##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended June 30, 2005
 Commission file number: 0-4136
 
 LIFECORE BIOMEDICAL, INC.
  Minnesota
    
    41-0948334(State or other jurisdiction
    
    (IRS Employerof incorporation or organization)
    
    Identification No.)
 3515 Lyman Boulevard
Chaska, Minnesota 55318-3051
 (952) 368-4300
 None
 Common Stock ($.01 par value)
Preferred Stock Purchase Rights
 
 þ o
 o
 þ o
 o þ
   
 DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESExhibit IndexEX-10.27 Separation AgreementEX-23.1 Consent of Grant Thornton LLPEX-31.1 Certification of CEO Pursuant to Section 302EX-31.2 Certification of CFO Pursuant to Section 302EX-32.1 Certification of CEO Pursuant to Section 906EX-32.2 Certification of CFO Pursuant to Section 906EX-99.1 Risk Factors    Table of Contents  
 PART I
 
 Item 1. Business
 General
 www.lifecore.com
     Ô
   2




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Trademarks
   Hyaluronan Division
 Background
   Strategy
   Establish strategic relationships with market leaders.
  Expand medical applications for hyaluronan.
 3




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 Maintain flexibility in product development and supply relationships.
 Hyaluronan Division Products
  PRODUCT
    
    DESCRIPTION
    
    MARKET
    
    STATUS+OPHTHALMICViscoat® Ophthalmic
Viscoelastic
Solution
    
    Lifecore supplies
hyaluronan powder
for inclusion in
Alcons Viscoat®
ophthalmic
viscoelastic
solution.
    
    Cataract surgery
    
    Commercial sales
since 1986LUROCOAT®
Ophthalmic
Viscoelastic
Solution
    
    Lifecore supplies
its private label
product for
marketing on a
non-exclusive
basis.
    
    Cataract surgery
    
    Commercial sales
since June 1997ORTHOPEDICHyaluronan Solution
for DBX®
Demineralized Bone
Matrix
    
    Lifecore supplies a
sterile hyaluronan
solution to MTF for
use as a carrier
vehicle for its
allogeneic
demineralized,
freeze-dried bone.
    
    Grafting material
for restoration of
bone defects
    
    Commercial sales
since 2000Hyaluron HEXAL®
Orthopedic
Viscosupplement
    
    Lifecore supplies a
finished orthopedic
viscosupplement for
HEXAL AGs
distribution
network.
    
    Injections for the
local treatment of
pain associated
with osteoarthritis
    
    Commercial sales
began in fiscal
2005VETERINARYHY-50®
    
    Lifecore supplies a
finished veterinary
viscosupplement to
Bexco Pharma, Inc.
for use as a
veterinary
orthopedic
injectible drug or
device.
    
    Veterinary
drug/device
    
    Commercial sales
since 1993ADHESION PREVENTIONFeHA Adhesion
Prevention Solution
(formally labeled
GYNECARE INTERGEL
Adhesion Prevention
Solution)
    
    Lifecores
proprietary product
for adhesion
prevention
applications.
    
    Adhesion prevention
    
    Voluntary market
withdrawal) in
March 2003
 
  4




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Ophthalmic Applications
 Cataract Surgery. Ò
      Orthopedic Applications
 Ò
 Veterinary Applications
   5




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Adhesion Prevention Opportunities
   Product Development
   Oral Restorative Division
 Background
  Ô
 6




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Strategy
  
    
    Development or acquisition of a broad line of dental implants, technology and
related dental surgery support products that facilitate the transition from competitive
systems to the Lifecore system.
    
    Development and delivery of unique customer support programs and materials
concentrating on the principles of tooth replacement therapy, practice management
techniques, and marketing and consulting skills training to foster higher patient
acceptance of dental implants.
    
    Increased pentration of markets by expanded direct selling efforts.
    
    Expansion of international markets and additional distribution agreements.
 Oral Restorative Division Products
  PRODUCT
    
    BENEFIT / APPLICATION
    
    STATUSRENOVA Internal Hex Dental
Implant System
    
    Major clinical
segment utilizing
internal hex
connection providing
increased stability;
available in both
straight and tapered
implant systems
offering flexibility
of clinical
treatment.
    
    Commercial salesRESTORE® External Hex Dental
Implant Systems
    
    Time proven external
hex implants with
industry leading
prosthetic fit and
familiar
surgical/restorative
procedures.
    
    Commercial salesSTAGE-1Ô Single Stage
Implant System
    
    Provides the
timesaving benefits
of a one-stage
surgical procedure
with the restorative
simplicity and
reliability of a
Morsetaper prosthetic
connection.
    
    Commercial salesQuick-Cap Impression System
    
    Increases the ease
and efficiency of the
implant restoration
process.
    
    Commercial salesCALMATRIX Calcium Sulfate
Bone Graft Binder
    
    Combined with bone
graft material,
CALMATRIX forms a
putty-like composite
that fills osseous or
periodontal defects
to regenerate bone.
    
    Commercial salesCALFORMA Calcium Sulfate
Bone Graft Barrier
    
    CALFORMA is a
shapeable putty-like
containment barrier
that covers
intra-oral defects
and provides
protection and
undisturbed space for
regeneration.
    
    Commercial salesCAPSET® Calcium Sulfate Bone
Graft Barrier, including SlowSetVersion
    
    For use with natural
and synthetic bone
graft materials as a
resorbable barrier
cap and/or binding
agent.
    
    Commercial salesTefGen Regenerative Membrane
    
    Non-resorbable
membrane for
assisting the
regeneration of bone
defects.
    
    Commercial sales
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Implant Products
      Ô
 Bone Regeneration Products
    8




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Product Development
  Sales and Marketing
 Hyaluronan Division Products
   Oral Restorative Division Products
   Manufacturing
   9




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Competition
  Hyaluronan Products
   10




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Oral Restorative Products
    Patents and Proprietary Rights
    11




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Government Regulation
       12




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Product Liability
  Seasonality
  Employees
  13




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Executive Officers of the Registrant
  Dennis J. Allingham.
 Larry A. Hiebert.
 David M. Noel.
 Kipling Thacker, Ph.D.
 
 Item 2. Properties
  14




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Item 3. Legal Proceedings
  Renee Contratto v. Ethicon, Inc., d/b/a
Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc Contratto .
    
