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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 January 31, 2005 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) 796-7300
----------------
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 X No
--- ---
On March 7, 2005, there were 11,757,230 shares of the registrant's common stock,
par value $.01 per share, outstanding.
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PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
- --------------------------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended
January 31,
2005 2004
----------- ----------
Net revenue $ 13,423 $ 11,519
Cost of revenue 8,196 5,901
----------- ----------
Gross margin 5,227 5,618
Operating expenses:
Selling, general and administrative 4,162 4,157
Research and development 908 894
Other 36 -
----------- ----------
Operating income 121 567
Other income, net 185 67
----------- ----------
Income before provision for income taxes 306 634
Provision for income taxes 101 215
----------- ----------
Net income $ 205 $ 419
=========== ==========
Earnings per share:
Basic $ 0.02 $ 0.04
=========== ==========
Diluted $ 0.02 $ 0.03
=========== ==========
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 JANUARY 31, 2005 AND OCTOBER 31, 2004
- --------------------------------------------------------------------------------
(in thousands, except share and per share data)
January 31, October 31,
2005 2004
------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,124 $ 15,369
Short-term investments 33,477 26,931
Accounts receivable, net 6,945 7,722
Inventories 11,270 11,591
Deferred income tax asset, net 1,088 1,088
Other current assets 2,441 2,467
------------------ ----------------
Total current assets 63,345 65,168
Property, plant and equipment, net 13,897 13,704
Goodwill, net 5,262 4,905
Other intangible assets, net 2,542 1,948
------------------ ----------------
Total assets $ 85,046 $ 85,725
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,287 $ 3,551
Accrued expenses 3,097 2,906
Current maturities of capital lease obligations 25 40
------------------ ----------------
Total current liabilities 5,409 6,497
Deferred income tax liability, net 1,227 1,227
------------------ ----------------
Total liabilities 6,636 7,724
------------------ ----------------
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at January 31, 2005 and
October 31, 2004 - -
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 11,748,641 at January 31, 2005 and
11,713,700 at October 31, 2004 117 117
Additional paid-in capital 72,818 72,614
Retained earnings 5,475 5,270
------------------ ----------------
Total shareholders' equity 78,410 78,001
------------------ ----------------
Total liabilities and shareholders' equity $ 85,046 $ 85,725
================== ================
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 THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
- --------------------------------------------------------------------------------
(in thousands)
Three Months Ended
January 31,
2005 2004
------------- -------------
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 205 $ 419
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation of property, plant and equipment 641 502
Amortization of intangible assets 98 74
Tax benefit from exercise of stock options - 283
Changes in operating assets and liabilities:
Accounts receivable 777 531
Inventories 321 (1,142)
Other current and non-current assets 26 27
Accounts payable (1,264) (95)
Accrued expenses 191 (1,018)
------------- -------------
Net cash provided by (used in) operating activities 995 (419)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (834) (1,217)
Disposition of property, plant and equipment - 43
Investments in patents and trademarks (43) (43)
Purchases of short-term investments (33,546) -
Redemptions of short-term investments 27,000 -
Purchase of assets of Neuroregen, LLC (986) -
Other (20) (17)
------------- -------------
Net cash used in investing activities (8,429) (1,234)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans 204 287
Repayment of capital lease obligations (15) (66)
Repayments of other long-term obligations - (25)
------------- -------------
Net cash provided by financing activities 189 196
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,245) (1,457)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,369 44,102
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,124 $ 42,645
============= =============
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)
(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 on Form 10-K for the year ended October 31, 2004.
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 months ended January 31, 2005 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, 2005.
(2) ACQUISITION OF BUSINESS:
On December 6, 2004, Synovis Micro Companies Alliance, Inc. (MCA), a wholly
owned subsidiary of Synovis Life Technologies, Inc., purchased substantially all
of the assets of Neuroregen, LLC. The primary asset acquired was the rights to
the Neurotube(R), a bioabsorbable nerve conduit which is designed to assist in
the regeneration of nerves severed as a result of injury or disease. Synovis MCA
will sell the Neurotube through its independent reps. The purchase price
included a cash payment of $986,000 plus certain additional payments to the
former shareholders of Neuroregen, LLC. These additional payments will be based
on the cumulative net sales of the Neurotube through December 6, 2009 and are
equal to 4% of the first $2,000,000 of cumulative net sales, 8% of the next
$3,000,000 in cumulative net sales and 12% of all cumulative net sales in excess
of $5,000,000. Approximately $653,000 of the purchase price was allocated to
identifiable intangible assets to be amortized on a straight line basis over an
estimated average useful life of five years. The remaining amount of the
purchase price was recorded as goodwill. Additional payments to the former
shareholders of Neuroregen, LLC will be recorded as additional goodwill when
earned.
