##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K   x
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended June 30, 2004
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
(Address of principal executive offices, including zip code) Registrants telephone number, including area code: (952) 368-4300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:Common Stock ($.01 par value)
Preferred Stock Purchase Rights
(Title of Class)   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 o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act. Yes x No o The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant based upon the closing price of the
registrants stock, as quoted on the Nasdaq National Market on December 31,
2003, the last business day of the registrants most recently completed second
fiscal quarter, as quoted on the Nasdaq National Market, was $57,560,609.
Shares of common stock held by each officer and director and by each person or
group who owns 5% or more of the outstanding common stock have been excluded
given that such persons or groups may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The number of shares outstanding of the registrants Common Stock, $.01
par value, as of August 27, 2004 was 12,932,958 shares.   DOCUMENTS INCORPORATED BY REFERENCE
 Certain responses to Part III are incorporated by reference to information
contained in the Companys definitive Proxy Statement for its 2004 Annual
Meeting to be filed with the Commission within 120 days after the end of the
registrants fiscal year.




---



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 SchedulesSIGNATURESREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSCHEDULE II  VALUATION AND QUALIFYING ACCOUNTSEXHIBIT INDEXEX-4.2 Indenture of TrustEX-10.6 2003 Stock Incentive PlanEX-10.9 Loan AgreementEX-10.10 Remarketing AgreementEX-10.11 Tax Exemption AgreementEX-10.12 Irrevocable Letter of CreditEX-10.13 Reimbursement AgreementEX-10.14 Mortgage, Security Agreement, Assignment of Leases and RentsEX-10.15 Security AgreementEX-10.16 Pledge and Security AgreementEX-10.17 Bond Purchase AgreementEX-23.1 Consent of Grant Thornton LLPEX-31.1 Certification of Dennis J. Allingham - Section 302EX-31.2 Certification of David M. Noel - Section 302EX-32.1 Certification of Dennis J. Allingham - Section 906EX-32.2 Certification of David M. Noel - Section 906EX-99.1 Risk Factors    Table of Contents  
 PART I 
 Item 1. Business Lifecore Biomedical, Inc. (Lifecore or the Company) manufactures
biomaterials and medical devices for use in various surgical markets. The
Company was incorporated in the State of Minnesota in 1965. The Company
operates two divisions, the Hyaluronan Division and the Oral Restorative
Division. Further information about Lifecore can be obtained from Lifecores
internet website at www.lifecore.com, however, the contents of the website are
not intended to be a part of this Form 10-K and are not incorporated by
reference. Also, Lifecore makes available free of charge through its internet
website the Companys Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the Exchange Act), as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the
Securities and Exchange Commission. The Companys Hyaluronan Division is principally involved in the
development and manufacture of products utilizing hyaluronan, a naturally
occurring polysaccharide that is widely distributed in the extracellar matrix
of connective tissues in both animals and humans. The Hyaluronan Division primarily sells into three medical segments: 1)
Ophthalmic, 2) Orthopedic, and 3) Veterinary. In addition, the Company
developed and marketed a product using its patented ferric hyaluronan adhesion
prevention technology. The product, GYNECARE INTERGEL Adhesion Prevention
Solution (INTERGEL Solution), has been clinically proven to reduce the
incidence of post-surgical adhesions following surgical trauma. The Companys
exclusive worldwide marketing partner, GYNECARE, a division of ETHICON, INC.
(ETHICON), a Johnson & Johnson company, began marketing INTERGEL Solution
outside the United States in June 1998 for reducing the incidence of
post-surgical adhesions. INTERGEL Solution was approved by the FDA for the
U.S. market in November 2001. INTERGEL Solution was voluntarily withdrawn from
the market by ETHICON in March 2003 in order to assess information obtained
from postmarketing experience with the product, including allegations of
adverse events associated with off-label use in non-conservative surgical
procedures (such as hysterectomies). The Company is working with ETHICON to
complete the post-marketing evaluation and determine the opportunities for
returning the product to market. Lifecore also supplies hyaluronan to customers pursuing other medical
applications, such as wound care, aesthetic surgery, medical device coatings,
tissue engineering, drug delivery and pharmaceuticals. The Company leverages
its hyaluronan manufacturing expertise to provide expanded hyaluronan product
offerings and specialized aseptic manufacturing of hyaluronan products. The Companys Oral Restorative Division develops and markets precision
surgical and prosthetic devices for the restoration of damaged or deteriorating
dentition and associated support tissues. The Companys dental implants are
permanently implanted in the jaw for tooth replacement therapy as long-term
support for crowns, bridges, and dentures. The Oral Restorative Division also offers innovative bone regenerative
products for the repair of bone defects resulting from periodontal disease and
tooth loss. Additionally, the Oral Restorative Division provides professional
support services to its dental surgery clients through comprehensive education
curricula, as provided in the Companys various Support Plus programs and
surgical courses. These professional continuing education programs are designed
to train restorative clinicians and their auxiliary teams in the principles of
tooth replacement therapy and practice management. The Companys Increasing
Case Acceptance Program (ICA) offers clients the marketing and consultative
tools and training to foster higher patient acceptance of dental implants. The Oral Restorative Divisions products are marketed in the United States
through the Companys direct sales force. Internationally, the Divisions
products are marketed through direct subsidiaries in Italy, Germany and Sweden,
and through 25 national distributors covering 35 additional countries. Financial information regarding the Companys two business segments is
contained in Note H to the Companys Consolidated Financial Statements. 2




---



##### Table of Contents



Trademarks The following trademarks are the property of Lifecore: LUROCOAT®
Ophthalmic Solution; RENOVA, RESTORE® and SUSTAIN® Dental Implant Systems;
STAGE-1 Single Stage Implant System; Quick-Cap Impression System; CAPSET®
Calcium Sulfate Bone Graft Barrier; SlowSet; TefGen Regenerative Membrane;
and Support Plus. GYNECARE INTERGEL Adhesion Prevention Solution, GYNECARE, and ETHICON,
INC., are registered trademarks of ETHICON, INC.; Viscoat® Ophthalmic
Viscoelastic Solution is a registered trademark of Alcon, Inc.; HY-50® is a
registered trademark of Bexco Pharma, Inc. Rayvisc Ophthalmic Viscoelastic
Solution is a registered trademark of Rayner: ENDOGEL Ophthalmic Viscoelastic
Solution is a registered trademark of IOLTECH; and DBX® Demineralized Bone
Matrix is a registered trademark of the Musculoskeletal Transplant Foundation. Hyaluronan Division Background Hyaluronan, a naturally occurring polysaccharide, is a component of many
tissues in the body and of physiological fluids that lubricate or otherwise
protect the bodys soft tissues. Due to its widespread presence in tissues,
critical role in normal physiology, and its high degree of biocompatibility,
the Company believes that hyaluronan will continue to be used for an increasing
variety of medical applications. The Company produces hyaluronan through a
proprietary fermentation process. Hyaluronan was first demonstrated to have commercial medical utility as a
viscoelastic solution in cataract surgery. In this application, it is used for
maintaining the shape of the anterior chamber and protecting corneal tissue
during the removal and implantation of intraocular lenses. The first
ophthalmic hyaluronan product, produced by extraction from rooster comb tissue,
became commercially available in the United States in 1981. Hyaluronan-based
products, produced either by rooster comb extraction or by fermentation
processes such as the Companys, have since gained widespread acceptance in
ophthalmology and are currently used in the majority of cataract extraction
procedures in the world. The Companys hyaluronan is also used as the primary
raw material for making INTERGEL Solution; as an aseptic solution which is used
as a carrier vehicle for allogeneic demineralized, freeze-dried bone provided
to orthopedic surgeons; as a component of devices to treat the symptoms of
osteoarthritis; and as a component to provide increased lubricity to medical
devices. The Companys hyaluronan has been utilized in veterinary applications
such as an embryo cryopreservation media and as a veterinary drug and device to
treat traumatic arthritis. Strategy The Company intends to use its proprietary fermentation process and
aseptic formulation and filling expertise to be a leader in the development of
hyaluronan-based products for multiple applications. Elements of the Companys
strategy include the following:  Establish strategic alliances with market leaders.The Company will
continue to develop applications for products with partners who have strong
marketing, sales and distribution capabilities to end-user markets. The Company
currently has established relationships with the market leading companies
Alcon, Inc. and Advanced Medical Optics in ophthalmology; Hexal AG in generic
devices and drugs, and Musculoskeletal Transplant Foundation (MTF), the
worlds largest bone tissue procurement and distribution service.  Expand medical applications for hyaluronan.Due to the growing
knowledge of the unique characteristics of hyaluronan and the role it plays in
normal physiology, the Company continues to identify and pursue further uses
for hyaluronan in other medical applications, such as wound care, aesthetic
surgery, adhesion prevention, drug delivery, device coatings and
pharmaceuticals.  Maintain flexibility in product development and supply relationships.
The Companys vertically integrated development and manufacturing capabilities
allow it to establish a variety of relationships with global corporate
partners. Lifecores role in these relationships extends from supplier of raw
materials to manufacturer of aseptically-packaged sterile products. In
addition, the Company may develop its own proprietary products. 3




---



##### Table of Contents



Hyaluronan Division Products The following chart summarizes the principal products of the Hyaluronan
Division, along with their applications, and the companies with which Lifecore
has related strategic alliances: PRODUCT
    
    STRATEGIC ALLIANCE
    
    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
outside the United
States
    
    Cataract surgery
    
    Commercial sales
since June 1997ORTHOPEDICHyaluronan Solution
for DBX
    
    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
expected to begin
in fiscal 2005,
pending regulatory
approvalVETERINARYHY-50®
    
    Lifecore supplies a
finished veterinary
viscosupplement to
Bexco Pharma, Inc.
for use as a
veterinary
orthopedic
injectible drug or
an orthopedic
device.
    
    Veterinary device /
drug
    
    Commercial sales
since 1993ADHESION PREVENTIONGYNECARE INTERGEL
Adhesion Prevention
Solution
    
    Lifecores
proprietary
product; ETHICON
has exclusive
worldwide marketing
rights for adhesion
prevention
applications
    
    Adhesion prevention
    
    Voluntary market
withdrawal March
2003
 + For many of the products listed above, government regulatory approvals are
required before commercial sales can commence in the United States or
elsewhere. See Government Regulation. No assurance can be given that such
products will be successfully approved in new markets. 4




---



##### Table of Contents



Ophthalmic Applications Cataract Surgery.Currently, a primary commercial application for the
Companys hyaluronan is in cataract surgery. Hyaluronan, in the form of a
viscoelastic solution, is used to maintain a deep chamber during anterior
segment surgeries (including cataract extraction and intraocular lens
implantation) and to protect the corneal endothelium and other ocular tissue.
These solutions have been shown to reduce surgical trauma and thereby
contribute to more rapid recovery with fewer complications than were
experienced prior to the use of viscoelastics. The Company currently sells
hyaluronan for this application to Alcon, Inc. (Alcon) the leading producer
of ophthalmic surgical products in the world, for inclusion in Viscoat®
Ophthalmic Viscoelastic Solution. The Company also has agreements with two
European ophthalmic companies to supply its hyaluronan based LUROCOAT Solution
(discussed below) under private label outside the United States and Canada. The Companys relationship with Alcon and its predecessors commenced in
1983. Since that time, sales of hyaluronan to Alcon have continued to be made
pursuant to supply agreements. The current Alcon supply agreement, as renewed
in December 2002, is a non-exclusive agreement for a term of two years through
December 31, 2004. Management expects that the Company will be able to
negotiate an extension of this supply agreement. See Managements Discussion
and Analysis of Financial Condition and Results of Operations. Hyaluronan-based products are used in the majority of cataract surgeries
in the world. The Company estimates that the worldwide market for hyaluronan
for cataract surgery, on a hospital cost basis, is approximately $140 million
per year. The Company has developed its own viscoelastic solution, LUROCOAT
Solution. The Company received CE marking for LUROCOAT Solution during 1997,
allowing LUROCOAT Solution to be marketed and sold in Europe. The Company
supplies LUROCOAT Solution outside the United States under private label
agreements. Export shipments of LUROCOAT Solution began in 1997. The Company signed an agreement with Advanced Medical Optics (AMO) to
supply Lifecores hyaluronan based viscoelastic under private label with sales
commencing in fiscal year 2005. The AMO agreement is for a term of three years
through May 2007 with renewal provisions. Lifecore estimates that its hyaluronan has been used in approximately 25
million ophthalmic patients globally since 1983. Orthopedic Applications The Company supplies an aseptic hyaluronan solution to BioCon, Inc., the
non-profit controlling affiliate of MTF, which utilizes the solution as a
carrier vehicle for its allogeneic demineralized, freeze-dried bone in a final
putty composition trademarked as DBX® Demineralized Bone Matrix. This bone
putty is provided by MTF to orthopedic surgeons through MTFs distribution
channels. The Company has a supply agreement with MTF through December 2009. Veterinary Applications The Company manufactures Bexco Pharma, Inc.s HY-50® product, an
aseptically packaged hyaluronan solution for use as a veterinary orthopedic
device or veterinary orthopedic injectible drug, under a supply agreement
expiring July 11, 2005. Bexco Pharma, Inc. has the option to renew the
agreement for an additional two years with the same terms and conditions as the
original agreement. Lifecore estimates that its veterinary hyaluronan product has been used in
over 500,000 equine procedures worldwide. Adhesion Prevention Opportunities with ETHICON The Company has developed a product using a version of its patented ferric
hyaluronan technology, INTERGEL Solution, for reducing the incidence of
post-surgical adhesions. ETHICON has worldwide, exclusive distribution rights
for INTERGEL Solution. 5




