UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
Commission File Number 0-21104
CRYOLIFE, INC.
(Exact name of registrant as specified in its charter)
-----------------------
Florida 59-2417093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1655 Roberts Boulevard, NW
Kennesaw, Georgia 30144
(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: (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
May 12, 2002 was 19,532,297.
THIS FILING INCLUDES UNAUDITED FINANCIAL STATEMENTS THAT HAVE NOT BEEN REVIEWED
IN ACCORDANCE WITH RULE 10-01(d) OF REGULATION S-X PROMULGATED BY THE SECURITIES
AND EXCHANGE COMMISSION. CRYOLIFE, INC. HAS ELECTED NOT TO OBTAIN SUCH A REVIEW
FROM ITS PRIOR AUDITOR, ARTHUR ANDERSEN LLP. SEE "INFORMATION WITH RESPECT TO
FINANCIAL STATEMENTS" IN THIS FILING FOR MORE INFORMATION.
Part I - FINANCIAL INFORMATION
INFORMATION WITH RESPECT TO FINANCIAL STATEMENTS
This filing includes unaudited financial statements that have not been reviewed
in accordance with Rule 10-01(d) of Regulation S-X promulgated by the Securities
and Exchange Commission. CryoLife, Inc. has elected not to obtain such a review
from its prior auditor, Arthur Andersen LLP. No independent auditor has reviewed
the financial statements set forth below or opined that such statements present
fairly, in all material aspects, the financial position, results of operations,
and cash flows of CryoLife, Inc. for the quarterly period ended March 31, 2002.
On April 11, 2002 CryoLife, Inc. filed a form 8-K, indicating that the Board of
Directors, upon the recommendation of the audit committee, had dismissed the
accounting firm Arthur Andersen LLP as the Company's auditors effective April 9,
2002. On May 10, 2002 CryoLife, Inc. filed a form 8-K, indicating that the Board
of Directors, upon the recommendation of the audit committee, had appointed
Deloitte & Touche, LLP as the Company's independent auditors effective May 7,
2002. Deloitte & Touche, LLP will review the financial statements for the
quarterly period ended March 31, 2002 in accordance with Rule 10-01(d) and, if
in the opinion of such accountants, any changes are required, the Company will
file an amended Report on Form 10-Q in accordance with Securities Exchange Act
of 1934 release No. 34-45589.
2
Item 1. Financial statements
CRYOLIFE, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
-------------------------------------
2002 2001
-------------------------------------
(Unaudited)
Revenues:
Human tissue preservation services $ 20,238 $ 18,566
Products 5,065 2,641
Distribution and grant 168 225
-------------------------------------
25,471 21,432
Costs and expenses:
Human tissue preservation services 8,063 7,673
Products 2,235 1,432
General, administrative and marketing 9,478 8,159
Research and development 1,153 1,086
Interest expense 192 --
Interest income (298) (562)
Other (income) expense, net (56) 747
-------------------------------------
20,767 18,535
-------------------------------------
Income before income taxes 4,704 2,897
Income tax expense 1,600 927
-------------------------------------
Net income $ 3,104 $ 1,970
=====================================
Earnings per share:
Basic $ 0.16 $ 0.11
=====================================
Diluted $ 0.16 $ 0.10
=====================================
Weighted average shares outstanding:
Basic 19,096 18,749
=====================================
Diluted 19,796 19,508
=====================================
See accompanying notes to summary consolidated financial statements.
3
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
2002 2001
-----------------------------------
ASSETS (Unaudited)
-
Current Assets:
Cash and cash equivalents $ 6,566 $ 7,204
Marketable securities, at market 25,057 26,483
Trade receivables, net 16,893 13,305
Other receivables, net 2,127 2,820
Note receivable, net 885 1,169
Deferred preservation costs, net 26,828 24,199
Inventories 6,484 6,259
Prepaid expenses and other assets 2,156 2,341
Deferred income taxes 155 688
-----------------------------------
Total current assets 87,151 84,468
-----------------------------------
Property and equipment, net 39,544 39,246
Goodwill, net 1,399 1,399
Patents, net 3,436 2,919
Other, net 1,136 1,278
-----------------------------------
TOTAL ASSETS $ 132,666 $ 129,310
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,653 $ 555
Accrued expenses and other current liabilities 1,662 1,491
Accrued compensation 1,353 2,560
Accrued procurement fees 6,948 6,592
Current maturities of capital lease obligations 1,086 609
Current maturities of long-term debt 1,600 1,600
Convertible debenture -- 4,393
-----------------------------------
Total current liabilities 14,302 17,800
-----------------------------------
Capital lease obligations, less current maturities 2,514 3,140
Bank loan, less current maturities 5,200 5,600
Deferred income taxes 238 449
Other long-term liabilities 931 882
-----------------------------------
Total liabilities 23,184 27,871
-----------------------------------
Shareholders' equity:
Preferred stock --- ---
Common stock (issued 20,793 shares in 2002 and
20,172 shares in 2001) 208 202
Additional paid-in capital 72,389 66,828
Retained earnings 43,649 40,547
Deferred compensation (30) (33)
Accumulated other comprehensive income (256) (145)
Less: Treasury stock at cost (1,308 shares in 2002 and
1,286 shares in 2001) (6,479) (5,960)
-----------------------------------
Total shareholders' equity 109,481 101,439
-----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 132,666 $ 129,310
===================================
See accompanying notes to summary consolidated financial statements.
