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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended January 31, 2004
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
--- ---
On March 5, 2004, there were 11,498,318 shares of the registrant's common stock,
par value $.01 per share, outstanding.
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
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(in thousands, except per share data)
Three Months Ended
January 31,
2004 2003
-------- --------
Net revenue $ 11,519 $ 12,469
Cost of revenue 5,901 7,027
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Gross margin 5,618 5,442
Operating expenses:
Selling, general and administrative 4,157 3,371
Research and development 894 861
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Operating income 567 1,210
Other income, net 67 1
-------- --------
Income before provision for income taxes 634 1,211
Provision for income taxes 215 418
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Net income $ 419 $ 793
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Earnings per share:
Basic $ 0.04 $ 0.08
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Diluted $ 0.03 $ 0.08
======== ========
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
2
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF JANUARY 31, 2004 AND OCTOBER 31, 2003
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(in thousands, except share and per share data)
January 31, October 31,
2004 2003
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ASSETS
Current assets:
Cash and cash equivalents $ 42,645 $ 44,102
Accounts receivable, net 6,010 6,541
Inventories 11,991 10,849
Deferred income taxes 738 738
Other 1,126 1,153
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Total current assets 62,510 63,383
Property, plant and equipment, net 11,231 10,559
Goodwill 4,860 4,843
Other intangible assets, net 2,018 2,049
Other assets 11 11
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Total assets $ 80,630 $ 80,845
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,956 $ 2,051
Accrued expenses 2,834 3,852
Current maturities of long-term obligations 206 281
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Total current liabilities 4,996 6,184
Deferred income taxes 554 554
Long-term obligations 29 45
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Total liabilities 5,579 6,783
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Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at January 31, 2004 and
October 31, 2003 -- --
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 11,487,482 at January 31, 2004 and
11,435,638 at October 31, 2003 115 114
Additional paid-in capital 70,525 69,956
Retained earnings 4,411 3,992
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Total shareholders' equity 75,051 74,062
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Total liabilities and shareholders' equity $ 80,630 $ 80,845
========= =========
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
3
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
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(in thousands)
Three Months Ended
January 31,
2004 2003
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NET CASH FROM OPERATING ACTIVITIES:
Net income $ 419 $ 793
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation of property, plant and equipment 502 435
Amortization of intangible assets 74 71
Tax benefit from exercise of stock options 283 --
Other -- 20
Changes in operating assets and liabilities:
Accounts receivable 531 (1,456)
Inventories (1,142) (613)
Other current assets 27 (126)
Accounts payable (95) (524)
Accrued expenses (1,018) (299)
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Net cash used in operating activities (419) (1,699)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition of property, plant and equipment 43 --
Purchase of property, plant and equipment (1,217) (708)
Investments in patents and trademarks (43) (30)
Other (17) (8)
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Net cash used in investing activities (1,234) (746)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans 287 266
Repayment of capital lease obligations (66) (66)
Repayments of other long-term obligations (25) (33)
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Net cash provided by financing activities 196 167
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,457) (2,278)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,102 7,866
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,645 $ 5,588
========== ==========
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, 2003.
In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
consolidated financial position, results of operations and cash flows of the
Company as of and for the interim periods presented have been included.
Operating results and cash flows for the three months ended January 31, 2004 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, 2004.
(2) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
January 31, October 31,
2004 2003
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Inventories:
Raw materials ........... $ 2,396,000 $ 2,596,000
Work in process ......... 4,067,000 3,365,000
Finished goods .......... 5,528,000 4,888,000
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$ 11,991,000 $ 10,849,000
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(3) GOODWILL AND OTHER INTANGIBLE ASSETS:
The following table summarizes the Company's amortized intangible assets:
As of January 31, As of October 31,
2004 2003
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Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Patents and trademarks $ 1,111,000 $ 400,000 $ 1,068,000 $ 381,000
Developed technology 1,102,000 287,000 1,102,000 259,000
Noncompete agreements 1,050,000 558,000 1,050,000 531,000
------------ ------------ ------------ ------------
Total $ 3,263,000 $ 1,245,000 $ 3,220,000 $ 1,171,000
============ ============ ============ ============
Amortization expense was $74,000 for the three months ended January 31, 2004 and
$71,000 for the three months ended January 31, 2003. The estimated amortization
expense for each of the next five years is approximately $296,000 per year,
based on the Company's present intangible assets.
