LCBM Lifecore Biomedical (MM)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

SCHEDULE 14D-9

 

SOLICITATION/RECOMMENDATION STATEMENT UNDER
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

Lifecore Biomedical, Inc.

(Name of Subject Company)

 

Lifecore Biomedical, Inc.

(Name of Persons Filing Statement)

 

Common Shares

(Title of Class of Securities)

 

532187101

(CUSIP Number of Class of Securities)

 

Dennis J. Allingham
Lifecore Biomedical, Inc.
3515 Lyman Boulevard
Chaska, Minnesota 55318
(952) 368-4300
(Name, address and telephone numbers of person authorized to receive notices

and communications on behalf of the persons filing statement)

 

Copies to:

 

Robert A. Rosenbaum
Dorsey & Whitney LLP
50 South Sixth Street, Suite 1500
Minneapolis, Minnesota 55402
(612) 340-2600

 

 

 

 

 

The name of the subject company is Lifecore Biomedical, Inc., a Minnesota corporation (the “ Company ”), and the address of the principal executive offices of the Company is 3515 Lyman Boulevard, Chaska, Minnesota 55318. The telephone number for its principal executive offices is (952) 368-4300.

 

 

The title of the class of equity securities to which this Solicitation/Recommendation Statement on Schedule 14D-9 (together with any Exhibits or Annexes hereto, this “ Statement ”) relates is common stock, par value $0.01 per share of the Company (the “ Shares ”). As of February 18, 2008, 13,558,691 Shares were issued and outstanding.

 

 

 

The name, business address and business telephone number of the Company, which is the person filing this Statement, are set forth in Item 1(a) above, which information is incorporated herein by reference.

 

 

This Statement relates to the cash tender offer by SBT Acquisition Inc. (“ Purchaser ”), a Minnesota corporation and wholly owned subsidiary of SBT Holdings Inc., a Delaware corporation (“ Parent ”), disclosed in a Tender Offer Statement on Schedule TO dated February 21, 2008 (the “ Schedule TO ”) filed with the Securities and Exchange Commission (the “ SEC ”), to purchase all of the outstanding Shares at a price of $17.00 per share, net to the seller in cash (the “ Offer Price ”), without interest and less any required withholding taxes, if any, upon the terms and subject to the conditions set forth in the Offer to Purchase dated February 21, 2008 (the “ Offer to Purchase ”), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, constitute the “ Offer ”). Copies of the Offer to Purchase and the Letter of Transmittal are filed as Exhibits (a)(1) and (a)(2) hereto, respectively, and are incorporated herein by reference.

 

The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of January 15, 2008 (the “ Merger Agreement ”), by and among Parent, Purchaser and the Company. The Merger Agreement is filed as Exhibit (e)(2) hereto and is incorporated herein by reference. The Merger Agreement provides, among other things, for the making of the Offer by Purchaser and further provides that, upon the terms and subject to the conditions contained in the Merger Agreement, as soon as practicable following completion of the Offer, Purchaser will merge with and into the Company (the “ Merger ”) and the Company will continue as the surviving company under the laws of the State of Minnesota (the “ Surviving Corporation ”), and the separate corporate existence of Purchaser will cease. In the Merger, the Shares issued and outstanding immediately prior to the consummation of the Merger (other than Shares owned by Parent, the Company, any subsidiary of Parent or any subsidiary of the Company, all of which will be cancelled, and other than Shares, where applicable, held by shareholders who are entitled to and who have properly exercised dissenters’ rights under the Minnesota Business Corporation Act (the “ MBCA ”)), will be converted into the right to receive an amount in cash equal to the Offer Price (the “ Merger Consideration ”).

 

The forgoing description of the Merger Agreement and the Offer is qualified in its entirety by reference to the Merger Agreement, the Offer to Purchase, and the Letter of Transmittal filed as Exhibits (e)(2), (a)(1), and (a)(2) to this Statement and incorporated herein by reference.

 

The Offer to Purchase states that the principal executive offices of Purchaser are located care of Warburg Pincus Private Equity IX, L.P. at 466 Lexington Avenue, New York, New York, 10017. The telephone number of Purchaser at such location is (212) 878-0600.

 

Certain contracts, agreements, arrangements or understandings between the Company or its affiliates and certain of its executive officers, directors or affiliates are, except as noted below, described in the Information Statement pursuant to Section 14(f) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and Rule 14f-1 thereunder (the “ Information Statement ”) that is attached hereto as Annex A and is incorporated herein by reference. Except as set forth in this Item 3, Item 4 below, the Information Statement, or in the Company’s Proxy Statement on Schedule 14A filed with the SEC on October 12, 2007, as incorporated herein by reference, to the knowledge of the Company, there are no material agreements, arrangements or understandings, and no actual or potential conflicts of interest, between the Company or its affiliates and (i) the Company’s executive officers, directors or affiliates or (ii) Parent or Purchaser or their respective executive officers, directors or affiliates.

 

 

Interests of Certain Persons.   Certain members of the Company’s management and Board of Directors (the “ Board ”) may be deemed to have interests in the transactions contemplated by the Merger Agreement that are different from or in addition to their interests as Company shareholders generally. The Board was aware of these interests and considered them, among other matters, in approving the Merger Agreement and the transactions contemplated thereby. As described below, the consummation of the Offer will constitute a change in control of the Company for the purposes of determining the entitlements due to certain executive officers and directors of the Company with respect to severance and certain other benefits as more fully described below.

 

Change-in-Control Agreements.   Agreements that provide for certain benefits in the event of a change in control of the Company are in effect between the Company and certain of its executive officers, including Dennis J. Allingham, James G. Hall, Larry D. Hiebert and David M. Noel. If, within 18 months (or in the case of Mr. Allingham, 24 months) after a change in control of the Company, the executive’s employment is terminated (i) by the Company other than for cause or (ii) by the executive for good reason, the Company has agreed to pay the executive an amount equal to the sum of (x) 12 times (or in the case of Mr. Allingham, 24 times) the executive’s current monthly base salary and (y) 1 times the executive’s most recent annual bonus and commission (or in the case of Mr. Allingham, twice). In addition, following such a change in control and termination of the executive’s employment, subject to certain restrictions and requirements, all unvested options granted to the executive will become immediately vested and exercisable and the executive will also receive outplacement services for up to one year and continued benefits under all employee welfare benefit plans, or equivalent plans, for up to 24 months. Each change-in-control agreement continues in effect until the executive and the Company mutually agree to terminate such agreement, the executive’s employment is terminated by the Company for cause or by the executive other than for good reason, or until the executive reaches the age of 65. The foregoing summary is qualified in its entirety by reference to the Information Statement attached hereto as Annex B and incorporated herein by reference, and to Exhibits (e)(5) through (e)(7) attached hereto.

 

Effect of the Offer on Employee Benefits.   The Merger Agreement provides that, for a period of one year following the closing of the Merger, the Surviving Corporation will provide current employees of the Company and its subsidiaries (other than those employees covered by a collective bargaining agreement, if any) who continue employment with the Surviving Corporation with compensation and benefits that are substantially similar in the aggregate than those provided under the Company’s compensation and benefit plans, programs, policies, practices and arrangements (excluding equity-based programs) in effect at the effective time of the Merger (the “ Effective Time ”). Following the Effective Time, the Surviving Corporation will honor all retention and change-in-control agreements existing as of the date of the Merger Agreement. The foregoing summary is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(2) hereto and is incorporated herein by reference.

 

Effect of the Offer and the Merger Agreement on the Company’s Stock Option Plans .  All unvested options under the Company’s stock option plans vested on February 21, 2008 pursuant to the terms of such

plans. All options under the Company’s stock option plans that are outstanding immediately prior to the Effective Time will be substituted for an option to purchase shares of common stock of the Surviving Corporation or, at the election of Parent, any direct or indirect parent of the Surviving Corporation; provided, however, that any holder of a stock option that is “in-the-money” prior to the Effective Time may execute a stock option cancellation agreement, in lieu of the conversion described above, and receive, in full settlement of such stock option, an amount (subject to any applicable withholding) in cash equal to the product of (x) the excess, if any, of the Merger Consideration over the exercise price per Share of such stock option multiplied by (y) the number of Shares subject to such stock option. Each stock option outstanding immediately prior to the Effective Time that is not subject to a stock option cancellation agreement will be substituted for an option to purchase shares of common stock of the Surviving Corporation, or, at Parent’s election, any direct or indirect parent of the Surviving Corporation (each, a “ Rollover Option ”). Each Rollover Option will be adjusted equitably to prevent any increase or decrease in the intrinsic value of its corresponding stock option as a result of the transactions contemplated by the Merger Agreement. At the election of Parent, the substitution of Rollover Options may be satisfied either by assumption and continuation of the corresponding stock options and the Company’s stock option plans under which such stock options have been granted or by granting new Rollover Options under a stock incentive plan established by the Surviving Corporation or, at the election of Parent, any direct or indirect parent of the Surviving Corporation. The foregoing summary is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(2) hereto and is incorporated herein by reference.

 

Effect of the Offer on Directors’ and Officers’ Indemnification and Insurance .  The Merger Agreement provides that the Surviving Corporation will indemnify the present and former directors and officers of the Company and its subsidiaries (the “ Indemnified Parties ”) against all losses, claims, damages, liabilities, costs, legal and other expenses, judgments, fines and settlement amounts in respect of acts or omissions occurring prior to the Effective Time. If any Indemnified Party becomes involved in a claim, suit proceeding or investigation covered by the indemnification provision in the Merger Agreement after the Effective Time, the Surviving Corporation will advance legal or other expenses to such Indemnified Party so long as such party undertakes to reimburse all amounts so advanced in the event it is ultimately determined that such Indemnified Party is not entitled thereto. The Merger Agreement further provides that for a period of six years after the Effective Time, the Surviving Corporation will maintain the Company’s current policies of directors’ and officers’ liability insurance in respect of acts or omissions occurring prior to the Effective Time, or obtain “tail” insurance policies with a claims period of six years from the Effective Time with at least the same coverage and amounts and containing terms and conditions that are no less advantageous in the aggregate to the Company’s directors and officers; provided, however, that in no event will the Surviving Corporation be required to expend an annual premium for such coverage in excess of 200% of the last annual premium paid by the Company for such insurance prior to the date of the Merger Agreement. The foregoing summary is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(2) hereto and is incorporated herein by reference.

 

 

The Board has taken steps to cause any dispositions of Shares or options to acquire Shares in connection with the Merger to be exempt from the effects of Section 16 of the Exchange Act by virtue of Rule 16b-3 promulgated under the Exchange Act.

 

 

In connection with the transactions contemplated by the Merger, the Company and Parent entered into the Merger Agreement and a Confidentiality Agreement dated July 21, 2006.

 

The Merger Agreement.   The summary of the material terms of the Merger Agreement set forth under the caption “Terms of the Offer” and “Purpose of the Offer and Plans for Lifecore; Merger Agreement and Other Matters” in the Offer to Purchase is incorporated herein by reference. The summary of the Merger Agreement contained in the Offer to Purchase is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(2) hereto and is incorporated herein by reference.

Confidentiality Agreement.   As a condition to being furnished certain information concerning the Company (the “ Evaluation Material ”), Warburg Pincus LLC (“ Warburg Pincus ”), an affiliate of Parent, has agreed, among other things, that it will, and it will cause its affiliates to, keep such Evaluation Material confidential and will use it for the sole purpose of evaluating a possible transaction with the Company. Evaluation Material does not include information that (i) was in the public domain before disclosure to Warburg Pincus or that becomes part of the public domain after disclosure to Warburg Pincus through no action or fault of Warburg Pincus, or (ii) Warburg Pincus can demonstrate was in its possession before disclosure to Warburg Pincus by the Company or its representative.

 

In addition, Warburg Pincus agreed to an a three-year standstill agreement, whereby Warburg Pincus and its affiliates are prohibited from taking various actions during such period, without the prior written consent of the Company, that would result in, among other things, the acquisition of shares of, or a merger or business combination involving, the Company or any of its subsidiaries, which stand still does not apply to the transactions contemplated by the Merger Agreement. The foregoing summary is qualified in its entirety by reference to the complete text of the Confidentiality Agreement which is filed as Exhibit (e)(4) hereto and is incorporated herein by reference.

 

Ownership of Company Securities.   The Offer to Purchase states that Parent and Purchaser do not own any Shares.

 

Board Designees.   The Merger Agreement provides that after Purchaser accepts for payment and pays for Shares pursuant to the Offer, Parent will be entitled to designate the number of directors, rounded up to the next whole number, on the Board that equals the product of (a) the total number of directors on the Board, giving effect to the election of any additional directors, and (b) the percentage that the number of Shares held by Parent and Purchaser bears to the total number of Shares outstanding. The Company will use its best efforts to cause Parent’s designees to be elected or appointed to the Board, including increasing the number of directors and seeking and accepting resignations of incumbent directors. Moreover, the Company will take all actions necessary to cause individuals designated by Parent to constitute the number of members, rounded up to the next whole number, on each committee of the Board, each board of directors of each subsidiary of the Company, and each committee of the board of each subsidiary, that represents the same percentage as the individuals represent on the Board, in each case to the fullest extent permitted by applicable law.

 

Following the election or appointment of Parent’s designees and until the consummation of the Merger, the approval of a majority of the directors of the Company then in office who were not designated by Parent (the “ Continuing Directors ”), or the approval of both Continuing Directors if there are only two Continuing Directors, will be required to authorize any amendment to or termination of the Merger Agreement by the Company, any extension of time for performance of any obligation or action under the Merger Agreement by Parent or Purchaser, any waiver of the Company’s rights under the agreements if such waiver would materially and adversely affect the Company’s shareholders, and any other action by the Company relating to the Merger Agreement if such action would materially and adversely affect the Company’s shareholders.

 

The foregoing is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(2) hereto and is incorporated herein by reference.

 

Parent intends to designate representatives to the Board from among the directors and officers of the Purchaser and Parent. Background information on these individuals is found in the Information Statement attached to this Statement as Annex A and incorporated herein by reference.

 

 

 

The Board, during a meeting held on January 14, 2008, by unanimous vote approved and adopted the Merger Agreement and the transactions contemplated thereby and determined that the Offer and the Merger are advisable and fair to, and in the best interests of, the Company and its shareholders.

Accordingly, the Board unanimously recommends that the holders of the Shares accept and tender their Shares pursuant to the Offer.

 

 

Commencing in the spring of 2003, the Board and the Company’s management, together with their legal and financial advisors, began to review and evaluate strategic opportunities and alternatives for the Company with a view toward enhancing shareholder value. The following describes the process and events leading up to the Offer and the Merger, as contemplated by the Merger Agreement.

 

Following the voluntary withdrawal from the market of a key Company product in the spring of 2003, the Board discussed the Company’s financial performance and the need to increase shareholder value. At a meeting held in May 2003, the Board resolved to undertake a strategic review of the Company and to engage an investment banker to advise and assist the Board in this review. After interviewing three investment banking firms, the Board engaged Piper Jaffray & Co. (“ Piper Jaffray ”) to assist the Board in its strategic review. Throughout the remainder of 2003, the Board worked with management and Piper Jaffray to assess strategic alternatives. Piper Jaffray engaged in a process to determine third party interest in a variety of potential transactions with the Company, contacting more than 50 parties. Seven of those parties submitted non-binding indications of interest, entered into non-disclosure agreements, and received confidential due diligence and management presentations. Neither Warburg Pincus nor any of its affiliates were contacted by Piper Jaffray during this process.

 

In November of 2003, Piper Jaffray, acting at the Board’s request, commenced negotiations with a larger, publicly held life sciences company (“ Company A ”) with respect to the potential sale of the Company to Company A. Following discussions over the course of several months, both by Piper Jaffray with Company A and by the Board with management and Piper Jaffray, the Board determined, in February 2004, to cease discussions with Company A and continue as a stand-alone enterprise under new leadership. The Board instead elected Dennis Allingham, the Company’s then Chief Financial Officer, to the position of President and Chief Executive Officer in February 2004, and endorsed his new strategic plan for the Company. Also in February 2004, the Company terminated its engagement of Piper Jaffray. Over the next four years, the value of the Company more than doubled when compared to the value of the last offer made by Company A.

 

On July 27, 2004, Sean Carney and Elizabeth Weatherman, each managing directors of Warburg Pincus, met with Mr. Allingham and David Noel, the Chief Financial Officer of the Company, to discuss the strategic direction of the Company and for Warburg Pincus to express a preliminary interest in a potential transaction involving the Company. Messrs. Allingham and Noel viewed this as a meeting with a prospective institutional investor in the Company’s capital stock, and discussed the industry and publicly available information regarding the Company. At the conclusion of the discussion, the parties decided not to continue to explore a potential transaction at that time.

