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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NUMBER: 0-19890
LIFECELL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0172936
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) identification no.)
ONE MILLENNIUM WAY
BRANCHBURG, NEW JERSEY 08876
(Address of principal executive offices, including zip code)
(908) 947-1100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No __
The aggregate market value of the voting stock (Common Stock and Series B
Preferred Stock, assuming conversion of such Preferred Stock into Common Stock
at the current conversion rate) held by non-affiliates of registrant as of June
30, 2003: $96,453,000.
Number of shares of registrant's Common Stock outstanding as of February 27,
2004: 25,667,537. (As of February 27, 2004 there were 67,601 shares of Series B
Preferred Stock outstanding which are convertible into an additional 2,449,319
shares of Common Stock.)
TABLE OF CONTENTS
DESCRIPTION
Item Page
- ---------- ---------------------------------------------------------------------------------------------- ----
PART I
Item 1. Business 3
General 3
Technology 3
Products 5
Product Development Activities 7
Marketing and Distribution 9
Sources of Materials 9
Government Regulation 9
Research and Development 14
Patents, Proprietary Information & Trademarks 15
Competition 16
Employees 16
Risk Factors 16
Special Note Regarding Forward-Looking Statements 23
Supervision and Regulation - Securities and Exchange Commission 23
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4 Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 25
Dividend Policy 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 27
General and Background 27
Critical Accounting Policies 27
Results of Operations 28
Liquidity and Capital Resources 30
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 32
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 32
Item 9A. Controls and Procedures 32
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 42
Item 13. Certain Relationships and Related Transactions 44
Item 14. Principal Accountant Fees and Services 44
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46
2
PART I
This Annual Report on Form 10-K contains, in addition to historical
information, "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) that involve risks and uncertainties. See
"Business-Special Note Regarding Forward-Looking Statements."
ITEM 1. BUSINESS
GENERAL
We develop and market products made from human (allograft) tissue for use
in reconstructive, urogynecologic and orthopedic surgical procedures. Our
patented tissue processing technology produces a unique regenerative tissue
matrix - a complex three-dimensional structure that contains proteins, growth
factor binding sites and vascular channels - that provides a complete template
for the regeneration of normal human tissue. We currently market a broad range
of tissue-based products: AlloDerm(R), our regenerative tissue matrix for
plastic reconstructive, general surgical, burn and periodontal procedures;
Cymetra(R), a version of AlloDerm(R) in particulate form; Repliform(R), our
regenerative tissue matrix for urogynecologic procedures; Graft Jacket(TM), our
regenerative tissue matrix for orthopedic applications; and AlloCraft(TM)DBM,
our regenerative tissue matrix for bone grafting procedures. We also distribute
cryopreserved allograft skin for use as a temporary wound dressing in the
treatment of burns. Our development programs include the potential application
of our tissue matrix technology to vascular and orthopedic tissue repair;
investigation of human tissues as carriers for therapeutics; ThromboSol(TM), a
formulation for extended storage of platelets and technologies to enhance the
storage of red blood cells for transfusion.
We were incorporated in the State of Delaware in 1992 as the successor to a
Delaware corporation that was incorporated in 1986. Our address is One
Millennium Way, Branchburg, New Jersey 08876, our phone number is (908) 947-1100
and our website address is www.lifecell.com.
TECHNOLOGY
Our patented tissue processing technology produces a unique regenerative
tissue matrix - a complex three-dimensional structure that contains proteins,
growth factor binding sites and vascular channels - that provides a complete
template for the regeneration of normal human tissue. To date our product
development programs have been generated from the following proprietary
technologies:
- methods for producing an acellular tissue matrix by removing antigenic
cellular elements while stabilizing the matrix against damage;
- methods for cell preservation by manipulating cells through signal
transduction (i.e., manipulation of cellular metabolism) to protect
cells during prolonged storage; and
- methods for freeze-drying biological cells and tissues without the
damaging effects of ice crystals.
TISSUE MATRIX TECHNOLOGY
Our tissue matrix technology removes antigenic cells from the tissue matrix
to eliminate the potential for specific rejection of the transplanted tissue.
Our tissue matrix technology also:
- stabilizes the tissue matrix by preserving its natural structure and
biochemical properties that promote cell repopulation; and
- allows for extended storage by freeze-drying the tissue matrix without
significant ice crystal damage thus avoiding a non-specific immune
response upon transplantation.
3
Soft tissue, such as dermis, heart valves, blood vessels and nerve
connective tissue, contains a complex, three-dimensional structure consisting of
multiple forms of collagen, elastin, proteoglycans, other proteins, growth
factor binding sites and blood vessels (the "tissue matrix"). Together, the
tissue matrix and the cells that populate it form the soft tissues of the body
and other tissue types. As part of the body's natural remodeling process, cells
within a tissue continuously degrade and, in the process, replace the tissue
matrix. However, in the event that a large portion of the tissue matrix is
destroyed or lost because of trauma or surgery, the body cannot regenerate the
damaged portion. 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. We believe 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.
We believe our tissue matrix technology offers the following important
benefits:
Natural Tissue Regeneration. Tissue grafts produced with our tissue
matrix technology retain the structural and biochemical properties that
support normal cell repopulation and normal soft tissue regeneration. In
addition, in our clinical studies with dermis and preliminary animal
studies with heart valve leaflets, nerve connective tissue grafts and
vascular grafts processed using our technology, we have shown that such
tissues can be remodeled by the recipient's own cells and eventually become
the recipient's own tissue.
Multiple Potential Applications. We believe that our tissue matrix
technology has the potential to generate additional products with multiple
clinical applications. In addition to the current commercial applications
of our proprietary tissue products, we believe that these products may
provide additional benefits in other clinical applications. We also are
evaluating the applicability of our technology to process other human
tissues and are conducting pre-clinical studies with vascular and
orthopedic tissues.
Safety. Our tissue matrix technology yields products that can
revascularize and integrate into the body's own tissues, thereby allowing
the patient's immune cells 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. Our processed
human tissue products have a proven safety record of over ten years and
with over 520,000 tissue grafts processed and distributed to date.
Prolonged Shelf Life. Our tissue matrix technology allows extended
storage and ease of transportation of products. AlloDerm, Repliform and
Graft Jacket can be stored at normal refrigerated temperatures for up to
two years. In contrast, traditionally processed skin allografts require low
temperature (-80 degrees C) storage and shipping with dry ice. Cymetra
can be stored at normal refrigerated temperatures for up to one year.
AlloCraft DBM can be stored at ambient temperature for up to one year.
Compatibility with Other Technologies. Human tissues processed with
our technology retain important biochemical components, such as
proteoglycans and hyaluronic acid. These biochemical components bind growth
factors and interact with cells that are involved in tissue regeneration.
Therefore, we believe it may be possible to use our technology to develop
tissue-based delivery vehicles for these factors and cells.
CELL PRESERVATION TECHNOLOGY
Blood cells circulating within the body are exposed to multiple factors
that maintain their stability and/or prevent spontaneous clotting. When blood
cells are removed from the body for storage, these stabilizing influences are
absent and result in the destabilization and/or irreversible spontaneous
clotting 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.
4
Through our research efforts, we have developed cell preservation
technology that mimics the stabilizing influences present in the body. We
accomplish this through manipulation of signal transduction mechanisms that
control cellular metabolism and function, combined with either low temperature
storage or our patented freeze-drying technology. If successfully implemented,
our 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.
PRODUCTS
RECONSTRUCTIVE TISSUE PRODUCTS
ALLODERM REGENERATIVE TISSUE MATRIX
AlloDerm is donated cadaveric skin that has been processed with our tissue
matrix technology. We believe that AlloDerm is the only human tissue product on
the market today that supports the regeneration of normal human soft tissue.
Following transplant, AlloDerm is revascularized (i.e., blood supply is
restored) and repopulated with the patient's own cells becoming engrafted into
the patient. AlloDerm is a versatile tissue and has multiple surgical
applications.
AlloDerm is marketed to plastic reconstructive and general surgeons as an
"off-the-shelf" alternative to autograft tissue and synthetic materials.
AlloDerm is predominately used in plastic reconstructive, general surgical, burn
and periodontal procedures:
- as an implant for soft tissue reconstruction or
tissue deficit correction;
- as an interpositional graft for tissue coverage or closure; and
- as a sling to support tissue following nerve or muscle damage.
In these procedures, alternatives to using AlloDerm include autologous
tissue, synthetic and biosynthetic materials. We believe the disadvantages of
using autologous tissue are the creation of a separate donor site wound and the
associated pain, morbidity and scarring from this additional wound.
Additionally, we believe the disadvantages of using synthetic materials are the
susceptibility of synthetics to infection, encapsulation (scarring), the graft
moving away from the transplanted area (mobility), and erosion of the graft
through the skin (extrusion). Some biosynthetic materials may include bovine
collagen, which requires patient sensitivity testing.
AlloDerm has been used in the treatment of third degree and deep
second-degree burns requiring skin grafting since 1994. 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 consisting
primarily 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 de novo
regeneration. The most conservative and common surgical treatment of third
degree and deep second-degree burns use split-thickness skin autografts (the
epidermal layer and a portion of the dermis) taken from uninjured areas of the
patient's body. The surgical procedure when using AlloDerm in treating these
patients is to place AlloDerm where the patient is missing dermis and cover the
AlloDerm with an ultra-thin split-thickness skin autograft (the epidermal layer
and a much thinner portion of the dermis). This procedure has produced
comparable results to normal thickness autografts while significantly reducing
donor site trauma.
The use of AlloDerm in burn grafting has clinically shown performance
equivalent to autograft in reducing the occurrence and effects of scar
contracture. Scar contracture is a progressive tightening of scar tissue that
can cause joint immobility. Severe scar contracture can limit the use and
function of all mobile joints, such as in the arms, legs, feet, hands and neck.
Burn patients commonly need repetitive reconstructive surgeries for scar
contracture. We believe that AlloDerm provides significant therapeutic value
when used in burn grafting over a patient's mobile joints.
5
AlloDerm is also used in general surgical procedures. For example, in
abdominal procedures, AlloDerm is used to replace tissue during hernia repair,
replacement of infected synthetic mesh and repair of the abdominal wall in
trauma cases.
Periodontal surgeons use AlloDerm to increase the amount of attached gum
tissue supporting the teeth. Prior to the development of AlloDerm, these
procedures were predominately performed with autologous connective tissue grafts
excised from the roof of the patient's mouth and then transplanted to the gum.
BioHorizons Implant Systems, Inc. is our exclusive distributor of AlloDerm and
AlloDerm(R)GBR(TM) for use in periodontal applications in the United States and
certain international markets.
In periodontal surgery, alternatives to using AlloDerm include autologous
tissue as well as synthetic material. We believe 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's tissue and does not require a separate procedure for removal.
CYMETRA MICRONIZED ALLODERM(R) TISSUE
Cymetra Micronized AlloDerm Tissue is made from AlloDerm sheets that are
micronized at a low temperature to create a particulate form of AlloDerm
suitable for injection. This form allows a non-surgical alternative in
reconstructive plastic and other procedures to replace damaged or inadequate
integumental tissue, such as correction of soft tissue defects and depressed
scars or to replace integumental tissue lost through atrophy. Cymetra does not
require patient sensitivity testing and similar to AlloDerm, promotes the
regeneration of normal human soft tissue.
UROGYNECOLOGIC TISSUE REPAIR PRODUCTS
REPLIFORM REGENERATIVE TISSUE MATRIX
Repliform is the trade name for our proprietary tissue matrix product
intended for use in repairing damaged or inadequate integumental tissue in
urogynecologic surgical procedures. Since 1997, surgeons have used Repliform in
urogynecologic procedures as a bladder sling in the treatment of stress urinary
incontinence and for the repair of pelvic floor defects. Boston Scientific
Corporation is our exclusive worldwide sales and marketing representative for
Repliform for use in urogynecologic surgical procedures.
Some forms of female stress urinary incontinence can be treated with a
sling procedure, which involves lifting and supporting the bladder neck to
provide urethral support and compression. Repliform is used by surgeons as the
sling material in these types of procedures.
Cystocele, rectocele and other pelvic floor conditions occur frequently in
women and require soft tissue surgical repair. These conditions are particularly
common after multiple vaginal births and cause significant discomfort to the
patient. It is common that these conditions exist together with urinary
incontinence. Therefore, it is becoming the current standard of care to correct
pelvic floor conditions at the same time as a sling or suspension procedure to
ensure that there are no conditions that can adversely affect patient outcome.
Repliform is also used by surgeons to reinforce the pelvic floor.
Currently, materials used for slings and pelvic floor repair surgeries
include autologous tissue, synthetic materials and cadaveric fascia. The
autologous tissue often is taken from the patient's thigh or abdomen resulting
in a painful donor site. We believe that Repliform used as a sling for urinary
incontinence or pelvic floor repair provides a safe and effective alternative
that eliminates the need for a donor site, will repopulate as the patient's own
tissue and will not erode through the soft pelvic tissues.
6
ORTHOPEDIC TISSUE REPAIR PRODUCTS
GRAFT JACKET REGENERATIVE TISSUE MATRIX
Graft Jacket is the trade name for our proprietary tissue product intended
for use in repairing damaged or inadequate integumental tissue in orthopedic
surgical procedures, such as for rotator cuff tendon reinforcement, periosteal
replacement for uncontained bone defects and for the treatment of lower
extremity ulcerations. We introduced Graft Jacket in 2002 through Wright Medical
Technology, Inc., a global orthopedic medical device company. Wright Medical
serves as our exclusive distributor for GraftJacket in the United States.
ALLOCRAFT DBM
AlloCraft DBM is a proprietary human tissue based bone-grafting product
that combines demineralized bone and micronized acellular dermis. AlloCraft DBM
is intended to promote bone formation through revascularization, cell adhesion,
migration and ultimately repopulation of the implant site with bone forming
cells. We introduced AlloCraft DBM in 2003 through Stryker Corporation, a
leading provider of orthopedic implants. Stryker serves as our exclusive
marketing agent for AlloCraft DBM in the United States.
PRODUCT DEVELOPMENT ACTIVITIES
ORTHOPEDIC TISSUE PRODUCTS
We are evaluating additional potential orthopedic applications of our
tissue matrix technology. In October 2000, we received final approval for a $2.3
million research grant from the Department of Defense, through the U.S. Army
Medical Research Acquisition Activity, to investigate the application of our
technology to the regeneration of orthopedic tissues. We retain all rights to
commercialize products resulting from this collaboration.
In 2001, we commenced pre-clinical studies to investigate the potential of
AlloDerm and Cymetra to remodel into various orthopedic tissues such as tendon,
ligament, cartilage, meniscus and bone. Such studies are ongoing. We are also
completing process development of applying our tissue matrix technology to
allograft tendons that would be used in ACL ("anterior cruciate ligament")
repair procedures.
VASCULAR TISSUE PRODUCTS
We are evaluating the application of our tissue matrix technology to human
tissue based vascular tissues. In October 2001, we received final approval for
a $2.1 million research grant from the Department of Defense, through the U.S.
Army Medical Research Acquisition Activity, to investigate the application of
our tissue matrix technology to the regeneration of vascular and nerve tissues.
We retain all rights to commercialize products resulting from this
collaboration.
We have focused our research on evaluating the suitability of a processed
acellular umbilical vein as a potential arterio-venous (A-V) access graft for
hemodialysis. Through our research, we have demonstrated that our tissue
processing technology is effective in removing antigenic cells from human
umbilical vein grafts without damaging the structures fundamental to its
function. In small animal implant studies, we demonstrated that vascular tissues
processed using our proprietary technology are amenable to host cell
repopulation and revascularization with minimal inflammation.
In February 2004, we submitted an Investigational Device Exemption ("IDE")
application to the United States Food and Drug Administration ("FDA") seeking
approval to commence a clinical study for the use of a processed acellular
umbilical vein as a potential arterio-venous (A-V) access graft for
hemodialysis. In March 2004,
7
the FDA informed us that our application was not approved and requesting that
we complete one additional animal study. We are in communication with the FDA
and are evaluating its request
If successfully developed, a human tissue based vascular graft may also
potentially have applications in coronary artery bypass procedures or used to
restore peripheral blood circulation in patients with peripheral vascular
disease, such as below-knee bypass procedures. Veins and arteries harvested from
the patient ("autologous") for use as a replacement graft continue to be the
mainstay of therapy, yet these vessels are frequently donor site limited as a
result of the condition of the patient. When available, autologous vessel
harvest leads to significant patient discomfort and an increase in risk for
complications. To address these drawbacks, we believe there is a critical need
for an "off-the-shelf" small diameter vascular graft, which is non-immunogenic,
non-thrombotic and has compliance characteristics and handling properties
equivalent to native vessels.
BLOOD CELL PRESERVATION PRODUCTS
THROMBOSOL
We are developing ThromboSol, a patented 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
increase the safety and 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.
Platelets are blood cells that initiate clotting. Untreated platelets are
sensitive to storage at low temperatures and cannot be refrigerated effectively.
Presently, platelets are stored at room temperature and, due to the risk of
microbial contamination, have a limited shelf life of five days. We have shown
in laboratory tests that the addition of ThromboSol solution preserves the in
vitro functional aspects of refrigerated platelets for up to nine days and
frozen platelets for more than two years. During 1999, we successfully completed
biocompatibility testing on the ThromboSol solutions. A pilot clinical study
under a physician-sponsored Investigational New Drug Application ("IND") was
conducted during 1998, and the study found that ThromboSol treated cryopreserved
platelets performed better than standard cryopreserved platelets. A second
physician-sponsored IND was performed that involved a "standard of care"
transfusion of ThromboSol cryopreserved platelets into oncology patients. This
study was completed in 2001 and demonstrated that Thrombosol preserved platelets
performed equivalent to fresh platelets. Any product developed will require
extensive regulatory approvals prior to marketing in the United States. Our
development efforts to date have primarily been funded through research grant
funds from the Department of Defense.
RED BLOOD CELLS
We are conducting research to develop procedures to freeze and 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. In February 2002, we
received final approval of an $824,000 research grant from the Department of
Defense to investigate the potential to preserve red blood cells through freeze
drying. We retain all rights to commercialize products resulting from this
collaboration.
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 and washed blood. We believe
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.
Any product developed will require extensive regulatory approvals,
including approval of an IND by the FDA to conduct clinical trials. Our
development efforts to date have primarily been funded through research grant
funds from the Department of Defense. Additionally, we may decide to establish
collaborative out-licensing arrangements with appropriate partners to fund the
development and commercialization of certain of these products.
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MARKETING AND DISTRIBUTION
We currently market AlloDerm in the United States for plastic
reconstructive, general surgical and burn applications through our direct sales
and marketing organization. Our direct sales and marketing representatives also
market Cymetra to hospital-based surgeons. BioHorizons Implant Systems, Inc.,
is our exclusive distributor in the United States and certain international
markets of AlloDerm and AlloDerm GBR for use in periodontal applications.
Boston Scientific Corporation is our exclusive worldwide sales and marketing
agent for Repliform for use in urogynecology. Wright Medical Technology,
Inc., is our exclusive distributor in the United States for Graft Jacket. In
June 2003, we entered into an exclusive marketing agreement with Stryker
Corporation for the marketing of AlloCraft DBM.
As of March 1, 2004, we had sales, marketing and customer service staff of
45 persons, including 36 domestic sales personnel. Our sales representatives are
responsible for interacting with ear, nose and throat surgeons, plastic
surgeons, burn surgeons and general surgeons and educating them regarding the
use and anticipated benefits of AlloDerm and Cymetra. We also participate in
numerous national fellowship programs, national and international conferences
and trade shows, and we participated in or fund certain educational symposia.
SOURCES OF MATERIALS
We receive donated human cadaveric tissue from tissue banks and organ
procurement organizations in the United States that comply with the FDA human
tissue regulations. In addition, we require supplying tissue banks and organ
procurement organizations to comply with procedural guidelines outlined by the
American Association of Tissue Banks. We conduct microbiological and other
rigorous quality assurance testing before our acellular human tissue products
are released for shipment.
In 2003, we obtained all of our donated human cadaveric tissue from 27
tissue banks and organ procurement organizations. We estimate that there are
approximately 100 tissue banks and organ procurement organizations in the United
States. We believe that we have established adequate sources of donated human
tissue to satisfy the expected demand for our products in the foreseeable
future. Although we have not experienced any material difficulty in procuring
adequate donated cadaveric tissue, there is a risk that the future availability
of donated human tissue will not be sufficient to meet our demand.
We are accredited by the American Association of Tissue Banks ("AATB"). The
AATB is recognized for the development of industry standards and its program of
inspection and accreditation. The AATB provides a standards-setting function and
has procedures for accreditation similar to the International Standards
Organization ("ISO") standards.
GOVERNMENT REGULATION
OVERVIEW
Government regulation, both domestic and foreign, is a significant factor
in the processing, marketing and distribution of our current products and
products that we are developing. In the United States, our human tissue products
are subject to regulation by the FDA. The FDA administers the Federal Food,
Drug, and Cosmetics Act ("FDC Act") and the Public Health Service Act ("PHS
Act"). These statutes and implementing regulations govern the design, testing,
manufacturing, labeling, storage, record keeping, approval, advertising and
promotion of our products.
