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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended April 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission File Number 0-13907
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SYNOVIS LIFE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554
Principal Executive Offices: 2575 University Ave. W.
St. Paul, Minnesota 55114
Telephone Number: (651) 603-3700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
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On June 9, 2003, there were 9,811,618 shares of the registrant's common stock,
par value $.01 per share, outstanding.
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED APRIL 30, 2003 AND 2002
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(in thousands, except per share data)
Three Months Ended Six Months Ended
April 30, April 30,
2003 2002 2003 2002
------------ ------------ ------------- -------------
Net revenue $ 15,298 $ 9,484 $ 27,767 $ 17,513
Cost of revenue 8,731 4,822 15,758 8,847
------------ ------------ ------------- -------------
Gross margin 6,567 4,662 12,009 8,666
Operating expenses:
Selling, general and administrative 3,610 3,084 6,981 5,878
Research and development 1,053 413 1,914 872
------------ ------------ ------------- -------------
Operating income 1,904 1,165 3,114 1,916
Interest, net (2) 9 (1) 27
------------ ------------ ------------- -------------
Income before provision for income taxes 1,902 1,174 3,113 1,943
Provision for income taxes 655 408 1,073 675
------------ ------------ ------------- -------------
Net income $ 1,247 $ 766 $ 2,040 $ 1,268
============ ============ ============= =============
Earnings per share:
Basic $ 0.13 $ 0.08 $ 0.21 $ 0.14
============ ============ ============= =============
Diluted $ 0.12 $ 0.08 $ 0.20 $ 0.13
============ ============ ============= =============
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
2
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF APRIL 30, 2003 AND OCTOBER 31, 2002
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(in thousands, except share and per share data)
April 30, October 31,
2003 2002
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ASSETS
Current assets:
Cash and cash equivalents $ 6,458 $ 7,866
Accounts receivable, net 6,706 4,815
Inventories 10,117 7,368
Deferred income taxes 388 388
Other 601 583
---------------- ---------------
Total current assets 24,270 21,020
Property, equipment and leasehold improvements, net 9,856 8,408
Goodwill, net 4,830 4,813
Other intangible assets, net 2,254 2,314
Deferred income taxes and other 36 58
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Total assets $ 41,246 $ 36,613
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,325 $ 2,529
Accrued expenses 3,235 2,942
Current maturities of long-term obligations 360 362
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Total current liabilities 7,920 5,833
Deferred income taxes 160 160
Long-term obligations, net of current maturities 142 322
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Total liabilities 8,222 6,315
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Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at April 30, 2003 and
October 31, 2002 - -
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 9,737,400 at April 30, 2003 and
9,586,222 at October 31, 2002 97 96
Additional paid-in capital 31,872 31,190
Unearned compensation (4) (7)
Retained earnings (accumulated deficit) 1,059 (981)
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Total shareholders' equity 33,024 30,298
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Total liabilities and shareholders' equity $ 41,246 $ 36,613
================ ===============
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
3
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED APRIL 30, 2003 AND 2002
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(in thousands)
Six Months Ended
April 30,
2003 2002
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NET CASH FROM OPERATING ACTIVITIES:
Net income $ 2,040 $ 1,268
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization of property, equipment and leasehold improvements 911 665
Amortization of intangible assets 142 151
Non-cash compensation 3 52
Other 22 227
Changes in operating assets and liabilities:
Accounts receivable (1,891) (661)
Inventories (2,749) (1,073)
Other current assets (18) (299)
Accounts payable 1,796 229
Accrued expenses 293 246
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Net cash provided by operating activities 549 805
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and leasehold improvements (2,359) (766)
Investments in patents and trademarks (82) (100)
Acquisition of Emtech, Inc., net of cash received - (620)
Other (17) (32)
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Net cash used in investing activities (2,458) (1,518)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans 683 449
Repayment of capital lease obligations (79) (31)
Repayments of other long-term obligations (103) (81)
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Net cash provided by financing activities 501 337
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,408) (376)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,866 7,090
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,458 $ 6,714
============= ============
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
4
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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(1) BASIS OF PRESENTATION:
The accompanying unaudited consolidated condensed financial statements of
Synovis Life Technologies, Inc. (Synovis or the Company) have been prepared by
the Company in accordance with generally accepted accounting principles applied
in the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Annual Report to Shareholders and incorporated by reference in the
Company's Form 10-K for the year ended October 31, 2002.
