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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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission File Number 0-13907
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SYNOVIS LIFE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554
Principal Executive Offices: 2575 University Ave. W.
St. Paul, Minnesota 55114
Telephone Number: (651) 796-7300
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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 June 5, 2005, there were 11,796,298 shares of the registrant's common stock,
par value $.01 per share, outstanding.
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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 AND SIX MONTHS ENDED APRIL 30, 2005 AND 2004
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(in thousands, except per share data)
Three Months Ended Six Months Ended
April 30, April 30,
` 2005 2004 2005 2004
--------------- ------------- -------------- -------------
Net revenue $ 14,366 $ 13,743 $ 27,789 $ 25,262
Cost of revenue 8,966 8,098 17,162 13,999
--------------- ------------- -------------------------------
Gross margin 5,400 5,645 10,627 11,263
Operating expenses:
Selling, general and administrative 4,238 4,091 8,400 8,248
Research and development 1,264 910 2,172 1,804
Other 50 - 86 -
--------------- ------------- -------------------------------
Operating income (loss) (152) 644 (31) 1,211
Interest income, net 197 58 382 125
--------------- ------------- -------------------------------
Income before provision for income taxes 45 702 351 1,336
Provision for income taxes 4 219 105 434
--------------- ------------- -------------------------------
Net income $ 41 $ 483 $ 246 $ 902
=============== ============= ===============================
Earnings per share:
Basic $ - $ 0.04 $ 0.02 $ 0.08
=============== ============= ============== =============
Diluted $ - $ 0.04 $ 0.02 $ 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 APRIL 30, 2005 AND OCTOBER 31, 2004
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(in thousands, except share and per share data)
April 30, October 31,
2005 2004
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ASSETS
Current assets:
Cash and cash equivalents $ 5,745 $ 15,369
Short-term investments 36,060 26,931
Accounts receivable, net 7,735 7,722
Inventories 10,405 11,591
Deferred income tax asset, net 1,088 1,088
Other current assets 2,415 2,467
---------------- ---------------
Total current assets 63,448 65,168
Property, plant and equipment, net 14,049 13,704
Goodwill 5,284 4,905
Other intangible assets, net 2,475 1,948
---------------- ---------------
Total assets $ 85,256 $ 85,725
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,191 $ 3,551
Accrued expenses 3,073 2,906
Current maturities of capital lease obligations 15 40
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Total current liabilities 5,279 6,497
Deferred income tax liability, net 1,227 1,227
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Total liabilities 6,506 7,724
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Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at April 30, 2005 and
October 31, 2004 - -
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 11,796,928 at April 30, 2005 and
11,713,700 at October 31, 2004 118 117
Additional paid-in capital 73,116 72,614
Retained earnings 5,516 5,270
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Total shareholders' equity 78,750 78,001
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Total liabilities and shareholders' equity $ 85,256 $ 85,725
================ ===============
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
3
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED APRIL 30, 2005 AND 2004
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(in thousands)
Six Months Ended
April 30,
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 246 $ 902
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 1,368 1,035
Amortization of intangible assets 206 148
Tax benefit from exercise of stock options - 283
Loss on disposal of manufacturing equipment 174 -
Changes in operating assets and liabilities:
Accounts receivable (13) (224)
Inventories 1,186 (861)
Other current and non-current assets 52 (105)
Accounts payable (1,360) (166)
Accrued expenses 167 (1,248)
-------------- --------------
Net cash provided by (used in) operating activities 2,026 (236)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,887) (3,162)
Investments in patents and trademarks (83) (89)
Purchases of short-term investments (57,479) (20,958)
Redemptions of short-term investments 48,350 -
Purchase of assets of Neuroregen, LLC (986) -
Other (43) 8
-------------- --------------
Net cash used in investing activities (12,128) (24,201)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans 503 589
Repayment of capital lease and other long-term obligations (25) (184)
-------------- --------------
Net cash provided by financing activities 478 405
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NET DECREASE IN CASH AND CASH EQUIVALENTS (9,624) (24,032)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,369 44,102
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,745 $ 20,070
============== ==============
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 on Form 10-K for the year ended October 31, 2004.
In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
consolidated financial position, results of operations and cash flows of the
Company as of and for the interim periods presented have been included.
Operating results and cash flows for the three and six months ended April 30,
2005 are not necessarily indicative of the results of operations and cash flows
of the Company that may be expected for the year ending October 31, 2005.
(2) ACQUISITION OF BUSINESS:
On December 6, 2004, Synovis Micro Companies Alliance, Inc. (MCA), a wholly
owned subsidiary of Synovis Life Technologies, Inc., purchased substantially all
of the assets of Neuroregen, LLC. The primary asset acquired was the rights to
the Neurotube(R), a bioabsorbable nerve conduit which is designed to assist in
the regeneration of nerves. The purchase price included a cash payment of
$986,000 plus certain additional payments to the former shareholders of
Neuroregen, LLC. These additional payments will be based on the cumulative net
sales of the Neurotube through December 6, 2009 and are equal to 4% of the first
$2,000,000 of cumulative net sales, 8% of the next $3,000,000 in cumulative net
sales and 12% of all cumulative net sales in excess of $5,000,000. Approximately
$653,000 of the purchase price was allocated to identifiable intangible assets
to be amortized on a straight line basis over an estimated average useful life
of five years. The remaining amount of the purchase price was recorded as
goodwill. Additional payments to the former shareholders of Neuroregen, LLC will
be recorded as additional goodwill when earned.
As the acquisition occurred in December 2004, sales of the Neurotube from
December 7, 2004 to April 30, 2005 are included in the Consolidated Condensed
Statement of Income for the three and six month period ended April 30, 2005. The
assets acquired in the transaction are included in the Company's Consolidated
Condensed Balance Sheet as of April 30, 2005 and the purchase transaction has
been included in the Consolidated Condensed Statement of Cash Flows for the six
month period ended April 30, 2005.