As the acquisition occurred in December 2004, sales of the Neurotube from
December 7, 2004 to January 31, 2005 are included in the Consolidated Condensed
Statement of Income for the three month period ended January 31, 2005. The
assets acquired in the transaction are included in the Company's Consolidated
Condensed Balance Sheet as of January 31, 2005 and the purchase transaction has
been included in the Consolidated Condensed Statement of Cash Flows for the
three month period ended January 31, 2005.
Pro forma combined financial information for the three month periods ended
January 31, 2005 and 2004 have not been provided as the historical operating
results of Neuroregen, LLC are not considered significant in relation to the
Company's results for the periods then ended.
(3) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (in thousands):
January 31, October 31,
2005 2004
---- ----
Inventories:
Finished Goods.................................................................. $ 3,897 3,822
Work in process................................................................. 4,553 4,647
Raw Materials................................................................... 2,820 3,122
------- -------
$11,270 $11,591
======= =======
5
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(4) GOODWILL AND OTHER INTANGIBLE ASSETS (in thousands):
The following table summarizes the Company's amortized intangible assets:
As of January 31, As of October 31,
2005 2004
---- ----
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Patents and trademarks $ 1,495 $ 475 $ 1,253 $ 447
Developed technology 1,102 397 1,102 369
Noncompete agreements 1,100 673 1,050 641
Other 400 10 - -
--------- --------- --------- ---------
Total $ 4,097 $ 1,555 $ 3,405 $ 1,457
========= ========= ========= =========
Amortization expense was $98 for the three months ended January 31, 2005 and $74
for the three months ended January 31, 2004. The estimated amortization expense
for each of the next five years is approximately $500 per year, based on the
Company's present intangible assets.
The following is a summary of goodwill by business segment:
Interventional business Surgical business Total
----------------------- ----------------- -----
Goodwill as of:
January 31, 2005 $ 4,093 $ 1,169 $ 5,262
October 31, 2004 $ 4,093 $ 812 $ 4,905
No impairment losses were incurred during the three months ended January 31,
2005.
(5) STOCK BASED COMPENSATION (in thousands except share and per share data):
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
January 31,
2005 2004
---- ----
Net income
As reported $ 205 $ 419
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 182 130
-------- ---------
Pro forma $ 23 $ 289
======== =========
6
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Basic earnings per share:
As reported 0.02 0.04
Pro forma 0.00 0.03
Diluted earnings per share:
As reported 0.02 0.03
Pro forma 0.00 0.02
As of January 31,
2005 2004
---- ----
Options outstanding............................................ 923,676 982,611
Range of exercise prices....................................... $2.00 - $25.07 $2.00 - $25.07
Range of expiration dates...................................... 2005 -- 2014 2004 -- 2011
(6) 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
January 31,
2005 2004
---- ----
Denominator for basic earnings per share --
weighted-average common shares..................... 11,727,821 11,459,261
Shares associated with option plans................ 275,948 602,963
---------- ----------
Denominator for diluted earnings per share --
weighted-average common shares and dilutive
potential common shares............................ 12,003,769 12,062,224
========== ==========
Options excluded from EPS calculation because
exercise prices are greater than the average
market price of the Company's common stock......... 95,628 30,906
========== ==========
(7) SEGMENT INFORMATION (in thousands):
The Company's operations, which are presently based mainly in Minnesota and
Puerto Rico, are comprised of two operating segments, the surgical business and
the interventional business, with segmentation based upon the similarities of
the underlying business operations, products and markets of each. The Company
evaluates the performance of its business segments and allocates resources based
upon their respective current or future
7
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
earnings contribution to the consolidated earnings of the Company or based upon
the segment's product research and development efforts in process at that time.
