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

FORM 10-K

LIFECORE BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)

3515 Lyman Boulevard
Chaska, Minnesota 55318-3051
(Address of principal executive offices)

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 stated 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. x

     The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $105,311,000 at August 30, 2002 when the last sale price of such stock, as reported by the Nasdaq National Market, was $8.28.

     The number of shares outstanding of the Registrant’s Common Stock, $.01 stated value, as of August 30, 2002 was 12,876,367 shares.

DOCUMENTS INCORPORATED BY REFERENCE

1.

Certain responses to Part III are incorporated by reference to information contained in the Company’s definitive Proxy Statement for its 2002 Annual Meeting to be filed with the Commission within 120 days after the end of the Registrant’s fiscal year.

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PART I

Item 1. Business

General

     Lifecore Biomedical, Inc. (“Lifecore” or the “Company”) manufactures biomaterials and medical devices for use in various surgical markets and provides related specialized contract aseptic manufacturing services. 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. The Company was incorporated in the State of Minnesota in 1965.

     The Company’s Hyaluronan Division is principally involved in the development and manufacture of products utilizing hyaluronan, a naturally occurring polysaccharide that moisturizes or lubricates the soft tissues of the body. The Hyaluronan Division’s primary clinical development project involves expanding the use of Lifecore’s patented ferric hyaluronan adhesion prevention technology. A current product, GYNECARE INTERGEL* Adhesion Prevention Solution (“INTERGEL Solution”). has been clinically proven to reduce the incidence of tissue adhesions commonly formed as part of the body’s natural healing process when tissues are subject to accidental or surgical trauma. These adhesions may cause internal complications that often require costly re-operations, particularly with respect to abdominal adhesions. Government sources recently estimated the annual cost for treatment of adhesion complications in the female pelvis alone at $1.6 billion in the United States. Since June 1998, the Company’s exclusive worldwide marketing partner, GYNECARE, a division of ETHICON, INC. (“ETHICON”), a Johnson & Johnson company, has been marketing INTERGEL Solution outside the U.S. On November 19, 2001, Lifecore received Pre-Market Approval from the FDA to market INTERGEL Solution in the United States for conservative gynecological surgery. ETHICON commenced marketing INTERGEL Solution in the United States during the first calendar quarter of 2002.

     In addition to the adhesion prevention market, the Company’s hyaluronan is used as a component in ophthalmic, orthopedic, and veterinary medical devices. Lifecore continues to apply its hyaluronan manufacturing expertise toward the pursuit of other medical applications based on hyaluronan as a primary component The Company leverages its hyaluronan manufacturing know how to provide specialized contract aseptic manufacturing services to selected hyaluronan customers.

     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 titanium alloy dental implants are permanently implanted in the jaw for tooth replacement therapy as long-term support for crowns, bridges, and dentures. In September 1999, the Company introduced the STAGE-1™ Single Stage Implant System. In March 2001 the Company introduced the RBM STAGE-1 Single Stage Implant System. In March 2002 the Company introduced the Quick-Cap™ Impressioning System. The Oral Restorative Division also offers innovative bone regenerative products for the repair of bone defects resulting from periodontal disease and tooth loss. 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 Case Acceptance Program offers client personnel the marketing and selling skills training to foster higher patient acceptance of dental implants. The Oral Restorative Division’s products are marketed in the U.S. through the Company’s direct sales force. Internationally, the Division’s products are marketed through direct subsidiaries in Italy, Germany and Sweden, and through 22 national distributors covering 35 additional countries.

Hyaluronan Division

Background

     Hyaluronan is a naturally occurring polysaccharide 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, its use for coating and lubricating tissues during the implantation of intraocular lenses dramatically improved the existing surgical success rates. 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

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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 to treat traumatic arthritis.

Strategy

     The Company intends to use its proprietary fermentation process 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 ophthalmic surgical products company Alcon, Inc., (“Alcon”) (formerly Alcon Laboratories, an indirect subsidiary of Nestle S.A.); ETHICON; and Musculoskeletal Transplant Foundation (“MTF”), the world’s largest bone tissue procurement and distribution service.

     •     Expand medical applications for hyaluronan. The company is currently pursuing expansion of adhesion prevention indications. 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.

     •     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 large corporate partners. Lifecore’s role in these relationships extends from supplier of raw materials to manufacturer of aseptically-packaged finished products. In addition, the Company may develop its own proprietary products.

