FORM 10-Q
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                (x) QUARTERLY REPORT PURSUANT TOUNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

    For the Quarterly Period Ended September 30, 1997March 31, 1998 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 30144
                    (Address of principal executive offices)
                                   (zip code)

                                 (770) 419-3355
              (Registrant's telephone number, including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate  by check  mark  whether  the  registrant:Registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

YES   X    NO 
   ----  ----------     ------

The number of shares of common stock, par value $0.01 per share,  outstanding on
October 31, 1997at
May 5, 1998 was 9,696,000.12,778,545.














Part I - FINANCIAL INFORMATION
Item 1. Financial statements


                                 CRYOLIFE, INC.
                    AND SUBSIDIARIES
                   CONDENSEDSUMMARY CONSOLIDATED STATEMENTS OF INCOME



                                                         Three Months Ended
                                                             March 31,
                                                        1998             1997
                                                            (Unaudited)

Revenues:
 Cryopreservation and products                  $ 14,501,000        $ 10,383,000
 Research grants, licenses and other revenues        124,000              30,000
                                                  ----------          ----------
                                                  14,625,000          10,413,000
Costs and expenses:
 Cryopreservation and products                     5,481,000           3,426,000
 General, administrative and marketing             5,827,000           4,479,000
 Research and development                          1,011,000             849,000
 Interest expense                                    430,000             132,000
                                                  ----------          ----------
                                                  12,749,000           8,886,000
                                                  ----------          ----------
Income before income taxes                         1,876,000           1,527,000
Income tax expense                                   704,000             575,000
                                                  ----------          ----------
Net income                                      $  1,172,000         $   952,000
                                                  ==========          ==========

Earnings per share:
     Basic and diluted                          $       0.12         $      0.10
                                                  ==========          ==========
Weighted average shares outstanding:
     Basic                                         9,739,000           9,581,000
     Diluted                                      10,077,000           9,877,000


See accompanying notes to summary consolidated financial statements.




546079.1

Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------Item 1. Financial Statements CRYOLIFE, INC. SUMMARY CONSOLIDATED BALANCE SHEETS Proforma March 31, March 31, December 31, 1998 1998 1997 1996 1997 1996 ------------------- --------------------------------------------------------------------- (Unaudited) (Unaudited) Revenues: Cryopreservation and products $14,569,000 $10,138,000 $37,593,000 $28,016,000 Research grants, licenses, leases, interest income, and other 72,000 273,000 221,000 526,000 --------------------------- ------------------------- 14,641,000 10,411,000 37,814,000 28,542,000 Costs and expenses: Cost of preservation and products 5,112,000 3,563,000 13,089,000 9,731,000 General, administrative and marketing 5,620,000 4,239,000 15,300,000 12,046,000 Research and development 1,243,000 616,000 2,950,000 2,006,000 Interest expense 317,000 39,000 744,000 39,000 --------------------------- ------------------------- 12,292,000 8,457,000 32,083,000 23,822,000 Income before income taxes 2,349,000 1,954,000 5,731,000 4,720,000 Income taxes 891,000 693,000 2,161,000 1,688,000 --------------------------- ------------------------- Net income $ 1,458,000 $ 1,261,000 $ 3,570,000 $ 3,032,000 =========================== ========================= Earnings per share of common stock $ 0.15 $ 0.13 $ 0.36 $ 0.31 =========================== ========================= Weighted average common and common equivalent shares outstanding 9,978,000 9,925,000 9,914,000 9,894,000 =========================== =========================
See accompanying notes to condensed consolidated financial statements. 2 Item 1. Financial Statements
