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, 1999
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 25, 1999 was 12,247,801.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial statements
CRYOLIFE, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Preservation services and products $ 16,274 $ 15,846 $ 49,601 $ 45,824
Research grants and licenses 255 168 648 305
--------- --------- --------- ---------
16,529 16,014 50,249 46,129
Costs and expenses:
Cost of preservation services and products 6,930 6,263 22,541 18,089
General, administrative and marketing 6,181 6,310 18,283 18,066
Research and development 1,156 1,150 3,113 3,416
Interest expense 92 110 300 619
Interest income (361) (483) (1,153) (883)
Other income, net (28) (200) (32) (970)
--------- --------- --------- ---------
13,970 13,150 43,052 38,337
--------- --------- --------- ---------
Income before income taxes 2,559 2,864 7,197 7,792
Income tax expense 845 962 2,376 2,718
--------- --------- --------- ---------
Net income $ 1,714 $ 1,902 $ 4,821 $ 5,074
========= ========= ========= =========
Earnings per share:
Basic $ 0.14 $ 0.15 $ 0.39 $ 0.43
========= ========= ========= =========
Diluted $ 0.14 $ 0.15 $ 0.38 $ 0.42
========= ========= ========= =========
Weighted average shares outstanding
Basic 12,274 12,808 12,372 11,754
========= ========= ========= =========
Diluted 12,485 13,074 12,563 12,058
========= ========= ========= =========
</TABLE>
See accompanying notes to summary consolidated financial statements.
<PAGE>
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 5,418 $ 12,885
Marketable securities, at market ..................................... 25,616 26,713
Receivables (net) .................................................... 13,945 11,187
Deferred preservation costs (net) .................................... 16,644 14,239
Inventories .......................................................... 5,688 3,385
Prepaid expenses and other assets .................................... 2,321 1,945
Deferred income taxes ................................................ 922 1,348
--------- ---------
Total current assets ............................................... 70,554 71,702
--------- ---------
Property and equipment (net) .............................................. 21,279 21,460
Goodwill (net) ............................................................ 1,614 1,685
Patents (net) ............................................................. 2,344 2,216
Other (net) ............................................................... 1,490 1,327
Deferred income taxes ..................................................... 582 --
--------- ---------
TOTAL ASSETS ......................................................... $ 97,863 $ 98,390
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................................... $ 1,313 $ 1,655
Accrued expenses ..................................................... 2,827 2,968
Accrued procurement fees ............................................. 2,474 1,806
Accrued compensation ................................................. 1,272 1,185
Current maturities of capital lease obligations ...................... 196 224
Current maturities of long-term debt ................................. 287 516
Deferred income ...................................................... 1,042 1,038
--------- ---------
Total current liabilities .......................................... 9,411 9,392
--------- ---------
Deferred income, less current portion ..................................... 591 1,525
Deferred income taxes ..................................................... --- 410
Capital lease obligations, less current maturities ........................ 1,575 1,714
Convertible debenture ..................................................... 4,393 4,393
Other long-term debt ...................................................... 250 535
--------- ---------
Total liabilities .................................................... 16,220 17,969
--------- ---------
Shareholders' equity:
Preferred stock ...................................................... --- ---
Common stock (issued 13,361 shares in 1999 and 1998) ................. 134 134
Additional paid-in capital ........................................... 64,347 64,347
Retained earnings .................................................... 23,934 19,113
Unrealized gain (loss) on marketable securities ...................... (397) 139
Less: Treasury stock (1,106 shares in 1999 and
845 shares in 1998) ................................................ (6,375) (3,312)
--------- ---------
Total shareholders' equity ...................................... 81,643 80,421
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .............................................. $ 97,863 $ 98,390
========= =========
</TABLE>
See accompanying notes to summary consolidated financial statements
2
<PAGE>
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Net cash flows (used in) provided by operating activities:
Net income ............................................................... $ 4,821 $ 5,074
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income recognized ............................................. (930) ---
Gain on sale of marketable equity securities ........................... (116) ---
Depreciation and amortization .......................................... 2,311 1,807
Provision for doubtful accounts ........................................ 72 77
Deferred income taxes .................................................. (290) (875)
Changes in operating assets and liabilities:
Receivables ......................................................... (2,830) (1,434)
Deferred preservation costs and inventories ......................... (4,708) (3,700)
Prepaid expenses and other assets ................................... (376) (1,303)