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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:

+ 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.

*     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. LUROCOAT® Ophthalmic Solution is a registered trademark of Lifecore Biomedical, Inc. HY-50® is a registered trademark of Bexco Pharma, Inc. DBX® Demineralized Bone Matrix is a registered trademark of the Musculoskeletal Transplant Foundation.

Adhesion Prevention Opportunities with ETHICON

     The Company has developed and globally launched 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.

     Following surgical procedures tissue adhesions, commonly form as part of the body’s natural healing process resulting from trauma to tissues or organs during surgery. Particularly with respect to abdominal, cardiovascular, gynecological, orthopedic, reproductive and thoracic surgeries, these adhesions may cause internal complications that require costly additional surgical intervention. For example, adhesions following gynecological surgery can cause infertility, life threatening bowel obstructions and can complicate subsequent surgical interventions. The Company believes that successful penetration of this market requires a product with broad effectiveness, low toxicity, easy application, high procedural flexibility, and appropriate pricing.

     INTERGEL Solution is a sterile, nonpyrogenic, amber colored, viscous solution of ferric hyaluronan (sodium hyaluronan, which has been ionically coordinated with ferric ions), that provides a transient coating on peritoneal surfaces following surgical

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procedures. INTERGEL Solution is packaged in a 300 ml low density polyethylene bellows bottle, which is provided in a sterile thermoformed tray sealed with a Tyvek® lid. When stored at controlled temperature (2-30° C) the product has a stable shelf life of 24 months.

     On November 19, 2001, the Company received FDA approval to market INTERGEL Solution in the United States. ETHICON began marketing INTERGEL Solution in the U.S. during the first calendar quarter of 2002. Even though Lifecore has received FDA approval, there can be no assurance that the product will receive prominent 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 safety and effectiveness of INTERGEL Solution has been established in patients undergoing class I, non-oncologic, pelvic gynecologic laparotomy. The safety and effectiveness has not been established in patients undergoing laparoscopy procedures. In order to maximize the market potential of the product it is the Company’s intention to pursue and demonstrate clinical safety and efficacy in patients undergoing laparoscopy procedures. No assurance can be given that the product trials will be successful and that the required regulatory approvals will be granted. Failure to achieve laparoscopic approval of the product in the U.S. could have a material adverse effect on future prospects for the Company’s operations. See “Government Regulation.”. Outside the U.S., INTERGEL Solution has been approved in 28 countries for the prevention of post-surgical adhesions.

     The composition and use of ferric hyaluronan technology in adhesion reduction applications is described in U.S. Patent No. 5,532,221 (SEE “Patents and Proprietary Rights”). The Company has a Conveyance, License, Development and Supply Agreement with ETHICON, Inc., related to those proprietary rights that extends through 2008 with provisions for renewal.

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, the leading producer of ophthalmic surgical products in the world, for inclusion in Viscoat® Ophthalmic Viscoelastic Solution. The Company also has agreements to supply its hyaluronan based LUROCOAT Solution under private label outside the United States and Canada.

     The Company’s relationship with Alcon and its predecessors commenced in 1983, when the Company’s hyaluronan was specified as a raw material component of Viscoat Solution, which received marketing clearance from the FDA in 1986. Until 1990, Alcon’s predecessors had the exclusive rights to purchase the Company’s hyaluronan for ophthalmic applications. In 1990, the arrangement with Alcon became non-exclusive. 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 2000, is for a term of two years through December 31, 2002. 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. Export shipments of LUROCOAT Solution began in 1997.

     Lifecore estimates that its hyaluronan has been used in approximately 26 million ophthalmic patients globally since 1983.

Other Applications

     The Company supplies an aseptic hyaluronan solution to BioCon, the not-for-profit controlling affiliate of the Musculoskelatal Transplant Foundation (“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 manufactures Bexco Pharma, Inc.’s HY-50® product, an aseptically packaged hyaluronan solution, for use as a veterinary orthopedic injectible drug, under a supply agreement expiring June 30, 2003. 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.

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     Lifecore estimates that its veterinary hyaluronan product has been used in 500,000 equine procedures worldwide.

     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 a partnership with others will be successfully developed or, if so developed, will be successfully and profitably marketed.

