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, 2001
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 14, 2001 was 18,875,051.
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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
-------------------------- --------------------------
(Unaudited) (Unaudited)
Revenues:
Preservation services and products $ 22,337 $ 19,429 $ 65,098 $ 58,215
Research grants and licenses 230 95 598 386
-------------------------- --------------------------
22,567 19,524 65,696 58,601
Costs and expenses:
Cost of preservation services and products 9,384 8,288 27,609 25,751
General, administrative and marketing 8,290 7,000 24,569 21,499
Research and development 1,232 1,211 3,604 3,705
Interest expense 37 75 53 236
Interest income (449) (526) (1,587) (1,313)
Other expense (income), net 114 33 109 (73)
-------------------------- ---------------------------
18,608 16,081 54,357 49,805
-------------------------- --------------------------
Income before income taxes 3,959 3,443 11,339 8,796
Income tax expense 1,267 1,135 3,629 2,906
-------------------------- --------------------------
Net income $ 2,692 $ 2,308 $ 7,710 $ 5,890
========================== ==========================
Earnings per share:
Basic $ 0.14 $ 0.12 $ 0.41 $ 0.32
========================== ==========================
Diluted $ 0.14 $ 0.12 $ 0.39 $ 0.31
========================== ==========================
Weighted average shares outstanding:
Basic 18,832 18,606 18,785 18,492
========================== ==========================
Diluted 19,771 19,253 19,635 19,031
========================== ==========================
See accompanying notes to summary consolidated financial statements.
2
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
2001 2000
-----------------------------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 10,971 $ 17,480
Marketable securities, at market 25,422 21,234
Receivables, net 15,585 12,739
Note receivable, net 529 1,833
Deferred preservation costs, net 22,516 20,311
Inventories 5,535 3,994
Prepaid expenses and other assets 1,693 893
Deferred income taxes 597 674
-----------------------------------
Total current assets 82,848 79,158
-----------------------------------
Property and equipment, net 32,769 25,579
Goodwill, net 1,423 1,495
Patents, net 2,737 2,540
Other, net 2,635 2,423
Note receivable, net 101 643
Deferred income taxes 65 171
-----------------------------------
TOTAL ASSETS $ 122,578 $ 112,009
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,006 $ 2,914
Accrued expenses 1,255 767
Accrued procurement fees 5,363 3,537
Accrued compensation 2,209 2,097
Current maturities of capital lease obligations 184 173
Current maturities of long-term debt 1,600 934
Convertible debenture 4,393 ---
-----------------------------------
Total current liabilities 16,010 10,422
-----------------------------------
Capital lease obligations, less current maturities 1,222 1,361
Bank loans 6,000 6,151
Convertible debenture --- 4,393
Other long-term liabilities 780 287
-----------------------------------
Total liabilities 24,012 22,614
-----------------------------------
Shareholders' equity:
Preferred stock --- ---
Common stock (issued 20,172 shares in 2001 and
20,077 shares in 2000) 202 201
Additional paid-in capital 66,341 64,936
Retained earnings 39,091 31,381
Deferred compensation (36) (45)
Accumulated other comprehensive income (981) (1,088)
Less: Treasury stock at cost (1,307 shares in 2001 and
1,356 shares in 2000) (6,051) (5,990)
-----------------------------------
Total shareholders' equity 98,566 89,395
-----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 122,578 $ 112,009
===================================
See accompanying notes to summary consolidated financial statements.
