Item 5. Market for Registrant's Equity and Related Stockholder Matters - page 35
of annual shareholder report below:
MARKET PRICE OF COMMON STOCK
The Company's Common Stock is traded under the symbol "CRY." The following table
sets forth, for the periods indicated, the intra-day high and low sale prices
per share of Common Stock on the NYSE.
1999 High Low
---------------------- ---------------------- ----------------------
First quarter 12 3/4 10 1/4
Second quarter 12 5/8 10
Third quarter 15 1/4 11 1/4
Fourth quarter 13 7/8 11 1/16
----------------------- ---------------------- ----------------------
1998 High Low
----------------------- ---------------------- ----------------------
First quarter 17 15/16 12 1/4
Second quarter 18 1/4 14 3/4
Third quarter 16 1/4 12 1/16
Fourth quarter 15 11/16 9 3/16
----------------------- ---------------------- ----------------------
Item 6. Selected Financial Data - page 36 of annual shareholder report below:
SELECTED FINANCIAL INFORMATION
(In thousands except per share data) December 31,
OPERATIONS 1999 1998 1997 1996 1995
- - -------------------------------------------------------- ----------- ------------ ----------- ----------- ----------
Revenues $66,722 $60,691 $50,571 $36,866 $29,226
Net income 4,451 6,486 4,725 3,927 2,202
Research and development as a percentage of revenues 6.6% 7.8% 7.8% 7.6% 9.0%
EARNINGS PER SHARE1,2
- - -------------------------------------------------------- ----------- ------------ ----------- ----------- ----------
Basic $0.36 $0.54 $0.49 $0.41 $0.23
Diluted $0.36 $0.53 $0.48 $0.40 $0.23
YEAR-END FINANCIAL POSITION
- - -------------------------------------------------------- ----------- ------------ ----------- ----------- ----------
Total assets $94,023 $98,390 $54,402 $34,973 $24,132
Working capital 59,928 62,310 19,478 10,787 15,217
Long-term liabilities 6,177 8,577 17,846 2,799 --
Shareholders' equity 80,226 80,421 30,227 24,929 20,465
Current ratio 9:1 8:1 4:1 3:1 5:1
Shareholders' equity per diluted common share1,2 $6.40 $6.56 $3.04 $2.52 $2.14
1 Reflects adjustment for the 2-for-1 stock split effected June 28, 1996.
2 Presented, and where appropriate, restated to conform to Statement
128 requirements.
1
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations - page 16-21 of annual shareholder report below:
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
CryoLife, Inc. was organized in 1984 to address market opportunities in the area
of biological implantable products and materials, and today is the leader in the
cryopreservation of viable human tissue for cardiovascular, vascular, and
orthopedic applications. The Company began cryopreserving aortic heart valves in
1984, pulmonary heart valves in 1986, and mitral heart valves in 1995. The
Company has also expanded into the cryopreservation of other human tissue,
including vascular tissue and connective tissue of the knee.
The Company pays a fee to an organ procurement agency or tissue bank at the time
such organization consigns human tissue to the Company. The Company generates
revenues from cryopreservation services by charging hospitals a fee, which
covers the Company's services, the associated procurement fee, and applicable
shipping expenses. The Company records revenue upon shipping tissue. Costs
associated with the procurement, processing, and storage of tissue are accounted
for as deferred preservation costs on the Company's consolidated balance sheet
and are expensed when the tissue is shipped. The Company continually monitors
cryopreserved tissue in its possession to determine its viability. Tissue
determined not to be suitable for implantation is disposed of and the associated
deferred preservation costs are expensed. As part of an effort to reduce its
working capital needs, while simultaneously facilitating the use of
cryopreserved tissue, the Company consigns liquid nitrogen freezers to a number
of hospitals. The Company retains ownership of the liquid nitrogen freezers and,
consequently, incurs associated depreciation charges. The hospitals are
responsible for operating expenses related to the use of the liquid nitrogen
freezers.
The Company has expanded, and intends to continue to expand, its portfolio of
products and services. Much of this expansion has been accomplished through
acquisitions of intellectual property and businesses. In 1992, the Company
purchased for $730,000 the exclusive distribution rights for a line of stentless
aortic porcine heart valves and in 1996 purchased for $275,000 a patent for an
advanced design stentless pulmonary porcine heart valve, both of which the
Company currently markets in Europe, South America, the Middle East, and South
Africa. In 1996, the Company purchased the patent for BioGlue, a surgical
adhesive which the Company currently markets in North America, Europe, South
America, Asia, South Africa, and the Middle East. In 1996, the Company also
acquired the assets of UCFI, a tissue processor, for $750,000 in cash and a $1.3
million note. In 1997, the Company acquired Ideas for Medicine, Inc. ("IFM") and
its line of single-use medical devices for $4.5 million in cash, and a $5.0
million convertible debenture.
On September 30, 1998 the Company completed the sale of substantially all of the
IFM product line and certain related assets to Horizon Medical Products, Inc.
("HMP") for $15 million in cash pursuant to an asset purchase agreement.
Concurrently, IFM and HMP signed a Manufacturing Agreement (the "Agreement")
which provides for the manufacture by IFM of specified minimum dollar amounts of
IFM products to be purchased exclusively by HMP over each of the four years
following the sale. Thereafter, responsibility for such manufacturing is to be
assumed by HMP. The Company recorded a deferred gain at the transaction date
totaling $2.9 million, representing the selling price less the net book value of
the assets sold, which included $7.7 million of goodwill, net of accumulated
amortization, and the costs related to the sale. The gain was deferred because
the sale and the manufacturing agreements represent, in the aggregate, a single
transaction for which the related income should be recognized over the term of
the Agreement. Accordingly, the deferred gain is being amortized in cost of
goods sold over the four-year term of the manufacturing agreement in a manner
which is expected to result in approximately equal margins over the four-year
period on the products manufactured and sold by IFM to HMP. During 1999 and 1998
amortization of deferred revenue totaled $1.2 million and $387,000,
respectively. As more fully discussed under nonrecurring charges in the Results
of Operations section, HMP defaulted on the Agreement in June of 1999.
The composition of the Company's revenues is expected to change in future years,
reflecting, among other things, the anticipated growth in shipments of human
vascular tissue and human connective tissue for the knee, and the introduction
of BioGlue surgical adhesive into domestic and international markets, as well as
other expected new products.
2
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues increased 10% to $66.7 million in 1999 from $60.7 million in 1998. The
increase in revenues was primarily due to increased acceptance in the medical
community of cryopreserved tissues, the Company's ability to procure greater
amounts of tissue, price increases for certain cryopreservation services
instituted during the third quarter of 1998 which continued during 1999, a full
year of BioGlue international revenue in 1999 as compared to nine months in
1998, and revenues attributable to the Company's introduction of osteoarticular
grafts in January 1999. These increases in revenues have been offset by certain
decreases in revenues as discussed below.
Revenues from human heart valve and conduit cryopreservation services decreased
6% to $29.0 million in 1999 from $30.8 million in 1998, representing 44% and
51%, respectively, of total revenues during such periods. This decrease in
revenues resulted from an 8% decrease in the number of heart allograft shipments
primarily resulting from a 9% decrease in the number of pulmonary heart valve
shipments due to a decrease in the number of Ross procedures being performed and
competitive price pressures on pulmonary valves. In a Ross procedure, the
patient's pulmonary valve is transplanted into the aortic position and a human
pulmonary allograft is transplanted into the patient's pulmonary position. The
Company has attempted to promote the positive clinical results of the Ross
procedure by hosting science forums around the country with its cardiovascular
surgeon customers. Although we are currently unable to predict the annual trend
in pulmonary heart valve shipments, shipments through March 10, 2000 are up 12%
over shipments through March 10, 1999.
