Lifecore Biomedical (LCBM) 10-Q 2001 Q3 Quarterly report

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

Form 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2001

[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number O-4136

Lifecore Biomedical, Inc.
(Exact name of Registrant as specified in its charter)

Minnesota	41-0948334
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
3515 Lyman Boulevard Chaska, Minnesota	55318
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 952-368-4300

Indicate by checkmark 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      

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of May 11, 2001 was 12,655,875 shares.

TABLE OF CONTENTS

Part I Financial Information
	Item 1. Financial Statements
	Condensed Consolidated Balance Sheets at March 31, 2001 and June 30, 2000
	Condensed Consolidated Statements of Operations for Three Months and Nine Months Ended March 31, 2001 and 2000
	Condensed Consolidated Statements of Cash Flows for Nine Months Ended March 31, 2001 and 2000
	Notes to Condensed Consolidated Financial Statements
	Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
	Item 6. Exhibits and Reports on Form 8-K

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

		Page
Part I	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at March 31, 2001 and June 30, 2000		3
	Condensed Consolidated Statements of Operations for Three Months and Nine Months Ended March 31, 2001 and 2000		4
	Condensed Consolidated Statements of Cash Flows for Nine Months Ended March 31, 2001 and 2000		5
	Notes to Condensed Consolidated Financial Statements		6-8
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition		9-13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		14
Part II	Other Information
Item 6.	a. Exhibits and Exhibit Index		15
	b. Reports on Form 8-K		15
Signatures			16

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

PART I
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

		March 31,			June 30,
		2001			2000
ASSETS
Current assets
	Cash and cash equivalents	$	2,240,000		$	1,101,000
	Accounts receivable		6,136,000			5,296,000
	Inventories		9,439,000			12,290,000
	Prepaid expenses		763,000			733,000
			18,578,000			19,420,000
Property, plant and equipment
	Land, building and equipment		42,842,000			42,334,000
	Less accumulated depreciation		(13,967,000	)		(11,982,000	)
			28,875,000			30,352,000
Other assets
	Intangibles		4,770,000			5,286,000
	Security deposits		859,000			847,000
	Inventories		9,368,000			9,368,000
	Other		488,000			515,000
			15,485,000			16,016,000
		$	62,938,000		$	65,788,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Current maturities of long-term obligations	$	222,000		$	243,000
	Accounts payable		1,423,000			2,230,000
	Accrued compensation		998,000			768,000
	Accrued expenses		274,000			347,000
	Customers’ deposits		—			302,000
			2,917,000			3,890,000
Long-term obligations			6,287,000			6,477,000
Shareholders’ equity			53,734,000			55,421,000
		$	62,938,000		$	65,788,000

See accompanying notes to condensed consolidated financial statements.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

PART I

ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

		Three months ended March 31,						Nine months ended March 31,
		2001			2000			2001			2000
Net sales		$	8,627,000		$	8,205,000		$	25,240,000		$	23,872,000
Cost of goods sold			4,432,000			5,180,000			13,308,000			12,059,000
Gross profit			4,195,000			3,025,000			11,932,000			11,813,000
Operating expenses
	Research and development		1,211,000			1,064,000			3,105,000			3,076,000
	Marketing and sales		2,327,000			1,857,000			6,689,000			5,797,000
	General and administrative		1,129,000			857,000			3,375,000			2,728,000
			4,667,000			3,778,000			13,169,000			11,601,000
Operating income (loss)			(472,000	)		(753,000	)		(1,237,000	)		212,000
Other income (expense)
	Interest income		49,000			40,000			177,000			63,000
	Interest expense		(178,000	)		(192,000	)		(628,000	)		(658,000	)
	Other		(20,000	)		(22,000	)		(100,000	)		(42,000	)
			(149,000	)		(174,000	)		(551,000	)		(637,000	)
Net loss		$	(621,000	)	$	(927,000	)	$	(1,788,000	)	$	(425,000	)
Net loss per share
	Basic	$	(.05	)	$	(.07	)	$	(.14	)	$	(.03	)
	Diluted	$	(.05	)	$	(.07	)	$	(.14	)	$	(.03	)
Weighted average shares outstanding
	Basic		12,626,257			12,497,650			12,622,034			12,449,843
	Diluted		12,626,257			12,497,650			12,622,034			12,449,843