The FDA does not apply a single regulatory scheme to human tissues and
products derived from human tissue. On a case-by-case basis, the FDA may choose
to regulate such products solely as human tissue if certain requirements are
met. If the applicable requirements are not met, the FDA will regulate human
tissue and products derived from human tissue as medical devices or biologics. A
fundamental difference in the treatment of products under these various
classifications is that the FDA generally permits products regulated solely as
human tissue to be commercially distributed without premarket clearance or
approval. In contrast, products regulated as medical devices or biologics
usually require such clearance or approval. The process of obtaining premarket
clearance or approval for a medical device or biologic is often expensive,
lengthy and uncertain.
9
Whether regulated as human tissue, a medical device or a biologic product,
once our products are on the market, they are subject to pervasive and
continuing regulation by the FDA. We are subject to inspection at any time by
the FDA and state agencies for compliance with regulatory requirements. The FDA
may impose a wide range of enforcement sanctions if we fail to comply,
including:
- fines;
- injunctions;
- civil penalties;
- recall or seizure of our products;
- total or partial suspension of production;
- refusal of the government to authorize the marketing of new products
or to allow us to enter into supply contracts; and
- criminal prosecution.
FDA'S HUMAN TISSUE REGULATION
The FDA's regulatory requirements for human tissue have been evolving in a
complex fashion and will continue to do so for some time to come. In 1993, the
FDA adopted the so-called "interim final rule" for human tissue for
transplantation, which imposed donor screening, testing, and record keeping
requirements. The rule was finalized in 1997. Under the 1997 final rule, covered
"human tissue" is any tissue derived from a human body, which: (i) is intended
for administration to another human for the diagnosis, cure, mitigation,
treatment or prevention of any condition or disease; (ii) is recovered,
processed, stored or distributed by methods not intended to change tissue
function or characteristics; (iii) is not currently regulated as a human drug,
biological product or medical device; (iv) excludes kidney, liver, heart, lung,
pancreas, or any other vascularized human organ; and (v) excludes semen or other
reproductive tissues, human milk and bone marrow. Establishments engaged in the
procurement, processing and/or distribution of human tissue are required to
conduct donor screening and infectious disease testing and to maintain records
available for FDA inspection documenting that the procedures were followed.
Moreover, the FDA has the authority to conduct inspections of tissue
establishments and to detain, recall or destroy tissue where the procedures were
not followed or appropriate documentation of the procedures is not available.
In February 1997, the FDA issued a discussion document called the "Proposed
Approach." In the Proposed Approach, the FDA sets forth product factors that
would determine the level of regulation that the agency would likely impose upon
various types of tissue and cellular based products, determined primarily from
the impact of these product factors in three general areas of concern: (i)
preventing inadvertent use of contaminated tissues with the potential for
transmitting infectious diseases; (ii) preventing improper handling or
processing that might contaminate or damage tissues; and (iii) ensuring that
clinical safety and effectiveness is demonstrated for tissues that are highly
processed, are used for other than their normal in vivo function, are combined
with non-tissue components or are used for metabolic purposes.
Pursuant to the Proposed Approach, in 2001 the FDA issued a final rule
requiring manufacturers of human cellular and tissue-based products, which the
FDA calls "HCT/Ps," to register their establishments and list their products
with the FDA. Implementation of portions of the 2001 final rule had been delayed
until earlier this year. The 2001 final rule requiring establishment
registration and product listing for HCT/P manufacturers is now fully effective.
The FDA also has issued proposed regulations in 1998 and 2001 that would require
most tissue donors to be screened for relevant communicable diseases and would
require manufacturers of tissue based products to follow current good tissue
practice. These proposed regulations have not been finalized, but they
demonstrate the FDA's increasingly proactive regulation of HCT/Ps, which will
likely lead to the imposition of significant additional regulatory requirements.
Eventually, this triad of new regulations is expected to supersede the 1997
final rule.
The 2001 final rule sets forth a new test for determining whether an HCT/P
is eligible for tissue regulation (as opposed to medical device or biologic
regulation). The FDA will apply human tissue regulation to an HCT/P that is: (i)
minimally manipulated; (ii) intended for homologous use; (iii) is not combined
with a device (with limited exceptions); and (iv) does not have a systemic
effect and is not dependent upon metabolic activity for its primary function.
HCT/Ps generally may be commercially distributed without prior FDA clearance or
approval.
10
FDA STATUS OF OUR PRODUCTS
We believe that our AlloDerm based products generally satisfy the FDA's
requirements to be considered "HCT/Ps" eligible for regulation solely as human
tissue. Accordingly, we have not obtained prior FDA clearance or approval for
commercial distribution of AlloDerm, Repliform, Cymetra, Graft Jacket or
AlloCraft DBM. Nevertheless, because our products meet the definition of an
HCT/P, we must comply with the FDA's donor screening, infectious disease
testing, record maintenance, establishment registration, and product listing
requirements. Moreover, the FDA has the authority to inspect our facilities and
to detain, recall or destroy our products where we have failed to comply with
these requirements.
In 1996 we were notified by the FDA that AlloDerm used for the replacement
or repair of damaged or inadequate integumental tissue (i.e. tissue lining the
surface of the body or a body cavity) would be regulated as human tissue under
the then effective 1993 interim regulation governing human tissue. Relying upon
this determination, we have not obtained prior FDA approval for commercial
distribution of AlloDerm for use in the treatment of burns, plastic
reconstructive surgery procedures (such as facial sling and scar revision),
periodontal surgical procedures (such as free-gingival grafting and guided
tissue regeneration) and general surgical procedures. We believe that the 1997
final tissue regulation and the 2001 final rule on establishment registration
and listing do not significantly alter the status of our products when used for
these indications. Therefore, we continue to believe that AlloDerm for these
uses is solely regulated as human tissue.
We believe that our decision not to obtain prior FDA clearance or approval
for commercial distribution of Repliform and Cymetra, which we began to market
in 1999, is supported by the FDA's regulations and by our correspondence with
the FDA regarding the status of these products as human tissue. Specifically, in
November 2000, the FDA requested detailed information about Repliform and
Cymetra. In February 2001, we responded to the FDA's request. In June 2001, the
FDA notified us that Repliform and Cymetra, as currently marketed, are subject
to regulation solely as human tissue.
In 2002, we commenced commercial distribution of Graft Jacket without
seeking prior FDA clearance or approval. Graft Jacket is the trade name given to
AlloDerm when it is labeled for the intended use of repairing damaged or
inadequate integumental tissue in orthopedic surgery. Relying on the 1997 and
2001 final rules and on the FDA's findings with respect to AlloDerm, Repliform
and Cymetra, we believe that Graft Jacket meets the definition of an HCT/P
eligible to be regulated solely as human tissue.
In late 2002, the FDA requested information to support our belief that
Graft Jacket is an HCT/P eligible for human tissue regulation when marketed for
rotator cuff repair and for periosteum replacement. We responded to this request
in March 2003. By letter dated December 8, 2003, the FDA informed us of their
determination that Graft Jacket for these two intended uses are non-homologous
uses of AlloDerm that do not qualify for human tissue regulation. Accordingly,
the FDA took the position that Graft Jacket requires premarket clearance or
approval as a medical device before it may be marketed for use in rotator cuff
repair. The FDA also took the position that, before Graft Jacket may be marketed
for periosteum replacement, we must submit a filing with the FDA requesting a
formal determination as to whether medical device or biologic regulation would
apply.
In early January 2004, we notified the FDA by that we had additional
information that we believed would lead them to conclude that Graft Jacket is
eligible for HCT/P status when marketed for rotator cuff repair and for
periosteum replacement. The FDA agreed to reconsider its Graft Jacket
determination in light of the additional information that we would submit.
Pursuant to an agreed upon schedule, on January 30, 2004, and on February 17,
2004, we wrote back to the FDA to request reconsideration, to propose certain
labeling changes to Graft Jacket to address the FDA's December 8th letter and to
explain why we believe
11
that the FDA should accord HCT/P status to Graft Jacket for rotator cuff repair
and periosteum replacement. We are continuing to market these products (with the
labeling changes) pending a decision. To date, the FDA has not responded. There
can be no assurance that the FDA will agree that Graft Jacket satisfies the
requirements for regulation solely as human tissue. If the FDA does not agree,
they may impose medical device regulation upon Graft Jacket for rotator cuff and
periosteum replacement or, possibly, biologics regulation with respect to
periosteum replacement. The FDA could also require us to cease marketing and, or
recall product already sold until FDA clearance or approval (or a biologic
license) is obtained and it could seek to impose enforcement sanctions against
us for marketing these products without prior FDA authorization.
In 2003, we commenced commercial distribution of AlloCraft DBM without
obtaining FDA clearance or approval based on our belief that AlloCraft DBM is
eligible for regulation solely as human tissue. There can be no assurance that
the FDA will agree with our determination regarding the status of AlloCraft DBM
as human tissue. If the FDA does not agree, they may impose medical device
regulation or biologics regulation upon AlloCraft DBM. The FDA could also
require us to cease marketing and/or recall product already sold until the FDA
clearance or approval (or a biologic license) is obtained and it could seek to
impose enforcement sanctions against us for marketing this product without such
FDA authorization.
FDA MEDICAL DEVICE REGULATION
A medical device generally may be marketed in the United States only with
the FDA's prior authorization. Devices classified by the FDA as posing less
risk are placed in class I or class II. Class II devices (and some class I
devices) generally require the manufacturer to seek premarket clearance, or
510(k) clearance, from the FDA prior to marketing through the filing of a
"premarket notification," unless exempted from this requirement by regulation.
Such clearance generally is granted based upon a finding that a proposed device
is substantially equivalent in intended use and safety and effectiveness to a
predicate device, which is a legally marketed class I or II device that already
has 510(k) clearance or that is a pre-amendment class III device (in commercial
distribution prior to May 28, 1976 and for which the FDA has not called for PMA
applications (defined below)). No assurance can be given that any medical
device will ever receive 510(k) clearance. Even if a device receives 510(k)
clearance, any modification that could significantly affect its safety or
effectiveness or that would constitute a major change in the intended use of
the device, will require a new 510(k) submission or, possibly, a PMA
application. In addition to 510(k) clearance requirements, class II devices can
be subject to special controls (e.g., performance standards, post market
surveillance, patient registries and FDA guidelines) that do not apply to class
I devices.
A medical device that does not qualify for 510(k) clearance is placed in
class III, which is reserved for devices classified by the FDA as posing the
greatest risk (e.g., life-sustaining, life-supporting or implantable devices, or
devices that are not substantially equivalent to a predicate device). A class
III device generally must undergo the premarket approval ("PMA"), process, which
requires the manufacturer to prove the safety and effectiveness of the device to
the FDA's satisfaction. A PMA application must provide extensive preclinical and
clinical trial data and information about the device and its components
regarding, manufacturing, labeling and promotion. As part of the PMA application
review, the FDA will inspect the manufacturer's facilities for compliance with
the Quality System Regulation ("QSR"), which includes elaborate testing,
control, documentation and other quality assurance procedures. Upon submission,
the FDA determines if the PMA application is sufficient to permit a substantive
review, and, if so, the PMA application is accepted for filing. The FDA then
commences an in-depth review of the PMA application, which we believe typically
takes one to three years, but which may take longer. Even after approval of a
PMA application, a new PMA application or a supplemental filing to an existing
PMA is required in the event of a modification to the device, its labeling or
its manufacturing process affecting the safety or efficacy of the device.
A clinical study in support of a PMA application or 510(k) submission for a
"significant risk" device requires an Investigational Device Exemption ("IDE"),
application approved in advance by the FDA for a limited number of patients. The
IDE application must be supported by appropriate data, such as animal and
laboratory testing results. The clinical study may begin only with approval from
FDA and the appropriate Institutional Review Board ("IRB"), at each clinical
study site. If the device presents a "non-significant risk" to the patient, a
sponsor may begin the clinical study after obtaining IRB approval without the
need for FDA approval. In all cases, the clinical study must be conducted under
the auspices of an IRB pursuant to the FDA's regulatory requirements intended
for the protection of subjects and to assure the integrity and validity of the
data.
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If we market medical device products, we will be subject to pervasive and
continuing regulation. We will have to comply with these requirements, including
the FDA's labeling regulations, the QSR, the Medical Device Reporting ("MDR"),
regulations (which require that a manufacturer report to the FDA certain types
of adverse events involving its products), and the FDA's general prohibitions
against promoting products for unapproved or "off-label" uses.
Based upon relevant precedents, it is not clear whether the FDA will
regulate our products under development as medical devices or biologic products
requiring premarket clearance or approval or as human tissue for
transplantation.
FDA BIOLOGICS REGULATION
Biologic products are regulated under Section 351(a) of the PHS Act as well
as the FDC Act. The PHS Act imposes a special additional licensing requirement,
known as a Biologic License. This license imposes very specific requirements
upon the facility and the manufacturing and marketing of licensed biologic
products to assure their safety, purity and potency. Some licensed biologic
products are also subject to batch release by the FDA. That is, the products
from a newly manufactured batch cannot be shipped until the FDA has evaluated
either a sample or the specific batch records and has given permission to ship
the batch of product. The PHS Act also grants the FDA authority to impose
mandatory product recalls and provides for civil and criminal penalties for
violations.
Before conducting the required clinical testing of a biologic product, an
applicant must submit an IND 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 biologic products typically are conducted
in three sequential phases but may overlap. Phase 1 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 2, 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 1 trial. Phase 3 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
protocols and are subject to the approval and monitoring of one or more IRB's.
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 Biologic License Application containing, among other things, a
complete description of the manufacturing process. Before the license can be
granted, the applicant must undergo a successful establishment inspection. The
FDA review and approval of a biologic product is very onerous and can take
several years. We cannot ensure that we will obtain the required approval for
ThromboSol platelet storage solution or any other proposed biological products.
Early this year the FDA announced that it will develop a policy for the
approval of "follow-on biologics," which would allow a second manufacturer of
the same product to be licensed based upon less scientific data than the
innovator. The FDA has not set a timetable for the implementation of such a
policy. Once on the market, a licensed biologic is subject to all the post
marketing requirements of both the PHS Act and the FDC Act, including compliance
with good manufacturing practice, safety and other reporting requirements, and
all relevant labeling, advertising and promotion requirements. Non-compliance
with these requirements may result in regulatory action, including warning
letters or untitled letters, license suspension, and/or withdrawal from the
market, product seizures, injunctions, and/or criminal prosecutions.
NATIONAL ORGAN TRANSPLANT ACT
Procurement of certain human organs and tissue for transplantation is
subject to the restrictions of the National Organ Transplant Act ("NOTA"), which
prohibits the acquisition of certain human organs, including skin and related
tissue for valuable consideration, but permits the payment of reasonable
expenses associated with the procurement, transportation, processing,
preservation, quality control and storage of human tissue and skin. We reimburse
tissue banks for their expenses incurred associated with the recovery, storage
and transportation of
13
donated human skin that they provide to us for processing. We include in our
pricing structure certain costs associated with processing, preservation,
quality control and storage of the tissue, and marketing and medical education
expenses, in addition to amounts paid to tissue banks to reimburse them for
their expenses associated with the recovery and transportation of the tissue.
OTHER REGULATION
We are subject to various federal, state and local laws, regulations and
requirements 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 our
research and development work. There can be no assurance that we will not incur
significant additional costs to comply with these laws or regulations in the
future.
INTERNATIONAL REGULATION
The regulation of our products outside the United States varies by country.
Certain countries regulate our human tissue products as a pharmaceutical
product, requiring us to make extensive filings and obtain regulatory approvals
before selling our product. Certain countries classify our products as human
tissue for transplantation but may restrict its import or sale. Other countries
have no applicable regulations regarding the import or sale of products similar
to our products, creating uncertainty as to what standards we may be required to
meet.
Our human tissue products are currently distributed in several countries
internationally. Additionally, we may pursue clearance to distribute our
products in certain other countries in the future. The uncertainty of the
regulations in each country may delay or impede the marketing of our products in
the future or impede our ability to negotiate distribution arrangements on
favorable terms. Certain foreign countries have laws similar to NOTA. These laws
may restrict the amount that we can charge for our products and may restrict our
ability to export or distribute our products to licensed not-for-profit
organizations in those countries. Noncompliance with foreign country
requirements may include some or all of the risks associated with noncompliance
with FDA regulation as well as other risks.
RESEARCH AND DEVELOPMENT
We have historically funded the development of our human tissue products
and blood cell preservation products primarily through external sources,
including a corporate alliance and government grants, as well as through the
proceeds from the sale of our securities and internally generated cash flows.
Our research and development costs in 2003, 2002 and 2001 for all programs were
approximately $5.4 million, $5.0 million and $4.4 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
We have received a substantial portion of our government grant funding from
the United States government's Small Business Innovation Research ("SBIR")
program. The SBIR grant program provides funding to evaluate the scientific and
technical merit and feasibility of an idea. To date, we have been awarded in
excess of $10 million through approved SBIR program awards and Department of
Defense contracts. We intend to continue to seek funding through the SBIR
programs, as well as to pursue additional government grant and contract
programs. Generally, we have the right to patent any 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.
14
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
Our ability to compete effectively with other companies is dependent
materially upon the proprietary nature of our technologies. We rely primarily
on patents, trade secrets and confidentiality agreements to protect our
technologies.
Three primary families of patents and patent applications protect our
technology. One United States patent covers methods of producing our
tissue-based products. Nine additional United States patents and five pending
United States patent applications supplement this patent and cover methods and
apparatus for freeze-drying without the damaging effects of ice crystal
formation. Six United States patents and one pending United States patent
application cover methods of extending the shelf life of platelets, red blood
cells and other blood cells.
We also have 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 us may differ from that of their
foreign counterparts.
In general, the patent position of biotechnology and medical product firms
is highly uncertain and involves complex legal, scientific and factual
questions. There is risk that other patents may not be granted with respect to
the patent applications filed by us. Furthermore, there is risk that one or
more patents issued or licensed to us will not provide commercial benefit to us
or will be infringed, invalidated or circumvented by others. The United States
Patent and Trademark Office currently has a significant backlog of patent
applications, and the approval or rejection of patents may take several years.
Prior to actual issuance, the contents of United States patent applications
are generally not made public. Once issued, a patent would constitute prior art
from its filing date, which might predate the date of a patent application on
which we rely. Conceivably, the issuance of such a prior art patent, or the
discovery of "prior art" of which we are currently unaware, could invalidate a
patent of ours or our licensor or discourage commercialization of a product
claimed within such patent.
No assurances may be given that our products or planned products may not be
the subject of infringement actions by third parties. Any successful patent
infringement claim relating to any products or planned products could have a
material adverse effect on our financial condition and results of operations.
Further, there can be no assurance that any patents or proprietary rights owned
by or licensed to us 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.
We generally conduct a cursory review of issued patents prior to engaging
in research or development activities. If others already have issued patents
covering new products that we develop, we may be required to obtain a license
from others to commercialize such future products. There can be no assurance
that any such license that may be required could be obtained on favorable terms
or at all.
We may decide for business reasons to retain certain knowledge that we
consider proprietary as confidential and elect to protect such information as a
trade secret, as business confidential information, or as know-how. In that
event, we must rely upon trade secrets, know-how and continuing technological
innovation to maintain our 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.
We have federal trademark or service mark registrations that we currently
use for LifeCell(R), which concerns processing and preserving tissue samples,
AlloDerm(R), which concerns our commercial acellular dermal graft product,
Micronized AlloDerm(R), the particulate form of AlloDerm, Cymetra(R) the brand
name for Micronized AlloDerm(R) and Repliform(R), the version of AlloDerm for
urology and gynecology. We have filed trademark registrations for
ThromboSol(TM), a formulation for extended storage of platelets and
AlloDerm(R)GBR(TM), for use in periodontal applications. Graft Jacket(TM) is a
trademark of Wright Medical Technology, Inc. AlloCraft(TM)DBM is a trademark of
Stryker Corporation.
15
COMPETITION
The biomedical field is undergoing rapid and significant technological
change. Our success depends upon our ability to develop and commercialize
efficient and effective products based on our technologies. There are many
companies, including Regeneration Technologies, Inc., Cook, Inc. and its
affiliates, Cryolife, Inc., Integra Life Sciences Holdings Corporation, Tissue
Science Laboratories, plc and academic institutions, including Rice University,
The University of Pittsburgh and Georgia Institute of Technology, 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 our products. Additionally, our
regenerative tissue products compete with synthetic products marketed by large
medical device companies such as Johnson & Johnson and W.L. Gore & Associates.
Many of these companies and academic institutions are well-established, and may
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 we do. These
companies and academic institutions may succeed in developing competing products
that are more effective than our products, or that receive government approvals
more quickly than our products, which may render our products or technology
uncompetitive, uneconomical or obsolete.
We believe that for many current applications of our human tissue products,
the principal form of competition is with the use of the patient's own tissue.
