LCBM Lifecore Biomedical (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

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

For the quarterly period ended December 31, 2007

o		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: 0-4136

Lifecore Biomedical, Inc.

(Exact name of registrant as specified in its charter)

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

					Page
Part I.		Financial Information
Item 1.		Financial Statements — Unaudited
		Condensed Consolidated Balance Sheets at December 31, 2007 and June 30, 2007			2
		Condensed Consolidated Statements of Operations for Three Months and Six Months Ended December 31, 2007 and 2006			3
		Condensed Consolidated Statements of Cash Flows for Six Months Ended December 31, 2007 and 2006			4
		Notes to Condensed Consolidated Financial Statements			5-10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			11-17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			18
Item 4.		Controls and Procedures			18
Part II.		Other Information
Item 1.		Legal Proceedings			19
Item 1A.		Risk Factors			20
Item 4.		Submission of Matters to a Vote of Security Holders			21
Item 6.		Exhibits			21
Signatures					22
Exhibit Index					23
Manufacturing Agreement
Amendment to Manufacturing Agreement
Certification
Certification
Certification
Certification

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

December 31, 2007

NOTE A — FINANCIAL INFORMATION

Lifecore Biomedical, Inc. (referred to in this report as “Lifecore” or 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 Dental 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 ophthalmologic and orthopedic surgery and veterinary medicine fields. The Dental Division markets its products through direct sales in the United States, Italy, Germany, Sweden and France and through distributors in other foreign countries.

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

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of December 31, 2007, the results of operations for the three and six month periods ended December 31, 2007 and 2006, and cash flows for the six month periods ended December 31, 2007 and 2006. The results of operations and cash flows for the six months ended December 31, 2007 are not necessarily indicative of the results for the full year or of the results for any future periods. The unaudited condensed consolidated balance sheet as of June 30, 2007 has been derived from audited financial statements as of that date.

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

NOTE B — INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist mainly of finished hyaluronan powder, aseptic units and dental 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:

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

December 31, 2007

NOTE C — INTANGIBLE ASSETS

Intangibles consist primarily of the cost of goodwill related to acquisitions, patents and distribution rights and licenses.

Also 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.

Goodwill is tested for impairment on an annual basis, or when there is an indication that an impairment has occurred, and is written down when impaired by applying a fair value based test. Purchased intangible assets other than goodwill are amortized over their estimated useful lives on a straight-line basis unless these lives are determined to be indefinite. There was no impairment recorded for the six month period ended December 31, 2007.

Intangibles consisted of the following at:

NOTE D — LINE OF CREDIT

The Company has a $5,000,000 credit facility with a bank which has a maturity date of December 31, 2008. The credit agreement allows for advances against eligible accounts receivable, subject to compliance with covenants. Under the credit facility, interest will accrue at the prime rate minus 1% or LIBOR plus 1.75%, at the Company’s option. At December 31, 2007 and June 30, 2007, there were no balances outstanding under the credit facility.

NOTE E — STOCK-BASED COMPENSATION

Commencing July 1, 2005, the Company adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (“SFAS 123R”), which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period. The Company recorded $213,000 and $343,000 of related compensation expense for the three month periods ended December 31, 2007 and 2006, respectively, and $412,000 and $656,000 of related compensation expense for the six month periods ended December 31, 2007 and 2006, respectively.

The Company classifies stock option expense based on option holders’ salary expense classification.

Stock compensation expense recognized related to restricted stock awards totaled $2,000 and $72,000 during the three month periods ended December 31, 2007 and 2006, respectively, and stock compensation expense recognized related to restricted stock awards totaled $5,000 and $144,000 during the six month periods ended December 31, 2007 and 2006, respectively.

NOTE F — ACCUMULATED OTHER COMPREHENSIVE INCOME

The Company has $146,000 of accumulated currency translation adjustment which reduces shareholders’ equity at December 31, 2007. Total comprehensive income was $1,214,000 and $1,507,000 for the three month periods ended December 31, 2007 and 2006, respectively, and total comprehensive income was $2,636,000 and $2,716,000 for the six month periods ended December 31, 2007 and 2006, respectively.

