a corporate alliance and government grants and
contracts as well as proceeds from equity offerings. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". LifeCell's research and
development costs in 1994, 1995 and 1996 and for the nine months ended September
30, 1997 for all programs, including those programs funded through corporate and
government support, were approximately $2.1 million, $2.2 million, $1.6 million
and $1.7 million, respectively. Research and development of heart valves is
currently being funded in part by Medtronic. See "-- Corporate Alliance".
The SBIR grant program provides funding for two phases of awards. Phase I
is to evaluate the scientific and technical merit and feasibility of an idea.
Awards are up to $100,000 with a period of performance normally not to exceed
six months. Phase II is to expand on the results of Phase I. Awards are up to
$750,000, with a period of performance normally not to exceed two years. To
date, LifeCell has been awarded approximately $4.6 million through 14 approved
SBIR program awards and Department of Defense contracts.
In 1996, LifeCell received a two-year Phase II SBIR grant award from the
National Science Foundation in the amount of $300,000 to support the composite
skin graft program, a one-year United States Navy contract in the amount of
approximately $613,000 to support the ThromboSol program and a two-year
Collaborative Agreement with the United States Army in the amount of
approximately $1.1 million to support investigation of AlloDerm grafts to repair
dura mater, the use of AlloDerm grafts in conjunction with microskin grafting in
burn wounds and the development of vascular graft products.
LifeCell intends to continue to seek funding through the SBIR programs, as
well as to pursue additional government grant and contract programs. Generally,
LifeCell has the right to patent any
42
<PAGE> 44
technologies developed from government grants and contract funding, subject to
the United States government's right to receive a royalty-free license for
federal government use and to require licensing to others in certain
circumstances.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
LifeCell's ability to compete effectively with other companies is
materially dependent upon the proprietary nature of its technologies. LifeCell
relies primarily on patents and trade secrets to protect its technologies.
LifeCell currently licenses the exclusive right to nine United States patents
and related foreign patents and the non-exclusive right to one United States
patent. In addition, LifeCell has been issued three United States utility
patents, one United States design patent and has five pending United States
patent applications.
The Company's technology is protected by three primary families of patents
and patent applications. One United States patent covers methods of producing
the Company's tissue-based products. Two United States patents and two pending
patent applications cover methods of extending the shelf-life of platelets, red
blood cells and other blood cells. Eight additional United States patents
supplement the Company's other patents and cover methods of freeze-drying
without the damaging effects of ice crystal formation.
LifeCell also has applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by United States patents
or proprietary rights owned by or licensed to LifeCell may differ from that of
their foreign counterparts.
On November 4, 1997, Integra and MIT filed a lawsuit in the United States
District Court for the District of Massachusetts, alleging that the Company
infringes the Integra Patents. The lawsuit seeks injunctive relief, an
accounting of revenues, enhanced monetary damages and attorneys' fees. On
November 14, 1997, LifeCell responded to the complaint denying the infringement
claims and asserting certain affirmative defenses and counterclaims. The outcome
of such litigation is inherently unpredictable, and there can be no assurance
that the result of this proceeding will be favorable to the Company or that it
will not have a material adverse effect on the Company's business, operating
results or financial condition. See "-- Legal Proceedings".
No assurances may be given that the Company's products or planned products
may not be the subject of additional infringement actions by third parties. Any
successful patent infringement claim relating to any products or planned
products could have a material adverse effect on the Company. Further, there can
be no assurance that any patents or proprietary rights owned by or licensed to
LifeCell will not be challenged, invalidated, circumvented, or rendered
unenforceable based on, among other things, subsequently discovered prior art,
lack of entitlement to the priority of an earlier, related application or
failure to comply with the written description, best mode, enablement or other
applicable requirements. See "Risk Factors -- Dependence on Patents and
Proprietary Rights".
LifeCell may decide for business reasons to retain certain knowledge that
it considers proprietary as confidential and elect to protect such information
as a trade secret, as business confidential information, or as know-how. In that
event, LifeCell must rely upon trade secrets, know-how and continuing
technological innovation to maintain its competitive position. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information or otherwise gain access to or disclose such
information.
LifeCell has federal trademark or service mark registrations that it
currently uses for LifeCell(R), which concerns processing and preserving tissue
samples, and AlloDerm(R), which concerns LifeCell's commercial acellular dermal
graft product.
43
<PAGE> 45
COMPETITION
The biomedical field is undergoing rapid and significant technological
change. LifeCell's success depends upon its ability to develop and commercialize
its technology. There are many companies and academic institutions that are
capable of developing products based on similar technology, and that have
developed and are capable of developing products based on other technologies,
which are or may be competitive with LifeCell's products. Many of those
companies and academic institutions are well-established, have substantially
greater financial and other resources, research and development capabilities and
more experience in conducting clinical trials, obtaining regulatory approvals,
manufacturing and marketing than LifeCell. These companies and academic
institutions may succeed in developing competing products that are more
effective than LifeCell's products or that receive government approvals more
quickly than LifeCell's products, which may render the Company's products or
technology uncompetitive, uneconomical or obsolete.
LifeCell anticipates direct competition for AlloDerm tissue products and
all of its proposed transplantable tissue products, as well as indirect
competition from advances in therapeutic agents, such as growth factors now used
to enhance wound healing. LifeCell believes that therapeutic growth factors may
be used in conjunction with its proposed products and may potentially enhance
the products' efficacy. LifeCell is not aware of any person or entity currently
marketing transplantable tissue products with features similar to AlloDerm or
LifeCell's other proposed transplantable products. There can be no assurance,
however, that LifeCell will be able to compete effectively with other
commercially available products or that development of other technologies will
not detrimentally affect LifeCell's commercial opportunities or competitive
advantage. See "Risk Factors -- Technological Change and Competition".
ENVIRONMENTAL MATTERS
LifeCell's research and development and processing techniques generate
waste that is classified as hazardous by the United States Environmental
Protection Agency and the Texas Natural Resources Commission. LifeCell
segregates such waste and disposes of it through a licensed hazardous waste
transporter. Although LifeCell believes it is currently in compliance in all
material respects with applicable environmental regulations, its failure to
comply fully with any such regulations could result in the imposition of
penalties, fines or sanctions that could have an adverse effect on LifeCell's
business. See "Risk Factors -- Disposal of Hazardous Materials".
EMPLOYEES
At September 30, 1997, the Company had 88 full-time and three part-time
employees of which 27 were employed in sales and marketing, 31 in engineering,
production and quality assurance, 17 in research and development and clinical
studies, and 16 in administration and accounting. As of September 30, 1997, the
Company employed, full-time, two persons with M.D. degrees and eight persons
with Ph.D. degrees.
PROPERTIES
LifeCell leases approximately 25,000 square feet of laboratory, office and
warehouse space at its facilities in The Woodlands, Texas, under lease
agreements that expire in January 2001. The Company's monthly rental obligation
for its facilities is approximately $24,000.
LEGAL PROCEEDINGS
On November 4, 1997, Integra and MIT filed a lawsuit in the United States
District Court for the District of Massachusetts, alleging that the Company
infringes the Integra Patents. The lawsuit seeks injunctive relief, an
accounting of revenues, enhanced monetary damages and attorneys' fees. On
November 14, 1997, LifeCell responded to the complaint denying the infringement
claims and asserting certain affirmative defenses and counterclaims. The Company
has received an opinion from its patent counsel to the effect that the intended
uses of AlloDerm do not infringe the Integra Patents. This
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<PAGE> 46
opinion represents only the reasoned professional judgment of the Company's
patent counsel and is not binding on any court or third party. Patent litigation
involves complex legal and factual questions. As a result, the outcome of such
litigation is inherently unpredictable, and there can be no assurance that the
result of this proceeding will be favorable to the Company or that it will not
have a material adverse effect on the Company's business, operating results or
financial condition. If it is determined that the Company is infringing the
Integra Patents, the court could issue an injunction prohibiting the Company
from making, using or selling its AlloDerm product for some or all of its
intended uses. Such injunction could also extend to the Company's other
potential products under development. In addition, the court could assess
significant damages and attorneys' fees against the Company, which would have a
material adverse effect on the Company's business, operating results and
financial condition and otherwise affect the ability of the Company to continue
as a viable enterprise. In addition, an adverse determination in this proceeding
could require the Company to seek licenses from Integra, which may not be
available on reasonable terms, if at all. Regardless of the outcome, defending
such claims could involve significant costs and diversion of management
resources, which could have a material adverse effect on the Company's business,
operating results or financial condition. See Risk Factors -- Patent
Infringement Lawsuit" and "Risk Factors -- Dependence on Patents and Proprietary
Rights".
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<PAGE> 47
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information as of September 30, 1997,
regarding the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- ------------------------------------------
<S> <C> <C>
Paul M. Frison....................................... 60 Chairman of the Board, President and Chief
Executive Officer
Stephen A. Livesey, M.D., Ph.D....................... 44 Executive Vice President and Chief
Science Officer and Director
John R. Harper, Ph.D................................. 45 Vice President, Clinical Development
Jane Lea Hicks....................................... 47 Vice President, Business Development
J. Donald Payne...................................... 42 Vice President, Chief Financial Officer
and Secretary
Charles M. Schiff.................................... 53 Vice President, Operations
Ronald J. Schwartz................................... 38 Vice President, Sales and Marketing
Michael E. Cahr(1)(2)(3)............................. 57 Director
James G. Foster(1)(2)................................ 52 Director
Lori G. Koffman(2)(3)................................ 38 Director
K. Flynn McDonald(1)(2)(3)........................... 44 Director
David A. Thompson(1)(2)(3)........................... 55 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Stock Option Committee.
PAUL M. FRISON. Mr. Frison has served as Chairman of the Board, President
and Chief Executive Officer of LifeCell since May 1986. His background includes
over 30 years of experience in the health care industry. He spent 13 years with
American Hospital Supply Corporation, where he was responsible for all corporate
activities in Western Europe and Latin America. From 1975 to 1984, he was
President, Chief Operating Officer and a director of LifeMark Corporation, a
Houston-based hospital management corporation. He joined LifeMark in September
1975 and remained until its merger with American Medical International in 1984.
Prior to joining LifeCell in 1986, Mr. Frison was Chairman of the Board,
President and Chief Executive Officer of ComputerCraft, Inc. Mr. Frison received
his bachelor's degree in 1958 from Occidental College in Los Angeles.
STEPHEN A. LIVESEY, M.D., PH.D. Dr. Livesey has served as Executive Vice
President, Chief Science Officer and as a director of the Company since March
1993. He served as Executive Vice President, Scientific Development of the
Company from June 1991 until March 1993. He is also a co-developer of the
Company's initial technology and was involved in the formation of the Company
and the licensing of such technology to the Company from The University of Texas
Health Science Center in Houston. Dr. Livesey served as a consultant to the
Company from its inception until June 1991, when he became a full-time employee.
He holds an adjunct instructorship position at Baylor College of Medicine,
Houston, Texas. Dr. Livesey received his medical degree from the University of
Melbourne, Australia in 1977 and a Ph.D. in biological chemistry in 1985 from
the University of Melbourne, Australia.
JOHN R. HARPER, PH.D. Dr. Harper has served as Vice President, Clinical
Development since June 1997. He served as Vice President of Research and
Development from November 1994 until June 1997. He is responsible for directing
LifeCell's clinical research and development activities for AlloDerm and future
products. Prior to joining LifeCell, Dr. Harper was Director of Fibrosis
Research at Telios Pharmaceuticals, La Jolla, California, from 1989 to 1994. He
was an Assistant Professor at the Scripps Clinic and Research Foundation, La
Jolla, California from 1986 to 1989. Dr. Harper received his Ph.D. in Biomedical
Sciences from the Graduate School of Biomedical Sciences at the University of
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<PAGE> 48
Texas, Health Science Center in Houston, Texas in 1981 and completed
post-doctoral studies at Scripps Clinic and Research Foundation and the National
Cancer Institute.
JANE LEA HICKS. Ms. Hicks, Vice President, Business Development, is
responsible for the development of corporate partnerships and strategic
alliances for LifeCell. Prior to becoming Vice President, Business Development
in March 1992, Ms. Hicks served LifeCell as Director of Business Development
since 1991. Ms. Hicks joined LifeCell in 1986 as Technical Marketing Manager
responsible for the development and implementation of sales and marketing
programs and the ultimate sublicensing of LifeCell's electron microscopy
equipment business. Prior to joining LifeCell, Ms. Hicks spent five years in
sales and marketing management with Warner Lambert Company, two years in medical
supply sales, and eight years in clinical laboratory management. Ms. Hicks
received her bachelor's degree in 1972 from the University of North Carolina at
Greensboro.
J. DONALD PAYNE. Mr. Payne joined LifeCell in March 1997 as Vice President,
Chief Financial Officer and Secretary. Prior to joining LifeCell, from 1992 to
1997, Mr. Payne was Vice President, Finance, Chief Financial Officer and a
director of Aprogenex, Inc. From 1980 to 1990, Mr. Payne was Vice President,
Finance, Treasurer, Corporate Secretary and Chief Financial Officer of UMC
Petroleum Corporation. Mr. Payne received his bachelor's degree in business
administration from Texas A&M University in 1976 and his master's degree in
business administration from Rice University in 1992.
CHARLES M. SCHIFF. Mr. Schiff was elected Vice President, Operations of the
Company in September 1997 and is responsible for directing the manufacturing
activities of LifeCell. From June 1996 until September 1997, Mr. Schiff served
as Director of Manufacturing for the Company. Prior to joining LifeCell, from
1994 to 1996, Mr. Schiff was Vice President of Operations of EyeSys
Technologies. Mr. Schiff was Vice President of Operations of EndoSonics Inc.
from 1989 to 1994. Mr. Schiff received his bachelor of science in mechanical
engineering from Ohio Northern University in 1967.
RONALD J. SCHWARTZ. Mr. Schwartz was elected Vice President, Sales and
Marketing of the Company in April 1995 and is responsible for the direction of
the sales and marketing activities for LifeCell. Prior to joining LifeCell, from
August 1984 to March 1995, Mr. Schwartz held various positions with Sherwood
Medical (a division of American Home Products), most recently as Group Marketing
Manager, where he was responsible for the sales and marketing programs for
Sherwood Medical's wound care product line. Mr. Schwartz received his bachelor's
degree in business administration from the University of South Florida in Tampa,
Florida in 1981.
MICHAEL E. CAHR. Mr. Cahr has been a director of the Company since July
1991. Mr. Cahr has been the chairman of Allscrips Pharmaceuticals, Inc., a
medication management and distribution firm, since June 1994, and also served as
its President and Chief Executive Officer from June 1994 to October 1997. From
1987 to June 1994, he was the venture group manager in the Venture Capital
Division of the Investment Department of Allstate Insurance Company, a principal
stockholder of the Company. Mr. Cahr is a director of Optek Technologies, Inc.,
an optoelectronic company, and Alarmguard Holdings, Inc., an electronic security
monitoring company.