4
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31,
-----------------------------------
2002 2001
-----------------------------------
(Unaudited)
Net cash from operating activities:
Net income $ 3,104 $ 1,970
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of marketable equity securities (10) --
Depreciation and amortization 1,230 1,009
Provision for doubtful accounts 24 24
Other non-cash adjustments to income -- 748
Deferred income taxes 365 (411)
Tax effect of nonqualified option exercises 306 72
Changes in operating assets and liabilities:
Receivables (3,513) (1,553)
Income Taxes 594 1,245
Deferred preservation costs and inventories (2,854) (671)
Prepaid expenses and other assets 185 (165)
Accounts payable, accrued expenses, and other liabilities 380 (927)
------------------------------------
Net cash flows (used in) provided by operating activities (189) 1,341
-----------------------------------
Net cash flows from investing activities:
Capital expenditures (1,398) (4,924)
Other assets (412) 17
Purchases of marketable securities (11,725) (2,613)
Sales and maturities of marketable securities 13,036 3,932
Proceeds from note receivable 284 237
-----------------------------------
Net cash flows used in investing activities (215) (3,351)
-----------------------------------
Net cash flows from financing activities:
Principal payments of debt (400) --
Payment of obligations under capital leases (149) (43)
Proceeds from exercise of stock options and
issuance of common stock 348 244
-----------------------------------
Net cash (used in) provided by financing activities (201) 201
-----------------------------------
Decrease in cash (605) (1,809)
Effect of exchange rate changes on cash (33) (3)
Cash and cash equivalents, beginning of period 7,204 17,480
-----------------------------------
Cash and cash equivalents, end of period $ 6,566 $ 15,668
===================================
See accompanying notes to summary consolidated financial statements.
5
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) accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States for complete financial presentations. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Certain prior
year balances have been reclassified to conform to the 2002 presentation.
CryoLife, Inc.'s unaudited prior year quarterly results of operations have been
revised from the data originally presented in the Form 10-Q for the quarter
ended March 31, 2001, as indicated in Note 20 to the consolidated financial
statements included in the CryoLife, Inc. Form 10-K for the year ended December
31, 2001. Operating results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the consolidated financial
statements and notes thereto included in the CryoLife, Inc. ("CryoLife" or the
"Company") Form 10-K for the year ended December 31, 2001.
NOTE 2 - CASH EQUIVALENTS AND 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. At March 31, 2002
and December 31, 2001, all marketable equity securities and debt securities were
designated 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. Interest income, dividends, realized gains and losses, and
declines in value judged to be other than temporary are included in investment
income. The cost of securities sold is based on the specific identification
method.