---



##### Table of Contents



ETHICON began marketing INTERGEL Solution outside the United States in
June 1998. The Company received FDA clearance for marketing INTERGEL Solution
in the United States in November 2001, and ETHICON began marketing it in the
United States during the first calendar quarter of 2002. INTERGEL Solution was
voluntarily withdrawn from the market by ETHICON in March 2003 in order to
assess information obtained from postmarketing experience with the product,
including allegations of adverse events associated with off-label use in
non-conservative surgical procedures (such as hysterectomies). The Company is
working with ETHICON to complete the post-marketing evaluation and determine
the opportunities for returning the product to market. Product Development The Hyaluronan Division undertakes its own product development activities
for hyaluronan-based applications, as well as on a contract basis with certain
clients. The majority of outside projects are initiated by a client to
demonstrate that the Companys hyaluronan is suitable for a particular medical
application. Suitability is often measured by detailed specifications for
product characteristics such as purity, stability, viscosity, and molecular
weight, as well as efficacy for a particular medical application. There can be no assurance that products currently under development by the
Company or in partnership with others will be successfully developed or, if so
developed, will be successfully and profitably marketed. Oral Restorative Division Background Dental implant systems are increasingly accepted as a replacement for
missing or extracted teeth and serve as supports for dentures, crowns and
bridges. In comparison to conventional restorative procedures, dental implants
are surgically placed in the jawbone, simulating the anchoring of a tooth by
its root. The implant maintains underlying bone structure and provides
superior fixation of restorations, minimizing loosening of fixtures against
surrounding teeth and gingiva. The titanium cylinder or screw-shaped implant
is categorized by shape and method of implantation. For example, the threaded
cylinder implant is surgically screwed into the jawbone, while an alternate
form, the press-fit cylinder, is placed into a precision-drilled hole with a
friction fit. To further enhance bone fixation, various implant styles may be
roughened to create added surface area for bone-to-implant contact or coated
with materials such as hydroxylapatite. The annual worldwide dental implant
market is trending to exceed $1 billion in 2005. Bone graft substitutes and bone regeneration membranes are used for the
restoration of deteriorated bone caused by periodontal disease and tooth loss.
Historically, autologous bone (self-donated from another part of the patients
own body) has been used to treat and regenerate deteriorated bone. Cadaver,
synthetic and animal-derived bone graft substitutes emerged to address the
issues of limited quantity and second surgical site morbidity associated with
use of autologous bone. The current annual U.S. market for synthetic and
animal-derived bone substitute products exceeds $36 million. And the addition
of supplemental bone regeneration barrier membranes has expanded the U.S.
dental bone regeneration market to approximately $75 million. The Companys
TefGen Regenerative Membrane and CAPSET® Calcium Sulfate Bone Graft Barrier
products, along with additional new product development, target this market
opportunity. Strategy The Company is committed to providing the dental community with
comprehensive treatment solutions and practice-building support through:  
    
    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.
    
    Expansion of international markets by direct selling efforts and additional distribution agreements. 6




---



##### Table of Contents



Oral Restorative Division Products The following chart summarizes the principal products of the Companys Oral Restorative Division: 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-1 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 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
 Implant Products The RENOVA Internal Hex Implant System design provides the stability of an
internal hex connection, while providing surgical treatment flexibility of both
straight and tapered implants, improved thread design, indexability, superior
esthetics and ease of clinician handling. The RENOVA system was commercially
launched in June 2004. The RESTORE System is based on a classic threaded titanium implant design
that pioneered the commercialization of these devices in general oral
restorative surgery. In July 1993, the Company acquired this implant design in
connection with its acquisition of Implant Support Systems, Inc. (ISS), a
manufacturer of dental implant products. The Company has since enhanced and
expanded the original ISS line into a broad range of implant options. The
Company now markets its line of external hex implants, prosthetics and
associated instrumentation under the RESTORE System name. The SUSTAIN System is based on a design that embraces both threaded and
press-fit cylinder formats with added bone-like hydroxylapatite (HA). In
May 1992, the Company acquired the basic SUSTAIN System from Bio-Interfaces,
Inc. after serving as an exclusive distributor for the SUSTAIN System since
1990. SUSTAIN HA-Coated Dental Implants are now marketed under the RESTORE
System name. The STAGE-1 Single Stage Implant System was designed by the Company to
allow for a one-stage surgical procedure. The STAGE-1 Implant design allows
placement in a single surgical procedure that reduces treatment time. The
systems reliable Morse taper prosthetic connection simplifies restorative
procedures for the dentist. Commercial sales began in September 1999. In
March 2001, the Company added the RBM STAGE-1 Single Stage Implant System to
this line. The Quick-Cap Impression System greatly improves the restorative
dentists ease and accuracy of impressioning for subsequent laboratory
construction of the final crown, bridge or denture. 7




---



##### Table of Contents



Lifecore has enhanced and expanded its product lines, creating numerous
new products with a combination of innovative features from its existing
systems. This gives the Company a broad product line which offers practitioners
maximum flexibility in choice of treatment modalities and several innovations
that enhance ease-of-use by the clinician. Additionally, the Oral Restorative
Division assists its dental surgery clients by developing comprehensive
continuing education curricula, as provided in the Companys various Support
Plus programs, to train restorative clinicians and their auxiliary teams in
the principles of tooth replacement therapy and practice management. The
Companys Increasing Patient Case Acceptance Program offers client personnel
the marketing and selling skills training to foster higher patient acceptance
of dental implants. The Company recently introduced Support Plus Overdentures,
a program that teaches a step-by-step approach to obtain predictable and
profitable results for attachment retained overdenture implant restorations. Bone Regeneration Products The Company offers products that address various bone and tissue
regeneration procedures. CAPSET® Calcium Sulfate Bone Graft Barrier received 510(k) clearance and
was introduced to the market in 1995. CAPSET SlowSet Barrier was introduced
in July 1999. These products are based on a proprietary medical grade calcium
sulfate technology developed by and licensed from Wright Medical, Inc., an
orthopedic product manufacturer based in Memphis, Tennessee. CAPSET Barrier and
CAPSET SlowSet Barriers provide guided bone regeneration containment barriers
to prevent migration of bone graft materials used to fill oral bone defects.
510(k) clearance was received in 1996 to market the calcium sulfate powder in
the Capset package reserve cup for use as a binder for bone graft materials.
This addition markedly improves the handling properties of various types of
bone graft materials and also enhances the bone regeneration process. TefGen Regenerative Membrane technology was acquired by the Company from
Bridger Biomed, Inc. in May 1997. This non-resorbable membrane is based on
nanoporous PTFE Biomaterials(nPTFE); competitive with the markets leading
product produced by W.L. Gore. A TefGen Regenerative Membrane allows the
dental surgeon to cover treated defect in bone to prevent the invasion of
unwanted soft tissue while the slower growing bone tissue underneath the
membrane regenerates. Product Development The Oral Restorative Division is also involved in product development
activities to improve existing components and packaging and to add new
components to the dental implant systems. These development activities enhance
the suitability and ease-of-use of the products for specific surgical
applications and reflect changing trends in dental implant technology. There
can be no assurance, however, that products which are currently under
development by the Company will be successfully developed, or if so developed,
will be successfully and profitably marketed. Sales and Marketing Hyaluronan Division Products The Company generally markets and distributes its hyaluronan products to
end-users through corporate partners. The Company sells hyaluronan to these
partners in a variety of forms, including powders, gels and solutions packaged
in bulk or single-application units. The Company has an agreement with ETHICON for exclusive distribution of
INTERGEL Solution. INTERGEL Solution was voluntarily withdrawn from the market
by ETHICON in March 2003 in order to assess information obtained from
postmarketing experience with the product, including allegations of adverse
events associated with off-label use in non-conservative surgical procedures
(such as hysterectomies). The Company is working with ETHICON to complete the
post-marketing evaluation and determine the opportunities for returning the
product to market. No assurance can be given that INTERGEL Solution will be
returned to the market. Further, there is no assurance that if INTERGEL
Solution is returned to the market, that the market will accept a product that
has been previously withdrawn. The Company also sells various forms of medical grade hyaluronan directly
to academic and corporate research customers for development and evaluation of
new applications. 8




---



##### Table of Contents



Oral Restorative Division Products The Company is focused on expanding its oral restorative product line and
developing increased sales and marketing support. The dental implant market is
highly specialized. Products are marketed to oral surgeons, periodontists,
implantologists, prosthodontists, general dental practitioners and dental
laboratories. Accordingly, management believes it must maintain a highly
experienced direct sales force in the United States for proper distribution of
these products. The Company believes that its sales force offers better
customer service, technical support and regulatory control than could be
achieved through an independent distributor network in the United States. The
Company employs 27 individuals dedicated to sales in the United States and four
U.S. based international sales personnel. The Oral Restorative Division
products are marketed internationally in 35 countries through 25 distributors
and in Italy through its subsidiary, Lifecore Biomedical SpA, in Germany
through its subsidiary, Lifecore Biomedical GmbH, and in Scandinavia through
its subsidiary, Lifecore Biomedical AB. The Companys marketing activities are designed to support its direct
domestic sales force and its international business base, and include
advertising and product publicity in trade journals, direct mail catalogs,
newsletters, continuing education programs, telemarketing, and attendance at
trade shows and professional association meetings. Industry estimates indicate
a need for replacement of approximately 100 million teeth in the adult
population of the United States. That represents a potential implants and
accessories market of approximately $20 billion compared to the actual current
U.S. market size of approximately $400 million. Manufacturing The commercial production of hyaluronan by the Company requires
fermentation, separation and purification capabilities, and aseptic packaging
of product in a variety of bulk and single dose configurations. In addition,
the production of the INTERGEL Solution requires formulation of viscous fluids,
contract Blow-Fill-Seal filling and secondary sterilization. The Company produces its hyaluronan through a proprietary fermentation
process. Until the introduction of the Companys medical grade hyaluronan, the
only commercial source for medical hyaluronan was through a process of
extraction from rooster combs. The Company believes that the fermentation
manufacturing approach is superior to rooster comb extraction because of
greater efficiency, flexibility, a more favorable long-term regulatory
environment, and better economies of scale in producing large commercial
quantities. The Companys 110,000 square foot facility is primarily used for the
proprietary hyaluronan manufacturing process, formulation and aseptic syringe
filling, and the formulation of INTERGEL Solution. As a result of the
voluntary withdrawal of INTERGEL, the hyaluronan manufacturing requirements
have been limited, and therefore the Company has noted the associated unused
manufacturing capacity charges, which negatively affected the Companys
profitability. The Company believes that the current inventory on-hand,
together with its manufacturing capacity, will be sufficient to allow it to
meet the needs of its current customers for the foreseeable future. The Company provides versatility in the manufacturing of various types of
finished products. Currently, the Company supplies several different forms of
hyaluronan in a variety of molecular weight fractions as powders, solutions and
gels, and in a variety of bulk and single-use finished packages. The Hyaluronan
Division continues to conduct development work designed to improve production
efficiencies and expand the Companys capabilities to achieve a wider range of
hyaluronan product specifications in order to address the broadening
opportunities for using hyaluronan in medical applications. The Companys facility was designed to meet applicable regulatory
requirements and has been cleared for the manufacture of both device and
pharmaceutical products. The FDA periodically inspects the Companys
manufacturing systems and requires conformance to the FDAs Quality Systems
Regulations (QSR). In addition, the Companys corporate partners conduct
intensive regulatory audits of the facility. The Company also periodically
contracts with independent regulatory consultants to conduct audits of the
Companys operations. The Company maintains a Quality System which assures
conformance to all applicable current standards (21 CFR820, 21 CFR210-211, ISO
9001 : 1994, ISO 13485 : 1996, 9/42/MDDEEL, and Canadian Medical Device
Regulation : 1998). These approvals represent international symbols of quality
system assurance and compliance with applicable European Medical Device
Directives, which greatly assist in the marketing of the Companys products in
the European Union. 9




