##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-Q
  [X]
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 2004  [  ]
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to _____________ Commission File Number O-4136 Lifecore Biomedical, Inc. 
  Minnesota
    
    41-0948334(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer Identification No.)
 3515 Lyman Boulevard
Chaska, Minnesota
    
    55318(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: 952-368-4300 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes    [X]    No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes    [X]    No [  ] The number of shares outstanding of the registrants Common Stock, $.01 par
value, as of May 3, 2004 was 12,906,050 shares.




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS  
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2004 and June 30, 2003
    
    
    2Condensed Consolidated Statements of Operations for Three Months and Nine Months Ended March 31, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for Nine Months Ended March 31, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5-9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    15Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    16Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    16-17Signatures
    
    
    
    
    18Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 1




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES 
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited) March 31,
    
    June 30,2004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    7,593,000
    
    
    $
    4,211,000Accounts receivable, less allowances
    
    
    7,518,000
    
    
    
    7,795,000Inventories
    
    
    9,641,000
    
    
    
    9,728,000Prepaid expenses
    
    
    677,000
    
    
    
    766,000Total current assets
    
    
    25,429,000
    
    
    
    22,500,000
Property, plant and equipmentLand, building and equipment
    
    
    45,085,000
    
    
    
    44,732,000Less accumulated depreciation
    
    
    (21,656,000
    )
    
    
    (19,820,000
    )23,429,000
    
    
    
    24,912,000Other AssetsIntangibles
    
    
    4,518,000
    
    
    
    4,643,000Security deposits
    
    
    839,000
    
    
    
    843,000Inventories
    
    
    4,253,000
    
    
    
    4,639,000Other
    
    
    564,000
    
    
    
    815,00010,174,000
    
    
    
    10,940,000$
    59,032,000
    
    
    $
    58,352,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesCurrent maturities of long-term obligations
    
    $
    145,000
    
    
    $
    156,000Accounts payable
    
    
    1,784,000
    
    
    
    1,880,000Accrued compensation
    
    
    1,359,000
    
    
    
    1,113,000Accrued expenses
    
    
    2,110,000
    
    
    
    840,000Total current liabilities
    
    
    5,398,000
    
    
    
    3,989,000
Long-term obligations
    
    
    5,878,000
    
    
    
    5,969,000Shareholders equity
    
    
    47,756,000
    
    
    
    48,394,000$
    59,032,000
    
    
    $
    58,352,000
 See accompanying notes to condensed consolidated financial statements. 2




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (continued) 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited) Three months ended March 31,
    
    Nine months ended March 31,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    12,537,000
    
    
    $
    11,833,000
    
    
    $
    34,042,000
    
    
    $
    31,067,000Cost of goods sold
    
    
    5,585,000
    
    
    
    5,413,000
    
    
    
    15,217,000
    
    
    
    14,487,000Gross profit
    
    
    6,952,000
    
    
    
    6,420,000
    
    
    
    18,825,000
    
    
    
    16,580,000
Operating expensesResearch and development
    
    
    1,032,000
    
    
    
    890,000
    
    
    
    3,536,000
    
    
    
    2,858,000Marketing and sales
    
    
    3,555,000
    
    
    
    3,154,000
    
    
    
    10,029,000
    
    
    
    9,059,000General and administrative
    
    
    1,513,000
    
    
    
    1,404,000
    
    
    
    4,764,000
    
    
    
    4,108,000Restructuring charges
    
    
    940,000
    
    
    
    
    
    
    
    940,000
    
    
    
    7,040,000
    
    
    
    5,448,000
    
    
    
    19,269,000
    
    
    
    16,025,000Operating income (loss)
    
    
    (88,000
    )
    
    
    972,000
    
    
    
    (444,000
    )
    
    
    555,000
Other income (expense)Interest income
    
    
    32,000
    
    
    
    3,000
    
    
    
    44,000
    
    
    
    38,000Interest expense
    
    
    (173,000
    )
    
    
    (163,000
    )
    
    
    (482,000
    )
    
    
    (591,000
    )Currency transaction gains
    
    
    193,000
    
    
    
    135,000
    
    
    
    591,000
    
    
    
    234,000Other
    
    
    (13,000
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    (23,000
    )39,000
    
    
    
    (25,000
    )
    
    
    149,000
    
    
    
    (342,000
    )Net income (loss)
    
    $
    (49,000
    )
    
    $
    947,000
    
    
    $
    (295,000
    )
    
    $
    213,000Net income (loss) per shareBasic
    
    $
    0.00
    
    
    $
    0.07
    
    
    $
    (0.02
    )
    