The following is a summary of cash equivalents and marketable securities, all of
which are classified as available-for-sale (in thousands):
Unrealized Estimated
Adjustments Adjusted Holding Market
March 31, 2002 Cost Basis to Cost Basis Cost Basis Gains/(Losses) Value
------------- ------------- ------------- ------------- -------------
Cash equivalents:
Money market funds $ 1,575 $ -- $ 1,575 $ -- $ 1,575
Municipal obligations 3,454 -- 3,454 -- 3,454
------------- ------------- ------------- ------------- -------------
$ 5,029 $ -- $ 5,029 $ -- $ 5,029
============= ============= ============= ============= =============
Marketable securities:
Municipal obligations $ 17,670 $ -- $ 17,670 $ 77 $ 17,747
Debt securities 6,227 (1,217) 5,010 (19) 4,991
Equity securities 2,625 (343) 2,282 (26) 2,256
Certificates of deposit 63 -- 63 -- 63
------------- ------------- ------------- ------------- -------------
$ 26,585 $ (1,560) $ 25,025 $ 32 $ 25,057
============= ============= ============= ============= =============
6
Unrealized Estimated
Adjustments Adjusted Holding Market
December 31, 2001 Cost Basis to Cost Basis Cost Basis Gains/(Losses) Value
------------- ------------- ------------- ------------- -------------
Cash equivalents:
Money market funds $ 1,301 $ -- $ 1,301 $ -- $ 1,301
Municipal obligations 500 -- 500 -- 500
------------- ------------- ------------- ------------- -------------
$ 1,801 $ -- $ 1,801 $ -- $ 1,801
============= ============= ============= ============= =============
Marketable securities:
Municipal obligations $ 17,696 $ -- $ 17,696 $ 147 $ 17,843
Debt securities 6,227 (1,217) 5,010 -- 5,010
Equity securities 3,900 (343) 3,557 10 3,567
Certificates of deposit 63 -- 63 -- 63
------------- ------------- ------------- ------------- -------------
$ 27,886 $ (1,560) $ 26,326 $ 157 $ 26,483
============= ============= ============= ============= =============
The Adjustments to Cost Basis column includes a $1.6 million loss recorded in
2001 for an other than temporary decline in the market value of debt and equity
securities. Differences between cost and market listed above, consisting of a
net unrealized holding gain less deferred taxes of $11,000 at March 31, 2001 and
$50,000 as of December 31, 2001, are included as a separate component of
shareholders' equity.
At March 31, 2002 and December 31, 2001 approximately $4.6 million and $3.4
million, respectively, of marketable securities had a maturity date between 90
days and 1 year, approximately $13.2 million and $14.5 million of marketable
securities mature between 1 and 5 years, and approximately $7.3 million and $8.6
million of marketable securities mature in more than 5 years or do not have a
maturity date.
NOTE 3 - INVENTORIES
Inventories are comprised of the following (in thousands):
March 31, December 31,
2002 2001
-----------------------------------
(Unaudited)
Raw materials $ 1,943 $ 1,987
Work-in-process 990 1,183
Finished goods 3,551 3,089
-----------------------------------
$ 6,484 $ 6,259
===================================
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended
March 31,
----------------------------
2002 2001
----------------------------
(Unaudited)
Numerator for basic and diluted earnings
per share - income available to
common shareholders $ 3,104 $ 1,970
===========================
Denominator for basic earnings per share -
weighted-average basis 19,096 18,749
Effect of dilutive stock options 700 759
---------------------------
7
Denominator for diluted earnings per share -
adjusted weighted-average shares 19,796 19,508
==========================
Earnings per share:
Basic $ 0.16 $ 0.11
==========================
Diluted $ 0.16 $ 0.10
==========================
NOTE 5 - DEBT
On April 25, 2000 the Company entered into a loan agreement, permitting the
Company to borrow up to $8 million under a line of credit during the expansion
of the Company's corporate headquarters and manufacturing facilities. Borrowings
under the line of credit accrued interest equal to Adjusted LIBOR plus 2%
adjusted monthly. On June 1, 2001, the line of credit was converted to a term
loan (the "Term Loan") to be paid in 60 equal monthly installments of principal
plus interest computed at Adjusted LIBOR plus 1.5% (3.37% at March 31, 2002).
The Term Loan contains certain restrictive covenants including, but not limited
to, maintenance of certain financial ratios and a minimum tangible net worth
requirement. The Term Loan is secured by substantially all of the Company's
assets. As of March 31, 2002 the Company was in compliance with these covenants.
In March 1997 the Company issued a $5.0 million convertible debenture in
connection with the Ideas for Medicine, Inc. acquisition. The debenture accrued
interest at 7% and was convertible into common stock of the Company at any time
prior to the due date of March 2002 at $8.05 per common share. On March 30, 1998
$607,000 of the convertible debenture was converted into 75,000 shares of the
Company's common stock, and on March 4, 2002 the remaining $4.4 million was
converted into 546,000 shares of the Company's common stock.
NOTE 6 - DERIVATIVES
The Company's Term Loan, which accrues interest computed at Adjusted LIBOR plus
1.5%, exposes the Company to changes in interest rates going forward. On March
16, 2000, the Company entered into a $4 million notional amount forward-starting
interest swap agreement, which took effect on June 1, 2001 and expires in 2006.