Revenues from human vascular tissue cryopreservation services increased 35% to
$19.3 million in 1999 from $14.3 million in 1998, representing 29% and 24%,
respectively, of total revenues during such periods. This increase in revenues
was primarily due to a 32% increase in the number of vascular allograft
shipments attributable to an increased demand for preserved vascular tissue, the
Company's ability to procure greater amounts of tissue, and the introduction of
the femoral vein program for use as A-V shuts in dialysis patients. The increase
in revenues was also due to the Company's focus on procuring and distributing
long segment veins, which have a higher per unit revenue than the short segment
veins.
Revenues from human connective tissue of the knee cryopreservation services
increased 45% to $11.2 million in 1999 from $7.7 million in 1998, representing
17% and 13%, respectively, of total revenues during such periods. This increase
in revenues was primarily due to a 31% increase in the number of allograft
shipments due to increased demand, the Company's ability to procure greater
amounts of tissue, and the introduction of preserved osteoarticular grafts in
January of 1999. Additional revenue increases resulted from price increases for
the cryopreservation of menisci and tendons during the third quarter of 1998.
Revenues from IFM decreased 34% to $3.7 million in 1999 from $5.7 million in
1998, representing 6% and 9%, respectively, of total revenues during such
periods. The decrease in revenues is due to HMP's failure to meet the minimum
purchase requirements set forth in the Agreement as more fully discussed below.
Revenues from bioprosthetic cardiovascular devices increased 20% to $955,000 in
1999 from $798,000 in 1998, representing 1% of total revenues during such
periods. This increase in revenues was due to a 7% increase in the number of
bioprosthetic cardiovascular device shipments due to an increase in demand, a
full year of international revenues from the CryoLife-Ross Pulmonary Valve in
1999 as compared to three months of revenues in 1998, and price increases in
November of 1998 that continued throughout 1999.
Revenues from BioGlue surgical adhesive increased 93% to $1.7 million for 1999
from $883,000 in 1998, representing 2% and 1%, respectively, of total revenues
during such periods. The increase in revenues is due to a 95% increase in the
volume of BioGlue shipments due to increased product awareness as a result of
the introduction of BioGlue in international markets in April of 1998, increased
surgeon training, and the receipt of the CE mark approval for the use of BioGlue
for pulmonary indications in Europe in March 1999.
Grant revenues increased to $877,000 in 1999 from $512,000 in 1998. This
increase in grant revenues is primarily attributable to the SynerGraft research
and development programs.
Other income decreased to $224,000 in 1999 from $1.1 million in 1998. Other
income in 1998 relates primarily to proceeds from the sale of the Company's port
product line.
Cost of cryopreservation services and products aggregated $30.2 million in 1999
compared to $25.3 million in 1998, representing 46% and 42%, respectively, of
total cryopreservation and product revenues. The increase of the cost of
cryopreservation services and products as a percentage of revenues in 1999
results from a smaller percentage of 1999 revenues being derived from human
3
heart valve and conduit cryopreservation services, which carry a significantly
higher gross margin than other cryopreservation services. An additional reason
for the increase in costs in 1999 results from the switch in October of 1998 to
OEM manufacturing of single-use medical devices, which generates lower gross
margins than cryopreservation services and lower gross margins than the IFM
products generated prior to the sale of the IFM product line.
General, administrative, and marketing expenses increased 3% to $24.7 million in
1999, compared to $23.9 million in 1998, representing 38% and 40%, respectively,
of total cryopreservation and product revenues in such periods. The increase in
expenditures in 1999 resulted from expenses incurred to support the increase in
revenues, partially offset by increased absorption of overhead expenses
associated with increased production of new products.
Research and development expenses decreased 7% to $4.4 million in 1999, compared
to $4.7 million in 1998, representing 7% and 8%, respectively, of total
cryopreservation and product revenues for each period. Research and development
spending relates principally to the Company's focus on its bioadhesives and
SynerGraft technologies.
The Company recorded a nonrecurring charge of $2.4 million in 1999 primarily as
a result of HMP's default on its manufacturing contract with IFM. On June 22,
1999 IFM notified HMP that it was in default of certain provisions of the
Agreement. Specifically, HMP is in violation of the payment provisions contained
within the Agreement, which calls for inventory purchases to be paid for within
45 days of delivery. Additionally, HMP is in violation due to nonpayment of
interest related to such past due accounts receivable.
After notification of the default, HMP indicated to the Company that it would
not be able to meet and has not met the minimum purchase requirements outlined
in the Agreement. The Company has been negotiating with HMP in order to reach a
mutually agreeable solution to the default; however, due to the significant
uncertainties related to the Company's ability to realize its investment in IFM,
the Company determined that it had incurred an impairment loss on its IFM
assets. In calculating the amount of the impairment loss, management used its
best estimate to determine the realizable value of its increase in working
capital due to the HMP default, and the recoverability of IFM's long-lived
assets, consisting primarily of leasehold improvements and equipment. As a
result, management recorded a $2.1 million impairment loss on working capital
and a $2.6 million impairment loss on leasehold improvements. Additionally, the
Company offset the above charges with $2.5 million of deferred gain recorded in
connection with the sale of the IFM product line to HMP. The net pretax effect
of the above nonrecurring charges is $2.2 million, and has been included under
the caption "Nonrecurring charges" in the accompanying Consolidated Income
Statements.
Net interest income was $1.2 million and $820,000 in 1999 and 1998,
respectively. This increase in interest income is due to recording a full year
of interest income on the invested proceeds from the follow-on equity offering
(the "Offering") completed in April 1998, lower interest expense resulting from
the repayment of certain indebtedness with the proceeds from the Offering, and
the conversion of certain convertible debentures into common stock of the
Company.
The increase in the effective income tax rate to 32% in 1999 from 25% in 1998,
is the result of the nonrecurrence of income tax benefits realized in 1998 from
the implementation of certain income tax planning strategies in the fourth
quarter, which had a significant one-time impact on 1998 taxes. Despite the
increase in the tax rate between 1999 and 1998, the 1999 effective tax rate is
reflective of the ongoing impact of these tax planning strategies.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues increased 20% to $60.7 million in 1998 from $50.6 million in 1997. The
increase in revenues was primarily due to increased acceptance in the medical
community of cryopreserved tissues, the Company's ability to procure greater
amounts of tissue, price increases for certain cryopreservation services,
revenues attributable to the Company's line of single-use medical devices
following the IFM acquisition in March of 1997, and revenues attributable to the
Company's introduction of BioGlue surgical adhesive in international markets in
April 1998.
Revenues from human heart valve and conduit cryopreservation services increased
6% to $30.8 million in 1998 from $29.0 million in 1997, representing 51% and
57%, respectively, of total revenues during such periods. This increase in
revenues was primarily due to a 6% increase in the number of heart allograft
shipments due to an increased demand and the Company's ability to procure
greater amounts of tissue.
4
Revenues from human vascular tissue cryopreservation services increased 36% to
$14.3 million in 1998 from $10.5 million in 1997, representing 24% and 21%,
respectively, of total revenues during such periods. This increase in revenues
was primarily due to a 37% increase in the number of vascular allograft
shipments due to an increased demand and the Company's ability to procure
greater amounts of tissue.
