FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,June 30, 2000
Commission File Number 0-21104
CRYOLIFE, INC.
(Exact name of Registrantregistrant as specified in its charter)
---------
Florida 59-2417093
(State or Other Jurisdictionother jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1655 Roberts Boulevard, NW
Kennesaw, Georgia 3114430144
(Address of principal executive offices)
(zip code)
(770) 419-3355
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant:registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
____---- ----
The number of shares of common stock, par value $0.01 per share, outstanding at
Mayon
August 9, 2000 was 12,341,696.
1234602v112,378,420.
Part I - FINANCIAL INFORMATION
Item 1. Financial statements
CRYOLIFE, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
-------------------------Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 -------------------------2000 1999
---------------------------- ----------------------------
(Unaudited) (Unaudited)
Revenues:
Preservation services and products $ 19,48119,305 $ 16,05917,268 $ 38,786 $ 33,327
Research grants and licenses 142 266
-------------------------
19,623 16,325149 127 291 393
--------------------------- ---------------------------
19,454 17,395 39,077 33,720
Costs and expenses:
Preservation services and products 9,149 7,3718,313 8,235 17,462 15,611
General, administrative and marketing 7,043 6,1707,422 5,937 14,500 12,102
Research and development 1,329 1,0741,165 883 2,494 1,957
Interest expense 100 11996 89 161 208
Interest income (377) (425)(410) (367) (787) (792)
Other income, net (15) (44)
-------------------------
17,229 14,265
-------------------------(91) 40 (106) (4)
--------------------------- ----------------------------
16,495 14,817 33,724 29,082
--------------------------- ---------------------------
Income before income taxes 2,394 2,0602,959 2,578 5,353 4,638
Income tax expense 790 680
-------------------------980 851 1,770 1,531
--------------------------- ---------------------------
Net income $ 1,6041,979 $ 1,380
=========================1,727 $ 3,583 $ 3,107
=========================== ===========================
Earnings per share:
Basic $ 0.130.16 $ 0.11
=========================0.14 $ 0.29 $ 0.25
=========================== ===========================
Diluted $ 0.130.16 $ 0.11
=========================0.14 $ 0.28 $ 0.25
=========================== ===========================
Weighted average shares outstanding:
Basic 12,238 12,49712,344 12,344 12,292 12,422
=========================== ===========================
Diluted 12,525 12,68012,674 12,527 12,612 12,606
=========================== ===========================
See accompanying notes to summary consolidated financial statements.
2
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31,
June 30, December 31,
2000 1999
--------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,9158,048 $ 6,128
Marketable securities, at market 24,34524,464 24,403
Receivables (net) 13,12312,579 12,333
Deferred preservation costs (net) 18,18819,228 17,652
Inventories 4,6365,125 4,597
Prepaid expenses 1,7511,589 1,454
Deferred income taxes 1,4351,046 983
--------------------------------------------------------------
Total current assets 69,39372,079 67,550
--------------------------------------------------------------
Property and equipment (net) 19,22620,467 18,674
Goodwill (net) 1,5661,542 1,590
Patents (net) 2,3992,475 2,363
Other (net) 2,4012,375 2,449
Deferred income taxes 1,012810 1,399
--------------------------------------------------------------
TOTAL ASSETS $ 95,99799,748 $ 94,025
==============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,3812,301 $ 975
Accrued expenses 936996 2,145
Accrued procurement fees 3,5573,855 2,874
Accrued compensation 1,2431,167 1,161
Income taxes payable 773950 ---
Current maturities of capital lease obligations 163166 180
Current maturities of long-term debt 250 287
287
--------------------------------------------------------------
Total current liabilities 8,3409,685 7,622
--------------------------------------------------------------
Capital lease obligations, less current maturities 1,4551,449 1,534
Convertible debenture 4,393 4,393
Other long-term debt 250 250
--------------------------------------------------------------
Total liabilities 14,43815,777 13,799
--------------------------------------------------------------
Shareholders' equity:
Preferred stock --- ---
Common stock (issued 13,42613,361 shares in 2000 and
13,361 shares in 1999) 133134 134
Additional paid-in capital 64,09264,034 64,425
Retained earnings 25,16827,147 23,564
Deferred compensation (54)(51) (57)
Unrealized gainloss on marketable securities (871)(847) (783)
Translation adjustment (3)(16) (2)
Less: Treasury stock (1,134(995 shares in 2000 and
1,134 shares in 1999) (6,906)(6,430) (7,055)
--------------------------------------------------------------
Total shareholders' equity 81,55983,971 80,226
--------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 95,99799,748 $ 94,025
==============================================================
See accompanying notes to summary consolidated financial statements.
