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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, 2003
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 Ave. W.
St. Paul, Minnesota 55114
Telephone Number: (651) 603-3700
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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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
On September 9, 2003, there were 9,882,321 shares of the registrant's common
stock, par value $.01 per share, outstanding.
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED JULY 31, 2003 AND 2002
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(in thousands, except per share data)
Three Months Ended Nine Months Ended
July 31, July 31,
2003 2002 2003 2002
-------- -------- -------- --------
Net revenue $ 15,279 $ 10,679 $ 43,046 $ 28,192
Cost of revenue 8,551 5,719 24,309 14,566
-------- -------- -------- --------
Gross margin 6,728 4,960 18,737 13,626
Operating expenses:
Selling, general and administrative 3,604 3,040 10,585 8,918
Research and development 903 593 2,817 1,465
-------- -------- -------- --------
Operating income 2,221 1,327 5,335 3,243
Interest, net (2) 7 (3) 34
-------- -------- -------- --------
Income before provision for income taxes 2,219 1,334 5,332 3,277
Provision for income taxes 756 439 1,829 1,114
-------- -------- -------- --------
Net income $ 1,463 $ 895 $ 3,503 $ 2,163
======== ======== ======== ========
Earnings per share:
Basic $ 0.15 $ 0.09 $ 0.36 $ 0.23
======== ======== ======== ========
Diluted $ 0.14 $ 0.09 $ 0.34 $ 0.22
======== ======== ======== ========
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
2
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF JULY 31, 2003 AND OCTOBER 31, 2002
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(in thousands, except share and per share data)
July 31, October 31,
2003 2002
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ASSETS
Current assets:
Cash and cash equivalents $ 6,716 $ 7,866
Accounts receivable, net 6,176 4,815
Inventories, net 11,333 7,368
Deferred income taxes 388 388
Other 925 583
-------- --------
Total current assets 25,538 21,020
Property, equipment and leasehold improvements, net 10,620 8,408
Goodwill, net 4,839 4,813
Other intangible assets, net 2,206 2,314
Deferred income taxes and other 23 58
-------- --------
Total assets $ 43,226 $ 36,613
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,492 $ 2,529
Accrued expenses 4,012 2,942
Current maturities of long-term obligations 329 362
-------- --------
Total current liabilities 7,833 5,833
Deferred income taxes 160 160
Long-term obligations, net of current maturities 86 322
-------- --------
Total liabilities 8,079 6,315
-------- --------
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at July 31, 2003 and
October 31, 2002 -- --
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 9,877,741 at July 31, 2003 and
9,586,222 at October 31, 2002 99 96
Additional paid-in capital 32,528 31,190
Unearned compensation (2) (7)
Retained earnings (accumulated deficit) 2,522 (981)
-------- --------
Total shareholders' equity 35,147 30,298
-------- --------
Total liabilities and shareholders' equity $ 43,226 $ 36,613
======== ========
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 (UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 2003 AND 2002
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(in thousands)
Nine Months Ended
July 31,
2003 2002
------- -------
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,503 $ 2,163
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization of property, equipment and leasehold improvements 1,393 1,112
Amortization of intangible assets 212 187
Non-cash compensation 5 73
Other 35 25
Changes in operating assets and liabilities:
Accounts receivable (1,361) (1,045)
Inventories (3,965) (1,466)
Other current assets (342) (49)
Accounts payable 963 (22)
Accrued expenses 1,070 525
------- -------
Net cash provided by operating activities 1,513 1,503
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and leasehold improvements (3,605) (1,599)
Investments in patents and trademarks (104) (153)
Acquisition of Emtech, Inc., net of cash received 0 (620)
Other (26) (45)
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Net cash used in investing activities (3,735) (2,417)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans 1,341 514
Repayment of capital lease obligations (219) (81)
Repayments of other long-term obligations (50) (123)
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Net cash provided by financing activities 1,072 310
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,150) (604)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,866 7,090
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,716 $ 6,486
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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 (UNAUDITED)
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(1) BASIS OF PRESENTATION:
The accompanying unaudited consolidated condensed financial statements of
Synovis Life Technologies, Inc. (Synovis or the Company) have been prepared by
the Company in accordance with generally accepted accounting principles applied
in the United States 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 notes 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, 2002.