5
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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The following is a summary of goodwill by business segment:
Interventional business Surgical business Total
----------------------- ----------------- -----------
Goodwill as of:
January 31, 2004 $ 4,093,000 $ 767,000 $ 4,860,000
October 31, 2003 $ 4,093,000 $ 750,000 $ 4,843,000
No impairment losses were incurred during the three months ended January 31,
2004.
(4) STOCK BASED COMPENSATION
The following table demonstrates the effect on net income and earnings per
share, net of taxes, as if the fair value based method of accounting had been
applied to all outstanding and unvested stock compensation awards in each
period:
Three Months ended
January 31,
2004 2003
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Net income
As reported $ 419,000 $ 793,000
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 130,000 104,000
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Pro forma 289,000 689,000
Basic income per share
As reported 0.04 0.08
Pro forma 0.03 0.07
Diluted income per share
As reported 0.03 0.08
Pro forma 0.02 0.07
As of January 31,
2004 2003
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Options outstanding ............... 982,611 1,217,286
Range of exercise prices .......... $2.00 - $25.07 $2.00 - $12.21
Range of expiration dates ......... 2004 - 2011 2003 - 2010
Non-vested stock awards ........... -- 2,233
6
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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(5) EARNINGS PER SHARE:
The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:
Three Months Ended
January 31,
2004 2003
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Denominator for basic earnings per share -
weighted-average common shares ............................................ 11,459,261 9,606,600
Effect of dilutive securities:
Shares associated with deferred
compensation .............................................................. -- 2,233
Shares associated with option plans ....................................... 602,963 438,090
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Potential dilutive common shares .......................................... 602,963 440,323
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Denominator for diluted earnings per share -
weighted-average common shares and dilutive
potential common shares ................................................... 12,062,224 10,046,923
============ ============
Options excluded from EPS calculation
because exercise prices are greater than
the average market price of the Company's
common stock .............................................................. 30,906 81,296
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(6) SEGMENT INFORMATION:
The following table presents certain financial information by business segment
for the three months ended January 31, 2004 and 2003:
Three Months Ended
January 31,
2004 2003
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Net revenue:
Surgical business $ 6,686,000 $ 6,070,000
Interventional business 4,833,000 6,399,000
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Total $ 11,519,000 $ 12,469,000
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Operating income:
Surgical business $ 1,102,000 $ 1,111,000
Interventional business (535,000) 99,000
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Total $ 567,000 $ 1,210,000
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7
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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(7) SHAREHOLDERS' EQUITY:
During the three months ended January 31, 2004, stock options for the purchase
of 50,654 shares of the Company's common stock were exercised at prices between
$3.85 and $12.20 per share. During the three months ended January 31, 2003,
stock options for the purchase of 64,896 shares of the Company's common stock
were exercised at prices between $3.25 and $5.96 per share.
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. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements. All
forward-looking statements in this document are based on information available
to the Company as of the date hereof, and the Company assumes no obligation to
update any forward-looking statements. You are advised, however, to consult any
future disclosures we make on related subjects in future filings with the SEC.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors may include, among others, the 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, 2003.
OVERVIEW
Synovis Life Technologies, Inc. is a diversified medical device company engaged
in developing, manufacturing and marketing products for the surgical and
interventional treatment of disease. Our business is conducted in two reportable
segments, the surgical business and the interventional business, with
segmentation based upon the similarities of the underlying business operations,
products and markets of each.
Our surgical business develops, manufactures and markets implantable biomaterial
products, devices for microsurgery and surgical tools, all designed to reduce
risk and/or facilitate critical surgeries, leading to better patient outcomes
and/or lower costs.