Beginning in fiscal 2005, operations that are not included in either of the
operating segments are included in the category "corporate and other." The
corporate and other segment captures costs that are not directly assignable to
one of the operating business segments, including the costs of being a public
company and the unallocated time of management personnel who support corporate
activities. Prior year amounts have been reclassified to provide comparable
financial presentation.
The following table presents certain financial information by business segment
for the three months ended January 31, 2005 and 2004:
Three Months Ended
January 31,
2005 2004
---- ----
Net revenue:
Surgical business $ 6,543 $ 6,686
Interventional business 6,880 4,833
--------- ---------
Total $ 13,423 $ 11,519
========= =========
Operating income (loss):
Surgical business $ 877 $ 1,490
Interventional business (275) (518)
Corporate and other (481) (405)
--------- ---------
Total $ 121 567
========= =========
(8) SHAREHOLDERS' EQUITY:
During the three months ended January 31, 2005, stock options for the purchase
of 34,941 shares of the Company's common stock were exercised at prices between
$2.59 and $10.07 per share. During the three months ended January 31, 2004,
stock options for the purchase of 50,654 shares of the Company's common stock
were exercised at prices between $3.85 and $12.20 per share.
(9) SHORT-TERM INVESTMENTS (in thousands):
During the three months ended January 31, 2005, the Company purchased $33,546
and redeemed at maturity $27,000 of short-term investments, resulting in net
holdings of $33,477 of such securities at the end of the period. Short-term
investments consist of highly liquid debt securities with maturities greater
than three months and less than one year. The Company determines the appropriate
classification of its investments at the time of purchase. Debt securities are
classified as held to maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
carried at amortized cost. Debt securities not classified as held to maturity
are classified as available for sale. Available for sale securities are measured
at fair market value in the balance sheets. As the fair market value of our
available for sale investments approximates their amortized cost, there are no
unrealized gains or losses for these investments to be reported as a separate
component of shareholders' equity.
8
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(10) SHAREHOLDER LITIGATION:
Between June and August 2004, five lawsuits were filed against the Company and
certain of its executive officers in the United States District Court for the
District of Minnesota by individual shareholders who seek to represent a class
of purchasers of the Company's common stock during the period from October 16,
2003 through May 18, 2004. Those lawsuits have been consolidated into a single
case which has expanded the class period from May 21, 2003 through May 18, 2004.
The consolidated complaint generally alleges that the defendants violated the
Securities Exchange Act of 1934 by issuing false or misleading statements about
our business and prospects, which artificially inflated the price of the
Company's securities. No damages have been specified. The Company believes that
the lawsuit has no factual basis and intends to vigorously defend the
consolidated action. Two related actions brought by individual shareholders who
seek to represent the Company derivatively have also been filed in United States
District Court for the District of Minnesota. Those lawsuits allege that certain
officers and the Company's directors violated their fiduciary duties to the
Company. The Company's Board of Directors has also received a demand to commence
a claim against certain directors and officers and has created a special
litigation committee to address that demand. The Company is unable to evaluate
the likelihood of prevailing in these cases at this early stage of the
proceedings and have not recorded a liability in the Company's consolidated
balance sheet. The Company has incurred legal expenses and expects to incur
additional legal expenses related to these suits in the future, potentially up
to $500,000 in aggregate, the deductible under the insurance policy we believe
provides coverage for such lawsuits. Legal and other fees could exceed the
amount of the Company's deductible for which, at this time, the Company
anticipates our insurance carriers would reimburse us.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Forward-Looking Statements:
The disclosures in this Form 10-Q include "forward-looking statements" made
under the Private Securities Litigation Reform Act of 1995. Without limiting the
foregoing, words such as "should", "could", "may", "will", "expect", "believe",
"anticipate", "estimate" or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. All forward-looking statements in this document are based on
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any forward-looking statements. 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 "important factors" listed from time to time in the Company's
filings with the Securities and Exchange Commission, such as the Annual Report
on Form 10-K for the year ended October 31, 2004.
OVERVIEW
Synovis Life Technologies, Inc. is a diversified medical device company engaged
in developing, manufacturing and marketing products for the surgical and
interventional treatment of disease. Our business is conducted in two operating
segments, the surgical business and the interventional business, with
segmentation based upon the similarities of the underlying business operations,
products and markets of each.
Our surgical business develops, manufactures and markets implantable biomaterial
products, devices for microsurgery and surgical tools, all designed to reduce
risk and/or facilitate critical surgeries, leading to better patient outcomes
and/or lower costs.
