UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2004
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission File Number 0-4136
Lifecore Biomedical, Inc.
| Minnesota | 41-0948334 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
| 3515 Lyman Boulevard Chaska, Minnesota |
55318 | |
| (Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: 952-368-4300
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No
The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of February
1, 2005 was 12,979,058 shares.
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
1
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
(Unaudited)
| December 31, | June 30, | |||||||
| 2004 | 2004 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 11,557,000 | $ | 8,553,000 | ||||
Accounts receivable, less allowances |
9,022,000 | 8,626,000 | ||||||
Inventories |
10,330,000 | 9,491,000 | ||||||
Prepaid expenses |
1,013,000 | 705,000 | ||||||
Total current assets |
31,922,000 | 27,375,000 | ||||||
Property, plant and equipment |
||||||||
Land, building and equipment |
46,190,000 | 45,398,000 | ||||||
Less accumulated depreciation |
(23,221,000 | ) | (22,200,000 | ) | ||||
| 22,969,000 | 23,198,000 | |||||||
Other Assets |
||||||||
Intangibles |
4,502,000 | 4,513,000 | ||||||
Security deposits |
7,000 | 837,000 | ||||||
Inventories |
3,035,000 | 3,891,000 | ||||||
Other |
601,000 | 504,000 | ||||||
| 8,145,000 | 9,745,000 | |||||||
| $ | 63,036,000 | $ | 60,318,000 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Current maturities of long-term obligations |
$ | 277,000 | $ | 177,000 | ||||
Accounts payable |
1,650,000 | 2,467,000 | ||||||
Accrued compensation |
1,441,000 | 1,362,000 | ||||||
Accrued expenses |
1,579,000 | 1,677,000 | ||||||
Total current liabilities |
4,947,000 | 5,683,000 | ||||||
Long-term obligations |
5,236,000 | 5,809,000 | ||||||
Shareholders’ equity |
52,853,000 | 48,826,000 | ||||||
| $ | 63,036,000 | $ | 60,318,000 | |||||
See accompanying notes to condensed consolidated financial statements.
2
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
(Unaudited)
| Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Net sales |
$ | 14,093,000 | $ | 11,558,000 | $ | 26,288,000 | $ | 21,505,000 | ||||||||
Cost of goods sold |
5,330,000 | 4,863,000 | 10,316,000 | 9,632,000 | ||||||||||||
Gross profit |
8,763,000 | 6,695,000 | 15,972,000 | 11,873,000 | ||||||||||||
Operating expenses |
||||||||||||||||
Research and development |
1,171,000 | 1,245,000 | 2,019,000 | 2,504,000 | ||||||||||||
Marketing and sales |
3,837,000 | 3,301,000 | 7,052,000 | 6,474,000 | ||||||||||||
General and administrative |
1,579,000 | 1,690,000 | 3,046,000 | 3,251,000 | ||||||||||||
| 6,587,000 | 6,236,000 | 12,117,000 | 12,229,000 | |||||||||||||
Operating income (loss) |
2,176,000 | 459,000 | 3,855,000 | (356,000 | ) | |||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
32,000 | 6,000 | 42,000 | 12,000 | ||||||||||||
Interest expense |
(55,000 | ) | (154,000 | ) | (168,000 | ) | (309,000 | ) | ||||||||
Bond retirement expense |
— | — | (290,000 | ) | — | |||||||||||
Currency transaction gains |
113,000 | 274,000 | 198,000 | 398,000 | ||||||||||||
Other |
250,000 | 12,000 | 252,000 | 9,000 | ||||||||||||
| 340,000 | 138,000 | 34,000 | 110,000 | |||||||||||||
Income (loss) before income taxes |
2,516,000 | 597,000 | 3,889,000 | (246,000 | ) | |||||||||||
Provision for income taxes |
136,000 | — | 230,000 | — | ||||||||||||
Net income (loss) |
$ | 2,380,000 | $ | 597,000 | $ | 3,659,000 | $ | (246,000 | ) | |||||||
Net income (loss) per share |
||||||||||||||||
Basic |
$ | 0.18 | $ | 0.05 | $ | 0.28 | $ | (0.02 | ) | |||||||
Diluted |
$ | 0.18 | $ | 0.05 | $ | 0.28 | $ | (0.02 | ) | |||||||
Weighted average shares outstanding |
||||||||||||||||
Basic |
12,945,903 | 12,891,083 | 12,939,254 | 12,890,098 | ||||||||||||
Diluted |
13,270,519 | 12,938,352 | 13,115,195 | 12,890,098 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
(Unaudited)
| Six months ended December 31, | ||||||||
| 2004 | 2003 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 3,659,000 | $ | (246,000 | ) | |||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
1,038,000 | 1,310,000 | ||||||
Allowance for doubtful accounts |
279,000 | (77,000 | ) | |||||
Stock compensation |
21,000 | — | ||||||
Accumulated currency translation adjustment |
243,000 | (108,000 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(676,000 | ) | 105,000 | |||||
Inventories |
17,000 | 33,000 | ||||||
Prepaid expenses |
(308,000 | ) | 218,000 | |||||
Accounts payable |
(817,000 | ) | (400,000 | ) | ||||
Accrued liabilities |
(19,000 | ) | 58,000 | |||||
Net cash provided by operating activities |
3,437,000 | 893,000 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