Revenues from human connective tissue for the knee cryopreservation services
increased 63% to $7.7 million in 1998 from $4.7 million in 1997, representing
13% and 9%, respectively, of total revenues during such periods. This increase
in revenues was primarily due to a 50% increase in the number of allograft
shipments due to increased demand and the Company's ability to procure greater
amounts of tissue. Additional revenue increases resulted from a greater
proportion of the 1998 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 IFM increased 1% to $5.7 million in 1998 from $5.6 million in
1997, representing 9% and 11%, respectively, of total revenues during such
periods. This increase in revenues was due to 1998 having two additional months
of IFM revenue than 1997 due to the IFM acquisition closing on March 5, 1997,
partially offset by the sale of the IFM product line to HMP pursuant to which
the Company became an OEM manufacturer of such products on October 1, 1998.
Revenues from bioprosthetic cardiovascular devices increased 33% to $798,000 in
1998 from $576,000 in 1997, representing 1% of total revenues during such
periods. This increase in revenues was primarily due to a 36% increase in the
number of bioprosthetic cardiovascular device shipments due to increased
manufacturing capacity. Revenues in 1998 also benefited from the introduction of
the CryoLife-Ross Pulmonary Valve into international markets in October 1998.
Revenues from BioGlue were $883,000 for 1998. The Company introduced the product
into international markets in April 1998.
Grant revenues increased to $512,000 in 1998 from $162,000 in 1997. This
increase in grant revenues is primarily attributable to the SynerGraft research
and development programs.
Other income increased to $1,078,000 in 1998 from $290,000 in 1997. Other income
in 1998 relates primarily to proceeds from the sale of the Company's port
product line.
Cost of cryopreservation services and products aggregated $25.3 million in 1998
compared to $17.8 million in 1997, representing 42% and 35%, respectively, of
total cryopreservation and product revenues. The increase in 1998 of the cost of
cryopreservation services and products as a percentage of revenues results from
a lesser portion of 1998 revenues being derived from human heart valve and
conduit cryopreservation services, which carry significantly higher gross
margins than other cryopreservation services, from increased manufacturing
overhead costs associated with the Company's new manufacturing facilities, from
the switch in October of 1998 to OEM manufacturing of single-use medical
devices, which generates lower gross margins than cryopreservation services and
lower gross margins than the IFM products generated prior to the sale of the IFM
product line, compared with ten months of IFM sales in 1997, and from a one-time
charge of $500,000 associated with the start-up of the bioprosthetic
cardiovascular device manufacturing facility. The increase in the cost of
cryopreservation services and products as a percentage of revenues was partially
offset by a decrease in the IFM products sold in 1998 relative to those sold in
1997, which generate lower gross margins than cryopreservation services, and the
impact of the fourth quarter amortization of deferred gain resulting from the
sale of the IFM product line, which has the impact of reducing cost of goods
sold.
General, administrative, and marketing expenses increased 16% to $23.9 million
in 1998, compared to $20.5 million in 1997, representing 40% and 41%,
respectively, of total cryopreservation and product revenues in such periods.
The increase in expenditures in 1998 resulted from expenses incurred to support
the increase in revenues and costs associated with the introduction of BioGlue
into international markets.
Research and development expenses increased 19% to $4.7 million in 1998,
compared to $3.9 million in 1997, representing 8% of total cryopreservation and
product revenues for each period. Research and development spending relates
principally to the Company's focus on its bioadhesives and SynerGraft
technologies.
Net interest income was $820,000 in 1998 compared to net interest expense of
$970,000 in 1997. This variance is due to the repayment of certain indebtedness
with the proceeds from the follow-on equity offering completed in April 1998, 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.
5
The decline in the effective income tax rate to 25% in 1998 from 38% in 1997 is
due to the implementation of certain income tax planning strategies including
the recognition of approximately $600,000 of research and development tax
credits during the fourth quarter of 1998, during which period studies were
completed which quantified the amounts related thereto.
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 this trend for human heart valve and conduit
cryopreservation services is primarily due to the high number of surgeries
scheduled during the summer months. Management believes the trends experienced
by the Company for its human connective tissue of the knee cryopreservation
services indicate this business may also be seasonal because it is an elective
procedure which may be performed less frequently during the fourth quarter's
holiday season. However, the demand for the Company's vascular tissue
cryopreservation services, bioprosthetic cardiovascular devices, single-use
medical devices, and BioGlue surgical adhesive does not appear to experience
seasonal trends.
Liquidity and Capital Resources
At December 31, 1999 net working capital was $59.9 million, compared to $62.3
million at December 31, 1998, with a current ratio of 9 to 1. The Company's
primary capital requirements arise out of general working capital needs, capital
expenditures for facilities and equipment, funding of research and development
projects, and a common stock repurchase plan approved by the board of directors
in October of 1998. The Company historically has funded these requirements
through bank credit facilities, cash generated by operations, and equity
offerings.
Net cash provided by operating activities was $1.0 million in 1999, as compared
to net cash provided by operating activities of $1.2 million in 1998. This
decrease primarily resulted from 1) an increase in the growth of deferred
preservation costs due to the inventory build up associated with the
introduction of new product lines, and 2) an increase in the amount of accounts
payable liquidated in the first quarter of 1999 as compared to the first quarter
of 1998 due to the expansion of the BioGlue manufacturing laboratory at
corporate headquarters, partially offset by 1) an increase in net income
excluding the nonrecurring charge of $2.4 million, 2) a decrease in prepaid
expenses, and 3) an increase in accrued expenses due to an increase in tissue
procurement.
Net cash used in investing activities was $3.3 million in 1999, as compared to
$18.9 million in 1998. This decrease in cash used was primarily attributable to
a decrease in capital expenditures and in purchases of marketable equity
securities during 1999, partially offset by the absence of proceeds from the
sale of the IFM product line in 1999, as compared to 1998.
Net cash used in financing activities was $4.5 million in 1999, as compared to
net cash provided by financing activities of $30.5 million in 1998. The 1998 net
cash inflow was primarily attributable to a follow-on equity offering in March
of 1998 that generated proceeds of $45.4 million, partially offset by the
repayment of borrowings on the Company's bank loans, and accrued interest
thereon, totaling $13.3 million. The Company used funds in 1999 primarily to
increase repurchases of treasury stock.
Management is currently seeking to complete a potential private placement of
equity or equity-oriented securities to form a subsidiary company for the
commercial development of its serine proteinase light activation technologies.
This strategy, if successful, will allow an affiliated entity to fund the light
activation technology and should expedite the commercial development of its
blood clot dissolving and surgical sealant product applications without
additional research and development expenditures by the Company (other than
through the affiliated company). This strategy, if successful, will favorably
impact the Company's liquidity going forward. The Company has ceased further
development of light activation technology pending the identification of a
corporate partner to fund future development. The Company began its search for a
corporate partner in October 1998 and anticipates locating a partner during
fiscal 2000. As of December 31, 1999, the Company classified approximately $1.5
million of equipment and other assets related to the light activation
technologies as being held for sale.
The Company anticipates that current cash and marketable securities and cash
generated from operations will be sufficient to meet its operating and
development needs for at least the next 12 months, including the expansion of
the Company's corporate headquarters and manufacturing facilities. Additionally,
the Company currently maintains a $2.0 million unrestricted line of credit that
expires on December 31, 2001. 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
6
further develop its marketing and sales capabilities if and when those products
gain approval, the resources required to expand its corporate headquarters and
manufacturing facility, and the extent to which the Company's products generate
market acceptance and demand. There can be no assurance 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 could have a material adverse effect
on the Company's business, financial condition, and results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - page 20 of
annual shareholder report below:
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 $5.0
million and short-term investments of $15.9 million in municipal obligations as
of December 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.