3
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
-----------------------------------
2001 2000
-----------------------------------
(Unaudited)
Net cash from operating activities:
Net income $ 7,710 $ 5,890
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,294 2,467
Provision for doubtful accounts 72 72
Deferred income taxes 155 491
Tax effect of nonqualified option exercises 179 ---
Changes in operating assets and liabilities:
Receivables (2,821) (240)
Income Taxes (97) ---
Deferred preservation costs and inventories (3,746) (3,230)
Prepaid expenses and other assets (800) (236)
Accounts payable and accrued expenses 671 3,331
-----------------------------------
Net cash flows provided by operating activities 4,617 8,545
-----------------------------------
Net cash flows from investing activities:
Capital expenditures (9,856) (6,730)
Other assets (956) (142)
Purchases of marketable securities (20,254) (1,326)
Sales and maturities of marketable securities 16,489 2,059
Proceeds from note receivable 1,846 ---
-----------------------------------
Net cash flows used in investing activities (12,731) (6,139)
-----------------------------------
Net cash flows from financing activities:
Principal payments of debt (650) ---
Proceeds from borrowings on bank line of credit 1,165 4,223
Payment of obligations under capital leases (128) (139)
Purchase of treasury stock --- (612)
Proceeds from exercise of stock options and
issuance of common stock 1,166 1,501
-----------------------------------
Net cash provided by financing activities 1,553 4,973
-----------------------------------
(Decrease) Increase in cash (6,561) 7,379
Effect of exchange rate changes on cash 52 (18)
Cash and cash equivalents, beginning of period 17,480 6,128
-----------------------------------
Cash and cash equivalents, end of period $ 10,971 $ 13,489
===================================
See accompanying notes to summary consolidated financial statements.
4
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) accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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. Certain prior
year balances have been reclassified to conform to the 2001 presentation.
Operating results for the three and nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the consolidated financial
statements and notes thereto included in the CryoLife, Inc. ("CryoLife" or the
"Company") Form 10-K for the year ended December 31, 2000.
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, 2001 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 zero
for the three month and nine month periods ended September 30, 2001 and 2000. As
of September 30, 2001 differences between cost and market of a $1.1 million loss
(less deferred taxes of $381,000) were included in accumulated other
comprehensive income.
At September 30, 2001 and December 31, 2000, approximately $5.5 million and $4.9
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
September 30, 2001 and December 31, 2000, approximately $5.6 million and $8.3
million of investments, respectively, matured within 90 days, $5.0 million and
zero investments, respectively, had a maturity date between 90 days and 1 year
and approximately $20.4 million and $21.2 million of investments, respectively,
matured in more than one year.
5
Note 3 - Inventories
Inventories are comprised of the following (in thousands):
September 30, December 31,
2001 2000
-----------------------------------
(Unaudited)
Raw materials $ 1,795 $ 1,796
Work-in-process 1,173 405
Finished goods 2,567 1,793
-----------------------------------
$ 5,535 $ 3,994
===================================
Note 4 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
2001 2000 2001 2000
-------------------------- --------------------------
(Unaudited) (Unaudited)
Numerator for basic and diluted earnings
per share - income available to
common shareholders $ 2,692 $ 2,308 $ 7,710 $5,890
========================== =======================
Denominator for basic earnings per share -
weighted-average basis 18,832 18,606 18,785 18,492
Effect of dilutive stock options 939 647 850 539
-------------------------- --------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares 19,771 19,253 19,635 19,031
========================== ==========================
Earnings per share:
Basic $ 0.14 $ 0.12 $ 0.41 $ 0.32
========================== ==========================
Diluted $ 0.14 $ 0.12 $ 0.39 $ 0.31
========================== ==========================
Note 5 - Debt
On April 25, 2000 the Company entered into a loan agreement, permitting the
Company to borrow up to $8 million under a line of credit during the expansion
of the Company's corporate headquarters and manufacturing facilities. A
commitment fee of $20,000 was paid when the Company entered into the loan
agreement. Borrowings under the line of credit accrued interest equal to
Adjusted LIBOR plus 2% adjusted monthly.
On June 1, 2001, the line of credit was converted to a term loan (the "Term
Loan") to be paid in 60 equal monthly installments of principal plus interest
computed at Adjusted LIBOR plus 1.5%. The Term Loan contains certain restrictive
covenants including, but not limited to, maintenance of certain financial ratios
and a minimum tangible net worth requirement, and is secured by substantially
all of the Company's assets.
6
Note 6 - Derivatives
On January 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") as amended. SFAS 133 requires the Company to recognize
all derivative instruments on the balance sheet at fair value, and changes in
the derivative's fair value must be recognized currently in earnings or other
comprehensive income, as applicable. The adoption of SFAS 133 impacts the
accounting for the Company's forward-starting interest rate swap agreement.
