EXHIBIT 13.1
C R Y O L I F E , I N C .
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues have been derived primarily from human heart valve,
vein and orthopaedic tissue preservation services.
YEAR ENDED DECEMBER 31, 1996
COMPARED TO YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Revenues increased 27% to $37.2 million in 1996 from $29.2 million in 1995.
These revenue increases were primarily due to greater allograft shipments
resulting from an increase in demand.
Revenues from human heart valve preservation increased 26% to $24.8 million in
1996 from $19.7 million in 1995, representing 67% of total revenues during each
year. These revenue increases were primarily due to a 29% increase in the number
of allograft shipments resulting from an increase in demand. Heart valve
revenues attributable to the acquisition of United Cryopreservation Foundation,
Inc. (UCFI) were $263,000 in 1996.
Revenues from human vein preservation increased 21% to $8.2 million in 1996 from
$6.8 million in 1995, representing 22% and 23%, respectively, of total revenues
during such years. These revenue increases were primarily due to a 22% increase
in the number of allograft shipments resulting from an increase in demand. Vein
revenues attributable to the acquisition of UCFI were $63,000 in 1996.
Revenues from orthopaedic connective tissue preservation increased 127% to $3.4
million in 1996 from $1.5 million in 1995, representing 9% and 5%, respectively,
of total revenues during each year. These revenue increases were primarily due
to a 173% increase in the number of allograft shipments resulting from an
increase in demand.
Revenues from the sale of porcine heart valves in 1996 were $385,000 compared to
$263,000 in 1995, representing 1% of revenues during each year. These revenues
increased due to a 29% increase in the number of units shipped. The Company has
concentrated marketing efforts for stentless porcine heart valve sales in
Europe. During December 1995, the Company obtained CE Mark certification for the
stentless porcine valves. Management believes that CE Mark certification will
help the Company gain entry and approval for its porcine heart valves in the
European Community. The Company currently intends to initiate the process for
Investigational Device Exemption (IDE) and Premarket Approval (PMA) approval of
stentless porcine heart valves in the United States in 1998.
Other revenues decreased to $362,000 in 1996 from $712,000 in 1995. Other
revenues in 1996 consist primarily of research grant award revenues and income
from the termination of the option agreement with Bayer Corporation. Research
grant award revenues in 1996 were primarily related to the bioadhesive and
SynerGraft projects. Income from the termination of the Bayer agreement totaled
$88,000, net of related expenses. The decrease compared to 1995 is primarily
attributable to the sale of the Company's patented Viral Inactivation Process
technology in 1995.
Preservation costs increased to $12.6 million in 1996 from $10.5 million in
1995. Cost of preservation services as a percentage of cryopreservation revenues
decreased to 34% in 1996 from 37% in 1995. This favorable decrease is primarily
due to an increase in the volume of processed tissue and more efficient
processing methods.
General, administrative and marketing expenses increased 23% to $15.7 million in
1996 from $12.8 million in 1995, representing 42% and 44%, respectively, of
total revenues during such years. The increased expenses of approximately $2.9
million are primarily attributable to additional regulatory and quality costs
related to the Company's CE Mark and ISO 9001 certifications, increased fees
paid to technical representatives and other related marketing expenses resulting
from the growth in revenues, and increases in general overhead expenses to
support the growth in revenues.
The Company has continued its commitment to research and development activity,
spending approximately $2.8 million and $2.6 million in 1996 and 1995,
representing 7.5% and 9.0%, respectively, of total revenues during such years.
The Company invested significantly during 1996 in the development of
bioadhesives for surgical applications and in its SynerGraft technology.
YEAR ENDED DECEMBER 31,1995
COMPARED TO YEAR ENDED DECEMBER 31, 1994
- --------------------------------------------------------------------------------
Revenues increased 23% to $29.2 million in 1995 from $23.8 million in 1994.
These revenue increases were primarily due to greater allograft shipments
resulting from an increase in demand, coupled with a general cryopreservation
fee increase in early 1995.
Revenues from human heart valve preservation increased 18% to $19.7 million in
1995 from $16.7 million in 1994, representing 67% and 70%, respectively, of
total revenues during such years. These revenues increased due in part to a 14%
increase in the number of preserved units shipped resulting from an increase in
demand,and the general cryopreservation fee increase in early 1995.
Revenues from human vein preservation increased 24% to $6.8 million in 1995 from
$5.5 million in 1994, representing 23% of total revenues during each year. These
revenues increased due to an 11% increase in the number of preserved units
shipped resulting from an increase in demand, coupled with the general
cryopreservation fee increase in early 1995.
Revenues from orthopaedic connective tissue preservation increased 153% to $1.5
million in 1995 from $593,000 in 1994, representing 5% and 2%, respectively, of
total revenues during each year. These revenues increased due to a 160% increase
in the number of preserved units shipped resulting from an increase in demand.