In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
consolidated financial position, results of operations and cash flows of the
Company as of and for the interim periods presented have been included.
Operating results and cash flows for the three and six months ended April 30,
2003 are not necessarily indicative of the results of operations and cash flows
of the Company that may be expected for the year ending October 31, 2003.
(2) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
April 30, October 31,
2003 2002
---- ----
Inventories:
Raw materials..................................................................... $ 2,363,000 $ 1,902,000
Work in process................................................................... 4,265,000 2,617,000
Finished goods.................................................................... 3,489,000 2,849,000
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$ 10,117,000 $ 7,368,000
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(3) GOODWILL AND OTHER INTANGIBLE ASSETS:
The following table summarizes the Company's amortized intangible assets:
As of April 30, As of October 31,
2003 2002
---- ----
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Patents and trademarks $ 1,108,000 $ 326,000 $ 1,026,000 $ 293,000
Developed technology 1,102,000 204,000 1,102,000 149,000
Noncompete agreements 1,050,000 476,000 1,050,000 422,000
------------ ------------ ----------- ------------
Total $ 3,260,000 $ 1,006,000 $ 3,178,000 $ 864,000
============ ============ =========== ============
Amortization expense related to intangible assets was $142,000 for the six
months ended April 30, 2003 and April 30, 2002. The estimated amortization
expense for each of the next five years is approximately $285,000 per year,
based on the Company's present intangible assets.
5
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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The following is a summary of goodwill by business segment:
Interventional business Surgical business Total
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Goodwill at:
April 30, 2003 $ 4,093,000 $ 737,000 $ 4,830,000
October 31, 2002 $ 4,093,000 $ 720,000 $ 4,813,000
The $17,000 increase in goodwill during the six months ended April 30, 2003 is
primarily attributable to an earnout payment to the former shareholder of a
previously acquired company, partially offset by a tax benefit from tax
deductible goodwill pertaining to this acquisition. No impairment losses were
incurred during the six months ended April 30, 2003.
(4) STOCK BASED COMPENSATION
The following table demonstrates the effect on net income and earnings per
share, net of taxes, as if the fair value based method had been applied to all
outstanding and unvested stock compensation awards in each period:
Three Months Ended Six Months Ended
April 30, April 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Income
As reported 1,247,000 766,000 2,040,000 1,268,000
Pro forma 1,136,000 603,000 1,825,000 1,025,000
Basic income per share
As reported 0.13 0.08 0.21 0.14
Pro forma 0.12 0.06 0.19 0.11
Diluted income per share
As reported 0.12 0.08 0.20 0.13
Pro forma 0.11 0.06 0.18 0.10
(5) EARNINGS PER SHARE:
The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:
Three Months Ended Six Months Ended
April 30, April 30,
2003 2002 2003 2002
---- ---- ---- ----
Denominator for basic earnings per share --
weighted-average common shares............... 9,688,964 9,367,728 9,647,100 9,301,541
6
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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Effect of dilutive securities:
Shares associated with deferred
compensation..................................... 2,233 31,511 2,233 31,511
Shares associated with option plans.............. 519,672 451,816 485,459 449,541
--------- --------- ---------- ---------
Dilutive potential common shares................. 521,905 483,327 487,692 481,052
--------- --------- ---------- ---------
Denominator for diluted earnings per share --
weighted-average common shares and dilutive
potential common shares................ 10,210,869 9,851,055 10,134,792 9,782,593
========== ========= ========== =========
Options outstanding with exercise prices
greater than the average market price of the
Company's common stock....................... -- 138,974 -- 109,733
========== ========= =========== =========
As of April 30,
2003 2002
---- ----
Options outstanding................................................... 1,217,286 1,417,979
Range of exercise prices.............................................. $2.09 - $12.21 $2.09 - $12.21