Our interventional business develops, engineers, prototypes and manufactures
coils, helices, stylets, guidewires and other complex micro-wire, polymer and
micro-machined metal components used in interventional devices for cardiac
rhythm management, neurostimulation, vascular and other procedures.
Beginning in fiscal 2005, operations that are not included in either of the
operating segments are included in the category "corporate and other." The
corporate and other segment captures costs that are not directly assignable to
one of the operating business segments, including the costs of being a public
company and the unallocated time of management personnel who support corporate
activities. Prior year amounts have been reclassified to provide comparable
financial presentation.
On December 6, 2004, Synovis Micro Companies Alliance, Inc. (MCA), a wholly
owned subsidiary of Synovis Life Technologies, Inc., purchased substantially all
of the assets of Neuroregen, LLC. The primary asset acquired was the rights to
the Neurotube(R), a bioabsorbable nerve conduit which is designed to assist in
the regeneration of nerves severed as a result of injury or disease. Synovis MCA
will sell the Neurotube through its independent reps. The purchase price
included a cash payment of $986,000 plus certain additional payments to the
former shareholders of Neuroregen, LLC. These additional payments will be based
on the cumulative net sales of the Neurotube through December 6, 2009 and are
equal to 4% of the first $2,000,000 of cumulative net sales, 8% of the next
$3,000,000 in cumulative net sales and 12% of all cumulative net sales in excess
of $5,000,000. Approximately $653,000 of the purchase price was allocated to
identifiable intangible assets to be amortized on a straight line basis over an
estimated average useful life of five years. The remaining amount of the
purchase price was recorded as goodwill. Additional payments to the former
shareholders of Neuroregen, LLC will be recorded as additional goodwill when
earned.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2005 WITH THE THREE MONTHS
ENDED JANUARY 31, 2004 (IN THOUSANDS EXCEPT PER SHARE DATA)
The following table summarizes our condensed consolidated operating results for
the first quarter of fiscal 2005 and fiscal 2004:
For the quarter ended
January 31,
Summary of Operating Results 2005 2004
---- ----
Net revenue $ 13,423 $ 11,519
Cost of revenue 8,196 5,901
-------------------------
Gross margin 5,227 5,618
Selling, general and administrative 4,162 4,157
Research and development 908 894
Other operating expenses 36 0
-------------------------
Operating expenses 5,106 5,051
-------------------------
Operating income $ 121 $ 567
=========================
For the quarter ended
January 31,
Summary of Operating Results (as a % of revenue) 2005 2004
---- ----
Net revenue 100.0% 100.0%
Cost of revenue 61.1 51.2
-------------------------
Gross margin 38.9 48.8
Selling, general and administrative 31.0 36.1
Research and development 6.8 7.8
Other operating expenses 0.2 0.0
-------------------------
Operating expenses 38.0 43.9
-------------------------
Operating income 0.9% 4.9%
=========================
Net revenue increased 17% to $13,423 in the first quarter of fiscal 2005
compared with $11,519 in the first quarter of fiscal 2004. Our consolidated
operating income decreased 79% to $121 in the first quarter of fiscal 2005 from
$567 in the prior year quarter. Consolidated net income decreased 51% in the
current quarter to $205, or two cents per diluted share, from $419, or three
cents per diluted share, in the same quarter of fiscal 2004.
