UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended October 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-13907
Synovis Life Technologies,
Inc.
(Exact name of Registrant as
specified in its charter)
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Minnesota
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41-1526554
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(State of
Incorporation)
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(I.R.S. Employer Identification
No.)
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2575 University Avenue W.,
St. Paul, Minnesota
55114-1024
(Address of principal executive
offices)
Telephone Number:
(651) 796-7300
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name on Each Exchange on Which Registered:
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Common Stock, $.01 par value
Common Stock Purchase Rights
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The Nasdaq Stock Market
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Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o
No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act.
Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No
þ
As of April 30, 2009, the last business day of the
registrants second quarter of fiscal 2009,
11,532,372 shares of Common Stock of the registrant were
outstanding, and the aggregate market value of the
registrants outstanding Common Stock (based upon the
closing price of the Common Stock on that date as reported by
the Nasdaq Global Market), excluding outstanding shares owned
beneficially by executive officers, directors and affiliates,
was approximately $168,274,000.
As of December 19, 2009, 11,185,497 shares of the
registrants Common Stock were outstanding.
Part III of this Annual Report on
Form 10-K
incorporates by reference (to the extent specific sections are
referred to herein) information from the registrants Proxy
Statement for its Annual Meeting of Shareholders to be held
March 4, 2010 (the 2010 Proxy Statement).
PART I
Except where the context otherwise requires, references in this
Annual Report on
Form 10-K
to Synovis, Company, we, and
our are to Synovis Life Technologies, Inc. and its
subsidiaries collectively.
Registered
Trademarks:
APEX
Processing®,
Dura-Guard®,
Flo-Rester®,
Flo-Thru
Flo-Rester®,
Flo-thru Intraluminal
Shunt®,
Flow
Coupler®,
Neurotube®,
OrthAdapt®,
Peri-Guard®,
Peri-Strips®,
Peri-Strips
Dry®,
Supple
Peri-Guard®,
Synovis®,
Unite®,
Vascu-Guard®
and
Veritas®
are registered trademarks of the Company or its business
divisions.
Forward-Looking
Statements
Certain statements contained in this Annual Report on
Form 10-K
are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. For this
purpose, any statements contained in this
Form 10-K
that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing,
words such as may, should,
will, expect, believe,
anticipate, estimate,
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 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, those factors set forth under the heading Risk
Factors beginning in Part I, Item 1A on this
Form 10-K.
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(a)
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General
Development of Business
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Introduction
Synovis Life Technologies, Inc., a diversified medical device
company, develops, manufactures and markets mechanical and
biological products used by several surgical specialties to
facilitate the repair and reconstruction of soft tissue damaged
or destroyed by disease or injury. The Companys products
include implantable biomaterials for soft tissue repair, devices
for microsurgery and surgical tools all designed to
reduce risks
and/or
facilitate critical surgeries, improve patient outcomes and
reduce healthcare costs.
History
Synovis Life Technologies, Inc. was incorporated in July of
1985. In 1985, the Company was spun-off to the shareholders of
its then parent company, thereafter operating as a separate
public company.
In 2001, we acquired Micro Companies Alliance, Inc.
(MCA), a Birmingham, Alabama company that provides
products to the microsurgery market. MCAs products
include, among others, the Microvascular Anastomotic Coupler, a
patented technology for connecting small veins and arteries
faster, easier and as effectively as conventional suturing.
MCAs name has since been changed to Synovis Micro
Companies Alliance, Inc.
During fiscal 2006 and fiscal 2007, we transitioned from a
third-party distribution sales force to a direct sales force in
the U.S.
In January 2008, we sold substantially all of the assets of our
former interventional business to Heraeus Vadnais, Inc. and its
related entities, pursuant to an Asset Purchase Agreement. Our
interventional business developed and manufactured metal and
polymer components and assemblies used in or with implantable or
minimally invasive devices for cardiac rhythm management,
neurostimulation, vascular and other procedures.
1
Operating results pertaining to our former interventional
business for the fiscal years ended October 31, 2008 and
2007 have been reclassified and presented as discontinued
operations. Unless otherwise indicated, the following
description of our business refers only to our continuing
operations.
On July 17, 2009, the Company, through its wholly-owned
subsidiary Synovis Orthopedic and Woundcare, Inc.
(Ortho & Wound), completed the acquisition
of substantially all of the assets of Pegasus Biologics, Inc., a
Delaware corporation. Operating results for Ortho &
Wound from July 17, 2009 to October 31, 2009 are
included in our Consolidated Statement of Operations for the
fiscal year ended October 31, 2009. The assets acquired in
the transaction are included in our Consolidated Balance Sheet
as of October 31, 2009 and the purchase transaction has
been included in our Consolidated Statement of Cash Flows for
the fiscal year ended October 31, 2009. Our
Ortho & Wound business is focused on developing
advanced biological solutions for soft tissue repair, primarily
within the orthopedic and wound care markets.
Our principal executive offices are located at 2575 University
Avenue W., St. Paul, Minnesota
55114-1024.
We can be contacted by telephone at
(651) 796-7300,
by facsimile at
(651) 642-9018,
or by electronic mail at info@synovislife.com. Our website is
www.synovislife.com. We make available free of charge on
our website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after filing such
material with, or furnishing it to, the SEC.
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(b)
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Financial
Information about Industry Segments
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We operate as one segment as a developer, manufacturer, marketer
and seller of medical devices.
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(c)
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Narrative
Description of Business
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The table below summarizes the revenue contributed by our
significant products or product lines for the periods indicated.
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Years Ended October 31,
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2009
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2008
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2007
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$
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%
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$
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%
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$
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%
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($ in thousands)
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Net Revenue:
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Peri-Strips®
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$
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19,384
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33
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%
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$
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17,653
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35
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%
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$
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13,788
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37
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%
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Veritas®
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8,757
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15
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%
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4,468
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9
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%
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1,296
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4
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%
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Tissue-Guard
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15,806
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27
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%
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14,477
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29
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%
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12,137
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32
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%
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Microsurgery
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8,668
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15
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%
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7,749
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16
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%
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5,439
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14
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%
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Surgical Tools and other
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5,596
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10
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%
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5,453
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11
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%
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5,031
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13
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%
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Total Net Revenue
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$
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58,211
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100
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%
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$
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49,800
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100
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%
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$
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37,691
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100
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%
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Products,
Markets and Competition
Business
Description
We are a diversified medical device company engaged in
developing, manufacturing and marketing mechanical and
biological products used by several surgical specialties for the
repair of soft tissue damaged or destroyed by disease or injury.
Our products are designed to reduce risks
and/or
facilitate critical surgeries, improve patient outcomes and
reduce healthcare costs.
Biomaterial
Products
A core competency of our business is the development and
manufacture of implantable biomaterial products for use by
surgeons in various procedures where reinforcing, reconstructing
and repairing tissue or preventing leaks of air, blood or other
bodily fluids is desirable to achieve a favorable outcome. The
historical
2
choice when tissue repair is necessary has been to use
autologous tissues, requiring the surgeon to excise tissue from
another part of the patients body. Harvesting tissue from
a second surgical site may increase procedure cost, time and the
risk of complications, leading to additional pain and recovery
time for the patient. Use of an available,
off-the-shelf
implantable medical product, whether tissue-based or synthetic,
is an alternative to harvesting autologous tissue from the
patient and is a means to reduce surgical costs and improve
patient outcomes.
Our biomaterial products are produced from bovine and equine
pericardium. Many of our products characteristics and
competitive advantages are derived from the pericardiums
collagen composition. Collagen, a fibrous protein, makes the
pericardium durable and provides performance characteristics
superior to synthetics and similar to autologous tissue.
We process pericardium using proprietary and patented
technologies to create three distinct product platforms:
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Our Veritas tissue processing results in an extremely strong and
conformable biomaterial. Once implanted, Veritas acts as a
scaffold that is rapidly revascularized and repopulated by the
patients surrounding tissue. Animal studies have
demonstrated the formation of new blood vessels (angiogenesis)
and cell in-growth with Veritas as early as 28 days
post-implant. The Veritas tissue format is used to manufacture
our Veritas Collagen Matrix, Peri-Strips Veritas and Peri-Strips
Veritas Circular products.
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Our Apex tissue processing creates a permanent patch or buttress
that provides enduring strength and reinforcement to a repair
site or staple line. Apex processing is used to manufacture our
Tissue-Guard and Peri-Strips Apex products.
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Our flexible cross-linking technologies are based on proprietary
stabilization and sterilization processes, resulting in a safe,
sterile, structurally sound, biologic scaffold of highly
organized collagen for soft tissue repair. We have exclusive
worldwide licenses for these processes for use in orthopedic,
oral/dental, spinal and neurological, abdominal and thoracic,
breast and wound applications and such licenses are used to
manufacture our OrthADAPT Bioimplant and Unite Biomatrix
products.
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Peri-Strips. Peri-Strips
(PSD) is a biomaterial stapling buttress used as
reinforcement at a surgical staple line to reduce the risk of
potentially fatal leaks, most significantly in bariatric
surgery, a treatment for morbid obesity, as well as in certain
thoracic procedures. Peri-Strips accounted for 33% of our
revenue in fiscal 2009, compared to 35% in fiscal 2008.
We have two tissue platforms for our linear Peri-Strips
products. Our PSD Veritas product incorporates our Veritas
tissue platform, which becomes the histological equivalent of
the host tissue over time. Our PSD Apex product is a permanent
technology in which the buttress permanently remains with the
staple line. Due to differing attributes between PSD Veritas and
PSD Apex, along with varying surgeon preference of those
attributes, we expect markets for both products to continue to
co-exist in the future. In addition to our linear buttresses, we
have a PSD Circular buttress which utilizes our Veritas
remodelable technology and is currently being marketed for
bariatric surgery.
In bariatric surgery, Peri-Strips are proven to reduce the
incidence of gastric leaks and to reduce bleeding at the staple
line. Because of the clean visual field provided by the improved
hemostasis and the atraumatic tissue manipulation provided by
Peri-Strips, it can also facilitate a quicker and safer surgical
procedure.
Peri-Strips
is typically applied during the formation of the gastric pouch
in a Roux-en-Y gastric bypass procedure. Recently, Peri-Strips
has also been applied to other stapling sites such as the J-J
anastomosis of the Roux-en-Y procedure and the gastric sleeve
staple line of the sleeve gastrectomy procedure.
Peri-Strips are also utilized in certain thoracic surgeries and
are proven to reduce bleeding and air leaks at the staple line
during lung resection procedures. Initially introduced as a
stapling buttress for Lung Volume Reduction Surgery
(LVRS), Peri-Strips are also used in a variety of
thoracic procedures: blebectomies, bullectomies, wedge
resections, segmentectomies, and lobectomies.
Veritas. Veritas is used in surgery to
repair soft tissue. Veritas accounted for 15% of our revenue in
fiscal 2009, compared with 9% in fiscal 2008. We launched
Veritas into the complex ventral hernia repair
3
market in the U.S. during fiscal 2007, following our 510(k)
market clearance in which indicated Veritas as having minimal
tissue attachment. We launched Veritas into the breast
reconstruction market in the U.S. in fiscal 2008. Veritas
has been used by surgeons in a broad range of procedures since
launch, including complex abdominal wall reconstruction, breast
reconstruction, chest wall repair, and repair of ventral,
hiatal, and parastomal hernias. Surgical results and experience
with Veritas in these applications have been favorable. In the
fourth quarter of fiscal 2009, we launched Veritas in Europe
after obtaining CE Mark approval for soft tissue repair of
abdominal wall, breast reconstruction, chest wall and hernia
indications.
Tissue-Guard. Our Tissue-Guard family
of products is used to repair and replace damaged tissue in an
array of surgical procedures, including cardiac, vascular,
thoracic, and neurologic procedures. Apex Processing, used to
manufacture Tissue-Guard products, is designed to retain the
intrinsic nature of bovine pericardial collagen with improved
biocompatibility, performance and safety. Tissue-Guard products
accounted for 27% of our revenue in fiscal 2009, compared to 29%
in fiscal 2008. Tissue-Guard products offer exceptional strength
and durability, resistance to leakage, autologous-like handling
characteristics and proven clinical performance. Since their
introduction, Tissue-Guard products have been used in over
850,000 procedures, including use for pericardial closure,
intracardiac defect repair, peripheral vascular repair and
reconstruction, dural closure and soft tissue repairs.
Ortho & Wound. Our recently
acquired Ortho & Wound products include the
OrthADAPT®
Bioimplant and
Unite®
Biomatrix products. OrthADAPT Bioimplant received FDA marketing
clearance in fiscal 2005 and is used in numerous orthopedic
applications, including rotator cuff and achilles tendon repair,
where there is a clinical need to reinforce the repair. Unite
Biomatrix received FDA marketing clearance in fiscal 2006 and
offers treatment for chronic wounds, such as diabetic foot
ulcers and pressure ulcers. Unite Biomatrix provides a durable,
collagen structure that can be applied to the wound easily and
maintains its integrity while promoting wound healing.
Microsurgery
In addition to our biomaterial products, our business offers
medical devices for microsurgery. The primary device within this
product group is the Microvascular Anastomotic Coupler (the
Coupler), a mechanical anastomotic product comprised
of a pair of implantable, single-use rings. The Coupler is
available in seven sizes, ranging from 1.0mm to 4.0mm in
diameter, in half millimeter increments. The Coupler enables
microsurgeons in numerous surgical specialties, including
plastic and reconstructive, head and neck, orthopedic and hand,
to perform highly effective anastomotic microsurgical procedures
(the connecting of small veins or arteries) faster, easier and
as or more dependably than traditional suture or sleeve
anastomosis.
In addition to the Coupler, we sell several other products to
the microsurgery market. These include the GEM Microclip, a
hemostatic clip designed to securely ligate vessels and provide
for atraumatic occlusion, as well as the Neurotube, a device
designed to assist in the reconnection of severed nerves. We
also distribute product lines for other companies in the
microsurgery market, including the S&T microsurgery
instrument product line.
Competition
Our products compete primarily on the basis of product
performance, quality and service. The surgical markets in which
we compete worldwide are characterized by intense competition.
These markets are typically dominated by very large, established
manufacturers that have broader product lines, greater
distribution capabilities, substantially greater capital
resources and larger marketing, research and development staffs
and facilities. Many of these competitors offer broader product
lines within our specific product market, particularly in our
surgical tool markets
and/or in
the general field of medical devices and supplies. Broad product
lines give many of our competitors the ability to negotiate
exclusive, long-term medical device supply contracts and,
consequently, the ability to offer comprehensive pricing for
their products, including those that compete with our products.
By offering a broader product line in the general field of
medical devices and supplies, competitors may also have an
advantage in marketing competing products to group purchasing
organizations, health maintenance organizations and other
managed care organizations that increasingly seek to reduce
costs by centralizing and consolidating their purchasing
functions.
4
Competition for our biomaterial products is primarily from
synthetic materials, other xenograft tissues and human cadaveric
tissue. The ability of these products to compete with our
biomaterial products varies based on each such products
indications for use, relative features and benefits and surgeon
preference.
Currently, we believe the major competitors to Veritas include
KCI Corporation, Covidien, Ltd., Ethicon, Inc., C.R. Bard, Inc.,
and Cook Group, Inc. We believe the major competitors to our
Tissue-Guard products include W.L. Gore & Associates,
Inc., Cook Group, Inc., Integra Lifesciences Corporation, and
Getinge AB. We believe the major competitors to our
Ortho & Wound products include Wright Medical Group,
Inc. and Integra Lifesciences Corporation.
At the beginning of fiscal 2009, there were two primary
companies, W.L. Gore & Associates, Inc. and Cook
Group, Inc., which offered buttress products that competed with
Peri-Strips. In the second quarter of fiscal 2009, a third
competitor, Covidien Ltd., one of the two primary companies
which offers surgical staplers on which our Peri-Strips products
are used, launched a buttress product supplied integral with
their stapler cartridges. During the second half of fiscal 2009,
worldwide revenue from Peri-Strips products which can be used
with Covidien staplers decreased 24% from the first half of
fiscal 2009. This was partially offset by revenue for
Peri-Strips products used with another manufacturers
staplers increasing 11%. We are addressing the Covidien
competitive threat by highlighting the clinical history of
Peri-Strips through our expanded direct sales force, the
development of product enhancements and strengthened efforts to
convert additional non-buttressing surgeons.
Peri-Strips also face indirect forms of competition, which
include alternate surgical techniques such as oversewing the
staple line and alternative bariatric procedures which do not
use surgical staplers or buttresses such as gastric banding.
Synthetic materials may be less expensive to produce and to the
extent that comparable synthetic materials are available and
effective in surgical procedures, we face significant price
competition for our biomaterial products. There are other
multi-purpose patches made from bovine and other types of animal
tissue that compete with our products. Cadaveric tissue from
tissue banks or from commercial distributors is utilized in
breast reconstruction, hernia repair, neurological surgery and
urologic procedures. There can be no assurance that competing
products or indirect forms of competition will not achieve
greater acceptance or that future products or alternative
treatments for morbid obesity will not offer similar or enhanced
performance advantages.
We believe that the collagen characteristics exclusive to
pericardial tissue, the strength of the multi-directional fibers
of the pericardial substrate, the proprietary tissue-treatment
process and the purification process we employ offer significant
benefits in product performance over competitive cadaveric
tissue and synthetic materials.
Intellectual
Property
We believe that in order to maintain a competitive advantage in
the marketplace, we must develop and maintain protection of the
proprietary aspects of our technology. We rely on a combination
or patent, trademark, confidentiality, trade secret and other
intellectual property rights and measures to aggressively
protect intellectual property we deem important to our business.
We have developed a patent portfolio internally, as well as
through acquisitions, that cover many aspects of our product
offerings. As of October 31, 2009, we held approximately 60
U.S. and foreign patents and 42 U.S. and foreign
pending patent applications. The expiration dates of our
material patents range from fiscal 2014 to fiscal 2024.
Synovis holds key patents related to Veritas Collagen Matrix in
both wet and dry forms, patents related to the Peri-Strip Dry in
both linear and circular formats, as well as the microanastomic
Coupler and Flow Coupler. Synovis has exclusive rights to
technology used in the cross-linking and sterilization of our
Ortho & Wound products.
We own trademarks on
Synovis®
as well as trade names used in conjunction with the sale of most
of our products, including Peri-Strips and Veritas.
5
We manufacture, market and sell our products both under our own
patents as well as license agreements. While we believe that our
patents are valuable, our knowledge and experience, our product
development teams and marketing staff, and our confidential
information regarding our manufacturing processes, materials and
product design have been equally important in providing for and
maintaining our proprietary product offering. To protect this
value, we have established policies and procedures, as well as
requiring as a condition of employment, all employees to execute
a confidentiality agreement with respect to proprietary
information and the assignment of intellectual property to us.
We also rely on unpatented proprietary technology and know-how.
We seek to protect our trade secrets and proprietary know-how
with confidentiality agreements with our employees, consultants
and vendors.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. We
have strongly defended, and will continue to defend, our
intellectual property. Despite our measures to protect our
intellectual property, however, we cannot be certain that the
measures we take to protect our intellectual property will be
successful. These risks are discussed in more detail in this
Report in Part I, Item 1A, Risk Factors under the
heading We may not be able to adequately enforce or
protect our intellectual property rights or to protect ourselves
against the infringement claims of others.
Marketing
and Customers
Our marketing and sales strategies include supporting our
superior quality products with sales and marketing programs.
These programs include advertising and direct mail campaigns,
participation in trade shows, support of key surgeons
gatherings, publication and presentation of clinical data and
new product information, and collaboration with key surgeons on
educational activities and internet-based programs. An important
strategy of our marketing programs is to identify and assess
customer needs. This is accomplished by developing and
maintaining a close working relationship with the hospitals and
surgeons who purchase and use our products and through
observations and interactions with our customers.
In the U.S., we utilize a direct sales model for all products
except for our newly acquired Ortho & Wound products.
As of October 31, 2009, we have 56 direct sales
representatives selling our Peri-Strips, Veritas, Tissue-Guard
and Surgical tools and other products. Additionally, we have 9
direct sales representatives selling our microsurgery products.
Internationally, we utilize an independent distributor sales
network to sell these products.
For Ortho & Wound, we are in the process of
establishing a hybrid sales model in the U.S. comprised of
both direct sales representatives and independent distributors.
We expect to hire eight direct sales representatives in the
U.S. by January 2010, and additionally to appoint up to 16
independent distributors in targeted U.S. territories in
fiscal 2010. Internationally, we expect to appoint three or more
independent stocking distributors in Europe during fiscal 2010.
Additional
Information Regarding Our Business
Backlog
Based on our experience, we believe that backlog is not a
meaningful predictor of future revenue levels of our business.
Raw
Materials
We acquire bovine pericardium for use in our biomaterial
products from United States Department of Agriculture
(USDA) inspected abattoirs as well as a USDA
approved source in New Zealand. We acquire equine pericardium
for use in our biomaterial products from USDA approved abattoirs
located in Mexico and Canada. The supply of bovine and equine
pericardium, as well as other raw materials, is currently
adequate. We have not experienced any product shortages arising
from interruptions in the supply of any raw materials or
components, and have identified alternative sources of supply
for significant raw materials and components, although at times
certain materials may be single sourced due either
to the complex nature or minimal requirements of various
components we purchase.
6
Research
and Development
As a component of our business strategy, we continue to make a
significant investment in research and development
(R&D) as well as new product design and
engineering. R&D expense for fiscal 2009, 2008 and 2007 was
$3,798,000, $3,248,000 and $2,620,000, respectively.
The R&D activities we expect to advance in fiscal 2010
include expanding the indications for use of our Veritas product
into new markets, providing research and clinical data to
support the use of Veritas in various surgical procedures,
exploring other process improvements and product enhancements
for our proprietary tissue products, improving the delivery
system for our Peri-Strips products, advancing the technology of
the Coupler and further development of an OrthAdapt-based
product and related instrumentation.