---



##### Table of Contents



The Company uses outside metal finishing vendors to produce its dental
implant devices and related components. The Company inspects vendors quality
assurance and control functions and performs its own finished packaging related
to the implant product lines. The Company purchases raw materials for its production of hyaluronan and
calcium sulfate-based products from outside vendors. While these materials are
available from a variety of sources, the Company principally uses limited
sources for some of its key materials to better monitor quality and achieve
cost efficiencies. Wright Medical, Inc. exclusively supplies the key raw
material for CAPSET Barrier. The Company believes Wright Medical is able to
provide adequate amounts of the raw materials for CAPSET Barrier, and is under
a supply agreement with the Company through September 2006. The Company
utilizes a supply agreement with Bridger Biomed, Inc. to supply the TefGen
Regenerative Membrane product line. Competition The competitors of the Company include major chemical, dental, medical,
and pharmaceutical companies, as well as smaller specialized firms. Many of
these companies have significantly greater financial, manufacturing, marketing
and research and development resources than the Company. Hyaluronan Products A number of companies produce hyaluronan products and thus directly or
indirectly compete with Lifecore or its corporate partners. Several companies
produce hyaluronan through a fermentation process, including Genzyme, Inc.,
Savient, Fidia SpA, IOLTECH, Kyowa Hakko, Kibun and Bayer. In addition, several
companies manufacture hyaluronan by using rooster comb extraction methods.
These companies primarily include Anika Therapeutics, Inc., Genzyme, Inc.,
Fidia SpA, Pharmacia and Kibun. The Company believes that its fermentation
process may offer production and regulatory advantages over the traditional
rooster comb extraction method. The Companys competitors have filed or
obtained patents covering aspects of fermentation production or uses of
hyaluronan. These patents may cover the same applications as the Companys.
Although there can be no assurance, the Company believes that it does not
infringe the patents of its competitors. See Patents and Proprietary Rights. Several companies are pursuing anti-adhesion product development,
including, but not limited to, Alliance Pharmaceuticals, Inc., Angiotech
Pharmaceuticals, Inc., Anika Therapeutics, Inc., Confluent Surgical, ETHICON,
Fidia SpA, FzioMed, Genzyme Corporation, Life Medical Sciences, M.L. Labs, W.L.
Gore & Associates, Inc. and Wright Medical Group, Inc. If any or all of the
competing products are successfully developed and obtain regulatory approval
and commercial acceptance, the Companys prospects for INTERGEL Solution may be
adversely affected. The Company believes that competition in the ophthalmic and medical grade
hyaluronan market is primarily based on product performance, manufacturing
capacity and product development capabilities. Future competition may be based
on the existence of established supply relationships, regulatory approvals,
intellectual property and product price. After a manufacturer has taken a
product through the FDA marketing approval process, a change in suppliers can
involve costs and delays because supplemental FDA review may be required. Oral Restorative Products The dental implant market is also highly competitive. Major market
competitors include Biomet, Inc., Zimmer (Centerpulse) Dental, Dentsply
International, Inc., Nobel Biocare AB and Straumann AG. A number of these
competitors are established companies with dominant market shares. The Company
believes that competition in the dental implant market is based primarily on
product performance and quality, strong sales support and education. The Company believes that its broad product line facilitates the
conversion of competitive implant users to a Lifecore system. In addition, the
Company has developed several innovative education and marketing support
programs which are designed to increase the clients implant business. The
Company believes it has established a strong reputation for quality products
due to its stringent design and inspection criteria. No assurance can be
given, however, that the Company can effectively compete with other
manufacturers of dental implant systems. The market for the Companys tissue regeneration products is also
competitive. The major competitors include Biomet, Inc., Dentsply
International, Inc., Geistlich, W. L. Gore (GORE-TEX), and Zimmer (Centerpulse)
Dental. While the Company believes its product line and experienced sales
representation are an advantage in this area, no assurance can be given that it
can gain significant market share from its more established competitors. 10




---



##### Table of Contents



Patents and Proprietary Rights The Company pursues a policy of obtaining patent protection for patentable
subject matter in its proprietary technology. In May 1985, the Company received
a U.S. patent covering certain aspects of its hyaluronan fermentation process.
In August 1994, in connection with the ETHICON Agreement, the Company was
assigned a pending patent covering the composition and use of INTERGEL
Solution, with applications filed in the United States, Australia, Brazil,
Canada, Europe, Greece, and Japan. Subsequently, the patent has been issued in
Australia, Canada, Greece, Japan, and the United States. The Company licenses
two patents covering the dental surgical use of calcium sulfate from Wright
Medical, Inc. The Company also licenses patented technology used in the
production of calcium sulfate from Wright Medical and the University of North
Carolina. In conjunction with the purchase of the TefGen Regenerative Membrane
product line, the Company obtained the rights to the patent for composition,
manufacture and use of the nPTFE material. The Company has received a patent
on its dental implant packaging and a patent on a self-tapping dental implant
design. The Company believes that patent protection is important to its business.
However, if other manufacturers were to infringe on its patents, there can be
no assurance that the Company would be successful in challenging, or would have
adequate resources to challenge, such infringement. The Company also relies
upon trade secrets, proprietary know-how and continuing technological
innovation to develop and maintain its competitive position. There can be no
assurance that others will not obtain or independently develop technologies
which are the same as or similar to the Companys technologies. The Company
pursues a policy of requiring employees, temporary staff, consultants and
customers (which have access to some of its proprietary information) to sign
confidentiality agreements. There can be no assurance that the Company will be
able to adequately protect its proprietary technology through patents or other
means. The Company is aware that one or more of its competitors have obtained, or
are attempting to obtain, patents covering fermentation and other processes for
producing hyaluronan. Other patents have been, or may be, issued in the future
in product areas of interest to the Company. Although the Company is not aware
of any claims that its current or anticipated products infringe on patents held
by others, no assurance can be given that there will not be an infringement
claim against the Company in the future. The costs of any Company involvement
in legal proceedings could be substantial, both in terms of legal costs and the
time spent by management of the Company in connection with such proceedings.
It is also possible that the Company, to manufacture and market some of its
products, may be required to obtain additional licenses, which may require the
payment of initial fees, minimum annual royalty fees and ongoing royalties on
net sales. There can be no assurance that the Company would be able to license
technology developed by others, on favorable terms or at all, that may be
necessary for the manufacture and marketing of its products. Government Regulation Government regulation in the United States and other countries is a
significant factor in the marketing of the Companys products and in the
Companys ongoing research and development activities. The Companys products
are subject to extensive and rigorous regulation by the FDA, which regulates
the products as medical devices and which, in some cases, requires Pre-Market
Approval, or PMA, and by foreign countries, which regulate the products as
medical devices or drugs. Under the Federal Food, Drug, and Cosmetic Act (FDC
Act), the FDA regulates clinical testing, manufacturing, labeling,
distribution, sale, and promotion of medical devices in the United States. Following the enactment of the Medical Device Amendments of 1976 to the
FDC Act, the FDA classified medical devices in commercial distribution at the
time of enactment (old devices) into one of three classes
- Class I, II, or
III. This classification is based on the controls necessary to reasonably
ensure the safety and effectiveness of medical devices. Class I devices are
those whose safety and effectiveness can reasonably be ensured through general
controls, such as labeling, premarket notification (the 510(k) Notification),
and adherence to FDA-mandated current QSR requirements for devices. Class II
devices are those whose safety and effectiveness can reasonably be ensured
through the use of special controls, such as performance standards, post-market
surveillance, patient registries and FDA guidelines. Class III devices are
devices that must receive a PMA from the FDA to ensure their safety and
effectiveness. Ordinarily, a PMA requires the performance of at least two
independent, statistically significant clinical trials that demonstrate the
devices safety and effectiveness. Class III devices are generally
life-sustaining, life-supporting or implantable devices, and also include most
devices that were not on the market before May 28, 1976 (new devices) and for
which the FDA has not made a finding of substantial equivalence based upon a
510(k) Notification. An old Class III device does not require a PMA unless and
until the FDA issues regulation requiring submission of a PMA application for
the device. 11




---



##### Table of Contents



The FDA invariably requires clinical data for a PMA application and has
the authority to require such data for a 510(k) Notification. If clinical data
is necessary, the manufacturer or distributor is ordinarily required to obtain
an Investigational Device Exemption, or IDE authorizing the conduct of human
studies. Once in effect, an IDE permits evaluation of devices under controlled
clinical conditions. After a clinical evaluation process, the resulting data
may be included in a PMA application or a 510(k) Notification. The PMA may be
approved or the 510(k) Notification may be cleared by the FDA, only after a
review process that may include requests for additional data, sometimes
requiring further studies. If a manufacturer or distributor of medical devices can establish to the
FDAs satisfaction that a new device is substantially equivalent to what is
called a predicate device, i.e., a legally marketed Class I or Class II
medical device or a legally marketed Class III device for which the FDA has not
required a PMA, the manufacturer or distributor may market the new device. In
the 510(k) Notification, a manufacturer or distributor makes a claim of
substantial equivalence, which the FDA may require to be supported by various
types of information, including data from clinical studies, showing that the
new device is as safe and effective for its intended use as the predicate
device. Following submission of the 510(k) Notification, the manufacturer or
distributor may not place the new device into commercial distribution until an
order is issued by the FDA finding the new device to be substantially
equivalent. The FDA has a 90 day period in which to respond to a 510(k)
Notification. Dependent on the specific submission and subsequent agency
requirements, the 510(k) Notification process can take significantly longer to
complete. The FDA may agree with the manufacturer or distributor that the new
device is substantially equivalent to a predicate device and allow the new
device to be marketed in the United States. The FDA may, however, determine
that the new device is not substantially equivalent and require the
manufacturer or distributor to submit a PMA or require further information,
such as additional test data, including data from clinical studies, before it
is able to make a determination regarding substantial equivalence. Although
the PMA process is significantly more complex, time-consuming and expensive
than the 510(k) Notification process, the latter process can also be expensive
and substantially delay the market introduction of a product. Hyaluronan products are generally Class III devices. In cases where the
Company is supplying hyaluronan to a corporate partner as a raw material or
producing a finished product under a license for the partner, the corporate
partner will be responsible for obtaining the appropriate FDA clearance or
approval. Export of the Companys hyaluronan products generally requires
approval of the importing country. The Companys TefGen Regenerative Membrane product line is a Class II
device. CAPSET Barrier has received market clearance through a 510(k)
Notification but is unclassified. Other regulatory requirements are placed on a medical devices manufacture
and the quality control procedures in place, such as the FDAs device QSR
regulations. Manufacturing facilities are subject to periodic inspections by
the FDA to ensure compliance with device QSR requirements. The Companys
facility is subject to inspections as both a device and a drug manufacturing
operation. Other applicable FDA requirements include the medical device
reporting regulation, which requires that the Company provide information to
the FDA regarding deaths or serious injuries alleged to have been associated
with the use of its devices, as well as product malfunctions that would likely
cause or contribute to death or serious injury if the malfunction were to
recur. If the Company is not in compliance with FDA requirements, the FDA or the
federal government can order a recall, detain the Companys devices, withdraw
or limit 510(k) Notification clearances or PMA approvals, institute proceedings
to seize the Companys devices, prohibit marketing and sales of the Companys
devices, and assess civil money penalties and impose criminal sanctions against
the Company, its officers, or its employees. There can be no assurance that any of the Companys clinical studies will
show safety or effectiveness; that 510(k) Notifications or PMA applications
will be submitted or, if submitted, accepted for filing; that any of the
Companys products that require clearance of a 510(k) Notification or approval
of a PMA application will obtain such clearance or approval on a timely basis,
on terms acceptable to the Company for the purpose of actually marketing the
products, or at all; or that following any such clearance or approval
previously unknown problems will not result in restrictions on the marketing of
the products or withdrawal of clearance or approval. 12




---



##### Table of Contents



Product Liability Product liability claims may be asserted with respect to the Companys
products. In addition, the Company may be subject to product liability claims
for the products of its customers that incorporate Lifecores materials. The
Company maintains product liability insurance coverage in amounts the Company
deems to be adequate. Lifecore Biomedical SpA and Lifecore GmbH also carry
product liability insurance. There can be no assurance that the Company will
have sufficient resources to satisfy product claims if they exceed available
insurance coverage. Employees As of August 27, 2004 the Company employed 183 persons on a full-time
basis, 8 part-time employees and 6 temporary employees. None of the Companys
employees is represented by a labor organization, and the Company has never
experienced a work stoppage or interruption due to labor disputes. Management
believes its relations with employees are good. Executive Officers of the Registrant Executive Officers The following sets forth the names of the executive officers of Lifecore,
in addition to information about their positions with Lifecore, their periods
of service in such capacities, and their business experience for at least the
past five years. There are no family relationships among them. All executive
officers named are elected or appointed by the Board of Directors for a term of
office from the time of election or appointment until the next annual meeting
of directors (held following the annual meeting of shareholders) and until
their respective successors are elected and have qualified. Dennis J. Allingham.Mr. Allingham, 53 years old, was appointed President
and Chief Executive Officer and to the Board of Directors in February 2004.
Mr. Allingham previously served as Executive Vice President of the Company
since November 1997. He has been Chief Financial Officer of the Company since
January 1996. Mr. Allingham has also been General Manager of the Hyaluronan
Division since November 1996 and General Manager of the Oral Restorative
Division since November 1997. David M. Noel.Mr. Noel, 47 years old, was appointed Vice President of
Finance and Chief Financial Officer in March 2004. Mr. Noel, a Certified
Public Accountant, joined the Company as Controller in February 2002. From
1996 to 2001, Mr. Noel was Controller of Nilfisk-Advance, Inc., a manufacturer
of floor maintenance equipment. Andre P. Decarie. Mr. Decarie, 58 years old, joined the Company as Vice
President of Sales and Marketing  ORD in January 2001. Prior to joining the
Company, Mr. Decarie was Vice President, Business Development for Avitar, Inc.,
a manufacturer of specialized wound dressings, from 1999 to December 2000.
From 1998 to 1999, Mr. Decarie was Vice President, Business Development for
Tremont Medical, Inc., a medical electronics company. From 1993 to 1998, Mr.
Decarie was Senior Vice President with Integra LifeSciences Corporation, a
medical products company. Larry A. Hiebert.Mr. Hiebert, 48 years old, was appointed Vice President
of Operations in March 2004. Mr. Hiebert had been the Director of Operations
since 1996 and has held various manufacturing and materials management
positions within the Company since 1983. 
 Item 2. Properties The Companys operations are all conducted in its 110,000 square foot
building in Chaska, Minnesota. The Company completed an expansion of its
facility during fiscal 1998. The Company leases local office space for its
three foreign subsidiaries. 13




---



##### Table of Contents



Item 3. Legal Proceedings Lifecore has been named as a defendant in 41 product liability lawsuits
filed by 37 different plaintiffs (four plaintiffs have filed more than one
case) alleging that the plaintiffs suffered injuries due to the defective
nature of INTERGEL Solution manufactured by Lifecore and marketed by ETHICON.
In the majority of the cases, Lifecore has not yet been served with the
complaints. Lifecore has been served in the following cases as of August 31,
2004:  1.
    