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,
2003 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, 2003.
(2) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
July 31, October 31,
2003 2002
----------- -----------
Inventories:
Raw materials $ 2,859,000 $ 1,902,000
Work in process 3,858,000 2,617,000
Finished goods 4,616,000 2,849,000
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$11,333,000 $ 7,368,000
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(3) GOODWILL AND OTHER INTANGIBLE ASSETS:
The following table summarizes the Company's amortized intangible assets:
As of July 31, As of October 31,
2003 2002
------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Patents and trademarks $1,130,000 $ 340,000 $1,026,000 $ 293,000
Developed technology 1,102,000 232,000 1,102,000 149,000
Noncompete agreements 1,050,000 504,000 1,050,000 422,000
---------- ---------- ---------- ----------
Total $3,282,000 $1,076,000 $3,178,000 $ 864,000
========== ========== ========== ==========
Amortization expense related to intangible assets was $212,000 for the nine
months ended July 31, 2003 and $215,000 for the nine months ended July 31, 2002.
The estimated amortization expense for each of the next five years is
approximately $285,000 per year, based on the Company's present intangible
assets.
5
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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The following is a summary of goodwill by business segment:
Interventional business Surgical business Total
----------------------- ----------------- ----------
Goodwill at:
July 31, 2003 $4,093,000 $746,000 $4,839,000
October 31, 2002 $4,093,000 $720,000 $4,813,000
No impairment losses were incurred during the nine months ended July 31, 2003.
(4) STOCK BASED COMPENSATION
The following table demonstrates the effect on net income and earnings per
share, net of taxes, as if the fair value based method of accounting had been
applied to all outstanding and unvested stock compensation awards in each
period:
Three Months Ended Nine Months Ended
July 31, July 31,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net Income
As reported $ 1,463,000 $ 895,000 $ 3,503,000 $ 2,163,000
Deduct: Total stock-based employee
compensation expense included in reported
net income, net of related tax effects (165,000) (127,000) (366,000) (348,000)
------------- ------------- ------------- -------------
Pro forma 1,298,000 768,000 3,137,000 1,815,000
Basic income per share
As reported 0.15 0.09 0.36 0.23
Pro forma 0.13 0.08 0.33 0.20
Diluted income per share
As reported 0.14 0.09 0.34 0.22
Pro forma 0.12 0.08 0.30 0.18
6
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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(5) EARNINGS PER SHARE:
The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended
July 31, July 31,
2003 2002 2003 2002
---------- --------- ---------- ---------
Denominator for basic earnings per share -
weighted-average common shares 9,819,841 9,484,556 9,706,747 9,364,176
Effect of dilutive securities:
Shares associated with deferred
compensation 2,233 30,063 2,233 30,063
Shares associated with option plans 697,203 404,810 598,924 435,009
---------- --------- ---------- ---------
Dilutive potential common shares 699,436 434,873 601,157 465,072
---------- --------- ---------- ---------
Denominator for diluted earnings per share -
weighted-average common shares and dilutive
potential common shares 10,519,277 9,919,429 10,307,904 9,829,248
========== ========= ========== =========
Options outstanding with exercise prices
greater than the average market price of the
Company's common stock -- 243,284 -- 150,745
========== ========= ========== =========
As of July 31,
2003 2002
-------------- --------------
Options outstanding 1,092,574 1,390,733
Range of exercise prices $2.00 - $24.23 $2.00 - $12.21
Range of expiration dates 2003 - 2011 2002 - 2010
Non-vested stock awards 2,233 30,063
7
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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(6) SEGMENT INFORMATION:
The following table presents certain financial information by business segment
for the three and nine months ended July 31, 2003 and 2002:
Three Months Ended Nine Months Ended
July 31, July 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net revenue:
Surgical business $ 6,608,000 $ 5,333,000 $19,004,000 $14,327,000
Interventional business 8,671,000 5,346,000 24,042,000 13,865,000
----------- ----------- ----------- -----------
Total $15,279,000 $10,679,000 $43,046,000 $28,192,000
=========== =========== =========== ===========
Operating income:
Surgical business $ 1,431,000 $ 903,000 $ 3,633,000 $ 1,513,000
Interventional business 790,000 424,000 1,702,000 1,730,000
----------- ----------- ----------- -----------
Total $ 2,221,000 $ 1,327,000 $ 5,335,000 $ 3,243,000
=========== =========== =========== ===========
(7) SHAREHOLDERS' EQUITY:
During the nine months ended July 31, 2003, stock options for the purchase of
274,342 shares of the Company's common stock were exercised at prices between
$2.09 and $12.21 per share.
