SYNOVIS LIFE TECHNOLOGIES INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For quarterly period ended July 31, 2002

OR

[ ] 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 0-13907

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SYNOVIS LIFE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)

State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554

Principal Executive Offices: 2575 University Avenue
St. Paul, Minnesota 55114
Telephone Number: (651) 603-3700

Former name: Bio-Vascular, Inc.
Date of Name Change: May 1, 2002

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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
----- -----

On September 3, 2002, there were 9,557,070 shares of the Registrant's common
stock, par value $.01 per share, outstanding.

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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS

SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JULY 31, 2002 AND OCTOBER 31, 2001
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(in thousands, except share data)

July 31, October 31,
2002 2001
--------------- --------------
(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents $ 6,486 $ 7,090
Accounts receivable, net 5,005 3,835
Inventories 6,394 4,898
Deferred income taxes 223 223
Other 466 446
--------------- --------------
Total current assets 18,574 16,492

Property, equipment and leasehold improvements, net 8,108 4,994
Goodwill, net 4,831 4,790
Other intangible assets, net 2,349 2,411
Deferred income taxes and other 47 221
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Total assets $ 33,909 $ 28,908
=============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,491 $ 1,387
Accrued expenses 2,644 2,010
Current maturities of long-term obligations 378 182
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Total current liabilities 4,513 3,579

Long-term obligations, net of current maturities 409 210
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Total liabilities 4,922 3,789
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Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at July 31, 2002 and
October 31, 2001 -- --
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 9,522,046 at July 31, 2002 and
9,246,170 at October 31, 2001 95 92
Additional paid-in capital 30,788 29,163
Unearned compensation (37) (114)
Accumulated deficit (1,859) (4,022)
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Total shareholders' equity 28,987 25,119
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Total liabilities and shareholders' equity $ 33,909 $ 28,908
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The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

2

SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 2002 AND 2001
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(in thousands, except per share data)

Three Months Ended Nine Months Ended
July 31, July 31,
2002 2001 2002 2001
--------------- ------------ ------------- -------------
(Unaudited) (Unaudited)

Net revenue $ 10,679 $ 7,125 $ 28,192 $ 20,586
Cost of revenue 5,719 3,561 14,566 10,322
-------------- ----------- ------------ ------------
Gross margin 4,960 3,564 13,626 10,264

Operating expenses:
Selling, general and administrative 3,040 2,423 8,918 7,140
Research and development 593 384 1,465 1,178
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Operating income 1,327 757 3,243 1,946

Other income, net 7 37 34 131
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Income before provision for income taxes 1,334 794 3,277 2,077

Provision for income taxes 439 291 1,114 794
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Net income $ 895 $ 503 $ 2,163 $ 1,283
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Earnings per share:
Basic $ 0.09 $ 0.06 $ 0.23 $ 0.14
============== =========== ============ ============
Diluted $ 0.09 $ 0.05 $ 0.22 $ 0.14
============== =========== ============ ============

The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

3

SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2002 AND 2001
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(in thousands)

Nine Months Ended
July 31,
2002 2001
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(Unaudited)

NET CASH FROM OPERATING ACTIVITIES:
Net Income $ 2,163 $ 1,283

Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property, equipment and leasehold improvements 1,112 884
Amortization of goodwill and other intangible assets 187 465
Non-cash compensation 73 174
Other 25 176

Changes in operating assets and liabilities:
Accounts receivable (1,045) (287)
Inventories (1,466) (798)
Other current assets (49) 90
Accounts payable (22) (80)
Accrued expenses 471 (21)
Accrued income taxes 54 (221)
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Net cash provided by operating activities 1,503 1,665
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and leasehold improvements (1,599) (1,204)
Investments in patents and trademarks (153) (70)
Acquisition of PE, net of cash received (620) --
Acquisition of MCA, net of cash received -- (491)
Other (45) 95
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Net cash used in investing activities (2,417) (1,670)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans 514 235
Repayment of capital lease obligations (81) (127)
Repayments of other long-term obligations (123) (113)
Repayment of debt in conjunction with the acquisition of MCA -- (177)
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Net cash provided by (used in) financing activities 310 (182)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (604) (187)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,090 5,480
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,486 $ 5,293
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The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