(792,000 | ) | (192,000 | ) | ||||
Refunds of (payments for) security deposits |
830,000 | (4,000 | ) | |||||
Other |
(102,000 | ) | 158,000 | |||||
Net cash used in investing activities |
(64,000 | ) | (38,000 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on long-term obligations |
(117,000 | ) | (79,000 | ) | ||||
Issuance of industrial revenue bonds |
5,630,000 | — | ||||||
Retirement of industrial revenue bonds |
(5,986,000 | ) | — | |||||
Proceeds from stock issuance |
104,000 | 24,000 | ||||||
Net cash used in financing activities |
(369,000 | ) | (55,000 | ) | ||||
Net increase in cash and cash equivalents |
3,004,000 | 800,000 | ||||||
Cash and cash equivalents at beginning of period |
8,553,000 | 4,211,000 | ||||||
Cash and cash equivalents at end of period |
$ | 11,557,000 | $ | 5,011,000 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 210,000 | $ | 362,000 | ||||
Taxes |
262,000 | 38,000 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
December 31, 2004
NOTE A – FINANCIAL INFORMATION
Lifecore Biomedical, Inc. (referred to in this report as “Lifecore” or the “Company”) manufactures biomaterials and surgical devices for use in various surgical markets and provides specialized contract aseptic manufacturing services through its two divisions, the Hyaluronan Division and the Oral Restorative Division. The Company’s manufacturing facility is located in Chaska, Minnesota. The Hyaluronan Division markets its products through original equipment manufacturers and contract manufacturing alliances in ophthalmologic, orthopedic surgery, veterinary medicine and gynecologic fields. The Oral Restorative Division markets its products through direct sales in the United States, Italy, Germany and Sweden and through distributors in other foreign countries.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.
In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of December 31, 2004, the results of operations for the three month and six month periods ended December 31, 2004 and 2003; and cash flows for the six month periods ended December 31, 2004 and 2003. The results of operations for the six months ended December 31, 2004 are not necessarily indicative of the results for the full year or of the results for any future periods. The unaudited condensed consolidated balance sheet as of June 30, 2004 has been derived from audited financial statements as of that date.
In preparation of the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses during the reporting periods. Actual results could differ from the estimates used by management.
NOTE B – INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or market. The portion of finished hyaluronan powder inventory not expected to be consumed within the next twelve months is classified as a long-term asset. Finished good inventories include hyaluronan, packaged aseptic, and oral restorative products. Inventories consist of the following:
| December 31, | June 30, | |||||||
| 2004 | 2004 | |||||||
Raw materials |
$ | 3,219,000 | $ | 2,756,000 | ||||
Work in progress |
314,000 | 416,000 | ||||||
Finished goods |
9,832,000 | 10,210,000 | ||||||
| $ | 13,365,000 | $ | 13,382,000 | |||||
5
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004
NOTE C – INTANGIBLE ASSETS
The Company does not amortize goodwill. The Company’s patents are amortized over their useful lives. On an ongoing basis the Company reviews the valuation of intangibles to determine possible impairment by comparing the carrying value to projected undiscounted future cash flows of the related assets. As a result of such review, there was no impairment recorded for the six month period ended December 31, 2004.
Intangibles consisted of the following at:
| December 31, | June 30, | |||||||
| 2004 | 2004 | |||||||
Goodwill |
$ | 4,352,000 | $ | 4,352,000 | ||||
Patents |
387,000 | 387,000 | ||||||
Accumulated amortization |
(237,000 | ) | (226,000 | ) | ||||
| $ | 4,502,000 | $ | 4,513,000 | |||||
NOTE D – LINE OF CREDIT
On November 17, 2004, the Company renewed its $5,000,000 bank credit facility to extend the maturity date to December 31, 2006. The agreement allows for advances against eligible accounts receivable, subject to a borrowing base certificate. Under the renewed credit facility, interest will accrue at the prime rate (5.25% at December 31, 2004) minus .5% or LIBOR (2.42% at December 31, 2004) plus 2.25% at the Company’s option. At December 31, 2004 and June 30, 2004, there were no balances outstanding under the line of credit. The terms of the agreement require the Company to comply with various financial covenants, including minimum tangible net worth, liabilities to tangible net worth ratio and profitability. At December 31, 2004 and June 30, 2004, the Company was in compliance with all covenants.