 Item 4. Submission of Matters to a Vote of Security Holders
  15




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##### Table of Contents



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  Fiscal year
    
    Low
    
    
    High2005First Quarter
    
    $
    4.86
    
    
    $
    7.14Second Quarter
    
    
    6.98
    
    
    
    11.59Third Quarter
    
    
    10.13
    
    
    
    18.09Fourth Quarter
    
    
    10.07
    
    
    
    17.202004First Quarter
    
    $
    5.32
    
    
    $
    6.83Second Quarter
    
    
    6.01
    
    
    
    7.19Third Quarter
    
    
    6.17
    
    
    
    8.17Fourth Quarter
    
    
    5.53
    
    
    
    8.20
   16




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Item 6. Selected Financial Data
 SELECTED CONSOLIDATED FINANCIAL DATA
  Years Ended June 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Statements of Operations Data:Net sales
    
    $
    55,221
    
    
    $
    47,036
    
    
    $
    42,441
    
    
    $
    38,794
    
    
    $
    34,136Costs of goods sold
    
    
    21,913
    
    
    
    20,483
    
    
    
    20,379
    
    
    
    22,116
    
    
    
    18,487Gross profit
    
    
    33,308
    
    
    
    26,553
    
    
    
    22,062
    
    
    
    16,678
    
    
    
    15,649Operating expensesResearch and development
    
    
    4,212
    
    
    
    4,519
    
    
    
    4,067
    
    
    
    4,865
    
    
    
    4,704Marketing and sales
    
    
    14,851
    
    
    
    13,782
    
    
    
    12,353
    
    
    
    10,774
    
    
    
    9,284General and administrative
    
    
    6,175
    
    
    
    6,372
    
    
    
    5,543
    
    
    
    5,035
    
    
    
    4,633Restructuring charges
    
    
    
    
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    25,238
    
    
    
    25,809
    
    
    
    21,963
    
    
    
    20,674
    
    
    
    18,621Operating income (loss)
    
    
    8,070
    
    
    
    744
    
    
    
    99
    
    
    
    (3,996
    )
    
    
    (2,972
    )Other income (expense), net.
    
    
    312
    
    
    
    130
    
    
    
    (367
    )
    
    
    (684
    )
    
    
    (729
    )Income (loss) before income taxes
    
    
    8,382
    
    
    
    874
    
    
    
    (268
    )
    
    
    (4,680
    )
    
    
    (3,701
    )Provision (benefit) for income taxes
    
    
    (9,129
    )
    
    
    167
    
    
    
    87
    
    
    
    37
    
    
    
    Net income (loss)
    
    $
    17,511
    
    
    $
    707
    
    
    $
    (355
    )
    
    $
    (4,717
    )
    
    $
    (3,701
    )Net income (loss) per common shareBasic
    
    $
    1.35
    
    
    $
    0.05
    
    
    $
    (0.03
    )
    
    $
    (0.37
    )
    
    $
    (0.29
    )Diluted
    
    $
    1.31
    
    
    $
    0.05
    
    
    $
    (0.03
    )
    
    $
    (0.37
    )
    
    $
    (0.29
    )Weighted average common and common
equivalent shares outstandingBasic
    
    
    12,975
    
    
    
    12,898
    
    
    
    12,882
    
    
    
    12,802
    
    
    
    12,631Diluted
    
    
    13,345
    
    
    
    12,958
    
    
    
    12,882
    
    
    
    12,802
    
    
    
    12,631
 As of June 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Balance Sheet Data:Working capital
    
    $
    36,189
    
    
    $
    21,692
    
    
    $
    18,511
    
    
    $
    17,783
    
    
    $
    14,210Total assets
    
    
    79,866
    
    
    
    60,318
    
    
    
    58,352
    
    
    
    60,096
    
    
    
    62,696Long-term obligations, net
    
    
    5,089
    
    
    
    5,809
    
    
    
    5,969
    
    
    
    6,114
    
    
    
    6,249Shareholders equity
    
    
    67,861
    
    
    
    48,826
    
    
    
    48,394
    
    
    
    48,548
    
    
    
    52,056
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Critical Accounting Policies
  Revenue Recognition:
  Allowance for Uncollectible Accounts Receivable:
  Inventories:
  Goodwill, Intangible and Other Long-Lived Assets:
    Accounting for Income Taxes:
  18




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Recent Accounting Pronouncements
   General
      19




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Ô
  Results of Operations
 Year ended June 30, 2005 compared with year ended June 30, 2004
 Hyaluronan
    
    
    Oral RestorativeDivision
    
    
    Division
    
    
    Consolidated2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    18,488,000
    
    
    $
    15,719,000
    
    
    $
    36,733,000
    
    
    $
    31,317,000
    
    
    $
    55,221,000
    
    
    $
    47,036,000Cost of goods sold
    
    
    9,119,000
    
    
    
    9,183,000
    
    
    
    12,794,000
    
    
    
    11,300,000
    
    
    
    21,913,000
    
    
    
    20,483,000Gross profit
    
    
    9,369,000
    
    
    
    6,536,000
    
    
    
    23,939,000
    
    
    
    20,017,000
    
    
    
    33,308,000
    
    
    
    26,553,000Operating expensesResearch and development
    
    
    3,073,000
    
    
    
    3,467,000
    
    
    
    1,139,000
    
    
    
    1,052,000
    
    
    
    4,212,000
    
    
    
    4,519,000Marketing and sales
    
    
    512,000
    
    
    
    508,000
    
    
    
    14,339,000
    
    
    
    13,274,000
    
    
    
    14,851,000
    
    
    
    13,782,000General and administrative
    
    
    2,299,000
    
    
    
    2,417,000
    
    
    
    3,876,000
    
    
    
    3,955,000
    
    
    
    6,175,000
    
    
    
    6,372,000Restructuring charges
    
    
    
    
    
    
    523,000
    
    
    
    
    
    
    
    613,000
    
    
    
    
    
    
    
    1,136,0005,884,000
    
    
    
    6,915,000
    
    
    
    19,354,000
    
    
    
    18,894,000
    
    
    
    25,238,000
    
    
    
    25,809,000Operating income (loss)
    
    $
    3,485,000
    
    
    $
    (379,000
    )
    
    $
    4,585,000
    
    
    $
    1,123,000
    
    
    $
    8,070,000
    
    
    $
    744,000
 Net Sales.
   Gross profit.
 20




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Research and development.
 Marketing and sales.
 General and administrative.
 Other income (expense).
 Provision (benefit) for income taxes
   21




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Year ended June 30, 2004 compared with year ended June 30, 2003
 Hyaluronan
    
    
    Oral RestorativeDivision
    
    
    Division
    
    
    Consolidated2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Net sales
    
    $
    15,719,000
    
    
    $
    15,659,000
    
    
    $
    31,317,000
    
    
    $
    26,782,000
    
    
    $
    47,036,000
    
    
    $
    42,441,000Cost of goods sold
    
    
    9,183,000
    
    
    
    9,762,000
    
    
    
    11,300,000
    
    
    
    10,617,000
    
    
    
    20,483,000
    
    
    
    20,379,000Gross profit
    
    
    6,536,000
    
    
    
    5,897,000
    
    
    
    20,017,000
    
    
    
    16,165,000
    
    
    
    26,553,000
    
    
    
    22,062,000Operating expensesResearch and development
    
    
    3,467,000
    
    
    
    3,165,000
    
    
    
    1,052,000
    
    
    
    902,000
    
    
    
    4,519,000
    
    
    
    4,067,000Marketing and sales
    
    
    508,000
    
    
    
    664,000
    
    
    
    13,274,000
    
    
    
    11,689,000
    
    
    
    13,782,000
    
    
    
    12,353,000General and administrative
    
    
    2,417,000
    
    
    
    2,035,000
    
    
    