Governmental
Regulation
General
Our business operates in a medical device marketplace subject to
extensive and rigorous regulation by the Food and Drug
Administration (FDA) and by comparable agencies in
foreign countries. In the United States, the FDA regulates the
design control, development, manufacturing, labeling, record
keeping and surveillance procedures for medical devices.
Food
and Drug Administration
FDA regulations classify medical devices based on perceived risk
to public health as either Class I, II
or III devices. Class I devices are subject to general
controls, Class II devices are subject to special controls
and Class III devices are subject to pre-market approval
(PMA) requirements. While most Class I devices
are exempt from pre-market submission, it is necessary for most
Class II devices to be cleared by a 510(k) pre-market
notification prior to marketing. 510(k) establishes that the
device is substantially equivalent to a device that
was legally marketed prior to May 28, 1976, the date on
which the Medical Device Amendments of 1976 became effective.
The 510(k) pre-market notification must be supported by data
establishing the claim of substantial equivalence to the
satisfaction of the FDA. The process of obtaining a 510(k)
clearance typically can take several months to a year or longer.
If the product is notably new or different and substantial
equivalence cannot be established, the FDA will require the
manufacturer to submit a PMA application for a Class III
device that must be reviewed and approved by the FDA prior to
sale and marketing of the device in the United States. The
process of obtaining PMA approval can be expensive, uncertain,
lengthy and frequently requires anywhere from one to several
years from the date of FDA submission, if approval is obtained
at all. The FDA controls the indicated uses for which a product
may be marketed and strictly prohibits the marketing of medical
devices for unapproved uses. The FDA can withdraw products from
the market for failure to comply with laws or the occurrence of
safety risks.
Our microsurgery instruments and 4Closure System are
Class I medical devices. The rest of our products are
classified as Class II medical devices and have received
510(k) marketing clearance from the FDA. Our manufacturing
operations are subject to periodic inspections by the FDA, whose
primary purpose is to audit the Companys compliance with
the Quality System Regulations published by the FDA and other
applicable government standards. Strict regulatory action may be
initiated in response to audit deficiencies or to product
performance problems. We believe that our manufacturing and
quality control procedures are in compliance with the
requirements of the FDA regulations.
International
Regulation
International regulatory bodies have established varying
regulations governing product standards, packaging and labeling
requirements, import restrictions, tariff regulations, duties
and tax. Many of these regulations are similar to those of the
FDA. With the exception of the European Union (EU),
Canada and Australia, we typically rely on our independent
distributors covering a given country to comply with the foreign
regulatory requirements, including registration of our devices
with the appropriate governmental authorities. To date, and to
the best of our knowledge, we have complied with the regulatory
requirements in the foreign countries in
7
which our medical devices are marketed. We do, however, face
certain regulatory risks in international markets related to our
bovine tissue products, which are discussed in Part I,
Item 1A of this report.
The registration system in the EU for our medical devices
requires that our quality system conform to international
quality standards and that our medical devices conform to
essential requirements set forth by the Medical
Device Directive (MDD). Manufacturing facilities and
processes under which our Ortho & Wound medical
devices are produced are inspected and audited by the National
Standards Authority of Ireland (NSAI). Manufacturing
facilities and processes under which all of our other medical
devices are produced are inspected and audited by the British
Standards Institute (BSI). These audits verify our
compliance with the essential requirements of the MDD, as well
as supplementary requirements for medical devices
incorporating animal tissue. These certifying bodies
verify that our quality system conforms to the international
quality standard ISO 13485:2003 and that our products conform to
the essential requirements and supplementary
requirements set forth by the MDD for the class of medical
devices we produce. These certifying bodies also certify our
conformity with both the quality standards and the MDD
requirements, entitling us to place the CE mark on
all of our current medical devices.
Third
Party Reimbursement
The availability and level of reimbursement from third-party
payers for procedures utilizing our products is significant to
our business. Our products are purchased primarily by hospitals
and other end-users, who in turn bill various third party payers
for the services provided to the patients. These payers, which
include Medicare, Medicaid, private health insurance plans and
managed care organizations, reimburse all or part of the costs
and fees associated with the procedures utilizing our products.
In response to the focus of national attention on rising health
care costs, a number of changes to reduce costs have been
proposed or have begun to emerge. There have been, and may
continue to be, proposals by legislators, regulators and third
party payers to curb these costs. The development or increased
use of more cost effective treatments for diseases could cause
such payers to decrease or deny reimbursement for surgeries or
devices to favor alternatives that do not utilize our products.
A significant number of Americans enroll in some form of managed
care plan. Higher managed care utilization typically drives down
the payments for health care procedures, which in turn places
pressure on medical supply prices. This causes hospitals to
implement tighter vendor selection and certification processes,
by reducing the number of vendors used, purchasing more products
from fewer vendors and trading discounts on price for guaranteed
higher volumes to vendors. Hospitals have also sought to control
and reduce costs over the last decade by joining group
purchasing organizations or purchasing alliances. We cannot
predict what continuing or future impact these practices, the
existing or proposed legislation, or such third-party payer
measures within a constantly changing healthcare landscape may
have on our future business, financial condition or results of
operations.
Employees
On October 31, 2009, we employed approximately
290 full-time and part-time individuals. Our employees are
not represented by a union, and we consider our relationship
with our employees to be good.
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(d)
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Financial
Information About Geographic Areas
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For information regarding net revenue by geographic area, please
refer to Note 5 to our consolidated financial statements
under Item 8 of this report.
The following factors are important and should be considered
carefully in connection with any evaluation of our business,
financial condition, results of operations, prospects and an
investment in our common stock. Additionally, the following
factors could cause our actual results to materially differ from
those reflected in any forward-looking statements.
8
We may
not be able to sustain or manage our growth.
We have achieved notable revenue growth over the past several
years. Our business has increased revenue 17% in fiscal 2009,
32% in fiscal 2008 and 36% in fiscal 2007. There can be no
assurance that we can manage the significant challenges that
accompany such growth, including management of an increasingly
diverse product portfolio and provision of necessary
infrastructure. In addition, there can be no assurance that we
will be able to identify and successfully consummate and
integrate acquisitions or develop new products to sustain rates
of revenue growth and profitability in future periods comparable
to those experienced in the past several years.
We may
not be able to timely re-establish our newly acquired
Ortho & Wound products in the marketplace and further,
we expect to incur significant operating losses in the
future.
On July 17, 2009, the Company, through its wholly-owned
subsidiary Synovis Orthopedic and Woundcare, Inc., completed the
acquisition of substantially all of the assets of Pegasus
Biologics, Inc. (Pegasus), a privately held medical
device company focused on the development of advanced biological
solutions for soft tissue repair. In 2008, Pegasus generated
$9,100,000 in revenue, and approximately 10,000 patients
having received treatment with various Pegasus products from
March 2006 to May 2009 when Pegasus effectively ceased
operations after attempts to raise additional operating capital
were unsuccessful due to the overall economic climate.
Following the completion of the acquisition, we faced several
key challenges with re-starting the
Ortho & Wound business.
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First, we needed to identify, contact, interview and
successfully hire employees in certain functions, including
production, quality, regulatory and clinical affairs, customer
service and general and administrative.
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Second, our Ortho & Wound products were out of the
market for over four months as we were required to obtain the
California Department of Public Health manufacturing license
necessary to repackage acquired inventory with Synovis labeling,
manufacture new products, and to sell products in the
marketplace. We obtained this license on September 29, 2009.
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Third, we need to build new sales channels for our
Ortho & Wound products. We believe that a hybrid model
of direct sales representatives and third-party independent
representatives will provide for the best opportunity to
generate revenues. Significant focus has been placed upon
establishing our hybrid sales force. We expect to hire eight
direct sales representatives in the U.S. by January 2010,
and additionally to appoint up to 16 independent distributors in
targeted U.S. territories in fiscal 2010. Internationally,
we expect to appoint three or more independent stocking
distributors in Europe during fiscal 2010.
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Based on the complexities associated with these and other
challenges, there can be no assurance that our sales channels
will be effective at re-establishing our Ortho & Wound
products in the marketplace or that our Ortho & Wound
products will achieve desired revenue levels. We also plan to
invest significant resources to build a foundation for future
growth of our Ortho & Wound business. Based on the
cost structure we presently expect for our Ortho &
Wound business, we believe that breakeven operating results will
require revenue levels well above what Pegasus had historically
achieved.
We face
significant competition from established competitors in the
medical device industry.
We face intense competition. The medical device industry is
highly competitive and characterized by rapid innovation and
technological change. We expect technology to continue to
develop rapidly, and our success will depend to a large extent
on our ability to maintain a competitive position with our
technology. There can be no assurance that we will be able to
compete effectively in the marketplace or that products
developed by our competitors will not render our products
obsolete or non-competitive. Similarly, there can be no
assurance that our competitors will not succeed in developing or
marketing products that are viewed by surgeons as providing
superior clinical performance
and/or are
less expensive relative to the products we currently market or
may develop.
9
Established companies manufacture and sell products that compete
with each of our products or capabilities. Some of the companies
with whom we compete have greater sales
and/or
distribution capabilities, substantially greater capital
resources, larger marketing, research and development staffs and
larger facilities. In addition, many of our competitors offer
broader product lines within our specific product markets. Broad
product lines may give our competitors the ability to negotiate
exclusive, long-term medical product supply contracts and the
ability to offer comprehensive pricing for their products. There
can be no assurance that we will be able to compete effectively
with such manufacturers.
We continue to evaluate new market opportunities for our
existing products. This process involves numerous steps,
including, but not limited to, identifying meaningful new
markets for our products, performing in-depth research and
analysis to forecast the market potential for our products in
these new markets, obtaining the required regulatory market
clearances, developing an attractive value proposition for
potential customers, and translating this value proposition into
meaningful revenue. Due to the inherent complexity of this
process, there can be no assurance that we will be able to
effectively enter new markets with our existing or newly
developed products.
Increases
to the size of our U.S. direct sales force may not generate
desired increases in revenues.
During fiscal 2006 and fiscal 2007, we converted from a
third-party distribution sales force to a direct sales force in
the U.S. for all products except for our Ortho &
Wound products. We initially hired 24 sales representatives in
fiscal 2006, and had expanded to 49 representatives by January
2009. In May 2009, we announced our intentions to expand the
size of our domestic sales force by as many as 16 for a total of
65 sales representatives by the end of fiscal 2009. As of
October 31, 2009, we have 56 direct sales representatives
selling our Peri-Strips, Veritas, Tissue-Guard and surgical
tools and other products. Additionally, we have 9 direct sales
representatives selling our microsurgery products.
We believe previous expansions in our sales force have been a
significant driver of our revenue growth in recent years, with
new sales representatives becoming effective and able to
generate increased sales volumes in approximately six to nine
months after hire. While we believe a direct sales force
provides us with the best avenue to maximize the revenue
potential of our current and future market opportunities, there
can be no assurance, however, that this strategy will continue
to result in the desired outcome of increasing sales volumes.
We may
not be able to adequately enforce or protect our intellectual
property rights or to protect ourselves against the infringement
claims of others.
We protect our technology through patents, trade secrets, and
proprietary know-how. We also seek to protect our technology
through confidentiality agreements with employees, consultants
and other parties.
There can be no assurance that our trade secrets or
confidentiality agreements will adequately protect our
proprietary information or, in the event of a breach of any
confidentiality agreement, that we will have adequate remedies.
Additionally, there can be no assurance that any pending or
future patent applications will result in issued patents, or
that any current or future patent, regardless of whether we are
an owner or licensee of such patent, will not be challenged,
invalidated or circumvented or that the rights granted
thereunder or under our licensing agreements will provide a
competitive advantage to us. Furthermore, there can be no
assurance that others will not independently develop similar
technologies or duplicate any technology developed by us, or
that our technology does not or will not infringe patents or
other rights owned by others.
The medical device industry is characterized by frequent and
substantial intellectual property litigation, and competitors
may resort to intellectual property litigation as a means of
competition. Intellectual property litigation is complex and
expensive, and the outcome of such litigation is difficult to
predict.
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 Companys risk
management practices, including its insurance coverage, are
reasonably adequate to protect against potential material
liability losses.
10
Oversight
of the medical device industry might affect the manner in which
we may sell medical devices.
There are laws and regulations that govern the means by which
companies in the healthcare industry may market their products
to healthcare professionals and may compete by discounting the
prices of their products, including for example, the federal
Anti-Kickback Statute, the federal False Claims Act, the federal
Health Insurance Portability and Accountability Act of 1996, and
state law equivalents to these federal laws that are meant to
protect against fraud and abuse. Violations of these laws are
punishable by criminal and civil sanctions, including, but not
limited to, in some instances civil and criminal penalties,
damages, fines, and exclusion from participation in federal and
state healthcare programs, including Medicare and Medicaid.
Although we exercise care in structuring our sales and marketing
practices and customer discount arrangements to comply with
those laws and regulations, we cannot assure you that:
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government officials charged with responsibility for enforcing
those laws will not assert that our sales and marketing
practices or customer discount arrangements are in violation of
those laws or regulations; or
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government regulators or courts will interpret those laws or
regulations in a manner consistent with our interpretation.
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ADVAMED, the principal U.S. trade association for the
medical device industry, has put in place a model code of
conduct that sets forth standards by which its members
should abide in the promotion of their products. We have
policies and procedures in place for compliance that we believe
are at least as stringent as those set forth in the ADVAMED
Code, and we provide routine training to our sales and marketing
personnel on our policies regarding sales and marketing
practices. Nevertheless, the sales and marketing practices of
our industry have been the subject of increased scrutiny from
federal and state government agencies, and we believe that this
trend will continue. For example, proposed federal legislation
and recent state legislation would require detailed disclosure
of gifts and other remuneration made to health care
professionals. In addition, prosecutorial scrutiny and
governmental oversight, on the state and federal levels, over
some major device companies regarding the retention of
healthcare professionals as consultants has limited the manner
in which medical device companies may retain healthcare
professionals as consultants. We have in place policies to
govern how we may retain healthcare professionals as consultants
that reflect the current climate on this issue and provide
training on these policies. Finally, various hospital
organizations, medical societies and trade associations are
establishing their own practices that may require detailed
disclosures of relationships between healthcare professionals
and medical device companies or ban or restrict certain
marketing and sales practices such as gifts and business meals.
Our
failure to obtain regulatory clearance/approval and maintain
regulatory compliance for any of our products would impact our
ability to generate revenue from those products.
We must comply with FDA regulations to market our products in
the United States. The medical device industry in
which our business operates is subject to extensive and rigorous
regulation by the FDA and by comparable agencies in foreign
countries. In the United States, the FDA regulates the design
control, development, manufacturing, labeling, record keeping
and surveillance procedures for our medical devices.
The process of obtaining marketing clearance or approvals from
the FDA for new products and new applications for existing
products can be time-consuming and expensive, and there is no
assurance that such clearance/approvals will be granted, or that
the FDA review will not involve delays that would adversely
affect our ability to commercialize additional products or
additional applications for existing products. Some of our
products that are in the research and development stage may be
subject to a lengthy and expensive pre-market approval process
with the FDA. The FDA has the authority to control the indicated
uses of a medical device. Products can also be withdrawn from
the market due to failure to comply with regulatory standards or
the occurrence of unforeseen problems. The FDA regulations
depend heavily on administrative interpretation, and there can
be no assurance that future interpretations made by the FDA or
other regulatory bodies, with possible retroactive effect, will
not adversely affect us.
Our facilities and processes are subject to
regulation. The FDA, various state agencies and
foreign regulatory agencies inspect our facilities to determine
whether we are in compliance with various regulations
11
relating to quality systems, such as manufacturing practices,
validation, testing, quality control, product labeling and
product surveillance. A determination that we are in violation
of such regulations could lead to imposition of civil penalties,
including fines, product recalls or product seizures and, in
extreme cases, criminal sanctions, depending on the nature of
the violation.
We must obtain regulatory approvals to market our products
internationally. The registration scheme in the
majority of international markets (e.g. Europe, Canada) for our
products requires that our quality system conforms to
international quality standards. We must remain compliant with
these requirements as well as product standards in order to sell
our products in these countries. There can be no assurance that
we will be able to maintain compliance with these regulations.
In addition, there can be no assurance that we will be
successful in obtaining registration for new product
introductions.
Further, international regulatory bodies have established
varying additional regulations governing product standards,
packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements.
We rely, in part, on our independent distributors to comply with
such foreign regulatory requirements. As a result, our
communication with foreign regulatory agencies may be indirect
as it occurs through the foreign distributor. The inability or
failure of independent distributors to comply with the varying
regulations or the imposition of new regulations could restrict
such distributors ability to sell our medical products
internationally and thereby adversely affect our business,
financial condition and results of operations.
Because
many of our biomaterial products are manufactured from bovine
pericardium, perceptions about Bovine Spongiform Encephalopathy
may impact our sales.
Under the direction of the United States Department of
Agriculture (USDA), the U.S. government has had
an active program of surveillance and import controls since the
late 1980s designed to prevent the introduction of Bovine
Spongiform Encephalopathy (BSE) into
U.S. cattle. The USDA program includes certain feed
restrictions which began in 1997. The World Health Organization
has categorized the levels of BSE infectivity of tissue. This
characterization places pericardium (which primarily consists of
collagen) as having no detectable infectivity, the lowest risk
category. The European authorities have specifically reviewed
our biomaterial sourcing and manufacturing processes and have
also certified our bovine pericardium products.
We obtain our raw bovine pericardium for our biomaterial
products from USDA-inspected abattoirs as well as from a USDA
approved source in New Zealand. The bovine pericardium is
collected under strict conditions; inspectors examine each heart
for disease and anomalies prior to harvesting the pericardium.
Additional measures are also taken to ensure brain and spinal
cord matter does not come into contact with the bovine
pericardium. Our bovine-based tissue products are manufactured
with sodium hydroxide, a processing technique recommended by
international experts to remove or inactivate the prion, the
agent believed to cause BSE, should it exist in the tissue. The
bovine pericardium used in our products is sourced from animals
who are 30 months or younger. Sourcing from these younger
animals markedly decreases the likelihood of BSE transmission.
Notwithstanding these safeguards, if the perception of risk
associated with BSE increases, it could have a material adverse
effect on our business, financial condition and results of
operations.
In 2004, the EU enacted medical device regulations that require
product specific evaluation of bovine-based products for
potential BSE patient health risks. All bovine-based medical
products currently sold in the EU are subject to this
evaluation. Our bovine-based products have been evaluated and
have obtained approval, although our Dura-Guard product has not
been approved for sale in France. Currently, none of our
bovine-based products are approved for sale in Japan or Taiwan.
In August 2006, the government of China began prohibiting the
sale of U.S. bovine-based products. We understand that
regulatory approvals will not be granted in the present
environment within those countries for products derived from
bovine pericardium, unless we source bovine pericardium from
countries which they consider at no risk for BSE (e.g. New
Zealand and Australia). Total international sales of our
bovine-based products accounted for 11.5% and 10.8% of our
consolidated net sales for the fiscal years ended
October 31, 2009 and 2008, respectively, and increased 25%
in fiscal 2009. Any prohibition by certain other countries of
U.S. bovine pericardium products as a result of concerns
related to BSE could have an adverse effect on our ability to
maintain or grow international sales of these products.
12
We may
face the risk of product liability claims and product recalls
that could result in costly and time consuming litigation and
significant liability.
The medical device industry historically has been litigious, and
the manufacture and sale of our products entails an inherent
risk of product liability claims. In particular, our principal
medical devices are designed to be permanently placed in the
human body, and production or other errors could result in an
unsafe product and injury to the patient. Although we maintain
product liability insurance in amounts believed to be adequate,
based upon the nature and risks of our business in general and
our actual experience to date, there can be no assurance that
one or more liability claims will not exceed the coverage limits
of such policies or that such insurance will continue to be
available on commercially reasonable terms, if at all.
Furthermore, we do not have nor do we expect to obtain insurance
covering our costs and losses as the result of any recall of our
products due to alleged defects, whether such a recall is
instituted by us or required by a regulatory agency. A product
liability claim, recall or other claim with respect to uninsured
liabilities or in excess of our insured liabilities could have a
material adverse effect on our business, financial condition and
results of operations.
Due to
the unpredictability of the health care industry, our customers
may not be able to receive third-party reimbursement for the
medical procedures utilizing our products.
Our products are purchased primarily by hospitals and other
end-users. Hospitals and end-users of our products bill various
third-party payers, including government health programs,
private health insurance plans, managed care organizations and
other similar programs, for the health care goods and services
provided to their patients. Third-party payers may deny
reimbursement if they determine that a procedure was not in
accordance with established third-party payer protocol regarding
treatment methods. Our products are covered by procedure costs
as a component of the overall medical procedure reimbursement
obtained from the third-party payer.
Third-party payers are also increasingly challenging the prices
charged for medical products and services and, in some
instances, have put pressure on medical device suppliers to
lower their prices. While we believe our pricing is appropriate
for the niche markets and technology of our products, we are
unable to predict what changes will occur in the reimbursement
methods used by third-party payers. There can be no assurance
that medical procedures in which our products are used will
continue to be considered cost-effective by third-party payers,
that reimbursement for such procedures will be available or, if
available, will continue, or that third-party payers
reimbursement levels will not adversely affect our ability to
sell our products on a profitable basis. The cost of health care
has risen significantly over the past decade, and there have
been and may continue to be proposals by legislators, regulators
and third-party payers to curb these costs.
Failure by hospitals and other users of our products to obtain
reimbursement from third-party payers for procedures in which
our products are used, changes in third-party payers
policies towards reimbursement for procedures using our products
or legislative action could have a material adverse effect on
our business, financial condition and results of operations.