3
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
ThreeSix Months Ended
March 31,
------------------------------June 30,
----------------------------
2000 1999
----------------------------------------------------------
(Unaudited)
Net cash fromflows provided by operating activities:
Net income ............................................................. $ 1,6043,583 $ 1,3803,107
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income recognized ..................................... -- (193)--- (876)
Gain on sale of marketable equity securities .......................... (132) ----- (112)
Depreciation and amortization .................................. 782 6861,590 1,482
Provision for doubtful accounts ................................ 24 2448 48
Deferred income taxes .......................................... (19) 25558 301
Changes in operating assets and liabilities:
Receivables ............................................ (814) (2,046)(325) (4,281)
Deferred preservation costs and inventories ............ (575) (777)(2,104) (1,817)
Prepaid expenses and other assets ...................... (297) (556)(135) (632)
Accounts payable and accrued expenses .................. 735 (780)2,145 (454)
---------------------------
Net cash flows provided by (used in) operating activities 5,360 (3,234)
---------------------------
Net cash flows used in investing activities:
Capital expenditures (3,284) (1,592)
Other assets (83) (371)
Purchases of marketable securities (259) (11,966)
Sales of marketable securities 102 12,071
--------------------------
Net cash flows used in investing activities (3,524) (1,858)
--------------------------
Net cash flows provided by (used in) financing activities:
Principal payments of debt (37) (264)
Payment of obligations under capital leases (99) (109)
Purchase of treasury stock (612) (2,508)
Proceeds from exercise of options and issuance of stock 846 229
--------------------------
Net cash provided by (used in) operating activities ............ 1,308 (2,237)
Net cash flows from investing activities:
Capital expenditures ................................................... (1,287) (963)
Other assets ........................................................... (11) (200)
Purchases of marketable securities ..................................... (2,714) (6,863)
Sales of marketable securities ......................................... 2,770 6,932
Net cash used in investing activities .................................. (1,242) (1,094)
Net cash flows from financing activities:
Principal payments of debt ............................................. -- (263)
Payment of obligations under capital leases ............................ (96) (54)
Purchase of treasury stock ............................................. (612) (1,259)
Proceeds from exercise of stock options and
issuance of common stock .............................................. 430 129
Net cash used in financing activities .................................. (278) (1,447)
Decrease98 (2,652)
---------------------------
Increase (Decrease) in cash .............................................................. (212) (4,778)1,934 (7,744)
Effect of exchange rate changes on cash ........................................ (1) --(14) ---
Cash and cash equivalents, beginning of period ................................. 6,128 12,885
--------------------------
Cash and cash equivalents, end of period ....................................... $ 5,9158,048 $ 8,1075,141
==========================
See accompanying notes to summary consolidated financial statements.
4
CRYOLIFE, INC. AND SUBSIDIARIES
NOTES TO SUMMARY CONSOLIDATED FINANCIAL STATEMENTS
NoteNOTE 1 - Basis of PresentationBASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with (i) U.S. generally accepted accounting principles
for interim financial information and (ii) the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements.presentations. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and
six months ended March 31,June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
1999.
NoteNOTE 2 - InvestmentsINVESTMENTS
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 "investments-grade""investment-grade" by national
rating services.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Debt securities not
classified as held-to-maturity or trading, and marketable equity securities not
classified as trading, are classified as available-for-sale. Available-for-sale
securities are stated at their fair values, with the unrealized gains and
losses, net of tax, reported in a separate component of shareholders' equity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other than temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income. At
March 31,June 30, 2000, all marketable equity securities and debt securities held by the
Company were designated as available-for-sale.
TheTotal gross realized gains on sales of available-for-sale securities totaledwere $0 and
$77,000 in$39,000 for the first quartersthree months ended June 30, 2000 and 1999, respectively. Total
gross realized gains on sales of available-for-sale securities were $0 and
$116,000 for the six months ended June 30, 2000 and 1999, respectively. As of
March
31,June 30, 2000, differences between cost and market of $1,320,000$1,281,000 (less deferred
taxes of $449,000)$434,000) are included as a separate component of shareholders' equity.