Accounts payable and accrued expenses ............................... 272 1,186
--------- ---------
Net cash flows (used in) provided by operating activities .............. (1,774) 832
--------- ---------
Net cash flows (used in) provided by investing activities:
Capital expenditures ..................................................... (1,912) (2,689)
Other assets ............................................................. (438) (511)
Net proceeds from sale of IFM product lines .............................. --- 15,000
Purchases of marketable securities ....................................... (4,722) ---
Sales of marketable securities ........................................... 5,123 ---
--------- ---------
Net cash flows (used in) provided by investing activities ............... (1,949) 11,800
--------- ---------
Net cash flows (used in) provided by financing activities:
Principal payments of debt ............................................... (514) (13,976)
Proceeds from borrowings on revolving term loan .......................... --- 1,680
Payment of obligations under capital leases .............................. (167) (150)
Purchase of treasury stock ............................................... (3,404) ---
Proceeds from issuance of common stock and
from notes receivable from shareholders .............................. 341 46,097
--------- ---------
Net cash (used in) provided by financing activities ...................... (3,744) 33,651
--------- ---------
(Decrease) increase in cash ................................................... (7,467) 46,283
Cash and cash equivalents, beginning of period ................................ 12,885 111
--------- ---------
Cash and cash equivalents, end of period ...................................... $ 5,418 $ 46,394
========= =========
Supplemental cash flow information Non-cash investing and financing activities:
Establishing capital lease obligations ................................... $ --- $ 2,141
========= =========
Debt conversion into common stock ........................................ $ --- $ 607
========= =========
</TABLE>
See accompanying notes to summary consolidated financial statements.
3
<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, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999. 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, 1998.
NOTE 2 - INVESTMENTS
The Company maintains cash equivalents and investments in several large
well-capitalized financial institutions, and the Company's policy disallows
investment in any securities rated less than "investment-grade" by national
rating services.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Debt securities not
classified as held-to-maturity or trading, and marketable equity securities not
classified as trading, are classified as available-for-sale. Available-for-sale
securities are stated at their fair values, with the unrealized gains and
losses, net of tax, reported in a separate component of shareholders' equity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other than temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income. At
September 30, 1999 all marketable equity securities and debt securities held by
the Company were designated as available-for-sale.
Total gross realized gains on sales of available-for-sale securities were $0 for
the three months ended September 30, 1999 and 1998, respectively. Total gross
realized gains on sales of available-for-sale securities were $116,000 and $0
for the nine months ended September 30, 1999 and 1998, respectively. As of
September 30, 1999 differences between cost and market of $601,000 (less
deferred taxes of $204,000) are included as a separate component of
shareholders' equity.
At September 30, 1999 and December 31, 1998, approximately $3.4 million and
$25.7 million, respectively, of debt securities with original maturities of 90
days or less at their acquisition dates were included in cash and cash
equivalents. At September 30, 1999 and December 31, 1998 approximately $2
million and $0, respectively, of investments matured between 90 days and 1 year
and approximately $15 million and $5.1 million of investments matured between
one and five years, respectively. The market values of these securities
approximate cost.
4
<PAGE>
NOTE 3 - INVENTORIES
Inventories are comprised of the following:
(Unaudited)
September 30, December 31,
1999 1998
-----------------------------------
Raw materials $ 1,768,000 $ 1,296,000
Work-in-process 902,000 1,037,000
Finished goods 3,018,000 1,052,000
-----------------------------------
$ 5,688,000 $ 3,385,000
===================================
NOTE 4 - 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,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings
per share - net income ................................ $ 1,714 ,000 $ 1,902,000 $ 4,821,000 $ 5,074,000
============ =========== =========== ===========
Denominator for basic earnings per share -
weighted-average basis ................................ 12,274,000 12,808,000 12,372,000 11,754,000
Effect of dilutive stock options ........................... 211,000 266,000 191,000 304,000
------------ ----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares ...................... 12,485,000 13,074,000 12,563,000 12,058,000
============ =========== =========== ===========
Earnings per share:
Basic ................................................. $ .14 $ .15 $ .39 $ .43
============ =========== =========== ===========
Diluted ............................................... $ .14 $ .15 $ .38 $ .42
============ =========== =========== ===========
</TABLE>
NOTE 5 - COMPREHENSIVE INCOME
During the nine months ended September 30, 1999 and 1998, net comprehensive
income was less than net income by approximately $536,000 and $0, respectively,
due to unrealized losses on marketable equity securities.