    3,955,000
    
    
    
    3,508,000
    
    
    
    6,372,000
    
    
    
    5,543,000Restructuring charges
    
    
    523,000
    
    
    
    
    
    
    
    613,000
    
    
    
    
    
    
    
    1,136,000
    
    
    
    6,915,000
    
    
    
    5,864,000
    
    
    
    18,894,000
    
    
    
    16,099,000
    
    
    
    25,809,000
    
    
    
    21,963,000Operating income (loss)
    
    $
    (379,000
    )
    
    $
    33,000
    
    
    $
    1,123,000
    
    
    $
    66,000
    
    
    $
    744,000
    
    
    $
    99,000
 Net Sales.
   Gross profit.
  Research and development.
 22




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Marketing and sales.
 General and administrative.
 Restructuring charges.
 Other income (expense).
 Liquidity and Capital Resources
  Cash Provided by Operating Activities .
   Cash Used in Investing Activities
 Cash Provided by Financing Activities.
  23




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Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    
    Year
    
    
    1 to 3 Years
    
    
    3 to 5 Years
    
    
    YearsLong-term debt
    
    $
    5,373,000
    
    
    $
    285,000
    
    
    $
    593,000
    
    
    $
    638,000
    
    
    $
    3,857,000Interest on long-term debt (1)
    
    
    2,254,000
    
    
    
    210,000
    
    
    
    584,000
    
    
    
    512,000
    
    
    
    948,000Operating leases
    
    
    457,000
    
    
    
    226,000
    
    
    
    206,000
    
    
    
    25,000
    
    
    
    Purchase obligations
    
    
    4,317,000
    
    
    
    4,317,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    12,401,000
    
    
    $
    5,038,000
    
    
    $
    1,383,000
    
    
    $
    1,175,000
    
    
    $
    4,805,000
 
  Seasonality
  24




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Cautionary Statement
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    25




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Item 8. Financial Statements and Supplementary Data
  Quarter (Unaudited)First
    
    
    Second
    
    
    Third
    
    
    FourthYear ended June 30, 2005Net sales
    
    $
    12,195,000
    
    
    $
    14,093,000
    
    
    $
    14,134,000
    
    
    $
    14,799,000Gross profit
    
    
    7,209,000
    
    
    
    8,763,000
    
    
    
    8,660,000
    
    
    
    8,676,000Net income
    
    
    1,279,000
    
    
    
    2,380,000
    
    
    
    2,108,000
    
    
    
    11,744,000Net income per shareBasic
    
    $
    0.10
    
    
    $
    0.18
    
    
    $
    0.16
    
    
    $
    0.90Diluted
    
    $
    0.10
    
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.87Weighted average common and common
equivalent shares outstandingBasic
    
    
    12,932,606
    
    
    
    12,945,903
    
    
    
    12,993,379
    
    
    
    13,028,016Diluted
    
    
    12,965,549
    
    
    
    13,270,519
    
    
    
    13,670,465
    
    
    
    13,544,347Year ended June 30, 2004Net sales
    
    $
    9,947,000
    
    
    $
    11,558,000
    
    
    $
    12,537,000
    
    
    $
    12,994,000Gross profit
    
    
    5,178,000
    
    
    
    6,695,000
    
    
    
    6,952,000
    
    
    
    7,728,000Net income (loss)
    
    
    (843,000
    )
    
    
    597,000
    
    
    
    (49,000
    )
    
    
    1,002,000Net income (loss) per shareBasic and diluted
    
    $
    (0.07
    )
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.08Weighted average common and common
equivalent shares outstandingBasic
    
    
    12,889,113
    
    
    
    12,891,083
    
    
    
    12,898,331
    
    
    
    12,912,589Diluted
    
    
    12,889,113
    
    
    
    12,938,352
    
    
    
    12,898,331
    
    
    
    12,971,547
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  26




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Managements Responsibility for Financial Information
    Managements Report on Internal Control over Financial Reporting
    27




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated Framework
    Internal Control 
Integrated Framework Internal Control  Integrated Framework
  
 
 Item 9B. Other Information
  28




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
   
 Item 11. Executive Compensation
   
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  Securities authorized for issuance under equity compensation plans
  Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    
    future issuance underto be issued upon
    
    
    Weighted-average
    
    
    equity compensationexercise of
    
    
    exercise price of
    
    
    plans (excludingoutstanding options,
    
    
    outstanding options,
    
    
    securities reflected inPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    column (a))( a )
    
    
    ( b )
    
    
    ( c )Equity compensation plans approved by security holders:
    
    
    1,720,706
    (1)
    
    $
    10.19
    
    
    
    3,225,961
    (2)Equity compensation plans not approved by security holders:
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,720,706
    
    
    $
    10.19
    
    
    
    3,225,961
 
 (1)
    
    Includes the Companys 1990 Stock Plan and 1996 Stock Plan.(2)
    
    Excludes 53,333 shares of restricted stock granted by the Company under the 1996 Stock Plan.
 29




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Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  Form 10-KPage Reference1.
    
    Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets - June 30, 2005 and 2004
    
    F-2 and F-3Consolidated Statements of Operations - years ended June 30, 2005,2004 and 2003
    
    F-4Consolidated Statements of Shareholders Equity - years ended June 30, 2005,2004 and 2003
    
    F-5Consolidated Statements of Cash Flows - years ended June 30, 2005,2004 and 2003
    
    F-6Notes to Consolidated Financial Statements
    
    F-7 through F-202.
    
    Consolidated Financial Statement ScheduleSchedule II - Valuation and Qualifying Accounts
    
    S-13.
    
    Exhibits
 Description2.1+
    
    Stock Purchase Agreement between ISS and Lifecore dated July 28, 1993 (includes $2 million 5% Promissory
Note dated July 28, 1993 as Exhibit A and Security Agreement as Exhibit B) (incorporated by reference to
Exhibit 2.1 to Form 8-K dated July 8, 1993)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)
 30




---



##### Table of Contents



Description3.3
    
    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])4.2
    
    Indenture of Trust, dated as of August 1, 2004, between City of Chaska, Minnesota and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 4.2 to Form 10-K for the year ended June 30,
2004)10.1+
    
    Hyaluronan Purchase Agreement dated March 28, 1990 between the Company and Alcon (incorporated by
reference to Exhibit 10 to Form 8-K dated April 10, 1990, as amended on Form 8 dated May 23, 1990) as
amended on July 17, 1992, (incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended
June 30, 1992)10.2
    
    Form of Indemnification Agreement entered into between the Company and directors and officers
(incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended June 30, 1995)10.3*
    
    1990 Stock Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration Statement [File No.
33-38914]) as amended by Amendment No. 1 (incorporated by reference to Exhibit 10.13 to Form 10-K for
the year ended June 30, 1994), as amended by Amendment No. 2 (incorporated by reference to Exhibit 10.11
to Form 10-K for the year ended June 30, 1997)10.4+
    
    Conveyance, License, Development and Supply Agreement dated August 8, 1994 between Lifecore Biomedical,
Inc. and ETHICON, INC. (incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended June
30, 1994)10.5*
    