    Linda Authement and Michael Ray Lavergne v. Ethicon, Inc.,
d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical,
Inc. and Vital Pharma, Inc. (Florida); served 8/20/042.
    
    Barbara Black v. Ethicon, Inc., d/b/a Gynecare Worldwide,
Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc.
(Florida); served 8/16/043.
    
    Renee Contratto v. Ethicon, Inc., d/b/a Gynecare Worldwide,
Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc.
(Northern District of California); served 9/15/034.
    
    Renee Contratto v. Ethicon, Inc., d/b/a Gynecare Worldwide,
Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc.
(Superior Court of the State of California, County of Alameda);
served 2/4/045.
    
    Nancy Susan Drinkwitz v. Lifecore Biomedical, Inc., Johnson &
Johnson, Ethicon, Inc. and Gynecare Worldwide (Carver County District
Court, State of Minnesota); served 8/20/046.
    
    April Ferrell and Michael Ferrell, Jr. v. Ethicon, Inc., d/b/a
Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and
Vital Pharma, Inc., (Florida); served 8/20/047.
    
    Michelle Frosh Bernard v. Ethicon, Inc., d/b/a Gynecare
Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital
Pharma, Inc. (Florida); served 8/20/048.
    
    Pamela Gregory and Darrell Gregory v. Ethicon, Inc., d/b/a
Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and
Vital Pharma, Inc. (Florida);served 8/20/049.
    
    Kristin Manning v. Johnson & Johnson, Ethicon, Inc., d/b/a
Gynecare Worldwide and Lifecore Biomedical, Inc. (D. Kansas); served
1/29/0410.
    
    Elizabeth M. Manning v. Lifecore Biomedical, Inc., Johnson &
Johnson, Ethicon, Inc. and Gynecare Worldwide (Carver County District
Court, State of Minnesota) - this case was settled in June 200411.
    
    Melissa Powers v. Gynecare Through Ethicon, Inc., Johnson &
Johnson, Lifecore Biomedical, Inc. and George B. Morris, IV, M.D.
(Civil District Court for the Parish of Orleans, State of Louisiana);
served 6/3/0412.
    
    Rebecca J. Rezendes v. Lifecore Biomedical, Inc., Johnson
&Johnson, Ethicon, Inc. and Gynecare Worldwide; served 6/4/0413.
    
    Natalie M. Sanders v. Johnson & Johnson, Inc., Gynecare
Worldwide, Ethicon, Inc., and Lifecore Biomedical, Inc. (District of
New Jersey); served 5/21/0414.
    
    Monika Shumbo-Poissant v. Lifecore Biomedical, Inc., et al.
(Superior Court of Connecticut); served 7/19/0415.
    
    Siobhan Sprecace and David Sprecace v. Ethicon, Inc., d/b/a
Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and
Vital Pharma, Inc. (Florida); served 8/20/04 ETHICON is defending Lifecore in the above-listed lawsuits. 14




---



##### Table of Contents



Lifecore has also received claim letters alleging claims similar to the
complaints listed above as follows:  1.
    
    Heather Dunne, letter dated October 9, 20032.
    
    Margery LeRoux, letter dated September 9, 20033.
    
    Kenna Schaller, letter dated July 10, 20034.
    
    Julia Smith, letter dated May 10, 2004 ETHICON is responding to the above-listed claim letters on behalf of
Lifecore. In addition to the above-listed claim letters, Lifecore has received
a claim letter on behalf of Melody Whitfield, dated October 2, 2003, relating
to injuries unrelated to INTERGEL Solution suffered in a second-look surgery as
part of a clinical trial. Whitfield is seeking $195,000 in damages. Lifecore
has not received any response to its letter dated February 19, 2003 disputing
her claim. ETHICON has denied Lifecores tender of defense of Whitfields
claim. 
 Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 15




---



##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities The Companys Common Stock is traded on the Nasdaq National Market under
the symbol LCBM. The following table sets forth for each quarter of fiscal 2004
and 2003 the range of high and low closing sale prices of the Common Stock on
the Nasdaq National Market. Fiscal year
    
    Low
    
    High2004First Quarter
    
    $
    5.32
    
    
    $
    6.83Second Quarter
    
    
    6.01
    
    
    
    7.19Third Quarter
    
    
    6.17
    
    
    
    8.17Fourth Quarter
    
    
    5.53
    
    
    
    8.202003First Quarter
    
    $
    6.02
    
    
    $
    11.20Second Quarter
    
    
    5.20
    
    
    
    8.83Third Quarter
    
    
    3.01
    
    
    
    9.25Fourth Quarter
    
    
    2.90
    
    
    
    5.97
 The Company has not paid cash dividends on its Common Stock and does not
plan to pay cash dividends in the near future. The Company expects to retain
any future earnings to finance its business. The Company has a loan agreement
that restricts its ability to pay dividends. See Note C to Consolidated
Financial Statements. At August 26, 2004, the Company had 587 shareholders of record. 16




---



##### Table of Contents



Item 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts) The following sets forth selected historical financial data with respect
to the Company and its subsidiaries. The data given below as of and for the
five years ended June 30, 2004 has been derived from the Companys Consolidated
Financial Statements audited by Grant Thornton LLP, independent registered
public accounting firm. Such data should be read in conjunction with the
Companys Consolidated Financial Statements and Notes thereto included
elsewhere herein and the Managements Discussion and Analysis of Financial
Condition and Results of Operations. Years Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000Statements of Operations Data:Net sales
    
    $
    47,036
    
    
    $
    42,441
    
    
    $
    38,794
    
    
    $
    34,136
    
    
    $
    32,823Costs of goods sold
    
    
    20,483
    
    
    
    20,379
    
    
    
    22,116
    
    
    
    18,487
    
    
    
    17,618Gross profit
    
    
    26,553
    
    
    
    22,062
    
    
    
    16,678
    
    
    
    15,649
    
    
    
    15,205Operating expensesResearch and development
    
    
    4,519
    
    
    
    4,067
    
    
    
    4,865
    
    
    
    4,704
    
    
    
    4,213Marketing and sales
    
    
    13,782
    
    
    
    12,353
    
    
    
    10,774
    
    
    
    9,284
    
    
    
    7,907General and administrative
    
    
    6,372
    
    
    
    5,543
    
    
    
    5,035
    
    
    
    4,633
    
    
    
    3,847Restructuring charges
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,809
    
    
    
    21,963
    
    
    
    20,674
    
    
    
    18,621
    
    
    
    15,967Operating income (loss)
    
    
    744
    
    
    
    99
    
    
    
    (3,996
    )
    
    
    (2,972
    )
    
    
    (762
    )Other income (expense), net
    
    
    130
    
    
    
    (367
    )
    
    
    (684
    )
    
    
    (729
    )
    
    
    (837
    )Income (loss) before income taxes
    
    
    874
    
    
    
    (268
    )
    
    
    (4,680
    )
    
    
    (3,701
    )
    
    
    (1,599
    )Provision for income taxes
    
    
    167
    
    
    
    87
    
    
    
    37
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    707
    
    
    $
    (355
    )
    
    $
    (4,717
    )
    
    $
    (3,701
    )
    
    $
    (1,599
    )Net income (loss) per common shareBasic
    
    $
    0.05
    
    
    $
    (0.02
    )
    
    $
    (0.37
    )
    
    $
    (0.29
    )
    
    $
    (0.13
    )Diluted
    
    $
    0.05
    
    
    $
    (0.02
    )
    
    $
    (0.37
    )
    
    $
    (0.29
    )
    
    $
    (0.13
    )Weighted average common and common
equivalent shares outstandingBasic
    
    
    12,898
    
    
    
    12,882
    
    
    
    12,802
    
    
    
    12,631
    
    
    
    12,489Diluted
    
    
    12,958
    
    
    
    12,882
    
    
    
    12,802
    
    
    
    12,631
    
    
    
    12,489
 As of June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000Balance Sheet Data:Working capital
    
    $
    21,692
    
    
    $
    18,511
    
    
    $
    17,783
    
    
    $
    14,210
    
    
    $
    15,530Total assets
    
    
    60,318
    
    
    
    58,352
    
    
    
    60,096
    
    
    
    62,696
    
    
    
    66,108Long-term obligations, net
    
    
    5,809
    
    
    
    5,969
    
    
    
    6,114
    
    
    
    6,249
    
    
    
    6,477Shareholders equity
    
    
    48,826
    
    
    
    48,394
    
    
    
    48,548
    
    
    
    52,056
    
    
    
    55,421
 17




---



##### Table of Contents



Item 7. 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 our 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 our
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 pursuant to customers orders, the
price is defined and collection is reasonably assured. 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 its 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 does not amortize goodwill and 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 date. General 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 units, the
Hyaluronan Division and the Oral Restorative Division. 18




---



##### Table of Contents



The Company has a number of relationships with corporate partners relating
to the development and marketing of hyaluronan-based products for a variety of
medical applications. Currently, the primary commercial application for the
Companys hyaluronan is as a component in ophthalmic surgical products marketed
by Alcon for cataract surgery. Sales to Alcon are made under a supply agreement
that extends through December 31, 2004. The agreement contains minimum
purchase requirements totaling $2.5 million in each of calendar years 2003 and
2004. ETHICON began marketing INTERGEL Solution outside the United States in
June 1998. The Company received FDA approval to market INTERGEL Solution in
the United States in November 2001, and ETHICON began marketing it in the
United States during the first calendar quarter of 2002. INTERGEL Solution was
voluntarily withdrawn from the market by ETHICON in March 2003 in order to
complete an assessment of information obtained during postmarketing experience
with the product, including allegations of adverse events associated with
off-label use in non-conservative surgical procedures (such as hysterectomies).
The Company is working with ETHICON to complete the post-marketing evaluation
and determine the opportunities for returning the product to market. The Companys Oral Restorative Division markets a comprehensive line of
titanium-based dental implants for tooth replacement therapy. The Oral
Restorative Division also manufactures and markets synthetic bone graft
substitute products for the restoration of bone tissue deterioration resulting
from periodontal disease and tooth loss. The Oral Restorative Division also
markets other products for the regeneration of bone and soft tissue. The
Divisions products are marketed in the United States through the Companys
direct sales force; in Italy through the Companys subsidiary, Lifecore
Biomedical SpA, in Germany through the Companys subsidiary, Lifecore
Biomedical GmbH, in Scandinavia through the Companys subsidiary, Lifecore
Biomedical AB, and in other countries through distributors. Results of Operations 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.Net sales increased $4,595,000 or 11% in fiscal 2004 from
fiscal 2003. Hyaluronan Division sales increased $60,000 and Oral Restorative
Division sales increased $4,535,000 or 17%. Hyaluronan Division sales increased to $15,719,000 in fiscal 2004 from
$15,659,000 in fiscal 2003 due to increased sales of ophthalmic and veterinary
products. Sales of ophthalmic products to a single customer were $7,435,000 in
fiscal 2004 compared with $6,725,000 for fiscal 2003. This sales increase was
partially offset by a reduction in INTERGEL Solution sales due to ETHICONs
voluntary withdrawal of INTERGEL Solution from the market. Oral Restorative Division sales increased to $31,317,000 in fiscal 2004
from $26,782,000 in fiscal 2003. Domestic sales increased 12% due to the
continued expansion of our sales representatives, the introduction of the
RENOVA Internal Hex Implant System and growth in market acceptance of the
STAGE-1 Single Stage Implant System. Sales in the international markets
increased by 22% due to sales increases at our subsidiary operations and a
favorable impact from currency translations. 19




---



##### Table of Contents



Gross profit.Consolidated gross profit, as a percentage of net sales,
was 56% in fiscal 2004 and 52% in fiscal 2003. The gross profit for the
Hyaluronan Division increased to 42% in fiscal 2004 from 38% in fiscal 2003.
The increase in gross profit is due to a favorable product mix and cost
savings, partially offset by an increase in unused manufacturing capacity
charges associated with decreased hyaluronan production. Gross profit for the
Oral Restorative Division increased to 64% in fiscal 2004 from 60% in fiscal
2003 due to sales mix, reduced discounting and lower material costs. Research and development.Research and development expenses increased
$452,000 or 11% in fiscal 2004 from fiscal 2003. The increase is due to
additional consulting and professional fees associated with the market
withdrawal of INTERGEL Solution in March 2003. Marketing and sales.Marketing and sales expenses increased by $1,429,000
or 12% in fiscal 2004 from fiscal 2003. The increase was due mainly to costs
associated with the expansion of the oral restoratives domestic sales force
and international operations. General and administrative.General and administrative expenses increased
by $829,000 or 15% in fiscal 2004 from fiscal 2003. The increase is principally
related to increases in legal, insurance, subsidiary operations and
Sarbanes-Oxley compliance costs. Restructuring charges.Restructuring charges of $1,136,000 were recorded
as part of a 10% workforce reduction. The restructuring charges consisted of
$1,072,000 for employee severance costs and $64,000 for professional fees. Other income (expense).Net other expense, as shown on the Condensed
Consolidated Statements of Operations, decreased $497,000 for the current
fiscal year as compared to the last fiscal year. The decrease is due to the
$294,000 increase in currency transaction gains realized on Euro denominated
intercompany transactions and a reduction of interest expense of $115,000. Year ended June 30, 2003 compared with year ended June 30, 2002. Hyaluronan
    
    Oral RestorativeDivision
    
    Division
    
    Consolidated2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002Net sales
    
    $
    15,659,000
    
    
    $
    15,244,000
    
    
    $
    26,782,000
    
    
    $
    23,550,000
    
    
    $
    42,441,000
    
    
    $
    38,794,000Cost of goods sold
    
    
    9,762,000
    
    
    