5
<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 3% to $16.3 million for the three
months ended September 30, 1999 from $15.8 million for the same period in 1998.
Preservation and product revenues increased 8% to $49.6 million for the nine
months ended September 30, 1999 from $45.8 million for the same period in 1998.
The increase in revenues was primarily due to the growing acceptance in the
medical community of cryopreserved tissues which has resulted in increased
demand for many of the Company's cryopreservation services, the Company's
ability to procure greater amounts of tissue, price increases for certain
preservation services during third quarter of 1998, revenues attributable to the
Company's introduction of BioGlue surgical adhesive in international markets in
April of 1998 with respect to the nine months ended September 30, 1999 and an
increase in the demand for BioGlue with respect to the three months ended
September 30, 1999, and revenues attributable to the Company's introduction of
osteoarticular grafts in January of 1999. These increases in revenues also have
been offset by certain decreases as discussed below.
Revenues from human heart valve and conduit cryopreservation services decreased
7% to $7.8 million for the three months ended September 30, 1999 from $8.4
million for the three months ended September 30, 1998, representing 47% and 53%,
respectively, of total revenues during such periods. Revenues from human heart
valve and conduit cryopreservation services decreased 6% to $22.5 million for
the nine months ended September 30, 1999 from $23.8 million for the nine months
ended September 30, 1998, representing 45% and 52%, respectively, of total
revenues during such periods. This decrease in revenues resulted from an 11% and
an 8% decrease in the number of heart allograft shipments for the three months
and nine months ended September 30, 1999, respectively. The decrease in the
number of heart allograft shipments primarily resulted from fewer pulmonary
heart valve allografts being shipped due to a decrease in the number of Ross
procedures being performed. The Company has attempted to promote the positive
clinical results of the Ross procedure by hosting science forums around the
country with its cardiovascular surgeon customers. While the response from the
surgeons has been positive we are currently unable to predict the trend in
pulmonary heart valve shipments.
Revenues from human vascular tissue cryopreservation services increased 34% to
$4.6 million for the three months ended September 30, 1999 from $3.4 million for
the three months ended September 30, 1998, representing 28% and 21%,
respectively, of total revenues during such periods. Revenues from human
vascular tissue cryopreservation services increased 33% to $14.0 million for the
nine months ended September 30, 1999 from $10.5 million for the nine months
ended September 30, 1998, representing 28% and 23%, respectively, of total
revenues during such periods. This increase in revenues was primarily due to a
32% and a 25% increase in the number of vascular allograft shipments for the
three months and nine months ended September 30, 1999, respectively, due to an
increased demand and the Company's ability to procure greater amounts of tissue.
The increase in revenues was also due to the Company's focus on procuring and
distributing long segment veins, which have a higher per unit revenue than the
short segment veins.
Revenues from human connective tissue cryopreservation services increased 61% to
$3.0 million for the three months ended September 30, 1999 from $1.8 million for
the three months ended September 30, 1998, representing 18% and 12%,
respectively, of total revenues during such periods. Revenues from human
connective tissue cryopreservation services increased 41% to $7.9 million for
the nine months ended September 30, 1999 from $5.6 million for the nine months
ended September 30, 1998, representing 16% and 12%, respectively, of total
revenues during such periods. This increase in revenues was primarily due to a
43% and a 27% increase in the number of allograft shipments for the three months
and nine months ended September 30, 1999, respectively, due to increased demand,
the Company's ability to procure greater amounts of tissue and the introduction
of osteoarticular grafts in January of 1999. Additional revenue increases have
resulted from a greater proportion of the 1999 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 during the third quarter of 1998.