    $
    0.02Diluted
    
    $
    0.00
    
    
    $
    0.07
    
    
    $
    (0.02
    )
    
    $
    0.02Weighted average shares outstandingBasic
    
    
    12,898,331
    
    
    
    12,885,206
    
    
    
    12,892,822
    
    
    
    12,880,683Diluted
    
    
    12,898,331
    
    
    
    12,962,378
    
    
    
    12,892,822
    
    
    
    12,965,972
 See accompanying notes to condensed consolidated financial statements. 3




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (continued) 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited) Nine months ended March 31,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (295,000
    )
    
    $
    213,000Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,969,000
    
    
    
    2,248,000Allowance for doubtful accounts
    
    
    (28,000
    )
    
    
    63,000Accumulated currency translation adjustment
    
    
    (427,000
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    305,000
    
    
    
    566,000Inventories
    
    
    473,000
    
    
    
    (442,000
    )Prepaid expenses
    
    
    89,000
    
    
    
    47,000Accounts payable
    
    
    (96,000
    )
    
    
    (1,738,000
    )Accrued liabilities
    
    
    1,516,000
    
    
    
    295,000Net cash provided by operating activities
    
    
    3,506,000
    
    
    
    1,252,000
Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (353,000
    )
    
    
    (631,000
    )Purchases of intangibles
    
    
    
    
    
    
    (80,000
    )Decrease in security deposits
    
    
    4,000
    
    
    
    9,000Decrease in other assets
    
    
    243,000
    
    
    
    176,000Net cash used in investing activities
    
    
    (106,000
    )
    
    
    (526,000
    )
Cash flows from financing activities:Payments on long-term obligations
    
    
    (103,000
    )
    
    
    (90,000
    )Proceeds from stock issuance
    
    
    85,000
    
    
    
    113,000Net cash provided by (used in) financing activities
    
    
    (18,000
    )
    
    
    23,000Net increase in cash and cash equivalents
    
    
    3,382,000
    
    
    
    749,000Cash and cash equivalents at beginning of period
    
    
    4,211,000
    
    
    
    2,528,000Cash and cash equivalents at end of period
    
    $
    7,593,000
    
    
    $
    3,277,000Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    486,000
    
    
    $
    541,000
 See accompanying notes to condensed consolidated financial statements. 4




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (continued) 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2004 NOTE A  FINANCIAL INFORMATION Lifecore Biomedical, Inc. (referred to in this report as Lifecore or the
Company) develops, manufactures and markets biomaterials and medical devices
for use in various surgical markets through two divisions, the Hyaluronan
Division and the Oral Restorative Division. The Companys manufacturing
facility is located in Chaska, Minnesota. The Hyaluronan Division conducts its
business through original equipment manufacturing and contract manufacturing
alliances in the gynecologic, ophthalmic, orthopedic and veterinary surgery
fields. The Oral Restorative Division conducts its dental surgery business
through direct sales and marketing in the United States, Germany, Italy and
Sweden and through 23 distributors in 35 countries. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Regulation S-X pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of March 31, 2004, the results of operations for the three and nine month
periods ended March 31, 2004 and 2003; and cash flows for the nine month
periods ended March 31, 2004 and 2003. The results of operations for the nine
months ended March 31, 2004 are not necessarily indicative of the results for
the full year or of the results for any future periods. The unaudited
condensed consolidated balance sheet as of June 30, 2003 has been derived from
audited financial statements as of that date. In preparation of the Companys consolidated financial statements, management
is required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses during the reporting
periods. Actual results could differ from the estimates used by management. NOTE B  INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or
market. The portion of finished hyaluronan powder inventory not expected to be
consumed within the next twelve months is classified as a long-term asset.
Finished good inventories include hyaluronan, packaged aseptic, and oral
restorative products. Inventories consist of the following: March 31,
    
    June 30,2004
    
    2003Raw materials
    
    $
    2,907,000
    
    
    $
    2,756,000Work in progress
    
    
    759,000
    
    
    
    344,000Finished goods
    
    
    10,228,000
    
    
    
    11,267,000$
    13,894,000
    
    
    $
    14,367,000
 5




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2004 NOTE C  INTANGIBLE ASSETS The Company does not amortize goodwill and technology or regulatory rights.
The Companys customer list is amortized on the straight-line method over five
years and patents are amortized over their useful lives. On an ongoing basis
the Company reviews the valuation of intangibles to determine possible
impairment by comparing the carrying value to projected undiscounted future
cash flows of the related assets. As a result of such review, there was no
impairment recorded for the nine month period ended March 31, 2004. Intangibles consisted of the following at: March 31,
    