Pro forma combined financial information for the three and six month periods
ended April 30, 2005 and 2004 have not been provided as the historical operating
results of Neuroregen, LLC are not considered significant in relation to the
Company's results for the periods then ended.
(3) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (in thousands):
April 30, October 31,
2005 2004
---- ----
Inventories:
Finished Goods.................................................................. $ 3,671 $ 3,822
Work in process................................................................. 4,211 4,647
Raw Materials................................................................... 2,523 3,122
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$ 10,405 $ 11,591
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5
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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(4) GOODWILL AND OTHER INTANGIBLE ASSETS (in thousands):
The following table summarizes the Company's amortized intangible assets:
As of April 30, As of October 31,
2005 2004
---- ----
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Patents and trademarks $ 1,536 $ 507 $ 1,253 $ 447
Developed technology 1,102 424 1,102 369
Noncompete agreements 1,500 732 1,050 641
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Total $ 4,138 $ 1,663 $ 3,405 $ 1,457
============= ============= ============= ============
Amortization expense was $206,000 for the six months ended April 30, 2005 and
$148,000 for the six months ended April 30, 2004. The estimated amortization
expense for each of the next five years is approximately $500,000 per year,
based on the Company's present intangible assets.
The following is a summary of goodwill by business segment:
Interventional business Surgical business Total
----------------------- ----------------- -----
Goodwill as of:
April 30, 2005 $ 4,093 $ 1,191 $ 5,284
October 31, 2004 $ 4,093 $ 812 $ 4,905
No impairment losses were incurred during the six months ended April 30, 2005.
(5) STOCK BASED COMPENSATION (in thousands except share and per share data):
The following table demonstrates the effect on net income and earnings per
share, net of taxes, as if the fair value based method of accounting had been
applied to all outstanding and unvested stock compensation awards in each
period:
Three Months Ended Six Months Ended
April 30, April 30,
2005 2004 2005 2004
---- ---- ---- ----
Net income
As reported $ 41 $ 483 $ 246 $ 902
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 212 186 404 315
------- ------- ------- -------
Pro forma net income (loss) $ (171) $ 297 $ (158) $ 587
======= ======= ======= =======
6
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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Basic earnings per share:
As reported 0.00 0.04 0.02 0.08
Pro forma (0.01) 0.03 (0.01) 0.05
Diluted earnings per share:
As reported 0.00 0.04 0.02 0.08
Pro forma (0.01) 0.02 (0.01) 0.05
As of April 30,
2005 2004
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Options outstanding....................................................... 898,821 982,376
Range of exercise prices.................................................. $2.00 - $25.07 $2.00 - $25.07
Range of expiration dates................................................. 2005 -- 2014 2004 -- 2014
(6) EARNINGS PER SHARE:
The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:
Three Months Ended Six Months Ended
April 30, April 30,
2005 2004 2005 2004
---- ---- ---- ----
Denominator for basic earnings per share --
weighted-average common shares 11,761,679 11,496,762 11,744,470 11,459,261
Shares associated with option plans 244,317 495,566 259,707 558,129
---------- ---------- ---------- ----------
Denominator for diluted earnings per share --
weighted-average common shares and dilutive
potential common shares 12,005,996 11,992,328 12,004,177 12,017,390
========== =========== ========== ==========
Options excluded from EPS calculation because
exercise prices are greater than the average
market price of the Company's common stock 222,136 32,214 166,640 31,964
========== ========== ========== ==========
7
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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(7) SEGMENT INFORMATION (in thousands):
The Company's operations, which are presently based mainly in Minnesota and
Puerto Rico, are comprised of two operating segments, the surgical business and
the interventional business, with segmentation based upon the similarities of
the underlying business operations, products and markets of each. The Company
evaluates the performance of its business segments and allocates resources based
upon their respective current or future earnings contribution to the
consolidated earnings of the Company or based upon the segment's product
research and development efforts in process at that time.
Operations that are not included in either of the operating segments are
included in the category "corporate and other." The corporate and other segment
captures costs that are not directly assignable to one of the operating business
segments, including the costs of being a public company and the portion of
management time estimated to be associated with corporate activities.
The following table presents certain financial information by business segment
for the three and six months ended April 30, 2005 and 2004:
Three Months Ended Six Months Ended
April 30, April 30,
2005 2004 2005 2004
---- ---- ---- ----
Net revenue:
Surgical business $ 5,950 $ 6,614 $ 12,493 $ 13,300
Interventional business 8,416 7,129 15,296 11,962
-------- -------- -------- --------
Total $ 14,366 $ 13,743 $ 27,789 $ 25,262
======== ======== ======== ========
Operating income (loss):
Surgical business $ 212 $ 1,355 $ 1,089 $ 2,845
Interventional business 169 (306) (106) (824)
Corporate and other (533) (405) (1,014) (810)
-------- -------- -------- --------
Total $ (152) $ 644 $ (31) $ 1,211
======== ======== ======== ========
(8) SHAREHOLDERS' EQUITY:
During the six months ended April 30, 2005, stock options for the purchase of
62,530 shares of the Company's common stock were exercised at prices between
$2.59 and $10.07 per share. During the six months ended April 30, 2004, stock
options for the purchase of 65,021 shares of the Company's common stock were
exercised at prices between $3.85 and $12.20 per share.