Revenues from Ideas for Medicine, Inc ("IFM") decreased 85% to $231,000 for the
three months ended September 30, 1999 from $1.5 million for the three months
ended September 30, 1998, representing 1% and 10%, respectively, of total
revenues during such periods. Revenues from IFM decreased 27% to $3.4 million
6
<PAGE>
for the nine months ended September 30, 1999 from $4.7 million for the nine
months ended September 30, 1998, representing 7% and 10%, respectively, of total
revenues during such periods. The decrease in the revenues for the three months
and nine months ended September 30, 1999 is due to Horizon Medical Products,
Inc.'s ("HMP") failure to meet the minimum purchase requirements set forth in
the Manufacturing Agreement discussed below.
The IFM product line was sold on September 30, 1998 to HMP. In October 1998 IFM
began an OEM manufacturing agreement with HMP which provides for the manufacture
by IFM of specified minimum dollar amounts of IFM products to be purchased
exclusively by HMP over each of the four years following the sale.
On June 22, 1999 IFM notified HMP that it was in default of certain provisions
of the Manufacturing Agreement (the "Agreement"). Specifically, HMP is in
violation of the payment provisions contained within the Agreement, which calls
for inventory purchases to be paid for within 45 days of delivery. Additionally,
HMP is in violation due to nonpayment of interest related to such past due
accounts receivable. The total of accounts receivable due from HMP at September
30, 1999 was approximately $1.9 million.
After notification of the default, HMP indicated to the Company that it would
not be able to meet and has not met the minimum purchase requirements outlined
in the Agreement. However, IFM has continued to manufacture product.
Accordingly, finished goods inventory has increased by approximately $1.3
million since June 30, 1999 to $2.5 million. The Company expects to realize its
investment in the inventory as a part of current negotiations between the
Company and HMP to either revise the Agreement or reach some other mutually
agreeable solution to the default; however, there can be no guarantee that this
will be the case. Any potential resolution may adversely affect the Company's
operating results. Such adverse effects could include lower revenues and the
incurrence of related expenses.
Revenues from bioprosthetic cardiovascular devices decreased 8% to $224,000 for
the three months ended September 30, 1999 from $243,000 for the three months
ended September 30, 1998, representing 1% and 2%, respectively, of total
revenues during each such periods. Revenues from bioprosthetic cardiovascular
devices increased 14% to $753,000 for the nine months ended September 30, 1999
from $660,000 for the nine months ended September 30, 1998, representing 1% of
total revenues during such periods. This decrease in revenues for the three
months ended September 30, 1999 was primarily due to a 16% decrease in the
number of bioprosthetic cardiovascular device shipments due to the timing of
orders received by distributors offset by price increases in November 1998. The
increase in the revenues for the nine months ended September 30, 1999 was
primarily due to price increases in November of 1998.
Revenues from BioGlue(R) surgical adhesive increased 21% to $445,000 for the
three months ended September 30, 1999 from $367,000 for the three months ended
September 30, 1999, representing 3% and 2%, respectively, of total revenues
during such periods. Revenues from BioGlue surgical adhesive increased 91% to
$1.1million for the nine months ended September 30, 1999 from $582,000 for the
nine months ended September 30, 1999, representing 2% and 1%, respectively, of
total revenues during such periods. The increase in revenues is due to increased
product awareness since the introduction of BioGlue in April of 1998, increased
surgeon training and the receipt of CE approval for pulmonary indications in
Europe in March 1999.
Grant revenues increased to $255,000 for the three months ended September 30,
1999 from $168,000 for the three months ended September 30, 1998. Grant revenues
increased to $648,000 for the nine months ended September 30, 1999 from $305,000
for the nine months ended September 30, 1998. This increase in grant revenues is
primarily attributable to the SynerGraft(R) research and development programs.
Other income decreased to $28,000 for the three months ended September 30, 1999
from $200,000 for the three months ended September 30, 1998. Other income
decreased to $32,000 for the nine months ended September 30, 1998 from $970,000
for the nine months ended September 30, 1998. Other income in 1998 related
primarily to proceeds from the sale of the Company's port product line.