    1996 Stock Option Plan (incorporated by reference to Exhibit 4.1 to S-8 Registration Statement [File No.
333-18515])10.6*
    
    2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to Form 10-K for the year ended
June 30, 2004)10.7
    
    Revolving Credit and Security Agreement dated December 18, 2002 between M & I Marshall & Ilsley Bank and
the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31,
2002)10.8
    
    Amendment No. 1 to Revolving Credit and Security Agreement dated June 27, 2003 between M & I Marshall &
Ilsley Bank and the Company (incorporated by reference to Exhibit 10.21 to Form 10-K for the year ended
June 30, 2003)10.9
    
    Loan Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota and the Company
(incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended June 30, 2004)10.10
    
    Remarketing Agreement, dated as of August 1, 2004, between the Company and Northland Securities, Inc.
(incorporated by reference to Exhibit 10.10 to Form 10-K for the year ended June 30, 2004)10.11
    
    Tax Exemption Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota, the Company and
Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 to Form 10-K for the
year ended June 30, 2004)10.12
    
    Irrevocable Letter of Credit, dated as of August 19, 2004, from M&I Marshall & Ilsley Bank to Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 10.12 to Form 10-K for the year
ended June 30, 2004)10.13
    
    Reimbursement Agreement, dated as of August 1, 2004, between the Company and M&I Marshall & Ilsley Bank
(incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended June 30, 2004)10.14
    
    Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement, dated as
of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit
10.14 to Form 10-K for the year ended June 30, 2004)10.15
    
    Security Agreement, dated as of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank
(incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended June 30, 2004)10.16
    
    Pledge and Security Agreement, dated as of August 1, 2004, between the Company, M&I Marshall & Ilsley
Bank and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.16 to Form 10-K
for the year ended June 30, 2004
 31




---



##### Table of Contents



Description10.17
    
    Bond Purchase Agreement, dated as of August 19, 2004, by and between City of Chaska, Minnesota, the
Company and Northland Securities, Inc. (incorporated by reference to Exhibit 10.17 to Form 10-K for the
year ended June 30, 2004)10.18*
    
    Form of Restricted Stock Agreement for participants under the Lifecore Biomedical, Inc. 1996 Stock Plan
(incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 1, 2004)10.19*
    
    Form of Option Agreement for employees under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated
by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2004)10.20*
    
    Form of Option Agreement for directors under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated
by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2004)10.21*
    
    Form of Change of Control Agreement between the Company and certain executive officers (incorporated by
reference to Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2004)10.22*
    
    Change of Control Agreement, dated as of June 17, 2004, between the Company and Dennis J. Allingham
(incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2004)10.23*
    
    Form of Noncompetition Agreement between the Company and certain executive officers (incorporated by
reference to Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 2004)10.24
    
    Amendment No. 2 dated November 17, 2004 to the Revolving Credit and Security Agreement between the
Company and M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.1 to Form 10-Q for the
quarter ended December 31, 2004)10.25+
    
    Supply Agreement, dated December 22, 2004, between the Company and Alcon Pharmaceuticals Ltd., a
subsidiary of Alcon, Inc. (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended
December 31, 2004)10.26*
    
    Noncompetition and Nonsolicitation Agreement, dated January 7, 2005, between the Company and Kipling
Thacker, Ph.D. (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended December
31, 2004)10.27*
    
    Separation Agreement, dated May 10, 2005, between the Company and Andre P. Decarie23.1
    
    Consent of Grant Thornton LLP31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Risk Factors
 
 +
    
    Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of
these exhibits have been deleted and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment.*
    
    Denotes management contract or compensatory plan, contract or arrangement.
 32




---



##### Table of Contents



SIGNATURES
   Dated: September 13, 2005
    
    /s/ Dennis j. allinghamDennis J. AllinghamPresident, Chief Executive Officer and Secretary
  Dated: September 13, 2005
    
    /s/ Dennis j. allinghamDennis J. AllinghamPresident, Chief Executive Officer, Secretary and Director(principal executive officer)Dated: September 13, 2005
    
    /s/ David m. noelDavid M. NoelVice President of Finance and Chief Financial Officer(principal financial and accounting officer)Dated: September 13, 2005
    
    /s/ Orwin L. CarterOrwin L. CarterDirectorDated: September 13, 2005
    
    /s/ Joan L. GardnerJoan L. GardnerDirectorDated: September 13, 2005
    
    /s/ Thomas H. GarrettThomas H. GarrettDirectorDated: September 13, 2005
    
    /s/ luther t. griffithLuther T. GriffithDirectorDated: September 13, 2005
    
    /s/ Richard W. PerkinsRichard W. PerkinsDirectorDated: September 13, 2005
    
    /s/ John e. RunnellsJohn E. RunnellsDirector
 33




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##### Table of Contents



Exhibit Index
 Description2.1+
    
    Stock Purchase Agreement between ISS and Lifecore dated July 28, 1993 (includes $2 million 5% Promissory
Note dated July 28, 1993 as Exhibit A and Security Agreement as Exhibit B) (incorporated by reference to
Exhibit 2.1 to Form 8-K dated July 8, 1993)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])4.2
    
    Indenture of Trust, dated as of August 1, 2004, between City of Chaska, Minnesota and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 4.2 to Form 10-K for the year ended June 30,
2004)10.1+
    
    Hyaluronan Purchase Agreement dated March 28, 1990 between the Company and Alcon (incorporated by
reference to Exhibit 10 to Form 8-K dated April 10, 1990, as amended on Form 8 dated May 23, 1990) as
amended on July 17, 1992, (incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended
June 30, 1992)10.2
    
    Form of Indemnification Agreement entered into between the Company and directors and officers
(incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended June 30, 1995)10.3*
    
    1990 Stock Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration Statement [File No.
33-38914]) as amended by Amendment No. 1 (incorporated by reference to Exhibit 10.13 to Form 10-K for
the year ended June 30, 1994), as amended by Amendment No. 2 (incorporated by reference to Exhibit 10.11
to Form 10-K for the year ended June 30, 1997)10.4+
    
    Conveyance, License, Development and Supply Agreement dated August 8, 1994 between Lifecore Biomedical,
Inc. and ETHICON, INC. (incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended June
30, 1994)10.5*
    
    1996 Stock Option Plan (incorporated by reference to Exhibit 4.1 to S-8 Registration Statement [File No.
333-18515])10.6*
    
    2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to Form 10-K for the year ended
June 30, 2004)10.7
    
    Revolving Credit and Security Agreement dated December 18, 2002 between M & I Marshall & Ilsley Bank and
the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31,
2002)10.8
    
    Amendment No. 1 to Revolving Credit and Security Agreement dated June 27, 2003 between M & I Marshall &
Ilsley Bank and the Company (incorporated by reference to Exhibit 10.21 to Form 10-K for the year ended
June 30, 2003)10.9
    
    Loan Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota and the Company
(incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended June 30, 2004)10.10
    