 

In the two weeks leading up to July 21, 2006, Mr. Carney contacted Mr. Allingham regarding Warburg Pincus’ interest in engaging in a transaction with the Company. After preliminary discussions, the Company and Warburg Pincus entered into a confidentiality agreement, dated July 21, 2006, which was accepted by Warburg Pincus on July 24, 2006, in order to facilitate the sharing of information with respect to discussions with Warburg Pincus regarding a potential transaction with the Company.

 

On September 12, 2006, representatives from Warburg Pincus, including Mr. Carney, had an introductory meeting with certain of the executive officers of the Company, including Messers. Allingham and Noel, and Larry Hiebert, the Company’s Vice President and General Manager of the Hyaluronan Division, to discuss the Company’s business, the Company’s international presence and to review the Company’s organizational structure. On September 21, 2006, Warburg Pincus and the Company had a call pursuant to which Warburg Pincus continued to express its interest in a potential transaction with the Company and began its preliminary due diligence review.

Between October 19, 2006, and October 27, 2006, representatives of Warburg Pincus had several meetings and calls with representatives of the Company and continued to discuss a potential transaction with the Company, including a meeting on October 27, 2006, to discuss the Hyaluronan Division.

 

From October 30, 2006, through early December 2006, Ernst and Young LLP (“ Ernst & Young ”), Warburg Pincus’ accounting advisor, conducted a diligence review of the Company, focused primarily on accounting and tax matters related to the Dental Division. During this time, the Company provided Ernst & Young with information in response to its initial information requests. In November of 2006, Ernst & Young and the Company participated in follow-up diligence calls and meetings regarding Ernst & Young’s accounting and tax review with respect to the Company. In addition, in November of 2006, Willkie Farr & Gallagher LLP (“ Willkie Farr ”), Warburg Pincus’ legal counsel, reviewed the publicly available information filed by the Company with the SEC.

 

On January 16, 2007, the Company released its second quarter earnings, and Mr. Allingham had a discussion with Mr. Carney with respect to the earnings release. On February 22, 2007, Mr. Carney telephoned Mr. Allingham to inform him that Warburg Pincus decided to suspend its efforts towards exploring a transaction with the Company.

 

On September 20, 2007, Mr. Carney called Mr. Allingham to request a meeting to renew discussions regarding a potential transaction involving the Company. Following the call, on September 23, 2007, representatives of Warburg Pincus requested additional information from the Company. In addition, on September 28, 2007, representatives of Warburg Pincus, including Mr. Carney, met with Messrs. Allingham, Hiebert and Noel to review and discuss the Company’s business.

 

From September 28, 2007, through the middle of December 2007, representatives of Warburg Pincus, including its legal and accounting advisors, periodically contacted the Company, including phone calls and e-mails between Warburg Pincus and its representatives and members of the Company’s senior management, regarding information requests and due diligence matters. During this period, the Company responded to such requests and provided Warburg Pincus and its representatives with confidential information, including the Company’s internally prepared financial budget for the Company’s fiscal year ended June 30, 2008.

 

On September 25, 2007, during an investor conference, representatives of a major investment banking firm approached Mr. Allingham and inquired about management’s interest in pursuing a leveraged buyout transaction. While stating that he was always interested in obtaining superior returns for the Company’s shareholders, Mr. Allingham did not express anything other than a willingness to listen on that basis. Over the course of the next two months, the investment banking firm and Messrs. Allingham and Noel had three calls and exchanged several e-mails to discuss possible deal structures and valuations. Management did not provide any confidential information to this investment bank, and no confidentiality or non-disclosure agreement was entered into with this investment bank. On November 27, 2007, Mr. Allingham informed the bank that neither management nor the Board had any interest in pursuing such a transaction.

 

Similarly, Mr. Allingham was approached in early October of 2007 by a boutique investment banking firm, that provided research to equity market participants regarding the Company, about the possibility of a leveraged buyout to be led by a well-capitalized private equity firm with investments in the dental space. Mr. Allingham similarly responded that he was willing to listen to any proposal that would generate superior returns for the Company’s shareholders. During November 2007, Mr. Allingham and other senior executives of the Company had discussions with representatives of this boutique firm and had one telephone conversation with the private equity firm. After a telephone conversation with representatives of the private equity firm held on November 29, 2007, no further discussions ensued. As with the other such inquiry, management did not provide any confidential information to either of these firms.

 

On November 30, 2007, Mr. Carney called Mr. Allingham to inform him that Warburg Pincus was again interested in pursuing a potential transaction with the Company. He outlined the general proposal of using a newly formed entity owned by a private equity fund sponsored by Warburg Pincus to acquire the Company by purchasing all of the issued and outstanding Shares. Following the call, Mr. Carney delivered a non-binding written proposal to the Company stating that Warburg Pincus was prepared to acquire all of the issued and

outstanding Shares for $16.00 per share. The proposal further stated that Warburg Pincus intended to finance the transaction with equity and did not anticipate using any debt or other outside financing, and that the proposal was not subject to any due diligence contingency. The non-binding written proposal noted that the offer price represented a 28% premium to the 30-day trading average closing price of the Company’s stock leading up to November 30, 2007, of $12.49 per share.

 

On December 4, 2007, the Board held a special meeting to consider, on a preliminary basis, the proposal received from Warburg Pincus, and to evaluate whether to retain Piper Jaffray as financial advisor in connection therewith. The Board met with Piper Jaffray and discussed their qualifications, specifically with respect to transactions in the medical technology space. Piper Jaffray then reviewed with the Board the terms of the Warburg Pincus proposal from a valuation perspective, using various methodologies. During the meeting, representatives of Dorsey & Whitney LLP (“ Dorsey & Whitney ”), external legal counsel to the Company, also made a presentation to the Board regarding their fiduciary duties under Minnesota law in the context of a potential sale of control of the Company. The Board then instructed management to request certain additional analyses regarding the Company and the Warburg Pincus proposal from Piper Jaffray for discussion at its next meeting.

 

On December 7, 2007, the Board held another special meeting with representatives of Piper Jaffray and Dorsey & Whitney present, and heard a management presentation regarding the Company’s current business, operations, financial performance and its prospects as a stand-alone company. Piper Jaffray then discussed with the Board the supplemental analyses requested by the Board at its last meeting, including a review of the possibility of selling the Company’s two business units separately. The Board discussed how to respond to Warburg Pincus, and covered a number of potential issues and risks to the Company, including the need for an appropriate “go shop” provision that would be tied to a relatively low termination fee mechanism and, particularly, the risks related to inadvertently putting the Company “in play.” The Board determined to retain Piper Jaffray and requested that Piper Jaffray prepare a proposed response to Warburg Pincus, to be delivered orally, for review by the Board and counsel.

 

On December 12, 2007, the Board held a special telephonic meeting, with representatives of Piper Jaffray and Dorsey & Whitney present, for the purpose of reviewing and discussing a proposed response to Warburg Pincus. Piper Jaffray reviewed the proposed response and updated the Board on certain valuation analyses previously presented to the Board. The Board discussed the proposed structure of the proposed offer ( i.e. , an all-cash tender offer without a financing or diligence condition) and also discussed again the need for an appropriate “go shop” and termination fee mechanism. While the foregoing structure, if obtained, was viewed by the Board as favorable to the Company’s shareholders, it concluded that the $16.00 per share offer price was too low. The Board therefore instructed Piper Jaffray to advise Warburg Pincus that the Board would be willing to consider a transaction in the range of $17.50 to $18.00 per share, assuming that reasonable “go shop” and termination fee terms could be reached as well. Also, during the meeting, the Board instructed management not to engage in any discussions regarding future employment with Warburg Pincus or any other potential acquirors of the Company.

 

On December 12, 2007, representatives of Piper Jaffray contacted representatives of Warburg Pincus to present the Board’s response to Warburg Pincus’ written proposal. In response to the discussion with Piper Jaffray, Warburg Pincus increased its proposed price to $16.75 per share, and agreed to a “go shop” period with a two-tiered termination provision, with the duration and amounts, respectively, to be agreed, to allow the Company to solicit competing proposals.

 

Between December 12, 2007, and the morning of December 17, 2007, representatives of Piper Jaffray and representatives of Warburg Pincus traded messages and had a conversation in which the price, the duration of the “go shop” period and the size of the termination fee were discussed, but not agreed.

 

On December 17, 2007, the Board held another special telephonic meeting, with representatives of Piper Jaffray and Dorsey & Whitney present, to discuss the conversations that Piper Jaffray had held with Warburg Pincus since the last Board meeting. At this meeting, the Board determined not to respond to Warburg Pincus concerning the specific open items. Instead, the Board determined to reflect further on these items and then hold an in-person meeting to enable a more fulsome discussion of the Warburg Pincus proposal, in the context

of the Company’s present circumstances, its existing strategy and its foreseeable prospects. Piper Jaffray was instructed to alert Warburg Pincus to the Board’s process.

 

On December 18, 2007, representatives of Piper Jaffray contacted representatives of Warburg Pincus in accordance with the Board’s direction.

 

On December 27, 2007, the Board held a special meeting, with representatives of Dorsey & Whitney present, and representatives of Piper Jaffray available by telephone, to review with counsel the current terms of the proposed offer from Warburg Pincus, and to discuss the Company’s past performance, present circumstances and reasonably foreseeable future prospects. During the meeting, the Board also considered numerous factors relative to the Company’s ability to continue to grow its two business units, each of which would require significant investment, and to compete, as a stand-alone, publicly reporting company, in a marketplace dominated by companies with much greater resources. The Board then contacted a representative of Piper Jaffray to discuss the Company’s response to the current terms of the proposed offer from Warburg Pincus, and to instruct Piper Jaffray in that regard.

 

On December 28, 2007, representatives of Piper Jaffray then contacted representatives of Warburg Pincus and notified Warburg Pincus that the Board, while satisfied with the other terms of the proposed offer, would require an increase in price in order to be comfortable recommending a transaction to the Company’s shareholders.

 

On December 31, 2007, representatives of Warburg Pincus contacted representatives of Piper Jaffray and indicated that Warburg Pincus was willing to increase the per share consideration of its offer to $17.00 per share.

 

On December 31, 2007, the Board held a special telephonic meeting, with representatives of Dorsey & Whitney present, to discuss Warburg Pincus’ latest proposal. Mr. Allingham reported to the Board on the results of the December 31 call between Piper Jaffray and Warburg Pincus, and noted that Warburg Pincus stated that they were prepared to deliver a draft of a definitive merger agreement immediately. The Board discussed the terms of the revised offer and authorized Mr. Allingham to accept that offer, subject to negotiation of a satisfactory definitive agreement. The Board also authorized Mr. Allingham to work with Piper Jaffray with respect to preparing for solicitation of third party bids during the “go shop” period.

 

On December 31, 2007, representatives of Piper Jaffray contacted Mr. Carney and the parties agreed to negotiate a merger agreement with respect to the proposed transaction, which would include a first-step tender offer followed by a merger. In addition, Warburg Pincus and the Company agreed that the merger agreement would provide for a 30-day “go-shop” period that would commence on the date that a definitive merger agreement was signed and would allow the Company to solicit competing proposals during that time.

 

Thereafter, on December 31, 2007, Willkie Farr delivered a preliminary draft of the merger agreement to Piper Jaffray and noted that Warburg Pincus wanted to negotiate the remaining terms of the merger agreement immediately.

 

Mr. Allingham and Mr. Carney also had a conversation on January 2, 2008, regarding the process and timing of negotiating the merger agreement.

 

On January 5, 2008, Dorsey & Whitney provided initial comments to the draft merger agreement to Willkie Farr. On January 7, 2008, Willkie Farr contacted Dorsey & Whitney to discuss the Company’s initial comments. During the telephone conference, Dorsey of Whitney requested that Warburg Pincus improve a number of the non-financial terms and conditions of the draft merger agreement and that the draft merger agreement should be revised to provide sufficient assurances to the Company that Warburg Pincus had sufficient assets at risk in the transaction. Counsel discussed various mechanisms to achieve that goal.

 

On January 8, 2008, Willkie Farr distributed a revised draft of the merger agreement and held a telephone conference with Dorsey & Whitney to discuss the draft. Following the call, Willkie Farr distributed an initial draft of the equity commitment letter and a revised draft of the merger agreement.

 

On January 9, 2008, Willkie Farr and Dorsey & Whitney held additional telephone conferences to discuss the outstanding issues in the draft merger agreement, including the appropriate mechanisms to provide the

Company with sufficient assurances that Warburg Pincus had sufficient assets at risk in the transaction, including the rights and remedies of the parties in the event of a breach of the merger agreement. Dorsey & Whitney again requested that the scope of certain conditions to the Offer and Merger be narrowed and that certain representations and warranties should include additional limitations.

 

During the morning of January 10, 2008, the Board held a special meeting, with representatives of Piper Jaffray and Dorsey & Whitney present, to discuss the remaining significant open items in the merger agreement. At the Board’s request, Dorsey & Whitney reviewed the terms and legal implications of each item. The Board and its advisors then discussed each item. The Board thereafter authorized Piper Jaffray to respond to Warburg Pincus. Also, during this meeting, the Board authorized the creation of a special committee of the Board for the purpose of reviewing and approving the transactions under consideration with Warburg Pincus in order to comply with certain requirements of the MBCA. See “Additional Information to be Furnished” below.

 

On January 10, 2008, Willkie Farr and Dorsey & Whitney discussed Warburg Pincus’ and the Company’s respective positions with respect to the rights and remedies of the parties in the event of a breach of the merger agreement. During the evening of January 10, 2008, Dorsey & Whitney distributed an initial draft of the Company’s disclosure letter referenced in the merger agreement.

 

On January 11, 2008, representatives of Warburg Pincus and Piper Jaffray, acting at the Board’s direction, agreed during a telephone conference that the merger agreement would provide for the payment of a reverse termination fee (equal to three times the Company’s non-“go shop” termination fee) as the Company’s exclusive remedy, that the payment of the reverse termination fee would be guaranteed by Warburg Pincus Private Equity IX, L.P. (“ WPPE IX ”), that the Company would not be entitled to seek an injunction to prevent breaches of the merger agreement and that the Company would not be entitled to specifically enforce the terms of the merger agreement (except for certain limited circumstances regarding the treatment of confidential information, the payment of the reverse termination fee and costs and expenses in connection with any action taken to collect the reverse termination fee).

 

On January 11, 2008, Willkie Farr and Dorsey & Whitney discussed the draft disclosure letter and Willkie Farr requested certain additional diligence materials referenced therein. In addition, on January 11, 2008, Dorsey & Whitney distributed a revised draft of the disclosure letter to the merger agreement. Also on that date, and following the discussions described in the preceding paragraph, Willkie Farr distributed a revised draft of the merger agreement, which narrowed the scope of certain conditions to the Offer and the Merger and provided for additional limitations to certain representations and warranties. The draft also provided for a reverse termination fee as the exclusive remedy for the Company in the event of a breach of the merger agreement and a limited guarantee of the payment of the reverse termination fee by WPPE IX in favor of the Company, but expressly denied the Company the right to specifically enforce the terms of the merger agreement (except for certain limited circumstances described therein).

 

Between January 11, 2008, and January 13, 2008, Dorsey & Whitney and the Company provided additional diligence materials referenced in the disclosure letter in response to requests by Willkie Farr. Dorsey & Whitney and Willkie Farr also held numerous telephone conferences and exchanged numerous e-mails regarding the ancillary documents and the disclosure letter referenced in the merger agreement.

 

On January 11, 2008, at Piper Jaffray’s request and in connection with the preparation of its fairness opinion to the Board, the Company’s management provided Piper Jaffray with financial projections for the fiscal years 2008 through 2013, which projections were subsequently provided to Parent and Purchaser and are set forth in the Offer to Purchase which is filed as Exhibit (a)(1) hereto and is incorporated herein by reference. These financial projections, as they relate to the Company’s fiscal year ending June 30, 2008, reflect the year-to-date results of the Company through the quarter ended December 31, 2007.

 

On January 12, 2008, Willkie Farr distributed an initial draft of the proposed limited guarantee and a revised draft of the equity commitment letter reflecting comments received by Dorsey & Whitney, and Dorsey & Whitney distributed a revised draft of the merger agreement.

 

On January 13, 2008, Willkie Farr distributed a revised draft of the merger agreement in a form that was to be presented to the Board for its review.

On January 14, 2008, Dorsey & Whitney distributed the final draft of the disclosure letter referenced in the merger agreement.