Cost of cryopreservation services and products aggregated $6.9 million for the
three months ended September 30, 1999, compared to $6.3 million for the
corresponding period in 1998, representing 43% and 40%, respectively, of total
cryopreservation and product revenues in each period. Cost of cryopreservation
services and products aggregated $22.5 million for the nine months ended
September 30, 1999, compared to $18.1 million, respectively, for the nine months
ended September 30, 1998, representing 45% and 39% of total cryopreservation and
product revenues, respectively. Cost of cryopreservation services and products
increased 25% for the nine months ended September 30, 1999 compared to the nine
months ended September 30, 1998. The increase in 1999 of the cost of
cryopreservation services and products as a percentage of revenues results from
a lesser portion of 1999 revenues being derived from human heart valve and
conduit cryopreservation services which carry a significantly higher gross
7
<PAGE>
margins than other cryopreservation services, and from the switch in October of
1998 to OEM manufacturing of single-use medical devices, which generates lower
gross margins than cryopreservation services and lower gross margins than the
IFM products generated prior to the sale of the IFM product line.
General, administrative and marketing expenses decreased 2% to $6.2 million for
the three months ended September 30, 1999, compared to $6.3 million for the
corresponding period in 1998, representing 38% and 40%, respectively, of total
cryopreservation and product revenues in each period. General, administrative
and marketing expenses increased 1% to $18.3 million for the nine months ended
September 30, 1999, compared to $18.1 million for the corresponding period in
1998, representing 37% and 39%, respectively, of total cryopreservation and
product revenues in each period. The increase in expenditures for the first nine
months of 1999 resulted from expenses incurred to support the increase in
revenues, partially offset by increased absorption of overhead expenses
associated with increased production of new products. The decrease in
expenditures for the three months ended September 30, 1999 resulted from
increased absorption of overhead expenses associated with increased production
of new products.
Research and development expenses were $1.2 million for the three months ended
September 30, 1999, and 1998, representing 7% of total cryopreservation and
product revenues for such periods. Research and development expenses decreased
9% to $3.1 million for the nine months ended September 30, 1999, compared to
$3.4 million for the corresponding period in 1998, representing 6% and 7%,
respectively, of total cryopreservation and product revenues for each period.
The decrease in expenses was primarily due to the delayed start date of certain
outside consulting projects until the third quarter of 1999. Research and
development spending relates principally to the Company's focus on its
bioadhesives and SynerGraft technologies.
Net interest income was $269,000 for the three months ended September 30, 1999
compared to net interest income of $373,000 for the corresponding period in
1998. Net interest income was $853,000 for the nine months ended September 30,
1999 compared to net interest income of $264,000 for the corresponding period in
1998. This increase in interest income for the nine months ended September 30,
1999 was due to the receipt of interest income on the invested proceeds from the
follow-on equity offering (the "Offering") completed in April 1998 and reduction
of interest expense from the repayment of certain indebtedness with the proceeds
from the Offering, as well as the conversion of a portion of a convertible
debenture into common stock of the Company.
The decline in the effective income tax rate to 33% from 34% for the three
months ended September 30, 1999 and 1998, respectively, and to 33% from 35% for
the nine months ended September 30, 1999 and 1998, respectively, is due to lower
effective state tax rates.
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 BioGlue surgical adhesive does not appear to
experience this seasonal trend. As an OEM manufacturer of single-use medical
devices, the sale of those products is currently dictated by a manufacturing
agreement which is not affected by a seasonal trend.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, net working capital was $61.1 million, compared to $62.3
million at December 31, 1998, 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 used in operating activities was $1.8 million for the nine months ended
September 30, 1999, as compared to net cash provided by operating activities of
$832,000 for the nine months ended September 30, 1998. This decrease in cash
primarily resulted from: 1) an increase in the accounts receivables due to
increased revenues, 2) an increase in the accounts receivable due from HMP, 3)
an increase in deferred preservation costs due to an increase in revenues, 4) an
8
<PAGE>
increase in inventories due to continued manufacturing of IFM products following
HMP's default under its manufacturing agreement, and 5) an increase in the
amount of accounts payable liquidated in the first quarter of 1999 due to the
expansion of the BioGlue manufacturing laboratory at corporate headquarters,
partially offset by a decrease in prepaids and other assets.