7
Item 8. Financial Statements and Supplementary Data - pages 22-35 of annual
shareholder report below:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CryoLife, Inc.:
We have audited the accompanying consolidated balance sheet of CRYOLIFE,
INC. AND SUBSIDIARIES as of December 31, 1999 and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of the Company as of
December 31, 1998 and for each of the two years ended December 31, 1998 were
audited by other auditors whose report dated February 2, 1999 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CryoLife, Inc. and subsidiaries
as of December 31, 1999 and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN, LLP
Atlanta, Georgia
February 7, 2000
8
CryoLife, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
ASSETS
December 31, 1999 1998
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Current assets:
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Cash and cash equivalents $6,128 $12,885
Marketable securities, at market 24,403 26,713
Receivables:
Trade accounts, less allowance for doubtful accounts of
$528 in 1999 and $256 in 1998 11,694 10,733
Income taxes 31 71
Other 608 383
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Total receivables 12,333 11,187
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Deferred preservation cost 17,652 14,239
Inventories 4,597 3,385
Prepaid expenses 1,454 1,945
Deferred income taxes 983 1,348
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Total current assets 67,550 71,702
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Property and equipment:
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Equipment 11,882 12,145
Furniture and fixtures 3,147 3,011
Leasehold improvements 14,487 14,254
Construction in progress 1,001 2,266
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
30,517 31,676
Less accumulated depreciation and amortization 11,843 10,216
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Net property and equipment 18,674 21,460
Other assets:
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Goodwill, less accumulated amortization
of $311 in 1999 and $215 in 1998 1,590 1,685
Patents, less accumulated amortization
of $794 in 1999 and $660 in 1998 2,363 2,216
Other, less accumulated amortization
of $742 in 1999 and $566 in 1998 2,449 1,327
Deferred income taxes 1,399 --
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
Total assets $94,025 $98,390
- - ---------------------------------------------------------------------------------------- ------------------- ---------------
See accompanying notes to consolidated financial statements.
9
CryoLife, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1999 1998
- - --------------------------------------------------------------------------------- -------------- -------------
Current liabilities:
- - --------------------------------------------------------------------------------- -------------- -------------
Accounts payable $975 $1,655
Accrued expenses 2,145 2,968
Accrued compensation 913 726
Accrued fees to technical service representatives 248 459
Accrued procurement fees 2,874 1,806
Current maturities of capital lease obligation 180 224
Current maturities of long-term debt 287 516
Deferred income -- 1,038
- - --------------------------------------------------------------------------------- -------------- -------------
Total current liabilities 7,622 9,392
- - --------------------------------------------------------------------------------- -------------- -------------
Deferred income, less current amount -- 1,525
Deferred income taxes -- 410
Capital lease obligations, less current maturities 1,534 1,714
Convertible debenture 4,393 4,393
Other long-term debt 250 535
- - --------------------------------------------------------------------------------- -------------- -------------
Total liabilities 13,799 17,969
- - --------------------------------------------------------------------------------- -------------- -------------
Commitments and Contingencies
Shareholders' equity:
Preferred stock $.01 par value per share;
authorized 5,000 shares including 2,000
shares of series A junior participating preferred stock;
no shares issued -- --
Common stock $.01 par value per share;
authorized 50,000 shares; issued 13,361
shares in 1999 and 1998 134 134
Additional paid-in capital 64,425 64,347
Retained earnings 23,564 19,113
Deferred compensation (57) --
Accumulated other comprehensive income (785) 139
Treasury stock; 1,134 shares in 1999 and 845
shares in 1998, at cost (7,055) (3,312)
- - --------------------------------------------------------------------------------- -------------- -------------
Total shareholders' equity 80,226 80,421
- - --------------------------------------------------------------------------------- -------------- -------------
- - --------------------------------------------------------------------------------- -------------- -------------
Total liabilities and shareholders' equity $94,025 $98,390
- - --------------------------------------------------------------------------------- -------------- -------------
See accompanying notes to consolidated financial statements.
10
CryoLife, Inc.
Consolidated Income Statements
(in thousands, except per share data)
Year Ended
December 31, 1999 1998 1997
- - ----------------------------------------------------------------- ------------------ --------------- ----------------
Revenues:
- - ----------------------------------------------------------------- ------------------ --------------- ----------------
Preservation services and products $65,845 $60,179 $50,409
Research grants and licenses 877 512 162
- - ----------------------------------------------------------------- ------------------ --------------- ----------------
66,722 60,691 50,571
- - ----------------------------------------------------------------- ------------------ --------------- ----------------
Costs and Expenses:
- - ----------------------------------------------------------------- ------------------ --------------- ----------------
Preservation services and products 30,170 25,303 17,764
General, administrative, and marketing 24,693 23,907 20,548
Research and development 4,396 4,708 3,946
Nonrecurring charges 2,355 -- --
Interest expense 387 670 978
Interest income (1,556) (1,490) (8)
Other income, net (224) (1,078) (290)
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
60,221 52,020 42,938
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
Income before income taxes 6,501 8,671 7,633
Income tax expense 2,050 2,185 2,908
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
Net income $4,451 $6,486 $4,725
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
Earnings per share:
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
Basic $ 0.36 $ 0.54 $ 0.49
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
Diluted $ 0.36 $ 0.53 $ 0.48
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
Weighted average shares outstanding:
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
Basic 12,341 11,974 9,642
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
Diluted 12,533 12,264 9,942
- - ----------------------------------------------------------------- ------------------ --------------- ---------------
See accompanying notes to consolidated financial statements.
11
CryoLife, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, 1999 1998 1997
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Net cash flows from operating activities:
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Net income $4,451 $6,486 $4,725
Adjustments to reconcile net income to net cash
flows provided by (used in) operating activities:
Deferred income recognized (1,176) (387) --
Gain on sale of marketable equity securities (112) (4) --
Depreciation of property and equipment 2,854 2,586 1,842
Amortization 300 905 814
Provision for doubtful accounts 121 176 46
Deferred income taxes (970) (1,948) 972
Nonrecurring charges 2,355 -- --
Changes in operating assets and liabilities:
Trade and other receivables (1,707) (1,797) (533)
Income taxes 40 771 (438)
Deferred preservation costs (3,413) (1,982) (5,079)
Inventories (2,882) (3,010) (864)
Prepaid expenses and other assets 491 (706) (506)
Accounts payable (686) 295 (2,756)
Accrued expenses 1,321 (158) (468)
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Net cash flows provided by (used in) operating activities 987 1,227 (2,245)
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Net cash flows from investing activities:
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Capital expenditures (3,853) (6,693) (5,059)
Cash paid for acquisitions, net of cash acquired -- -- (4,418)
Net proceeds from sale of IFM product line -- 15,000 --
Other assets (452) (752) (148)
Purchases of marketable securities (5,123) (34,063) --
Sales of marketable securities 6,149 7,604 3
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Net cash flows used in investing activities (3,279) (18,904) (9,622)
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Net cash flows from financing activities:
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Principal payments of debt (514) (13,990) (6,607)
Proceeds from debt issuance -- 1,680 16,643
Principal payments on obligations under capital leases (224) (203) --
Proceeds from exercise of options and issuance of stock 571 46,298 567
Purchase of treasury stock (4,296) (3,350) --
Net payments on notes receivable from shareholders -- 16 5
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Net cash flows (used in) provided by financing activities: (4,463) 30,451 10,608
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Increase (decrease) in cash (6,755) 12,774 (1,259)
Effect of exchange rate changes on cash (2) -- --
Cash and cash equivalents, beginning of year 12,885 111 1,370
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Cash and cash equivalents, end of year $6,128 $12,885 $111
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Supplemental disclosures of cash flow information - cash paid during the year
for:
- - ------------------------------------------------------------------------------------------------------------------------
Interest $369 $742 $920
Income taxes 3,816 3,568 2,380
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Noncash investing and financing activities:
Establishing capital lease obligation $-- $2,141 $--
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Debt conversion into common stock $-- $608 $--
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Purchase of property and equipment
in accounts payable $6 $185 $440
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Net cash paid for acquisition $-- $-- $1,768
Cost in excess of assets acquired -- -- 8,541
Liabilities assumed -- -- (891)
Notes issued for assets acquired -- -- (5,000)
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
Fair value of assets acquired $-- $-- $4,418
- - ------------------------------------------------------------------------ --------------- --------------- ---------------
See accompanying notes to consolidated financial statements.