We anticipate direct competition for our tissue products as well as indirect
competition from advances in therapeutic agents, such as growth factors now used
to enhance wound healing. We believe that therapeutic growth factors may be used
in conjunction with our proposed products and may potentially enhance the
products' efficacy. There can be no assurance that we will be able to compete
effectively with other commercially available products or that development of
other technologies will not detrimentally affect our commercial opportunities or
competitive advantage.
EMPLOYEES
At March 1, 2004, we had 173 employees, of which 46 were employed in sales,
marketing and customer service, 79 in production and quality assurance, 22 in
research and development and 24 in administration and accounting. Also, at such
date, we employed 13 individuals with Ph.D. degrees.
RISK FACTORS
You should carefully consider these risk factors in addition to our
financial statements and notes to such financial statements. In addition to the
following risks, there may also be risks that we do not yet know of or that we
currently think are immaterial that may also impair our business operations. If
any of the following risks occur, our business, financial condition or operating
results could be adversely affected.
GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT THE MARKETING OF OUR CURRENT
PRODUCTS AND THE DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS CURRENTLY BEING
DEVELOPED BY US.
We have not obtained prior FDA clearance or approval for commercial
distribution of Graft Jacket, AlloCraft DBM or any of our other AlloDerm
products, because we believe that these products qualify for regulation as human
tissue.
In December 2003, the FDA informed us of their determination that Graft
Jacket, when intended for rotator cuff repair or periosteum replacement, is not
eligible for human tissue regulation. In early January 2004, we notified the FDA
that we had additional information that we believed would lead them to conclude
that Graft Jacket is eligible for HCT/P status when marketed for rotator cuff
repair and for periosteum replacement. The FDA agreed to reconsider its Graft
Jacket determination in light of the additional information that we would
submit. Pursuant to an agreed upon schedule, in January 2004 and February 2004,
we wrote back to the FDA to request reconsideration, to propose certain labeling
changes to Graft Jacket to address FDA's December 8th letter and to explain why
we believe that the FDA should accord HCT/P status to Graft Jacket for rotator
cuff repair and periosteum replacement. We are continuing to market these
products, with the labeling
16
changes, pending a decision from the FDA. To date, the FDA has not responded.
There can be no assurance that the FDA will agree that Graft Jacket satisfies
the requirements for regulation solely as human tissue. If the FDA does not
agree, they may impose medical device regulation upon Graft Jacket for rotator
cuff and periosteum replacement or, possibly, biologics regulation with respect
to periosteum replacement. The FDA could also require us to cease marketing and
or recall product already sold until FDA clearance or approval (or a biologic
license) is obtained and could seek to impose enforcement sanctions against us
for marketing these products without prior FDA authorization.
We cannot assure you that our other tissue-based products, such as
AlloCraft DBM, that we are currently marketing or that we may develop in the
future will be regulated as human tissue. The regulation of each of our products
as human tissue is decided by the FDA on a case-by-case basis and the agency's
position is subject to change. If the FDA chooses to regulate any of our current
or future products as a medical device or biologic product, the process of
obtaining FDA clearance or approval (or a biologic license) would be expensive,
lengthy and unpredictable. We anticipate that it could take from one to three
years or longer to obtain such clearance or approval (or a biologic license). We
do not know if such clearance or approval (or a biologic license) could be
obtained in a timely fashion, or at all. Such clearance or approval (or a
biologic license) process would almost certainly include a requirement to
provide extensive supporting clinical testing data. In addition, the FDA
requires that medical devices and biologics be produced in accordance with the
Quality System Regulation for medical devices or Good Manufacturing Practice
regulation for biologics. As a result, our manufacturing and compliance costs
would increase and any such future device and biologic products would be subject
to more comprehensive development, testing, monitoring and validation standards.
Additionally, any disruption in our ability to market our current products would
adversely affect our results of operations and cash flows.
PROPOSED FDA GOOD TISSUE PRACTICE REQUIREMENTS OR OTHER MORE STRINGENT HUMAN
TISSUE REGULATIONS COULD INCREASE THE COSTS OF DEVELOPING, MANUFACTURING AND
MARKETING OUR TISSUE-BASED PRODUCTS.
The FDA has issued proposed rules that would impose additional donor
suitability and Current Good Tissue Practice requirements on manufacturers of
tissue-based products. If these or similar requirements actually become law, we
will likely incur additional manufacturing and compliance costs for our
tissue-based products.
A few states impose their own regulatory requirements on transplanted human
tissue. We believe that we are in compliance with such regulations. There can be
no assurance that the various states in which our products are sold will find
that we are in compliance or will not impose additional regulatory requirements
or marketing impediments on our products.
THE FDA CAN IMPOSE CIVIL AND CRIMINAL SANCTIONS AND OTHER PENALTIES ON US IF WE
FAIL TO COMPLY WITH THE STRINGENT FDA REGULATIONS APPLICABLE TO OUR TISSUE
FACILITIES.
Failure to comply with any applicable FDA requirements could result in
civil and criminal enforcement actions and other fines and penalties that would
increase our expenses and adversely affect our cash flows. Tissue
establishments must engage in:
- donor screening and infectious disease testing;
- stringent record keeping; and
- establishment registration and product listing.
As a result, our involvement in the processing and distribution of human tissue
for transplantation requires us to ensure that proper donor screening and
infectious disease testing are done appropriately and conducted under strict
procedures. In addition, we must maintain records, which are available for FDA
inspectors documenting that the procedures were followed. The FDA has authority
to conduct inspections of tissue establishments and to detain, recall, or
destroy tissue if the procedures were not followed or appropriate documentation
is not available.
17
Labeling and promotional activities are also subject to scrutiny by the FDA
and, in certain instances, by the Federal Trade Commission. From time to time,
the FDA may modify such requirements, imposing additional or different
requirements, which may require us to alter our business methods.
THE NATIONAL ORGAN TRANSPLANT ACT ("NOTA") COULD BE INTERPRETED IN A WAY THAT
COULD REDUCE OUR REVENUES AND INCOME IN THE FUTURE.
Procurement of certain human organs and tissue for transplantation is
subject to the restrictions of NOTA, which prohibits the acquisition of certain
human organs, including skin and related tissue for valuable consideration, but
permits the payment of reasonable expenses associated with the procurement,
transportation, processing, preservation, quality control and storage of human
tissue, including skin. We reimburse tissue banks for expenses incurred that
are associated with the recovery and transportation of donated cadaveric human
skin that we process and distribute. In addition to amounts paid to tissue
banks to reimburse them for their expenses associated with the procurement and
transportation of human skin, we include in our pricing structure certain costs
associated with:
- tissue processing;
- tissue preservation;
- quality control and storage of the tissue; and
- marketing and medical education expenses.
NOTA payment allowances may be interpreted to limit the amount of costs and
expenses that we may recover in our pricing for our products, thereby negatively
impacting our future revenues and profitability. If we are found to have
violated NOTA's prohibition on the sale of human tissue, we also are potentially
subject to criminal enforcement sanctions which may adversely affect our
operating results.
OUR PRODUCTS CONTAIN DONATED HUMAN CADAVERIC TISSUE AND THEREFORE HAVE THE
POTENTIAL FOR DISEASE TRANSMISSION.
The non-profit organizations that supply such tissue are required to follow
FDA regulations for screening donors for potential disease transmission. Such
procedures include donor testing for certain viruses, including HIV. Our
manufacturing process also has been demonstrated to inactivate concentrated
suspensions of HIV. While we believe such procedures are adequate to reduce the
threat of disease transmission, there can be no assurance that:
- our products will not be associated with transmission of disease; or
- a patient otherwise infected with disease would not erroneously assert
a claim that the use of our products resulted in the disease
transmission.
Any such transmission or alleged transmission could have a material adverse
effect on our ability to market our products and could result in litigation.
WE DEPEND HEAVILY UPON A LIMITED NUMBER OF SOURCES OF HUMAN CADAVERIC TISSUE AND
ANY INTERRUPTION IN THE AVAILABILITY OF HUMAN TISSUE WOULD INTERFERE WITH OUR
ABILITY TO PROCESS AND MARKET OUR PRODUCTS.
Our business is dependent on the availability of donated human cadaveric
tissue. We currently receive human tissue from approximately 27 United States
tissue banks and organ procurement organizations. We estimate that there are
approximately 100 tissue banks and organ procurement organizations in the United
States. Although we have established what we believe to be adequate sources of
donated human tissue to satisfy the expected demand for our human tissue
products in the foreseeable future, we cannot be sure that donated human
cadaveric tissue will continue to be available at current levels or will be
sufficient to meet our needs. If our current sources can no longer supply human
cadaveric tissue or our requirements for human cadaveric tissue exceed their
current capacity, we may
18
not be able to locate other sources on a timely basis, or at all. Any
significant interruption in the availability of human cadaveric tissue would
likely cause us to slow down the processing and distribution of our human tissue
products, which could adversely affect our ability to supply the needs of our
customers and adversely affect our operating results and our relationship with
our customers.
NEGATIVE PUBLICITY CONCERNING THE USE OF DONATED HUMAN TISSUE IN RECONSTRUCTIVE
COSMETIC PROCEDURES COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND NEGATIVELY
IMPACT THE SUPPLY OF AVAILABLE DONOR TISSUE.
Although we do not promote the use of our human tissue products for cosmetic
applications, clinicians may use our products in applications or procedures that
may be considered "cosmetic." Negative publicity concerning the use of donated
human tissue in cosmetic procedures could reduce the demand for our products or
negatively impact the willingness of families of potential donors to agree to
donate tissue or tissue banks to provide tissue to us for processing.
INCREASING OUR REVENUES AND MAINTAINING PROFITABILITY WILL DEPEND ON OUR ABILITY
TO INCREASE MARKET PENETRATION OF OUR CURRENT PRODUCTS AND TO DEVELOP AND
COMMERCIALIZE NEW PRODUCTS.
Much of our ability to increase revenues and to continue to generate net
income and positive cash flows from operations will depend on:
- expanding the use and market penetration of our current products;
and
- the successful introduction of our products in development.
The use of our products in certain procedures represent new methods of
treatment. Surgeons will not use our 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 our products is established as
clinically significant, surgeons may not elect to use such products for any
number of reasons. Consequently, surgeons, health care payers and patients may
not accept our current products or products under development. Broad market
acceptance of our products may require the training of numerous surgeons 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 payers' approval of reimbursement for our
products in development may be an important factor in establishing market
acceptance.
We may be required to undertake time-consuming and costly development
activities and seek regulatory clearance or approval for new products. Although
we have conducted animal studies on many of our products under development which
indicate that the product may be feasible for a particular application, results
obtained from expanded studies may not be consistent with earlier trial results
or be sufficient for us to obtain any required regulatory approvals or
clearances. The completion of the development of any of our 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 possibility of insufficient funds for the completion of such
development.
If we are unable to commercialize new products, our future revenues and
profitability could be adversely affected.
19
CHANGES IN THIRD-PARTY PAYER REIMBURSEMENT PRACTICES REGARDING THE PROCEDURES
PERFORMED WITH OUR PRODUCTS COULD ADVERSELY AFFECT THE MARKET ACCEPTANCE OF OUR
PRODUCTS.
Generally, hospitals, surgeons and other health care providers purchase
products, such as the products being sold or developed by us, for use in
providing care to their patients. These parties typically rely on third-party
payers, 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.
Third-party payers have adopted cost control measures in recent years that 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. We believe that
certain third-party payers provide reimbursement for medical procedures at a
specified rate without additional reimbursement for products, such as those
being sold or developed by us, used in such procedures. Adequate third-party
payer reimbursement may not be available for us to maintain price levels
sufficient for realization of an appropriate return on our investment in
developing new products. The FDA generally permits human tissue for
transplantation to be commercially distributed without obtaining prior FDA
approval of the product. In contrast, products regulated as medical devices or
biologics usually require such approval. Certain government and other
third-party payers refuse, in some cases, to provide any coverage for uses of
products for indications for which the FDA has not granted marketing approval.
Further, certain of our products are used in medical procedures that typically
are not covered by third-party payers or for which patients sometimes do not
obtain coverage. These and future changes in third-party payer reimbursement
practices regarding the procedures performed with our products could adversely
affect the market acceptance of our products and therefore also adversely affect
our revenues and results of operations.
WE ARE HIGHLY DEPENDENT UPON INDEPENDENT SALES AND MARKETING AGENTS AND
DISTRIBUTORS TO GENERATE OUR REVENUES.
Our independent sales and marketing agents and distributors generated 38%
of our total product revenue in the year ended December 31, 2003. Boston
Scientific Corporation, our exclusive worldwide sales and marketing agent for
Repliform represented 23% of our total product revenues in 2003. No other
individual independent sales agent or distributor generated more than 5% of our
total product revenues in the year ended December 31, 2003.
If any of our independent sales and marketing agents or distributors,
especially Boston Scientific, fails to adequately market our products, our
revenues could be adversely affected until a replacement agent or distributor
could be retained by us. Finding replacement agents and distributors could be a
time consuming process during which our revenues could be negatively impacted.
WE MAY NEED ADDITIONAL CAPITAL TO DEVELOP AND COMMERCIALIZE NEW PRODUCTS, AND IT
IS UNCERTAIN WHETHER SUCH CAPITAL WILL BE AVAILABLE.
We intend to expend funds for our ongoing research and product development
activities. We may need additional capital, depending on:
- the number and types of research and product development programs
undertaken; and
20
- the progress of our research and product development efforts and
the associated costs relating to obtaining regulatory approvals,
if any, that may be needed to commercialize some of our products
currently under development.
Although we believe that our current cash resources together with
anticipated cash from ongoing operating activities, committed research grant
funding and remaining availability under our credit facility will be sufficient
to fund our planned operations, research and development programs and fixed
asset additions in the foreseeable future, there can be no assurance that such
sources will be sufficient to meet our long-term needs and as a result we may
need additional funding. We have no commitments for any future funding and
there can be no assurance that we will be able to obtain additional financing in
the future from either debt or equity financings, collaborative arrangements or
other sources on terms acceptable to us, or at all. If adequate funds are not
available, we expect that we will be required to delay, scale back or eliminate
one or more of our product development programs. 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 us to relinquish our rights to
certain of our technologies, products or marketing territories.
THE BIOMEDICAL FIELD IS HIGHLY COMPETITIVE AND SUCH COMPETITION COULD ADVERSELY
AFFECT OUR REVENUES AND RESULTS OF OPERATIONS.
The biomedical field is undergoing rapid and significant technological
change. Our success depends upon our ability to develop and commercialize
effective products that meet medical needs. There are many companies, including
Regeneration Technologies, Inc., Cook, Inc. and its affiliates, Cryolife, Inc.,
Integra Life Sciences Holdings Corporation, Tissue Science Laboratories, plc and
academic institutions, including Rice University, The University of Pittsburgh
and Georgia Institute of Technology, that are capable of developing products
based on similar technology. Some or all of these competitors have developed
and are capable of developing products based on other technologies, which are or
may be competitive with our products. Additionally, our regenerative tissue
products compete with synthetic products marketed by large medical device
companies such as Johnson & Johnson and W.L. Gore & Associates. Many of these
companies and academic institutions are well-established, and have substantially
greater financial and other resources, research and development capabilities and
more experience in conducting clinical trials, obtaining regulatory approvals
and manufacturing and marketing than we do. These companies and academic
institutions may succeed in developing competing products that are more
effective than our products, or that receive government approvals more quickly
than our products, which may render our products or technology uncompetitive,
uneconomical or obsolete.
OUR SUCCESS DEPENDS ON THE SCOPE OF OUR INTELLECTUAL PROPERTY RIGHTS AND NOT
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. THE VALIDITY,
ENFORCEABILITY AND COMMERCIAL VALUE OF THESE RIGHTS ARE HIGHLY UNCERTAIN.
Our ability to compete effectively with other companies is materially
dependent upon the proprietary nature of our technologies. We rely primarily on
patents and trade secrets to protect our technologies. Third parties may seek
to challenge, invalidate, circumvent or render unenforceable any patents or
proprietary rights owned by or licensed to us 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.
21
In general, the patent position of biotechnology and medical product firms
is highly uncertain, still evolving and involves complex legal, scientific and
factual questions. We are at risk that:
- other patents may be granted with respect to the patent
applications filed by us; and
- any patents issued or licensed to us may not provide commercial
benefit to us or will be infringed, invalidated or circumvented
by others.
The United States Patent and Trademark Office currently has a significant
backlog of patent applications, and the approval or rejection of patents may
take several years. Prior to actual issuance, the contents of United States
patent applications are generally not made public. Once issued, such a patent
would constitute prior art from its filing date, which might predate the date of
a patent application on which we rely. Conceivably, the issuance of such a
prior art patent, or the discovery of "prior art" of which we are currently
unaware, could invalidate a patent of ours or our licensor or prevent
commercialization of a product claimed thereby.
We generally conduct a cursory review of issued patents prior to engaging
in research or development activities. If others already have issued patents
covering new products that we develop, we may be required to obtain a license
from them to commercialize such new products. There can be no assurance that any
necessary license could be obtained on favorable terms or at all.
There can be no assurance that we will not be required to resort to
litigation to protect our patented technologies or other proprietary rights or
that we will not be the subject of additional patent litigation to defend our
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 our resources.
We also have 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 us may differ from that of their
foreign counterparts.
We may decide for business reasons to retain certain knowledge that we
consider proprietary as confidential and elect to protect such information as a
trade secret, as business confidential information or as know-how. In that
event, we must rely upon trade secrets, know-how and continuing technological
innovation to maintain our 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.
WE ARE EXPOSED TO POTENTIAL PRODUCT LIABILITY CLAIMS FOR WHICH OUR PRODUCT
LIABILITY INSURANCE MAY BE INADEQUATE.
Our business exposes us to potential product liability risks inherent in
the testing, manufacturing, marketing and use of medical products. Although we
maintain product liability insurance, we cannot be certain that:
- our insurance will provide adequate coverage against potential
liabilities;
- adequate product liability insurance will continue to be
available in the future; or
- our insurance can be maintained on acceptable terms.
The legal expenses associated with defending against product liability claims
and the obligation to pay a product liability claim in excess of available
insurance coverage would increase our operating expenses and could adversely
affect our results of operations and cash flows.
22
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public
market could cause a decrease in the market price of our common stock. As of
February 27, 2004, we had 25,667,537 shares of common stock outstanding and
67,601 shares of Series B preferred stock outstanding, which are convertible
into an additional 2,449,319 shares of common stock. A significant portion of
our outstanding shares are freely tradeable. In addition, options and warrants
to purchase 6,042,736 shares of our common stock were outstanding at December
31, 2003, of which 4,340,944 were vested. The remainder represents options that
will vest over the next four years. The weighted average the exercise prices of
such options and warrants are substantially lower than the current market price
of our common stock. We may also issue additional shares of stock in connection
with our business and may grant additional stock options to our employees,
officers, directors and consultants under our stock option plans or warrants to
third parties. If a significant portion of these shares were sold in the public
market, the market value of our common stock could be adversely affected.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements typically are identified by use
of terms such as "may," "will," "should," "plan," "expect," "anticipate,"
"estimate" and similar words, although some forward-looking statements are
expressed differently. Forward-looking statements represent our management's
judgment regarding future events. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, we can give no
assurance that such expectations will prove to be correct. All statements other
than statements of historical fact included in this Annual Report on Form 10-K
regarding our financial position, business strategy, products, products under
development and clinical trials, markets, budgets, plans, or objectives for
future operations are forward-looking statements. We cannot guarantee the
accuracy of the forward-looking statements, and you should be aware that our
actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including the statements
under "Risk Factors" set forth above and "Critical Accounting Policies" in
"Managements Discussion and Analysis of Financial Condition and Results of
Operations".
SUPERVISION AND REGULATION - SECURITIES AND EXCHANGE COMMISSION
We maintain a website at http://www.lifecell.com. We make available on our
-----------------------
website the proxy statements and reports on Forms 8-K, 10-K and 10-Q that we
file with the SEC as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC.
ITEM 2. PROPERTIES
We lease approximately 90,000 square feet of laboratory, production and
office space in one building in Branchburg, New Jersey under a lease agreement
that expires in November 2010. The current monthly rental obligation under this
lease is approximately $76,000. We believe that our current laboratory,
production and office space will be sufficient to meet our anticipated needs for
the next several years.
ITEM 3. LEGAL PROCEEDINGS
The previously reported litigation filed in the Superior Court of
California, Los Angeles County, Central District, captioned Joan Savitt,
individually and on behalf of others similarly situated, v. Doheny Eye & Tissue
Bank, et al., was settled in June 2003 when the plaintiff and the LifeCell
entered into a mutual release and dismissal of the complaint.
23
In November 2003, a complaint was filed in the Circuit Court of Fairfax,
Virginia captioned Sun Hee Jung v. Yongsook Victoria Suh, M.D., Victoria Plastic
Surgery Center, Inc. and LifeCell Corporation. The matter is a product liability
action for personal injury damages allegedly arising from the use of one of the
Company's products. The case is in its beginning stages and the parties are
conducting preliminary discovery. We intend to vigorously defend against this
action. The likelihood of an unfavorable outcome is unknown at this time
however, we believe any potential losses resulting from this action would be
covered by our insurance policies.