Net cash used in investing activities was $2.0 million for the nine months ended
September 30, 1999, as compared to net cash provided by investing activities of
$11.8 million for the nine months ended September 30, 1998. This decrease in
cash was primarily attributable to the absence of proceeds from the sale of a
product line during the third quarter of 1999 as compared to the third quarter
of 1998, during which the IFM product line was sold, partially offset by a
decrease in capital expenditures and net sales of marketable equity securities
during the nine months ended September 30, 1999.
Net cash used in financing activities was $3.7 million for the nine months ended
September 30, 1999, as compared to cash provided by financing activities of
$33.7 million for the nine months ended September 30, 1998. This decrease in
cash was primarily attributable to a follow-on equity offering in March of 1998
that generated proceeds of $45.4 million, partially offset by the repayment of
borrowings on the Company's bank loans, and accrued interest thereon, totaling
$13.3 million. Additional decreases resulted from the repurchase of treasury
stock during the nine months ended September 30, 1999.
Management is currently seeking to complete a potential private placement of
equity or equity-oriented securities to form a subsidiary company for the
commercial development of its serine proteinase light activation (FibRx(R))
technologies. This strategy, if successful, will allow an affiliated entity to
fund the FibRx technology and should expedite the commercial development of its
blood clot dissolving and surgical sealant product applications without
additional R&D expenditures by the Company (other than through the affiliated
company). This strategy, if successful, will favorably impact the Company's
liquidity going forward.
The Company anticipates that current cash and marketable securities 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 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 verified the readiness of its
significant suppliers through the distribution of a questionnaire which was 90%
returned by the suppliers by January 1, 1999 indicating compliance or that
compliance would be achieved by June 30, 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 1998. 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 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 Company believes it is year 2000 compliant. However, as of
June 30, 1999 the Company completed its contingency plan which provides for
manual paper record keeping based on standard operating procedures currently
documented. The Company anticipates its current personnel will be sufficient to
9
<PAGE>
accomplish the task manually although additional time and effort will be
required. As a part of other emergency procedures, the Company maintains limited
power generation and other emergency backup facilities. Although the Company is
uncertain what the costs associated with a disruption in its business activities
would be or the related impact on operations, liquidity and financial condition,
the Company does not expect the impact to be material.
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.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q for the quarter ended September 30, 1999 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) the adequacy of the Company's
financing arrangements over the next twelve months, (4) the outcome of the
ongoing discussions with HMP and, (5) governmental or third-party reimbursement
policies. See the "Business-Risk Factors" section of the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 for a more detailed discussion
of 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 of $3.7
million and short-term investments of $17.0 million in municipal obligations as
of September 30, 1999 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.
10
<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.
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.
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.)
4.1 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1 (No. 33-56388).)
4.2 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
27* Financial Data Schedule: Quarter Ended September 30, 1998
- --------------
* Filed herewith.
(b) Reports on Form 8-K.
None.
11
<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)
October 25, 1999 /s/ EDWIN B. CORDELL, JR..
- ------------------ ----------------------------------
DATE EDWIN B. CORDELL, JR.
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
12
RESTATED ARTICLES OF
INCORPORATION OF
CRYOLIFE, INC.
WITH AMENDMENTS
The undersigned officers of CryoLife, Inc., hereby file with the
Secretary of State of the State of Florida these Restated Articles of
Incorporation with Amendments for the purpose of consolidating the amendments
that have been made in the Articles of Incorporation.
1. The name of the corporation is CryoLife, Inc.
2. Restated Articles of Incorporation: The Board of Directors adopted
the Restated Articles of Incorporation on June 18, 1992, following the
Shareholder's Meeting of that date. The text of the Restated Articles of
Incorporation are as follows:
ARTICLE I
NAME
The name of this corporation shall be CryoLife, Inc.
ARTICLE II
EXISTENCE OF CORPORATION
This corporation shall have perpetual existence.
ARTICLE III
PURPOSES
The corporation may engage in the transaction of any or all lawful
business for which corporations may be incorporated under the laws of the State
of Florida.