(8) NEW ACCOUNTING PRONOUNCEMENTS:
In June 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 it is
incurred. The Company adopted SFAS No. 143 on November 1, 2002, and the adoption
had no impact on the Company's consolidated financial position and results of
operations.
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 adopted SFAS No. 144 on November 1, 2002, and the
adoption had no impact on the Company's consolidated financial position and
results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other provisions, this Statement eliminates the requirement that gains and
losses from extinguishment of debt be classified as extraordinary items. The
Company adopted SFAS No. 145 on November 1, 2002, and the adoption had no impact
on the Company's consolidated financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
8
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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liability is incurred, rather than when a company commits to an exit plan as was
previously required. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company adopted SFAS No. 146 on
January 1, 2003, and the adoption had no impact on the Company's consolidated
financial position or results of operations.
In December 2002, The FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the pro
forma disclosure provisions of SFAS No. 123 for companies that continue to apply
APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations to require prominent disclosures about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. This statement also amends APB Opinion No. 28, Interim
Financial Reporting to require pro forma disclosure about those effects in
interim financial statements. The transition guidance of SFAS No. 148 is
effective for financial reports for interim periods beginning after December 15,
2002. The Company will continue to account for the stock-based compensation in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, as
allowed by SFAS No. 123. This results in no charge to earnings when options are
issued to employees at fair market value. The adoption of this standard had no
impact on the Company's consolidated financial position or results of
operations. The required interim disclosures have been provided in Note 4.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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Forward-Looking Statements:
The disclosures in this Form 10-Q may include "forward-looking statements" made
under the Private Securities Litigation Reform Act of 1995. The statements can
be identified by words such as "should", "may", "will", "expect", "believe",
"anticipate", "estimate", "continue" or other similar expressions. 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
Securities and Exchange Commission (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 SEC, such as the year-end Annual Report on Form
10-K for the year ended October 31, 2002.
OVERVIEW
Synovis Life Technologies, Inc. (Synovis or the Company) is a diversified
medical device company engaged in developing, designing, manufacturing and
bringing to market products for the surgical and interventional treatment of
disease. Its business is conducted in two reportable segments, the surgical
business and the interventional business, with segmentation based upon
similarities of the underlying business operations, products and markets of
each.
The surgical business develops, manufactures and markets implantable biomaterial
products, tools to assist in cardiovascular surgeries and products for
microsurgery, all designed to reduce risks and/or facilitate critical surgeries,
leading to better patient outcomes and lower costs. The interventional business
provides product engineering services and manufacturing of fixation helices,
conductor coils, stylets, guidewires and other micro-wire and plastic devices
used in cardiac rhythm management, neurostimulation and vascular procedures.
CRITICAL ACCOUNTING POLICIES
Goodwill: In accordance with the Statement of Financial Accounting Standards
(SFAS) No. 142, goodwill is no longer amortized, but is reviewed annually for
impairment as of the end of each fiscal year. Please see Note 3 to the unaudited
consolidated condensed financial statements for additional goodwill information.
Other Intangible Assets: The Company's other intangible assets, primarily
developed technology, patents, trademarks, and non-compete agreements pertaining
to previous business acquisitions, are recorded at cost and are amortized using
the straight-line method over their estimated useful lives, generally seven to
17 years. These assets are reviewed annually for impairment as of the end of
each fiscal year. Please see Note 3 to the unaudited consolidated condensed
financial statements for additional intangible asset information.