Healthcare
reform legislation could adversely affect our revenue and
financial condition.
In recent years, there have been numerous initiatives on the
federal and state levels for comprehensive reforms affecting the
payment for, the availability of and reimbursement for
healthcare services in the United States. These initiatives
have ranged from proposals to fundamentally change federal and
state healthcare reimbursement programs, including providing
comprehensive healthcare coverage to the public under
governmental funded programs, to minor modifications to existing
programs. Recently, President Obama and members of Congress have
proposed significant reforms to the U.S. healthcare system.
Both houses of Congress have conducted hearings about
U.S. healthcare reform and a number of bills have been
proposed in Congress. A leading proposal includes an excise tax
on the medical device industry that would be payable based on
revenue, not income. In addition, recent legislation and many of
these proposed bills include funding to assess the comparative
effectiveness of medical devices. Although Congress has
indicated that this funding is intended to improve the quality
of health care, it is unclear what impact this assessment will
have on coverage, reimbursement or other third-party payor
policies, or what effect that assessment and the excise tax
proposal would have on our products or our financial results. To
the extent these or other reform measures
13
affect the coverage and reimbursement of our current or future
products, there could be a material adverse affect on our
financial condition and operating results.
The ultimate content or timing of any future healthcare reform
legislation, and its impact on medical device companies such as
Synovis, is impossible to predict. If significant reforms are
made to the healthcare system in the United States, or in other
jurisdictions, those reforms could materially impact our
business, financial condition and operating results.
The
current global economic downturn could continue to adversely
impact our business.
A significant portion of our product sales are used in medical
procedures covered by patient health insurance. Additionally, a
notable percentage of medical procedures utilizing our products
may be considered elective by the patient. The current global
economic downturn may have a meaningful impact on availability
to or affordability of health insurance, or may impact patient
decisions to have an elective medical procedure performed. This
may in turn also impact the financial condition of our
customers. Accordingly, a pronounced and sustained economic
downturn could have a material, adverse effect on our business,
financial condition and results of operations.
We depend
on highly specialized equipment to manufacture our products and
loss of or damage to one of our manufacturing facilities could
result in reduced revenues and significant losses.
We presently have two manufacturing facilities: our newly
acquired Irvine, California (CA) facility which
manufactures our Ortho & Wound products, and our St.
Paul, Minnesota (MN) facility. The loss of or damage
to either of our manufacturing facilities due to natural
disaster, equipment failure or other difficulty could result in
significant delays in production. In the event of such disaster,
re-starting manufacturing activity at our other location, or
locating third-party manufacturers to manufacture our products
in any such event would likely be difficult given the
specialized equipment and processes necessary to produce those
products. Although we maintain business interruption insurance
to mitigate the financial impact on our business, any sustained
period of suspended production would likely have a material
adverse effect on our business, financial condition and results
of operations.
We cannot
predict the outcome of our clinical studies.
In fiscal 2010, we expect to perform several post-clearance
marketing clinical studies for certain of our products, which
are designed to document the comparative strengths of our
products versus competitive products, and also to more fully
understand the role implant technique and other factors may
affect clinical outcomes. We expect these clinical studies will
require significant investment and may span several years. We
cannot predict the outcome of our clinical studies, nor what
impact, if any, they may have in the marketplace.
Our
strategy to acquire complementary businesses and technologies
involves risk and may result in disruptions to our business by,
among other things, distracting management time and diverting
financial resources.
One of our growth strategies is the acquisition of complementary
businesses and technologies. We may not be able to identify
suitable acquisition candidates, or if we do, we may not be able
to make such acquisitions on commercially acceptable terms. If
we make acquisitions, a significant amount of management time
and financial resources may be required to evaluate or complete
the acquisition and integrate the acquired business into our
existing operations. Even with this investment of management
time and financial resources, an acquisition may not produce the
desired revenue, earnings or business synergies. Acquisitions
involve numerous other potential risks including: assumption of
unanticipated operating problems or legal liabilities, problems
integrating the purchased operations, technologies or products,
diversion of managements attention from our core
businesses, adverse effects on existing business relationships
with suppliers and customers, inaccurate estimates of fair value
made in the accounting for acquisitions and amortization of
acquired intangible assets which would reduce future reported
earnings, and potential loss of customers or key employees of
acquired businesses, among others.
14
We may be
obligated to indemnify the purchaser or our former
interventional business for certain material adverse events that
may arise.
As contractually defined, we may be obligated to indemnify the
purchaser of our former interventional business for certain
material adverse events arising out of or related to our prior
operation of that business, including environmental matters,
intellectual property disputes and unforeseen liabilities, among
others. While we have not been made aware of any such potential
indemnification matters by the purchaser, our obligation to
indemnify the purchaser in the future for a qualifying adverse
event could have a material, adverse effect on our business,
results of operations and financial condition.
We may
not be able to hire or retain key personnel.
We depend on key management, sales and technical personnel.
Moreover, because of the highly technical nature of our
business, our ability to continue our technological developments
and to market and sell our products depends in large part on our
ability to attract and retain qualified technical, sales and key
management personnel. Competition for qualified personnel is
intense, and we cannot ensure that we will be able to attract
and retain the individuals we need. The loss of key personnel,
or our inability to hire or retain qualified personnel, could
have a materially adverse effect on our business, financial
condition and results of operations.
|
|
Item 1B
|
Unresolved
Staff Comments
|
None.
We have a lease for our corporate headquarters and manufacturing
facility, totaling 65,000 square feet, located at 2575
University Ave. W., St. Paul, Minnesota. The lease expires on
December 31, 2013, and the base rent is currently $724,000
annually.
We lease approximately 14,830 square feet for our
Ortho & Wound facility at 4 and 6 Jenner Drive,
Irvine, CA. The lease expires August 31, 2012, and the base
rent is currently $223,000 annually.
We lease approximately 3,750 square feet for our MCA
facility at 439 Industrial Lane, Birmingham, Alabama. The lease
expires June 30, 2011, and the base rent is currently
$37,000 annually.
We pay apportioned real estate taxes and common costs on our St.
Paul, MN and Irvine, CA leased facilities.
|
|
Item 3
|
Legal
Proceedings
|
In March 2007, we initiated a patent infringement action in
U.S. District Court for the District of Minnesota against
W.L. Gore & Associates, Inc. The action alleged
infringement of U.S. Patent No. 7,128,748
Circular Stapler Buttress Combination, which covers
certain surgical buttress technology. Gore brought a
counterclaim seeking a determination that the patent is invalid.
We have reached a settlement in the litigation with W.L.
Gore & Associates, Inc. By Order dated
November 12, 2009, the court approved the parties
stipulation and ordered that all claims and counterclaims be
dismissed with prejudice, with each party to bear its own costs
and attorneys fees. Judgment dismissing all claims and
counterclaims was entered on November 13, 2009.
From time to time, we may become involved in routine litigation
incidental to our 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 our
risk management practices, including our insurance coverage, are
reasonably adequate to protect against potential material
product liability losses.
15
|
|
Item 4
|
Submission
of Matters to a Vote of Security Holders
|
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
|
|
Item 4A
|
Executive
Officers of the Registrant
|
Our executive officers, their ages, and the offices they held as
of December 1, 2009, and certain biographical information,
are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Title
|
|
Richard W. Kramp
|
|
|
64
|
|
|
President and Chief Executive Officer
|
David A. Buché
|
|
|
48
|
|
|
Vice President and COO of Synovis Surgical Innovations
|
Michael K. Campbell
|
|
|
58
|
|
|
President of Synovis Micro Companies Alliance, Inc.
|
Timothy F. Floeder
|
|
|
51
|
|
|
Vice President of Corporate Development
|
Mary L. Frick
|
|
|
56
|
|
|
Vice President of Regulatory/Clinical/Quality Affairs
|
Daniel L. Mooradian
|
|
|
51
|
|
|
Vice President of Research and Development
|
Brett A. Reynolds
|
|
|
41
|
|
|
Chief Financial Officer, Vice President of Finance and Corporate
Secretary
|
Richard W. Kramp. Mr. Kramp was named
Chief Executive Officer of the Company effective
January 2007. Mr. Kramp has served as President of
Synovis Life Technologies, Inc. since June 2006. From August
2004 to May 2006, he served as President and Chief Operating
Officer of the Companys former interventional business.
Prior to joining the Company, Mr. Kramp most recently
served as the President and Chief Operating Officer of Medical
CV, Inc. From 1988 to 2003, Mr. Kramp served as President
and Chief Operating Officer, and then President and Chief
Executive Officer, as well as a Board Member at ATS Medical.
From 1978 to 1988, Mr. Kramp held sales and marketing
positions at St. Jude Medical, serving as Vice President of
Sales and Marketing from 1981 to 1988.
David A. Buche. Mr. Buche has served as a
Vice President and Chief Operating Officer of Synovis Surgical
Innovations since June 2004. From January 1998 to May 2004, he
served as Vice President of Marketing and Sales of Synovis
Surgical Innovations. Prior to January 1998, Mr. Buche held
the positions of Director of Marketing from November 1997 and
Director of International Marketing and Sales from March 1995.
Michael K. Campbell. Mr. Campbell has
served as President of Synovis Micro Companies Alliance, Inc.
since the acquisition of MCA by the Company in July 2001. Prior
to the acquisition he was President and CEO of MCA from July
2000 through July 2001. From June 1999 to May 2000,
Mr. Campbell served as Executive Vice President of
PrimeSource Surgical, a specialty medical products distributor.
From 1979 to June 1999, he was a director and Vice
President of Futuretech, Inc., a specialty medical distribution
company serving the southeastern United States.
Timothy F. Floeder. Mr. Floeder has
served as Vice President of Corporate Development of the Company
since May 2008. Prior to joining the Company, Mr. Floeder
served as Vice President of Business Development for Compex
Technologies, Inc. (Compex) from 2003 to 2006, and
upon the sale of Compex to Encore Medical Corporation, served as
interim CEO/managing director of Compexs
U.S. consumer business and Compexs European
subsidiary (Compex S.A.) from 2006 to 2007. In addition,
Mr. Floeder served as a non-employee director for HEI, Inc.
from 2002 to 2007. From 1996 to 2002, Mr. Floeder served as
Managing Director of merger and acquisition services for Miller
Johnson Steichen Kinnard, Inc., advising companies in several
industries, including the medical device industry.
Mary L. Frick, M.S.C. Ms. Frick has
served as Vice President of Regulatory/Clinical/Quality Affairs
of the Company since November 2000. She had previously served in
several positions within the Company, including Director of
Regulatory/Clinical/Quality Affairs since November 1998 and as
Group Manager of Regulatory/Clinical/Quality Affairs from June
to November of 1998. From 1984 to June 1998, Ms. Frick held
a series of management positions in Research, Operations and
Regulatory/Clinical Affairs at INCSTAR Corporation, a diagnostic
medical device manufacturer.
16
Daniel L.
Mooradian, Ph.D. Dr. Mooradian has
served as Vice President of Research and Development since
December 1, 2008. From May 2006 to November 2008,
Dr. Mooradian held various positions at Boston Scientific,
including Director of Preclinical Sciences and Director of the
Research and Technology Center. From January 2005 to April 2006,
Dr. Mooradian served as Vice President of Research and
Development for QuestStar Medical, Inc. From January 2001 to
December 2004, Dr. Mooradian held various positions at
Synovis Life Technologies, Inc., including Director of Research
and Development and Principal Scientist. From September 1987 to
December 2000, Dr. Mooradian held various positions at the
University of Minnesota.
Brett A. Reynolds. Mr. Reynolds has
served as Chief Financial Officer, Vice President of Finance and
Corporate Secretary since April 2005. Prior to April 2005,
Mr. Reynolds served as Director of Finance from September
2003. From October 2001 to September 2003, Mr. Reynolds
served in several financial positions at Chiquita Processed
Foods, LLC, a division of Chiquita Brands International,
ultimately serving as Corporate Controller. From 1991 to 2001,
Mr. Reynolds held a series of audit, accounting and
consulting positions with Deloitte and Touche LLP.
|
|
Item 5
|
Market
for Registrants Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity
Securities
|
Price
Range
Our common stock is currently traded on the Nasdaq Global Market
under the symbol SYNO. The following table sets
forth, for each of the fiscal periods indicated, the range of
high and low closing sale prices per share as reported by the
Nasdaq Global Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Fiscal Quarter Ended:
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
January 31
|
|
$
|
18.74
|
|
|
$
|
11.62
|
|
|
$
|
23.17
|
|
|
$
|
15.15
|
|
April 30
|
|
|
18.10
|
|
|
|
11.60
|
|
|
|
18.69
|
|
|
|
15.10
|
|
July 31
|
|
|
21.45
|
|
|
|
12.90
|
|
|
|
21.75
|
|
|
|
16.62
|
|
October 31
|
|
|
16.05
|
|
|
|
12.06
|
|
|
|
24.43
|
|
|
|
15.16
|
|
Dividends
We have not declared or paid any cash dividends on our common
stock since inception, and our Board of Directors presently
intends to retain all earnings for use in the business for the
foreseeable future.
Shareholders
As of November 30, 2009, there were approximately 5,500
beneficial owners and 900 registered shareholders of our common
stock.
Sales
of Unregistered Securities
None.
Purchases
of Equity Securities
On May 28, 2008, the Company announced that its Board of
Directors had authorized the Company to repurchase up to
1,000,000 shares of its common stock. This program was
completed on January 9, 2009. The share repurchase was
funded using the Companys existing cash balances and
occurred in the open market in accordance with SEC regulations.
The timing and extent to which the Company bought back shares
depended upon market conditions and other corporate
considerations.
From inception of the program on May 28, 2008 through its
completion on January 9, 2009, the Company used $16,675,000
to repurchase 1,000,000 shares at an average price of
$16.68 per share. The following table
17
presents the total number of shares repurchased from
May 28, 2008 through January 9, 2009, the average
price paid per share and the number of shares that were
purchased.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
of Shares Purchased
|
|
|
of Shares That May
|
|
|
|
Total Number
|
|
|
|
|
|
as Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced Plan or
|
|
|
Under the Plan
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Program
|
|
|
or Program
|
|
|
May 1, 2008 May 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
1,000,000
|
|
June 1, 2008 June 30, 2008
|
|
|
87,585
|
|
|
$
|
17.82
|
|
|
|
87,585
|
|
|
|
912,415
|
|
October 1, 2008 October 31, 2008
|
|
|
416,582
|
|
|
$
|
16.77
|
|
|
|
504,167
|
|
|
|
495,833
|
|
November 1, 2008 November 30, 2008
|
|
|
145,833
|
|
|
$
|
16.67
|
|
|
|
650,000
|
|
|
|
350,000
|
|
December 1, 2008 December 31, 2008
|
|
|
294,801
|
|
|
$
|
16.02
|
|
|
|
944,801
|
|
|
|
55,199
|
|
January 1, 2009 January 31, 2009
|
|
|
55,199
|
|
|
$
|
17.61
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,000,000
|
|
|
$
|
16.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 29, 2009, the Company announced that its Board
of Directors had authorized the Company to repurchase up to
500,000 shares of its common stock. The share repurchase is
funded using the Companys existing cash balances and may
occur either in the open market or through private transactions
from time to time, in accordance with SEC regulations. The
timing and extent to which the Company may buy back shares
depends upon market conditions and other corporate
considerations. The repurchase plan does not have an expiration
date.
From inception of the program on September 29, 2009 through
October 31, 2009, the Company used $2,893,000 to repurchase
220,404 shares at an average price of $13.12 per share. The
following table presents the total number of shares repurchased
from September 29, 2009 through October 31, 2009, the
average price paid per share and the number of shares that were
purchased and the maximum number of shares that may yet be
purchased at October 31, 2009, pursuant to our stock
repurchase program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
of Shares Purchased
|
|
|
of Shares That May
|
|
|
|
Total Number
|
|
|
|
|
|
as Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced Plan or
|
|
|
Under the Plan
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Program
|
|
|
or Program
|
|
|
September 29, 2009 September 30, 2009
|
|
|
43,968
|
|
|
$
|
13.75
|
|
|
|
43,968
|
|
|
|
456,032
|
|
October 1, 2009 October 31, 2009
|
|
|
176,436
|
|
|
$
|
12.97
|
|
|
|
220,404
|
|
|
|
279,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
220,404
|
|
|
$
|
13.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Performance
Graph
In accordance with the rules of the SEC, the following
performance graph compares the performance of our common stock
on the Nasdaq Global Market to the Nasdaq Global Market and to
Nasdaqs Surgical and Medical Instruments and
Supplies Index. The following performance graph compares
the cumulative total shareholder return as of the end of each of
our last five fiscal years on $100 invested at the beginning of
the period and assumes reinvestment of all dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
|
|
10/31/04
|
|
|
|
10/31/05
|
|
|
|
10/31/06
|
|
|
|
10/31/07
|
|
|
|
10/31/08
|
|
|
|
10/31/09
|
|
Company Index
|
|
|
|
100.0
|
|
|
|
|
85.2
|
|
|
|
|
69.8
|
|
|
|
|
225.9
|
|
|
|
|
165.4
|
|
|
|
|
114.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nasdaq Market Index
|
|
|
|
100.0
|
|
|
|
|
108.3
|
|
|
|
|
121.3
|
|
|
|
|
144.3
|
|
|
|
|
89.4
|
|
|
|
|
83.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nasdaq Surgical and Medical Instruments and Supplies Index
|
|
|
|
100.0
|
|
|
|
|
125.2
|
|
|
|
|
140.8
|
|
|
|
|
193.5
|
|
|
|
|
111.6
|
|
|
|
|
124.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Item 6
|
Selected
Financial Data
|
Summary
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except per share data)
|
|
|
Net revenue
|
|
$
|
58,211
|
|
|
$
|
49,800
|
|
|
$
|
37,691
|
|
|
$
|
27,743
|
|
|
$
|
24,993
|
|
Gross margin
|
|
|
41,767
|
|
|
|
34,144
|
|
|
|
24,370
|
|
|
|
16,435
|
|
|
|
14,077
|
|
Operating income (loss)
|
|
|
4,002
|
|
|
|
7,194
|
|
|
|
2,468
|
|
|
|
(3,226
|
)
|
|
|
(1,206
|
)
|
Net income (loss) from continuing operations
|
|
|
2,706
|
|
|
|
6,165
|
|
|
|
3,292
|
|
|
|
(862
|
)
|
|
|
(111
|
)
|
Gain on sale of discontinued operations
|
|
|
|
|
|
|
5,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
(20
|
)
|
|
|
518
|
|
|
|
(619
|
)
|
|
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,706
|
|
|
$
|
11,485
|
|
|
$
|
3,810
|
|
|
$
|
(1,481
|
)
|
|
$
|
883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.23
|
|
|
$
|
0.50
|
|
|
$
|
0.27
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
|
0.00
|
|
|
|
0.43
|
|
|
|
0.04
|
|
|
|
(0.05
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.23
|
|
|
$
|
0.93
|
|
|
$
|
0.31
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.23
|
|
|
$
|
0.48
|
|
|
$
|
0.26
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
|
0.00
|
|
|
|
0.42
|
|
|
|
0.04
|
|
|
|
(0.05
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.23
|
|
|
$
|
0.90
|
|
|
$
|
0.30
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,588
|
|
|
|
12,395
|
|
|
|
12,225
|
|
|
|
12,004
|
|
|
|
11,793
|
|
Diluted
|
|
|
11,827
|
|
|
|
12,721
|
|
|
|
12,528
|
|
|
|
12,004
|
|
|
|
11,998
|
|
Summary
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Working capital
|
|
$
|
63,885
|
|
|
$
|
62,097
|
|
|
$
|
66,616
|
|
|
$
|
50,253
|
|
|
$
|
48,520
|
|
Total assets
|
|
|
93,720
|
|
|
|
97,401
|
|
|
|
94,677
|
|
|
|
80,540
|
|
|
|
80,243
|
|
Shareholders equity
|
|
|
86,011
|
|
|
|
89,861
|
|
|
|
86,953
|
|
|
|
77,049
|
|
|
|
76,747
|
|
|
|
Item 7
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial condition
and results of operations should be read together with the
selected consolidated financial data and our financial
statements and the related notes appearing elsewhere in this
report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of many factors,
including but not limited to those set forth in Part 1,
Items 1A, Risk Factors, of this report.
Overview
Synovis Life Technologies, Inc., a diversified medical device
company, develops, manufactures and markets mechanical and
biological products used by several surgical specialties to
facilitate the repair and reconstruction of soft tissue damaged
or destroyed by disease or injury. The Companys products
include implantable biomaterials for soft tissue repair, devices
for microsurgery and surgical tools all designed to
reduce risks
and/or
facilitate critical surgeries, improve patient outcomes and
reduce healthcare costs.
20
Operating
Results Fiscal 2009 ($ in thousands except per share
data)
Net revenue increased 17% during fiscal 2009 to $58,211 from
$49,800 in fiscal 2008. Our operating income was $4,002 in
fiscal 2009, compared to $7,194 in the prior year. The decrease
in profitability was primarily due to the expense of acquired
in-process research and development costs and
start-up
costs related to our acquisition of Synovis Orthopedic and
Woundcare, Inc. (Ortho & Wound). Net
income from continuing operations for fiscal 2009 was $2,706, or
23 cents per diluted share, compared to $6,165, or 48 cents per
diluted share during fiscal 2008.