Oral Restorative Division

Background

     Dental implants 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 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 spray-coated with hydroxylapatite and/or grit blasted to create a roughened surface. The Company believes the current annual worldwide dental implant market is approximately $700 million.

     Bone graft substitutes and bone regeneration membranes are used for the restoration of deteriorated bone caused by periodontal disease and tooth loss. Historically, bone-filling material needed to fill holes or restore deteriorated bone was only available from cadavers or autologous bone (self-donated from another part of the patient’s body). These sources have quality, convenience, and safety limitations. Synthetic and animal-derived bone graft substitutes emerged to address these issues, as did the demineralized freeze-dry processing of cadaver bone. The current annual U.S. market for synthetic and animal-derived bone substitute products is approximately $35 million. In May 2000, the Company entered into a representation agreement with the Musculoskeletal Transplant Foundation to solicit orders for its MTF® Bone Allograft Tissue for a representation fee. In May 2002, the Company and MTF mutually terminated this agreement to allow the Company to focus its resources on its own product line.

     The addition of supplemental bone regeneration barrier membranes has expanded the U.S. dental bone regeneration market to approximately $70 million. The Company’s TefGen Regenerative Membrane™ and CAPSET® Calcium Sulfate Bone Graft Barrier products address this market opportunity.

     Lifecore estimates that its oral restorative products have been used in over 500,000 dental procedures worldwide.

Strategy

     The Company is the value leader in the oral restorative surgical products industry and has increased the market share for its implant products by implementing the following strategies:

	•		Develop a broad line of dental implants and related dental surgery support products that facilitate the transition from competitive systems to a broad-based Lifecore system.
	•		Develop and deliver unique educational programs and materials aimed at restorative clinicians and their auxiliary teams in the principles of tooth replacement therapy, practice management techniques and marketing and selling skills training to foster higher patient acceptance of dental implants.
	•		Continue expansion in international markets through either direct selling efforts or additional distribution agreements.

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Oral Restorative Division Products

     The following chart summarizes the principal products of the Company’s Oral Restorative Division:

     SUSTAIN® and RESTORE® Dental Implant Systems, STAGE-1™ Single Stage Implant System, Quick-Cap™ Impressioning System, CAPSET® Calcium Sulfate Bone Graft Barrier, SlowSet™, TefGen Regenerative Membrane™, and Support Plus™ are registered trademarks of Lifecore Biomedical, Inc.

Implant Products

     The Company offers the RESTORE Dental Implant System, the SUSTAIN Dental Implant System and the STAGE-1 Single Stage Implant System.

     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, marketed under the RESTORE System name. Included in the ISS acquisition was a line of dental implant prosthetic components that the Company continues to market under the Implant Support Systems brand. These components are compatible and interchangeable with several other dental implant manufacturers’ systems, as well as miscellaneous dental implant support products, permitting the Company to market its products to dental offices that currently use competitors’ implant systems.

     The SUSTAIN System is based on a newer innovative design that embraces both threaded and press-fit cylinder formats with added “bone-like” hydroxylapatite. 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. The SUSTAIN System, like the RESTORE System, is complemented by a complete line of prosthetic components.

     The STAGE-1 Single Stage Implant System was designed by the Company to allow for a one-stage surgical procedure. The STAGE-1 System uses a self-tapping implant design for easier placement and includes the reliable Morse taper prosthetic connection. 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™ Impressioning System was added to the Stage-1 Single Stage line in March 2002. This system greatly improves the restorative dentist’s ease and accuracy of impressioning for subsequent laboratory construction of the final crown, bridge or denture.

     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 Case Acceptance Program offers client personnel the marketing and selling skills training to foster higher patient acceptance of dental implants.

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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 calcium sulfate plaster technology developed by and licensed from Wright Medical, Inc., an orthopedic product manufacturer based in Memphis, Tennessee. CAPSET Barrier and CAPSET SlowSet Barrier allow the clinician to more efficiently use demineralized freeze-dried bone grafts to restore missing bone, particularly in periodontal defects, without resorting to more elaborate treatment techniques or no treatment at all.

     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. TefGen Regenerative Membrane allows the dental surgeon to cover a treated defect in bone and prevent the invasion of soft tissue while the slower growing bone tissue underneath has time to establish itself.

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 sells its ophthalmic grade hyaluronan powder to Alcon for Viscoat solution.