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 have occurred, the price and
terms of sale are fixed and collection of the receivable is reasonably assured.
The Company's sales policy does not allow sales returns.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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Inventories: Inventories, which are comprised of component parts, sub-assemblies
and finished goods, are valued at the lower of first-in, first-out (FIFO) cost
or market.
Derivative Instruments and Hedging Activities: The Company does not enter into
any derivative instruments or hedging activities. The Company's policy is to
only enter into contracts that can be designated as normal purchases or sales.
In addition, substantially all of the Company's contracts are negotiated,
invoiced and paid in U.S. dollars.
OPERATING RESULTS
COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2003 WITH THE THREE MONTHS ENDED
JULY 31, 2002
Net revenue increased 43% to $15,279,000 in the third quarter of fiscal 2003
compared with $10,679,000 in the third quarter of fiscal 2002. The Company's
consolidated operating income increased 67% to $2,221,000 in the third quarter
of fiscal 2003 from $1,327,000 in the prior-year quarter. Consolidated net
income increased 63% to $1,463,000, or 14 cents per diluted share, from
$895,000, or nine cents per diluted share, in the same quarter of fiscal 2002.
The surgical business generated net revenue growth of 24% in the third quarter
of fiscal 2003 to $6,608,000 from $5,333,000 in the year-ago quarter. Worldwide
net revenue from the sales of Peri-Strips(R) increased 50% over the third
quarter of fiscal 2003, contributing net revenue of $3,171,000 in the third
quarter of 2003, compared to $2,117,000 in the third quarter of 2002.
Peri-Strips(R) are used to reduce risks and improve patient outcomes in several
procedures, primarily gastric bypass surgery. Gastric bypass is a surgical
treatment for morbid obesity, which is considered epidemic in the United States.
Peri-Strips(R) growth potential in gastric bypass surgery comes from its value
in reducing the risk of life-threatening complications from the surgery and from
the growing number of these procedures. Projections estimate that the number of
gastric bypass procedures are expected to reach between 80,000 and 100,000 in
2003 and between 110,000 and 150,000 in 2004.
Peri-Strips(R) are also used in a variety of pulmonary resections and lung
volume reduction surgery (LVRS). Peri-Strips(R) were first used in LVRS in 1994
to provide staple line integrity and reduce the risks of air leaks, making a
successful surgery possible. During fiscal 1995, the first full year of
Peri-Strip(R) sales, the product generated $5.5 million in revenue for the
Company. At that time, LVRS was the only surgical procedure in which
Peri-Strips(R) were used. On January 1, 1996, the Healthcare Financing
Administration (HCFA), citing efficacy and benefit concerns, made a national
non-coverage decision related to LVRS and instituted a seven-year study to
determine if LVRS prolonged life or improved its quality. Although LVRS was
still available and was sought out by patients on a private pay basis,
Peri-Strips(R) revenue declined each year until surgeons began using it for
gastric bypass surgery and the Company received market clearance from the Food
and Drug Administration (FDA) for such indication.
On August 20, 2003, the Centers for Medicare and Medicaid Services
(CMS), the successor to HCFA, announced its intent to cover LVRS for a defined
sub-set of patients with late stage emphysema. The Company estimates that of the
approximately 2,000,000 people with emphysema, 12% are in the late stages, and
35% of those, or 84,000 individuals, are suitable candidates eligible for
covered LVRS, once the coverage becomes effective. There are no available
statistics on the rate at which individuals with emphysema enter into or leave
what is defined as "the late stages" of the illness. The Company expects
increased revenue from Peri-Strips(R) as a result of the CMS decision, although
the actual amount and timing of such revenue is uncertain. The expected increase
and the actual amount and timing will be impacted by the coverage implementation
date, the accuracy of the Company's estimates with regard to suitable candidates
eligible for covered LVRS, the frequency with which LVRS is performed, and the
extent to which Peri-Strips(R) are utilized in such procedures.
