864307v1
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 June 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
July 19, 1999 was 12,276,144.
Part I - FINANCIAL INFORMATION
Item 1. Financial statements
CRYOLIFE, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------------------------- ----------------------------
(Unaudited) (Unaudited)
Revenues:
Preservation services and products $ 17,268 $ 15,477 $ 33,327 $ 29,978
Research grants and licenses 127 77 393 137
--------------------------- ---------------------------
17,395 15,554 33,720 30,115
Costs and expenses:
Preservation services and products 8,235 6,345 15,611 11,826
General, administrative and marketing 5,937 5,841 12,102 11,707
Research and development 883 1,256 1,957 2,267
Interest expense 89 118 208 509
Interest income (367) (399) (792) (399)
Other income, net 40 (708) (4) (772)
---------------------------- ----------------------------
14,817 12,453 29,082 25,138
--------------------------- ---------------------------
Income before income taxes 2,578 3,101 4,638 4,977
Income tax expense 851 1,053 1,531 1,757
--------------------------- ---------------------------
Net income $ 1,727 $ 2,048 $ 3,107 $ 3,220
=========================== ===========================
Earnings per share:
Basic $ 0.14 $ 0.16 $ 0.25 $ 0.29
=========================== ===========================
Diluted $ 0.14 $ 0.16 $ 0.25 $ 0.28
=========================== ===========================
Weighted average shares outstanding:
Basic 12,344 12,709 12,422 11,219
=========================== ===========================
Diluted 12,527 13,033 12,606 11,577
=========================== ===========================
See accompanying notes to summary consolidated financial statements.
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1999 1998
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,141 $ 12,885
Marketable securities, at market 26,224 26,713
Receivables (net) 15,420 11,187
Deferred preservation costs (net) 15,053 14,239
Inventories 4,388 3,385
Prepaid expenses 2,577 1,945
Deferred income taxes 1,522 1,348
---------------------------------
Total current assets 70,325 71,702
---------------------------------
Property and equipment (net) 21,704 21,460
Goodwill (net) 1,637 1,685
Patents (net) 2,340 2,216
Other (net) 1,487 1,327
---------------------------------
TOTAL ASSETS $ 97,493 $ 98,390
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Accounts payable $ 930 $ 1,655
Accrued expenses 2,612 2,968
Accrued procurement fees 2,524 1,806
Accrued compensation 1,091 1,185
Current maturities of capital lease obligations 213 224
Current maturities of long-term debt 287 516
Deferred income 1,042 1,038
---------------------------------
Total current liabilities 8,699 9,392
---------------------------------
Deferred income, less current portion 645 1,525
Deferred income taxes 717 410
Capital lease obligations, less current maturities 1,616 1,714
Convertible debenture 4,393 4,393
Other long-term debt 500 535
---------------------------------
Total liabilities 16,570 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 22,219 19,113
Unrealized gain (loss) on marketable securities (189) 139
Less: Treasury stock (1,045 shares in 1999 and
845 shares in 1998) (5,588) (3,312)
---------------------------------
Total shareholders' equity 80,923 80,421
---------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 97,493 $ 98,390
=================================
See accompanying notes to summary consolidated financial statements.
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
June 30,
1999 1998
(Unaudited)
Net cash flows (used in) provided by operating activities:
Net income $ 3,107 $ 3,220
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income recognized (876) ---
Depreciation and amortization 1,482 1,808
Provision for doubtful accounts 48 53
Deferred income taxes 301 57
Changes in operating assets and liabilities:
Receivables (4,281) (608)
Deferred preservation costs and inventories (1,817) (2,754)
Prepaid expenses and other assets (632) (843)
Accounts payable and accrued expenses (454) 113
-----------------------------------
Net cash flows (used in) provided by operating activities (3,122) 1,046
-----------------------------------
Net cash flows used in investing activities:
Capital expenditures (1,592) (2,090)
Other assets (371) (724)
Purchases of marketable securities (11,582) ---
Sales of marketable securities 12,071 ---
Gross unrealized gain on marketable equity securities (496) ---
-----------------------------------
Net cash flows used in investing activities (1,970) (2,814)
-----------------------------------
Net cash flows (used in) provided by financing activities:
Principal payments of debt (264) (13,732)
Proceeds from borrowings on revolving term loan --- 1,680
Payment of obligations under capital leases (109) (97)
Purchase of treasury stock (2,508) ---
Proceeds from issuance of common stock and
from notes receivable from shareholders 229 45,912
-----------------------------------
Net cash (used in) provided by financing activities (2,652) 33,763
-----------------------------------
(Decrease) Increase in cash (7,744) 31,995
Cash and cash equivalents, beginning of period 12,885 111
-----------------------------------
Cash and cash equivalents, end of period $ 5,141 $ 32,106
===================================
Supplemental cash flow information
Non-cash investing and financing activities:
Establishing capital lease obligations $ --- $ 2,141
===================================
Debt conversion into common stock $ --- $ 607
===================================
See accompanying notes to summary consolidated financial statements.