See accompanying notes to condensed consolidated financial statements.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

			Nine months ended
			March 31,
			2001			2000
Cash flows from operating activities:
Net loss			$	(1,788,000	)	$	(425,000	)
Adjustments to reconcile net loss to net cash provided from operating activities:
Depreciation and amortization				2,509,000			2,446,000
Allowance for doubtful accounts				(13,000	)		30,000
Changes in operating assets and liabilities
	Accounts receivable			(827,000	)		1,491,000
	Inventories			2,851,000			(1,885,000	)
	Prepaid expenses			(30,000	)		(151,000	)
	Accounts payable			(807,000	)		(55,000	)
	Accrued liabilities			157,000			(504,000	)
	Customers’ deposits			(302,000	)		1,800,000
Net cash provided from operating activities				1,750,000			2,747,000
Cash flows from investing activities:
	Purchases of property, plant and equipment			(508,000	)		(807,000	)
	Purchases of intangibles			(21,000	)		(24,000	)
	Other			28,000			(16,000	)
Net cash used in investing activities				(501,000	)		(847,000	)
Cash flows from financing activities:
	Payment of long-term obligations			(210,000	)		(211,000	)
	Net payments on line of credit			—			(1,883,000	)
	Proceeds from stock issuance			100,000			352,000
Net cash used in financing activities				(110,000	)		(1,742,000	)
Net increase in cash and cash equivalents				1,139,000			158,000
Cash and cash equivalents at beginning of period				1,101,000			544,000
Cash and cash equivalents at end of period			$	2,240,000		$	702,000
Supplemental disclosure of cash flow information:
	Cash paid during the period:
		Interest	$	625,000		$	759,000

See accompanying notes to condensed consolidated financial statements.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

NOTE A —FINANCIAL INFORMATION

Lifecore Biomedical, Inc. (the “Company”) produces biomaterials and medical devices for 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 OEM and contract manufacturing alliances in the fields of general surgery, ophthalmology, veterinary and wound care management. The Oral Restorative Division markets its products through direct sales in the United States, Italy and Germany and through distributors in other foreign countries.

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, the unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of March 31, 2001, and the results of operations and cash flows for the nine month periods ended March 31, 2001 and 2000. The results of operations for the nine months ended March 31, 2001 are not necessarily indicative of the results for the full year or of the results for any future periods. The unaudited consolidated condensed balance sheet as of June 30, 2000 has been derived from audited financial statements as of that date.

In preparation of the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management.

NOTE B —INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories not expected to be consumed within one year are classified as a long-term asset. Finished good inventories include hyaluronan, packaged aseptic and oral restorative products. Inventories consist of the following:

	March 31,		June 30,
	2001		2000
	(Unaudited)
Raw materials	$	3,035,000	$	3,833,000
Work in progress		425,000		255,000
Finished goods		15,347,000		17,570,000
	$	18,807,000	$	21,658,000

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

March 31, 2001

NOTE C —AGREEMENTS

The Company and ETHICON, INC., a Johnson & Johnson Company (“ETHICON”), have entered into a Conveyance, License, Development and Supply Agreement (the “ETHICON Agreement”). Under the terms of the ETHICON Agreement, ETHICON transferred to the Company its ownership in certain technology related to research and development previously conducted on the Company’s sodium hyaluronan material. The technology transferred to the Company 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 patent applications. The Company has assumed responsibility for continuing the anti-adhesion development project including conducting human clinical trials on GYNECARE INTERGEL* Adhesion Prevention Solution. The Company has granted ETHICON exclusive worldwide marketing rights through 2008 to the products developed by the Company within defined fields of use.