The following table summarizes our condensed consolidated operating results by
business segment for the first quarter of fiscal 2005 and fiscal 2004:
For the quarter ended
January 31,
Business Segment Information 2005 2004
---- ----
Net revenue
Surgical business $ 6,543 $ 6,686
Interventional business 6,880 4,833
--------- ---------
Total $ 13,423 $ 11,519
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
Gross margin
Surgical business $ 3,910 $ 4,345
Interventional business 1,317 1,273
--------- ---------
Total $ 5,227 $ 5,618
Gross margin percentage
Surgical business 60% 65%
Interventional business 19% 26%
Total 39% 49%
Operating income (loss)
Surgical business $ 877 $ 1,490
Interventional business (275) (518)
Corporate and other (481) (405)
--------- ---------
Total $ 121 $ 567
Our surgical business generated net revenue of $6,543 in the first quarter of
fiscal 2005, a 2% decrease from $6,686 in the year-ago quarter. The following
table summarizes our surgical business net revenue by product group for the
first quarter of fiscal 2005 and fiscal 2004:
For the quarter ended
January 31,
Surgical Business Net Revenue 2005 2004
---- ----
Peri-Strips(R) $ 2,713 $ 3,095
Other Biomaterial Products 2,204 2,091
Devices for Microsurgery and Surgical Tools 1,327 1,187
Other 299 313
--------- ---------
Total $ 6,543 $ 6,686
The decrease in surgical business net revenue is due to decreased sales of
Peri-Strips, partially offset by increases in Other Biomaterial Products and
Devices for Microsurgery and Surgical Tools. Worldwide net revenue from the
sales of Peri-Strips decreased 12% over the first quarter of fiscal 2004,
contributing net revenue of $2,713 in the first quarter of 2005, compared to
$3,095 in the first quarter of 2004. Peri-Strips are used to reduce risks and
improve patient outcomes in several procedures, with the predominance of our
revenue in gastric bypass surgery.
The decrease in Peri-Strips revenue in the first quarter of fiscal 2005 is
believed to be attributable to several factors within the gastric bypass market,
which is in a state of flux. These factors include but may not be limited to:
- capacity constraints of many surgical practices that perform gastric
bypass,
- insurance providers aggravating capacity constraints by encouraging
patients towards centers of excellence which specialize in gastric
bypass,
- certain hospitals electing not to support gastric bypass programs,
- concerns of some insurers that offer either health care or liability
coverage, and
- alternatives to gastric bypass surgery.
Revenue from Other Biomaterial Products increased 5% to $2,204 in the first
quarter of fiscal 2005. This increase was driven by increased revenue from our
Veritas(R) remodelable biomaterial products, which increased $80 to $225 in the
quarter. Revenue from Devices for Microsurgery and Surgical Tools was $1,327 in
the first quarter of fiscal 2005, an increase of $140 or 12% from $1,187 in the
year-ago quarter. Driving this increase were increased sales of our Coupler
products and $69 in revenue from our newly acquired Neurotube(R) product. The
Coupler is a device to
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
connect extremely small arteries or veins, without sutures, quickly, easily and
with consistently excellent results. The Neurotube is designed to assist in the
regeneration of nerves severed as a result of injury or disease.
In November 2004, we announced that our surgical business had reached a mutual
agreement with a distributor to change the representation of its products in a
large U.S. territory. By agreement, the transition process continues through
April 2005, when new sales representation will be in place. The territory
affected by the change covers approximately 22% of the U.S. population and
approximately 200 hospitals that use our products. We believe this transition
will yield long-term benefits, although the process of change will have
short-term costs.
Our interventional business customers predominantly operate in the cardiac
rhythm management ("CRM") market and we address three segments of this market:
pacing, implantable cardioverter defibrillation ("ICD") and congestive heart
failure ("CHF"). Within the CRM market, we produce conductor and shocking coils
for pacing and defibrillator leads, helices for active fixation leads, and
stylets used to implant all types of leads. Our interventional business has
customarily experienced variations in revenue from period to period primarily
due to inherent variability in the timing of customer demand. Such variations
may continue in the future.
The following table summarizes our interventional business net revenue by market
for the first quarter of fiscal 2005 and fiscal 2004:
For the quarter ended
January 31,
Interventional Business Net Revenue 2005 2004
---- ----
Cardiac rhythm management $ 5,100 $ 3,595
Other 1,780 1,238
-------- --------
Total $ 6,880 $ 4,833
The following table summarizes our interventional business net revenue by
product for the first quarter of fiscal 2005 and fiscal 2004:
For the quarter ended
January 31,
Interventional Business Net Revenue 2005 2004
---- ----
Coils and helices $ 3,438 $ 2,205
Stylets and other wireforms 2,329 1,628
Machining, molding and tool making 873 633
Other 240 367
-------- ---------
Total $ 6,880 $ 4,833
Interventional business net revenue increased 42% to $6,880 in the first quarter
of fiscal 2005 from $4,833 in the first quarter of fiscal 2004. The revenue
increase is primarily due to increased sales to our interventional businesses'
three largest customers, who collectively accounted for 81% and 77% of revenue
in the first quarter of fiscal 2005 and 2004, respectively. Sales growth to
these customers averaged 49% in the first quarter of fiscal 2005 compared to the
prior-year period.