    Remarketing Agreement, dated as of August 1, 2004, between the Company and Northland Securities, Inc.
(incorporated by reference to Exhibit 10.10 to Form 10-K for the year ended June 30, 2004)10.11
    
    Tax Exemption Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota, the Company and
Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 to Form 10-K for the
year ended June 30, 2004)
 34




---



##### Table of Contents



Description10.12
    
    Irrevocable Letter of Credit, dated as of August 19, 2004, from M&I Marshall & Ilsley Bank to Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 10.12 to Form 10-K for the year
ended June 30, 2004)10.13
    
    Reimbursement Agreement, dated as of August 1, 2004, between the Company and M&I Marshall & Ilsley Bank
(incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended June 30, 2004)10.14
    
    Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement, dated as
of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit
10.14 to Form 10-K for the year ended June 30, 2004)10.15
    
    Security Agreement, dated as of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank
(incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended June 30, 2004)10.16
    
    Pledge and Security Agreement, dated as of August 1, 2004, between the Company, M&I Marshall & Ilsley
Bank and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.16 to Form 10-K
for the year ended June 30, 2004)10.17
    
    Bond Purchase Agreement, dated as of August 19, 2004, by and between City of Chaska, Minnesota, the
Company and Northland Securities, Inc. (incorporated by reference to Exhibit 10.17 to Form 10-K for the
year ended June 30, 2004)10.18*
    
    Form of Restricted Stock Agreement for participants under the Lifecore Biomedical, Inc. 1996 Stock Plan
(incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 1, 2004)10.19*
    
    Form of Option Agreement for employees under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated
by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2004)10.20*
    
    Form of Option Agreement for directors under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated
by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2004)10.21*
    
    Form of Change of Control Agreement between the Company and certain executive officers (incorporated by
reference to Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2004)10.22*
    
    Change of Control Agreement, dated as of June 17, 2004, between the Company and Dennis J. Allingham
(incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2004)10.23*
    
    Form of Noncompetition Agreement between the Company and certain executive officers (incorporated by
reference to Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 2004)10.24
    
    Amendment No. 2 dated November 17, 2004 to the Revolving Credit and Security Agreement between the
Company and M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.1 to Form 10-Q for the
quarter ended December 31, 2004)10.25+
    
    Supply Agreement, dated December 22, 2004, between the Company and Alcon Pharmaceuticals Ltd., a
subsidiary of Alcon, Inc. (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended
December 31, 2004)10.26*
    
    Noncompetition and Nonsolicitation Agreement, dated January 7, 2005, between the Company and Kipling
Thacker, Ph.D. (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended December
31, 2004)10.27*
    
    Separation Agreement, dated May 10, 2005, between the Company and Andre P. Decarie23.1
    
    Consent of Grant Thornton LLP31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 35




---



##### Table of Contents



Description99.1
    
    Risk Factors
 
 +
    
    Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of
these exhibits have been deleted and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment.*
    
    Denotes management contract or compensatory plan, contract or arrangement.
 36




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal ControlIntegrated
Framework
 
 F-1




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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 CONSOLIDATED BALANCE SHEETS
June 30,
 2005
    
    
    2004ASSETSCURRENT
ASSETSCash and cash equivalents
    
    $
    18,508,000
    
    
    $
    8,553,000Accounts receivable, less allowances
    
    
    10,171,000
    
    
    
    8,626,000Inventories
    
    
    9,456,000
    
    
    
    9,491,000Deferred income taxes
    
    
    4,190,000
    
    
    
    Prepaid expenses
    
    
    780,000
    
    
    
    705,000Total current assets
    
    
    43,105,000
    
    
    
    27,375,000PROPERTY, PLANT AND EQUIPMENT  AT COSTLand
    
    
    249,000
    
    
    
    249,000Building
    
    
    23,970,000
    
    
    
    23,970,000Equipment
    
    
    19,669,000
    
    
    
    17,672,000Land and building improvements
    
    
    3,512,000
    
    
    
    3,507,00047,400,000
    
    
    
    45,398,000Less accumulated depreciation
    
    
    (24,211,000
    )
    
    
    (22,200,000
    )23,189,000
    
    
    
    23,198,000OTHER ASSETSIntangibles
    
    
    4,799,000
    
    
    
    4,663,000Security deposits
    
    
    7,000
    
    
    
    837,000Inventories
    
    
    2,409,000
    
    
    
    3,891,000Deferred income taxes
    
    
    6,062,000
    
    
    
    Other
    
    
    295,000
    
    
    
    354,00013,572,000
    
    
    
    9,745,000$
    79,866,000
    
    
    $
    60,318,000
 F-2




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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 CONSOLIDATED BALANCE SHEETS  (continued)
June 30,
 2005
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of long-term obligations
    
    $
    285,000
    
    
    $
    177,000Accounts payable
    
    
    3,418,000
    
    
    
    2,467,000Accrued compensation
    
    
    1,920,000
    
    
    
    1,362,000Accrued expenses
    
    
    1,293,000
    
    
    
    1,677,000Total current liabilities
    
    
    6,916,000
    
    
    
    5,683,000LONG-TERM OBLIGATIONS
    
    
    5,089,000
    
    
    
    5,809,000COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITYPreferred
stock  authorized, 25,000,000 shares of $1.00 stated
value; none issued
    
    
    
    
    
    
    Preferred stock, Series A Junior Participating  authorized,
500,000 shares of $1.00 par value; none issued
    
    
    
    
    
    
    Common stock
 authorized, 50,000,000 shares of
$.01 stated value; issued and outstanding, 13,054,312 and
12,931,758 shares at June 30, 2005 and 2004
    
    
    130,000
    
    
    
    129,000Accumulated currency translation adjustment
    
    
    (656,000
    )
    
    
    (422,000
    )Additional paid-in capital
    
    
    91,194,000
    
    
    
    89,116,000Deferred stock-based compensation
    
    
    (321,000
    )
    
    
    Accumulated deficit
    
    
    (22,486,000
    )
    
    
    (39,997,000
    )67,861,000
    
    
    
    48,826,000$
    79,866,000
    
    
    $
    60,318,000
  F-3




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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
 2005
    
    
    2004
    
    
    2003Net sales
    
    $
    55,221,000
    
    
    $
    47,036,000
    
    
    $
    42,441,000Cost of goods sold
    
    
    21,913,000
    
    
    
    20,483,000
    
    
    
    20,379,000Gross profit
    
    
    33,308,000
    
    
    
    26,553,000
    
    
    
    22,062,000Operating expensesResearch and development
    
    
    4,212,000
    
    
    
    4,519,000
    
    
    
    4,067,000Marketing and sales
    
    
    14,851,000
    
    
    
    13,782,000
    
    
    
    12,353,000General and administrative
    
    
    6,175,000
    
    
    
    6,372,000
    
    
    
    5,543,000Restructuring charges
    
    
    
    
    
    
    1,136,000
    
    
    
    25,238,000
    
    
    
    25,809,000
    
    
    
    21,963,000Operating income
    
    
    8,070,000
    
    
    
