FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1998 Commission File Number 0-21104
CRYOLIFE, INC.
(Exact name of Registrant as specified in its charter)
---------
Florida 59-2417093
(State or Other Jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1655 Roberts Boulevard, NW
Kennesaw, Georgia 30144
(Address of principal executive offices)
(zip code)
(770) 419-3355
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------ ------
The number of shares of common stock, par value $0.01 per share, outstanding at
May 5, 1998 was 12,778,545.
Part I - FINANCIAL INFORMATION
Item 1. Financial statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1998 1997
(Unaudited)
Revenues:
Cryopreservation and products $ 14,501,000 $ 10,383,000
Research grants, licenses and other revenues 124,000 30,000
---------- ----------
14,625,000 10,413,000
Costs and expenses:
Cryopreservation and products 5,481,000 3,426,000
General, administrative and marketing 5,827,000 4,479,000
Research and development 1,011,000 849,000
Interest expense 430,000 132,000
---------- ----------
12,749,000 8,886,000
---------- ----------
Income before income taxes 1,876,000 1,527,000
Income tax expense 704,000 575,000
---------- ----------
Net income $ 1,172,000 $ 952,000
========== ==========
Earnings per share:
Basic and diluted $ 0.12 $ 0.10
========== ==========
Weighted average shares outstanding:
Basic 9,739,000 9,581,000
Diluted 10,077,000 9,877,000
See accompanying notes to summary consolidated financial statements.
546079.1
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
Proforma
March 31, March 31, December 31,
1998 1998 1997
---------------------------------------------------
(Unaudited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 114,000 32,434,000 $ 111,000
Proceeds due from public stock offering 40,140,000 --- ---
Receivables (net) 9,517,000 9,517,000 9,765,000
Deferred preservation costs (net) 12,640,000 12,640,000 12,257,000
Inventories 2,820,000 2,820,000 1,761,000
Prepaid expenses 1,595,000 1,595,000 1,260,000
---------- ---------- ----------
Total current assets 66,826,000 59,006,000 25,154,000
---------- ---------- ----------
Property and equipment (net) 17,979,000 17,979,000 15,487,000
Goodwill (net) 9,655,000 9,655,000 9,809,000
Patents (net) 2,190,000 2,190,000 2,196,000
Other (net) 1,906,000 1,906,000 1,103,000
---------- ---------- ----------
TOTAL ASSETS $98,556,000 $90,736,000 $53,749,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Accounts payable $ 1,969,000 1,969,000 $ 1,612,000
Accrued expenses 955,000 332,000 534,000
Accrued procurement fees 1,388,000 1,388,000 1,565,000
Accrued compensation 1,009,000 1,009,000 1,122,000
Current maturities of capital lease obligations 210,000 210,000 ---
Current maturities of long-term debt 1,496,000 496,000 1,496,000
Income taxes payable 484,000 484,000 ---
---------- ---------- ----------
Total current liabilities 7,511,000 5,888,000 6,329,000
---------- ---------- ----------
Deferred income taxes 190,000 190,000 327,000
Capital lease obligations, less current maturities 1,896,000 1,896,000 ---
Bank loans 12,207,000 --- 10,777,000
Convertible debenture 4,393,000 4,393,000 5,000,000
Other long-term debt 799,000 799,000 1,089,000
---------- ---------- ----------
Total liabilities 26,996,000 13,166,000 23,522,000
---------- ---------- ----------
Shareholders' equity:
Preferred stock --- --- ---
Common stock (issued 10,261,000 shares, and
13,287,000 proforma shares in 1998 and
10,243,000 shares in 1997) 103,000 133,000 102,000
Common stock to be issued (2,638,000 shares
in 1998) 26,000 --- ---
Additional paid-in capital 57,828,000 63,834,000 17,694,000
Retained earnings 13,799,000 13,799,000 12,627,000
Less: Treasury stock (543,000 shares) (180,000) (180,000) (180,000)
Note receivable from shareholder (16,000) (16,000) (16,000)
----------- ----------- ---------
Total shareholders' equity 71,560,000 77,570,000 30,227,000
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $98,556,000 $90,736,000 $53,749,000
========== ========== ==========
See accompanying notes to summary consolidated financial statements.