    June 30,2004
    
    2003Goodwill
    
    $
    4,301,000
    
    
    $
    4,301,000Customer list
    
    
    725,000
    
    
    
    725,000Patents
    
    
    387,000
    
    
    
    387,000Accumulated amortization
    
    
    (895,000
    )
    
    
    (770,000
    )$
    4,518,000
    
    
    $
    4,643,000
 NOTE D  AGREEMENTS Lifecore and ETHICON, INC. (ETHICON) have entered into a Conveyance, License,
Development and Supply Agreement (the ETHICON Agreement) whereby ETHICON
transferred to Lifecore its ownership in certain technology related to research
and development previously conducted on the Companys sodium hyaluronan
material. The technology transferred to Lifecore includes written technical
documents related to ETHICONs research and development of a product to inhibit
the formation of postsurgical adhesions. These documents include product
specifications, methods and techniques, technology, know-how and certain
patents. Lifecore assumed responsibility for continuing the anti-adhesion
development project, including conducting a human gynecology clinical trial on
GYNECARE INTERGEL* Adhesion Prevention Solution (INTERGEL Solution), a
second-generation ferric hyaluronan-based product. Lifecore has granted
ETHICON exclusive worldwide marketing rights to the products developed by
Lifecore within defined fields of use through 2008. On March 27, 2003, the
Company announced that ETHICON voluntarily suspended global marketing and sales
of INTERGEL Solution and has voluntarily withdrawn the product from the market
in order to assess information obtained from postmarketing experience with the
device. The assessment will include a review of technical issues, surgical
techniques and circumstances associated with the postmarketing events,
including reports from off-label use. From the launch of the product in August
of 1998 to February 2003, the worldwide complaint rate has been 0.29 percent of
units sold. The contribution of INTERGEL Solution to these events is unknown.
Management does not believe there has been an impairment of hyaluronan assets
as of March 31, 2004. *Trademark of ETHICON 6




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2004 NOTE E  LINE OF CREDIT The Company has a $5,000,000 credit facility with a bank which has a maturity
date of December 31, 2005. The credit facility agreement allows for advances
against eligible accounts receivable, subject to a borrowing base certificate.
Interest is accrued at the prime rate, which was 4.00% at March 31, 2004. At
March 31, 2004 and June 30, 2003, there were no balances outstanding under the
line of credit. The terms of the credit facility agreement require the Company
to comply with various financial covenants, including minimum tangible net
worth, liabilities to tangible net worth ratio and profitability. At March 31,
2004 and June 30, 2003, the Company was in compliance with all covenants. NOTE F  LEGAL PROCEEDINGS Lifecore is a party in four pending lawsuits, all of which allege that the
plaintiffs suffered injuries due to the defective nature of INTERGEL Solution
manufactured by Lifecore and marketed by ETHICON. ETHICON is currently
defending Lifecore in each of these lawsuits. Lifecore also has products
liability insurance that it believes will cover these claims. NOTE G  STOCK PLAN INFORMATION The Company has various stock option plans that provide for the granting of
stock options to officers, employees and directors. The Company accounts for
stock-based compensation using the intrinsic value method whereby the options
are granted at market price, and therefore no compensation costs are
recognized. If compensation expense for the Companys various stock option
plans had been determined based upon the projected fair values at the grant
dates for awards under those plans, the Companys pro-forma net income (loss),
and basic and diluted net income (loss) per common share would have been as
follows: Three months ended March 31,
    
    Nine months ended March 31,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    (49,000
    )
    
    $
    947,000
    
    
    $
    (295,000
    )
    
    $
    213,000Deduct: Total stock-based employee compensation expense
determined under fair value method for awards, net of
related tax effects
    
    
    (10,000
    )
    
    
    (6,000
    )
    
    
    (127,000
    )
    
    
    (73,000
    )Pro forma net income (loss)
    
    $
    (59,000
    )
    
    $
    941,000
    
    
    $
    (422,000
    )
    
    $
    140,000Net income (loss) per common equivalent share:Basic and diluted  as reported
    
    $
    0.00
    
    
    $
    0.07
    
    
    $
    (0.02
    )
    
    $
    0.02Basic and diluted  pro-forma
    
    $
    0.00
    
    
    $
    0.07
    
    
    $
    (0.03
    )
    
