FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TOUNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998March 31, 1999 Commission File Number 0-21104
CRYOLIFE, INC.
(Exact name of registrantRegistrant as specified in its charter)
---------
Florida 59-2417093
(State or other jurisdictionOther Jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1655 Roberts Boulevard, NW
Kennesaw, Georgia 3014431144
(Address of principal executive offices)
(zip code)
(770) 419-3355
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: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 ____
The number of shares of common stock, par value $0.01 per share, outstanding on
November 13, 1998at
May 10, 1999 was 12,668,336.12,370,991.
Part I - FINANCIAL INFORMATION
Item 1. Financial statements
CRYOLIFE, INC.
AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Revenues:
Preservation services and products $ 15,846,000 $ 14,569,000 $ 45,824,000 $ 37,593,000
Research grants and licenses 168,000 --- 305,000 28,000
---------------------------- ----------------------------
16,014,000 14,569,000 46,129,000 37,621,000
Costs and expenses:
Cost of preservation services and products 6,263,000 5,112,000 18,089,000 13,089,000
General, administrative and marketing 6,310,000 5,620,000 18,066,000 15,300,000
Research and development 1,150,000 1,243,000 3,416,000 2,950,000
Interest (income) expense, net (373,000) 316,000 (264,000) 736,000
Other income, net (200,000) (71,000) (970,000) (185,000)
---------------------------- ----------------------------
13,150,000 12,220,000 38,337,000 31,890,000
---------------------------- ----------------------------
Income before income taxes 2,864,000 2,349,000 7,792,000 5,731,000
Income tax expense 962,000 891,000 2,718,000 2,161,000
---------------------------- ----------------------------
Net income $ 1,902,000 $ 1,458,000 $ 5,074,000 $ 3,570,000
============================ ============================
Earnings per share:
Basic $ 0.15 $ 0.15 $ 0.43 $ 0.37
============================ ============================
Diluted $ 0.15 $ 0.15 $ 0.42 $ 0.36
============================ ============================
Weighted average shares outstanding
Basic 12,808,000 9,670,000 11,754,000 9,622,000
============================ ============================
Diluted 13,074,000 9,978,000 12,058,000 9,914,000
============================ ============================(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
_____________________
1999 1998
_____________________
(Unaudited)
Revenues:
Preservation services and products $ 16,059 $ 14,501
Research grants and licenses 266 60
________ ________
16,325 14,561
Costs and expenses:
Preservation services and products 7,371 5,481
General, administrative and marketing 6,170 5,827
Research and development 1,074 1,011
Interest expense 119 430
Interest income (425) ---
Other income, net (44) (64)
________ _______
14,265 12,685
________ _______
Income before income taxes 2,060 1,876
Income tax expense 680 704
________ _______
Net income $ 1,380 $ 1,172
======== =======
Earnings per share:
Basic $ 0.11 $ 0.12
======== =======
Diluted $ 0.11 $ 0.12
======== =======
Weighted average shares outstanding:
Basic 12,497 9,739
Diluted 12,680 10,077
See accompanying notes to summary consolidated financial statements.
2
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30,March 31, December 31,
1999 1998 1997
(Unaudited)
ASSETS Current Assets:____________________________
Current Assets:
Cash and cash equivalents $ 46,394,0008,107 $ 111,00012,885
Marketable securities, at market 26,490 26,713
Receivables (net) 11,122,000 9,765,00013,209 11,187
Deferred preservation costs (net) 13,638,000 12,257,00014,252 14,239
Inventories 2,694,000 1,761,0004,149 3,385
Prepaid expenses and other assets 2,542,000 1,260,0002,501 1,945
Deferred income taxes 1,294,000 ---
-----------------------------------1,384 1,348
---------------------------------
Total current assets 77,684,000 25,154,000
-----------------------------------70,092 71,702
---------------------------------
Property and equipment (net) 19,037,000 15,487,00021,804 21,460
Goodwill (net) 1,713,000 9,809,0001,662 1,685
Patents (net) 2,208,000 2,196,0002,298 2,216
Other (net) 1,423,000 1,103,000
-----------------------------------1,401 1,327
---------------------------------
TOTAL ASSETS $ 102,065,00097,257 $ 53,749,000
===================================98,390
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,030,0001,139 $ 1,612,0001,652
Accrued expenses 2,320,000 534,0002,734 2,968
Accrued procurement fees 1,700,000 1,565,0001,693 1,806
Accrued compensation 1,641,000 1,122,0001,265 1,185
Current maturities of capital lease obligations 202,000 ---229 224
Current maturities of long-term debt 496,000 1,496,000290 516
Deferred income 721,000 ---
Income taxes payable 2,224,000 ---