This swap agreement was designated as a cash flow hedge to effectively convert a
portion of the Term Loan balance to a fixed rate basis, thus reducing the impact
of interest rate changes on future income. This agreement involves the receipt
of floating rate amounts in exchange for fixed rate interest payments over the
life of the agreement, without an exchange of the underlying principal amounts.
The differential to be paid or received is recognized in the period in which it
accrues as an adjustment to interest expense on the Term Loan.
At March 31, 2002 the notional amount of this swap agreement was $3.4 million,
and the fair value of the interest rate swap agreement, as estimated by the bank
based on its internal valuation models, was a liability of $291,000. The fair
value of the swap agreement is recorded as part of long-term liabilities and is
recorded net of tax as part of accumulated other comprehensive income within the
Statement of Shareholders' Equity.
NOTE 7 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of other comprehensive income consist of the following, net of tax
(in thousands):
Change in
Unrealized Fair Value
Net Gain/(Loss) on of Interest Translation Comprehensive
Three months ended: Income Investments Rate Swap Adjustment Income
------------- ------------- ------------- ------------- -------------
March 31, 2002 $ 3,104 $ (86) $ 8 $ (33) $ 2,993
March 31, 2001 $ 1,970 $ 702 $ (163) $ (3) $ 2,506
8
The tax effect on the change in unrealized gain/loss on investments is $39,000,
and $339,000 for the three months ended March 31, 2002 and 2001, respectively.
The tax effect on the change in fair value of the interest rate swap is $5,000
and $84,000 for the three months ended March 31, 2002 and 2001, respectively.
The translation adjustment is not currently adjusted for income taxes as it
relates to a permanent investment in a foreign subsidiary.
NOTE 8 - ACCOUNTING PRONOUNCEMENTS
On January 1, 2002 the Company was required to adopt SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 142 specifies
that goodwill and certain other intangible assets will no longer be amortized
but instead will be subject to periodic impairment testing. SFAS 144 clarifies
accounting and reporting for assets held for sale, scheduled for abandonment or
other disposal, and recognition of impairment loss related to the carrying value
of long-lived assets. The Company has completed its impairment testing as
required by FAS 142. The adoption of these statements did not have a material
effect on the consolidated financial statements of the Company. However, the
adoption of SFAS 142 will increase the Company's pretax income by approximately
$100,000 in 2002 due to the cessation of goodwill amortization.
The Company will be required to adopt SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143") on January 1, 2003. SFAS 143 addresses
accounting and reporting for asset retirement costs of long-lived assets
resulting from legal obligations associated with acquisition, construction, or
development transactions. The Company has determined that the adoption of SFAS
143 will not have a material effect on the results of operations or financial
position of the Company.
NOTE 9 - SEGMENT INFORMATION
The Company has two reportable segments: Human Tissue Preservation Services and
Implantable Medical Devices. The Company's segments are organized according to
services and products.
The HUMAN TISSUE PRESERVATION SERVICES segment includes external revenue from
cryopreservation services of cardiovascular, vascular, and orthopaedic human
tissue. The IMPLANTABLE MEDICAL DEVICES segment includes external revenue from
product sales of BioGlue Surgical Adhesive and bioprosthetic devices, including
stentless porcine heart valves, SynerGraft treated porcine heart valves, and
SynerGraft treated bovine vascular grafts. There are no intersegment sales.
The primary measure of segment performance, as viewed by the Company's
management, is segment gross margin, or net external revenues less cost of
preservation services and products. The Company does not segregate assets by
segment; therefore asset information is excluded from the segment disclosures
below.
The following table summarizes revenues, cost of preservation services and
products, and gross margin for the Company's operating segments (in thousands):
Cost of Preservation Gross
March 31, 2002 Revenue Services and Products Margin
- --------------------------------------------------------------------------------------------------
Human tissue preservation services $ 20,238 $ 8,063 $ 12,175
Implantable medical devices 5,065 2,235 2,830
All other (a) 168 -- 168
- --------------------------------------------------------------------------------------------------
$ 25,471 $ 10,298 $ 15,173
==================================================================================================
March 31, 2001
- --------------------------------------------------------------------------------------------------
Human tissue preservation services $ 18,566 $ 7,673 $ 10,893
Implantable medical devices 2,641 1,432 1,209
All other (a) 225 -- 225
- --------------------------------------------------------------------------------------------------
$ 21,432 $ 9,105 $ 12,327
==================================================================================================
(a) The All Other designation includes 1) grant revenue and 2) distribution
revenue.