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 fair
presentation have been included. Operating results for the three and six months
ended June 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 footnotes thereto included in the
Company's 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
June 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
$39,000 and $0 for the three months ended June 30, 1999 and 1998, respectively.
Total gross realized gains on sales of available-for-sale securities were
$116,000 and $0 for the six months ended June 30, 1999 and 1998, respectively.
As of June 30, 1999 differences between cost and market of $286,000 (less
deferred taxes of $97,000) are included as a separate component of shareholders'
equity.
At June 30, 1999 and December 31, 1998 approximately $4.1 million and $8.9
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
June 30, 1999 and December 31, 1998 no investments had a maturity date between
90 days and 1 year and approximately $17.1 million and $16.1 million of
investments matured between one and five years, respectively. The market values
of these securities approximate cost.
NOTE 3 - INVENTORY
Inventories are comprised of the following:
(Unaudited)
June 30, December 31,
1999 1998
-----------------------------------
Raw materials $ 1,739,000 $ 1,296,000
Work-in-process 978,000 1,037,000
Finished goods 1,671,000 1,052,000
-----------------------------------
$ 4,388,000 $ 3,385,000
===================================
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
------------------------ ------------------------
Numerator for basic and diluted earnings
per share - net income $ 1,727,000 $ 2,048,000 $ 3,107,000 $ 3,220,000
======================== ========================
Denominator for basic earnings per share -
weighted-average basis 12,344,000 12,709,000 12,422,000 11,219,000
Effect of dilutive stock options 183,000 324,000 184,000 358,000
------------------------ ------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares 12,527,000 13,033,000 12,606,000 11,577,000
======================== ========================
Earnings per share:
Basic $ .14 $ .16 $ .25 $ .29
======================== ========================
Diluted $ .14 $ .16 $.25 $ .28
======================== ========================
NOTE 5 - COMPREHENSIVE INCOME
During the six months ended June 30, 1999 and 1998, net comprehensive income was
less than net income by approximately $328,000 and $0, respectively, due to
unrealized losses on marketable equity securities.
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 12% to $17.3 million for the three
months ended June 30, 1999 from $15.5 million for the same period in 1998.
Preservation and product revenues increased 11% to $33.3 million for the six
months ended June 30, 1999 from $30.0 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
the Company's cryopreservation services, the Company's ability to procure
greater amounts of tissue, price increases for certain preservation services
during the third quarter of 1998, revenues attributable to the Company's
introduction of BioGlue surgical adhesive in international markets in April 1998
and revenues attributable to the Company's introduction of osteoarticular grafts
in January of 1999.
Revenues from human heart valve and conduit cryopreservation services decreased
1% to $7.8 million for the three months ended June 30, 1999 from $7.9 million
for the three months ended June 30, 1998, representing 45% and 51%,
respectively, of total revenues during such periods. Revenues from human heart
valve and conduit cryopreservation services decreased 5% to $14.6 million for
the six months ended June 30, 1999 from $15.3 million for the six months ended
June 30, 1998, representing 43% and 51%, respectively, of total revenues during
such periods. This decrease in revenues results from a 3% decrease in the number
of heart allograft shipments for the six months ended June 30, 1999. The
decrease in the number of heart allograft shipments primarily results 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 26% to
$4.5 million for the three months ended June 30, 1999 from $3.6 million for the
three months ended June 30, 1998, representing 26% and 23%, respectively, of
total revenues during such periods. Revenues from human vascular tissue
cryopreservation services increased 33% to $9.4 million for the six months ended
June 30, 1999 from $7.1 million for the six months ended June 30, 1998,
representing 28% and 24%, respectively, of total revenues during such periods.