Porcine heart valve revenue in 1995 was $263,000 compared to $414,000 in 1994.
Marketing efforts for the porcine heart valves were hindered by ongoing legal
actions between the Company (the exclusive worldwide distributor) and the
manufacturer (Bravo). In early 1995, the Company and Bravo reached an agreement
to settle their differences whereby the Company obtained ownership of the
trademarks, rights and patents of the stentless porcine heart valves and Bravo
retained the same for the stented porcine heart valves. Consequently, revenues
decreased due to the transfer of the stented porcine valve technology to Bravo.
Cost of preservation services as a percentage of cryopreservation revenues
decreased to 37% in 1995 from 39% in 1994. This favorable decrease was primarily
due to an increase in the volume of processed tissue, more efficient processing
methods and the general cryopreservation fee increase.
Other revenues increased to $712,000 in 1995 from $412,000 in 1994. The increase
was primarily attributable to the sale of the Company's patented Viral
Inactivation Process technology. Also contributing to this increase was an
increase in research grants revenue from $320,000 in 1994 to $353,000 in 1995.
The Company has continued to receive research grants for both bioadhesives and
tissue engineering research.
General, administrative and marketing expenses increased 15% to $12.8 million in
1995 from $11.1 million in 1994, representing 44% and 47%, respectively, of
total revenues during such years.
The increased expenses of approximately $1.7 million were primarily attributable
to additional regulatory consulting related to the Company's bioadhesives,
provisions for a sales and use tax audit, additional direct technical
representatives, increased fees paid to technical representatives and other
related marketing expenses.
The Company continued its commitment to research and development activity,
spending approximately $2.6 million in 1995 and $2.0 million in 1994
representing 9.0% and 8.4% of revenues, respectively, in such years. The Company
invested heavily during 1995 in the development of bioadhesives for surgical
applications.
CONTINUING OPERATIONS
REVENUES AND PERFORMANCE DATA FROM CONTINUING OPERATIONS BY MAJOR PRODUCT LINES
FOR THE YEARS ENDING 1996, 1995 AND 1994.
Year Ended December 31, (Dollars in Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Heart Valves and Conduits:
- --------------------------------------------------------------------------------
Units shipped 4,528 3,499 3,065
Revenues $24,764 $19,723 $16,669
VEINS:
- --------------------------------------------------------------------------------
Units shipped 2,147 1,765 1,591
Revenues $8,172 $6,771 $5,505
ORTHOPAEDIC TISSUES:
- --------------------------------------------------------------------------------
Units shipped 1,562 573 220
Revenue $3,358 $1,456 593
Human heart valve preservation services currently account for the majority of
the Company's revenues, followed by vein and orthopaedic services. The business
of the Company is expected to change in future years, reflecting, among other
things, the anticipated growth in vein and orthopaedic tissue services.
Orthopaedic tissue units shipped consist of both tendons and menisci. The number
of tendons shipped increased to 1,272 in 1996, from 338 in 1995 and 35 in 1994.
The increase in shipments resulted from an increase in demand for such tissue.
Menisci shipments were 290 in 1996, 235 in 1995 and 185 in 1994.
The Company continually reviews tissue on hand to determine its viability.
Tissue determined not to be suitable for implantation is disposed of properly
and the associated deferred preservation costs are expensed.
In July, 1992, the Company acquired the exclusive distribution rights to certain
aortic and mitral porcine heart valves principally for sale in overseas markets.
Revenues from the sale of porcine valves totaled $385,000, $263,000 and $414,000
for 1996, 1995 and 1994, respectively.
SEASONALITY
The demand for the Company's human heart valve tissue preservation services is
seasonal, with peak demand generally occurring in the second and third quarters.
Management believes this demand trend for human heart valves is primarily due to
the high number of pediatric surgeries scheduled during the summer months.
However, the demand for the Company's vein preservation services does not appear
to experience this seasonal trend. Management believes the trends experienced by
the Company to date for its orthopaedic tissue preservation services indicate
this business may also be seasonal because it is an elective procedure that may
be performed less frequently during the fourth quarter holiday months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements arise out of working capital needs,
capital expenditures for additional lab and production facilities, research and
development spending, and acquisitions. Historically, the Company has met these
requirements primarily with proceeds from sales of common stock, loans under its
credit facilities and earnings.