 

On January 14, 2008, the Board and its special committee each met, reviewed with representatives of Dorsey & Whitney the terms and conditions of each of the Merger Agreement and related agreements, reviewed its fiduciary duties in that context, and received Piper Jaffray’s oral opinion that the $17.00 per Share in cash price to be paid to the Company’s shareholders in the Offer and the Merger, was fair, from a financial point of view, to such shareholders. The special committee then approved the Merger Agreement, the Offer and the Merger in accordance with the requirements of certain provisions of the MBCA. See “Additional Information to be Furnished” below. The Board, after further deliberation, then unanimously (i) approved the Merger Agreement, the Offer and the Merger; (ii) determined that the terms of the Offer, the Merger and the Merger Agreement were fair to and in the best interests of the holders of the Shares; and (iii) recommended that such holders accept the Offer and tender their shares into the Offer and, if a shareholder meeting to approve the Merger were necessary, such holders vote any Shares held by them at such time in favor of the Merger. Following such approvals, the Board then discussed with representatives of Piper Jaffray and Dorsey & Whitney the mechanics of the “go shop” process, including a proposed timeline, a list of prospective contacts and proposed initial marketing materials to be used at the outset of the process.

 

During the evening of January 14, 2008, (i) the Company, Parent and Purchaser executed the Merger Agreement; (ii) WPPE IX and the Company executed the limited guarantee; and (iii) WPPE IX and Parent executed the equity commitment letter. On January 15, 2008, prior to the opening of trading on the NASDAQ, the Company and Warburg Pincus issued a press release announcing the transaction. In addition, pursuant to the terms of the Merger Agreement, the 30-day “go shop” period during which the Company could solicit competing offers commenced on January 15, 2008.

 

Between January 15, 2008, and February 21, 2008, Warburg Pincus, the Company and their respective advisors held conference calls and exchanged e-mails with respect to gathering the necessary information for the filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “ HSR Act ”) and other anti-trust notifications and filings that are required by the transaction. Following January 15, 2008, Willkie Farr and Dorsey & Whitney were in limited contact concerning matters and on-going developments with respect to the Company’s business and operations. Between January 15, 2008, and February 13, 2008, representatives of Warburg Pincus periodically contacted the Company, including phone calls and e-mails between Warburg Pincus and members of the Company’s senior management, regarding Warburg Pincus’ continued review of the Company and its operations. As part of these discussions, on February 7, 2008, Warburg Pincus met with the Company to discuss the Company’s recent business performance and operational matters.

 

On February 5, 2008, in accordance with the terms of the Merger Agreement, the Company submitted the premerger Notification and Report Form required by the HSR Act, and the Parent filed a notification form, on its behalf and on behalf of the Company, with the Federal Cartel Office in Germany pursuant to the German Act Against Restraints of Competition with respect to the transaction. On February 12, 2008, the required approval by the Federal Cartel Office in Germany was obtained in respect of the transactions contemplated by the Merger Agreement. See “Additional Information to be Furnished” below. The waiting period required by the HSR Act expired at 11:59 p.m. on February 15, 2008.

 

Commencing during the week of January 7, 2008, management of the Company, together with Piper Jaffray and Dorsey & Whitney, assembled confidential materials, created an electronic data room, prepared a management presentation and marketing materials, and drafted forms of a non-disclosure agreement and a merger agreement, all for use with prospective bidders during the “go shop” period. On January 15, 2008, after the public announcement of the Offer, Piper Jaffray began contacting prospective bidders, eventually making contact with 56 parties, including Company A, selected with the assistance of management and representing likely strategic and financial bidders for the Company or portions thereof. While each prospective bidder was urged to bid for the entire Company, Piper Jaffray, at the direction of the Board, also informed the prospective bidders that they could, if they chose, make an offer for only one of the two business units of the Company. After discussions and negotiations, 10 of the 56 parties entered into non-disclosure agreements with

the Company and were then invited to review confidential materials through the electronic data room. Of these 10 parties, four expressed continuing interest, and two submitted, preliminary non-binding bids for the entire Company. These two parties then received management presentations and a form of merger agreement, and were requested to submit final, binding bids, along with a mark-up of the proposed merger agreement. Each of the two remaining parties notified Piper Jaffray in advance of the deadline for submitting bids that it would not be submitting a final bid. On February 13, 2008, the 30-day “go shop” period provided for in the Merger Agreement expired, and representatives of Piper Jaffray notified Warburg Pincus to that effect.

 

On February 14, 2008, the Company issued a press release notifying the market that the “go shop” period had expired without the Company receiving any qualifying offers.

 

On February 21, 2008, Purchaser commenced the Offer. During the pendency of the Offer, the Company and its representatives intend to have on-going contacts with Purchaser, Parent, WPPE IX and their respective representatives.

 

 

In evaluating the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, and making its recommendations to the holders of Shares, the Board consulted with the Company’s senior management, legal counsel and financial advisor and considered a number of factors, including the following material factors which the Board viewed as supporting its recommendation.

 

 

 

 

 

In evaluating the Merger Agreement and the transactions contemplated thereby, and making its recommendation to the holders of Shares, the Board consulted with the Company’s senior management, legal counsel and financial advisor and considered a number of factors, including the following potentially negative factors:

 

 

 

The Board believed that, overall, the potential benefits of the Offer and the Merger to the Company shareholders outweigh the risks of the Offer and the Merger and provide the maximum value to shareholders.

The foregoing discussion of information and factors considered by the Board is not intended to be exhaustive. In light of the variety of factors considered in connection with its evaluation of the Offer and the Merger, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determinations and recommendations. Moreover, each member of the Board applied his own personal business judgment to the process and may have given different weight to different factors.

 

 

The Company retained Piper Jaffray to act as its financial advisor, and, if requested, to render to the Board an opinion as to the fairness, from a financial point of view, to the holders of Shares of the $17.00 per share in cash to be paid in the Offer and the Merger.

 

The full text of the Piper Jaffray written opinion dated January 14, 2008, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Piper Jaffray in rendering its opinion, is attached as Annex B and is incorporated in its entirety herein by reference. The Company’s shareholders are urged to, and should, carefully read the Piper Jaffray opinion in its entirety. The Piper Jaffray opinion addresses only the fairness, from a financial point of view and as of the date of the opinion, to holders of Shares of $17.00 per share in cash to be paid in the Offer and the Merger. The Piper Jaffray opinion was directed to the Board and was not intended to be, and does not constitute, a recommendation as to whether any of the Company’s shareholder’s should tender their Shares in connection with the Offer or how any of the Company’s shareholder’s should vote with respect to the Merger or any other matter.

 

In connection with rendering the opinion described above and performing its related financial analyses, Piper Jaffray:

 

 

In addition, Piper Jaffray performed a discounted cash flows analysis for the Company on a stand-alone basis. Piper Jaffray conducted such other analyses, examinations and inquiries and considered such other financial, economic and market criteria as Piper Jaffray deemed necessary and appropriate in arriving at its opinion. Piper Jaffray also conducted discussions with members of the senior management of the Company and representatives of the Company concerning the financial condition, historical and current operating results, business and prospects for the Company, as well as its business and prospects on a stand-alone basis.

 

The following is a summary of the material financial analyses performed by Piper Jaffray in connection with the preparation of its fairness opinion, which was reviewed with the Board at a meeting held on January 14, 2008 and was formally delivered to the Board at a meeting held on January 14, 2008. The preparation of analyses and a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to

the particular circumstances and, therefore, this summary does not purport to be a complete description of the analyses performed by Piper Jaffray or of its presentations to the Board on January 14, 2008.

 

This summary includes information presented in tabular format, which tables must be read together with the text of each analysis summary, and considered as a whole, in order to fully understand the financial analyses presented by Piper Jaffray. The tables alone do not constitute a complete summary of the financial analyses. The order in which these analyses are presented below, and the results of those analyses, should not be taken as any indication of the relative importance or weight given to these analyses by Piper Jaffray or the Board. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before January 14, 2008, and is not necessarily indicative of current market conditions.

 

Selected Publicly Traded Companies Analysis

 

Piper Jaffray reviewed selected financial data that were prepared by the Company’s management as its internal forecasts for calendar years 2007 through 2008 and compared them to corresponding consensus Wall Street forecasts, where applicable, for publicly traded companies that are engaged primarily in the medical technology industry and which Piper Jaffray believed were similar to the Company’s financial profile. The Company’s fiscal year ends June 30 and, as a result, the projections prepared by the Company’s management for the calendar year results were calculated by combining 50% of the projections for each of the fiscal years making up the relevant calendar year. Piper Jaffray selected companies based on information obtained by searching SEC filings, public company disclosures, press releases, industry and popular press reports, databases and other sources and by applying the following criteria:

 

 

Based on these criteria, Piper Jaffray identified and analyzed the following eight selected companies:

 

 

Piper Jaffray compared valuation multiples for the Company derived from its aggregate enterprise value based on the Offer Price and Merger Consideration, as applicable, to be paid in the Offer and the Merger, respectively, and projected revenue and earnings data for the Company, on the one hand, to valuation multiples

for the selected companies derived from their market valuation and actual and projected revenue and earnings data, on the other hand:

 

 

 

 

Piper Jaffray, among other things, calculated the ratio of enterprise value to revenue for each of the selected companies for the last twelve months and calendar year 2008 to obtain a range valuation multiples. Piper Jaffray also calculated the enterprise value to EBITDA ratio for each selected company for the last twelve months to obtain a range of valuation multiples. Piper Jaffray also calculated the price-to-earnings ratio for each selected company for the last twelve months and calendar year 2008 to obtain a range of valuation multiples. This analysis showed that, based on the estimates and assumptions used in the analysis, (i) when comparing the enterprise value to revenue ratio for the last 12 months and calendar year 2008, the proposed $17.00 per share offer implied valuation multiples for the Company that were within the range of valuation multiples of the selected companies, (ii) when comparing the enterprise value to EBITDA ratio for the last 12 months, the proposed $17.00 per share offer implied a valuation multiple for the Company that was within the range of valuation multiples of the selected companies and (iii) when comparing the price-to-earnings ratio for the last twelve months and calendar year 2008, the proposed $17.00 per share offer price implied valuation multiples for the Company that were within the range of valuation multiples of the selected companies.

 

Selected M&A Transaction Analysis

 

Piper Jaffray reviewed transactions involving target companies that it deemed comparable to the Company. Piper Jaffray selected these transactions by searching SEC filings, public company disclosures, press releases, industry and press reports, databases and other sources and by applying the following criteria:

 

 

 

Based on these criteria, the following nineteen transactions were deemed similar to the proposed transaction:

 

 

Piper Jaffray calculated the enterprise value to revenue for the last twelve months preceding each transaction and to projected revenue for the twelve consecutive months following each transaction, or the forward period, enterprise value to EBITDA for the last twelve months preceding each transaction and equity value to net income for the last twelve months and projected net income for the forward period for each transaction. Piper Jaffray then compared the results of these calculations with similar calculations for the Offer, the Merger and the transactions contemplated by the Merger Agreement. The analysis indicated the following multiples:

 

 

 

 

The analysis showed that, based on the estimates and assumptions used in the analysis, (i) the enterprise value implied by the proposed $17.00 per share offer price as a multiple of projected revenue for the forward period and as a multiple of revenue for the last twelve months was within the range of similar multiples for the selected transactions, (ii) the enterprise value implied as a multiple of EBITDA for the last twelve months was within the range of multiples for the selected transactions and (iii) the equity value implied by the proposed $17.00 per share offer price as a multiple of projected net income for the forward period and as a multiple of revenue for the previous twelve months was within the range of similar multiples for the selected transactions.

 

A comparable M&A transaction analysis generates an implied value of a company based on publicly available financial terms of selected change of control transactions involving companies that share certain characteristics with the company being valued. However, no company or transaction utilized in the comparable transaction analysis is identical to the Company or the Offer and the Merger, respectively.

 

Premiums Paid Analysis

 

Piper Jaffray reviewed publicly available information for selected completed or pending merger or buyout transactions to determine the premiums (or discounts) paid in the transactions over recent trading prices of the target companies prior to announcement of the transaction. Piper Jaffray selected these transactions by searching SEC filings, public company disclosures, press releases, industry and popular press reports, databases and other sources and by applying the following criteria:

 

 

Piper Jaffray performed its analysis on 53 transactions that satisfied the criteria, and the table below shows a comparison of premiums (or discounts) paid in these transactions to the premium that would be paid to the Company’s shareholders based on the $17.00 per share offer price payable in the Offer and the Merger:

 

 

 

 

This analysis showed that, based on the estimates and assumptions used in the analysis, the premiums over the market prices at the selected dates for the Shares implied by the $17.00 per share offer price was within the range of premiums paid in the selected merger and acquisition transactions.

 

Discounted Cash Flow Analysis

 

Using a discounted cash flow analysis, Piper Jaffray calculated an estimated range of theoretical equity values for the Company based on the net present value of (1) the projected calendar year free cash flows from calendar year 2008 to 2012, discounted back to January 1, 2008 and (2) a terminal value based on multiples of projected EBITDA at calendar year end 2012 discounted back to January 1, 2008. Piper Jaffray utilized forecasts of future results furnished to it by management of the Company for the period from fiscal year 2008 to fiscal year 2013. The Company’s fiscal year ends June 30 and, as a result, the projections prepared by the Company’s management for the for calendar year results were calculated by combining 50% of the projections for each of the fiscal years making up the relevant calendar year. Piper Jaffray calculated the range of net present values based on an assumed tax rate of 40.0%, discount rates of 15.0%, 17.5% and 20.0%, and

terminal value multiples of 11.0x, 12.0x and 13.0x applied to the projected calendar year 2012 EBITDA. Piper Jaffray based the discount rates on the weighted average cost of capital for the Company and the Morningstar Micro-Cap Size Premium. This analysis resulted in implied per share values of the Company’s equity ranging from a low of $14.75 to a high of $19.52. Piper Jaffray observed that the $17.00 per share offer price was within the range of values derived from this analysis.

 

Miscellaneous

 

The summary set forth above does not contain a complete description of the analyses performed by Piper Jaffray, but does summarize the material analyses performed by Piper Jaffray in rendering its opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Piper Jaffray believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses or of the summary, without considering the analyses as a whole or all of the factors included in its analyses, would create an incomplete view of the processes underlying the analyses set forth in the Piper Jaffray opinion. In arriving at its opinion, Piper Jaffray considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Instead, Piper Jaffray made its determination as to fairness on the basis of its experience and financial judgment after considering the results of all of its analyses. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that this analysis was given greater weight than any other analysis. No company or transaction used in the above analyses as a comparison is directly comparable to the Company or the transactions contemplated by the Merger Agreement.

 

Piper Jaffray performed its analyses solely for purposes of providing its opinion to the Board. In performing its analyses, Piper Jaffray made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Certain of the analyses performed by Piper Jaffray are based upon forecasts of future results furnished to Piper Jaffray by the Company’s management, which are not necessarily indicative of actual future results and may be significantly more or less favorable than actual future results. These forecasts are inherently subject to uncertainty because, among other things, they are based upon numerous factors or events beyond the control of the parties or their respective advisors. Piper Jaffray does not assume responsibility if future results are materially different from forecasted results.

 

Piper Jaffray’s opinion was one of many factors taken into consideration by the Board in making the determination to approve the Merger Agreement and recommend that the shareholders tender their Shares in connection with the Offer. The above summary does not purport to be a complete description of the analyses performed by Piper Jaffray in connection with the opinion and is qualified in its entirety by reference to the written opinion of Piper Jaffray attached as Annex B hereto.

 

Piper Jaffray has relied upon and assumed, without assuming liability or responsibility for independent verification, the accuracy and completeness of all information that was publicly available or was furnished, or otherwise made available, to it or discussed with or reviewed by it. Piper Jaffray has further relied upon the assurances of the management of the Company that the financial information provided has been prepared on a reasonable basis in accordance with industry practice and that they are not aware of any information or facts that would make any information provided to Piper Jaffray incomplete or misleading. Without limiting the generality of the foregoing, for the purpose of its opinion, Piper Jaffray has assumed that with respect to financial forecasts, estimates and other forward-looking information reviewed by it, including the Company’s conversion of its financial forecasts from a fiscal year-end basis to a calendar year-end basis, that such information has been reasonably prepared based on assumptions reflecting the best currently available estimates and judgments of the management of the Company as to the expected future results of operations and financial condition of the Company to which such financial forecasts, estimates and other forward-looking information relate. Piper Jaffray expresses no opinion as to any such financial forecasts, estimates or forward-looking information or the assumptions on which they were based. With the consent of the Company, Piper Jaffray has relied on advice of the outside counsel and the independent accountants to the Company, and on the assumptions of the management of the Company, as to all accounting, legal, tax and financial reporting matters with respect to the Company, SBT Holdings Inc. and the Merger Agreement.

Piper Jaffray assumed that the Offer and the Merger would be completed on the terms set forth in the Merger Agreement reviewed by Piper Jaffray, without amendments and with full satisfaction of all covenants and conditions without any waiver. Piper Jaffray expressed no opinion regarding whether the necessary approvals or other conditions to the consummation of the merger will be obtained or satisfied.