     The Company has an agreement with ETHICON for exclusive distribution of INTERGEL Solution. The Company believes that ETHICON is the worldwide market leader in the area of surgical products and has one of the largest marketing and sales forces in the industry. Successful commercialization of INTERGEL Solution is dependent on successful manufacturing of commercial quantities and the efforts of ETHICON to develop the market for the product. No assurance can be given that any or all of these conditions will be met.

     The Company also sells various forms of medical grade hyaluronan directly to academic and corporate research customers for development and evaluation of new applications.

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 twenty-one individuals dedicated to sales in the United States and three U.S.-based salespersons dedicated to international sales. The Oral Restorative Division products are marketed internationally in 35 countries through 22 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 sales force 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 $250 million.

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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 high volume precision mixing of viscous fluids.

     The Company produces its hyaluronan through a proprietary process of fermentation. Until the introduction of the Company’s medical grade hyaluronan, the only commercial source for medical hyaluronan was through an animal rendering process of extraction from rooster combs. The Company believed that the rooster comb extraction method would not be capable of producing large quantities of hyaluronan in an efficient manner if demand for the use of medical grade hyaluronan greatly increased. In addition, changing regulatory requirements make medical use of animal extracts increasingly problematic. Consequently, the Company developed its proprietary fermentation process for hyaluronan using existing knowledge of other successful fermentation manufacturing processes. 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 used primarily for the proprietary hyaluronan manufacturing process and the formulation of INTERGEL Solution. Since January 2000, the Company has reduced its manufacturing levels causing excess capacity charges in the ongoing periods. The FDA completed a pre-approval site inspection of the Company’s INTERGEL Solution manufacturing operations allowing release of product in the U.S. after approval. 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 simultaneous manufacturing of various types of finished products. Currently, the Company supplies several different forms of hyaluronan (e.g., varied molecular weight fractions) in powders, solutions and gels, and in a variety of bulk and single-use finished packages. The Hyaluronan Division is continuously conducting development work relating to the techniques utilized in hyaluronan manufacturing. Such development activity is 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 facilities. The Company also periodically contracts with independent regulatory consultants to conduct audits of the Company’s operations. The Company has received certification of conformance to ISO 9001 Quality Assurance System , ISO 13485 and EN 46001 Medical Device Standards as per the Medical Device Directive, 93/42/EEC, as well as the Conformite Europeene (CE) Mark for our products from TUV Product Services of Munich, Germany. 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.

     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. 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.

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Hyaluronan Products

     A number of companies produce hyaluronan products and thus directly or indirectly compete with Lifecore or its corporate partners. Several companies are pursuing anti-adhesion product development, including, but not limited to, Alliance Pharmaceuticals, Inc., Anika Therapeutics, Inc., Confluent Surgical, ETHICON, Fidia SpA, FzioMed, Genzyme Corporation, Life Medical Sciences, M.L. Labs and W.L. Gore & Associates, Inc. If any or all of the competing products are successfully developed, obtain regulatory approval and commercial acceptance, the Company’s prospects for INTERGEL Solution, may be adversely affected.

     Several companies produce hyaluronan through a fermentation process, including Genzyme, Bio-Technology General Corporation, Fidia SpA, IOLTECH, Kyowa Hakko 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, and Pharmacia and Kibun. The Company believes that its patented 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.”

     The Company believes that competition in the ophthalmic and medical grade hyaluronan market is primarily based on product performance and manufacturing capacity, as well as 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 significant cost and delay because significant manufacturing issues may be encountered and supplemental FDA review may be required.

Oral Restorative Products

     The dental implant market is also highly competitive. Major market competitors include Dentsply International, Inc., Centerpulse Dental, Biomet, Inc., Straumann AG and Nobel Biocare AB. 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 Centerpulse Dental (Biomend). 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.

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 United States 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 super self-tapping dental implant design.

     The Company believes that patent protection is significant 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

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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 a 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.

     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 are necessary, the manufacturer or distributor is ordinarily required to obtain an 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 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 by 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,

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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 on 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.

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 30, 2002, the Company employed 188 persons on a full-time basis, 8 part-time employees and 3 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.

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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.

     James W. Bracke, Ph.D. Dr. Bracke has been President and Chief Executive Officer and a director of the Company since August 1983 and Secretary since March 1995. He joined the Company in February 1981 as Senior Research Scientist.