The decrease in marketable securities results from the sale of such securities
to finance the leasehold improvements and furnishings for the new corporate
headquarters. The increase in accounts receivable is due to the growth in
revenues. The increase in deferred preservation costs relates to an increase in
donors necessary to support the previously mentioned revenue growth. The
increase in property and equipment relates primarily to the Company's new
corporate headquarters. The Company does not expect to incur significant
additional costs relating to the new headquarters. The increase in other assets
relates primarily to the acquisition of the BioGlue(R) technology and to
intangible assets recorded in connection with the acquisition of UCFI. The
increase in accounts payable results primarily from liabilities associated with
the construction and equipping of the new corporate headquarters. The increase
in accrued procurement fees results from the increase in tissue procurement in
the fourth quarter of 1996. Long-term debt results from the acquisition of the
BioGlue technology and from the acquisition of UCFI. The increase in the bank
line of credit is primarily due to leasehold improvements, furniture and
equipment purchases for the new facility.
Net cash provided by operating activities was $4.0 million in 1996, as compared
to net cash provided by operating activities of $2.4 million in 1995. The
increase in net cash provided by operating activities during 1996 was primarily
a result of an increase in earnings and payables, partially offset by increased
receivables.
Net cash flows from financing activities were $1,816,000 in 1996 and $265,000 in
1995. This activity primarily consists of net proceeds from borrowings under the
Company's line of credit and the exercise of stock options.
The Company's capital expenditures totaled $9,220,000, the majority of which
relates to the construction and equipping of the Company's new corporate
headquarters. Also, the Company has made a commitment for up to $1,000,000 in
construction costs for a new manufacturing facility for Ideas for Medicine.
The Company's research and development expenditures totaled $2.8 million in 1996
and $2.6 million in 1995. Management estimates that research and development
expenditures for 1997 will be approximately $3.9 million but are dependent upon
achieving certain milestones in clinical testing. A large portion of this
spending relates to the continued development of bioadhesives and application
for clinical trial approval of the bioadhesives to the FDA.
During 1996 the Company secured a revolving credit facility of $10.0 million at
the bank's prime rate of interest. In addition, the Company may supplement its
financial resources from time to time, as market conditions permit, through
additional financing through collaborative marketing and distribution
agreements.
The Company believes that the cash generated from operations and loans available
under its revolving credit facility will be sufficient to meet the Company's
funding needs for the foreseeable future, including the approximately $4.5
million cash portion of the purchase price relating to the acquisition of Ideas
for Medicine which was completed on March 5, 1997.
INFLATION
Although the Company cannot determine the precise effects of inflation,
management does not believe it has had a significant effect on revenues or
results of operations and does not expect it to have a significant effect in the
near future.
OUTLOOK
Management expects 1997 to be another strong year. The existing markets for the
Company's products continue to grow. The Company's backlog remains strong, and
new products introduced during 1996, together with expanded international
marketing efforts, should spur demand. Management does not anticipate that the
move to the new corporate headquarters will adversely affect product gross
margins. Management expects that the acquisition of Ideas of Medicine will not
have a significant impact on 1997 earnings.
FOWWARD-LOOKING STATEMENTS
Statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, and elsewhere in this 1996 Annual Report that state
the Company's or management's intentions, hopes, beliefs, expectations or
predictions of the future are forward- looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements include, among others, statements regarding the
Company's competitive position, the acquisition and subsequent integration of
Ideas for Medicine, the application to the U.S. FDA for the stentless O'Brien
porcine heart valves, estimates regarding 1997 research and development
expenditures, the Company's expectations regarding the adequacy of current
financing arrangements, product demand and market growth, and other statements
regarding future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. It should be noted
that the Company's actual results could differ materially from those contained
in such forward-looking statements mentioned above, due to adverse changes in
any number of factors that affect this Company's business, including without
limitation, changes in government regulation of the Company's business, the
availability of tissue for implant, the status of the Company's products under
development, the protection of the Company's proprietary technology, the
reimbursement of health care costs by third-party payors, and the Company's
ability to sufficiently integrate acquired businesses.
C R Y O L I F E, I N C.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Current assets:
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 1,369,699 $ 516,416
Marketable securities 43,145 6,015,158
Receivables:
Trade accounts, less allowance
for doubtful accounts of
$94,287 in 1996 and $30,000
in 1995 6,571,751 5,092,658
Income taxes 150,123 --
Other 1,474,793 194,260
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Total receivables 8,196,667 5,286,918
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Deferred preservation costs, less
allowance of $278,399 in 1996
and $247,484 in 1995 7,178,043 5,996,201
Inventories 260,796 424,200
Prepaid expenses 846,294 369,594
Deferred income taxes 286,679 275,375
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Total current assets 18,181,323 18,883,862
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Property and equipment:
- -----------------------------------------------------------------------------------------------------------------
Equipment 8,366,234 5,692,383
Furniture and fixtures 1,493,239 382,605
Leasehold improvements 7,494,487 2,018,722
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17,353,960 8,093,710
Less accumulated depreciation
and amortization 5,787,596 4,814,542
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Net property and equipment 11,566,364 3,279,168
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Other assets:
- -----------------------------------------------------------------------------------------------------------------
Patents and other intangibles,
less accumulated amortization of
$669,140 in 1996 and $286,570
in 1995 4,701,281 1,728,262
Other 523,751 240,897
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Total assets $34,972,719 $24,132,189
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See accompanying notes to consolidated financial statements.