We do not expect the final resolution of this matter to have a material
impact on our financial position, results of operations, or cash flows.
However, there can be no assurance that the resolution of this matter will not
be material to LifeCell's financial position, results of operations, or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is listed on the NASDAQ National Market under the symbol
"LIFC." On March 5, 2004, the last reported sale price for our Common Stock on
the NASDAQ National Market was $7.68 per share. The following table sets forth
the high and low sales information for our Common Stock for the periods
indicated, as reported by the NASDAQ Stock Market.
Price Range
-----------
High Low
----- -----
2002 First Quarter. $3.82 $2.30
Second Quarter 3.54 2.26
Third Quarter. 2.50 1.72
Fourth Quarter 3.28 1.70
2003 First Quarter. $3.05 $2.00
Second Quarter 6.23 2.33
Third Quarter. 7.40 3.50
Fourth Quarter 7.06 4.96
As of February 27, 2003, there were approximately 359 holders of record of
shares of Common Stock and 23 holders of record of shares of Series B Preferred
Stock. We estimate that there are in excess of 8,000 beneficial holders of
Common Stock.
DIVIDEND POLICY
We have not paid a cash dividend to holders of shares of Common Stock and do not
anticipate paying cash dividends to the holders of our Common Stock in the
foreseeable future. Additionally, pursuant to the terms of our loan agreement
with our bank we are restricted from paying dividends on our Common Stock
without the bank's consent.
25
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected financial data of LifeCell for
each of the years in the five-year period ended December 31, 2003, derived from
the audited financial statements. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Operations Statement Data:
- --------------------------
Revenues:
Product revenues $ 38,577 $ 32,935 $ 26,560 $ 21,330 $ 11,912
Research grant revenues 1,672 1,493 1,209 1,442 764
--------- --------- --------- --------- ---------
Total revenues 40,249 34,428 27,769 22,772 12,676
--------- --------- --------- --------- ---------
Costs and expenses:
Costs of products sold 12,241 10,134, 8,862 6,949 3,452
Research and development 5,396 5,015 4,351 4,523 3,871
General and administrative 5,594 4,590 4,098 6,180 4,840
Selling and marketing 14,940 13,288 11,978 11,779 7,236
Relocation costs -- -- -- -- 2,937
--------- --------- --------- --------- ---------
Total costs and expenses 38,171 33,027 29,289 29,431 22,336
--------- --------- --------- --------- ---------
Income (loss) from operations 2,078 1,401 (1,520) (6,659) (9,660)
Interest and other income (expense), net (28) (129) (550) (479) 468
--------- --------- --------- --------- ---------
Income (loss) before income taxes 2,050 1,272 (2,070) (7,138) (9,192)
Income tax benefit 16,622 157 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) 18,672 1,429 (2,070) (7,138) (9,192)
Preferred stock and deemed dividends -- -- (1,591) (593) (710)
--------- --------- --------- --------- ---------
Net income (loss) to common shareholders $ 18,672 $ 1,429 $ (3,661) $ (7,731) $ (9,902)
========= ========= ========= ========= =========
Income (loss) per common share:
Basic $ 0.85 $ 0.07 $ (0.20) $ (0.54) $ (0.83)
========= ========= ========= ========= =========
Diluted $ 0.70 $ 0.06 $ (0.20) $ (0.54) $ (0.83)
========= ========= ========= ========= =========
Shares used in computing
income (loss) per share:
Basic 22,094 21,176 18,240 14,372 11,938
========= ========= ========= ========= =========
Diluted 26,632 24,696 18,240 14,372 11,938
========= ========= ========= ========= =========
As of December 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Balance Sheet Data:
- ------------------
Cash, cash equivalents and short-term
investments $ 11,785 $ 5,458 $ 4,900 $ 5,535 $ 5,052
Working capital 23,283 11,466 8,851 5,330 2,542
Total assets 58,273 24,116 23,131 25,410 18,083
Notes payable and term debt -- 863 2,197 6,285 2,792
Common stock, subject to redemption -- 478 1,935 3,885 3,885
Accumulated deficit (45,669) (64,341) (65,770) (62,109) (54,378)
Total stockholders' equity 52,379 17,719 14,833 8,904 5,364
26
ITEM 7. 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 Annual Report on Form 10-K.
Special Note: Certain statements set forth below constitute forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. See "Business-Special Note Regarding
Forward-Looking Statements" and "Business-Risk Factors." In the following
discussions, most percentages and dollar amounts have been rounded to aid the
presentation. As a result, all such figures are approximations.
GENERAL AND BACKGROUND
We develop and market products made from human (allograft) tissue for use in
reconstructive, urogynecologic and orthopedic surgical procedures. Our patented
tissue processing technology produces a unique regenerative tissue matrix - a
complex three dimensional structure that contains proteins, growth factor
binding sites and vascular channels - that provides a complete template for the
regeneration of normal human tissue. We currently market a broad range of
products: AlloDerm, regenerative tissue matrix for reconstructive surgical
procedures and skin grafting for burn procedures through our direct sales
organization and for periodontal surgery through BioHorizons, Inc.; Cymetra, a
version of AlloDerm in particulate form, through our direct sales organization;
Repliform, regenerative tissue matrix for urogynecologic procedures, through a
marketing agreement with Boston Scientific Corporation; Graft Jacket,
regenerative tissue matrix for orthopedic applications, through a distribution
agreement with Wright Medical Technology, Inc.; and AlloCraft DBM, regenerative
tissue matrix for bone grafting, through a marketing agreement with Stryker
Corporation. Our product development programs include the application of our
tissue matrix technology to vascular and orthopedic tissue repair; investigation
of human tissues as carriers for therapeutics; Thrombosol, a formulation for
extended storage of platelets and technologies to enhance the storage of red
blood cells for transfusion.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to the understanding of our
financial statements. The application of these polices requires management to
make estimates and assumptions that affect the valuation of assets and expenses
during the reporting period. There can be no assurance that actual results will
not differ from these estimates. The impact and any associated risks related to
these policies on our business operations are discussed below. For a detailed
discussion on the application of these and other accounting policies, including
the impact of recent accounting pronouncements, see Note 2 in the Notes to the
Financial Statements in Part IV, Item. 15 of this Annual Report on Form 10-K.
Revenue Recognition. We recognize revenue for product sales when title to
products and risk of loss are transferred to customers. Additional conditions
for recognition of revenue are that collection of sales proceeds is reasonably
assured and we have no further performance obligations. We utilize independent
sales and marketing agents to supplement our direct sales organization. For
products marketed through our independent sales and marketing agents we
recognize revenue when the products are delivered to the third-party customer,
as this is when title and risk of loss to the product transfers. Amounts billed
to customers for shipping and handling are included in revenue at the time the
related product revenue is recognized. Research grant revenues are recognized
at the time qualified expenses are incurred, unless we have continuing
performance obligations, in which case revenue is recognized upon the
satisfaction of such obligations.
Accounts receivable. We maintain an allowance for estimated bad debt losses on
our accounts receivable based upon our historical experience and any specific
customer collection issues that we have identified. Since our accounts
receivable are not concentrated within a relatively few number of customers, we
believe that a significant change in the liquidity or financial position of any
one customer would not have a material adverse impact on the collectability of
our accounts receivable and therefore our future operating results. While bad
debt losses depend to a large degree on future economic conditions affecting our
customers, we do not anticipate significant bad debt losses in 2004.
27
Inventories. We value our inventory at the lower of cost or market, with cost
being determined on a first-in, first-out basis. We record a provision for
excess and obsolete inventory based primarily on inventory quantities on hand,
our historical product sales, and estimated forecast of future product demand
and production requirements. Although we believe that our current inventory
reserves are adequate, any significant change in demand or technological
developments could have a significant impact on the value of our inventory and
therefore our future operating results.
Income Taxes. Significant judgment is required in determining our income tax
provision. In the ordinary course of business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Although we believe
that our estimates are reasonable, no assurance can be given that the final
outcome of these matters will not be different than that which is reflected in
our historical income tax provisions and accruals. Such differences could have
a material effect on our income tax provision and net income in the period in
which such determination is made.
We apply an asset and liability approach to accounting for income taxes.
Deferred tax liabilities and assets are recognized for the expected future tax
consequences of temporary differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. The recoverability of
deferred tax assets is dependent upon our assessment of whether it is more
likely than not that sufficient future taxable income will be generated to
utilize the deferred tax asset. In the event we determine that future taxable
income will not be sufficient to utilize the deferred tax asset, a valuation
allowance is recorded. At December 31, 2003, the valuation allowance primarily
reflected uncertainties involving the realization of certain tax credits and
loss carryforwards due to the potential impact of future stock option exercises
and shorter-term tax asset expiration dates.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
Total revenues for the year ended December 31, 2003 increased 17% to $40.2
million compared to $34.4 million for the same period in 2002. The increase was
primarily attributable to a 17% increase in product revenues to $38.6 million in
the current period as compared to $32.9 million in the prior year.
Revenues generated from the use of our products in reconstructive surgical
procedures increased 24% to $28.1 million in the year ended December 31, 2003
compared to $22.7 million in 2002. The growth was driven by increased demand
for AlloDerm, partially offset by a decrease in Cymetra revenues. AlloDerm
revenues increased 38% to $23.7 million in the year ended December 31, 2003
compared to $17.2 million in 2002. Cymetra revenues have been negatively
impacted by competitive products and we expect this trend to continue in 2004.
Revenues generated from the use of our Repliform product in urogynecologic
surgical procedures decreased 14% to $8.7 million in the year ended December 31,
2003 compared to $10.1 million for the same period in 2002. Demand for
Repliform in the treatment of stress urinary incontinence has been negatively
affected by competition from synthetic alternatives and we anticipate this
negative trend to continue in 2004.
Orthopedic product revenue grew to $1.7 million in 2003 from $173,000 in 2002.
This revenue growth resulted primarily from the full market launch of our Graft
Jacket product in the first quarter of 2003. In the fourth quarter of 2003, we
introduced AlloCraft DBM on a limited basis and revenues from this product were
not significant in 2003.
Our independent sales and marketing agents and distributors generated 38% of our
total product revenue in the year ended December 31, 2003 and 48% in 2002. One
of our independent agents, Boston Scientific Corporation, represented 23% of our
total product revenues in 2003 compared to 31% for the same period in 2002. No
other individual independent sales agent or distributor generated more than 5%
of our total product revenues in the year ended December 31, 2003.
Total revenues were also favorably impacted by a 12% increase in research grant
revenues, which totaled $1.7 million in 2003 compared to $1.5 million in 2002.
This increase was primarily due to an increase in research spending on projects
funded by approved research grants, since research grant revenues are recognized
when qualified expenses are incurred. As of December 31, 2003, approximately
$3.4 million of approved grant funding was available to fund future research and
development expenses through 2005.
28
Cost of products sold for the year ended December 31, 2003 was $12.2 million, or
32% of product revenues, compared to cost of products sold of $10.1 million, or
31% of product revenue for the same period in 2002. The increase in cost of
products sold as a percentage of products sold was primarily the result of costs
related to the launch of AlloCraft DBM.
Total research and development expenses increased 8% to $5.4 million in the year
ended December 31, 2003 compared to $5.0 million for the same period in 2002.
The increase was primarily associated with higher spending on research focused
on the potential application of our tissue matrix technology to vascular tissue,
which is funded through a grant from the Department of Defense, and increased
spending on AlloCraft DBM product development and other product development
programs.
General and administrative expenses increased 22% to $5.6 million in the year
ended December 31, 2003 compared to $4.6 million for the same period in 2002.
The increase was primarily attributable to an increase in payroll and related
expenses, professional fees and, training and travel expenses associated with
training and implementation costs associated with a new fully integrated
computer software system.
Selling and marketing expenses increased 12% to $14.9 million for the year ended
December 31, 2003 compared to $13.3 million for the same period in 2002. The
increase in 2003 was primarily attributable to higher selling expense associated
with the expansion of our direct sales force and an increase in marketing
expenses relating to launch of AlloDerm for new surgical indications. Our
marketing agents are paid agency fees based on the amount of product revenues
they generate for us. Selling and marketing expenses include marketing agent
fees of $4.6 million and $5.7 million, respectively, in 2003 and 2002. The
decrease in agent fees resulted from the decrease in revenue generated through
our independent sales and marketing agents.
Interest and other income (expense), net decreased $101,000 in the year ended
December 31, 2003 compared to 2002. The net decrease was due to a $124,000
decrease in interest expense resulting from a decrease in debt outstanding and a
$2,000 increase in interest income, partially offset by a $25,000 loss on the
disposal of fixed assets.
Prior to 2003, no deferred provision or benefit for federal income taxes was
recorded because we were in a net deferred tax asset position and a full
valuation allowance had been recorded. During the fourth quarter of 2003, we
re-evaluated the amount of valuation allowance required in light of
profitability achieved in recent years and expected in future years. As a
result, we reduced the valuation allowance on deferred tax assets to an amount
that we believe is more likely than not of being realized based on our
assessment of the likelihood of future taxable income. The reduction in the
valuation allowance resulted in the recognition of a non-cash income tax benefit
of $16.6 million in the fourth quarter of 2003. At December 31, 2003, the
valuation allowance primarily reflected uncertainties involving the realization
of certain tax credits and loss carryforwards due to the potential impact of
future stock option exercises and shorter-term tax asset expiration dates. In
2003, we also realized $235,000 through the sale and transfer of $3.0 million of
state tax net operating losses. In 2002, we realized $248,000 through the sale
and transfer of $3.2 million of state tax net operating losses. The sales and
transfers were made through the Technology Business Tax Certificate Program
sponsored by the New Jersey Economic Development Authority.
YEARS ENDED DECEMBER 31, 2002 AND 2001
Total revenues for the year ended December 31, 2002 increased 24% to $34.4
million compared to $27.8 million in 2001. The increase was principally
attributable to a 24% increase in product revenues to $32.9 million in the
current year as compared to $26.6 million in the prior year. The increase in
product revenues was largely due to increased demand for our AlloDerm products.
AlloDerm revenues increased 35% to $17.1 million in the year ended December 31,
2002 compared to $12.7 million in the same period in 2001. Repliform revenues
increased 9% to $10.1 million in the year ended December 31, 2002 compared to
$9.3 million for the same period in 2001. Cymetra revenues decreased 5% to $3.8
million in 2002 compared to $4.0 million in 2001.
For the year ended December 31, 2002, our independent sales and marketing agents
and distributors generated 48% of our total product revenues. During 2002,
sales of our products through Boston Scientific Corporation and OMP, Inc.
represented 31% and 8%, respectively, of our total product revenues compared to
35% and 9%, respectively, in 2001. No other independent sales agent or
distributor generated more than 5% of our total product revenues in 2002.
29
Total revenues were also favorably impacted by a 23% increase in research grant
revenues, which totaled $1.5 million in 2002 compared to $1.2 million in 2001.
This increase was primarily due to an increase in research spending on projects
funded by research grants, since research grant revenues are recognized when
qualified expenses are incurred. During 2002, we were awarded grants from the
Department of Defense and the National Institute of Health totaling $927,000. As
of December 31, 2002, approximately $3.9 million of approved grant funding was
available to fund future research and development expenses through 2004.
Cost of products sold for the year ended December 31, 2002 was $10.1 million, or
31% of product revenues, compared to cost of products sold of $8.9 million, or
33% for the same period in 2001. The cost of products sold decreased as a
percentage of product revenues due to efficiencies realized in our processing
operation as a result of volume increases and process improvements.
Total research and development expenses increased 15% to $5.0 million in 2002
compared to $4.4 million in 2001. The increase was primarily associated with
higher spending on research focused on the potential application of our tissue
matrix technology to vascular tissue, which is funded through a grant from the
Department of Defense, and increased spending on other product development
projects.
General and administrative expenses increased 12% to $4.6 million in 2002
compared to $4.1 million in 2001. The increase was primarily the result of
increased investor relations activities, higher recruiting expenses and payroll
related costs.
Selling and marketing expenses increased 11% to $13.3 million in 2002 compared
to $12.0 million in the same period in 2001. The increase in 2002 was primarily
attributable to higher selling expense associated with the increase in product
revenues. Selling and marketing expenses decreased as a percentage of product
revenues from 45% in 2001 to 40% in 2002. Selling and marketing expenses
include marketing agent fees of $5.7 million and $5.4 million, respectively, in
2002 and 2001.
Interest and other income (expense), net decreased $421,000 in 2002 compared to
2001. The net decrease was due to a $517,000 decrease in interest expense,
resulting from a decrease in debt outstanding, partially offset by a $96,000
decline in interest income resulting from lower average interest rates during
the period.
In the year ended December 31, 2002, we recorded a net tax benefit of $155,000
consisting of a provision for state income taxes of $93,000, offset by proceeds
of $248,000 from the sale of state net operating losses. The sale was made
through the Technology Business Tax Certificate Program sponsored by the New
Jersey Economic Development Authority. No federal provision for income taxes
has been recorded as we intend to utilize net operating loss carryforwards to
offset our estimated federal tax liability of $492,000. We were unable to
utilize net operating loss carryforwards to offset our state tax liability in
2002 because the State of New Jersey enacted tax legislation during the year
suspending the use of loss carryforwards to offset taxable income in 2002 and
2003. We have provided a full valuation allowance against our deferred tax
assets based on the uncertainty as to whether it is more likely than not that we
will realize future benefit of these assets.
Preferred stock and deemed dividends totaled $1.6 million for the year ended
December 31, 2001 and consisted of $440,000 of preferred stock dividends, which
ceased accruing September 30, 2001, and a non-cash deemed dividend of $1.2
million recorded in connection with issuance of additional shares and the
re-pricing of warrants, pursuant to the terms of an investment made in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had cash and cash equivalents and short-term
investments of $11.8 million compared to $5.5 million at December 31, 2002.
Working capital increased to $23.2 million at December 31, 2003 from $11.5
million at December 31, 2002. The increase in cash, cash equivalents and
short-term investments and working capital resulted principally from the $14.7
million net proceeds from the private placement of our Common Stock in 2003.
Our operating activities generated net cash of $822,000 for the year ended
December 31, 2003 compared to $2.5 million for the same period in 2002. Although
net income increased in 2003 compared to 2002, net cash provided by operating
activities decreased primarily due to higher cash used to fund the net increase
in working capital. Accounts receivable increased $1.6 million from December 31,
2002 due to the higher revenues in the fourth quarter
30
of 2003 versus the fourth quarter of 2002. Inventories increased by $2.5 million
in 2003 due to higher receipts of tissue from our tissue banks and a planned
increase in processed tissue to support the increase in demand and full launch
of AlloCraft DBM.
Our investing activities, which consist of purchases of investments and capital
equipment, used net cash of $13.3 million for the year ended December 31, 2003
compared to $582,000 for the same period in 2002. The increase in 2003 resulted
principally from the purchase of $10.9 million of investments and purchases of
hardware and software for a new fully integrated computer system and production
equipment.
Our financing activities generated $14.6 million for the year ended December 31,
2003 compared to $1.3 million used for principal payments on long-term debt in
2002. In 2003, we received net proceeds of $15.5 million from the private
placement of our Common Stock and the exercise of warrants and options to
purchase Common Stock. During 2003, we utilized $863,000 to retire all of our
outstanding long-term debt. At December 31, 2003, we had no debt outstanding
under our borrowing arrangements compared to $863,000 outstanding at December
31, 2002, and remaining availability on a revolving credit line of $2 million.
In March 2004, the financial institution increased the borrowing limit on the
revolving line of credit to $4 million and extended the expiration through March
2005. The credit facility is collateralized by the Company's accounts
receivable, inventory, intellectual property, intangible and fixed assets and
contains certain financial covenants and a subjective acceleration clause. As
of December 31, 2003 we were in compliance with the covenants of our credit
facility.
The following table reflects a summary of our contractual cash obligations as of
December 31, 2003:
Payments Due by Period
----------------------------------------------
Less than 1 to 3 4 to 5 After 5
Total one year years years years
------ ---------- ------- ------- --------
Operating leases $6,243 $ 833 $ 1,810 $ 1,838 $ 1,762
------ ---------- ------- ------- --------
Total contractual cash obligations $6,243 $ 833 $ 1,810 $ 1,838 $ 1,762
====== ========== ======= ======= ========
We believe that our current cash resources together with anticipated product
revenues, committed research and development grant funding and remaining
availability under our credit facility will be sufficient to finance our planned
operations, research and development programs and fixed asset requirements in
the foreseeable future. However, there can be no assurance that such sources of
funds will be sufficient to meet our long-term needs and as a result, we may
need additional funding. There can be no assurance that we will be able to
obtain additional funding from either debt or equity financing, collaborative
arrangements or other sources on terms acceptable to us, or at all. 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 us to
relinquish our rights to certain of our technologies, products or marketing
territories.