JAMES G. FOSTER. Mr. Foster has been a director of the Company since March
1995. Mr. Foster has been Vice President and General Manager of Medtronic Heart
Valves, a division of Medtronic, since December 1994. From February 1984 to
December 1994, Mr. Foster held various officer positions with Medtronic. Mr.
Foster was named to the Board of Directors pursuant to Medtronic's right under
its investment agreement with LifeCell to designate one member of the Company's
Board of Directors.
LORI G. KOFFMAN. Ms. Koffman was elected a director of the Company in
November 1996. Ms. Koffman is a Managing Director of CIBC Wood Gundy Ventures,
Inc., the merchant banking arm of the Canadian Imperial Bank of Commerce, where
she has been employed since April 1995. From August 1984 to December 1994, Ms.
Koffman was employed at Lehman Brothers Inc., most recently as a senior vice
president in the Merchant Banking Group. Ms. Koffman is a director of R.P.
Scherer Corporation, Sinclair Montrose Healthcare plc, Mulberry Childcare
Centers, Inc., Collegiate Health Care, Inc. and Village Inc. Ms. Koffman was
named to the Board of Directors pursuant to the right of
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<PAGE> 49
the holders of the Series B Preferred Stock to elect up to three members of the
Board of Directors. See "Description of Capital Stock -- Series B Preferred
Stock".
K. FLYNN MCDONALD. Ms. McDonald was elected a director of the Company in
November 1996. Ms. McDonald is a Managing Director of Vector Fund Management,
L.P., the general partner of Vector Later-Stage Equity Fund, L.P., where she has
been employed since November 1995. From December 1993 through October 1995, she
was a Vice President of Technology Funding, investing in both the technology and
health care sectors. From 1986 through 1993, Ms. McDonald was employed at
Raychem Corporation where her last position was Vice President of Raychem
Ventures and Controller/Director of Business Development, Technology Sector. Ms.
McDonald is a director of MaterniCare, Inc., an obstetrics and gynecology
physician practice management company, Pilot Network Services, Inc., a provider
of security services to the Internet and Digirad, Inc., a private company
focusing on solid-state, semiconductor gamma camera technology. Ms. McDonald was
named to the Board of Directors pursuant to the right of the holders of the
Series B Preferred Stock to elect up to three members of the Board of Directors.
See "Description of Capital Stock -- Series B Preferred Stock".
DAVID A. THOMPSON. Mr. Thompson was elected a director of the Company in
June 1997. Mr. Thompson has been Chief Executive Officer of Strategic
Improvement Processes, a private consulting firm, since June 1995. From 1964
through June 1995, Mr. Thompson was employed by Abbott Laboratories, a
healthcare company, where he served in various capacities, including Senior Vice
President, Diagnostic Operations, President, Diagnostic Division, Vice
President, Human Resources and Vice President, Corporate Materials Management.
Mr. Thompson is a director of HYCOR Biomedical, Inc., a medical diagnostic
company, NABI, a biopharmaceutical company, and NeoPath, Inc., an automated
medical images company.
BOARD OF DIRECTORS
The holders of the shares of Series B Preferred Stock have the right to
elect up to three directors of the Company. Each holder of Series B Preferred
Stock has entered into a voting agreement pursuant to which such holder has
agreed to vote such holder's shares of Series B Preferred Stock in favor of one
nominee designated by CIBC Wood Gundy Ventures, Inc. and one nominee designated
by Vector Later-Stage Equity Fund, L.P. In addition, Medtronic has the right,
pursuant to the investment agreement dated March 3, 1994, between the Company
and Medtronic, to designate one member of the Board of Directors until March 3,
1999. See "Description of Capital Stock -- Series B Preferred Stock".
COMMITTEES
The Board of Directors has established an Audit Committee, a Compensation
Committee and a Stock Option Committee. The Audit Committee recommends the
independent public accountants appointed by the Board of Directors to audit the
financial statements of the Company and reviews issues raised by such
accountants as to the scope of their audit and their report thereon, including
any questions and recommendations that may arise relating to such audit and
report or the Company's internal accounting and auditing procedures. The
Compensation Committee reviews, approves and makes recommendations to the Board
of Directors on matters regarding the compensation of the Company's officers,
directors, employees and agents. The Stock Option Committee administers the
Company's stock option plans.
AFFILIATED TRANSACTIONS
Prior to the closing of the Offering, the Company will adopt a policy that
all future material transactions and loans with affiliates of the Company will
be made or entered into on terms that are no less favorable to the Company than
those that can be obtained from unaffiliated third parties. In addition, all
future material affiliated transactions and loans, and any forgiveness of loans,
will be approved by a majority of the Company's independent directors who do not
have an interest in such transactions or loans and who have access, at the
Company's expense, to the Company's or independent legal counsel.
48
<PAGE> 50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
MANAGEMENT AND SELLING STOCKHOLDERS
The following table sets forth information as of September 30, 1997, with
respect to (i) persons known to the Company to be beneficial holders of five
percent or more of either the outstanding shares of Common Stock or the
outstanding shares of Series B Preferred Stock, (ii) the executive officers and
directors of the Company, (iii) all executive officers and directors of the
Company as a group and (iv) the Selling Stockholders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
----------------------------------------------------------------
SERIES B COMMON STOCK COMMON STOCK
PREFERRED PRIOR TO NUMBER SUBSEQUENT TO
STOCK OFFERING OF OFFERING
------------- ---------------- SHARES -----------------
BENEFICIAL OWNER NUMBER % NUMBER % TO BE SOLD NUMBER %
- --------------------------------------------- ------ ---- --------- ---- ---------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE OFFICERS AND 5%
STOCKHOLDERS:
CIBC Wood Gundy Ventures, Inc.(2)............ 47,098 38.0 2,530,901 26.6 -- 2,530,901 18.7
425 Lexington Avenue
New York, New York 10017
Vector Later-Stage Equity Fund, L.P.(3)...... 42,050 33.9 2,259,676 24.4 -- 2,259,676 17.0
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Allstate Insurance Company(4)................ -- -- 889,109 12.7 195,789** 693,320 6.3
Allstate Plaza South G5D
Northbrook, Illinois 60062
The Woodlands Venture Capital Company(5)..... 2,627 2.1 732,498 10.3 100,000 632,498 5.7
2201 Timberloch Place
The Woodlands, Texas 77380
S.B.S.F. Biotechnology Fund, L.P.(6)......... 9,460 7.6 508,386 6.8 -- 508,386 4.4
c/o Spears, Benzak, Salomon & Farrell
45 Rockefeller Plaza, 33rd Floor
New York, New York 10111
Medtronic, Inc.(7)........................... -- -- 345,191 5.0 -- 345,191 3.1
Corporate Center
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
Paul M. Frison(8)............................ -- -- 334,237 4.7 -- 334,237 3.0
Chairman of the Board, President and
Chief Executive Officer
Michael E. Cahr.............................. 524 * 103,643 1.5 -- 103,643 *
Director(9)
James G. Foster.............................. -- -- -- -- -- -- --
Director(10)
Lori Koffman(11)............................. -- -- -- -- -- -- --
Director
Stephen A. Livesey, M.D., Ph.D.(12).......... 261 * 220,759 3.1 -- 220,759 2.0
Executive Vice President, Chief
Science Officer and Director
K. Flynn McDonald(13)........................ -- -- 25,000 * -- 25,000 *
Director
David A. Thompson............................ -- -- 1,700 * -- 1,700 *
Director
John R. Harper, Ph.D.(14).................... -- -- 12,546 * -- 12,546 *
Vice President, Clinical Development
Jane Lea Hicks(15)........................... -- -- 80,261 * -- 80,261 *
Vice President, Business Development
J. Donald Payne(16).......................... -- -- 66 * -- 66 *
Vice President, Chief Financial Officer and
Secretary
Charles M. Schiff(17)........................ -- -- 7,034 * -- 7,034 *
Vice President, Operations
Ronald J. Schwartz(18)....................... -- -- 20,882 * -- 20,882 *
Vice President, Sales and Marketing
All executive officers and directors as a
group (12 persons)(19)..................... 785 * 806,128 10.7 -- 806,128 7.0
OTHER SELLING STOCKHOLDERS:
EPEC Insurance Ventures, Inc.
(f/k/a Tenneco Insurance Ventures, Inc.)... -- -- 204,211 2.9 204,211 -- --
</TABLE>
49
<PAGE> 51
- ---------------
* Less than 1%.
** If the Underwriters' over-allotment option is exercised in full, "Number of
Shares to be Sold", "Common Stock Subsequent to Offering -- Number" and
"Common Stock Subsequent to Offering -- %" will be 870,789, 18,320 and less
than 1%, respectively.
(1) Each beneficial owner's percentage ownership is determined by assuming that
options, warrants and other convertible securities that are held by such
person (but not those held by any other person) and that are exercisable or
convertible within 60 days of September 30, 1997 have been exercised or
converted. Unless otherwise noted, the Company believes that all persons
named in the above table have sole voting and investment power with respect
to all shares of Common Stock and/or Series B Preferred Stock beneficially
owned by them.
(2) Includes 2,530,901 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock and exercise of a warrant. Lori Koffman,
a director of the Company, is a managing director of CIBC Wood Gundy
Ventures, Inc. ("CIBC").
(3) Includes 2,259,676 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock and exercise of a warrant. K. Flynn
McDonald, a director of the Company, is a vice president of Vector Fund
Management, L.P., the general partner of Vector Later-Stage Equity Fund,
L.P.
(4) Information with respect to such stockholder was obtained from its report
on Form 4 dated October 3, 1997, as received by the Company, and the
Company's stock records.
(5) Total number of shares of Common Stock includes 141,192 shares of Common
Stock issuable upon conversion of shares of Series B Preferred Stock and
exercise of a warrant. The Woodlands Venture Capital Company is a wholly
owned subsidiary of Mitchell Energy & Development Corp. George P. Mitchell
owns the majority of the issued and outstanding shares of Mitchell Energy &
Development Corp. Because of these relationships, Mitchell Energy &
Development Corp. and George P. Mitchell may be deemed to be the beneficial
owners of the 732,498 shares of Common Stock held directly or indirectly by
The Woodlands Venture Capital Company. Certain information with respect to
the ownership of such stockholders was obtained from Amendment No. 3 to
their joint report on Schedule 13G dated February 13, 1997, as received by
the Company, and the Company's stock records.
(6) Includes 508,386 shares of Common Stock issuable upon conversion of shares
of Series B Preferred Stock and exercise of warrants.
(7) Does not include shares of Common Stock issuable upon exercise of an option
to convert a $1.5 million licensing fee into shares of Common Stock
pursuant to a license and development agreement between LifeCell and
Medtronic. Information with respect to the ownership of such stockholder
was obtained from Amendment No. 1 to its report on Schedule 13G dated
February 14, 1997, as received by the Company, and the Company's stock
records. James G. Foster, a director of the Company, is the Vice President
and General Manager of Medtronic Heart Valves, a division of Medtronic.
(8) Total number of shares of Common Stock includes 158,734 shares underlying
options granted under the 1992 Stock Option Plan and 395 shares held for
Mr. Frison's account by the Employee Stock Purchase Plan (the "Stock
Purchase Plan").
(9) Total number of shares of Common Stock includes 75,000 shares underlying
options granted under the LifeCell Corporation Second Amended and Restated
1993 Non-Employee Director Stock Option Plan, as amended (the "Director
Stock Option Plan"), and 28,193 shares of Common Stock issuable upon
conversion of shares of Series B Preferred Stock and exercise of a warrant.
(10) Mr. Foster is the Vice President and General Manager of Medtronic Heart
Valves, a division of Medtronic, and because of such position may be deemed
the beneficial owner of the 345,191 shares of Common Stock held by
Medtronic. Mr. Foster disclaims any such beneficial ownership.
(11) Ms. Koffman is a Managing Director of CIBC and because of such position may
be deemed the beneficial owner of the 2,530,901 shares of Common Stock and
the 47,098 shares of Series B Preferred Stock beneficially owned by CIBC.
Ms. Koffman disclaims any such beneficial ownership.
(12) Total number of shares of Common Stock includes 105,414 shares underlying
options granted under the 1992 Stock Option Plan, 13,774 shares of Common
Stock issuable pursuant to the conversion of shares of Series B Preferred
Stock and exercise of a warrant and 752 shares of Common Stock held for Dr.
Livesey's account by the Stock Purchase Plan.
(13) Includes 25,000 shares underlying options granted under the Director Stock
Option Plan. Ms McDonald is required under the terms of her employment with
Vector Fund Management, L.P. to transfer to Vector Fund Management, L.P.
any net gain received upon sale of the shares of Common Stock underlying
such options. Ms. McDonald is a Managing Director of Vector Fund
Management, L.P., the general partner of Vector Later-Stage Equity Fund,
L.P., and because of such position may be deemed the beneficial owner of
the 2,259,676 shares of Common Stock and the 42,050 shares of Series B
Preferred Stock beneficially owned by Vector Later-Stage Equity Fund, L.P.
Ms. McDonald disclaims any such beneficial ownership.
(14) Total number of shares of Common Stock includes 12,291 shares underlying
options granted under the 1992 Stock Option Plan and 255 shares of Common
Stock held for Mr. Harper's account by the Stock Purchase Plan.
(15) Total number of shares of Common Stock includes 67,207 shares underlying
options granted under the 1992 Stock Option Plan and 752 shares of Common
Stock held for Ms. Hicks' account by the Stock Purchase Plan.
(16) Total number of shares of Common Stock includes 66 shares held for Mr.
Payne's account by the Stock Purchase Plan.
(17) Total number of shares of Common Stock includes 6,250 shares underlying
options granted under the 1992 Stock Option Plan and 84 shares of Common
Stock held for Mr. Schiff's account by the Stock Purchase Plan.
(18) Total number of shares of Common Stock includes 20,416 shares underlying
options granted under the 1992 Stock Option Plan and 466 shares of Common
Stock held for Mr. Schwartz's account by the Stock Purchase Plan.
(19) See notes (8) through (18).
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DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the capital stock of
LifeCell does not purport to be complete and is subject to, and qualified in its
entirety by, the Restated Certificate of Incorporation and the By-laws of the
Company which are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
LifeCell is authorized by the Restated Certificate of Incorporation to
issue 25,000,000 shares of Common Stock, $.001 par value per share, and
2,000,000 shares of Preferred Stock, $.001 par value per share ("Preferred
Stock"), 182,205 shares of which are designated "Series B Preferred Stock". The
Company previously had designated 300,000 shares of Preferred Stock as "Series A
Preferred Stock". In March 1997, in accordance with the terms of the Series A
Preferred Stock, the Company redeemed all of the outstanding shares of Series A
Preferred Stock through the conversion of such shares into shares of Common
Stock, and in September 1997, the Company retired all of such shares. As of
September 30, 1997, there were 6,990,917 shares of Common Stock issued and
outstanding and 124,036 shares of Series B Preferred Stock issued and
outstanding. In addition, there were an aggregate of approximately 11,059,605
shares of Common Stock reserved for issuance upon conversion of the Series B
Preferred Stock, upon exercise of outstanding warrants, under director and
employee benefit plans and pursuant to other rights to acquire Common Stock.