Our interventional business manufactures components and devices used primarily
in cardiac rhythm management, neurostimulation, and interventional vascular
procedures, including micro-wire components such as fixation helices, conducting
coils, stylets, guidewires, injection molded and machined components.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2004 WITH
THE THREE MONTHS ENDED JANUARY 31, 2003
The following table summarizes our condensed consolidated operating results for
the first quarter of fiscal 2004 and fiscal 2003:
For the quarter ended
January 31,
Summary of Operating Results (in thousands) 2004 2003
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Net revenue $ 11,519 $ 12,469
Cost of revenue 5,901 7,027
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Gross margin 5,618 5,442
Selling, general and administrative 4,157 3,371
Research and development 894 861
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Operating expenses 5,051 4,232
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Operating income $ 567 $ 1,210
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9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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For the quarter ended
January 31,
Summary of Operating Results (as a % of revenue) 2004 2003
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Net revenue 100.0% 100.0%
Cost of revenue 51.2 56.4
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Gross margin 48.8 43.6
Selling, general and administrative 36.1 27.0
Research and development 7.8 6.9
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Operating expenses 43.9 33.9
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Operating income 4.9% 9.7%
========== ==========
Net revenue decreased 8% to $11,519,000 in the first quarter of fiscal 2004
compared with $12,469,000 in the first quarter of fiscal 2003. Our consolidated
operating income decreased 53% to $567,000 in the first quarter of fiscal 2004
from $1,210,000 in the prior year quarter. Consolidated net income decreased 47%
in the current quarter to $419,000, or three cents per diluted share, from
$793,000, or eight cents per diluted share, in the same quarter of fiscal 2003.
The following table summarizes our condensed consolidated operating results by
business segment for the first quarter of fiscal 2004 and fiscal 2003:
For the quarter ended
January 31,
Business Segment Information (in thousands) 2004 2003
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Net revenue
Surgical business $ 6,686 $ 6,070
Interventional business 4,833 6,399
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Total $ 11,519 $ 12,469
Gross margin
Surgical business $ 4,345 $ 3,951
Interventional business 1,273 1,491
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Total $ 5,618 $ 5,442
Gross margin percentage
Surgical business 65% 65%
Interventional business 26% 23%
Total 49% 44%
Operating income (loss)
Surgical business $ 1,102 $ 1,111
Interventional business (535) 99
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Total $ 567 $ 1,210
Our surgical business generated record net revenue of $6,686,000 in the first
quarter of fiscal 2004, a 10% increase from $6,070,000 in the year-ago quarter.
The increase in surgical business revenue was primarily due to increased volumes
of product sold. Worldwide net revenue from the sales of Peri-Strips(R)
increased 14% over the first quarter of fiscal 2004, contributing net revenue of
$3,095,000 in the first quarter of 2004, compared to $2,714,000 in the
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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first quarter of 2003. Peri-Strips are used to reduce risks and improve patient
outcomes in several procedures, notably 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 costly and/or life-threatening complications from gastric bypass
surgery, the growing number of gastric bypass procedures, and the percentage of
these procedures being performed laparoscopically (a minimally invasive
technique that generally requires more staple line buttressing). According to
independent projections, the number of bariatric procedures (including gastric
bypass procedures) is expected to reach between 110,000 and 150,000 in 2004. The
growth rate in Peri-Strips revenue in the first quarter of fiscal 2004 is lower
than in previous quarters due to the expected entry of competition in the
gastric bypass market, which surfaced visibly in January. Going forward, we
expect Peri-Strips revenue to continue to grow in this market, as a result of
both the overall growth in gastric bypass procedures and our belief that
Peri-Strips demonstrates superior buttressing characteristics compared to the
current competitive product in burst strength, leak pressure, tensile strength
and durability. Our expectation depends upon, among other things, the accuracy
of the number of procedures projected, our ability to meet competition and
continuing health care coverage of gastric bypass.
The market for Peri-Strips in lung volume reduction surgery ("LVRS") is expected
to create additional demand for Peri-Strips, and we have accordingly forecast
modest revenue related to LVRS in fiscal 2004. In January 2004, the Centers for
Medicare and Medicaid Services ("CMS") announced that coverage of the procedure
has been reinstated. We expect increased revenue from Peri-Strips resulting from
the CMS decision to develop gradually, depending upon several factors, including
the rate of physician referral, surgeons' experience with the procedure and the
development of hospital programs related to LVRS.