4

SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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(1) BASIS OF PRESENTATION:

The accompanying unaudited consolidated condensed financial statements of
Synovis Life Technologies, Inc. ("Synovis Life Technologies" or "the Company"),
formerly known as Bio-Vascular, Inc., have been prepared by the Company in
accordance with generally accepted accounting principles applied in the United
States of America for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report to Shareholders and incorporated by reference in the
Company's Form 10-K for the year ended October 31, 2001.

In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
consolidated financial position, results of operations and cash flows of the
Company as of and for the interim periods presented have been included.
Operating results and cash flows for the three and nine months ended July 31,
2002 are not necessarily indicative of the results of operations and cash flows
of the Company that may be expected for the year ending October 31, 2002.

(2) ACQUISITION OF BUSINESS:

On March 6, 2002, Synovis Interventional Solutions ("IS"), a wholly owned
subsidiary of Synovis Life Technologies, Inc., completed the purchase of the
stock of Emtech, Inc., a privately held company with manufacturing capabilities
in injection molding, computer numerical control machining and tool building.
The aggregate $2.1 million cash and stock transaction includes the purchase of
the Emtech business, as well as a 20,000-square-foot building located in Lino
Lakes, Minnesota.

The Company issued 140,434 shares of its common stock at a price based on a fair
market value of $8.04 per share and paid $95,000 in cash in exchange for all the
outstanding stock of Emtech. The Company also paid $852,000 for the land and
building. Emtech's name was subsequently changed to Synovis Precision
Engineering ("PE").

PE's operating results for March through July 2002 are included in the
Consolidated Condensed Statement of Operations for the three and nine month
periods ended July 31, 2002. The assets and liabilities acquired in the
transaction are included in the Company's Consolidated Condensed Balance Sheet
as of July 31, 2002 and the purchase transaction has been included in the
Consolidated Condensed Statement of Cash Flows for the nine month period ended
July 31, 2002.

The Company has substantially completed the allocation process of the purchase
price to the assets and liabilities acquired, as reflected in the Consolidated
Condensed Balance Sheet as of July 31, 2002. Pro forma combined financial
information for the three and nine month periods ended July 31, 2002 and 2001
has not been provided as PE's historical operating results are not considered
significant in relation to the Company's results for the periods then ended. The
Company expects to finalize the values assigned by October 31, 2002.

(3) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:

5

SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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(4) EARNINGS PER SHARE:

The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:

6

SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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(5) SEGMENT INFORMATION:

The following table presents certain financial information by business segment
for the three and nine months ended July 31, 2002 and 2001:

(6) SHAREHOLDERS' EQUITY:

During the nine months ended July 31, 2002, stock options for the purchase of
119,339 shares of the Company's common stock were exercised at prices between
$2.59 and $5.94 per share. 17,551 shares of common stock were purchased by
employees at a price of $5.07 under the Company's employee stock purchase plan
and 1,448 shares of common stock were forfeited by an employee upon termination
of employment during the first nine months of fiscal 2002.

(7) NEW ACCOUNTING PRONOUNCEMENTS:

In July of 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires that goodwill, as well as other
intangibles determined to have an indefinite life, will no longer be amortized.
Instead, these assets will be reviewed for impairment on a periodic basis. SFAS
No. 142 also requires the identification of reporting units for purposes of
assessing potential future impairment of goodwill.