(9) SHORT-TERM INVESTMENTS (in thousands):
During the six months ended April 30, 2005, the Company purchased $57,479 and
redeemed at maturity $48,350 of short-term investments, resulting in net
holdings of $36,060 of such securities at the end of the period. Short-term
investments consist of highly liquid debt securities with maturities less than
one year. The Company determines the appropriate classification of its
investments at the time of purchase. Debt securities are classified as held to
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held to maturity securities are carried at amortized
cost. Debt securities not classified as held to maturity are classified as
available for sale. Available for sale securities are measured at fair market
value in the balance sheets. As the fair market value of our available for sale
investments approximates their amortized cost, there are no unrealized gains or
losses for these investments to be reported as a separate component of
shareholders' equity.
8
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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(10) SUBSEQUENT EVENTS:
On May 13, 2005, the Company accelerated the vesting of 19,000 unvested and
"out-of-the-money" stock options that were granted under the Company's 1995
Stock Incentive Plan. The acceleration is intended to enable the Company to
avoid recognizing compensation expenses associated with these options in future
periods following its adoption of Financial Accounting Standards Board ("FASB")
Statement No. 123R (Shared-Based Payment) as of November 1, 2005.
Of the Company's other outstanding options, only options held by non-employee
directors will remain unvested under their current terms at the time of the
Company's adoption of FASB Statement No. 123R. The Company is evaluating
alternatives to these options and its other stock-based compensation practices.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Forward-Looking Statements:
The disclosures in this Form 10-Q include "forward-looking statements" made
under the Private Securities Litigation Reform Act of 1995. Without limiting the
foregoing, words such as "should", "could", "may", "will", "expect", "believe",
"anticipate", "estimate" or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. All forward-looking statements in this document are based on
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any forward-looking statements. You are advised,
however, to consult any future disclosures we make on related subjects in future
filings with the SEC. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such factors may include, among
others, the "important factors" listed from time to time in the Company's
filings with the Securities and Exchange Commission, such as the Annual Report
on Form 10-K for the year ended October 31, 2004.
OVERVIEW
Synovis Life Technologies, Inc. is a diversified medical device company engaged
in developing, manufacturing and marketing products for the surgical and
interventional treatment of disease. Our business is conducted in two operating
segments, the surgical business and the interventional business, with
segmentation based upon the similarities of the underlying business operations,
products and markets of each.
Our surgical business develops, manufactures and markets implantable biomaterial
products, devices for microsurgery and surgical tools, all designed to reduce
risk and/or facilitate critical surgeries, leading to better patient outcomes
and/or lower costs.
Our interventional business develops, engineers, prototypes and manufactures
coils, helices, stylets, guidewires and other complex micro-wire, polymer and
micro-machined metal components used in interventional devices for cardiac
rhythm management, neurostimulation, vascular and other procedures.
Operations that are not included in either of the operating segments are
included in the category "corporate and other." The corporate and other segment
captures costs that are not directly assignable to one of the operating business
segments, including the costs of being a public company and the estimated time
of management personnel in support of corporate activities.
On December 6, 2004, Synovis Micro Companies Alliance, Inc. (MCA), a wholly
owned subsidiary of Synovis Life Technologies, Inc., purchased substantially all
of the assets of Neuroregen, LLC. The primary asset acquired was the rights to
the Neurotube(R), a bioabsorbable nerve conduit which is designed to assist in
the regeneration of nerves. The purchase price included a cash payment of
$986,000 plus certain additional payments to the former shareholders of
Neuroregen, LLC. These additional payments will be based on the cumulative net
sales of the Neurotube through December 6, 2009 and are equal to 4% of the first
$2,000,000 of cumulative net sales, 8% of the next $3,000,000 in cumulative net
sales and 12% of all cumulative net sales in excess of $5,000,000. Approximately
$653,000 of the purchase price was allocated to identifiable intangible assets
to be amortized on a straight line basis over an estimated average useful life
of five years. The remaining amount of the purchase price was recorded as
goodwill. Additional payments to the former shareholders of Neuroregen, LLC will
be recorded as additional goodwill when earned.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 2005 WITH THE THREE MONTHS ENDED
APRIL 30, 2004 (IN THOUSANDS EXCEPT PER SHARE DATA)
The following table summarizes our condensed consolidated operating results:
For the quarter ended For the quarter ended
April 30, 2004 April 30, 2005
$$$ % $$$ %
--- --- --- ---
Summary of Operating Results
Net revenue $ 14,366 100.0% $13,743 100.0%
Cost of revenue 8,966 62.4 8,098 58.9
---------------------- --------------------
Gross margin 5,400 37.6 5,645 41.1
Selling, general and administrative 4,238 29.5 4,091 29.8
Research and development 1,264 8.8 910 6.6
Other 50 0.3 0 0.0
---------------------- --------------------
Operating expenses 5,552 38.6 5,001 36.4
---------------------- --------------------
Operating (loss) income $ (152) (1.0%) $ 644 4.7%
====================== ====================
Net revenue increased 5% to $14,366 in the second quarter of fiscal 2005
compared with $13,743 in the second quarter of fiscal 2004. Our consolidated
operating income decreased $796 to a loss of $152 in the second quarter of
fiscal 2005 from income of $644 in the prior year quarter. Consolidated net
income decreased 92% in the current quarter to $41, or zero cents per diluted
share, from $483, or four cents per diluted share, in the same quarter of fiscal
2004.