C R Y O L I F E, I N C.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Current liabilities:
- -----------------------------------------------------------------------------------------------------------------
Accounts payable $ 3,695,862 $ 1,372,862
Accrued expenses 719,427 388,579
Accrued compensation 878,263 610,194
Accrued fees to technical service
representatives 213,828 391,300
Accrued procurement fees 1,210,194 694,486
Current maturities of debt 527,054 --
Income taxes payable -- 209,574
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Total current liabilities 7,244,628 3,666,995
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Bank line of credit 1,250,000 --
Long-term debt 1,548,900 --
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Total liabilities 10,043,528 3,666,995
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Commitments and Contingencies
Shareholders' equity:
- -----------------------------------------------------------------------------------------------------------------
Preferred stock of $.01 par value per share.
Authorized 5,000,000
shares; no shares issued. -- --
Common stock of $.01 par
value per share.
Authorized 50,000,000
shares; issued 10,110,326
shares in 1996 and 101,103 99,743
9,974,332 shares in 1995
Additional paid-in capital 17,127,706 16,568,313
Retained earnings 7,902,019 3,974,538
Unrealized gain (loss) on
marketable securities (1,146) 28,092
Treasury stock of 543,000
shares, at cost (179,625) (179,625)
Notes receivable from
shareholders (20,866) (25,867)
Total shareholders' equity 24,929,191 20,465,194
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-------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $34,972,719 $24,132,189
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See accompanying notes to consolidated financial statements.
C R Y O L I F E, I N C.
CONSOLIDATED STATEMENTS OF INCOME
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Revenues:
- --------------------------------------------------------------------------------------------------------------
Cryopreservation $36,677,973 $28,257,333 $23,231,841
Research grants, licenses,
lease and other revenues 361,613 712,352 412,386
Interest income 188,768 255,817 165,794
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37,228,354 29,225,502 23,810,021
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Costs and expenses:
- --------------------------------------------------------------------------------------------------------------
Preservation 12,593,126 10,485,225 8,965,087
General, administrative and
marketing 15,672,550 12,806,706 11,084,492
Research and development 2,807,262 2,633,311 1,975,238
Interest expense 71,800 4,398 21,468
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31,144,738 25,929,640 22,046,285
----------------------------------------------------------------------------------------------------
Income before income taxes 6,083,616 3,295,862 1,763,736
Income tax expense 2,156,135 1,094,133 497,369
- --------------------------------------------------------------------------------------------------------------
Net income $3,927,481 $2,201,729 $1,266,367
- --------------------------------------------------------------------------------------------------------------
Earnings per share of common stock $ 0.40 $ 0.23 $ 0.14
- --------------------------------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding $9,906,036 $9,568,498 $9,372,896
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
C R Y O L I F E, I N C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Net cash flow from operating activities:
- ----------------------------------------------------------------------------------------------------------------
Net income $ 3,927,481 $ 2,201,729 $ 1,266,367
----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization 1,355,624 979,682 1,027,286
Provision for doubtful
accounts 166,600 266,433 150,000
Gain on sale of equipment -- -- (34,148)
Deferred income taxes (11,304) (107,415) (167,960)
Changes in operating assets and liabilities:
Trade and other receivables (2,561,176) (1,779,993) (206,167)
Income taxes (359,697) 105,859 50,892
Deferred preservation costs (1,053,287) 378,974 199,754
Inventories 163,404 432,000 438,000
Prepaid expenses (476,700) (145,471) (32,987)
Accounts payable 2,085,097 37,629 (316,712)
Accrued expenses 739,899 39,383 289,949
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Net cash flows provided by operating
activities 3,975,941 2,408,810 2,664,274
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Net cash flows used in investing activities:
- ----------------------------------------------------------------------------------------------------------------
Capital expenditures (9,220,250) (1,572,928) (1,418,880)
Cash paid for acquisition, net of
cash acquired (721,721) -- --
Other assets (939,216) (1,001,633) (87,108)
Net sales (purchases) of
marketable securities 5,942,775 (2,175,833) (106,654)
Proceeds from sale of property
and equipment -- -- 77,072
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Net cash flows used in investing
activities (4,938,412) (4,750,394) (1,535,570)
----------------------------------------------------------------------------------------------------------
Net cash flows from financing activities:
- ----------------------------------------------------------------------------------------------------------------
Principal payments of debt (750,000) -- --
Proceeds from debt issuance 2,000,000 -- --
Proceeds from exercise of options 560,753 264,920 58,185
Net payments on notes receivable
from shareholder 5,001 281 31,000
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Net cash provided by financing
activities 1,815,754 265,201 89,185
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Increase (decrease) in cash 853,283 (2,076,383) 1,217,889
Cash and cash equivalents at beginning of
period 516,416 2,592,799 1,374,910
Cash and cash equivalents at end of period
$ 1,369,699 $ 516,416 $ 2,592,799
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow
information -- cash paid during the year for:
- ----------------------------------------------------------------------------------------------------------------
Interest $ 33,917 $ 4,398 $ 21,468
Income taxes $ 2,528,598 $ 1,089,466 $ 640,727
Noncash investing and financing
activities:
Note issued for patent $ 825,953 -- --
-------------------------------------------------------------------
Fair value of assets acquired $ 533,605 $ -- $ --
Cost in excess of assets 1,873,274 -- --
acquired
Liabilities assumed (435,158) -- --
Note issued for assets
acquired (1,250,000) -- --
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Net cash paid for acquisition
$ 721,721 -- --
-------------------------------------------------------------------
C R Y O L I F E, I N C.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Common Stock
- ----------------------------------------------------------------------------------------------------------------
Balance beginning of year $ 99,743 $ 98,693 $ 98,434
(9,974,332, 9,326,372, and
9,300,512 shares outstanding
at January 1, 1996, 1995 and
1994, respectively)
Issuances of common stock:
Employee stock purchase
plan (1,939 shares) 19 -- --
Purchase of other assets
(10,395 shares) 104 -- --
Exercise of options (123,660,
104,960, and 25,860 shares in
1996, 1995, and 1994,
respectively)
1,237 1,050 259
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Balance, end of year 101,103 99,743 98,693
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Additional Paid-in Capital
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 16,568,313 $ 16,304,443 $ 16,246,517
Issuances of common stock:
Employee stock purchase
plan 20,996 -- --
Purchase of other assets 129,834 -- --
Exercise of options 408,563 263,870 57,926
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Balance, end of year 17,127,706 16,568,313 16,304,443
----------------------------------------------------------------------------------------------------------
Retained Earnings
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 3,974,538 $ 1,772,809 $ 506,442
Net income 3,927,481 2,201,729 1,266,367
----------------------------------------------------------------------------------------------------------
Balance, end of year 7,902,019 3,974,538 1,772,809
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Unrealized Gain (Loss) on Marketable
Securities
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 28,092 $ (37,628) $ --
Unrealized gain (loss) (29,238) 65,720 (37,628)
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Balance, end of year (1,146) 28,092 (37,628)
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Treasury Stock
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning and end of year
$ (179,625) (179,625) (179,625)
----------------------------------------------------------------------------------------------------------
Notes Receivable From Shareholders
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ (25,867) $ (26,148) $ (57,148)
Payments on shareholder notes 5,001 281 31,000
----------------------------------------------------------------------------------------------------------
Balance, end of year (20,866) (25,867) (26,148)
----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity, end of year $ 24,929,191 $ 20,465,194 $ 17,932,544
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS
Founded in 1984, CryoLife, Inc. was the first company in the United States to
specialize in the commercialization of ultra-low temperature preservation of
human tissues for transplant. The Company markets its products in North and
South America, Europe and Asia. The Company's preservation efforts have been
directed toward tissue transplant opportunities in the areas of cardiac,
vascular and orthopaedic surgery. The Company seeks to identify medical market
areas that can benefit from its expertise in biochemistry and cell biology to
develop innovative techniques and biological products for cardiac, vascular and
orthopaedic reconstructive surgery. Additionally, the Company seeks to develop
and investigate the development of new technologies and products to expand the
Company's implantable product lines and laboratory service business to include
biological products that are not dependent upon the availability of human
tissue.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances have been eliminated.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the 1996
presentation.
USE OF ESTIMATES
The 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 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.
MARKETABLE SECURITIES
Marketable securities consist primarily of municipal bond investments. The
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities", on
January 1, 1994. Under that Statement, the Company classifies its marketable
securities as available-for-sale with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity. The
aggregate amortized cost of such securities at December 31, 1996 and 1995 was
$43,145 and $5,987,066, respectively. The investments mature at various dates
through 2027.
DEFERRED PRESERVATION COSTS AND REVENUE RECOGNITION
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 shipment to the implanting hospital. Deferred preservation costs
consist primarily of laboratory expenses, organ procurement fees, 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.
INVENTORIES
Inventories are comprised of purchased porcine heart valves 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 5 to 10 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.
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 life of
the patent (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 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.
LICENSE FEE AND RESEARCH GRANT REVENUES
License fee revenues are recognized in the period the cash is received and all
licensor obligations have been fulfilled. Revenues for research grants are
recognized in the period the associated costs are incurred.
EARNINGS PER SHARE
The Company's earnings per share are computed by dividing net income by the
weighted average number of common and common equivalent shares. Dilutive common
stock options have been included in the earnings per share calculation using the
treasury stock method.