At March 31,June 30, 2000 and December 31, 1999, approximately $3.7$4.0 million and $4.1
million, respectively, of debt securities with original maturities of 90 days or
less at their acquisition dates were included in cash and cash equivalents. At
March 31,June 30, 2000 and December 31, 1999, no investments had a maturity date between
90 days and 1one year and approximately $15.9 million of investments matured
between one and five years.years, respectively. The market values of these securities
approximate cost.
5
NoteNOTE 3 - Inventory
Inventories are comprised of the following:
(Unaudited)
March 31, December 31,
2000 1999
-----------------------------------------
Raw materials $ 1,617,000 $ 1,555 ,000
Work-in-process 838,000 578,000
Finished goods 2,180,000 2,464,000
-----------------------------------------
$ 4,636,000 $ 4,597,000
=========================================
NoteINVENTORY
Inventories are comprised of the following:
(Unaudited)
June 30, December 31,
2000 1999
-----------------------------------
Raw materials $ 1,657,000 $ 1,555,000
Work-in-process 949,000 578,000
Finished goods 2,519,000 2,464,000
-----------------------------------
$ 5,125,000 $ 4,597,000
===================================
NOTE 4 - Earnings per Share
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
(Unaudited) (Unaudited)
Three Months Ended March 31,
-----------------------------------Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 -----------------------------------
(Unaudited)2000 1999
------------------------ ------------------------
Numerator for basic and diluted earnings
per share - net income $ 1,604,0001,979,000 $ 1,380,000
===================================1,727,000 $3,583,000 $3,107,000
======================== ========================
Denominator for basic earnings per share -
weighted-average basis 12,238,000 12,497,00012,344,000 12,344,000 12,292,000 12,422,000
Effect of dilutive stock options 287,000330,000 183,000 ------------------------------------320,000 184,000
------------------------ ------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares 12,525,000 12,680,000
====================================12,674,000 12,527,000 12,612,000 12,606,000
======================== ========================
Earnings per share:
Basic $ .13.16 $ .11
====================================.14 $.29 $ .25
======================== =================
Diluted $ .13.16 $ .11
====================================.14 $.28 $ .25
======================== =================
NoteNOTE 5 - Comprehensive IncomeDEBT
On April 25, 2000, the Company entered into a loan agreement (the "Agreement")
which permits the Company to borrow up to $8 million under a line of credit
during the expansion of the Company's corporate headquarters. Borrowings under
the line of credit bear interest equal to the Adjusted LIBOR plus 2% to be
adjusted monthly. Upon the earlier of completion of construction or June 30,
2001, the line of credit will be converted to a term loan to be paid in 60 equal
monthly installments of principal plus interest computed at Adjusted LIBOR plus
1.5%. The Agreement contains certain restrictive covenants including, but not
limited to, maintenance of certain financial ratios and a minimum tangible net
worth requirement. The Agreement is secured by substantially all of the
Company's assets. At June 30, 2000, $8 million was available to be borrowed
under the line of credit.
NOTE 6 - COMPREHENSIVE INCOME
During the periodssix months ended March 31,June 30, 2000 and 1999, net comprehensive income was
less than net income by approximately $88,000$64,000 and $102,000,$328,000 respectively, due to
unrealized losses on marketable equity securities.
6
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Preservation and product revenues increased 20%12% to $19.5$19.3 million for the three
months ended March 31,June 30, 2000 from $16.1$17.3 million for the same period in 1999.
Preservation and product revenues increased 16% to $38.8 million for the six
months ended June 30, 2000 from $33.3 million for the same period in 1999. The
increase in revenues was primarily due to the growing acceptance in the medical
community of cryopreserved tissues which has resulted in increased demand for
the Company's cryopreservation services, the Company's ability to procure
greater amounts of tissue, revenues attributable to the Company's introduction
of BioGlue Surgical Adhesivesurgical adhesive in domestic markets in January of 2000 increased
product awareness since the introduction of BioGlue in international markets in
April 1998 and other
reasons discussed below.