    12,165,000
    
    
    
    10,617,000
    
    
    
    9,951,000
    
    
    
    20,379,000
    
    
    
    22,116,000Gross profit
    
    
    5,897,000
    
    
    
    3,079,000
    
    
    
    16,165,000
    
    
    
    13,599,000
    
    
    
    22,062,000
    
    
    
    16,678,000Operating expensesResearch and development
    
    
    3,165,000
    
    
    
    3,948,000
    
    
    
    902,000
    
    
    
    917,000
    
    
    
    4,067,000
    
    
    
    4,865,000Marketing and sales
    
    
    664,000
    
    
    
    259,000
    
    
    
    11,689,000
    
    
    
    10,515,000
    
    
    
    12,353,000
    
    
    
    10,774,000General and administrative
    
    
    2,035,000
    
    
    
    1,831,000
    
    
    
    3,508,000
    
    
    
    3,204,000
    
    
    
    5,543,000
    
    
    
    5,035,0005,864,000
    
    
    
    6,038,000
    
    
    
    16,099,000
    
    
    
    14,636,000
    
    
    
    21,963,000
    
    
    
    20,674,000Operating income (loss)
    
    $
    33,000
    
    
    $
    (2,959,000
    )
    
    $
    66,000
    
    
    $
    (1,037,000
    )
    
    $
    99,000
    
    
    $
    (3,996,000
    )
 Net Sales.Net sales increased $3,647,000 or 9% in fiscal 2003 from
fiscal 2002. Hyaluronan Division sales increased $415,000 or 3%, and Oral
Restorative Division sales increased $3,232,000 or 14%. Hyaluronan Division sales increased to $15,659,000 in fiscal 2003 from
$15,244,000 in fiscal 2002 due to increased sales of ophthalmic and orthopedic
products. Sales of ophthalmic products to a single customer were $6,725,000 in
fiscal 2003 compared with $5,359,000 for fiscal 2002. This sales increase was
partially offset by a reduction in INTERGEL Solution sales due to ETHICONs
voluntary withdrawal of INTERGEL Solution from the market. 20




---



##### Table of Contents



Oral Restorative Division sales increased to $26,782,000 in fiscal 2003
from $23,550,000 in fiscal 2002. Domestic sales increased 4% due to continued
growth in market acceptance of the STAGE-1 Single Stage Implant System and the
RBM coated implant lines. Sales in the international markets increased by 27%
due to sales increases at our subsidiary operations and a favorable impact from
currency translations. Gross profit.Consolidated gross profit, as a percentage of net sales,
was 52% in fiscal 2003 and 43% in fiscal 2002. The gross profit for the
Hyaluronan Division increased to 38% in fiscal 2003 from 20% in fiscal 2002.
The increase in gross profit is due to absorption of unused manufacturing
capacity charges associated with increased hyaluronan production and product
mix. Gross profit for the Oral Restorative Division increased to 60% in fiscal
2003 from 58% in fiscal 2002 due to sales mix and reduced material costs. Research and development.Research and development expenses decreased
$798,000 or 16% in fiscal 2003 from fiscal 2002. The decrease is due to the
decline in consulting and professional fees related to the regulatory review
process of INTERGEL Solution which received FDA approval in fiscal 2002. Marketing and sales.Marketing and sales expenses increased by $1,579,000
or 15% in fiscal 2003 from fiscal 2002. The increase was due mainly to costs
associated with the international expansion of the oral restorative business. General and administrative.General and administrative expenses increased
by $508,000 or 10% in fiscal 2003 from fiscal 2002. The increase is principally
related to costs associated with subsidiary operations and higher legal
expenses in the 2003 fiscal year as compared to the 2002 fiscal year. Other income (expense).Net other expense decreased $267,000 for the 2003
fiscal year as compared to the 2002 fiscal year. The decrease is primarily due
to the $291,000 increase in other income from currency gains realized on
Euro-denominated intercompany transactions. Liquidity and Capital Resources Inventories consist mainly of finished hyaluronan powder and oral
restorative products and related raw materials. The portion of finished
hyaluronan inventory that is not expected to be consumed within the next twelve
months is classified as long-term inventory. The finished hyaluronan inventory
is maintained in a frozen state and has a shelf life of ten years. Total
inventory decreased by $985,000 and $759,000 in fiscal 2004 and 2003,
respectively, as the Company decreased production of hyaluronan powder. The Company had positive cash flow from operations in fiscal 2004, 2003
and 2002. 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 United States from the FDA. In October 2001, the Company issued an aggregate of 21,647 shares of
common stock to Lancet as the final payment under a consulting agreement. The
number of shares issued to Lancet was determined using a formula based on the
quoted market value of the common stock as determined on the Nasdaq National
Market. Under the terms of the agreement, Lancet exercised the right to have
the shares registered for sale. A Registration Statement on Form S-3 was filed
and declared effective by the Securities and Exchange Commission in November
2001. 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 June 2004 to waive the fixed charge coverage ratio and
the cash flow coverage ratio through June 30, 2005. On July 27, 2004, the
Company gave notice to the bond trustee of its intention to redeem the bonds on
September 1, 2004. The Company repaid the existing bonds with the proceeds of
a new issuance of industrial revenue bonds which closed on August 19, 2004.
The aggregate principal amount of the new bonds is $5,630,000 and the bonds
will bear interest at a variable rate set weekly by the bond Remarketing Agent
(1.28% on date of closing). In addition, the Company will pay an annual
remarketing fee equal to .125% and an annual letter of credit fee of 1.0%. 21




---



##### Table of Contents



The Company has a $5,000,000 credit facility with a bank which has a
maturity date of December 31, 2005. The agreement allows for advances against
eligible accounts receivable and inventories, subject to a borrowing base
certificate. Interest is accrued at the prime rate at June 30, 2004 and 2003,
which was 4.0% and 4.25%, respectively. At June 30, 2004 and 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 net
income (loss). At June 30, 2004 and 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 availability 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. Contractual Obligations The Companys off-balance sheet financing activities consist of
operating leases for office equipment. See the amount of contractual
obligations for operating leases in the table below. The effect of these
operating leases is not material. Payments due by period for our contractual obligations at June 30, 2004
are as follows: Payments due by periodLess than 1Total
    
    Year
    
    1 to 3 Years
    
    4 to 5 Years
    
    ThereafterLong-term debt
    
    $
    5,986,000
    
    
    $
    177,000
    
    
    $
    375,000
    
    
    $
    460,000
    
    
    $
    4,974,000Operating leases
    
    
    427,000
    
    
    
    169,000
    
    
    
    193,000
    
    
    
    65,000
    
    
    
    Purchase obligations
    
    
    3,150,000
    
    
    
    3,150,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    9,563,000
    
    
    $
    3,496,000
    
    
    $
    568,000
    
    
    $
    525,000
    
    
    $
    4,974,000
 Subsequent to the end of the year, on August 19, 2004, the Company issued
variable rate industrial revenue bonds. The proceeds from these bonds were
used to retire the existing 10.25% fixed rate industrial revenue bonds on
September 1, 2004. The new bond obligation is $5,630,000 and the variable
interest rate at the date of issuance was 1.28%. The five year scheduled
maturity of this new issuance beginning 2005 and ending in 2009 is: $280,000,
$285,000, $290,000, $305,000, $315,000; and $4,155,000 thereafter. Cautionary Statement Statements included in this Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-K,
in the Letter to Shareholders contained in the Annual Report to Shareholders,
in future filings by the Company with the Securities and Exchange Commission
and in the Companys press releases and oral statements made with the approval
of authorized executive officers, if the statements are not historical or
current facts, should be considered forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements relate to market acceptance and
demand for the Companys products, future product development plans and timing,
the results of clinical trials, FDA clearances and the related timing of such,
the potential size of the markets for the Companys products, future product
introductions, future revenues, expense levels and capital needs and the
Companys ability to successfully negotiate acceptable agreements with its
corporate partners. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The
following important factors, among others, in some cases have affected and in
the future could affect the Companys actual results and could cause its actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the uncertainty associated with the future
market status of INTERGEL 22




---



##### Table of Contents



Solution; (ii) obtaining the necessary regulatory
approvals for new hyaluronan and oral restorative products; (iii) the
Companys reliance on corporate partners to develop new products on a timely
basis and to market the Companys existing and new hyaluronan products
effectively; (iv) intense competition in the markets for the Companys
principal products and (v) other factors discussed in the risk factors filed as
Exhibit 99.1 to this Form 10-K. The foregoing list should not be construed as
exhaustive, and the Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events. 
 Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Company invests its excess cash in money market mutual funds and
highly rated short-term 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. At June 30, 2004, the Companys outstanding long-term debt carries
interest at a fixed rate. As a result, there is no material market risk.
However, the Company will repay the existing bonds with the proceeds of a new
issuance of industrial revenue bonds on September 1, 2004. The aggregate
principal amount of the new bonds is $5,630,000, and the new bonds will bear
interest at a variable rate set weekly by the bond Remarketing Agent. The
effective rate on August 19, 2004 was 1.28%. A ten percent change in this
variable rate would be approximately $10,000 annually. 23




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data The consolidated financial statements and schedule are listed under Item
15 of this report. Summarized unaudited quarterly financial data for 2004 and
2003 is as follows: QuarterFirst
    
    Second
    
    Third
    
    FourthYear 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
    
    
    
    12,971,547Year ended June 30, 2003Net sales
    
    $
    8,972,000
    
    
    $
    10,262,000
    
    
    $
    11,833,000
    
    
    $
    11,374,000Gross profit
    
    
    4,063,000
    
    
    
    6,097,000
    
    
    
    6,420,000
    
    
    
    5,482,000Net income (loss)
    
    
    (1,046,000
    )
    
    
    312,000
    
    
    
    947,000
    
    
    
    (568,000
    )Net income (loss) per shareBasic and diluted
    
    $
    (0.08
    )
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    (0.04
    )Weighted average common and common
equivalent shares outstandingBasic
    
    
    12,874,628
    
    
    
    12,882,313
    
    
    
    12,885,206
    
    
    
    12,885,417Diluted
    
    
    12,874,628
    
    
    
    12,949,904
    
    
    
    12,962,378
    
    
    
    12,885,417
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A. 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
its disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under 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 are adequately designed to ensure that information required to be
disclosed by the Company in the reports it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in applicable rules and forms. During the Companys most recent fiscal quarter, there has been no change
in the Companys internal control over financial reporting (as defined in Rule
13a-15(f) or 15d-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. 
 Item 9B. Other Information None. 24




---



##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant Information concerning director nominees is set forth in the sections
entitled Election of Directors and Section 16(a) Beneficial Ownership
Reporting Compliance in the Companys Proxy Statement for its 2004 Annual
Meeting of Shareholders to be held November 11, 2004, which is incorporated
herein by reference. See also Executive Officers of the Registrant in Item 1
above. Code of Business Conduct and Ethics The Company has adopted a Code of Business Conduct and Ethics (the Code)
that applies to all officers, directors and employees. The Code and the
charters of the Audit and Governance and Nominating committees are posted on
the Companys website at www.Lifecore.com. The Company intends to post any
amendments to or waivers from the Code on its website. 
 Item 11. Executive Compensation A description of our executive officers compensation is set forth in the
sections titled Executive Compensation, Option Grants, Option Exercises
and Option Values and Executive Agreements of the Companys Proxy Statement
for its 2004 Annual Meeting of Shareholders, which is incorporated herein by
reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership of certain owners and management is set forth in the
section entitled Security Ownership of Certain Beneficial Owners and
Management in the Companys Proxy Statement for its 2004 Annual Meeting of
Shareholders, which is incorporated herein by reference. Securities authorized for issuance under equity compensation plans The following table provides information on equity compensation plans
under which equity securities of the Company are authorized for issuance, as of
June 30, 2004: Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    under equityissued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected in columnand rights
    
    and rights
    
    (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation plans approved by
security holders:
    
    
    2,751,640
    (1)
    
    $
    11,28
    
    
    
    1,448,381
    (2)Equity compensation plans not approved by
security holders:
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,751,640
    
    
    $
    11,28
    
    
    
    1,448,381
  (1)
    
    Includes the Companys 1990 Stock Plan and 1996 Stock Plan.  (2)
    
    The Company has not granted shares of restricted stock under the 1996 Stock
Plan or any shares under the 2003 Stock Plan. 25




---



##### Table of Contents



Item 13. Certain Relationships and Related Transactions None. 
 Item 14. Principal Accountant Fees and Services. A description of the fees paid to our independent registered public
accounting firm is set forth in the section titled Independent Registered
Public Accountants of the Companys Proxy Statement for its 2004 Annual
Meeting of Shareholders and is incorporated herein by reference. 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules (a) Documents filed as part of the report  1.
    
    Consolidated Financial Statements Form 10-KPage ReferenceReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets - June 30, 2004 and 2003
    
    F-2 and F-3Consolidated Statements of Operations - years ended June 30, 2004,
2003 and 2002
    
    F-4Consolidated Statements of Shareholders Equity - years ended June 30, 2004,
2003 and 2002
    
    F-5Consolidated Statements of Cash Flows - years ended June 30, 2004,
2003 and 2002
    
    F-6Notes to Consolidated Financial Statements
    
    F-7 through F-19
  2.
    
    Consolidated Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts
    
    S-1
  3.
    