The Company adopted SFAS No. 142 on November 1, 2001. The effect of implementing
this statement on net income and diluted earnings per share is as follows:

Three Months Ended Nine Months Ended
July 31, July 31,
2002 2001 2002 2001
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(Unaudited) (Unaudited)

Reported net income............................. $ 895,000 $ 503,000 $ 2,163,000 $ 1,283,000
Add back: Goodwill amortization................. -- 56,000 -- 167,000
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Adjusted net income............................. $ 895,000 $ 559,000 $ 2,163,000 $ 1,450,000
========= ========= =========== ===========

Diluted earnings per share:
Reported net income........................ $ 0.09 $ 0.05 $ 0.22 $ 0.14
Add back: Goodwill amortization............ -- 0.01 -- 0.02
------- ------- -------- --------
Adjusted net income........................ $ 0.09 $ 0.06 $ 0.22 $ 0.16
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7

SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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The following table summarizes the Company's amortized intangible assets:

As of July 31, 2002
(Unaudited)

Gross Carrying Accumulated Weighted Average
Amount Amortization Amortization Period
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Amortized intangible assets:
Patents and trademarks............... $ 990,000 $ 278,000 14.1 years
Developed technology................. 1,102,000 121,000 10.0 years
Noncompete agreements................ 1,050,000 394,000 9.7 years
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Total.......................... $ 3,142,000 $ 793,000

As of October 31, 2001

Gross Carrying Accumulated Weighted Average
Amount Amortization Amortization Period
-------------- ------------ -------------------

Amortized intangible assets
Patents and trademarks............... $ 837,000 $ 227,000 14.1 years
Developed technology................. 1,102,000 39,000 10.0 years
Noncompete agreements................ 1,050,000 312,000 9.7 years
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Total.......................... $ 2,989,000 $ 578,000

Amortization expense for the assets listed above during the nine months ended
July 31, 2002 and 2001 was $215,000 and $187,000, respectively. The estimated
amortization expense for each of the next five years is approximately $285,000
per year.

The $41,000 change in goodwill during the nine months ended July 31, 2002 is
attributable to an earnout payment to the sole shareholder from a previous
acquisition. No impairment losses were incurred during the nine months ended
July 31, 2002.

The following is a summary of goodwill by business segment:

Interventional business Surgical device business Total
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Goodwill at:
July 31, 2002 (Unaudited).. $ 4,093,000 $ 738,000 $ 4,831,000
October 31, 2001 .......... $ 4,093,000 $ 697,000 $ 4,790,000

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. Also, in September 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that
long-lived assets to be disposed of by sale, including discontinued operations,
be measured at the lower of the carrying cost or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. SFAS
No. 144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company expects to adopt SFAS Nos. 143 and
144 in fiscal 2003. The Company's management has not yet determined the impact
the adoption of SFAS Nos. 143 and 144 will have on its consolidated financial
position and results of operations.

8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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Forward-Looking Statements:

Except for the historical information contained herein, the disclosures in this
Form 10-Q are "forward-looking statements" made under the Private Securities
Litigation Reform Act of 1995. All forward-looking statements in this document
are based upon information available to the Company as of the date hereof, and
the Company assumes no obligation to correct or update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any future disclosures we make on related
subjects in future filings with the SEC. Forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors may include, among others, the risk factors listed from time to time in
the Company's filings with the Securities and Exchange Commission, such as the
year-end Annual Report on Form 10-K for the year ended October 31, 2001.

OVERVIEW

Synovis Life Technologies, Inc. ("SLT") is a diversified medical device company,
engaged in developing, manufacturing and bringing to market products for the
surgical and interventional treatment of disease. Its businesses are comprised
of two reportable segments, the surgical device business and the interventional
business, based upon similarities of the underlying business operations and
products of each.

SLT's surgical device business includes Synovis Surgical Innovations ("SI") and
Synovis Micro Companies Alliance ("MCA"). SI provides implantable biomaterial
products and surgical tools which offer biocompatible solutions to reduce risks
of critical surgeries, leading to better patient outcomes and lowering cost. MCA
provides products used across several surgical specialties in the niche
microsurgery market.

SLT's interventional business includes Synovis Interventional Solutions ("IS")
and Synovis Precision Engineering ("PE"). IS designs, engineers and manufactures
precision micro-wire forms used in interventional devices, such as pacemakers
and implantable defibrillators, for various cardiac, neuro and vascular
procedures. PE provides design engineering, quick-turn prototyping, short-run
and long-run manufacturing of polymer injection molding, and computer numerical
control ("CNC") of high tolerance machining services to medical device and
technology companies. In addition, PE provides these services to other Synovis
businesses.