 

Piper Jaffray did not assume responsibility for performing, and did not perform, any appraisals or valuations of specific assets or liabilities of the Company. Piper Jaffray expresses no opinion regarding the liquidation value or solvency of any entity. Piper Jaffray did not undertake any independent analysis of any outstanding, pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities to which the Company, or any of its respective affiliates, are a party or may be subject. At the direction of the Company, and with its consent, Piper Jaffray’s opinion made no assumption concerning, and therefore did not consider, the potential effects of litigation, claims, investigations, or possible assertions of claims, or the outcomes or damages arising out of any such matters.

 

Piper Jaffray’s opinion was necessarily based on the information available to it and the facts and circumstances as they existed and were subject to evaluation as of the date of the opinion. Events occurring after the date of the opinion could materially affect the assumptions used by Piper Jaffray in preparing its opinion. Piper Jaffray expresses no opinion as to the prices at which Shares have traded or may trade following announcement of the transaction or at any time after the date of the opinion. Piper Jaffray has not undertaken and is not obligated to affirm or revise its opinion or otherwise comment on any events occurring after the date it was rendered.

 

Piper Jaffray was not requested to opine as to, and the opinion does not address, the basic business decision to proceed with or effect the Offer, the Merger or the transactions contemplated by the Merger Agreement, the pre-signing process conducted by the Company, the merits of the transaction compared to any alternative business strategy or transaction that may be available to the Company, SBT Holdings Inc.’s ability to fund the consideration, any other terms contemplated by the Merger Agreement or the fairness of the amount or nature of the compensation to the Company’s officers, directors or employees, or any class of such persons, relative to the compensation to be received by holders of the Shares. Piper Jaffray did not express any opinion as to whether any alternative transaction might produce consideration for the Company’s shareholders in excess of the consideration.

 

Piper Jaffray is a nationally recognized investment banking firm and is regularly engaged as a financial advisor in connection with mergers and acquisitions, underwritings and secondary distributions of securities and private placements. The Board selected Piper Jaffray to render its fairness opinion in connection with the transactions contemplated by the Merger Agreement on the basis of its experience and reputation in acting as a financial advisor in connection with mergers and acquisitions.

 

Piper Jaffray acted as financial advisor to the Company in connection with the Offer and the Merger and will receive an estimated fee of approximately $2.7 million from the Company, which is contingent upon the consummation of the Offer. Piper Jaffray also received a non-refundable retainer in the amount of $75,000 and a fee of $500,000 from the Company for providing its opinion, both of which will be credited against the fee for financial advisory services. The opinion fee was not contingent upon the consummation of the Offer or the Merger. The Company has also agreed to indemnify Piper Jaffray against certain liabilities in connection with its services and to reimburse it for certain expenses in connection with its services. In the ordinary course of its business, Piper Jaffray and its affiliates may actively trade securities of the company for its own account or the accounts of its customers and, accordingly, Piper Jaffray may at any time hold a long or short position in such securities. Piper Jaffray and may seek to be engaged by the Company in the future to provide investment banking services and commercial banking services, for which it would expect to be compensated.

 

 

To the knowledge of the Company, to the extent permitted by applicable securities laws, rules or regulations, including Section 16(b) of the Exchange Act, each executive officer and director of the Company currently intends to tender all Shares over which he or she has sole dispositive power.

 

Pursuant to a letter agreement dated December 10, 2007, the Company retained Piper Jaffray as its financial advisor in connection with the Offer and the Merger and to provide a financial opinion letter in connection with the Merger Agreement, the Offer and the Merger, which is filed hereto as Annex B and is incorporated herein by reference (the “ Engagement Letter ”). Pursuant to the Engagement Letter, the Company agreed to pay Piper Jaffray an estimated fee of approximately $2.7 million, which is contingent upon the consummation of the Offer. Piper Jaffray also received a non-refundable retainer in the amount of $75,000 and a fee of $500,000 from the Company for providing its opinion, both of which will be credited against the fee for financial advisory services. The opinion fee was not contingent upon the consummation of the Offer or the Merger. The Company has also agreed in the Engagement Letter to reimburse Piper Jaffray for all reasonable expenses incurred in performing its services and to indemnify Piper Jaffray and certain related persons against certain liabilities and expenses, including certain liabilities under the federal securities laws, relating to or arising out of its engagement.

 

Except as set forth above, neither the Company nor any person acting on its behalf has employed, retained or agreed to compensate any person to make solicitations or recommendations to shareholders of the Company concerning the Offer or the Merger.

 

 

Except as set forth in this Item 6, no transactions in the Shares have been effected during the last sixty days by the Company or any of its subsidiaries or, to the knowledge of the Company, by any executive officer, director or affiliate of the Company.

 

 

Except as set forth in this Statement, the Company is not engaged in any negotiation in response to the Offer which relates to or would result in (a) a tender offer for or other acquisition of the Company’s securities by the Company, any subsidiary of the Company or any other person, (b) an extraordinary transaction, such as a merger, reorganization or liquidation, involving the Company or any subsidiary of the Company, (c) a purchase, sale or transfer of a material amount of assets by the Company or any subsidiary of the Company or (d) any material change in the present dividend rate or policy, or indebtedness or capitalization.

 

Except as set forth above, there are no transactions, resolutions of the Board, agreements in principle or signed contracts in response to the Offer that relate to one or more of the events referred to in the preceding paragraph.

 

 

 

No dissenters’ rights are available in connection with the Offer. However, under Minnesota law, shareholders who do not sell their Shares in the Offer will have the right, by fully complying with the applicable provisions of Sections 302A.471 and 302A.473 of the MBCA, to dissent with respect to the Merger and to receive a judicial determination of the fair value of their Shares and to receive payment of such statutory value in cash, together with a fair rate of interest thereon. Any such judicial determination of the fair value of the Shares could be based upon factors other than, or in addition to, the price per Share to be paid in the Merger or the market value of the Shares. The term “fair value” means the value of the Shares immediately before the effective time of the Merger and may be less than, equal to or greater than the price per share to be paid in the Merger.

 

To be entitled to payment, the dissenting shareholder must not accept the Offer, must file with the Company, prior to the vote for the Merger, a written notice of intent to demand payment of the fair value of the dissenting shareholder’s Shares, must not vote in favor of the Merger and must satisfy the other procedural requirements of the MBCA. Any shareholder contemplating the exercise of such dissenters’ rights should review carefully the provisions of Sections 302A.471 and 302A.473 of the MBCA, particularly the procedural

steps required to perfect such rights, and should consult legal counsel. Dissenters’ rights will be lost if the procedural requirements of the statute are not fully and precisely satisfied.

 

If a vote of shareholders is required to approve the Merger under the MBCA, the notice and proxy statement for the meeting of the shareholders will again inform each shareholder of record as of the record date of the meeting of the shareholders (excluding persons who tender all of their Shares pursuant to the Offer if such Shares are purchased in the Offer) of their dissenters’ rights and will include a copy of Sections 302A.471 and 302A.473 of the MBCA and a summary description of the procedures to be followed to obtain payment of fair value for their Shares. If a vote of the shareholders is not required to approve the Merger, the Surviving Corporation will send a notice to those persons who are shareholders of the Surviving Corporation immediately prior to the effective time of the Merger which, among other things, will include a copy of Sections 302A.471 and 302A.473 of the MBCA and a summary description of the procedures to be followed to obtain payment of fair value for their Shares. A vote of the shareholders will not be required in the event that Purchaser owns 90% or more of the outstanding Shares on a fully diluted basis after the consummation of the Offer, because Parent may effect a short-form merger of Purchaser into the Company in accordance with Section 302A.621 of the MBCA.

 

Dissenters’ rights cannot be exercised at this time. The information set forth above is for informational purposes only with respect to alternatives available to shareholders if the Merger is consummated. Shareholders who will be entitled to dissenters’ rights in connection with the Merger will receive additional information concerning dissenters’ rights and the procedures to be followed in connection therewith before such shareholders have to take any action relating thereto.

 

The foregoing summary of the dissenters’ rights under the MBCA does not purport to be a complete statement of the procedures to be followed by shareholders desiring to exercise any dissenters’ rights available under the MBCA and is qualified in its entirety by reference to the MBCA. The preservation and exercise of dissenters’ rights require strict adherence to the applicable provisions of the MBCA. If a shareholder who asserts dissenters’ rights with respect to its Shares under the MBCA effectively withdraws or otherwise loses for any reason (including failure to perfect) his or her dissenters’ rights, then as of the Effective Time of the Merger or the occurrence of such event, whichever later occurs, such holder’s Shares will be automatically cancelled and converted into, and represent only the right to receive, the Merger Consideration, without interest and less any required withholding taxes, if any.

 

 

State Takeover Laws.   The Company is incorporated under the laws of the State of Minnesota. Under the MBCA and other Minnesota statutes, the Company is subject to several state takeover laws including, but not limited to, the Minnesota Control Share Acquisition Act and the Minnesota Business Combination Act.

 

Minnesota Control Share Acquisition Act.   The Company is currently subject to the Minnesota Control Share Acquisition Act under Section 302A.671 of the MBCA, which provides that, absent certain exceptions, a person who becomes the beneficial owner of a new range of the voting power of the shares of an issuing public corporation (i.e., from less than 20% to 20% or more, from less than 33 1 / 3 % to 33 1 / 3 % or more, or from less than a majority to a majority) will lose voting rights with respect to the shares above any such new percentage level of voting control, in the absence of special shareholder approval. That approval can be obtained only by a resolution adopted by (i) the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote and (ii) the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote, excluding all “interested shares” (generally, shares held by the acquiring person, any officer of the issuing public corporation, or any director who is also an employee of the issuing public corporation). If such approval is not obtained, the issuing public corporation may redeem the shares that exceed the new percentage level of voting control at their market value. A shareholders’ meeting to vote on whether to grant voting power to the acquiring person may not be held unless the acquiring person has delivered an information statement to the issuing public corporation.

 

The above provisions do not apply if the issuing public corporation’s articles of incorporation or bylaws approved by the corporation’s shareholders provide that the statute is inapplicable or if there is an applicable

exception. The statute contains several exceptions, including an exception for cash tender offers (i) approved by a majority vote of the members of a committee composed solely of one or more disinterested directors of the issuing public corporation formed pursuant to Section 302A.673, subdivision 1, paragraph (d) of the MBCA, prior to the commencement of, or the public announcement of the intent to commence, the offer, and (ii) pursuant to which the acquiring person will become the owner of over 50% of the voting stock of the issuing public corporation. Under Section 302A.673 of the MBCA, a director or person is “disinterested” if the director or person is neither an officer nor an employee, nor has been an officer or employee within five years preceding the formation of the committee, of the publicly held Minnesota corporation or of a related organization.

 

The Company’s Amended and Restated Articles of Incorporation, and Amended Bylaws, do not exclude the Company from the restrictions imposed by the Minnesota Control Share Acquisition Act. However, because a special committee of disinterested directors of the Board have approved the Merger Agreement and the transactions contemplated thereby, the restrictions of the Minnesota Control Share Acquisition Act are inapplicable to the Merger Agreement and the transactions contemplated thereby, including the Offer, Top-Up Option and the Merger.

 

Minnesota Business Combination Act.   The Company is currently subject to the Minnesota Business Combination Act under Section 302A.673 of the MBCA, which prohibits a publicly held Minnesota corporation, like the Company, from engaging in any “business combination,” including a merger, with an “interested shareholder” (defined as any beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding shares of such corporation entitled to vote) for a period of four years after the date of the transaction in which the person became an interested shareholder, unless, among other things, a committee of that corporation’s board of directors comprised solely of one or more disinterested directors has given its approval of either the business combination or the transaction which resulted in the shareholder becoming an “interested shareholder” prior to such shareholder becoming an interested shareholder. Under the MBCA, a director or person is “disinterested” if the director or person is neither an officer nor an employee, nor has been an officer or employee within five years preceding the formation of the committee, of the publicly held Minnesota corporation or of a related organization.

 

Prior to the execution of the Merger Agreement, a special committee of disinterested directors of the Board approved the Purchaser’s acquisition of the Shares pursuant to the Offer and the subsequent Merger, which Purchaser intends to complete if it consummates the Offer, for the purposes of the Minnesota Business Combination Act. Therefore, the restrictions of the Minnesota Business Combination Act do not apply to Purchaser’s intended consummation of the Merger following Purchaser’s acquisition of the Shares pursuant to the Offer.

 

Takeover Disclosure Statute.   The Minnesota Takeover Disclosure Law, Minnesota Statutes Sections 80B.01-80B.13 (the “ Takeover Disclosure Statute ”), by its terms requires certain disclosures and the filing of certain disclosure material with the Minnesota Commissioner of Commerce (the “ Commissioner ”) with respect to any offer for a corporation, such as the Company, that has its principal place of business in Minnesota and a certain number of shareholders resident in Minnesota. The Purchaser has informed the Company that the purchaser will file a registration statement with the Commissioner prior to the date the Schedule TO is filed with the SEC. Although the Commissioner does not have an approval right with respect to the Offer, the Commissioner does review the disclosure material for the adequacy of such disclosure and is empowered to suspend summarily the Offer in Minnesota within three days of such filing if the Commissioner determines that the registration statement does not (or the material provided to beneficial owners of the Shares residing in Minnesota does not) provide full disclosure. If such summary suspension occurs, a hearing must be held (within 10 days of the summary suspension) as to whether to permanently suspend the Offer in Minnesota, subject to corrective disclosure. If the Commissioner takes action under the Takeover Disclosure Statute, such action may have the effect of significantly delaying the Offer and, if the Offer is suspended pursuant to the Minnesota Takeover Statute and Parent reasonably believes such suspension would delay the purchase of the Shares past the initial expiration date of the Offer, the Company has agreed, at the request of Parent, to amend the Merger Agreement to provide for the termination of the Offer and the consummation of

the transactions contemplated by the Merger Agreement through a one-step merger structure in which the Company would merge with Purchaser, with the Company surviving.

 

“Fair Price” Provision.   Section 302A.675 of the MBCA which provides that an offeror generally may not acquire shares of a Minnesota publicly held corporation from a shareholder within two years following the offeror’s last purchase of shares of the same class pursuant to a takeover offer, including, but not limited to, acquisitions made by purchase, exchange or merger, unless the selling shareholder is afforded, at the time of the proposed acquisition, a reasonable opportunity to dispose of the shares to the offeror upon substantially equivalent terms as those provided in the earlier takeover offer. However, because a special committee of disinterested directors of the Board has approved the Merger Agreement and the transactions contemplated thereby, the restrictions of Sections 302A.675 are inapplicable to the Merger Agreement and the transactions contemplated thereby, including the Offer, the Top-Up Option and the Merger.

 

 

United States.  The acquisition of Shares pursuant to the Merger Agreement is subject to the pre-merger notification and reporting obligations under the HSR Act. Under the HSR Act, both parties to the transaction are required to submit a Notification and Report Form (the “ HSR Application ”) and observe a 15-day waiting period following Purchaser’s filing prior to Purchaser’s acquisition of the Shares. During the 15-day HSR waiting period, the Antitrust Division of the U.S. Department of Justice (the “ Antitrust Division ”) and the Federal Trade Commission (the “ FTC ”), will examine the legality under the antitrust laws of Purchaser’s acquisition of the Shares. At any time prior to the expiration of the 15-day HSR waiting period, the Antitrust Division or the FTC has the authority to open an investigation of the transaction and suspend the running of the waiting period by issuance of a Request for Additional Information and Documentary Material, sometimes referred to as a Second Request. The Antitrust Division and the FTC also have the statutory authority after Purchaser’s acquisition of Shares pursuant to the Offer to take any action under the antitrust laws it deems necessary or desirable in the public interest, including (i) seeking to enjoin the purchase of Shares pursuant to the Offer or the consummation of the Merger or (ii) seeking the divestiture of Shares or substantial assets of the Company or its subsidiaries. Private parties, and state attorneys general, may also bring legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Offer on antitrust grounds will not be made, or, if a challenge is made, the ultimate result. Parent submitted its HSR Application on January 30, 2008, and the Company submitted its HSR Application on February 5, 2008. The waiting period required by the HSR Act expired at 11:59 p.m. on February 14, 2008, with respect to both applications.