    $
    0.01
 7




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2004 NOTE H  NET INCOME (LOSS) PER SHARE The Companys basic net income (loss) per share amounts have been computed by
dividing net income (loss) by the weighted average number of outstanding common
shares. The Companys diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of outstanding common
shares and common share equivalents relating to stock options, when dilutive.
For the three and nine month periods ended March 31, 2004 the Company reported
a net loss, and as such, no common share equivalents were included in the
computation of diluted net loss per share. However, if the Company would have
reported net income in the three and nine month periods ended March 31, 2004,
80,181 and 48,876 common share equivalents, respectfully, would have been
included in the computation of diluted net income per share. For the three and
nine month periods ended March 31, 2003 the Company reported net income and as
a result, 77,172 and 85,289 common share equivalents, respectively, were
included in the computation of diluted net income per share. Options to purchase 2,362,683 and 2,436,458 shares of common stock with a
weighted average exercise price of $12.46 and $12.30 for the three-month and
nine-month periods ended March 31, 2004, respectively, and options to purchase
2,510,494 and 2,501,494 shares of common stock with a weighted average exercise
price of $12.69 and $12.71 for the three-month and nine-month periods ended
March 31, 2003, respectively, were outstanding but were not included in the
calculation of diluted net loss per share because the options exercise prices
were greater than the average market price of the Companys common stock during
those periods. Although these options were antidilutive for the periods
presented, they may be dilutive in future period calculations. NOTE I  SEGMENT INFORMATION The Company operates two business segments. The Hyaluronan Division develops,
manufactures and markets products containing hyaluronan. The Oral Restorative
Division develops, manufactures and markets various oral restorative products
to the area of implant dentistry. Currently, products containing hyaluronan
are sold primarily to customers pursuant to ongoing supply agreements. The
Companys Oral Restorative Division markets products directly to clinicians and
dental laboratories in the United States, Germany, Italy and Sweden and
primarily through distributorship arrangements in other foreign locations. 8




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2004 NOTE I  SEGMENT INFORMATION (continued) Segment assets and the basis of segmentation are consistent with that reported
at June 30, 2003. Segment information for sales and income (loss) from
operations are as follows: Three months ended March 31,
    
    Nine months ended March 31,2004
    
    2003
    
    2004
    
    2003Net salesHyaluronan products
    
    $
    4,475,000
    
    
    $
    4,547,000
    
    
    $
    11,578,000
    
    
    $
    11,656,000Oral restorative products
    
    
    8,062,000
    
    
    
    7,286,000
    
    
    
    22,464,000
    
    
    
    19,411,000$
    12,537,000
    
    
    $
    11,833,000
    
    
    $
    34,042,000
    
    
    $
    31,067,000Income (loss) from operationsHyaluronan products
    
    $
    (233,000
    )
    
    $
    595,000
    
    
    $
    (869,000
    )
    
    $
    732,000Oral restorative products
    
    
    145,000
    
    
    
    377,000
    
    
    
    425,000
    
    
    
    (177,000
    )$
    (88,000
    )
    
    $
    972,000
    
    
    $
    (444,000
    )
    
    $
    555,000
 NOTE J  RESTRUCTURING PLAN During the third quarter of fiscal 2004, the Company announced and implemented
a restructuring plan (the Restructuring Plan). The Restructuring Plan was
implemented to bolster profitability on a going-forward basis, while aligning
resources for future revenue growth. The Restructuring Plan included a
workforce reduction of 10% and resulted in a one-time restructuring charge of
$940,000 in the third quarter of 2004. The components of the restructuring
charge in the third quarter were $876,000 for employee severance costs and
$64,000 for professional fees. 9




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies The discussion and analysis of our financial condition and results of
operations are based upon the Companys consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and assumptions in certain circumstances
that affect the reported amount of assets and liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities at the
date of the Companys financial statements. Management bases its estimates and
judgments on historical experience, observance of trends in the industry,
information provided by customers and other outside sources and on various
other factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. Revenue Recognition: The Companys revenues are recognized when products are shipped to or otherwise
accepted by unaffiliated customers. The Securities and Exchange Commissions
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition provides
guidance on the application of generally accepted accounting principles to
selected revenue recognition issues. The Company has concluded that its
revenue recognition policy is appropriate and in accordance with generally
accepted accounting principles and SAB No. 101. Allowance for Uncollectible Accounts Receivable: Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The Company extends credit to customers in the
normal course of business but generally does not require collateral or any
other security to support amounts due. Management performs on-going credit
evaluations of the Companys customers and bases the estimated allowance on
these evaluations. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or
market and have been reduced to the lower of cost or market for obsolete,
excess or unmarketable inventory. The lower of cost or market adjustment is
based on managements review of inventories on hand compared to estimated
future usage and sales. Goodwill, Intangible and Other Long-Lived Assets: Intangible and certain other long-lived assets with a definite life are
amortized over their useful lives. Useful lives are based on managements
estimates of the period that the assets will generate revenue. The Company reviews goodwill for impairment on a regular basis, at least
annually. Management has reviewed goodwill and other intangibles for impairment and has
concluded that such assets are appropriately valued at the financial statement
dates. 10