The following table summarizes our condensed consolidated operating results by
business segment:
For the quarter ended
April 30,
Business Segment Information (in thousands) 2005 2004
---- ----
Net revenue
Surgical business $ 5,950 $ 6,614
Interventional business 8,416 7,129
--------- ---------
Total $ 14,366 $ 13,743
Gross margin
Surgical business $ 3,582 $ 4,358
Interventional business 1,818 1,287
---------- ---------
Total $ 5,400 $ 5,645
Gross margin percentage
Surgical business 60% 66%
Interventional business 22% 18%
Total 38% 41%
Operating income (loss)
Surgical business $ 212 $ 1,355
Interventional business 169 (306)
Corporate and other (533) (405)
---------- ---------
Total $ (152) $ 644
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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Our surgical business generated net revenue of $5,950 in the second quarter of
fiscal 2005, a 10% decrease from $6,614 in the year-ago quarter. The following
table summarizes our surgical business net revenue by product group for the
second quarter of fiscal 2005 and fiscal 2004:
For the quarter ended
April 30,
Surgical Business Net Revenue 2005 2004
---- ----
Peri-Strips(R) $ 2,170 $ 2,785
Other Biomaterial Products 2,078 2,227
Devices for Microsurgery and Surgical Tools 1,382 1,293
Other 320 309
--------- ---------
Total $ 5,950 $ 6,614
The decreased volume in surgical business net revenue is primarily due to
decreased sales of Peri-Strips. Worldwide net revenue from the sales of
Peri-Strips, which includes our newly introduced Peri-Strips Dry with Veritas(R)
Collagen Matrix ("PSD Veritas"), was $2,170 in the second quarter of fiscal
2005. This was a decrease of 22% over the second quarter of fiscal 2004 ($2,785)
and 20% over the first quarter of fiscal 2005 ($2,713). Peri-Strips are used to
reduce risks and improve patient outcomes in several procedures, with the
predominance of our revenue in gastric bypass surgery.
The decrease in Peri-Strips revenue in the second quarter of fiscal 2005 is
believed to be attributable to several factors occurring within the gastric
bypass market, which continues to be in a state of flux. These factors include
but may not be limited to:
- availability of insurance to patients to cover gastric bypass,
- certain hospitals electing not to support gastric bypass programs,
- competing buttressing products,
- alternatives to gastric bypass surgery, including gastric banding, and
- patient perception of gastric bypass as a safe, effective treatment
option.
To the extent the above and other market factors continue to negatively impact
Peri-Strips revenue, surgical business and consolidated operating performance
could be adversely affected.
Revenue from Other Biomaterial Products decreased 7% to $2,078 in the second
quarter of fiscal 2005. The decrease was primarily driven by the country of
Taiwan, which as of April 2004, no longer permitted imports of bovine-based
tissue products. In the second quarter of fiscal 2004, sales of Other
Biomaterial Products to Taiwan totaled $87. The decrease was partially offset by
increased revenue from our Veritas(R) remodelable biomaterial products, which
increased $54 to $198 in the quarter. Revenue from Devices for Microsurgery and
Surgical Tools was $1,382 in the second quarter of fiscal 2005, an increase of
$89 or 7% from $1,293 in the year-ago quarter. Driving this increase were
increased sales of our Coupler products and $90 in revenue from our newly
acquired Neurotube(R) product. The Coupler is a device to connect extremely
small arteries or veins, without sutures, quickly, easily and with consistently
excellent results. The Neurotube is designed to assist in the regeneration of
nerves.
In November 2004, we announced that our surgical business had reached a mutual
agreement with a distributor to change the representation of its products in a
large U.S. territory. By agreement, the distributor stopped representing our
products as of April 30, 2005, and new sales representation became effective May
1, 2005. The territory affected by the change covers approximately 22% of the
U.S. population and approximately 200 hospitals that use our products. We
believe this transition will yield long-term benefits, although the process of
change will have short-term costs.
Given the continued revenue decrease of the surgical business into the second
quarter, we are expecting to add several personnel who will work in concert with
our distributors and reps in an effort to drive sales of our surgical
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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products. We do not expect to see revenue gains in the near term from any
resources added in the third quarter given the time required to identify good
candidates, the selection process and training required before they are sent
into the field.
Our interventional business customers predominantly operate in the cardiac
rhythm management ("CRM") market and we address three segments of this market:
pacing, implantable cardioverter defibrillation ("ICD") and congestive heart
failure ("CHF"). Within the CRM market, we produce conductor and shocking coils
for pacing and defibrillator leads, helices for active fixation leads, and
stylets used to implant all types of leads. Our interventional business has
customarily experienced variations in revenue from period to period primarily
due to inherent variability in the timing of customer demand. Such variations
may continue in the future.
The following table summarizes our interventional business net revenue by market
for the second quarter of fiscal 2005 and fiscal 2004:
For the quarter ended
April 30,
Interventional Business Net Revenue 2005 2004
---- ----
Cardiac rhythm management $ 6,617 $ 5,107
Other 1,799 2,022
--------- ---------
Total $ 8,416 $ 7,129
The following table summarizes our interventional business net revenue by
product for the second quarter of fiscal 2005 and fiscal 2004:
For the quarter ended
April 30,
Interventional Business Net Revenue 2005 2004
---- ----
Coils and helices $ 4,257 $ 3,650
Stylets and other wireforms 2,769 2,174
Machining, molding and tool making 1,060 719
Other 330 586
---------- ---------
Total $ 8,416 $ 7,129
Interventional business net revenue increased 18% to $8,416 in the second
quarter of fiscal 2005 from $7,129 in the second quarter of fiscal 2004. The
revenue increase is primarily due to increased sales to our interventional
businesses' three largest customers, who collectively accounted for 81% of
revenue in each of the second quarters of fiscal 2005 and 2004.
Our interventional business is indirectly affected by the market conditions and
trends of the CRM market, and we are directly affected by the actions of our
customers in response to this market. Sales of components within the CRM market
increased 30% in the second quarter of fiscal 2005 as compared to the same
period in fiscal 2004. As previously reported, however, we believe that
interventional business revenue in fiscal 2004 was negatively impacted by a
material slowdown in customer orders for components for their CRM devices.
