UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
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
November 13, 1998 was 12,668,336.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial statements
CRYOLIFE, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Revenues:
<S> <C> <C> <C> <C>
Preservation services and products $ 15,846,000 $ 14,569,000 $ 45,824,000 $ 37,593,000
Research grants and licenses 168,000 --- 305,000 28,000
---------------------------- ----------------------------
16,014,000 14,569,000 46,129,000 37,621,000
Costs and expenses:
Cost of preservation services and products 6,263,000 5,112,000 18,089,000 13,089,000
General, administrative and marketing 6,310,000 5,620,000 18,066,000 15,300,000
Research and development 1,150,000 1,243,000 3,416,000 2,950,000
Interest (income) expense, net (373,000) 316,000 (264,000) 736,000
Other income, net (200,000) (71,000) (970,000) (185,000)
---------------------------- ----------------------------
13,150,000 12,220,000 38,337,000 31,890,000
---------------------------- ----------------------------
Income before income taxes 2,864,000 2,349,000 7,792,000 5,731,000
Income tax expense 962,000 891,000 2,718,000 2,161,000
---------------------------- ----------------------------
Net income $ 1,902,000 $ 1,458,000 $ 5,074,000 $ 3,570,000
============================ ============================
Earnings per share:
Basic $ 0.15 $ 0.15 $ 0.43 $ 0.37
============================ ============================
Diluted $ 0.15 $ 0.15 $ 0.42 $ 0.36
============================ ============================
Weighted average shares outstanding
Basic 12,808,000 9,670,000 11,754,000 9,622,000
============================ ============================
Diluted 13,074,000 9,978,000 12,058,000 9,914,000
============================ ============================
See accompanying notes to summary consolidated financial statements.
</TABLE>
<PAGE>
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 46,394,000 $ 111,000
Receivables (net) 11,122,000 9,765,000
Deferred preservation costs (net) 13,638,000 12,257,000
Inventories 2,694,000 1,761,000
Prepaid expenses and other assets 2,542,000 1,260,000
Deferred income taxes 1,294,000 ---
-----------------------------------
Total current assets 77,684,000 25,154,000
-----------------------------------
Property and equipment (net) 19,037,000 15,487,000
Goodwill (net) 1,713,000 9,809,000
Patents (net) 2,208,000 2,196,000
Other (net) 1,423,000 1,103,000
-----------------------------------
TOTAL ASSETS $ 102,065,000 $ 53,749,000
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Accounts payable $ 1,030,000 $ 1,612,000
Accrued expenses 2,320,000 534,000
Accrued procurement fees 1,700,000 1,565,000
Accrued compensation 1,641,000 1,122,000
Current maturities of capital lease obligations 202,000 ---
Current maturities of long-term debt 496,000 1,496,000
Deferred income 721,000 ---
Income taxes payable 2,224,000 ---
-----------------------------------
Total current liabilities 10,334,000 6,329,000
-----------------------------------
Deferred income 2,229,000 ---
Deferred income taxes 746,000 327,000
Capital lease obligations, less current maturities 1,789,000 ---
Bank loans --- 10,777,000
Convertible debenture 4,393,000 5,000,000
Other long-term debt 570,000 1,089,000
-----------------------------------
Total liabilities 20,061,000 23,522,000
-----------------------------------
Shareholders' equity:
Preferred stock --- ---
Common stock (issued 13,359,000 shares in 1998 and
10,243,000 shares in 1997) 134,000 102,000
Additional paid-in capital 64,350,000 17,694,000
Retained earnings 17,700,000 12,627,000
Less: Treasury stock (543,000 shares) (180,000) (180,000)
Note receivable from shareholder --- (16,000)
-----------------------------------
Total shareholders' equity 82,004,000 30,227,000
-----------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 102,065,000 $ 53,749,000
===================================
</TABLE>
See accompanying notes to summary consolidated financial statements.