-----------------------------------1,090 1,038
---------------------------------
Total current liabilities 10,334,000 6,329,000
-----------------------------------8,440 9,389
---------------------------------
Deferred income, 2,229,000 ---less current portion 1,280 1,525
Deferred income taxes 746,000 327,000419 410
Capital lease obligations, less current maturities 1,789,000 ---
Bank loans --- 10,777,0001,655 1,714
Convertible debenture 4,393,000 5,000,0004,393 4,393
Other long-term debt 570,000 1,089,000
-----------------------------------498 535
---------------------------------
Total liabilities 20,061,000 23,522,000
-----------------------------------16,685 17,966
---------------------------------
Shareholders' equity:
Preferred stock --- ---
Common stock (issued 13,359,00013,361 shares in 19981999
and 10,243,000 shares in 1997) 134,000 102,0001998) 134 134
Additional paid-in capital 64,350,000 17,694,00064,350 64,350
Retained earnings 17,700,000 12,627,00020,493 19,113
Unrealized gain on marketable securities 37 139
Less: Treasury stock (543,000 shares) (180,000) (180,000)
Note receivable from shareholder --- (16,000)
-----------------------------------(945 shares in 1999 and
845 shares in 1998) (4,442) (3,312)
---------------------------------
Total shareholders' equity 82,004,000 30,227,000
-----------------------------------80,572 80,424
---------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 102,065,00097,257 $ 53,749,000
===================================98,390
=================================
See accompanying notes to summary consolidated financial statements.
3
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NineThree Months Ended
September 30,March 31,
____________________________
1999 1998
1997
(Unaudited)
Net cash flows provided by (used in) operating activities:____________________________
Net cash flows used in operating activities:
Net income $ 5,074,0001,380 $ 3,570,0001,172
Adjustments to reconcile net income to net cash
provided by (used in)used in operating activities:
Deferred income recognized (193) ---
Depreciation and amortization 1,807,000 1,622,000686 960
Provision for doubtful accounts 77,000 31,00024 24
Deferred income taxes (875,000) 1,00025 ---
Changes in operating assets and liabilities:
Receivables (1,434,000) (819,000)(2,046) 224
Deferred preservation costs and inventories (3,700,000) (5,080,000)(777) (1,442)
Prepaid expenses and other assets (1,303,000) (564,000)(556) (335)
Accounts payable and accrued expenses 1,186,000 (1,670,000)(780) 95
-----------------------------------
Net cash flows (used in) provided by (used in) operating activities 832,000 (2,909,000)(2,237) 698
-----------------------------------
Net cash flows provided by (used in)used in investing activities:
Capital expenditures (2,689,000) (2,955,000)(963) (1,058)
Other assets (511,000) 32,000
Net proceeds from sale of IFM product lines 15,000,000 ---
Cash paid for acquisition, net of cash acquired --- (4,418,000)
Net sales(200) (896)
Purchases of marketable securities (6,709) ---
3,000Sales of marketable securities 6,932 ---
Gross unrealized gain on marketable equity securities (154) ---
-----------------------------------
Net cash flows provided by (used in)used in investing activities 11,800,000 (7,338,000)(1,094) (1,954)
-----------------------------------
Net cash flows provided by financing activities:
Principal payments of debt (13,976,000) ---(263) (540)
Proceeds from borrowings on revolving term loan 1,680,000 8,475,000--- 1,680
Payment of obligations under capital leases (150,000)(54) (35)
Purchase of treasury stock (1,259) ---
Proceeds from issuance of common stock and
from notes receivable from shareholders 46,097,000 444,000129 154
-----------------------------------
Net cash (used in) provided by financing activities 33,651,000 8,919,000(1,447) 1,259
-----------------------------------
Increase (decrease)(Decrease) increase in cash 46,283,000 (1,328,000)(4,778) 3
Cash and cash equivalents, beginning of period 111,000 1,370,00012,885 111
-----------------------------------
Cash and cash equivalents, end of period $ 46,394,0008,107 $ 42,000114
===================================
Supplemental cash flow information
Non-cash investing and financing activities:
Establishing capital lease obligations $ 2,141,000--- $ ---2,141,000
===================================
Debt conversion into common stock $ 607,000 $ ---
===================================
Fair value of assets acquired $ --- $ 1,768,000
Cost in excess of assets acquired --- 8,541,000
Liabilities assumed --- (891,000)
Debt issued for assets acquired --- (5,000,000)
-----------------------------------
Net cash paid for acquisition $ --- $ 4,418,000607,000
===================================
See accompanying notes to summary consolidated financial statements.