12
CryoLife, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(in thousands)
Common Shares Notes
Outstanding Additional Unrealized Receivable Total
Shares Paid-In Retained Deferred Gains on Translation Treasury From Shareholders'
Amount Capital Earnings Compsation Investments Gain Stock Shareholders Equity
- - ------------------- ------------- ---------- -------- ------------ ----------- ----------- -------- ------------ -------------
Balance at December
31, 1996 9,567 $ 101 $ 17,128 $ 7,902 $ -- $ (1) $ -- $ (180) $ (21) $ 24,929
- - ------------------ ------------- ---------- -------- ------------ ----------- ----------- -------- ------------ -------------
Net income -- -- -- 4,725 -- -- -- -- -- 4,725
Unrealized gains on
investments -- -- -- -- -- 1 -- -- -- 1
--------------
Comprehensive income 4,726
Exercise of options 105 1 298 -- -- -- -- -- -- 299
Employee stock
purchase plan 30 -- 268 -- -- -- -- -- -- 268
Additions to
shareholder notes -- -- -- -- -- -- -- -- (21) (21)
Payments on
shareholder notes -- -- -- -- -- -- -- -- 26 26
- - ------------------- ------------- ---------- -------- ------------ ----------- ----------- -------- ------------ -------------
Balance at December
31, 1997 9,702 102 17,694 12,627 -- -- -- (180) (16) 30,227
- - ------------------- ------------- ---------- -------- ------------ ----------- ----------- -------- ------------ -------------
Net income -- -- -- 6,486 -- -- -- -- -- 6,486
Unrealized gains on
investments -- -- -- -- -- 139 -- -- -- 139
-------------
Comprehensive income 6,625
Follow-on equity
offering, net of $703
of offering costs 2,976 30 45,417 -- -- -- -- -- -- 45,447
Exercise of options 100 1 338 -- -- -- -- 121 -- 460
Employee stock
purchase plan 31 -- 294 -- -- -- -- 97 -- 391
Convertible debenture 50 1 604 -- -- -- -- -- -- 605
Purchase of treasury
stock (343) -- -- -- -- -- -- (3,350) -- (3,350)
Payment on
shareholder note -- -- -- -- -- -- -- -- 16 16
- - ------------------- ------------- ---------- -------- ------------ ----------- ----------- -------- ------------ -------------
Balance at December
31, 1998 12,516 134 64,347 19,113 -- 139 -- (3,312) -- 80,421
- - ------------------- ------------- ---------- -------- ------------ ----------- ----------- -------- ------------ -------------
Net income -- -- -- 4,451 -- -- -- -- -- 4,451
Unrealized losses on
investments -- -- -- -- -- (922) -- -- -- (922)
Translation
adjustment -- -- -- -- -- -- (2) -- -- (2)
-------------
Comprehensive income 3,527
Exercise of options 49 -- (126) -- -- -- -- 305 -- 179
Employee stock
purchase plan 40 -- 144 -- -- -- -- 248 -- 392
Issuance of stock
options to a
nonemployee -- -- 60 -- (60) -- -- -- -- --
Amortization of de-
ferred compensation -- -- -- -- 3 -- -- -- -- 3
Purchase of treasury
stock (378) -- -- -- -- -- -- (4,296) -- (4,296)
- - ------------------- ------------- ---------- -------- ------------ ----------- ----------- -------- ------------ -------------
Balance at December
31, 1999 12,227 $134 $ 64,425 $23,564 $ (57) $ (783) $ (2) $(7,055) $ -- $ 80,226
- - ------------------- ============= ========== ======== ============ =========== =========== ======== ============ =============
See accompanying notes to consolidated financial statements.
13
CRYOLIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Business
Founded in 1984, CryoLife, Inc. (the "Company") is the leader in the
cryopreservation of viable human tissues for transplant, and is developing and
commercializing additional implantable and single-use nonimplantable devices for
use in vascular, cardiovascular, and orthopaedic applications. The Company has
one primary business segment, cryopreservation of human tissues, marketed in
North and South America, Europe, and Asia. The Company's bioprosthetic
implantable products include stentless porcine heart valves marketed in Europe,
South America, the Middle East, and South Africa, as well as a proprietary
project to transplant human cells onto the structure of animal tissue. The
Company also serves as an original equipment manufacturer for single-use medical
devices for use in vascular surgical procedures. In addition, the Company
develops proprietary implantable bioadhesives, including BioGlue surgical
adhesive, which it has begun commercializing for vascular and pulmonary
applications in North America, Europe, South America, Asia, South Africa, and
the Middle East. International revenues were $4.0 million for 1999 and 1998 and
were $2.7 million in 1997. Net sales by product for the years ended December 31,
1999, 1998, and 1997 were as follows:
1999 1998 1997
----------------- ------------------ -----------------
Cryopreservation services:
Heart valve and conduit $29,043 $30,836 $29,046
Vascular tissue 19,273 14,270 10,469
Connective tissue 11,200 7,720 4,727
--------------- --------------- ---------------
Total cryopreservation services 59,516 52,826 44,242
Bioprosthetic products 955 798 576
Single-use medical devices 3,717 5,672 5,591
BioGlue surgical adhesive 1,657 883 ---
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances are eliminated.
Reclassifications
Certain prior year balances have been reclassified to conform to the 1999
presentation.
Use of Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts based on
informed estimates and judgments of management with consideration given to
materiality. Actual results could differ from those estimates.
Cash and cash equivalents
Cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and maturity dates of 90 days or less at the
time of acquisition. The carrying value of cash equivalents approximates fair
value.
Marketable Securities
The Company maintains cash equivalents and investments in several large,
well-capitalized financial institutions, and the Company's policy disallows
investment in any securities rated less than "investment-grade" by national
rating services.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. 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 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 values, with the unrealized gains and
losses, net of tax, reported in a separate component of 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.
14
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 income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income. At
December 31, 1999 and 1998, all marketable equity securities and debt securities
were designated as available-for-sale.
Deferred Preservation Costs and Revenue Recognition
Tissue is procured from deceased human donors by organ procurement organizations
and tissue banks which consign the tissue to the Company for processing and
preservation. Preservation costs related to tissue held by the Company are
deferred until shipment to the implanting hospital. Deferred preservation costs
consist primarily of laboratory expenses, tissue procurement fees, fringe and
facility allocations, and freight-in charges, and are stated at average cost,
determined annually, on a first-in, first-out basis. When the tissue is shipped
to the implanting hospital, revenue is recognized and the related deferred
preservation costs are charged to operations. The Company does not require
collateral or other security for its receivables.
Inventories
Inventories are comprised of single-use medical devices, bioprosthetic
implantable products, and implantable bioadhesives and are valued at the lower
of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets, generally five to ten years, on a
straight-line basis. Leasehold improvements are amortized on a straight-line
basis over the lease term or the estimated useful lives of the assets, whichever
is shorter.