On July 17, 2009, the Company, through its wholly-owned
subsidiary Synovis Orthopedic and Woundcare, Inc.,
(Ortho & Wound) acquired substantially all
of the assets of Pegasus Biologics, Inc., a Delaware corporation
(Pegasus). The acquisition resulted from a sealed
bid auction process after Pegasus effectively ceased operations
when attempts to raise additional operating capital were
unsuccessful. Our Ortho & Wound business is focused on
developing advanced biological solutions for soft tissue repair,
primarily within the orthopedic and wound care markets. Synovis
paid $12,100 in cash to Comerica Bank for the assets
transferred. See Note 2 to the consolidated financial
statements included in this report on
Form 10-K
for additional information.
In fiscal 2009, we had $65 of revenue from our Ortho &
Wound products after obtaining the California Department of
Public Health manufacturing license necessary to sell these
products in the marketplace. We also incurred $1,840 of
operating expenses related to the
start-up of
Ortho & Wound operations during the year.
The following table summarizes our net revenue by product group
and geography for fiscal 2009 and fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Peri-Strips®
|
|
$
|
19,384
|
|
|
$
|
17,653
|
|
Veritas®
|
|
|
8,757
|
|
|
|
4,468
|
|
Tissue-Guard
|
|
|
15,806
|
|
|
|
14,477
|
|
Microsurgery
|
|
|
8,668
|
|
|
|
7,749
|
|
Surgical tools and other
|
|
|
5,596
|
|
|
|
5,453
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,211
|
|
|
$
|
49,800
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
49,290
|
|
|
$
|
42,190
|
|
International
|
|
|
8,921
|
|
|
|
7,610
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,211
|
|
|
$
|
49,800
|
|
|
|
|
|
|
|
|
|
|
The increase in net revenue in fiscal 2009 compared to the
prior-year was primarily due to the following:
|
|
|
|
|
Incremental worldwide units sold (inclusive of new product
introductions) and product mix changes increased revenue
approximately $6,700; and
|
|
|
|
Higher average net selling prices primarily due to various
worldwide hospital list price increases for certain of our
products increased revenues by approximately $1,700.
|
We believe that expansion of our direct sales force is a key
long-term strategy to increase revenues. During the first half
of fiscal 2009, we expanded our direct sales force from 43 to 49
sales representatives in the U.S. In the second half of
fiscal 2009, we further expanded our sales force by an
additional 16 sales representatives. As of October 31,
2009, we had 56 direct sales representatives selling our
Peri-Strips, Veritas, Tissue-Guard and Surgical tools and other
products. Additionally, we have 9 direct sales representatives
selling our microsurgery products.
For our Ortho & Wound products, we are in the process
of establishing a hybrid sales model in the U.S. comprised
of both direct sales representatives and independent
distributors. We expect to hire eight direct sales
representatives in the U.S. and to appoint up to 16
independent distributors in targeted U.S. territories in
fiscal 2010.
21
The increase in worldwide units sold was primarily attributable
to our direct sales force, the expansion of our direct sales
force and increased market acceptance of Veritas into the
domestic hernia and general surgery markets.
We cannot fully assess the impact that the current economic
downturn may have had on our results of operations during fiscal
2009. We believe, however, that the volume of certain surgical
procedures in which our products are used, particularly those
which may be considered elective, has been impacted by the
current economic downturn. In addition, we believe the financial
conditions of certain of our hospital customers have been
negatively impacted by the economic downturn. These notable
items, as well as other factors, may have had an impact our
results of operations.
Worldwide net revenue from Peri-Strips was $19,384 in fiscal
2009, an increase of 10% from $17,653 in fiscal 2008.
Peri-Strips growth rate exceeded the estimated growth of
procedures in which the product is used, which we believe was
attributable to product performance, our direct sales force
communicating the benefits of Peri-Strips, and the increased
international market penetration of PSD Veritas, partially
offset by increased competition. Peri-Strips are used to reduce
risks and improve patient outcomes in several procedures, with
the predominant procedure being gastric bypass surgery. Included
in the Peri-Strips product line was revenue from our two linear
products: PSD Veritas, our remodelable buttress, and PSD Apex,
our permanent buttress, as well as revenue from our PSD Veritas
Circular buttress.
We believe increased market acceptance of Peri-Strips has been
offset by the impact of increasing competition within the
buttressing market. Covidien, one of the two primary companies
which offer surgical staplers on which our Peri-Strips products
are used, launched a buttress product which is supplied integral
with their stapler cartridges in mid-fiscal 2009. During the
second half of fiscal 2009, worldwide revenue from Peri-Strips
products which are used with Covidien staplers decreased 24%
from the first half of fiscal 2009. This was partially offset by
revenue for Peri-Strips products used with another stapler
manufacturers products increasing 11%. We are addressing
the Covidien competitive threat by highlighting the clinical
history of
Peri-Strips
through our expanded direct sales force, the development of
product enhancements and strengthened efforts to convert
additional non-buttressing surgeons.
Revenue from Veritas patch products was $8,757 in fiscal 2009,
an increase of $4,289 or 96% from $4,468 in fiscal 2008. Veritas
revenue growth in fiscal 2009 was primarily driven by
incremental sales into the domestic hernia, reconstructive and
general surgery markets. Additionally, late in the fourth
quarter of fiscal 2009, we received CE Mark approval for the use
of Veritas in hernia and breast reconstruction. Veritas is an
extremely strong and conformable biomaterial which acts as a
scaffold that enables rapid repopulation and
revascularization by the surrounding host tissue.
Revenue from Tissue-Guard patch products was $15,806 in fiscal
2009, an increase of $1,329 or 9% from $14,477 in fiscal 2008.
The fiscal 2009 increase was driven by an 8% increase in units
sold worldwide. Our Tissue-Guard family of products is used to
repair and replace damaged tissue in an array of surgical
procedures, including cardiac, vascular, thoracic, and
neurologic procedures.
Revenue from microsurgery was $8,668 in fiscal 2009, an increase
of $919 or 12% from $7,749 in fiscal 2008. This revenue growth
was driven by Coupler unit sales growth in the current year as
well as list price increases to the Coupler in late fiscal 2008.
The Coupler is a device used to connect extremely small arteries
or veins, without sutures, quickly, easily and with consistently
excellent results.
Our gross margin increased three percentage points to 72% in
fiscal 2009 from 69% during fiscal 2008, due primarily to the
following factors:
|
|
|
|
|
Favorable sales mix (both product and geographic) benefited the
fiscal 2009 gross margin by nearly two percentage points.
|
|
|
|
Improved utilization of production resources in fiscal 2009
benefited the current-year gross margin by nearly one percentage
point.
|
|
|
|
Higher average list selling prices for certain of our products
benefited the fiscal 2009 gross margin by approximately
one-half of one percentage point.
|
22
Factors which may affect the gross margin include product and
geographic mix of products sold, volume, product acquisitions
and disposals, and other production activities. Accordingly, our
gross margin may fluctuate from period to period based on
variations in these factors.
Selling, general and administrative (SG&A)
expense during fiscal 2009 was $29,867, an increase of $6,165 or
26% from SG&A expense of $23,702 in fiscal 2008. As a
percentage of net revenue, SG&A expense was 51% in fiscal
2009 as compared to 48% in the prior year. The SG&A
increase was due to the aforementioned expansion of our direct
sales force in fiscal 2009, $1,840 of operating expenses related
to the
start-up of
our newly acquired Ortho & Wound business, increased
legal expense as well as general and administrative investments
in new business development, clinical personnel and information
technology. Additionally, stock-based compensation expense was
$937 (7 cents per diluted share) in fiscal 2009, up from $509 (3
cents per diluted share) in fiscal 2008.
In fiscal 2010, we expect to incur significant additional
operating expense as compared to fiscal 2009 due to a full year
of expense related to our expanded sales force. In addition, we
will incur a full year of Ortho & Wound operating
activity as compared to three and a half months of operating
activity in fiscal 2009.
Research and development (R&D) expense totaled
$3,798 during fiscal 2009, an increase of $550 or 17% from the
prior year, driven by increased project activity during the
current year. Fiscal 2009 activity focused on several
activities, including research to support current indications
for use of Veritas, exploring potential opportunities for
further expanding the indications for use of Veritas, improving
the delivery system for our Peri-Strips products and advancing
the technology of the Coupler, among others.
In fiscal 2010, we expect R&D expense to increase compared
to fiscal 2009 due to several activities, including research to
expand the indications for use for our Veritas product into new
markets, providing research and clinical data to support the use
of Veritas in various surgical procedures, exploring other
process improvements and product enhancements for our
proprietary tissue products, improving the delivery system for
our Peri-Strips products, advancing the technology of the
Coupler and further development of an OrthAdapt-based product
and related instrumentation. R&D expense fluctuates from
year to year based on the timing and progress of internal and
external project-related activities 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, and expected timing
and nature of costs for each project.
In fiscal 2009, we recorded other operating expenses of $4,100.
We expensed acquired in-process R&D costs of $3,500 related
to our acquisition of the assets of Pegasus, as it was
determined the related projects had no alternative future use.
We also recorded an impairment charge of $600 related to
identifiable intangible assets related to our fiscal 2007
acquisition of the
4Closuretm
Surgical Fascia Closure System (4Closure) following
an impairment analysis. This analysis was performed as a result
of a delay in the expected third quarter of fiscal 2009
re-launch and re-brand of the product, combined with actual
revenues since acquisition not meeting projected expectations.
No such other operating expenses were recorded in fiscal 2008.
We recorded operating income from continuing operations of
$4,002 in fiscal 2009, a decrease of $3,192 compared to
operating income of $7,194 in fiscal 2008. Interest income was
$920 in fiscal 2009 compared with $2,077 in fiscal 2008, with
the current year decrease primarily due to lower investment
yields. Additionally in fiscal 2009, we sold our auction rate
securities (ARS), which had a par value of $9,000,
for $7,650, realizing a loss on sale of $1,350.
We recorded income tax expense of $866 in fiscal 2009 at an
effective rate of 24.2% of pretax income. Our current year
effective tax rate was comprised of a tax rate of 27.3% on
operations and interest income and a 35.3% tax benefit on the
capital loss of $1,350 incurred upon the sale of our ARS. In
fiscal 2008, we recorded income tax expense of $3,106 at an
effective rate of 33.5% on continuing operations. Our fiscal
2009 effective tax rate on operations and interest income was
lower than the prior-year due to a decrease in pretax income in
fiscal 2009 as compared to fiscal 2008, higher permanent
differences that reduce taxes, and a lower overall rate for
state taxes. The lower state tax rate was primarily due to a
change in state apportionment factors caused by the current
expected mix of our product sales by state. As of
October 31, 2009, we recorded $367 in net current deferred
income tax assets and $2,022 in net long-term deferred income
tax assets.
23
During fiscal 2008, we recorded a net gain on sale of our
interventional business of $5,340 which reflected a pre-tax gain
of $11,423 and a tax provision of $6,083. Approximately $4,100
of book basis goodwill had a tax basis of $0, thereby resulting
in a higher gain for tax purposes. Additionally in fiscal 2008,
we recorded a net loss related to our discontinued operations of
$20. Included within the net loss from discontinued operations
was an operating loss of $30 and a benefit from income taxes of
$10.
Operating
Results Fiscal 2008 ($ in thousands except per share
data)
Net revenue increased 32% during fiscal 2008 to $49,800 from
$37,691 in fiscal 2007. Our operating income was $7,194 in
fiscal 2008, compared to $2,468 in fiscal 2007. The increase in
profitability was due to higher revenues and gross margins,
partially offset by increased operating expenses. Net income
from continuing operations for fiscal 2008 was $6,165, or 48
cents per diluted share, up from $3,292, or 26 cents per diluted
share during fiscal 2007.
Net income in fiscal 2008, including the gain on sale of
discontinued operations and operating results from discontinued
operations, was $11,485 or 90 cents per diluted share, as
compared to $3,810, or 30 cents per diluted share in fiscal 2007.
The following table summarizes our net revenue by product group
and geography for fiscal 2008 and fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Peri-Strips®
|
|
$
|
17,653
|
|
|
$
|
13,788
|
|
Veritas®
|
|
|
4,468
|
|
|
|
1,296
|
|
Tissue-Guard
|
|
|
14,477
|
|
|
|
12,137
|
|
Microsurgery
|
|
|
7,749
|
|
|
|
5,439
|
|
Surgical tools and other
|
|
|
5,453
|
|
|
|
5,031
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,800
|
|
|
$
|
37,691
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
42,190
|
|
|
$
|
32,063
|
|
International
|
|
|
7,610
|
|
|
|
5,628
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,800
|
|
|
$
|
37,691
|
|
|
|
|
|
|
|
|
|
|
The increase in net revenue in fiscal 2008 compared to fiscal
2007 was primarily due to the following:
|
|
|
|
|
Incremental worldwide units sold (inclusive of new product
introductions) and product mix changes increased revenue
approximately $10,100; and
|
|
|
|
Higher average net selling prices primarily due to various
worldwide hospital list price increases for certain of our
products increased revenues by approximately $2,000.
|
We believe the increase in worldwide units sold was primarily
attributable to increasing effectiveness of our expanded direct
sales force growing domestic product sales, as well as improved
international sales as a result of product realignment based
upon distributor call points. In addition, revenues increased
due to the fiscal 2007 introduction of products into new
markets, most notably Veritas into the hernia and general
surgery markets and PSD Veritas into the European market.
Worldwide net revenue from Peri-Strips was $17,653 in fiscal
2008, an increase of 28% from $13,788 in fiscal 2007. The
increase was driven by our direct sales force growing product
sales and the increased international revenue resulting from the
introduction of PSD Veritas into the European market, which
began during the third quarter of fiscal 2007.
Revenue from Veritas was $4,468, an increase of $3,172 or 245%
as compared to $1,296 in fiscal 2007. The increase was driven by
the introduction of Veritas into the U.S. hernia,
reconstructive and general surgery markets.
24
Tissue-Guard revenue increased $2,340 or 19% to $14,477 in
fiscal 2008 from $12,137 in the last fiscal year. A 12% increase
in worldwide Tissue-Guard units sold combined with various
worldwide hospital list price increases for certain of our
products in fiscal 2008 were the primary drivers of the increase.
Revenue from microsurgery was $7,749 in fiscal 2008, an increase
of $2,310 or 42% from $5,439 in fiscal 2007. The increase was
attributable to the expansion of the direct sales force focused
on microsurgery, which has driven incremental unit growth across
all products. The revenue growth was led by worldwide Coupler
unit sales, which increased 41% in fiscal 2008 compared to
fiscal 2007, as well as revenue from the S&T instrument
product line.
Our gross margin increased four percentage points to 69% in
fiscal 2008 from 65% during fiscal 2007, due primarily to the
following factors:
|
|
|
|
|
Higher average list selling prices for certain of our products
benefited the fiscal 2008 gross margin by approximately two
percentage points.
|
|
|
|
Favorable sales mix (both product and geographic) benefited the
fiscal 2008 gross margin by approximately one percentage
point.
|
|
|
|
Improved utilization of production resources and increased
production efficiencies improved the fiscal 2008 gross
margin by approximately one percentage point.
|
SG&A expense during fiscal 2008 was $23,702, an increase of
$4,420 or 23% from SG&A expense of $19,282 in fiscal 2007.
As a percentage of net revenue, SG&A expense was 48% in
fiscal 2008 as compared to 51% in fiscal 2007. The SG&A
increase was driven by $3,640 of incremental sales and marketing
costs, primarily attributable to the expansion of our direct
sales force (which began in the third quarter of fiscal 2007 and
was completed in the first quarter of fiscal 2008), various
product initiatives and increased sales meeting, convention and
related activities in fiscal 2008. The remainder of the increase
was driven by increased general and administrative investment in
new business development and technology.
R&D expense totaled $3,248 during fiscal 2008, an increase
of $628 or 24% from fiscal 2007, driven by increased project
activity during fiscal 2008, which were primarily focused on
expanding the indications for use of Veritas, improving the
delivery system for our Peri-Strips products and advancing the
technology of the Coupler.
We recorded operating income from continuing operations of
$7,194 in fiscal 2008, an improvement of $4,726 compared to
operating income of $2,468 in fiscal 2007. Interest income was
$2,077 in fiscal 2008, essentially flat compared with $2,092 in
fiscal 2007. While we had a significantly higher investment
balance due to the fiscal 2008 sale of our interventional
business, lower market interest rates in fiscal 2008 have
resulted in essentially flat interest income in fiscal 2008.
We recorded a provision for income taxes in fiscal 2008 of
$3,106 at an effective tax rate of 33.5%. In fiscal 2007, we
recorded income tax expense of $1,268 at an effective rate of
28%. Our effective tax rate for fiscal 2008 was closer to the
statutory federal tax rate due to a lower proportion of
permanent items relative to taxable income in fiscal 2008 as
compared to fiscal 2007. As of October 31, 2008, we
recorded $147 in net current deferred income tax liabilities and
$330 in net long-term deferred income tax assets.
During fiscal 2008, we recorded a net gain on sale of our
interventional business of $5,340 which reflected a pre-tax gain
of $11,423 and a tax provision of $6,083. Approximately $4,100
of book basis goodwill had a tax basis of $0, thereby resulting
in a higher gain for tax purposes. Additionally in fiscal 2008,
we recorded a net loss related to our discontinued operations of
$20. Included within the net loss from discontinued operations
was an operating loss of $30 and a benefit from income taxes of
$10.
Liquidity
and Capital Resources ($ in thousands)
Cash, cash equivalents and investments totaled $60,749 as of
October 31, 2009, a decrease of $14,039 as compared to
cash, cash equivalents, investments and restricted cash of
$74,788 as of October 31, 2008. Included in the above, we
have $5,926 of investments classified as non-current as of
October 31, 2009. Working capital at October 31, 2009
and October 31, 2008 was $63,885 and $62,097, respectively.
We have
25
no long-term debt. We currently expect our cash on hand and cash
from operations to be sufficient to cover both of our short-and
long-term operating requirements, subject however, to numerous
variables, including acquisition opportunities, research and
development priorities and the growth and profitability of the
business.
The decrease in cash, cash equivalents and investments in fiscal
2009 was primarily due to the use of cash of $12,319 related to
the acquisition of substantially all of the assets of Pegasus in
the third quarter of fiscal 2009. Additionally, we used cash of
$11,018 to repurchase 716,237 shares of our common stock in
fiscal 2009. The use of cash was partially offset by cash
provided by operating activities of $9,794 in fiscal 2009.
Operating activities provided cash of $9,794 in fiscal 2009, as
compared to providing cash of $1,421 during fiscal 2008. Fiscal
2009 net income of $2,706 included $6,986 in non-cash
expenses, with the most significant of these non-cash items
being $3,500 in acquired in-process R&D expense and the
$1,350 loss on ARS sale. Working capital changes provided cash
of $102 in fiscal 2009, driven by increased accrued income taxes
of $2,085, partially offset by $953 in cash used for increased
accounts receivable to support higher revenue levels. Cash flow
from operating activities from continuing operations was
approximately $5,700 in fiscal 2008, while operating cash flows
from discontinued operations used cash of approximately $4,300
during fiscal 2008.
Investing activities used cash of $30,786 during fiscal 2009
compared to cash provided of $42,720 during fiscal 2008. In
fiscal 2009, we used cash of $12,319 for the acquisition of
substantially all of the assets of Pegasus. We also used cash of
$19,821 towards the net purchase short- and long-term municipal
bonds as part of our investment strategy, as compared to net
proceeds from the sale of investments of $16,563 in the prior
year. Additionally in fiscal 2009, $2,950 of cash was provided
by the release from escrow of our restricted cash pertaining to
our sale of the interventional business. We also recorded $1,156
in purchases of property, plant and equipment in fiscal 2009,
compared to purchases of $990 in fiscal 2008. Additionally in
fiscal 2008, we recorded $30,440 in proceeds from the sale of
the interventional business.
Financing activities used cash of $10,040 during fiscal 2009.
$11,018 of cash was used to repurchase 716,237 shares of
common stock, partially offset by $978 of proceeds from
equity-based compensation plans. Financing activities used cash
of $6,824 during fiscal 2008. $8,549 of cash was used to
repurchase 504,167 shares of common stock, partially offset
by $1,725 of proceeds from equity-based compensation plans.
In October 2009, we sold our ARS, which had a par value of
$9,000, for $7,650, recording a loss on sale of $1,350. Should a
regulatory or other settlement occur during the 24 months
subsequent to the date of ARS sale in which the Company would
have otherwise been eligible to tender any of its ARS, the
Company will be entitled to an additional payment of the amount
the Company would have received in such settlement that is in
excess of the amount of sales proceeds received by the Company
up to the securities par value. We are presently not aware of
any regulatory or other settlement involving ARS in which we
would be eligible to participate, nor do we expect any such
settlement in the future.
The following table summarizes our contractual obligations and
operating leases. For more information, see Note 8 to our
Consolidated Financial Statements. Our commitments under these
obligations are as follows for the fiscal year ending October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 < Years
|
|
Total
|
|
Operating leases
|
|
$
|
1,022
|
|
|
$
|
2,001
|
|
|
$
|
862
|
|
|
$
|
|
|
|
$
|
3,885
|
|
Inflation
We believe inflation has not had a material effect on our
operations or financial condition.
Foreign
Currency Transactions
Substantially all of our foreign transactions are negotiated,
invoiced and paid in U.S. dollars. Fluctuations in currency
exchange rates in other countries may therefore influence the
demand for our products by changing the price of our products as
denominated in the currency of the countries in which the
products are sold.
26
Recent
Accounting Standards ($ in thousands)
In June 2009, the Financial Accounting Standards Board
(FASB) issued and established its Accounting
Standards Codification (ASC) as the exclusive
authoritative reference for nongovernmental U.S. Generally
Accepted Accounting Principles (GAAP) for use in
financial statements issued for interim and annual periods
ending after September 15, 2009, except for SEC rules and
interpretative releases, which are also authoritative for SEC
registrants. Accordingly, the Company has adopted the ASC
effective for its fourth quarter 2009 financial reporting. All
references in this Annual Report on
Form 10-K
to U.S. GAAP principles have been changed to reference the
relevant topic from the FASB ASC. The adoption did not have a
material impact on the Companys consolidated financial
statements.