9
The following table summarizes net revenues by product (in thousands):
Revenue March 31, 2002 March 31, 2001
- --------------------------------------------------------------------------------
Human tissue preservation services:
Cardiovascular tissue $ 7,307 $ 6,911
Vascular tissue 7,017 6,412
Orthopaedic tissue 5,914 5,243
- --------------------------------------------------------------------------------
Total preservation services 20,238 18,566
BioGlue surgical adhesive 4,873 2,442
Bioprosthetic devices 192 199
Distribution and grant 168 225
- --------------------------------------------------------------------------------
$ 25,471 $ 21,432
================================================================================
10
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CRITICAL ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is included in Note 1
to the consolidated financial statements, as filed in the Form 10-K for the
fiscal year ended December 31, 2001. Management believes that the consistent
application of these policies enables the Company to provide the users of the
financial statements with useful and reliable information about the Company's
operating results and financial condition. The consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States, which require the Company to make estimates and assumptions. The
following are accounting policies that management believes are most important to
the portrayal of the Company's financial condition and results and may involve a
higher degree of judgment and complexity.
REVENUE RECOGNITION: The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on applying generally accepted accounting
principles to revenue recognition issues. Revenues for human tissue preservation
services are recognized when services are completed and tissue is delivered to
the customer. Revenues for products are recognized at the time the product is
shipped, at which time title passes to the customer. There are no further
performance obligations and delivery occurs upon shipment. Revenues from
research grants are recognized in the period the associated costs are incurred.
The Company assesses the likelihood of collection based on a number of factors,
including past transaction history with the customer and the credit-worthiness
of the customer.
DEFERRED PRESERVATION COSTS: Tissue is procured from deceased human donors by
organ procurement agencies 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 revenue is recognized upon shipment of
the tissue 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, net of reserve, on a
first-in, first-out basis.
INTANGIBLE ASSETS: Goodwill resulting from business acquisitions is not
amortized, but is instead subject to periodic impairment testing in accordance
with FAS 142. 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 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.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002 the Company was required to adopt SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 142 specifies
that goodwill and certain other intangible assets will no longer be amortized
but instead will be subject to periodic impairment testing. SFAS 144 clarifies
accounting and reporting for assets held for sale, scheduled for abandonment or
other disposal, and recognition of impairment loss related to the carrying value
of long-lived assets. The Company has completed its impairment testing as
required by FAS 142. The adoption of these statements did not have a material
effect on the consolidated financial statements of the Company. However, the
adoption of SFAS 142 will increase the Company's pretax income by approximately
$100,000 in 2002 due to the cessation of goodwill amortization.
The Company will be required to adopt SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143") on January 1, 2003. SFAS 143 addresses
accounting and reporting for asset retirement costs of long-lived assets
resulting from legal obligations associated with acquisition, construction, or
development transactions. The Company has determined that the adoption of SFAS
143 will not have a material effect on the results of operations or financial
position of the Company.
11
RESULTS OF OPERATIONS
Revenues increased 19% to $25.5 million for the three months ended March 31,
2002 from $21.4 million for the same period in 2001. The increase in revenues
was primarily due to increased sales of BioGlue Surgical Adhesive and growth in
the Company's preservation services. The increases are primarily attributable to
the receipt of FDA approval for BioGlue in December 2001, a greater acceptance
of these products by the surgical community and the Company's ability to procure
greater amounts of tissue.
Revenues from the sale of BioGlue Surgical Adhesive increased 100% to $4.9
million for the three months ended March 31, 2002 from $2.4 million for the
three months ended March 31, 2001, representing 19% and 11%, respectively, of
total revenues during such periods. The increase in revenues is due to a 77%
increase in the number of milliliter shipments of BioGlue. The increase in
shipments was primarily due to the receipt of FDA approval in December 2001 for
the use of BioGlue in the U.S. as an adjunct in open surgical repair of large
vessels for adult patients. Domestic revenues accounted for 80% and 66% of total
BioGlue revenues for the three months ended March 31, 2002 and 2001,
respectively.