CRYOLIFE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 1997 1996 ------------- ------------ (Unaudited) ASSETS Current assets:Assets: Cash and cash equivalents $ 42,000114,000 32,434,000 $ 1,370,000 Marketable securities 41,000 43,000 Trade receivables111,000 Proceeds due from public stock offering 40,140,000 --- --- Receivables (net) 9,894,000 6,572,000 Other receivables 51,000 1,625,0009,517,000 9,517,000 9,765,000 Deferred preservation costs 11,668,000 7,178,000(net) 12,640,000 12,640,000 12,257,000 Inventories 1,487,000 260,0002,820,000 2,820,000 1,761,000 Prepaid expenses 1,467,000 846,000 Deferred income taxes 286,000 287,000 ------------------------------1,595,000 1,595,000 1,260,000 ---------- ---------- ---------- Total current assets 24,936,000 18,181,000 ------------------------------66,826,000 59,006,000 25,154,000 ---------- ---------- ---------- Property and equipment (net) 13,509,000 11,567,00017,979,000 17,979,000 15,487,000 Goodwill (net) 8,166,000 1,846,0009,655,000 9,655,000 9,809,000 Patents (net) 2,190,000 2,190,000 2,196,000 Other intangibles (net) 5,073,000 3,379,000 ------------------------------1,906,000 1,906,000 1,103,000 ---------- ---------- ---------- TOTAL ASSETS $51,684,000 $34,973,000 ==============================$98,556,000 $90,736,000 $53,749,000 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:Liabilities: Accounts payable $ 1,520,0001,969,000 1,969,000 $ 3,696,0001,612,000 Accrued expenses 727,000 934,000955,000 332,000 534,000 Accrued procurement fees 1,851,000 1,210,0001,388,000 1,388,000 1,565,000 Accrued compensation 1,351,000 878,0001,009,000 1,009,000 1,122,000 Current maturities of capital lease obligations 210,000 210,000 --- Current maturities of long-term debt 478,000 527,0001,496,000 496,000 1,496,000 Income taxes payable 490,000 -- ------------------------------484,000 484,000 --- ---------- ---------- ---------- Total current liabilities 6,417,000 7,245,000 ------------------------------7,511,000 5,888,000 6,329,000 ---------- ---------- ---------- Deferred income taxes 190,000 190,000 327,000 Capital lease obligations, less current maturities 1,896,000 1,896,000 --- Bank loans 12,207,000 --- 10,777,000 Convertible debenture 4,393,000 4,393,000 5,000,000 Other long term liabilities, principally revolving term loan and convertible debentures 16,323,000 2,799,000 ------------------------------long-term debt 799,000 799,000 1,089,000 ---------- ---------- ---------- Total liabilities 22,740,000 10,044,000 ------------------------------26,996,000 13,166,000 23,522,000 ---------- ---------- ---------- Shareholders' equity: Preferred stock -- ----- --- --- Common stock (issued 10,222,00010,261,000 shares, and 13,287,000 proforma shares in 19971998 and 10,106,00010,243,000 shares in 1996)1997) 103,000 133,000 102,000 101,000Common stock to be issued (2,638,000 shares in 1998) 26,000 --- --- Additional paid-in capital 17,566,000 17,128,00057,828,000 63,834,000 17,694,000 Retained earnings 11,472,000 7,902,00013,799,000 13,799,000 12,627,000 Less: Unrealized gain on investments -- (1,000) Treasury stock (543,000 shares) (180,000) (180,000) Notes(180,000) Note receivable from shareholdersshareholder (16,000) (21,000) ------------------------------(16,000) (16,000) ----------- ----------- --------- Total shareholders' equity 28,944,000 24,929,000 ------------------------------71,560,000 77,570,000 30,227,000 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $51,684,000 $34,973,000 ==============================$98,556,000 $90,736,000 $53,749,000 ========== ========== ==========
See accompanying notes to condensedsummary consolidated financial statements. 3546079.1 Item 1. Financial Statements CRYOLIFE, INC. AND SUBSIDIARIES CONDENSEDSUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, --------------------- 1997 1996 --------------------- (Unaudited) Net cash flows provided by (used in) operating activities: Net income $ 3,570,000 $ 3,032,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,622,000 1,007,000 Provision for doubtful accounts 31,000 (82,000) Deferred income taxes 1,000 (201,000) Changes in assets and liabilities: Receivables (819,000) (1,783,000) Deferred preservation costs and inventories (5,080,000) (176,000) Prepaid expenses and other assets (564,000) (214,000) Accounts payable and accrued expenses (1,670,000) 662,000 ------------------------------- Net cash flows provided by (used in) operating activities (2,909,000) 2,245,000 ------------------------------- Net cash flows used in investing activities: Capital expenditures (2,955,000) (7,097,000) Other assets 32,000 (1,665,000) Cash paid for acquisition, net of cash acquired (4,418,000) (721,000) Proceeds from other long term liabilities -- -- Net sales of marketable securities 3,000 3,869,000 ------------------------------- Net cash flows used in investing activities (7,338,000) (5,614,000) ------------------------------- Net cash flows provided by financing activities: Proceeds from borrowings on revolving term loan 8,475,000 -- Proceeds from other long term liabilities -- 2,810,000 Proceeds from issuance of common stock and notes receivable from shareholders, net 444,000 489,000 ------------------------------ Net cash provided by financing activities 8,919,000 3,299,000 ------------------------------- Decrease in cash (1,328,000) (70,000) Cash and cash equivalents at beginning of period 1,370,000 167,000 ------------------------------- Cash and cash equivalents at end of period $ 42,000 $ 97,000 =============================== Supplemental cash flow information Non-cash investing and financing activities: Fair value of assets acquired $ 1,768,000 $ 645,000 Cost in excess of assets acquired 8,541,000 1,620,000 Liabilities assumed (891,000) (293,000) Debt issued for assets acquired (5,000,000) (1,250,000) ------------------------------- Net cash paid for acquisition $ 4,418,000 $ 722,000 ===============================