     Dennis J. Allingham. Mr. Allingham was appointed Executive Vice President of the Company in 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.

     Andre P. Decarie. Mr. Decarie 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.

     Brian J. Kane. Mr. Kane was appointed Vice President of New Business Development of the Company in January 2001. He had been Vice President of New Business Development and Marketing since December 1997. He joined the Company as Vice President of Marketing in 1986.

     Colleen M. Olson. Ms. Olson has been Vice President of Corporate Administrative Operations of the Company since May 1991. She has been involved in the administration operations of the Company since 1980.

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.

Item 3. Legal Proceedings

     In March 2000, the Company was served with a lawsuit in the Federal District Court for the District of Massachusetts by The Straumann Company alleging unfair competition and trade dress infringement surrounding the Company’s STAGE-1 Single Stage Implant System. Straumann Company moved for a preliminary injunction, seeking a court order prohibiting Lifecore’s continued sale of STAGE-1 Single Stage Implants. The federal court denied Straumann’s motion, ruling that Straumann had failed to prove that the claimed “trade dress” was nonfunctional in nature. In February 2002, the federal court granted the Company’s motion for summary judgment in part, ruling that several of the features of the Straumann implant were functional as a matter of law. The discovery period recently ended, and the Company has renewed its motion for summary judgment, seeking judgment as a matter of law on the remaining functionality issues, on secondary meaning and on likelihood of confusion. The Company believes the lawsuit is without merit and intends to vigorously defend this position.

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     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 2002 and 2001 the range of high and low closing sale prices of the Common Stock on the Nasdaq National Market.

     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 30, 2002, the Company had 623 shareholders of record.

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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, 2002 has been derived from the Company’s Consolidated Financial Statements audited by Grant Thornton LLP, independent certified public accountants. Such data should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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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 agreed by unaffiliated customers. The Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition” provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

Allowance for Uncollectible Accounts Receivable:

     Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company extends credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of 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 by an allowance for obsolete, excess or unmarketable inventory. The estimated allowance 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.

     In July 2001, the Financial Accounting Standards Board issued SFAS 142 which deals with, among other things, amortization of goodwill. The Company adopted this new standard effective July 1, 2001 and ceased amortization of goodwill at that date 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.

     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, 2002. The agreement contains minimum purchase requirements totaling $2.5 million in each of calendar years 2001 and 2002. Management expects that the Company will be able to

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negotiate an extension of this supply agreement. Initial sales of INTERGEL Solution occurred during fiscal 1998, as ETHICON, began marketing INTERGEL Solution in Europe. On November 19, 2001, the Company received FDA approval to market INTERGEL Solution in the United States. Sales of INTERGEL Solution commenced in the United States during the first calendar quarter of 2002.

     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, 2002 compared with year ended June 30, 2001.

     Net Sales. Net sales increased $4,658,000 or 14% in fiscal 2002 from fiscal 2001. Hyaluronan Division sales increased $1,059,000 or 7% and Oral Restorative Division sales increased $3,599,000 or 18%.

     Hyaluronan Division sales increased to $15,244,000 in fiscal 2002 from $14,185,000 in fiscal 2001 due to increased sales of INTERGEL Solution to ETHICON with the approval of INTERGEL Solution for sale in the United States. This sales increase was partially offset by reduced ophthalmic hyaluronan shipments and the termination of the Bausch & Lomb shipments that occurred in fiscal 2001.

     Oral Restorative Division sales increased to $23,550,000 in fiscal 2002 from $19,951,000 in fiscal 2001. Domestic sales increased 12% 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 28% from sales increases at our subsidiary operations.

     Gross profit. Consolidated gross profit, as a percentage of net sales, was 43% in fiscal 2002 and 46 % in fiscal 2001. The gross profit for the Hyaluronan Division decreased to 20% in fiscal 2002 from 28% in fiscal 2001. Charges for unused capacity, associated with the Company’s hyaluronan production as a result of an unanticipated delay in receiving INTERGEL Solution marketing approval in the U.S. from the FDA, were $3.8 million in fiscal 2002 and $2.7 million in fiscal 2001. The Company expects that its Hyaluronan Division gross margins will gradually improve as production levels increase to meet the expected demand for hyaluronan. Gross profit for the Oral Restorative Division decreased to 58% in fiscal 2002 from 59% in fiscal 2001. The decrease is the result of product sales mix.