Quarter over quarter statistics presented for tissues procured and processed for
human tissue preservation services are from the period beginning in November of
the prior year through January of the year presented, as such procurement and
processing of tissues received during this time period is the primary generator
of first quarter revenues. During the time period for which procurement
statistics are discussed, the Company benefited from significant increases in
procurement due to new relationships with tissue banks and competitive wins of
tissue bank contracts. Additionally, the Company has changed certain tissue
acceptance guidelines, which has resulted in an increase in tissues procured and
processed. These increases in procurement surpassed the Company's expectations
during this period. Although the Company expects this increase in procurement to
continue, there can be no assurance that these procurement levels can be
maintained. Due to a variety of factors, including the time required to process
these greater amounts of tissue, the increase in processing time and complexity
for tissues processed using the SynerGraft technology, and the focus of the
Company on the marketing and roll-out of BioGlue, these increases did not
directly translate into equivalent increases in revenues from preservation
services. As a result of this increased procurement, the level of deferred
preservation costs increased in all of the Company's main tissue service
categories: cardiac, vascular, and orthopaedic. These higher levels of deferred
preservation costs are expected to drive some revenue growth in the short term
as the Company provides services related to the more critical implant needs. The
Company expects that the majority of this increase in procurement will generate
more modest increases in service revenues over a longer period of time, as less
critical need tissues and tissues of various sizes are properly matched with
recipients.
Revenues from cardiovascular preservation services increased 6% to $7.3 million
for the three months ended March 31, 2002 from $6.9 million for the three months
ended March 31, 2001, representing 29% and 32%, respectively, of total revenues
during such periods. This increase in revenues resulted from a 4% increase in
the number of cardiovascular allograft shipments as a result of a 27% increase
in cardiovascular tissues procured and processed quarter over quarter.
Revenues from human vascular tissue preservation services increased 9% to $7.0
million for the three months ended March 31, 2002 from $6.4 million for the
three months ended March 31, 2001, representing 28% and 30%, respectively, of
total revenues during such periods. This increase in revenues was primarily due
to a 10% increase in average service fees in 2002 as compared to 2001 despite a
1% decrease in the number of vascular allograft shipments. Average service fees
were higher during the first quarter of 2002 due to an increase in longer
singular vascular grafts shipped per case relative to shorter multiple grafts,
used as composite grafts, shipped per case in the first quarter of 2001. The
number of cases for which vascular grafts were shipped increased over the first
quarter of 2001. Vascular tissues procured and processed increased 41% quarter
over quarter.
Revenues from human orthopaedic tissue preservation services increased 13% to
$5.9 million for the three months ended March 31, 2002 from $5.2 million for the
three months ended March 31, 2001, representing 23% and 24%, respectively, of
total revenues during such periods. This increase in revenues was primarily due
to a 9% increase in the number of orthopaedic allograft shipments. The increase
in orthopaedic shipments, primarily boned tendons, resulted from a 47% increase
in orthopaedic allograft tissues procured and processed quarter over quarter and
an increasing acceptance of these tissues in the orthopaedic surgeon community.
Shipments of boned tendons increased 66% in 2002 due to increased availability
12
of these higher demand tissues, which resulted in a $500,000 increase in
revenues in 2002 as compared to 2001. Additional increases in revenues are due
to a more favorable product mix, with increased shipments of hemi-osteochondral
grafts, which carry higher average service fees than other orthopaedic tissues.
Revenues from bioprosthetic cardiovascular devices decreased 4% to $192,000 for
the three months ended March 31, 2002 from $199,000 for the three months ended
March 31, 2001, representing 1% of total revenues during such periods.
Distribution and grant revenues decreased to $168,000 for the three months ended
March 31, 2002 from $225,000 for the three months ended March 31, 2001. The
decrease in grant revenues is due to the completion of one of the Company's
federal grant award programs in December 2001, partially offset by $141,000 of
distribution revenues for orthopaedic grafts. Grant revenues both years are
primarily attributable to the SynerGraft research and development programs.
Cost of human tissue preservation services aggregated $8.1 million for the three
months ended March 31, 2002 compared to $7.7 million for the three months ended
March 31, 2001, representing 40% and 41%, respectively, of total human tissue
preservation service revenues during each such periods. Cost of products
aggregated $2.2 million for the three months ended March 31, 2002 compared to
$1.4 million for the three months ended March 31, 2001, representing 44% and
54%, respectively, of total product revenues during such periods. The decrease
in the 2002 cost of products as a percentage of total product revenues is due to
a more favorable product mix during 2002. The product mix was impacted by an
increase in revenues from BioGlue Surgical Adhesive, which carries higher gross
margins than bioprosthetic devices.