Three Months Ended March 31, 1998 1997 (Unaudited) Net cash flows used in operating activities: Net income $ 1,172,000 $ 952,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 960,000 526,000 Provision for doubtful accounts 24,000 15,000 Receivables 224,000 163,000 Deferred preservation costs and inventories (1,442,000) (1,543,000) Prepaid expenses and other assets (335,000) (837,000) Accounts payable and accrued expenses 95,000 (1,535,000) ----------- ----------- Net cash flows provided by (used in) operating activities 698,000 (2,259,000) ----------- ----------- Net cash flows used in investing activities: Capital expenditures (1,058,000) (1,071,000) Other assets (896,000) (213,000) Cash paid for acquisition, net of cash acquired --- (4,418,000) ------------ ----------- Net cash flows used in investing activities (1,954,000) (5,702,000) ------------ ----------- Net cash flows provided by financing activities: Principal payments of debt (540,000) --- Proceeds from borrowings on revolving term loan 1,680,000 6,653,000 Payment of obligations under capital leases (35,000) --- Proceeds from issuance of common stock and from notes receivable from shareholders 154,000 130,000 ----------- ----------- Net cash provided by financing activities 1,259,000 6,783,000 ----------- ----------- Increase (decrease) in cash 3,000 (1,178,000) Cash and cash equivalents, beginning of period 111,000 1,370,000 ----------- ----------- Cash and cash equivalents, end of period $ 114,000 $ 192,000 =========== =========== Supplemental cash flow information Non-cash investing and financing activities: Proceeds due from public stock offering $ 40,140,000 $ --- =========== =========== Establishing capital lease obligations $ 2,141,000 $ --- =========== =========== Debt conversion into common stock $ 607,000 $ --- =========== =========== Fair value of assets acquired $ --- $ 1,768,000 Cost in excess of assets acquired --- 8,541,000 Liabilities assumed --- (891,000) Debt issued for assets acquired --- (5,000,000) ------------ ----------- Net cash paid for acquisition $ --- $ 4,418,000 ============ =========== See accompanying notes to condensedsummary consolidated financial statements. 4546079.1 CRYOLIFE, INC. AND SUBSIDIARIES NOTES TO CONDENSEDSUMMARY CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with (i) generally accepted accounting principles for interim financial information, and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial presentations.statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1997March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997.1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996.1997. The accompanying unaudited proforma summary consolidated balance sheet as of March 31, 1998 reflects the receipt of the proceeds of the Company's following-on equity offering (the "Offering") of 2,588,000 shares of its common stock which became effective March 30, 1998 and closed on April 3, 1998 as well as the underwriters' exercise of an overallotment option with respect to 387,500 additional shares which closed on April 16, 1998, and the application of those proceeds to the repayment of certain debt and interest aggregating $13,296,000 and the payment of certain offering costs aggregating $534,000. NOTE 2 - ACQUISITION OF IDEAS FOR MEDICINEFOLLOW-ON EQUITY OFFERING On March 5, 1997,April 3, 1998 the Company acquiredcompleted the Offering of 2,588,000 new shares of its common stock resulting in net proceeds of $39.4 million. On April 16, 1998 the Company issued an additional 387,500 shares of common stock pursuant to the underwriters' overallotment option resulting in $6.0 million of additional net proceeds to the Company. The net proceeds will be used to repay outstanding amounts under the Company's bank loans, for expansion of manufacturing facilities and for general corporate purposes, including working capital and potential acquisitions. The accompanying proforma balance sheet at March 31, 1998 gives effect to the receipt of the proceeds from the underwriters, the repayment of the Company's bank loans and the payment of certain offering costs. In conjunction with the Offering, $607,000 of the convertible debentures were converted into 50,000 shares of the Company's common stock. NOTE 4 - INVENTORY Inventories are comprised of the following: (Unaudited) March 31, December 31, 1998 1997 ----------------------------------- Raw materials $ 292,000 $ 262,000 Work-in-process 717,000 358,000 Finished goods 1,811,000 1,141,000 --------- ---------- $ 2,820,000 $ 1,761,000 ========== ========== 546079.1 NOTE 5 - CAPITAL LEASE OBLIGATIONS Commencing January 