The Board of Directors has authority to divide the Preferred Stock into one
or more series and has broad authority to fix and determine relative rights and
preferences of the shares of each such series. Preferred Stock retired by the
Company will assume the status of authorized but unissued Preferred Stock and
may be reissued in the same manner as other authorized but unissued shares of
Preferred Stock. Holders of Preferred Stock have no preemptive rights. The
Company has agreed not to issue any Preferred Stock without a vote of the
holders of Common Stock unless the issuance is approved by a majority of the
Company's independent directors who have access at the Company's expense to the
Company's or independent legal counsel.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as are
declared by the Board of Directors and to share ratably in assets available for
distribution to holders of the Common Stock upon any liquidation. Any
distributions to holders of Common Stock upon liquidation will be subject to the
prior rights of any holders of Series B Preferred Stock then outstanding. See
"Risk Factors -- Rights of Holders of Series B Preferred Stock". Each share of
Common Stock entitles the holder thereof to one vote on all matters submitted to
a vote of the stockholders of the Company. Holders of Common Stock have no
preemptive rights and no right to cumulate votes. Except as otherwise required
by law or the provisions of the Restated Certificate of Incorporation, the
holders of shares of Common Stock are not entitled to vote separately as a class
on any matter submitted to a vote of the stockholders of the Company.
SERIES B PREFERRED STOCK
Dividends
Holders of the Series B Preferred Stock are entitled to receive, when, as
and if declared by the Board of Directors, out of the funds of the Company
legally available therefor, a quarterly dividend payable in Series B Preferred
Stock or cash or a combination of Series B Preferred Stock and cash, at the
Company's option, at an annual rate equal to the greater of (i) the per annum
rate of dividends paid on the Common Stock and (ii) $6.00 per share (and, in the
case of any accrued but unpaid dividends, at such additional times and for such
interim periods, if any, as determined by the Board of Directors). Dividends on
shares of Series B Preferred Stock accrue on the last day of each calendar
quarter during which such shares are outstanding (with each such date being an
"Accrual Date") and are cumulative from the date of issuance. Accrued but unpaid
dividends do not bear interest. Dividends cease accruing on September 30, 2001.
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The number of shares of Series B Preferred Stock to be issued as a
dividend, with respect to the portion of such dividend accrued on each Accrual
Date, is equal to the number obtained by dividing the dollar amount of such
dividend or portion thereof to be paid in Series B Preferred Stock by $100.00
(as adjusted on the same basis as the conversion price).
Voting and Special Rights
On all matters submitted to a vote of the stockholders of the Company, each
share of Series B Preferred Stock entitles the holder thereof to one vote for
each share of Common Stock into which such share of Series B Preferred Stock is
then convertible.
Without the vote or consent of the holders of at least a majority of the
shares of Series B Preferred Stock then outstanding, the Company may not
authorize or create any class or series of capital stock ranking prior to or on
a parity with the Series B Preferred Stock either as to redemption or
liquidation.
The holders of the shares of Series B Preferred Stock have the right to
elect up to three directors of the Company. Each holder of Series B Preferred
Stock has entered into a voting agreement pursuant to which such holder agreed
to vote such holder's shares of Series B Preferred Stock in favor of one nominee
designated by CIBC Wood Gundy Ventures, Inc., and one nominee designated by
Vector Later-Stage Equity Fund, L.P.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of shares of Series B Preferred
Stock will be entitled to receive out of the assets of the Company available for
distribution to stockholders, before any distribution of assets is made to
holders of Common Stock or of any other class or series of stock of the Company
ranking junior to the Series B Preferred Stock, liquidating distributions in the
amount equal to $100.00 per share of Series B Preferred Stock, plus accrued and
unpaid dividends. If upon any liquidation, dissolution or winding up of the
Company, the amounts payable with respect to the Series B Preferred Stock and
any other class or series of stock ranking as to any such distribution on a
parity with the Series B Preferred Stock are not paid in full, the holders of
the Series B Preferred Stock and of such other stock will share ratably in any
such distribution of assets in proportion to the full respective preferential
amounts to which they are entitled. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of shares of
Series B Preferred Stock will be entitled to share ratably (treating all then
issued and outstanding shares of Series B Preferred Stock as if such shares had
been converted into Common Stock) in any further distribution of assets by the
Company to the holders of Common Stock.
Conversion
Each share of Series B Preferred Stock is convertible at the option of the
holder at any time into shares of Common Stock at a conversion price per share
of Common Stock initially equal to $3.10, subject to adjustment upon certain
events. In addition, each outstanding share of Series B Preferred Stock shall be
converted, at the conversion price then in effect, into fully paid and
nonassessable shares of Common Stock on the earlier to occur of (i) the
Company's completion of an underwritten public offering of shares of Common
Stock in which the proceeds to the Company (net of underwriter's discounts) are
equal to or greater than $20.0 million and the per share offering price is equal
to or greater than $9.30 and (ii) the first date following the Company's
completion of an underwritten public offering of shares of Common Stock in which
the proceeds to the Company (net of underwriter's discounts) are equal to or
greater than $20.0 million and average closing price of the Common Stock for 30
consecutive trading days has been equal to or greater than $9.30.
The 124,036 shares of Series B Preferred Stock outstanding as of September
30, 1997 currently are convertible into 4,001,161 shares of Common Stock. The
number of shares of Common Stock to be issued upon conversion will be calculated
to the nearest 1/100th of share.
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No fractional shares or securities representing fractional shares of Common
Stock will be issued upon conversion. Any fractional shares resulting from
conversion will be paid in cash based on the current market price of the Common
Stock at the close of business on the first business day preceding the date of
conversion.
REGISTRATION RIGHTS
Pursuant to agreements with the Company, at September 30, 1997, holders of
an aggregate of 8,585,213 shares of Common Stock, including 3,089,507 shares of
Common Stock issuable upon the exercise of outstanding warrants (the
"Registrable Securities"), are entitled to certain registration rights
("Registration Rights"). The holders of such shares may, subject to certain
limitations, require the Company to register their Registrable Securities for
public resale at the Company's expense. Such holders also have the right to
include their Registrable Securities, subject to certain limitations, in any
registration of shares of Common Stock by the Company under the Securities Act.
The holders of approximately 345,191 Registrable Securities also have the right
to request one registration on Form S-3 in any six-month period. In general, the
Company is required to bear all registration expenses, other than underwriters'
discounts and commissions, for all Company-initiated registrations.
The Company maintains the effectiveness of two registration statements
covering the public sale of shares of Common Stock. One such registration
statement covers the public sale of an aggregate of 2,559,617 shares of Common
Stock issued upon conversion of and as dividends on shares of preferred stock
issued by the Company in a private placement completed in 1994 and upon exercise
of warrants issued in connection therewith. The other registration statement
covers the public sale of an aggregate of 8,775,644 shares of Series B Preferred
Stock issued by the Company in a private placement completed during 1996, upon
the exercise of warrants issued in connection therewith and upon conversion of
shares of Series B Preferred Stock issued or issuable as dividends on the Series
B Preferred Stock.
WARRANTS
At September 30, 1997, the Company had outstanding warrants to purchase an
aggregate of 3,189,507 shares of Common Stock, at exercise prices ranging from
$2.50 to $11.05 per share and with terms expiring from December 31, 1997 to
November 18, 2001. The warrants contain certain anti-dilution adjustments.
Warrant holders have been granted certain registration rights.
MEDTRONIC RIGHTS
In 1994, LifeCell entered into a license and development agreement and an
investment agreement pursuant to which Medtronic paid LifeCell an initial $1.5
million licensing fee. If, however, Medtronic terminates the license and
development agreement prior to FDA approval of the heart valve products,
Medtronic may convert the $1.5 million licensing fee into a number of shares of
Common Stock equal to $1.5 million divided by the then average market price of
the Common Stock for the 20 trading days immediately preceding the date of
Medtronic's termination notice (the "Average Market Price"). Pursuant to the
terms of the investment agreement, the shares of Common Stock issuable upon
conversion of the licensing fee, together with all other shares of Common Stock
held by Medtronic, may not exceed 19% of the then issued and outstanding shares
of Common Stock. In the event that as a result of such limitation, LifeCell is
not obligated to convert the entire $1.5 million into shares of Common Stock,
LifeCell must pay to Medtronic cash or a promissory note or a combination of
cash and a promissory note equal to the difference between $1.5 million and the
value of the shares of Common Stock actually converted. If, however, immediately
after conversion of the $1.5 licensing fee into shares of Common Stock, the
aggregate number of shares of Common Stock held by Medtronic is less than 5% of
the then outstanding shares of Common Stock, Medtronic will have the option to
purchase from LifeCell in cash at a price per share equal to the Average Market
Price a number of shares of Common Stock that when added to the shares converted
and any other shares of Common Stock held by Medtronic would equal 5% of then
issued and outstanding shares of Common Stock.
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CERTAIN ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE
OF INCORPORATION, BY-LAWS AND DELAWARE GENERAL CORPORATION LAW
The Restated Certificate of Incorporation and By-laws contain certain
provisions that could make more difficult the acquisition of the Company by
means of a tender or exchange offer, a proxy contest or otherwise. The
description of such provisions set forth below is intended only as a summary and
is qualified in its entirety by reference to the Restated Certificate of
Incorporation and the By-laws, each of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. See "Risk
Factors -- Possible Anti-Takeover Effects".
Preferred Stock. The Restated Certificate of Incorporation authorizes the
Board of Directors to establish one or more series of Preferred Stock and to
determine, with respect to any series of Preferred Stock, the terms and rights
of such series. The Company believes that the ability of the Board of Directors
to issue one or more series of Preferred Stock will provide the Company with
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs that may arise. The authorized shares of Preferred
Stock, as well as shares of Common Stock, will be available for issuance without
further action by the Company's stockholders, unless such action is required by
the Restated Certificate of Incorporation, applicable laws or the rules of any
stock exchange or automated quotation system on which the Company's securities
may be listed or traded.
Although the Board of Directors has no intention at the present time of
doing so, it could issue a series of Preferred Stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. The Board of Directors will make any determination to
issue such shares based on its judgment as to the best interests of the Company
and its stockholders. The Board of Directors, in so acting, could issue
Preferred Stock having terms that could discourage an acquisition attempt
through which an acquiror may be otherwise able to change the composition of the
Board of Directors, including a tender or exchange offer or other transaction
that some, or a majority, of the Company's stockholders might believe to be in
their best interests or in which stockholders might receive a premium for their
stock over the then current market price of such stock.
Special Meeting of Stockholders. The By-laws provide that special meetings
of stockholders may be called only by the President or the Board of Directors.
Such provisions, together with the other anti-takeover provisions described
herein, also could have the effect of discouraging a third party from initiating
a proxy contest, making a tender or exchange offer or otherwise attempting to
obtain control of the Company.
Notice Procedures. The By-Laws provide that stockholder election of
directors may be conducted only at annual meetings of stockholders and establish
advance notice procedures with regard to stockholder proposals relating to the
nomination of candidates for election as director. These procedures provide that
notice of such stockholder proposals must be timely and notice must be received
at the principal executive offices of the Company not less than 60 days nor more
than 90 days prior to an annual meeting. The notice must contain certain
information specified in the By-Laws.
Delaware Anti-Takeover Law. Under Section 203 of the Delaware General
Corporation Law (the "Delaware anti-takeover law"), certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that such
stockholder became an interested stockholder, unless (i) the corporation has
elected in its certificate of incorporation or bylaws not to be governed by the
Delaware anti-takeover law (the Company has not made such an election), (ii)
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder was approved by the board of
directors of the corporation before the other party to the business combination
became an interested stockholder, (iii) upon consummation of the transaction
that made it an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the commencement
of the transaction (excluding voting stock owned by directors who are also
officers or held in employee stock plans in which the employees do not have a
right to determine confidentially whether to tender or vote
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stock held by the plan), or (iv) the business combination was approved by the
board of directors of the corporation and ratified by 66 2/3% of the voting
stock which the interested stockholder did not own. The three-year prohibition
does not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets or
stock of the corporations or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as a stockholder who becomes
the beneficial owner of 15% or more of a Delaware corporation's voting stock.
Section 203 could have the effect of delaying, deferring or preventing a change
in control of the Company.
LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate of Incorporation provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit. The Company is required to
indemnify any director who, as the result of his acting as a director of the
Company, was or is a party or is threatened to be made a party to any
threatened, pending or contemplated action, suit or proceeding, whether civil,
criminal, administrative or investigative, to the full extent permitted by
Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank, New York, New York.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom Vector Securities
International, Inc. and Gruntal & Co., L.L.C. are acting as representatives (the
"Representatives"), have severally agreed to purchase and the Company and the
Selling Stockholders have agreed to sell to the Underwriters, the following
respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Vector Securities International, Inc........................
Gruntal & Co., L.L.C. ......................................
---------
Total............................................. 4,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
public offering of the shares of Common Stock, the offering price and other
selling terms may be changed by the Representatives.
Gruntal & Co., L.L.C. has advised the Company that it intends to make sales
of the Common Stock offered by this Prospectus to accounts over which it
exercises discretionary authority.
The Selling Stockholders have granted to the Underwriters an option,
exercisable at any time during the 30-day period after the date of this
Prospectus, to purchase up to an additional 675,000 shares of Common Stock at
the public offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, in connection
with the Offering. To the extent such option is exercised, each Underwriter will
be obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares of Common Stock set
forth next to such Underwriter's name in the preceding table bears to the total
number of shares listed in the table.
The offering of shares is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this Offering without notice. The Underwriters reserve the right
to reject any order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The executive officers, directors and certain other stockholders of the
Company, including the Selling Stockholders, have agreed that they will not,
without the prior consent of Vector Securities International, Inc., offer, sell
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by them for a period of 90 days after the date
of this Prospectus. The Company has agreed that it will not, without the prior
written consent of Vector Securities International, Inc., offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable or convertible into shares of
Common Stock for a period
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of 90 days after the date of this Prospectus, except that the Company may grant
additional options under its stock option plans, or issue shares upon the
exercise of outstanding stock options or warrants.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members in
the Offering, if the syndicate repurchases previously distributed Common Stock
in syndicate covering transactions or otherwise. Any of these activities may
stabilize or maintain the market price above independent market levels. The
Underwriters are not required to engage in these activities and may end any of
these activities at any time.
In connection with this Offering, certain Underwriters and selling group
members (if any) who are qualifying registered market makers may engage in
passive market-making transactions in the Common Stock in accordance with Rule
103 of Regulation M promulgated by the Commission. In general, a passive market
maker may not bid for, or purchase, the Common Stock at a price that exceeds the
highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the Common Stock during a specified two month prior period, or 200
shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize the market price of the Common Stock
at a level above that which might otherwise prevail, and, if commenced, may be
discontinued at any time.
An affiliate of Vector Securities International, Inc. holds 33.9% of the
Series B Preferred Stock. K. Flynn McDonald, an officer of such affiliate, is a
director of LifeCell pursuant to the right of the holders of the Series B
Preferred Stock to elect up to three members of LifeCell's Board of Directors.