General, administrative, and marketing expenses increased 16% to $9.5 million
for the three months ended March 31, 2002, compared to $8.2 million for the
three months ended March 31, 2001, representing 37% and 38%, respectively, of
total revenues during such periods. The increase in expenditures in 2002 was
primarily due to an increase in marketing and general expenses to support
revenue growth and increased overhead costs in connection with the expansion of
the corporate headquarters and manufacturing facility, which was substantially
complete in the first quarter of 2002.
Research and development expenses increased 6% to $1.2 million for the three
months ended March 31, 2002, compared to $1.1 million for the three months ended
March 31, 2001, representing 5% of total revenues during each such period.
Research and development spending in the first quarter of 2002 was primarily
focused on the Company's SynerGraft and Protein Hydrogel Technologies.
Interest income, net of interest expense, was $106,000 and $562,000 for the
three months ended March 31, 2002 and 2001, respectively. The 2002 decrease in
net interest income is due to reduced interest rates in 2002 as compared to 2001
and the lack of interest expense capitalized in 2002 in connection with the
expansion of the corporate headquarters and manufacturing facility, which was
substantially completed in the first quarter of 2002.
Other income was $56,000 for the three months ended March 31, 2002 as compared
to other expense of $747,000 for the three months ended March 31, 2001. Other
expense in the first quarter of 2001 consisted of a $747,000 loss related to an
other than temporary decline in the market value of marketable securities
previously recorded in comprehensive income as a component of shareholder's
equity.
The effective income tax rate was 34% and 32% for the periods ended March 31,
2002 and 2001, respectively.
SEASONALITY
The demand for the Company's cardiovascular tissue preservation services is
seasonal, with peak demand generally occurring in the second and third quarters.
Management believes this trend for cardiovascular tissue preservation services
is primarily due to the high number of surgeries scheduled during the summer
months. However, the demand for the Company's human vascular and orthopaedic
tissue preservation services, BioGlue Surgical Adhesive, and bioprosthetic
cardiovascular and vascular devices does not appear to experience seasonal
trends.
13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002 net working capital was $72.8 million, compared to $66.7
million at March 31, 2001, with a current ratio of 6 to 1. The Company's primary
capital requirements arise out of general working capital needs, capital
expenditures and lease payments for facilities and equipment, and funding of
research and development projects. The Company historically has funded these
requirements through bank credit facilities, cash generated by operations, and
equity offerings.
Net cash used in operating activities was $189,000 for the three months ended
March 31, 2002, as compared to cash provided of $1.3 million for the three
months ended March 31, 2001. This decrease in cash was primarily due to an
increase in working capital requirements due to sales growth and expansion of
product lines, partially offset by an increase in net income before
depreciation, taxes, and non cash items.
Net cash used in investing activities was $215,000 for the three months ended
March 31, 2002, as compared to $3.4 million for the three months ended March 31,
2001. This decrease in cash used was primarily attributable to a reduction in
capital expenditures in 2002 as the expansion and renovation of the Company's
corporate headquarters and manufacturing facilities approached completion,
partially offset by an increase in patent costs.
Net cash used by financing activities was $201,000 for the three months ended
March 31, 2002, as compared to cash provided of $201,000 for the three months
ended March 31, 2001. This decrease was primarily due to the principal payments
on the term loan made during the current quarter. As repayment of the term loan
began in June 2001, no principle payments were made in the prior year quarter.
On March 4, 2002 the $4.4 million convertible debenture due on March 5, 2002 was
converted into approximately 546,000 shares of common stock at $8.05 per common
share.
The Company's Term Loan contains certain restrictive covenants including, but
not limited to, maintenance of certain financial ratios and a minimum tangible
net worth requirement. The Term Loan is secured by substantially all of the
Company's assets. As of March 31, 2002 the Company was in compliance with these
covenants.
The Company's Term Loan, which accrues interest computed at Adjusted LIBOR plus
1.5%, exposes the Company to changes in interest rates going forward. On March
16, 2000, the Company entered into a $4 million notional amount forward-starting
interest swap agreement, which took effect on June 1, 2001 and expires in 2006.
This swap agreement was designated as a cash flow hedge to effectively convert a
portion of the Term Loan balance to a fixed rate basis, thus reducing the impact
of interest rate changes on future income. This agreement involves the receipt
of floating rate amounts in exchange for fixed rate interest payments over the
life of the agreement, without an exchange of the underlying principal amounts.
