FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
Commission File Number 0-21104
CRYOLIFE, INC.
(Exact name of registrant as specified in its charter)
---------
Florida 59-2417093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1655 Roberts Boulevard, NW
Kennesaw, Georgia 30144
(Address of principal executive offices)
(zip code)
(770) 419-3355
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
The number of shares of common stock, par value $0.01 per share, outstanding on
October 31, 1997 was 9,696,000.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial statements
CRYOLIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1997 1996 1997 1996
------------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
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
=========================== =========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
Item 1. Financial Statements
<TABLE>
<CAPTION>
CRYOLIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,000 $ 1,370,000
Marketable securities 41,000 43,000
Trade receivables (net) 9,894,000 6,572,000
Other receivables 51,000 1,625,000
Deferred preservation costs 11,668,000 7,178,000
Inventories 1,487,000 260,000
Prepaid expenses 1,467,000 846,000
Deferred income taxes 286,000 287,000
------------------------------
Total current assets 24,936,000 18,181,000
------------------------------
Property and equipment (net) 13,509,000 11,567,000
Goodwill (net) 8,166,000 1,846,000
Other intangibles (net) 5,073,000 3,379,000
------------------------------
TOTAL ASSETS $51,684,000 $34,973,000
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,520,000 $ 3,696,000
Accrued expenses 727,000 934,000
Accrued procurement fees 1,851,000 1,210,000
Accrued compensation 1,351,000 878,000
Current maturities of debt 478,000 527,000
Income taxes payable 490,000 --
------------------------------
Total current liabilities 6,417,000 7,245,000
------------------------------
Other long term liabilities, principally revolving term
loan and convertible debentures 16,323,000 2,799,000
------------------------------
Total liabilities 22,740,000 10,044,000
------------------------------
Shareholders' equity:
Preferred stock -- --
Common stock (issued 10,222,000 shares in 1997
and 10,106,000 shares in 1996) 102,000 101,000
Additional paid-in capital 17,566,000 17,128,000
Retained earnings 11,472,000 7,902,000
Less: Unrealized gain on investments -- (1,000)
Treasury stock (543,000 shares) (180,000) (180,000)
Notes receivable from shareholders (16,000) (21,000)
------------------------------
Total shareholders' equity 28,944,000 24,929,000
------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $51,684,000 $34,973,000
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Item 1. Financial Statements
CRYOLIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
---------------------
(Unaudited)
<S> <C> <C>
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
===============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CRYOLIFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three and nine months
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997. 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.
NOTE 2 - ACQUISITION OF IDEAS FOR MEDICINE
On March 5, 1997, the Company acquired the stock of Ideas for Medicine, Inc.
(IFM) of Clearwater, Florida, a medical device company specializing in the
manufacture and distribution of single use cardiovascular products, for
consideration of approximately $4.5 million in cash and approximately $5 million
in convertible debentures plus related expenses. The cash portion of the
purchase price was financed by borrowings under the Company's Revolving Term
Loan Agreement. 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:
Nine Months Ended September 30
1997 1996
---- ----
Net sales $39,027,000 $33,503,000
Net income $3,601,000 $2,807,000
Net income per common share $0.36 $0.28
NOTE 3 - INVENTORY
Inventory consists of the following:
September 30, December 31,
1997 1996
---- ----
Raw materials $ 324,000 $ --
Work in process 102,000 --
Finished goods 1,061,000 260,000
------------- ---------
$1,487,000 $260,000
============ ========
5
<PAGE>
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Revenues were $14.6 million and $37.8 million for the three and nine months
ended September 30, 1997, respectively, compared to $10.4 million and $28.5
million for the corresponding periods in 1996. Revenues increased 41% and 32%
for the three and nine months ended September 30, 1997, respectively, compared
to the corresponding periods in 1996. Revenues for the three and nine months
ended September 30, 1997 included $1.7 million and $3.9 million, 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 preservation increased 22% to $8.6 million for
the three months ended September 30, 1997 from $7.1 million for the three months
ended September 30, 1996, representing 59% and 68% of total revenues,
respectively. For the nine months ended September 30, revenues from human heart
valve preservation increased 16% 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 million for the three
months ended September 30, 1997 from $2.2 million for the three months ended
September 30, 1996, representing 18% and 21% of total revenues, respectively.
For the nine months ended September 30, revenues from vein preservation
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% for the
three months ended September 30, 1997 and increased 26% for the nine months
ended September 30, 1997 as compared to the same periods for 1996, due to an
increase in demand.
Revenues from orthopedic tissue preservation increased 75% to $1.4 million for
the three months ended September 30, 1997 from $775,000 for the three months
ended September 30, 1996, representing 9% and 7% of total revenues,
respectively. For the nine months ended September 30, revenues from orthopedic
tissue preservation were $3.4 million and $2.4 million for 1997 and 1996,
respectively, representing 9% and 8% of total revenue, respectively. Shipments
of orthopedic tissue increased 51% 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 $72,000 for the three months ended September 30, 1997
compared to $273,000 for the three months ended September 30, 1996, representing
1% and 3% 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 million and $13.1 million,
respectively, for the three and nine months ended September 30, 1997,
representing 35% 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. Cost of preservation
and products increased 43% for third quarter 1997 compared to third quarter 1996
and increased 35% for the first nine months of 1997 compared to the first nine
months of 1996. The increase in cost of preservation and products as a
percentage of revenue relates to an increase in costs associated with the
revenues generated by IFM, partially offset by the general cryopreservation fee
increase and efficiencies resulting from an increase in units processed.