Revenues from human heart valve and conduit cryopreservation services increased
11%decreased
3% to $7.6 million for the three months ended March 31,June 30, 2000 from $6.8$7.8 million
for the three months ended March 31,June 30, 1999, representing 39% and 42%45%,
respectively, of total revenues during such periods. This increase wasRevenues from human heart
valve and conduit cryopreservation services increased 4% to $15.2 million for
the six months ended June 30, 2000 from $14.6 million for the six months ended
June 30, 1999, representing 39% and 43%, respectively, of total revenues during
such periods. The decrease in revenues for the three months ended June 30, 2000
primarily results from a decrease in the number of aortic heart valve allograft
shipments due to a 15%decrease in the number of aortic valve donations received
during the three months ended June 30, 2000, partially offset by an increase in
the number of heart allograft shipments for the three
months ended March 31, 2000. The increase in the number of heart allograft
shipments primarily results from the Company's ability to procure greater
amounts of tissue and an increase in shipments of pulmonary heart valvesvalve shipments which results from an increase in
the number of Ross procedures being performed. In a Ross procedure, the
patient's pulmonary valve is transplanted into the aortic position and a human
pulmonary allograft is transplanted into the patient's pulmonary position. The
increase in revenues for the six months ended June 30, 2000 primarily results
from the Company's ability to procure greater amounts of tissue during the first
quarter of 2000 and an increase in the shipments of pulmonary heart valves as
discussed above.
Revenues from human vascular tissue cryopreservation services increased 14%21% to
$5.6$5.5 million for the three months ended March 31,June 30, 2000 from $4.9$4.5 million for the
three months ended March 31,June 30, 1999, representing 28% and 30%26%, respectively, of
total revenues during such periods. Revenues from human vascular tissue
cryopreservation services increased 18% to $11.1 million for the six months
ended June 30, 2000 from $9.4 million for the six months ended June 30, 1999,
representing 28% and 28%, respectively, of total revenues during such periods.
This increase in revenues was primarily due to a 22% and a 20% increase in the
number of vascular allograft shipments for the three months and six months ended
March 31,June 30, 2000, respectively, due to an increased demand for saphenous vein, the
Company's ability to procure greater amounts of tissue and the growth in demand
for the Company's cryopreserved femoral vein for dialysis access.
Revenues from human connective tissue cryopreservation services increased 64%55% to
$3.9 million for the three months ended March 31,June 30, 2000 from $2.4$2.5 million for the
three months ended March 31,June 30, 1999, representing 20% and 15%, respectively, of
total revenues during such periods. Revenues from human connective tissue
cryopreservation services increased 60% to $7.8 million for the six months ended
June 30, 2000 from $4.9 million for the six months ended June 30, 1999,
representing 20% and 15%, respectively, of total revenues during such periods.
This increase in revenues was primarily due to a 56%52% and a 54% increase in the
number of allograft shipments for the three months and six months ended March 31,June 30,
2000, respectively, due to increased demand and the Company's ability to procure
greater amounts of tissue. Additional revenue increases have resulted from a
greater proportion of the 2000 shipments consisting of preserved osteoarticular
grafts, which have a significantly higher per unit revenue than the Company's
cryopreserved menisci and tendons.
7
Revenues from BioGlue(R) surgical adhesive increased 265% to $1.5 million for
the three months ended June 30, 2000 from $409,000 for the three months ended
June 30, 1999, representing 8% and 2%, respectively, of total revenues during
such periods. Revenues from BioGlue surgical adhesive increased 295% to $2.6
million for the six months ended June 30, 2000 from $663,000 for the six months
ended June 30, 1999, representing 7% and 2%, respectively, of total revenues
during such periods. This increase in revenues is due to a 150% and a 182%
increase in the number of BioGlue milliliter shipments for the three months and
six months ended June 30, 2000, respectively. The improvement in shipments is
due to increased product awareness since the introduction of BioGlue in
international markets in April of 1998, increased surgeon training, the receipt
of the CE approval for pulmonary indications in Europe in March 1999, and the
introduction of BioGlue in domestic markets in January of 2000 pursuant to a
Humanitarian Use Device Exemption for the use of BioGlue as an adjunct in the
repair of acute thoracic aortic dissections.