    744,000
    
    
    
    99,000Other income (expense)Interest income
    
    
    217,000
    
    
    
    52,000
    
    
    
    49,000Interest expense
    
    
    (280,000
    )
    
    
    (642,000
    )
    
    
    (757,000
    )Bond retirement expense
    
    
    (290,000
    )
    
    
    
    
    
    
    Currency transaction gains
    
    
    299,000
    
    
    
    650,000
    
    
    
    356,000Other, net
    
    
    366,000
    
    
    
    70,000
    
    
    
    (15,000
    )312,000
    
    
    
    130,000
    
    
    
    (367,000
    )Income (loss) before income taxes
    
    
    8,382,000
    
    
    
    874,000
    
    
    
    (268,000
    )Provision (benefit) for income taxes
    
    
    (9,129,000
    )
    
    
    167,000
    
    
    
    87,000Net income (loss)
    
    $
    17,511,000
    
    
    $
    707,000
    
    
    $
    (355,000
    )Net income (loss) per common shareBasic
    
    $
    1.35
    
    
    $
    0.05
    
    
    $
    (0.03
    )Diluted
    
    $
    1.31
    
    
    $
    0.05
    
    
    $
    (0.03
    )Weighted average common and common equivalent
shares outstandingBasic
    
    
    12,974,730
    
    
    
    12,897,737
    
    
    
    12,881,863Diluted
    
    
    13,344,642
    
    
    
    12,957,726
    
    
    
    12,881,863
  F-4




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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 AccumulatedCommon Stock
    
    
    Currency
    
    
    Additional
    
    
    DeferredShares
    
    
    
    
    
    
    Translation
    
    
    Paid-In
    
    
    Stock-based
    
    
    AccumulatedIssued
    
    
    Amount
    
    
    Adjustment
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    TotalBalances at June 30, 2002
    
    
    12,867,742
    
    
    $
    129,000
    
    
    $
    
    
    
    $
    88,768,000
    
    
    
    
    
    
    $
    (40,349,000
    )
    
    $
    48,548,000Exercise of stock options and stock awards
    
    
    17,675
    
    
    
    
    
    
    
    
    
    
    
    114,000
    
    
    
    

    
    
    
    
    
    
    
    114,000Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    (355,000
    )
    
    
    (355,000
    )Addition to accumulated currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    87,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,000Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (268,000
    )Balances at June 30, 2003
    
    
    12,885,417
    
    
    
    129,000
    
    
    
    87,000
    
    
    
    88,882,000
    
    
    
    
    
    
    
    (40,704,000
    )
    
    
    48,394,000Exercise of stock options and stock awards
    
    
    46,341
    
    
    
    
    
    
    
    
    
    
    
    234,000
    
    
    
    
    
    
    
    
    
    
    
    234,000Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    707,000
    
    
    
    707,000Addition to accumulated currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    (509,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (509,000
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198,000Balances at June 30, 2004
    
    
    12,931,758
    
    
    
    129,000
    
    
    
    (422,000
    )
    
    
    89,116,000
    
    
    
    
    
    
    
    (39,997,000
    )
    
    
    48,826,000Exercise of stock options and stock awards
    
    
    102,554
    
    
    
    1,000
    
    
    
    
    
    
    
    768,000
    
    
    
    
    
    
    
    
    
    
    
    769,000Issuance of restricted stock
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    512,000
    
    
    
    (321,000
    )
    
    
    
    
    
    
    191,000Tax benefits from exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798,000
    
    
    
    
    
    
    
    
    
    
    
    798,000Comprehensive income:Addition to accumulated currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    (234,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (234,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,511,000
    
    
    
    17,511,000Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,277,000Balances at June 30, 2005
    
    
    13,054,312
    
    
    $
    130,000
    
    
    $
    (656,000
    )
    
    $
    91,194,000
    
    
    $
    (321,000
    )
    
    $
    (22,486,000
    )
    
    $
    67,861,000
  F-5




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
 2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    17,511,000
    
    
    $
    707,000
    
    
    $
    (355,000
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,087,000
    
    
    
    2,520,000
    
    
    
    2,874,000Deferred income taxes
    
    
    (10,252,000
    )
    
    
    
    
    
    
    Tax benefits from stock options
    
    
    798,000
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    191,000
    
    
    
    
    
    
    
    Allowance for doubtful accounts
    
    
    90,000
    
    
    
    (7,000
    )
    
    
    89,000Accumulated currency translation adjustment
    
    
    (234,000
    )
    
    
    (509,000
    )
    
    
    87,000Changes in operating assets and liabilitiesAccounts receivable
    
    
    (1,635,000
    )
    
    
    (823,000
    )
    
    
    (2,000
    )Inventories
    
    
    1,517,000
    
    
    
    985,000
    
    
    
    759,000Prepaid expenses
    
    
    (74,000
    )
    
    
    61,000
    
    
    
    231,000Accounts payable
    
    
    951,000
    
    
    
    587,000
    
    
    
    (1,620,000
    )Accrued liabilities
    
    
    174,000
    
    
    
    1,086,000
    
    
    
    158,000Net cash provided by operating activities
    
    
    11,124,000
    
    
    
    4,607,000
    
    
    
    2,221,000Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (2,002,000
    )
    
    
    (666,000
    )
    
    
    (744,000
    )Purchases of intangibles
    
    
    (200,000
    )
    
    
    
    
    
    
    Decrease in security deposits
    
    
    830,000
    
    
    
    6,000
    
    
    
    2,000Decrease in other assets
    
    
    47,000
    
    
    
    300,000
    
    
    
    218,000Net cash used in investing activities
    
    
    (1,325,000
    )
    
    
    (360,000
    )
    
    
    (524,000
    )Cash flows from financing activities:Payments on long-term obligations
    
    
    (256,000
    )
    
    
    (139,000
    )
    
    
    (128,000
    )Issuance of industrial revenue bonds
    
    
    5,630,000
    
    
    
    
    
    
    
    Retirement of industrial revenue bonds
    
    
    (5,986,000
    )
    
    
    
    
    
    
    Proceeds from stock options exercised
    
    
    768,000
    
    
    
    234,000
    
    
    
    114,000Net cash provided by (used in) financing activities
    
    
    156,000
    
    
    
    95,000
    
    
    
    (14,000
    )Net increase in cash and cash equivalents
    
    
    9,955,000
    
    
    
    4,342,000
    
    
    
    1,683,000Cash and cash equivalents at beginning of year
    
    
    8,553,000
    
    
    
    4,211,000
    
    
    
    2,528,000Cash and cash equivalents at end of year
    
    $
    18,508,000
    
    
    $
    8,553,000
    
    
    $
    4,211,000Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    330,000
    
    
    $
    645,000
    
    
    $
    713,000Taxes
    
    
    494,000
    
    
    
    87,000
    
    
    
    61,000
  F-6




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    Consolidation
  Cash and Cash Equivalents
  Accounts Receivable
  F-7




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE A
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
 Inventories
  As of June 30,2005
    