The consolidated gross margin percentage decreased three percentage points, from
41% to 38% during the second quarter of fiscal 2005 from the same quarter of
fiscal 2004. The decreased consolidated gross margin percentage is attributable
to the impact of business unit mix being weighted more heavily to our
interventional business, which operates at a lower gross margin percentage than
our surgical business. The gross margin for our surgical business decreased six
percentage points, from 66% in the second quarter of fiscal 2004 to 60% in the
second quarter of fiscal 2005. The decreased margin within our surgical business
is primarily due to higher overhead rates in fiscal 2004 as compared to fiscal
2003. As inventory within our surgical business turns approximately twice a
year, inventory sold in the second quarter of fiscal 2004 was produced in fiscal
2003 at lower rates. While increased overhead rates are the primary driver of
the decreased surgical business margin, product mix also was a factor, as
Peri-Strips generally
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
have a higher gross margin than our other surgical business products. Over the
past four quarters, gross margins for the surgical business have ranged from
59.8% to 60.4%. For the remainder of fiscal 2005, surgical business gross
margins are expected to be dependent upon product mix and overall revenue
levels. Gross margin in the interventional business increased four percentage
points, from 18% in fiscal 2004 to 22% in fiscal 2005. The improvement is due to
a reduced cost structure that resulted from the realignment and right-sizing of
our direct labor and overhead workforce, our focus on manufacturing efficiencies
and our continued transfer of manufacturing activities to Puerto Rico, where
labor rates are lower. We expect gross margins in the interventional business to
improve in the second half of fiscal 2005 as compared to the first half of the
year. However, there can be no assurance interventional margins will improve.
Factors which affect the consolidated gross margin include the relative revenue
of each business unit, product mix, volume and other production activities.
Accordingly, our consolidated gross margins may fluctuate from period to period
based on variations in these factors.
Selling, general and administrative ("SG&A") expense during the second quarter
of fiscal 2005 was $4,238, an increase of 4% compared to fiscal 2004 of $4,091.
As a percentage of net revenue, SG&A expense was 30% in both the second quarter
of fiscal 2005 and fiscal 2004. During the 2005 period, we incurred additional
SG&A costs associated with Sarbanes-Oxley compliance, increases at our surgical
business resulting from our fiscal 2004 facility expansion, as well as increased
operating expenses associated with the acquisition of the Neurotube product
line. SG&A expense is expected to trend upward in the second half of fiscal 2005
as compared to the first half of fiscal 2005 due to the expected addition of
several sales personnel within the surgical business as noted above, the
expected commencement of a colorectal clinical market evaluation using PSD
Veritas, as well as other factors.
Research and development ("R&D") expense increased $354 or 39% during the second
quarter of fiscal 2005 to $1,264 from $910 during the prior-year quarter. This
increase is due to two studies within our surgical business: a colorectal
circular stapler study and a bariatric circular stapler study, both utilizing
our newly introduced PSD Veritas. In both business units R&D expense fluctuates
from quarter to quarter based on the timing and progress through external
parties of the projects, and the timing of such expense will continue to be
influenced primarily by the number of projects and the related R&D personnel
requirements, development and regulatory approval path, expected costs, timing
and nature of those costs for each project.
During the second quarter of fiscal 2005 we incurred $50 of other operating
expenses, all of which are related to legal and other fees incurred in
connection with certain lawsuits filed against the Company. These lawsuits
allege that the Company and certain of its executive officers violated the
Securities Exchange Act of 1934 by issuing false or misleading statements about
the Company's business and prospects, which artificially inflated the price of
the Company's securities. We believe that the lawsuits have no factual basis and
intend to vigorously defend the actions. However, we expect to incur additional
legal expenses related to these suits in the future, potentially up to $500, the
deductible under the insurance policy the Company believes provides coverage for
such lawsuits. As of April 30, 2005, we have incurred a total of $132 in legal
and other fees related to the lawsuits.
Operating loss in the second quarter of fiscal 2005 was $152, a decrease of $796
from operating income of $644 in the second quarter of fiscal 2004. Second
quarter operating income for our surgical business decreased $1,143 to $212 in
fiscal 2005 compared with $1,355 in fiscal 2004. Our interventional business had
operating income of $169 in the second quarter of 2005, an increase of $475 from
an operating loss of $306 in the prior year quarter. Operating expenses in our
corporate and other business increased $128 to $533 in the first quarter of
fiscal 2005 from $405 in the second quarter of 2004.
We recorded a provision for income taxes of $4 in the second quarter of fiscal
2005, at an effective tax rate of 9%, as compared to $219 at an effective tax
rate of 31% in the second quarter of fiscal 2004. The decreased rate in the
second quarter of fiscal 2005 is the result of adjusting our expected fiscal
2005 effective tax rate from 33% to 30%, and due to relatively low pretax income
in the second quarter. We presently expect to have an effective tax rate of 30%
for fiscal 2005.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 2005 WITH THE SIX MONTHS ENDED
APRIL 30, 2004 (IN THOUSANDS EXCEPT PER SHARE DATA)
The following table summarizes our condensed consolidated operating results:
For the six months ended For the six months ended
April 30, 2004 April 30, 2005
Summary of Operating Results $$$ % $$$ %
--- --- --- ---
Net revenue $ 27,789 100.0% $ 25,262 100.0%
Cost of revenue 17,162 61.8 13,999 55.4
-------------------------- ------------------------
Gross margin 10,627 38.2 11,263 44.6
Selling, general and administrative 8,400 30.2 8,248 32.6
Research and development 2,172 7.8 1,804 7.2
Other 86 0.3 0 0.0
-------------------------- ------------------------
Operating expenses 10,658 38.3 10,052 39.8
-------------------------- ------------------------
Operating (loss) income $ (31) (0.1%) $ 1,211 4.8%
=============================== ========================
Net revenue increased 10% to $27,789 in the first six months of fiscal 2005
compared with $25,262 in the first six months of fiscal 2004. Our consolidated
operating income decreased $1,242 to an operating loss of $31 in the first half
of fiscal 2005 from $1,211 in the prior year period. Consolidated net income
decreased 73% in the first half of fiscal 2005 to $246, or two cents per diluted
share, from $902, or eight cents per diluted share, in the same period of fiscal
2004.