CRITICAL ACCOUNTING POLICIES

The Company's consolidated financial statements include the accounts of Synovis
Life Technologies, Inc. and its wholly owned subsidiaries, Synovis IS and
Synovis MCA, after elimination of intercompany accounts and transactions. The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. We do not believe there is a great
likelihood that materially different amounts would be reported related to the
accounting policies described below, however, actual results could differ from
those estimates.

Revenue recognition: The Company's policy is to ship products to customers on
FOB shipping point terms. The Company recognizes revenue when the product has
been shipped to the customer if there is evidence that the customer has agreed
to purchase the products, delivery and performance has occurred, the price and
terms of sale are fixed and collection of the receivable is expected. The
Company's sales policy does not allow sales returns.

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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Inventory valuation: Inventories, which are comprised of component parts,
subassemblies and finished goods, are valued at the lower of first-in, first-out
(FIFO) cost or market.

Equipment and leasehold improvements: Equipment and leasehold improvements are
stated at cost. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the related assets.
Major replacements and improvements are capitalized, while maintenance and
repairs, which do not improve or extend the useful lives of the respective
assets, are charged to operations. The asset and related accumulated
depreciation or amortization accounts are adjusted for asset retirements and
disposals with the resulting gain or loss, if any, recorded in the Consolidated
Statement of Operations at the time of disposal.

Income taxes: The Company accounts for income taxes using the asset and
liability method. The asset and liability method provides that deferred tax
assets and liabilities are recorded based on the differences between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes ("temporary differences"). Temporary differences relate
primarily to research and experimentation tax credit carryforwards,
depreciation, non-compete obligations, and the carrying value of receivables and
inventory.

ACQUISITION OF EMTECH, INC.

On March 6, 2002, the IS subsidiary of the Company purchased the stock of
Emtech, Inc., a private company located in Lino Lakes, Minnesota with
manufacturing capabilities including injection molding, computer numerical
control machining and tool building. The Company believes that Emtech's
capabilities will expand the scope of the Company's offerings to its OEM
customers and could be used to manufacture components of some current SLT
products at a lower cost. The Company has changed the Emtech, Inc. name to
Synovis Precision Engineering ("PE"), and operates PE as a division of Synovis
Interventional Solutions.

The aggregate $2.1 million cash and stock transaction includes the purchase of
the Emtech business, as well as a 20,000-square-foot building and land located
in Lino Lakes, Minnesota. The Company issued 140,434 shares of its common stock
at a price based on a fair market value of $8.04 per share and paid $95,000 in
cash in exchange for all the outstanding stock of Emtech. Additionally, the
Company paid $852,000 for the building.

PE's operating results for March through July 2002 are included in the
consolidated condensed financial statements for the three and nine months ended
July 31, 2002. Pro forma combined financial information has not been provided as
Emtech's operating results are not considered significant in relation to the
Company's consolidated financial results.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2002 WITH
THE THREE MONTHS ENDED JULY 31, 2001

For the third quarter of fiscal 2002, consolidated net revenue increased 50% to
$10,679,000 from $7,125,000 in the third quarter of fiscal 2001. The Company's
consolidated operating income for the third quarter of fiscal 2002 grew 75% to
$1,327,000 from $757,000 in the prior year quarter. Consolidated net income for
the quarter increased to $895,000, or nine cents per diluted share, up 78% from
$503,000, or five cents per diluted share, in the same quarter of fiscal 2001.