    Exhibits and 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) (Pursuant to Rule 24b-2, certain portions of this Exhibit have been deleted and filed separately with the
Commission) (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)
 26




---



##### 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 Association10.1
    
    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, (Certain information has been deleted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2) (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. (pursuant to Rule
24b-2, certain portions of this Exhibit have been omitted and filed separately with the Commission) (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 Plan10.7
    
    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 Company10.10
    
    Remarketing Agreement, dated as of August 1, 2004, between the Company and Northland Securities, Inc.10.11
    
    Tax Exemption Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota, the Company and Wells Fargo Bank, National Association10.12
    
    Irrevocable Letter of Credit, dated as of August 19, 2004, from M&I Marshall & Ilsley Bank to Wells Fargo Bank, National Association10.13
    
    Reimbursement Agreement, dated as of August 1, 2004, between the Company and M&I Marshall & Ilsley Bank10.14
    
    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
 27




---



##### Table of Contents



Description10.15
    
    Security Agreement, dated as of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank10.16
    
    Pledge and Security Agreement, dated as of August 1, 2004, between the Company, M&I Marshall & Ilsley Bank and Wells Fargo Bank, National
Association10.17
    
    Bond Purchase Agreement, dated as of August 19, 2004, by and between City of Chaska, Minnesota, the Company and Northland Securities, Inc.23.1
    
    Consent of Grant Thornton LLP31.1
    
    Certification of Dennis J. Allingham pursuant to Exchange Act Rules 13a  14(a) and 15d  14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of David M. Noel pursuant to Exchange Act Rules 13a  14(a) and 15d  14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    Certification of Dennis J. Allingham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of David M. Noel pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Risk Factors*
    
    Denotes management contract or compensatory plan, contract or arrangement.
 (b) Reports on Form 8-K The Company filed the following Current Reports on Form 8-K on the dates
and for the purposes indicated: April 13, 2004
    
    Press release announcing results for the third quarter of
fiscal year 2004.June 14, 2004
    
    Press release announcing the introduction of the RENOVA
Internal Hex Dental Implant System.
 28




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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.Dated: September 13, 2004
    
    
    
    /s/ DENNIS J. ALLINGHAMDennis J. AllinghamPresident, Chief Executive Officerand Secretary
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the dates indicated. Dated: September 13, 2004
    
    /s/ DAVID M. NOELDavid M. NoelVice President of Finance and Chief
Financial Officer
(principal financial and accounting officer)Dated: September 13, 2004
    
    /s/ DENNIS J. ALLINGHAMDennis J. AllinghamPresident, Chief Executive Officer, Secretary and Director
(principal executive officer)Dated: September 13, 2004
    
    /s/ ORWIN L. CARTEROrwin L. CarterDirectorDated: September 13, 2004
    
    /s/ JOAN L. GARDNERJoan L. GardnerDirectorDated: September 13, 2004
    
    /s/ THOMAS H. GARRETTThomas H. GarrettDirectorDated: September 13, 2004
    
    /s/ JOHN C. HEINMILLERJohn C. HeinmillerDirectorDated: September 13, 2004
    
    /s/ RICHARD W. PERKINSRichard W. PerkinsDirectorDated: September 13, 2004
    
    /s/ JOHN E. RUNNELLSJohn E. RunnellsDirector
 29




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors
Lifecore Biomedical, Inc. We have audited the accompanying consolidated balance sheets of Lifecore
Biomedical, Inc. and Subsidiaries as of June 30, 2004 and 2003, and the related
consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended June 30, 2004. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lifecore
Biomedical, Inc. and Subsidiaries as of June 30, 2004 and 2003, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 2004, in conformity with
accounting principles generally accepted in the United States of America. We have also audited Schedule II of Lifecore Biomedical, Inc. and
Subsidiaries for each of the three years in the period ended June 30, 2004. In
our opinion, this schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be set forth therein. /s/ GRANT THORNTON LLP Minneapolis, Minnesota July 29, 2004 (except for the last paragraph of Note C, as to which the date is
September 1, 2004) F-1




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries 
 CONSOLIDATED BALANCE SHEETS June 30,
 ASSETS 2004
    
    2003CURRENT ASSETSCash and cash equivalents
    
    $
    8,553,000
    
    
    $
    4,211,000Accounts receivable, less
allowances
    
    
    8,626,000
    
    
    
    7,795,000Inventories
    
    
    9,491,000
    
    
    
    9,728,000Prepaid expenses
    
    
    705,000
    
    
    
    766,000Total current
assets
    
    
    27,375,000
    
    
    
    22,500,000PROPERTY, PLANT AND EQUIPMENT  AT COSTLand
    
    
    249,000
    
    
    
    249,000Building
    
    
    23,970,000
    
    
    
    23,960,000Equipment
    
    
    17,672,000
    
    
    
    17,024,000Land and building improvements
    
    
    3,507,000
    
    
    
    3,499,00045,398,000
    
    
    
    44,732,000Less accumulated depreciation
    
    
    (22,200,000
    )
    
    
    (19,820,000
    )23,198,000
    
    
    
    24,912,000OTHER ASSETSIntangibles
    
    
    4,513,000
    
    
    
    4,643,000Security deposits
    
    
    837,000
    
    
    
    843,000Inventories
    
    
    3,891,000
    
    
    
    4,639,000Other
    
    
    504,000
    
    
    
    815,0009,745,000
    
    
    
    10,940,000$
    60,318,000
    
    
    $
    58,352,000
 F-2




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS  (continued) June 30,
 LIABILITIES AND SHAREHOLDERS EQUITY 2004
    
    2003CURRENT LIABILITIESCurrent maturities of long-term obligations
    
    $
    177,000
    
    
    $
    156,000Accounts payable
    
    
    2,467,000
    
    
    
    1,880,000Accrued compensation
    
    
    1,362,000
    
    
    
    1,113,000Accrued expenses
    
    
    1,677,000
    
    
    
    840,000Total current liabilities
    
    
    5,683,000
    
    
    
    3,989,000LONG-TERM
OBLIGATIONS
    
    
    5,809,000
    
    
    
    5,969,000COMMITMENTS 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, 12,931,758 and
12,885,417 shares at June 30, 2004 and
2003
    
    
    129,000
    
    
    
    129,000Accumulated currency translation adjustment
    
    
    (422,000
    )
    
    
    87,000Additional paid-in
capital
    
    
    89,116,000
    
    
    
    88,882,000Accumulated
deficit
    
    
    (39,997,000
    )
    
    
    (40,704,000
    )48,826,000
    
    
    
    48,394,000$
    60,318,000
    
    
    $
    58,352,000
 The accompanying notes are an integral part of these statements. F-3




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries 
 CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30, 2004
    
    2003
    
    2002Net sales
    
    $
    47,036,000
    
    
    $
    42,441,000
    
    
    $
    38,794,000Cost of goods sold
    
    
    20,483,000
    
    
    
    20,379,000
    
    
    
    22,116,000Gross profit
    
    
    26,553,000
    
    
    
    22,062,000
    
    
    
    16,678,000Operating expensesResearch and development
    
    
    4,519,000
    
    
    
    4,067,000
    
    
    
    4,865,000Marketing and sales
    
    
    13,782,000
    
    
    
    12,353,000
    
    
    
    10,774,000General and administrative
    
    
    6,372,000
    
    
    
    5,543,000
    
    
    
    5,035,000Restructuring charges
    
    
    1,136,000
    
    
    
    
    
    
    
    25,809,000
    
    
    
    21,963,000
    
    
    
    20,674,000Operating income (loss)
    
    
    744,000
    
    
    
    99,000
    
    
    
    (3,996,000
    )Other income (expense)Interest income
    
    
    52,000
    
    
    
    49,000
    
    
    
    72,000Interest expense
    
    
    (642,000
    )
    
    
    (757,000
    )
    
    
    (743,000
    )Currency transaction gains (losses)
    
    
    650,000
    
    
    
    356,000
    
    
    
    (19,000
    )Other, net
    
    
    70,000
    
    
    
    (15,000
    )
    
    
    6,000130,000
    
    
    
    (367,000
    )
    
    
    (684,000
    )Income (loss) before income taxes
    
    
    874,000
    
    
    
    (268,000
    )
    
    
    (4,680,000
    )Provision for income taxes
    
    
    167,000
    
    
    
    87,000
    
    
    
    37,000Net income (loss)
    
    $
    707,000
    
    
    $
    (355,000
    )
    
    $
    (4,717,000
    )Net income (loss) per common shareBasic
    
    $
    0.05
    
    
    $
    (0.03
    )
    
    $
    (0.37
    )Diluted
    
    $
    0.05
    
    
    $
    (0.03
    )
    
    $
    (0.37
    )Weighted average common and common equivalent
shares outstandingBasic
    
    
    12,897,737
    
    
    
    12,881,863
    
    
    
    12,802,354Diluted
    
    
    12,957,726
    
    
    
    12,881,863
    
    
    
    12,802,354
 The accompanying notes are an integral part of these statements. F-4




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Common Stock
    
    Accumulated
    
    AdditionalShares
    
    
    
    
    
    Currency Translation
    
    Paid-In
    
    AccumulatedIssued
    
    Amount
    
    Adjustment
    
    Capital
    
    DeficitBalances at June 30, 2001
    
    
    12,679,127
    
    
    $
    127,000
    
    
    $
    
    
    
    $
    87,561,000
    
    
    $
    (35,632,000
    )Exercise of stock options and
employee stock purchase savings
plan
    
    
    97,371
    
    
    
    1,000
    
    
    
    
    
    
    
    653,000
    
    
    
    Issuance of common stock as
payment for services
    
    
    21,647
    
    
    
    
    
    
    
    
    
    
    
    208,000
    
    
    
    Issuance of common stock as
payment for subsidary purchase
    
    
    69,597
    
    
    
    1,000
    
    
    
    
    
    
    
    346,000
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,717,000
    )Balances at June 30, 2002
    
    
    12,867,742
    
    
    
    129,000
    
    
    
    
    
    
    
    88,768,000
    
    
    
    (40,349,000
    )Exercise of stock options and stock awards
    
    
    17,675
    
    
    
    
    
    
    
    
    
    
    
    114,000
    
    
    
    Addition to accumulated currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    87,000
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (355,000
    )Balances at June 30, 2003
    
    
    12,885,417
    
    
    
    129,000
    
    
    
    87,000
    
    
    
    88,882,000
    
    
    
    (40,704,000
    )Exercise of stock options and stock awards
    
    
    46,341
    
    
    
    
    
    
    
    
    
    
    
    234,000
    
    
    
    Addition to accumulated currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    (509,000
    )
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    707,000Balances at June 30, 2004
    
    
    12,931,758
    
    
    $
    129,000
    
    
    $
    (422,000
    )
    
    $
    89,116,000
    
    
    $
    (39,997,000
    )
 The accompanying notes are an integral part of these statements. F-5




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2004
    
    2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    707,000
    
    
    $
    (355,000
    )
    
    $
    (4,717,000
    )Adjustments to reconcile net income (loss) to net
cash provided by
operating activities:Depreciation and amortization
    
    
    2,520,000
    
    
    
    2,844,000
    
    
    
    2,940,000Allowance for doubtful accounts
    
    
    (7,000
    )
    
    
    89,000
    
    
    
    187,000Accumulated currency translation adjustment
    
    
    (509,000
    )
    
    
    87,000
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable
    
    
    (823,000
    )
    
    
    (2,000
    )
    
    
    (1,146,000
    )Inventories
    
    
    985,000
    
    
    
    759,000
    
    
    
    2,935,000Prepaid expenses
    
    
    61,000
    
    
    
    231,000
    
    
    
    (322,000
    )Accounts payable
    
    
    587,000
    
    
    
    (1,620,000
    )
    
    
    443,000Accrued liabilities
    
    
    1,086,000
    
    
    
    158,000
    
    
    
    688,000Net cash provided by operating activities
    
    
    4,607,000
    
    
    
    2,191,000
    
    
    
    1,008,000Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (666,000
    )
    
    
    (744,000
    )
    
    
    (961,000
    )Purchases of intangibles
    
    
    
    
    
    
    
    
    
    
    (60,000
    )Decrease in security deposits
    
    
    6,000
    
    
    
    2,000
    
    
    
    9,000Decrease (increase) in other assets
    
    
    300,000
    
    
    
    248,000
    
    
    
    (209,000
    )Net cash used in investing activities
    
    
    (360,000
    )
    
    
    (494,000
    )
    
    
    (1,221,000
    )Cash flows from financing activities:Payments on long-term obligations
    
    
    (139,000
    )
    
    
    (128,000
    )
    
    
    (223,000
    )Proceeds from stock options exercised
    
    
    234,000
    
    
    
    114,000
    
    
    
    654,000Net cash provided by (used in) financing activities
    
    
    95,000
    
    
    
    (14,000
    )
    
    
    431,000Net increase in cash and cash equivalents
    
    
    4,342,000
    
    
    
    1,683,000
    
    
    
    218,000Cash and cash equivalents at beginning of year
    
    
    4,211,000
    
    
    
    2,528,000
    
    
    
    2,310,000Cash and cash equivalents at end of year
    
    $
    8,553,000
    
    
    $
    4,211,000
    
    
    $
    2,528,000Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    645,000
    
    
    $
    713,000
    
    
    $
    763,000Taxes
    
    
    87,000
    
    
    
    61,000
    
    
    
    37,000
 The accompanying notes are an integral part of these statements. F-6




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Lifecore Biomedical, Inc. (the Company) manufactures biomaterials and
surgical devices for use in various surgical markets and provides specialized
contract aseptic manufacturing services through its two divisions, the
Hyaluronan Division and the Oral Restorative Division. The Companys
manufacturing facility is located in Chaska, Minnesota. The Hyaluronan
Division markets its products through original equipment manufacturers and
contract manufacturing alliances in gynecologic, ophthalmologic and orthopedic
surgery and veterinary medicine. The Oral Restorative Division markets its
products through direct sales in the United States, Italy, Germany and Sweden
and through distributors in other foreign countries. In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
periods. Actual results could differ from those estimates. A summary of significant accounting policies consistently applied in the
preparation of the financial statements follows:  1.
    