The following table summarizes our condensed consolidated operating results by
business segment:
For the six months ended
April 30,
Business Segment Information 2005 2004
---- ----
Net revenue
Surgical business $ 12,493 $ 13,300
Interventional business 15,296 11,962
-------- --------
Total $ 27,789 $ 25,262
Gross margin
Surgical business $ 7,492 $ 8,703
Interventional business 3,135 2,560
-------- --------
Total $ 10,627 $ 11,263
Gross margin percentage
Surgical business 60% 65%
Interventional business 21% 21%
Total 38% 45%
Operating income (loss)
Surgical business $ 1,089 $ 2,845
Interventional business (106) (824)
Corporate and other (1,014) (810)
-------- --------
Total $ (31) $ 1,211
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
Our surgical business generated net revenue of $12,493 in the first six months
of fiscal 2005, a 6% decrease from $13,300 in the year-ago period. The following
table summarizes our surgical business net revenue by product group for the
first six months of fiscal 2005 and fiscal 2004:
For the six months ended
April 30,
Surgical Business Net Revenue 2005 2004
---- ----
Peri-Strips(R) $ 4,883 $ 5,880
Other Biomaterial Products 4,282 4,318
Devices for Microsurgery and Surgical Tools 2,709 2,480
Other 619 622
--------- ---------
Total $ 12,493 $ 13,300
Worldwide net revenue from the sales of Peri-Strips was $4,883 in the first six
months of fiscal 2005, a decrease of $997 or 17% compared to $5,880 in the first
half of fiscal 2004. The decrease in Peri-Strips revenue in the second quarter
of fiscal 2005 is believed to be attributable to several factors within the
gastric bypass market, which are discussed in the second quarter comparison.
Revenue from Other Biomaterial Products decreased 1% to $4,282 in the first six
months of fiscal 2005. The decrease was primarily driven by the country of
Taiwan, which as of April 2004, no longer permitted imports of bovine-based
tissue products. In the first half of fiscal 2004, sales of Other Biomaterial
Products to Taiwan totaled $203. The decrease was partially offset by increased
revenue from our Veritas(R) remodelable biomaterial products, which increased
$135 to $424 in the year to date period. Revenue from Devices for Microsurgery
and Surgical Tools was $2,709 in the first half of fiscal 2005, an increase of
$229 or 9% from $2,480 in the year-ago quarter. Driving this increase were
increased sales of our Coupler products and $159 in revenue from our newly
acquired Neurotube(R) product.
The following table summarizes our interventional business net revenue by
market:
For the six months ended
April 30,
Interventional Business Net Revenue 2005 2004
---- ----
Cardiac rhythm management $ 11,717 $ 8,702
Other 3,579 3,260
-------- ---------
Total $ 15,296 $ 11,962
The following table summarizes our interventional business net revenue by
product:
For the six months ended
April 30,
Interventional Business Net Revenue (in thousands) 2005 2004
---- ----
Coils and helices $ 7,695 $ 5,855
Stylets and other wireforms 5,097 3,802
Machining, molding and tool making 1,934 1,352
Other 570 953
---------- ---------
Total $ 15,296 $ 11,962
Interventional business net revenue increased 28% to $15,296 in the first six
months of fiscal 2005 from $11,962 in the same period of fiscal 2004. The
revenue increase is primarily due to increased sales to our interventional
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
businesses' three largest customers, who collectively accounted for 81% and 79%
of revenue in the first half of fiscal 2005 and 2004, respectively. Sales growth
to these customers averaged 31% in the first six months of fiscal 2005 compared
to the prior-year period.
Our interventional business is indirectly affected by the market conditions and
trends of the CRM market, and we are directly affected by the actions of our
customers in response to this market. Sales of components within the CRM market
increased 35% in the first six months of fiscal 2005, and accounted for 90% of
our interventional businesses' revenue growth in the period.
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 difficult to precisely
predict and are expected to continue in the future.
During the first half of fiscal 2005, our interventional business recorded its
first sales of a product incorporating our Navi-Glide(TM) Steerable Stylet
("Navi-Glide") technology. The Navi-Glide is designed as a single-use disposable
device designed to assist physicians in interventional cardiac and neuro
procedures. This sale marked the completion of a development cycle initiated
with one of our customers in prior years. We are presently working with other
customers on individualized applications of this technology. We currently expect
minimal revenue from Navi-Glide in fiscal 2005 as the adaptation, development
and review processes required to bring these projects to completion are lengthy
in nature, and are shared with our customers, who control the timeline and
prioritization of such projects.
The consolidated gross margin percentage decreased seven percentage points, from
45% to 38% during the first six months of fiscal 2005 from the same period of
fiscal 2004. The decreased consolidated gross margin percentage is primarily
attributable to the impact of business unit mix being weighted more heavily to
our interventional business, which operates at a lower gross margin percentage
than our surgical business. The gross margin for our surgical business decreased
five percentage points, from 65% in the first half of fiscal 2004 to 60% in the
first half of fiscal 2005. As inventory within our surgical business turns
approximately twice a year, inventory sold in the first six months of fiscal
2004 was produced in fiscal 2003 at our lower rates. While increased overhead
rates are the primary driver of the decreased surgical business margin, product
mix also was a factor, as Peri-Strips generally have a higher gross margin than
our other surgical business products. Over the past four quarters, gross margins
for the surgical business have ranged from 59.8% to 60.4%. Gross margin in the
interventional business was consistent at 21% in the first half of both fiscal
2005 and fiscal 2004. Factors which affect the consolidated gross margin include
the relative revenue of each business unit, product mix, volume and other
production activities. Accordingly, our consolidated gross margins may fluctuate
from period to period based on variations in these factors.