Assets Held for Sale
As of December 31, 1999, other assets included approximately $1.5 million of
equipment and other assets related to the Company's FibRx technologies. In
January 1999, the Company ceased further development of FibRx pending the
identification of a corporate partner to fund future development. The Company
continues to actively pursue a strategic partner for the FibRx technologies. The
nonrecurring charge taken in the fourth quarter of 1999 includes approximately
$158,000 in costs associated with the location of a corporate partner.
Intangible Assets
Goodwill resulting from business acquisitions is amortized on a straight-line
basis over 20 years. Patent costs are amortized over the expected useful lives
of the patents (primarily 17 years) using the straight-line method. Other
intangibles, which consist primarily of manufacturing rights and agreements, are
being amortized over the expected useful lives of the related assets (primarily
five years).
The Company periodically evaluates the recoverability of noncurrent tangible and
intangible assets and measures the amount of impairment, if any, by assessing
current and future levels of income and cash flows as well as other factors,
such as business trends and prospects and market and economic conditions.
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Research Grant and License Revenues
Revenues from research grants are recognized in the period the associated costs
are incurred. License revenues are recognized in the period the cash is received
and all licensor obligations have been fulfilled.
Earnings Per Share
In 1997 the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128"). Statement
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented and, where appropriate, restated to
conform to the Statement 128 requirements.
15
Comprehensive Income
In 1997 the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement
130"), which established standards for the reporting and display of
comprehensive income and its components in a full set of comparative
general-purpose financial statements. The statement became effective for the
Company in 1998. Comprehensive income is defined in Statement 130 as net income
plus other comprehensive income, which, under existing accounting standards,
includes foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. Comprehensive income disclosures are included in the Consolidated
Statements of Shareholders' Equity and Comprehensive Income.
2. Follow-On Equity Offering
On April 3, 1998 the Company completed a follow-on equity offering (the
"Offering") of 2,588,000 new shares of its common stock resulting 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 was used to repay $13.3 million of principal and
interest outstanding under the Company's bank loans.
3. Ideas for Medicine, Inc.
On March 5, 1997 the Company acquired the stock of Ideas for Medicine, Inc.
("IFM"), a medical device company specializing in the manufacture and
distribution of single-use medical devices, for consideration of approximately
$4.5 million in cash and approximately $5.0 million in convertible debentures
plus related expenses. The cash portion of the purchase price was financed by
borrowings under the Company's revolving term loan agreement. Pursuant to the
purchase agreement, an additional consideration of $700,000 was paid in January
2000. The acquisition was accounted for as a purchase; accordingly, the results
of operations have been included in the accompanying consolidated income
statements from the date of acquisition. Based on the allocation of the purchase
price, the Company's unaudited condensed pro forma results of operations for
1997, assuming consummation of the purchase as of January 1, 1997, are as
follows (in thousands, except per share data):
1997
----------------
Revenues $52,082
Net income 4,756
Earnings per share:
Basic $0.49
Diluted 0.48
In connection with this acquisition, the Company also entered into a consulting
agreement with the former majority shareholder of IFM requiring monthly payments
to such shareholder of approximately $17,000 until March 2002.
On September 30, 1998 the Company completed the sale of substantially all of the
IFM product line and certain related assets to Horizon Medical Products, Inc.
("HMP") for $15 million in cash pursuant to an asset purchase agreement.
Concurrently, IFM and HMP signed a Manufacturing Agreement (the "Agreement")
which provides for the manufacture by IFM of specified minimum dollar amounts of
IFM products to be purchased exclusively by HMP over each of the four years
following the sale. Thereafter, responsibility for such manufacturing is to be
assumed by HMP.
The Company recorded deferred income at the transaction date totaling $2.9
million, representing the selling price less the net book value of the assets
sold, which included $7.7 million of goodwill, net of accumulated amortization,
and the costs related to the sale. The income was deferred because the sale and
manufacturing agreements represent, in the aggregate, a single transaction for
which the related income should be recognized over the term of the manufacturing
agreement. Accordingly, the deferred income is being reflected in cost of goods
sold over the four-year term of the Agreement in a manner which is expected to
result in approximately equal margins over the four-year period on the products
manufactured and sold by IFM to HMP. During 1999 and 1998 amortization of
deferred income totaled $1.2 million and $387,000, respectively.
On June 22, 1999 IFM notified HMP that it was in default of certain provisions
of the Agreement. Specifically, HMP is in violation of the payment provisions
contained within the Agreement, which calls for inventory purchases to be paid
for within 45 days of delivery. Additionally, HMP is in violation due to
nonpayment of interest related to such past due accounts receivable.
After notification of the default, HMP indicated to the Company that it would
not be able to meet and has not met the minimum purchase requirements outlined
in the Agreement. The Company has been negotiating with HMP in order to reach a
mutually agreeable solution to the default; however, due to the significant
uncertainties related to the Company's ability to realize its investment in IFM,
the Company determined that it had incurred an impairment loss on its IFM
16
assets. In calculating the amount of the impairment loss, management used its
best estimate to determine the realizable value of its increase in working
capital due to the HMP default and the recoverability of IFM's long-lived
assets, consisting primarily of leasehold improvements and equipment. As a
result, management recorded a $2.1 million impairment loss on working capital
and a $2.6 million impairment loss on leasehold improvements. Additionally, the
Company offset the above charges with $2.5 million of deferred income recorded
in connection with the sale of the IFM product line to HMP. The net pretax
effect of the above nonrecurring charges is $2.2 million and has been included
under the caption "Nonrecurring charges" in the accompanying Consolidated Income
Statements.
At December 31, 1999, after recognition of the impairment loss, IFM assets
consist of $800,000 of accounts receivable, $1.7 million of inventory, $1.6
million of a building, and $360,000 of equipment. Management believes any
potential resolution to the default on the manufacturing agreement will not have
a material adverse impact on the Company's future operating results.
4. Marketable Securities
The following is a summary of available-for-sale securities (in thousands):
Unrealized Estimated
Holding Losses Market Value
December 31, 1999 Cost
----------------- ----------------- -----------------
Municipal obligations $ 20,223 $ (226) $ 19,997
Equity securities 9,444 (959) 8,485
---------------- ---------------- ----------------
$ 29,667 $ (1,185) $ 28,482
================ ================ ================
Unrealized Estimated
Holding Gains Market Value
December 31, 1998 Cost
----------------- ----------------- -----------------
Municipal obligations $ 24,963 $ 35 $ 24,998
Equity securities 10,440 175 10,615
---------------- ---------------- ----------------
$ 35,403 $ 210 $ 35,613
================ ================ ================
The gross realized gains on sales of available-for-sale securities totaled
$112,000 and $4,000 in 1999 and 1998, respectively. Differences between cost and
market of a $1.2 million loss (less deferred taxes of $403,000) and a $210,000
gain (less deferred taxes of $71,000) are included as a separate component of
shareholders' equity as of December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, approximately $4.1 million and $8.9 million,
respectively, of debt securities with original maturities of 90 days or less at
their acquisition dates were included in cash and cash equivalents. At December
31, 1999 no investments had a maturity date between 90 days and 1 year and
approximately $15.9 million of investments mature between 1 and 5 years.