6
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004
NOTE E – STOCK PLAN INFORMATION
The Company has various stock option plans that provide for the granting of stock options to officers, employees and directors. The Company accounts for stock-based compensation using the intrinsic value method whereby the options are granted at market price, and therefore no compensation costs are recognized. If compensation expense for the Company’s various stock option plans had been determined based upon the projected fair values at the grant dates for awards under those plans, the Company’s pro-forma net income (loss), and basic and diluted net income (loss) per common share would have been as follows:
| Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Net income (loss), as reported |
$ | 2,380,000 | $ | 597,000 | $ | 3,659,000 | $ | (246,000 | ) | |||||||
Deduct: Total stock-based employee compensation expense
determined under fair value method for awards, net of
related tax effects (no tax effect in 2004 and 2003) |
(198,000 | ) | (3,000 | ) | (398,000 | ) | (93,000 | ) | ||||||||
Pro forma net income (loss) |
$ | 2,182,000 | $ | 594,000 | $ | 3,261,000 | $ | (339,000 | ) | |||||||
Net income (loss) per common equivalent share: |
||||||||||||||||
Basic — as reported |
$ | 0.18 | $ | 0.05 | $ | 0.28 | $ | (0.02 | ) | |||||||
Diluted — as reported |
$ | 0.18 | $ | 0.05 | $ | 0.28 | $ | (0.02 | ) | |||||||
Basic — pro-forma |
$ | 0.17 | $ | 0.05 | $ | 0.25 | $ | (0.03 | ) | |||||||
Diluted — pro-forma |
$ | 0.16 | $ | 0.05 | $ | 0.25 | $ | (0.03 | ) | |||||||
NOTE F – NET INCOME (LOSS) PER SHARE
The Company’s basic net income (loss) per share amounts have been computed by dividing net income (loss) by the weighted average number of outstanding common shares. The Company’s diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options and restricted stock, when dilutive. For the three and six month periods ended December 31, 2004, 324,616 shares and 175,941 shares of common stock equivalents, respectively, were included in the computation of diluted net income per share. For the three month period ended December 31, 2003, 47,269 shares of common stock equivalents were included in the computation of diluted net income per share. For the six month period ended December 31, 2003, 38,720 common share equivalents would have been included in the computation of diluted net income per share had net income been achieved.
Options to purchase 626,668 and 1,018,918 shares of common stock with a weighted average exercise price of $14.75 and $12.41 for the three-month and six-month periods ended December 31, 2004, respectively, and options to purchase 2,435,416 and 2,437,791 shares of common stock with a weighted average exercise price of $12.29 and $12.29 for the three-month and six-month periods ended December 31, 2003, respectively, were outstanding but were not included in the calculation of diluted net loss per share because the options’ exercise prices were greater than the average market price of the Company’s common stock during those periods. Although these options were antidilutive for the periods presented, they may be dilutive in future period calculations.
7
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004
NOTE G – SEGMENT INFORMATION
The Company operates in two business segments. The Hyaluronan Division manufactures, markets and sells products containing hyaluronan and provides contract aseptic packaging services. The Oral Restorative Division produces and markets various oral restorative products to the area of implant dentistry. Currently, products containing hyaluronan are sold primarily to customers pursuant to ongoing supply agreements. The Company’s Oral Restorative Division markets products directly to clinicians and dental laboratories in the United States, Germany, Italy and Sweden and primarily through distributorship arrangements in other foreign locations.
Segment assets and the basis of segmentation are consistent with that reported at June 30, 2004. Segment information for sales and income (loss) from operations are as follows:
| Three months ended December 31, | Six months ended December 31, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Net sales |
||||||||||||||||
Hyaluronan products |
$ | 4,510,000 | $ | 3,545,000 | $ | 9,147,000 | $ | 7,103,000 | ||||||||
Oral restorative products |
9,583,000 | 8,013,000 | 17,141,000 | 14,402,000 | ||||||||||||
| $ | 14,093,000 | $ | 11,558,000 | $ | 26,288,000 | $ | 21,505,000 | |||||||||
Income (loss) from operations |
||||||||||||||||
Hyaluronan products |
$ | 853,000 | $ | (62,000 | ) | $ | 2,172,000 | $ | (636,000 | ) | ||||||
Oral restorative products |
1,323,000 | 521,000 | 1,683,000 | 280,000 | ||||||||||||
| $ | 2,176,000 | $ | 459,000 | $ | 3,855,000 | $ | (356,000 | ) | ||||||||
NOTE H – NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151, Inventory Costs (“SFAS 151”). The provisions of this statement become effective for the Company in fiscal 2006. SFAS 151 amends the existing guidance on the recognition of inventory costs to clarify the accounting for abnormal amounts of idle expense, freight, handling costs, and wasted material (spoilage). Existing rules indicate that under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. SFAS 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal”. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company’s existing policies with regard to inventory accounting are consistent with the provisions of SFAS 151 and the adoption of SFAS 151 is not expected to have a material impact on the valuation of inventory or operating results.
In December 2004, the FASB issued SFAS 123R, Share-Based Payment, (“SFAS 123R”). This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS 123R will be effective for all interim or annual periods beginning after June 15, 2005. The Company will adopt this standard July 1, 2005. Management believes it will have a significant impact due to the Company’s use of options as employee incentives but has not yet determined the impact on earnings.
8
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004
NOTE I – AGREEMENTS
On September 20, 2004, the Company secured worldwide marketing rights to its ferric hyaluronan adhesion prevention product from Ethicon, Inc. Lifecore’s product, which was previously marketed by Gynecare, a division of Ethicon, Inc. (“Gynecare”), under the trademark GYNECARE INTERGEL Adhesion Prevention Solution, was voluntarily withdrawn from the market by Gynecare on March 27, 2003 to assess information obtained from its usage in the treatment of patients. Under the agreement, Gynecare will have no responsibility for any aspect of the future manufacture, marketing, sale or distribution of the product nor will it derive any financial benefit therefrom. A payment of $250,000, included in other income, was received during the second quarter from Ethicon, Inc. in conjunction with the above mentioned agreement.
