| Any of the risks discussed below, or elsewhere in this Form 10-K or the Company’s other filings with the Securities and Exchange Commission, could have a material impact on the Company’s business, financial condition or results of operations |
| Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be immaterial may also impair the Company’s business operations |
| The Company’s business could be adversely affected if it is not able to successfully compete against the competitors in the human health care products industry |
| Competitors of the Hyaluronan and Oral Restorative Divisions in the United States and elsewhere are numerous and include major chemical, dental, medical, and pharmaceutical companies, as well as smaller specialized firms |
| Many of these competitors have substantially greater capital resources, marketing experience, and research and development resources than the Company |
| These companies may succeed in developing products that are more effective than any that have been or may be developed by Lifecore and may also prove to be more successful than Lifecore in producing and marketing these products |
| In addition, the Oral Restorative Division is competing against a number of large established competitors |
| In order to increase sales, the Division may need to gain market share from its competitors |
| There can be no assurance that Lifecore will be able to continue to compete successfully against these competitors |
| Several companies produce hyaluronan through a fermentation process, including Genzyme, Inc, Savient, Fidia SpA, IOLTECH, Kyowa Hakko, Kibun and Bayer |
| In addition, several companies manufacture hyaluronan by using rooster comb extraction methods |
| These companies primarily include Anika Therapeutics, Inc, Genzyme, Inc, Fidia SpA, Pharmacia and Kibun |
| The Company’s competitors have filed or obtained patents covering aspects of fermentation production or uses of hyaluronan |
| These patents may cover the same applications as the Company’s applications |
| Although the Company believes that it does not infringe the patents of its competitors, there can be no assurance that the Company will not receive claims of infringement from third parties |
| In addition, negative announcements regarding any competitor’s products may have a negative impact on the public’s perception of the market potential for all similar products, including the Company’s products |
| There can be no assurance that product introductions by present or future competitors or future technological or health care innovations will not render Lifecore’s products and processes obsolete |
| If Lifecore is unable to successfully protect its proprietary technology or if it is unable to maintain a competitive technological position in its product areas, its business will be adversely affected |
| While certain of Lifecore’s patents have been allowed or issued, there can be no assurance that, to the extent issued, the Company’s patents will effectively protect its proprietary technology |
| If other manufacturers were to infringe on its patents, there can be no assurance that the Company would be successful in challenging, or would have adequate resources to challenge, such infringement |
| Lifecore also relies upon trade secrets, proprietary know-how and continuing technological innovation to develop and maintain its competitive position |
| There can be no assurance that others will not independently develop such know-how or otherwise obtain access to the Company’s technology |
| While Lifecore’s employees, temporary staff, consultants and corporate partners with access to proprietary information are required to enter into confidentiality agreements, there can be no assurance that these agreements will provide the Company with adequate protection from loss of proprietary technology or know-how |
| 14 _________________________________________________________________ [48]Table of Contents Under current law, patent applications in the United States are maintained in secrecy until patents are issued, and patent applications in foreign countries are maintained in secrecy for a period after filing |
| The right to a device patent in the United States is attributable to the first to invent the device, not the first to file a patent application |
| Accordingly, the Company cannot be sure that its products or technologies do not infringe patents that may be granted in the future pursuant to pending patent applications |
| The Company has not received any notices alleging, and is not aware of, any infringement by the Company of any other entity’s patents relating to the Company’s current or anticipated products |
| There can be no assurance, however, that its products do not infringe any patents or proprietary rights of third parties |
| In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from selling its products or could be required to obtain licenses from the owners of such patents or be required to redesign its products or processes to avoid infringement |
| There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement |
| The Company’s failure to obtain these licenses or to redesign its products or processes would have a material adverse effect on the Company’s business, financial condition, and results of operations |
| The Company’s business will be adversely affected if it is unable to obtain regulatory approval for new product introductions or to expand sales of existing products into new markets |
| The Company’s products under development are considered to be medical devices and, therefore, they require clearance or approval by the FDA before commercial sales can be made in the United States |
| The products also require approvals of foreign government agencies before sales may be made in many other countries |
| The process of obtaining these clearances or approvals varies according to the nature and use of the product |
| It can involve lengthy and detailed laboratory and clinical testing, sampling activities and other costly and time-consuming procedures |
| There can be no assurance that any of the required clearances or approvals will be granted on a timely basis, if at all |
| In addition, most of the existing products being sold by the Company and its customers are subject to continued regulation by the FDA, various state agencies and foreign regulatory agencies which regulate manufacturing, labeling and record keeping procedures for such products |
| Marketing clearances or approvals by these agencies can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance or approval |
| These agencies can also limit or prevent the manufacture or distribution of the Company’s products |
| A determination that the Company is in violation of such regulations could lead to the imposition of civil penalties, including fines, product recalls or product seizures, injunctions, and, in extreme cases, criminal sanctions |