Gruntal & Co., L.L.C. has previously provided financial advisory services to the
Company for reasonable and customary fees, including a warrant to purchase
354,734 shares of Common Stock, and acted as the placement agent in a private
placement of the Company's equity securities in November 1996.
The Common Stock is currently listed on the Nasdaq SmallCap Market under
the symbol "LIFC". The Company has applied to have the Common Stock listed on
the Nasdaq National Market under the symbol "LIFC". No assurances may be given
that Nasdaq will approve the Company's application. See "Risk Factors -- No
Assurance of Nasdaq National Market Listing".
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for
LifeCell by Fulbright & Jaworski L.L.P., Houston, Texas. Robert E. Wilson, a
partner of Fulbright & Jaworski L.L.P., beneficially owns 200 shares of the
Company's Common Stock. Certain legal matters for the Underwriters will be
passed upon by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago,
Illinois.
EXPERTS
The financial statements included in this Prospectus to the extent and for
the periods indicated in their report have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said report. Statements in this Prospectus under the captions
"Risk Factors -- Dependence on Patents and Proprietary Rights",
"Business -- General", "Business -- Technology" and "Business -- Patents,
Proprietary Information and Trademarks" insofar as they relate to patent matters
have been reviewed and approved by Arnold, White & Durkee, Houston, Texas,
patent counsel to the Company, and have been included herein in reliance upon
the review and approval by such firm as experts in patent law.
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AVAILABLE INFORMATION
LifeCell has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-2 (herein, together with all
amendments, exhibits and financial statement schedules thereto, the
"Registration Statement") under the Securities Act, with respect to the shares
of Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement, which may be inspected
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of which may be obtained from the Commission at prescribed rates.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
The Company furnishes holders of Common Stock annual reports containing
financial statements audited by its independent public accountants in accordance
with generally accepted accounting principles following the end of each fiscal
year, and with quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year following the end of each such
fiscal quarter. The Company is subject to the reporting requirements of the
Exchange Act, and in accordance therewith files reports and other information
with the Commission. Such reports and other information may be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, 14th Floor, Chicago, Illinois 60661. The Commission also
maintains a World Wide Web site on the Internet at http://www.sec.gov. which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Such
reports, proxy and information statements and other information concerning the
Company can also be inspected and copied at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as amended by Amendment No. 1 to the Annual Report on
Form 10-K on Form 10-K/A and Amendment No. 2 to the Annual Report on Form
10-K on Form 10-K/A;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(c) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997;
(d) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, as amended by Amendment No. 1 to the Quarterly Report
on Form 10-Q on Form 10-Q/A; and
(e) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A (filed February 27, 1992), including any
amendment or report filed for the purpose of updating such description.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the Offering of the Common Stock pursuant hereto
shall be deemed to be incorporated by reference in this
58
<PAGE> 60
Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in this Prospectus or in a document
incorporated or deemed to be incorporated by reference in this Prospectus shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the written or oral request of
any such person, a copy of any or all of the documents incorporated by reference
herein, other than the exhibits to such documents, unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates. Written or oral requests for such copies should be directed to the
Company at 3606 Research Forest Drive, The Woodlands, Texas 77381, Attention:
Secretary (Telephone number: 281/367-5368).
59
<PAGE> 61
For California residents: With respect to sales of the security being
offered hereby to California residents, such security may be sold only to (1)
"accredited investors" within the meaning of Regulation D under the Securities
Act, (2) banks, savings and loan associations, trust companies, insurance
companies, investment companies registered under the Investment Company Act of
1940, pension or profit-sharing trusts, corporations or other entities which,
together with the corporation's or other entity's affiliates which are under
common control, have a net worth on a consolidated basis according to their most
recent regularly prepared financial statements (which shall have been reviewed,
but not necessarily audited, by outside accountants) of not less than
$14,000,000, and subsidiaries of the foregoing, (3) any person (other than a
person formed for the sole purpose of purchasing the security being offered
hereby) who purchases at least $1,000,000 aggregate amount of the security
offered hereby or (4) any individual with an annual income of $65,000 and a net
worth of $250,000 exclusive of home, home furnishings or automobiles, or an
individual with a net worth of $500,000 exclusive of home, home furnishings or
automobiles. Each California resident purchasing the security offered hereby
will be deemed to represent by such purchase that it comes within one of the
aforementioned categories, that it will not sell or otherwise transfer such
security to a California resident unless the transferee comes within one of the
aforementioned categories and that it will advise the transferee of this
condition which transferee, by becoming such, will be deemed to be bound by the
same restrictions on resale.
60
<PAGE> 62
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................. F-2
Balance Sheets as of December 31, 1995 and 1996........... F-3
Statements of Operations for the years ended December 31,
1994, 1995 and 1996.................................... F-4
Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996....................... F-5
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996.................................... F-7
Notes to Audited Financial Statements..................... F-8
UNAUDITED FINANCIAL STATEMENTS
Balance Sheets as of September 30, 1997 and December 31,
1996................................................... F-20
Statements of Operations for the three months ended
September 30, 1997 and 1996............................ F-21
Statements of Operations for the nine months ended
September 30, 1997 and 1996............................ F-22
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996............................ F-23
Notes to Unaudited Financial Statements................... F-24
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LifeCell Corporation:
We have audited the accompanying balance sheets of LifeCell Corporation (a
Delaware corporation) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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 financial position of LifeCell Corporation as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 26, 1997
F-2
<PAGE> 64
LIFECELL CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 3,015,332 $ 10,748,250
Accounts and other receivables............................ 251,509 436,839
Inventories............................................... 351,502 839,821
Prepayments and other..................................... 51,838 52,780
------------ ------------
Total current assets.............................. 3,670,181 12,077,690
FURNITURE AND EQUIPMENT, net................................ 415,563 478,098
INTANGIBLE ASSETS, net...................................... 290,295 334,227
------------ ------------
Total assets...................................... $ 4,376,039 $ 12,890,015
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 384,780 $ 514,848
Accrued liabilities....................................... 218,351 539,271
Deferred revenues......................................... 179,002 138,792
------------ ------------
Total current liabilities......................... 782,133 1,192,911
DEFERRED CREDIT............................................. 1,500,000 1,500,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A preferred stock, $.001 par value, 300,000 shares
authorized, 264,500 and 260,000 issued and outstanding,
including accrued dividends of $70,533 and $86,667........ 5,496,793 5,291,473
Series B preferred stock, $.001 par value, 182,205 shares
authorized, none and 124,157 issued and outstanding and
accrued dividends of none and 1,426 shares................ -- 126
Undesignated preferred stock, $.001 par value, 1,517,795
shares authorized, none issued and outstanding............ -- --
Common stock, $.001 par value, 12,500,000 and 25,000,000
shares authorized, respectively, 4,403,658 and 4,899,944
shares issued and outstanding, respectively............... 4,404 4,900
Warrants outstanding to purchase 574,066 and 3,378,264
shares of Common Stock, respectively...................... 226,560 423,218
Additional paid-in capital.................................. 21,160,808 33,788,321
Unearned portion of restricted stock compensation &
warrants.................................................. (19,906) --
Accumulated deficit......................................... (24,774,753) (29,310,934)
------------ ------------
Total stockholders' equity........................ 2,093,906 10,197,104
------------ ------------
Total liabilities and stockholders' equity........ $ 4,376,039 $ 12,890,015
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 65
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Product sales...................................... $ 93,940 $ 742,238 $ 2,012,205
Corporate alliance................................. 358,331 825,221 546,461
Grants and contracts............................... 364,344 239,116 386,904
----------- ----------- -----------
Total revenues............................. 816,615 1,806,575 2,945,570
----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold................................. 515,500 925,174 1,281,353
Funded research and development.................... 722,675 1,064,337 933,365
Proprietary research and development............... 1,363,176 1,105,427 654,821
General and administrative......................... 1,381,470 1,422,588 1,911,254
Selling and marketing.............................. 727,615 1,475,296 2,389,573
----------- ----------- -----------
Total costs and expenses................... 4,710,436 5,992,822 7,170,366
----------- ----------- -----------
LOSS FROM OPERATIONS................................. (3,893,821) (4,186,247) (4,224,796)
----------- ----------- -----------
Interest income.................................... 167,300 280,843 135,082
----------- ----------- -----------
NET LOSS............................................. $(3,726,521) $(3,905,404) $(4,089,714)
=========== =========== ===========
Loss per share before effect of preferred dividends,
accretion of preferred stock and warrant
exercises.......................................... $ (0.87) $ (0.91) $ (0.90)
Effect of preferred dividends, accretion of preferred
stock and warrant exercises........................ $ (0.03) $ (0.19) $ (0.24)
----------- ----------- -----------
LOSS PER COMMON SHARE................................ $ (0.90) $ (1.10) $ (1.14)
=========== =========== ===========
SHARES USED IN COMPUTING LOSS PER
COMMON SHARE....................................... 4,294,179 4,313,366 4,542,519
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 66
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B CLASS I
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------- ---------------- ------------------ --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ------ --------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993........ -- $ -- -- $ -- 1,473,359 $1,473 2,803,812 $ 2,804
Class I common converted to
common.......................... -- -- -- -- 2,803,812 2,804 (2,803,812) (2,804)
Purchase of common stock.......... -- -- -- -- -- -- -- --
Issuance for cash ($7.77 per
share).......................... -- -- -- -- 20,421 21 -- --
Issuance of Series A preferred
stock and warrants for cash..... 264,500 4,877,995 -- -- -- -- -- --
Warrant issued to purchase common
stock........................... -- -- -- -- -- -- -- --
Earned portion of restricted
stock........................... -- -- -- -- -- -- -- --
Earned portion of warrants........ -- -- -- -- -- -- -- --
Dividends accrued on preferred
stock........................... -- 333,246 -- -- -- -- -- --
Accretion of preferred stock...... -- 68,668 -- -- -- -- -- --
Expiration of warrants............ -- -- -- -- -- -- -- --
Net Loss.......................... -- -- -- -- -- -- -- --
------- ---------- ------- ---- --------- ------ ---------- -------
Balance at December 31, 1994........ 264,500 $5,279,909 -- $ -- 4,297,592 $4,298 -- $ --
Warrant issued to purchase common
stock........................... -- -- -- -- -- -- -- --
Stock options exercised........... -- -- -- -- 1,000 1 -- --
Warrants exercised................ -- -- -- -- 1,250 1 -- --
Issuance of common stock as
dividends on Series A Preferred
stock........................... -- (317,400) -- -- 103,816 104 -- --
Earned portion of restricted
stock........................... -- -- -- -- -- -- -- --
Earned portion of warrants........ -- -- -- -- -- -- -- --
Dividends accrued on preferred
stock........................... -- 190,947 -- -- -- -- -- --
Accretion of preferred stock...... -- 343,337 -- -- -- -- -- --
Net Loss.......................... -- -- -- -- -- -- -- --
------- ---------- ------- ---- --------- ------ ---------- -------
Balance at December 31, 1995........ 264,500 $5,496,793 -- $ -- 4,403,658 $4,404 -- $ --
Stock options exercised........... -- -- -- -- 6,062 6 -- --
Warrants exercised................ -- -- -- -- 339,066 339 -- --
Expiration of warrants............ -- -- -- -- -- -- -- --
Conversion of preferred stock..... (4,500) (90,000) -- -- 30,104 30 -- --
Issuance of common stock as
dividends on Series A Preferred
stock........................... -- (415,920) -- -- 121,054 121 -- --
Earned portion of restricted
stock........................... -- -- -- -- -- -- -- --
Issuance of stock options for
services........................ -- -- -- -- -- -- -- --
Issuance of Series B preferred
stock and common stock warrants
for cash........................ -- -- 124,157 124 -- -- -- --
Dividends accrued on preferred
stock........................... -- 300,600 -- 2 -- -- -- --
Net Loss.......................... -- -- -- -- -- -- -- --
------- ---------- ------- ---- --------- ------ ---------- -------
Balance at December 31, 1996........ 260,000 $5,291,473 124,157 $126 4,899,944 $4,900 -- $ --
======= ========== ======= ==== ========= ====== ========== =======
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 67
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
UNEARNED
WARRANTS TO PORTION OF
PURCHASE RESTRICTED
COMMON STOCK STOCK ADDITIONAL TOTAL
--------------------- COMPENSATION PAID IN TREASURY ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT AND WARRANTS CAPITAL STOCK DEFICIT EQUITY
--------- --------- ------------ ----------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993...... 165,933 $ 116,260 $(529,942) $21,073,701 $ -- $(16,618,635) $ 4,045,661
Class I common converted to
common........................ -- -- -- -- -- -- --
Purchase of common stock........ -- -- -- -- (307,755) -- (307,755)
Issuance for cash ($7.77 per
share)........................ -- -- -- 174,341 307,755 -- 482,117
Issuance of Series A preferred
stock and warrants for cash... 264,500 105,800 -- -- -- -- 4,983,795
Warrant issued to purchase
common stock.................. 90,816 5,000 -- -- -- -- 5,000
Earned portion of restricted
stock......................... -- -- 238,872 -- -- -- 238,872
Earned portion of warrants...... -- -- 21,958 -- -- -- 21,958
Dividends accrued on preferred
stock......................... -- -- -- -- -- (333,246) --
Accretion of preferred stock.... -- -- -- (68,668) -- -- --
Expiration of warrants.......... (5,933) -- -- -- -- -- --
Net Loss........................ -- -- -- -- -- (3,726,521) (3,726,521)
--------- --------- --------- ----------- --------- ------------ -----------
Balance at December 31, 1994...... 515,316 $ 227,060 $(269,112) $21,179,374 $ -- $(20,678,402) $ 5,743,127
Warrant issued to purchase
common stock.................. 60,000 -- -- -- -- -- --
Stock options exercised......... -- -- -- 2,999 -- -- 3,000
Warrants exercised.............. (1,250) (500) -- 4,574 -- -- 4,075
Issuance of common stock as
dividends on Series A
Preferred stock............... -- -- -- 317,198 -- -- (98)
Earned portion of restricted
stock......................... -- -- 238,872 -- -- -- 238,872
Earned portion of warrants...... -- -- 10,334 -- -- -- 10,334
Dividends accrued on preferred
stock......................... -- -- -- -- -- (190,947) --
Accretion of preferred stock.... -- -- -- (343,337) -- -- --
Net Loss........................ -- -- -- -- -- (3,905,404) (3,905,404)
--------- --------- --------- ----------- --------- ------------ -----------
Balance at December 31, 1995...... 574,066 $ 226,560 $ (19,906) $21,160,808 $ -- $(24,774,753) $ 2,093,906
Stock options exercised......... -- -- -- 17,274 -- -- 17,280
Warrants exercised.............. (339,066) (104,300) -- 1,155,617 -- -- 1,051,656
Expiration of warrants.......... (15,000) (6,000) -- 6,000 -- -- --
Conversion of preferred stock... -- -- -- 89,970 -- -- --
Issuance of common stock as
dividends on Series A
Preferred stock............... -- -- -- 409,700 -- -- (6,099)
Earned portion of restricted
stock......................... -- -- 19,906 -- -- -- 19,906
Issuance of stock options for
services...................... -- -- -- 150,000 -- -- 150,000
Issuance of Series B preferred
stock and common stock
warrants for cash............. 3,158,264 306,958 -- 10,653,087 -- -- 10,960,169
Dividends accrued on preferred
stock......................... -- -- -- 145,865 -- (446,467) --
Net Loss........................ -- -- -- -- -- (4,089,714) (4,089,714)
--------- --------- --------- ----------- --------- ------------ -----------
Balance at December 31, 1996...... 3,378,264 $ 423,218 $ -- $33,788,321 $ -- $(29,310,934) $10,197,104
========= ========= ========= =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 68
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss............................................. $(3,726,521) $(3,905,404) $(4,089,714)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization..................... 107,351 138,518 229,237
Stock and warrant compensation expense............ 260,830 249,206 169,906
Change in assets and liabilities --
(Increase) in accounts and other receivables...... (67,237) (87,014) (185,330)
(Increase) in inventories......................... (54,834) (243,720) (488,319)
(Increase) decrease in prepayments and other...... (8,580) 11,347 (942)
Increase in accounts payable and accrued
liabilities..................................... 270,219 118,494 450,988
Increase (decrease) in deferred revenues and
credit.......................................... 1,769,640 (90,638) (40,210)
----------- ----------- -----------
Total adjustments............................ 2,277,389 96,193 135,330
----------- ----------- -----------
Net cash used in operating activities........ (1,449,132) (3,809,211) (3,954,384)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................. (90,509) (190,199) (278,673)
Intangible assets.................................... (34,012) (24,354) (57,032)
Short-term investments............................... (2,138,313) 5,154,824 --
----------- ----------- -----------
Net cash provided by (used in) investing
activities................................. (2,262,834) 4,940,271 (335,705)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and warrants......... 5,163,157 6,977 12,029,105
Proceeds from issuance of notes payable.............. -- -- 370,000
Dividends paid....................................... -- -- (6,098)
Payments of notes payable............................ -- -- (370,000)
----------- ----------- -----------
Net cash provided by financing
activities................................. 5,163,157 6,977 12,023,007
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 1,451,191 1,138,037 7,732,918
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......... 426,104 1,877,295 3,015,332
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END
OF YEAR.............................................. $ 1,877,295 $ 3,015,332 $10,748,250
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest............... $ -- $ -- $ 13,766
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
During 1995 and 1996, the Company issued common stock
as payment for dividends in the amount of $317,400
and $415,920, respectively.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 69
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION:
LifeCell Corporation, a Delaware corporation (LifeCell or the Company), is
engaged in the research, development and commercialization of transplantable
tissue and transfusable blood products. The Company was incorporated on January
6, 1992 for the purpose of merging with its predecessor entity, which was formed
in 1986. LifeCell began commercial sales of its first transplantable tissue
product, AlloDerm(R), during 1994. Sales of AlloDerm to date have not been
sufficient to fund the Company's operations, and the Company expects continued
operating losses during 1997. The future operating results of the Company will
be principally dependent on the market acceptance of its current and future
products, competition from other products or technologies, protection of the
Company's proprietary technology, and access to funding as required.