The differential to be paid or received is recognized in the period in which it
accrues as an adjustment to interest expense on the Term Loan.
On January 1, 2001 the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") as amended. SFAS 133 requires
the Company to recognize all derivative instruments on the balance sheet at fair
value, and changes in the derivative's fair value must be recognized currently
in earnings or other comprehensive income, as applicable. The adoption of SFAS
133 impacts the accounting for the Company's forward-starting interest rate swap
agreement. Upon adoption of SFAS 133, the Company recorded an unrealized loss of
approximately $175,000 related to the interest rate swap, which was recorded as
part of long-term liabilities and accumulated other comprehensive income within
the Statement of Shareholders' Equity.
At March 31, 2002 the notional amount of this swap agreement was $3.4 million,
and the fair value of the interest rate swap agreement, as estimated by the bank
based on its internal valuation models, was a liability of $291,000. The fair
value of the swap agreement is recorded as part of long-term liabilities and is
recorded net of tax as part of accumulated other comprehensive income within the
Statement of Shareholders' Equity.
Since October 1998 management has been seeking to enter into a corporate
collaboration or to complete a potential private placement of equity or
equity-oriented securities to fund the commercial development of its Activation
Control Technology ("ACT"). This technology is now held by the Company's
wholly-owned subsidiary AuraZyme Pharmaceutical, Inc., which was formed on
February 26, 2001. This strategy, if successful, will allow an affiliated entity
14
to fund the ACT and should expedite the commercial development of its oncology,
fibrin olysis (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. However, if the Company
is unable to obtain funds for the commercial development of the ACT and/or if
the Company decides to fund the technology itself, the expenses required to fund
the ACT could adversely impact the Company's liquidity going forward.
The Company anticipates that current cash, marketable securities 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 for any additional
expansion of its corporate headquarters and manufacturing facility, the extent
to which the Company's products generate market acceptance and demand, and the
outcome of the litigation described at Item 3 of the Form 10-K for the fiscal
year ended December 31, 2001. 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.
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q that look forward in time or that express
management's beliefs, expectations or hopes regarding future occurrences,
including the possible requirement to file an amended Form 10-Q because no
independent auditor has reviewed the financial statements set forth herein,
continuation of procurement increases, the effect of changes in interest rates
on the Company's income, the effect of new accounting pronouncements, funding to
continue development of ACT, future expenses related to this technology, the
sufficiency of funds to meet operating and development needs over the next 12
months and other statements regarding future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These future events may not
occur when expected, if at all, and are subject to various risks and
uncertainties. Such risks and uncertainties include the timing of the Company's
receipt of FDA approvals to begin clinical trials for its products currently in
development, potential loss of relationships with tissue banks or other tissue
providers, the resources required to further develop marketing and sales
capabilities, the resources required for any additional expansion of the
Company's corporate headquarters, the extent to which the Company's products
generate market acceptance and demand, the outcome of any litigation,
competition from other companies, the continued acceptance of the Company's
products and other risk factors detailed in the Company's Securities and
Exchange Commission filings, including the Company's Form 10-K for the year
ended December 31, 2001.
Item 3. Quantitative and Qualitative Disclosures 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 and cash equivalents of
$6.6 million and short-term investments in municipal obligations of $17.7
million as of March 31, 2002, as well as interest paid on its debt. A 10%
adverse change in interest rates affecting the Company's cash equivalents and
short-term investments would not have a material impact on the Company's
interest income for 2002.
The Company manages interest rate risk through the use of fixed debt and an
interest rate swap agreement. At March 31, 2002 approximately $3 million of the
Company's $7 million in debt charged interest at a fixed rate. This fixed rate
debt includes a portion of the Company's outstanding term loan balance that has
been effectively converted to fixed rate debt through an interest rate swap
agreement. A 10% increase in interest rates affecting the Company's variable
rate debt, net of the effect of the interest rate swap agreement, would not have
a material increase in the Company's interest expense for 2002.
15
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
For a discussion of certain legal proceedings, see Part I Item 3 in the
Company's Form 10-K for the year ended December 31, 2001.
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
Item 5. Other information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibit index can be found below.
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.)
3.2 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.)
3.3 Articles of Amendment to the Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.)
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).)
(b) No Reports on Form 8-K were filed during the quarter.
16
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)
May 15, 2002 /s/ DAVID ASHLEY LEE
- ------------ ----------------------------------
DATE DAVID ASHLEY LEE
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
17