The Company has made and continues to make a significant investment in the development and testing of GYNECARE INTERGEL Solution. The Company submitted an application for FDA Pre-Market Approval (“PMA”) in March 1999, which was accepted by the FDA in May 1999 for expedited review. In January 2000, an advisory panel to the FDA recommended to the FDA that GYNECARE INTERGEL Solution not be approved for use in the United States. In June 2000, the Company filed a major amendment to the PMA to address the concerns raised at the January Panel meeting. After review of the amendment, FDA’s Office of Device Evaluation (“ODE”) determined that, while the results of clinical testing may appear to be encouraging, in their opinion there was not sufficient information to demonstrate reasonable assurance of safety and effectiveness. Thus, ODE concluded that the PMA is not approvable at this time and notified the Company of options for agency review of ODE’s determination.

The Company’s current PMA application remains open while it pursues the formal dispute resolution process outlined under the auspices of the FDA Modernization Act of 1997. The Company is scheduled to appear before the Medical Devices Dispute Resolution Panel (“MDDRP”) on June 4, 2001. That Panel is expected to make a determination and recommendation to the FDA’s Director of the Center for Devices and Radiological Health regarding GYNECARE INTERGEL Solution. However, even if the Company ultimately receives approval from the FDA, there can be no assurance that it will receive market acceptance. Failure to achieve significant sales of the product could have a material adverse effect on future prospects for the Company’s operations.

NOTE D —LINE OF CREDIT

The Company has an agreement with a bank for a $5,000,000 line of credit. 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 8.00% and 9.50% at March 31, 2001 and June 30, 2000, respectively. The agreement has a maturity date of December 28, 2001. At March 31, 2001 and June 30, 2000, there was no balance outstanding under this line of credit. The terms of the agreement require the Company to comply with various financial covenants including minimum net worth, capital expenditure limitations and fixed charge coverage ratio. At March 31, 2001 and June 30, 2000, the Company was in compliance with all covenants, except for the fixed charge coverage ratio at March 31, 2001, for which the bank issued a waiver of compliance.

* Capitalized product names are trademarks of ETHICON, INC.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

March 31, 2001

NOTE E —NET INCOME (LOSS) PER SHARE

The Company’s basic net income (loss) per share amounts have been computed by dividing net income (loss) by the weighted average number of outstanding common shares. The Company’s diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. For the three months and nine months ended March 31, 2000, the Company reported a net loss and as such, no common share equivalents were included in the computation of diluted net loss per share. However, if the Company would have reported net income in the three months and nine months ended March 31, 2000, the common share equivalents that would have been included in the computation of diluted net income per share were 154,209 and 225,621. For the three months and nine months ended March 31, 2001, the Company reported a net loss and as such, no common share equivalents were included in the computation of diluted net loss per share. However, if the Company would have reported net income in the three months and the nine months ended March 31, 2001, the common share equivalents that would have been included in the computation of diluted net income per share were 6,874 and 29,107.

Options to purchase 2,689,466 and 1,465,086 shares of common stock with a weighted average exercise price of $12.75 and $16.65 were outstanding at March 31, 2001 and 2000, 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 on such dates.

NOTE F —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 to the area of implant dentistry. Currently, products containing hyaluronan are sold primarily to customers pursuant to supply agreements. Sales to Alcon Laboratories under such agreements were 19% of total sales in the nine months ended March 31, 2001 and 2000. The Company’s Oral Restorative Division markets products directly to clinicians and dental laboratories in the United States, Italy and Germany and primarily through distributorship arrangements in other foreign locations. The operations of the Company’s Italian subsidiary, Lifecore Biomedical SpA, and the Company’s German subsidiary, Lifecore Biomedical GmbH have not been material to the consolidated financial statements.

Segment assets and the basis of segmentation are consistent with that reported at June 30, 2000. Segment information for sales and income (loss) from operations are as follows:

		Three months ended March 31,						Nine months ended March 31,
		2001			2000			2001			2000
Net sales
	Hyaluronan products	$	3,343,000		$	3,073,000		$	10,558,000		$	9,313,000
	Oral restorative products		5,284,000			5,132,000			14,682,000			14,559,000
		$	8,627,000		$	8,205,000		$	25,240,000		$	23,872,000
Income (loss) from operations
	Hyaluronan products	$	(439,000	)	$	(1,249,000	)	$	(482,000	)	$	(375,000	)
	Oral restorative products		(33,000	)		496,000			(755,000	)		587,000
		$	(472,000	)	$	(753,000	)	$	(1,237,000	)	$	212,000