On May 16, 1996 the Board of Directors declared a two-for-one stock split,
effected in the form of a stock dividend, payable on June 28, 1996 to
shareholders of record on June 7, 1996. All share and per share information in
the accompanying consolidated financial statements have been adjusted to reflect
such split.
2. REVOLVING TERM LOAN AGREEMENT
On August 30, 1996 the Company executed a Revolving Term Loan Agreement with a
bank which permits the Company to borrow up to $10,000,000 at either the bank's
prime rate of interest (8.25% at December 31, 1996) or adjusted Libor, as
defined, plus an applicable Libor margin. This credit agreement contains certain
restrictive covenants including, but not limited to, maintenance of certain
financial ratios and a minimum tangible net worth requirement. The credit
agreement is secured by substantially all of the Company's assets, excluding
intellectual property. Commitment fees are paid based on the unused portions of
the facility. At December 31, 1996 $1,250,000 was outstanding under this
agreement. (See Note 13).
3. LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
- --------------------------------------------------------------------------------
8.25% note payable due in equal annual installments of
$250,000 $1,250,000
Note payable due in 2000 with an effective interest rate of 8%,
net of unamortized discount of $84,046 825,954
------------------------------------------------------------------------
Less current maturities 2,075,954
527,054
------------------------------------------------------------------------
Total long-term debt $1,548,900
------------------------------------------------------------------------
In September 1996 the Company issued $1,250,000 of notes in connection with the
acquisition of certain assets of United Cryopreservation Foundation, Inc. Also,
in April 1996 the Company issued $910,000 of non-interest bearing notes in
connection with the acquisition of its BioGlue(R) technology.
Scheduled maturities of long-term debt for the next five years are as follows:
- --------------------------------------------------------------------------------
1997 $527,054
1998 496,088
1999 515,775
2000 287,037
2001 250,000
- --------------------------------------------------------------------------------
$2,075,954
- --------------------------------------------------------------------------------
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (Statement 107), requires the Company to
disclose estimated fair values for its financial instruments. The carrying
amounts of cash and cash equivalents, marketable securities, trade receivables
and accounts payable approximate their fair values due to the short-term
maturity of these instruments and because they are marked to market. The
estimated fair value of long-term debt approximates the carrying amount of such
debt at December 31, 1996.
5. LEASES
The Company leases equipment and office space under various operating leases
with terms of up to 15 years. Certain leases contain escalation clauses and
renewal options for additional periods. Future minimum lease payments under
noncancelable operating leases as of December 31, 1996 are as follows:
Year ending December 31,
- --------------------------------------------------------------------------------
1997 $1,140,962
1998 1,158,418
1999 1,076,357
2000 934,748
2001 951,887
Thereafter 9,885,044
- --------------------------------------------------------------------------------
Total minimum lease payments $ 15,147,416
- --------------------------------------------------------------------------------
Total rental expense for operating leases amounted to $713,571, $740,588, and
$692,159, for 1996, 1995, and 1994, respectively.
6. STOCK OPTION PLANS
The Company has certain stock option plans that provide for grants of options to
employees to purchase shares of common stock at an exercise price generally
equal to the fair value at the date of grant, which generally become exercisable
over a five-year vesting period and expire within ten years of grant date. A
summary of stock option transactions under the plans follows:
Shares Price Weighted Average
Exercise Price
Outstanding at December 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
279,880 $2.25 - $4.13
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Granted 201,000 3.13 - 3.85
Exercised (25,860) 2.25
Canceled (40,900) 2.25 - 4.13
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994
- -------------------------------------------------------------------------------------------------------------------------
414,120 2.25 - 4.13
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Granted 321,000 3.63 - 7.74 $4.90
Exercised (104,960) 2.25 - 4.13 2.53
Canceled (40,000) 2.25 - 4.13 3.10
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
590,160 2.25 - 7.74 4.21
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Granted 247,000 8.50 - 18.43 15.70
Exercised (123,660) 2.26 - 7.26 3.31
Canceled (5,200) 2.25 - 3.75 3.68
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------
708,300 2.25 - 18.43 7.36
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement 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 value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
1996 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------------------------------------------------------------
Expected Dividend Yield 0% 0%
----------------------------------------------------------------------
Expected Stock Price Volatility 0.552 0.515
----------------------------------------------------------------------
Risk-Free Interest Rate 6.48% 5.91%
----------------------------------------------------------------------
Expected Life of Options 4.8 Years 4.0 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.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows:
1996 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net income - as reported 3,927,481 2,201,729
----------------------------------------------------------------------
Net income - pro forma 3,632,183 2,123,134
----------------------------------------------------------------------
Earnings per share - as reported 0.40 0.23
----------------------------------------------------------------------
Earnings per share - pro forma 0.37 0.22
----------------------------------------------------------------------
Other information concerning stock
options follows:
Weighted average fair value of options
granted during the year 7.97 $2.36
----------------------------------------------------------------------
Number of shares as to which options are
exercisable at end of year 156,700 73,600
----------------------------------------------------------------------
Weighted average remaining contractual life
of outstanding options 3.51 Years
----------------------------------------------------------------------
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2000.
7. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan providing retirement benefits to all
employees who have completed six months of service. The Company makes matching
contributions of 50% of each participant's contribution up to 5% of each
participant's salary. The total contributions charged to operations were
$123,193, $131,399 and $100,114 in 1996, 1995 and 1994, 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 for 1996, 1995 or 1994.
On May 16, 1996 the Company's shareholders approved the CryoLife, Inc. Employee
Stock Purchase Plan (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, 1996 there were 598,061 shares of common stock reserved for the
ESPP and there had been 1,939 shares issued under the plan.
8. INCOME TAXES
Income tax expense consists of the following:
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 1,826,144 $ 1,012,356 $ 537,795
State 341,295 189,192 127,534
-----------------------------------------------------------------------------------------------------
Total current 2,167,439 1,201,548 665,329
Deferred (11,304) (107,415) (167,960)
-----------------------------------------------------------------------------------------------------
Total income tax
expense $ 2,156,135 $ 1,094,133 $ 497,369
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
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:
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Tax expense at
statutory rate $ 2,068,429 $ 1,120,593 $ $599,670
-----------------------------------------------------------------------------------------------------
INCREASE (REDUCTION) IN INCOME TAXES
RESULTING FROM:
- ----------------------------------------------------------------------------------------------------------------------
Change in validation
allowance for
deferred tax
assets (129,171) (51,529) (184,664)
-----------------------------------------------------------------------------------------------------
Entertainment
expenses 29,855 32,845 17,684
-----------------------------------------------------------------------------------------------------
Officer's life
insurance 3,532 3,873 7,613
-----------------------------------------------------------------------------------------------------
State income taxes,
net of federal
benefit 240,911 126,464 99,480
-----------------------------------------------------------------------------------------------------
Non-taxable interest
income (50,142) (73,955) (48,217)
-----------------------------------------------------------------------------------------------------
Other (7,279) (64,158) (5,803)
-----------------------------------------------------------------------------------------------------
$2,156,135 $ 1,094,133 $ 497,369
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
The tax effects of temporary differences which give rise to deferred tax assets
and deferred tax liabilities are presented below:
December 31, 1996 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
- --------------------------------------------------------------------------------
Depreciation $ 111,298 $ 186,262
-----------------------------------------------------------------------
Deferred preservation costs
and inventory reserves 86,616 94,044
-----------------------------------------------------------------------
Note receivable reserve -- 85,500
-----------------------------------------------------------------------
Other 118,765 68,740
-----------------------------------------------------------------------
316,679 434,546
Less valuation allowance 30,000 159,171
-----------------------------------------------------------------------
Net deferred tax assets $ 286,679 $ 275,375
-----------------------------------------------------------------------
-----------------------------------------------------------------------
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances.
9. FDA REGULATION
Human heart valves historically have not been subject to regulation by the
United States Food and Drug Administration (FDA). However, in June 1991 the FDA
published a notice stating that human heart valves for transplantation are
medical devices subject to Premarket Approval (PMA) or an Investigational Device
Exemption (IDE). In October 1994 the FDA announced in the Federal Register that
neither an approved application for PMA nor an IDE is required for processors
and distributors who had marketed heart valve allografts before June 1991. This
action by the FDA has removed allograft heart valves from clinical trial status
thus allowing the Company to distribute such valves to cardiovascular surgeons
throughout the United States.
10. EXECUTIVE INSURANCE PLAN
In December 1992 the Company's Board of Directors approved 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 the executives. The Company's aggregate premium contributions
were $37,515, $30,864 and $36,269 for 1996, 1995 and 1994, respectively.
11. EQUIPMENT ON LOAN TO IMPLANTING HOSPITALS
The Company consigns liquid nitrogen freezers with the implanting hospitals for
tissue storage. The freezers are the property of the Company. At December 31,
1996, freezers with a total cost of approximately $1,021,000 and related
accumulated depreciation of approximately $678,000 were located at the
implanting hospitals' premises. Depreciation is provided over the estimated
useful lives of the freezers on a straight-line basis.
12. TRANSACTIONS WITH RELATED PARTIES
The Company expensed $39,208, $66,609, and $64,767 during 1996, 1995 and 1994,
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.
13. SUBSEQUENT EVENT
On March 5, 1997 the Company acquired the stock of Ideas for Medicine, Inc.