546079.1
Item 1. Financial Statements
CRYOLIFE, INC.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1998 1997
(Unaudited)
Net cash flows used in operating activities:
Net income $ 1,172,000 $ 952,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 960,000 526,000
Provision for doubtful accounts 24,000 15,000
Receivables 224,000 163,000
Deferred preservation costs and inventories (1,442,000) (1,543,000)
Prepaid expenses and other assets (335,000) (837,000)
Accounts payable and accrued expenses 95,000 (1,535,000)
----------- -----------
Net cash flows provided by (used in)
operating activities 698,000 (2,259,000)
----------- -----------
Net cash flows used in investing activities:
Capital expenditures (1,058,000) (1,071,000)
Other assets (896,000) (213,000)
Cash paid for acquisition, net of cash acquired --- (4,418,000)
------------ -----------
Net cash flows used in investing activities (1,954,000) (5,702,000)
------------ -----------
Net cash flows provided by financing activities:
Principal payments of debt (540,000) ---
Proceeds from borrowings on revolving term loan 1,680,000 6,653,000
Payment of obligations under capital leases (35,000) ---
Proceeds from issuance of common stock and
from notes receivable from shareholders 154,000 130,000
----------- -----------
Net cash provided by financing activities 1,259,000 6,783,000
----------- -----------
Increase (decrease) in cash 3,000 (1,178,000)
Cash and cash equivalents, beginning of period 111,000 1,370,000
----------- -----------
Cash and cash equivalents, end of period $ 114,000 $ 192,000
=========== ===========
Supplemental cash flow information Non-cash
investing and financing activities:
Proceeds due from public stock offering $ 40,140,000 $ ---
=========== ===========
Establishing capital lease obligations $ 2,141,000 $ ---
=========== ===========
Debt conversion into common stock $ 607,000 $ ---
=========== ===========
Fair value of assets acquired $ --- $ 1,768,000
Cost in excess of assets acquired --- 8,541,000
Liabilities assumed --- (891,000)
Debt issued for assets acquired --- (5,000,000)
------------ -----------
Net cash paid for acquisition $ --- $ 4,418,000
============ ===========
See accompanying notes to summary consolidated financial statements.
546079.1
CRYOLIFE, INC.
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 statements. 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 months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 1997.
The accompanying unaudited proforma summary consolidated balance sheet as of
March 31, 1998 reflects the receipt of the proceeds of the Company's
following-on equity offering (the "Offering") of 2,588,000 shares of its common
stock which became effective March 30, 1998 and closed on April 3, 1998 as well
as the underwriters' exercise of an overallotment option with respect to 387,500
additional shares which closed on April 16, 1998, and the application of those
proceeds to the repayment of certain debt and interest aggregating $13,296,000
and the payment of certain offering costs aggregating $534,000.
NOTE 2 - FOLLOW-ON EQUITY OFFERING
On April 3, 1998 the Company completed the Offering of 2,588,000 new shares of
its common stock resulting in net proceeds of $39.4 million. On April 16, 1998
the Company issued an additional 387,500 shares of common stock pursuant to the
underwriters' overallotment option resulting in $6.0 million of additional net
proceeds to the Company. The net proceeds will be used to repay outstanding
amounts under the Company's bank loans, for expansion of manufacturing
facilities and for general corporate purposes, including working capital and
potential acquisitions. The accompanying proforma balance sheet at March 31,
1998 gives effect to the receipt of the proceeds from the underwriters, the
repayment of the Company's bank loans and the payment of certain offering costs.
In conjunction with the Offering, $607,000 of the convertible debentures were
converted into 50,000 shares of the Company's common stock.