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Overview The Company manufactures biomaterials and medical devices for use in various
surgical markets and provides related specialized contract aseptic
manufacturing services. The Company operates through two business divisions,
the Hyaluronan Division and the Oral Restorative Division. The Companys performance continues to be positively affected by growth in the
Oral Restorative Division and the related financial leverage on operating
results. Continued unused manufacturing capacity charges resulting from
reduced hyaluronan production levels and ongoing expenses associated with the
market withdrawal of INTERGEL Solution are negatively impacting the Hyaluronan
Division operating results. The Company recorded a $940,000 restructuring
charge in the quarter ended March 31, 2004 related to a workforce reduction.
The above factors are applicable to both the three month and nine month periods
ended March 31, 2004. Results of Operations Three Months Ended March 31, 2004 Compared to Three Months Ended March 31,
2003: Hyaluronan
    
    Oral RestorativeDivision
    
    Division
    
    Consolidated2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    4,475,000
    
    
    $
    4,547,000
    
    
    $
    8,062,000
    
    
    $
    7,286,000
    
    
    $
    12,537,000
    
    
    $
    11,833,000Cost of goods sold
    
    
    2,715,000
    
    
    
    2,619,000
    
    
    
    2,870,000
    
    
    
    2,794,000
    
    
    
    5,585,000
    
    
    
    5,413,000Gross profit
    
    
    1,760,000
    
    
    
    1,928,000
    
    
    
    5,192,000
    
    
    
    4,492,000
    
    
    
    6,952,000
    
    
    
    6,420,000
Operating expensesResearch and
development
    
    
    761,000
    
    
    
    668,000
    
    
    
    271,000
    
    
    
    222,000
    
    
    
    1,032,000
    
    
    
    890,000Marketing and sales
    
    
    133,000
    
    
    
    164,000
    
    
    
    3,422,000
    
    
    
    2,990,000
    
    
    
    3,555,000
    
    
    
    3,154,000General and
administrative
    
    
    576,000
    
    
    
    501,000
    
    
    
    937,000
    
    
    
    903,000
    
    
    
    1,513,000
    
    
    
    1,404,000Restructuring charges
    
    
    523,000
    
    
    
    
    
    
    
    417,000
    
    
    
    
    
    
    
    940,000
    
    
    
    1,993,000
    
    
    
    1,333,000
    
    
    
    5,047,000
    
    
    
    4,115,000
    
    
    
    7,040,000
    
    
    
    5,448,000Operating income (loss)
    
    $
    (233,000
    )
    
    $
    595,000
    
    
    $
    145,000
    
    
    $
    377,000
    
    
    $
    (88,000
    )
    
    $
    972,000
 Net sales for the quarter ended March 31, 2004 increased $704,000 or 6% as
compared to the same quarter of last fiscal year. Hyaluronan product sales for
the current quarter decreased $72,000 or 2% as compared to the same quarter of
last fiscal year due to decreased gynecologic sales, offset by increased
ophthalmic and veterinary sales. Oral restorative product sales for the
current quarter increased $776,000 or 11% compared to the same quarter of last
fiscal year. Domestic sales increased 11% and international sales increased
10% as compared to the same quarter of last fiscal year. Favorable foreign
currency comparisons increased international sales by $302,000 over the same
quarter of last fiscal year. Consolidated gross margin increased to 55% for the current quarter from 54% for
the same quarter of last fiscal year. The gross margin for the Hyaluronan
Division decreased to 39%, from a gross margin of 42%, due to increased unused
manufacturing capacity charges associated with reduced hyaluronan production.
The gross margin for the Oral Restorative Division increased to 64% for the
current quarter from 62% for the same quarter of last fiscal year. The gross
margin increase is due to sales mix and reduced material costs. 11




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Research and development expenses increased $142,000 or 16% in the current
quarter as compared to the same quarter of last fiscal year. The increase is
due to consulting and professional fees associated with the market withdrawal
of INTERGEL Solution. Marketing and sales expenses increased $401,000 or 13% in the current quarter
as compared to the same quarter of last fiscal year due to increased costs
associated with expansion of oral restoratives domestic sales force and
international operations. General and administrative expenses increased $109,000 or 8% for the current
quarter as compared to the same quarter of last fiscal year. The increase
resulted from increased legal expenses and higher insurance premiums. Restructuring charges of $940,000 were recorded for the current quarter as part
of a 10% workforce reduction. The restructuring charges in the third quarter
consisted of $876,000 for employee severance costs and $64,000 for professional
fees. Net other expense, as shown on the Condensed Consolidated Statements of
Operations, decreased $64,000 for the current quarter as compared to the same
quarter of last fiscal year. The decrease is primarily due to the $58,000
increase in currency transaction gains realized on Euro denominated
intercompany transactions. Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003 Hyaluronan
    