Range of expiration dates............................................. 2003 -- 2010 2002 -- 2010
Non-vested stock awards............................................... 2,233 31,511
(6) SEGMENT INFORMATION:
The following table presents certain financial information by business segment
for the three and six months ended April 30, 2003 and 2002:
Three Months Ended Six Months Ended
April 30, April 30,
2003 2002 2003 2002
---- ---- ---- ----
Net revenue:
Surgical business $ 6,326,000 $ 4,835,000 $12,396,000 $ 8,994,000
Interventional business 8,972,000 4,649,000 15,371,000 8,519,000
----------- ----------- ----------- -----------
Total $15,298,000 $ 9,484,000 $27,767,000 $17,513,000
=========== =========== =========== ===========
Operating income:
Surgical business $ 1,090,000 $ 501,000 $ 2,202,000 $ 610,000
Interventional business 814,000 664,000 912,000 1,306,000
----------- ----------- ----------- -----------
Total $ 1,904,000 $ 1,165,000 $ 3,114,000 $ 1,916,000
=========== =========== =========== ===========
7
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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(7) SHAREHOLDERS' EQUITY:
During the six months ended April 30, 2003, stock options for the purchase of
134,000 shares of the Company's common stock were exercised at prices between
$2.688 and $5.96 per share.
(8) NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. The Company adopted SFAS No. 143 on November 1, 2002, and the adoption
had no impact on the Company's consolidated financial position and results of
operations.
In September 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets
to be disposed of by sale, including discontinued operations, be measured at the
lower of the carrying cost or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS No. 144 also broadens
the reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The Company adopted SFAS No. 144 on November 1, 2002, and the
adoption had no impact on the Company's consolidated financial position and
results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other provisions, this Statement eliminates the requirement that gains and
losses from extinguishment of debt be classified as extraordinary items. The
Company adopted SFAS 145 on November 1, 2002, and the adoption had no impact on
the Company's financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred, rather than when a company commits to an exit plan as was previously
required. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted SFAS 146 on January 1,
2003, and the adoption had no impact on the Company's financial position or
results of operations.
In December 2002, The FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the pro
forma disclosure provisions of SFAS No. 123 for companies that continue to apply
APB No. 25, "Accounting for Stock Issued to Employees," and related
interpretations to require prominent disclosures about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. This statement also amends APB Opinion No. 28, "Interim
Financial Reporting" to require pro forma disclosure about those effects in
interim financial statements. The transition guidance of SFAS No. 148 is
effective for financial reports for interim periods beginning after December 15,
2002. The Company will continue to account for the stock-based compensation in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees",
as allowed by SFAS No. 123. This results in no charge to earnings when options
are issued to employees at fair market value. The adoption of this standard had
no impact on the Company's consolidated financial position or results of
operations. The required interim disclosures have been provided in Note 4.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Forward-Looking Statements:
The disclosures in this Form 10-Q may include "forward-looking statements" made
under the Private Securities Litigation Reform Act of 1995. The statements can
be identified by words such as "should", "may", "will", "expect", "believe",
"anticipate", "estimate", "continue" or other similar expressions. All
forward-looking statements in this document are based upon information available
to the Company as of the date hereof, and the Company assumes no obligation to
correct or update any forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised, however, to consult
any future disclosures we make on related subjects in future filings with the
SEC. Forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors may include, among others, the risk
factors listed from time to time in the Company's filings with the Securities
and Exchange Commission, such as the year-end Annual Report on Form 10-K for the
year ended October 31, 2002.