Effective November 1, 2008, the Company adopted FASB ASC
820, Fair Value Measurements and Disclosures (ASC
820), related to the Companys financial assets and
liabilities. ASC 820 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value
measurements. ASC 820 defines fair value as the price that would
be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also describes
three levels of inputs that may be used to measure fair value:
Level 1 quoted prices in active markets
for identical assets and liabilities.
Level 2 observable inputs other than
quoted prices in active markets for identical assets and
liabilities.
Level 3 unobservable inputs in which
there is little or no market data available, which require the
reporting entity to develop its own assumptions.
ASC 820 also provides guidance for determining the fair value of
a financial asset when the market for that asset is not active,
and for determining fair value when the volume and level of
activity for an asset or liability have significantly decreased
and includes guidance on identifying circumstances that indicate
when a transaction is not orderly. The adoption of ASC 820 did
not have a material impact on the Companys financial
condition or results of operations.
The effective date for certain aspects of ASC 820 was deferred
and are currently being evaluated by the Company. Areas impacted
by the deferral relate to nonfinancial assets and liabilities
that are measured at fair value, but are recognized or disclosed
at fair value on a nonrecurring basis. The effects of these
remaining aspects of ASC 820 are to be applied by the Company to
fair value measurements prospectively beginning November 1,
2009. The adoption of the remaining aspects of ASC 820 is not
expected to have a material impact on its financial condition or
results of operations.
Effective November 1, 2008, the Company adopted certain
aspects of ASC 825, Financial Instruments (ASC
825), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The
Company has not elected the fair value option for any financial
assets or liabilities as of October 31, 2009. The adoption
of ASC 825 did not have a material impact on the Companys
financial condition or results of operations.
In December 2007, the FASB issued ASC 805, Business
Combinations (ASC 805). ASC 805 changes how a
reporting enterprise will account for the acquisition of a
business. ASC 805 will apply prospectively to business
combinations with an acquisition date on or after
November 1, 2009. The adoption of ASC 805 is not expected
to have a material impact on the Companys financial
condition or results of operations, however future acquisitions
would be accounted for under this guidance.
In May 2009, the FASB issued ASC 855, Subsequent Events
(ASC 855), which provides guidance on
managements assessment of subsequent events. The new
standard clarifies that management must evaluate, as of each
reporting period, events or transactions that occur after the
balance sheet date through the date that the financial
statements are issued or are available to be issued. ASC 855 is
not expected to significantly change practice because its
guidance is similar to that in U.S. auditing literature,
which the Company relied on previously for guidance on assessing
and disclosing subsequent events. ASC 855 is effective for the
Company for interim periods and fiscal years beginning after
May 1, 2009. The Company has evaluated its financial
statements as of October 31, 2009 for subsequent events
through January 5, 2010, the date the financial
27
statements were available to be issued. Other than the
November 12, 2009 settlement with W.L. Gore &
Associates, Inc., the Company is not aware of any subsequent
events which would require recognition or disclosure in the
financial statements.
Critical
Accounting Policies ($ in thousands)
Investments: Our investments consist of
tax-exempt municipal bond investments. Our investment policy
seeks to manage these assets to achieve our goal of preserving
principal, maintaining adequate liquidity at all times, and
maximizing returns subject to our investment guidelines. We
account for all of our investments as
available-for-sale
and report these investments at fair value, with unrealized
gains and losses excluded from earnings and reported in
Accumulated Other Comprehensive Income (Loss), a
component of shareholders equity. At October 31,
2009, we recorded an unrealized gain on other investments of
$92, which was reflected as Accumulated Other Comprehensive
Income (Loss) at October 31, 2009. At October 31,
2008, the Company recorded an unrealized loss of $2,429 on the
valuation of its ARS, along with an unrealized gain on other
investments of $22, which was reflected as a net Accumulated
Other Comprehensive Loss of $2,407 at October 31, 2008.
We review our investments for impairment to determine the
classification of the impairment as temporary or
other-than-temporary.
A temporary impairment charge results in an unrealized loss
being recorded in the other comprehensive income component of
shareholders equity. Such unrealized loss does not reduce
net income for the applicable accounting period because the loss
is not viewed as
other-than-temporary.
We recorded a loss on sale of ARS of $1,350 in our consolidated
statement of operations for the year ended October 31,
2009. See Note 6 to the consolidated financial statements
included in this report on
Form 10-K
for additional investment information.
Accounts Receivable: Credit is extended based
on evaluation of a customers financial condition,
historical sales and payment history. Generally, collateral is
not required. Accounts receivable are generally due within
30-90 days
and are stated at amounts due from customers net of an allowance
for doubtful accounts. Accounts receivable outstanding longer
than the contractual payment terms are considered past due. The
Company determines its allowance for doubtful accounts by
considering a number of factors, including the length of time
trade accounts receivable are past due, the Companys
previous loss history, the customers current ability to
pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes
off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited
to the allowance for doubtful accounts.
Indefinite-lived Intangible
Assets: Indefinite-lived intangible assets
consist of goodwill, which is carried at cost. The Company
accounts for goodwill under ASC 350, Intangibles, Goodwill
and Other (ASC 350), which prohibits the
amortization of indefinite-lived intangible assets, and requires
that these assets are reviewed annually for impairment, and
between annual test dates in certain circumstances. We typically
perform our annual impairment test for goodwill in the fourth
quarter of each fiscal year, or more often as circumstances
require. In assessing the recoverability of goodwill, estimates
of market capitalization and other factors are made to determine
the fair value of the respective assets. If these estimates
change in the future, we may be required to record impairment
charges for these assets. ASC 350 requires us to compare the
fair value of the Company to its carrying amount to determine if
there is potential impairment. If the fair value of the Company
is less than its carrying value, an impairment loss is recorded
to the extent that the fair value of the goodwill within the
Company is less than their carrying value. If the carrying
amount of the goodwill exceeds their fair value, an impairment
loss is recognized.
Definite-lived Intangible
Assets: Definite-lived intangible assets consist
of patents, trademarks, developed technology, non-competes and
licenses, which are carried at amortized cost. The Company
reviews its definite-lived intangible assets whenever events or
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company assesses recoverability by
reference to future cash flows from the products underlying
these intangible assets.
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, when
there is evidence that the customer has agreed to purchase the
products, delivery and performance have occurred, the price and
terms of
28
sale are fixed and collection of the receivable is expected. All
amounts billed to customers in a sales transaction related to
shipping and handling are classified as net revenue. Our sales
policy does not allow sales returns.
Inventories: Inventories, which are comprised
of raw materials, work in process and finished goods, are valued
at the lower of cost,
first-in,
first-out (FIFO) or market. Overhead costs are
applied to work in process and finished goods based on annual
estimates of production volumes and overhead spending. These
estimates are reviewed and assessed for reasonableness on a
quarterly basis and adjusted as needed. 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.
Stock-Based Compensation: The Company accounts
for stock based payment awards in accordance with ASC 718,
Compensation Stock Compensation (ASC
718). The Company recognizes stock-based compensation
based on certain assumption inputs within the Black-Scholes
Model. These assumption inputs are used to determine an
estimated fair value of stock based payment awards on the date
of grant and require subjective judgment. Because employee stock
options have characteristics significantly different from those
of traded options, and because changes in the input assumptions
can materially affect the fair value estimate, the existing
models may not provide a reliable single measure of the fair
value of the employee stock options. Management assesses the
assumptions and methodologies used to calculate estimated fair
value of stock-based compensation on a regular basis.
Circumstances may change and additional data may become
available over time, which could result in changes to these
assumptions and methodologies and thereby materially impact our
fair value determination.
Income Taxes: We account for income taxes
using the asset and liability method. The asset and liability
method provides that deferred tax assets and liabilities are
recorded based on the differences between the tax basis of
assets and liabilities and their carrying amounts for financial
reporting purposes (temporary differences). Deferred
tax assets are reduced by a valuation allowance, when, in the
opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
See Note 7 to the consolidated financial statements in this
Report on
Form 10-K
for a summary of our temporary differences.
We recognize the financial statement benefit of a tax position
only after determining that the relevant tax authority would
more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold,
the amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of
being realized upon ultimate settlement with the relevant tax
authority.
Derivative Instruments and Hedging
Activities: We may enter into derivative
instruments or perform hedging activities. All derivatives are
recognized on the balance sheet at fair value. Derivatives that
are not hedges are adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset
against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized
in shareholders equity through other comprehensive income
until the hedged item is recognized. It is our policy to enter
into derivative transactions only to the extent true exposures
exist. We do not enter into derivative transactions for
speculative or trading purposes.
|
|
Item 7A
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We maintain financial instruments in cash and cash equivalents,
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-collectability 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.
29
|
|
Item 8
|
Financial
Statements and Supplementary Data
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Synovis Life Technologies, Inc.
We have audited the accompanying consolidated balance sheets of
Synovis Life Technologies, Inc. and Subsidiaries (the
Company) as of October 31, 2009 and 2008, and
the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended October 31, 2009. Our audits of
the basic consolidated financial statements included the
financial statement schedule listed in the index appearing under
Item 15. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Synovis Life Technologies, Inc. and Subsidiaries as
of October 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended October 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Synovis Life Technologies Inc. and Subsidiaries internal
control over financial reporting as of October 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our
report dated January 5, 2010 expressed an unqualified
opinion on the effectiveness of the Companys internal
control over financial reporting.
Minneapolis, Minnesota
January 5, 2010
30
Board of Directors and Shareholders
Synovis Life Technologies, Inc.
We have audited Synovis Life Technologies, Inc. and
Subsidiaries (the Company) internal control
over financial reporting as of October 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Synovis Life Technologies, Inc. and Subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of October 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Synovis Life Technologies, Inc.
and Subsidiaries as of October 31, 2009 and 2008, and the
related consolidated statements of operations,
shareholders equity, and cash flows and financial
statement schedule for each of the three years in the period
ended October 31, 2009, and our report dated
January 5, 2010 expressed an unqualified opinion on those
consolidated financial statements and financial statement
schedule.
Minneapolis, Minnesota
January 5, 2010
31
SYNOVIS
LIFE TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Net revenue
|
|
$
|
58,211
|
|
|
$
|
49,800
|
|
|
$
|
37,691
|
|
Cost of revenue
|
|
|
16,444
|
|
|
|
15,656
|
|
|
|
13,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
41,767
|
|
|
|
34,144
|
|
|
|
24,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
29,867
|
|
|
|
23,702
|
|
|
|
19,282
|
|
Research and development
|
|
|
3,798
|
|
|
|
3,248
|
|
|
|
2,620
|
|
Other
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
37,765
|
|
|
|
26,950
|
|
|
|
21,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,002
|
|
|
|
7,194
|
|
|
|
2,468
|
|
Interest income
|
|
|
920
|
|
|
|
2,077
|
|
|
|
2,092
|
|
Loss on sale of investments
|
|
|
(1,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes
|
|
|
3,572
|
|
|
|
9,271
|
|
|
|
4,560
|
|
Provision for income taxes
|
|
|
866
|
|
|
|
3,106
|
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
2,706
|
|
|
|
6,165
|
|
|
|
3,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued business, net of
tax (benefit) provision of ($10) and $297, respectively
|
|
|
|
|
|
|
(20
|
)
|
|
|
518
|
|
Gain on sale of discontinued operations, net of taxes of $6,083
|
|
|
|
|
|
|
5,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,706
|
|
|
$
|
11,485
|
|
|
$
|
3,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.23
|
|
|
$
|
0.50
|
|
|
$
|
0.27
|
|
Discontinued operations
|
|
|
|
|
|
|
0.43
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.23
|
|
|
$
|
0.93
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.23
|
|
|
$
|
0.48
|
|
|
$
|
0.26
|
|
Discontinued operations
|
|
|
|
|
|
|
0.42
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.23
|
|
|
$
|
0.90
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,588
|
|
|
|
12,395
|
|
|
|
12,225
|
|
Diluted
|
|
|
11,827
|
|
|
|
12,721
|
|
|
|
12,528
|
|
The accompanying notes are an integral part of these
consolidated financial statements
32
SYNOVIS
LIFE TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except
|
|
|
|
share and per
|
|
|
|
share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,863
|
|
|
$
|
46,895
|
|
Restricted cash
|
|
|
|
|
|
|
2,950
|
|
Short-term investments
|
|
|
38,960
|
|
|
|
5,598
|
|
Accounts receivable, net
|
|
|
6,925
|
|
|
|
6,071
|
|
Inventories
|
|
|
7,724
|
|
|
|
5,733
|
|
Deferred income tax asset, net
|
|
|
367
|
|
|
|
|
|
Other current assets
|
|
|
1,755
|
|
|
|
2,390
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
71,594
|
|
|
|
69,637
|
|
|
|
|
|
|
|
|
|
|
Investments, net
|
|
|
5,926
|
|
|
|
19,345
|
|
Property, plant and equipment, net
|
|
|
3,719
|
|
|
|
2,931
|
|
Goodwill
|
|
|
3,618
|
|
|
|
3,283
|
|
Other intangible assets, net
|
|
|
6,841
|
|
|
|
1,875
|
|
Deferred income tax asset, net
|
|
|
2,022
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
93,720
|
|
|
$
|
97,401
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,962
|
|
|
$
|
1,325
|
|
Accrued expenses
|
|
|
5,747
|
|
|
|
6,068
|
|
Deferred income tax liability, net
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,709
|
|
|
|
7,540
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,709
|
|
|
|
7,540
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock: authorized 5,000,000 shares of
$0.01 par value; none issued or outstanding as of
October 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock: authorized 20,000,000 shares of
$0.01 par value; issued and outstanding, 11,398,874 and
12,018,670 as of October 31, 2009 and 2008, respectively
|
|
|
114
|
|
|
|
120
|
|
Additional paid-in capital
|
|
|
63,132
|
|
|
|
72,181
|
|
Accumulated other comprehensive income (loss)
|
|
|
92
|
|
|
|
(2,407
|
)
|
Retained earnings
|
|
|
22,673
|
|
|
|
19,967
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
86,011
|
|
|
|
89,861
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
93,720
|
|
|
$
|
97,401
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
33
SYNOVIS
LIFE TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balance as of October 31, 2006
|
|
|
12,101,253
|
|
|
|
121
|
|
|
|
75,132
|
|
|
|
|
|
|
|
4,672
|
|
|
|
79,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, including tax benefit
|
|
|
250,283
|
|
|
|
3
|
|
|
|
2,562
|
|
|
|
|
|
|
|
|
|
|
|
2,565
|
|
Employee Stock Purchase Plan activity
|
|
|
7,766
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
114
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
539
|
|
Net and comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,810
|
|
|
|
3,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007
|
|
|
12,359,302
|
|
|
|
124
|
|
|
|
78,347
|
|
|
|
|
|
|
|
8,482
|
|
|
|
86,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, including tax benefit
|
|
|
158,635
|
|
|
|
1
|
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
1,790
|
|
Employee Stock Purchase Plan activity
|
|
|
4,900
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Repurchase of the Companys common stock
|
|
|
(504,167
|
)
|
|
|
(5
|
)
|
|
|
(8,544
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,549
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
509
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,407
|
)
|
|
|
|
|
|
|
(2,407
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,485
|
|
|
|
11,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2008
|
|
|
12,018,670
|
|
|
$
|
120
|
|
|
$
|
72,181
|
|
|
$
|
(2,407
|
)
|
|
$
|
19,967
|
|
|
$
|
89,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, including tax benefit
|
|
|
89,376
|
|
|
|
1
|
|
|
|
927
|
|
|
|
|
|
|
|
|
|
|
|
928
|
|
Employee Stock Purchase Plan activity
|
|
|
7,065
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
Repurchase of the Companys common stock
|
|
|
(716,237
|
)
|
|
|
(7
|
)
|
|
|
(11,011
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,018
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
937
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,499
|
|
|
|
|
|
|
|
2,499
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,706
|
|
|
|
2,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2009
|
|
|
11,398,874
|
|
|
$
|
114
|
|
|
$
|
63,132
|
|
|
$
|
92
|
|
|
$
|
22,673
|
|
|
$
|
86,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
34
SYNOVIS
LIFE TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,706
|
|
|
$
|
11,485
|
|
|
$
|
3,810
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development expense
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
Loss on sale of investments
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
Impairment of intangible assets
|
|
|
600
|
|
|
|
|
|
|
|
|
|
Gain on sale of interventional business
|
|
|
|
|
|
|
(5,340
|
)
|
|
|
|
|
Depreciation and amortization of property, plant and equipment
|
|
|
1,017
|
|
|
|
1,897
|
|
|
|
3,905
|
|
Amortization of intangible assets
|
|
|
539
|
|
|
|
462
|
|
|
|
482
|
|
Amortization of investment premium, net
|
|
|
1,027
|
|
|
|
187
|
|
|
|
17
|
|
Loss (gain) on sale or disposal of manufacturing equipment
|
|
|
25
|
|
|
|
10
|
|
|
|
(5
|
)
|
Provision for uncollectible accounts
|
|
|
149
|
|
|
|
134
|
|
|
|
94
|
|
Stock-based compensation
|
|
|
937
|
|
|
|
509
|
|
|
|
539
|
|
Tax benefit from stock option exercises
|
|
|
48
|
|
|
|
145
|
|
|
|
424
|
|
Deferred income taxes
|
|
|
(2,206
|
)
|
|
|
644
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(953
|
)
|
|
|
(627
|
)
|
|
|
(2,118
|
)
|
Inventories
|
|
|
62
|
|
|
|
(634
|
)
|
|
|
(1,392
|
)
|
Other current assets
|
|
|
677
|
|
|
|
(1,447
|
)
|
|
|
631
|
|
Accounts payable
|
|
|
637
|
|
|
|
(381
|
)
|
|
|
480
|
|
Accrued expenses
|
|
|
(321
|
)
|
|
|
(5,623
|
)
|
|
|
1,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
9,794
|
|
|
|
1,421
|
|
|
|
8,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(1,156
|
)
|
|
|
(990
|
)
|
|
|
(1,747
|
)
|
Investments in identifiable intangible assets
|
|
|
(105
|
)
|
|
|
(46
|
)
|
|
|
(68
|
)
|
Purchase of assets of Pegasus Biologics, Inc.
|
|
|
(12,319
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of interventional business
|
|
|
|
|
|
|
30,440
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
2,950
|
|
|
|
(2,950
|
)
|
|
|
|
|
Purchase of
4Closuretm
Surgical Fascia Closure System
|
|
|
|
|
|
|
|
|
|
|
(2,056
|
)
|
Purchases of investments
|
|
|
(43,226
|
)
|
|
|
(60,019
|
)
|
|
|
(46,546
|
)
|
Redemptions of investments
|
|
|
23,405
|
|
|
|
76,582
|
|
|
|
42,355
|
|
Other
|
|
|
(335
|
)
|
|
|
(297
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(30,786
|
)
|
|
|
42,720
|
|
|
|
(8,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds related to stock-based compensation plans
|
|
|
823
|
|
|
|
1,429
|
|
|
|
1,880
|
|
Repurchase of the Companys common stock
|
|
|
(11,018
|
)
|
|
|
(8,549
|
)
|
|
|
|
|
Excess tax benefit of stock option exercises
|
|
|
155
|
|
|
|
296
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(10,040
|
)
|
|
|
(6,824
|
)
|
|
|
2,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(31,032
|
)
|
|
|
37,317
|
|
|
|
2,525
|
|
Cash and cash equivalents at beginning of year
|
|
|
46,895
|
|
|
|
9,578
|
|
|
|
7,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
15,863
|
|
|
$
|
46,895
|
|
|
$
|
9,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
35
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
1.
|
Business
Description and Summary of Significant Accounting Policies (in
thousands):
|
Synovis Life Technologies, Inc. develops, manufactures and
markets mechanical and biological products used by several
surgical specialties for the repair of soft tissue damaged or
destroyed by disease or injury. The companys products are
designed to reduce risks
and/or
facilitate critical surgeries, improve patient outcomes and
reduce healthcare costs. Our products serve a wide array of
medical markets, including general surgery, bariatric, vascular,
cardiac, thoracic, neurological, microsurgery, orthopedic and
woundcare.
As discussed in Note 3 to our consolidated financial
statements, the Company completed the sale of substantially all
of the assets of its interventional business on January 31,
2008. The pre-tax gain on the sale totaled $11,423. Income taxes
recorded on the gain were $6,083, resulting in a net gain of
$5,340. The Company also recorded a net loss related to the
operation of discontinued operations in fiscal 2008 of $20.
In June 2009, the Financial Accounting Standards Board
(FASB) issued and established its Accounting
Standards Codification (ASC) as the exclusive
authoritative reference for nongovernmental U.S. Generally
Accepted Accounting Principles (GAAP) for use in
financial statements issued for interim and annual periods
ending after September 15, 2009, except for SEC rules and
interpretative releases, which are also authoritative for SEC
registrants. Accordingly, the Company has adopted the ASC
effective for its fourth quarter 2009 financial reporting. All
references in this Annual Report on
Form 10-K
to U.S. GAAP principles have been changed to reference the
relevant topic from the FASB ASC. The adoption did not have a
material impact on the Companys consolidated financial
statements.
Basis of Consolidation: The consolidated
financial statements include the accounts of Synovis Life
Technologies, Inc. and its wholly owned subsidiaries, after
elimination of intercompany accounts and transactions.
Use of Estimates: The preparation of
consolidated financial statements in conformity with GAAP in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash
equivalents consist of cash and highly liquid investments
purchased with an original maturity of three months or less when
purchased. These investments are carried at cost, which
approximates fair value. Cash amounts typically are in excess of
federally insured limits.