5. Inventories
Inventories at December 31 are comprised of the following (in thousands):
1999 1998
-------------------- -------------------
Raw materials $1,555 $1,296
Work -in process 578 1,037
Finished goods 2,464 1,052
-------------------- -------------------
$4,597 $3,385
==================== ===================
17
6. Long-Term Debt
Long-term debt at December 31 consists of the following (in thousands):
1999 1998
----------------- ------------------
7% convertible debenture, due in March 2002 $4,393 $4,393
8.25% note payable due in equal annual installments of $250,000
500 750
Note payable due in 2000 with an effective interest rate
of 8%, net of unamortized discount of $3,000 in 1999 and $29,000
in 1998
37 301
----------------- ------------------
4,930 5,444
Less current maturities 287 516
----------------- ------------------
Total long-term debt $4,643 $4,928
----------------- ------------------
On August 30, 1996 the Company executed a $10 million revolving loan agreement
(the "Loan Agreement") with a bank which, as amended on June 12, 1998, permits
the Company to borrow up to $2.0 million at either the bank's prime rate of
interest (8.5% at December 31, 1999) or at adjusted LIBOR, as defined, plus an
applicable LIBOR margin. The Loan Agreement expires on December 31, 2001. The
Loan Agreement contains certain restrictive covenants including, but not limited
to, maintenance of certain financial ratios and a minimum tangible net worth
requirement. The Loan Agreement is secured by substantially all of the Company's
assets, including IFM's stock but excluding intellectual property. Commitment
fees are paid based on the unused portion of the facility.
In March 1997 the Company issued a $5.0 million convertible debenture in
connection with the IFM acquisition. The debenture bears interest at 7% and is
due in March 2002. The debenture is convertible into common stock of the Company
at any time prior to the due date at $12.08 per common share. In conjunction
with the Offering, $607,000 of the convertible debenture was converted into
50,000 shares of the Company's common stock on March 30, 1998.
On September 12, 1996 the Company acquired the assets of United Cryopreservation
Foundation, Inc. ("UCFI"), a processor and distributor of cryopreserved human
heart valves and saphenous veins for transplant. The Company issued a $1.25
million note in connection with the acquisition. The note bears interest at
prime, as adjusted annually on the anniversary date of the acquisition.
In April 1996 the Company issued a $910,000 noninterest bearing note in
connection with the acquisition of its BioGlue technology. The note is payable
in three annual installments of $290,000, plus a final payment of $40,000 at
maturity.
Scheduled maturities of long-term debt for the next five years are as follows
(in thousands):
2000 $287
2001 250
2002 4,393
-----
$4,930
7. Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires the Company to disclose estimated fair
values for its financial instruments. The carrying amounts of receivables and
accounts payable approximate their fair values due to the short-term maturity of
these instruments. The carrying value of the Company's other financial
instruments approximated fair value at December 31, 1999 and 1998.
8. Leases
The Company leases equipment, furniture, and office space under various leases
with terms of up to 15 years. Commencing January 5, 1998 IFM leased office and
manufacturing facilities under a capital lease for $24,125 per month through
January 2008 from the former majority shareholder of IFM. Certain leases contain
18
escalation clauses and renewal options for additional periods. Future minimum
lease payments under noncancelable leases as of December 31, 1999 are as follows
(in thousands):
Capitalized Operating
Leases Leases
2000 $ 310 $ 1,422
2001 290 1,324
2002 290 975
2003 290 952
2004 290 933
Thereafter 868 11,342
--------------------------------------------------------------------------------------------------
Total minimum lease payments 2,338 $ 16,948
=================
Less amount representing interest 624
------------------------------------------------------------------
Present value of net minimum
lease payments 1,714
Less current portion 180
------------------------------------------------------------------
$ 1,534
==================================================================
Property acquired under capital leases at December 31, 1999 consists of the
following (in thousands):
Buildings $ 1,987
Furniture and fixtures 150
-----------------
2,137
Accumulated depreciation 529
$ 1,608
=================
Total rental expense for operating leases amounted to $1,457,000, $1,321,000,
and $1,282,000 for 1999, 1998, and 1997, respectively.
9. Stock Option Plans
The Company has stock option plans which provide for grants of options to
employees and directors to purchase shares of the Company's common stock at
exercise prices generally equal to the fair values of such stock at the dates of
grant, which generally become exercisable over a five-year vesting period and
expire within ten years of the grant dates. Under the 1993 Employee Incentive
Stock Option Plan, the 1998 Long-Term Incentive Plan, and the amended and
restated Nonemployee Director's Plan, the Company has authorized the grant of
options of up to 700,000, 300,000, and 396,000 shares of common stock,
respectively. As of December 31, 1999 and 1998, there were 383,000 and 569,000
shares of common stock reserved for future issuance under the Company's stock
option plans. A summary of stock option transactions under the plans follows:
Exercise Weighted Average
Shares Price Exercise Price
--------------- ----------------- ------------------------
Outstanding at December 31, 1996 708,000 $2.25-18.43 $7.36
Granted 201,000 10.25-15.88 11.97
Exercised (105,000) 2.25-7.50 2.85
Canceled (50,000) 2.25-16.75 10.06
---------------
Outstanding at December 31, 1997 754,000 3.00-18.43 8.95
Granted 331,000 12.00-17.13 15.48
Exercised (103,000) 3.12-10.25 4.80
Canceled (155,000) 3.12-18.43 16.03
---------------
Outstanding at December 31, 1998 827,000 3.00-17.13 10.73
Granted 335,000 11.88-17.13 13.86
Exercised (49,000) 3.00-10.25 3.66
Canceled (100,000) 10.25-17.13 16.94
---------------
Outstanding at December 31, 1999 1,013,000 $3.00-17.13 $11.49
===============
19
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
- - -------------------------------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted
Range of Exercise Remaining Average Average
Prices Number Contractual Life Exercise Number Exercise
Outstanding Price Exercisable Price
- - ------------------- ---------------- ---------------------- -------------- ------------------ --------------
$3.00-10.25 341,000 1.1 $6.26 284,000 $5.92
11.28-12.75 351,000 5.0 12.36 112,000 12.05
13.50-17.13 321,000 4.5 16.11 219,000 16.49
---------------- ------------------
$3.00-17.13 1,013,000 3.5 11.49 615,000 $10.79
================ ==================
In September 1999, the Company granted options to a nonemployee to purchase
12,000 shares of common stock at an exercise price of $12.31 per share. In
connection with the issuance of these options, the Company recognized $60,000 as
deferred compensation for the estimated fair value of the options. Deferred
compensation is amortized ratably over the vesting period of the options.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations ("APB
25") in accounting for its employee stock options because, as discussed below,
the alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement 123"), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of the grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The fair values
for these options were estimated at the dates of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
1999 1998 1997
----------------- ---------------- -----------------
Expected dividend yield 0% 0% 0%
Expected stock price volatility .540 .520 .533
Risk-free interest rate 5.78% 5.30% 5.75%
Expected life of options 3.6Years 3.8 Years 4.7 Years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
20
For purposes of pro forma disclosures, the estimated fair values of the options
are amortized to expense over the options' vesting periods. The Company's pro
forma information follows (in thousands, except per share data):
1999 1998 1997
---------------- ----------------- -----------------
Net income--as reported $4,451 $6,486 $4,725
Net income--pro forma $3,421 $5,705 $4,164
Earnings per share--as reported:
Basic $ 0.36 $ 0.54 $ 0.49
Dilutive $ 0.36 $ 0.53 $ 0.48
Earnings per share--pro forma:
Basic $ 0.28 $ 0.48 $ 0.43
Dilutive $ 0.27 $ 0.47 $ 0.42
Other information concerning stock options follows:
1999 1998 1997
---------------- ----------------- -----------------
Weighted average fair value of options granted
during the year $5.62 $6.54 $6.69
Number of shares as to which options are
exercisable at end of year 615,000 505,000 308,000
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not fully reflected until 1999.
10. Shareholder Rights Plan
On November 27, 1995 the Board of Directors adopted a shareholder rights plan to
protect long-term share value for the Company's shareholders. Under the plan,
the Board declared a distribution of one Right for each outstanding share of the
Company's Common Stock to shareholders of record on December 11, 1995.