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION

Results of Operations

Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000

		Hyaluronan						Oral Restorative
(Unaudited)		Division						Division					Consolidated
		2001			2000			2001			2000		2001			2000
Net sales		$	3,343,000		$	3,073,000		$	5,284,000		$	5,132,000	$	8,627,000		$	8,205,000
Cost of goods sold			2,385,000			3,024,000			2,047,000			2,156,000		4,432,000			5,180,000
Gross profit			958,000			49,000			3,237,000			2,976,000		4,195,000			3,025,000
Operating expenses
	Research and development		915,000			902,000			296,000			162,000		1,211,000			1,064,000
	Marketing and sales		51,000			27,000			2,276,000			1,830,000		2,327,000			1,857,000
	General and administrative		431,000			369,000			698,000			488,000		1,129,000			857,000
			1,397,000			1,298,000			3,270,000			2,480,000		4,667,000			3,778,000
Operating income (loss)		$	(439,000	)	$	(1,249,000	)	$	(33,000	)	$	496,000	$	(472,000	)	$	(753,000	)

Net sales for the quarter ended March 31, 2001 increased $422,000 or 5% as compared to the same quarter of last fiscal year. Hyaluronan product sales for the current quarter increased $270,000 as compared to the same quarter of last fiscal year. The sales increase was from higher veterinary and orthopedic bone-regeneration hyaluronan revenues compared to the prior year. Oral restorative product sales for the current quarter increased 3% compared to the same quarter of last fiscal year. A 15% International sales increase of oral restorative products was offset by a 4% decrease in Domestic sales. The Domestic oral restorative sales decrease in the current quarter was due to reduced regeneration product sales. The Company ceased distribution of LifeCell Corporation’s AlloDerm(R) Acellular Dermal Graft as of July 31, 2000. Exclusive of AlloDerm(R) Graft product line sales in the current quarter and the year ago quarter, Domestic oral restorative sales increased by 17%.

Consolidated gross margin increased to 49% for the current quarter from 37% for the same quarter of last fiscal year. The gross margin for the Hyaluronan Division increased to 29% from 2% due to absorption of unused capacity associated with the Company’s Hyaluronan production. The unused capacity is a result of an unanticipated delay with the FDA for U.S. marketing approval of GYNECARE INTERGEL Solution. The gross margin for the Oral Restorative Division increased to 61% for the current quarter from 58% for the same quarter of last fiscal year. The increase in gross margin can be attributed to the absence of the lower margin AlloDerm Graft product line sales in the current quarter compared to the same quarter of last fiscal year.

Research and development expenses increased $147,000 or 14% for the current quarter as compared to the same quarter of last fiscal year. The increase resulted principally from product development costs for the RBM STAGE-1 Single Stage Implant that was introduced in March 2001 and from the ongoing regulatory process with the FDA for GYNECARE INTERGEL Solution.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION —(cont.)

Marketing and sales expenses increased $470,000 or 25% in the current quarter as compared to the same quarter of last fiscal year due to promotion of new products, an increase in Domestic sales personnel and costs associated with international expansion.

General and administrative expenses increased $272,000 or 32% for the current quarter as compared to the same quarter last fiscal year. The increase is principally from costs associated with operating Lifecore Germany and higher legal and insurance expenses in the current period as compared to the same period of last fiscal year.

Net other expense decreased $25,000 for the current quarter as compared to the same quarter of last fiscal year. Interest income increased $9,000 due to a higher average amount of cash to invest than in the same quarter of last fiscal year. Interest expense decreased $14,000 for the current quarter due to lower average borrowings as compared to the same quarter of last fiscal year.