OVERVIEW
Synovis Life Technologies, Inc. (Synovis or the Company) is a diversified
medical device company engaged in developing, designing, manufacturing and
bringing to market products for the surgical and interventional treatment of
disease. Its business is conducted in two reportable segments, the surgical
business and the interventional business, with segmentation based upon
similarities of the underlying business operations, products and markets of
each.
The surgical business develops, manufactures and markets implantable biomaterial
products, tools to assist in cardiovascular surgeries and products for
microsurgery, all designed to reduce risks and/or facilitate critical surgeries,
leading to better patient outcomes and lower costs. The interventional business
provides product engineering services and manufacturing of fixation helices,
conductor coils, stylets, guidewires and other micro-wire and plastic devices
used in cardiac rhythm management, neurostimulation and vascular procedures.
CRITICAL ACCOUNTING POLICIES
Goodwill: In accordance with the Statement of Financial Accounting Standards
(SFAS) No. 142, goodwill is no longer amortized, but is reviewed annually for
impairment. Please see Note 3 to the unaudited consolidated condensed financial
statements for additional goodwill information.
Other Intangible Assets: The Company's other intangible assets, primarily
developed technology, patents, trademarks, and non-compete agreements pertaining
to previous business acquisitions, are recorded at cost and are amortized using
the straight-line method over their estimated useful lives, generally seven to
17 years. These assets are reviewed annually for impairment. Please see Note 3
to the unaudited consolidated condensed financial statements for additional
intangible asset information.
Revenue Recognition: The Company's policy is to ship products to customers on
FOB shipping point terms. The Company recognizes revenue when the product has
been shipped to the customer if there is evidence that the customer has agreed
to purchase the products, delivery and performance has occurred, the price and
terms of sale are fixed and collection of the receivable is expected. The
Company's sales policy does not allow sales returns.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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Derivative Instruments and Hedging Activities: The Company does not enter into
any derivative instruments or hedging activities. The Company's policy is to
only enter into contracts that can be designated as normal purchases or sales.
In addition, substantially all of the Company's contracts are negotiated,
invoiced and paid in U.S. dollars.
OPERATING RESULTS
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 2003 WITH
THE THREE MONTHS ENDED APRIL 30, 2002
Net revenue increased 61% to $15,298,000 in the second quarter of fiscal 2003
compared with $9,484,000 in the second quarter of fiscal 2002. The Company's
consolidated operating income grew 63% to $1,904,000 in the second quarter of
fiscal 2003 from $1,165,000 in the prior year quarter. Consolidated net income
increased 63% to $1,247,000, or twelve cents per diluted share, from $766,000,
or eight cents per diluted share, in the same quarter of fiscal 2002.
The surgical business generated net revenue growth of 31% in the second quarter
of fiscal 2003 to $6,326,000 from $4,835,000 in the year-ago quarter. Worldwide
net revenue from the sales of Peri-Strips(R) increased 69% over the second
quarter of fiscal 2003, contributing net revenue of $2,783,000 in the second
quarter of 2003, compared to $1,647,000 in the second quarter of 2002.
Peri-Strips are used to reduce risks and improve patient outcomes in several
procedures, primarily gastric bypass surgery. Gastric bypass is a surgical
treatment for morbid obesity, which is considered epidemic in the United States.
This product's growth potential comes from its value in reducing the risk of
life-threatening complications from gastric bypass surgery and from the growing
number of these procedures as well as other applications. Projections estimate
that the number of gastric bypass procedures are expected to reach 80,000 in
2003 and between 110,000 and 150,000 in 2004.