The surgical device business generated net revenue growth in the third quarter
of fiscal 2002 of 28%, to $5,333,000 from $4,176,000 in the year-ago quarter.
Worldwide net revenue from the sales of Peri-Strips(R) increased 43%,
contributing net revenue of $2,117,000 in the third quarter of 2002, compared to
$1,483,000 in the third quarter of 2001. Peri-Strips are used to reduce risks
and improve patient outcomes in several procedures, notably gastric bypass

10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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surgery, a surgical treatment for morbid obesity, which is considered epidemic
in the United States. The projected number of gastric bypass procedures in the
United States is approximately 63,000 in 2002, 80,000 in 2003 and 110,000 by
2004, as estimated by the American Society of Bariatric Surgery ("ASBS"). In
November 2001, the Company received a U.S. patent for Veritas(TM), a
revolutionary implantable biomaterial tissue. The Company has received FDA
marketing clearance for the use of Veritas as a sling for stress urinary
incontinence and as a reconstruction material for the surgical treatment of
prolapse and for the repair of the pelvic floor. Prolapse, the falling or
sliding of organs in the pelvic area, is a frequent condition in women caused by
injury during childbirth and by the aging process. The Company's formal
commercial introduction of the Veritas product for these two indications
occurred at the annual meeting of the American Urological Society in late May.

MCA, acquired in July 2001, contributed net revenue of $246,000 in the third
quarter of 2002. Last year, the Company owned MCA in just the third month of the
quarter, and sales were $62,000 in July of 2001. Of the third quarter revenue,
$194,000 was from sales of the Microvascular Anastomotic Coupler System (the
"Coupler"), the primary product of the microsurgery business. MCA is focused on
the development of domestic and European distribution channels for the Coupler,
a device that enables microsurgeons to connect small arteries or veins - without
sutures - quickly, easily and with consistently favorable results as compared to
conventional suturing.

The interventional business, conducted through the Company's IS subsidiary and
its PE division, generated net revenue of $5,346,000 in the third quarter of
2002, an 81% increase over $2,949,000 in the third quarter last year. PE,
acquired by IS on March 6, 2002, added net revenue of $380,000 to the third
quarter of this year. Excluding revenue from the PE division, the growth rate of
the base interventional business was 68% compared with the third quarter of
2001, primarily due to higher revenue related to coil and stylet sales from
existing customers.

The consolidated gross margin percentage decreased four percentage points, from
50% to 46% during the third quarter of fiscal 2002 from the same quarter of
fiscal 2001. This decrease is attributable to business unit and product sales
mix in the comparative quarters. Factors which affect the gross margin include
the relative revenue of each business unit, product mix, volume and other
production activities. The Company's consolidated gross margin may fluctuate
quarter to quarter based on variations in these factors.

Consolidated selling, general and administrative ("SG&A") expense during the
third quarter of fiscal 2002 increased $617,000, or 26%, to $3,040,000 from
$2,423,000 in the comparable fiscal 2001 quarter. SG&A expense declined,
however, as a percentage of net revenue from 34% in the fiscal 2001 quarter to
28% in the fiscal 2002 quarter, as a result of relatively greater increases in
revenue levels as compared to increases in SG&A spending.

Consolidated research and development ("R&D") expense during the third quarter
of fiscal 2002 increased 54% to $593,000 from expense of $384,000 during the
same quarter last year. In both business units, R&D expense fluctuates from
quarter to quarter based on the timing and progress through external parties of
the projects. This forward-looking statement will be influenced primarily by the
number of projects and the related R&D personnel requirements, development and
regulatory approval path, expected costs, timing and nature of those costs for
each project.

The Company's consolidated operating income for the third quarter of fiscal 2002
increased 75% to $1,327,000 from $757,000 in the third quarter of 2001, driven
by higher income contributions from both businesses. Third quarter operating
income for the surgical device business increased 39% to $903,000 in fiscal 2002
from $648,000 in fiscal 2001. Operating income for the interventional business
increased $315,000, or 289%, to $424,000 from $109,000 in the year-ago quarter.
The increase is primarily due to relatively greater increases in revenue as
compared to organizational operating expenses.

Other income, primarily net interest income, was $7,000 in the third fiscal 2002
quarter, compared with $37,000 in the same fiscal 2001 quarter. The decrease in
other income is primarily attributable to lower interest income yields in fiscal
2002 as compared to fiscal 2001. The Company's income before income taxes was
$1,334,000 in the third quarter of fiscal 2002 as compared to $794,000 in the
comparative quarter of fiscal 2001.