 

Germany.   Under the German Act Against Restraints of Competition (“ ARC ”), the purchase of Shares pursuant to the Offer may be consummated if the acquisition is approved by the German Federal Cartel Office (“ FCO ”), either by written approval or by expiration of a one month waiting period that is commenced by the filing by Parent of a complete notification (the “ German Notification ”) with respect to the Offer, unless the FCO notifies Parent within the one month waiting period of the initiation of an in-depth investigation. Parent filed a notification with the FCO on February 5, 2008 on behalf of itself, Purchaser and the Company. On February 12, 2008, the required approval by the FCO in respect of the transactions contemplated by the Merger Agreement was obtained. Accordingly, the requirements of the ARC with respect to the acquisitions of Shares in the Offer have been satisfied. The written approval of the FCO or the expiration of any applicable waiting period is a condition to Purchaser’s obligation to accept for payment and pay for Shares tendered pursuant to the Offer.

 

 

Subject to the terms of the Merger Agreement, the Company has granted Parent and Purchaser a “Top-Up Option” to purchase from the Company, at a price per share equal to the Offer Price, the lesser of (i) a number of Shares that, when added to the number of Shares owned by Parent or Purchaser at the time of such exercise, will constitute one Share more than 90% of the total number of Shares then outstanding on a fully diluted basis (assuming the issuance of the Shares purchased under the Top-Up Option) or (ii) the aggregate number of Shares that the Company is authorized to issue under the Company’s Amended and Restated Articles of

Incorporation, but that are not issued and outstanding (and not otherwise subscribed for or otherwise committed to be issued) at the time of exercise of the Top-Up Option. The purchase price may be paid by Parent or Purchaser, at its election, either entirely in cash or by executing and delivering to the Company a promissory note having a principal amount equal to the purchase price. The foregoing summary is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(2) hereto and is incorporated herein by reference.

 

 

Under Section 302A.621 of the MBCA, if Purchaser acquires, pursuant to the Offer, the Top-Up Option or otherwise, at least 90% of the outstanding Shares, Purchaser will be able to effect the Merger after consummation of the Offer without a vote by the Company’s shareholders. If Purchaser acquires less than 90% of the outstanding Shares, the affirmative vote of the holders of a majority of the outstanding Shares will be required under the MBCA to effect the Merger. If Purchaser purchases Shares pursuant to the Offer, Purchaser will own a sufficient number of Shares to ensure approval of the Merger regardless of the vote of any other shareholders and Purchaser has agreed to vote all of its Shares in favor of the Merger.

 

 

The Information Statement attached as Annex A to this Statement is being furnished pursuant to Section 14(f) under the Exchange Act in connection with the possible designation by Parent, pursuant to the Merger Agreement, of certain persons to be appointed to the Board other than at a meeting of the Company’s shareholders as described in the Information Statement, and is incorporated herein by reference.

 

SIGNATURE

 

After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

 

LIFECORE BIOMEDICAL, INC.

 

Name:     Dennis J. Allingham

 

Dated: February 21, 2008

INDEX TO EXHIBITS

 

 

ANNEX A

 

LIFECORE BIOMEDICAL, INC.

3515 LYMAN BOULEVARD

CHASKA, MINNESOTA 55318

(952) 368-4300

 

INFORMATION STATEMENT PURSUANT TO SECTION 14(f) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14f-1 THEREUNDER

 

GENERAL INFORMATION

 

This Information Statement is being mailed on or about February 21, 2008, as part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the “Schedule 14D-9” ) of Lifecore Biomedical, Inc. ( “Lifecore” or the “Company” ), with respect to the tender offer by SBT Acquisition Inc. (“Purchaser”) , a Minnesota corporation and wholly owned subsidiary of SBT Holdings Inc., a Delaware corporation (“Parent”) to holders of the Company’s common stock, par value $0.01 per share (the “ Shares ”). Unless the context indicates otherwise, in this Information Statement, we use the terms “us,” “we” and “our” to refer to Lifecore. You are receiving this Information Statement in connection with the possible election of persons designated by Parent to a majority of the seats on the board of directors of the Company (the “Board” ).

 

BACKGROUND

 

On January 15, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement” ) with Parent and Purchaser. Pursuant to the Merger Agreement, Purchaser has commenced a cash tender offer (the “Offer” ) to purchase all outstanding Shares at a price of $17.00 per share (the “Offer Price” ), net to the sellers in cash, without interest and less any required withholding taxes, if any, upon the terms and conditions set forth in the Offer to Purchase, dated February 21, 2008 (the “Offer to Purchase” ). Unless extended in accordance with the terms and conditions of the Merger Agreement, the Offer is scheduled to expire at 5:00 p.m., New York City time, on March 19, 2008, at which time, if all conditions to the Offer have been satisfied or waived, Purchaser will purchase all Shares validly tendered pursuant to the Offer and not properly withdrawn. Copies of the Offer to Purchase and the accompanying Letter of Transmittal have been mailed to the Lifecore shareholders and are filed as Exhibits (a)(1)(A) and (a)(1)(B), respectively, to the Tender Offer Statement on Schedule TO filed by Purchaser and Parent with the Securities and Exchange Commission (the “SEC” ) on February 21, 2008.

 

The Merger Agreement provides, among other things, for the making of the Offer by Purchaser and further provides that, upon the terms and subject to the conditions contained in the Merger Agreement, following completion of the Offer and the satisfaction or waiver of certain conditions, Purchaser will merge with and into the Company (the “Merger” ) and the Company will continue as the surviving corporation under the laws of the State of Minnesota, and the separate corporate existence of Purchaser will cease. In the Merger, Shares issued and outstanding immediately prior to the consummation of the Merger (other than Shares owned by Parent, Purchaser, any other subsidiary of Parent or any subsidiary of the Company, all of which will be cancelled, and other than Shares held by shareholders who have properly exercised dissenters’ rights under the Minnesota Business Corporation Act), will be converted into the right to receive an amount in cash equal to the Offer Price, without interest and less any required withholding taxes, if any.

 

The Offer, the Merger and the Merger Agreement are more fully described in the Schedule 14D-9, to which this Information Statement is attached, which was filed by the Company with the SEC on February 21, 2008, and which is being mailed to shareholders of the Company along with this Information Statement.

 

This Information Statement is being mailed to you in accordance with Section 14(f) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) and Rule 14f-1 promulgated thereunder. Information set forth herein relating to Parent, Purchaser or the Board Designees (as defined below) has been provided by Parent. You are urged to read this Information Statement carefully. You are not, however, required to take any action in connection with the matters set forth herein.

The Purchaser commenced the Offer on February 21, 2008. As set forth in the Offer to Purchase, the Offer will expire at 5:00 p.m., New York City time, on March 19, 2008, or any later time to which Purchaser, subject to the terms of the Merger Agreement, extends the period of time during which the Offer is open.

 

DIRECTORS DESIGNATED BY PARENT

 

Right to Designate Directors

 

The Merger Agreement provides that, after Purchaser accepts for payment and pays for Shares pursuant to the Offer. Parent will be entitled to designate the number of directors (the “Board Designees” ), rounded up to the next whole number, on the Board that equals the product of (a) the total number of directors on the Board, giving effect to the election of any additional directors, and (b) the percentage that the number of Shares owned by Parent and Purchaser bears to the total number of Shares then outstanding. Promptly following Parent’s request, the Company will use its best efforts to cause Parent’s designees to be elected or appointed to the Board, including increasing the number of directors and seeking and accepting resignations of incumbent directors, provided that, at all times prior to the consummation of the Merger, the Board shall include at least two directors who were on the Board prior to Parent’s designation of the Board Designees or who were appointed to the Board as described in the following sentence (the “Continuing Directors” ). In the event that, prior to the consummation of the Merger, the number of Continuing Directors is reduced below two, the remaining Continuing Director shall be entitled to designate any other person who is not an affiliate, shareholder or employee of Parent or any of its subsidiaries to fill the vacancy left by such departed Continuing Director. Moreover, the Company will take all necessary action to cause individuals designated by Parent to constitute the number of members, rounded up to the next whole number, on each committee of the Board, each board of directors of each subsidiary of the Company, and each committee of the board of each subsidiary, that represents the same percentage as the individuals represent on the Board, in each case to the fullest extent permitted by applicable law.

 

Following the election or appointment of Parent’s designees and until the consummation of the Merger, the approval of a majority of the Continuing Directors, or the approval of both Continuing Directors if there are only two Continuing Directors, will be required to authorize any amendment to or termination of the Merger Agreement by the Company, any extension of time for performance of any obligation or action under the Merger Agreement by Parent or Purchaser, any waiver of the Company’s rights under the Merger Agreement, and any other action of the Board relating to the Merger Agreement if such action would materially and adversely affect the Company’s shareholders.

 

Information with respect to the Board Designees

 

As of the date of this Information Statement, Parent has not determined who it will designate to the Board. However, such designees will be selected from the list of potential designees provided below (the “Potential Designees” ). The Potential Designees have consented to serve as directors of the Company if so designated. None of the Potential Designees currently is a director of, or holds any position with, the Company. To our knowledge, none of the Potential Designees beneficially owns any equity securities, or rights to acquire any equity securities of the Company, has a familial relationship with any director or executive officer of the Company or has been involved in any transactions with the Company or any of its directors, executive officers or affiliates that are required to be disclosed pursuant to the rules of the SEC. To our knowledge, there are no material pending legal proceedings to which any Potential Designee listed below is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries. To our knowledge, none of the Potential Designees listed below has, during the past five years, (1) been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (2) been a party to any judicial or administrative proceeding that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.

 

The following sets forth information with respect to the Potential Designees (including age as of the date hereof, business address, current principal occupation or employment and five-year employment history). Unless otherwise noted, the business address of each Potential Designee is care of Warburg Pincus Private

Equity IX, L.P. at 466 Lexington Avenue, New York, New York, 10017 and each Potential Designee is a citizen of the United States.

 

 

CERTAIN INFORMATION CONCERNING THE COMPANY

 

The authorized capital stock of the Company consists of 50,000,000 Shares and 25,000,000 shares of preferred stock, par value $1.00 per share (the “Preferred Stock” ). As of the close of business on February 18, 2008, there were 13,558,691 Shares outstanding and no shares of Preferred Stock outstanding.

 

The Shares are the only class of voting securities of the Company outstanding that are entitled to vote at a meeting of shareholders of the Company. Each Share entitles the record holder to one vote on all matters submitted to a vote of the shareholders.

 

The following are brief biographies of each current director and executive officer of the Company (including present principal occupation or employment, and material occupations, positions, offices or employment for the past five years). Unless otherwise indicated, to the knowledge of the Company, no current director or executive officer of the Company has been convicted in a criminal proceeding during the last five years and no director or executive officer of the Company was a party to any judicial or administrative proceeding during the last five years (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. There are no family relationships between directors and executive officers of the Company.

 

Dennis J. Allingham has been a director of the Company since 2004. Mr. Allingham was appointed President, Chief Executive Officer and Secretary and to the Board of Directors in February 2004. Mr. Allingham previously served as our Executive Vice President from November 1997 to February 2004. He served as our Chief Financial Officer from January 1996 to March 2004. Mr. Allingham was also General Manager of the Hyaluronan Division from November 1996 to February 2004 and General Manager of the Dental Division from November 1997 to February 2004.

 

David M. Noel was appointed Vice President of Finance and Chief Financial Officer in March 2004. Mr. Noel, a Certified Public Accountant, joined the Company as Controller in February 2002 and served in such position until March 2004. From 1996 to 2001, Mr. Noel was Controller of Nilfisk-Advance, Inc., a manufacturer of floor maintenance equipment.

 

Larry D. Hiebert was appointed Vice President and General Manager of the Hyaluronan Division in July 2006. Mr. Hiebert served as Vice President of Operations since March 2004, Director of Operations from 1997 to March 2004 and held various manufacturing and materials management positions within the Company from 1983 to March 2004.

 

Kipling Thacker, Ph.D. was appointed Vice President of New Business Development in November 2004. Dr. Thacker served as Director of New Business Development from 2000 to November 2004 and is the co-inventor of the hyaluronan fermentation and manufacturing process. He held various research and business development positions at the Company from 1981 to 2004.

 

James G. Hall was appointed Vice President of Technical Operations in July 2006. Mr. Hall has served as the Company’s Director of Manufacturing Operations and Engineering since 2001. Prior to that he was the Manager of Engineering and Operations at Lifecore. Mr. Hall has over 17 years of drug and device manufacturing experience and was with Protein Design Labs prior to joining Lifecore.

 

John E. Runnells, III has been a director of the Company since 2002. Mr. Runnells has been a Managing Director of The Vertical Group, Inc., an investment management and venture capital firm focused on the

medical device industry, since 1992. Prior to that time, he was a co-founder (in 1984) and Managing Director of Paddington Partners, an investment firm that merged with The Vertical Group, Inc. in 1992. He serves on the board of directors of Anova, Inc., Dynamic Implants, Inc., Flexuspine, Inc., Incumed, Inc., Orbital Fixation, Inc. and TCT, Inc., all privately held companies. He currently serves as the Lead Director and Chairman of the Governance and Nominating Committee.

 

Martin J. Emerson has been a director of the Company since 2006. Mr. Emerson served as President and Chief Executive Officer of American Medical Systems, Inc. (“AMS”) , a leading provider of medical devices and therapies that restore pelvic health of individuals worldwide, between January 2005 and December 2007. He served as President and Chief Operating Officer of AMS from March 2004 to January 2005. From January 2003 to March 2004, Mr. Emerson served as Executive Vice President, Global Sales and Marketing, and Chief Operating Officer for AMS. From 2000 through 2002, he served as Vice President and General Manager of International at AMS. Mr. Emerson has over 20 years of experience in the medical device industry, including earlier experience with Boston Scientific and Baxter International. Mr. Emerson also serves on the board of directors of AMS, Wright Medical Technology, Inc. and Incisive Surgical, Inc., a privately held company. He currently serves on the Audit Committee and the Compensation Committee.

 

Thomas H. Garrett has been a director of the Company since 1996. Mr. Garrett has been a business consultant since July 1996. Prior to July 1996, Mr. Garrett was a partner at the law firm of Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota and served as its Managing Partner from 1993 through 1995. Mr. Garrett also serves on the board of directors of St. Jude Medical, Inc. He currently serves as Chairman of the Compensation Committee and serves on the Governance and Nominating Committee.

 

Luther T. Griffith has been a director of the Company since 2004. Mr. Griffith has been President of Griffith Resources, Inc., which provides consulting and capital resources to small businesses in the process of change, since 1994. Mr. Griffith is also an “angel investor” in various early stage companies. From 1995 through 2005, Mr. Griffith also served as the Chairman of Care Technologies, Inc., a manufacturer of wireless monitoring and locating systems for the eldercare market. From 1978 through 1994, Mr. Griffith also served in numerous management capacities for Alexander & Alexander Services, Inc. Mr. Griffith serves on the board of directors of Theragenics Corporation. He currently serves as the Chairman of the Audit Committee and serves on the Governance and Nominating Committee.

 

Richard W. Perkins has been a director of the Company since 1983. Mr. Perkins has served as President, Chief Executive Officer and director of Perkins Capital Management, Inc., an investment management firm, since January 1985. Mr. Perkins is a director of the following public companies: Synovis Life Technologies, Inc., Nortech Systems, Inc. and Vital Images, Inc. He currently serves on the Audit Committee and the Compensation Committee.

 

CORPORATE GOVERNANCE

 

Director Independence

 

The Board has determined that each of our directors satisfies the independence requirements of the Nasdaq Global Market, or Nasdaq, except for Dennis J. Allingham, who serves as our President, Chief Executive Officer and Secretary.

 

Our Audit Committee, Compensation Committee, and Governance and Nominating Committee consist solely of independent directors, as defined by Nasdaq. The members of our Audit Committee also meet the additional SEC and Nasdaq independence and experience requirements applicable specifically to members of the Audit Committee. In addition, all of the members of our Compensation Committee are “non-employee directors” within the meaning of the rules of Section 16 of the Exchange Act, and are “outside directors” for purposes of Internal Revenue Code Section 162(m).

 

Board Meetings and Participation

 

As of the date of this Information Statement, the Board has six members currently comprised of Messrs. Allingham, Runnells, Emerson, Garrett, Griffith and Perkins. The Board has a standing Audit Committee, Compensation Committee, and Governance and Nominating Committee. Current copies of the

charters of each of the committees are available in the Governance section of the Investor Information section of our website at www.lifecore.com.

 

During the fiscal year ended June 30, 2007, (i) the Board held 5 meetings; (ii) the Audit Committee held seven meetings (iii) the Compensation Committee held four meetings; and (iv) the Governance and Nominating Committee held one meeting. During the fiscal year ended June 30, 2007, each director attended at least 75% or more of the aggregate number of the meetings of the Board and of the committees on which he is a member. The Board does not have a formal policy requiring attendance by the directors at the annual meetings of shareholders; however, all of our directors attended our 2007 annual meeting.