NOTE G — NET INCOME PER SHARE

The Company’s basic net income per share amounts have been computed by dividing net income by the weighted average number of outstanding common shares. The Company’s diluted net income per share is computed by dividing net income by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. For the three and six month periods ended December 31, 2007, 302,578 and 314,100 common share equivalents, respectively, were included in the computation of diluted net income per share. For the three and six month periods ended December 31, 2006, 471,572 and 481,655 common share equivalents, respectively, were included in the computation of diluted net income per share.

Options to purchase 297,550 and 294,550 shares of common stock with a weighted average exercise price of $15.06 and $15.09 for the three and six month periods ended December 31, 2007, respectively, and options to purchase 197,000 and 237,500 shares of common stock with a weighted average exercise price of $17.83 and $17.49 for the three and six month periods ended December 31, 2006, respectively, were outstanding but were not included in the calculation of diluted net income per share because the options’ exercise prices were greater than the average market price of the Company’s common stock during those periods. Although these options were antidilutive for the periods presented, they may be dilutive in future period calculations.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

December 31, 2007

NOTE H — INCOME TAXES

Provision for income taxes was $794,000 at an effective rate of 39.0% and $856,000 at an effective rate of 38.5% for the three month periods ended December 31, 2007 and 2006, respectively. Provision for income taxes was $1,601,000 at an effective rate of 39.0% and $1,569,000 at an effective rate of 38.5% for the six month periods ended December 31, 2007 and 2006, respectively. With the exception of the Alternative Minimum Tax and certain state taxes, the Company will not use cash for domestic income taxes until its net operating losses are fully utilized on its tax returns. As of December 31, 2007, the net operating losses are anticipated to be fully utilized.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109,” which clarifies what criteria must be met prior to recognition of the financial statement benefit of a position taken in a tax return. FIN No. 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN No. 48 effective July 1, 2007. As a result of the implementation of FIN No. 48, the Company recognized a $569,000 increase in current and long-term tax liabilities for uncertain tax benefits, which was accounted for as a reduction to the July 1, 2007 balance of retained earnings. As of the adoption date, the Company had gross tax affected unrecognized tax benefits of $639,000, which when recognized will affect the effective tax rate. Also as of the date of adoption, the Company had accrued $72,300 of interest and penalties related to the unrecognized tax benefits. The Company will recognize penalties and interest expense related to unrecognized tax benefits in interest expense. There were no material changes to the reserve during the six month period ended December 31, 2007.

The Company is subject to income taxes in the U.S. federal jurisdiction and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and require significant judgment to apply. With few exceptions, because of the net operating loss utilization, the Company is subject to U.S. federal, state, local and foreign tax examinations by taxing authorities for years after the fiscal year ended June 30, 1994.

NOTE I — 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 Dental Division produces and markets various dental products to the area of implant dentistry. Currently, products containing hyaluronan are sold primarily to customers pursuant to ongoing supply agreements. The Company’s Dental Division markets products directly to clinicians and dental laboratories in the United States, Italy, Germany, Sweden and France and primarily through distributorship arrangements in other foreign locations.

NOTE J — RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement but does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not expect the impact of this pronouncement to have a material impact on the Company’s consolidated financial position or results of operations.

On February 15, 2007, FASB issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB No. 115” (“SFAS No. 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the impact of this pronouncement to have a material impact on the Company’s consolidated financial position or results of operations.

In June 2007, FASB ratified a consensus opinion reached by the Emerging Issues Task Force (“EITF”) on EITF Issue 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities.” The guidance in EITF Issue 07-3 requires the Company to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered nor the services expected to be performed, the Company would be required to expense the related capitalized advance payments.

The consensus in EITF Issue 07-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2007 and is to be applied prospectively to new contracts entered into on or after December 15, 2007. Early adoption is not permitted. Retrospective application of EITF Issue 07-3 is also not permitted.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

December 31, 2007

NOTE J — RECENT ACCOUNTING PRONOUNCEMENTS — (continued)

The Company intends to adopt EITF Issue 07-3 effective January 1, 2008. The impact of applying this consensus will depend on the terms of the Company’s future research and development contractual arrangements entered into on or after December 15, 2007.