The microsurgery product line of the surgical business contributed net revenue
of $343,000 in the second quarter of 2003, a 20% increase over the prior year
quarter. The primary product sold to the microsurgeon is the Microvascular
Anastomotic Coupler System (Coupler), a device used to connect extremely small
arteries or veins, without sutures, quickly, easily and with consistently
excellent results. The Coupler is a platform technology which the Company is
currently leveraging to enter other markets. The Company has filed a patent to
incorporate technology to detect blood flow and other critical parameters in an
anastomotic device, with the ultimate objective of entering the large cardiac
and vascular markets.
The interventional business generated net revenue of $8,972,000 in the second
quarter of 2003, a 93% increase over $4,649,000 in the second quarter last year.
In March 2002, the interventional business was vertically integrated through an
acquisition to expand its capabilities in polymer injection molding, CNC
machining and tooling. The acquisition contributed revenue of $502,000 in the
second quarter of 2003 compared with $310,000 in March and April of 2002.
Excluding the effect of the acquisition, revenue for the interventional business
increased 95% over the prior-year quarter.
The consolidated gross margin decreased six percentage points, to 43% during the
second quarter of fiscal 2003 from 49% in the same quarter of fiscal 2002. Gross
margin for the surgical business increased to 63% in the second quarter of 2003
from 62% in the second quarter of 2002 due to sales mix, production volume and
related manufacturing efficiencies. Gross margin for the interventional business
improved to 29% in the second quarter of fiscal 2003, up sequentially from 23%
in the first quarter of fiscal 2003, but still below the 36% margin of the
second quarter in fiscal 2002. Product mix, start-up costs related to new
processes and products, along with the costs of training a rapidly growing
workforce reduced the first quarter margin. As anticipated, the gross margin
percentage showed improvement from the first quarter as these transitional
activities progress. Factors which affect the consolidated gross margin include
the relative revenue of each business unit, product mix, volume and other
production activities. The Company's consolidated gross margin may fluctuate
quarter to quarter based on variations in these factors.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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Selling, general and administrative (SG&A) expense during the second quarter of
fiscal 2003 increased $526,000, or 17%, to $3,610,000 from $3,084,000 in the
comparable fiscal 2002 quarter. However, as a percentage of net revenue, SG&A
expense declined nine percentage points, from 33% in the fiscal 2002 quarter to
24% in the fiscal 2003 quarter. The percentage decrease is the result of
controlled SG&A spending increases in a period of incrementally higher levels of
revenue.
Research and development (R&D) expense increased 155% during the second quarter
of fiscal 2003 to $1,053,000 from $413,000 during the prior-year quarter. This
planned increase is partially due to the development of various interventional
projects including proprietary devices for sale to interventional customers,
along with the increased number, timing and nature of various surgical R&D
projects. In both business units, R&D expense fluctuates from quarter to quarter
based on the timing and progress through external parties of the projects. This
forward-looking statement will be influenced primarily by the timing and number
of projects, the related R&D personnel requirements, regulatory approval path,
and the nature of the expected costs for each project.
Operating income increased 63% in the second quarter of fiscal 2003, to
$1,904,000 from $1,165,000 in the second quarter of fiscal 2002. Second quarter
operating income for the surgical business increased 118% to $1,090,000 in
fiscal 2003 from $501,000 in fiscal 2002. The increase for the surgical business
is primarily due to relatively greater increases in revenue and related gross
margin contributions as compared to organizational operating expenses. Operating
income for the interventional business increased 23% to $814,000 in the second
quarter of 2003 from $664,000 in the second quarter of 2002. The increase for
the interventional business is largely attributable to higher levels of revenue
and relatively smaller increases in SG&A spending, partially offset by decreased
gross margins and increased R&D expenses.
The Company recorded a provision for income taxes of $655,000 in the second
quarter of fiscal 2003, at an effective tax rate of 34.4%, as compared to
$408,000 at an effective tax rate of 34.8% in the second quarter of fiscal 2002.