 

Audit Committee

 

The members of our Audit Committee are Messrs. Griffith, Emerson and Perkins. Mr. Griffith is the chair of the committee. All current and proposed Audit Committee members are independent, as independence is defined in Rule 4200(a)(15) of the National Association of Securities Dealers’ listing standards. The Board has identified Mr. Griffith as the Audit Committee financial expert within the meaning of Item 401(h) of Regulation S-K under the Securities Exchange Act. Consistent with its charter, the Audit Committee assists our Board with its oversight responsibilities regarding the integrity of our financial statements and the audit process; our compliance with legal and regulatory requirements; and the qualifications, independence and performance of our independent registered public accounting firm. The Audit Committee reviews the scope of the independent audit, considers comments by the Company’s independent registered public accounting firm regarding internal controls and accounting procedures, and considers management’s response to those comments.

 

Compensation Committee

 

The members of our Compensation Committee are Messrs. Garrett, Emerson and Perkins. Mr. Garrett is the chair of the committee. Consistent with its charter, the committee assists the Board in its oversight of the evaluation of management’s performance, and reviews and makes recommendations to the Board concerning the election of corporate officers. In addition, the Compensation Committee discharges the Board’s responsibilities relating to compensation of the Company’s corporate officers, and administers and grants awards under the Company’s stock-based plans.

 

Governance and Nominating Committee

 

The members of our Governance and Nominating Committee are Messrs Runnells, Garrett and Griffith. Mr. Runnells is the chair of the committee. Consistent with its charter, the Governance and Nominating Committee assists the Board in identifying individuals qualified to become Board members, and recommends to the Board persons to be nominated for election as directors by the shareholders at the annual meeting of shareholders or by the Board to fill vacancies. In addition, the Governance and Nominating Committee assists the Board in developing the Company’s corporate governance principles, and in overseeing the process by which the Board and its committees assess their effectiveness.

 

The Governance and Nominating Committee determines the required selection criteria and qualifications of director nominees based upon our needs at the time nominees are considered. Directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of our shareholders. In evaluating a candidate for nomination as a director of Lifecore, the Governance and Nominating Committee will consider criteria including business and financial expertise; geography; experience as a director of a public company; gender and ethnic diversity on the Board; and general criteria such as ethical standards, independent thought, practical wisdom and mature judgment. The Governance and Nominating Committee will consider these criteria for nominees identified by the Governance and Nominating Committee, by shareholders, or through some other source.

 

The Governance and Nominating Committee conducts a process of making a preliminary assessment of each proposed nominee based upon the resume and biographical information, an indication of the individual’s willingness to serve and other background information, business experience, and leadership skills, all to the extent available and deemed relevant by the Governance and Nominating Committee. This information is evaluated against the criteria set forth above and our specific needs at that time. Based upon a preliminary assessment of the candidate(s), those who appear best suited to meet our needs may be invited to participate in a series of interviews,

which are used as a further means of evaluating potential candidates. On the basis of information learned during this process, the Governance and Nominating Committee determines which nominee(s) to recommend to the Board to submit for election at the next annual meeting. The Governance and Nominating Committee uses the same process for evaluating all nominees, regardless of the original source of the nomination.

 

Shareholder Communications with our Board

 

Shareholders who wish to address questions or concerns regarding our business directly with the Board, or any individual director, should direct questions in writing to Lifecore Biomedical, Inc., Attention: Corporate Secretary, 3515 Lyman Boulevard, Chaska, Minnesota 55318. Questions and concerns will be forwarded directly to the appropriate directors.

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics for our directors, executive officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions) and employees. Our Code of Business Conduct and Ethics is available under Corporate Governance in the Investor Information section of our website at www.lifecore.com. We intend to disclose any amendments to, or waivers from, our Code of Business Conduct and Ethics on our website. Shareholders may request a free copy of our Code of Business Conduct and Ethics by writing to us at Lifecore Biomedical, Inc., 3515 Lyman Boulevard, Chaska, Minnesota 55318, Attention: Investor Relations.

 

DIRECTOR COMPENSATION

 

In fiscal 2007, our non-employee directors received a monthly retainer of $1,000, a $1,000 fee for each Board meeting attended, a $500 fee for each telephonic Board meeting attended, and a $500 fee for each committee meeting attended. Additionally, the annual committee chairman fees for the Lead Director and Governance and Nominating Committee Chair, Audit Committee Chair and Compensation Committee Chair were $5,000, $4,000 and $2,000, respectively. In fiscal 2008, our non-employee directors will receive an annual retainer of $15,000, a $1,000 fee for each Board meeting attended, a $500 fee for each telephonic Board meeting attended, and a $1,000 fee for each committee meeting attended. Additionally, the annual committee chairman fees for the Lead Director and Governance and Nominating Committee Chair, Audit Committee Chair and Compensation Committee Chair will be $5,000.

 

Directors may elect to receive the annual retainer fee either as 100% cash, 50% cash plus 50% restricted stock, or 100% restricted stock. To the extent that a director elects to receive shares of restricted stock, the shares are issued to the director as of the first business day of the month following the month in which they are re-elected to the Board, which is typically December 1st. The number of shares to be issued is determined by dividing the amount of Board fees to be paid in shares by the closing price of one Share on the issue date. The restriction on the shares lapses on the six-month anniversary of the grant date. Mr. Garrett is the only director who elected to participate in this program in fiscal 2007.

 

The 1996 Stock Plan, as amended to date (the “1996 Plan” ), provides for the automatic granting of options to non-employee directors upon election or re-election by the Board or shareholders. The 1996 Plan provides that each non-employee director will be automatically granted an option to purchase 7,500 Shares upon the director’s election or re-election to our Board of Directors. Such options vest as to one half of the Shares eight months after the date of grant and as to the balance of the Shares 20 months after the date of grant.

In fiscal year 2007, our non-employee directors received the following compensation for service as directors:

 

 

 

 

Reimbursement of Expenses

 

We also reimburse all of our non-employee directors for expenses incurred in attending meetings of the Board and its committees. The amounts set forth in the table do not include reimbursement of expenses.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; PRINCIPAL SHAREHOLDERS

 

The following table sets forth certain information regarding the beneficial ownership of our Shares, as of February 18, 2008, by (i) each person whom we know to beneficially own 5% or more of our Shares, (ii) each of the Company’s directors, (iii) each person listed on the Summary Compensation Table set forth under “Executive Compensation” and (iv) all of the Company’s directors and executive officers as a group. The number of Shares beneficially owned by each shareholder is determined in accordance with the rules of the SEC and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those Shares over which the shareholder exercises sole or shared voting or investment power and any Shares which the person has the right to acquire within 60 days through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. The percentage ownership of Shares, however, is based on the assumption, expressly required by the rules of the SEC, that only the person or entity whose ownership is being reported has converted or exercised Share-equivalents into Shares; that is, Shares underlying Share-equivalents are not included in calculations in the table below for any other purpose, including for the purpose of calculating the number of Shares outstanding generally.

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Compensation Philosophy

 

Our Compensation Committee sets the overall compensation philosophy for executive officers. The objectives of our executive compensation program are to:

 

 

The Compensation Committee believes that the best interests of Lifecore shareholders will be served if the executive officers are focused on the long-term objectives of Lifecore, as well as the current year’s goals.

 

The Compensation Committee reviews and evaluates our executive compensation program with the assistance of Riley, Dettmann & Kelsey, LLC, Minnetonka, Minnesota ( “Riley” ), an independent compensation consulting firm retained by the Compensation Committee. Riley assisted the Compensation Committee in identifying an appropriate compensation peer group. The Compensation Committee has retained Riley to prepare a comprehensive executive and/or director compensation survey in 2004 and 2007 and Riley has advised the Committee in each of its annual deliberations since 2004.

 

Compensation Program Elements

 

Our compensation program for our executive officers consists of the following elements:

 

 

 

 

The Company’s Named Executive Officers are Dennis J. Allingham, David M. Noel, Larry D. Hiebert, Kipling Thacker, Ph.D., James G. Hall and Benjamin C. Beckham. Certain of the Named Executive Officers have entered into change in control agreements with us, and may be entitled to receive change in control payments. The Compensation Committee views base salary and annual cash incentive awards to be the best method to reward and provide incentives for the achievement of current goals. The Compensation Committee views long-term equity awards such as restricted stock and stock options to be the best method to provide incentives to management to focus on achieving long-term objectives.

 

The Compensation Committee independently determines, taking into account the recommendation of the Chief Executive Officer for Named Executive Officers other than the Chief Executive Officer, the amount and allocation of each component of the compensation package for each Named Executive Officer. There is no pre-established policy or target for the allocation between either cash or non-cash or short-term and long-term incentive compensation. The Compensation Committee received a comprehensive Executive Compensation report from Riley in June 2004. This report confirmed that the Named Executive Officers base salaries were low compared to other medical device companies located in the Midwest. The Compensation Committee concluded that this was acceptable since management was unproven and working on a three year business plan

covering the period from fiscal 2005 — 2007 and designed to meet aggressive revenue and profitability goals presented by a relatively new management team led by our Chief Executive Officer in June 2004.

 

The philosophy of the Compensation Committee was (1) make modest changes in base salaries over the three year period, (2) adopt a bonus plan that would promote achievement of the new three year plan, and (3) provide long-term equity awards in the form of restricted stock and stock options in amounts deemed appropriate for achievement of the three year business plan. In view of this philosophy, the size of the awards were larger than in prior years and the Compensation Committee advised the recipients that it was unlikely that additional awards would be made during the three-year plan period. While the total compensation packages (base-bonus-equity) was known to be competitive with industrial companies located in the Midwest that are similar in size to Lifecore, the Compensation Committee with advice from Riley understood that its executive compensation packages were below median (defined as the middle number in a given sequence of numbers) levels of those smaller medical device companies in the peer group. The Compensation Committee advised the Board that it considered the philosophy fair to the management team and Company shareholders given the risks of meeting the three year plan profit goals while, at the same time, acknowledging that the compensation levels were low relative to other competitors for executive talent. The Compensation Committee believed that the risk of losing key executive talent was mitigated by the sizable long-term equity awards issued at a time when our company’s stock price was deemed to be undervalued.

 

The following is a description of the basic components of total compensation for executive officers during fiscal year 2007.

 

Base Salaries

 

Base salaries provide a fixed amount of compensation for the executive’s regular work. Since 2004, base salary levels for our Named Executive Officers have been determined based upon average compensation increases for public companies of similar size located in the Midwest. Some variation above and below the competitive median is allowed when, in the judgment of management and/or the Compensation Committee, as appropriate, the individual’s experience, role, responsibilities, performance, skills and other factors justify variation. Base salaries of our Named Executive Officers are reviewed by the Compensation Committee annually, as well as at the time of promotion or other change in responsibilities, and any base salary increase for an individual in this group must be approved by the Compensation Committee. Typically, our annual base salary increases, if awarded, are effective in July of each year. Increases in salaries are generally based upon performance appraisals which are conducted annually by the Chief Executive Officer and the Compensation Committee. The following table summarizes the salary increases for the Named Executive Officers:

 

 

Annual Cash Incentive Awards

 

Annual cash incentive awards are designed to reward short-term performance results. Combined base salary and target annual cash incentive levels are intended to provide a compensation package which approaches being competitive with the peer group base salary and annual cash incentive levels.

 

The Compensation Committee adopted the Lifecore Biomedical FY 2007 Bonus Plan (the “2007 Bonus Plan” ), effective as of July 1, 2006. The 2007 Bonus Plan provides for the payment of cash bonuses to our officers, director-level employees and certain other senior managers based on the attainment by Lifecore of

specified performance objectives and the attainment of individual objectives. The primary objective of the 2007 Bonus Plan is to provide incentives to the executive officers and other key members of management to achieve financial and business objectives. The program is designed to:

 

 

Each participant in the 2007 Bonus Plan has a target incentive opportunity equal to a percentage of the participant’s annual base salary. On an annual basis, our Chief Executive Officer recommends the target incentive opportunity for consideration by the Compensation Committee and the Compensation Committee makes the ultimate determination of the target incentive opportunity to be applied. The target incentive opportunity is the amount that will be paid if Lifecore meets all of its performance objectives. The actual payout to participants may be higher, lower or equal to the target incentive opportunity.

 

Each year, our Chief Executive Officer recommends, for consideration by the Compensation Committee, financial and individual performance measures that support our business plan for the coming year and appropriate weighting for each performance measure. The Compensation Committee makes the ultimate determination of the performance measures to be applied and the appropriate weighting for each performance measure. Net sales and net income are currently used as financial performance measures each year, although additional performance measures may also be established. A minimum target and maximum performance level for each of the annual performance measures is set each year. Performance below the minimum will result in no payment for that performance measure. Performance exceeding expectations will result in additional payouts up to the allowed maximum. At the target performance level, participants will receive 100% of their target incentive opportunity. Individual performance goals are established annually for each of the Named Executive Officers. Under the 2007 Bonus Plan, achievement of the individual performance goals by a Named Executive Officer results in a bonus payment of up to 5% of annual base salary.

 

For fiscal 2007, the performance measures were set as follows: (i) net sales, (ii) net income and (iii) individualized objectives, with each performance measure accounting for 36%, 55% and 9%, respectively, of the target incentive opportunity. The target incentive opportunity for fiscal 2007 was 55% of annual base salary for the Chief Executive Officer and 40% of annual base salary for each of the other Named Executive Officers. Following the year ended June 30, 2007, payouts due under the 2007 Bonus Plan were determined by our management and considered and approved by the Compensation Committee. Actual payouts under the 2007 Bonus Plan were paid in August 2007 and are set forth in the table below:

 

 

 

 

Long-Term Equity Incentive Awards

 

The Lifecore Biomedical, Inc. 1996 Stock Plan permits Lifecore to grant executive officers stock options, stock appreciation rights, restricted stock and deferred stock awards. The Lifecore Biomedical, Inc. 2003 Stock Incentive Plan permits Lifecore to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, other stock grants and other stock-based awards. The Compensation Committee views such equity awards as an important long-term incentive vehicle for our executive officers. Stock-based awards provide executives with the opportunity to share in the appreciation of the value of the Shares which the Compensation Committee believes would be due largely to the efforts of such executives.

 

The Compensation Committee began taking a different approach with long-term equity incentive awards when Lifecore’s new management team was put into place in fiscal 2004. In fiscal 2004, a new three-year plan aimed at achieving profitability and growth was developed. Under the new plan, the Compensation Committee awarded larger option grants and awarded shares of restricted stock to executive officers with the understanding that it was unlikely that additional equity awards would be made to the executive officers during the three-year plan period. The shares of restricted stock granted under the three-year program vest at the earlier of (1) four years from the date of grant or (2) in installments upon achievement of the fiscal 2005, 2006 and 2007 annual targets on a cumulative basis. The stock options vested at date of grant due in part to the Compensation Committee’s desire to provide immediate incentives, the relatively new responsibilities of the executive officers and the execution of non-competition agreements with each of the executive officers. New executive officers hired since early 2004 have received pro-rata grants of restricted stock depending upon their year of hire and full stock option grants. The long-term equity awards made to the Named Executive Officers under this three-year plan are summarized below:

 

 

No other equity awards were made to the Named Executive Officers during fiscal 2007.

All of an executive officer’s unvested shares of restricted stock are forfeited upon the termination of the executive officer’s employment prior to the end of the vesting period; provided, however, that if the recipient’s employment is terminated by reason of death, disability, or retirement, the restrictions with respect to such unvested restricted shares lapse and the shares become transferable and non-forfeitable as of the date of such termination. In addition, all restrictions with respect to restricted shares lapse if there is a “Significant Change” in Lifecore (as defined in the restricted stock agreements). Each recipient is entitled to receive any cash dividends or other distributions made with respect to the restricted shares, unless and until such shares are forfeited.

 

All options granted have an exercise price equal to the fair market value of our common stock at the time of grant, and therefore any value which ultimately accrues to executive officers directly reflects stock price increases shared by our shareholders.

 

401(k) Retirement Plan

 

We provide our tax-qualified 401(k) retirement plan to substantially all of our U.S. based full-time employees. In fiscal 2007, we made matching contributions to employee 401(k) plan accounts equal to 50% of the employee’s aggregate pre-tax contributions up to 4% of the employee’s compensation for the year. Effective October 1, 2007, we began making contributions to the employee 401(k) accounts equal to 50% of the employee’s aggregate pre-tax contributions up to 6% of the employee’s compensation for the year. Our employees are fully vested in their own contributions and in our matching contributions. IRS rules limit the amounts that an employee may allocate to tax-qualified savings plans and the amount of compensation that can be taken into account in computing benefits under our 401(k) retirement plan. The calendar 2007 maximum before-tax contribution is $15,500 per year or $20,500 per year for certain participants age 50 and over.