Investments: Our investments consist of
tax-exempt municipal bond investments. Our investment policy is
to seek to manage these assets to achieve our goal of preserving
principal, maintaining adequate liquidity at all times, and
maximizing returns subject to our investment guidelines. We
account for all of our investments as
available-for-sale
and report these investments at fair value, with unrealized
gains and losses excluded from earnings and reported in
Accumulated Other Comprehensive Income, a component
of shareholders equity.
We review our investments for impairment to determine the
classification of the impairment as temporary or
other-than-temporary.
A temporary impairment charge results in an unrealized loss
being recorded in the other comprehensive income component of
shareholders equity. Such unrealized loss does not reduce
net income for the applicable accounting period because the loss
is not viewed as
other-than-temporary.
See Note 6 to the consolidated financial statements
included in this report on
Form 10-K
for additional investment information.
Accounts Receivable: Credit is extended based
on evaluation of a customers financial condition,
historical sales and payment history. Generally, collateral is
not required. Accounts receivable are generally due within
30-90 days
and are stated at amounts due from customers net of an allowance
for doubtful accounts. Accounts receivable outstanding longer
than the contractual payment terms are considered past due. The
Company determines its allowance for doubtful accounts by
considering a number of factors, including
36
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the length of time trade accounts receivable are past due, the
Companys previous loss history, the customers
current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole.
The Company writes off accounts receivable when they become
uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts.
Inventories: Inventories, which are comprised
of raw materials, work in process and finished goods, are valued
at the lower of cost,
first-in,
first-out (FIFO) or market. Overhead costs are
applied to work in process and finished goods based on annual
estimates of production volume and overhead spending. These
estimates are reviewed and assessed for reasonableness on a
quarterly basis and adjusted if so needed. 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 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.
Property, Plant and Equipment: Property, plant
and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated
useful lives of the related assets. Furniture, fixtures and
computer equipment are depreciated over a 3 to 7 year life,
and manufacturing equipment is depreciated over a 5 to
10 year life. Amortization of leasehold improvements is
recorded on a straight-line basis over the life of the related
facility leases or the estimated useful life of the assets,
whichever is shorter. Major replacements and improvements are
capitalized and maintenance and repairs, which do not improve or
extend the useful lives of the respective assets, are charged to
operations. The asset and related accumulated depreciation or
amortization accounts are adjusted for asset retirements and
disposals with the resulting gain or loss, if any, recorded in
the Consolidated Statements of Operations at the time of
disposal. The Companys long-lived depreciable assets are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset in
question may not be recoverable. Impairment losses are recorded
whenever indicators of impairment are present.
Indefinite-lived Intangible
Assets: Indefinite-lived intangible assets
consist of goodwill, which is carried at cost. The Company
accounts for goodwill under ASC 350, Intangibles, Goodwill
and Other (ASC 350), which prohibits the
amortization of indefinite-lived intangible assets, and requires
that these assets are reviewed annually for impairment, and
between annual test dates in certain circumstances. We typically
perform our annual impairment test for goodwill in the fourth
quarter of each fiscal year, or at other periods as
circumstances require. In assessing the recoverability of
goodwill, estimates of market capitalization and other factors
are made to determine the fair value of the respective assets.
If these estimates change in the future, we may be required to
record impairment charges for these assets. ASC 350 requires us
to compare the fair value of the Company to its carrying amount
to determine if there is potential impairment. If the fair value
of the Company is less than its carrying value, an impairment
loss is recorded to the extent that the fair value of the
goodwill within the Company is less than their carrying value.
If the carrying amount of the goodwill exceeds their fair value,
an impairment loss is recognized.
Definite-lived Intangible
Assets: Definite-lived intangible assets consist
of patents, trademarks, developed technology, non-competes and
licenses, which are carried at amortized cost. The Company
reviews its definite-lived intangible assets whenever events or
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company assesses recoverability by
reference to future cash flows from the products underlying
these intangible assets.
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, when
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
expected. All amounts billed to customers in a sales transaction
related to shipping and handling are classified as net revenue.
Our sales policy does not allow sales returns.
37
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shipping and Handling: The Company records all
amounts billed to customers in a sales transaction related to
shipping and handling as net revenue. The Company records costs
related to shipping and handling in cost of revenue.
Derivative Instruments and Hedging
Activities: The Company may enter into derivative
instruments or perform hedging activities. All derivatives are
recognized on the balance sheet at fair value. Derivatives that
are not hedges are adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset
against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized
in shareholders equity through other comprehensive income
until the hedged item is recognized. It is the Companys
policy to enter into derivative transactions only to the extent
true exposures exist. The Company does not enter into derivative
transactions for speculative or trading purposes.
Research and Development: Research and
development costs are expensed as incurred.
Stock-Based Compensation: The Company accounts
for stock based payment awards in accordance with ASC 718,
Compensation Stock Compensation (ASC
718). The Company recognizes stock-based compensation
based on certain assumption inputs within the Black-Scholes
Model. These assumption inputs are used to determine an
estimated fair value of stock based payment awards on the date
of grant and require subjective judgment. Because employee stock
options have characteristics significantly different from those
of traded options, and because changes in the input assumptions
can materially affect the fair value estimate, the existing
models may not provide a reliable single measure of the fair
value of the employee stock options. Management assesses the
assumptions and methodologies used to calculate estimated fair
value of stock-based compensation on a regular basis.
Circumstances may change and additional data may become
available over time, which could result in changes to these
assumptions and methodologies and thereby materially impact our
fair value determination. See Note 9 for additional
stock-based compensation information.
Income Taxes: We account for income taxes
using the asset and liability method. The asset and liability
method provides that deferred tax assets and liabilities are
recorded based on the differences between the tax basis of
assets and liabilities and their carrying amounts for financial
reporting purposes (temporary differences). Deferred
tax assets are reduced by a valuation allowance, when, in the
opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
See Note 7 to the consolidated financial statements in this
Report on
Form 10-K
for a summary of our temporary differences.
We recognize the financial statement benefit of a tax position
only after determining that the relevant tax authority would
more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold,
the amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of
being realized upon ultimate settlement with the relevant tax
authority.
Net Earnings (Loss) Per Share: Basic earnings
per share (EPS) is computed based on the weighted
average number of common shares outstanding, while diluted EPS
is computed based on the weighted average number of common
shares outstanding adjusted by the weighted average number of
additional shares that would have been outstanding had the
potential dilutive common shares been issued. Potential dilutive
shares of common stock include stock options and other
stock-based awards granted under the Companys stock-based
compensation plans, when their impact is not anti-dilutive. See
Note 10 for additional earnings per share information.
Reclassifications: Certain reclassifications
have been made to the fiscal 2007 and fiscal 2008 consolidated
financial statements to conform with the fiscal 2009
presentation. These reclassifications had no effect on net
income or earnings per share.
38
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent Accounting Standards:
Effective November 1, 2008, the Company adopted FASB ASC
820, Fair Value Measurements and Disclosures (ASC
820), related to the Companys financial assets and
liabilities. ASC 820 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value
measurements. ASC 820 defines fair value as the price that would
be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also describes
three levels of inputs that may be used to measure fair value:
Level 1 quoted prices in active markets
for identical assets and liabilities.
Level 2 observable inputs other than
quoted prices in active markets for identical assets and
liabilities.
Level 3 unobservable inputs in which
there is little or no market data available, which require the
reporting entity to develop its own assumptions.
ASC 820 also provides guidance for determining the fair value of
a financial asset when the market for that asset is not active,
and for determining fair value when the volume and level of
activity for an asset or liability have significantly decreased
and includes guidance on identifying circumstances that indicate
when a transaction is not orderly. The adoption of ASC 820 did
not have a material impact on the Companys financial
condition or results of operations.
The effective date for certain aspects of ASC 820 was deferred
and are currently being evaluated by the Company. Areas impacted
by the deferral relate to nonfinancial assets and liabilities
that are measured at fair value, but are recognized or disclosed
at fair value on a nonrecurring basis. The effects of these
remaining aspects of ASC 820 are to be applied by the Company to
fair value measurements prospectively beginning November 1,
2009. The adoption of the remaining aspects of ASC 820 is not
expected to have a material impact on its financial condition or
results of operations. See Note 6 to the consolidated
financial statements in this Report on
Form 10-K
for additional investment information.
Effective November 1, 2008, the Company adopted certain
aspects of ASC 825, Financial Instruments (ASC
825), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The
Company has not elected the fair value option for any financial
assets or liabilities as of October 31, 2009. The adoption
of ASC 825 did not have a material impact on the Companys
financial condition or results of operations.
In December 2007, the FASB issued ASC 805, Business
Combinations (ASC 805). ASC 805 changes how a
reporting enterprise will account for the acquisition of a
business. ASC 805 will apply prospectively to business
combinations with an acquisition date on or after
November 1, 2009. The adoption of ASC 805 is not expected
to have a material impact on the Companys financial
condition or results of operations, however future acquisitions
would be accounted for under this guidance.
In May 2009, the FASB issued ASC 855, Subsequent Events
(ASC 855), which provides guidance on
managements assessment of subsequent events. The new
standard clarifies that management must evaluate, as of each
reporting period, events or transactions that occur after the
balance sheet date through the date that the financial
statements are issued or are available to be issued. ASC 855 is
not expected to significantly change practice because its
guidance is similar to that in U.S. auditing literature,
which the Company relied on previously for guidance on assessing
and disclosing subsequent events. ASC 855 is effective for the
Company for interim periods and fiscal years beginning after
May 1, 2009. The Company has evaluated its financial
statements as of October 31, 2009 for subsequent events
through January 5, 2010, the date the financial statements
were available to be issued. Other than the November 12,
2009 settlement with W.L. Gore & Associates, Inc., the
Company is not aware of any subsequent events which would
require recognition or disclosure in the financial statements.
39
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Acquisition
of Businesses (in thousands):
|
On July 17, 2009, the Company, through its wholly-owned
subsidiary Synovis Orthopedic and Woundcare, Inc.,
(Ortho & Wound) completed the acquisition
of substantially all of the assets of Pegasus Biologics, Inc., a
Delaware corporation (Pegasus), from Comerica Bank
(Comerica) pursuant to a Foreclosure Sale Agreement
with Comerica dated as of July 2, 2009 (the
Foreclosure Sale Agreement). The acquisition
resulted from a sealed bid auction process after Pegasus
effectively ceased operations when attempts to raise additional
operating capital were unsuccessful. Pegasus, a privately held
medical device company based in Irvine, California, focused on
the development of advanced biological solutions for soft tissue
repair.
Synovis paid $12,100 in cash to Comerica for the assets
transferred. Synovis purchased the assets on an as
is, where is basis and without recourse,
subject to the representations and warranties provided for in
the Foreclosure Sales Agreement.
Operating results for Ortho & Wound from July 17,
2009 to October 31, 2009 are included in the Consolidated
Statement of Operations for the fiscal year ended
October 31, 2009. The assets acquired in the transaction
are included in the Companys Consolidated Balance Sheet as
of October 31, 2009 and the purchase transaction has been
included in the Consolidated Statement of Cash Flows for the
fiscal year ended October 31, 2009.
The Company accounted for the acquisition of substantially all
of the assets of Pegasus under the purchase method of
accounting. Accordingly, the purchase price was allocated to the
tangible and intangible assets acquired based on the
Companys determination of fair value at the acquisition
date, and are consolidated with those of the Company. The
purchase price allocation was based upon preliminary estimates
of the fair value of the assets acquired. Determination of fair
value required the use of significant assumptions and estimates,
including but not limited to, expected utilization of acquired
inventory, future expected cash flows and applicable discount
rates. The Company used the income approach to determine the
fair value of the acquired intangible assets. The purchase price
allocation will be finalized once the Company has all the
necessary information to complete its estimate, but no later
than one year from the acquisition date.
The following provides further information on the preliminary
purchase price allocations:
Purchase Price
|
|
|
|
|
Cash payment
|
|
$
|
12,100
|
|
Acquisition related costs
|
|
|
219
|
|
|
|
|
|
|
Total consideration
|
|
$
|
12,319
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation
|
|
|
|
|
Accounts receivable
|
|
$
|
50
|
|
Inventory
|
|
|
2,053
|
|
Other current assets
|
|
|
42
|
|
Property and equipment
|
|
|
674
|
|
Identifiable intangible assets
|
|
|
|
|
Developed technology
|
|
|
6,000
|
|
Acquired in-process research and development
|
|
|
3,500
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
12,319
|
|
|
|
|
|
|
In accordance with GAAP, the Company expensed the acquired
in-process research and development costs of $3,500 in fiscal
2009. This expense was recorded as other operating
expense in the Consolidated Statement of Operations. The Company
assigned an eleven year weighted average amortization period to
the
40
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
identifiable developed technology assets. As the Company
assigned the entire purchase price to tangible and identifiable
intangible assets, none of the preliminary purchase price was
allocated to goodwill.
Pro Forma Results of Operations:
The following unaudited pro forma financial information presents
a summary of consolidated results of operations of the Company
as if the acquisition of the assets of Pegasus had occurred at
the beginning of the earliest period presented. The unaudited
pro forma results presented below assume the in-process research
and development expense of $3,500 occurred as of
November 1, 2006. Annual amortization expense of $545
related to acquired developed technology is reflected on a pro
rata basis in each of the periods presented. The historical
consolidated financial information has been adjusted to give
effect to pro forma events that are directly attributable to the
acquisition and are factually supportable. The unaudited pro
forma condensed consolidated financial information is presented
for informational purposes only. The pro forma information is
not necessarily indicative of what the financial position or
results of operations actually would have been had the
acquisition been completed at the dates indicated. In addition,
the unaudited pro forma condensed consolidated financial
information does not purport to project the future financial
position or operating results of the Company after completion of
the acquisition.
The following provides unaudited pro forma financial information
for the fiscal years ended October 31, 2009, 2008 and 2007,
assuming the Company consummated the purchase of the assets from
Pegasus as of November 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net revenue
|
|
$
|
61,853
|
|
|
$
|
58,924
|
|
|
$
|
45,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,886
|
)
|
|
$
|
2,070
|
|
|
$
|
(4,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic
|
|
$
|
($0.16
|
)
|
|
$
|
$0.17
|
|
|
$
|
($0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share diluted
|
|
$
|
($0.16
|
)
|
|
$
|
$0.17
|
|
|
$
|
($0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In April 2007, the Company purchased the
4Closuretm
Surgical Fascia Closure System (4Closure System)
from Fascia Closure Systems, LLC. The 4Closure System is a
device and operating method for closure of punctures in the
fascia, a layer of connective tissue on the inner surface of the
chest or abdominal wall, following laparoscopic procedures which
use larger diameter operating ports or trocars. The device is
authorized for sale in the United States and has a patent
pending. The purchase price was a cash payment of $2,000 plus
certain additional milestone payments of $500 each to be paid
upon achieving cumulative net sales of the 4Closure System equal
to $2,500, $5,000, $7,500, $10,000 and $12,500. In addition, a
royalty payment will be paid in the amount of 5 percent of
net sales of the 4Closure System through April 2019.
Approximately $1,000 of the original purchase price was
allocated to identifiable intangible assets to be amortized on a
straight-line basis over an estimated average useful life of
nine years. The remaining amount of the purchase price was
recorded as goodwill. Additional milestone payments to the
seller will be recorded as additional goodwill when earned.
Operating results of the 4Closure System from April 3, 2007
are included in the Consolidated Statement of Operations for the
fiscal years ended October 31, 2009, 2008 and 2007.
Pro forma combined financial information for the fiscal year
ended October 31, 2007 have not been provided as the
historical operating results of Fascia Closure Systems, LLC are
not considered significant in relation to the Companys
results for the period then ended.
41
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Discontinued
Operations (in thousands):
|
On January 31, 2008, the Company sold substantially all of
the assets of Synovis interventional business to Heraeus
Vadnais, Inc. and its related entities (Heraeus),
pursuant to an Asset Purchase Agreement dated January 8,
2008. Synovis interventional business developed and
manufactured metal and polymer components and assemblies used in
or with implantable or minimally invasive devices for cardiac
rhythm management, neurostimulation, vascular and other
procedures, and had facilities located in Lino Lakes, Minnesota
and Dorado, Puerto Rico. The decision to sell the interventional
business resulted from the Companys determination to focus
its attention and resources on opportunities in its surgical
markets.
The primary terms of the sale included the following:
|
|
|
|
|
Heraeus paid Synovis $30,440 in cash (the Purchase
Price) for substantially all of the assets (including
receivables, inventory, fixed assets and intellectual property)
and assumed certain operating liabilities of the interventional
business. This was comprised of an initial payment of $29,500 on
January 31, 2008, plus a working capital adjustment payment
of $940, which was received by the Company during our second
quarter of fiscal 2008.
|
|
|
|
$2,950 of the Purchase Price was placed in escrow until
July 31, 2009 to cover certain post-closing covenants and
potential indemnification obligations. The escrow amount is
included in our net gain from the sale, and was recorded as
restricted cash on our balance sheet as of October 31, 2008.
|
The Company recorded a pretax gain of $11,423 and a provision
for income taxes of $6,083, resulting in a net gain on sale of
$5,340. The net gain was computed as follows:
Carrying values of net assets transferred to Heraeus:
|
|
|
|
|
Accounts receivable
|
|
$
|
3,186
|
|
Inventories
|
|
|
4,843
|
|
Other assets
|
|
|
208
|
|
Property, plant and equipment
|
|
|
6,381
|
|
Other intangible assets
|
|
|
4,269
|
|
Accounts payable and accrued liabilities
|
|
|
(479
|
)
|
|
|
|
|
|
Total
|
|
$
|
18,408
|
|
|
|
|
|
|
Cash proceeds received from Heraeus, including escrow
|
|
$
|
30,440
|
|
Net assets sold
|
|
|
(18,408
|
)
|
Transaction costs
|
|
|
(609
|
)
|
|
|
|
|
|
Pre-tax gain on sale of discontinued operations
|
|
|
11,423
|
|
Tax provision for gain on sale of discontinued operations
|
|
|
6,083
|
|
|
|
|
|
|
Net gain on sale of discontinued operations
|
|
$
|
5,340
|
|
|
|
|
|
|
42
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Operating results related to the divested operations for fiscal
2008 and fiscal 2007 have been reclassified and are presented in
the Companys consolidated statements of operations as
discontinued operations, as summarized below:
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net revenue
|
|
$
|
7,907
|
|
|
$
|
30,183
|
|
Cost of revenue
|
|
|
6,361
|
|
|
|
23,265
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,546
|
|
|
|
6,918
|
|
Operating expenses
|
|
|
1,576
|
|
|
|
6,103
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from discontinued operations
|
|
|
(30
|
)
|
|
|
815
|
|
Provision for (benefit from) income taxes
|
|
|
(10
|
)
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
(20
|
)
|
|
$
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Supplemental
Financial Statement Information (in thousands):
|
We operate as one segment as a developer, manufacturer and
seller of medical devices.
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
$
|
7,269
|
|
|
$
|
6,341
|
|
Allowance for doubtful accounts
|
|
|
(344
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,925
|
|
|
$
|
6,071
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
2,793
|
|
|
$
|
1,660
|
|
Work in process
|
|
|
3,573
|
|
|
|
2,932
|
|
Raw materials
|
|
|
1,358
|
|
|
|
1,141
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,724
|
|
|
$
|
5,733
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Furniture, fixtures, and computer equipment
|
|
$
|
3,180
|
|
|
$
|
3,204
|
|
Manufacturing equipment
|
|
|
5,071
|
|
|
|
4,427
|
|
Leasehold improvements
|
|
|
3,110
|
|
|
|
2,889
|
|
Equipment in process
|
|
|
697
|
|
|
|
489
|
|
Accumulated depreciation and amortization
|
|
|
(8,339
|
)
|
|
|
(8,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,719
|
|
|
$
|
2,931
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Payroll, employee benefits and related taxes
|
|
$
|
3,081
|
|
|
$
|
3,282
|
|
Accrued income taxes
|
|
|
1,128
|
|
|
|
|
|
Accrued stock repurchases
|
|
|
198
|
|
|
|
1,154
|
|
Other accrued expenses
|
|
|
1,340
|
|
|
|
1,632
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,747
|
|
|
$
|
6,068
|
|
|
|
|
|
|
|
|
|
|
43
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplemental Cash Flow Information: Income tax
payments made by the Company totaled $850, $8,599 and $566 for
the years ended October 31, 2009, 2008 and 2007,
respectively. Income tax refunds received by the Company totaled
$118, $95 and $32 for the years ended October 31, 2009,
2008 and 2007, respectively.
The following table summarizes the Companys amortizable
intangible assets as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Gross
|
|
|
|
|
|
Average
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Period
|
|
|
Patents and trademarks
|
|
$
|
1,187
|
|
|
$
|
600
|
|
|
|
13
|
.9 years
|
Developed technology
|
|
|
7,418
|
|
|
|
1,283
|
|
|
|
10
|
.8 years
|
Non-competes and other
|
|
|
634
|
|
|
|
612
|
|
|
|
5
|
.7 years
|
Licenses
|
|
|
100
|
|
|
|
3
|
|
|
|
11
|
.0 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,339
|
|
|
$
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Gross
|
|
|
|
|
|
Average
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Period
|
|
|
Patents and trademarks
|
|
$
|
1,182
|
|
|
$
|
515
|
|
|
|
13
|
.8 years
|
Developed technology
|
|
|
1,952
|
|
|
|
945
|
|
|
|
10
|
.0 years
|
Non-competes and other
|
|
|
700
|
|
|
|
499
|
|
|
|
5
|
.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,834
|
|
|
$
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2009, the Company recorded $6,000 in developed
technology related to the acquisition of the assets of Pegasus.