In January 2004, we filed a 510(k) application with the Food and Drug
Administration ("FDA") for Peri-Strips' use as a buttress to reinforce the
staple lines during cardiac surgery, including the surgical removal of the left
atrial appendage ("LAA"), a procedure believed to prevent strokes. Removal of
the LAA can be performed as an adjunct procedure during cardiac bypass surgery,
mitral valve repair, atrial fibrillation or other heart procedures, or as a
treatment by itself. An estimated 600,000 to one million applicable LAA
procedures could be performed annually, with approximately half of those
performed in the United States. It is uncertain when we would begin to generate
revenue from the application. The timing and volume of revenue is dependent upon
many factors, including approval and timing of such approval of the 510(k)
application by the FDA, surgeons' acceptance of the product in LAA procedures
and the number of Peri-Strips used with each procedure.
Revenue from our other surgical business product lines, which include
Veritas(R), Tissue-Guard, Surgical Tools and Microsurgery, was $3,591,000 in the
first quarter of fiscal 2004 compared with $3,356,000 in the prior-year quarter.
Our microsurgery product line contributed net revenue of $372,000 in the first
quarter of 2003, a 19% increase over net revenue of $313,000 in 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. We believe that the Coupler is a platform technology, and
have filed a patent application and a 510(k) for a Flow Coupler, a device
incorporating the technology to detect blood flow and other critical parameters
in an anastomotic device.
Our interventional business customers predominantly operate in the cardiac
rhythm management ("CRM") market and we address three segments of this market:
pacing, implantable cardioverter defibrillation ("ICD") and congestive heart
failure ("CHF"). Within the CRM market, we produce conductor and shocking coils
for pacing and defibrillator leads, helices for active fixation leads, and
stylets used to implant all types of leads.
We also serve customers in the neurostimulation market, where we supply
conductor coils for stimulation leads as well as stylets to deliver the leads
and customers in the interventional vascular market, where we produce core
wires, coils and guidewire assembly components. Other customers of our
interventional business operate in numerous markets and our services to these
customers include polymer injection molding, computer numeric control
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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("CNC") machining capabilities, swiss-screw machining capabilities, product
development services and interventional devices.
The following table summarizes our interventional business net revenue by market
for the first quarter of fiscal 2004 and fiscal 2003:
For the quarter ended
January 31,
Interventional Business Net Revenue (in thousands) 2004 2003
-------- --------
Cardiac rhythm management $ 3,595 $ 4,743
Other 1,238 1,656
-------- --------
Total $ 4,833 $ 6,399
The following table summarizes our interventional business net revenue by
product for the first quarter of fiscal 2004 and fiscal 2003:
For the quarter ended
January 31,
Interventional Business Net Revenue (in thousands) 2004 2003
--------- ---------
Coils and helices $ 2,205 $ 3,408
Stylets and other wireforms 1,628 2,181
Machining, molding and tool making 633 480
Other 367 330
--------- ---------
Total $ 4,833 $ 6,399
Interventional business net revenue decreased 24% to $4,833,000 in the first
quarter of fiscal 2004 from $6,399,000 in the first quarter of fiscal 2003. The
revenue decrease is primarily due to lower sales to our CRM customers, which we
believe is due to lower than expected demand for our customers' end devices in
the latter part of calendar 2003. We believe that the lower than expected demand
for our customer's end devices caused certain key customers to have higher than
expected inventories of our product and that these inventories were being
reduced during the first quarter of fiscal 2004. We expect our near-term demand
in this business segment will also be affected by our customers' efforts to move
to just-in-time inventory management, after which we expect revenues to regain
momentum. Our expectations, of course, depend upon a number of factors,
including demand for our customers' end devices and our understanding of our
customers' inventory.
Machining, molding and tool making revenue increased 32% in the first quarter of
fiscal 2004 compared to the first quarter of fiscal 2003. This increase is due
to the addition of new customers as well as added capabilities, such as
swiss-screw machining, which have expanded the scope of services we provide.
In March 2003, operations commenced at Synovis Caribe, Inc., a leased 22,700
square foot manufacturing facility in Dorado, Puerto Rico. The new facility is
designed to increase the manufacturing capacity of our interventional business
and strategically position us to capture new business. All operating expenses
related to Synovis Caribe, Inc. during the first quarter of fiscal 2004 are
incremental compared with the prior year, as the facility was not operational at
that time.
Our interventional business has customarily experienced variations in revenue
from period to period primarily due to variability in the timing of customer
draws against annual purchase orders. Such variations are expected to continue
in the future.