| The Company is exposed to the risks of operating a global business, including risks associated with exchange rate fluctuations, legal and regulatory changes and the impact of regional and global economic disruptions, which could have an adverse effect on the Company’s business |
| International shipments accounted for 49prca of net sales in fiscal 2006 |
| We expect that international shipments will continue to represent a significant percentage of net sales in the future |
| Our non-US sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following: • Periodic local or geographic economic downturns and unstable political conditions; • Price and currency exchange controls; • Fluctuation in the relative values of currencies; • Difficulties protecting intellectual property; • Local labor disputes; • Shipping delays and disruptions; • Increases in shipping costs, caused by increased fuel costs or otherwise, which we may not be able to pass on to our customers; • Unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and • Difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing suppliers, distributors and representatives, and repatriation of earnings |
| 15 _________________________________________________________________ [49]Table of Contents Our business and operating results are subject to uncertainties arising out of the possibility of regional or global economic disruptions (including those resulting from natural disasters and outbreaks of infectious disease), the economic consequences of military action or terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce |
| In particular, due to these uncertainties we are subject to: • The risk of more frequent instances of shipping delays; and • The risk that demand for our products may not increase or may decrease |
| The development of new hyaluronan products entails substantial risk of failure and uncertainty related to timing, and a significant amount of the Company’s anticipated growth is dependent on its ability to develop, manufacture and market new product applications for hyaluronan |
| A significant amount of the Company’s anticipated growth is dependent on its ability to develop, manufacture and market new product applications for hyaluronan |
| Such formulations must be developed, tested and, in most cases, approved for use by appropriate government agencies |
| Once approved as products, they must be manufactured in commercial quantities and marketed successfully |
| Each of these steps involves significant amounts of time and expense |
| There can be no assurance that any of these products, if and when fully developed and tested, will perform in accordance with the Company’s expectations, that necessary regulatory approvals will be obtained in a timely manner, if at all, or that these products can be successfully and profitably produced and marketed |
| The Company is dependent on the marketing and development support from corporate partners for the sales growth of the Hyaluronan Division, and the Company’s business could be adversely affected if the Company’s strategic alliances fail to develop or market products as planned |
| The Company has historically developed, manufactured, and marketed its Hyaluronan Division products through long-term strategic alliances with corporate partners |
| In the case of such relationships, the speed and other aspects of the development project are sometimes outside of the Company’s control, as the other party to the relationship often has priorities that differ from those of the Company |
| Thus, the timing of commercialization of the Company’s products under development may be subject to unanticipated delays |
| Further, the Company currently has limited direct sales capabilities in the Hyaluronan Division and generally relies upon its corporate partners for marketing and distribution to end-users |
| The market success of the Company’s hyaluronan products generally will depend upon the size and skill of the marketing organizations of the Company’s corporate partners, as well as the level of priority assigned to the marketing of the Company’s products by these entities, which may differ from the Company’s priorities |
| Should one or more of the Company’s strategic alliances fail to develop or market products as planned, the Company’s business may be adversely affected |
| No assurance can be given that the Company will be able to negotiate acceptable strategic alliances in the future or that current strategic alliances will continue |
| The development contracts into which the Company enters with corporate partners are long-term agreements that are subject to development milestones, product specifications, and other terms |
| Consequently, future agreement often is required regarding the course and nature of continued development activities |
| Contractual issues requiring resolution between the parties have arisen in the past and are expected to arise in the ordinary course of the Company’s future development activities |
| There can be no assurance that all such issues will be successfully resolved |
| If the Company is unable to scale up manufacturing operations in the event of a significant increase in customer demand, the Company’s business could be adversely affected |
| The Company has designed its modular facility to permit the production of hyaluronan at levels exceeding current levels of production |
| However, in the event of a sudden significant increase in demand for any of the Company’s hyaluronan products, the Company will be required to scale-up operations, including the acquisition and validation of additional equipment and training of additional personnel |
| No assurance can be given that the Company will be able to adequately meet any such demands on a timely basis |
| 16 _________________________________________________________________ [50]Table of Contents An interruption in the Company’s manufacturing activities could adversely affect the Company’s relations with its customers |
| The Company’s manufacturing requires extensive specialized equipment |
| In addition, the Company manufactures its hyaluronan products at one facility |
| Although the Company has contingency plans in effect for certain natural disasters, as well as other unforeseen events that could damage the Company’s facilities or equipment, no assurance can be given that any such events will not materially interrupt the Company’s business |
| In the event of such an occurrence, the Company has business interruption insurance to cover lost revenues and profits |
| However, such insurance would not compensate the Company for the loss of opportunity and potential adverse impact on relations with existing customers created by an inability to produce its products |