Subsequent to the acquisition, we paid cash consideration of
$100 for license rights related to acquired product
manufacturing processes.
In fiscal 2009, the Company recorded an impairment charge of
$600 as an other operating expense related to identifiable
intangible assets related to our fiscal 2007 acquisition of the
4Closuretm
Surgical Fascia Closure System (4Closure) following
an impairment analysis. A discounted cash flows impairment
analysis was performed as a result of a delay in the expected
third quarter of fiscal 2009 re-launch and re-brand of the
product, combined with actual revenues since acquisition not
meeting expectations.
Amortization expense for the intangible assets listed above was
$539, $437 and $376 in fiscal 2009, 2008 and 2007, respectively.
The Companys estimated amortization expense for each of
the next five years is expected to be approximately $800 per
year based on the current amortizable intangible assets owned by
the Company.
44
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
5. Supplemental
Net Revenue Information (in thousands):
The following table summarizes net revenues by product line for
the fiscal years ended October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Product Line:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Peri-Strips
|
|
$
|
19,384
|
|
|
$
|
17,653
|
|
|
$
|
13,788
|
|
Veritas
|
|
|
8,757
|
|
|
|
4,468
|
|
|
|
1,296
|
|
Tissue-Guard
|
|
|
15,806
|
|
|
|
14,477
|
|
|
|
12,137
|
|
Microsurgery
|
|
|
8,668
|
|
|
|
7,749
|
|
|
|
5,439
|
|
Surgical Tools and Other
|
|
|
5,596
|
|
|
|
5,453
|
|
|
|
5,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,211
|
|
|
$
|
49,800
|
|
|
$
|
37,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the Companys international net
revenues are negotiated, invoiced and paid in U.S. dollars.
The following table summarizes net revenues by geographic area
for the years ended October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geographic Area:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
49,290
|
|
|
$
|
42,190
|
|
|
$
|
32,063
|
|
Europe
|
|
|
6,094
|
|
|
|
5,346
|
|
|
|
3,879
|
|
Asia and Pacific region
|
|
|
963
|
|
|
|
1,019
|
|
|
|
668
|
|
Canada
|
|
|
817
|
|
|
|
699
|
|
|
|
643
|
|
Other
|
|
|
1,047
|
|
|
|
546
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,211
|
|
|
$
|
49,800
|
|
|
$
|
37,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Investments
(in thousands):
|
The following table summarizes the Companys cash, cash
equivalents and investments at October 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Value
|
|
|
Cash
|
|
$
|
1,752
|
|
|
$
|
|
|
|
$
|
1,752
|
|
Money Market Funds
|
|
|
14,111
|
|
|
|
|
|
|
|
14,111
|
|
Municipal Bonds
|
|
|
44,794
|
|
|
|
92
|
|
|
|
44,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,657
|
|
|
$
|
92
|
|
|
$
|
60,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,863
|
|
|
|
|
|
|
$
|
15,863
|
|
Short-term investments
|
|
|
38,879
|
|
|
|
81
|
|
|
|
38,960
|
|
Long-term investments
|
|
|
5,915
|
|
|
|
11
|
|
|
|
5,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,657
|
|
|
$
|
92
|
|
|
$
|
60,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized Gain
|
|
|
Fair
|
|
|
|
Cost
|
|
|
(Loss)
|
|
|
Value
|
|
|
Cash
|
|
$
|
3,498
|
|
|
$
|
|
|
|
$
|
3,498
|
|
Money Market Funds
|
|
|
28,510
|
|
|
|
|
|
|
|
28,510
|
|
Variable Rate Demand Notes
|
|
|
17,837
|
|
|
|
|
|
|
|
17,837
|
|
Municipal Bonds
|
|
|
18,350
|
|
|
|
22
|
|
|
|
18,372
|
|
Auction Rate Securities
|
|
|
9,000
|
|
|
|
(2,429
|
)
|
|
|
6,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77,195
|
|
|
$
|
(2,407
|
)
|
|
$
|
74,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46,895
|
|
|
|
|
|
|
$
|
46,895
|
|
Restricted cash
|
|
|
2,950
|
|
|
|
|
|
|
|
2,950
|
|
Short-term investments
|
|
|
5,582
|
|
|
|
16
|
|
|
|
5,598
|
|
Long-term investments
|
|
|
21,768
|
|
|
|
(2,423
|
)
|
|
|
19,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77,195
|
|
|
$
|
(2,407
|
)
|
|
$
|
74,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31, 2009, the Companys long-term municipal
bond investments mature in fiscal 2011.
The Company utilizes a pricing service to estimate fair value
measurements for its short- and long-term municipal bond
investments. The pricing service utilizes market quotations for
fixed maturity securities that have quoted prices in active
markets. Since fixed maturities other than U.S. Treasury
securities generally do not trade on a daily basis, the pricing
service prepares estimates of fair value measurements for these
securities using its proprietary pricing applications which
include available relevant market information, benchmark curves,
benchmarking of like securities, sector groupings and matrix
pricing.
The fair value estimates provided by the pricing service for the
Companys municipal bond investments are based on
observable market information rather than market quotes.
Accordingly, the estimates of fair value for the Companys
investments were determined based on Level 2 inputs at
October 31, 2009.
In October 2009, the Company sold its auction rate securities,
which had a par value of $9,000, for $7,650, realizing a loss on
sale of $1,350. Should a regulatory or other settlement occur
during the 24 months subsequent to the date of the ARS sale
in which the Company would have otherwise been eligible to
tender any of its ARS, the Company will be entitled to an
additional payment of the amount the Company would have received
in such settlement that is in excess of the amount of sales
proceeds received by the Company up to the securities par value.
The right to receive an additional payment qualifies as a
derivative. The fair value estimate for this derivative was
based on Level 3 inputs, including a probability assessment
of such a settlement occurring, and the present value of such a
settlement based on discounted cash flows. Based on these
estimates, the Company has assessed the fair value at $0 as of
October 31, 2009.
At October 31, 2008, the Company recorded an unrealized
loss of $2,429 on the valuation of its ARS, along with an
unrealized gain on other investments of $22, which was reflected
as a net Accumulated Other Comprehensive Loss of $2,407 at
October 31, 2008.
46
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
7. Income
Taxes (in thousands):
Provision
For (Benefit From) Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,752
|
|
|
$
|
2,509
|
|
|
$
|
1,076
|
|
State
|
|
|
320
|
|
|
|
96
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,072
|
|
|
|
2,605
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,016
|
)
|
|
|
351
|
|
|
|
298
|
|
State
|
|
|
(190
|
)
|
|
|
150
|
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,206
|
)
|
|
|
501
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
866
|
|
|
$
|
3,106
|
|
|
$
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Effective Income Tax Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income before income taxes
|
|
$
|
3,572
|
|
|
$
|
9,271
|
|
|
$
|
4,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal rate
|
|
|
1,215
|
|
|
|
3,245
|
|
|
|
1,550
|
|
State taxes, net of federal benefit
|
|
|
112
|
|
|
|
228
|
|
|
|
123
|
|
Tax exempt interest
|
|
|
(169
|
)
|
|
|
(147
|
)
|
|
|
(265
|
)
|
Other permanent differences
|
|
|
(117
|
)
|
|
|
(45
|
)
|
|
|
142
|
|
Research and development credits
|
|
|
(175
|
)
|
|
|
(175
|
)
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
866
|
|
|
$
|
3,106
|
|
|
$
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of Deferred Income Tax Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Inventory
|
|
$
|
273
|
|
|
$
|
304
|
|
Deferred gain on sale due to escrow
|
|
|
|
|
|
|
(550
|
)
|
Other, net
|
|
|
94
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Net current deferred income tax assets (liabilities)
|
|
|
367
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
253
|
|
|
|
182
|
|
Stock-based compensation book expense
|
|
|
360
|
|
|
|
252
|
|
Intangible asset amortization
|
|
|
1,382
|
|
|
|
(104
|
)
|
Temporary impairment of investments
|
|
|
|
|
|
|
885
|
|
Other, net
|
|
|
27
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
(885
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term deferred income tax assets
|
|
|
2,022
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
2,389
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
47
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A net income tax payable of $1,128 was recorded at
October 31, 2009, as compared to a net income tax
receivable of $957 at October 31, 2008. A tax benefit of
$203, $441 and $799 related to the exercise of stock options was
recorded to additional paid-in capital in fiscal 2009, 2008 and
2007, respectively.
As of October 31, 2008, the Company recorded a valuation
allowance for the deferred tax asset related to the temporary
impairment of investments as the impairment was recorded to
other comprehensive income (loss). In fiscal 2009, the
investments that were temporarily impaired at October 31,
2008 were sold and the loss was realized. As a result, the
Companys valuation allowance for deferred income taxes
decreased $885 in fiscal 2009. Management expects to fully
utilize all other remaining net deferred tax assets against
future taxable income.
Significant judgment is required in evaluating our tax positions
and determining our provision for income taxes. During the
ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is
uncertain. The Company establishes reserves for tax-related
uncertainties based on estimates of whether, and the extent to
which, additional taxes may be due. These reserves are
established when we believe that certain positions might be
challenged despite our belief that our tax return positions are
fully supportable. The Company adjusts these reserves in light
of changing facts and circumstances, such as the outcome of a
tax audit or changes in the tax law. The provision for income
taxes includes the impact of reserve provisions and changes to
reserves that are considered appropriate.
The Company is subject to income taxes in the U.S. Federal
jurisdiction, Minnesota, Puerto Rico and various states. Tax
regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the
Company is no longer subject to U.S. federal, state or
local income tax examinations by tax authorities for the fiscal
years ended before October 31, 2005. The Company is
currently under examination for the years ended October 31,
2008 and 2007 by the Internal Revenue Service. The Company
expects the examination to be concluded within the next
12 months, and this conclusion may have an impact upon the
recognition of unrecognized tax benefits.
At October 31, 2009, the Company had unrecognized tax
benefits of $435. If recognized, these benefits would favorably
impact the effective tax rate. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
Balance as of November 1, 2007
|
|
$
|
401
|
|
Increases for current period tax positions
|
|
|
42
|
|
Decreases for lapses in applicable statute of limitations
|
|
|
(56
|
)
|
|
|
|
|
|
Balance as of October 31, 2008
|
|
$
|
387
|
|
|
|
|
|
|
Increases for current period tax positions
|
|
|
48
|
|
Decreases for lapses in applicable statute of limitations
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2009
|
|
$
|
435
|
|
|
|
|
|
|
Our policy is to include interest and penalties related to our
tax contingencies in income tax expense.
|
|
8.
|
Commitments
and Contingencies (in thousands):
|
Operating Leases: The Company is committed
under non-cancelable operating leases for its office and
production facilities. At October 31, 2009, the remaining
terms on the leases range from three to five years. In addition
to base rent charges, the Company also pays apportioned real
estate taxes and common costs on its St. Paul, MN and Irvine, CA
leased facilities. The Company has an option to renew its St.
Paul, MN lease prior to December 31, 2013 for an additional
three or five years at fair market value. Total facilities rent
expense, including real estate taxes and common costs, was
$1,200, $1,038 and $1,032 for the fiscal years ended
October 31, 2009, 2008 and 2007, respectively.
48
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of October 31, 2009, future minimum lease payments,
excluding real estate taxes and common costs, due under existing
non-cancelable operating leases are as follows:
|
|
|
|
|
Fiscal Years Ended October 31,
|
|
|
|
|
2010
|
|
$
|
1,022
|
|
2011
|
|
|
1,020
|
|
2012
|
|
|
981
|
|
2013
|
|
|
741
|
|
2014
|
|
|
121
|
|
|
|
|
|
|
|
|
$
|
3,885
|
|
|
|
|
|
|
Royalties: The Company incurred royalty
expense, primarily related to revenue from Peri-Strips, of
approximately $753, $696 and $604 for the years ended
October 31, 2009, 2008 and 2007, respectively, which is
included in cost of revenue. The Company is also obligated to
pay royalties related to our Ortho & Wound products of
2% to 4% on Ortho & Wound revenue, depending upon the
surgical indication for which the products are used. The
Ortho & Wound minimum annual royalty expense is $135.
Other Commitments: The Company was obligated
to pay an earnout to the sole selling shareholder of a previous
acquisition up to a cumulative total of $1,350 based on 5% of
related product revenues through 2010 which will be recorded as
additional goodwill. Such payments were approximately $304, $333
and $230 for the years ended October 31, 2009, 2008 and
2007, respectively. The full earnout target of $1,350 was
achieved as of October 31, 2009.
|
|
9.
|
Shareholders
Equity (in thousands except share and per share data):
|
Authorized Shares: The Companys
authorized capital stock consists of 20,000,000 shares of
common stock and 5,000,000 shares of undesignated preferred
stock.
Shareholder Rights Agreement: On June 1,
2006, the Companys board of directors declared a dividend
distribution of one common stock purchase right for each
outstanding share of the Companys common stock, payable to
shareholders of record at the close of business on June 11,
2006. The description and terms of the rights are set forth in a
Rights Agreement (the Rights Agreement), dated as of
June 1, 2006, between the Company and American Stock
Transfer & Trust Company, as Rights Agent. The
Rights Agreement was approved by the shareholders at the
Companys 2007 Annual Meeting of Shareholders.
Upon certain acquisition events set forth in the Rights
Agreement, each holder of a right other than certain
acquiring persons, will have the right to receive
upon exercise for a purchase price equal to ten times the
purchase price of the right, shares of Company common stock (or
in certain circumstances, cash, property or other securities)
having a market value equal to 20 times the purchase price.
Stock-Based Compensation: The Companys
current stock-based compensation plans consist of its 2006 Stock
Incentive Plan, as amended (the 2006 Plan), and an
Employee Stock Purchase Plan (ESPP). Under the 2006
Plan, the Company is authorized to issue up to
1,500,000 shares of its common stock, plus certain shares
becoming available under its prior 1995 Stock Incentive Plan or
issued or assumed by the Company in certain merger or
acquisition transactions, pursuant to incentive awards granted
under the plan. At October 31, 2009, 1,002,495 shares
remained available for grant under the 2006 Plan. Under the
ESPP, the Company is authorized to sell and issue up to
300,000 shares of its common stock to its employees. At
October 31, 2009, a total of 12,330 shares remained
available for issuance under the ESPP.
The 2006 Plan was approved by the Companys shareholders in
February 2006, and an increase in the number of shares available
for issuance was approved by the Companys shareholders in
March 2009. The 2006 Plan permits the Company to grant incentive
stock options, non-qualified stock options and other share-based
awards to eligible recipients for up to 1,500,000 shares of
its common stock, plus the number of shares
49
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
or awards outstanding under our prior 1995 Stock Incentive Plan
as of its expiration which are subsequently cancelled or
forfeited. The grant price of an option under the 2006 Plan may
not be less than the fair market value of the common stock
subject to the option as of the grant date. The term of any
options granted under the 2006 Plan may not exceed seven years
from the date of grant. As of October 31, 2009, 724,422
stock options have been granted under the 2006 Plan.
The Company recognizes expense related to the fair value of our
stock-based compensation awards using the provisions of ASC 718.
The Company recognized compensation expense for stock options on
a straight-line basis over the requisite service period of all
stock-based compensation awards granted to, but not yet vested.
Total stock-based compensation expense included in the
Companys statements of operations for the years ended
October 31, 2009, 2008 and 2007 was $937 ($804, net of
tax), $509 ($405, net of tax) and $539 ($450, net of tax),
respectively.
The Company estimated the fair values of its stock options using
the Black-Scholes option-pricing model. The Black-Scholes option
valuation weighted average assumptions used in the valuation of
stock options for the fiscal years ended October 31, 2009,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Risk-free rate(1)
|
|
1.1%
|
|
2.7%
|
|
4.6%
|
Expected dividend yield
|
|
None
|
|
None
|
|
None
|
Expected stock volatility(2)
|
|
50%
|
|
46%
|
|
50%
|
Expected life of stock options(3)
|
|
3.0 years
|
|
2.8 years
|
|
3.5 years
|
Fair value per option
|
|
$4.30 $7.41
|
|
$5.21 $6.39
|
|
$3.08 $5.53
|
Forfeiture rate
|
|
8%
|
|
8%
|
|
8%
|
|
|
|
(1) |
|
Based on the U.S Treasury Strip interest rates whose term is
consistent with the expected life of the stock options. |
|
(2) |
|
Expected stock price volatility is based on the Companys
historical volatility over a period generally consistent with
the expected term of our stock options. |
|
(3) |
|
Expected life of stock options is estimated based on historical
experience. |
As of October 31, 2009, there was $433 of unrecognized
compensation expense related to unvested stock options that is
expected to be recognized over a weighted average period of
approximately one year.
Stock Options: The exercise price of each
stock option equals 100% of the market price of the
Companys stock on the date of grant and has a maximum term
ranging from 7 to 10 years. Stock options granted to
non-employee directors and employees generally vest ratably over
two or three years. A summary of the status of the
Companys stock options for the years ended October 31 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
689,761
|
|
|
$
|
9.32
|
|
|
|
906,538
|
|
|
$
|
8.84
|
|
|
|
683,916
|
|
|
$
|
9.24
|
|
Granted
|
|
|
161,880
|
|
|
|
15.24
|
|
|
|
28,682
|
|
|
|
18.75
|
|
|
|
533,860
|
|
|
|
7.58
|
|
Exercised
|
|
|
(89,376
|
)
|
|
|
8.12
|
|
|
|
(158,635
|
)
|
|
|
8.50
|
|
|
|
(250,283
|
)
|
|
|
7.05
|
|
Cancelled
|
|
|
(25,889
|
)
|
|
|
17.39
|
|
|
|
(86,824
|
)
|
|
|
8.93
|
|
|
|
(60,955
|
)
|
|
|
9.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
736,376
|
|
|
$
|
10.48
|
|
|
|
689,761
|
|
|
$
|
9.32
|
|
|
|
906,538
|
|
|
$
|
8.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
661,201
|
|
|
$
|
9.95
|
|
|
|
513,625
|
|
|
$
|
9.56
|
|
|
|
539,557
|
|
|
$
|
9.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total intrinsic value of options exercised during the fiscal
year ended October 31, 2009, 2008 and 2007 was $737, $1,631
and $1,871, respectively. The aggregate intrinsic value of
options outstanding and options exercisable as of
October 31, 2009 was $1,897.
The following table summarizes information about stock options
outstanding at October 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Number of
|
|
|
Price of
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Life
|
|
|
Options
|
|
|
Exercisable
|
|
Range of Prices
|
|
Outstanding
|
|
|
Price
|
|
|
(Years)
|
|
|
Exercisable
|
|
|
Options
|
|
|
$ 6.00 $ 7.50
|
|
|
337,301
|
|
|
$
|
7.48
|
|
|
|
1.99
|
|
|
|
337,301
|
|
|
$
|
7.48
|
|
8.27 10.92
|
|
|
190,513
|
|
|
|
10.21
|
|
|
|
2.22
|
|
|
|
190,513
|
|
|
|
10.21
|
|
12.45 21.45
|
|
|
208,562
|
|
|
|
15.59
|
|
|
|
3.83
|
|
|
|
133,387
|
|
|
|
15.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 6.00 $21.45
|
|
|
736,376
|
|
|
$
|
10.48
|
|
|
|
2.57
|
|
|
|
661,201
|
|
|
$
|
9.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan: The Company
sponsors an ESPP under which 300,000 shares of common stock
were reserved for future issuance. The ESPP was established to
enable employees of the Company to invest in Company stock
through payroll deductions. Shares are available to employees to
purchase shares of stock at a price equal to 95% of the fair
market value of the stock on the last day of each offering
period. There were 7,065, 4,900 and 7,766 shares purchased
through the ESPP in fiscal 2009, 2008 and 2007, respectively.
Repurchase of Common Shares: On May 28,
2008, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 1,000,000 shares
of its common stock. This program was completed on
January 9, 2009. The share repurchase was funded using the
Companys existing cash balances and occurred in the open
market, in accordance with Securities and Exchange Commission
regulations. The timing and extent to which the Company bought
back shares depended upon market conditions and other corporate
considerations.
From inception of the program on May 28, 2008 through its
completion on January 9, 2009, the Company used $16,675 to
repurchase 1,000,000 shares at an average price of $16.68
per share. The following table presents the total number of
shares repurchased from May 28, 2008 through
January 9, 2009, the average price paid per share and the
number of shares that were purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
of Shares That
|
|
|
|
|
|
|
|
|
|
as Part of
|
|
|
May Yet Be
|
|
|
|
Total
|
|
|
Average
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
Number
|
|
|
Price
|
|
|
Announced
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Plan or
|
|
|
Plan
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Program
|
|
|
or Program
|
|
|
May 1, 2008 May 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
1,000,000
|
|
June 1, 2008 June 30, 2008
|
|
|
87,585
|
|
|
$
|
17.82
|
|
|
|
87,585
|
|
|
|
912,415
|
|
October 1, 2008 October 31, 2008
|
|
|
416,582
|
|
|
$
|
16.77
|
|
|
|
504,167
|
|
|
|
495,833
|
|
November 1, 2008 November 30, 2008
|
|
|
145,833
|
|
|
$
|
16.67
|
|
|
|
650,000
|
|
|
|
350,000
|
|
December 1, 2008 December 31, 2008
|
|
|
294,801
|
|
|
$
|
16.02
|
|
|
|
944,801
|
|
|
|
55,199
|
|
January 1, 2009 January 31, 2009
|
|
|
55,199
|
|
|
$
|
17.61
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,000,000
|
|
|
$
|
16.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 29, 2009, the Company announced that its Board
of Directors had authorized the Company to repurchase up to
500,000 shares of its common stock. The share repurchase is
funded using the Companys existing cash balances and may
occur either in the open market or through private transactions
from time to
51
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
time, in accordance with Securities and Exchange Commission
regulations. The timing and extent to which the Company may buy
back shares depends upon market conditions and other corporate
considerations. The repurchase plan does not have an expiration
date.