It is possible that our results of operations or liquidity and capital resources
could be adversely affected by the ultimate outcome of pending litigation or as
a result of the cost of contesting such legal action. For a discussion of this
matters see Note 13 of "Notes to Financial Statements" and Part I., Item 3.
"Legal Proceedings".
INFLATION
We do not believe that inflation has had a material impact on our results of
operations for the years ended December 31, 2003, 2002 and 2001.
NEW ACCOUNTING PRONOUNCEMENTS
FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities", an interpretation of ARB No. 51 (FIN 46R), replaces FIN 46,
"Consolidation of Variable Interest Entities", an interpretation of ARB No. 51,
which had been issued in January 2003. FIN 46R clarifies some of the provisions
of FIN 46 relating to variable interest entities (VIEs) and exempts certain
entities from its requirements. FIN 46R addresses consolidation of VIEs which
have one or more of the following characteristics: the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support
31
provided by any parties, the equity investors lack some essential
characteristics of a controlling financial interest and the equity investors
have voting rights that are not proportionate to their economic interests.
Application of FIN 46R is required in financial statements of companies that
have interests in structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public
entities for all other types of variable interest entities is required in
financial statements for periods ending after March 15, 2004. We do not expect
the adoption of FIN 46R to have a material impact on our financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our investments in
certain marketable securities, consisting principally of fixed income debt
securities. Although our investments are available for sale, we generally hold
such investments to maturity. Our Investments are stated at fair value, with
net unrealized gains or losses on the securities recorded as accumulated other
comprehensive income (loss) in shareholders' equity. Net unrealized gains and
losses were not material at December 31, 2003 or 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to be
filed under this Item are presented commencing on page F-1 of the Annual Report
on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
A. DISCLOSURE CONTROLS AND PROCEDURES.
As of the end of the period covered by this Annual Report on Form
10-K, we carried out an evaluation, with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are
effective in ensuring that information required to be disclosed by us
in the reports that we file or submit under the Securities Exchange
Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms.
B. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING.
There have been no changes in our internal control over financial
reporting that occurred during our last fiscal quarter to which this
Annual Report on Form 10-K relates that have materially affected, or
are reasonably likely to materially affect, our internal control over
financial reporting.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BACKGROUND OF DIRECTORS
The persons listed below served as directors of the Company during the year
ended December 31, 2003.
NOMINEE AGE POSITION WITH THE COMPANY DIRECTOR SINCE
- ---------------------------- --- ------------------------------------------ --------------
Paul G. Thomas 48 Chairman of the Board, President and Chief 1998
Executive Officer
Michael E. Cahr (1) (2) (3) 63 Director 1991
David Fitzgerald (1) (2) (3) 70 Director 2001
James G. Foster (1) (2) (3) 57 Director 1995
Stephen A. Livesey (4) 51 Chief Scientist 1993
Jonathan Silverstein (5) 36 Director 2002
Martin P. Sutter (6) 48 Director 2003
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation and Stock Option Committee of the Board of
Directors.
(3) Member of the Nominating Committee of the Board of Directors.
(4) Dr. Livesey's term ended May 30, 2003 and he was not elected to an
additional term.
(5) Mr. Silverstein resigned from the Board of Directors on December 22, 2003.
(6) Mr. Sutter was appointed to the Board of Directors on December 22, 2003.
All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualified; vacancies and any additional
positions created by board action are filled by action of the existing Board of
Directors.
Paul G. Thomas. Mr. Thomas has served as Director, President and Chief
Executive Officer of LifeCell since October 1998. Mr. Thomas was elected
Chairman of the Board in June 1999. Prior to joining LifeCell, Mr. Thomas was
President of the Pharmaceutical Products Division of Ohmeda Inc., a world leader
in inhalation anesthetics and acute care pharmaceuticals. Mr. Thomas was
responsible for the overall operations of Ohmeda's Pharmaceutical Division,
which had worldwide sales of approximately $200 million in 1997. Mr. Thomas
received his MBA degree with an emphasis in Marketing and Finance from Columbia
University Graduate School of Business and completed his postgraduate studies in
Chemistry at the University of Georgia Graduate School of Arts and Science. He
received his B.S. degree in Chemistry from St. Michael's College in Vermont,
where he graduated Cum Laude.
Michael E. Cahr. Mr. Cahr has been a director of LifeCell since July 1991. Mr.
Cahr is currently President of Saxony Consultants, an Illinois-based company
that provides financial and marketing expertise to organizations in the United
States and abroad. From February 2000 through March 2002, Mr. Cahr was
President and Chief Executive Officer of IKADEGA, Inc., a Northbrook, Illinois
server technology company developing products and services for the healthcare,
data storage and hospitality fields. He also served as Chairman of Allscripts,
Inc., a leading developer of hand-held device technology that provides
physicians with real-time access to health, drug and other critical information
from September 1997 through March 1999 and President, Chief Executive Officer
and Chairman from June 1994 to September 1997. Prior to Allscripts, Mr. Cahr
was Venture Group Manager for Allstate Venture Capital where he oversaw
investments in technology and biotech from 1987 to June 1994. Mr. Cahr serves
as a director of Pacific Health Laboratories, a publicly held Woodbridge, New
Jersey nutritional products firm which develops and commercializes functionally
unique nutritional products, and a director of
33
Truswal Systems, an Arlington, Texas-based software engineering firm. Mr. Cahr
received his undergraduate degree in Economics from Colgate University and his
Masters of Business Administration from Fairleigh Dickinson University. Mr. Cahr
is chairman of the Company's audit committee
David Fitzgerald. Mr. Fitgerald has been a director of LifeCell since December
2001. He served as President and Chief Executive Officer of Howmedica, Inc.
from 1980 until his retirement in 1996. In 1988, he was named Executive Vice
President of Pfizer Hospital Products Group, a $1.3 billion group of medical
device companies including Howmedica. In 1992, he was also named Vice President
of Pfizer Inc. Mr. Fitzgerald serves as a director of Arthrocare Corp., a
publicly traded Nasdaq company specializing in soft tissue surgical technology
and Orthovita, Inc., a publicly traded Nasdaq company specializing in
biomaterial products for the restoration of the human skeleton.
James G. Foster. Mr. Foster has been a director of LifeCell since March 1995.
Mr. Foster was Vice President and General Manager of Medtronic Heart Valves, a
division of Medtronic, Inc. ("Medtronic") a medical device company, from
December 1994 through his retirement in December 2001. From February 1984 to
December 1994, Mr. Foster held various officer positions with Medtronic
including; Vice President of Cardiac Surgery Sales & Strategic Planning in 1994,
Vice President and General Manager of Medtronic Neurological Implantables from
1992 through 1994, Vice President and General Manager of Medtronic
Interventional Vascular from 1990 through 1992 and Vice President and General
Manager of Medtronic Blood Systems from 1983 through 1989. Currently, Mr.
Foster serves as a director of Arthrocare Corp., a publicly traded Nasdaq
company specializing in soft tissue surgical technology.
Stephen A. Livesey, M.D., Ph.D. Dr. Livesey first joined LifeCell in June 1991
as Executive Vice President, Scientific Development of LifeCell. From March 1993
through March 2003, Dr. Livesey has served as Executive Vice President, Chief
Science Officer and as a director of LifeCell. Effective April 1, 2003, Dr.
Livesey joined the newly formed National Stem Cell Centre Ltd. in Australia as
Director of Tissue Regeneration and Professional Fellow (Tissue Engineering) at
the Victorian Institute of Forensic Medicine. LifeCell and Dr. Livesey have
entered into an agreement under which Dr. Livesey will remain employed with
LifeCell in the role of Chief Scientist (a non-executive officer of LifeCell).
Dr. Livesey' Director term ended May 30, 2003 and he was not elected to an
additional term. Dr. Livesey is also a co-developer of LifeCell's initial
technology and was involved in the formation of LifeCell and the licensing of
such technology to LifeCell from The University of Texas Health Science Center
in Houston. Dr. Livesey received his medical degree and a Ph.D. in biological
chemistry from the University of Melbourne, Australia.
Jonathan Silverstein. Mr. Silverstein served as a director of LifeCell from
April 2002 through December 2003. He is a director at OrbiMed Advisors LLC
("OrbiMed"), a healthcare fund that managers roughly $4 billion dollars in
global healthcare investments. OrbiMed is also a major shareholder in LifeCell
and currently holds approximately 10 percent of our outstanding common stock.
Mr. Silverstein joined OrbiMed in 1999. From 1996 to 1999, Mr. Silverstein was
the Director of Life Sciences in the investment banking department at the
Sumitomo Bank, Limited in charge of strategic alliances, mergers and
acquisitions in the biotechnology sector. Prior to 1996, Mr. Silverstein was an
associate at Hambro Resources Development. Mr. Silverstein has a B.A. in
Economics from Denison University and a J.D. and M.B.A. from the University of
San Diego. Currently, Mr. Silverstein is a Director of Given Imaging, Ltd. and
Predix Pharmaceuticals, Inc.
Martin P. Sutter. Mr. Sutter is a Managing Director at Essex Woodlands Health
Ventures, one of the oldest and largest venture capital organizations focused
exclusively on health care. Essex Woodlands Health Ventures currently holds
approximately five percent of our outstanding Common Stock. Mr. Sutter began
his career in management consulting with Peat Marwick, Mitchell & Co. in 1977
and shortly thereafter moved to Mitchell Energy & Development Corporation where
he held various positions in operations, engineering and marketing. He founded
the Woodlands Venture Capital Company in 1984 and Woodlands Venture Partners, an
independent venture capital partnership, in 1988. He currently serves on the
board of directors of Confluent Surgical, Inc., a privately held company
specializing in surgical sealants and adhesion barriers, EluSys Therapeutics,
Inc, a privately held company
34
specializing in developing products for patients with end-stage congestive heart
failure, Rinat Neuroscience Corporation, a privately held company specializing
in developing therapeutic antibodies and Sontra Medical Corporation, a publicly
traded Nasdaq company specializing in non-invasive ultrasound-mediated skin
permeation technology.
COMMITTEES OF THE BOARD OF DIRECTORS
Composition of the Board of Directors. Since the adoption of the
Sarbanes-Oxley Act in July 2002, there has been a growing public and regulatory
focus on the independence of directors. Recently, Nasdaq adopted amendments to
its definition of independence. Additional requirements relating to independence
are imposed by the Sarbanes-Oxley Act with respect to members of the Audit
Committee and the Nominating Committee. As noted below, the Board of Directors
has determined that the members of the Audit Committee and the Nominating
Committee satisfy all such definitions of independence. The Board of Directors
has also determined that Messrs. Cahr, Fitzgerald, Foster and Sutter satisfy the
Nasdaq definition of independence.
Audit Committee. During 2003, the Audit Committee was comprised of Mr.
Cahr, Mr. Fitzgerald and Mr. Foster. The Audit Committee is empowered by the
Board of Directors to, among other things: serve as an independent and objective
party to monitor our financial reporting process, internal control system and
disclosure control system; review and appraise the audit efforts of the our
independent accountants; assume direct responsibility for the appointment,
compensation, retention and oversight of the work of the outside auditors and
for the resolution of disputes between the outside auditors and the our
management regarding financial reporting issues; and provide an open avenue of
communication among the independent accountants, financial and senior
management, and our Board of Directors.
Audit Committee Financial Expert. The Board of Directors has determined
that Michael E. Cahr is an "audit committee financial expert", as such term is
defined by the SEC. As noted above, Mr. Cahr - as well as the other members of
the Audit Committee - has been determined to be "independent" within the meaning
of SEC and Nasdaq regulations.
Independence of Audit Committee Members.Our Common Stock is listed on the
Nasdaq National Market and we are governed by the listing standards applicable
thereto. All members of the Audit Committee of the Board of Directors have been
determined to be "independent directors" pursuant to the definition contained in
Rule 4200(a)(15) of the National Association of Securities Dealers' Marketplace
Rules and under the SEC's Rule 10A-3.
Nominating Committee.The Board of Directors has established a Nominating
Committee consisting of Mr. Cahr, Mr. Fitzgerald and Mr. Foster. The Nominating
Committee is empowered by the Board of Directors to, among other things,
recommend to the Board of Directors qualified individuals to serve on our Board
of Directors and to identify the manner in which the Nominating Committee
evaluates nominees recommended for the Board.
Compensation Committee. During 2003, the Compensation Committee was
comprised of Mr. Cahr, Mr. Fitzgerald and Mr. Foster. The Compensation Committee
reviews, approves and makes recommendations to the Board of Directors on matters
regarding the compensation of our senior executive officers.
Stock Option Committee. During 2003, the Stock Option Committee was
comprised of Mr. Cahr, Mr. Fitzgerald and Mr. Foster. The Stock Option Committee
administers our stock option plans.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16(a)")
requires our officers, directors and persons who own more than 10% of a
registered class of our equity securities to file statements on Form 3, Form 4
and Form 5 of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by the regulation to furnish us with copies of all Section 16(a)
reports that they file.
35
Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to us during our most recent fiscal year, reports on Form 5 and
amendments thereto furnished to us with respect to our most recent fiscal year
and written representations from reporting persons that no report on Form 5 was
required, we believe that, no person who, at any time during 2003, was subject
to the reporting requirements of Section 16(a) with respect to us failed to meet
such requirements on a timely basis, except that reports on Form 4 reporting the
grant of stock options in December 2003 to Paul G. Thomas, William E. Barnhart,
Fred Feldman, Steven T. Sobieski, Lisa N. Colleran and Bradly C. Tyler due on
December 14, 2003 were not filed until December 31, 2003. These late filings
were inadvertent, and the required filings were made promptly after noting the
failures to file.
BACKGROUND OF EXECUTIVE OFFICERS
The following sets forth certain information regarding the Company's executive
officers
DATE OF
NAME OFFICES HELD FIRST ELECTION AGE
- -------------------- ------------------------------------------- -------------- ---
Paul G. Thomas Chairman of the Board, President and Chief October 1998 48
Executive Officer
William E. Barnhart Senior Vice President, Operations August 1999 61
Fred Feldman, Ph.D Senior Vice President Product Development August 2003 61
& Quality
Steven T. Sobieski Vice President, Finance and Administration June 2000 47
& Chief Financial Officer
Lisa N. Colleran Vice President, Marketing and Business December 2002 46
Development
All executive officers serve at the discretion of the Board of Directors.
Paul G. Thomas. For further background information regarding Mr. Thomas, see
"Background of Directors."
William E. Barnhart joined LifeCell in August 1999 as Sr. Vice President,
Operations. He has over twenty-five years of management experience in a variety
of roles in drug and device manufacturing and quality assurance. From March 1997
to September 1999, Mr. Barnhart was Sr. Vice President, Quality Assurance for
Centeon, LLC, a multinational provider of pharmaceuticals and plasma derived
biologics. From 1993 to 1997, Mr. Barnhart was Vice President, Quality Assurance
for Ohmeda, Inc. Prior to joining Ohmeda, Mr. Barnhart was Vice President of
Operations, Allergan U.S. Operations. In this capacity he was responsible for
general management for five operations manufacturing prescription ophthalmics,
biologics and medical devices. Mr. Barnhart graduated from Miami University with
a Bachelor of Science degree and a Masters of Science degree in chemistry.
Fred Feldman, Ph.D. joined LifeCell in August 2003 as Sr. Vice President,
Product Development & Quality. From 1974 through 1995, Dr. Feldman served in
various scientific roles with Armour Pharmaceutical Company where he was
directly responsible for bringing a number of breakthrough human therapeutics
through the development pipeline to FDA and international registrations and
commercial success. Dr. Feldman joined Centeon, LLC, a joint venture of Armour
Pharmaceutical (a Rhone Poulenc Rorer subsidiary) and Behringwerke (a Hoechst
subsidiary), in
36
1995 as Vice President of World Wide Preclinical R&D and Biotechnology
Evaluation. In 1999, Dr. Feldman was appointed Vice President Scientific and
Technical Affairs and Chief Scientist of Aventis Behring, a successor company to
Centeon, where he was responsible for corporate research and development
strategic planning and scientific direction. From 2001 through 2002, Dr. Feldman
was Chief Executive Officer of Genesis Therapeutics Corporation, a drug
development start-up that was a spin-out of Aventis Behring. After leaving
Genesis Therapeutics Corporation Dr. Feldman was an independent consultant to
pharmaceutical and biotechnology companies. Dr. Feldman earned his undergraduate
degree in Biochemistry at the University of Chicago and received a Ph.D. in
Biochemistry from Purdue University.
Steven T. Sobieski joined LifeCell in June 2000 as Vice President, Finance and
Chief Financial Officer. He has twenty years of financial management experience
in a variety of roles in public accounting and the medical technology field.
Prior to joining LifeCell, Mr. Sobieski was Vice President Finance at Osteotech,
Inc, a publicly traded Nasdaq company focused on developing and marketing human
tissue based products for orthopedic applications, where he served in various
positions from 1991 to 2000. From 1981 through 1991, he served in various
positions of increasing responsibility with Coopers & Lybrand. Mr. Sobieski
received his Bachelor of Science degree in Business Administration from Monmouth
University and his Masters in Business Administration with a concentration in
accounting from Rutgers University. He is a Certified Public Accountant.
Lisa N. Colleran joined LifeCell in December 2002 as Vice President, Marketing
and Business Development. She has twenty years of marketing experience. Prior to
joining LifeCell, Ms. Colleran served as Vice President/General Manager - Renal
Pharmaceuticals for Baxter Healthcare Corporation, a worldwide manufacturer and
distributor of diversified products, systems and services used primarily in the
health-care field, from 1997 until December 2002, and served in various other
sales and marketing positions at Baxter from 1983 through 1997. Ms. Colleran
received her Bachelor of Science from Molloy College and her Masters in Business
Administration from Loyola University of Chicago.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer and
controller. A copy of our Code of Ethics has been filed as Exhibit 14.1 to this
Annual Report on Form 10-K.
37
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain compensation information concerning our
chief executive officer and our four most highly compensated executive officers,
other than the chief executive officer, for the fiscal year ended December 31,
2003.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NAME AND PRINCIPAL SECURITIES
POSITION AT UNDERLYING ALL OTHER
DECEMBER 31, 2003 YEAR SALARY BONUS OPTIONS(1) COMPENSATION(2)
- -------------------------- ---- ---------- ---------- ----------- ----------------
Paul G. Thomas 2003 $ 330,000 $ 179,520 100,000 $ 900
Chairman of the Board, 2002 $ 303,200 $ 160,696 200,000 $ 750
President and Chief 2001 $ 288,750 $ 129,938 160,000 $ 400
Executive Officer
William E. Barnhart 2003 $ 196,900 $ 67,104 34,080 $ 900
Senior Vice President, 2002 $ 188,400 $ 59,911 75,000 $ 750
Operations 2001 $ 180,250 $ 48,668 50,000 $ 425
Fred Feldman, Ph.D. 2003 $93,750(3) $31,275(3) 133,360 -
Senior Vice President, 2002 - - - -
Product Development & 2001 - - - -
Quality
Steven T. Sobieski 2003 $ 202,000 $ 70,902 35,100 $ 1,200
Vice President, Finance 2002 $ 193,300 $ 59,150 75,000 $ 1,050
and Administration & 2001 $ 185,000 $ 49,950 60,000 $ 700
Chief Financial Officer
Lisa N. Colleran 2003 $ 215,000 $ 81,724 50,000 $ 42,765(4)
Vice President, 2002 $ 5,788(5) $40,000(6) 100,000 -
Marketing and Business 2001 - - - -
Development
- ---------------
(1) Represents shares issuable pursuant to stock options granted under our
stock option plans. These options vest 25% per year commencing on the first
anniversary of the date of grant.
(2) Represents contributions made by us pursuant to our 401(k) Plan and/or
stock purchase plan unless otherwise noted.
(3) Employment commenced August 2003. Annual salary was $225,000.
(4) Includes $41,565 of relocation related costs paid by the Company.
(5) Employment commenced December 2002. Annual salary was $215,000.
(6) Represents hiring bonus.
38
OPTION GRANTS IN 2003
The following table provides certain information with respect to options granted
to our chief executive officer and to each of the executive officers named in
the Summary Compensation Table during the fiscal year ended December 31, 2003:
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL RATES OF
NUMBER OF OPTIONS EXERCISE MARKET STOCK PRICE APPRECIATION
SECURITIES GRANTED TO PRICE PRICE ON FOR OPTION TERM(1)
UNDERLYING EMPLOYEES DATE OF ------------------------------
OPTIONS IN PER SHARE GRANT EXPIRATION
NAME GRANTED(2) FISCAL YEAR ($) ($) DATE 5% 10%
- ------------------- ----------- ------------ ----------- --------- ---------- -------------- --------------
Paul G. Thomas 100,000 13.5% $ 5.27 $ 5.27 12/11/13 $ 331,427 $ 839,902
William E. Barnhart 34,080 4.6% $ 5.27 $ 5.27 12/11/13 $ 112,950 $ 286,239
Fred Feldman, Ph.D. 100,000 13.5% $ 5.20 $ 5.20 07/31/13 $ 327,025 $ 828,746
Fred Feldman, Ph.D. 33,360 4.5% $ 5.27 $ 5.27 12/11/13 $ 110,564 $ 280,191
Steven T. Sobieski 35,100 4.7% $ 5.27 $ 5.27 12/11/13 $ 116,331 $ 294,806
Lisa N. Colleran 50,000 6.7% $ 5.27 $ 5.27 12/11/13 $ 165,714 $ 419,951
=================== =========== ============ =========== ========= ========== ============== ==============
- ---------------
(1) The Securities and Exchange Commission (the "SEC") requires disclosure of
the potential realizable value or present value of each grant. The 5% and
10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the SEC and do not represent our estimate or
projection of our future common stock prices. The disclosure assumes the
options will be held for the full ten-year term prior to exercise. Such
options may be exercised prior to the end of such ten-year term. The actual
value, if any, an executive officer may realize will depend on the excess
of the stock price over the exercise price on the date the option is
exercised. There can be no assurance that the stock price will appreciate
at the rates shown in the table.