    Oral RestorativeDivision
    
    Division
    
    Consolidated2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    11,578,000
    
    
    $
    11,656,000
    
    
    $
    22,464,000
    
    
    $
    19,411,000
    
    
    $
    34,042,000
    
    
    $
    31,067,000Cost of goods sold
    
    
    6,987,000
    
    
    
    6,707,000
    
    
    
    8,230,000
    
    
    
    7,780,000
    
    
    
    15,217,000
    
    
    
    14,487,000Gross profit
    
    
    4,591,000
    
    
    
    4,949,000
    
    
    
    14,234,000
    
    
    
    11,631,000
    
    
    
    18,825,000
    
    
    
    16,580,000Operating expensesResearch and
development
    
    
    2,755,000
    
    
    
    2,171,000
    
    
    
    781,000
    
    
    
    687,000
    
    
    
    3,536,000
    
    
    
    2,858,000Marketing and sales
    
    
    396,000
    
    
    
    517,000
    
    
    
    9,633,000
    
    
    
    8,542,000
    
    
    
    10,029,000
    
    
    
    9,059,000General and
administrative
    
    
    1,786,000
    
    
    
    1,529,000
    
    
    
    2,978,000
    
    
    
    2,579,000
    
    
    
    4,764,000
    
    
    
    4,108,000Restructuring charges
    
    
    523,000
    
    
    
    
    
    
    
    417,000
    
    
    
    
    
    
    
    940,000
    
    
    
    5,460,000
    
    
    
    4,217,000
    
    
    
    13,809,000
    
    
    
    11,808,000
    
    
    
    19,269,000
    
    
    
    16,025,000Operating income (loss)
    
    $
    (869,000
    )
    
    $
    732,000
    
    
    $
    425,000
    
    
    $
    (177,000
    )
    
    $
    (444,000
    )
    
    $
    555,000
 Net sales for the nine months ended March 31, 2004 increased $2,975,000 or 10%
as compared to the same period of last fiscal year. Hyaluronan product sales
for the current period decreased $78,000 or 1% as compared to the same period
of last fiscal year. A decrease in gynecologic sales was offset by higher
veterinary and ophthalmic sales. Oral restorative product sales for the
current period increased $3,053,000 or 16% compared to the same period of last
fiscal year. Domestic sales increased 10% and international sales increased
22% as compared to the same period of last fiscal year. Favorable foreign
currency comparisons increased international sales by $854,000 over the same
period of last fiscal year. 12




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Consolidated gross margin increased to 55% for the current period from 53% for
the same period of last fiscal year. The gross margin for the Hyaluronan
Division decreased to 40% for the current period from a gross margin of 42% for
the same period of last fiscal year due to increased unused manufacturing
capacity charges associated with reduced hyaluronan production, partially
offset by a more favorable product mix. The gross margin for the Oral
Restorative Division increased to 63% for the current period from 60% for the
same quarter of last fiscal year. The gross margin increase is due to sales
mix and reduced material costs. Research and development expenses increased $678,000 or 24% in the current
period as compared to the same period of last fiscal year. The increase is
primarily due to consulting and professional fees associated with the market
withdrawal of INTERGEL Solution. Marketing and sales expenses increased $970,000 or 11% in the current period as
compared to the same period of last fiscal year due to increased costs
associated with expansion of oral restoratives domestic sales force and
international operations. General and administrative expenses increased $656,000 or 16% for the current
period as compared to the same period of last fiscal year. The increase
resulted from higher legal expenses, higher insurance premiums, and higher
international operation expenses. Restructuring charges of $940,000 were recorded for the current period as part
of a 10% workforce reduction in the third quarter. The restructuring charges
consisted of $876,000 for employee severance costs and $64,000 for professional
fees. Net other expense, as shown on the Condensed Consolidated Statements of
Operations, decreased $491,000 for the current period as compared to the same
period of last fiscal year. The decrease is due to the $357,000 increase in
other income from currency transaction gains realized on Euro denominated
intercompany transactions and reduced interest expenses. Liquidity and Capital Resources The Companys Annual Report on Form 10-K for the year ended June 30, 2003
contains a detailed discussion of Lifecores liquidity and capital resources.
Investors should read the 2003 Form 10-K in conjunction with this Quarterly
Report on Form 10-Q. For the nine month period ended March 31, 2004, the Company had positive cash
flow from operations of $3,506,000. Cash flow from operations was positive in
fiscal years 2003, 2002 and 2001. Charges for unused manufacturing capacity
associated with the Companys hyaluronan production, additional costs
associated with the withdrawal of INTERGEL Solution from the market and
restructuring charges have negatively impacted operating results in the current
fiscal year. Also, marketing and sales expenses for the oral restorative
products are expected to continue at a high level due to continued
international expansion and increased personnel costs. Prior to the current
fiscal year, charges for unused capacity were due to an unanticipated delay in
receiving INTERGEL Solution marketing approval in the U.S. from the FDA. The loan agreement between the Company and the holder of the industrial
development revenue bonds issued to finance the Companys Chaska, Minnesota
facility was amended in May 2003 to waive through June 30, 2004 the fixed
charge coverage ratio and the cash flow coverage ratio. With respect to
certain of these covenants, the Company may be required to obtain further
waivers for fiscal 2005. There can be no assurance that future waivers will be
granted to the Company. 13