From inception of the program on September 29, 2009 through
October 31, 2009, the Company used $2,893 to repurchase
220,404 shares at an average price of $13.12 per share. The
following table presents the total number of shares repurchased
from September 29, 2009 through October 31, 2009, the
average price paid per share and the number of shares that were
purchased and the maximum number of shares that may yet be
purchased at October 31, 2009, pursuant to our stock
repurchase program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
Shares That
|
|
|
|
|
|
|
|
|
|
as Part of
|
|
|
May Yet Be
|
|
|
|
Total
|
|
|
Average
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
Number
|
|
|
Price
|
|
|
Announced
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Plan or
|
|
|
Plan
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Program
|
|
|
or Program
|
|
|
September 29, 2009 September 30, 2009
|
|
|
43,968
|
|
|
$
|
13.75
|
|
|
|
43,968
|
|
|
|
456,032
|
|
October 1, 2009 October 31, 2009
|
|
|
176,436
|
|
|
$
|
12.97
|
|
|
|
220,404
|
|
|
|
279,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
220,404
|
|
|
$
|
13.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Earnings
Per Share (in thousands):
|
The following table sets forth the computation of basic and
diluted shares outstanding for the fiscal years ended October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
2,706
|
|
|
$
|
6,165
|
|
|
$
|
3,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted
average common shares
|
|
|
11,588
|
|
|
|
12,395
|
|
|
|
12,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares associated with option plans
|
|
|
239
|
|
|
|
326
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
239
|
|
|
|
326
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share weighted
average common shares and dilutive potential common shares
|
|
|
11,827
|
|
|
|
12,721
|
|
|
|
12,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding with exercise prices greater than the
average market price of the Companys common stock totaled
178, 33 and 50 options for fiscal years ended October 31,
2009, 2008 and 2007, respectively.
|
|
11.
|
Employee
Benefit Plan (in thousands):
|
Salary Reduction Plan: The Company sponsors a
salary reduction plan for all eligible U.S. employees who
qualify under Section 401(k) of the Internal Revenue Code.
Employees may contribute up to 100% of their annual
compensation, subject to annual limitations. At its discretion,
the Company may make matching contributions equal to a
percentage of the salary reduction or other discretionary amount
for each plan. In fiscal 2009, 2008 and 2007, the Company made
discretionary matching contributions to employee participants in
the plan of $164, $131 and $107, respectively.
52
SYNOVIS
LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Comprehensive
Income (in thousands):
|
The following table summarizes the components of comprehensive
income for the fiscal year ended October 31, 2009 and
fiscal 2008. Comprehensive income equaled net income in the
fiscal year ended October 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Year Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
2,706
|
|
|
$
|
11,485
|
|
Unrealized gain on investments
|
|
|
70
|
|
|
|
22
|
|
Unrealized gain (loss) on ARS
|
|
|
2,429
|
|
|
|
(2,429
|
)
|
|
|
|
|
|
|
|
|
|
Other accumulated comprehensive gain (loss)
|
|
|
2,499
|
|
|
|
(2,407
|
)
|
Comprehensive income
|
|
$
|
5,205
|
|
|
$
|
9,078
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Quarterly
Information (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Fiscal 2009 (unaudited)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net revenue
|
|
$
|
13,414
|
|
|
$
|
14,755
|
|
|
$
|
15,032
|
|
|
$
|
15,010
|
|
Gross margin
|
|
|
9,441
|
|
|
|
10,679
|
|
|
|
10,775
|
|
|
|
10,872
|
|
Operating income (loss)
|
|
|
2,240
|
|
|
|
2,774
|
|
|
|
(1,654
|
)
|
|
|
642
|
|
Net income (loss)
|
|
$
|
1,663
|
|
|
$
|
2,082
|
|
|
$
|
(4,874
|
)
|
|
$
|
3,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
$
|
0.14
|
|
|
$
|
0.18
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
$
|
0.14
|
|
|
$
|
0.18
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Fiscal 2008 (unaudited)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net revenue
|
|
$
|
11,306
|
|
|
$
|
12,413
|
|
|
$
|
13,366
|
|
|
$
|
12,715
|
|
Gross margin
|
|
|
7,621
|
|
|
|
8,403
|
|
|
|
9,195
|
|
|
|
8,925
|
|
Operating income
|
|
|
1,283
|
|
|
|
1,397
|
|
|
|
2,278
|
|
|
|
2,236
|
|
Net income from continuing operations
|
|
|
1,195
|
|
|
|
1,301
|
|
|
|
1,760
|
|
|
|
1,909
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
|
5,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,515
|
|
|
$
|
1,301
|
|
|
$
|
1,760
|
|
|
$
|
1,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
Discontinued operations
|
|
|
0.43
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.53
|
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
Discontinued operations
|
|
|
0.42
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.51
|
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly calculations of net earnings per share are made
independently during the fiscal year.
53
|
|
Item 9
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A
|
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 have concluded that our
disclosure controls and procedures are effective and designed to
ensure that information required to be disclosed by us in
reports we file or submit 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 the Companys internal control over
financial reporting during the most recently completed fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, internal control over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting of
the Company. This system of internal accounting controls is
designed to provide reasonable assurance that assets are
safeguarded and transactions are properly recorded and executed
in accordance with managements authorization. The design,
monitoring and revision of the system of internal accounting
controls involves, among other things, managements
judgments with respect to the relative cost and expected
benefits of specific control measures. The effectiveness of the
control system is supported by the selection, retention and
training of qualified personnel and an organizational structure
that provides an appropriate division of responsibility and
formalized procedures. The system of internal accounting
controls is periodically reviewed and modified in response to
changing conditions. Designated Company employees regularly
monitor the adequacy and effectiveness of internal accounting
controls.
In addition to the system of internal accounting controls,
management maintains corporate policy guidelines that help
monitor proper overall business conduct, possible conflicts of
interest, compliance with laws and confidentiality of
proprietary information. The guidelines are documented in the
Synovis Code of Business Conduct and Ethics and are reviewed on
a periodic basis with all employees of the Company.
Because of its inherent limitations, a system of internal
control over financial reporting can provide only reasonable
assurance and may not prevent or detect misstatements. Further,
because of changes in conditions, effectiveness of internal
controls over financial reporting may vary over time. Our system
contains control monitoring mechanisms, and actions are taken to
correct deficiencies as they are identified.
Management conducted an evaluation of the effectiveness of the
system of internal control over financial reporting based on the
framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on this evaluation, management concluded that the
Companys system of internal control over financial
reporting was effective as of October 31, 2009. Grant
Thornton LLP, the Companys independent registered public
accounting firm, has issued a report, included herein, on the
Companys internal control over financial reporting.
|
|
ITEM 9B
|
Other
information
|
None.
54
PART III
|
|
Item 10
|
Directors,
Executive Officers and Corporate Governance
|
(a) Directors of the Registrant:
The information under the captions Election of
Directors Information About Nominees and
Election of Directors Other Information About
Nominees in the Registrants 2010 Proxy Statement is
incorporated herein by reference.
(b) Executive Officers of the Registrant:
Information concerning Executive Officers of the Company is
included under the caption Executive Officers of the
Registrant in Item 4A in this report.
(c) Compliance with Section 16(a) of the Exchange Act:
The information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the
Registrants 2010 Proxy Statement is incorporated herein by
reference.
(d) Audit Committee and Audit Committee Financial Expert:
The information under the caption Election of
Directors Information About the Board and its
Committees in the Registrants 2010 Proxy Statement
is incorporated herein by reference.
(e) Code of Ethics:
We have adopted a Code of Ethics that applies to our Chief
Executive Officer and all senior financial officers. A copy of
the Code of Ethics has been posted on our website at
www.synovislife.com.
(f) Policy for Nominees:
The Companys policy for nominating Board candidates is
discussed under the caption Election of
Directors Information About the Board and its
Committees in the Registrants 2010 Proxy Statement
is incorporated herein by reference. No material changes to the
nominating process have occurred.
|
|
Item 11
|
Executive
Compensation
|
The information under the captions Compensation Committee
Report, Director Compensation,
Compensation Discussion and Analysis and
Executive Compensation in the Registrants 2010
Proxy Statement is incorporated herein by reference.
|
|
Item 12
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information under the captions Security Ownership of
Certain Beneficial Owners and Management and Equity
Compensation Plan Information in the Registrants
2010 Proxy Statement is incorporated herein by reference.
|
|
Item 13
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information under the captions Related Person
Relationships and Transactions, Election of
Directors Other Information About Nominees and
Election of Directors Information About the
Board and its Committees in the Registrants 2010
Proxy Statement is incorporated herein by reference.
|
|
Item 14
|
Principal
Accountant Fees and Services
|
(a) Audit Fees:
The information under the caption Fees of Independent
Auditors Audit Fees in the Registrants
2010 Proxy Statement is incorporated herein by reference.
55
(b) Audit-Related Fees:
The information under the caption Fees of Independent
Auditors Audit-Related Fees in the
Registrants 2010 Proxy Statement is incorporated herein by
reference.
(c) Tax Fees:
The information under the caption Fees of Independent
Auditors Tax Fees in the Registrants
2010 Proxy Statement is incorporated herein by reference.
(d) All Other Fees:
The information under the caption Fees of Independent
Auditors All Other Fees in the
Registrants 2010 Proxy Statement is incorporated herein by
reference.
(e) Fees of Independent Auditors Pre-Approval
Policies:
The information under the caption Fees of Independent
Auditors Pre-Approval Policies in the
Registrants 2010 Proxy Statement is incorporated herein by
reference.
PART IV
|
|
Item 15
|
Exhibits,
Financial Statement Schedule
|
(a) List of documents filed as part of this Report:
1) Financial Statements, Related Notes and Report of
Independent Registered Public Accounting Firm:
The following financial statements are included in this report
on the pages indicated:
|
|
|
|
|
|
|
Page
|
|
Reports of Grant Thornton LLP
|
|
|
30-31
|
|
Consolidated Statements of Operations for the
years ended October 31, 2009, 2008 and 2007
|
|
|
32
|
|
Consolidated Balance Sheets as of
October 31, 2009 and 2008
|
|
|
33
|
|
Consolidated Statements of Shareholders
Equity for the years ended October 31, 2009, 2008 and
2007
|
|
|
34
|
|
Consolidated Statements of Cash Flows for the
years ended October 31, 2009, 2008 and 2007
|
|
|
35
|
|
Notes to Consolidated Financial Statements
|
|
|
36-53
|
|
2) Exhibits:
The exhibits to this Report on
Form 10-K
are listed in the Exhibit Index on pages
E-1 to
E-2 of this
Report.
The Company will furnish a copy of any exhibit to a shareholder
who requests a copy in writing to the Company. Requests should
be sent to: Chief Financial Officer, Synovis Life Technologies,
Inc., 2575 University Avenue W., St. Paul, Minnesota
55114-1024.
The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an
exhibit to this Annual Report of
Form 10-K
pursuant to Item 15(b):
A. 1995 Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10.15 to the Companys Annual
Report on
Form 10-K
for the year ended October 31, 1998 (File No. 0-13907)).
B. Employee Stock Purchase Plan, as amended
October 11, 2005 (incorporated by reference to
Exhibit 10.2 to the Companys Annual Report on
Form 10-K
for the year ended October 31, 2005 (File
No. 0-13907)).
56
C. Form of Change in control agreement dated
December 12, 2008 between
the
Company and Richard Kramp, Brett Reynolds, David Buche, Michael
Campbell, Timothy Floeder, Mary Frick and Daniel Mooradian
(incorporated by reference to Exhibit 10.1 to the
Companys Report on
Form 8-K
dated December 17, 2008 (File
No. 0-13907)).
D. Summary of fiscal 2010 Non-Employee Director
Compensation (filed
herewith
electronically).
E. Summary of fiscal 2010 Named Executive Officer
Compensation (filed herewith electronically).
F. 2004 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the
Companys Report on
Form 10-Q
for the period ended April 30, 2004 (File
No. 0-13907)).
G. 2006 Stock Incentive Plan (incorporated by reference to
Exhibit 10.23 to the Companys Report on
Form 10-K
for the period ended October 31, 2006 (File
No. 0-13907)).
H. Form of Incentive Stock Option Agreement under 2006
Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended April 30, 2009 (File
No. 0-13907)).
I. Form of Non-Statutory Stock Option Agreement under 2006
Stock Incentive Plan (incorporated by reference to Exhibit 10.25
to the Companys Report on
Form 10-K
for the period ended October 31, 2006 (File
No. 0-13907)).
(b) Exhibits:
The response to this portion of Item 15 is included as a
separate section of this Report on
Form 10-K
on pages E-1
to E-2.
57
SCHEDULE II
SYNOVIS
LIFE TECHNOLGIES, INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Cost and
|
|
|
|
|
|
at End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Period
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, 2009
|
|
$
|
270,000
|
|
|
$
|
149,000
|
|
|
$
|
75,000
|
|
|
$
|
344,000
|
|
Year ended October 31, 2008
|
|
|
173,000
|
|
|
|
133,000
|
|
|
|
36,000
|
|
|
|
270,000
|
|
Year ended October 31, 2007
|
|
|
557,000
|
|
|
|
104,000
|
|
|
|
488,000
|
|
|
|
173,000
|
|
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Synovis Life
Technologies, Inc.
Richard W. Kramp,
President and Chief Executive Officer
(Principal Executive Officer)
Dated: January 5, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on January 5, 2010
by the following persons on behalf of the registrant and in the
capacities indicated.
|
|
|
|
|
|
|
|
/s/ Richard
W. Kramp
Richard
W. Kramp
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
/s/ Brett
A. Reynolds
Brett
A. Reynolds
|
|
Vice President of Finance, Chief Financial Officer
and Corporate Secretary
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ Timothy
M. Scanlan
Timothy
M. Scanlan
|
|
Chairman, Board of Directors
|
|
|
|
/s/ William
G. Kobi
William
G. Kobi
|
|
Director
|
|
|
|
/s/ Karen
Gilles Larson
Karen
Gilles Larson
|
|
Director
|
|
|
|
/s/ Mark
F. Palma
Mark
F. Palma
|
|
Director
|
|
|
|
/s/ Richard
W. Perkins
Richard
W. Perkins
|
|
Director
|
|
|
|
/s/ John
D. Seaberg
John
D. Seaberg
|
|
Director
|
|
|
|
/s/ Sven
A. Wehrwein
Sven
A. Wehrwein
|
|
Director
|
59
SYNOVIS
LIFE TECHNOLOGIES, INC.
EXHIBIT INDEX
TO ANNUAL REPORT ON
FORM 10-K
For the
Year Ended October 31, 2009
|
|
|
|
|
|
2
|
.1
|
|
Asset Purchase Agreement among Heraeus Vadnais, Inc., Heraeus
Materials Caribe, Inc., and Heraeus Materials S.A., as Buyers,
and Synovis Interventional Solutions, Inc., Synovis Caribe, Inc.
and Synovis Life Technologies, Inc., as Seller Parties, dated as
of January 8, 2008 (incorporated by reference to
Exhibit 10.1 to the Companys Report on
Form 8-K
dated January 8, 2008 (File
No. 0-13907)).
|
|
2
|
.2
|
|
Foreclosure Sale Agreement by and between Comerica Bank and
Synovis Surgical Sales, Inc., a wholly-owned subsidiary of
Synovis Life Technologies, Inc., dated as of July 2, 2009
(incorporated by reference to Exhibit 2.1 to the
registrants Current Report on
Form 8-K
dated July 2, 2009 (File
No. 0-13907))
(Schedules and Exhibits have been omitted; however copies
thereof will be furnished to the Securities and Exchange
Commission upon request).
|
|
3
|
.1
|
|
Restated Articles of Incorporation of the Company, as amended,
(incorporated by reference to Exhibit 3.1 to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended April 30, 1997 (File
No. 0-13907)).
|
|
3
|
.2
|
|
Amendment to Restated Articles of Incorporation of the Company,
as amended, dated March 20, 1997 (incorporated by reference
to Exhibit 3.2 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended April 30, 1997 (File
No. 0-13907)).
|
|
3
|
.3
|
|
Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.1 to
Form 8-K
filed on October 5, 2007 (File
No. 0-13907)).
|
|
3
|
.4
|
|
Amendment to Restated Articles of Incorporation, effective
May 1, 2002, regarding the Company name Change from
Bio-Vascular, Inc. to Synovis Life
Technologies, Inc. (incorporated by reference to
Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended April 30, 2002
(File No. 0-13907)).
|
|
4
|
.1
|
|
Form of common stock Certificate of the Company (incorporated by
reference to Exhibit 4.1 to the Companys registration
statement on Form 10 (File
No. 0-13907)).
|
|
4
|
.2
|
|
Rights Agreement, dated as of June 1, 2006, between Synovis
Life Technologies, Inc. and American Stock Transfer &
Trust Company, as Rights Agent, including exhibits thereto
(incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on
Form 8-A
dated June 1, 2006 (File
No. 0-13907)).
|
|
4
|
.3
|
|
Restated Articles of Incorporation of the Company, as amended
(see Exhibit 3.1).
|
|
4
|
.4
|
|
Amendment to Restated Articles of Incorporation of the Company,
as amended, dated March 20, 1997 (see Exhibit 3.2).
|
|
4
|
.5
|
|
Amended and Restated Bylaws of the Company (see
Exhibit 3.3).
|
|
4
|
.6
|
|
Amendment to Restated Articles of Incorporation, effective
May 1, 2002 (see Exhibit 3.4).
|
|
10
|
.1
|
|
1995 Stock Incentive Plan, as amended (incorporated by reference
to Exhibit 10.15 to the Companys Annual Report of
Form 10-K
for the year ended October 31, 1998 (File
No. 0-13907)).
|
|
10
|
.2
|
|
Employee Stock Purchase Plan, as amended October 11, 2005
(incorporated by reference to Exhibit 10.2 to the
Companys Annual Report on
Form 10-K
for the year ended October 31, 2005 (File
No. 0-13907)).
|
|
10
|
.3
|
|
Change in control agreement dated December 12, 2008 between
the Company and Richard Kramp, Brett Reynolds, David Buche,
Michael Campbell, Timothy Floeder, Mary Frick and Daniel
Mooradian (incorporated by reference to Exhibit 10.1 to the
Companys Report on
Form 8-K
dated December 17, 2008 (File
No. 0-13907)).
|
|
10
|
.4
|
|
Acquisition Agreement and Plan of Reorganization by and among
the Company, MCA Acquisition, Inc., Medical Companies Alliance,
Inc. and Michael K. Campbell, dated July 6, 2001
(incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended July 31, 2001
(File No. 0-13907)).
|
|
10
|
.5
|
|
Lease Agreement effective August 1, 1995 between the
Company and CSM Investors, Inc. (incorporated by reference to
Exhibit 10.25 to the Companys Annual Report on
Form 10-K
for the year ended October 31, 1995 (File
No. 0-13907)).
|
E-1
|
|
|
|
|
|
10
|
.6
|
|
First Amendment to Lease Agreement effective August 1, 1995
between the Company and CSM Investors, Inc., dated
September 19, 2002 (incorporated by reference to
Exhibit 10.14 to the Companys Annual Report on
Form 10-K
for the period ended October 31, 2002 (File
No. 0-13907)).
|
|
10
|
.7
|
|
Second Amendment to Lease Agreement effective August 1,
1995 between the Company and CSM Investors, Inc., dated
January 1, 2004 (incorporated by reference to
Exhibit 10.7 to the Companys Annual Report on
Form 10-K
for the period ended October 31, 2008 (File
No. 0-13907)).
|
|
10
|
.8
|
|
Third Amendment to Lease Agreement effective August 1, 1995
between the Company and CSM Investors, Inc., dated
August 1, 2005 (incorporated by reference to
Exhibit 10.14 to the Companys Annual Report in
Form 10-K
for the period ended October 31, 2005 (file
No. 0-13907)).
|
|
10
|
.9
|
|
2004 Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the Companys Report on
Form 10-Q
for the period ended April 30, 2004 (File
No. 0-13907)).
|
|
10
|
.10
|
|
Summary of fiscal 2010 Non-Employee Director Compensation (filed
herewith electronically).
|
|
10
|
.11
|
|
Summary of fiscal 2010 Named Executive Officer Compensation
(filed herewith electronically).
|
|
10
|
.12
|
|
2006 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Companys QuarterlyReport on
Form 10-Q
for the quarter ended April 30, 2009 (File
No. 0-13907)).
|
|
10
|
.13
|
|
Form of Incentive Stock Option Agreement under 2006 Stock
Incentive Plan (incorporated by reference to Exhibit 10.24
to the Companys Annual Report on
Form 10-K
for the period ended October 31, 2006 (File
No. 0-13907)).
|
|
10
|
.14
|
|
Form of Non-Statutory Stock Option Agreement under 2006 Stock
Incentive Plan (incorporated by reference to Exhibit 10.25
to the Companys Annual Report on
Form 10-K
for the period ended October 31, 2006 (File
No. 0-13907)).
|
|
10
|
.15
|
|
Fourth Amendment to Lease Agreement effective August 1,
1995 between Company and CSM Investors, Inc., dated
August 4, 2008 (incorporated by reference to
Exhibit 10.1 to the Companys Report on
Form 8-K
dated August 5, 2008 (File
No. 0-13907)).
|
|
10
|
.16
|
|
Lease agreement effective July 17, 2009 between the Company
and the Irvine Group (filed herewith electronically).
|
|
21
|
.1
|
|
List of Subsidiaries of the Company (filed herewith
electronically).
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP (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 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes- Oxley Act
of 2002 (filed herewith electronically).
|
E-2