Additionally, the Company has further authorized and directed the issuance of
one Right with respect to each Common Share that shall become outstanding
between December 11, 1995 and the earliest of the Right's exercise date or
expiration date. Each Right entitles the registered holder to purchase from the
Company one-tenth of a share of a newly created Series A Junior Participating
Preferred Stock at an exercise price of $100. The Rights, which expire on
November 27, 2005, may be exercised only if certain conditions are met, such as
the acquisition of 15% or more of the Company's Common Stock by a person or
affiliated group ("Acquiring Person").
In the event the Rights become exercisable, each Right will enable the owner,
other than the Acquiring Person, to purchase, at the Right's then current
exercise price, that number of shares of Common Stock with a market value equal
to twice the exercise price. In addition, unless the Acquiring Person owns more
than 50% of the outstanding shares of Common Stock, the Board of Directors may
elect to exchange all outstanding Rights (other than those owned by such
Acquiring Person) at an exchange ratio of one share of Common Stock, or
one-tenth of a Preferred Share, per Right.
11. Stock Repurchase
On October 14, 1998, the Company's Board of Directors authorized the Company to
purchase 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 December 31, 1999 and 1998,
the Company had purchased 721,000 and 343,000 shares, respectively, of its
common stock for an aggregate purchase price of $7,646,000 and $3,350,000,
respectively.
12. Employee Benefit Plans
The Company has a 401(k) savings plan (the "Plan") providing retirement benefits
to all employees who have completed at least six months of service. The Company
makes matching contributions of 50% of each participant's contribution up to 5%
of each participant's salary. Total company contributions approximated $351,000,
$241,000, and $139,000 for 1999, 1998, and 1997, respectively. Additionally, the
Company may make discretionary contributions to the Plan that are allocated to
each participant's account. No such discretionary contributions were made in
1999, 1998, or 1997.
On May 16, 1996 the Company's shareholders approved the CryoLife, Inc. Employee
Stock Purchase Plan (the "ESPP"). The ESPP allows eligible employees the right
to purchase common stock on a quarterly basis at the lower of 85% of the market
price at the beginning or end of each three-month offering period. As of
December 31, 1999 and 1998 there were 503,000 and 543,000, respectively, shares
of common stock reserved under the ESPP and there had been 97,000 and 57,000,
respectively, shares issued under the plan.
21
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
1999 1998 1997
-------------- ------------ ----------------
Numerator for basic and diluted earnings per share -- income
available to common shareholders $4,451 $6,486 $4,725
============== ============ ================
Denominator for basic earnings per share - weighted-average 12,341 11,974 9,642
basis
Effect of dilutive stock options 192 290 300
-------------- ------------ ----------------
Denominator for diluted earnings per share -- adjusted 12,533 12,264 9,942
weighted-average shares
============== ============ ================
Basic earnings per share $ 0.36 $ 0.54 $ 0.49
============== ============ ================
Diluted earnings per share $ 0.36 $ 0.53 $ 0.48
============== ============ ================
14. Income Taxes
Income tax expense consists of the following (in thousands):
1999 1998 1997
------------------ ----------------- ----------------
Current:
Federal $2,912 $3,854 $1,533
State 95 279 403
------------------ ----------------- ----------------
3,007 4,133 1,936
Deferred (957) (1,948) 972
------------------ ----------------- ----------------
$2,050 $2,185 $2,908
================== ================= ================
Such amounts differ from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax income as a result of the following (in
thousands):
1999 1998 1997
------------------ ----------------- ----------------
Tax expense at statutory rate $2,210 $2,947 $2,593
Increase (reduction) in income taxes
resulting from:
Change in valuation allowance for
deferred tax assets -- -- (30)
Entertainment expenses 47 90 42
State income taxes, net of federal 163 173 266
benefit
Nontaxable interest income (232) (63) --
Research and development credits (100) (585) --
State and local tax refunds -- (256) --
Other (38) (121) 37
------------------ ----------------- ----------------
$2,050 $2,185 $2,908
================== ================= ================
22
The tax effects of temporary differences which give rise to deferred tax
liabilities and assets at December 31 are as follows (in thousands):
1999 1998
---------------- -----------------
Long-term deferred tax assets (liabilities):
Impairment of IFM long-lived assets $993 $--
Intangible assets 579 547
Property (556) (1,537)
Deferred income -- 580
---------------- -----------------
1,016 (410)
Current deferred tax assets (liabilities):
Impairment of IFM inventory 634 --
Unrealized gain on marketable securities 403 (71)
Allowance for bad debts 201 97
Accrued expenses 98 872
Deferred income -- 394
Deferred preservation costs and inventory reserves 57 20
Other (27) 36
---------------- -----------------
1,366 1,348
---------------- -----------------
Net deferred tax assets $2,382 $938
================ =================
At December 31, 1999, the Company has recorded a net deferred tax asset of $2.4
million. Realization of the net deferred tax asset is dependent on generating
sufficient taxable income in future periods. Although realization is not
ensured, management believes that it is more likely than not that the deferred
tax asset will be realized.
15. Executive Insurance Plan
Pursuant to a supplemental life insurance program for certain executive officers
of the Company, the Company and the executives share in the premium payments and
ownership of insurance policies on the lives of such executives. The Company's
aggregate premium contributions under this program were $33,000, $43,000, and
$38,000 for 1999, 1998, and 1997, respectively.
16. Equipment on Loan to Implanting Hospitals
The Company consigns liquid nitrogen freezers with certain implanting hospitals
for tissue storage. The freezers are the property of the Company. At December
31, 1999 freezers with a total cost of approximately $1.8 million and related
accumulated depreciation of approximately $1.0 million were located at the
implanting hospitals' premises. Depreciation is provided over the estimated
useful lives of the freezers on a straight-line basis.
17. Transactions with Related Parties
The Company expensed $60,000, $68,000, and $65,000 during 1999, 1998, and 1997,
respectively, relating to services performed by a law firm whose sole proprietor
is a member of the Company's Board of Directors and a shareholder of the
Company. The Company expensed $64,000 and $75,000 in 1999 and 1998,
respectively, relating to consulting services performed by a member of the
Company's Board of Directors and a shareholder of the Company. The Company
expensed $195,000, $210,000, and $175,000 in 1999, 1998, and 1997, respectively,
relating to consulting services performed by a shareholder of the Company.
23
SELECTED QUARTERLY FINANCIAL INFORMATION
(In thousands except per share data)
- - ------------------------------------------- ----------- ------------ ----------- ----------- -----------
REVENUES Year First Second Third Fourth
Quarter Quarter Quarter Quarter
- - ------------------------------------------- ----------- ------------ ----------- ----------- -----------
1999 $16,325 $17,395 $16,529 $16,473
1998 14,561 15,554 16,014 14,562
1997 10,413 12,723 14,641 13,092
NET INCOME
- - ------------------------------------------- ----------- ------------ ----------- ----------- -----------
1999 $1,380 $1,727 $1,714 $ (370)
1998 1,172 2,048 1,902 1,364
1997 952 1,160 1,458 $1,155
EARNINGS PER SHARE - DILUTED1,2
- - ------------------------------------------- ----------- ------------ ----------- ----------- -----------
1999 $0.11 $0.14 $0.14 $ (0.03)
1998 0.12 0.16 0.15 0.11
1997 0.10 0.12 0.15 0.12
1 Reflects adjustment for the 2-for-1 stock split effected June 28, 1996.
2 Presented, and where appropriate, restated to conform to Statement
128 requirements.
24