1, 1998 the Company began leasing office and manufacturing facilities and furniture under capital leases through January 2008 from the former majority shareholder of Ideas for Medicine, Inc. (IFM)("IFM"), which was acquired by the Company in March 1997. The Company has recorded capital lease obligations totaling $2.1 million during the quarter ended March 31, 1998. NOTE 6 - EARNINGS PER SHARE The following table sets forth the computation of Clearwater, Florida, a medical device company specializing in the manufacturebasic 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. The acquisition has been accounted for as a purchase. Based on the allocation of the purchase price, the Company's unaudited pro forma results of operations for the nine months ended September 30, 1997 and September 30, 1996, assuming the consummation of the purchase and issuance of the convertible debentures as of January 1, 1997 and 1996, respectively, are as follows: Ninediluted earnings per share: Three Months Ended September 30March 31, 1998 1997 1996 ---- ---- Net sales $39,027,000 $33,503,000 Net(Unaudited) Numerator for basic and diluted earnings per share - income $3,601,000 $2,807,000 Net incomeavailable to common shareholders $ 1,172,000 $ 952,000 ========== ========== Denominator for basic earnings per common share $0.36 $0.28 NOTE 3 - INVENTORY Inventory consistsweighted- average basis 9,739,000 9,581,000 Effect of the following: September 30, December 31, 1997 1996 ---- ---- Raw materialsdilutive stock options 338,000 296,000 ---------- ---------- Denominator for diluted earnings per share - adjusted weighted-average shares 10,077,000 9,877,000 ========== ========== Basic and diluted earnings per share $ 324,000.12 $ -- Work in process 102,000 -- Finished goods 1,061,000 260,000 ------------- --------- $1,487,000 $260,000 ============ ======== 5 NOTE 4 - LONG TERM DEBT The increase in the borrowings on the revolving term loan principally relates to costs associated with the construction of the new corporate headquarters, the acquisition of IFM, and general working capital purposes. NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. The Statement requires companies to (a) display items of other comprehensive income either below the total for net income in the income statement, or in a separate statement that begins with net income, or in a statement of changes in equity, and (b) disclose the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of the balance sheet. The new rules are effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related information, which supersedes FASB Statement No. 14. The new rules will require selected information about reportable segments in interim financial statements issued to shareholders. Statement 131 is effective for financial statements for fiscal years beginning after December 15, 1997. 6.10 ========== ========== 546079.1 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Revenues wereincreased 40% to $14.6 million and $37.8 million for the three and nine months ended September 30, 1997, respectively, compared toMarch 31, 1998 from $10.4 million and $28.5 million for the corresponding periodssame period in 1996. Revenues increased 41% and 32% for the three and nine months ended September 30, 1997, respectively, compared1997. The increase in revenues was primarily due to the corresponding periodsgrowing acceptance in 1996.the medical community of cryopreserved tissues, the Company's ability to procure greater amounts of tissue, price increases for certain cryopreservation services and revenues attributable to the Company's line of single-use devices following the Ideas for Medicine, Inc. ("IFM") acquisition in March 1997. Revenues for the three and nine months ended September 30,March 31, 1998 and March 31, 1997 included $1.7 million$1,585,000 and $3.9 million,$554,000 respectively, attributable to the acquisition of IFM. The remaining revenue increases are due to greater allograft shipments resulting from increased demand, and a general cryopreservation fee increase in January 1997. Revenues from human heart valve preservationand conduit cryopreservation services increased 22%15% to $8.6$7.4 million for the three months ended September 30, 1997March 31, 1998 from $7.1$6.5 million for the three months ended September 30, 1996,March 31, 1997, representing 59%51% and 68%62%, respectively, of total revenues respectively. Forduring such periods. This increase in revenues was primarily due to a 14% increase in the nine months ended September 30, revenuesnumber of heart allograft shipments. Revenues from human heart valve preservationvascular tissue cryopreservation services increased 16%37% to $22.2 million for 1997 from $19.2 million for 1996, representing 59% and 67% of total revenue, respectively. Shipments of human heart valves increased 15% for the three months ended September 30, 1997 and increased 14% for the nine months ended September 30, 1997 as compared to the same periods for 1996, due to an increase in demand. Revenues from vein preservation increased 21% to $2.7$3.5 million for the three months ended