This increase in revenues was primarily due to a 15% and a 22% increase in the
number of vascular allograft shipments for the three months and six months ended
June 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 31% to
$2.5 million for the three months ended June 30, 1999 from $1.9 million for the
three months ended June 30, 1998, representing 15% and 12%, respectively, of
total revenues during such periods. Revenues from human connective tissue
cryopreservation services increased 32% to $4.9 million for the six months ended
June 30, 1999 from $3.7 million for the six months ended June 30, 1998,
representing 15% and 12%, respectively, of total revenues during such periods.
This increase in revenues was primarily due to a 16% and a 19% increase in the
number of allograft shipments for the three months and six months ended June 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 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") were $1.6 million for the three
months ended June 30, 1999 and 1998, representing 9% and 10%, respectively, of
total revenues during such periods. Revenues from Ideas for Medicine, Inc.
("IFM") were $3.2 million for the six months ended June 30, 1999 and 1998,
representing 9% and 11%, respectively, of total revenues during such periods.
The IFM product line was sold on September 30, 1998 to Horizon Medical Products,
Inc ("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 the purchaser of the IFM product
line 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 June 30,
1999 was approximately $2.5 million.
HMP has 60 days from the notification of default to cure. If HMP does not take
corrective action within 60 days, the Company may terminate the Agreement at its
discretion. If the Company terminates the Agreement, HMP would be liable to the
Company for six months of direct and indirect labor associated with the
manufacturing of the IFM product line and manufacturing overhead for the
remainder of the Agreement.
HMP has indicated to the Company that it will not be able to meet the minimum
purchase requirements outlined in the Agreement. The Company and HMP are
currently negotiating to revise the Agreement. Additionally, the Company is
evaluating its alternatives, including reacquiring the IFM product line. If the
Agreement is terminated, the Company may receive lower revenues and incur
related expenses.
Revenues from bioprosthetic cardiovascular devices increased 51% to $330,000 for
the three months ended June 30, 1999 from $218,000 for the three months ended
June 30, 1998, representing 2% and 1%, respectively, of total revenues during
such periods. Revenues from bioprosthetic cardiovascular devices increased 27%
to $529,000 for the six months ended June 30, 1999 from $418,000 for the six
months ended June 30, 1998, representing 2% and 1%, respectively, of total
revenues during such periods. This increase in revenues was primarily due to a
31% and an 9% increase in the number of bioprosthetic cardiovascular device
shipments due to increased demand for the three months and six months ended June
30, 1999, respectively, due to increased manufacturing capacity.
Revenues from BioGlue(R) surgical adhesive increased 90% to $409,000 for the
three months ended June 30, 1999 from $215,000 for the three months ended June
30, 1998, representing 2% and 1%, respectively, of total revenues during such
periods. Revenues from BioGlue surgical adhesive increased 208% to $663,000 for
the six months ended June 30, 1999 from $215,000 for the six months ended June
30, 1998, 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 $127,000 for the three months ended June 30, 1999
from $77,000 for the three months ended June 30, 1998. Grant revenues increased
to $393,000 for the six months ended June 30, 1999 from $137,000 for the six
months ended June 30, 1998. This increase in grant revenues is primarily
attributable to the SynerGraft(R) research and development programs.
Other revenues and expenses decreased to $40,000 expense for the three months
ended June 30, 1999 from $708,000 revenue for the three months ended June 30,
1998. Other revenues decreased to $4,000 for the six months ended June 30, 1999
from $772,000 for the six months ended June 30, 1998. Other revenues in 1998
relate primarily to proceeds from the sale of the Company's port product line.
Cost of cryopreservation services and products aggregated $8.2 million for the
three months ended June 30, 1999, compared to $6.3 million for the corresponding
period in 1998, representing 48% and 41%, respectively, of total
cryopreservation and product revenues in each period. Cost of cryopreservation
services and products aggregated $15.6 million for the six months ended June 30,
1999, compared to $11.8 million, respectively, for the six months ended June 30,
1998, representing 47% and 39% of total cryopreservation and product revenues,
respectively. 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 margin 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 increased 2% to $5.9 million for
the three months ended June 30, 1999, compared to $5.8 million for the
corresponding period in 1998, representing 34% and 38%, respectively, of total
cryopreservation and product revenues in each period. General, administrative
and marketing expenses increased 3% to $12.1 million for the six months ended
June 30, 1999, compared to $11.7 million for the corresponding period in 1998,
representing 36% and 39%, respectively, of total cryopreservation and product
revenues in each period. The increase in expenditures in 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.