The effective annual tax rate expected to be applied for fiscal 2003 is
consistent with the Company's quarterly tax rate.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 2003 WITH
THE SIX MONTHS ENDED APRIL 30, 2002
Net revenue increased 59% to $27,767,000 in the first six months of fiscal 2003
compared with $17,513,000 in the same period of fiscal 2002. The Company's
consolidated operating income grew 63% to $3,114,000 in the first six months of
fiscal 2003 from $1,916,000 in the prior-year period. Consolidated net income
increased 61% to $2,040,000, or twenty cents per diluted share, from $1,268,000,
or thirteen cents per diluted share, in the same period of fiscal 2002.
The surgical business generated net revenue growth of 38% in the first half of
fiscal 2003 to $12,396,000 from $8,994,000 in the first half of fiscal 2002.
Worldwide net revenue from the sales of Peri-Strips(R) increased 86% in the
first half of fiscal 2003. The microsurgery product line of the surgical
business contributed net revenue of $656,000 in the first half of 2003, compared
with $536,000 in the first half of fiscal 2002, a 22% increase over the prior
period.
The interventional business generated net revenue of $15,371,000 in the first
half of fiscal 2003, an 80% increase over $8,519,000 in the same period of
fiscal 2002. In March 2002, the interventional business was vertically
integrated through an acquisition to expand its capabilities in polymer
injection molding, CNC machining and tooling. The acquisition contributed
revenue of $982,000 in the first half of 2003 compared with $310,000 in March
and April of 2002. Prior to the effect of the acquisition, revenue for the
interventional business increased 75% in the first six months of fiscal 2003
over the prior-year period.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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The consolidated gross margin decreased six percentage points, to 43% during the
first six months of fiscal 2003 from 49% in the same period of fiscal 2002.
Gross margin for the surgical business increased three percentage points to 64%
in the first half of 2003 from 61% in the same period of 2002 due to sales mix,
production volume and related manufacturing efficiencies. The interventional
business' margin decreased from 37% to 26% in the first half of 2003. Product
mix, start-up costs related to new processes and products, along with the costs
of training a rapidly growing workforce reduced the interventional business
gross margin in fiscal 2003. Additionally, during the first quarter of fiscal
2002, the interventional business had revenue of $415,000 for milestone payments
- -- with no associated cost of sales or other period cost -- related to
successful work on an embolic distal protection device designed and patented by
Metamorphic Surgical Devices, LLC (MSD), an unrelated company. Factors which
affect the consolidated gross margin include the relative revenue of each
business unit, product mix, volume and other production activities. The
Company's consolidated gross margin may fluctuate quarter to quarter based on
variations in these factors.
SG&A expense during the first half of fiscal 2003 increased $1,103,000, or 19%,
to $6,981,000 from $5,878,000 in the comparable fiscal 2002 period. As a
percentage of revenue, however, SG&A expense declined nine percentage points,
from 34% in fiscal 2002 to 25% in fiscal 2003. The percentage decrease is the
result of controlled SG&A spending increases in a period of incrementally higher
levels of revenue.
R&D expense increased 119% during the six months ended April 30, 2003 to
$1,914,000 from $872,000 during the six months ended April 30, 2002. This
planned increase is partially due to the development expenses of various
interventional projects including proprietary devices for sale to interventional
customers, along with the increased number, timing and nature of various
surgical R&D projects. In both business units, R&D expense fluctuates from
quarter to quarter based on the timing and progress through external parties of
the projects. This forward-looking statement will be influenced primarily by the
number of projects and the related R&D personnel requirements, development and
regulatory approval path, expected costs, timing and nature of those costs for
each project.
Operating income increased 63% in the first half of fiscal 2003, to $3,114,000
from $1,916,000 in the first half of fiscal 2002. Operating income for the
surgical business increased 261% to $2,202,000 in fiscal 2003 from $610,000 in
fiscal 2002. The increase for the surgical business is primarily due to
relatively greater increases in revenue and related gross margin contributions
as compared to organizational operating expenses. Operating income for the
interventional business decreased 30% to $912,000 in the first half of 2003 from
$1,306,000 in the first half of 2002. This segment's operating income
contribution is in line with the Company's expectations. The change from the
prior-year period reflects the impact of significantly higher revenue offset by
decreased gross margins and higher operating expenses, particularly R&D spending
which increased 292% in the first half of fiscal 2003.