ARTICLE IV
GENERAL POWERS
The corporation shall have power:
(a) To purchase, take, receive, lease, or otherwise acquire, own, hold, improve,
use, or otherwise deal in and with real or personal property or any interest
therein, wherever situated.
(b) To sell, convey, mortgage, pledge, create a security interest in, lease,
exchange, transfer, and otherwise dispose of all or part of its property and
assets.
(c) To lend money to, and use its credit to assist its officers and employees in
accordance with Section 607.141, Florida Statutes (1976).
(d) To purchase, take, receive, subscribe for, or otherwise acquire, own, hold,
vote, use, employ, sell, mortgage, lend, pledge, or otherwise dispose of, and
otherwise use and deal in and with, shares or other interests in, or obligations
of, other domestic or foreign corporations, associations, partnerships, or
individuals, or direct or indirect obligations of the United States or of any
other government, state, territory, governmental district, or municipality or of
any instrumentality thereof.
(e) To make contracts and guarantees and incur liabilities, borrow money at such
rates of interest as the corporation may determine, issue its notes, bonds, and
other obligations, and secure any of its obligations by mortgage or pledge of
all or any of its property, franchise, and income.
(f) To lend money for its corporate purposes, invest and reinvest its funds, and
<PAGE>
take and hold real and personal property as security for the payment of funds so
loaned or invested.
(g) To conduct its business, carry on its operations, and have offices and
exercise the powers granted by the State of Florida, within or without the
state.
(h) To elect or appoint officers and agents of the corporation and define their
duties and fix their compensation.
(i) To make and alter by-laws, not inconsistent with the laws of the State of
Florida, for the administration and regulation of the affairs of the
corporation.
(j) To make donations for the public welfare or for charitable, scientific or
educational purposes.
(k) To transact any lawful business which the board of directors shall find will
be in aid of governmental policy.
(l) To pay pensions and establish pension plans, profit sharing plans, stock
bonus plans, stock option plans, and other incentive plans for any or all of its
directors, officers, and employees and for any or all of the directors,
officers, and employees of its subsidiaries.
(m) To be a promoter, incorporator, partner, member, associate, or manager of
any corporation, partnership, joint venture, trust, or other enterprise.
(n) To have and exercise all powers necessary or convenient to effect its
purposes.
ARTICLE V
CAPITAL STOCK
(a)(1) The number of shares of capital stock authorized to be issued by
this corporation shall be Twenty Million (20,000,000) shares of common stock,
each with a par value of One Cent ($.01) and Five Million (5,000,000) shares of
preferred stock, each with a par value of One Cent ($.01). The shares of
preferred stock may be divided into and issued in series.
(a)(2) Pursuant to Section 607.047 of the Florida Statutes, the Board
of Directors is expressly authorized and empowered to divide any or all of the
shares of preferred stock into series and, within the limitations set forth in
Section 607.047 of the Florida Statutes, to fix and determine the relative
rights and preferences of the shares of any series so established. The Board of
Directors is expressly authorized to designate each series of preferred stock so
as to distinguish the shares thereof from the shares of all other series and
classes.
(a)(3) Each share of issued and outstanding common stock shall entitle
the holder thereof to one (1) vote on each matter with respect to which
shareholders have the right to vote, to fully participate in all shareholder
meetings, and to share ratably in the net assets of the corporation upon
liquidation and/or dissolution. Each share of issued and outstanding preferred
stock shall have one (1) vote on each matter with respect to which common
shareholders have the right to vote and shall be entitled to fully participate
in all shareholder meetings unless the Board of Directors determines that such
preferred stock or any series thereof shall not have voting rights. Each share
of issued and outstanding preferred stock shall have such rights to share in the
net assets of the corporation upon liquidation and/or dissolution as are
determined and fixed by the Board of Directors pursuant to Florida Statutes
Section 607.047. All or any part of said capital stock may be paid for in cash,
in property or in labor or services at a fair valuation to be fixed by the Board
of Directors at a meeting called for such purposes. All stock when issued shall
be paid for and shall be nonassessable.
(b) In the election of directors of this corporation, there shall be no
cumulative voting of the stock entitled to vote at such election.