Research and development expenses decreased 30% to $883,000 for the three months
ended June 30, 1999, compared to $1.3 million for the corresponding period in
1998, representing 5% and 8%, respectively, of total cryopreservation and
product revenues for each period. Research and development expenses decreased
14% to $2.0 million for the six months ended June 30, 1999, compared to $2.3
million for the corresponding period in 1998, representing 6% and 8%,
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 $278,000 for the three months ended June 30, 1999
compared to net interest income of $281,000 for the corresponding period in
1998. Net interest income was $584,000 for the six months ended June 30, 1999
compared to net interest expense of $110,000 for the corresponding period in
1998. This increase in interest income and decrease in interest expense for the
six months ended June 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 June 30, 1999 and 1998, respectively, and to 33% from 35% for the
six months ended June 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 this demand trend for human heart valve and
conduit cryopreservation services is primarily due to the high number of
surgeries scheduled during the summer months. Management believes the trends
experienced by the Company to date for its human connective tissue for the knee
cryopreservation services indicate this business may also be seasonal because it
is an elective procedure which may be performed less frequently during the
fourth quarter holiday months. However, the demand for the Company's 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
are dictated by a manufacturing agreement which is not affected by a seasonal
trend.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, net working capital was $61.6 million, compared to $62.3
million at December 31, 1998, with a current ratio of 8 to 1 at June 30, 1999.
The Company's primary capital requirements arise out of general working capital
needs, capital expenditures for facilities and equipment and 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 $3.1 million for the six months ended
June 30, 1999, as compared to net cash provided by operating activities of $1.0
million for the six months ended June 30, 1998. This increase primarily resulted
from an increase in the accounts receivables due to increased revenues and the
increase in the accounts receivable due from Horizon Medical Products, Inc.
Additional increases resulted from 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 the
reduction in the increase of deferred preservation costs and inventories between
the first half of 1999 as compared to the first half of 1998.
Net cash used in investing activities was $2.0 million for the six months ended
June 30, 1999, as compared to $2.8 million for the six months ended June 30,
1998. This decrease was primarily attributable to the decrease in the capital
expenditures in the first half on 1999, the decrease in the addition of other
assets during the first quarter of 1999, and the sales of marketable equity
securities during the first half of 1999, partially offset by purchases of
marketable equity securities.
Net cash used in financing activities was $2.6 million for the six months ended
June 30, 1999, as compared to net cash provided by financing activities of $33.8
million for the six months ended June 30, 1998. This decrease 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
first half of 1999.
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 separate 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, should also favorably impact the
Company's liquidity going forward.
The Company anticipates that the remaining net proceeds from the Offering and
cash generated from operations will be sufficient to meet its operating and
development needs for 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 unavailability 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 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. 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 July 31, 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:. With the exception of the clinical tracking database, 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 accomplish the task
manually although additional time and effort will be required. 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. 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 June 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, changes in (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 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 $4.1
million and short-term investments of $17.1 million in municipal obligations as
of June 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.
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.
(a) The Annual Meeting of Shareholders was held on May 27, 1999.
(b) Management's nominees for director were elected at the meeting by
the holders of common stock. The election was uncontested.
The following table shows the results of voting in the election of
Directors:
Shares Voted For Authority Withheld
Steven G. Anderson 11,694,180 78,455
Ronald C. Elkins, M.D. 11,679,812 92,823
Benjamin H. Gray 11,694,180 78,455
Virginia C. Lacy 11,679,812 92,823
Ronald D. McCall, Esq. 11,679,812 92,823
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.
(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 June 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).
27.1 Financial Data Schedule: Quarter Ended June 30, 1999
(b) Current Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K with the Commission
on June 4 with respect to a Change in the Registrant's Certifying
Accountant.
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)
July 20, 1999 /s/ EDWIN B. CORDELL, JR..
- ------------------ ----------------------------------
DATE EDWIN B. CORDELL, JR.
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
5
0000784199
CRYOLIFE, INC.
6-MOS
DEC-31-1999
JUN-30-1999
5,141,000
26,224,000
14,216,000
252,000
4,388,000
70,217,000
33,269,000
11,565,000
97,385,000
8,699,000
7,009,000
0
0
134,000
80,923,000
97,385,000
4,389,000
33,720,000
3,689,000
15,611,000
13,472,000
48,000
208,000
4,637,000
1,531,000
3,106,000
0
0
0
3,106,000
0.25
0.25