     Research and development. Research and development expenses increased $161,000 or 3% in fiscal 2002 from fiscal 2001. The increase resulted principally from consulting and related expenses associated with the regulatory process with the FDA for INTERGEL Solution.

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     Marketing and sales. Marketing and sales expenses increased by $1,491,000 or 16% in fiscal 2002 from fiscal 2001. The increase was due mainly to the development and execution of new products, promotions and customer training programs for the Oral Restorative Division and increased costs associated with subsidiary operations.

     General and administrative. General and administrative expenses increased by $401,000 or 9% in fiscal 2002 from fiscal 2001. The increase is principally related to costs associated with subsidiary operations and higher legal expenses in the current period as compared to the same period of last fiscal year.

     Other income (expense). Interest expense was lower in fiscal 2002 compared to 2001 mainly due to a lower level of borrowings on the line of credit in fiscal 2002. Interest income decreased due to lower level of cash available for investment, combined with lower interest rates in fiscal 2002 .

Year ended June 30, 2001 compared with year ended June 30, 2000

     Net Sales. Net sales increased $1,313,000 or 4% in fiscal 2001 from fiscal 2000. Hyaluronan Division sales increased $1,420,000 or 11% while the Oral Restorative Division sales decreased $107,000.

     The increase in Hyaluronan Division sales was due to an increase in sales of ophthalmic products and an increase from other Hyaluronan Division customers in fiscal 2001 compared to fiscal 2000. Sales of ophthalmic products to a single customer were $6,406,000 in fiscal 2001 compared with $5,981,000 for fiscal 2000.

     Oral Restorative Division sales decreased to $19,951,000 in fiscal 2001 from $20,058,000 in fiscal 2000. Sales in the domestic market declined due to the end of the Alloderm Graft distribution agreement in July 2000. When sales of Alloderm Graft are adjusted out of the two years, domestic sales grew by 8%. International sales increased by 12%, mainly from the addition of the German subsidiary.

     Gross profit. Consolidated gross profit, as a percentage of net sales, was 46% in both fiscal 2001 and fiscal 2000. The gross profit for the Hyaluronan Division decreased to 28% in fiscal 2001 from 29% in fiscal 2000. Charges for unused capacity, associated with the Company’s hyaluronan production as a result of an unanticipated delay in receiving INTERGEL Solution marketing approval in the U.S. from the FDA, were $2.7 million in fiscal 2001 and $3.2 million in fiscal 2000. Gross profit for the Oral Restorative Division increased to 59% in fiscal 2001 from 57% in fiscal 2000. The increase is the result of product mix; sales of the lower margin Alloderm Graft product declined in fiscal 2001.

     Research and development. Research and development expenses increased $491,000 or 12% in fiscal 2001 from fiscal 2000. 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 consulting and related expenses associated with the regulatory process with the FDA for INTERGEL Solution.

     Marketing and sales. Marketing and sales expenses increased by $1,377,000 or 17% in fiscal 2001 from fiscal 2000. The increase was due mainly to the development and execution of new products, promotions and customer training programs for the Oral Restorative Division and costs associated with operating Lifecore GmbH.

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     General and administrative. General and administrative expenses increased by $786,000 or 20% in fiscal 2001 from fiscal 2000. The increase is principally from costs associated with operating Lifecore GmbH and higher legal and health insurance expenses in fiscal 2001 as compared to the same period of fiscal 2000.

     Other income (expense). Interest expense was lower in fiscal 2001 compared to 2000 mainly from a lower level of borrowings on the line of credit in fiscal 2001. A higher level of cash available for investment in fiscal 2001 contributed to the increase in interest income.

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 in excess of five years. Total inventory decreased by $2,935,000 and $3,597,000 in fiscal 2002 and 2001 as the Company decreased production of hyaluronan powder and INTERGEL Solution after the unanticipated delay in receiving marketing approval of INTERGEL Solution from the FDA. INTERGEL Solution sales have increased after the Company obtained FDA approval to market INTERGEL Solution in the United States in November 2001, which also contributed to the decrease in hyaluronan inventory.