Accordingly, there can be no assurance of the Company's future success. See
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" elsewhere herein.
2. ACCOUNTING POLICIES:
Cash and Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Investments
that the Company intends to hold to maturity are classified as either current or
non-current assets based on the maturity date of the security. As of December
31, 1995 and 1996, the Company held $3,009,376 and $10,638,981, respectively, of
interest bearing money market accounts and A1/P1 commercial paper which were
classified as "held to maturity" securities. The carrying basis of these
investments approximated fair value and amortized cost. The securities held at
December 31, 1996 matured prior to March 31, 1997.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis.
Furniture and Equipment
Furniture and equipment are stated at cost. Maintenance and repairs that do
not improve or extend the life of the assets are expensed as incurred.
Expenditures for renewals and betterments are capitalized. The cost of assets
retired and the related accumulated depreciation are removed from the accounts
and any gain or loss is included in the results of operations.
Depreciation of furniture and equipment is provided on the straight-line
method based on the estimated useful lives of the assets of five years.
Leasehold improvements are depreciated over the life of the lease.
Intangible Assets
Intangible assets primarily consist of the costs of obtaining patents for
the proprietary technology owned by or licensed to the Company. These costs are
being amortized over the lesser of the legal (generally 17 years) or economic
life of the patent. Accumulated amortization at December 31, 1995 and 1996,
amounted to $39,933 and $53,033, respectively.
F-8
<PAGE> 70
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Product sales are recognized as revenue when the product is shipped to fill
customer orders. Revenues from corporate alliances and from government grants
and contracts are recognized as the work is performed unless the Company has
continuing performance obligations, in which case revenue is recognized upon the
satisfaction of such obligations. Revenue received, but not yet earned, is
classified as deferred revenue.
Research and Development Costs
Research and development costs are expensed when incurred. The Company
performs research funded by others, including research funded through the
corporate alliance with Medtronic (see Note 8), as well as its own independent
proprietary research, development and clinical testing of its products.
Externally funded research consists of direct costs associated with specific
projects as well as an allocation of overhead associated with administering
these activities.
Loss Per Share
Loss per share has been computed by dividing net loss, which has been
increased for periodic accretion and imputed and stated dividends on outstanding
Preferred Stock and the discount offered on warrant exercises induced during
1996, by the weighted average number of shares of Common Stock outstanding
during the periods. In all applicable years, all Common Stock equivalents,
including the Series A Preferred Stock and the Series B Preferred Stock, were
antidilutive and, accordingly, were not included in the computation.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Statement 128
establishes standards for computing and presenting earnings per share (EPS).
This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. The statement also retroactively
revises the presentation of earnings per share in the financial statements. The
Company will adopt this Standard for the year ended December 31, 1997, and has
not currently quantified the effect of applying the new Standard.
Stock-Based Compensation
The Company accounts for employee stock-based compensation pursuant to the
provisions of Accounting Principles Board Opinion No. 25. Compensation expense
for stock options issued to employees and directors is generally recorded at the
intrinsic value (the discount, if any, of the option price from the market price
of the Common Stock under option) of the option at the date of grant. Subsequent
changes in the market price of the underlying stock do not affect the accounting
treatment of the option. Options granted to others are accounted for under the
provisions of Statement of Financial Accounting Standards No. 123, which
requires that the option be recorded at its estimated fair value using
option-pricing formulas used in the financial markets.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE> 71
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES:
Inventories consist of products in various stages produced for sale and
includes the costs of raw materials, labor, and overhead.
A summary of inventories is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Raw Materials............................................... $ 29,171 $ 52,738
Work-In-Process............................................. 107,988 437,221
Finished Goods.............................................. 214,343 349,862
-------- --------
$351,502 $839,821
======== ========
</TABLE>
4. FURNITURE AND EQUIPMENT:
A summary of furniture and equipment is as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Office furniture and fixtures............................... $ 57,636 $ 61,130
Machinery and equipment..................................... 1,097,480 1,342,243
Leasehold improvements...................................... 189,877 220,293
---------- ----------
1,344,993 1,623,666
Less --
Accumulated depreciation and amortization................. 929,430 1,145,568
---------- ----------
Net furniture and equipment............................... $ 415,563 $ 478,098
========== ==========
</TABLE>
5. CAPITAL STOCK:
Authorized Capital Stock
As of December 31, 1996, the authorized capital of the Company consisted of
25,000,000 shares of Common Stock, $.001 par value, and 2,000,000 shares of
Preferred Stock, $.001 par value, of which 300,000 shares were designated as
Series A Convertible Preferred Stock and 182,205 shares were designated as
Series B Preferred Stock. As of December 31, 1996, there were 4,899,944 shares
of Common Stock, 260,000 shares of Series A Convertible Preferred Stock and
124,157 shares of Series B Preferred Stock outstanding. During March 1997, all
outstanding shares of Series A Convertible Preferred Stock and a portion of the
accrued dividends were converted into 1,772,433 shares of Common Stock.
Series A Preferred Stock
During November 1994, the Company issued 264,500 shares of Series A
Convertible Preferred Stock (Series A Preferred Stock) and warrants to acquire
264,500 shares of Common Stock for gross proceeds of approximately $5.3 million
in a private placement. Each share of Series A Preferred Stock was convertible
at any time at the option of the holder into 6.69 shares of Common Stock. During
1996, 4,500 shares of Series A Preferred Stock were converted into 30,104 shares
of Common Stock. The Series A Preferred Stock had a liquidation preference of
$20 per share, or $5,200,000 as of December 31, 1996.
The Series A Preferred Stock bore dividends at annual rates of $1.20,
$1.60, and $2.00 per share for each of the first, second and third years,
respectively, after the date of original issuance. Dividends were payable in
cash, Common Stock, or any combination of cash and Common Stock at the Com-
F-10
<PAGE> 72
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
pany's discretion. The Series A Preferred Stock had no ordinary voting rights.
While the preferred shares were outstanding or any dividends were owed thereon,
the Company could not declare or pay cash dividends on its Common Stock. During
1995 and 1996, respectively, the Company paid $317,400 and $415,920 in accrued
dividends on the Series A Preferred Stock by issuing 103,816 shares and 121,054
shares of Common Stock.
The preferred stock was automatically convertible into Common Stock on
November 9, 1997 and could be redeemed sooner by the Company if, after November
9, 1995, the closing bid price of the Company's Common Stock averaged or
exceeded $5.17 per share for 20 consecutive days. Pursuant to such provisions,
during February 1997, the Company called for redemption all outstanding shares
of Series A Preferred Stock. During March 1997 the Company issued 1,739,128
shares of Common Stock to redeem the Series A Preferred Stock and paid a cash
dividend of $65,000 and issued an additional 33,305 shares of Common Stock for
dividends accrued through the date of redemption.
The carrying amount of the Series A Preferred Stock was increased for
accrued and unpaid stated dividends plus periodic accretion, using the effective
interest method, such that the carrying amount equaled the redemption amount on
November 9, 1995. In November 1994, the Series A Preferred Stock was also
increased by imputed dividends resulting from the increasing dividend rates.
Series B Preferred Stock
During November 1996, the Company issued 124,157 shares of Series B
Preferred Stock (Series B Preferred Stock) and warrants to acquire 2,803,530
shares of Common Stock for gross proceeds of approximately $12.4 million in a
private placement. Each share of Series B Preferred Stock is initially
convertible at any time at the option of the holder into approximately 32.26
shares of Common Stock (or 4,005,064 shares of Common Stock at December 31,
1996), subject to adjustment for dilutive issuances of securities. The Series B
Preferred Stock has a liquidation preference of $100 per share, or $12,415,700
as of December 31, 1996, and shares ratable in any residual assets after payment
of such liquidation preference.
The Series B Preferred Stock bears cumulative dividends, payable quarterly,
for five years at the greater of the annual rate of $6.00 per share or the rate
of any dividends paid on the Series A Preferred Stock (effectively $10 per share
until the Series A Preferred Stock was redeemed in March 1997). Dividends may be
paid in cash, in additional shares of Series B Preferred Stock based on the
stated value of $100 per share, or any combination of cash and Series B
Preferred Stock at the Company's option. On all matters for which the Company's
stockholders are entitled to vote, each share of Series B Preferred Stock will
entitle the holder to one vote for each share of Common Stock into which the
share of Series B Preferred Stock is then convertible. Additionally, the holders
of Series B Preferred Stock have the right to elect up to three directors to the
Board of Directors of the Company. While the preferred shares are outstanding or
any dividends are owned thereon, the Company may not declare or pay cash
dividends on its Common Stock. During 1996 the Company declared accrued
dividends on the Series B Preferred Stock of $145,867 payable through the
issuance of 1,426 additional shares of Series B Preferred Stock on February 15,
1997.
The preferred stock will be automatically converted into Common Stock if
(i) the closing price of the Company's Common Stock averages or exceeds $9.30
per share for 30 consecutive trading days and (ii) the Company conducts an
underwritten public offering of newly issued Common Stock with gross proceeds,
net of underwriting discounts and commissions, exceeding $20 million.
Additionally, the preferred stock will be automatically converted into Common
Stock if the Company conducts an underwritten public offering of newly issued
Common Stock with gross proceeds, net of underwriting discounts and commissions,
exceeding $20 million and the price per share in such offering equals or exceeds
$9.30.
F-11
<PAGE> 73
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock
During February 1994, all previously outstanding shares of Class I Common
Stock were automatically converted into 2,803,812 shares of Common Stock and the
Class I Common Stock was eliminated during June 1995.
During 1995 and 1996, respectively, the Company issued 103,816 shares and
121,054 shares of Common Stock as payment of accrued dividends on Series A
Preferred Stock. Additionally, during 1996, the Company induced the exercise of
warrants by temporarily lowering exercise prices and issued 339,066 shares of
Common Stock at a weighted average price of $3.10 upon exercise of certain
warrants.
During March 1997, the Company issued 1,739,128 shares of Common Stock to
redeem all outstanding shares of the Series A Preferred Stock and paid a cash
dividend of $65,000 and issued an additional 33,305 shares of Common Stock for
dividends accrued through the date of redemption.
During 1994, the Company purchased 43,965 shares of Common Stock from
several employees, including officers and directors, for the purpose of
satisfying their income tax liabilities for shares and options previously
granted under a deferred compensation arrangement. These treasury shares were
subsequently reissued during 1994.
In 1992, the Company adopted a Restricted Stock Plan and issued 241,372
shares of Common Stock to employees, a director and a consultant of the Company
for $.001 per share. The restricted stock vested over a four year period.
Deferred compensation expense totaling $965,000 was expensed over the vesting
period of the grants. The non-cash charge related to these stock grants was
$239,000 for 1994 and 1995 and $20,000 for 1996.
Options
The Company's 1992 Stock Option Plan, as amended (1992 Plan), provides for
the grant of options to purchase up to 1,000,000 shares of Common Stock. Granted
options generally become exercisable over a four year period, 25 percent per
year beginning on the first anniversary of the date of grant. To the extent not
exercised, options generally expire on the tenth anniversary of the date of
grant, except for employees who own more than 10 percent of all the voting
shares of the Company, in which event the expiration date is the fifth
anniversary of the date of grant. All options granted under the plan have
exercise prices equal to the fair market value at the dates of grant.
The 1993 Non-Employee Director Stock Option Plan (Director Plan) was
adopted in 1993 and amended during 1996. A total of 750,000 shares of Common
Stock are available for grant under the Director Plan. Upon amendment of the
Director Plan in 1996, options to purchase 50,000 shares of Common Stock were
granted to each then-current non-employee director of the Company at an exercise
price equal to the fair market value of a share of Common Stock on the date of
the Director Plan. Options to purchase 25,000 shares of Common Stock will be
granted to newly elected directors at an exercise price equal to the fair market
value of a share of Common Stock on such election date. The provisions of the
Director Plan provide for an annual grant of an option to purchase 10,000 shares
of Common Stock to each non-employee director. Options under the Director Plan
generally vest one year after date of grant and expire after 10 years.