The consolidated gross margin percentage increased five percentage points, from
44% to 49% during the first quarter of fiscal 2004 from the same quarter of
fiscal 2003. Four of the five percentage point increase in the first
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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fiscal quarter of 2004 is attributable to the impact of business unit mix being
weighted more heavily to our surgical business, which operates at a higher gross
margin percentage than our interventional business. Gross margin for our
surgical business remained consistent at 65% in the first quarter of 2004 and
2003. The remaining percentage point increase is due to the increased margin in
our interventional business, which increased three percentage points, from 23%
in the first quarter of 2003 to 26% in the first quarter of 2004. This increase
is attributable to several factors. One percentage point of the higher
interventional gross margin relates to a milestone payment of $75,000 recognized
and included in net revenues during the first quarter for work we did pursuant
to a technology engineering and development agreement, with no associated period
cost. The remaining interventional margin increase was due to product mix within
the segment and other variables. Factors which affect the consolidated gross
margin include the relative revenue of each business unit, product mix, volume
and other production activities.
Selling, general and administrative ("SG&A") expense during the first quarter of
fiscal 2004 increased $786,000, or 23%, to $4,157,000 from $3,371,000 in the
comparable fiscal 2003 quarter. As a percentage of net revenue, SG&A expense was
36% in the first quarter of fiscal 2004 as compared to 27% in the prior year
quarter. Planned increases in regulatory and clinical expenses, facility
expansion costs, and marketing efforts to advance growth opportunities, combined
with lower than expected revenue levels are the primary reasons for this
percentage increase.
Research and development ("R&D") expense increased 4% during the first quarter
of fiscal 2004 to $894,000 from $861,000 during the prior-year quarter. This
planned increase is partially due to the timing and nature of various surgical
device projects, along with the development of various proprietary devices for
sale to interventional customers. In both business units, R&D expense fluctuates
from quarter to quarter based on the timing and progress through external
parties of the projects, and the timing of such expense will continue to be
influenced primarily by the number of projects and the related R&D personnel
requirements, development and regulatory approval path, expected costs, timing
and nature of those costs for each project.
Operating income decreased 53% in the first quarter of fiscal 2004, to $567,000
from $1,210,000 in the first quarter of fiscal 2003. First quarter operating
income for our surgical business was essentially flat - $1,102,000 in fiscal
2004 compared with $1,111,000 in fiscal 2003. Operating income for our
interventional business decreased from operating income of $99,000 in the first
quarter of 2003 to an operating loss of $535,000 in the first quarter of 2004.
We recorded a provision for income taxes of $215,000 in the first quarter of
fiscal 2004, at an effective tax rate of 34%, as compared to $418,000 at an
effective tax rate of 35% in the first quarter of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $42,645,000 at January 31, 2004 as compared to
$44,102,000 at October 31, 2003, a decrease of $1,457,000. The decrease in cash
is primarily related to working capital requirements and investments in capital
equipment necessary to support our expected future growth. As of January 31,
2004, the Company had long-term obligations (including current portions) of
$235,000, requiring payments through 2005.
Operating activities used cash of $419,000 in the first three months of fiscal
2004, as compared to using cash of $1,699,000 during the first three months of
fiscal 2003. Cash was used by operations for working capital necessary to
support expected growth in both business units, primarily for inventories (net
increase of $1,142,000). The increase in inventories is primarily due to the
mechanics of applying annual standard rates to units produced. Unit inventory
levels are fairly consistent with October 31, 2003. This was partially offset by
net income and a decrease in accounts receivable.
Investing activities used $1,234,000 of cash during the first three months of
fiscal 2004, primarily due to $1,217,000 in purchases of equipment and leasehold
improvements. During fiscal 2004, we may spend up to $8,000,000 for investments
in capital assets for various manufacturing, research and development,
information technology and facility projects necessary to support our expected
future growth.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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Financing activities provided $196,000 of cash during the first three months of
fiscal 2004, which consisted of proceeds of $287,000 received upon the exercise
of stock options under our stock option plan, offset by $91,000 in cash
repayments of capital equipment lease and other long-term obligations.