    
    2004Raw materials
    
    $
    3,102,000
    
    
    $
    2,756,000Work-in-process
    
    
    426,000
    
    
    
    416,000Finished goods-current
    
    
    5,928,000
    
    
    
    6,319,0009,456,000
    
    
    
    9,491,000Finished goods-long term
    
    
    2,409,000
    
    
    
    3,891,000$
    11,865,000
    
    
    $
    13,382,000
 Depreciation
  Number ofyearsBuilding
    
    7-40Equipment
    
    3-7Land and building improvements
    
    7-40
 Intangibles
   F-8




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE A
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
   2005
    
    
    2004Goodwill
    
    $
    4,352,000
    
    
    $
    4,352,000Patents
    
    
    387,000
    
    
    
    387,000Distribution rights and licenses
    
    
    350,000
    
    
    
    150,000Less accumulated amortization
    
    
    (290,000
    )
    
    
    (226,000
    )$
    4,799,000
    
    
    $
    4,663,000
 Revenue Recognition
  . Income taxes
  F-9




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE A
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
 Comprehensive Income (Loss)
  Net Income (Loss) Per Common Share
   F-10




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE A
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
 Stock Based Compensation
  2005
    
    
    2004
    
    
    2003Net income (loss), as reported
    
    $
    17,511,000
    
    
    $
    707,000
    
    
    $
    (355,000
    )Deduct: Total stock-based employee compensation expense
determined under fair value method for awards, net of
related tax effects (no tax effect in 2004 and 2003)
    
    
    (834,000
    )
    
    
    (1,978,000
    )
    
    
    (1,799,000
    )Pro forma net income (loss)
    
    $
    16,677,000
    
    
    $
    (1,271,000
    )
    
    $
    (2,154,000
    )Net income (loss) per common equivalent share:Basic  as reported
    
    $
    1.35
    
    
    $
    0.05
    
    
    $
    (0.03
    )Diluted  as reported
    
    $
    1.31
    
    
    $
    0.05
    
    
    $
    (0.03
    )Basic  pro-forma
    
    $
    1.29
    
    
    $
    (0.10
    )
    
    $
    (0.17
    )Diluted  pro-forma
    
    $
    1.25
    
    
    $
    (0.10
    )
    
    $
    (0.17
    )
  2005
    
    2004
    
    2003Risk-free interest rate
    
    
    3.9
    %
    
    
    3.8
    %
    
    
    3.8
    %Expected volatility
    
    
    69.6
    %
    
    
    81.6
    %
    
    
    86.6
    %Expected life (in years)
    
    
    5.4
    
    
    
    6.2
    
    
    
    6.0Dividend yield
    
    
    
    
    
    
    
    
    
    
    
 Recent Accounting Pronouncements
  F-11




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE A
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
  NOTE B
 LINE OF CREDIT
  NOTE C  LONG-TERM OBLIGATIONS
 Industrial Development Revenue Bond
  F-12




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE C
 LONG-TERM OBLIGATIONS (continued)
   As of June 30,2005
    
    
    2004Industrial development revenue bonds
    
    $
    5,374,000
    
    
    $
    5,986,000Less current maturities
    
    
    (285,000
    )
    
    
    (177,000
    )$
    5,089,000
    
    
    $
    5,809,000
  2006
    
    $
    285,0002007
    
    
    290,0002008
    
    
    304,0002009
    
    
    314,0002010
    
    
    324,000Thereafter
    
    
    3,857,000$
    5,374,000
 NOTE D
 INCOME TAXES
  2005
    
    
    2004
    
    
    2003CurrentFederal
    
    $
    129,000
    
    
    $
    23,000
    
    
    $
    State
    
    
    57,000
    
    
    
    
    
    
    
    Foreign
    
    
    139,000
    
    
    
    144,000
    
    
    
    87,000Deferred
    
    
    2,468,000
    
    
    
    
    
    
    
    Benefit from release of valuation allowance
    
    
    (11,922,000
    )
    
    
    
    
    
    
    $
    (9,129,000
    )
    
    $
    167,000
    
    
    $
    87,000
 F-13




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE D
 INCOME TAXES  (continued)
  2005
    
    
    2004Current deferred tax assets:Net operating loss carryforward
    
    $
    3,000,000
    
    
    $
    1,500,000Inventories
    
    
    798,000
    
    
    
    1,892,000Other
    
    
    461,000
    
    
    
    419,000Current deferred tax asset before valuation allowance
    
    
    4,259,000
    
    
    
    3,811,000Current deferred tax liabilities:Prepaid expenses
    
    
    (69,000
    )
    
    
    (197,000
    )Current deferred tax liabilities
    
    
    (69,000
    )
    
    
    (197,000
    )Net current deferred tax asset before valuation allowance
    
    
    4,190,000
    
    
    
    3,614,000Valuation allowance
    
    
    
    
    
    
    (3,614,000
    )Net current deferred tax asset
    
    $
    4,190,000
    
    
    $
    Long-term deferred tax assets:Net operating loss carryforward
    
    $
    7,550,000
    
    
    $
    9,822,000Tax credit carryforward
    
    
    1,213,000
    
    
    
    1,054,000Amortization of intangibles
    
    
    15,000
    
    
    
    15,000Long-term deferred tax assets before valuation allowance
    
    
    8,778,000
    
    
    
    10,891,000Long-term deferred tax liabilities:Depreciation
    
    
    (1,042,000
    )
    
    
    (805,000
    )Customer list
    
    
    
    
    
    
    (20,000
    )Long-term deferred tax liabilities before valuation
allowance
    
    
    (1,042,000
    )
    
    
    (825,000
    )Net long-term deferred tax asset before valuation
allowance
    
    
    7,736,000
    
    
    
    10,066,000Valuation allowance
    
    
    (1,674,000
    )
    
    
    (10,066,000
    )Net long-term deferred tax asset
    
    $
    6,062,000
    
    
    $
    
   F-14




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE D
 INCOME TAXES  (continued)
    2005
    
    2004
    
    2003Statutory income tax rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    (34.0
    )%State taxes, net of federal benefit
    
    
    2.3
    %
    
    
    1.1
    %
    
    
    0.0
    %Research and development credits
    
    
    (0.8
    )%
    
    
    (13.7
    )%
    
    
    (85.1
    )%Foreign sales deduction
    
    
    (7.9
    )%
    
    
    (30.5
    )%
    
    
    (95.1
    )%Other permanent differences
    
    
    0.8
    %
    
    
    7.8
    %
    
    
    19.1
    %Benefit from release of valuation allowance
    
    
    (142.2
    )%
    
    
    0.0
    %
    
    
    0.0
    %Change in valuation allowance
    
    
    7.3
    %
    
    
    24.1
    %
    
    
    227.7
    %Other
    
    
    (2.4
    )%
    
    
    (3.7
    )%
    
    
    0.0
    %(108.9
    )%
    
    
    19.1
    %
    
    
    32.5
    %
 NOTE E  SHAREHOLDERS EQUITY
 Stock Option Plans
  F-15




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE E
 SHAREHOLDERS EQUITY  (continued)
  Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceOutstanding at June 30, 2002
    