4
CRYOLIFE, INC. AND SUBSIDIARIES
NOTES TO SUMMARY CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited, condensed, consolidated financial statements have
been prepared in accordance with (i) generally accepted accounting principles
for interim financial information, and (ii) 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 presentations.statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine months ended
September 30, 1998March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.1999. For further information, refer
to the consolidated financial statements and notesfootnotes thereto included in the
CryoLife Inc. (the "Company")Company's Form 10-K for the year ended December 31, 1997.1998.
Note 2 - Follow-on Equity Offering
On April 3, 1998 theInvestments
The Company completed a follow-on equity offering (the
"Offering") of 2,588,000 newly issued shares of its common stock resultingmaintains cash equivalents and investments in net proceeds of $39.4 million. On April 16, 1998 the Company issued an
additional 387,500 shares of common stock pursuant to the underwriters'
overallotment option resulting in $6.0 million of additional net proceeds to the
Company. A portion of the net proceeds were used to repay outstanding amounts
underseveral large
well-capitalized financial institutions, and the Company's bank loans and for expansion of manufacturing facilities.
The remainder of the proceeds will be used for additional expansion of
manufacturing facilities and for general corporate purposes, including working
capital and potential acquisitions.
In conjunction with the Offering, $607,000 of the convertible debentures were
converted into 50,000 shares of the Company's common stock.
Note 3 - Investmentspolicy disallows
investment in any securities rated less than "investments-grade" by national
rating services.
Management determines the appropriate classification of investmentsdebt securities at the
time of purchase and reevaluates such designation atdesignations as of each balance sheet
date. Available for saleDebt securities are carriedclassified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Debt securities not
classified as held-to-maturity or trading, and marketable equity securities not
classified as trading, are classified as available-for-sale. Available-for-sale
securities are stated at their fair value,values, with the unrealized gains and
losses, net of tax, reported in a separate component of stockholders'shareholders' equity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other than temporary on available-for-sale
securities are included in investment incomeincome. The cost of securities sold is
based on the specific identification method. Interest and are determineddividends on
a
first-in, first-out basis.
At September 30, 1998 and December 31, 1997, the Company held $30.8 million and
$0, respectively, in mutual funds and money market funds. All investments weresecurities classified as available for sale as of September 30, 1998. Fair market value is
equivalent to cost at September 30, 1998.
All investmentsavailable-for-sale are included in interest income. At
March 31, 1999 all marketable equity securities and debt securities held by the
Company havewere designated as available-for-sale.
The gross realized gains on sales of available-for-sale securities totaled
$77,000 and $0 in the first quarters of 1999 and 1998, respectively. As of March
31, 1999 differences between cost and market of $56,000 (less deferred taxes of
$19,000) are included as a separate component of shareholders' equity.
At March 31, 1999 and December 31, 1998 approximately $5.9 million and $8.9
million, respectively, of debt securities with original maturities of 90 days or
less thanat their acquisition dates were included in cash and cash equivalents. At
March 31, 1999 and December 31, 1998 no investments had a maturity date between
90 days and are classified as cash1 year and cash equivalents asapproximately $17.3 million and $16.1 million of
September 30, 1998.investments matured between one and five years, respectively. The market values
of these securities approximate cost.
5
Note 43 - InventoriesInventory
Inventories are comprised of the following:
(Unaudited)
September 30, December 31,
1998 1997
-----------------------------------
Raw materials $ 557,000 $ 262,000
Work-in-process 184,000 358,000
Finished goods 1,953,000 1,141,000
-----------------------------------
$ 2,694,000 $ 1,761,000(Unaudited)
March 31, December 31,
1999 1998
-----------------------------------
Raw materials $ 1,621,000 $ 1,296,000
Work-in-process 1,115,000 1,037,000
Finished goods 1,413,000 1,052,000
-----------------------------------
$ 4,149,000 $ 3,385,000
===================================
Note 54 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
(Unaudited) (Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
______________________
1999 1998
1997 1998 1997______________________
(Unaudited)
Numerator for basic and diluted earnings per share -
net income $ 1,902,0001,380,000 $ 1,458,000 $5,074,000 $3,570,000
======================== =======================1,172,000
===================================
Denominator for basic earnings per share - weighted-averageweighted-
average basis 12,808,000 9,670,000 11,754,000 9,622,00012,497,000 9,739,000
Effect of dilutive stock options 266,000 308,000 304,000 292,000
------------------------ ------------------------183,000 338,000
-----------------------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares 13,074,000 9,978,000 12,058,000 9,914,000
======================== ========================12,680,000 10,077,000
===================================
Earnings per share:
Basic $ .15.11 $ .15 $ .43 $ .37
======================== ========================.12
===================================
Diluted $ .15.11 $ .15 $ .42 $ .36
======================== =========================.12
===================================
Note 65 - Sale of Ideas for Medicine, Inc. Product Line
On September 30,Comprehensive Income
During the periods ended March 31, 1999 and 1998, the Company closed the sale of the product linenet comprehensive income was
less than net income by approximately $102,000 and certain related assets of its wholly-owned subsidiary, Ideas for Medicine, Inc.,
a Florida corporation ("IFM"),$0, respectively, due to
Horizon Medical Products, Inc. ("Horizon"),
for $15 million in cash. The IFM product line consists of speciality
cardiovascular and vascular medical instruments and devices. The sale was made
pursuant to an asset purchase agreement. IFM and Horizon also signed a
manufacturing agreementunrealized losses on September 30, 1998 which provides for the manufacture
by IFM of a specified minimum dollar amount of products from the IFM product
line to be purchased exclusively by Horizon over each of the next four years.