NOTE J – LEGAL PROCEEDINGS
Lifecore is a party in 54 pending lawsuits filed by 50 different plaintiffs, all of which allege that the plaintiffs suffered injuries due to the defective nature of INTERGEL Solution manufactured by Lifecore and marketed by ETHICON. ETHICON is currently defending Lifecore in each of these lawsuits. Lifecore also has product liability insurance that it believes will cover these claims.
9
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions in certain circumstances that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s financial statements. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by customers and other outside sources and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition:
The Company recognizes revenue when the product is shipped, or otherwise accepted by unaffiliated customers, pursuant to customers orders, the price is fixed and collection is reasonably assured. The Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition” provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.
Allowance for Uncollectible Accounts Receivable:
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company extends credit to customers in the normal course of business but generally does not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of the Company’s customers and bases the estimated allowance on these evaluations.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or market and have been reduced to the lower of cost or market for obsolete, excess or unmarketable inventory. The lower of cost or market adjustment is based on management’s review of inventories on hand compared to estimated future usage and sales.
Goodwill, Intangibles and Other Long-Lived Assets:
Intangibles and certain other long-lived assets with a definite life are amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue.
The Company reviews goodwill for impairment on a regular basis, at least annually.
Management has reviewed goodwill and other intangibles for impairment and has concluded that such assets are appropriately valued at the financial statement dates.
10
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Overview
The Company manufactures biomaterials and medical devices for use in various surgical markets and provides related specialized contract aseptic manufacturing services. The Company operates through two business divisions, the Hyaluronan Division and the Oral Restorative Division.
The Company’s performance continues to be positively affected by revenue growth in both the Oral Restorative Division and the Hyaluronan Division. Continued unused manufacturing capacity charges resulting from reduced hyaluronan production levels have negatively impacted the Hyaluronan Division operating results. Offsetting this impact, the financial leverage gained by the reduction of regulatory consulting expenses and the workforce reduction in fiscal 2004 has had a positive impact on operating results. The above factors are applicable to the three month and six month periods ended December 31, 2004.
Results of Operations
Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003:
| Hyaluronan | Oral Restorative | |||||||||||||||||||||||
| Division | Division | Consolidated | ||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Net sales |
$ | 4,510,000 | $ | 3,545,000 | $ | 9,583,000 | $ | 8,013,000 | $ | 14,093,000 | $ | 11,558,000 | ||||||||||||
Cost of goods sold |
2,091,000 | 1,903,000 | 3,239,000 | 2,960,000 | 5,330,000 | 4,863,000 | ||||||||||||||||||
Gross profit |
2,419,000 | 1,642,000 | 6,344,000 | 5,053,000 | 8,763,000 | 6,695,000 | ||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Research and development |
895,000 | 975,000 | 276,000 | 270,000 | 1,171,000 | 1,245,000 | ||||||||||||||||||
Marketing and sales |
150,000 | 136,000 | 3,687,000 | 3,165,000 | 3,837,000 | 3,301,000 | ||||||||||||||||||
General and administrative |
521,000 | 593,000 | 1,058,000 | 1,097,000 | 1,579,000 | 1,690,000 | ||||||||||||||||||
| 1,566,000 | 1,704,000 | 5,021,000 | 4,532,000 | 6,587,000 | 6,236,000 | |||||||||||||||||||
Operating income (loss) |
$ | 853,000 | $ | (62,000 | ) | $ | 1,323,000 | $ | 521,000 | $ | 2,176,000 | $ | 459,000 | |||||||||||
Net sales for the quarter ended December 31, 2004 increased $2,535,000 or 22% as compared to the same quarter of last fiscal year. Hyaluronan product sales for the current quarter increased $965,000 or 27% as compared to the same quarter of last fiscal year due to increased ophthalmic and orthopedic sales. Oral restorative product sales for the current quarter increased $1,570,000 or 20% compared to the same quarter of last fiscal year. Domestic sales increased 22% and international sales increased 18% as compared to the same quarter of last fiscal year. Favorable foreign currency comparisons increased international sales by $172,000 over the same quarter of last fiscal year.
Consolidated gross margin increased to 62% for the current quarter from 58% for the same quarter of last fiscal year. The gross margin for the Hyaluronan Division increased to 54%, from a gross margin of 46%, due to a favorable product mix and decreased unused manufacturing capacity charges associated with increased production. The gross margin for the Oral Restorative Division was 66% for the current quarter compared to 63% for the same quarter of last fiscal year.
11
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Research and development expenses decreased $74,000 or 6% in the current quarter as compared to the same quarter of last fiscal year. The decrease is due to the decline in regulatory consulting and professional fees associated with the market withdrawal of INTERGEL Solution in March 2003.