    
    2,823,210
    
    
    $
    11.87Granted
    
    
    203,267
    
    
    
    7.62Exercised
    
    
    (17,575
    )
    
    
    6.41Canceled
    
    
    (70,599
    )
    
    
    11.46Outstanding at June 30, 2003
    
    
    2,938,303
    
    
    
    11.66Granted
    
    
    342,000
    
    
    
    6.48Exercised
    
    
    (46,341
    )
    
    
    5.07Canceled
    
    
    (482,322
    )
    
    
    10.48Outstanding at June 30, 2004
    
    
    2,751,640
    
    
    
    11.28Granted
    
    
    189,000
    
    
    
    9.84Exercised
    
    
    (102,554
    )
    
    
    7.51Canceled
    
    
    (1,117,380
    )
    
    
    13.06Outstanding at June 30, 2005
    
    
    1,720,706
    
    
    $
    10.19
 Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceOptions exercisable at June 30:2005
    
    
    1,395,106
    
    
    $
    10.662004
    
    
    2,329,865
    
    
    
    11.622003
    
    
    2,213,838
    
    
    
    12.10
 F-16




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE E
 SHAREHOLDERS EQUITY  (continued)
  Options OutstandingRange of
    
    
    
    
    
    
    Number
    
    
    Weighted Average Remaining
    
    Weighted AverageExercise Price
    
    
    
    
    
    
    Outstanding
    
    
    Contractual Life
    
    Exercise Price$   3.55
    
    
    
    
    
    
    5.82
    
    
    
    
    
    
    
    125,250
    
    
    6.6 years
    
    $
    5.275.83
    
    
    
    
    
    
    8.75
    
    
    
    
    
    
    
    747,038
    
    
    7.1 years
    
    
    7.228.76
    
    
    
    
    
    
    13.12
    
    
    
    
    
    
    
    393,375
    
    
    6.3 years
    
    
    10.1113.13
    
    
    
    
    
    
    19.68
    
    
    
    
    
    
    
    424,043
    
    
    2.6 years
    
    
    16.1019.69
    
    
    
    
    
    
    23.38
    
    
    
    
    
    
    
    31,000
    
    
    2.5 years
    
    
    21.551,720,706
    
    
    
    
    $
    10.19
 Options ExercisableRange of
    
    
    
    
    
    
    Number
    
    
    Weighted AverageExercise Price
    
    
    
    
    
    
    Exercisable
    
    
    Exercise Price$   3.55
    
    
    
    
    
    
    5.82
    
    
    
    
    
    
    
    86,150
    
    
    $
    5.315.83
    
    
    
    
    
    
    8.75
    
    
    
    
    
    
    
    584,163
    
    
    
    7.168.76
    
    
    
    
    
    
    13.12
    
    
    
    
    
    
    
    269,750
    
    
    
    10.1613.13
    
    
    
    
    
    
    19.68
    
    
    
    
    
    
    
    424,043
    
    
    
    16.1019.69
    
    
    
    
    
    
    23.38
    
    
    
    
    
    
    
    31,000
    
    
    
    21.551,395,106
    
    
    $
    10.66
  Issuance of Restricted Stock
  F-17




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE E
 SHAREHOLDERS EQUITY  (continued)
 Shareholder Rights Plan
   NOTE F  COMMITMENTS AND CONTINGENCIES
 Royalty Agreements
  Severance Agreements
  Legal Proceedings
  F-18




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE G  EMPLOYEE BENEFIT PLAN
  NOTE H  SEGMENT INFORMATION
   Year ended June 30,2005
    
    
    2004
    
    
    2003Net salesHyaluronan products
    
    $
    18,488,000
    
    
    $
    15,719,000
    
    
    $
    15,659,000Oral restorative products
    
    
    36,733,000
    
    
    
    31,317,000
    
    
    
    26,782,000$
    55,221,000
    
    
    $
    47,036,000
    
    
    $
    42,441,000Operating income (loss)Hyaluronan products
    
    $
    3,485,000
    
    
    $
    (379,000
    )
    
    $
    33,000Oral restorative products
    
    
    4,585,000
    
    
    
    1,123,000
    
    
    
    66,000$
    8,070,000
    
    
    $
    744,000
    
    
    $
    99,000Capital expendituresHyaluronan products
    
    $
    1,316,000
    
    
    $
    369,000
    
    
    $
    444,000Oral restorative products
    
    
    686,000
    
    
    
    297,000
    
    
    
    300,000$
    2,002,000
    
    
    $
    666,000
    
    
    $
    744,000Depreciation and amortization expenseHyaluronan products
    
    $
    1,172,000
    
    
    $
    1,823,000
    
    
    $
    2,120,000Oral restorative products
    
    
    915,000
    
    
    
    697,000
    
    
    
    724,000$
    2,087,000
    
    
    $
    2,520,000
    
    
    $
    2,844,000
 As of June 30,2005
    
    
    2004Identifiable assetsHyaluronan products
    
    $
    35,838,000
    
    
    $
    31,899,000Oral restorative products
    
    
    25,878,000
    
    
    
    20,847,000General corporate
    
    
    18,150,000
    
    
    
    7,572,000$
    79,866,000
    
    
    $
    60,318,000
 F-19




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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 NOTE I  AGREEMENTS
  
  NOTE J
 RESTRUCTURING PLAN
   EmployeeSeverance
    
    
    OutplacementCosts
    
    
    Fees
    
    
    TotalBalances at June 30, 2003
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring charges
    
    
    1,072,000
    
    
    
    64,000
    
    
    
    1,136,000Amounts utilized
    
    
    (621,000
    )
    
    
    (38,000
    )
    
    
    (659,000
    )Balances at June 30, 2004
    
    
    451,000
    
    
    
    26,000
    
    
    
    477,000Amounts utilized
    
    
    (451,000
    )
    
    
    (26,000
    )
    
    
    (477,000
    )Balances at June 30, 2005
    
    $
    
    
    
    $
    
    
    
    $
    
 NOTE K
 RECLASSIFICATIONS
  F-20




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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 Balance at
    
    
    Charged to
    
    
    Charged toBeginning
    
    
    Costs and
    
    
    Other
    
    
    
    
    
    
    Balance at EndDescription
    
    of Period
    
    
    Expenses
    
    
    Accounts
    
    
    Deductions
    
    
    of PeriodYear ended
June 30, 2005
Accounts receivable
allowance
    
    $
    407,000
    
    
    $
    227,000
    
    
    $
    
    
    
    $
    (138,000
    )(A)
    
    $
    496,000Year ended
June 30, 2004
Accounts receivable
allowance
    
    
    414,000
    
    
    
    194,000
    
    
    
    
    
    
    
    (201,000
    )(A)
    
    
    407,000Year ended
June 30, 2003
Accounts receivable
allowance
    
    
    325,000
    
    
    
    171,000
    
    
    
    
    
    
    
    (82,000
    )(A)
    
    
    414,000
 
 (A)
    
    Deductions represent accounts receivable balances written-off during the year. S-1