The Company recorded a provision for income taxes of $1,073,000 in the six
months ended April 30, 2003, at an effective tax rate of 34.5%, as compared to
$675,000 at an effective tax rate of 34.7% in the six months ended April 30,
2002. The effective annual tax rate expected to be applied for fiscal 2003 is
consistent with the Company's tax rate in the first half of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $6,458,000 at April 30, 2003 as compared to
$7,866,000 at October 31, 2002, a decrease of $1,408,000. The Company primarily
utilizes internally generated cash flow and existing cash balances to fund the
operations of its businesses. The decrease in cash is primarily related to
working capital as well as capital expenditures necessary to support two
high-growth business units. As of April 30, 2003, the Company had long-term
obligations (including current portions) of $502,000, requiring payments through
2005.
Operating activities provided cash of $549,000 in the first six months of fiscal
2003, as compared to providing cash of $805,000 during the first six months of
fiscal 2002. Cash was used by operations for working capital necessary to
support growth in both business units, primarily for accounts receivable (net
increase of $1,891,000 in 2003
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
compared with an increase of $661,000 in 2002) and inventories (net increase of
$2,749,000 in 2003 compared with an increase of 1,073,000 in 2002). This was
partially offset by an increase in net income and accounts payable.
Investing activities used $2,458,000 of cash during the first half of fiscal
2003, which included $2,359,000 in purchases of equipment and leasehold
improvements, $82,000 of investments in patents and trademarks and $17,000 in
other investing activities.
Financing activities provided $501,000 of cash during the first six months of
fiscal 2003, which consisted of proceeds of $683,000 received upon the exercise
of stock options under the Company's stock option plan and stock purchases under
the Company's employee stock purchase plan, offset by $182,000 in cash
repayments of capital equipment leases and other long-term obligations.
The Company believes existing cash and investments, coupled with anticipated
cash flows from operations will be sufficient to satisfy its operating cash
requirements for the next twelve months. During the second quarter of fiscal
2003, the Company opened a manufacturing facility in Puerto Rico, expanding the
capacity of the interventional business. The ongoing investment in the Puerto
Rico facility is expected to be financed through a combination of Puerto Rican
incentives for job creation and facility improvements, with the remainder to be
provided by the Company's cash and cash flow. This forward-looking statement
regarding sufficiency of cash and cash flows, as well as the Company's long-term
cash requirements, will be a function of a number of variables, including
research and development priorities, acquisition opportunities and the growth
and profitability of the business.
NEW ACCOUNTING STANDARDS
In December 2002, The FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the pro
forma disclosure provisions of SFAS No. 123 for companies that continue to apply
APB No. 25, "Accounting for Stock Issued to Employees," and related
interpretations to require prominent disclosures about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. This statement also amends APB Opinion No. 28, "Interim
Financial Reporting" to require pro forma disclosure about those effects in
interim financial statements. The transition guidance of SFAS No. 148 is
effective for financial reports for interim periods beginning after December 15,
2002. The Company will continue to account for the stock-based compensation in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees",
as allowed by SFAS No. 123. This results in no charge to earnings when options
are issued to employees at fair market value. The adoption of this standard had
no impact on the Company's consolidated financial position or results of
operations. The required interim disclosures have been provided in Note 4 to the
unaudited consolidated condensed financial statements.