ARTICLE VI
REGISTERED OFFICE AND REGISTERED AGENT
The street address of the corporation's registered office is 600 North
Florida Avenue, Suite 1625, Tampa, Florida 33602, and the name of the
corporation's registered agent at such address is Ronald D. McCall. The
Corporation may change its registered office or its registered agent or both by
filing with the Department of State of the State of Florida, a statement
2
<PAGE>
complying with Section 607.037 of the Florida Statutes.
ARTICLE VII
INITIAL BOARD OF DIREECTORS
The number of Directors constituting the initial Board of Directors
shall be one, and the name and address of the person who is to serve as a member
thereof is as follows:
STEVEN G. ANDERSON
100 Madison Street
Tampa, Florida 33602
ARTICLE VIII
INCORPORATOR
The name and street address of the incorporator of this corporation is
as follows:
STEVEN G. ANDERSON
100 Madison Street
Tampa, Florida 33602
ARTICLE IX
AMENDMENT OF ARTICLES OF INCORPORATION
The corporation reserves the right to amend, alter, change or repeal
any provisions contained in these Articles of Incorporation in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are subject to this reservation.
ARTICLE X
INDEMNIFICATION
If in the judgment of the majority of the entire Board of
Directors (excluding from such majority and director under consideration for
indemnification), the criteria set forth in ss. 607.014(1) or (2), Florida
Statutes, have been met, then the corporation shall indemnify any officer or
director, or former officer or director, his personal representatives, devisees
or heirs, in the manner and to the extent contemplated by the said ss. 607.014.
ARTICLE XI
SHAREHOLDERS PROHIBITED FRON TAKING
ACTION WITHOUT A MEETING
The shareholders may not take action by written consent. Any and all
action by a shareholder is required to be taken at the annual shareholders
meeting or at a special shareholders meeting. This provision applies to common
stock and all classes of preferred stock.
ARTICLE XII
SPECIAL MEETINGS OF SHAREHOLDERS
Special meetings of the shareholders for any purpose may be called at
the request in writing of shareholders owning not less than 50% of all votes
entitled to be cast on any issue proposed to be considered at the proposed
meeting by delivering one or more written demands for the meeting which are
signed, dated and delivered to the Secretary of the Company and describing the
purposes for which the meeting is to be held.
3. It is hereby certified by the undersigned that the Restatement
contains only amendments adopted by the Board of Directors that did not require
shareholder's approval.
IN WITNESS WHEREOF, the foregoing Restated Articles of Incorporation
with Amendments are executed by the President, STEVEN G. ANDERSON and attested
by RONALD D. McCALL, as Secretary of CRYOLIFE, INC. this 13th day of August,
1992.
3
<PAGE>
WITNESSES:
/s/Suzanne K. Gabbert /s/Steven G. Anderson
- --------------------------------- ------------------------------------
SUZANNE K. GABBERT STEVEN G. ANDERSON
President and CEO CryoLife,
Inc.
/s/Joyce A. Clarke /s/ Ronald D. McCall
- --------------------------------- ------------------------------------
JOYCE A. CLARKE RONALD D. McCALL
Secretary, CryoLife, Inc.
4
<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, 1999 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,418,000
<SECURITIES> 25,616,000
<RECEIVABLES> 12,761,000
<ALLOWANCES> 113,000
<INVENTORY> 5,688,000
<CURRENT-ASSETS> 70,554,000
<PP&E> 33,588,000
<DEPRECIATION> 12,309,000
<TOTAL-ASSETS> 97,863,000
<CURRENT-LIABILITIES> 9,411,000
<BONDS> 6,701,000
0
0
<COMMON> 134,000
<OTHER-SE> 81,509,000
<TOTAL-LIABILITY-AND-EQUITY> 97,863,000
<SALES> 5,290,000
<TOTAL-REVENUES> 50,249,000
<CGS> 4,785,000
<TOTAL-COSTS> 22,541,000
<OTHER-EXPENSES> 20,511,000
<LOSS-PROVISION> 72,000
<INTEREST-EXPENSE> 300,000
<INCOME-PRETAX> 7,197,000
<INCOME-TAX> 2,376,000
<INCOME-CONTINUING> 4,821,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,821,000
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.38
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