<PAGE>
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
(Unaudited)
Net cash flows provided by (used in) operating activities:
<S> <C> <C>
Net income $ 5,074,000 $ 3,570,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,807,000 1,622,000
Provision for doubtful accounts 77,000 31,000
Deferred income taxes (875,000) 1,000
Receivables (1,434,000) (819,000)
Deferred preservation costs and inventories (3,700,000) (5,080,000)
Prepaid expenses and other assets (1,303,000) (564,000)
Accounts payable and accrued expenses 1,186,000 (1,670,000)
-----------------------------------
Net cash flows provided by (used in) operating activities 832,000 (2,909,000)
-----------------------------------
Net cash flows provided by (used in) investing activities:
Capital expenditures (2,689,000) (2,955,000)
Other assets (511,000) 32,000
Net proceeds from sale of IFM product lines 15,000,000 ---
Cash paid for acquisition, net of cash acquired --- (4,418,000)
Net sales of marketable securities --- 3,000
-----------------------------------
Net cash flows provided by (used in) investing activities 11,800,000 (7,338,000)
-----------------------------------
Net cash flows provided by financing activities:
Principal payments of debt (13,976,000) ---
Proceeds from borrowings on revolving term loan 1,680,000 8,475,000
Payment of obligations under capital leases (150,000) ---
Proceeds from issuance of common stock and
from notes receivable from shareholders 46,097,000 444,000
-----------------------------------
Net cash provided by financing activities 33,651,000 8,919,000
-----------------------------------
Increase (decrease) in cash 46,283,000 (1,328,000)
Cash and cash equivalents, beginning of period 111,000 1,370,000
-----------------------------------
Cash and cash equivalents, end of period $ 46,394,000 $ 42,000
===================================
Supplemental cash flow information Non-cash investing and financing activities:
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
===================================
</TABLE>
See accompanying notes to summary consolidated financial statements.
<PAGE>
CRYOLIFE, INC. AND SUBSIDIARIES
NOTES TO SUMMARY 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 a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. For further information,
refer to the consolidated financial statements and notes thereto included in the
CryoLife Inc. (the "Company") Form 10-K for the year ended December 31, 1997.
Note 2 - Follow-on Equity Offering
On April 3, 1998 the Company completed a follow-on equity offering (the
"Offering") of 2,588,000 newly issued 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. A portion of the net proceeds were used to repay outstanding amounts
under the Company's bank loans and for expansion of manufacturing facilities.
The remainder of the proceeds will be used for additional expansion of
manufacturing facilities and for general corporate purposes, including working
capital and potential acquisitions.
In conjunction with the Offering, $607,000 of the convertible debentures were
converted into 50,000 shares of the Company's common stock.
Note 3 - Investments
Management determines the appropriate classification of investments at the time
of purchase and reevaluates such designation at each balance sheet date.
Available for sale securities are carried at fair value, with unrealized gains
and losses reported in a separate component of stockholders' equity. Realized
gains and losses are included in investment income and are determined on a
first-in, first-out basis.
At September 30, 1998 and December 31, 1997, the Company held $30.8 million and
$0, respectively, in mutual funds and money market funds. All investments were
classified as available for sale as of September 30, 1998. Fair market value is
equivalent to cost at September 30, 1998.
All investments held by the Company have original maturities of less than 90
days and are classified as cash and cash equivalents as of September 30, 1998.
<PAGE>
Note 4 - Inventories
Inventories are comprised of the following:
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
-----------------------------------
<S> <C> <C>
Raw materials $ 557,000 $ 262,000
Work-in-process 184,000 358,000
Finished goods 1,953,000 1,141,000
-----------------------------------
$ 2,694,000 $ 1,761,000
===================================
</TABLE>
Note 5 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Numerator for basic and diluted earnings
<S> <C> <C> <C> <C>
per share - net income $ 1,902,000 $ 1,458,000 $5,074,000 $3,570,000
======================== =======================
Denominator for basic earnings per share -
weighted-average basis 12,808,000 9,670,000 11,754,000 9,622,000
Effect of dilutive stock options 266,000 308,000 304,000 292,000
------------------------ ------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares 13,074,000 9,978,000 12,058,000 9,914,000
======================== ========================
Earnings per share:
Basic $ .15 $ .15 $ .43 $ .37
======================== ========================
Diluted $ .15 $ .15 $ .42 $ .36
======================== =========================
</TABLE>
Note 6 - Sale of Ideas for Medicine, Inc. Product Line
On September 30, 1998 the Company closed the sale of the product line and
certain related assets of its wholly-owned subsidiary, Ideas for Medicine, Inc.,
a Florida corporation ("IFM"), to Horizon Medical Products, Inc. ("Horizon"),
for $15 million in cash. The IFM product line consists of speciality
cardiovascular and vascular medical instruments and devices. The sale was made
pursuant to an asset purchase agreement. IFM and Horizon also signed a
manufacturing agreement on September 30, 1998 which provides for the manufacture
by IFM of a specified minimum dollar amount of products from the IFM product
line to be purchased exclusively by Horizon over each of the next four years.