September 30, 1997March 31, 1998 from $2.2$2.6 million for the three months ended September 30, 1996,March 31, 1997, representing 18%24% and 21%25%, respectively, of total revenues respectively. Forfor those periods. This increase in revenues was primarily due to a 34% increase in the nine months ended September 30, revenuesnumber of vascular allograft shipments resulting from vein preservationthe introduction of cryopreserved tissues for new procedures and increased 27% to $7.8 million for 1997 from $6.1 million for 1996, representing 21% of total revenue for each period. Shipments of veins increased 18%demand for the three months ended September 30, 1997 and increased 26%Company's existing cryopreservation services. Revenues from human connective tissue for the nine months ended September 30, 1997 as comparedknee cryopreservation services increased 158% to the same periods for 1996, due to an increase in demand. Revenues from orthopedic tissue preservation increased 75% to $1.4$1.8 million for the three months ended September 30, 1997March 31, 1998 from $775,000$693,000 for the three months ended September 30, 1996,March 31, 1997, representing 9%12% and 7%, respectively, of total revenues respectively. Forfor those periods. This increase in revenues was primarily due to a 127% increase in the nine months ended September 30, revenuesnumber of allograft shipments and a greater proportion of the 1998 shipments consisting of cryopreserved menisci, which have a significantly higher per unit revenue than the Company's cryopreserved tendons. Revenues from orthopedic tissue preservation were $3.4 million and $2.4 million for 1997 and 1996, respectively, representing 9% and 8%the sale of total revenue, respectively. Shipments of orthopedic tissuebioprosthetic cardiovascular devices increased 51%92% to $200,000 for the three months ended September 30, 1997 and increased 16% for the nine months ended September 30, 1997 as compared to the same periods for 1996, due to an increase in demand. Other revenues were $72,000March 31, 1998 from $104,000 for the three months ended September 30,March 31, 1997, comparedrepresenting 1% of total revenues during each period. This increase in revenues was primarily due to $273,000a 169% increase in the number of bioprosthetic cardiovascular device shipments. Other revenues increased to $124,000 for the three months ended September 30, 1996,March 31, 1998 from $30,000 for the three months ended March 31, 1997. Other revenues in 1998 relate primarily to research grant awards for the Company's synergraft technology. Cost of cryopreservation services and products aggregated $5.5 million for the three months ended March 31, 1998, representing 1% and 3%37% of total revenues, respectively. For the nine months ended September 30, other revenues were $221,000 for 1997 compared to $526,000 for 1996, representing 1% and 2% of total revenues, respectively. Other revenues consist primarily of research grant award revenues and interest income. Research grant award revenues are primarily related to the bioadhesive and synergraft projects. Cost of preservation and products aggregated $5.1$3.4 million and $13.1 million, respectively, for the three and nine months ended September 30,March 31, 1997, representing 35%33% of total revenues for each period, compared to $3.6 million and $9.7 million, respectively, for the three and nine months ended September 30, 1996, representing 34% of total revenues for both periods.revenues. Cost of preservationcryopreservation services and products increased 43% for third quarter 1997 compared to third quarter 1996 and increased 35%60% for the first nine months of 1997quarter 1998 compared to the first nine months of 1996.quarter 1997. The increase in 1998 of the cost of preservationcryopreservation services and products as a percentage of revenue relates to an increase inrevenues results from increased manufacturing overhead costs associated with the revenues generated byCompany's new corporate headquarters and manufacturing facility and the inclusion of three months of IFM's sales in 1998, which generate lower gross margins than cryopreservation services, compared with one month of IFM partially offset bysales in the general cryopreservation fee increase and efficiencies resulting from an increase in units processed. 7first quarter 1997. 546079.1 General, administrative and marketing expenses aggregated $5.6increased 30% to $5.8 million and $15.3 million, respectively, for the three and nine months ended September 30,March 31, 1998, compared to $4.5 million for the corresponding period in 1997, representing 38%40% and 41%43%, respectively, of total revenues respectively, compared to $4.2 million and $12.0 million, respectively, for the three and nine months ended September 30, 1996, representing 41% and 42% of total revenues, respectively.in each period. The increase in expenses principallyexpenditures in 1998 results from cost associated withexpenses incurred to support the IFM acquisitionincrease in revenues and costs associated with the new corporate headquarters. The decrease in expenses as a