In December 2007, the FASB ratified EITF Issue No. 07-01, “Accounting for Collaborative Arrangements” (“EITF 07-01”). EITF 07-01 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-01 also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. EITF 07-01 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the impact of this pronouncement to have a material impact on the Company’s consolidated financial position or results of operations.

NOTE K — LEGAL PROCEEDINGS

Lifecore was named as a defendant in 81 product liability lawsuits. The lawsuits alleged that the plaintiffs suffered injuries due to the defective nature of GYNECARE INTERGEL Adhesion Prevention Solution (“INTERGEL Solution”) which was manufactured by Lifecore and marketed by ETHICON, Inc (“ETHICON”). The other defendants in these lawsuits were ETHICON, which was Lifecore’s exclusive worldwide marketing partner for INTERGEL Solution through its division, GYNECARE Worldwide, and Johnson & Johnson, the parent company of ETHICON. Many of the lawsuits also named Vital Pharma, Inc. (“Vital Pharma”) as a defendant; Vital Pharma acted as the contract packager for the INTERGEL Solution. The plaintiffs in these actions were individuals who were patients in medical procedures during which INTERGEL Solution was used and who were allegedly injured due to the defective nature of INTERGEL Solution.

ETHICON accepted Lifecore’s tender of the defense of these lawsuits under the Conveyance, License, Development and Supply Agreement between the parties, subject to a reservation of rights, and ETHICON defended Lifecore in all of these matters. Lifecore accepted Vital Pharma’s tender of the defense of these lawsuits under the Supply Agreement between Lifecore and Vital Pharma, subject to a reservation of rights. Lifecore’s insurer, Federal Insurance Company (“Federal Insurance”), has paid for Vital Pharma’s defense. Lifecore has also asserted that ETHICON is obligated to pay for Vital Pharma’s defense costs, pursuant to the agreement between ETHICON and Lifecore.

On September 20, 2006, settlement documents relating to all but one of the lawsuits remaining at that date were executed on behalf of the parties. The terms of the settlement did not call for any cash payment by Lifecore. As of February 6, 2008, there was one remaining lawsuit which was filed after the 2006 settlement.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

Net Sales . Net sales for the quarter ended December 31, 2007 increased $742,000 or 4% as compared to the same quarter of last fiscal year. Hyaluronan Division sales increased $562,000 or 13% and Dental Division sales increased $180,000 or 1%.

Hyaluronan Division sales for the current quarter increased to $4,881,000 from $4,319,000 in the same quarter of last fiscal year due to higher sales to ophthalmic and orthopedic customers and increased revenues from product development activities offset partially by lower sales to other customers.

Dental Division sales for the current quarter increased to $12,413,000 from $12,233,000 in the same quarter of last fiscal year. Domestic sales decreased 5% due to adverse economic conditions and challenges associated with repositioning marketing and product sales to the specialist market. International sales increased 9% due to sales of the Prima™ Implant System and sales growth by our subsidiaries offset by variability in distributor purchasing patterns. Favorable foreign currency comparisons increased international sales by $391,000 over the same quarter of last fiscal year.

Gross profit . Consolidated gross profit, as a percentage of net sales, was 63% in the current quarter and 61% in the same quarter of last fiscal year.

The gross profit for the Hyaluronan Division increased to 59% in the current quarter from 48% in the same quarter of last fiscal year of which 2.5% was due to a favorable shift in product mix from lower margin products to higher margin products and 7.5% was due to a decrease in unused manufacturing capacity charges associated with lower overhead expenses and increased hyaluronan production.

Gross profit for the Dental Division decreased to 64% in the current quarter from 65% in the same quarter of last fiscal year as a result of sales mix and increased costs.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

Research and development . Consolidated research and development expenses consist of personnel costs, contract services, facility and equipment charges and materials consumed in the development of new products or the research and testing of enhancements to existing products. Research and development activities include: pilot plant operations, development of new formulations, design and testing of new products, regulatory services and clinical evaluation. Research and development expenses increased $454,000 or 45% in the current quarter as compared to the same quarter of last fiscal year. The increase is due to increases in product development activities.