Upon adoption of SFAS 133 in 2001, the Company recorded a pre-tax unrealized
loss of approximately $175,000 related to an interest rate swap, which was
recorded as part of long-term liabilities and accumulated other comprehensive
income. The interest rate swap is described below. The reclassification of any
gains or losses associated with the interest rate swap into the consolidated
income statement is anticipated to occur upon the various maturity dates of the
interest rate swap agreement, which expires in 2006.
The Company's Term Loan accrues interest at a variable rate based on Adjusted
LIBOR. This exposes the Company to ongoing interest rate fluctuations. On March
16, 2000, the Company entered into a forward-starting interest rate swap
agreement with a notional amount of $4 million. This swap agreement took effect
on June 1, 2001. The agreement was designated as a cash flow hedge to
effectively convert a portion of the $8 million Term Loan principal balance to a
fixed rate basis, thus reducing the impact of interest rate changes on future
income. This agreement involves the receipt of floating rate interest amounts in
exchange for fixed rate interest payments over the life of the agreement without
an exchange of the underlying principal amounts. The differential is paid or
received monthly and is recognized as an adjustment to interest expense.
Note 7 - Comprehensive Income
Comprehensive income includes unrealized gains and losses in the fair value of
certain derivative instruments, which qualify for hedge accounting. The
following is a reconciliation of net income to comprehensive income (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
2001 2000 2001 2000
-------------------------- --------------------------
(Unaudited) (Unaudited)
Net income $ 2,692 $ 2,308 $ 7,710 $ 5,890
Cumulative effect of adoption of
SFAS 133, net of income taxes --- --- (116) ---
Change in fair value of interest rate
swaps, net of income taxes (67) --- (109) ---
Translation adjustment 176 (4) 52 (18)
Unrealized gains (losses) on marketable
equity securities, net of income taxes (29) 48 280 (16)
-------------------------- ---------------------------
Comprehensive income $ 2,772 $ 2,352 $ 7,817 $ 5,856
========================== ==========================
Note 8 - Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
which became effective July 1, 2001; Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective
for the Company on January 1, 2002; and Statement of Financial Accounting
7
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"),
which is effective for the Company on January 1, 2003. SFAS 141 prohibits
pooling-of-interests accounting for acquisitions. SFAS 142 specifies that
goodwill and certain other intangible assets will no longer be amortized but
instead will be subject to periodic impairment testing. The Company is in the
process of evaluating the financial statement impact of adoption of SFAS 142.
SFAS 143 addresses accounting and reporting for asset retirement costs of
long-lived assets resulting from legal obligations associated with acquisition,
construction, or development transactions. The Company has determined the
adoption of SFAS 143 will not have a material effect on the results of
operations or financial position of the Company.
In August 2001 the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which is effective for the Company on January 1, 2002. SFAS 144 clarifies
accounting and reporting for assets held for sale, scheduled for abandonment or
other disposal, and recognition of impairment loss related to the carrying value
of long-lived assets. The Company does not believe the adoption of SFAS 144 will
have a material effect on the results of operations or financial position of the
Company.
8
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Revenues increased 16% to $22.6 million for the three months ended September 30,
2001 from $19.5 million for the same period in 2000. Revenues increased 12% to
$65.7 million for the nine months ended September 30, 2001 from $58.6 million
for the nine months ended September 30, 2000. The increase in revenues for the
three month and nine month periods ended September 30, 2001 was primarily due to
growth in the Company's human vascular and orthopaedic tissue cryopreservation
businesses and increased sales of BioGlue surgical adhesive, partially offset by
the elimination of Ideas for Medicine, Inc. ("IFM") sales due to the sale of the
remaining assets of IFM.
