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