Marketing and sales . Consolidated marketing and sales expenses increased by $388,000 or 7% in the current quarter as compared to the same quarter of last fiscal year. The increase was due to increased subsidiary expenses compared to the same quarter of last fiscal year primarily due to foreign currency comparisons.

General and administrative . Consolidated general and administrative expenses increased by $415,000 or 22% in the current quarter as compared to the same quarter of last fiscal year. The increase was primarily due to increased subsidiary, consulting, personnel and legal expenses.

Other income (expense) . Net other income, as shown on the Consolidated Statements of Operations, increased $261,000 for the current quarter as compared to the same quarter of last fiscal year. The increase was due to an increase in interest income of $133,000 resulting from a higher cash balance and a $129,000 increase in currency transaction gains realized on Euro-denominated intercompany transactions.

Provision for income taxes. Provision for income taxes was $794,000 at an effective rate of 39.0% and $856,000 at an effective rate of 38.5% for the three month periods ended December 31, 2007 and 2006, respectively. With the exception of the Alternative Minimum Tax and certain state taxes, the Company will not use cash for domestic income taxes until its net operating losses are fully utilized on its tax returns. As of December 31, 2007, the net operating losses are anticipated to be fully utilized.

Net Sales . Net sales for the six months ended December 31, 2007 increased $1,415,000 or 4% as compared to the same period of last fiscal year. Hyaluronan Division sales increased $632,000 or 7%, and Dental Division sales increased $783,000 or 3%.

Hyaluronan Division sales for the current period increased to $9,730,000 from $9,098,000 in the same period of last fiscal year due to increased revenues from product development activities and higher sales to orthopedic customers offset partially by lower sales to other customers.

Dental Division sales for the current period increased to $23,247,000 from $22,464,000 in the same period of last fiscal year. Domestic sales increased 2% due to sales of the Prima ^TM Implant System. International sales increased 6% due to sales of the Prima ^TM Implant System and sales growth by our subsidiaries. Favorable foreign currency comparisons increased international sales by $575,000 over the same period of last fiscal year.

Gross profit . Consolidated gross profit, as a percentage of net sales, was 62% in the current period and 62% in the same period of last fiscal year.

The gross profit for the Hyaluronan Division increased to 58% in the current period from 52% in the same period of last fiscal year of which 1.9% was due to increased higher margin product development revenue and 4.1% was due to a decrease in unused manufacturing capacity charges associated with lower overhead expenses.

Gross profit for the Dental Division decreased to 64% in the current period from 66% in the same period of last fiscal year as a result of sales mix and increased costs.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

Research and development . Consolidated research and development expenses consist of personnel costs, contract services, facility and equipment charges and materials consumed in the development of new products or enhancements to existing products. Research and development activities include: pilot plant operations, development of new formulations, design and testing of new products, regulatory services and clinical evaluation. Research and development expenses increased $598,000 or 28% in the current period as compared to the same period last fiscal year. The increase is due to increases in product development activities. The Company expects increased research and development costs during fiscal year 2008 to support product development, primarily in the Hyaluronan Division.

Marketing and sales. Consolidated marketing and sales expenses increased by $304,000 or 3% in the current period as compared to the same period of last fiscal year. The increase was due to increased subsidiary expenses primarily due to foreign currency comparisons.

General and administrative. Consolidated general and administrative expenses increased by $567,000 or 15% in the current period as compared to the same period of last fiscal year. The increase was primarily due to increased personnel, consulting, legal and subsidiary expenses.

Other income (expense) . Net other income, as shown on the Consolidated Statements of Operations, increased $428,000 for the current period as compared to the same period of last fiscal year. The increase was primarily due to an increase in interest income of $298,000 resulting from a higher cash balance and a $110,000 increase in currency transaction gains realized on Euro-denominated intercompany transactions.