Nine Months Ended March 31, 2001 Compared to Nine Months Ended March 31, 2000

		Hyaluronan						Oral Restorative
(Unaudited)		Division						Division					Consolidated
		2001			2000			2001			2000		2001			2000
Net sales		$	10,558,000		$	9,313,000		$	14,682,000		$	14,559,000	$	25,240,000		$	23,872,000
Cost of goods sold			7,319,000			5,906,000			5,989,000			6,153,000		13,308,000			12,059,000
Gross profit			3,239,000			3,407,000			8,693,000			8,406,000		11,932,000			11,813,000
Operating expenses
	Research and development		2,310,000			2,591,000			795,000			485,000		3,105,000			3,076,000
	Marketing and sales		147,000			102,000			6,542,000			5,695,000		6,689,000			5,797,000
	General and administrative		1,264,000			1,089,000			2,111,000			1,639,000		3,375,000			2,728,000
			3,721,000			3,782,000			9,448,000			7,819,000		13,169,000			11,601,000
Operating income (loss)		$	(482,000	)	$	(375,000	)	$	(755,000	)	$	587,000	$	(1,237,000	)	$	212,000

Net sales for the nine months ended March 31, 2001 increased $1,368,000 or 6% as compared to the same period of last fiscal year. Hyaluronan product sales for the period increased $1,245,000 or 13% as compared to the same period of last fiscal year. The sales increase was the result of higher ophthalmic and orthopedic bone-regeneration hyaluronan revenues compared to the prior year. Oral restorative product sales for the current period increased $123,000 or 1% compared to the same period of last fiscal year. A 12% International sales increase of oral restorative products was offset by a 5% decrease in Domestic sales. The Domestic oral restorative sales decrease in the current period was due to reduced regeneration product sales. The Company ceased distribution of LifeCell Corporation’s AlloDerm(R) Acellular Dermal Graft as of July 31, 2000. Exclusive of AlloDerm(R) Graft product line sales in the current period and the year ago period, Domestic oral restorative sales increased by 11%.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION —(cont.)

Consolidated gross margin decreased to 47% for the current period from 49% for the same period of last fiscal year. The gross margin for the Hyaluronan Division decreased to 31% from 37% due to unabsorbed excess capacity costs associated with decreased hyaluronan production. That production has been slowed due to unexpected delays in the FDA review process of GYNECARE INTERGEL Solution for U.S. distribution. The gross margin for the Oral Restorative Division increased to 59% for the current period from 58% for the same period of last fiscal year.

Research and development expenses increased $29,000 or 1% for the current period as compared to the same period of last fiscal year. The increase resulted principally from product development costs for the RBM STAGE-1 Single Stage Implant that was introduced in March 2001 and from increased costs associated with the ongoing regulatory process with the FDA for GYNECARE INTERGEL Solution.

Marketing and sales expenses increased $892,000 or 15% for the current period as compared to the same period of last fiscal year due to promotion of new products, an increase in Domestic sales personnel and costs associated with international expansion.

General and administrative expenses increased $647,000 or 24% principally from costs associated with operating Lifecore Germany and higher legal and insurance expenses in the current period as compared to the same period of last fiscal year.

Net other expense decreased $86,000 for the current period as compared to the same period of last fiscal year. The $114,000 increase in interest income results from a higher than average amount of cash to invest than in the same period of last fiscal year. Interest expense decreased $30,000 for the current period principally due to lower average borrowings as compared to the same period of last fiscal year.

Liquidity and Capital Resources

The Company’s Annual Report on Form 10-K for the year ended June 30, 2000 contains a detailed discussion of Lifecore’s liquidity and capital resources. In conjunction with this Quarterly Report on Form 10-Q, investors should read the 2000 Form 10-K.

While the Company has had positive cash flow from operations in fiscal 2001 and 2000, the Company had significant operating cash flow deficits in fiscal years 1999 and 1998. As the Hyaluronan Division’s production levels increase, its related production efficiencies will increase. However, charges for unabsorbed overhead costs associated with the Company’s hyaluronan production have negatively impacted operating results in the current period. These charges are a result of an unanticipated delay by the FDA in the review process for GYNECARE INTERGEL Solution marketing approval in the U.S. The Company expects that its Hyaluronan Division gross margins will continue to be negatively impacted until marketing approval for GYNECARE INTERGEL Solution is achieved and production levels increase. Also, marketing and sales expenses for the oral restorative products are expected to continue at a high level, and personnel costs have increased. The ongoing research, development and PMA process costs for GYNECARE INTERGEL Solution will continue for the foreseeable future.