11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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The Company recorded a provision for income taxes of $439,000 in the third
quarter of fiscal 2002, at an effective tax rate of 33%, as compared to $291,000
at an effective tax rate of 37% in the third quarter of fiscal 2001. The
decrease in the effective tax rate in fiscal 2002 compared to fiscal 2001 is
primarily due to the decreased impact of permanent differences on the Company's
increased pre-tax income level. The effective annual tax rate expected to be
applied for fiscal 2002 is 34%.

The Company's consolidated third quarter fiscal 2002 net income increased to
$895,000, or nine cents per diluted share, from $503,000, or five cents per
diluted share, in the third quarter of fiscal 2001.

COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2002 WITH
THE NINE MONTHS ENDED JULY 30, 2001

Consolidated net revenue increased 37% during the first nine months of fiscal
2002 to $28,192,000 from $20,586,000 in the first nine months of fiscal 2001.
The Company's consolidated operating income increased to $3,243,000 from
$1,946,000 during the first three quarters of fiscal 2001, an increase of 67%.
The Company's consolidated net income for the nine months ended July 31, 2002
increased to $2,163,000, or 22 cents per diluted share, from $1,283,000, or 14
cents per share, during the first nine months of fiscal 2001.

Net revenue for the surgical device business in the first nine months of fiscal
2002 increased $2,704,000, or 23%, to $14,327,000 from $11,623,000 in the same
period of fiscal 2001. MCA, acquired in July 2001, contributed $782,000 in
revenue in fiscal 2002. In 2001, the Company owned MCA in just July, when sales
were $62,000. The SI division experienced revenue increases across all product
groups during the first nine months of fiscal 2002 over the comparable period of
fiscal 2001. On a year to date basis, revenue from Peri-Strips increased 34%.
The significant increase in Peri-Strips revenue during fiscal 2002 is believed
to be due to the Company's continued market penetration into gastric bypass, a
surgical procedure for the treatment of morbid obesity. The projected number of
gastric bypass procedures in the United States is approximately 63,000 in 2002,
80,000 in 2003 and 110,000 by 2004, as estimated by the ASBS.

Net revenue for the interventional business in the first nine months of fiscal
2002 increased 55% to $13,865,000 from $8,963,000 in the comparable prior year
period. Included is $690,000 in net revenue from PE from March through July of
fiscal 2002. Also included in net revenue for the first nine months of fiscal
2002 is $415,000 in milestone payments with no related cost, resulting from work
done by the IS Technology Development Center under an agreement to develop and
manufacture an embolic distal protection device designed and patented by
Metamorphic Surgical Devices, LLC, an unrelated company. IS generated revenue
growth in every product category over the same period of fiscal 2001.

The Company's consolidated gross margin percentage decreased two percentage
points, from 50% to 48% during the first nine months of fiscal 2002 from the
first nine months of the prior year. This decrease is primarily attributable to
business unit and product sales mix in the comparative periods. Factors which
affect the gross margin include the relative revenue of each business unit,
product mix, volume and other production activities. The Company's consolidated
gross margin may fluctuate period to period based on variations in these
factors.

Consolidated SG&A expense during the first nine months of fiscal 2002 increased
25% to $8,918,000 from $7,140,000 in the comparable fiscal 2001 period. SG&A
expense declined slightly, however, as a percentage of net revenue from 35% in
fiscal 2001 to 32% in fiscal 2002 as a result of relatively greater increases in
revenue levels as compared to increases in SG&A.

12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------

Consolidated R&D expense during the first nine months of fiscal 2002 was
$1,465,000, an increase of 24%, from the comparable fiscal 2001 expense of
$1,178,000. In both business units, R&D expense is expected to fluctuate from
period to period based on the timing and progress through external parties of
projects. This forward-looking statement will be influenced primarily by the
number of projects and the related R&D personnel requirements, development and
regulatory approval path, expected costs, timing and nature of those costs for
each project.