We primarily utilize internally generated cash flow and existing cash balances
to fund the operations of our businesses. We believe existing cash and
investments, coupled with anticipated cash flows from operations will be
sufficient to satisfy our operating cash requirements for the next twelve
months. This forward-looking statement regarding sufficiency of cash and cash
flows, as well as our long-term cash requirements, will be a function of a
number of variables, including research and development priorities, acquisition
opportunities and the growth and profitability of the business.
CRITICAL ACCOUNTING POLICIES
Goodwill: In accordance with the Statement of Financial Accounting Standards
("SFAS") No. 142, goodwill is no longer amortized, but is reviewed annually for
impairment as of the end of each fiscal year. Please see Note 3 to the unaudited
consolidated condensed financial statements for additional goodwill information.
Other Intangible Assets: Our other intangible assets, primarily developed
technology, patents, trademarks, and non-compete agreements pertaining to
previous business acquisitions, are recorded at cost and are amortized using the
straight-line method over their estimated useful lives, generally seven to 17
years. These assets are reviewed annually for impairment as of the end of each
fiscal year. Please see Note 3 to the unaudited consolidated condensed financial
statements for additional intangible asset information.
Revenue Recognition: Our policy is to ship products to customers on FOB shipping
point terms. We recognize revenue when the product has been shipped to the
customer if there is evidence that the customer has agreed to purchase the
products, delivery and performance have occurred, the price and terms of sale
are fixed and collection of the receivable is reasonably assured. Our sales
policy does not allow sales returns.
Inventories: Inventories, which are comprised of component parts, sub-assemblies
and finished goods, are valued at the lower of first-in, first-out ("FIFO") cost
or market. Overhead costs are applied to sub-assemblies and finished goods based
on annual estimates of production volume and such costs. These estimates are
reviewed and assessed by us on a quarterly basis.
Derivative Instruments and Hedging Activities: We do not enter into any
derivative instruments or hedging activities. Our policy is to only enter into
contracts that can be designated as normal purchases or sales. In addition,
substantially all of our contracts are negotiated, invoiced and paid in U.S.
dollars.
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.
14
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 we maintain are in accounts receivable and
long-term obligations. We believe that the interest rate, credit and market risk
related to these accounts is not significant. We manage the risk associated with
these accounts through periodic reviews of the carrying value for
non-collectibility of assets and establishment of appropriate allowances in
connection with our internal controls and policies. We do not utilize any
derivative financial instruments, derivative commodity instruments, other
financial instruments or engage in any other hedging activities.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports filed or submitted under the Exchange
Act are recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There was no
change in our internal control over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect our internal control over financial reporting.
15
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in litigation which is ordinary, routine
litigation incidental to its business. Management believes losses, if any, that
might eventually be sustained from such litigation would not be material to the
Company's consolidated financial position, results of operations or cash flows
for any period. Further, product liability claims may be asserted in the future
relative to events not known to management at the present time. Management
believes that the Company's risk management practices, including its insurance
coverage, are reasonably adequate to protect against potential material product
liability losses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002 (filed
herewith electronically).
b. Reports on Form 8-K
On November 6, 2003, Synovis Life Technologies, Inc.
("Synovis") filed a report on Form 8-K under Item 5
containing a press release announcing the promotion
of Fariborz Boor Boor to executive vice president.
On December 3, 2003, Synovis filed a report on Form
8-K filing certain financial information under Item 5
and furnishing a press release under Item 12, all
relating to its earnings for the fourth quarter ended
October 31, 2003 and the year ended October 31, 2003.
On January 13, 2004, Synovis filed a report on Form
8-K furnishing under Item 9 a press release
reaffirming its fiscal 2004 guidance, despite the
slow start in the Interventional Business and its
effect on first quarter results.
16
PART II. OTHER INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
On January 14, 2004, Synovis (the "Company") filed a
report on Form 8-K furnishing under Item 11 a notice
to its directors and executive officers concerning
the Company's upcoming stock trading blackout in
connection with a change in brokers for the Company's
Employee Stock Purchase Plan.
17
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SYNOVIS LIFE TECHNOLOGIES, INC.
Dated: March 12, 2004 /s/ Connie L. Magnuson
--------------------------------------------------
Connie L. Magnuson
Vice President of Finance, Chief Financial Officer
and Corporate Secretary
(Principal Financial Officer)
18
SYNOVIS LIFE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002 (filed
herewith electronically).
19