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company has a $5,000,000 credit facility with a bank which has a maturity
date of December 31, 2005. The credit facility agreement allows for advances
against eligible accounts receivable, subject to a borrowing base certificate.
Interest is accrued at the prime rate which was 4.00% at March 31, 2004. At
March 31, 2004 and June 30, 2003, there were no balances outstanding under the
line of credit. The terms of the agreement require the Company to comply with
various financial covenants, including minimum tangible net worth, liabilities
to tangible net worth ratio and profitability. At March 31, 2004 and June 30,
2003, the Company was in compliance with all covenants. The Companys ability to generate positive cash flow from operations and
achieve ongoing profitability is dependent upon the continued expansion of
revenue from its hyaluronan and oral restorative businesses. Growth in the
Hyaluronan Division is unpredictable due to the uncertainty associated with the
future market status of INTERGEL Solution, the complex governmental regulatory
environment for new medical products and the early stage of certain of these
markets. Similarly, expansion of the Companys Oral Restorative Division sales
is also dependent upon increased revenue from new and existing customers, as
well as successfully competing in a more mature market. The Company expects
its cash generated from anticipated operations and the available funds under
the line of credit to satisfy cash flow needs in the near term. No assurance
can be given that the Company will maintain positive cash flow from operations.
While the Companys capital resources appear adequate today, the Company may
seek additional financing in the future. If additional financing is necessary,
no assurance can be given that such financing will be available and, if
available, will be on terms favorable to the Company and its shareholders. The Company does not have any material off-balance sheet financing
activities. Cautionary Statement Certain statements in this Form 10-Q are forward-looking statements as defined
in the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which refer to the likelihood of the return of INTERGEL Solution to
the market and the timing of such return; the extent of the impact on
Hyaluronan Division margins from increased unused manufacturing capacity
charges; the level of expenditures related to the process associated with the
assessment of information obtained from postmarketing experience with the
device; the likelihood of adequate cash flow and access to financial markets;
expected production levels; and the future marketing and sales success of Oral
Restorative Division products, are subject to change. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results and those presently anticipated or
projected, such as, unforeseen difficulties or delays in assessing information
obtained from postmarketing experience with INTERGEL Solution, unforeseen
difficulties or delays in interactions with the FDA, and lack of cooperation or
marketing success from marketing partners for the hyaluronan products.
Investors are referred to a more detailed discussion of the risks presented in
the Managements Discussion and Analysis of Financial Condition and Results of
Operations section in the Companys Annual Report on Form 10-K for the year
ended June 30, 2003 as well as Exhibit 99.1 to such Form 10-K. 14




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company invests its excess cash in money market mutual funds and highly
rated corporate debt securities. All investments are held to maturity. The
market risk on such investments is minimal. Receivables from sales to foreign customers are denominated in U.S. dollars.
Transactions at the Companys foreign subsidiaries are denominated in European
Euros at Lifecore Biomedical SpA and Lifecore Biomedical GmbH and are
denominated in Swedish Krona at Lifecore Biomedical AB. The Company is exposed
to foreign currency exchange rate risk arising from transactions in the normal
course of business from sales to its foreign subsidiaries. Because the
Companys products are manufactured or sourced primarily from the United
States, a stronger U.S. dollar generally has a negative impact on results from
operations outside the United States while a weaker dollar generally has a
positive effect. The Company does not use derivative financial instruments to
manage foreign currency fluctuation risk. The Companys outstanding long-term debt carries interest at a fixed rate.
There is no material market risk relating to the Companys long-term debt. 
 ITEM 4. CONTROLS AND PROCEDURES  (a)
    