The Company's consolidated operating income for the first nine months of fiscal
2002 was $3,243,000, representing an increase of $1,297,000, or 67%, from
$1,946,000 during the comparable period of fiscal 2001. Year to date operating
income for the surgical device business increased 21% to $1,513,000 in fiscal
2002 from $1,245,000 in fiscal 2001. Interventional business operating income
increased $1,029,000 to $1,730,000 in the first nine months of fiscal 2002, from
$701,000 in the comparative fiscal 2001 period. The growth in operating income
was driven by increased incremental revenues and effective expense management.
These variables are offset by increased investment spending for R&D and the
implementation of appropriate first phase infrastructures to support the sales
growth of MCA and PE.

Other income, primarily net interest income, was $34,000 in the first nine
months of fiscal 2002 and $131,000 in the comparative period of fiscal 2001. The
decrease in other income is primarily attributable to lower interest income
yields in fiscal 2002 compared to fiscal 2001. The Company's income before
income taxes was $3,277,000 in the first three quarters of fiscal 2002, as
compared to $2,077,000 in the fiscal 2001 period.

The Company recorded a provision for income taxes of $1,114,000 in the first
nine months of fiscal 2002, at an effective tax rate of 34%, as compared to a
provision for income taxes of $794,000, at an effective tax rate of 38% in the
comparative period of fiscal 2001. The decrease in the effective tax rate in
fiscal 2002 from the comparable period of fiscal 2001 is primarily due to the
decreased impact of permanent differences on the Company's increased pre-tax
income level. The effective tax rate of 34% for the first nine months represents
the expected annual effective tax rate to be applied for fiscal 2002 based on
forecasted income before income taxes for the year.

The Company's consolidated net income for the first three quarters of fiscal
2002 increased to $2,163,000, or 22 cents per diluted share, from $1,283,000, or
14 cents per share, in the same period of fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $6,486,000 at July 31, 2002 as compared to
$7,090,000 at October 31, 2001, a decrease of $604,000. The Company primarily
utilizes internally generated cash flow and existing cash balances to fund the
operations of its businesses. The decrease in cash is primarily related to the
Emtech acquisition, and related equipment and furnishing costs required to
expand the business. As of July 31, 2002, the Company had long-term obligations
(including current portions) of $787,000, requiring payments through 2004.

Operating activities provided cash of $1,503,000 in the first nine months of
fiscal 2002, as compared to providing cash of $1,665,000 during the first nine
months of fiscal 2001. Cash was provided by operations during fiscal 2002
through the combination of net income and non-cash expenses, partially offset by
a net increase in working capital primarily used for accounts receivable and
inventories.

Investing activities used $2,417,000 of cash during the first nine months of
fiscal 2002, which included $1,599,000 in purchases of equipment and leasehold
improvements, $620,000 for the purchase of Emtech, Inc. net of cash acquired,
$153,000 of investments in patents and trademarks and $45,000 in other investing
activities. Financing activities provided $310,000 of cash during the first
three quarters of fiscal 2002, which consisted of proceeds of $514,000 received
upon the exercise of stock options under the Company's stock option plan and
stock purchases under the Company's employee stock purchase plan, offset by
$204,000 in cash repayments of capital equipment lease and other long-term
obligations.

13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------

The Company believes existing cash and investments, coupled with anticipated
cash flow from operations will be sufficient to satisfy its operating cash
requirements for the next twelve months. This forward-looking statement, as well
as the Company's long-term cash requirements, will be a function of a number of
variables, including research and development priorities, acquisition
opportunities and the growth and profitability of the business.

NEW ACCOUNTING STANDARDS

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which is
incurred. Also, in September 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that
long-lived assets to be disposed of by sale, including discontinued operations,
to be measured at the lower of the carrying cost or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
SFAS No. 144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. The Company will adopt SFAS Nos. 143 and
144 in fiscal 2003. The Company's management has not yet determined the impact
adoption of SFAS Nos. 143 and 144 will have on its consolidated financial
position and results of operations.