Thereafter, the responsibility for such manufacturing will be assumed by
Horizon.
The Company established a deferred revenue balance at the transaction date
totaling $2,950,000 which amount represents the selling price less the net book
value of the assets sold and the costs related to the sale. Such amount will be
amortized into cost of goods sold over the four year life of the manufacturing
agreement.
<PAGE>
Note 7 - Subsequent Events
On October 14, 1998, the Company's Board of Directors authorized the purchase of
up to 1 million shares of its common stock. The purchase of shares will be made
from time to time in open market or privately-negotiated transactions on such
terms as management deems appropriate. As of November 9, 1998, the Company has
purchased 188,000 shares of its common stock for an aggregate purchase price of
$1,843,000.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Preservation and product revenues increased 9% to $15.8 million for the three
months ended September 30, 1998 from $14.6 million for the same period in 1997.
Preservation and product revenues increased 22% to $45.8 million for the nine
months ended September 30, 1998 from $37.6 million for the same period in 1997.
The increase in revenues was primarily due to the growing acceptance in the
medical community of cryopreserved tissues which has resulted in increased
demand, the Company's ability to procure greater amounts of tissue, price
increases for certain preservation 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 from IFM decreased 10% to $1.5 million for the three months ended
September 30, 1998 from $1.7 million for the three months ended September 30,
1997, representing 10% and 12%, respectively, of total revenues during such
periods. This decrease in revenues was primarily attributable to a 3% decrease
in IFM shipments due to a decrease in demand and a decrease in average selling
price due to competitive pricing pressures and a change in the product mix for
the three months ended September 30, 1998. Revenues from IFM increased 22% to
$4.7 million for the nine months ended September 30, 1998 from $3.9 million for
the nine months ended September 30, 1997, representing 10% of total revenues
during such periods. This increase in revenues is due to the nine months ended
September 30, 1998 having two extra months of IFM revenue than the nine months
ended September 30, 1997 due to the IFM acquisition closing on March 5, 1997.
Revenues from human heart valve and conduit cryopreservation services decreased
2% to $8.4 million for the three months ended September 30, 1998 from $8.6
million for the three months ended September 30, 1997, representing 53% and 59%,
respectively, of total revenues during such periods. This decrease was primarily
due to a decrease in average selling price resulting from a change in the
product mix, partially offset by a 1% increase in the number of heart allograft
shipments for the three months ended September 30, 1998. Revenues from human
heart valve and conduit cryopreservation services increased 7% to $23.8 million
for the nine months ended September 30, 1998 from $22.2 million for the nine
months ended September 30, 1997, representing 52% and 59%, respectively, of
total revenues during such periods. This increase in revenues was primarily due
to a 7% increase in the number of heart allograft shipments for the nine months
ended September 30, 1998, respectively, due to an increased demand and the
Company's ability to procure greater amounts of tissue partially offset by the
decrease in average selling price as discussed above.
Revenues from human vascular tissue cryopreservation services increased 27% to
$3.4 million for the three months ended September 30, 1998 from $2.7 million for
the three months ended September 30, 1997, representing 21% and 19%,
respectively, of total revenues during such periods. Revenues from human
vascular tissue cryopreservation services increased 35% to $10.5 million for the
nine months ended September 30, 1998 from $7.8 million for the nine months ended
September 30, 1997, representing 23% and 21%, respectively, of total revenues
during such periods. This increase in revenues was primarily due to a 25% and a
34% increase in the number of vascular allograft shipments for the three months
and nine months ended September 30, 1998, respectively, due to an increased
demand and the Company's ability to procure greater amounts of tissue.
Revenues from human connective tissue cryopreservation services increased 36% to
$1.8 million for the three months ended September 30, 1998 from $1.4 million for
the three months ended September 30, 1997, representing 12% and 9%,
respectively, of total revenues during such periods. Revenues from human
connective tissue cryopreservation services increased 65% to $5.6 million for
the nine months ended September 30, 1998 from $3.4 million for the nine months
ended September 30, 1997, representing 12% and 9%, respectively, of total
revenues during such periods. This increase in revenues was primarily due to a
16% and an 55% increase in the number of allograft shipments for the three
months and nine months ended September 30, 1998, respectively, due to increased
demand and the Company's ability to procure greater amounts of tissue.
Additional revenue increases have resulted from a greater proportion of the 1998
shipments consisting of cryopreserved menisci, which have a significantly higher
per unit revenue than the Company's cryopreserved tendons and price increases
for the cryopreservation of menisci and tendons.