NOTE 4 - INVENTORY
Inventories are comprised of the following:
(Unaudited)
March 31, December 31,
1998 1997
-----------------------------------
Raw materials $ 292,000 $ 262,000
Work-in-process 717,000 358,000
Finished goods 1,811,000 1,141,000
--------- ----------
$ 2,820,000 $ 1,761,000
========== ==========
546079.1
NOTE 5 - CAPITAL LEASE OBLIGATIONS
Commencing January 1, 1998 the Company began leasing office and manufacturing
facilities and furniture under capital leases through January 2008 from the
former majority shareholder of Ideas for Medicine, Inc. ("IFM"), which was
acquired by the Company in March 1997. The Company has recorded capital lease
obligations totaling $2.1 million during the quarter ended March 31, 1998.
NOTE 6 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
March 31,
1998 1997
(Unaudited)
Numerator for basic and diluted earnings per share -
income available to common shareholders $ 1,172,000 $ 952,000
========== ==========
Denominator for basic earnings per share - weighted-
average basis 9,739,000 9,581,000
Effect of dilutive stock options 338,000 296,000
---------- ----------
Denominator for diluted earnings per share - adjusted
weighted-average shares 10,077,000 9,877,000
========== ==========
Basic and diluted earnings per share $ .12 $ .10
========== ==========
546079.1
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Revenues increased 40% to $14.6 million for the three months ended March 31,
1998 from $10.4 million for the same period in 1997. The increase in revenues
was primarily due to the growing acceptance in the medical community of
cryopreserved tissues, the Company's ability to procure greater amounts of
tissue, price increases for certain cryopreservation services and revenues
attributable to the Company's line of single-use devices following the Ideas for
Medicine, Inc. ("IFM") acquisition in March 1997. Revenues for the three months
ended March 31, 1998 and March 31, 1997 included $1,585,000 and $554,000
respectively, attributable to the acquisition of IFM.
Revenues from human heart valve and conduit cryopreservation services increased
15% to $7.4 million for the three months ended March 31, 1998 from $6.5 million
for the three months ended March 31, 1997, representing 51% and 62%,
respectively, of total revenues during such periods. This increase in revenues
was primarily due to a 14% increase in the number of heart allograft shipments.
Revenues from human vascular tissue cryopreservation services increased 37% to
$3.5 million for the three months ended March 31, 1998 from $2.6 million for the
three months ended March 31, 1997, representing 24% and 25%, respectively, of
total revenues for those periods. This increase in revenues was primarily due to
a 34% increase in the number of vascular allograft shipments resulting from the
introduction of cryopreserved tissues for new procedures and increased demand
for the Company's existing cryopreservation services.
Revenues from human connective tissue for the knee cryopreservation services
increased 158% to $1.8 million for the three months ended March 31, 1998 from
$693,000 for the three months ended March 31, 1997, representing 12% and 7%,
respectively, of total revenues for those periods. This increase in revenues was
primarily due to a 127% increase in the number of allograft shipments and a
greater proportion of the 1998 shipments consisting of cryopreserved menisci,
which have a significantly higher per unit revenue than the Company's
cryopreserved tendons.
Revenues from the sale of bioprosthetic cardiovascular devices increased 92% to
$200,000 for the three months ended March 31, 1998 from $104,000 for the three
months ended March 31, 1997, representing 1% of total revenues during each
period. This increase in revenues was primarily due to a 169% increase in the
number of bioprosthetic cardiovascular device shipments.
Other revenues increased to $124,000 for the three months ended March 31, 1998
from $30,000 for the three months ended March 31, 1997. Other revenues in 1998
relate primarily to research grant awards for the Company's synergraft
technology.
Cost of cryopreservation services and products aggregated $5.5 million for the
three months ended March 31, 1998, representing 37% of total revenues, compared
to $3.4 million for the three months ended March 31, 1997, representing 33% of
total revenues. Cost of cryopreservation services and products increased 60% for
the first quarter 1998 compared to the first quarter 1997. The increase in 1998
of the cost of cryopreservation services and products as a percentage of
revenues results from increased manufacturing overhead costs associated with the
Company's new corporate headquarters and manufacturing facility and the
inclusion of three months of IFM's sales in 1998, which generate lower gross
margins than cryopreservation services, compared with one month of IFM sales in
the first quarter 1997.