Marketing and sales expenses increased $536,000 or 16% in the current quarter as compared to the same quarter of last fiscal year due to increased costs associated with expansion of the Oral Restorative Division’s domestic sales force and international operations.
General and administrative expenses decreased $111,000 or 7% for the current quarter as compared to the same quarter of last fiscal year. The decrease resulted from the workforce reduction in the third quarter of fiscal 2004 and lower legal expenses.
Other income, as shown on the Condensed Consolidated Statements of Operations, increased $202,000 for the current quarter as compared to the same quarter of last fiscal year. The increase is due to the receipt of $250,000 in conjunction with the Company securing the worldwide marketing rights to its anti-adhesion product. Also, net interest expense decreased $125,000 from the second quarter of a year ago. This was due to the refinancing of the Company’s industrial revenue bonds in the first quarter which reduced the Company’s interest rate by over 6.5% and interest income has increased due to increased cash balances and higher interest rates. Offsetting the impact of the above, currency transaction gains decreased $161,000 from the same period a year ago.
Six Months Ended December 31, 2004 Compared to Six Months Ended December 31, 2003:
| Hyaluronan | Oral Restorative | |||||||||||||||||||||||
| Division | Division | Consolidated | ||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Net sales |
$ | 9,147,000 | $ | 7,103,000 | $ | 17,141,000 | $ | 14,402,000 | $ | 26,288,000 | $ | 21,505,000 | ||||||||||||
Cost of goods sold |
4,177,000 | 4,272,000 | 6,139,000 | 5,360,000 | 10,316,000 | 9,632,000 | ||||||||||||||||||
Gross profit |
4,970,000 | 2,831,000 | 11,002,000 | 9,042,000 | 15,972,000 | 11,873,000 | ||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Research and development |
1,499,000 | 1,994,000 | 520,000 | 510,000 | 2,019,000 | 2,504,000 | ||||||||||||||||||
Marketing and sales |
242,000 | 263,000 | 6,810,000 | 6,211,000 | 7,052,000 | 6,474,000 | ||||||||||||||||||
General and administrative |
1,057,000 | 1,210,000 | 1,989,000 | 2,041,000 | 3,046,000 | 3,251,000 | ||||||||||||||||||
| 2,798,000 | 3,467,000 | 9,319,000 | 8,762,000 | 12,117,000 | 12,229,000 | |||||||||||||||||||
Operating income (loss) |
$ | 2,172,000 | $ | (636,000 | ) | $ | 1,683,000 | $ | 280,000 | $ | 3,855,000 | $ | (356,000 | ) | ||||||||||
Net sales for the six months ended December 31, 2004 increased $4,783,000 or 22% as compared to the same period of last fiscal year. Hyaluronan product sales for the current period increased $2,044,000 or 29% as compared to the same period of last fiscal year due to increased ophthalmic and orthopedic sales. Oral restorative product sales for the current period increased $2,739,000 or 19% compared to the same period of last fiscal year. Domestic sales increased 23% and international sales increased 15% as compared to the same period of last fiscal year. Favorable foreign currency comparisons increased international sales by $304,000 over the same period of last fiscal year.
12
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Consolidated gross margin increased to 61% for the current period from 55% for the same period of last fiscal year. The gross margin for the Hyaluronan Division increased to 54% for the current period from a gross margin of 40% for the same period of last fiscal year due to a favorable product mix and decreased unused manufacturing capacity charges associated with increased production. The gross margin for the Oral Restorative Division increased to 64% for the current period from 63% for the same quarter of last fiscal year. The gross margin increase is due to operating leverage afforded by the higher sales volume.
Research and development expenses decreased $485,000 or 19% in the current period as compared to the same period of last fiscal year. The decrease is primarily due to reduced consulting and professional fees associated with the market withdrawal of INTERGEL Solution.
Marketing and sales expenses increased $578,000 or 9% in the current period as compared to the same period of last fiscal year due to increased costs associated with expansion of oral restorative’s domestic sales force and international operations.
General and administrative expenses decreased $205,000 or 6% for the current period as compared to the same period of last fiscal year. The decrease resulted from the workforce reduction in the third quarter of fiscal 2004 and lower legal expenses.
Other income, as shown on the Condensed Consolidated Statements of Operations, decreased $76,000 for the current period as compared to the same period of last fiscal year. The decrease is due to a reduction in currency transaction gains of $200,000 from the same period a year ago and bond retirement expense of $290,000 recorded in the first quarter of the current fiscal year resulting from the refinancing of industrial revenue bonds. Offsetting the impact of these other expenses was a one-time pretax gain of $250,000 in conjunction with the Company securing the worldwide marketing rights to its anti-adhesion product. Also, net interest expense decreased $171,000 from the same period a year ago. This is due to the refinancing of the Company’s industrial revenue bonds in the first quarter which reduced the Company’s interest rate by over 6.5% and interest income has increased due to increased cash balances and higher interest rates.
Liquidity and Capital Resources
The Company’s Annual Report on Form 10-K for the year ended June 30, 2004 contains a detailed discussion of Lifecore’s liquidity and capital resources. Investors should read the 2004 Form 10-K in conjunction with this Quarterly Report on Form 10-Q.