Revenues from human heart valve and conduit cryopreservation services increased
4% to $8.2 million for the three months ended September 30, 2001 from $7.9
million for the three months ended September 30, 2000, representing 36% and 40%,
respectively, of total revenues during each such period. Revenues from human
heart valve and conduit cryopreservation services decreased 3% to $22.3 million
for the nine months ended September 30, 2001 from $23.1 million for the nine
months ended September 30, 2000, representing 34% and 39%, respectively, of
total revenues during each such period. The increase in revenues for the three
month period ended September 30, 2001 was due to a 4% increase in the number of
allograft heart valve shipments over the prior year quarter, as a result of
increased demand for SynerGraft treated pulmonary valves and non-valved conduits
and patches. The decrease in revenues for the nine month period ended September
30, 2001 was due to a 5% decrease in the number of allograft heart valve
shipments over the prior year, as a result of decreased heart procurement year
over year, partially offset by higher fees received for processing SynerGraft
treated human heart valves.
Revenues from human vascular tissue cryopreservation services increased 19% to
$6.2 million for the three months ended September 30, 2001 from $5.2 million for
the three months ended September 30, 2000, representing 27% of total revenues
during each such period. Revenues from human vascular tissue cryopreservation
services increased 15% to $18.6 million for the nine months ended September 30,
2001 from $16.2 million for the nine months ended September 30, 2000,
representing 28% of total revenues during each such period. The increase in
revenues for the three month and nine month periods ended September 30, 2001 was
due to an increase in the number of vascular allograft shipments of 29% and 16%,
respectively. The increase in shipments during these periods was primarily due
to the Company's ability to procure greater amounts of tissue and an increase in
demand for saphenous vein composite grafts and femoral artery grafts.
Revenues from human orthopaedic tissue cryopreservation services increased 34%
to $5.3 million for the three months ended September 30, 2001 from $4.0 million
for the three months ended September 30, 2000, representing 24% and 20%,
respectively, of total revenues during each such period. Revenues from human
orthopaedic tissue cryopreservation services increased 37% to $16.1 million for
the nine months ended September 30, 2001 from $11.8 million for the nine months
ended September 30, 2000, representing 25% and 20%, respectively, of total
revenues during each such period. This increase in revenues for the three month
and nine month periods ended September 30, 2001 was primarily due to an increase
in the number of allograft shipments of 23% and 27%, respectively, price
increases for cryopreservation services in domestic and Canadian markets, and a
more favorable product mix. The increase in orthopaedic shipments, primarily
osteoarticular grafts and non-bone tendons, was due to increases in orthopaedic
allograft tissue procurement and increasing acceptance of these tissues in the
orthopaedic surgeon community.
Revenues from the sale of BioGlue surgical adhesive increased 46% to $2.4
million for the three months ended September 30, 2001 from $1.7 million for the
three months ended September 30, 2000, representing 11% and 9%, respectively, of
total revenues during each such period. Revenues from the sale of BioGlue
surgical adhesive increased 75% to $7.5 million for the nine months ended
9
September 30, 2001 from $4.3 million for the nine months ended September 30,
2000, representing 11% and 7%, respectively, of total revenues during each such
period. The increase in revenues for the three month and nine month periods
ended September 30, 2001 is due to an increase in the milliliters of BioGlue
shipped of 37% and 63%, respectively. The increase in shipments was primarily
due to increasing acceptance of BioGlue in international markets for use in
vascular and pulmonary repairs, and increased acceptance domestically following
the January 2000 introduction of BioGlue pursuant to a Humanitarian Use Device
Exemption ("HDE") for use as an adjunct in the repair of acute thoracic aortic
dissections.
Revenues from bioprosthetic cardiovascular devices decreased 10% to $169,000 for
the three months ended September 30, 2001 from $188,000 for the three months
ended September 30, 2000, representing 1% of total revenues during each such
period. Revenues from bioprosthetic cardiovascular devices decreased 14% to
$524,000 for the nine months ended September 30, 2001 from $611,000 for the nine
months ended September 30, 2000, representing 1% of total revenues during each
such period.
Revenues from IFM decreased to zero in the three and nine month periods ended
September 30, 2001 from $.5 million and $2.2 million for the three and nine
month periods ended September 30, 2000, respectively. The decrease is due to the
October 9, 2000 sale of substantially all of the remaining assets of IFM to
Horizon Medical Products, Inc. ("HMP").