Thereafter, the responsibility for such manufacturing will be assumed by
Horizon.
The Company established a deferred revenue balance at the transaction date
totaling $2,950,000 which amount represents the selling price less the net book
value of the assets sold and the costs related to the sale. Such amount will be
amortized into cost of goods sold over the four year life of the manufacturing
agreement.
Note 7 - Subsequent Events
On October 14, 1998, the Company's Board of Directors authorized the purchase of
up to 1 million shares of its common stock. The purchase of shares will be made
from time to time in open market or privately-negotiated transactions on such
terms as management deems appropriate. As of November 9, 1998, the Company has
purchased 188,000 shares of its common stock for an aggregate purchase price of
$1,843,000.marketable equity securities.
6
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Preservation and product revenues increased 9%11% to $15.8$16.1 million for the three
months ended September 30, 1998March 31, 1999 from $14.6$14.5 million for the same period in 1997.
Preservation and product revenues increased 22% to $45.8 million for the nine
months ended September 30, 1998 from $37.6 million for the same period in 1997.1998. The
increase in revenues was primarily due to the growing acceptance in the medical
community of cryopreserved tissues which has resulted in increased demand for
the Company's cryopreservation services, the Company's ability to procure
greater amounts of tissue, price increases for certain preservation services,
and revenues attributable to the Company's lineintroduction of single-use devices following the Ideas for Medicine, Inc.
("IFM") acquisitionBioGlue Surgical
Adhesive in March 1997.
Revenues from IFM decreased 10% to $1.5 million for the three months ended
September 30, 1998 from $1.7 million for the three months ended September 30,
1997, representing 10% and 12%, respectively, of total revenues during such
periods. This decreaseinternational markets in revenues was primarily attributable to a 3% decrease
in IFM shipments due to a decrease in demand and a decrease in average selling
price due to competitive pricing pressures and a change in the product mix for
the three months ended September 30,April 1998. Revenues from IFM increased 22% to
$4.7 million for the nine months ended September 30, 1998 from $3.9 million for
the nine months ended September 30, 1997, representing 10% of total revenues
during such periods. This increase in revenues is due to the nine months ended
September 30, 1998 having two extra months of IFM revenue than the nine months
ended September 30, 1997 due to the IFM acquisition closing on March 5, 1997.
Revenues from human heart valve and conduit cryopreservation services decreased
2%8% to $8.4$6.8 million for the three months ended September 30, 1998March 31, 1999 from $8.6$7.4 million
for the three months ended September 30, 1997,March 31, 1998, representing 53%42% and 59%51%,
respectively, of total revenues during such periods. This decrease was primarily
due to a 9% decrease in average selling price resulting from a change in the
product mix, partially offset by a 1% increase in the number of heart allograft shipments for the three
months ended September 30, 1998.March 31, 1999. The decrease in the number of heart allograft
shipments primarily results from fewer pulmonary heart valve allografts being
shipped due to a decrease in the number of Ross procedures being performed.
Revenues from human heart valve and conduitvascular tissue cryopreservation services increased 7%39% to
$23.8$4.9 million for the ninethree months ended September 30, 1998March 31, 1999 from $22.2$3.5 million for the
ninethree months ended September 30, 1997,March 31, 1998, representing 52%30% and 59%24%, respectively, of
total revenues during such periods. This increase in revenues was primarily due
to a 7%29% increase in the number of heartvascular allograft shipments for the ninethree
months ended September 30, 1998, respectively,March 31, 1999 due to an increased demand and the Company's ability
to procure greater amounts of tissue partially offset byand a focus on procuring and distributing
long segment veins which have a higher per unit revenue than the decrease in average selling price as discussed above.short segment
veins.