(2) These options vest 25% per year commencing on the first anniversary of the
date of grant.
39
OPTION EXERCISES AND HOLDINGS
The following table provides information concerning options exercised during
2003 and the value of unexercised options held by each of the executive officers
named in the Summary Compensation Table at December 31, 2003.
OPTION VALUES AT DECEMBER 31, 2003
----------------------------------
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED OPTIONS VALUE OF
SHARES AT DECEMBER 31, 2003 IN-THE-MONEY OPTIONS AT
ACQUIRED (# OF SHARES) DECEMBER 31, 2003 ($)(1)
ON VALUE -------------------------- ----------------------------
Name (# SHARES) REALIZED Exercisable UNEXERCISABLE Exercisable UNEXERCISABLE
- ------------------- ---------- -------- ----------- ------------- ------------ --------------
Paul G. Thomas - - 690,000 350,000 $ 1,897,060 $ 1,009,320
William E. Barnhart - - 156,250 152,830 $ 352,863 $ 387,982
Fred Feldman, Ph.D. - - - 133,360 - $ 131,025
Steven T. Sobieski - - 146,250 153,850 $ 299,835 $ 384,388
Lisa N. Colleran - - 25,000 125,000 $ 86,500 $ 306,000
- ---------------
(1) Based on $6.20 per share, the closing price of the Common Stock, as
reported by the Nasdaq National Market, on December 31, 2003.
COMPENSATION OF DIRECTORS
During 2003, non-employee directors were paid $1,500 per month regardless
of the number of Board meetings attended. Non-employee directors who serve on
the Compensation Committee were also paid $2,000 per year regardless of the
number of committee meetings attended. Non-employee directors who serve on the
Audit Committee were paid $4,000 per year regardless of the number of committee
meetings attended. Our directors who are employees of LifeCell receive no
directors' fees. Directors are reimbursed their expenses for attendance at such
meetings.
Newly elected non-employee directors receive an option to purchase 25,000
shares of Common Stock at an exercise price equal to the fair market value of a
share of Common Stock on such election date and each of our non-employee
directors receives an annual option grant to purchase 10,000 shares of Common
Stock on the date of our Annual Meeting of Stockholders. Options granted under
our director stock option plans generally vest one year after the date of grant
and expire ten years after the date of grant.
Pursuant to our 1993 Director Stock Option Plan, on June 1, 2003, Mr. Cahr,
Mr. Foster, Mr. Fitzgerald and Mr. Silverstein were each granted options to
purchase 10,000 shares of Common Stock at an exercise price of $3.60 per share.
In addition, pursuant to our 2003 Director Stock Option Plan, Mr. Sutter was
granted options to purchase 25,000 shares of Common Stock at an exercise price
of $5.88 per share on December 22, 2003.
CHANGE IN CONTROL AND SEVERANCE AGREEMENTS
We have entered into severance and change in control agreements with our
executive officers to ensure that we will have their continued dedication as
executives notwithstanding the possibility, threat or occurrence of a defined
"change in control". Following are details of the agreements.
40
PAUL G. THOMAS
In December 2002, we entered into a change in control agreement with Mr.
Thomas. Under the agreement, if within twelve months of a change in control
there occurs a "trigger event", Mr. Thomas will be entitled to receive all then
accrued compensation and fringe benefits, continuation of health and medical
benefits and life insurance for a period of twelve months and a cash payment
equal to 2.9 times his current base salary and performance bonus paid in the
preceding year. Additionally, all stock options or other unvested benefits under
any compensation or employee benefit plan shall immediately become vested and
exercisable. A "trigger event" is defined to include termination of employment
by us other than for "cause".
Additionally, we have entered into a severance arrangement with Mr. Thomas.
Pursuant to such arrangement, Mr. Thomas is entitled to receive 12 months
severance pay based on his salary immediately prior to termination, health and
medical benefits and life insurance coverage if he is terminated by us without
cause. Mr. Thomas is also entitled to a bonus based on the bonus paid to Mr.
Thomas in the previous year, on a pro rata basis based on the number of months
employed during the year of termination.
WILLIAM E. BARNHART
In December 2002, we entered into a change in control agreement with Mr.
Barnhart. Under the agreement, if within twelve months of a change in control
there occurs a "trigger event", Mr. Barnhart will be entitled to receive all
then accrued compensation and fringe benefits, continuation of health and
medical benefits and life insurance for a period of twelve months and a cash
payment equal to two times his current base salary and performance bonus paid in
the preceding year. Additionally, all stock options or other unvested benefits
under any compensation or employee benefit plan shall immediately become vested
and exercisable. A "trigger event" is defined to include termination of
employment by us other than for "cause".
FRED FELDMAN, PH.D.
In August 2003, we entered into compensation arrangements with Dr. Feldman
upon commencement of his employment. Pursuant to such arrangements, Dr. Feldman
is entitled to receive twelve months of salary, based on his salary immediately
prior to termination, and fringe benefits continuation if he is terminated by us
without cause. Additionally, if Dr. Feldman is terminated by us without cause
following a change in control, as described in Section 17 of our 2000 Stock
Option Plan, all of his remaining unvested stock options shall vest immediately.
STEVEN T. SOBIESKI
In December 2002, we entered into a change in control agreement with Mr.
Sobieski. Under the agreement, if within twelve months of a change in control
there occurs a "trigger event", Mr. Sobieski will be entitled to receive all
then accrued compensation and fringe benefits, continuation of health and
medical benefits and life insurance for a period of twelve months and a cash
payment equal to two times his current base salary and performance bonus paid in
the preceding year. Additionally, all stock options or other unvested benefits
under any compensation or employee benefit plan shall immediately become vested
and exercisable. A "trigger event" is defined to include termination of
employment by us other than for "cause".
Additionally, we have entered into a severance arrangement with Mr.
Sobieski. Pursuant to such arrangement, Mr. Sobieski is entitled to receive 12
months severance pay based on his salary immediately prior to termination,
health and medical benefits and life insurance coverage if he is terminated by
us without cause.
LISA N. COLLERAN
In November 2002, we entered into compensation arrangements with Ms.
Colleran upon commencement of her employment. Pursuant to such arrangements, Ms.
Colleran is entitled to receive twelve months of salary, based on her salary
immediately prior to termination, and fringe benefits continuation and
outplacement services if she is terminated by us without cause or she
experiences a material reduction in responsibilities or compensation following a
change in control. Additionally, following a change in control, as described in
Section 17 of our 1992 Stock Option Plan, all of her remaining unvested stock
options shall vest immediately.
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information as of February 27, 2004, with respect
to (i) persons known to us 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) our executive officers and directors and (iii)
all of our executive officers and directors as a group. Unless otherwise
indicated, the address of each such person is c/o LifeCell Corporation, One
Millennium Way, Branchburg, New Jersey 08876.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
--------------------------------------------
COMMON STOCK SERIES B PREFERRED STOCK
-------------- ---------------------------
BENEFICIAL OWNER SHARES % SHARES %
- --------------------------------------------------- --------- ------ ------------- ------------
Samuel D. Isaly(2). . . . . . . . . . . . . . . . . 2,955,500 10.95% --- ---
OrbiMed Capital LLC
OrbiMed Advisors Inc.
OrbiMed Advisors LLC
c/o OrbiMed Advisors LLC
767 Third Avenue
New York, New York 10017
Austin W. Marxe and David Greenhouse (3). . . . . . 2,652,233 10.16% --- ---
c/o Special Situations Private Equity Fund, L.P.
153 E. 53rd Street
New York, New York 10022
Vector Later-Stage Equity Fund, L.P.(4) . . . . . . 2,660,644 9.54% 57,615 85.23%
Vector Fund Management, L.P.
VSI Advisors, L.L.C.
D. Theodore Berghorst
Peter F. Drake
Barclay A. Phillps
Douglas Reed
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Essex Woodlands Health Ventures Fund V LP (5) . . . 1,300,000 5.06% --- ---
10001 Woodlock Forest Dr. Ste. 175
The Woodlands, Texas 77380
Paul G. Thomas(6) . . . . . . . . . . . . . . . . . 691,780 2.62% --- ---
Chairman of the Board, President and Chief
Executive Officer
Michael E. Cahr(7). . . . . . . . . . . . . . . . . 149,856 * 578 *
Director
David Fitzgerald(8) . . . . . . . . . . . . . . . . 35,000 * --- ---
Director
James G. Foster(9). . . . . . . . . . . . . . . . . 55,000 * --- ---
Director
Martin P. Sutter(10). . . . . . . . . . . . . . . . 52,130 * --- ---
Director
William E. Barnhart(11) . . . . . . . . . . . . . . 188,838 * --- ---
Sr. V. P., Operations
Fred Feldman., Ph.D.(12). . . . . . . . . . . . . . --- * --- ---
Senior Vice President Product Development &
Quality
Steven T. Sobieski(13). . . . . . . . . . . . . . . 175,855 * --- ---
Vice President and Chief Financial Officer
Lisa N. Colleran.(14) . . . . . . . . . . . . . . . 25,386 * --- ---
Vice President, Marketing and Business
Development
All executive officers, and directors as a group. . 1,374,845 5.11% 578 *
(9 persons)(15)
42
Notes to Security Ownership table
- ---------------------------------
*Less than 1%.
(l) Each beneficial owner's percentage ownership of Common Stock is determined
by assuming that options, warrants and other convertible securities (such
as the Series B Preferred Stock) that are held by such person (but not
those held by any other person) and that are exercisable or convertible
within 60 days of February 27, 2004 have been exercised or converted.
Options, warrants and other convertible securities that are not exercisable
within 60 days of February 27, 2004 have been excluded. Unless otherwise
noted, we believe 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) These shares of Common Stock are owned as follows: 1,130,000 shares of
Common Stock and 902,043 shares of Common Stock issuable upon exercise of a
warrant are owned by Caduceus Private Investments, LP, 23,000 shares of
Common Stock and 18,776 shares of Common Stock issuable upon exercise of a
warrant are owned by OrbiMed Associates, LLC and 490,000 shares of Common
Stock and 391,681 shares of Common Stock issuable upon exercise of a
warrant are owned by PW Juniper Crossover Fund, L.L.C. Samuel D. Islay,
OrbiMed Advisors LLC, OrbiMed Advisors Inc. and OrbiMed Capital LLC are
deemed to beneficially own these shares by virtue of their mutual
affiliation to the above indicated entities. Information with respect to
the ownership of such stockholders was obtained from a Schedule 13D filed
on December 30, 2003 and our stock records.
(3) These shares of Common Stock are owned as follows: 923,988 shares of Common
Stock and 218,750 shares of Common Stock issuable upon exercise of a
warrant are owned by Special Situations Fund III, L.P., 980,863 shares of
Common Stock and 144,375 shares of Common Stock issuable upon exercise of a
warrant are owned by Special Situations Private Equity Fund, L.P. and
309,912 shares of Common Stock and 74,375 shares of Common Stock issuable
upon exercise of a warrant are owned by Special Situations Cayman Fund,
L.P. Austin Marxe and David Greenhouse are deemed to beneficially own these
shares by virtue of being executive officers of the investment advisors of
each such entity. Information with respect to the ownership of such
stockholders was obtained from a Schedule 13G filed on February 13, 2004 as
and our stock records.
(4) These shares of Common Stock are owned as follows:271,376 shares of Common
Stock and 1,640,621 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock owned by Vector Later-Stage Equity Fund,
LP, 125,000 shares of Common Stock issuable upon exercise of warrants owned
by VSI Advisors, LLC, 133,485 shares of Common Stock and 389,893 shares of
Common Stock issuable upon conversion of shares of Series B Preferred Stock
owned by D. Theodore Berghorst, 6,286 shares of Common Stock and 38,007
shares of Common Stock issuable upon conversion of shares of Series B
Preferred Stock owned by Peter F. Drake, 6,320 shares of Common Stock and
9,493 shares of Common Stock issuable upon conversion of shares of Series B
Preferred Stock owned by Barclay A. Phillips and 30,670 shares of Common
Stock and 9,493 shares of Common Stock issuable upon conversion of shares
of Series B Preferred Stock owned by Douglas Reed. Information with respect
to the ownership of such stockholders was obtained from a Schedule 13G/A
filed September 29, 2003 and our stock records.
(5) Includes 1,300,000 shares of common stock owned by Essex Woodlands Health
Ventures Fund V LP but excludes 52,130 shares of common stock beneficially
owned by Martin P. Sutter, one of our Directors. Mr. Sutter is a managing
director of the general partner of the Essex Woodlands Health Ventures Fund
V LP, however he disclaims beneficial ownership of the shares owned by the
partnership. Ownership information was obtained from our stock records and
a Form 3 filed on December 30, 2003.
(6) Includes 690,000 shares underlying stock options
(7) Includes 88,914 shares of common stock, 20,942 shares of Common Stock
issuable upon conversion of shares of Series B Preferred Stock and 40,000
shares underlying stock options
(8) Represents 35,000 shares underlying stock options.
(9) Represents 55,000 shares underlying stock options.
(10) Includes 37,130 shares of common stock and 15,000 shares underlying stock
options but excludes 1,300,000 shares of common stock owned by Essex
Woodlands Health Ventures V LP. Mr. Sutter is a managing director of the
general partner of the Essex Woodlands Health Ventures Fund V LP, however
he disclaims beneficial ownership of the shares owned by the partnership.
Ownership information was obtained from our stock records and a Form 3
filed on December 30, 2003.
(11) Includes 187,500 shares underlying stock options.
(12) Includes 171,250 shares underlying stock options.
(13) Includes 25,000 shares underlying stock options.
(14) See notes (5) through (13).
43
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about our Common Stock that may be issued
upon the exercise of options, warrants and rights under our Amended and Restated
1992 Stock Option Plan, 1993 Directors Stock Option Plan, 2000 Stock Option Plan
and 2003 Directors Stock Option Plan as of December 31, 2003. These plans were
our only equity compensation plans in existence as of December 31, 2003.
(c)
Number Of Securities
Remaining Available
For
(a) (b) Future Issuance Under
Number Of Securities To Weighted-Average Equity Compensation
Be Issued Upon Exercise Exercise Price Of Plans (Excluding
Of Outstanding Options, Outstanding Options, Securities Reflected In
Plan Category Warrants and Rights Warrants and Rights Column (a)
- --------------------- ------------------------ ---------------------- ------------------------
Equity Compensation
Plans Approved by
Shareholders 4,012,736 $ 3.77 2,154,019
Equity Compensation
Plans Not Approved by
Shareholders. . . . . 2,030,000(1) $ 2.32 0
------------------------ ---------------------- ------------------------
TOTAL 6,042,736 $ 3.28 2,154,019
(1) See "Note 9-Capital Stock, Options and Warrants" included in the financial
statements for the year ended December 31, 2003 included in commencing on
page F-1 in this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into change in control and severance agreements with our
executive officers. See "Item 11. Executive Compensation - Change in Control
and Severance Agreements".
Any transactions involving related parties in the future will be reviewed and
approved by our Audit Committee of the Board of Directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and
the Audit Committee's charter, all audit and audit-related work and all
non-audit work performed by our independent accountants, PricewaterhouseCoopers
LLP ("PWC"), is approved in advance by the Audit Committee, including the
proposed fees for such work. The Audit Committee is informed of each service
actually rendered.
Audit Fees. Audit fees billed or expected to be billed to us by PWC for the
audit of the financial statements included in our Annual Reports on Form 10-K,
and reviews of the financial statements included in our Quarterly Reports on
Form 10-Q, for the years ended December 31, 2003 and 2002 totaled approximately
$161,750 and $103,000, respectively.
44
Audit-Related Fees. We were billed $27,700 and $14,000 by PWC for the
fiscal years ended December 31, 2003 and 2002, respectively, for assurance and
related services that are reasonably related to the performance of the audit or
review of our financial statements and are not reported under the caption Audit
Fees above.
Tax Fees. We were billed an aggregate of $1,225 and $14,350 by PWC for the
fiscal years ended December 31, 2003 and 2002, respectively, for tax services,
principally advice regarding the preparation of income tax returns.
All Other Fees. We did not incur any fees for the fiscal years ended
December 31, 2003 and 2002, for permitted non-audit services.
Other Matters. The Audit Committee has considered whether the provision of
the Audit-Related Fees and Tax Fees are compatible with maintaining the
independence of our principal accountant.
Applicable law and regulations provide an exemption that permits certain
services to be provided by our outside auditors even if they are not
pre-approved. We have not relied on this exemption at any time since the
Sarbanes-Oxley Act was enacted.
45
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets as of December 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations for the years ended December 31, 2003, 2002 and 2001. . . . . . . . F-4
Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001 . . . F-5
Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
2. FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted because they are not applicable, not
required, or because the required information is contained in the Company's
financial statements and the notes thereto.
(b) REPORTS ON FORM 8-K:
On October 20, 2003, we announced our third quarter operating results.
On December 23, 2003, we announced the appointment of Martin P. Sutter to
our Board of Directors.
On January 20, 2004, we announced preliminary fourth quarter and full year
operating results as well as financial guidance for 2004.
On February 25, 2004, we announced our fourth quarter and full year 2003
operating results as well as guidance for 2004. We also announced that we
planned to conduct a conference call to discuss the operating results and
related matters.
(c) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report
on Form 10-K. All exhibits not so designated are incorporated by reference
to a prior filing as indicated.
Exhibits designated by the symbol are management contracts or
compensatory plans or arrangements that are required to be filed with this
report pursuant to this Item 15.
LifeCell undertakes to furnish to any stockholder so requesting a copy
of any of the following exhibits upon payment to us of the reasonable costs
incurred by us in furnishing any such exhibit.
3.1 Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998, filed with the Securities
and Exchange Commission ("the Commission") on August 10, 1998).
46
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, filed with the Commission on August 14,
1996.)
10.1+ LifeCell Corporation 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,
1998, filed with the Commission on August 10, 1998).
10.2+ 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).
10.3 LifeCell Corporation 2003 Non-Employee Director Stock Option Plan (incorporated by reference to
Annex B to the Company's Definitive Proxy Statement on Schedule 14A filed on April 24, 2003).
10.4 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).
10.5 Second Amended and Restated Voting Agreement dated as of April 13, 2000 among the Company and the
Series B Preferred Shareholders (incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q filed with the Commission on May 12, 2000).
10.6 Waiver Agreement dated as of March 11, 2002 among the Company and certain holders of the Series B
preferred stock (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 2001).
10.7 Registration Rights Agreement dated November 18, 1996, between LifeCell Corporation and certain
stockholders named therein (incorporated by reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996).
10.8+ Agreement dated October 5, 1998 between LifeCell Corporation and Paul G. Thomas (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the Commission on
November 13, 1998.)
10.9+ Letter agreement dated September 8, 1998 between LifeCell Corporation and Paul G. Thomas, as
amended by letter agreements dated September 9, 1998 and September 29, 1998 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Commission on
November 13, 1998.)
10.10 Lease Agreement by and between Maurice M. Weill, Trustee for Branchburg Property and LifeCell
Corporation dated June 17, 1999 (incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q filed with the Commission on November 15, 1999.)
10.11 Amendment dated September 21, 1999 to Lease Agreement by and between Maurice M. Weill, Trustee
for Branchburg Property and LifeCell Corporation (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.12 Amendment dated April 7, 2000 to Lease Agreement by and between Maurice M. Weill, Trustee for
Branchburg Property and LifeCell Corporation (incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
47
10.13 LifeCell Corporation Year 2000 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q filed with the Commission on July 28, 2000).
10.14 Form of Purchase Agreement dated September 1, 2000 between LifeCell Corporation and Certain
Investors (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
filed with the Commission on November 13, 2000).
10.15+ Form of Change in Control Agreement (incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.16 Stock Purchase Warrant dated October 31, 2000, issued to Prudential Securities Incorporated
(incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000).
10.17 Stock Purchase Warrant dated October 31, 2000, issued to Gruntal & Co., L.L.C. (incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.18 Form of Purchase Agreement dated June 29, 2001 between LifeCell Corporation and Certain Investors
(incorporated by reference to Exhibit 10.29 of the Company's Form 8-K filed with the Commission on
July 11, 2001).