F-12
<PAGE> 74
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1992 STOCK OPTION PLAN DIRECTOR PLAN
------------------------ ------------------------
WEIGHTED- WEIGHTED-
AVG. EXERCISE AVG. EXERCISE
OPTIONS PRICE($) OPTIONS PRICE($)
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993...................... 224,593 9.06 40,000 11.00
Granted......................................... 192,819 2.87 10,000 3.00
Exercised....................................... -- -- -- --
Forfeited....................................... (2,650) 7.68 -- --
-------- --------
Balance at December 31, 1994...................... 414,762 6.19 50,000 9.40
-------- --------
Granted......................................... 266,350 2.46 10,000 2.75
Exercised....................................... (1,000) 3.00 -- --
Forfeited....................................... (225,917) 8.97 -- --
-------- --------
Balance at December 31, 1995...................... 454,195 2.63 60,000 8.29
-------- --------
Granted......................................... 558,000 3.80 240,000 3.07
Exercised....................................... (1,062) 2.74 (5,000) 2.88
Forfeited....................................... (42,313) 3.18 -- --
Reissue......................................... -- -- (220,000) 4.14
-------- --------
Balance at December 31, 1996...................... 968,820 3.28 75,000 4.11
-------- --------
Exercisable at December 31, 1994.................. 57,606 9.11 40,000 11.00
Exercisable at December 31, 1995.................. 158,330 2.61 50,000 9.40
Exercisable at December 31, 1996.................. 255,429 2.61 15,000 8.29
</TABLE>
At December 31, 1996, 28,718 and 670,000 options were available for future
grant under the 1992 Plan and the Director Plan, respectively. The exercise
prices of options outstanding under the 1992 Plan and the Director Plan at
December 31, 1996 range from $0.07 to $4.375 and $2.75 to $11.00, respectively.
The weighted average contractual life of options outstanding at December 31,
1996 was 9.1 years for the 1992 Plan and 7.8 years for the Director Plan.
In addition to the amounts set forth in the table above, during 1996, the
Company granted options to purchase 220,000 shares of Common Stock to directors
who resigned upon the closing of the sale of the Series B Preferred Stock in
exchange for options previously granted under the Director Plan. These options
have provisions identical to the options previously granted under the Director
Plan, including exercise prices and vesting periods. The weighted average
exercise price of the options granted was $4.14. The weighted average remaining
contractual life of the grants was 8.8 years as of December 31, 1996. The
Company expensed $150,000, which was the difference between the market price and
the option price on the date of the grant, during 1996 related to this
reissuance.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" which, if fully adopted, requires
the Company to record stock-based compensation at fair value. The Company has
adopted the disclosure requirements of SFAS No. 123 and has elected to record
employee compensation expense in accordance with Accounting Principles Board
Opinion (APB) No. 25.
F-13
<PAGE> 75
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for its employee stock-based compensation plans under
APB No. 25 and its related interpretations. Accordingly, deferred compensation
expense is recorded for stock options based on the excess of the market value of
the common stock on the date the options were granted over the aggregate
exercise price of the options. This deferred compensation is amortized over the
vesting period of each option. As the exercise price of options granted under
the 1992 Plan and the Director Plan has been equal to or greater than the market
price of the Company's stock on the date of grant, no compensation expense
related to these plans has been recorded. Had compensation expense for its 1992
Plan and Director Plan been determined consistent with SFAS No. 123, the
Company's net loss and loss per share would have been increased to the following
pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net Loss:
As reported......................................... $3,905,404 $4,089,714
Pro forma........................................... $3,940,041 $5,372,049
Loss Per Share:
As reported......................................... $ 1.10 $ 1.14
Pro forma........................................... $ 1.10 $ 1.42
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Under the provisions of SFAS No. 123, the weighted average fair value of
options granted in 1995 and 1996 was $1.88 and $3.21, respectively, under the
1992 Plan. The weighted average fair value of options granted in 1995 and 1996
was $2.21 and $2.40, respectively, under the Director Plan. 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 1995 and 1996, respectively: a weighted average risk-free interest
rate of 6 percent for both years; no expected dividend yields for both years;
expected lives of 3 years for both years and expected volatility between 96 and
100 percent.
The stock options issued to retiring directors in 1996 had a weighted
average fair value of $2.57. The fair values of such options are estimated on
the date of grant using Black-Scholes option price model with the following
assumptions used: a weighted average risk-free interest rate of 6 percent,
expected lives of 3 to 5 years, expected volatility of 99 percent and no
expected dividends.
During 1995, options to purchase 225,917 shares of Common Stock at exercise
prices of $9.00 and $14.50 were canceled and reissued at substantially the same
terms, but with an exercise price equal to the then current market price of
$2.50.
Warrants
As of December 31, 1996, warrants to acquire a total of 3,378,264 shares of
Common Stock were outstanding as set forth below.
During 1996, the Company issued warrants to acquire 2,803,530 shares of
Common Stock in conjunction with the sale of the Series B Preferred Stock (the
1996 Warrants). The 1996 Warrants are exercisable at an exercise price of $4.13
per share. The warrants expire on the fifth anniversary of the date of grant,
are callable if the average closing price of the Company's Common Stock for 30
trading days equals or exceeds three times the then-exercise price, and allow
cashless exercise. The warrants also have provisions for adjustment of the
exercise price and number of shares for below-exercise price issuance of
securities.
F-14
<PAGE> 76
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Company issued a warrant to acquire 354,734 shares of
Common Stock to the placement agent for the Series B Preferred Stock (Agent
Warrant). The Agent Warrant is exercisable at an exercise price of $4.50 per
share. The warrant expires on the fifth anniversary of the date of grant and
allows cashless exercise. The warrant also has provisions for adjustment of the
exercise price and number of shares for below-exercise price issuance of
securities.
In connection with the sale of the Series A Preferred Stock, the Company
issued warrants to acquire 264,500 shares of Common Stock at exercise prices of
$3.26 per share during the first year and $3.54 per share during the second
year. Additionally, the placement agent was issued a warrant to purchase 90,816
shares of Common Stock at $6.00 per share. A total of 339,066 warrants were
exercised during 1996 through inducement of exercise by lowering the exercise
price to $3.10 per share. The difference between the market price on the date of
inducement and the induced exercise price has been deducted from net income to
determine loss per Common share. A total of 15,000 warrants expired unexercised.
As of December 31, 1996, additional warrants to acquire 100,000 shares of
Common Stock were outstanding with exercise prices ranging from $2.50 to $11.05.
Such warrants expire during periods ranging from December 31, 1997 to December
13, 2000. Additionally, as of December 31, 1996, warrants to acquire 120,000
shares of Common Stock were outstanding but expired unexercised on February 27,
1997.
6. EMPLOYEE BENEFIT PLANS:
The Company maintains a retirement savings plan as described in Section
401(k) of the Internal Revenue Code of 1986. The Company may, at its discretion,
contribute amounts not to exceed each employee's contribution. During January
1996 and January 1997, the Company made total contributions of $5,292 and $8,187
to the plan for a partial matching of employee contributions during 1995 and
1996, respectively.
During 1996, the Company established an Employee Stock Purchase Plan to
allow for the purchase of the Company's Common Stock on the open market using
employee and any employer matching contributions. During 1996, the Company
contributed $1,328 to this plan.
7. FEDERAL INCOME TAXES:
The Company has not made any income tax payments since inception. As of
December 31, 1996, the Company has a net operating loss (NOL) carryforward for
federal income tax purposes of approximately $26 million, subject to the
limitations described below, expiring as follows:
<TABLE>
<CAPTION>
YEAR EXPIRES
------------
<S> <C>
2001...................................................... $ 500,000
2002...................................................... 1,500,000
2003...................................................... 2,800,000
2004...................................................... 2,200,000
2005...................................................... 1,700,000
2006...................................................... 1,400,000
2007...................................................... 2,400,000
2008...................................................... 3,000,000
2009...................................................... 2,500,000
2010...................................................... 4,000,000
2011...................................................... 4,000,000
-----------
$26,000,000
===========
</TABLE>
F-15
<PAGE> 77
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Company has approximately $385,000 of research and
development tax credit carryforwards which will expire in varying amounts
commencing in 2001. The Company's ability to utilize its tax loss and credit
carryforwards to reduce future taxable income may be limited by either the prior
expiration of such loss or credit or by the occurrence of a "change in
ownership," as such term is defined by federal income tax laws and regulations.
A change in ownership may occur upon the sale of additional equity securities by
the Company, conversion of existing shares of Series B Preferred Stock or by
sales of stock by existing stockholders. In the event of a change in ownership,
the amount of the tax loss and credit carryforwards that may be utilized to
offset taxable income in any year may be limited and result in the payment of
federal income taxes that otherwise would be offset by such tax losses or
credits.
For financial reporting purposes, a valuation allowance of $9,897,000 has
been recorded as of December 31, 1996 to fully offset the deferred tax asset
related to these carryforwards. The principal components of the deferred tax
asset as of December 31, 1995 and 1996, assuming a 34% federal tax rate, are as
follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Temporary differences:
Deferred revenue.......................................... 582,000 510,000
Restricted stock compensation............................. (196,000) 154,000
Uniform capitalization of inventory costs................. 160,000 37,000
Other items............................................... 66,000 (29,000)
---------- ----------
Total temporary differences............................... 612,000 672,000
Federal tax losses and credits not currently utilizable... 7,845,000 9,225,000
---------- ----------
Total deferred tax assets................................... 8,457,000 9,897,000
Less valuation allowance.................................. (8,457,000) (9,897,000)
---------- ----------
Net deferred tax asset...................................... -- --
---------- ----------
</TABLE>
The net increase in the deferred tax valuation allowance for 1995 and 1996
was $1,691,000, and $1,440,000, respectively. Other than the net operating loss
and tax credit carryforwards, there is no significant difference between the
statutory federal income tax rate and the Company's effective tax rate during
1994, 1995 and 1996.
8. COLLABORATIONS AND CORPORATE ALLIANCES
Medtronic Collaboration
During March 1994, the Company entered into a collaboration with Medtronic,
Inc. (Medtronic) for the development and commercialization of universal tissue
heart valves engineered with LifeCell's proprietary technology. Medtronic paid
the Company an initial licensing fee of $1,500,000, agreed to fund development
of heart valve products, and acquired $500,000 of the Company's Common Stock at
a price of $7.77 per share. Medtronic is obligated to pay royalties, up to a
maximum of $25,000,000, on any product sales. Medtronic was also granted rights
of first refusal to evaluate technology and negotiate license and development
agreements for vascular conduit products utilizing the Company's technology. In
the event Medtronic terminates funding of the heart valve program, Medtronic may
convert its initial $1.5 million license fee into newly issued shares of the
Company's Common Stock at the then-current market price. Accordingly, the
Company has deferred recognition of the initial license fee and recorded a $1.5
million deferred credit in the accompanying balance sheet. Medtronic also has
the right, subject to certain restrictions, to purchase additional shares of the
Company's Common Stock, to have the Company register the resale of any Common
Stock acquired from it, and to appoint one member of the Board of Directors of
the company through March 1999.
Other Product Sales Arrangements
The Company has negotiated other distribution or sales collaboration
arrangements with various parties with exclusive regional or international
territories under each agreement. The agreements generally provide that the
distributor must meet certain performance measures or the agreement may
F-16
<PAGE> 78
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
be terminated by the Company. The markets served by these arrangements include
plastic and reconstructive surgery.
9. COMMITMENTS AND CONTINGENCIES:
External Funding for Research
Certain of the Company's research programs have been funded by Small
Business Innovation Research (SBIR) grants and other direct federal government
funding contracts. The grants and contracts generally obligate the Company to
perform specified research activities in return for such funding, and the
utilization of funds under the grants is subject to audit by the appropriate
governmental agencies. At December 31, 1996, the Company had received $138,792
of deferred revenue, including advance payments from a corporate alliance, for
research to be conducted during 1997. Additionally, as of December 31, 1996, the
Company has unfunded awards totaling $1,597,000 for research that is expected to
occur and be funded during 1997 and 1998.
Exclusive License Agreement
The Company has an exclusive license agreement with the Board of Regents of
the University of Texas System (Board) to technology and patents related to the
analysis or preservation of certain cells or tissues. The Company is required to
pay the Board royalties on net sales of products encompassing the licensed
technologies. For the periods ended December 31, 1994, 1995 and 1996 no
significant royalties were paid under the agreement.
Leases
The Company leases approximately 20,000 square feet for office and
laboratory space. The future minimum lease payments under noncancelable lease
terms in excess of one year as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
1997........................................................ $218,028
1998........................................................ 221,320
1999........................................................ 221,320
2000........................................................ 221,320
2001........................................................ 18,443
--------
Total.................................................. $900,431
--------
</TABLE>
10. TRANSACTIONS WITH RELATED PARTIES:
The Company leases office space from an affiliate of a stockholder of the
Company. The Company paid rent expense of approximately $139,000, $129,000 and
$142,000 during 1994, 1995, and 1996 respectively, related to this lease.
The Company paid consulting fees and expenses to an affiliate of a
stockholder and a former director of the Company, totaling approximately
$96,000, $91,000 and $80,000 during the years ended December 31, 1994, 1995 and
1996 respectively, pursuant to a consultant agreement.
As of December 31, 1996, the Company has notes receivable totaling $95,060
from participants, two of whom are directors of the Company, in a previous
deferred compensation plan. Such notes represent loans of federal income tax
amounts payable by the individuals as a result of grants under the plan.
F-17
<PAGE> 79
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summary unaudited financial data for the years
ended December 31, 1995 and 1996. The Company believes that this information
reflects all adjustments, consisting of only normal recurring items, considered
necessary for a fair presentation of the quarterly financial information
presented. The operating results for any quarterly period are not necessarily
indicative of the results that may be expected for future periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Product Sales.................................. $ 98 $ 130 $ 251 $ 263
Total Revenues................................. $ 430 $ 399 $ 514 $ 464
Gross Margin................................... $ (5) $ (52) $ (7) $ (119)
Net loss....................................... $ (958) $(1,016) $ (867) $(1,064)
Loss per share................................. $(0.27) $ (0.29) $ (0.25) $ (0.29)
1996
Product Sales.................................. $ 421 $ 429 $ 561 $ 602
Total Revenues................................. $ 576 $ 678 $ 816 $ 876
Gross Margin................................... $ 149 $ 157 $ 205 $ 220
Net loss....................................... $ (949) $ (909) $(1,023) $(1,209)
Loss per share................................. $(0.25) $ (0.24) $ (0.33) $ (0.32)
</TABLE>
12. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED)
On November 4, 1997, Integra (Artificial Skin) Corporation ("Integra"), a
subsidiary of Integra LifeSciences Corporation, and Massachusetts Institute of
Technology ("MIT") filed a lawsuit in the United States District Court for the
District of Massachusetts, alleging that the Company infringes two patents
licensed by MIT to Integra (the "Integra Patents"). The lawsuit seeks injunctive
relief, an accounting of revenues, enhanced monetary damages and attorneys'
fees. On November 14, 1997, LifeCell responded to the complaint denying the
infringement claims and asserting certain affirmative defenses and
counterclaims. The Company has received an opinion from its patent counsel to
the effect that the intended uses of AlloDerm do not infringe the Integra
Patents. This opinion represents only the reasoned professional judgment of the
Company's patent counsel and is not binding on any court or third party. Patent
litigation involves complex legal and factual questions. As a result, the
outcome of such litigation is inherently unpredictable, and there can be no
assurance that the result of this proceeding will be favorable to the Company or
that it will not have a material adverse effect on the Company's business,
operating results or financial condition. If it is determined that the Company
is infringing the Integra Patents, the court could issue an injunction
prohibiting the Company from making, using or selling its AlloDerm product for
some or all of its intended uses. Such injunction could also extend to the
Company's other potential products under development. In addition, the court
could assess significant damages and attorneys' fees against the Company, which
would have a material adverse effect on the Company's business, operating
results and financial condition and otherwise affect the ability of the Company
to continue as a viable enterprise. In addition, an adverse determination in
this proceeding could require the Company to seek licenses from Integra, which
may not be available on reasonable terms, if at all. Regardless of the outcome,
defending such claims could involve significant costs and diversion of
management resources, which could have a material adverse effect on the
Company's business, operating results or financial condition.
