Highlights
* FY 2010 first quarter sales from continuing operations were $11.6 million reflecting soft customer demand
* FY 2010 first quarter loss from continuing operations was $0.4 million, or $0.02 per share
* Del Medical Imaging business was sold on November 24, 2009.
* U.S. Credit facility amended to reflect reduced U.S. borrowing requirements

Q1 FY 2010 FINANCIAL RESULTS

Consolidated net sales from continuing operations for the fiscal 2010 first quarter declined by approximately 18.6% to $11.6 million from $14.2 million in the first quarter of fiscal 2009, due primarily to decreased volume at the Medical Systems Group, where net sales declined 17.3% to $9.5 million from $11.5 million in the prior year’s first quarter, as a result of decreased international customer orders. The Medical Systems Group consists of the Villa Sistemi Medicali S.p.A. (“Villa”) subsidiary. Sales at the Power Conversion Group, which consists of the Company’s RFI Corporation subsidiary (“RFI”), for the first quarter of fiscal 2010 were $2.1 million, approximately $0.6 million, or 23.6% less than the prior year’s first quarter.

Consolidated gross margin for the fiscal 2010 first quarter was 22.2% compared to 26.1% in the same period last year, due to the impact of lower sales volume. The Medical Systems Group’s first quarter 2010 gross margin of 20.3% was lower than the gross margin of 23.7% in the first quarter of fiscal 2009 primarily related to lower sales volume. The Power Conversion Group’s gross margin for the first quarter of fiscal 2010 was 31.1 %, versus 36.2% in the prior year first quarter.

Total operating expenses in the fiscal 2010 first quarter were $2.7 million, or 23.1% of total sales, compared to $2.8 million, or 19.5% of total sales, in the prior year’s first quarter.

The operating loss for the fiscal 2010 first quarter was $0.1 million, as compared to operating income of $0.9 million in the first quarter of fiscal 2009. The Medical Systems Group generated operating income of $0.2 million in the fiscal 2010 first quarter compared to operating income of $0.8 million for the first quarter of fiscal 2009. RFI posted an operating profit of $0.1 million in the fiscal 2010 first quarter as compared to $0.4 million in the comparable period last year. Unallocated corporate expenses for the first quarter of fiscal 2010 totaled $0.4 million.

The discontinued operations loss of $3.1 million in the first quarter of fiscal 2010 reflects a $1.3 million loss from operations on sales of $3.5 million and $1.8 million from the write-down of assets to net realizable value. The discontinued operations in the first quarter of fiscal 2009 incurred a loss from operations of $1.2 million on sales of $8.1 million.

For the first quarter of fiscal 2010, the Company reported a net loss of $3.5 million, or $0.15 per diluted share, compared to net loss of $0.6 million, or $0.03 per diluted share, in the first quarter of fiscal 2009.

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For the 2009 fiscal fourth quarter, net revenue rose to $15.0 million, an 18 percent increase over $12.7 million in the year-ago period. Net income on a GAAP basis for the fiscal 2009 fourth quarter was $3.8 million, or $0.33 per diluted share. Adjusted fourth quarter net income (non-GAAP), excluding the gain on the sale of auction rate securities and the related impact on income taxes, was $0.6 million, or $0.05 per diluted share, versus GAAP net income of $1.9 million, or $0.15 per diluted share, in the year-earlier period.

For fiscal 2009, net revenue rose to $58.2 million, up 17 percent from $49.8 million in fiscal 2008. On a GAAP basis, net income for fiscal 2009 was $2.7 million, or $0.23 per diluted share. Adjusted net income (non-GAAP), excluding certain special charges, was $6.6 million, or $0.56 per diluted share, compared to GAAP net income from continuing operations of $6.2 million, or $0.48 per diluted share, in fiscal 2008.

Gross margin for the fiscal fourth quarter was 72 percent, a 2 percentage point gain over the fourth quarter of fiscal 2008. The gross margin improvement resulted from increased sales of higher margin Veritas products, as well as higher average net selling prices. SG&A expense totaled $9.1 million in the quarter, a significant increase over $5.8 million in the fourth quarter of fiscal 2008, largely due to the 40 percent expansion of the domestic surgical sales force and $1.6 million in start-up costs associated with the recently acquired Synovis Orthopedic and Woundcare (OWC) operations. Research and development expenses totaled $1.1 million in the fourth quarter, a 19 percent increase over the year-ago period. Priority projects during the fourth quarter included the final-stage development of the Flow Coupler device and Peri-Strips enhancement initiatives.

Fiscal fourth quarter operating income was $642,000, compared to $2.2 million in the year-ago period. Excluding the start-up costs associated with OWC, non-GAAP operating income in the fourth quarter of fiscal 2009 was $2.2 million.

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For the nine months that ended September 30, 2009, the Company reported revenues of $21.8 million, an increase of 4.7% over the same period in 2008. Domestic revenues increased 3.5% due principally to sales to the DHHS in the third quarter of 2009, and international revenues increased 11.3% due to higher average international sales prices. Loss from operations increased due principally to increased litigation costs and stock option expense, mitigated by a higher gross profit.

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For the 2009 fiscal third quarter, net revenue rose to $15.0 million, a 12 percent increase over $13.4 million in the year-ago period. Net loss on a GAAP basis for the third quarter of fiscal 2009 was $(4.9) million, or $(0.42) per share. Adjusted third quarter net income (non-GAAP), excluding certain special charges, was $2.2 million, or $0.19 per diluted share, up 24 percent from GAAP net income of $1.8 million, or $0.14 per diluted share, in the year-earlier period.

Synovis recorded several special charges in the third quarter, which totaled $8.2 million on a pretax basis and $7.1 million on an after-tax basis, or $0.61 per diluted share. These charges include: the other-than-temporary impairment of $4.1 million in auction rate securities; the immediate expensing of $3.5 million of acquired in-process research and development projects related to the purchase of the assets of Pegasus Biologics; and the write-off of $600,000 of intangibles related to a lower priority product.

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