10.19 Form of Warrants dated July 10, 2001 between LifeCell Corporation and Certain Investors (incorporated
by reference to Exhibit 10.31 of the Company's Form 8-K filed with the Commission on July 11, 2001).
10.20 Form of Purchase Agreement dated August 11, 2003 between LifeCell Corporation and Certain Investors
(incorporated by reference to Exhibit 99.2 of the Company's Form 8-K filed with the Commission on
August 13, 2003).
10.21 Loan and Security Agreement dated January 15, 2003 between LifeCell Corporation and Silicon Valley
Bank (incorporated by reference to Exhibit 10.32 of the Company's Form 8-K filed with the Commission
on February 14, 2003).
10.22 Revolving Promissory Note in the principal amount of $2,000,000 between LifeCell Corporation and
Silicon Valley Bank (incorporated by reference to Exhibit 10.33 of the Company's Form 8-K filed with
the Commission on February 14, 2003).
14.1 * Code of Ethics for Senior Financial Officers
23.1 * Consent of PricewaterhouseCoopers LLP.
31.1 * Certification of the Registrant's Chief Executive Officer, Paul G. Thomas, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 * Certification of the Registrant's Chief Financial Officer, Steven T. Sobieski, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 * Certification of the Registrant's Chief Executive Officer, Paul G. Thomas, and Chief Financial Officer,
Steven T. Sobieski, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Representation letter dated March 22, 2002 regarding the audit performed by Arthur Andersen
(incorporated by reference to Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001).
48
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LIFECELL CORPORATION
(Registrant)
By: /s/ Paul G. Thomas
----------------------------------------
Paul G. Thomas
President, Chief Executive Officer and
Chairman of the Board of Directors
Dated: March 12, 2004.
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ---------------------- ------------------------------------------ --------------
/s/ Paul G. Thomas President and Chief Executive March 12, 2004
- ---------------------- Officer (Principal Executive Officer) and
Paul G. Thomas Chairman of the Board of Directors
/s/ Steven T. Sobieski Vice President and Chief Financial March 12, 2004
- ---------------------- Officer (Principal Financial Officer)
Steven T. Sobieski
/s/ Bradly C. Tyler Controller March 12, 2004
- ---------------------- (Principal Accounting Officer)
Bradly C. Tyler
/s/ Michael E. Cahr Director March 12, 2004
- ----------------------
Michael E. Cahr
/s/ James G. Foster Director March 12, 2004
- ----------------------
James G. Foster
/s/ David Fitzgerald Director March 12, 2004
- ----------------------
David Fitzgerald
/s/ Martin P. Sutter Director March 12, 2004
- ----------------------
Martin P. Sutter
49
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders:
In our opinion, the accompanying balance sheets as of December 31, 2003 and 2002
and the related statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of LifeCell
Corporation at December 31, 2003 and 2002, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. 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 audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. The
financial statements of LifeCell Corporation for the year ended December 31,
2001, were audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion on those
financial statements in their report dated February 25, 2002.
PRICEWATERHOUSECOOPERS, LLP
Florham Park, New Jersey
March 9, 2004
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
To LifeCell Corporation:
We have audited the accompanying balance sheets of LifeCell Corporation (a
Delaware corporation) as of December 31, 2000 and 2001, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States. 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.
As more fully described in Note 8 to the financial statements, the Company has
revised the balance sheet as of December 31, 2000 and the statement of
stockholders' equity for the years ended December 31, 1999 and 2000 to reflect
the reclassification of common stock, subject to redemption from stockholders'
equity.
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, 2000 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 25, 2002
F-2
LIFECELL CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------
2003 2002
--------- ---------
Assets
Current assets
Cash and cash equivalents $ 7,387 $ 5,202
Short-term investments 4,398 256
Receivables, less allowance of $54 in 2003 and $40 in 2002 5,876 4,332
Inventories 8,830 6,367
Prepayments and other 317 257
Deferred tax assets 2,067 -
--------- ---------
Total current assets 28,875 16,414
Investments in marektable securities 6,735 -
Fixed assets, net 7,508 7,091
Deferred tax assets 14,589 -
Other assets, net 566 611
--------- ---------
Total assets $ 58,273 $ 24,116
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,260 $ 1,438
Accrued liabilities 4,332 3,173
Current portion of long-term debt - 337
--------- ---------
Total current liabilities 5,592 4,948
Deferred revenue 130 351
Long-term debt - 526
Other liabilities 172 94
Commitments and contingencies
Temporary equity
Common stock, subject to redemption, $.001 par value, 113,836
shares issued and outstanding in 2002 - 478
Stockholders' equity
Series B preferred stock, $.001 par value, 182,205 shares authorized,
67,601 and 74,278 shares issued and outstanding in 2003 and 2002
(liquidation preference at December 31, 2003 of $6,760,000)
Undesignated preferred stock, $.001 par value 1,817,795
shares authorized, none issued and outstanding - -
Common stock, $.001 par value, 48,000,000 shares authorized;
25,592,475 and 21,193,159 shares issued and oustanding in 2003 and 2002 26 21
Common stock warrants, 2,000,000 and 2,284,211 outstanding in 2003 and 2002 3,412 4,002
Additional paid-in capital 94,610 78,037
Accumulated deficit (45,669) (64,341)
--------- ---------
Total stockholders' equity 52,379 17,719
--------- ---------
Total liabilities and stockholders' equity $ 58,273 $ 24,116
========= =========
The accompanying notes are an integral part of these financial statements.
F-3
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Year Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues:
Product revenues $ 38,577 $ 32,935 $ 26,560
Research grant revenues 1,672 1,493 1,209
------------ ------------ ------------
Total revenues 40,249 34,428 27,769
------------ ------------ ------------
Costs and expenses:
Cost of products sold 12,241 10,134 8,862
Research and development 5,396 5,015 4,351
General and administrative 5,594 4,590 4,098
Selling and marketing 14,940 13,288 11,978
------------ ------------ ------------
Total costs and expenses 38,171 33,027 29,289
------------ ------------ ------------
Income (loss) from operations 2,078 1,401 (1,520)
Interest and other income (expense), net (28) (129) (550)
------------ ------------ ------------
Income (loss) before income taxes 2,050 1,272 (2,070)
Income tax benefit 16,622 157 --
------------ ------------ ------------
Net income (loss) 18,672 1,429 (2,070)
Preferred stock and deemed dividends -- -- (1,591)
------------ ------------ ------------
Net income (loss) applicable to
common stockholders $ 18,672 $ 1,429 $ (3,661)
============ ============ ============
Net income (loss) per common share:
Basic $ 0.85 $ 0.07 $ (0.20)
============ ============ ============
Diluted $ 0.70 $ 0.06 $ (0.20)
============ ============ ============
Shares used in computing net income (loss)
per common share:
Basic 22,093,655 21,175,602 18,240,431
============ ============ ============
Diluted 26,631,839 24,696,376 18,240,431
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
SERIES B COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS ADDITIONAL
----------------- ------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------- ---------- ------- ----------- -------- ---------
Balance at December 31, 2000 95,931 $ - 15,784,368 $ 16 3,370,298 $ 1,269 $ 69,728
Stock options exercised - - 135 - - - -
Warrants issued - - - - 2,224,030 3,231 (3,231)
Warrants expired - - - - (3,310,117) (498) 498
Common stock issued for cash - - 3,125,000 4 - - 5,906
Reclassification of common stock,
subject to redemption - - 464,364 - - - 1,950
Dividends on Series B preferred stock 5,795 - - - - - 579
Deemed dividend recorded in connection
with issuance of additional shares of
common stock and warrant re-pricing - 478,001 - - - 1,151
Net loss - - - - - - -
-------- ------- ---------- ------- ----------- -------- ---------
Balance at December 31, 2001 101,726 - 19,851,868 20 2,284,211 4,002 76,581
Conversion of Series B preferred stock (27,448) - 994,491 1 - - (1)
Reclassification of common stock,
subject to redemption - - 346,800 - - - 1,457
Net income - - - - - - -
-------- ------- ---------- ------- ----------- -------- ---------
Balance at December 31, 2002 74,278 - 21,193,159 21 2,284,211 4,002 78,037
Stock options exercised - - 129,595 - - - 462
Warrants exercised - - 224,000 - (284,211) (590) 982
Conversion of Series B preferred stock (6,677) - 241,916 - - - -
Common stock issued for cash - - 3,689,969 5 - - 14,651
Reclassification of common stock,
subject to redemption - - 113,836 - - - 478
Net income - - - - - - -
-------- ------- ---------- ------- ----------- -------- ---------
Balance at December 31, 2003 67,601 $ - 25,592,475 $ 26 2,000,000 $ 3,412 $ 94,610
======== ======= ========== ======= =========== ======== =========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- ---------------
Balance at December 31, 2000 $ (62,109) $ 8,904
Stock options exercised - -
Warrants issued - -
Warrants expired - -
Common stock issued for cash - 5,910
Reclassification of common stock,
subject to redemption - 1,950
Dividends on Series B preferred stock (440) 139
Deemed dividend recorded in connection
with issuance of additional shares of
common stock and warrant re-pricing (1,151) -
Net loss (2,070) (2,070)
------------- ---------------
Balance at December 31, 2001 (65,770) 14,833
Conversion of Series B preferred stock - -
Reclassification of common stock,
subject to redemption - 1,457
Net income 1,429 1,429
------------- ---------------
Balance at December 31, 2002 (64,341) 17,719
Stock options exercised - 462
Warrants exercised - 392
Conversion of Series B preferred stock - -
Common stock issued for cash - 14,656
Reclassification of common stock,
subject to redemption - 478
Net income 18,672 18,672
------------- ---------------
Balance at December 31, 2003 $ (45,669) $ 52,379
============= ===============
The accompanying notes are an integral part of these financial statements.
F-5
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
--------- -------- --------
Cash Flows from Operating Activities:
Net income (loss) $ 18,672 $ 1,429 $(2,070)
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Depreciation and amortization 2,010 2,296 1,761
Reversal of deferred tax valuation allowance (16,656) - -
Receivable allowance 61 (56) (15)
Deferred revenues (221) (221) (222)
Deferred rent expense 78 24 -
Loss on disposal of fixed assets 25 - -
Accretion of debt discount and financing cost - - 192
Increase (decrease) in cash from changes in assets and liabilities:
Receivables (1,605) (477) 503
Inventories (2,463) (1,676) 20
Prepayments and other (60) 62 (50)
Accounts payable and accrued liabilities 981 1,087 (1,791)
Other liabilities - - (13)
--------- -------- --------
Net cash provided by (used in) operating activities 822 2,468 (1,685)
--------- -------- --------
Cash Flows from Investing Activities:
Purchase of investments (10,877) (6) -
Capital expenditures (2,507) (576) (458)
Increase in other assets - - (171)
Proceeds from sale of equipment 100 - -
Proceeds from investments - - 65
--------- -------- --------
Net cash used in investing activities (13,284) (582) (564)
--------- -------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock and warrants 15,682 - 5,910
Proceeds from issuance of long-term debt 1,451 - -
Proceeds from exercise of common stock and warrants 856 - -
Principal payments on long-term debt (2,314) (1,334) (1,229)
Offering fees (1,028) - -
Payments on notes payable - - (2,998)
Cash dividends paid - - (4)
--------- -------- --------
Net cash provided by (used in) financing activities 14,647 (1,334) 1,679
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,185 552 (570)
Cash and cash equivalents at beginning of period 5,202 4,650 5,220
--------- -------- --------
Cash and cash equivalents at end of period $ 7,387 $ 5,202 $ 4,650
========= ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 64 $ 186 $ 581
========= ======== ========
Cash paid during the year for income taxes $ 336 $ 40 $ -
========= ======== ========
Supplemental Disclosure of Non-cash Financing Activities:
Series B preferred stock issued as payment of dividends $ - $ - $ 579
========= ======== ========
Deemed dividends $ - $ - $ 1,151
========= ======== ========
Fair value of warrants issued in connection with common stock $ - $ - $ 3,231
========= ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION
LifeCell Corporation ("LifeCell" or "the Company") develops and markets products
made from human (allograft) tissue for use in reconstructive, urogynecologic and
orthopedic surgical procedures. The Company's products are subject to
regulation by the United States Food and Drug Administration as human tissue for
transplantation. LifeCell was incorporated in Delaware in 1992 for the purpose
of merging with its predecessor entity, which was formed in 1986. The Company
began commercial sales of its first tissue product during 1993.
2. ACCOUNTING POLICIES
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.
Cash and Cash Equivalents and Investments in Marketable Securities
The Company considers all highly liquid investments with an original maturity of
three months or less, when purchased, to be cash equivalents. Investments with
maturities in excess of three months but less than one year are classified as
short-term investments and are stated at cost, net of any unamortized premiums
or discounts, which approximates fair value.
The Company classifies its marketable securities as available for sale. The
securities consist of fixed income debt securities, which are stated at fair
value, with net unrealized gains or losses on the securities recorded as
accumulated other comprehensive income (loss) in shareholders' equity. Net
unrealized gains and losses were not material at December 31, 2003 or 2002.
Realized gains and losses are included in earnings and are derived using the
specific identification method for determining the cost of the securities.
Realized gains were not material in 2003, 2002, or 2001.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis. Inventories on hand include the cost
of materials, freight, direct labor and manufacturing overhead. The Company
records a provision for excess and obsolete inventory based primarily on
inventory quantities on hand, the historical product sales and estimated
forecast of future product demand and production requirements.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. Major
expenditures that improve or extend the life of the assets are capitalized
whereas maintenance and repairs are expensed as incurred. 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
computer equipment, furniture and fixtures is computed on the straight-line
method based on the estimated useful lives of the assets of three to five years.
Depreciation of machinery and equipment is computed on the straight-line method
based on the estimated useful lives of the assets of five to ten years. The
cost of leasehold improvements is depreciated over the shorter of the lease term
or the estimated useful life of the asset.
F-7
Deferred Patent Costs
The Company capitalizes external legal costs associated with obtaining patents.
Net deferred patent costs amounted to $414,000 and are included in other assets,
net in the accompanying balance sheet. Such costs are amortized to expense on a
straight-line basis over the legal life of the patent. For the years ended
December 31, 2003, 2002 and 2001, amortization expense relating to deferred
patent costs was $45,000, $83,000 and $40,000, respectively.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. Management believes that the carrying
value of its long-lived assets reported on the balance sheet at December 31,
2003 represent recoverable value and during 2003 and 2002 no impairment reviews
were required.
Revenue Recognition
Product revenues are recognized when title and risk of loss for the product is
transferred to the customer. The Company utilizes independent sales and
marketing agents to supplement its direct sales organization. These independent
agents hold the Company's inventory on a consignment basis. For products
marketed through independent sales and marketing agents the Company recognizes
revenue when the products are delivered to the third-party customer, as this is
when title and risk of loss to the product transfers. Additionally, amounts
billed to customers for shipping and handling are included in revenue at the
time the related product revenue are recognized.
Research grant revenues are recognized at the time qualified expenses are
incurred, unless the Company has continuing performance obligations, in which
case, revenue is recognized upon the satisfaction of such obligations. Grant
payments received, but not yet earned, is recorded as deferred revenue.
Research and Development Expense
Research and development costs are expensed when incurred.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, short-term and
long-term investments in marketable securities, accounts receivable, accounts
payable, debt and certain current liabilities. Management believes the carrying
amounts reported in the balance sheet for these items approximate fair value.
Income Taxes
Significant judgment is required in determining the Company's income tax
provision. In the ordinary course of business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Although the Company
believes that its estimates are reasonable, no assurance can be given that the
final outcome of these matters will not be different than that which is
reflected in its historical income tax provisions and accruals. Such
differences could have a material effect on the Company's income tax provision
and net income in the period in which such determination is made.
F-8
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset-and-liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The recoverability of
deferred tax assets is dependent upon the Company's assessment of whether it is
more likely than not that sufficient future taxable income will be generated to
utilize the deferred tax asset. In the event we determine that future taxable
income will not be sufficient to utilize the deferred tax asset, a valuation
allowance is recorded. At December 31, 2003, the valuation allowance primarily
reflected uncertainties involving the realization of certain tax credits and
loss carryforwards due to the potential impact of future stock option exercises
and shorter-term tax asset expiration dates. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Comprehensive Income
SFAS No. 130 "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. There were no components of comprehensive income other
than net income for the years ended December 31, 2003, 2002, or 2001.
Stock-based Compensation
The Company follows Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for equity-based awards issued to employees and directors. No
stock-based compensation cost is reflected in net income, as all options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation for the years ended December 31,:
2003 2002 2001
--------------- --------------- ---------------
(dollars in thousands, except per share data)
Net income (loss), as reported $ 18,672 $ 1,429 $ (2,070)
Less: Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects (1,248) (1,223) (1,942)
--------------- --------------- ---------------
Pro forma $ 17,424 $ 206 $ (4,012)
=============== =============== ===============
Net income (loss) per common share - basic
As reported $ 0.85 $ 0.07 $ (0.20)
=============== =============== ===============
Pro forma $ 0.79 $ 0.01 $ (0.31)
=============== =============== ===============
Net income (loss) per common share - diluted
As reported $ 0.70 $ 0.06 $ (0.20)
=============== =============== ===============
Pro forma $ 0.66 $ 0.01 $ (0.31)
=============== =============== ===============
See Note 9 for additional information regarding the computations presented
above.
F-9
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents, short- and
long-term investments and accounts receivable. The Company has investment
policies that limit investments of excess cash to investment grade securities.
The Company provides credit, in the normal course of business to hospitals,
medical professionals and distributors. The risk with respect to accounts
receivables is mitigated because amounts due the Company are not concentrated
within a relatively few number of customers. The Company maintains an allowance
for doubtful accounts and charges actual losses to the allowance when incurred.
Write-offs
Charge and
Balance at (Benefit) to Deductions Balance at
Beginning of Costs and From End of
Allowance for Doubtful Accounts Period Expenses Allowance Period
------------- -------------- ----------- -----------
(dollars in thousands)
December 31, 2003 $ 40 $ 61 $ (47) $ 54
December 31, 2002 114 (56) (18) 40
December 31, 2001 170 (15) (41) 114
New Accounting Pronouncements
FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities", an interpretation of ARB No. 51 (FIN 46R), replaces FIN 46,
"Consolidation of Variable Interest Entities", an interpretation of ARB No. 51,
which had been issued in January 2003. FIN 46R clarifies some of the provisions
of FIN 46 relating to variable interest entities (VIEs) and exempts certain
entities from its requirements. FIN 46R addresses consolidation of VIEs which
have one or more of the following characteristics: the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support provided by any parties, the equity
investors lack some essential characteristics of a controlling financial
interest, and the equity investors have voting rights that are not proportionate
to their economic interests. Application of FIN 46R is required in financial
statements of companies that have interests in structures that are commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Application by public entities for all other types of variable interest
entities is required in financial statements for periods ending after March 15,
2004. The Company does not expect the adoption of FIN 46R to have a material
impact on the Company's financial position or results of operations.
3. INVENTORIES
Inventories consist of the following at December 31,:
2003 2002
------------ ------------
(dollars in thousands)
Unprocessed tissue and materials $ 4,453 $ 2,940
Tissue products in-process 1,592 1,446
Tissue products available for distribution 2,785 1,981
------------ ------------
Total inventories $ 8,830 $ 6,367
============ ============
F-10
4. INVESTMENTS
Cash, cash equivalents and investments consist of the following at December 31,:
2003 2002
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- ------ --------- ------
(dollars in thousands)
Cash and cash equivalents $ 7,387 $7,387 $ 5,202 $5,202
Short-term investments 4,398 4,397 256 256
Long-term investments 6,735 6,744 -- --
The Company's long-term investments mature at various dates through May 2005.
5. FIXED ASSETS
Fixed assets consist of the following at December 31,:
2003 2002
------------- -------------
(dollars in thousands)
Machinery and equipment $ 4,581 $ 3,973
Leasehold improvements 7,542 7,486
Computer equipment, furniture and fixtures 3,585 1,933
------------- -------------
15,708 13,392
Accumulated depreciation and amortization (8,200) (6,301)
------------- -------------
Fixed assets, net $ 7,508 $ 7,091
============= =============
For the years ended December 31, 2003, 2002 and 2001, depreciation and
amortization expense related to fixed assets was $1,965,000, $2,213,000 and
$1,721,000, respectively.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31,:
2003 2002
-------------- --------------
(dollars in thousands)
Tissue recovery expenses $ 1,478 $ 1,025
Employee compensation and benefits 1,985 1,436
Marketing agent fees 432 601
Operating expenses and other 437 111
-------------- --------------
Total accrued liabilities $ 4,332 $ 3,173
============== ==============
F-11
7. DEFERRED REVENUE
In March 1999, in conjunction with the signing of an agreement with an
independent sales and marketing agent, the Company issued 108,577 shares of
common stock at a premium of $506,000 over the closing market price of the
Company's common stock on the date of issuance. This premium, which was recorded
as deferred revenue and is being recognized over the five-year term of the
agreement, represented a payment for marketing rights. The total equity
investment was valued at $1.0 million less offering costs of $100,000.