    Consolidation The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.  2.
    
    Cash and Cash Equivalents The Company considers all highly liquid temporary investments with
original maturities of three months or less to be cash equivalents. At June
30, 2004 and 2003, substantially all of the Companys cash and cash equivalents
were invested in a money market fund.  3.
    
    Accounts Receivable 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 its customers.
The Companys customers are located primarily throughout the United States,
Asia, Europe and South America. Accounts receivable balances from customers
located in Asia, Europe and South America were 16%, 31% and 8% of total
receivables, respectively, at June 30, 2004 and 12%, 35% and 9% of total
receivables, respectively, at June 30, 2003. The Company maintains allowances
for potential credit losses, which were $407,000 and $414,000 at June 30, 2004
and 2003, respectively. F-7




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTE TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued) 4. Inventories Inventories are stated at the lower of cost (first-in, first-out method)
or market. Inventories consist mainly of finished hyaluronan powder, aseptic
units and oral restorative products and related raw materials. The Companys
inventory has been reduced to 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. The portion of finished hyaluronan powder inventory not expected to
be consumed within the next 12 months is classified as a long-term asset. The
finished hyaluronan inventory is maintained in a frozen state and has a shelf
life of ten years. Inventories consist of the following: As of June 30,2004
    
    2003Raw
materials
    
    $
    2,756,000
    
    
    $
    2,756,000Work-in-process
    
    
    416,000
    
    
    
    344,000Finished
goods
    
    
    10,210,000
    
    
    
    11,267,000$
    13,382,000
    
    
    $
    14,367,000
 5. Depreciation Depreciation is provided in amounts sufficient to charge the cost of
depreciable assets to operations over their estimated service lives principally
on a straight-line method for financial reporting purposes and on straight-line
and accelerated methods for income tax reporting purposes. Depreciation expense
was approximately $2,379,000, $2,627,000 and $2,603,000 for the years ended
June 30, 2004, 2003 and 2002, respectively. Lives used in straight-line
depreciation for financial reporting purposes are as follows: Number ofyearsBuilding
    
    
    18-25Equipment
    
    
    3-15Land and building improvements
    
    
    18
 6. Intangibles Intangibles consist primarily of the cost of technology and regulatory
rights, the goodwill related to acquisitions and the cost of acquiring a
customer list. All intangibles relate to the oral restorative segment. Included within intangibles are costs incurred to register patents and
trademarks, which are capitalized as incurred. Amortization of these costs
commences when the related patent or trademark is granted. The costs are
amortized over the estimated useful life of the patent or trademark, not to
exceed 17 years. F-8




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTE TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued) Effective July 1, 2001, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142
the Company ceased amortization of goodwill and technology and regulatory
rights effective July 1, 2001, while the customer list continued to be
amortized on the straight-line method over 5 years and was fully amortized as
of June 30, 2004. 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,
an impairment loss of $40,000 and $160,000 was recorded in general and
administrative expenses in fiscal 2003 and 2002, respectively. There was no
impairment recorded in fiscal 2004. Intangibles consisted of the following at June 30: 2004
    
    2003Goodwill
    
    $
    8,245,000
    
    
    $
    8,245,000Customer list
    
    
    725,000
    
    
    
    725,000Patents
    
    
    387,000
    
    
    
    387,000Less accumulated amortization
    
    
    (4,844,000
    )
    
    
    (4,714,000
    )$
    4,513,000
    
    
    $
    4,643,000
 7. Other Assets Other assets consist of the following at June 30: 2004
    
    2003Website development costs
    
    $
    802,000
    
    
    $
    802,000Financing costs
    
    
    317,000
    
    
    
    307,000Distribution rights and licenses
    
    
    150,000
    
    
    
    150,000Other
    
    
    38,000
    
    
    
    69,000Less accumulated amortization
    
    
    (803,000
    )
    
    
    (513,000
    )$
    504,000
    
    
    $
    815,000
 Amortization of these costs commences when the related asset is placed in
service. The costs are amortized over the estimated useful life of the asset
ranging from 3 to 20 years. 8. Revenue Recognition The Company recognizes revenue when product is shipped, or otherwise
accepted by the customer, pursuant to customers orders, the price is fixed and
collection is reasonably assured. 9. Income taxes Deferred income taxes are provided on the liability method whereby
deferred tax assets and deferred tax liabilities are recognized for the effects
of taxable temporary differences. Temporary differences are the differences
between reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment. F-9




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTE TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued) 10. Net Income (Loss) Per Common 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 loss by the weighted average number of outstanding common shares
and common share equivalents relating to stock options, when dilutive. For the
fiscal year ended June 30, 2004, 59,989 shares of common stock equivalents were
included in the computation of diluted net income per share. For the fiscal
years ended June 30, 2003 and 2002, the common share equivalents that would
have been included in the computation of diluted net income per share were
62,539 and 308,513, respectively, had net income been achieved. Options to purchase 2,334,340, 2,620,145 and 1,532,793 shares of common
stock with a weighted average exercise price of $12.26, $12.37 and $15.52 were
outstanding at June 30, 2004, 2003, and 2002, respectively, but were excluded
from the computation of common share equivalents because their exercise prices
were greater than the average market price of the common shares. 11. Stock Based Compensation 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 income (loss) per common share would
have been as follows: 2004
    
    2003
    
    2002Net income (loss), as
reported
    
    $
    707,000
    
    
    $
    (355,000
    )
    
    $
    (4,717,000
    )Deduct: Total stock-based employee compensation expense
determined under fair value method for awards, net of
related tax effects (no tax effect in 2004, 2003 and 2002)
    
    
    (1,978,000
    )
    
    
    (1,841,000
    )
    
    
    (2,768,000
    )Pro forma net loss
    
    $
    (1,271,000
    )
    
    $
    (2,196,000
    )
    
    $
    (7,485,000
    )Net income (loss) per common equivalent share:Basic  as reported
    
    $
    0.05
    
    
    $
    (0.03
    )
    
    $
    (0.37
    )Diluted  as reported
    
    $
    0.05
    
    
    $
    (0.03
    )
    
    $
    (0.37
    )Basic  pro-forma
    
    $
    (0.10
    )
    
    $
    (0.17
    )
    
    $
    (0.58
    )Diluted  pro-forma
    
    $
    (0.10
    )
    
    $
    (0.17
    )
    
    $
    (0.58
    )
 F-10




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTE TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued) The weighted average fair value of options granted in 2004, 2003 and 2002
was $6.48, $7.62 and $7.66 per share, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in 2004, 2003, and 2002, respectively: no dividend yield; risk-free rate
of return of 3.8%, 6%, 6%; volatility of 81.59%, 86.57% and 89.4%; and an
average term of 6.15, 6.0, 6.0 years. These effects may not be representative
of the future effects of applying the fair value method. NOTE B  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 agreement allows for advances against
eligible accounts receivable and inventories, subject to a borrowing base
certificate. Interest is accrued at the prime rate, which was 4.00% and 4.25%
at June 30, 2004 and 2003, respectively. At June 30, 2004 and 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 net
income (loss). At June 30, 2004 and 2003, the Company was in compliance with
all covenants. NOTE C  LONG-TERM OBLIGATIONS Long-term obligations consist of the following: As of June 30,2004
    
    2003Industrial
development revenue
bonds
    
    $
    5,986,000
    
    
    $
    6,125,000Less current
maturities
    
    
    (177,000
    )
    
    
    (156,000
    )$
    5,809,000
    
    
    $
    5,969,000
 Industrial Development Revenue Bonds In 1990, the Company completed a $7,000,000 transaction to finance its
manufacturing and administrative facility through the issuance of 30-year
industrial development revenue bonds by the municipality where the facility is
located. The bonds are collateralized by a first mortgage on the facility and
bear interest at 10.25%. The Company is required to make debt service payments
on the bonds of approximately $775,000 per year through 2021. The payments are
required to be made monthly to a sinking fund. At June 30, 2004 and 2003, the
Company had approximately $700,000 on deposit with the bond trustee to cover
the reserve fund requirement. F-11




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE C  LONG-TERM OBLIGATIONS  (continued) The Company has the right to redeem the bonds upon the payment of the
outstanding principal balance plus accrued interest and a premium. The premium
is 2% of the principal amount during the year commencing September 1, 2004 and
declines during subsequent years. The terms of the loan agreement require the Company to comply with various
financial covenants including minimum current ratio, fixed charges coverage and
cash flow coverage requirements and maximum debt to net worth limitation. The
fixed charges coverage and cash flow coverage requirements have been waived by
the bondholder through fiscal 2005. The debt to net worth ratio covenant has
the effect of restricting the payment of cash dividends or repurchases of
common stock. The aggregate minimum annual principal payments of long-term obligations
for the years ending June 30 are as follows: 2005
    
    $
    177,0002006
    
    
    180,0002007
    
    
    195,0002008
    
    
    220,0002009
    
    
    240,000Thereafter
    
    
    4,974,000$
    5,986,000
 Subsequent to the end of the year, on August 19, 2004, the Company issued
variable rate industrial revenue bonds. The proceeds from these bonds were
used to retire the existing 10.25% fixed rate industrial revenue bonds on
September 1, 2004. The aggregate principal amount of the new bonds is
$5,630,000 and the bonds will bear interest at a variable rate set weekly by
the bond Remarketing Agent (1.28% on date of closing). The bonds are
collateralized by a Bank Letter of Credit which is secured by a first mortgage
on the facility. The Company is required to make monthly principal and
interest payments to a sinking fund. 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 net income (loss). In
addition, the Company will pay an annual remarketing fee equal to .125% and an
annual letter of credit fee of 1.0%. The five year scheduled maturity of this
new issuance beginning 2005 and ending in 2009 is: $280,000, $285,000,
$290,000, $305,000, $315,000; and $4,155,000 thereafter. As a result of
calling the fixed rate bonds for redemption the Company incurred an early
redemption premium of approximately $120,000 and wrote off unamortized deferred
financing costs of approximately $170,000 both of which will be recorded in the
first quarter of fiscal 2005 as additional interest expense. Deferred
financing costs associated with the newly issued bonds of approximately
$160,000 will be amortized over the life of the new bonds which are scheduled
to be fully repaid in 2020. F-12




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE D  INCOME TAXES The provision for income taxes consists of the following at June 30: 2004
    
    2003
    
    2002CurrentFederal
    
    $
    23,000
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    144,000
    
    
    
    87,000
    
    
    
    37,000Deferred
    
    
    
    
    
    
    
    
    
    
    $
    167,000
    
    
    $
    87,000
    
    
    $
    37,000
 Deferred tax assets and liabilities represent the tax effects, based on
current tax law, of future deductible or taxable amounts attributable to events
that have been recognized in the financial statements. Deferred tax assets
(liabilities) consist of the following at June 30: 2004
    
    2003Deferred tax assetsNet operating loss carryforward
    
    $
    11,322,000
    
    
    $
    11,674,000Tax credit carryforward
    
    
    1,054,000
    
    
    
    934,000Inventories
    
    
    1,892,000
    
    
    
    1,338,000Other
    
    
    434,000
    
    
    
    384,000Total deferred tax assets
    
    
    14,702,000
    
    
    
    14,330,000Deferred tax liabilitiesDepreciation
    
    
    (805,000
    )
    
    
    (802,000
    )Prepaid expenses
    
    
    (197,000
    )
    
    
    Customer list
    
    
    (20,000
    )
    
    
    (59,000
    )Total deferred tax liabilities
    
    
    (1,022,000
    )
    
    
    (861,000
    )Net deferred tax asset before valuation allowance
    
    
    13,680,000
    
    
    
    13,469,000Valuation allowance
    
    
    (13,680,000
    )
    
    
    (13,469,000
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 The Company
has established a valuation allowance due to uncertainties
regarding the realization of deferred tax assets based on the Companys lack of
historical earnings. The Company will continue to assess the valuation
allowance and to the extent it is determined the allowance is no longer
required, the tax benefit of remaining deferred tax assets will be recognized
in the future. At
June 30, 2004, the Company had net operating loss carryforwards of
approximately $28,800,000 for Federal tax reporting purposes, which expire from 2007
through 2024. Included as part of the Companys net operating loss
carryforwards are approximately $2,000,000 in tax deductions that resulted from
the exercise of stock options. When the loss carryforwards are realized the
corresponding changes in the valuation allowance will be recorded as additional
paid-in capital. F-13




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE D  INCOME TAXES  (continued) The Company also has general business credit carryforwards of
approximately $1,054,000, which expire from 2007 through 2019. Differences between income tax expense (benefit) and amounts derived by
applying the statutory federal income tax rate to loss before income taxes are
as follows for fiscal years ending June 30: 2004
    
    2003
    
    2002Statutory income tax rate
    
    
    34.0
    %
    
    
    (34.0
    )%
    
    
    (34.0
    )%Research and development credits
    
    
    (13.7
    )%
    
    
    (85.1
    )%
    
    
    (8.7
    )%Foreign sales deduction
    
    
    (30.5
    )%
    
    
    (95.1
    )%
    
    
    (5.0
    )%Other permanent differences
    
    

    7.8
    %
    
    
    19.1
    %
    
    
    0.9
    %Expiration of net operating loss
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    11.9
    %Change in valuation allowance
    