    Evaluation of disclosure controls and procedures. Under the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer,
the Company evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rule 13a  15(e)
under the Securities Exchange Act of 1934, as amended, (the Exchange Act)).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, the
Companys disclosure controls and procedures were adequately designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in applicable rules and forms.  (b)
    
    Changes in internal control over financial reporting. During the fiscal period covered by this report, there has been no change in
the Companys internal control over financial reporting (as defined in Rule 13a
 15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial
reporting. 15




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES 
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS Lifecore is a party in four pending lawsuits, all of which allege that the
plaintiffs suffered injuries due to the defective nature of INTERGEL Solution
manufactured by Lifecore and marketed by ETHICON. ETHICON is currently
defending Lifecore in each of these lawsuits. Lifecore also has products
liability insurance that it believes will cover these claims.  1.
    
    Contratto v. ETHICON, Inc., Johnson & Johnson, Lifecore Biomedical, Inc.,
and Vital Pharma, Inc. (N.D. California). This case was originally filed
on August 14, 2003, and an amended complaint was filed on September 8,
2003. The complaint alleges claims of negligence, strict products
liability, products liability, defect in design, products liability,
failure to warn, breach of warranty, breach of implied warranty of
merchantability, breach of implied warranty of fitness for a particular
use, intentional misrepresentation, and negligent misrepresentation.2.
    
    Contratto v. ETHICON, Inc., Johnson & Johnson and Lifecore Biomedical,
Inc. (Superior Court of the Sate of California, County of Alameda). This
case was filed on January 27, 2004. This case alleges the same injuries
as the federal court case, but is based on an alleged violation of a
California statute, Section 17200 of the California Business and
Professions Code.3.
    
    Elizabeth Manning v. Lifecore Biomedical, Inc., Johnson & Johnson,
ETHICON, Inc., and Gynecare Worldwide (Carver County, Minnesota).
Lifecore was served with this action on December 29, 2003. Manning alleges
claims of failure to warn, design defect, breach of implied warranty, and
unjust enrichment.4.
    
    Kristin Manning v. Johnson & Johnson, ETHICON, Inc. and Lifecore
Biomedical, Inc. (D. Kansas). This case was filed January 28, 2004. The
complaint alleges claims of negligence, failure to warn, and breach of
implied warranty. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits  3.1
    
    Restated Articles of Incorporation, as amended (incorporated
by reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated
July 13, 1988, to Form 10-Q for the quarter ended December 31,
1987), as amended by Amendment No. 2 (incorporated by reference to
Exhibit 3.1 to Form 10-K for the year ended June 30, 1997)3.2
    
    Amended Bylaws (incorporated by reference to Exhibit 3.2 to
Form 10-K/A for the year ended June 30, 1995)3.3
    
    Form of Rights Agreement, dated as of May 23, 1996, between
the Company and Norwest Bank Minnesota, National Association
(incorporated by reference to Exhibit 1 to the Companys Form 8-A
Registration Statement dated May 31, 1996)4.1
    
    Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to 1987 S-2 Registration Statement [File No.
33-12970])31.1
    
    Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 16




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II  OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)  32.1
    
    Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
    Denotes management contract or compensatory plan, contract or
arrangement.(b)
    
    Reports on Form 8-KA report on Form 8-K was filed on January 15, 2004 (dated January
13, 2004) to report under Item 12 the Companys Fiscal 2004 second
quarter financial results.A report on Form 8-K was filed on January 21, 2004 (dated January
20, 2004) to report under Item 9 that the Company had signed an
exclusive agreement with HEXAL AG, a pharmaceutical company based
in Holzkirchen, Germany, to supply the Companys generic Hyaluronan
knee-injection therapeutic product in Europe.A report on Form 8-K was filed on February 11, 2004 (dated February
10, 2004) to report under Item 9 that the Company had appointed
Dennis J. Allingham, President and Chief Executive Officer and to
the Board of Directors.A report on Form 8-K was filed on March 12, 2004 (dated March 11,
2004) to report under Item 9 that the Company had appointed Larry
Hiebert, Vice President of Operations and David Noel, Vice
President of Finance and Chief Financial Officer.A report on Form 8-K was filed on April 13, 2004 (dated April 13,
2004) to report under Item 12 the Companys Fiscal 2004 third
quarter financial results. 17




---



##### Table of Contents



LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II  OTHER INFORMATION 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. LIFECORE BIOMEDICAL, INC.By:Dated: May 12, 2004
    
    /s/
    
    Dennis J. AllinghamDennis J. AllinghamPresident and Chief Executive OfficerDated: May 12, 2004
    
    /s/
    
    David M. NoelDavid M. NoelVice President of Finance and Chief Financial Officer(principal financial officer)
 18