Provision for income taxes. Provision for income taxes was $1,601,000 at an effective rate of 39.0% and $1,569,000 at an effective rate of 38.5% for the six month periods ended December 31, 2007 and 2006, respectively. With the exception of the Alternative Minimum Tax and certain state taxes, the Company will not use cash for domestic income taxes until its net operating losses are fully realized on its tax returns. As of December 31, 2007, the net operating losses are anticipated to be fully utilized.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

Liquidity and Capital Resources

As of December 31, 2007, the Company had $43.9 million of cash and cash equivalents and working capital of $68.8 million. Cash and cash equivalents increased during the six month period ended December 31, 2007 by $4.8 million.

Cash Provided by Operating Activities. Operating cash flow for the six month period ended December 31, 2007 was primarily the result of operational profitability. Net cash provided by operations was approximately $5.0 million, attributable to net income of $2.5 million and adjustments for non-cash charges related to the changes in deferred tax assets of $1.2 million, depreciation and amortization of $1.2 million and stock-based compensation of $0.4 million. Accounts receivable decreased by $1.4 million, accounts payable decreased by $0.7 million and inventories increased $0.6 million.

Net cash provided by operations for the six month period ended December 31, 2006 was approximately $4.0 million, attributable to net income of $2.5 million and adjustments for non-cash charges related to the changes in deferred tax assets of $1.2 million, depreciation and amortization of $1.1 million and stock-based compensation of $0.8 million. Accounts receivable increased $0.7 million and accounts payable decreased $0.5 million.

Cash Used in Investing Activities . Net cash used in investing activities was $0.6 million and $0.9 million in the six month periods ended December 31, 2007 and 2006, respectively. Cash used in investing activities reflected purchases of property and equipment of $0.6 million and $0.9 million in the six month periods ended December 31, 2007 and 2006, respectively.

Cash Provided by Financing Activities. Net cash provided by financing activities was $0.4 million and $1.1 million in the six month periods ended December 31, 2007 and 2006, respectively. Cash provided was attributable to proceeds from the exercise of stock options of $0.5 million and $1.3 million in the six month periods ended December 31, 2007 and 2006, respectively.

The Company has a $5,000,000 credit facility with a bank which has a maturity date of December 31, 2008. The credit agreement allows for advances against eligible accounts receivable, subject to compliance with covenants. Under the credit facility, interest will accrue at the prime rate minus 1% or LIBOR plus 1.75%, at the Company’s option. At December 31, 2007 and June 30, 2007, there were no balances outstanding under the credit facility.

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 was $5,630,000, and the bonds bear interest at a variable rate set weekly by the bond remarketing agent (3.36% as of December 31, 2007). In addition, the Company pays an annual remarketing fee equal to 0.125% and an annual letter of credit fee of 1.0%. The bonds are collateralized by a bank letter of credit which is secured by a first mortgage on the facility. 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). As of December 31, 2007 and June 30, 2007, the Company was in compliance with all covenants.

The Company’s ability to generate positive cash flow from operations and sustain its profitability is dependent upon the continued expansion of revenue from its hyaluronan and dental businesses. Growth in the Hyaluronan Division is unpredictable due to the complex governmental regulatory environment for new medical products, difficulty in predicting development timelines when working with customers and the early stage of certain of these markets. Similarly, expansion of the Company’s Dental Division sales is also dependent upon increased revenue from new and existing customers, successful introduction of new products as well as successfully competing in a more mature market. The Company expects its current cash position, 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

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

capital resources appear adequate today, the Company may seek additional financing in the future. If additional financing is necessary, no assurance can be given that such financing will be available and, if available, will be on terms favorable to the Company and its shareholders.

The Company does not have any material “off-balance sheet” financing activities. See Note J for a discussion of recent accounting pronouncements.

Subsequent Event

On January 15, 2008, the Company entered into a definitive agreement with affiliates of Warburg Pincus LLC, the global private equity firm, to be acquired through a tender offer, followed by a merger, for a price of $17.00 per share in cash. The transaction is subject to the valid tender of a majority of the Company’s fully diluted common shares, regulatory approvals and other customary conditions, but is not subject to any financing condition. The Company commenced solicitation of superior proposals from third parties on January 15, 2008, and will continue to do so during the 30-day period following the execution of the definitive agreement, as permitted by, and subject to, the terms and conditions of the definitive agreement.