Our interventional business is indirectly affected by the market conditions and
trends of the CRM market, and we are directly affected by the actions of our
customers in response to this market. Sales of components within the CRM market
increased 42% in the first quarter of fiscal 2005, and accounted for 74% of our
interventional businesses' revenue growth in the quarter.
During the first quarter of fiscal 2005, our interventional business recorded
its first sales of a product incorporating our Navi-Glide(TM) Steerable Stylet
("Navi-Glide") technology. The Navi-Glide is designed as a single-use
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
disposable device designed to assist physicians in interventional cardiac and
neuro procedures. This sale marked the completion of a development cycle
initiated with one of our customers in prior years. We are presently working
with other customers on individualized applications of this technology. We
currently expect minimal revenue from Navi-Glide in fiscal 2005 as the
adaptation, development and review processes required to bring these projects to
completion are lengthy in nature, and are shared with our customers, who control
the timeline and prioritization of such projects.
The consolidated gross margin percentage decreased ten percentage points, from
49% to 39% during the first quarter of fiscal 2005 from the same quarter of
fiscal 2004. The decreased consolidated gross margin is primarily due to two
reasons. First, four of the ten percentage point decrease in the first fiscal
quarter of 2005 is attributable to the impact of business unit mix being
weighted more heavily to our interventional business, which operates at a lower
gross margin percentage than our surgical business. Second, higher overhead
rates in fiscal 2004 associated with the manufacturing costs within both
business units resulted in decreased gross margin in the first quarter of fiscal
2005 compared to the prior year, due to the accounting mechanics for matching
these costs of production to the units when sold. The increase in fiscal 2004
rates was due to higher overhead costs incurred to facilitate and support
expected future growth and expansion at both businesses. The gross margin for
our surgical business decreased five percentage points, from 65% in the first
quarter of fiscal 2004 to 60% in the first quarter of fiscal 2005. While
increased overhead rates are the primary driver of the decreased margin, product
mix also was a factor. Gross margin in the interventional business decreased
seven percentage points, from 26% in fiscal 2004 to 19% in fiscal 2005,
primarily attributable to higher overhead rates as noted above. Factors which
affect the consolidated gross margin include the relative revenue of each
business unit, product mix, volume and other production activities. Accordingly,
our consolidated gross margins may fluctuate from period to period based on
variations in these factors.
Selling, general and administrative ("SG&A") expense during the first quarter of
fiscal 2005 was $4,162, essentially flat with fiscal 2004 of $4,157. As a
percentage of net revenue, SG&A expense was 31% in the first quarter of fiscal
2005 as compared to 36% in the prior year quarter. During the 2005 period, we
incurred added SG&A costs associated with preparing for Sarbanes-Oxley
compliance, increases at our surgical business resulting from our fiscal 2004
facility expansion, as well as increased operating expenses associated with the
acquisition of the Neurotube product line. These increases are offset by
decreased SG&A costs within our interventional business, which are the result of
a leaner management structure and decreased legal fees in this segment in the
current quarter.
Research and development ("R&D") expense increased 2% during the first quarter
of fiscal 2005 to $908 from $894 during the prior-year quarter. This increase is
partially due to the timing and nature of various surgical device projects,
along with the development of a steerable guidewire within our interventional
business. In both business units R&D expense fluctuates from quarter to quarter
based on the timing and progress through external parties of the projects, and
the timing of such expense will continue to 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.
During the first quarter of fiscal 2005 we incurred $36 of other operating
expenses, which is for legal and other fees incurred in connection with certain
filed lawsuits against the Company. These lawsuits allege that the Company and
certain of its executive officers violated the Securities Exchange Act of 1934
by issuing false or misleading statements about the Company's business and
prospects, which artificially inflated the price of the Company's securities. We
believe that the lawsuits have no factual basis and intend to vigorously defend
the actions. However, we expect to incur additional legal expenses related to
these suits in the future, potentially up to $500, the deductible under the
insurance policy the Company believes provides coverage for such lawsuits.
Through January 31, 2005, we have incurred $82 in legal and other fees related
to the lawsuits.