    
    24.1
    %
    
    
    227.7
    %
    
    
    35.6
    %Other
    
    
    (2.6
    )%
    
    
    0.0
    %
    
    
    0.0
    %19.1
    %
    
    
    32.5
    %
    
    
    0.8
    %
 NOTE E  SHAREHOLDERS EQUITY Issuance of Stock On October 8, 2001, the Company issued 21,647 shares of common stock with
an aggregate value of $208,000 as the final payment under a consulting
agreement relating to the development of the Companys e-Commerce website. On July 2, 2001, the Company issued 69,597 shares of common stock with an
aggregate value of $347,000, in connection with the acquisition of shares of
Lifecore Biomedical AB held by two individuals. Stock Option Plans The Company has three stock option plans. In November 1990, the
shareholders adopted the 1990 Stock Plan (the 1990 Plan) to provide for
options to be granted to certain eligible employees, non-employee members of
the Board of Directors and other non-employee persons as defined in the 1990
Plan. In November 1993, the 1990 Plan was amended to provide for a total of
1,000,000 shares of common stock reserved for issuance under the 1990 Plan. In
November 1996, the shareholders adopted the 1996 Stock Plan (the 1996 Plan)
to provide for options to be granted to certain eligible employees,
non-employee members of the Board of Directors and other non-employee persons
as defined in the 1996 Plan. A total of 3,000,000 shares of common stock are
reserved for issuance under the 1996 Plan. In November 2003, the shareholders
adopted the 2003 Stock Plan (the 2003 Plan) to provide for options to be
granted to certain eligible employees, non-employee members of the Board of
Directors and other non-employee persons as defined in the 2003 Plan. A total
of 1,000,000 shares of common stock are reserved for issuance under the 2003
Plan. No stock options have been issued under the 2003 Plan. Options will be
granted under all plans at exercise prices that are determined by a committee
appointed by the Board of Directors. Options granted to date under all plans
have been at exercise prices equal to the fair market value of the Companys
stock on the date of grant. Each grant awarded specifies the period for which
the options are exercisable and provides that the options shall expire at the
end of such period. F-14




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE E  SHAREHOLDERS EQUITY  (continued) Option transactions under the 1990 and 1996 Stock Option Plans during the
three years ended June 30, 2004 are summarized as follows: Number of
    
    Weighted AverageShares
    
    Exercise PriceOutstanding at June 30, 2001
    
    
    2,723,073
    
    
    $
    12.27Granted
    
    
    325,900

    
    
    
    7.66Exercised
    
    
    (70,860
    )
    
    
    7.45Canceled
    
    
    (154,903
    )
    
    
    13.13Outstanding 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
    
    
    $
    11.28
 Number of
    
    Weighted AverageShares
    
    Exercise PriceOptions exercisable at June 30:2004
    
    
    2,329,865
    
    
    $
    11.622003
    
    
    2,213,838
    
    
    
    12.102002
    
    
    1,884,541
    
    
    
    12.63
 F-15




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE E  SHAREHOLDERS EQUITY  (continued) The following tables summarize information concerning currently
outstanding and exercisable stock options. Options OutstandingRange of
    
    Number
    
    Weighted Average Remaining
    
    Weighted AverageExercise Price
    
    Outstanding
    
    Contractual Life
    
    Exercise Price$  3.55 - 5.82
    
    
    158,050
    
    
    6.4 years
    
    $
    5.245.83 - 8.75
    
    
    1,148,945
    
    
    5.5 years
    
    
    7.498.76 - 13.12
    
    
    344,146
    
    
    5.1 years
    
    
    10.0213.13 - 19.68
    
    
    1,066,499
    
    
    1.4 years
    
    
    16.3319.69 - 23.38
    
    
    34,000
    
    
    3.5 years
    
    
    21.532,751,640
    
    
    
    
    
    
    $
    11.28
 Options OutstandingOptions ExercisableRange of
    
    Number
    
    Weighted AverageExercise Price
    
    Exercisable
    
    Exercise Price$  3.55 - 5.82
    
    
    88,875
    
    
    $
    5.255.83 - 8.75
    
    
    919,845
    
    
    
    7.458.76 - 13.12
    
    
    280,396
    
    
    
    9.9813.13 - 19.68
    
    
    1,026,249
    
    
    
    16.2219.69 - 23.38
    
    
    14,500
    
    
    
    21.332,329,865
    
    
    $
    11.62
 Employee Stock Purchase Savings Plan The 1990 Employee Stock Purchase Savings Plan (ESPSP) provides for the
purchase by eligible employees of Company common stock at a price equal to 85%
of the market price on either the anniversary date of such plans commencement
or the termination date of the plan, whichever is lower. Participants may
authorize payroll deductions up to 10% of their base salary during the plan
year to purchase the stock. Since inception of the ESPSP a total of 149,828
shares have been issued, including 26,511 shares for approximately $126,000 in
2002 and 6,178 shares for approximately $29,000 in 2001. The ESPSP was
terminated in 2002 because 149,828 shares of the 150,000 shares authorized for
the plan had been issued. F-16




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE E  SHAREHOLDERS EQUITY  (continued) Shareholder Rights Plan In May 1996 the Board of Directors unanimously adopted a shareholder
rights plan designed to ensure that all of the Companys shareholders receive
fair and equal treatment in the event of any proposal to acquire the Company.
The Board declared a distribution of one Right for each share of common stock
outstanding on June 15, 1996. Each Right entitles the holder to purchase
1/100th of a share of a new series of Junior Participating Preferred Stock of
Lifecore at an initial exercise price of $110.00. Initially, the Rights are
attached to the common stock and are not exercisable. They become exercisable
only following the acquisition by a person or group, without the prior consent
of the Companys Board of Directors, of 15 percent or more of the Companys
voting stock, or following the announcement of a tender offer or exchange offer
to acquire an interest of 15 percent or more of the Companys voting stock. In the event that the Rights become exercisable, each Right will entitle
the holder to purchase, at the exercise price, common stock with a market value
equal to twice the exercise price and, should the Company be acquired, each
Right would entitle the holder to purchase, at the exercise price, common stock
of the acquiring company with a market value equal to twice the exercise price.
Rights that are owned by the acquiring person would become void. In certain
specified instances, the Company may redeem the Rights. If not redeemed, the
Rights will expire on June 15, 2006. NOTE F  COMMITMENTS AND CONTINGENCIES Royalty Agreements The Company has entered into agreements that provide for royalty payments
based on a percentage of net sales of certain products. Royalty expense under
these agreements was $184,000, $128,000 and $148,000 for the years ended June
30, 2004, 2003 and 2002, respectively. Severance Agreements The Company has an agreement with each officer that provides severance pay
benefits if there is a change in control of the Company (as defined) and the
officer is involuntarily terminated (as defined). The maximum potential
liability under these agreements at June 30, 2004 was approximately $985,000. NOTE G  EMPLOYEE BENEFIT PLAN The Company has a 401(k) profit sharing plan for eligible employees. The
Company, at the discretion of the Board of Directors, may set a matching
percentage that is proportionate to the amount of the employees elective
contributions each year. During the years ended June 30, 2004, 2003 and 2002,
the Board of Directors authorized a company matching contribution to the plan
of $92,000, $81,000 and $65,000, respectively. F-17




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE H  SEGMENT INFORMATION The Company operates two business segments. The Hyaluronan Division
manufactures, markets and sells products containing hyaluronan and provides
contract aseptic packaging services. The Oral Restorative Division produces
and markets various oral restorative products in the area of implant dentistry.
Currently, products containing hyaluronan are sold primarily to customers
pursuant to supply agreements. Sales to one customer under such agreements
were 16%, 16% and 14% of total sales in 2004, 2003 and 2002, respectively. The
Companys Oral Restorative Division markets products directly to clinicians and
dental laboratories in the United States, Italy, Germany and Sweden and
primarily through distributorship arrangements in other foreign locations.
Sales to customers located principally in Europe accounted for 44%, 35% and 31%
of total Company sales during the years ended June 30, 2004, 2003 and 2002,
respectively. Segment information for the Company is as follows: Year ended June 30,2004
    
    2003
    
    2002Net salesHyaluronan products
    
    $
    15,719,000
    
    
    $
    15,659,000
    
    
    $
    15,244,000Oral restorative products
    
    
    31,317,000
    
    
    
    26,782,000
    
    
    
    23,550,000$
    47,036,000
    
    
    $
    42,441,000
    
    
    $
    38,794,000Operating income (loss)Hyaluronan products
    
    $
    (379,000
    )
    
    $
    33,000
    
    
    $
    (2,959,000
    )Oral restorative products
    
    
    1,123,000
    
    
    
    66,000
    
    
    
    (1,037,000
    )$
    744,000
    
    
    $
    99,000
    
    
    $
    (3,996,000
    )Capital expendituresHyaluronan products
    
    $
    369,000
    
    
    $
    444,000
    
    
    $
    637,000Oral restorative products
    
    
    297,000
    
    
    
    300,000
    
    
    
    324,000$
    666,000
    
    
    $
    744,000
    
    
    $
    961,000Depreciation and amortization expenseHyaluronan products
    
    $
    1,823,000
    
    
    $
    2,120,000
    
    
    $
    2,070,000Oral restorative products
    
    
    697,000
    
    
    
    724,000
    
    
    
    870,000$
    2,520,000
    
    
    $
    2,844,000
    
    
    $
    2,940,000
 As of June 30,2004
    
    2003Identifiable assetsHyaluronan products
    
    $
    31,899,000
    
    
    $
    35,433,000Oral restorative products
    
    
    20,847,000
    
    
    
    18,708,000General corporate
    
    
    7,572,000
    
    
    
    4,211,000$
    60,318,000
    
    
    $
    58,352,000
 F-18




---



##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) NOTE I  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. INTERGEL Solution was
voluntarily withdrawn from the market by ETHICON in March 2003 in order to
assess information obtained from postmarketing experience with the product,
including allegations of adverse events associated with off-label use in
non-conservative surgical procedures (such as hysterectomies). The Company is
working with ETHICON to complete the post-marketing evaluation and determine
the opportunities for returning the product to market. Management does not
believe there has been an impairment of hyaluronan assets as of June 30, 2004. *Trademark of ETHICON NOTE J  RESTRUCTURING PLAN During the fiscal year ended June 30, 2004, the Company announced and
implemented a restructuring plan (the Restructuring Plan). The Restructuring
Plan was implemented to bolster future profitability by aligning resources for
future revenue growth. The Restructuring Plan included a workforce reduction
of 10% and resulted in a one-time restructuring charge of $1,136,000. The
components of the restructuring charge for the fiscal year were $1,072,000 for
employee severance costs and $64,000 for outplacement fees. The following table summarizes the Restructuring Plan accrual, which is
included in Accrued expenses: 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
    
    
    $
    477,000
 NOTE K  LEGAL PROCEEDINGS Lifecore is a party in 41 pending lawsuits filed by 37 different
plaintiffs, 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 product liability insurance that it believes will cover
these claims. NOTE L  RECLASSIFICATIONS Certain 2002 and 2003 amounts have been reclassified to conform to the
2004 presentation. F-19




---



##### 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, 2004Accounts receivable
allowance
    
    $
    414,000
    
    
    $
    194,000
    
    
    $
    
    
    
    $
    (201,000
    )(A)
    
    $
    407,000Year ended
June 30, 2003Accounts receivable
allowance
    
    
    325,000
    
    
    
    171,000
    
    
    
    
    
    
    
    (82,000
    )(A)
    
    
    414,000Year ended
June 30, 2002Accounts receivable
allowance
    
    
    145,000
    
    
    
    272,000
    
    
    
    
    
    
    
    (92,000
    )(A)
    
    
    325,000
  (A)
    
    Deductions represent accounts receivable balances written-off during the
year. S-1




---



##### 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) (Pursuant to Rule 24b-2,
certain portions of this Exhibit have been deleted and filed separately with the Commission)
(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 Association10.1
    
    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, (Certain information has been deleted from this exhibit and filed separately
with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule
24b-2) (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. (pursuant to Rule 24b-2, certain portions of this Exhibit have been omitted and
filed separately with the Commission) (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 Plan10.7
    
    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)




---



##### Table of Contents



10.9
    
    Loan Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota and the Company10.10
    
    Remarketing Agreement, dated as of August 1, 2004, between the Company and Northland Securities, Inc.10.11
    
    Tax Exemption Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota, the Company and
Wells Fargo Bank, National Association10.12
    
    Irrevocable Letter of Credit, dated as of August 19, 2004, from M&I Marshall & Ilsley Bank to Wells Fargo
Bank, National Association10.13
    
    Reimbursement Agreement, dated as of August 1, 2004, between the Company and M&I Marshall & Ilsley Bank10.14
    
    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 Bank10.15
    
    Security Agreement, dated as of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank10.16
    
    Pledge and Security Agreement, dated as of August 1, 2004, between the Company, M&I Marshall & Ilsley
Bank and Wells Fargo Bank, National Association10.17
    
    Bond Purchase Agreement, dated as of August 19, 2004, by and between City of Chaska, Minnesota, the
Company and Northland Securities, Inc.23.1
    
    Consent of Grant Thornton LLP31.1
    
    Certification of Dennis J. Allingham pursuant to Exchange Act Rules 13a  14(a) and 15d  14(a), as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of David M. Noel pursuant to Exchange Act Rules 13a  14(a) and 15d  14(a), as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Dennis J. Allingham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of David M. Noel pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 200299.1
    
    Risk Factors
  *
    
    Denotes management contract or compensatory plan, contract or arrangement.