Grant revenues increased to $230,000 for the three months ended September 30,
2001 from $95,000 for the three months ended September 30, 2000. Grant revenues
increased to $598,000 for the nine months ended September 30, 2001 from $386,000
for the nine months ended September 30, 2000. Grant revenues are primarily
attributable to the SynerGraft research and development programs.
Cost of cryopreservation services and products aggregated increased 13% to $9.4
million for the three months ended September 30, 2001 from $8.3 million for the
three months ended September 30, 2000, representing 42% and 43%, respectively,
of total cryopreservation and product revenues for each such period. Cost of
cryopreservation services and products aggregated increased 7% to $27.6 million
for the nine months ended September 30, 2001 from $25.8 million for the nine
months ended September 30, 2000, representing 42% and 44%, respectively, of
total cryopreservation and product revenues for each such period. The decrease
in the 2001 cost of cryopreservation services and products as a percentage of
total cryopreservation and product revenues is due to a more favorable product
mix during 2001. The product mix was impacted by an increase in revenues from
BioGlue surgical adhesive, which carries higher gross margins than
cryopreservation services, as well as the termination of the IFM OEM contract
with HMP, which had significantly lower margins than the Company's core
businesses.
General, administrative, and marketing expenses increased 18% to $8.3 million
for the three months ended September 30, 2001, compared to $7.0 million for the
three months ended September 30, 2000, representing 37% and 36%, respectively,
of total revenues during each such period. General, administrative, and
marketing expenses increased 14% to $24.6 million for the nine months ended
September 30, 2001, compared to $21.5 million for the nine months ended
September 30, 2000, representing 37% of total revenues during each such period.
The increase in expenditures for the three months ended September 30, 2001 was
primarily due to an increase in marketing and general expenses to support
revenue growth. The increase in expenditures for the nine month period ended
September 30, 2001 was primarily due to the inclusion of nine full months of
operations of CryoLife Europa, Ltd., the Company's European headquarters
established in early 2000, and due to an increase in marketing and general
expenses to support revenue growth.
Research and development expenses were $1.2 million for the three months ended
September 30, 2001 and 2000, representing 5% and 6% of total revenues for each
such period. Research and development expenses decreased 3% to $3.6 million for
the nine months ended September 30, 2001, compared to $3.7 million for the nine
months ended September 30, 2000, representing 5% and 6%, respectively of total
revenues for each such period. Research and development spending relates
principally to the Company's human clinical trials for its BioGlue surgical
adhesive and its focus on SynerGraft and BioGlue technologies.
Interest income, net of interest expense, was $412,000 and $451,000 for the
three months ended September 30, 2001 and 2000, respectively. Interest income,
net of interest expense, was $1.5 million and $1.1 million for the nine months
10
ended September 30, 2001 and 2000, respectively. The decrease in net interest
income for the three months ended September 30, 2001 was primarily due to
current year decreases in short term interest rates. The increase in net
interest income for the nine months ended September 30, 2001 was primarily due
to interest on cash generated from operations during the nine month period ended
September 30, 2001 and the year ended December 31, 2000, partially offset by
reductions in short term interest rates.
The effective income tax rate was 32% and 33% for the three and nine months
ended September 30, 2001 and 2000, respectively.
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 trend for human heart valve and conduit
cryopreservation services is primarily due to the high number of surgeries
scheduled during the summer months. However, the demand for the Company's human
connective tissue for the knee cryopreservation services, human vascular tissue
cryopreservation services, bioprosthetic cardiovascular devices, and BioGlue
surgical adhesive does not appear to experience seasonal trends.
Liquidity and Capital Resources
At September 30, 2001, net working capital was $66.8 million, with a current
ratio of 5 to 1, compared to $68.7 million at December 31, 2000. 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. 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 $4.6 million for the nine months
ended September 30, 2001, as compared to $8.5 million for the nine months ended
September 30, 2000. This decrease in cash provided was primarily due to an
increase in working capital requirements due to sales growth, expansion of
product lines, and construction on the Company's corporate headquarters and
manufacturing facilities, largely offset by an increase in net income before
depreciation and taxes.