 

Other Benefits

 

The Named Executive Officers participate in various medical, dental, life, disability and other benefit programs that are generally made available to all of our employees.

 

Stock Ownership Guidelines

 

We adopted Stock Ownership Guidelines (the “ Guidelines ”) in September 2006, which apply to our directors and executive officers. The Guidelines encourage our directors and executive officers to own Shares in order to demonstrate their commitment to the long-term success of Lifecore. Under the Guidelines, directors are expected to own Shares in an amount having a market value of five times the annual retainer paid to our directors. Under the Guidelines, executive officers are expected to own Shares in an amount having a market value of a multiple of one or two times the individual’s annual base salary, depending upon the individual’s management level. Moreover, our executive officers are expected to retain a portion of restricted stock upon vesting in order to achieve compliance with the Guidelines. Our directors and executive officers are also expected to be in compliance with the Guidelines within five years of first becoming subject to the Guidelines. The Compensation Committee monitors compliance with the Guidelines and has the authority to waive compliance with the Guidelines in the event of financial hardship or other good cause. The Guidelines are published on our website at www.lifecore.com under “Investor Info — Corporate Governance.”

 

Section 162(m) Compliance

 

Under Section 162(m) of the U.S. Internal Revenue Code, we must meet specified requirements related to our performance and shareholder approval of certain compensation arrangements in order for us to fully deduct compensation in excess of $1,000,000 paid to any Named Executive Officer.

 

The shareholders approved the 1996 Stock Plan and the 2003 Stock Incentive Plan. Therefore, compensation attributable to stock options, stock appreciation rights, restricted stock, performance share awards and certain other awards granted under those plans may be excluded from the $1,000,000 cap under Section 162(m) as well.

The Compensation Committee intends to continue its practice of paying competitive compensation consistent with our philosophy to attract, retain and motivate executive officers to manage our business in the best interests of Lifecore and our shareholders. The Compensation Committee, therefore, may choose to provide non-deductible compensation to our executive officers if it deems such compensation to be in the best interests of Lifecore and our shareholders.

 

Benchmarking

 

Starting in 2004, the Compensation Committee has met periodically with an independent compensation consultant selected by the Compensation Committee to review our executive compensation programs and policies. Since fiscal 2004, the Compensation Committee has engaged the services of Riley to advise the Compensation Committee on matters related to our executive compensation programs and policies and matters related to compensation for our Chief Executive Officer. Riley reports directly to the Compensation Committee and does not advise management. During fiscal 2007, Riley did not receive any fees or compensation from us other than fees for advising the Compensation Committee. Management does not engage a separate compensation consultant to provide advice on executive compensation matters.

 

During fiscal 2007, Riley assisted the Compensation Committee in updating its compensation peer group, a task that had also been done in 2004. The compensation peer group is a group of publicly-traded companies in competitive industries against which the Compensation Committee believes Lifecore competes for talent and shareholder investment. The companies comprising the compensation peer group are:

 

 

The compensation peer group is periodically reviewed and updated by the Compensation Committee. Lifecore’s annual revenues were slightly less than the median annual revenues of the companies comprising the compensation peer group based on the most recently reported annual revenues.

 

In making compensation decisions for Lifecore’s executive officers, the Compensation Committee compares each element of total compensation against the compensation peer group. The Compensation Committee’s goal is to provide a competitive compensation package consistent with companies of similar size and financial performance. The Compensation Committee has recognized, however, that from fiscal 2004 through 2007 the overall compensation package of our Named Executive Officers was below the median of the compensation peer group. Therefore, the Compensation Committee intends to gradually raise compensation levels beginning in fiscal 2008.

The Role of Management in Determining Executive Compensation

 

Our Chief Executive Officer provides recommendations regarding the design of our compensation programs to the Compensation Committee. Upon Compensation Committee approval, management is ultimately accountable for executing against the objectives of the approved compensation program.

 

Our Chief Executive Officer is responsible for bringing to the Compensation Committee recommended compensation actions involving other executive officers and members of senior management; however, he cannot unilaterally implement compensation changes for any of the executive officers. During Compensation Committee meetings at which executive compensation actions are discussed, our Chief Executive Officer participates in these discussions at the discretion of the Compensation Committee. The Compensation Committee’s independent compensation consultant is available as needed at such meetings.

 

Under its charter, the Compensation Committee is responsible for establishing our Chief Executive Officer’s compensation. The Compensation Committee reviews its decisions regarding our Chief Executive Officer compensation with the full Board.

 

Compensation of the Chief Executive Officer

 

Annual Performance Evaluation

 

Annually, the Board analyzes the performance of our Chief Executive Officer against agreed upon objectives. The annual performance evaluation is conducted by the Compensation Committee which also solicits input from all non-employee directors. The Chair of the Compensation Committee reviews the results of the annual performance evaluation with members of the Compensation Committee and the full Board and such results are orally communicated to the Chief Executive Officer by the Compensation Committee. This performance evaluation is a primary criterion used by the Compensation Committee in determining the appropriate pay level for our Chief Executive Officer for the upcoming fiscal year.

 

Base Salary

 

Mr. Allingham was elected to the position of Chief Executive Officer in February 2004. Mr. Allingham’s salary was $312,000 for fiscal 2007 (an increase of 4% over his 2006 base salary). The Compensation Committee determined that the base salary adjustment appropriately rewarded Mr. Allingham’s performance and was consistent with salary increases in the Midwest market. Mr. Allingham’s fiscal 2007 base salary was lower than the 50th percentile for chief executive officer positions at companies in our compensation peer group.

 

Annual Cash Incentive Awards

 

Mr. Allingham’s fiscal 2007 annual cash incentive award was made pursuant to the 2007 Bonus Plan. At the beginning of fiscal 2007, the Compensation Committee established financial performance metrics for Mr. Allingham of net sales and net income as well as individual objectives as described under the heading “Annual Cash Incentive Awards” above. Lifecore’s actual net sales ($69.6 million) and net income ($7.7 million) in fiscal 2007 exceeded the threshold levels of the net sales and net income goals set by the Compensation Committee but were lower than the target levels of such performance goals. This resulted in a 21% cash incentive being payable to Mr. Allingham. Mr. Allingham also received a 5% cash incentive based on his achievement of individual performance goals during fiscal 2007. In total, Mr. Allingham’s annual cash incentive award under the 2007 Bonus Plan was $81,120, which was equal to 26% of his annual base pay. The Compensation Committee determined that Mr. Allingham’s annual cash incentive compensation is below the annual cash incentive compensation received by other chief executive officers in the compensation peer group.

 

Long-Term Incentives

 

Mr. Allingham’s long-term incentive awards are described above under “Long-Term Equity Incentive Awards.” No long-term incentive awards have been made to Mr. Allingham since fiscal 2004. The

Compensation Committee determined that Mr. Allingham’s long-term incentive compensation is in line with the long-term incentive compensation received by other chief executive officers in the compensation peer group.

 

Compensation of the Other Named Executive Officers

 

In determining the fiscal 2007 compensation for each of our other Named Executive Officers, the Compensation Committee reviewed with the Chief Executive Officer the performance of each other Named Executive Officer, which is the primary criterion used by the Compensation Committee in determining the appropriate pay level for our other Named Executive Officers for the upcoming fiscal year.

 

Mr. Noel’s Compensation

 

Mr. Noel has served as our Vice President of Finance and Chief Financial Officer since March 2004. In July 2006, the Compensation Committee increased Mr. Noel’s salary 6.9% to $155,000 for fiscal 2007. The Compensation Committee determined that the base salary adjustment was consistent with salary increases for companies in the Midwest market. Mr. Noel’s fiscal 2007 base salary was lower than the 50th percentile for comparable positions at companies in our compensation peer group.

 

Mr. Noel’s financial performance metrics for his fiscal 2007 annual cash incentive award were the same as for the Chief Executive Officer and the other Named Executive Officers. Based on Lifecore’s actual net sales and net income levels described above under “Chief Executive Officer Compensation,” Mr. Noel earned a 12% cash incentive award. Mr. Noel also received a 5% cash incentive award based on his achievement of individual performance goals during fiscal 2007. In total, Mr. Noel’s annual cash incentive award under the 2007 Bonus Plan was $26,350, which was equal to 17% of his annual base pay. The Compensation Committee determined that Mr. Noel’s annual cash incentive compensation is below the annual cash incentive compensation received by other chief financial officers in the compensation peer group.

 

Mr. Noel’s long-term incentive awards are described above under “Long-Term Equity Incentive Awards.” No long-term incentive awards have been made to Mr. Noel since fiscal 2004. The Compensation Committee determined that Mr. Noel’s long-term incentive compensation is in line with the long-term incentive compensation received by other chief financial officers in the compensation peer group.

 

Mr. Hiebert’s Compensation

 

Mr. Hiebert has served as our Vice President since March 2004 and he was promoted to General Manager of the Hyaluronan Division in July 2006. In July 2006, the Compensation Committee increased Mr. Hiebert’s salary 10.3% to $160,000 for fiscal 2007. The Compensation Committee determined that the base salary adjustment appropriately reflected Mr. Hiebert’s promotion and salary increases for companies in the Midwest market. Mr. Hiebert’s fiscal 2007 base salary was lower than the 50th percentile for comparable positions at companies in our compensation peer group.

 

Mr. Hiebert’s financial performance metrics for his fiscal 2007 annual cash incentive award were the same as for the Chief Executive Officer and the other Named Executive Officers. Based on Lifecore’s actual net sales and net income levels described above under “Chief Executive Officer Compensation,” Mr. Hiebert earned a 12% cash incentive award. Mr. Hiebert also received a 5% cash incentive award based on his achievement of individual performance goals during fiscal 2007. In total, Mr. Hiebert’s annual cash incentive award under the 2007 Bonus Plan was $27,200, which was equal to 17% of his annual base pay. The Compensation Committee determined that Mr. Hiebert’s annual cash incentive compensation is below the annual cash incentive compensation received by officers with similar responsibilities in the compensation peer group.

 

Mr. Hiebert’s long-term incentive awards are described above under “Long-Term Equity Incentive Awards.” No long-term incentive awards have been made to Mr. Hiebert since fiscal 2004. The Compensation Committee determined that Mr. Hiebert’s long-term incentive compensation is in line with the long-term

incentive compensation received by officers with similar levels of responsibility in the compensation peer group.

 

Dr. Thacker’s Compensation

 

Dr. Thacker has served as our Vice President of New Business Development since November 2004. In July 2006, the Compensation Committee increased Dr. Thacker’s salary 7.7% to $140,000 for fiscal 2007. The Compensation Committee determined that the base salary adjustment was consistent with salary increases for companies in the Midwest market. Dr. Thacker’s fiscal 2007 base salary was lower than the 50th percentile for comparable positions at companies in our compensation peer group.

 

Dr. Thacker’s financial performance metrics for his fiscal 2007 annual cash incentive award were the same as for the Chief Executive Officer and the other Named Executive Officers. Based on Lifecore’s actual net sales and net income levels described above under “Chief Executive Officer Compensation,” Dr. Thacker earned a 12% cash incentive award. Dr. Thacker also received a 5% cash incentive award based on his achievement of individual performance goals during fiscal 2007. In total, Dr. Thacker’s annual cash incentive award under the 2007 Bonus Plan was $23,800, which was equal to 17% of his annual base pay. The Compensation Committee determined that Dr. Thacker’s annual cash incentive compensation is below the annual cash incentive compensation received by officers with similar responsibilities in the compensation peer group.

 

Dr. Thacker’s long-term incentive awards are described above under “Long-Term Equity Incentive Awards.” No long-term incentive awards have been made to Dr. Thacker since fiscal 2005. The Compensation Committee determined that Dr. Thacker’s long-term incentive compensation is in line with the long-term incentive compensation received by officers with similar levels of responsibility in the compensation peer group.

 

Mr. Hall’s Compensation

 

Mr. Hall was promoted to Vice President of Technical Operations in July 2006 and his base salary was set at $132,000 for fiscal 2007. Mr. Hall’s fiscal 2007 base salary was lower than the 50th percentile for comparable positions at companies in our compensation peer group.

 

Mr. Hall’s financial performance metrics for his fiscal 2007 annual cash incentive award were the same as for the Chief Executive Officer and the other Named Executive Officers. Based on Lifecore’s actual net sales and net income levels described above under “Chief Executive Officer Compensation,” Mr. Hall earned a 12% cash incentive award. Mr. Hall also received a 5% cash incentive award based on his achievement of individual performance goals during fiscal 2007. In total, Mr. Hall’s annual cash incentive award under the 2007 Bonus Plan was $22,440, which was equal to 17% of his annual base pay. The Compensation Committee determined that Mr. Hall’s annual cash incentive compensation is below the annual cash incentive compensation received by officers with similar responsibilities in the compensation peer group.

 

Mr. Hall’s long-term incentive awards are described above under “Long-Term Equity Incentive Awards.” No long-term incentive awards have been made to Mr. Hall since fiscal 2007. The Compensation Committee determined that Mr. Hall’s long-term incentive compensation is in line with the long-term incentive compensation received by officers with similar levels of responsibility in the compensation peer group.

 

Mr. Beckham’s Compensation

 

Mr. Beckham served as our Vice President of Sales and Marketing for the Dental Division from January 2006 until the termination of his employment in May 2007. Mr. Beckham’s base salary was set at $160,000 for fiscal 2007.

 

Under the terms of the 2007 Bonus Plan, Mr. Beckham was not eligible to receive an annual cash incentive award for fiscal 2007.

Separation Agreement and Departure of Former Vice President of Sales and Marketing of the Dental Division

 

In May 2007, with the approval of the Compensation Committee, we entered into a separation agreement with Benjamin C. Beckham, our former Vice President of Sales and Marketing of the Dental Division. Under the separation agreement, Mr. Beckham is entitled to receive his base salary, less all customary withholding and deductions, for a period of six months beginning on the first pay date after June 4, 2007. In exchange, Mr. Beckham agreed to not compete with Lifecore or to solicit our employees or customers for six months following his termination of employment. The Separation Agreement did not modify the terms of existing stock options and the 5,000 options that were unexercised at the end of the fiscal year expired on July 31, 2007.

 

Fiscal 2008 Compensation Decisions

 

Overview

 

In January 2007, the Board of Directors discussed with the Compensation Committee the desire to learn from the executive officers their views of the compensation program adopted and implemented for the three fiscal years ending in June 2007. Riley was engaged by the Compensation Committee to interview the Company’s executive officers and report back to the Committee. The Board also expressed the view that our Company was growing to a size where it was beginning to compete for executive talent outside the Midwest and with other medical device companies located in regions beyond the Midwest. Riley was also engaged to prepare a comprehensive report on executive compensation. One of the primary directives from the Compensation Committee was that the report focus on levels of compensation within the U.S. medical device industry in general and the peer group medical device companies in particular.

 

The final Riley report delivered to members of the Compensation Committee prior to its June 11, 2007 meeting confirmed the prior understanding that executive officer compensation packages were lower than the median levels determined for the medical device companies within the peer group and the peer group in general. Moreover, the Company was recognizing that it would likely need to pay higher levels of compensation if it hired an experienced executive to replace its former Vice President of Sales and Marketing of the Dental Division.

 

Based on these findings the Compensation Committee concluded that steps needed to be taken to augment our Company’s executive officer compensation packages. While recognizing that such a process would be best implemented over a number of years and be subject to annual reassessment based upon factors including our company’s financial performance and compensation practices and levels adopted by peer group companies, the Compensation Committee deemed it imperative to send a message to the Named Executive Officers that they had proven themselves in the period prior to the end of fiscal 2007 and that levels of compensation in the immediate future years would likely rise provided the necessary performance was delivered and shareholder value enhanced. The discussion that follows represents the first steps deemed necessary and appropriate by the Compensation Committee to attain the Company’s general compensation philosophy as referenced at the beginning of this Executive Compensation section.

 

Base Salaries

 

The Compensation Committee recognized that the overall compensation packages for the Named Executive Offices was low relative to the medical devices companies in our compensation peer group and determined that efforts would be made to gradually bring the compensation levels more in line with the medical device marketplace. Effective July 1, 2007, the Compensation Committee effected salary increases for Messrs. Allingham, Noel, Hiebert, Hall and Thacker, based upon executive compensation data received from a

survey provided by Riley, to adjust their base salaries based upon merit and to be in line with the competitive marketplace. The following table summarizes the salary increases for the Named Executive Officers:

 

 

Annual Cash Incentive Awards

 

The Compensation Committee adopted the Lifecore Biomedical FY 2008 Bonus Plan (the “ 2008 Bonus Plan ”), effective as of July 1, 2007. The 2008 Bonus Plan provides for the payment of cash bonuses to our officers, director-level employees and certain other senior managers based on the attainment by Lifecore of specified performance objectives and the attainment of individual objectives. The Compensation Committee has set the following performance measures for fiscal 2008: (i) net sales, (ii) net income and (iii) individualized objectives, with each performance measure accounting for 39%, 46% and 15%, respectively, of the target incentive opportunity. The target incentive opportunity for fiscal 2008 is 65% of annual base salary for the Chief Executive Officer and 49% of annual base salary for each of the other Named Executive Officers.