Selling, general and administrative ("SG&A") expense during the first six months
of fiscal 2005 was $8,400, a 2% increase from $8,248 in fiscal 2004. As a
percentage of net revenue, SG&A expense was 30% in the first six months of
fiscal 2005 as compared to 33% in the prior-year period. During the 2005 period,
we incurred additional SG&A costs associated with Sarbanes-Oxley compliance,
increases at our surgical business resulting from our fiscal 2004 facility
expansion, as well as increased operating expenses associated with the
acquisition of the Neurotube product line.
Research and development ("R&D") expense increased 20% during the first half of
fiscal 2005 to $2,172 from $1,804 during the prior-year period. This increase is
primarily due to two studies within our surgical business: a colorectal circular
stapler study and a bariatric circular stapler study, both utilizing our newly
introduced PSD Veritas. 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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
During the first six months of fiscal 2005 we incurred $86 of other operating
expenses, which is for legal and other fees incurred in connection with certain
lawsuits filed against the Company. These lawsuits allege that the Company and
certain of its executive officers violated the Securities Exchange Act of 1934
by issuing false or misleading statements about the Company's business and
prospects, which artificially inflated the price of the Company's securities. We
believe that the lawsuits have no factual basis and intend to vigorously defend
the actions. However, we expect to incur additional legal expenses related to
these suits in the future, potentially up to $500, the deductible under the
insurance policy the Company believes provides coverage for such lawsuits.
Operating loss in the first six months of fiscal 2005 was $31, a decrease of
$1,242 from operating income of $1,211 in the first six months of fiscal 2004.
First half operating income for our surgical business decreased $1,756 to $1,089
in fiscal 2005 compared with $2,845 in fiscal 2004. Operating loss for our
interventional business was reduced by $718 to $106 in the first six months of
2005 from $824 in fiscal 2004. Operating expenses in our corporate and other
business increased $204 to $1,014 in the first six months of fiscal 2005 from
$810 in the first six months of 2004.
We recorded a provision for income taxes of $105 in the first six months of
fiscal 2005, at an effective tax rate of 30%, as compared to $434 at an
effective tax rate of 33% in the first six months of fiscal 2004. We presently
expect to have an effective tax rate of 30% for fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $5,745 at April 30, 2005 as compared to $15,369
at October 31, 2004, a decrease of $9,624. The decrease in cash is primarily
related to net purchases of $9,129 of short-term investments during the first
six months of fiscal 2005. These investments represent highly liquid, low-risk
debt securities with maturities greater than three months. Cash, cash
equivalents and short-term investments were $41,805 at April 30, 2005 as
compared to $42,300 at October 31, 2005. Additionally, $986 of cash was used in
the first half of fiscal 2005 for the purchase of substantially all of the
operating assets of Neuroregen, LLC.
Operating activities generated cash of $2,026 in the first six months of fiscal
2005, as compared to using cash of $236 during the first six of fiscal 2004.
Cash in the first six months of fiscal 2005 was primarily provided by net income
of $246 and non-cash expenses of $1,748. Working capital generated cash of $32.
Inventories decreased by $1,186, driven by a decrease in our interventional
business where inventories can fluctuate significantly depending upon the timing
of purchases and usage of precious metals. Accrued expenses and accounts payable
decreased by a net of $1,193 due to timing of various payments.
Investing activities used $12,128 of cash during the first six months of fiscal
2005 compared to $24,201 in the prior-year period. Investing activities in the
first six months of fiscal 2005 include the net purchases of $9,129 in
short-term investments, $986 of cash used for the purchase of substantially all
of the operating assets of Neuroregen, LLC and $1,887 used for capital
expenditures for purchases of equipment and leasehold improvements. During
fiscal 2005, we may spend up to an aggregate of $5,000 for investments in
capital assets for various manufacturing, information technology and facility
projects necessary to support our expected future growth.
Financing activities provided $478 of cash during the first six months of fiscal
2005, similar to $405 provided in the first six months of fiscal 2004. Proceeds
from stock-based compensation plans totaled $503, offset by $25 in cash
repayments of capital lease obligations.
We have historically funded the operations and investments in our businesses
utilizing internally generated cash flow and existing cash balances. We believe
existing cash, cash equivalents and short-term investments, coupled with
anticipated cash flows from operations will be sufficient to satisfy our
operating cash requirements for the next twelve months. This forward-looking
statement, as well as our long-term cash requirements, will be a function of a
number of variables, including research and development priorities, acquisition
opportunities and the growth and profitability of the business.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
Short-term Investments: Our short-term investments consist of highly liquid debt
securities with maturities less than one year. We determine the appropriate
classification of our investments at the time of purchase. Debt securities are
classified as held to maturity when we have the positive intent and ability to
hold the securities to maturity. Held to maturity securities are carried at
amortized cost. Debt securities not classified as held to maturity are
classified as available for sale. Available for sale securities are measured at
fair market value in the balance sheets. As the fair market value of our
available for sale investments approximates their amortized cost, there are no
unrealized gains or losses for these investments to be reported as a separate
component of shareholders' equity.
Goodwill: In accordance with the Statement of Financial Accounting Standards
("SFAS") No. 142, goodwill is no longer amortized, but is reviewed annually for
impairment as of the end of each fiscal year. Please see Note 4 to the unaudited
consolidated condensed financial statements for additional goodwill information.
Other Intangible Assets: Our other intangible assets, primarily developed
technology, patents, trademarks, and non-compete agreements pertaining to
previous business acquisitions, are recorded at cost and are amortized using the
straight-line method over their estimated useful lives, generally five to 17
years. These assets are reviewed annually for impairment as of the end of each
fiscal year. Please see Note 4 to the unaudited consolidated condensed financial
statements for additional intangible asset information.