Revenues from bioprosthetic cardiovascular devices increased 37% to $243,000 for
the three months ended September 30, 1998 from $177,000 for the three months
ended September 30, 1997, representing 2% and 1%, respectively, of total
revenues during each such periods. Revenues from bioprosthetic cardiovascular
devices increased 59% to $660,000 for the nine months ended September 30, 1998
from $414,000 for the nine months ended September 30, 1997, representing 1% of
total revenues during such periods. This increase in revenues was primarily due
to a 31% and an 61% increase in the number of bioprosthetic cardiovascular
device shipments for the three months and nine months ended September 30, 1998,
respectively, due to increased manufacturing capacity.
Revenues from BioGlue(R) were $367,000 and $582,000 for the three months and
nine months ended September 30, 1998, respectively. The Company is currently
introducing the product in the European market as well as in other selected
overseas markets. Shipments began in April of 1998.
Grant revenues increased to $168,000 for the three months ended September 30,
1998 from $0 for the three months ended September 30, 1997. Grant revenues
increased to $305,000 for the nine months ended September 30, 1998 from $28,000
for the nine months ended September 30, 1997. This increase in grant revenues is
primarily attributable to the SynerGraft(R) research and development programs.
Other income increased to $200,000 for the three months ended September 30, 1998
from $71,000 for the three months ended September 30, 1997. Other income
increased to $970,000 for the nine months ended September 30, 1998 from $185,000
for the nine months ended September 30, 1997. Other income in 1998 relates
primarily to proceeds from the sale of the Company's port product line.
Cost of cryopreservation services and products aggregated $6.3 million for the
three months ended September 30, 1998, compared to $5.1 million for the
corresponding period in 1997, representing 40% and 35%, respectively, of total
cryopreservation and product revenues in each period. Cost of cryopreservation
services and products aggregated $18.1 million for the nine months ended
September 30, 1998, compared to $13.1 million, respectively, for the nine months
ended September 30, 1997, representing 39% and 35% of total cryopreservation and
product revenues, respectively. Cost of cryopreservation services and products
increased 23% for the third quarter of 1998 compared to the third quarter of
1997. The increase in 1998 of the cost of cryopreservation services and products
as a percentage of revenues results from a lesser portion of 1998 revenues being
derived from human heart valve and conduit cryopreservation services which carry
a significantly higher gross margins than other cryopreservation services, from
increased manufacturing overhead costs associated with the Company's new
manufacturing facilities and from the inclusion in 1998 of nine months of IFM's
sales, which generate lower gross margins than cryopreservation services,
compared with seven months of IFM sales in the first nine months of 1997.
General, administrative and marketing expenses increased 12% to $6.3 million for
the three months ended September 30, 1998, compared to $5.6 million for the
corresponding period in 1997, representing 40% and 39%, respectively, of total
cryopreservation and product revenues in each period. General, administrative
and marketing expenses increased 18% to $18.1 million for the nine months ended
September 30, 1998, compared to $15.3 million for the corresponding period in
1997, representing 39% and 41%, respectively, of total cryopreservation and
product revenues in each period. The increase in expenditures in 1998 resulted
from expenses incurred to support the increase in revenues and costs associated
with the introduction of BioGlue into the European community.
Research and development expenses were $1.2 million for the three months ended
September 30, 1998, and 1997, representing 7% and 9%, respectively, of total
cryopreservation and product revenues for each period. Research and development
expenses increased 16% to $3.4 million for the nine months ended September 30,
1998, compared to $3.0 million for the corresponding period in 1997,
representing 7% and 8%, respectively, of total cryopreservation and product
revenues for each period. Research and development spending relates principally
to the Company's focus on its bioadhesives and SynerGraft technologies.
Net interest income was $373,000 for the three months ended September 30, 1998
compared to net interest expense of $316,000 for the corresponding period in
1997. Net interest income was $264,000 for the nine months ended September 30,
1998 compared to net interest expense $736,000 for the corresponding period in
1997. This decrease in interest expense for the three and nine months ended
September 30, 1998 is due to the repayment of certain indebtedness with the
proceeds from the follow-on equity offering completed in April 1998, as well as
the conversion of a portion of a convertible debenture into common stock of the
Company, and the receipt of interest income on the invested proceeds from the
Offering.
The decline in the effective income tax rate to 34% from 38% for the three
months ended September 30, 1998 and 1997, respectively, and to 35% from 38% for
the nine months ended September 30, 1998 and 1997, respectively, is due to the
implementation of certain income tax planning strategies.