Revenues from bioprosthetic cardiovascular devices were $196,000 and $423,000
for the three and six months ended June 30, 2000, representing 1% of total
revenues during each such period and were $330,000 and $529,000 for the three
and six months ended June 30, 1999, representing 2% of total revenues during
each such period.
Revenues from Ideas for Medicine, Inc. ("IFM") decreased 31%63% to $1.1 million$608,000 for the
three months ended March 31,June 30, 2000 from $1.6 million for the three months ended
March 31,June 30, 1999, representing 6%3% and 10%9%, respectively, of total revenues during
such periods. Revenues from IFM decreased 47% to $1.7 million for the six months
ended June 30, 2000 from $3.2 million for the six months ended June 30, 1999,
representing 4% and 9%, respectively, of total revenues during such periods. The
IFM product line was sold to Horizon Medical Products, Inc. ("HMP") on September
30, 1998. In October 1998 IFM began an OEM manufacturing agreement with HMP
which provides for the manufacture by IFM of specified minimum dollar amounts of
IFM products to be purchased exclusively by the purchaser of the IFM product
line over each of the four years following the sale.
The Company recorded a nonrecurring charge of $2.4 million in 1999 primarily as
a result of HMP's default on its manufacturing contract with IFM. On June 22,
1999, IFM notified HMP that it was in default of certain provisions of the
Agreement.contract. After notification of the default, HMP indicated to the Company that
it would not be able to meet and has not met the minimum purchase requirements
outlined in the Agreement.contract. The Company has been and continues to negotiate with
HMP in order to reach a mutually agreeable solution to the default.
7
Revenues from BioGlue (R) surgical adhesiveGrant revenues increased 345% to $1.1 million$149,000 for the three months ended March 31,June 30, 2000
from $254,000$127,000 for the three months ended March 31, 1999, respectively. This increase in revenues is due to a 235%
increase in the number BioGlue milliliter shipments due to increased product
awareness since the introduction of BioGlue in international markets in April of
1998, increased surgeon training, the receipt of the CE approval for pulmonary
indications in Europe in March 1999, and the introduction of BioGlue in domestic
markets in January of 2000 pursuant to a Humanitarian Use Device Exemption for
the use of BioGlue as an adjunct in the repair of acute thoracic aortic
dissections.
Revenues from bioprosthetic cardiovascular devices were $226,000 and $200,000
for the three months ended March 31, 2000 and 1999, representing 1% of total
revenues during each such periods.June 30, 1999. Grant revenues decreased
to $142,000$291,000 for the threesix months ended March 31,June 30, 2000 from $266,000$393,000 for the threesix
months ended March 31,June 30, 1999. Grant revenues are primarily attributable to the
SynerGraft (R)SynerGraft(R) research and development programs.
Cost of cryopreservation services and products aggregated $9.1$8.3 million for the
three months ended March 31,June 30, 2000, compared to $7.4$8.2 million for the corresponding
period in 1999, representing 47%43% and 46%48%, respectively, of total
cryopreservation and product revenues in each period. Cost of cryopreservation
services and products aggregated $17.5 million for the six months ended June 30,
2000, compared to $15.6 million, respectively, for the six months ended June 30,
1999, representing 45% and 47% of total cryopreservation and product revenues,
respectively. The increasedecrease in the 2000 cost of cryopreservation services and
products as a percentage of revenues results from an increase in revenues from
BioGlue surgical adhesive, which carry higher gross margins than
cryopreservation services, and from a greater portion of 2000 orthopaedic
cryopreservation revenues being derived from services that have higher gross
margins than other orthopaedic cryopreservation services, partially offset by a
lesser portion of 2000 revenues being derived from human heart valve and conduit
cryopreservation services, which carry significantly higher gross margins than
other cryopreservation services, and from the switch in October of
1998 to OEM manufacturing of single-use medical devices, which generates lower
gross margins than cryopreservation services and lower gross margins than the
IFM products generated prior to the sale of the IFM product line.services.
8
General, administrative and marketing expenses increased 14%25% to $7$7.4 million for
the three months ended March 31,June 30, 2000, compared to $6.2$5.9 million for the
corresponding period in 1999, representing 36%38% and 38%34%, respectively, of total
preservationcryopreservation and product revenues in each period. General, administrative
and marketing expenses increased 20% to $14.5 million for the six months ended
June 30, 2000, compared to $12.1 million for the corresponding period in 1999,
representing 37% and 36%, respectively, of total cryopreservation and product
revenues in each period. The increase in expenditures in 2000 resulted from
expenses incurred to support the increase in revenues and expenses associated
with the establishment of the Company's European headquarters.