Revenues from human vascularconnective tissue cryopreservation services increased 27%33% to
$3.4$2.4 million for the three months ended September 30, 1998March 31, 1999 from $2.7$1.8 million for the
three months ended September 30, 1997,March 31, 1998, representing 21%15% and 19%,
respectively, of total revenues during such periods. Revenues from human
vascular tissue cryopreservation services increased 35% to $10.5 million for the
nine months ended September 30, 1998 from $7.8 million for the nine months ended
September 30, 1997, representing 23% and 21%12%, respectively, of
total revenues during such periods. This increase in revenues was primarily due
to a 25% and a
34% increase in the number of vascular allograft shipments for the three months
and nine months ended September 30, 1998, respectively, due to an increased
demand and the Company's ability to procure greater amounts of tissue.
Revenues from human connective tissue cryopreservation services increased 36% to
$1.8 million for the three months ended September 30, 1998 from $1.4 million for
the three months ended September 30, 1997, representing 12% and 9%,
respectively, of total revenues during such periods. Revenues from human
connective tissue cryopreservation services increased 65% to $5.6 million for
the nine months ended September 30, 1998 from $3.4 million for the nine months
ended September 30, 1997, representing 12% and 9%, respectively, of total
revenues during such periods. This increase in revenues was primarily due to a
16% and an 55%23% increase in the number of allograft shipments for the three months
and nine months ended September 30, 1998, respectively,March 31, 1999 due to increased demand and the Company's ability to
procure greater amounts of tissue. Additional revenue increases have resulted
from a greater proportion of the 19981999 shipments consisting of cryopreserved
menisci, which have a significantly higher per unit revenue than the Company's
cryopreserved tendons and price increases for the cryopreservation of menisci
and tendons.
Revenues from bioprosthetic cardiovascular devices increased 37% to $243,000Ideas for Medicine, Inc. ("IFM") were $1.6 million for the three
months ended March 31, 1999 and 1998, representing 10% and 11%, respectively, of
total revenues during such periods. The IFM product line was sold on September
30, 1998. In October 1998 IFM began an OEM manufacturing agreement which
provides for the manufacture by IFM of specified minimum dollar amounts of IFM
products to be purchased exclusively by the purchaser of the IFM product line
over each of the four years following the sale.
Revenues from $177,000bioprosthetic cardiovascular devices were $200,000 for the three
months ended September 30, 1997,March 31, 1999 and 1998, representing 2% and 1%, respectively, of total revenues during
each such periods.
Revenues from bioprosthetic cardiovascular
devices increased 59% to $660,000 for the nine months ended September 30, 1998
from $414,000 for the nine months ended September 30, 1997, representing 1% of
total revenues during such periods. This increase in revenues was primarily due
to a 31%BioGlue(R) surgical adhesive were $254,000 and an 61% increase in the number of bioprosthetic cardiovascular
device shipments$0 for the three
months and nine months ended September 30, 1998,
respectively, due to increased manufacturing capacity.
Revenues from BioGlue(R) were $367,000March 31, 1999 and $582,000 for the three months and
nine months ended September 30, 1998, respectively. The Company is currently
introducingcommercializing the product in the European market as well as in other selected
overseas markets. Shipments began in April of 1998.
Grant revenues increased to $168,000$266,000 for the three months ended September 30,
1998March 31, 1999
from $0$60,000 for the three months ended September 30, 1997. Grant revenues
increased to $305,000 for the nine months ended September 30, 1998 from $28,000
for the nine months ended September 30, 1997.March 31, 1998. This increase in grant
revenues is primarily attributable to the SynerGraft(R) research and development
programs.
Other income increased to $200,000 for the three months ended September 30, 1998
from $71,000 for the three months ended September 30, 1997. Other income
increased to $970,000 for the nine months ended September 30, 1998 from $185,000
for the nine months ended September 30, 1997. Other income in 1998 relates
primarily to proceeds from the sale of the Company's port product line.7
Cost of cryopreservation services and products aggregated $6.3$7.4 million for the
three months ended September 30, 1998,March 31, 1999, compared to $5.1$5.5 million for the
corresponding period in 1997,1998, representing 40%46% and 35%, respectively,38% of total cryopreservation
and product revenues in each period. Cost of cryopreservation
services and products aggregated $18.1 million for the nine months ended
September 30, 1998, compared to $13.1 million, respectively, for the nine months
ended September 30, 1997, representing 39% and 35% of total cryopreservation and
product revenues, respectively. Cost of cryopreservation services and products
increased 23% for the third quarter of 1998 compared to the third quarter of
1997. The increase in 1998 of the 1999 cost of
cryopreservation services and products as a percentage of revenues results from a lesser portion of 19981999
revenues being derived from human heart valve and conduit cryopreservation
services, which carry a significantly higher gross margins than other
cryopreservation services, from
increased manufacturing overhead costs associated with the Company's new
manufacturing facilities and from the inclusionswitch in October of 1998 to OEM
manufacturing of nine months of IFM's
sales,single-use medical devices, which generategenerates lower gross margins
than cryopreservation services compared with seven monthsand lower gross margins than the IFM products
generated prior to the sale of the IFM sales in the first nine months of 1997.product line.