percentageintroduction of revenues forBioGlue into the third quarter results from higher revenues in the third quarter.European community. Research and development expenses aggregated $1.2were $1.0 million and $3.0 million, respectively, for the three and nine months ended September 30,March 31, 1998, compared to $849,000 for the corresponding period in 1997, representing 9%7% and 8%, respectively, of total revenues respectively, compared to $616,000 and $2.0 million, respectively, for the three and nine months ended September 30, 1996, representing 6% and 7% of total revenues, respectively.each period. Research and development spending relates principally to the Company's focus on its bioadhesives and synergraft technologies. TheInterest expense increased to $430,000 for the three months ended March 31, 1998 from $132,000 for the three months ended March 31, 1997. This increase in spendinginterest expense is due to a full quarter of interest expense in the third quarter principally relates to preclinical toxicology and efficacy studies1998 relating to the Company's bioadhesives.convertible debenture entered into for the acquisition of IFM in March 1997 as well as an increase in the bank loans used to finance the building of the IFM manufacturing facility. Seasonality The demand for the Company's human heart valve tissue preservationand conduit cryopreservation services is seasonal, with peak demand generally occurring in the second and third quarters. Management believes that this demand trend for human heart valvesvalve and conduit cryopreservation services is primarily due to the high number of pediatric surgeries scheduled during the summer months. Management believes that the trends experienced by the Company to date for its human connective tissue for the knee cryopreservation services indicate that this business may also be seasonal because it is an elective procedure that may be performed less frequently during the fourth quarter holiday months. However, the demand for the Company's human vascular tissue cryopreservation services, bioprosthetic cardiovascular devices and single-use medical devices does not appear to experience this seasonal trend. Liquidity and Capital Resources At September 30, 1997March 31, 1998, net working capital was $18.5$59.5 million, compared to $10.9$18.8 million at December 31, 1996,1997, with a current ratio of 3.9 to 19-to-1 at September 30, 1997. Shareholders' equity at September 30, 1997 was $28.9 million.March 31, 1998. The Company's primary capital requirements arise out of general working capital needs, including receivables and deferred preservation costs, capital expenditures for facilities and equipment and funding of research and development projects. The Company historically has funded these requirements through bank credit facilities, cash generated by operations and equity offerings. Net cash provided by operating activities was $698,000 for the three months ended March 31, 1998, as compared to net cash used in operating activities of $2.3 million for the three months ended March 31, 1997. This increase in receivables resultsprimarily resulted from the increase in revenue and from the acquisition of IFM. The increase in deferred preservation costs results from an increasea decrease in the amount of tissue procured. The increase in inventory results primarily from the acquisition of IFM. The increase in prepaid expenses relates primarily to prepaid insurance premiums. The increase in other assets results primarily from intangible assets associated with the acquisition of IFM. The decrease in accounts payable results from paymentliquidated in the first quarter in 1998 as compared to the first quarter of amounts associated with1997 due to the construction of and equipping of the Company's new corporate headquarters. The increaseheadquarters and manufacturing facility. Net cash used in debt results frominvesting activities was $2.0 million for the three months ended March 31, 1998, as compared to $5.7 million for the three months ended March 31, 1997. This decrease was primarily attributable to the absence a business acquisition during the first quarter of 1998 as compared to the first quarter of 1997, during which the Company acquired IFM. Net cash provided by financing activities was $1.3 million for the three months ended March 31, 1998, as compared to $6.8 million for the three months ended March 31, 1997. This decrease was primarily attributable to a decrease in borrowings on the Company's revolving term loan facilitybank loans. On April 3, 1998, the Company completed a follow-on equity offering (the "Offering") of 2,588,000 shares which became effective March 30, 1998, and on April 16, 1998, an overallotment option was exercised for an additional 387,500 shares. A portion of the net proceeds of $45,450,000 were used to repay the bank loans and accrued interest totaling $13,296,000. 