Revenue Recognition: Our policy is to ship products to customers on FOB shipping
point terms. We recognize revenue when the product has been shipped to the
customer if there is evidence that the customer has agreed to purchase the
products, delivery and performance have occurred, the price and terms of sale
are fixed and collection of the receivable is reasonably assured. Our sales
policy does not allow sales returns.
Inventories: Inventories, which are comprised of component parts, subassemblies
and finished goods, are valued at the lower of first-in, first-out ("FIFO") cost
or market. Overhead costs are applied to sub-assemblies and finished goods based
on annual estimates of production volumes and such costs. These estimates are
reviewed and assessed for reasonableness on a quarterly basis. The estimated
value of excess, slow-moving and obsolete inventory as well as inventory with a
carrying value in excess of its net realizable value is established by us on a
quarterly basis through review of inventory on hand and assessment of future
product demand, anticipated release of new products into the market, historical
experience and product expiration.
Derivative Instruments and Hedging Activities: We may enter into derivative
instruments or perform hedging activities. However, our policy is to only enter
into contracts that can be designated as normal purchases or sales.
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, Inventory Costs. This statement amends Chapter 4 of ARB No. 43 to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage), as well as requiring that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of this
statement are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005 and the Company does not expect SFAS No. 151 to
have a material impact on its operating results and financial condition.
In December 2004, the FASB issued SFAS No. 123R (Share-Based Payment). SFAS No.
123R revises SFAS No. 123 and requires entities to recognize compensation
expense for all share-based payment transactions in an amount equal to the fair
value of share-based payments granted to employees. SFAS No. 123R requires a
company to record compensation expense for all awards granted after the date of
adoption of SFAS No. 123R and for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. SFAS No. 123R is
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
effective as of the beginning of the first annual reporting period that begins
after June 15, 2005.
On May 13, 2005, the Company accelerated the vesting of 19,000 unvested and
"out-of-the-money" stock options that were granted under the Company's 1995
Stock Incentive Plan. The acceleration is intended to enable the Company to
avoid recognizing compensation expenses associated with these options in future
periods following its adoption of SFAS No. 123R as of November 1, 2005.
Of the Company's other outstanding options, only options held by non-employee
directors will remain unvested under their current terms at the time of the
Company's adoption of FASB Statement No. 123R. The Company is evaluating
alternatives to these options and its other stock-based compensation practices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal financial instruments we maintain are in short-term investments
and accounts receivable. We believe that the interest rate, credit and market
risk related to these accounts is not significant. We manage the risk associated
with these accounts through periodic reviews of the carrying value for
non-collectibility of assets and establishment of appropriate allowances in
connection with our internal controls and policies. We may enter into derivative
instruments or perform hedging activities. However, our policy is to only enter
into contracts that can be designated as normal purchases or sales.
ITEM 4 -- CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There was no
change in our internal control over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect our internal control over financial reporting.
20
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Between June and August 2004, five lawsuits were filed against the Company and
certain of its executive officers in the United States District Court for the
District of Minnesota by individual shareholders who seek to represent a class
of purchasers of the Company's common stock during the period from October 16,
2003 through May 18, 2004. Those lawsuits have been consolidated into a single
case which has expanded the class period from May 21, 2003 through May 18, 2004.
The consolidated complaint generally alleges that the defendants violated the
Securities Exchange Act of 1934 by issuing false or misleading statements about
our business and prospects, which artificially inflated the price of the
Company's securities. No damages have been specified. We believe that the
lawsuit has no factual basis and intend to vigorously defend the consolidated
action. Two related actions brought by individual shareholders who seek to
represent the Company derivatively have also been filed in United States
District Court for the District of Minnesota. Those lawsuits allege that certain
officers and the Company's directors violated their fiduciary duties to the
Company. The Company's Board of Directors has also received a demand to commence
a claim against certain directors and officers and has created a special
litigation committee to address that demand. We are unable to evaluate the
likelihood of prevailing in these cases at this early stage of the proceedings
and have not recorded a liability in our consolidated condensed balance sheet.
We have incurred legal expenses and expect to incur additional legal expenses
related to these suits in the future, potentially up to $500,000 in aggregate,
the deductible under the insurance policy we believe provides coverage for such
lawsuits. Legal and other fees could exceed the amount of our deductible for
which, at this time, we anticipate our insurance carriers would reimburse us.
From time to time, the Company may become involved in litigation which is
ordinary, routine litigation incidental to its business. Further, product
liability claims may be asserted in the future relative to events not known to
management at the present time. Management believes that the Company's risk
management practices, including its insurance coverage, are reasonably adequate
to protect against potential material liability losses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following is a report of the voting results of the Company's annual
shareholders meeting held on February 22, 2005.
The proposal to elect seven directors, as described in the Company's proxy
statement for its annual meeting of shareholders held on February 22, 2005, was
approved. Karen Gilles Larson, William G. Kobi, Mark F. Palma, Richard W.
Perkins, Timothy M. Scanlan, Edward E. Strickland and Sven A. Wehrwein 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 10,685,367 246,495
Karen Gilles Larson 10,677,617 254,245
Mark F. Palma 10,723,769 208,093
Richard W. Perkins 9,732,784 1,199,078
Timothy M. Scanlan 10,718,629 213,233
Edward E. Strickland 10,675,381 256,481
Sven A. Wehrwein 10,722,968 208,894
21
ITEM 5. OTHER INFORMATION
None.
ITEM 6. 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).
22
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 8, 2005 /s/ Brett Reynolds
------------------------------------
Brett Reynolds
Vice President of Finance,
Chief Financial Officer
and Corporate Secretary
(Principal Financial Officer)
23
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).
24