| There is uncertainty and risk that FeHA will not be returned to the market, which would negatively impact the Company’s future revenue potential |
| FeHA, (formerly labeled as GYNECARE INTERGEL Adhesion Prevention Solution (“INTERGEL Solution”)) was voluntarily withdrawn from the market by ETHICON in March 2003 in order to assess information obtained from postmarketing experience with the product, including allegations of adverse events associated with off-label use in non-conservative surgical procedures (such as hysterectomies) |
| The Company has completed the post-marketing evaluation and shared the results with the FDA The Company is currently evaluating regulatory requirements and opportunities for distribution partners for the FeHA product to return to market |
| The markets for the Company’s dental products are very competitive, and the Company’s results of operations and financial condition could be adversely affected if it cannot maintain or increase the market share of these products |
| The Oral Restorative Division markets its products through a direct sales force and a distribution network |
| Continued growth of the Company’s revenues from oral restorative products will depend on the ability of this sales and distribution network to increase the Company’s market share by convincing practitioners to use the Company’s products over competing established products |
| No assurance can be given that the sales and distribution network will be successful in increasing or maintaining the Company’s market share or sales levels |
| Failure to maintain and increase the market share of these products would adversely affect the Company’s results of operations and financial condition |
| The Company may be subject to product liability claims and other legal proceedings which could have a material adverse effect on the Company’s business, financial condition and results of operations |
| The manufacture and sale of the Company’s products entails a risk of product liability claims |
| In addition to product liability exposure for its own products, the Company may be subject to claims for products of its customers which incorporate Lifecore’s materials |
| The Company maintains product liability insurance coverage in amounts it deems adequate |
| However, there can be no assurance that the Company will have sufficient resources if claims exceed available insurance coverage |
| In addition, other types of claims may arise that are not covered by such insurance |
| Lifecore was named as a defendant in 80 product liability lawsuits, all of which allege that the plaintiffs suffered injuries due to the defective nature of INTERGEL Solution manufactured by Lifecore and marketed by ETHICON During the course of the past year, ETHICON settled several of the lawsuits without seeking any contribution from Lifecore |
| In addition, eight of the cases were voluntarily dismissed and one case was dismissed on summary judgment |
| There can be no assurance that these pending claims, other new product liability claims, claims with respect to uninsured liabilities or claims in excess of insured liabilities, will not have a material adverse effect on the business, financial condition and results of operations of the Company |
| In addition, there can be no assurance that insurance will continue to be available to the Company and that, if available, the insurance will continue to be on commercially acceptable terms |
| 17 _________________________________________________________________ [51]Table of Contents Failure to maintain effective internal controls could have a material adverse effect on the Company’s business, operating results and stock price |
| In connection with our fiscal 2006 audit, we documented and tested our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments |
| If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to prevent financial fraud |
| If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly |
| The Company’s tax rates are subject to fluctuation, which could impact its financial position, and its estimates of tax liabilities may be subject to audit, which could result in additional assessments |
| Our effective tax rates are subject to fluctuation as the income tax rates for each year are a function of: (a) the effects of a mix of profits (losses) earned by Lifecore and its subsidiaries in numerous tax jurisdictions with a broad range of income tax rates, (b) our ability to utilize recorded deferred tax assets, and (c) changes in tax laws or the interpretation of such tax laws |
| Changes in the mix of these items may cause our effective tax rates to fluctuate between periods, which could have a material adverse effect on our financial position |
| We are subject to income taxes in both the United States and foreign jurisdictions |
| During the ordinary course of business there are many transactions and calculations for which the ultimate tax determination is uncertain |
| Significant judgment is exercised in determining our world wide provisions for income taxes |
| The Company’s business could be adversely affected if it were to lose the services of its key management employees |
| The Company’s success depends in large part upon the services of its executive officers |
| The executive officers consist of Dennis J Allingham, President and Chief Executive Officer, David M Noel, Vice President of Finance and Chief Financial Officer; Larry Hiebert, Vice President and General Manager of the Hyaluronan Division; Ben Beckham, Vice President of Sales and Marketing for the Oral Restorative Division, James G Hall, Vice President of Technical Operations and Kipling Thacker, Ph |
| The loss of any one of these individuals may have a material adverse effect on the Company’s business and operations |
| The Company does not have employment agreements with or life insurance on its officers |
| Market prices for securities of medical technology companies are highly volatile, and the trading price of the Company’s Common Stock is subject to significant fluctuations |
| Market prices in the United States for securities of medical technology companies can be highly volatile, and the trading price of the Company’s Common Stock could be subject to significant fluctuations in response to quarterly variations in operating results, announcements of the status or results of development projects or technological innovations by the Company or its competitors, government regulation and other events or factors |
| The volatility in market prices may be unrelated to the operating performance of particular companies |
| These market fluctuations have in the past materially adversely affected the market price of the Company’s Common Stock, and may have such an effect in the future |