In February 2000, in conjunction with the Company entering into an agreement
with an independent agent, the agent agreed to make a $600,000 payment in
exchange for certain product marketing rights. The payment, which was received
in September 2000, was recorded as deferred revenue and is being recognized over
the five-year term of the agreement.
8. FINANCING ARRANGEMENTS AND LONG-TERM DEBT
In January 2003, the Company secured a $4 million credit facility through a
financial institution consisting of a $2 million revolving line of credit and an
equipment line for up to an additional $2 million. The credit facility is
collateralized by the Company's accounts receivable, inventory, intellectual
property, intangible and fixed assets. The agreement contains certain financial
covenants and a subjective acceleration clause. The revolving line of credit
bears interest at the bank prime rate plus 0.75% and was available through
January 2004. The equipment term note bore interest at the bank prime rate plus
1.5%. In 2003, the Company received proceeds of $1,451,000 under the equipment
line portion of the credit facility and used part of the proceeds to repay all
of its existing debt. In September 2003, the Company repaid the entire
outstanding balance on the equipment line and the equipment line was terminated.
At December 31, 2003, the Company had remaining availability on the revolving
line of credit of $2 million. In March 2004, the financial institution
increased the borrowing limit on the revolving line of credit to $4 million and
extended the expiration through March 2005.
As of December 31, 2002, the Company had term debt facilities with three
financial institutions as follows:
(1) A three-year term loan bearing an interest rate of 14.2%, repayable in
monthly installments of principal and interest of $100,000 through and including
March 1, 2003. This credit facility was collateralized by the Company's
accounts receivable, inventory, intellectual property, intangible and fixed
assets and is guaranteed by the New Jersey Economic Development Authority. The
balance outstanding on the term loan was $196,000 at December 31, 2002.
(2) A three-year term loan bearing an interest rate of 6.5%, repayable in
monthly installments of principal and interest of $18,000 through and including
June 1, 2003. The loan was collateralized by the Company's accounts receivable,
inventories and fixed assets. The balance outstanding on this loan was $89,000
at December 31, 2002.
(3) A ten-year term loan bearing an interest rate of 9.0%, repayable in annual
installments of principal and interest of $106,000 through and including August
1, 2010. This loan was collateralized by payments that the Company is entitled
to receive through a New Jersey Business Employment Incentive Grant. Such
payments were assigned to the lender and will be used to satisfy the Company's
obligations under the loan agreement as they are received. The balance
outstanding on the note was $578,000 at December 3, 2002.
Interest expense for the years ended December 31, 2003, 2002 and 2001 was
$57,000, $180,000 and $697,000, respectively.
F-12
9. CAPITAL STOCK, OPTIONS AND WARRANTS
Common stock, subject to redemption
In November 1999, the Company issued 925,000 shares of common stock in a private
placement at a price of $4.20 per share. The proceeds of the offering were
approximately $3.9 million. Pursuant to the terms of the purchase agreement,
the Company was required to issue additional shares to the investor if the
market price of the Company's common stock declined below a fixed amount per
share. In November 2001, the Company issued 478,001 additional shares of common
stock to the investor, without additional consideration, pursuant to the terms
of this agreement. In connection with the issuance, the Company recorded a
deemed dividend of $1,037,000 equal to the fair value of shares issued. An
additional deemed dividend of $114,000 was recorded in 2001 in connection with
the repricing of certain warrants that were issued as part of the private
placement.
The shares of common stock originally issued in 1999 were redeemable at $4.20
per share by the Company if it did not maintain a listing or a quotation of its
shares of common stock on a U.S. stock exchange or market system. Given this
requirement was beyond the Company's control, the remaining outstanding shares
held by this investor were considered to be temporary equity. In the fourth
quarter of 2001 and 2002, the Company received notification that the investor
sold 464,364 and 346,800 shares, respectively, of the original 925,000 shares
and accordingly, $1.9 million and $1.5 million, respectively, of the original
amount was reclassified to stockholders' equity - common stock. In 2003, the
Company received notification that the investor sold the remainder of all such
shares and accordingly, the redemption rights terminated. As a result, such
shares were reclassified to common stock in 2003.
Series B Preferred Stock
Each share of Series B preferred stock is convertible at any time at the option
of the holder into approximately 36.232 shares of common stock (2,449,319 shares
of common stock at December 31, 2003), subject to adjustment for dilutive
issuances of securities. The Series B preferred stock has a liquidation
preference of $100 per share, or $6,760,000 as of December 31, 2003, and shares
ratably in any residual assets after payment of such liquidation preference. The
Series B preferred stock will be automatically converted into common stock if
the closing price of the Company's common stock averages or exceeds $9.30 per
share for 30 consecutive trading days. 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
The Series B preferred stock paid cumulative dividends quarterly, through
December 31, 2001, at an annual rate of $6.00 per share. Dividends were paid in
cash, in additional shares of Series B preferred stock based on the liquidation
value of $100 per share, or any combination of cash and Series B preferred stock
at the Company's option. 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
Common Stock
In July 2001, the Company issued 3,125,000 shares of common stock in a private
placement at a price of $1.92 per share. The proceeds of the offering were
approximately $6.0 million before deducting placement agent fees and offering
costs of $90,000.
In August 2003, the Company sold 3,294,113 shares of its common stock at $4.25
per share in a private placement to a group of institutional investors. In
connection with the private placement, in September 2003, the Company sold an
additional 395,856 shares of its common stock at $4.25 per share to several
holders of LifeCell's Series B
F-13
preferred stock, including one of the Company's directors. These shares were
sold pursuant to a contractual right of the holders of the Series B preferred
stock to participate in the August 2003 private placement. The net proceeds of
the private placement were approximately $14.7 million after deducting offering
costs.
Options
The Company's Amended and Restated 1992 Stock Option Plan (the "1992 Plan")
provided for the grant of options to purchase up to 2,500,000 shares of common
stock through January 16, 2002. In June 2000, the stockholders of the Company
approved the Year 2000 Stock Option Plan (the "2000 Plan"), which provides for
the grant of options to purchase up to 1,500,000 shares of common stock through
March 1, 2010. In May 2003, the Company's shareholders approved an amendment to
the 2000 Plan increasing the number of shares reserved for issuance under the
2000 Plan by 2,000,000 shares, from 1,500,000 to 3,500,000. Common stock
authorized for issuance under the 2000 Plan is subject to adjustment in the
event of certain changes in the Company's capitalization, a merger, or a similar
transaction. Such shares may be treasury shares or newly issued shares or a
combination of both.
Options generally become exercisable ratably over a four-year period, 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 plans have exercise prices equal to the
fair market value at the date of grant.
In May 2003, the Company's shareholders approved the LifeCell Corporation 2003
Non-Employee Director Stock Option Plan (the "Directors Plan"). Under the 2003
Directors Plan, options may be granted to purchase up to 750,000 shares of the
Company's common stock through March 2013. Options granted vest on the first
anniversary and have a maximum term of ten years. The 2003 Directors Plan
replaced the Second Amended and Restated 1993 Non-Employee Director Stock Option
Plan, which terminated in July 2003. The provisions of the "Directors Plan"
provide for an initial grant of options to purchase 25,000 shares of common
stock for newly elected non-employee directors and an annual grant of an option
to purchase 10,000 shares upon re-election to the Company's Board. Options
under the Director Plan have exercise prices equal to the fair market value at
the date of grant, vest one year after date of grant and expire after 10 years.
A summary of stock option activity for the years ended December 31, 2003, 2002
and 2001 is as follows:
Weighted
Total Average
Stock Exercise
Options Price ($)
---------- ---------
Balance at December 31, 2000 2,867,423 4.16
Granted 650,050 2.23
Exercised (135) 0.73
Forfeited or canceled (347,069) 4.16
----------
Balance at December 31, 2001 3,170,269 3.77
Granted 716,775 2.73
Forfeited or canceled (208,875) 4.64
----------
Balance at December 31, 2002 3,678,169 3.52
Granted 806,824 5.03
Exercised (79,595) 4.00
Forfeited or canceled (392,662) 3.93
----------
Balance at December 31, 2003 4,012,736 3.77
==========
At December 31, 2003, there were 1,424,019 options available for future grant
under the 2000 Plan and 725,000 under the Directors Plan.
F-14
A summary of stock options outstanding under all plans at December 31, 2003 is
as follows:
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2003 Life (Years) Price 2003 Price
$1.64 to $ 1.99 31,500 7.9 $ 1.73 23,125 $ 1.73
2.00 to 2.99 1,593,262 7.9 2.45 748,056 2.36
3.00 to 3.99 890,000 4.6 3.77 831,500 3.78
4.00 to 4.99 351,700 5.3 4.24 338,137 4.22
5.00 to 5.99 974,824 8.7 5.31 232,713 5.38
6.00 to 6.99 162,000 4.5 6.55 130,325 6.61
7.00 to 10.88 9,450 6.2 10.17 7,088 10.17
------------ --------------- ------------
$1.64 to $10.88 4,012,736 7.0 $ 3.77 2,310,944 $ 3.71
============ =============== ============
In addition to the amounts set forth in the tables above, during 1996 the
Company granted options to purchase 220,000 shares of common stock not pursuant
to a plan, to directors who resigned upon the closing of the sale of the Series
B preferred stock. During 2003, option holders exercised options to purchase
50,000 shares of common stock pursuant to these grants. At December 31, 2003,
options to acquire 30,000 shares of common stock remained outstanding with a
weighted average exercise price of $3.63. The weighted average remaining
contractual life of the outstanding option grants was 1.9 years as of December
31, 2003.
The Company accounts for its employee stock-based compensation plans under APB
No. 25 and its related interpretations. Had compensation expense been
determined by the Company based on the fair value as of the grant dates for
awards in 2003, 2002 and 2001 consistent with SFAS No. 123, the Company would
have recorded stock-based compensation expense of $1,248,000, $1,223,000 and
$1,942,000 respectively. See Note 2 for the pro forma effect on net income.
Under the provisions of SFAS No. 123, the weighted average fair value of options
granted in 2003, 2002, and 2001 was $3.63, $2.22 and $1.56 per share,
respectively. 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 2003, 2002 and 2001, respectively: a
weighted average risk-free interest rate of approximately 3% - 7% percent for
all years; no expected dividend yield during the expected life of the option;
expected lives of 5 to 6 years for each grant and expected volatility between 64
and 112 percent.
Common Stock Warrants
The following table summarizes information about common stock warrants
outstanding at December 31,:
Warrants Outstanding
--------------------
Exercise Price 2003 2002 Expiration Date
- --------------- --------- --------- ----------------
$1.92 1,750,000 1,750,000 July 10, 2006
$1.96 -- 200,000 --
$4.75 -- 84,211 --
$5.00 250,000 250,000 October 27, 2005
--------- ---------
2,000,000 2,284,211
========= =========
F-15
9. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) retirement savings plan, which covers all
full-time employees. The Company may, at its discretion, contribute amounts not
to exceed each employee's contribution. Participant's contributions may not
exceed 15% of their annual compensation, subject to annual dollar limits set by
the Internal Revenue Service. Participants are always 100% vested in their
contributions. Company contributions are fully vested after one year of
employment. Total Company contributions during 2003, 2002 and 2001 were
$86,000, $67,000 and $34,000, respectively.
The Company also maintains an Employee Stock Purchase Plan to allow all
full-time employees to purchase the Company's common stock on the open market
using employee and Company matching contributions. Total Company contributions
during 2003, 2002, and 2001 were $22,000, $21,000 and $13,000, respectively.
11. INCOME TAXES
Significant components of the Company's income tax expense (benefit) for the
years ended December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
--------- ------ ------
(dollars in thousands)
Current
Federal $ 43 $ -- $ --
State (9) (155) --
Deferred
Federal (15,617) -- --
State (1,039) -- --
--------- ------ ------
Income tax benefit, net $(16,622) $(155) $ --
========= ====== ======
A reconciliation of income taxes computed at the statutory federal income tax
rate of 34% to actual benefit for the years ended December 31, 2003, 2002, and
2001 as follows:
2003 2002 2001
--------- ------ ------
U.S. federal tax (benefit) at statutory rate $ 692 $ 492 $(704)
State taxes (net of federal benefit) 226 93 --
Sale of state tax net operating losses (235) (248) --
Change in valuation allowance (16,656) (492) 704
Net operating losses utilized (778) -- --
Other non-deductible items 86 -- --
Alternative minimum taxes 43 -- --
--------- ------ ------
Total income tax benefit $(16,622) $(155) $ --
========= ====== ======
In 2003, the Company realized $235,000 through the sale and transfer of $3.0
million of state tax net operating losses. In 2002, the Company realized
$248,000 through the sale and transfer of $3.2 million of state tax net
operating losses. The sales and transfers were made through the Technology
Business Tax Certificate Program sponsored by the New Jersey Economic
Development Authority.
F-16
The principal components of the Company's deferred tax assets as of December 31,
2002 and 2003 are as follows:
2003 2002
------------- -------------
(dollars in thousands)
Temporary differences:
Deferred revenue $ 44 $ 119
Uniform capitalization of inventory costs 159 113
Other items (306) (213)
------------- -------------
Total temporary differences (103) 19
Federal tax losses and credits not currently utilizable 19,732 20,298
State tax losses and credits not currently utilizable 1,627 1,145
------------- -------------
Total gross deferred tax assets 21,256 21,462
Less valuation allowance (4,600) (21,462)
------------- -------------
Net deferred tax assets $ 16,656 $ --
============= =============
As of December 31, 2003, the Company has a net operating loss carryforward
("NOL") for federal income tax purposes of approximately $54.5 million expiring
as follows (dollars in thousands):
Year Expires
2004 $ 2,200
2005 1,700
2006 1,400
2007 2,400
2008 and beyond 46,800
-----------
$ 54,500
===========
The federal net operating loss carryforwards are subject to limitation under the
rules regarding a change in stock ownership as determined by the Internal
Revenue Code. As of December 31, 2003, of the Company's total net operating
loss carryover of $54.5 million, approximately $15.9 million is subject to an
annual limitation under Internal Revenue Code Section 382.
At December 31, 2003, the Company also had a net operating loss carryforward for
state income tax purposes of approximately $11.9 million, which expire in
varying amounts commencing in 2006. Additionally, the Company has approximately
$1.9 million of research and development tax credit carryforwards for federal
and state income tax purposes, which will expire in varying amounts commencing
in 2003.
Prior to 2003, no deferred provision or benefit for income taxes was recorded
because the Company was in a net deferred tax asset position and a full
valuation allowance had been recorded. During the fourth quarter of 2003, the
Company re-evaluated the amount of valuation allowance required in light of
profitability achieved in 2003 and 2002 and expected in future years. As a
result, the Company reduced the valuation allowance on deferred tax assets to an
amount that it believes is more likely than not of being realized based on the
Company's assessment of the likelihood of future taxable income. At December
31, 2003, the valuation allowance primarily reflected uncertainties involving
the realization of certain tax credits and loss carryforwards due to the
potential impact of future stock option exercises and shorter-term deferred tax
asset expiration dates.
F-17
12. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 2003, 2002 and 2001:
For the Year Ended December 31,
---------------------------------------------
2003 2002 2001
------------- -------------- --------------
(dolllars in thousands, except per share data)
Net income (loss) applicable to common stockholders $ 18,672 $ 1,429 $ (3,661)
============= ============== ==============
Weighted average common shares outstanding 22,093,655 21,175,602 18,240,431
------------- -------------- --------------
Denominator for basic net income (loss) per share 22,093,655 21,175,602 18,240,431
------------- -------------- --------------
Effect of dilutive securities:
Series B preferred stock assuming conversion 2,657,581 2,822,635 -
Common stock warrants 993,243 540,533 -
Common stock options 887,360 157,606 -
------------- -------------- --------------
Denominator for diluted net income (loss) per share 26,631,839 24,696,376 18,240,431
------------- -------------- --------------
Basic net income (loss) per share $ 0.85 $ 0.07 $ (0.20)
============= ============== ==============
Diluted net income (loss) per share $ 0.70 $ 0.06 $ (0.20)
============= ============== ==============
The calculation of net income per share for the years ended December 31, 2003
and 2002 excludes potentially dilutive common stock equivalents consisting of
outstanding options to purchase 1,207,274 and 2,726,444 shares of common stock
in 2003 and 2002, respectively, and warrants to purchase 250,000 and 334,211
shares of common stock in 2003 and 2002, respectively, because their inclusion
would be antidilutive.
The calculation of net loss per share for the year ended December 31, 2001
excludes potentially dilutive common stock equivalents of 9,250,216 in 2001.
These common stock equivalents, which consisted of convertible Series B
preferred stock, warrants, and outstanding stock options, were not included in
the calculation of the net loss per share because their inclusion would be
antidilutive.
13. COMMITMENTS AND CONTINGENCIES
Litigation
In June 2002, a complaint was filed in the Superior Court of California, Los
Angeles County, Central District, captioned Joan Savitt, individually and on
behalf of others similarly situated, v. Doheny Eye & Tissue Bank, et al. The
complaint alleged among other things, the Company, by engaging in the storing,
processing and distribution of human tissue, violates the public policy and laws
of the state of California in various ways. In June 2003, the plaintiff and the
Company entered into a mutual release and dismissal of the complaint.
F-18
In November 2003, a complaint was filed in the Circuit Court of Fairfax,
Virginia captioned Sun Hee Jung v. Yongsook Victoria Suh, M.D., Victoria Plastic
Surgery Center, Inc. and LifeCell Corporation. The matter is a product
liabilities action for personal injury damages allegedly arising from the use of
one of the Company's products. The case is in its beginning stages and the
parties are conducting preliminary discovery. The Company intends to vigorously
defend against this action. The likelihood of an unfavorable outcome is unknown
at this time however, the Company believes any potential losses resulting from
this action would be covered by its insurance policies.
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.
Independent Sales and Marketing Agency and Distributor Agreements
The Company utilizes independent sales and marketing agents and distributors to
supplement its direct sales organization. The Company's independent sales and
marketing agents and distributors generated 38%, 48% and 54% of total product
revenue in the years ended December 31, 2003, 2002 and 2001. One of the
Company's sales and marketing agents generated 23% of total product revenues in
2003. No other individual independent sales agent or distributor generated more
than 5% of our total product revenues in the year ended December 31, 2003.
Independent sales and marketing agents hold Company inventory on a consignment
basis. The Company records revenues when products are delivered to third-party
customers. Our independent sales and marketing agents are paid agency fees
based on the amount of product revenues they generate for the Company. Such
fees are included in the statement of operations as selling and marketing
expense at the time that revenues are recorded.
In addition to sales and marketing agents, the Company also distributes products
through independent domestic and international distributors. These distributors
take title to and assume risk of loss for the products upon shipment from the
Company to the distributor, and therefore the Company recognizes revenue upon
shipment to the distributor for these sales.
Leases
The Company leases approximately 90,000 square feet for office, production and
laboratory space in one building under a lease agreement that expires in
November 2010. The lease contains a renewal option for an additional two
successive five-year periods. In addition, the Company has various other
operating leases. Rental expense was $1,021,000, $949,000 and $872,000 for the
years ended December 31, 2003, 2002, and 2001, respectively. The future minimum
lease payments under noncancelable lease terms in excess of one year as of
December 31, 2003, were as follows (dollars in thousands):
2004 $ 833
2005 891
2006 919
2007 919
2008 and beyond 2,681
--------
Total $ 6,243
========
F-19
14. SEGMENT DATA
The Company has one reportable business operating segment - the processing and
distribution of human tissue based products for use in various surgical
procedures. Product revenues by geographic area for the years ended December 31,
2003, 2002 and 2001, are summarized as follows (dollars in thousands):
2003 2002 2001
------- ------- -------
United States $37,257 $31,163 $24,939
Other countries 1,320 1,772 1,621
------- ------- -------
Total Product Revenues $38,577 $32,935 $26,560
======= ======= =======
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of unaudited quarterly results for the years ended
December 31, 2003 and 2002:
First Second Third Fourth
(In thousands except per share amounts) Quarter Quarter Quarter Quarter
-------- -------- -------- ----------
2003
Total Revenues $ 8,995 $ 9,680 $ 10,505 $ 11,069
Product Revenues 8,585 9,143 10,103 10,746
Cost of Products Sold 2,540 2,820 2,995 3,886
Net Income 562 380 506 17,224(1)
Income Per Share of Common Stock - Basic 0.03 0.02 0.02 0.68
Income Per Share of Common Stock - Diluted 0.02 0.01 0.02 0.56
2002
Total Revenues $ 7,659 $ 8,394 $ 9,102 $ 9,273
Product Revenues 7,310 8,050 8,711 8,864
Cost of Products Sold 2,396 2,513 2,642 2,583
Net Income 436 214 344 435
Income Per Share of Common Stock - Basic 0.02 0.01 0.02 0.02
Income Per Share of Common Stock - Diluted 0.02 0.01 0.01 0.02
(1) Includes $16,656,000 of reversal of deferred tax asset valuation allowance.
F-20