Operating income decreased 79% in the first quarter of fiscal 2005, to $121 from
$567 in the first quarter of fiscal 2004. First quarter operating income for our
surgical business decreased $613 to $877 in fiscal 2005 compared with
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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$1,490 in fiscal 2004. Operating loss for our interventional business was
reduced by $243 to $275 in the first quarter of 2005 from $518 in fiscal 2004.
Operating expenses in our corporate and other business increased $76 to $481 in
the first quarter of fiscal 2005 from $405 in the first quarter of 2004.
We recorded a provision for income taxes of $101 in the first quarter of fiscal
2005, at an effective tax rate of 33%, as compared to $215 at an effective tax
rate of 34% in the first quarter of fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
Cash and cash equivalents were $8,124 at January 31, 2005 as compared to $15,369
at October 31, 2004, a decrease of $7,245. The decrease in cash is primarily
related to net purchases of $6,546 of short-term investments during the first
three months of fiscal 2005. These investments represent highly liquid, low-risk
debt securities with maturities greater than three months. Additionally, $986 of
cash was used in the first quarter of fiscal 2005 for the purchase of
substantially all of the operating assets of Neuroregen, LLC.
Operating activities generated cash of $995 in the first three months of fiscal
2005, as compared to using cash of $419 during the first three months of fiscal
2004. Cash in the first quarter of fiscal 2005 was primarily provided by net
income of $205 and non-cash expenses of $739. Working capital generated cash of
$51. Accounts receivable provided cash of $777, primarily as a result of a
decrease within our interventional business, which was due in large part to one
account where the processing of payments to us was delayed as of October 31,
2004. Inventories decreased by $321, driven by a decrease in our interventional
business where inventories can fluctuate significantly depending upon the timing
of purchases and usage of precious metals. Accrued expenses and accounts payable
decreased by a net of $1,073 due to timing of various payments.
Investing activities used $8,429 of cash during the first three months of fiscal
2005 compared to $1,234 in the prior-year period. The increase is primarily due
to the net purchases of $6,546 in short-term investments, $986 of cash used for
the purchase of substantially all of the operating assets of Neuroregen, LLC and
$834 used for capital expenditures for purchases of equipment and leasehold
improvements. During fiscal 2005, we may spend up to $5,000 for investments in
capital assets for various manufacturing, research and development, information
technology and facility projects necessary to support our expected future
growth.
Financing activities provided $189 of cash during the first three months of
fiscal 2005, similar to $196 provided in the first quarter of fiscal 2004.
Proceeds from stock-based compensation plans totaled $204, offset by $15 in cash
repayments of capital lease obligations.
We have historically funded the operations and investments in our businesses
utilizing internally generated cash flow and existing cash balances. We believe
existing cash, cash equivalents and short-term investments, coupled with
anticipated cash flows from operations will be sufficient to satisfy our
operating cash requirements for the next twelve months. This forward-looking
statement, as well as our 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.
CRITICAL ACCOUNTING POLICIES
Short-term Investments: Our short-term investments consist of highly liquid debt
securities with maturities greater than three months and less than one year. We
determine the appropriate classification of our investments at the time of
purchase. Debt securities are classified as held to maturity when we have the
positive intent and ability to hold the securities to maturity. Held to maturity
securities are carried at amortized cost. Debt securities not classified as held
to maturity are classified as available for sale. Available for sale securities
are measured at fair market value in the balance sheets. As the fair market
value of our available for sale investments approximates their amortized cost,
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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there are no unrealized gains or losses for these investments to be reported as
a separate component of shareholders' equity.
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 4 to the unaudited
consolidated condensed financial statements for additional goodwill information.
Other Intangible Assets: Our 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 five to 17
years. These assets are reviewed annually for impairment as of the end of each
fiscal year. Please see Note 4 to the unaudited consolidated condensed financial
statements for additional intangible asset information.
Revenue Recognition: Our policy is to ship products to customers on FOB shipping
point terms. We recognize 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. Our sales
policy does not allow sales returns.
Inventories: 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. Overhead costs are applied to sub-assemblies and finished goods based
on annual estimates of production volumes and such costs. These estimates are
reviewed and assessed for reasonableness on a quarterly basis. The estimated
value of excess, slow-moving and obsolete inventory as well as inventory with a
carrying value in excess of its net realizable value is established by us on a
quarterly basis through review of inventory on hand and assessment of future
product demand, anticipated release of new products into the market, historical
experience and product expiration.