The microsurgery product line of the surgical business contributed net revenue
of $333,000 in the third quarter of 2003, a 35% increase over the prior year
quarter. The primary product sold to the microsurgeon is the Microvascular
Anastomotic Coupler System (Coupler), a device designed to connect extremely
small arteries or
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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veins, without sutures, quickly, easily and with consistently excellent results.
The Coupler is a platform technology which the Company is currently leveraging
to expand the product's markets. The Company has filed a patent to incorporate
technology to detect blood flow and other critical parameters in an anastomotic
device, while a larger-diameter Coupler is being designed to accommodate the
technical requirements of cardiac use.
The interventional business generated net revenue of $8,671,000 in the third
quarter of 2003, a 62% increase over $5,346,000 in the third quarter last year.
The quarterly revenue increase was driven by a $1,951,000 or 66% increase in
coils and helices revenue and a $794,000 or 49% increase in revenue from stylets
and other wireforms. The revenue increase is primarily the result of higher
levels of customer demand for interventional components manufactured by the
Company, generally associated with increases in demand for customers'
end-products. In March 2002, the interventional business was vertically
integrated through an acquisition to expand its capabilities in polymer
injection molding, CNC machining and tooling. The acquisition contributed
revenue of $573,000 in the third quarter of 2003 compared with $380,000 in the
prior-year quarter.
The consolidated gross margin decreased two percentage points, to 44% during the
third quarter of fiscal 2003 from 46% in the same quarter of fiscal 2002. Gross
margin for the surgical business increased to 66% in the third quarter of 2003
from 64% in the third quarter of 2002 due to sales mix, production volume and
related manufacturing efficiencies. Gross margin for the interventional business
decreased one percentage point to 28% in the third quarter of fiscal 2003, from
29% in the third quarter of fiscal 2002. Product mix, start-up costs related to
new processes and products, along with training costs are factors contributing
to the segment's decrease over the prior-year. Factors which affect the
consolidated 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.
Selling, general and administrative (SG&A) expense during the third quarter of
fiscal 2003 increased $564,000, or 19%, to $3,604,000 from $3,040,000 in the
comparable fiscal 2002 quarter. However, as a percentage of net revenue, SG&A
expense declined four percentage points, from 28% in the fiscal 2002 quarter to
24% in the fiscal 2003 quarter. The percentage decrease is the result of
controlled SG&A spending increases in a period of incrementally higher levels of
revenue.
Research and development (R&D) expense increased 52% during the third quarter of
fiscal 2003 to $903,000 from $593,000 during the prior-year quarter. This
planned increase is partially due to the increased number, timing and nature of
various surgical R&D projects, along with the development of various
interventional projects including proprietary devices for sale to interventional
customers. In both business units, R&D expense will continue to fluctuate,
influenced primarily by the timing and number of projects and the related R&D
personnel requirements, development and regulatory approval path, expected costs
and nature of those costs for each project.
Operating income increased 67% in the third quarter of fiscal 2003, to
$2,221,000 from $1,327,000 in the third quarter of fiscal 2002, driven by higher
income contributions from both businesses. Third quarter operating income for
the surgical business increased 59% to $1,431,000 in fiscal 2003 from $903,000
in fiscal 2002. The increase for the surgical business is primarily due to
relatively greater increases in revenue through volume and related gross margin
contributions as compared to organizational operating expenses. Operating income
for the interventional business increased 86% to $790,000 in the third quarter
of 2003 from $424,000 in the third quarter of 2002. The increase for the
interventional business is largely attributable to higher levels of revenue and
relatively smaller increases in SG&A spending, partially offset by slightly
lower gross margins and increased R&D expenses.
The Company recorded a provision for income taxes of $756,000 in the third
quarter of fiscal 2003, at an effective tax rate of 34.0%, as compared to
$439,000 at an effective tax rate of 32.9% in the third quarter of fiscal 2002.