Research and development expenses were $1.3increased 32% to $1.2 million for the three
months ended March 31,June 30, 2000, compared to $1.1$883,000 for the corresponding period in
1999, representing 6% and 5%, respectively, of total cryopreservation and
product revenues for each period. Research and development expenses increased
27% to $2.5 million for the threesix months ended March 31,June 30, 2000, compared to $2.0
million for the corresponding period in 1999, representing 7%6% of total
cryopreservation and product revenues for each period. Research and development
spending relates principally to the Company's ongoing human clinical trials for
its BioGlue surgical adhesive and to its focus on its SynerGraft technologies.
Net interest income was $377,000$314,000 and $425,000$278,000 for the three months ended March
31,June
30, 2000 and 1999, respectively. 8
SeasonalityNet interest income was $626,000 and $584,000
for the six months ended June 30, 2000 and 1999, respectively.
SEASONALITY
The demand for the Company's human heart valve and conduit cryopreservation
services is seasonal, with peak demand generally occurring in the second and
third quarters. Management believes this demand trend for human heart valve and
conduit cryopreservation services is primarily due to the high number of
surgeries scheduled during the summer months. Management believes the trends
experienced by the Company to date for its human connective tissue for the knee
cryopreservation services indicate this business may also be seasonal because it
is an elective procedure which may be performed less frequently during the
fourth quarter holiday months. However, the demand for the Company's vascular
tissue cryopreservation services, bioprosthetic cardiovascular devices, and
BioGlue surgical adhesive does not appear to experience this seasonal trend. Liquidity and Capital ResourcesAs
an OEM manufacturer of single-use medical devices, the sale of those products
are dictated by a manufacturing agreement which is not affected by a seasonal
trend.
LIQUIDITY AND CAPITAL RESOURCES
At March 31,June 30, 2000, net working capital was $61.1$62.4 million, compared to $59.9
million at December 31, 1999, with a current ratio of 8-to-17 to 1 at March 31,June 30, 2000.
The Company's primary capital requirements arise out of general working capital
needs, capital expenditures for facilities and equipment and funding of research
and development projects and a common stock repurchase plan approved by the
Board of Directors in October of 1998. The Company historically has funded these
requirements through bank credit facilities, cash generated by operations and
equity offerings.
Net cash provided by operating activities was $1.3$5.4 million for the threesix months
ended March 31,June 30, 2000, as compared to net cash used in operating activities of
$2.2$3.2 million for the threesix months ended March 31,June 30, 1999. This increase primarily
resulted from a reduction in the increase in accounts receivablesreceivable despite
increased revenues and a decrease in the amount of accounts payable liquidated
in the first quarterhalf of 2000 as compared to the first quarterhalf of 1999 due to expenses
associated with the BioGlue manufacturing laboratory.laboratory incurred in 1999.
Net cash used in investing activities was $1.2$3.5 million for the threesix months ended
March 31,June 30, 2000, as compared to $1.1$1.9 million for the threesix months ended March 31,June 30,
1999. Investing activitiesThis increase was primarily consistattributable to the increase in capital
expenditures in 2000 related to the expansion of property and equipment
additions.the Company's corporate
headquarters.
9
Net cash used inprovided by financing activities was $278,000$98,000 for the threesix months ended
March 31,June 30, 2000, as compared to net cash used in financing activities of $1.4$2.7
million for the threesix months ended March 31,June 30, 1999. This decrease was primarily
attributable to a reduction in the Company's repurchase of treasury stock during
the first quarterhalf of 2000 coupled with an increase in the proceeds from stock
option exercises.
Management is currently seeking to complete a potential private placement of
equity or equity-oriented securities to form a subsidiary company for the
commercial development of its serine proteinase light activation technologies.
This strategy, if successful, will allow an affiliated entity to fund the light
activation technology and should expedite the commercial development of its
blood clot dissolving and surgical sealant product applications without
additional research and development expenditures by the Company (other than
through the affiliated company). This strategy, if successful, will favorably
impact the Company's liquidity going forward. The Company has ceased further
development of light activation technology pending the identification of a
corporate partner to fund future development.