Seasonality
The demand for the Company's human heart valve and conduit cryopreservation
services is seasonal, with peak demand generally occurring in the second and
third quarters. Management believes that this demand trend for human heart valve
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. Additionally, based on the current approved
indications for BioGlue, management does not anticipate the demand for BioGlue
to experience a seasonal trend.
Liquidity and Capital Resources
At September 30, 1998, net working capital was $67.4 million, compared to $18.8
million at December 31, 1997, with a current ratio of 8 to 1. The Company's
primary capital requirements arise out of general working capital needs, capital
expenditures for facilities and equipment, funding of research and development
projects and a common stock repurchase plan approved by the board of directors
in October of 1998. The Company historically has funded these requirements
through bank credit facilities, cash generated by operations and equity
offerings.
Net cash provided by operating activities was $832,000 for the nine months ended
September 30, 1998, as compared to net cash used in operating activities of $2.9
million for the nine months ended September 30, 1997. This increase primarily
resulted from: 1) an increase in net income, 2) an increase in payables due to
construction projects, and 3) a decrease in the growth of deferred preservation
cost due to more stringent inventory management policies, partially offset by 1)
an increase in receivables related to the increase in revenues, 2) an increase
in prepaids and other assets resulting from the note receivable from the sale of
the IFM port line and other miscellaneous deposits, and 3) the establishment of
a deferred tax asset in conjunction with the sale of the remaining IFM product
line.
Net cash provided by investing activities was $11.8 million for the nine months
ended September 30, 1998, as compared to net cash used in investing activities
of $7.3 million for the nine months ended September 30, 1997. This increase was
primarily attributable to the absence of a business acquisition during the first
quarter of 1998 as compared to the first quarter of 1997, during which the
Company acquired IFM, coupled with the net proceeds from the sale of the IFM
product line as of September 30, 1998.
Net cash provided by financing activities was $33.6 million for the nine months
ended September 30, 1998, as compared to $8.9 million for the nine months ended
September 30, 1997. This increase was primarily attributable to proceeds of
$45.4 million from the Offering, partially offset by the repayment of borrowings
on the Company's bank loans, and accrued interest thereon, totaling $13.3
million.
In October 1998, the Company entered into an agreement with an investment
banking firm to provide financial advisory services related to a potential
private placement of equity or equity-oriented securities to form a subsidiary
company for the commercial development of its serine proteinase light activation
(FibRx(R)) technologies. This strategy will allow the Company to fund the FibRx
technology in a subsidiary company and should expedite the commercial
development of its blood clot dissolving and surgical sealant product
applications without additional R&D expenditures by the Company. This strategy,
if successful, will favorably impact the Company's liquidity going forward.
The Company anticipates that the net proceeds from the Offering, proceeds from
the sale of the IFM product lines, and cash generated from operations will be
sufficient to meet its operating and development needs for at least the next 12
months. However, the Company's future liquidity and capital requirements beyond
that period will depend upon numerous factors, including the timing of the
Company's receipt of FDA approvals to begin clinical trials for its products
currently in development, the resources required to further develop its
marketing and sales capabilities if, and when, those products gain approval, the
resources required to expand manufacturing capacity and the extent to which the
Company's products generate market acceptance and demand. There can be no
assurance that the Company will not require additional financing or will not
seek to raise additional funds through bank facilities, debt or equity offerings
or other sources of capital to meet future requirements. These additional funds
may not be available when needed or on terms acceptable to the Company, which
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 companies will face as the year
2000 approaches. In order to become year 2000 compliant, the Company has set up
a project team to address the issue and has taken the following steps:
Impact Assessment: The Company has identified potential year 2000 issues and the
associated potential risks. The Company has assessed the impact of the year 2000
issue and believes that its business products and services will not be
significantly impacted. Additionally, the Company has determined that, with the
exception of the Company's clinical tracking database, all of the Company's
financial and operational applications have been upgraded to or replaced with
year 2000 compliant software.
Third Party Impact Assessments: The Company has begun to verify the readiness of
its significant suppliers through the distribution of a questionnaire. This
process is estimated to be complete by January 1, 1999. The Company does not
anticipate that a lack of compliance of the vendors will significantly affect
the Company's daily operations.
Project Plan: The Company began its compliance strategy in October 1997. With
the exception of the clinical tracking database, all of the "off the shelf"
software packages have been upgraded to compliant releases. Older internally
developed software has been replaced with new systems that are year 2000
compliant. The remaining clinical tracking system will be internally rewritten,
and implemented by first quarter 1999. The Company estimates that all
modifications and testing for year 2000 issues will be completed at a cost of
less than $50,000 including expenditures to date.