For the six month period ended December 31, 2004, the Company had positive cash flow of $3,004,000. The Company has had positive cash flow in fiscal years 2004, 2003 and 2002. Charges for unused manufacturing capacity associated with the Company’s hyaluronan production have negatively impacted operating results in the current fiscal year. Also, marketing and sales expenses for the oral restorative products are expected to continue at a high level due to continued international expansion and increased personnel costs.
On November 17, 2004, the Company renewed its $5,000,000 bank credit facility to extend the maturity date to December 31, 2006. The agreement allows for advances against eligible accounts receivable, subject to a borrowing base certificate. Under the renewed credit facility, interest will accrue at the prime rate (5.25% at December 31, 2004) minus .5% or LIBOR (2.42% at December 31, 2004) plus 2.25% at the Company’s option. At December 31, 2004 and June 30, 2004, there were no balances outstanding under the line of credit. The terms of the agreement require the Company to comply with various financial covenants, including minimum tangible net worth, liabilities to tangible net worth ratio and profitability. At December 31, 2004 and June 30, 2004, the Company was in compliance with all covenants.
13
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
On August 19, 2004, the Company issued variable rate industrial revenue bonds. The proceeds from these bonds were used to retire the existing 10.25% fixed rate industrial revenue bonds on September 1, 2004. The aggregate principal amount of the new bonds is $5,630,000, and the bonds will bear interest at a variable rate set weekly by the bond remarketing agent (1.99% as of December 31, 2004). In addition, the Company will pay an annual remarketing fee equal to .125% and an annual letter of credit fee of 1.0%. The bonds are collateralized by a bank letter of credit which is secured by a first mortgage on the facility. The Company is required to make monthly principal and interest payments to a sinking fund. The terms of the agreement require the Company to comply with various financial covenants including minimum tangible net worth, liabilities to tangible net worth ratio and net income (loss). As of December 31, 2004, the Company was in compliance with all covenants.
The Company’s ability to generate positive cash flow from operations and achieve ongoing profitability is dependent upon the continued expansion of revenue from its hyaluronan and oral restorative businesses. Growth in the Hyaluronan Division is unpredictable due to the complex governmental regulatory environment for new medical products, the early stage of certain of these markets and the uncertainty associated with the future market status of the Company’s adhesion prevention product. Similarly, expansion of the Company’s Oral Restorative Division sales is also dependent upon increased revenue from new and existing customers, as well as successfully competing in a more mature market. The Company expects its cash generated from anticipated operations and the available funds under the line of credit to satisfy cash flow needs in the near term. No assurance can be given that the Company will maintain positive cash flow from operations. While the Company’s capital resources appear adequate today, the Company may seek additional financing in the future. If additional financing is necessary, no assurance can be given that such financing will be available and, if available, will be on terms favorable to the Company and its shareholders.
The Company does not have any material “off-balance sheet” financing activities.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151, Inventory Costs (“SFAS 151”). The provisions of this statement become effective for the Company in fiscal 2006. SFAS 151 amends the existing guidance on the recognition of inventory costs to clarify the accounting for abnormal amounts of idle expense, freight, handling costs, and wasted material (spoilage). Existing rules indicate that under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. SFAS 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal”. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company’s existing policies with regard to inventory accounting are consistent with the provisions of SFAS 151 and the adoption of SFAS 151 is not expected to have a material impact on the valuation of inventory or operating results.
In December 2004, the FASB issued SFAS 123R, Share-Based Payment, (“SFAS 123R”). This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS 123R will be effective for all interim or annual periods beginning after June 15, 2005. The Company will adopt this standard July 1, 2005. Management believes it will have a significant impact due to the Company’s use of options as employee incentives but has not yet determined the impact on earnings.
14
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Cautionary Statement
Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-Q, in future filings by the Company with the Securities and Exchange Commission and in the Company’s press releases and oral statements made with the approval of authorized executive officers, that are not historical or current facts, should be considered “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may, among other things, relate to market acceptance and demand for the Company’s products, future product development plans and timing, the results of clinical trials, FDA clearances and the related timing of such, the potential size of the markets for the Company’s products, future product introductions, future revenues, expense levels and capital needs and the Company’s ability to successfully negotiate acceptable agreements with its corporate partners. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected or in the future could affect the Company’s actual results and could cause its actual financial performance to differ materially from that expressed in any forward-looking statement: (i) obtaining the necessary regulatory approvals for new hyaluronan and oral restorative products; (ii) the Company’s reliance on corporate partners to develop new products on a timely basis and to market the Company’s existing and new hyaluronan products effectively; (iii) intense competition in the markets for the Company’s principal products; and (iv) the uncertainty associated with the future market status of the Company’s adhesion prevention product. Investors are referred to a more detailed discussion of the risks presented in Exhibit 99.1 to the Company’s Annual Report on Form 10-K.
15
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds and highly rated short-term corporate debt securities. All investments are held to maturity. The market risk on such investments is minimal.