The effective annual tax rate expected to be applied for fiscal 2003 is 34.2%,
slightly higher than the Company's third quarter tax rate, but lower than the
effective tax rate of 34.5% applied during the first half of fiscal 2003.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2003 WITH THE NINE MONTHS ENDED
JULY 31, 2002
Net revenue increased 53% to $43,046,000 in the first nine months of fiscal 2003
compared with $28,192,000 in the same period of fiscal 2002. The Company's
consolidated operating income grew 65% to $5,335,000 in the nine months ended
July 31, 2003 from $3,243,000 in the prior-year period. Consolidated net income
increased 62% to $3,503,000, or 34 cents per diluted share, from $2,163,000, or
22 cents per diluted share, in the same period of fiscal 2002.
The surgical business generated net revenue growth of 33% in the first nine
months of fiscal 2003 to $19,004,000 from $14,327,000 in the first nine months
of fiscal 2002. Worldwide net revenue from the sales of Peri-Strips(R) increased
71% to $8,669,000 in the first nine months of fiscal 2003 as compared to
$5,080,000 in the prior-year period. The microsurgery product line of the
surgical business contributed net revenue of $990,000 in the nine months ended
July 31, 2003, compared with $782,000 in the first nine months of fiscal 2002, a
27% increase over the prior period.
The interventional business generated net revenue of $24,042,000 in the first
nine months of fiscal 2003, a 73% increase over $13,865,000 in the same period
of fiscal 2002. Revenue increases was driven by a $6,550,000 or 93% increase in
coils and helices revenue and a $2,879,000 or 62% increase in revenue from
stylets and other wireforms. The revenue increase is primarily the result of
higher levels of customer demand for interventional components manufactured by
the Company, generally associated with increases in demand for customers'
end-products. In March 2002, the interventional business was vertically
integrated through an acquisition to expand its capabilities in polymer
injection molding, CNC machining and tooling. The acquisition contributed
revenue of $1,555,000 in the first nine months of 2003 compared with $690,000
from March to July of fiscal 2002. Prior to the effect of the acquisition,
revenue for the interventional business increased 71% in the nine months ended
July 31, 2003 over the prior-year period.
The consolidated gross margin decreased four percentage points, to 44% during
the first nine months of fiscal 2003 from 48% in the same period of fiscal 2002.
Gross margin for the surgical business increased three percentage points to 65%
in the first nine months of 2003 from 62% in the same period of 2002 due to
sales mix, production volume and related manufacturing efficiencies. The
interventional business' margin decreased from 34% to 27% in the first nine
months of fiscal 2003. Product mix, start-up costs related to new processes and
products, along with training costs reduced the interventional business gross
margin in fiscal 2003. Additionally, during the first quarter of fiscal 2002,
the interventional business had revenue of $415,000 for milestone payments -
with no associated cost of sales or other period cost - related to successful
work on an embolic distal protection device designed and patented by Metamorphic
Surgical Devices, LLC (MSD), an unrelated company. Factors which affect the
consolidated 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.
SG&A expense during the nine months ended July 31, 2003 increased $1,667,000, or
19%, to $10,585,000 from $8,918,000 in the comparable fiscal 2002 period. As a
percentage of revenue, however, SG&A expense declined seven percentage points,
from 32% in fiscal 2002 to 25% in fiscal 2003. The percentage decrease is the
result of controlled SG&A spending increases in a period of incrementally higher
levels of revenue.
R&D expense increased 92% during the nine months ended July 31, 2003 to
$2,817,000 from $1,465,000 during the nine months ended July 31, 2002. This
planned increase is partially due to the development expenses of various
interventional projects including proprietary devices for sale to interventional
customers, along with the increased number, timing and nature of various
surgical R&D projects. In both business units, R&D expense will continue to
fluctuate, influenced primarily by the number of projects and the related R&D
personnel requirements, development and regulatory approval path, expected costs
and nature of those costs for each project.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
Operating income increased 65% in the first nine months of fiscal 2003, to
$5,335,000 from $3,243,000 in the first nine months of fiscal 2002. Operating
income for the surgical business increased 140% to $3,633,000 in fiscal 2003
from $1,513,000 in fiscal 2002. The increase for the surgical business is
primarily due to relatively greater increases in revenue through volume and
related gross margin contributions as compared to organizational operating
expenses. Operating income for the interventional business decreased 2% to
$1,702,000 in the nine months ended July 31, 2003 from $1,730,000 in the nine
months ended July 31, 2002. This segment's operating income contribution is in
line with the Company's expectations. The segment's change from the prior-year
period reflects the impact of significantly higher revenue offset by decreased
gross margins and higher operating expenses, particularly R&D spending which
increased 198% in the first nine months of fiscal 2003.