546079.1 The Company anticipates that the net proceeds from the issuance of convertible debentures associated with the IFM acquisitionOffering and the construction of the new corporate headquarters. The Company is currently in negotiations with a bank to increase its borrowing capacity. The Company believes that the extension of its borrowing capacity along with cash generated from operations will be sufficient to meet its operating and development needs for the next 12 months,months. However, the Company's future liquidity and capital requirements beyond that period will depend upon numerous factors, including the approximately $2.5 million which it has now committed for the constructiontiming of a new manufacturing/office facility for IFM, the interest resulting from the convertible debentures issued in connection with the IFM acquisition and any stock repurchases made under the Company's potential repurchasereceipt of upFDA approvals to 500,000 shares ofbegin clinical trials for its Common Stock authorized on April 2, 1997. Ifproducts currently in development, the Company is unsuccessful inresources required to further develop its negotiations withmarketing and sales capabilities if, and when, those products gain approval, the bankresources required to increase it's borrowingexpand manufacturing capacity thenand the extent to which the Company's products generate market acceptance and demand. There can be no assurance that the Company will neednot require additional financing or will not seek to seek alternativeraise additional funds through bank facilities, debt or equity offerings or other sources of financing incapital to meet future requirements. These additional funds may not be available when needed or on terms acceptable to the near future. See "Forward-Looking Statements"Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. Year 2000 The Company is aware of the issues that many computer systems will face as the millennium (year 2000) approaches. The Company, however, believes that its own internal software and hardware is year 2000 compliant. The Company believes that any year 2000 problems encountered by procurement agencies, hospitals and other customers and vendors are not likely to have a material adverse effect on the Company's operations. The Company anticipates no other year 2000 problems which are reasonably likely to have a material adverse effect on the Company's operations. There can be no assurance, however, that such problems will not arise. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income ("Statement 130"). 8 The Company adopted Statement 130 for the quarter ended March 31, 1998. Due to the immateriality of the Company's elements of comprehensive income, such adoption had no effect on the Company's consolidated financial statements. Forward-Looking Statements Statements made in this Form 10-Q for the three and nine monthsquarter ended September 30, 1997March 31, 1998 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) government regulation of the Company's business, (2) the Company's competitive position, (3) the availability of tissue for implant, (4) the status of the Company's products under development, (5) the protection of the Company's proprietary technology and (6) the Company's ability to successfully negotiate a new credit facility, (7) the reimbursement of health care costs by third-party payers and (8) the Company's ability to successfully integrate the operations of IFM.payors. See the "Business-Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 19961997 for a more detailed discussion of certain of these and other factors which might affect the Company's future performance. Item 3. Qualitative and Quantitative Discussion About Market Risk. Not Applicable. 9546079.1 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 Item 5. Other information. On August 20, 1997 Virginia C. Lacy was elected as a director to serve for the remaining term of Rodney C. Lacy. The term expires in May 1998. Ms. Lacy was appointed to serve on the Audit Committee and the Compensation Committee of the Board of Directors.None Item 6. Exhibits and Reports on Form 8-K (a) The exhibit index can be found below. Exhibit Number Description - ------- ----------- 3.1 Restated Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (No. 33-56388).) 3.2 Amendment to Articles of Incorporation of the Company dated November 29, 1995. (Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal yearthree months ended December 31, 1995.) 3.3 Amendment to the Company's Articles of Incorporation to increase the number of authorized shares of common stock from 20 million to 50 million shares and to delete the requirement that all preferred shares have one vote per share. (Incorporated by reference to Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 1996.) 3.4 BylawsByLaws 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.) 11.1 Statement re: computation of earnings per share 27.1 Financial Data Schedule (b) Current Reports on Form 8-K. None 10546079.1 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CRYOLIFE, INC. (Registrant) November 13, 1997 /s/May 6, 1998 EDWIN B. CORDELL, JR. - ----------------- ------------------------------------------ ---------------------------------- DATE EDWIN B. CORDELL, JR. Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 11