Receivables from sales to foreign customers are denominated in U.S. dollars. Transactions at the Company’s foreign subsidiaries are denominated in European Euros at Lifecore Biomedical SpA and Lifecore Biomedical GmbH and are denominated in Swedish Krona at Lifecore Biomedical AB. The Company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business from sales to its foreign subsidiaries. Because the Company’s products are manufactured or sourced primarily from the United States, a stronger U.S. dollar generally has a negative impact on results from operations outside the United States while a weaker dollar generally has a positive effect. The Company does not use derivative financial instruments to manage foreign currency fluctuation risk.
On August 19, 2004, the Company issued variable rate industrial revenue bonds. The proceeds from these bonds were used to retire the existing 10.25% fixed rate industrial revenue bonds on September 1, 2004. The aggregate principal amount of the new bonds is $5,630,000, and the bonds will bear interest at a variable rate set weekly by the bond remarketing agent (1.99% as of December 31, 2004). A ten percent change in this variable rate would result in approximately $10,000 of additional interest expense annually.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a – 15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were adequately designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms.
(b) Changes in internal control over financial reporting.
During the fiscal period covered by this report, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a – 15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
16
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Lifecore has been named as a defendant in 54 product liability lawsuits filed by 50 different plaintiffs (four plaintiffs have filed more than one case) alleging that the plaintiffs suffered injuries due to the defective nature of INTERGEL Solution manufactured by Lifecore and marketed by ETHICON. Lifecore has been served in the following cases as of February 1, 2005:
| 1. | Linda Authement and Michael Ray Lavergne v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/20/04 | |||
| 2. | Susan Bethers v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/3/04 | |||
| 3. | Barbara Black v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/16/04 | |||
| 4. | Renee Contratto v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Northern District of California); served 9/15/03 | |||
| 5. | Renee Contratto v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Superior Court of the State of California, County of Alameda); served 2/4/04 | |||
| 6. | Nancy Susan Drinkwitz v. Lifecore Biomedical, Inc., Johnson & Johnson, Ethicon, Inc. and Gynecare Worldwide (Carver County District Court, State of Minnesota); served 8/20/04 | |||
| 7. | April Ferrell and Michael Ferrell, Jr. v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc., (Florida); served 8/20/04 | |||
| 8. | Michelle Frosh Bernard v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/20/04 | |||
| 9. | Pamela Gregory and Darrell Gregory v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/20/04 | |||
| 10. | Misty Langfitt v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/3/04 | |||
| 11. | Kristin Manning v. Johnson & Johnson, Ethicon, Inc., d/b/a Gynecare Worldwide and Lifecore Biomedical, Inc. (D. Kansas); served 1/29/04 | |||
| 12. | Elizabeth M. Manning v. Lifecore Biomedical, Inc., Johnson & Johnson, Ethicon, Inc. and Gynecare Worldwide (Carver County District Court, State of Minnesota) — this case was settled in June 2004 | |||
| 13. | Marie McCabe and Scott McCabe v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 10/29/04 | |||
| 14. | Antoinette McNeil v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/3/04 | |||
17
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (continued)
| 15. | Lauria Nuccio and Dominic Nuccio Sr. v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/3/04 | |||
| 16. | Tammy Philibert and Rudolph Philibert v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida, transferred to Louisiana); served 11/3/04 | |||
| 17. | Melissa Powers v. Gynecare Through Ethicon, Inc., Johnson & Johnson, Lifecore Biomedical, Inc. and George B. Morris, IV, M.D. (Civil District Court for the Parish of Orleans, State of Louisiana); served 6/3/04 | |||
| 18. | Rebecca J. Rezendes v. Lifecore Biomedical, Inc., Johnson &Johnson, Ethicon, Inc. and Gynecare Worldwide; served 6/4/04 | |||
| 19. | Natalie M. Sanders v. Johnson & Johnson, Inc., Gynecare Worldwide, Ethicon, Inc., and Lifecore Biomedical, Inc. (District of New Jersey); served 5/21/04 | |||
| 20. | Monika Shumbo-Poissant v. Lifecore Biomedical, Inc., et al. (Superior Court of Connecticut); served 7/19/04 | |||
| 21. | Siobhan Sprecace and David Sprecace v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/20/04 | |||
| 22. | Heather Strauch v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/3/04 | |||
| 23. | Charmaine Wickwire and Michael Steven Wickwire, Sr. v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/3/04 | |||
| 24. | Marisol Suarez Saiz v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/8/04 | |||
| 25. | Dianna Shirley v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/8/04 | |||
| 26. | Stephanie Succar v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/8/04 | |||
| 27. | Joanne Thorpe v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/8/04 | |||
| 28. | Stephanie and Michael Stibor and Wisconsin Physicians Service Insurance Corporation v. Ethicon, Inc., Lifecore Biomedical, Inc. and Krista Jacobson (Wisconsin State Court); served | |||
| 29. | Pamela Jo Bechtel and Michael R. Bechtel v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/16/04 | |||
18
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (continued)
| 30. | Ashley Carlson v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served recently | |||
| 31. | Victoria Lynn Evans-Sands and Wesley A. Sands, Sr. v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/12/04 | |||
| 32. | Teresa Hogan v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/19/04 | |||
| 33. | Kimberley Jackson and Rufus A. Jackson v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/21/04 | |||
| 34. | Shannon Killebrew v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/21/04 | |||
| 35. | Elaine Lavergne and Michael Ray Lavergne v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/18/04 | |||
| 36. | Dionesia Lewis and Daniel Lewis v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/18/04 | |||
| 37. | Karene Sue Marchon and Carlos Marchon v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/21/04 | |||
| 38. | Janet Meador and Dan Meader v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/27/04 | |||
| 39. | Louise O’Connor and Joseph O’Connor v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/21/04 | |||
| 40. | Linda Odem v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/18/04 | |||
| 41. | Bonnie Ray O’Neal and Maurice Miller v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/21/04 | |||
| 42. | Tanya Rengifo and Henry Rengifo v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/21/04 | |||
| 43. | Lisa Surbey and Glen C. Surbey v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 12/7/04 | |||
| 44. | Chonn Whiting v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/19/04 | |||
| 45. | Cathy Whitmore v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served recently | |||
| 46. | Wendy Wilkerson v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 11/19/04 | |||
19
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (continued)
ETHICON is defending Lifecore in the above-listed lawsuits.