ADDITIONAL INFORMATION ON SYNOVIS

We are currently subject to the informational requirements of the Exchange Act
of 1934, as amended. As a result, we are required to file periodic reports and
other information with the SEC, such as annual, quarterly and current reports,
proxy and information statements. You are advised to read this Form 10-Q in
conjunction with the other reports, proxy statements and other documents we file
from time to time with the SEC. If you would like more information regarding
Synovis, you may read and copy the reports, proxy and information statements and
other documents we file with the SEC, at prescribed rates, at the SEC's public
reference room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information regarding the operation of the SEC's public reference rooms by
calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the
public free of charge at the SEC's website. The address of this website is
http://www.sec.gov.

In addition, our website also contains a hyperlink to a third-party SEC Filings
website which makes all of our SEC filings, such as annual, quarterly and
current reports and proxy statements, available to the public. The address of
our website is www.synovislife.com. Neither our website nor the information
contained on any hyperlink provided in our website, is intended to be, and is
not, a part of this Quarterly Report on Form 10-Q. We also provide electronic or
paper copies of our SEC filings (excluding exhibits) to any person free of
charge upon receipt of a written request for such filing. All requests for our
SEC filings should be sent to the attention of the Chief Financial Officer at
Synovis Life Technologies, Inc., 2575 University Ave. W, St. Paul, Minnesota
55114.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal financial instruments the Company maintains are in accounts
receivable and long-term obligations. The Company believes that the interest
rate, credit and market risk related to these accounts is not significant. The
Company manages the risk associated with these accounts through periodic reviews
of the carrying value for non-collectibility of assets and establishment of
appropriate allowances in connection with the Company's internal controls and
policies. The Company does not utilize any derivative financial instruments,
derivative commodity instruments, other financial instruments or engage in any
other hedging activities.

14

PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------

ITEM 1. LEGAL PROCEEDINGS

The Company is currently involved in litigation which is ordinary, routine
litigation incidental to its business. Management believes losses, if any, that
might eventually be sustained from such litigation would not be material to the
Company's consolidated financial position, results of operations or cash flows
for any period. Further, product liability claims may be asserted in the future
relative to events not known to management at the present time. Management
believes that the Company's risk management practices, including its insurance
coverage, are reasonably adequate to protect against potential material product
liability losses.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In connection with the above-discussed acquisition of Emtech, Inc. on March 6,
2002, the Company issued an aggregate of 140,434 shares of common stock to two
of the former Emtech shareholders as consideration for the purchase of their
shares of Emtech stock.

Although the Company agreed to use reasonable best efforts to register the
resale of such shares under the Securities Act of 1933 ( and has effected such
registration), the shares were issued without registration under the Securities
Act in reliance on the exemption provided by Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder. The Company's reliance on
these exemptions is based upon the fact that these shares were only offered and
sold to the former Emtech shareholders, the limited number of persons receiving
the shares, the Company's reasonable belief that each recipient was capable of
evaluating merits and risks of their investment decision, the information made
available to the recipients regarding the acquisition and the Company, and the
restrictive legends placed on certificates representing the shares, among other
factors.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

None.

15

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 hereunto duly authorized.

SYNOVIS LIFE TECHNOLOGIES, INC.

Dated: September 12, 2002 /s/ Connie L. Magnuson
--------------------------------------
Connie L. Magnuson
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Karen Gilles Larson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Synovis
Life Technologies, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report.

[Items 4, 5 and 6 have been omitted pursuant to the transition provisions of
Release No. 33-8124]

Dated: September 12, 2002 /s/ Karen Gilles Larson
--------------------------------------
Karen Gilles Larson
President and Chief Executive Officer

CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, Connie L. Magnuson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Synovis
Life Technologies, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light on the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report.

[Items 4, 5 and 6 have been omitted pursuant to the transition provisions of
Release No. 33-8124]

Dated: September 12, 2002 /s/ Connie L. Magnuson
--------------------------------------
Connie L. Magnuson
Vice-President of Finance and
Chief Financial Officer

The written statements of our Chief Executive Officer and Chief Financial
Officer required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, accompanied the filing of this
report by correspondence to the Securities and Exchange Commission.

16

SYNOVIS LIFE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------

None.

17