     The Company had positive cash flow from operations in fiscal 2002, 2001 and 2000. As the Hyaluronan Division’s production levels increase, its related production efficiencies will increase. However, charges for unused capacity associated with the Company’s hyaluronan production have negatively impacted operating results in fiscal 2002 and 2001. These charges are a result of the unanticipated delay in receiving INTERGEL Solution marketing approval in the U.S. from the FDA. The Company expects that its Hyaluronan Division gross margins will gradually increase as production levels and efficiency increases as a result of gaining FDA approval to sell INTERGEL Solution in the United States. Also, marketing and sales expenses for the oral restorative products are expected to continue at a high level, and personnel costs have increased.

     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. The issuances were completed pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933.

     On March 15, 2001, the Company entered into an agreement with Lancet Software Development, Inc. whereby Lancet agreed to develop an e-Commerce site for the Company to market its products worldwide. Payments due under the agreement may be made in the form of the Company’s common stock or cash, at the option of the Company. In April 2001, the Company issued an aggregate of 20,973 shares of common stock to Lancet as the first progress payment under the agreement. In June 2001, the Company issued an aggregate of 23,152 shares of common stock to Lancet as the second progress payment under the agreement. In October 2001, the Company issued an aggregate of 21,097 shares of common stock to Lancet as the final payment under the 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. Registration Statements on Form S-3 were filed and declared effective by the Securities and Exchange Commission in April, August and 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 2002 to waive the fixed charge coverage ratio and the cash flow coverage ratio through June 30, 2003. With respect to certain of these covenants, the Company may be required to obtain further waivers for fiscal 2004. 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 plus 1% at June 30, 2002 and at prime at June 30, 2001, which was 5.75% and 6.75% at the respective dates. The agreement has a maturity date of December 31, 2002. At June 30, 2002 and 2001 there was no outstanding balance 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 liabilities to tangible net worth ratio. At June 30, 2002, the Company was in compliance with all covenants. It is the intention of the Company to either renew the existing line of credit agreement or seek a comparable line of credit agreement with a different bank. There is no assurance that the Company will be able to renew the existing line of credit agreement or be able to secure a line of credit agreement with a new bank when the current agreement expires on December 31, 2002.

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     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 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.

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 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) obtaining the necessary regulatory approvals for new hyaluronan and oral restorative products; (ii) 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; (iii) possible limitations on the Company’s ability to meet anticipated significant commercial demand for INTERGEL Solution on a timely basis; (iv) the uncertainty of the possible outcome of the litigation with The Straumann Company regarding the STAGE-1 Single Stage Implant System, (v) intense competition in the markets for the Company’s principal products and (vi) other factors discussed in the risk factors filed as Exhibit 99 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.

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Item 7a. Quantitative and Qualitative Disclosures About Market Risk

     The Company invests its excess cash in money market mutual funds and highly rated corporate debt securities. All investments are held-to-maturity. The market risk on such investments is minimal. Receivables from sales to foreign customers are denominated in U.S. Dollars. Transactions at the Company’s foreign subsidiaries are denominated in European Euros at Lifecore Biomedical SpA and Lifecore Biomedical GmbH and are denominated in Swedish Krona at Lifecore Biomedical AB. The Company 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. The Company’s outstanding long-term debt carries interest at a fixed rate. There is no material market risk relating to the Company’s long-term debt.

Item 8. Financial Statements and Supplementary Data

     The consolidated financial statements are listed under item 14 of this report. Summarized unaudited quarterly financial data for 2002 and 2001 is as follows:

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

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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 2002 Annual Meeting of Shareholders to be held November 14, 2002, which is incorporated herein by reference. See also “Executive Officers of the Registrant” in Item 1 above.

Item 11. Executive Compensation

     Information concerning executive compensation is set forth in the section entitled “Executive Compensation” in the Company’s Proxy Statement for its 2002 Annual Meeting of Shareholders which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     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 2002 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, 2002:

(1)  - Includes the Company’s 1987 Stock Plan, 1990 Stock Plan and 1996 Stock Plan.

(2)  - The 1996 Stock Plan authorizes the issuance of awards in the form of restricted stock. There are a total of 562,748 shares available for future issuance under the 1996 Stock Plan. The Company has not granted any shares of restricted stock under the 1996 Stock Plan.

Item 13. Certain Relationships and Related Transactions

     Not Applicable.

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PART IV

Item 14. Controls and Procedures

     There have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect these controls since the date these controls were last evaluated by the executive officers of the Company.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Description

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Description

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Description

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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.

     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.