The Company recorded a provision for income taxes of $1,829,000 in the nine
months ended July 31, 2003, at an effective tax rate of 34.3%, as compared to
$1,114,000 at an effective tax rate of 34.0% in the nine months ended July 31,
2002. The effective annual tax rate expected to be applied for fiscal 2003 is
34.2%, slightly lower than the Company's tax rate for the nine months ended July
31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $6,716,000 at July 31, 2003 as compared to
$7,866,000 at October 31, 2002, a decrease of $1,150,000. 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
working capital as well as capital expenditures necessary to support two
high-growth business units. As of July 31, 2003, the Company had long-term
obligations (including current portions) of $415,000, requiring payments through
2005.
Operating activities provided cash of $1,513,000 in the first nine months of
fiscal 2003, as compared to providing cash of $1,503,000 during the first nine
months of fiscal 2002. Cash was used by operations for working capital necessary
to support growth in both business units, primarily for accounts receivable (net
increase of $1,361,000 in 2003 compared with an increase of $1,045,000 in 2002)
and inventories (net increase of $3,965,000 in 2003 compared with an increase of
$1,466,000 in 2002). The inventory increase in fiscal 2003 generally reflects
the growth of the businesses as well as interventional customer purchase order
inventory requirements. This was partially offset by an increase in net income,
accounts payable and accrued expenses.
Investing activities used $3,735,000 of cash during the first nine months of
fiscal 2003, which included $3,605,000 in purchases of equipment and leasehold
improvements, $104,000 of investments in patents and trademarks and $26,000 in
other investing activities.
Financing activities provided $1,072,000 of cash during the nine months ended
July 31, 2003, which consisted of proceeds of $1,341,000 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 $269,000
in cash repayments of capital equipment leases and other long-term obligations.
During the second quarter of fiscal 2003, the Company opened a manufacturing
facility in Puerto Rico, expanding the capacity of the interventional business.
The ongoing investment in the Puerto Rico facility is expected to be financed
through a combination of Puerto Rican incentives for job creation and facility
improvements, with the remainder to be provided by the Company's cash and cash
flow.
The Company believes existing cash and investments, coupled with anticipated
cash flows from operations will be sufficient to satisfy its operating cash
requirements for the next twelve months. This forward-looking statement
regarding sufficiency of cash and cash flows, 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS
In December 2002, The FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the pro
forma disclosure provisions of SFAS No. 123 for companies that continue to apply
APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations to require prominent disclosures about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. This statement also amends APB Opinion No. 28, Interim
Financial Reporting to require pro forma disclosure about those effects in
interim financial statements. The transition guidance of SFAS No. 148 is
effective for financial reports for interim periods beginning after December 15,
2002. The Company will continue to account for the stock-based compensation in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, as
allowed by SFAS No. 123. This results in no charge to earnings when options are
issued to employees at fair market value. The adoption of this standard had no
impact on the Company's consolidated financial position or results of
operations. The required interim disclosures have been provided in Note 4 to the
unaudited consolidated condensed financial statements.
ADDITIONAL INFORMATION ON SYNOVIS
We are currently subject to the informational requirements of the Securities
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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of our disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports filed or submitted under the
Exchange Act are recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. There
was no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect our internal control over financial reporting.
16
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
None.
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
a. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith
electronically).
b. Reports on Form 8-K
On May 21, 2003, Synovis Life Technologies, Inc. (Synovis) filed a
report on Form 8-K furnishing under Item 12 the press release
announcing its earnings for the second quarter ended April 30,
2003 and the six months ended April 30, 2003.
17
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, 2003 /s/ Connie L. Magnuson
-----------------------------------
Connie L. Magnuson
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
18
SYNOVIS LIFE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934 (filed
herewith electronically).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934 (filed
herewith electronically).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith electronically).
19