(IFM) of Clearwater, Florida, a medical device company specializing in the
manufacture and distribution of single use cardiovascular products, for
consideration of approximately $4.5 million in cash and approximately $5 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 discussed in Note 2. The acquisition will be accounted for as a
purchase.
INDEPENDENT AUDITORS' REPORT
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ERNST & YOUNG LLP
The Board of Directors and Shareholders of CryoLife, Inc.:
We have audited the accompanying consolidated balance sheet of CryoLife, Inc. as
of December 31, 1996 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 consolidated financial
statements based on our audit. The consolidated financial statements of
CryoLife, Inc. for the years ended December 31, 1995 and 1994 were audited by
other auditors whose report dated February 14, 1996, except as to Note 13, which
is as of March 18, 1996, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
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 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CryoLife, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
February 7, 1997, except for Note 13 as to which the date is March 5, 1997
- --------------------------------------------------------------------------------
MARKET PRICE OF COMMON STOCK
The following table sets forth the range of high and low sales prices for the
Company's common stock, on the NASDAQ National Market System, for each of the
quarters of fiscal 1996 and 1995. Such prices have been restated to reflect the
two-for-one stock split effected June 28, 1996.
High Low
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996
-----------------------------------------------------------------------
First quarter 12 5/8 7
Second quarter 20 3/4 10 4/5
Third quarter 20 1/2 11 1/4
Fourth quarter 15 3/4 12 3/16
-----------------------------------------------------------------------
1995
-----------------------------------------------------------------------
First quarter 4 1/4 3 1/8
Second quarter 5 5/8 3 3/8
Third quarter 9 1/8 5 3/8
Fourth quarter 9 1/16 6 1/8
SELECTED FINANCIAL & QUARTERLY INFORMATION
SELECTED FINANCIAL INFORMATION
(In thousands except share data) December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 37,228 $ 29,226 $ 23,810 $ 21,340 $ 19,633
Net income 3,927 2,202 1,266 554 696
Research and development as a percent
of revenues 7.5% 9.0% 8.3% 6.5% 7.1%
EARNINGS PER SHARE
- -----------------------------------------------------------------------------------------------------------------------
Net income* $ 0.40 $ 0.23 $ 0.14 $ 0.06 $ 0.09
YEAR-END FINANCIAL POSITION
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 34,973 $ 24,132 $ 21,417 $ 20,075 $ 12,441
Working capital 10,937 15,217 14,279 13,397 5,266
Long-term liabilities 2,799 0 0 0 1,141
Shareholders' equity 24,929 20,465 17,933 16,615 7,333
Current ratio 3:1 5:1 5:1 5:1 2:1
Shareholders' equity per common
share*
$ 2.61 $ 2.17 $ 1.92 $ 1.83 $ 1.00
SELECTED QUARTERLY FINANCIAL INFORMATION
First Second Third Fourth
(In thousands except share data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
Revenues 1996 $ 8,434 $ 9,698 $ 10,411 $ 8,685
--------------------------------------------------------------------------------------------------------------
1995 6,605 7,230 8,347 7,044
1994 5,281 5,876 6,647 6,006
Net Income 1996 $ 782 $ 988 $ 1,261 $ 896
--------------------------------------------------------------------------------------------------------------
1995 390 559 685 568
1994 195 289 349 433
Earnings per share* 1996 $ 0.08 $ 0.10 $ 0.13 $ 0.09
--------------------------------------------------------------------------------------------------------------
1995 0.04 0.06 0.07 0.06
1994 0.02 0.03 0.04 0.05
* Reflects adjustment for the two-for-one stock split effected June 28, 1996.
CRYOLIFE, INC.
Board of Directors
Steven G. Anderson
Chairman, President and
Chief Executive Officer
CryoLife, Inc.
Kennesaw, Georgia
Ronald C. Elkins, M.D.
Chief, Department of Thoracic and
Cardiovascular Surgery
University of Oklahoma Health
Science Center
Oklahoma City, Oklahoma
Benjamin H. Gray
Partner
Massey Burch Capital Corp.
(An investment firm)
Nashville, Tennessee
Rodney G. Lacy
President
AI Industries
(A manufacturing concern)
West Chicago, Illinois
Ronald D. McCall, Esq.
Attorney at Law
Tampa, Florida
Corporate Officers
Steven G. Anderson
Chairman, President and
Chief Executive Officer
Kirby S. Black, Ph.D.
Vice President, Research &
Development
Edwin B. Cordell, Jr.
Vice President and Chief Financial Officer
Albert E. Heacox, Ph.D.
Vice President, Laboratory Operations
Ronald D. McCall, Esq.
Secretary/Treasurer
Robert T. McNally, Ph.D.
Senior Vice President, Clinical Research
Gerald B. Seery
Vice President, Marketing
James C. Vander Wyk, Ph.D.
Vice President, Regulatory Affairs and
Quality Assurance
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