General, administrative and marketing expenses increased 12%6% to $6.3$6.2 million for
the three months ended September 30, 1998,March 31, 1999, compared to $5.6$5.8 million for the
corresponding period in 1997,1998, representing 40%38% and 39%, respectively,40% of total cryopreservation and product revenues in each period. General, administrative
and marketing expenses increased 18% to $18.1 million for the nine months ended
September 30, 1998, compared to $15.3 million for the corresponding period in
1997, representing 39% and 41%, respectively, of total cryopreservationpreservation and
product revenues in each period. The increase in expenditures in 19981999 resulted
from expenses incurred to support the increase in revenues and costs associated
with the introduction of BioGlue into the European community.revenues.
Research and development expenses were $1.2$1.1 million for the three months ended
September 30, 1998, and 1997, representing 7% and 9%, respectively, of total
cryopreservation and product revenues for each period. Research and development
expenses increased 16%March 31, 1999, compared to $3.4$1 million for the ninethree months ended September 30,March 31,
1998, compared to $3.0 million for the corresponding period in 1997,
representing 7% and 8%, respectively, of total cryopreservation and product revenues for each
period. Research and development spending relates principally to the Company's
ongoing human clinical trials for its BioGlue surgical adhesive and to its focus
on its bioadhesives and SynerGraft technologies.
Net interest income was $373,000$306,000 for the three months ended September 30, 1998March 31, 1999
compared to net interest expense of $316,000$430,000 for the corresponding period in
1997. Net1998. This increase in interest income was $264,000 for the nine months ended September 30,
1998 compared to net interest expense $736,000 for the corresponding period in
1997. Thisand decrease in interest expense for the
three and nine months ended September 30,March 31, 1999 was due to the receipt of interest income on
the invested proceeds from the follow-on equity offering (the "Offering")
completed in April 1998 is due toand reduction of interest expense from the repayment of
certain indebtedness with the proceeds from the follow-on equity offering completed in April 1998,Offering, as well as the
conversion of a portion of a convertible debenture into common stock of the
Company, and the receipt of interest income on the invested proceeds from the
Offering.Company.
The decline in the effective income tax rate to 34%33% from 38% for the three
months ended September 30,March 31, 1999 and 1998, and 1997, respectively, and to 35% from 38% for
the nine months ended September 30, 1998 and 1997, respectively, is due to the implementation
of certain income tax planning strategies.
Seasonality
The demand for the Company's human heart valve and conduit cryopreservation
services is seasonal, with peak demand generally occurring in the second and
third quarters. Management believes that this demand trend for human heart valve and
conduit cryopreservation services is primarily due to the high number of
pediatric surgeries scheduled during the summer months. Management believes that the trends
experienced by the Company to date for its human connective tissue for the knee
cryopreservation services indicate that this business may also be seasonal because it
is an elective procedure thatwhich may be performed less frequently during the
fourth quarter holiday months. However, the demand for the Company's human vascular
tissue cryopreservation services, bioprosthetic cardiovascular devices, and
single-use medical devicesBioGlue surgical adhesive does not appear to experience this seasonal trend. Additionally, based onAs
an OEM manufacturer of single-use medical devices the current approved
indications for BioGlue, management doesproduct sales are dictated
by a manufacturing agreement which is not anticipate the demand for BioGlue
to experienceaffected by a seasonal trend.
Liquidity and Capital Resources
At September 30, 1998,March 31, 1999, net working capital was $67.4$61.7 million, compared to $18.8$62.3
million at December 31, 1997,1998, with a current ratio of 8 to 1.8-to-1 at March 31, 1999.
The Company's primary capital requirements arise out of general working capital
needs, capital expenditures for facilities and equipment and funding of research
and development projects and a common stock repurchase plan approved by the
boardBoard of directorsDirectors in October of 1998. The Company historically has funded these
requirements through bank credit facilities, cash generated by operations and
equity offerings.