Contingency Plan: The principal risk the Company faces is a delay in the
implementation of the new clinical tracking system. Although the clinical
tracking system is not critical to the day-to-day operations of the Company, it
is important for FDA compliance regarding follow-up procedures after transplant.
A delay in the implementation of the new clinical tracking system would result
in the Company having to rely on its paper support for required FDA data.
Although the Company is uncertain what the costs associated with a delay would
be or the related impact on operations, liquidity and financial condition, the
Company does not expect the impact to be material. The Company expects to have a
contingency plan completed by March 15, 1999.
The Company believes that it is diligently addressing the year 2000 issue and
expects that through its actions, year 2000 problems are not reasonably likely
to have a material adverse effect on its operations. However, there can be no
assurance that such problems will not arise.
Recent Accounting Pronouncements
In September 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). The Company
adopted Statement 130 January 1, 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 quarter ended September 30, 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, (1) the effects on the Company of year 2000 issues including
unanticipated expenses in connection therewith, (2) the Company's ability to
find an equity investor in the FibRx technology and the impact of such an
investment on the Company's liquidity, (3) government regulation of the
Company's business, (4) the Company's competitive position, (5) the availability
of tissue for implant, (6) the status of the Company's products under
development, (7) the protection of the Company's proprietary technology and (8)
the reimbursement of health care costs by third-party payors. See the
"Business-Risk Factors" section of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 for a more detailed discussion of these and
other factors which might affect the Company's future performance.
Item 3. Qualitative and Quantitative Discussion About Market Risk.
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents and
short-term investments as well as interest paid on its debt. To mitigate the
impact of fluctuations in U.S. interest rates, the Company generally maintains
80% to 90% of its debt as fixed rate in nature. As a result, the Company is
subject to a risk that interest rates will decrease and the Company may be
unable to refinance its debt.
<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.
With respect to the Company's annual meeting of shareholders to be held
in 1999, all shareholder proposals submitted outside the shareholder
proposal rules contained in Rule 14a-8 promulgated under the Securities
Exchange Act of 1934, as amended, which pertains to the inclusion of
shareholder proposals in a Company's proxy materials, must be received
by the Company by March 3, 1999, in order to be considered timely. With
regard to such shareholder proposals, if the date of the next annual
meeting of shareholders is advanced or delayed by more than 30 calendar
days from May 21, 1999, the Company shall, in a timely manner, inform
its shareholders of the change, and the date by which such proposals
must be received. As set forth in the Company's Proxy Statement dated
April 17, 1998, shareholders who wish to avail themselves of the
provisions of Rule 14a-8 must submit their proposals no later than
December 18, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibit index can be found below.
Exhibit
Number Description
2.1 Asset Purchase Agreement dated as of September 30, 1998 by and between
Ideas For Medicine, Inc. ("IFM") and Horizon Medical Products, Inc.
(incorporated herein by reference to Exhibit 2 to the Current Report
on Form 8-K of Horizon Medical Products, Inc. (File No. 000-24029)
filed on October 14, 1998).
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 three 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
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.)
27.1 Financial Data Schedule: Quarter Ended September 30, 1998
(b) None.
<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 16, 1998 /s/ EDWIN B. CORDELL, JR..
- - ------------------ ----------------------------------
DATE EDWIN B. CORDELL, JR.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS CONTAINED IN ITS REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 46,394,000
<SECURITIES> 0
<RECEIVABLES> 10,964,000
<ALLOWANCES> 158,000
<INVENTORY> 2,694,000
<CURRENT-ASSETS> 77,684,000
<PP&E> 28,526,000
<DEPRECIATION> 9,489,000
<TOTAL-ASSETS> 102,065,000
<CURRENT-LIABILITIES> 10,334,000
<BONDS> 7,450,000
0
0
<COMMON> 134,000
<OTHER-SE> 81,870,000
<TOTAL-LIABILITY-AND-EQUITY> 102,065,000
<SALES> 5,968,000
<TOTAL-REVENUES> 46,129,000
<CGS> 3,459,000
<TOTAL-COSTS> 18,089,000
<OTHER-EXPENSES> 20,248,000
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<INTEREST-EXPENSE> 619,000
<INCOME-PRETAX> 7,792,000
<INCOME-TAX> 2,718,000
<INCOME-CONTINUING> 5,074,000
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<EXTRAORDINARY> 0
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