Lifecore has also received claim letters alleging claims similar to the complaints listed above as follows:
| 1. | Heather Dunne, letter dated October 9, 2003 | |||
| 2. | Margery LeRoux, letter dated September 9, 2003 | |||
| 3. | Kenna Schaller, letter dated July 10, 2003 | |||
| 4. | Julia Smith, letter dated May 10, 2004 | |||
| 5. | Mrs. Piccinini Chiara, letter dated January 5, 2005 | |||
ETHICON is responding to the above-listed claim letters on behalf of Lifecore. In addition to the above-listed claim letters, Lifecore has received a claim letter on behalf of Melody Whitfield, dated October 2, 2003, relating to injuries unrelated to INTERGEL Solution suffered in a second-look surgery as part of a clinical trial. Whitfield is seeking $195,000 in damages. Lifecore has not received any response to its letter dated February 19, 2004 disputing her claim. Lifecore is responsible for the outcome of this claim.
20
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 11, 2004, the Company held its Annual Meeting of Shareholders. At the meeting, the shareholders elected director Richard W. Perkins (with 11,997,116 affirmative votes and 355,629 votes withheld).
The shareholders also ratified and approved the appointment of Grant Thornton LLP as registered independent certified public accountants of the Company for the current fiscal year ending June 30, 2005 (with 12,194,129 affirmative votes, 114,016 negative votes, 44,600 votes abstained and no broker non-votes).
ITEM 6. EXHIBITS
| 3.1 | Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated July 13, 1988, to Form 10-Q for the quarter ended December 31, 1987), as amended by Amendment No. 2 (incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended June 30, 1997) | |||
| 3.2 | Amended Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K/A for the year ended June 30, 1995) | |||
| 3.3 | Form of Rights Agreement, dated as of May 23, 1996, between the Company and Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit 1 to the Company’s Form 8-A Registration Statement dated May 31, 1996) | |||
| 4.1 | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration Statement [File No. 33-12970]) | |||
| 10.1 | Amendment No. 2 dated November 17, 2004 to the Revolving Credit and Security Agreement between the Company and M&I Marshall & Ilsley Bank | |||
| 10.2* | Supply Agreement, dated December 22, 2004, between the Company and Alcon Pharmaceuticals Ltd., a subsidiary of Alcon, Inc. | |||
| 10.3 | Noncompetition and Nonsolicitation Agreement, dated January 7, 2005, between the Company and Kipling Thacker, Ph.D. | |||
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
* — Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of these exhibits have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LIFECORE BIOMEDICAL, INC. | ||||
| By: | ||||
Dated: February 9, 2005
|
/s/ Dennis J. Allingham | |||
| Dennis J. Allingham | ||||
| President, Chief Executive Officer, Secretary and Director (duly authorized officer) | ||||
Dated: February 9, 2005
|
/s/ David M. Noel | |||
| David M. Noel | ||||
| Vice President of Finance and Chief Financial Officer | ||||
| (principal financial and accounting officer) |
22
Exhibit Index
| 3.1 | Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated July 13, 1988, to Form 10-Q for the quarter ended December 31, 1987), as amended by Amendment No. 2 (incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended June 30, 1997) | |||
| 3.2 | Amended Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K/A for the year ended June 30, 1995) | |||
| 3.3 | Form of Rights Agreement, dated as of May 23, 1996, between the Company and Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit 1 to the Company’s Form 8-A Registration Statement dated May 31, 1996) | |||
| 4.1 | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration Statement [File No. 33-12970]) | |||
| 10.1 | Amendment No. 2 dated November 17, 2004 to the Revolving Credit and Security Agreement between the Company and M&I Marshall & Ilsley Bank | |||
| 10.2 | * | Supply Agreement, dated December 22, 2004, between the Company and Alcon Pharmaceuticals Ltd., a subsidiary of Alcon, Inc. | ||
| 10.3 | Noncompetition and Nonsolicitation Agreement, dated January 7, 2005, between the Company and Kipling Thacker, Ph.D. | |||
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| * - Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of these exhibits have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. |
23