The Company began its search for a
corporate partner in October 1998.
9
The Company anticipates that the remaining net proceedscurrent cash and marketable securities, cash
generated from operations and its 1998 follow-on
equity offering (the "Offering") of 2,975,500 new shares of its common stock
resulting in net proceeds of approximately $45 million, $11$10 million of bank credit facilities and cash generated from operations(of which $1.9
million was drawn as of July 31, 2000) will be sufficient to meet its operating
and development needs for at least the next 12 months.months, including the expansion
of the Company's corporate headquarters and manufacturing facilities. However,
the Company's future liquidity and capital requirements beyond that period will
depend upon numerous factors, including the timing of the Company's receipt of
FDA approvals to begin clinical trials for its products currently in
development, the resources required to further develop its marketing and sales
capabilities if and when those products gain approval, the resources required to
expand its corporate headquarters and manufacturing capacityfacility, and the extent to
which the Company's products generate market acceptance and demand. There can be
no assurance that the Company will not require additional financing or will not seek
to raise additional funds through bank facilities, debt or equity offerings, or
other sources of capital to meet future requirements. These additional funds may
not be available when needed or on terms acceptable to the Company, which unavailability could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Forward-Looking StatementsFORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q for the quarter ended March 31,June 30, 2000 that state
the Company's or management's intentions, hopes, beliefs, expectations or
predictions of the future are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. It is important to note
that the Company's actual results could differ materially from those contained
in such forward-looking statements as a result of adverse changes in any of a
number of factors that affect the Company's business, including without
limitation, changes in, (1) the Company's ability to find an equity investor in
the FibRx technology and the impact of such an investment on the Company's
liquidity, (2) the adequacy of the Company's financing arrangements over the
next twelve months, (3) the outcome of the ongoing discussions with HMP and, (4)
governmental or third-party reimbursement policies. See the "Business-Risk
Factors" section of the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 for a more detailed discussion of factors which might affect
the Company's future performance.
Item 3. Quantitative and Qualitative and Quantitative DiscussionDisclosures About Market Risk.
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents of $4.1
million and short-term investments of $15.9 million in municipal obligations as
of March 31,June 30, 2000 as well as interest paid on its debt. At July 31, 2000,
approximately $1.9 million of the Company's debt charged interest at a variable
rate. To mitigate the impact of fluctuations in U.S. interest rates, the Company
generally maintains
approximately 50% of its debt as fixed rate in nature. As a result, the
Company is subject to a risk that interest rates will decrease and the Company
may be unable to refinance its debt.
10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults Upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
None(a) The Annual Meeting of Shareholders was held on May 26, 2000.
(b) Management's nominees for director were elected at the meeting by the
holders of common stock. The election was uncontested.
The following table shows the results of voting in the election of
Directors:
Shares Voted For Authority Withheld
---------------- ------------------
Steven G. Anderson 11,149,963 28,603
John M. Cook 11,151,863 26,703
Ronald C. Elkins, M.D. 10,864,063 314,503
Virginia C. Lacy 11,066,763 111,803
Ronald D. McCall, Esq. 11,148,963 29,603
Alexander C. Schwartz, Jr. 11,150,663 27,903
Bruce J. Van Dyne, M.D. 11,150,963 27,603
(c) A proposal was approved to increase the number of shares available for
issuance under the CryoLife, Inc. 1998 Long-Term Incentive Plan. The
result of the voting was as follows:
Common Shares
-------------
Voting for 10,091,162
Voting against 1,063,048
Abstain from voting 24,356
-----------
Total 11,178,566
==========
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.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, 1999.)
11
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.)
4.1 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1 (No. 33-56388).)
4.2 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
27.1*10.1 Construction Loan and Permanent Financing Agreement with Bank of America
dated April 25, 2000.
27.1 Financial Data Schedule
- --------------
* Filed herewith.Schedule: Quarter Ended June 30, 2000
(b) Current Reports on Form 8-K. None
11None.
12
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 12,August 11, 2000 /s/ DAVID ASHLEY LEE
- ------------------ ----------------------------------
DATE DAVID ASHLEY LEE
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)