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 2000 to waive the fixed charge coverage ratio and the cash flow coverage ratio through June 30, 2001. With respect to certain of these covenants, the Company

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION —(cont.)

may be required to obtain further waivers for fiscal 2002. There can be no assurance that future waivers will be granted to the Company.

The Company has an agreement with a bank for a $5,000,000 line of credit. 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 8.00% and 9.50% at March 31, 2001 and June 30, 2000, respectively. At March 31, 2001 and June 30, 2000, there were no balances outstanding under this line of credit. The terms of the agreement require the Company to comply with various financial covenants including minimum net worth, capital expenditure limitations and fixed charge coverage ratio. At March 31, 2001 and June 30, 2000, the Company was in compliance with all covenants, except for the fixed charge coverage ratio at March 31, 2001, for which the bank issued a waiver of compliance. The agreement has a maturity date of December 28, 2001.

The Company has made and continues to make a significant investment in the development and testing of GYNECARE INTERGEL Solution. The Company submitted an application for FDA Pre-Market Approval (“PMA”) in March 1999, which was accepted by the FDA in May 1999 for expedited review. In January 2000, an advisory panel to the FDA recommended to the FDA that GYNECARE INTERGEL Solution not be approved for use in the United States. In June 2000, the Company filed a major amendment to the PMA to address the concerns raised at the January Panel meeting. After review of the amendment, FDA’s Office of Device Evaluation (“ODE”) determined that, while the results of clinical testing may appear to be encouraging, in their opinion there was not sufficient information to demonstrate reasonable assurance of safety and effectiveness. Thus, ODE concluded that the PMA is not approvable at this time and notified the Company of options for agency review of ODE’s determination.

The Company’s current PMA application remains open while it pursues the formal dispute resolution process outlined under the auspices of the FDA Modernization Act of 1997. The Company is scheduled to appear before the Medical Devices Dispute Resolution Panel (“MDDRP”) on June 4, 2001. That Panel is expected to make a determination and recommendation to the FDA’s Director of the Center for Devices and Radiological Health regarding GYNECARE INTERGEL Solution. However, even if the Company ultimately receives approval from the FDA, there can be no assurance that it will receive market acceptance. Failure to achieve significant sales of the product could have a material adverse effect on future prospects for the Company’s operations.

The Company’s ability to generate positive cash flow from operations and achieve 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 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. With the completion of the facility expansion, the Company expects its cash generated from anticipated operations and the availability of the line of credit to satisfy cash flow needs in the near term. No assurance can be given that the Company will attain and maintain positive cash flow before its capital resources are exhausted. While the Company’s capital resources appear adequate today, unforeseen events, prior to achieving and maintaining positive cash flow, could require additional financing. 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.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION —(cont.)

Cautionary Statement

Certain statements in this Form 10-Q are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Statements that imply continued financial improvement and the timing or outcome of the FDA review process for GYNECARE INTERGEL(TM) Solution are subject to change. Because of numerous risks and uncertainties in the regulatory aspects of Lifecore’s business activity, actual results may differ materially from those implied. Investors are referred to a more detailed discussion of those risks presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s Annual Report on Form 10-K for the year ended June 30, 2000.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company invests its excess cash in money market mutual funds and highly rated corporate debt securities. All investments are held-to-maturity. The market risk on such investments is minimal.

Receivables from sales to foreign customers are denominated in U.S. Dollars. Transactions at the Company’s foreign subsidiaries, Lifecore Biomedical SpA and Lifecore Biomedical GmbH, are in Italian Lira and Deutsche Marks, respectively. The Company has historically had minimal exposure to changes in foreign currency exchange rates, and as such, has not used derivative financial instruments to manage foreign currency fluctuation risk.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II —OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

      a. Exhibits and Exhibit Index

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])

      b. Reports on Form 8-K

      None

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		LIFECORE BIOMEDICAL, INC.
Dated:	May 14, 2001	/s/ James W. Bracke                           James W. Bracke President & Chief Executive Officer
Dated:	May 14, 2001	/s/ Dennis J. Allingham                       Dennis J. Allingham Executive Vice President & Chief Financial Officer (Principal Financial Officer)

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