8
Net cash used in operating activities was $2,237,000 for the three months ended
March 31, 1999, as compared to net cash provided by operating activities was $832,000of
$698,000 for the ninethree months ended September 30, 1998, as compared to net cash used in operating activities of $2.9
million for the nine months ended September 30, 1997.March 31, 1998. This increasedecrease primarily
resulted from: 1)from an increase in net income, 2)the accounts receivables due to increased revenues
and an increase in payablesthe amount of accounts payable liquidated in the first
quarter in 1999 due to construction projects, and 3)the expansion of the BioGlue manufacturing laboratory at
corporate headquarters, partially offset by a decreasereduction in the growthincrease of
deferred preservation cost due to more stringent inventory management policies, partially offset by 1)
an increase in receivables related to the increase in revenues, 2) an increase
in prepaidscosts and other assets resulting from the note receivable from the sale of
the IFM port line and other miscellaneous deposits, and 3) the establishment of
a deferred tax asset in conjunction with the sale of the remaining IFM product
line.
Net cash provided by investing activities was $11.8 million for the nine months
ended September 30, 1998, as compared to net cash used in investing activities
of $7.3 million for the nine months ended September 30, 1997. This increase was
primarily attributable to the absence of a business acquisition duringinventories between the first quarter of 19981999 as
compared to the first quarter of 1997,1998.
Net cash used in investing activities was $1.1 million for the three months
ended March 31, 1999, as compared to $2.0 million for the three months ended
March 31, 1998. This decrease was primarily attributable to the decrease in the
addition of other assets during which the Company acquired IFM, coupled withfirst quarter of 1999.
Net cash used in financing activities was $1.4 million for the net proceeds from the sale of the IFM
product linethree months
ended March 31, 1999, as of September 30, 1998.
Netcompared to net cash provided by financing activities
was $33.6of $1.3 million for the ninethree months ended September 30, 1998, as compared to $8.9 million for the nine months ended
September 30, 1997.March 31, 1998. This increasedecrease was
primarily attributable to proceeds of
$45.4 million from the Offering, partially offset by the repayment ofa decrease in borrowings on the Company's bank loans
due to the repayment of the Company's bank loans from the Offering proceeds and
accrued interest thereon, totaling $13.3
million.the Company's repurchase of treasury stock during the first quarter of 1999.
In October 1998 the Company entered into an agreement with an investment banking
firm to provide financial advisory services related to a potential private
placement of equity or equity-oriented securities to form a subsidiaryseparate company for
the commercial development of its serine proteinase light activation (FibRx(R))
technologies. This strategy, if successful, will allow the Companyan affiliated entity to
fund the FibRx technology in a subsidiary company and should expedite the commercial development of its
blood clot dissolving and surgical sealant product applications without
additional R&D expenditures by the Company.Company (other than through the affiliated
company). This strategy, if successful, willshould also favorably impact the
Company's liquidity going forward.
The Company anticipates that the remaining net proceeds from the Offering proceeds from
the sale of the IFM product lines, and
cash generated from operations will be sufficient to meet its operating and
development needs for at least the next 12 months. However, the Company's future
liquidity and capital requirements beyond that period will depend upon numerous
factors, including the timing of the Company's receipt of FDA approvals to begin
clinical trials for its products currently in development, the resources
required to further develop its marketing and sales capabilities if, and when,
those products gain approval, the resources required to expand manufacturing
capacity and the extent to which the Company's products generate market
acceptance and demand. There can be no assurance that the Company will not
require additional financing or will not seek to raise additional funds through
bank facilities, debt or equity offerings or other sources of capital to meet
future requirements. These additional funds may not be available when needed or
on terms acceptable to the Company, which unavailability could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Year 2000
The Company is aware of the issues that many companies will face as the year
2000 approaches. In order to become year 2000 compliant, the Company has set up
a project team to address the issue and has taken the following steps:
Impact Assessment: The Company has identified potential year 2000 issues and the
associated potential risks. The Company has assessed the impact of the year 2000
issue and believes that its business products and services will not be
significantly impacted. Additionally, the Company has determined that, with the
exception of the Company's clinical tracking database, all of the Company's
financial and operational applications have been upgraded to or replaced with
year 2000 compliant software.
Third Party Impact Assessments: The Company has begun to verifyverified the readiness of its
significant suppliers through the distribution of a questionnaire. This
process is estimated to be completequestionnaire which was 90%
returned by the suppliers by January 1, 1999 indicating compliance or that
compliance would be achieved by June 30, 1999. The Company does not anticipate
that a lack of compliance of the vendors will significantly affect the Company's
daily operations.
9
Project Plan: The Company began its compliance strategy in October 1997.1998. With
the exception of the clinical tracking database, all of the "off the shelf"
software packages have been upgraded to compliant releases. Older internally
developed software has been replaced with new systems that are year 2000
compliant. The remaining clinical tracking system will be internally rewritten,
and implemented by first quarterJuly 31, 1999. The Company estimates that all modifications
and testing for year 2000 issues will be completed at a cost of less than
$50,000 including expenditures to date.