Derivative Instruments and Hedging Activities: We may enter into derivative
instruments or perform hedging activities. However, our policy is to only enter
into contracts that can be designated as normal purchases or sales.
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, Inventory Costs. This statement amends Chapter 4 of ARB No. 43 to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage), as well as requiring that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of this
statement are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005 and the Company is currently assessing the impact
of SFAS No. 151 on its operating results and financial condition.
In December 2004, the FASB issued SFAS No. 123 (revised). SFAS No. 123 (revised)
revises SFAS No. 123 and requires entities to recognize compensation expense for
all share-based payment transactions in an amount equal to the fair value of
share-based payments granted to employees. SFAS No. 123 (revised) requires a
company to record compensation expense for all awards granted after the date of
adoption of SFAS No. 123 (revised) and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption. SFAS No. 123
(revised) is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. The Company is currently
assessing the impact of the adoption of SFAS No. 123 (revised) on its operating
results and financial condition.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
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 we maintain are in short-term investments
and accounts receivable. We believe that the interest rate, credit and market
risk related to these accounts is not significant. We manage 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 our internal controls and policies. We may enter into derivative
instruments or perform hedging activities. However, our policy is to only enter
into contracts that can be designated as normal purchases or sales.
ITEM 4 -- CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) 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 us in reports filed or submitted under the Exchange
Act is 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.
17
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Between June and August 2004, five lawsuits were filed against the Company and
certain of its executive officers in the United States District Court for the
District of Minnesota by individual shareholders who seek to represent a class
of purchasers of the Company's common stock during the period from October 16,
2003 through May 18, 2004. Those lawsuits have been consolidated into a single
case which has expanded the class period from May 21, 2003 through May 18, 2004.
The consolidated complaint generally alleges that the defendants violated the
Securities Exchange Act of 1934 by issuing false or misleading statements about
our business and prospects, which artificially inflated the price of the
Company's securities. No damages have been specified. We believe that the
lawsuit has no factual basis and intend to vigorously defend the consolidated
action. Two related actions brought by individual shareholders who seek to
represent the Company derivatively have also been filed in United States
District Court for the District of Minnesota. Those lawsuits allege that certain
officers and the Company's directors violated their fiduciary duties to the
Company. The Company's Board of Directors has also received a demand to commence
a claim against certain directors and officers and has created a special
litigation committee to address that demand. We are unable to evaluate the
likelihood of prevailing in these cases at this early stage of the proceedings
and have not recorded a liability in our consolidated balance sheet. We have
incurred legal expenses and expect to incur additional legal expenses related to
these suits in the future, potentially up to $500,000 in aggregate, the
deductible under the insurance policy we believe provides coverage for such
lawsuits. Legal and other fees could exceed the amount of our deductible for
which, at this time, we anticipate our insurance carriers would reimburse us.
From time to time, the Company may become involved in litigation which is
ordinary, routine litigation incidental to its business. 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 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
10.1 Compensation Arrangements for Named Executive Officers (filed herewith electronically).
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).
18
b. Reports on Form 8-K
On November 10, 2004, Synovis filed a report on Form 8-K under Item
8.01 in connection with a press release announcing that the
surgical business segment will transition to new distribution for
its surgical innovations products in a large distributor territory.
On December 1, 2004, Synovis filed a report on Form 8-K filing
certain financial information under Item 2.02 and furnishing a
press release under Item 8.01, all relating to its earnings for the
three and twelve months ended October 31, 2004.
On December 7, 2004, Synovis filed a report on Form 8-K under Item
1.01 discussing changes to non-employee director compensation in
fiscal 2005 and Item 5.01 in connection with the election of Mark
F. Palma and Sven A. Wehrwein to the Company's Board of Directors.
On December 17, 2004, Synovis filed an amended report on Form 8-K/A
under Item 5.02 which announced Board committee elections for Mr.
Palma and Mr. Wehrwein.
19
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: March 10, 2005 /s/ Connie L. Magnuson
------------------------------------
Connie L. Magnuson
Vice President of Finance, Chief
Financial Officer and Corporate
Secretary (Principal Financial
Officer)
20
SYNOVIS LIFE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
10.1 Compensation Arrangements for Named Executive Officers (filed herewith electronically).
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).
21