7
<PAGE>
General, administrative, and marketing expenses aggregated $5.6 million and
$15.3 million, respectively, for the three and nine months ended September 30,
1997, representing 38% and 41% 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.
The increase in expenses principally results from cost associated with the IFM
acquisition and costs associated with the new corporate headquarters. The
decrease in expenses as a percentage of revenues for the third quarter results
from higher revenues in the third quarter.
Research and development expenses aggregated $1.2 million and $3.0 million,
respectively, for the three and nine months ended September 30, 1997,
representing 9% and 8% 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. Research and
development spending relates principally to the Company's focus on bioadhesives
and synergraft technologies. The increase in spending in the third quarter
principally relates to preclinical toxicology and efficacy studies relating to
the Company's bioadhesives.
Seasonality
The demand for the Company's human heart valve tissue preservation services is
seasonal, with peak demand generally occurring in the second and third quarters.
Management believes this demand trend for human heart valves is primarily due to
the high number of pediatric surgeries scheduled during the summer months.
Liquidity and Capital Resources
At September 30, 1997 net working capital was $18.5 million, compared to $10.9
million at December 31, 1996, with a current ratio of 3.9 to 1 at September 30,
1997. Shareholders' equity at September 30, 1997 was $28.9 million. The
Company's primary capital requirements arise out of working capital needs,
including receivables and deferred preservation costs, capital expenditures for
facilities and equipment, and funding of research and development projects. The
increase in receivables results from the increase in revenue and from the
acquisition of IFM. The increase in deferred preservation costs results from an
increase 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 payment of amounts associated with the
construction of and equipping of the Company's new corporate headquarters. The
increase in debt results from borrowings on the Company's revolving term loan
facility and from the issuance of convertible debentures associated with the IFM
acquisition 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, including the
approximately $2.5 million which it has now committed for the construction 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 repurchase of up to 500,000
shares of its Common Stock authorized on April 2, 1997. If the Company is
unsuccessful in its negotiations with the bank to increase it's borrowing
capacity, then the Company will need to seek alternative sources of financing in
the near future. See "Forward-Looking Statements".
8
<PAGE>
Forward-Looking Statements
Statements made in this Form 10-Q for the three and nine months ended September
30, 1997 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, (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. See the "Business-Risk
Factors" section of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 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.
9
<PAGE>
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.
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 year 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
September 30, 1996.)
3.4 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.)
11.1 Statement re: computation of earnings per share
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K.
None
10
<PAGE>
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/EDWIN B. CORDELL, JR.
- ----------------- ------------------------
DATE EDWIN B. CORDELL, JR.
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
11
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 9,670,000 9,529,000 9,622,000 9,484,000
Net effect of dilutive stock options
based on the treasury
stock method using
the greater of quarter-end
market price or average market price 308,000 396,000 292,000 410,000
----------- ----------- ---------- ---------
Totals 9,978,000 9,925,000 9,914,000 9,894,000
=========== ========== ========= =========
Net Income $ 1,458,000 $ 1,261,000 $ 3,570,000 $ 3,032,000
=========== ========== ========== =========
Per share amount $ .15 $ .13 $ .36 $ .31
=========== ========== ========== ==========
Fully diluted:
Average shares outstanding 9,670,000 9,529,000 9,622,000 9,484,000
Net effect of dilutive stock options
based on the treasury stock method
using the greater of quarter-end
market price or average market price 333,000 396,000 362,000 410,000
Totals 10,003,000 9,925,000 9,984,000 9,894,000
========== ========= ========== =========
Net Income $ 1,458,000 $ 1,261,000 $ 3,570,000 $ 3,032,000
========== ========= ========== ==========
Per share amount $ .15 $ .13 $ .36 $ .31
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDIED
CONSOLIDATED BALANCE SHEET OF CRYOLIFE, INC. AS OF SEPTEMBER 30, 1997 AND THE
RELATED UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000784199
<NAME> CRYOLIFE, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 42,000
<SECURITIES> 41,000
<RECEIVABLES> 10,040,000
<ALLOWANCES> 146,000
<INVENTORY> 1,487,000
<CURRENT-ASSETS> 24,936,000
<PP&E> 20,997,000
<DEPRECIATION> 7,488,000
<TOTAL-ASSETS> 51,684,000
<CURRENT-LIABILITIES> 6,417,000
<BONDS> 5,000,000
0
0
<COMMON> 102,000
<OTHER-SE> 28,842,000
<TOTAL-LIABILITY-AND-EQUITY> 51,684,000
<SALES> 3,864,000
<TOTAL-REVENUES> 37,814,000
<CGS> 1,874,000
<TOTAL-COSTS> 13,089,000
<OTHER-EXPENSES> 18,994,000
<LOSS-PROVISION> 31,000
<INTEREST-EXPENSE> 744,000
<INCOME-PRETAX> 5,731,000
<INCOME-TAX> 2,161,000
<INCOME-CONTINUING> 3,570,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,570,000
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