Seasonality

The Company’s dental business is seasonal in nature. Historically, sales for the Dental Division are lower in the first quarter than throughout the rest of the year, as a result of European holidays during the summer months.

Cautionary Statement

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-Q, in future filings by the Company with the SEC and in the Company’s press releases and oral statements made with the approval of authorized executive officers, that 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 may, among other things, relate to the pending acquisition of the Company by Warburg Pincus LLC, market acceptance and demand for the Company’s products, future product development plans and timing, manufacturing capabilities, availability of raw materials, 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 and profit margins, expense levels, tax rates, 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 or 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: (1) obtaining the necessary regulatory approvals for new hyaluronan and dental products; (2) 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; and (3) intense competition in the markets for the Company’s principal products. Investors are referred to a more detailed discussion of the risks presented in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007 and in Part II, Item 1A of this report on Form 10-Q.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

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

ITEM 1A. RISK FACTORS

The discussion of the Company’s business and operations should be read together with the risk factors contained in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007 filed with the SEC, which describe various risks and uncertainties to which the Company is or may become subject. These risks and uncertainties have the potential to affect the Company’s business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. The Company is updating the risk factors set forth in the Company’s Annual Report on Form 10-K by amending the first risk factor below and adding the second risk factor below:

The Company may be subject to product liability claims and other legal proceedings which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The manufacture and sale of the Company’s products entails a risk of product liability claims. In addition to product liability exposure for its own products, the Company may be subject to claims for products of its customers which incorporate Lifecore’s materials. The Company maintains product liability insurance coverage in amounts it deems adequate. However, there can be no assurance that the Company will have sufficient resources if claims exceed available insurance coverage. In addition, other types of claims may arise that are not covered by such insurance.

Lifecore was named as a defendant in 81 product liability lawsuits, all of which alleged that the plaintiffs suffered injuries due to the defective nature of INTERGEL Solution manufactured by Lifecore and marketed by ETHICON. On September 20, 2006, settlement documents relating to all but one of the lawsuits remaining at that date were executed on behalf of the parties. The terms of the settlement did not call for any cash payment by the Company. As of February 6, 2008, there was one remaining lawsuit which was filed after the 2006 settlement. Although the vast majority of the INTERGEL Solution claims have been resolved, there can be no assurance that other related claims will not arise.

There can be no assurance that these pending claims, other new product liability claims, claims with respect to uninsured liabilities or claims in excess of insured liabilities, will not have a material adverse effect on the business, financial condition and results of operations of the Company. In addition, there can be no assurance that insurance will continue to be available to the Company and that, if available, the insurance will continue to be on commercially acceptable terms.

The Company may be subject to a number of risks and uncertainties if the announced acquisition fails to close.

The Company’s expectations with respect to the announced acquisition transaction with an affiliate of Warburg Pincus are subject to a number of risks and uncertainties that could affect the Company’s results. For example, the transaction may not close due to the failure of a sufficient number of shares of the Company’s common stock to be tendered in the tender offer or the failure to satisfy other closing conditions. The transaction may involve unexpected costs. The Company’s business may suffer as a result of uncertainty surrounding the transaction.

Failure to complete the transaction could negatively impact the Company’s stock price and future business and operations. For example,

	•		if the merger agreement is terminated, the Company may be required, in specific circumstances, to pay a termination fee of up to $3.0 million,
	•		the price of the Company’s common stock may decline to the extent that the current market price reflects an assumption that the transaction will be completed, and
	•		the Company must pay its expenses related to the transaction, including substantial legal and accounting fees, even if the transaction is not completed. This could affect the Company’s results of operations for the period during which the fees are incurred.

Current and prospective employees may experience uncertainty about their future role with the Company and Warburg until Warburg’s strategies are announced or executed. This may adversely affect the Company’s ability to attract and retain key management, research and development, sales and marketing and other personnel.

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

SIGNATURES

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

Lifecore Biomedical (MM) (NASDAQ:LCBM)
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