Contingency Plan: The principal risk the Company faces is a delay in the
implementation of the new clinical tracking system. Although the clinical
tracking system is not critical to the day-to-day operations of the Company, it
is important for FDA compliance regarding follow-up procedures after transplant.
A delay in the implementation of the new clinical tracking system would result
in the Company having to rely on its paper support for required FDA data.
Although the Company is uncertain what the costs associated with a delay would
be or the related impact on operations, liquidity and financial condition, the
Company does not expect the impact to be material. The Company expects to have a
contingency plan completed by March 15,June 30, 1999.
The Company believes that it is diligently addressing the year 2000 issue and
expects that through its actions, year 2000 problems are not reasonably likely
to have a material adverse effect on its operations. However, there can be no
assurance that such problems will not arise.
Recent Accounting Pronouncements
In September 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). The Company
adopted Statement 130 January 1, 1998. Due to the immateriality of the Company's
elements of comprehensive income, such adoption had no effect on the Company's
consolidated financial statements.
Forward-Looking Statements
Statements made in this Form 10-Q for the quarter ended September 30, 1998March 31, 1999 that
state the Company's or management's intentions, hopes, beliefs, expectations or
predictions of the future are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. It is important to note
that the Company's actual results could differ materially from those contained
in such forward-looking statements as a result of adverse changes in any of a
number of factors that affect the Company's business, including without
limitation, changes in (1) the effects on the Company of year 2000 issues
including unanticipated expenses in connection therewith, (2) the Company's
ability to find an equity investor in the FibRx technology and the impact of
such an investment on the Company's liquidity, (3) government regulationthe adequacy of the Company's
business, (4)financing arrangements over the Company's competitive position, (5) the availability
of tissue for implant, (6) the status of the Company's products under
development, (7) the protection of the Company's proprietary technology and (8)
the reimbursement of health care costs by third-party payors.next twelve months. See the "Business-Risk
Factors" section of the Company's Annual Report on Form 10-K for the year ended
December 31, 19971998 for a more detailed discussion of these and
other factors which might affect
the Company's future performance.
Item 3. Qualitative and Quantitative Discussion About Market Risk.
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents of $5.9
million and short-term investments of $17.3 million in municipal obligations as
of March 31, 1999 as well as interest paid on its debt. To mitigate the impact
of fluctuations in U.S. interest rates, the Company generally maintains 80% to
90% of its debt as fixed rate in nature. As a result, the Company is subject to
a risk that interest rates will decrease and the Company may be unable to
refinance its debt.
10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
None.None
Item 5. Other information.
With respect to the Company's annual meeting of shareholders to be held
in 1999, all shareholder proposals submitted outside the shareholder
proposal rules contained in Rule 14a-8 promulgated under the Securities
Exchange Act of 1934, as amended, which pertains to the inclusion of
shareholder proposals in a Company's proxy materials, must be received
by the Company by March 3, 1999, in order to be considered timely. With
regard to such shareholder proposals, if the date of the next annual
meeting of shareholders is advanced or delayed by more than 30 calendar
days from May 21, 1999, the Company shall, in a timely manner, inform
its shareholders of the change, and the date by which such proposals
must be received. As set forth in the Company's Proxy Statement dated
April 17, 1998, shareholders who wish to avail themselves of the
provisions of Rule 14a-8 must submit their proposals no later than
December 18, 1998.None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibit index can be found below.
Exhibit
Number Description
2.1 Asset Purchase Agreement dated as of September 30, 1998 by and between
Ideas For Medicine, Inc. ("IFM") and Horizon Medical Products, Inc.
(incorporated herein by reference to Exhibit 2 to the Current Report
on Form 8-K of Horizon Medical Products, Inc. (File No. 000-24029)
filed on October 14, 1998)._______ ___________
3.1 Restated Certificate of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
3.2 Amendment to Articles of Incorporation of the Company dated November
29, 1995. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal three months
ended December 31, 1995.)
3.3 Amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of common stock from 20 million to 50
million shares and to delete the requirement that all preferred shares
have one vote per share. (Incorporated by reference to Exhibit 3.3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30,June 31, 1996.)
3.4 ByLaws of the Company, as amended. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
4.1 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1 (No. 33-56388).)
4.2 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
27.1 Financial Data Schedule: Quarter Ended September 30, 1998Schedule
(b) None.Current Reports on Form 8-K.
None
11
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 thereunto duly authorized.
CRYOLIFE, INC.
(Registrant)
November 16, 1998May 10, 1999 /s/ EDWIN B. CORDELL, JR..
-JR.
- ------------------ ----------------------------------
DATE EDWIN B. CORDELL, JR.
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
12