Net cash used in investing activities was $12.7 million for the nine months
ended September 30, 2001, as compared to $6.1 million for the nine months ended
September 30, 2000. This increase in cash used was primarily due to an increase
in capital expenditures related to the expansion and renovation of the Company's
corporate headquarters and manufacturing facilities, an increase in purchases of
marketable securities, net of proceeds from sales and maturities, partially
offset by the proceeds from the Company's note receivable.
Net cash provided by financing activities was $1.6 million for the nine months
ended September 30, 2001, as compared to $5.0 million for the nine months ended
September 30, 2000. This decrease was primarily attributable to a decrease in
the proceeds from the issuance of debt under the Term Loan in the current year
and the lack of treasury stock repurchases during the nine months ended
September 30, 2001 as compared to the prior year period, partially offset by
principle payments of debt and a decrease in proceeds from stock option
exercises.
In June 2001 the FASB issued SFAS 141, which became effective July 1, 2001; SFAS
142, which is effective for the Company on January 1, 2002; and SFAS 143, which
is effective for the Company on January 1, 2003. SFAS 141 prohibits
pooling-of-interests accounting for acquisitions. SFAS 142 specifies that
goodwill and certain other intangible assets will no longer be amortized but
instead will be subject to periodic impairment testing. The Company is in the
process of evaluating the financial statement impact of adoption of SFAS 142.
SFAS 143 addresses accounting and reporting for asset retirement costs of
long-lived assets resulting from legal obligations associated with acquisition,
construction, or development transactions. The Company has determined the
adoption of SFAS 143 will not have a material effect on the results of
operations or financial position of the Company.
11
In August 2001 the FASB issued SFAS 144, which is effective for the Company on
January 1, 2002. SFAS 144 clarifies accounting and reporting for assets held for
sale, scheduled for abandonment or other disposal, and recognition of impairment
loss related to the carrying value of long-lived assets. The Company does not
believe the adoption of SFAS 144 will have a material effect on the results of
operations or financial position of the Company.
Since October 1998, management has been seeking to enter into a corporate
collaboration or to complete a potential private placement of equity or
equity-oriented securities to fund the commercial development of its Activation
Control Technology ("ACT"). This technology is now held by CryoLife's wholly
owned subsidiary AuraZyme Pharmaceuticals, Inc., which was formed on March 13,
2001. This strategy, if successful, will allow an affiliated entity to fund the
ACT and should expedite the commercial development of its oncology, blood clot
dissolving, and surgical sealant product applications without additional
research and development expenditures by the Company (other than through the
affiliated company). In addition, if successful, this strategy will favorably
impact the Company's liquidity going forward.
The Company anticipates that current cash and marketable securities, cash
generated from operations, and its $10 million of bank facilities (of which
approximately $7.5 million was drawn as of November 14, 2001) will be sufficient
to meet its operating and development needs for at least the next 12 months,
including the expansion and renovation of the Company's corporate headquarters
and manufacturing facilities. 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 U.S. Food and Drug
Administration ("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 for any additional expansion of its corporate headquarters
and manufacturing facilities, and the extent to which the Company's products
generate market acceptance and demand. There can be no assurance 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.
Item 3. Quantitative and Qualitative Disclosures 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 $5.6
million and short-term investments in municipal obligations of $19.1 million as
of September 30, 2001, as well as interest paid on its debt. A 10% adverse
change in interest rates affecting the Company's cash equivalents and short-term
investments would not have a material impact on the fair value of the Company's
investment or interest income for 2001.
The company manages interest rate risk through the use of fixed debt and an
interest rate swap agreement. At September 30, 2001 approximately $8 million of
the Company's $12 million in debt charged interest at a fixed rate. This fixed
rate debt includes a portion of the Company's outstanding term loan balance that
has been effectively converted to fixed rate debt through an interest rate swap
agreement. A 10% increase in interest rates affecting the Company's variable
rate debt, net of the effect of the interest rate swap agreement, would not have
a material increase in the Company's interest expense for 2001.
12
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.
(Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.)
3.2 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.)
3.3 Articles of Amendment to the Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.)
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).)
13
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 14, 2001 /s/ DAVID ASHLEY LEE
- ------------------ ----------------------------------
DATE DAVID ASHLEY LEE
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
14