F-18
<PAGE> 80
[PAGE INTENTIONALLY LEFT BLANK]
F-19
<PAGE> 81
LIFECELL CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 5,535,837 $ 10,748,250
Accounts and other receivables............................ 860,069 436,839
Inventories............................................... 981,317 839,821
Prepayments and other..................................... 151,392 52,780
------------ ------------
Total current assets.............................. 7,528,615 12,077,690
FURNITURE AND EQUIPMENT, net................................ 839,689 478,098
INTANGIBLE ASSETS, net...................................... 376,741 334,227
OTHER ASSETS................................................ 66,838 --
------------ ------------
$ 8,811,883 $ 12,890,015
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 324,226 $ 514,848
Accrued liabilities....................................... 966,966 539,271
Deferred revenues......................................... 106,510 138,792
------------ ------------
Total current liabilities......................... 1,397,702 1,192,911
DEFERRED CREDIT............................................. 1,500,000 1,500,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A preferred stock, $.001 par value, none and 300,000
shares authorized, none and 260,000 issued and
outstanding, including accrued dividends of none and
$86,667, respectively..................................... -- 5,291,473
Series B preferred stock, $.001 par value, 182,205 shares
authorized, 124,036 and 124,157 issued and outstanding and
accrued dividends of 1,837 and 1,426 shares,
respectively.............................................. 126 126
Undesignated preferred stock, $.001 par value, 1,817,795 and
1,517,795 shares authorized, none issued and
outstanding............................................... -- --
Common stock, $.001 par value, 25,000,000 shares authorized,
6,990,917 and 4,899,944 shares issued and outstanding,
respectively.............................................. 6,991 4,900
Warrants outstanding to purchase 3,189,507 and 3,378,264
shares of Common Stock, respectively...................... 416,540 423,218
Additional paid-in capital.................................. 40,199,622 33,788,321
Accumulated deficit......................................... (34,709,098) (29,310,934)
------------ ------------
Total stockholders' equity........................ 5,914,181 10,197,104
------------ ------------
Total liabilities and stockholders' equity........ $ 8,811,883 $ 12,890,015
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 82
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Product sales............................................. $ 1,409,900 $ 560,672
Research funded by others................................. 223,926 255,454
----------- -----------
Total revenues.................................... 1,633,826 816,126
----------- -----------
COSTS AND EXPENSES
Cost of goods sold........................................ 694,773 355,647
Funded research and development........................... 223,926 255,454
Proprietary research and development...................... 329,824 209,014
General and administrative................................ 516,255 423,288
Selling and marketing..................................... 1,346,120 597,214
----------- -----------
Total costs and expenses.......................... 3,110,898 1,840,617
----------- -----------
LOSS FROM OPERATIONS........................................ (1,477,072) (1,024,491)
----------- -----------
Interest income and other, net............................ 83,859 11,988
----------- -----------
NET LOSS.................................................... $(1,393,213) $(1,012,503)
=========== ===========
Loss per Common share before preferred dividends, accretion
of preferred stock and warrant exercises.................. $ (0.20) $ (0.22)
Effect of preferred dividends, accretion of preferred
stock and warrant exercises............................ (0.03) (0.11)
----------- -----------
LOSS PER COMMON SHARE....................................... $ (0.23) $ (0.33)
=========== ===========
SHARES USED IN COMPUTING LOSS PER COMMON SHARE.............. 6,941,013 4,548,547
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 83
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Product sales............................................. $ 3,238,333 $ 1,410,373
Research funded by others................................. 779,149 659,385
----------- -----------
Total revenues.................................... 4,017,482 2,069,758
----------- -----------
COSTS AND EXPENSES
Cost of goods sold........................................ 1,704,963 899,805
Funded research and development........................... 779,149 659,385
Proprietary research and development...................... 889,686 550,354
General and administrative................................ 2,007,130 1,196,104
Selling and marketing..................................... 3,572,769 1,699,739
----------- -----------
Total costs and expenses.......................... 8,953,697 5,005,387
----------- -----------
LOSS FROM OPERATIONS........................................ (4,936,215) (2,935,629)
----------- -----------
Interest income and other, net............................ 320,389 55,371
----------- -----------
NET LOSS.................................................... $(4,615,826) $(2,880,258)
=========== ===========
Loss per Common share before preferred dividends, accretion
of preferred stock and warrant exercises.................. $ (0.73) $ (0.65)
Effect of preferred dividends, accretion of preferred
stock and warrant exercises............................ (0.13) (0.18)
----------- -----------
LOSS PER COMMON SHARE....................................... $ (0.86) $ (0.82)
=========== ===========
SHARES USED IN COMPUTING LOSS PER COMMON SHARE.............. 6,304,204 4,452,307
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 84
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss.................................................. $(4,615,826) $(2,880,258)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 156,644 124,332
Stock and warrant compensation expense................. -- 19,906
Change in assets and liabilities --
(Increase) decrease in accounts and other
receivables........................................... (423,229) (156,205)
(Increase) decrease in inventories..................... (141,496) (415,651)
(Increase) decrease in prepayments and other........... (98,613) (340,886)
Increase in accounts payable and accrued liabilities... 206,720 530,497
Increase (decrease) in deferred revenues............... (32,281) (9,966)
----------- -----------
Total adjustments................................. (332,255) (247,973)
----------- -----------
Net cash used in operating activities............. (4,948,081) (3,128,231)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (498,745) (152,205)
Intangible assets......................................... (55,466) (41,592)
----------- -----------
Net cash used in investing activities............. (554,211) (193,797)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock........................... 406,294 1,061,605
Proceeds from issuance of notes payable................... 65,369 432,316
Deferred offering expenses accrued........................ (66,838) --
Dividends paid............................................ (79,927) --
Payments of notes payable................................. (35,019) (47,661)
----------- -----------
Net cash provided by financing activities......... 289,879 1,446,260
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (5,212,413) (1,875,768)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 10,748,250 3,015,332
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5,535,837 $ 1,139,564
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest............... $ 4,059 $ 6,719
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 85
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND CERTAIN SIGNIFICANT RISKS:
LifeCell Corporation, a Delaware corporation ("LifeCell" or the "Company"),
is a bio-engineering company engaged in the development and commercialization of
tissue regeneration and cell preservation products. The Company was incorporated
on January 6, 1992, for the purpose of merging with its predecessor entity,
which was formed in 1986. LifeCell began commercial sales of its first
transplantable tissue product, AlloDerm(R) acellular dermal graft, during 1994.
Sales of AlloDerm products to date have not been sufficient to fund the
Company's operations, and the Company expects continued operating losses at
least into 1998. The future operating results of the Company will be principally
dependent on the market acceptance of its current and future products,
competition from other products or technologies, protection of the Company's
proprietary technology, and access to funding as required. Accordingly, there
can be no assurance of the Company's future success. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
elsewhere herein.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"Commission"). Certain information and footnote disclosures normally included in
the annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations. This financial information should be read in conjunction with the
Financial Statements included elsewhere herein.
In the opinion of the management of the Company, the accompanying financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of financial position
and the results of operations for the periods presented. Financial results for
interim periods are not necessarily indicative of the results for the full year
or future interim periods.
3. REDEMPTION OF SERIES A PREFERRED STOCK
The Series A Preferred Stock was automatically convertible into Common
Stock on November 9, 1997, and could be redeemed sooner by the Company if, after
November 9, 1995, the closing bid price of the Company's Common Stock averaged
or exceeded $5.17 per share for 20 consecutive days. Pursuant to such
provisions, during February 1997, the Company called for redemption all
outstanding shares of Series A Preferred Stock. During March 1997 the Company
issued 1,739,128 shares of Common Stock to redeem the Series A Preferred Stock,
paid a cash dividend of $65,000 and issued an additional 33,305 shares of Common
Stock for dividends accrued through the date of redemption.
4. DIVIDENDS PAYABLE ON SERIES B PREFERRED STOCK
The Series B Preferred Stock bears cumulative dividends, payable quarterly
for five years ending 2001, at the greater of the annual rate of $6.00 per share
or the rate of any dividends paid on the Series A Preferred Stock (effectively
$10.00 per share until the Series A Preferred Stock was redeemed in March 1997).
Dividends may be paid in cash, in additional shares of Series B Preferred Stock
based on the stated value of $100 per share, or any combination of cash and
Series B Preferred Stock at the Company's option. While the shares of Series B
Preferred Stock are outstanding or any dividends are owed thereon, the Company
may not declare or pay cash dividends on its Common Stock.
During the third quarter of 1997, the Company accrued dividends on the
Series B Preferred Stock of $187,237, payable in cash of $3,537 and 1,837 shares
of Series B Preferred Stock. Such dividend is payable on November 15, 1997.
During the first nine months of 1997, the Company accrued dividends on the
Series B Preferred Stock of $669,748, payable in cash of $15,148 and 6,546
shares of Series B Preferred Stock. Such
F-24
<PAGE> 86
CONDENSED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
dividend was at the rate of $10.00 per share for the period through March 26,
1997, the date of redemption of the Series A Preferred Stock, and $6.00 per
share thereafter.
5. LOSS PER COMMON SHARE
Loss per common share has been computed by dividing net loss, which has
been increased by imputed and stated dividends on outstanding Preferred Stock as
well as in 1996 the effect of inducement of warrant exercises, by the weighted
average number of shares of Common Stock outstanding during the periods. Such
imputed and stated dividends and effect of the warrant exercise inducement
totaled $498,597 and $187,237 for the three months ended September 30, 1996 and
1997, respectively, and $791,959 and $782,324 for the nine months ended
September 30, 1996 and 1997, respectively. In all applicable periods, all Common
Stock equivalents, including the Series A Preferred Stock and the Series B
Preferred Stock, were anti-dilutive and, accordingly, were not included in the
computation.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Statement 128
establishes standards for computing and presenting earnings per share ("EPS").
This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings per Share", and makes them
comparable to international EPS standards. The statement also retroactively
revises the presentation of earnings per share in the financial statements. The
Company will adopt this Standard for the year ended December 31, 1997, but such
adoption is not expected to have a significant effect on net loss per share for
the period ended September 30, 1997.
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to numerous risks and uncertainties and from time to
time may be subject to various claims in the ordinary course of its operations.
The Company maintains insurance coverage for events and in amounts that it deems
appropriate. There can be no assurance that the level of insurance maintained
will be sufficient to cover any claims incurred by the Company or that the type
of claims will be covered by the terms of insurance coverage.
7. SUBSEQUENT EVENTS
In October, 1997, the Company filed a registration statement with the
Securities and Exchange Commission in connection with a proposed public offering
of 4,500,000 shares of its Common Stock, of which 4,000,000 shares will be
issued and sold by LifeCell and 500,000 shares will be sold by certain selling
stockholders of the Company.
On November 4, 1997, Integra (Artificial Skin) Corporation ("Integra"), a
subsidiary of Integra LifeSciences Corporation, and the Massachusetts Institute
of Technology ("MIT") filed a lawsuit in the United States District Court for
the District of Massachusetts, alleging that the Company infringes two patents
licensed by MIT to Integra (the "Integra Patents"). The lawsuit seeks injunctive
relief, an accounting of revenues, enhanced monetary damages and attorneys'
fees. On November 14, 1997, LifeCell responded to the complaint denying the
infringement claims and asserting certain affirmative defenses and
counterclaims. The Company has received an opinion from its patent counsel to
the effect that the intended uses of AlloDerm do not infringe the Integra
Patents. This opinion represents only the reasoned professional judgment of the
Company's patent counsel and is not binding on any court or third party. Patent
litigation involves complex legal and factual questions. As a result, the
outcome of such litigation is inherently unpredictable, and there can be no
assurance that the result of this proceeding will be favorable to the Company or
that it will not have a material adverse effect on the Company's business,
operating results or financial condition. If it is determined that the Company
is infringing the Integra Patents, the court could issue an injunction
prohibiting the Company from making, using or selling its AlloDerm product for
some or all of its intended uses. Such injunction
F-25
<PAGE> 87
CONDENSED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
could also extend to the Company's other potential products under development.
In addition, the court could assess significant damages and attorneys' fees
against the Company, which would have a material adverse effect on the Company's
business, operating results and financial condition and otherwise affect the
ability of the Company to continue as a viable enterprise. In addition, an
adverse determination in this proceeding could require the Company to seek
licenses from Integra, which may not be available on reasonable terms, if at
all. Regardless of the outcome, defending such claims could involve significant
costs and diversion of management resources, which could have a material adverse
effect on the Company's business, operating results or financial condition.
F-26
<PAGE> 88
===============================================================================
No dealer, sales representative or any other person is authorized in
connection with any offering made hereby to give any information or to make any
representation not contained herein, and if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or the Underwriters. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any security other than the securities offered
hereby, nor does it constitute an offer to sell or a solicitation of an offer to
buy any such securities to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create an
implication that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is correct as of any
date subsequent to the date hereof.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Special Note Regarding Forward-Looking
Statements.......................... 16
Use of Proceeds....................... 17
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 26
Management............................ 46
Security Ownership of Certain
Beneficial Owners, Management and
Selling Stockholders................ 49
Description of Capital Stock.......... 51
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Available Information................. 58
Incorporation of Certain Information
by Reference........................ 58
Index to Financial Statements......... F-1
</TABLE>
---------------------
===============================================================================
===============================================================================
4,500,000 SHARES
[LIFECELL CORPORATION LOGO]
COMMON STOCK
-----------------------------------
PROSPECTUS
-----------------------------------
Vector Securities International, Inc.
Gruntal & Co., L.L.C.
, 1997
===============================================================================
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering are:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 12,546
NASD Filing Fee............................................. 4,640
Nasdaq National Market Listing Fee.......................... 50,000
Legal Fees and Expenses..................................... 300,000
Accounting Fees and Expenses................................ 60,000
Blue Sky Fees and Expenses (including legal fees)........... 50,000
Printing Expenses........................................... 150,000
Transfer Agent and Registrar Fees........................... 1,000
Miscellaneous............................................... 71,814
--------
TOTAL............................................. $700,000
========
</TABLE>
None of these expenses will be paid by the Selling Stockholders pursuant to
the terms of the agreements under which the shares of Common Stock to be sold
hereby are being registered.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article X of the Company's By-laws provides for mandatory indemnification
to at least the extent specifically allowed by Section 145 of the General
Corporation Law of the State of Delaware (the "GCL").