ADDITIONAL INFORMATION ON SYNOVIS
We are currently subject to the informational requirements of the Exchange Act
of 1934, as amended. As a result, we are required to file periodic reports and
other information with the SEC, such as annual, quarterly and current reports,
proxy and information statements. You are advised to read this Form 10-Q in
conjunction with the other reports, proxy statements and other documents we file
from time to time with the SEC. If you would like more information regarding
Synovis, you may read and copy the reports, proxy and information statements and
other documents we file with the SEC, at prescribed rates, at the SEC's public
reference room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information regarding the operation of the SEC's public reference rooms by
calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the
public free of charge at the SEC's website. The address of this website is
http://www.sec.gov.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
In addition, our website also contains a hyperlink to a third-party SEC Filings
website which makes all of our SEC filings, such as annual, quarterly and
current reports and proxy statements, available to the public. The address of
our website is www.synovislife.com. Neither our website nor the information
contained on any hyperlink provided in our website, is intended to be, and is
not, a part of this Quarterly Report on Form 10-Q. We also provide electronic or
paper copies of our SEC filings (excluding exhibits) to any person free of
charge upon receipt of a written request for such filing. All requests for our
SEC filings should be sent to the attention of the Chief Financial Officer at
Synovis Life Technologies, Inc., 2575 University Ave. W, St. Paul, Minnesota
55114.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal financial instruments the Company maintains are in accounts
receivable and long-term obligations. The Company believes that the interest
rate, credit and market risk related to these accounts is not significant. The
Company manages the risk associated with these accounts through periodic reviews
of the carrying value for non-collectibility of assets and establishment of
appropriate allowances in connection with the Company's internal controls and
policies. The Company does not utilize any derivative financial instruments,
derivative commodity instruments, other financial instruments or engage in any
other hedging activities.
ITEM 4 -- CONTROLS AND PROCEDURES
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures within 90 days before the filing date of this quarterly
report. Based on that evaluation, the CEO and CFO concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls subsequent to the date
the CEO and CFO completed their evaluation.
14
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in litigation which is ordinary, routine
litigation incidental to its business. Management believes losses, if any, that
might eventually be sustained from such litigation would not be material to the
Company's consolidated financial position, results of operations or cash flows
for any period. Further, product liability claims may be asserted in the future
relative to events not known to management at the present time. Management
believes that the Company's risk management practices, including its insurance
coverage, are reasonably adequate to protect against potential material product
liability losses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following is a report of the voting results of the Company's annual
shareholders meeting held on February 25, 2003.
The proposal to elect six directors, as described in the Company's proxy
statement for its annual meeting of shareholders held on February 25, 2003, was
approved. Karen Gilles Larson, William G. Kobi, Richard W. Perkins, Anton R.
Potami, Timothy M. Scanlan and Edward E. Strickland were elected until the next
annual meeting of shareholders or until their successors are duly elected and
qualified. There were no broker non-votes, abstentions or votes withheld. The
tabulation was as follows:
Director Votes For Votes Against
-------- --------- -------------
William G. Kobi 8,474,682 40,865
Karen Gilles Larson 8,474,310 41,237
Richard W. Perkins 8,329,512 186,035
Anton R. Potami 8,474,682 40,865
Timothy M. Scanlan 8,449,682 65,865
Edward E. Strickland 8,459,432 56,115
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
99.1 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).
15
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SYNOVIS LIFE TECHNOLOGIES, INC.
Dated: June 12, 2003 /s/ Connie L. Magnuson
------------------------------------
Connie L. Magnuson
Vice President of Finance and Chief
Financial Officer
(Principal Financial Officer)
16
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, Karen Gilles Larson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synovis Life
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
June 12, 2003
/s/ Karen Gilles Larson
- -------------------------------------
Karen Gilles Larson
President and Chief Executive Officer
17
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, Connie L. Magnuson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synovis Life
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
June 12, 2003
/s/ Connie L. Magnuson
- -----------------------------------------------------
Connie L. Magnuson
Vice-President of Finance and Chief Financial Officer
18
SYNOVIS LIFE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
99.1 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).
19