 

Long Term Incentive Awards

 

In August 2007, the Compensation Committee approved stock option awards to Messrs. Allingham, Noel, Hiebert, Thacker and Hall. Mr. Allingham received an option to purchase 35,000 Shares, Messrs. Noel and Hiebert each received an option to purchase 17,500 Shares, and Messrs. Thacker and Hall each received an option to purchase 15,000 Shares. The options were granted under the Lifecore Biomedical, Inc. 2003 Stock Plan, have a ten year term and vest at the rate of 25% each year commencing one year from the grant date of the options. In approving these stock option awards, the Compensation Committee reviewed the impact the awards would have on Lifecore’s financial statements and considered Lifecore’s annual option run rate and option overhang. In addition, the Compensation Committee reviewed the stock option award practices of the compensation peer group companies, including the ratio of fair value of the options to base salaries. The options were granted with the intent of augmenting the value of the overall compensation packages with a view toward bringing the Named Executive Officer’s total compensation more in line with those of Lifecore’s compensation peer group, retaining their services and providing a long-term incentive to increase shareholder value. The Compensation Committee decided not to award restricted stock to the Named Executive Officers at this time.

 

Conclusion

 

Lifecore and the Compensation Committee believe Lifecore’s compensation policies and practices are appropriately designed to meet Lifecore’s stated objectives and fully support our overall compensation philosophy.

 

Change of Control and Post-Employment Payments and Benefits for Executives

 

We have entered into change in control agreements with certain of the Named Executive Officers designed to retain the executive officer and provide for continuity of management in the event of an actual or threatened change in control of Lifecore (as “change in control” is defined in the agreements). These agreements are “double trigger” agreements and provide that, in the event of a change in control, each Named Executive Officer would have specific rights and would receive specified benefits if the Named Executive Officer is terminated without “cause” (as defined in the agreements) or the Named Executive Officer voluntarily terminates his employment for “good reason” (as defined in the agreements) within two years after the change in control for Mr. Allingham and within 18 months after the change in control for certain other

Named Executive Officers. In these circumstances, Mr. Allingham will receive a severance payment equal to two times the sum of his annual base salary and most recent annual bonus, and certain other Named Executive Officers will each receive a severance payment equal to the sum of his annual base salary and most recent annual bonus. In addition, all options to purchase shares of our common stock and all other incentive awards granted to the Named Executive Officers under our stock option and incentive compensation plans become immediately exercisable or vested, as applicable. In addition, for the 24-month period following the Named Executive Officer’s termination date, we will provide the executive officer with life, disability, accident and health insurance coverage benefits substantially similar to the benefits the executive was receiving under our health and welfare benefit plans in effect immediately prior to the date of the change in control. Pursuant to the agreements we are also required to pay certain of the Named Executive Officer’s outplacement fees and expenses for one year following the date of termination.

 

The severance amounts payable and benefits to be received by the executive officers upon completion of the Merger and in the event of termination following the Merger are described in Item 3 of Schedule 14D-9.

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based upon this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Information Statement.

 

Submitted by the members of the Compensation Committee of Lifecore’s Board of Directors.

 

 

 

 

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table shows the unexercised stock options held at the end of the 2007 fiscal year by the Named Executive Officers. None of the Named Executive Officers held any unvested restricted stock at the end of the 2007 fiscal year.

 

 

 

 

 

 

 

Employment Arrangements; Potential Payments and Benefits Upon Termination and Change-in-Control

 

The following discussion and tables summarize the potential payments to certain Named Executive Officers assuming that the triggering event occurred on June 29, 2007. The amounts payable and benefits to be received by the executive officers upon completion of the Merger and in the event of termination following the Merger are described in Item 3 of the Schedule 14D-9.

 

General Severance Plans and Benefits

 

Our Named Executive Officers are not covered under any employment agreements or general severance plans. Any severance benefits payable to our Named Executive Officers for a termination for reasons not triggered by a change in control would be determined by the Compensation Committee at its discretion.

 

Change in Control Agreements

 

We have entered into change in control agreements with our Named Executive Officers designed to retain the executive officer and provide for continuity of management in the event of an actual or threatened change in control of Lifecore (as “change in control” is defined in the agreements). These agreements are “double trigger” agreements and provide that, in the event of a change in control, each Named Executive Officer would have specific rights and would receive specified benefits if the Named Executive Officer is terminated without “cause” (as defined in the agreements) or the Named Executive Officer voluntarily terminates his employment for “good reason” (as defined in the agreements) within two years after the change in control for Mr. Allingham and within 18 months after the change in control for the other Named Executive Officers. In these circumstances, Mr. Allingham will receive a severance payment equal to two times the sum of his annual base salary and most recent annual bonus, and the other Named Executive Officers will each receive a severance payment equal to the sum of his annual base salary and most recent annual bonus. In addition, all options to purchase Shares and all other incentive awards granted to the Named Executive Officers under our stock option and incentive compensation plans become immediately exercisable or vested, as applicable. In addition, for the 24-month period following the Named Executive Officer’s termination date, we will provide the executive officer with life, disability, accident and health insurance coverage benefits substantially similar to the benefits the executive was receiving under our health and welfare benefit plans in effect immediately prior to the date of the change in control. Pursuant to the agreements we are also required to pay all of the Named Executive Officer’s outplacement fees and expenses for one year following the date of termination.

 

 

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

For a description of certain relationships and transactions with members of the Board or their affiliates, see “Certain Relationships and Related Transactions” below.

 

REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS ^* (

 

The following is the report of the Audit Committee with respect to our audited financial statements for the fiscal year ended June 30, 2007. The Audit Committee has reviewed and discussed our audited financial statements with management. The Audit Committee has discussed with Grant Thornton LLP, our independent registered public accounting firm, the matters required to be discussed by Statement of Auditing Standards No. 61, Communication with Audit Committees. The Audit Committee has received the written disclosures and the letter from Grant Thornton LLP required by Independence Standards Board Standard No. 1 relating to the independent registered

 

 

(   ^*  The material in this report is not “solicitation material,” is not deemed filed with the SEC, and is not incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing.

public accounting firm’s independence from Lifecore, has discussed with Grant Thornton LLP their independence from Lifecore, and has considered the compatibility of non-audit services with the firm’s independence.

 

The Audit Committee acts pursuant to the Audit Committee Charter. The Audit Committee Charter was amended by the Board of Directors in August 2004 to be in compliance with all provisions of the Sarbanes-Oxley Act of 2002 and Nasdaq requirements. Each of the members of the Audit Committee qualifies as an “independent” director under the current Nasdaq listing standards and the rules of the Securities and Exchange Commission.

 

Based on the review and discussions referred to above, the Audit Committee recommended to our Board of Directors that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

 

Submitted by the Audit Committee of Lifecore’s Board of Directors.

 

Luther T. Griffith, Chairman
Martin J. Emerson
Richard W. Perkins

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

On April 16, 2007, the Audit Committee of the Board of Directors adopted a written policy regarding transactions with related persons. In accordance with the policy, the Audit Committee is responsible for the review and approval or ratification of all transactions with related persons that are required to be disclosed under the rules of the Securities and Exchange Commission. Under the policy, a “related person” includes any of our directors or executive officers, certain of our shareholders and any of their respective immediate family members. The policy applies to transactions in which Lifecore is a participant, the amount involved exceeds $120,000 and a related person has a direct or indirect material interest. A related person’s material interest in a transaction is to be determined based on the significance of the information to investors in light of all the circumstances. Under the policy, management of Lifecore is responsible for disclosing to the Audit Committee all material information related to any covered transaction prior to entering into the transaction. The Audit Committee may use any process and review any information that it determines is reasonable under the circumstances in order to determine whether the covered transaction is fair and reasonable and on terms no less favorable to Lifecore than could be obtained in a comparable arms-length transaction with an unrelated third party.

 

We compensate non-employee directors for their services on our Board of Directors and its committees. Please refer to the section above entitled “Director Compensation.”

 

Except as set forth in this Information Statement, there are no transactions between the Company and related persons that are required to be disclosed under the rules of the SEC.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of our securities to file initial reports of ownership of those securities on Form 3 and reports of changes in ownership on Form 4 or Form 5 with the SEC. Specific due dates for these reports have been established by the SEC, and we are required to disclose in this Information Statement any failure to timely file the required reports by these dates. Based solely on our review of the copies of these reports received by us and written representations from our directors and executive officers, we believe that our executive officers and directors complied with all Section 16(a) filing requirements for the fiscal year ended June 30, 2007.

APPENDIX B

 

January 14, 2008

 

Board of Directors

Lifecore Biomedical, Inc.

3515 Lyman Boulevard

Chaska, Minnesota 55318

 

Members of the Board:

 

You have requested our opinion as to the fairness, from a financial point of view, to the holders of common stock, par value $0.01 per share (the “Company Common Stock”) of Lifecore Biomedical, Inc. (the “Company”), of the Cash Consideration (as defined below) pursuant to a draft of the Agreement and Plan of Merger, dated as of January 15, 2008 (the “Agreement”), to be entered into among the Company, SBT Holdings Inc. (“Acquiror”) and SBT Acquisition Inc. (“Merger Sub”), a newly formed wholly-owned subsidiary of Acquiror. The Agreement provides that, among other things, (i) Merger Sub will commence a cash tender offer (the “Tender Offer”) for all of the issued and outstanding shares of Company Common Stock at a purchase price of $17.00 per share in cash (the “Cash Consideration”) and (ii) subsequent to the Tender Offer, Merger Sub will be merged with and into the Company (the “Merger,” and together with the Tender Offer, the “Transaction”), pursuant to which each outstanding share of Company Common Stock not previously tendered, other than shares of Company Common Stock held in treasury or owned by the Acquiror, will be converted into the right to receive the Cash Consideration. The terms and conditions of the Transaction are more fully set forth in the Agreement.

 

In connection with our review of the Transaction, and in arriving at our opinion, we have: (i) reviewed and analyzed the financial terms of a draft of the Agreement, dated January 13, 2008; (ii) reviewed and analyzed certain financial and other data with respect to the Company which was publicly available, (iii) reviewed and analyzed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets, liabilities and prospects of the Company that were publicly available, as well as those that were furnished to us by the Company; (iv) conducted discussions with members of senior management and representatives of the Company concerning the matters described in clauses (ii) and (iii) above, as well as its business and prospects on a stand alone basis; (v) reviewed the current and historical reported prices and trading activity of Company Common Stock and similar information for certain other companies deemed by us to be comparable to the Company; (vi) compared the financial performance of the Company with that of certain other publicly-traded companies that we deemed relevant; and (vii) reviewed the financial terms, to the extent publicly available, of certain business combination transactions that we deemed relevant. In addition, we have conducted such other analyses, examinations and inquiries and considered such other financial, economic and market criteria as we have deemed necessary in arriving at our opinion.

 

We have relied upon and assumed, without assuming liability or responsibility for independent verification, the accuracy and completeness of all information that was publicly available or was furnished, or otherwise made available, to us or discussed with or reviewed by us. We have further relied upon the assurances of the management of the Company that the financial information provided has been prepared on a reasonable basis in accordance with industry practice and that they are not aware of any information or facts that would make any information provided to us incomplete or misleading. Without limiting the generality of the foregoing, for the purpose of this opinion, we have assumed that with respect to financial forecasts, estimates and other forward-looking information reviewed by us, including the Company’s conversion of its financial forecasts from a fiscal year-end basis to a calendar year-end basis, that such information has been reasonably prepared based on assumptions reflecting the best currently available estimates and judgments of the management of the Company as to the expected future results of operations and financial condition of the Company to which such financial forecasts, estimates and other forward-looking information relate. We express no opinion as to any such financial forecasts, estimates or forward-looking information or the assumptions on which they were based. We have relied, with your consent, on advice of the outside counsel and the independent accountants to the Company, and on the assumptions of the management of the Company,

as to all accounting, legal, tax and financial reporting matters with respect to the Company, the Acquiror and the Agreement.

 

In arriving at our opinion, we have assumed that the executed Agreement will be in all material respects identical to the last draft reviewed by us. We have relied upon and assumed, without independent verification, that (i) the representations and warranties of all parties to the Agreement and all other related documents and instruments that are referred to therein are true and correct, (ii) each party to such agreements will fully and timely perform all of the covenants and agreements required to be performed by such party, (iii) the Transaction will be consummated pursuant to the terms of the Agreement without amendments thereto and (iv) all conditions to the consummation of the Transaction will be satisfied without waiver by any party of any conditions or obligations thereunder. Additionally, we have assumed that all the necessary regulatory approvals and consents required for the Transaction will be obtained in a manner that will not adversely affect the Company or the contemplated benefits of the Transaction.

 

In arriving at our opinion, we have not performed any appraisals or valuations of any specific assets or liabilities (fixed, contingent or other) of the Company, and have not been furnished or provided with any such appraisals or valuations, nor have we evaluated the solvency of the Company under any state or federal law relating to bankruptcy, insolvency or similar matters. The analyses performed by us in connection with this opinion were going concern analyses. We express no opinion regarding the liquidation value of the Company or any other entity. Without limiting the generality of the foregoing, we have undertaken no independent analysis of any pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company or any of its affiliates is a party or may be subject, and at the direction of the Company and with its content, our opinion makes no assumption concerning, and therefore does not consider, the possible assertion of claims, outcomes or damages arising out of any such matters.

 

This opinion is necessarily based upon the information available to us and facts and circumstances as they exist and are subject to evaluation on the date hereof; events occurring after the date hereof could materially affect the assumptions used in preparing this opinion. We are not expressing any opinion herein as to the price at which shares of Company Common Stock may trade following announcement of the Transaction or at any future time. We have not undertaken to reaffirm or revise this opinion or otherwise comment upon any events occurring after the date hereof and do not have any obligation to update, revise or reaffirm this opinion.

 

We have been engaged by the Company to act as its financial advisor to the Board of Directors of the Company and we will receive a fee from the Company for providing such services, a significant portion of which is contingent upon the consummation of the Transaction. We will also receive a fee in connection with providing this opinion. This opinion fee is not contingent upon the consummation of the Transaction or the conclusions reached in our opinion. The Company has also agreed to indemnify us against certain liabilities and reimburse us for certain expenses in connection with our services. We have in the past provided financial advisory and other investment banking services to the Company and the Acquiror and their affiliates for which we received fees, and we may, in the future, provide such services to the Company or the Acquiror, or their affiliates, for which we would receive fees for the rendering of such services. In addition, in the ordinary course of our business, we and our affiliates may actively trade securities of the Company for our own account or the account of our customers and, accordingly, may at any time hold a long or short position in such securities. We may also, in the future, provide investment banking and financial advisory services to the Company, the Acquiror or entities that are affiliated with the Company or the Acquiror, for which we would expect to receive compensation.

 

This opinion is provided to the Board of Directors of the Company in connection with its consideration of the Transaction and is not intended to be and does not constitute a recommendation to any stockholder of the Company as to whether such stockholder should tender its shares in connection with the Transaction or how such stockholder should vote on any matter relating to the Transaction or any other matter. Except with respect to the use of this opinion in connection with the Schedule 14D-9 relating to the Tender Offer or any proxy statement relating to the Merger in accordance with our engagement letter with the Company, this opinion shall not be disclosed, referred to, published or otherwise used (in whole or in part), nor shall any

public references to us be made, without our prior written approval. This opinion has been approved for issuance by the Piper Jaffray Opinion Committee.

 

This opinion addresses solely the fairness, from a financial point of view, to holders of Company Common Stock of the proposed Cash Consideration set forth in the Agreement and does not address any other terms or agreement relating to the Transaction or any other terms of the Agreement. We were not requested to opine as to, and this opinion does not address the basic business decision to proceed with or effect the Transaction, the pre-signing process conducted by the Company, the merits of the Transaction relative to any alternative transaction or business strategy that may be available to the Company, the Acquiror’s or Merger Sub’s ability to fund the Cash Consideration, any other terms contemplated by the Agreement or the fairness of the amount or nature of compensation to the Company’s officers, directors or employees, or any class of such persons, relative to the compensation to be received by holders of Company Common Stock.

 

Based upon and subject to the foregoing and based upon such other factors as we consider relevant, it is our opinion that the Cash Consideration is fair, from a financial point of view, to the holders of Company Common Stock, as of the date hereof.

 

Sincerely,

 

PIPER JAFFRAY & CO.

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