Pursuant to Section 145 of the GCL, the Company generally has the power to
indemnify its current and former directors, officers, employees and agents
against expenses and liabilities incurred by them in connection with any suit to
which they are, or are threatened to be made, a party by reason of their serving
in such positions so long as they acted in good faith and in a manner in which
they reasonably believed to be, or not opposed to, the best interest of the
Company, and with respect to any criminal action, they had no reasonable cause
to believe their conduct was unlawful. With respect to suits by or in the right
of the Company, however, indemnification is generally limited to attorneys' fees
and other expenses and is not available if such person is adjudged to be liable
to the Registrant unless the court determines that indemnification is
appropriate. The statute expressly provides that the power to indemnify
authorized thereby is not exclusive of any rights granted under any bylaw,
agreement, vote of stockholders or disinterested directors, or otherwise. The
Company also has the power to purchase and maintain insurance for such persons.
The above discussion of the Company's By-laws and Section 145 of the GCL is
not intended to be exhaustive and is qualified in its entirety by such document
and statute.
Directors and Officers are insured at the Company's expense, against
certain liabilities which might arise out of their employment and which are not
subject to indemnification under the By-laws.
Reference is made to the form of the Underwriting Agreement, filed as
Exhibit 1.1 hereto, which contains provisions for indemnification of the
Company, its directors, officers and any controlling persons by the Underwriters
against certain liabilities for information furnished by the Underwriters.
II-1
<PAGE> 90
ITEM 15. EXHIBITS.
(a) Exhibits:
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
1.1+ -- Form of Underwriting Agreement.
3.1* -- Restated Certificate of Incorporation, as amended.
3.2 -- Amended and Restated By-laws (incorporated by reference
to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1996).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.2 to Amendment No. 2 to the
Company's Registration Statement on Form S-1,
Registration No. 33-44969, filed with the Commission on
February 10, 1992).
4.2 -- See Exhibits numbered 3.1 and 3.2 for provisions of the
Restated Certificate of Incorporation and Amended and
Restated By-laws of LifeCell defining the rights of the
holders of Common Stock.
5.1 -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- LifeCell Corporation Second Amended and Restated 1992
Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997, filed with the
Commission on August 12, 1997).
10.4 -- LifeCell Corporation Second Amended and Restated 1993
Non-Employee Director Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, filed with the Commission on
March 31, 1997).
10.5 -- Form of Confidentiality/Non-Compete Agreement
(incorporated by reference to Exhibit 10.28 to the
Company's Registration Statement on Form S-1,
Registration No. 33-44969, filed with the Commission on
January 9, 1992).
10.6 -- Exclusive License Agreement dated June 6, 1986, between
the Registrant and The Board of Regents of The University
of Texas System (incorporated by reference to Exhibit
10.29 to the Company's Registration Statement on Form
S-1, Registration No. 33-44969, filed with the Commission
on January 9, 1992).
10.7 -- Amended and Restated Registration Rights Agreement dated
February 26, 1992, by and between the Registration and
the stockholders named therein (incorporated by reference
to Exhibit 10.40 to Amendment No. 3 to the Company's
Registration Statement on Form S-1, Registration No.
33-44969, filed with the Commission on February 27,
1992).
10.8 -- Underwriter's Warrant Agreement dated March 6, 1992,
between the Registrant and Robert Todd Financial
Corporation, and First Amendment to Underwriter's Warrant
Agreement dated January 26, 1993, between the Registrant
and Robert Todd Financial Corporation (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992).
</TABLE>
II-2
<PAGE> 91
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.9 -- Lease Agreement dated December 10, 1986, between the
Registrant and The Woodlands Corporation, Modification
and Ratification of Lease Agreement dated April 11, 1988,
between the Registration and The Woodlands Corporation
Modification and Ratification of Lease dated August 1,
1992, between the Company and The Woodlands Corporation
and Modification, Extension and Ratification of Lease
dated March 5, 1993, between the Registrant and The
Woodlands Corporation, and Modification and Ratification
of Lease Agreement dated December 21, 1995, between the
Company and The Woodlands Office Equities -- '95 Limited
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1996).
10.10 -- Lease Agreement dated September 1, 1988, between the
Registrant and The Woodlands Corporation, and
Modification of Lease Agreement dated March 5, 1993,
between the Registrant and The Woodlands Corporation
(incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992).
10.11 -- Stock Purchase Warrant dated January 26, 1993, issued to
Strategem of Alabama, Inc. (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992).
10.12 -- License and Development Agreement dated March 3, 1994,
between the Registrant and Medtronic, Inc. (incorporated
by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated March 3, 1994).
10.13 -- Investment Agreement dated March 3, 1994, between the
Registrant and Medtronic, Inc. (incorporated by reference
to Exhibit 10.2 to Company's Current Report on Form 8-K
dated March 3, 1994).
10.14 -- Lease Agreement between LifeCell Corporation and Unichem,
dated August 1, 1994 (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1994).
10.15 -- Securities Purchase Agreement dated November 18, 1996,
between LifeCell Corporation and the Investors named
therein (incorporated by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996).
10.16 -- Voting Agreement dated November 18, 1996, among LifeCell
Corporation and certain stockholders named therein
(incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.17 -- Registration Rights Agreement dated November 18, 1996,
between LifeCell Corporation and certain stockholders
named therein (incorporated by reference to Exhibit 10.15
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.18 -- Form of Stock Purchase Warrant dated November 18, 1996,
issued to each of the warrant holders named on Schedule
10.19 attached thereto (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996).
10.19 -- Stock Purchase Warrant dated November 18, 1996, issued to
Gruntal & Co., Incorporated (incorporated by reference to
Exhibit 10.19 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996 on Form 10-K/A).
</TABLE>
II-3
<PAGE> 92
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.20* -- Agreement dated July 1, 1997, between LifeCell
Corporation and Paul M. Frison.
10.21* -- Agreement dated July 1, 1997, between LifeCell
Corporation and Stephen A. Livesey.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Fulbright & Jaworski L.L.P. (included in
Exhibit 5.1).
23.3 -- Consent of Arnold, White & Durkee.
24.1 -- Powers of Attorney from certain members of the Board of
Directors of the Company (contained on page II-5).
</TABLE>
- ---------------
* Previously filed.
+ To be filed by amendment.
As permitted by Item 601(b)(4) of Regulation S-K, the Company has not filed
with this Registration Statement certain instruments defining the rights of
holders of long-term debt of the Company, if any, because the total amount of
securities authorized under any of such instruments does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated basis. The
Company agrees to furnish a copy of any such agreements to the Securities and
Exchange Commission upon request.
ITEM 16. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as a part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, LifeCell
Corporation has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of The Woodlands, State of Texas, on November 17,
1997.
LifeCell Corporation
By: /s/ PAUL M. FRISON
----------------------------------
Paul M. Frison
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PAUL M. FRISON Chairman of the Board, November 17, 1997
- ----------------------------------------------------- President and Chief
Paul M. Frison Executive Officer
(Principal Executive
Officer)
/s/ J. DONALD PAYNE Vice President, Chief November 17, 1997
- ----------------------------------------------------- Financial Officer and
J. Donald Payne Secretary (Principal
Financial and Accounting
Officer)
* Director November 17, 1997
- -----------------------------------------------------
Michael E. Cahr
* Director November 17, 1997
- -----------------------------------------------------
James G. Foster
* Director November 17, 1997
- -----------------------------------------------------
Lori G. Koffman
* Director November 17, 1997
- -----------------------------------------------------
Stephen A. Livesey
Director , 1997
- -----------------------------------------------------
K. Flynn McDonald
* Director November 17, 1997
- -----------------------------------------------------
David A. Thompson
*By: /s/ J. DONALD PAYNE
------------------------------------------------
J. Donald Payne, Attorney-in-Fact
for each of the persons indicated
</TABLE>
II-5
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
1.1+ -- Form of Underwriting Agreement.
3.1* -- Restated Certificate of Incorporation, as amended.
3.2 -- Amended and Restated By-laws (incorporated by reference
to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1996).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.2 to Amendment No. 2 to the
Company's Registration Statement on Form S-1,
Registration No. 33-44969, filed with the Commission on
February 10, 1992).
4.2 -- See Exhibits numbered 3.1 and 3.2 for provisions of the
Restated Certificate of Incorporation and Amended and
Restated By-laws of LifeCell defining the rights of the
holders of Common Stock.
5.1 -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- LifeCell Corporation Second Amended and Restated 1992
Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997, filed with the
Commission on August 12, 1997).
10.4 -- LifeCell Corporation Second Amended and Restated 1993
Non-Employee Director Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, filed with the Commission on
March 31, 1997).
10.5 -- Form of Confidentiality/Non-Compete Agreement
(incorporated by reference to Exhibit 10.28 to the
Company's Registration Statement on Form S-1,
Registration No. 33-44969, filed with the Commission on
January 9, 1992).
10.6 -- Exclusive License Agreement dated June 6, 1986, between
the Registrant and The Board of Regents of The University
of Texas System (incorporated by reference to Exhibit
10.29 to the Company's Registration Statement on Form
S-1, Registration No. 33-44969, filed with the Commission
on January 9, 1992).
10.7 -- Amended and Restated Registration Rights Agreement dated
February 26, 1992, by and between the Registration and
the stockholders named therein (incorporated by reference
to Exhibit 10.40 to Amendment No. 3 to the Company's
Registration Statement on Form S-1, Registration No.
33-44969, filed with the Commission on February 27,
1992).
10.8 -- Underwriter's Warrant Agreement dated March 6, 1992,
between the Registrant and Robert Todd Financial
Corporation, and First Amendment to Underwriter's Warrant
Agreement dated January 26, 1993, between the Registrant
and Robert Todd Financial Corporation (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992).
10.9 -- Lease Agreement dated December 10, 1986, between the
Registrant and The Woodlands Corporation, Modification
and Ratification of Lease Agreement dated April 11, 1988,
between the Registration and The Woodlands Corporation
Modification and Ratification of Lease dated August 1,
1992, between the Company and The Woodlands Corporation
and Modification, Extension and Ratification of Lease
dated March 5, 1993, between the Registrant and The
Woodlands Corporation, and Modification and Ratification
of Lease Agreement dated December 21, 1995, between the
Company and The Woodlands Office Equities -- '95 Limited
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1996).
</TABLE>
<PAGE> 95
<TABLE>
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NO. DESCRIPTION
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<C> <S>
10.10 -- Lease Agreement dated September 1, 1988, between the
Registrant and The Woodlands Corporation, and
Modification of Lease Agreement dated March 5, 1993,
between the Registrant and The Woodlands Corporation
(incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992).
10.11 -- Stock Purchase Warrant dated January 26, 1993, issued to
Strategem of Alabama, Inc. (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992).
10.12 -- License and Development Agreement dated March 3, 1994,
between the Registrant and Medtronic, Inc. (incorporated
by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated March 3, 1994).
10.13 -- Investment Agreement dated March 3, 1994, between the
Registrant and Medtronic, Inc. (incorporated by reference
to Exhibit 10.2 to Company's Current Report on Form 8-K
dated March 3, 1994).
10.14 -- Lease Agreement between LifeCell Corporation and Unichem,
dated August 1, 1994 (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1994).
10.15 -- Securities Purchase Agreement dated November 18, 1996,
between LifeCell Corporation and the Investors named
therein (incorporated by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996).
10.16 -- Voting Agreement dated November 18, 1996, among LifeCell
Corporation and certain stockholders named therein
(incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.17 -- Registration Rights Agreement dated November 18, 1996,
between LifeCell Corporation and certain stockholders
named therein (incorporated by reference to Exhibit 10.15
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.18 -- Form of Stock Purchase Warrant dated November 18, 1996,
issued to each of the warrant holders named on Schedule
10.19 attached thereto (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996).
10.19 -- Stock Purchase Warrant dated November 18, 1996, issued to
Gruntal & Co., Incorporated (incorporated by reference to
Exhibit 10.19 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996 on Form 10-K/A).
10.20* -- Agreement dated July 1, 1997, between LifeCell
Corporation and Paul M. Frison.
10.21* -- Agreement dated July 1, 1997, between LifeCell
Corporation and Stephen A. Livesey.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Fulbright & Jaworski L.L.P. (included in
Exhibit 5.1).
23.3 -- Consent of Arnold, White & Durkee.
24.1 -- Powers of Attorney from certain members of the Board of
Directors of the Company (contained on page II-5).
</TABLE>
- ---------------
* Previously filed.
+ To be filed by amendment.
<PAGE> 1
EXHIBITS 5.1
[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]
November 17, 1997
LifeCell Corporation
3606 Research Forest Drive
The Woodlands, Texas 77381
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-2 (Registration
No. 333-37123), as amended (the "Registration Statement"), filed by LifeCell
Corporation, a Delaware corporation (the "Company"), with the Securities and
Exchange Commission under the Securities Act of 1933, relating to (i) the offer
by the Company of 4,000,000 shares of the Company's Common Stock, $.001 par
value per share (the "Common Stock"), and (ii) the offer by the selling
stockholders of the Company listed in the Registration Statement (the "Selling
Stockholders") of 500,000 shares of Common Stock and up to 675,000 shares of
Common Stock that may be sold by the Selling Stockholders in the event the
underwriters for the offering elect to exercise their over-allotment option.
As counsel to the Company, we have examined such corporate
records, documents and questions of law as we have deemed necessary or
appropriate for the purposes of this opinion. In such examinations, we have
assumed the genuineness of signatures and the conformity to the originals of
the documents supplied to us as copies. As to various questions of fact
material to this opinion, we have relied upon statements and certificates of
officers and representatives of the Company.
Upon the basis of such examination, we are of the opinion that:
(i) The 4,000,000 shares of Common Stock offered by the
Company, when sold in accordance with the terms agreed upon in the
Underwriting Agreement filed as Exhibit 1.1 to the Registration
Statement, will be legally issued, fully paid and nonassessable.
(ii) The 1,175,000 shares of Common Stock offered by the
Selling Stockholders have been legally issued and are fully paid
and nonassessable.
<PAGE> 2
LifeCell Corporation
November 17, 1997
Page 2
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus contained therein. This consent is not to be
construed as an admission that we are a person whose consent is required to be
filed with the Registration Statement under the provisions of the Securities
Act of 1933.
Very truly yours,
/s/ FULBRIGHT & JAWORSKI L.L.P.
Fulbright & Jaworski L.L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of and
incorporated by reference in this Registration Statement.
ARTHUR ANDERSEN LLP
Houston, Texas
November 17, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT
We hereby consent to the references to our Firm under the caption
"Experts" in this Amendment No. 2 to Registration Statement on Form S-2 of
LifeCell Corporation.
Arnold, White & Durkee
Houston, Texas
November 17, 1997