546079.1
General, administrative and marketing expenses increased 30% to $5.8 million for
the three months ended March 31, 1998, compared to $4.5 million for the
corresponding period in 1997, representing 40% and 43%, respectively, of total
revenues in each period. The increase in expenditures in 1998 results from
expenses incurred to support the increase in revenues and costs associated with
the introduction of BioGlue into the European community.
Research and development expenses were $1.0 million for the three months ended
March 31, 1998, compared to $849,000 for the corresponding period in 1997,
representing 7% and 8%, respectively, of total revenues for each period.
Research and development spending relates principally to the Company's focus on
its bioadhesives and synergraft technologies.
Interest expense increased to $430,000 for the three months ended March 31, 1998
from $132,000 for the three months ended March 31, 1997. This increase in
interest expense is due to a full quarter of interest expense in 1998 relating
to the convertible debenture entered into for the acquisition of IFM in March
1997 as well as an increase in the bank loans used to finance the building of
the IFM manufacturing facility.
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
surgeries scheduled during the summer months. Management believes that the
trends experienced by the Company to date for its human connective tissue for
the knee cryopreservation services indicate that this business may also be
seasonal because it is an elective procedure that may be performed less
frequently during the fourth quarter holiday months. However, the demand for the
Company's human vascular tissue cryopreservation services, bioprosthetic
cardiovascular devices and single-use medical devices does not appear to
experience this seasonal trend.
Liquidity and Capital Resources
At March 31, 1998, net working capital was $59.5 million, compared to $18.8
million at December 31, 1997, with a current ratio of 9-to-1 at March 31, 1998.
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 $698,000 for the three months
ended March 31, 1998, as compared to net cash used in operating activities of
$2.3 million for the three months ended March 31, 1997. This increase primarily
resulted from a decrease in the amount of accounts payable liquidated in the
first quarter in 1998 as compared to the first quarter of 1997 due to the
construction of the Company's new corporate headquarters and manufacturing
facility.
Net cash used in investing activities was $2.0 million for the three months
ended March 31, 1998, as compared to $5.7 million for the three months ended
March 31, 1997. This decrease was primarily attributable to the absence a
business acquisition during the first quarter of 1998 as compared to the first
quarter of 1997, during which the Company acquired IFM.
Net cash provided by financing activities was $1.3 million for the three months
ended March 31, 1998, as compared to $6.8 million for the three months ended
March 31, 1997. This decrease was primarily attributable to a decrease in
borrowings on the Company's bank loans. On April 3, 1998, the Company completed
a follow-on equity offering (the "Offering") of 2,588,000 shares which became
effective March 30, 1998, and on April 16, 1998, an overallotment option was
exercised for an additional 387,500 shares.
A portion of the net proceeds of $45,450,000 were used to repay the bank loans
and accrued interest totaling $13,296,000.
546079.1
The Company anticipates that the 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 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 computer systems will face as the
millennium (year 2000) approaches. The Company, however, believes that its own
internal software and hardware is year 2000 compliant. The Company believes that
any year 2000 problems encountered by procurement agencies, hospitals and other
customers and vendors are not likely to have a material adverse effect on the
Company's operations. The Company anticipates no other year 2000 problems which
are reasonably likely to have a material adverse effect on the Company's
operations. There can be no assurance, however, that such problems will not
arise.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income ("Statement 130"). The Company adopted Statement
130 for the quarter ended March 31, 1998. Due to the immateriality of the
Company's elements of comprehensive income, such adoption had no effect on the
Company's consolidated financial statements.
Forward-Looking Statements
Statements made in this Form 10-Q for the quarter ended March 31, 1998 that
state the Company's or management's intentions, hopes, beliefs, expectations or
predictions of the future are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. It is important to note
that the Company's actual results could differ materially from those contained
in such forward-looking statements as a result of adverse changes in any of a
number of factors that affect the Company's business, including without
limitation, changes in (1) government regulation of the Company's business, (2)
the Company's competitive position, (3) the availability of tissue for implant,
(4) the status of the Company's products under development, (5) the protection
of the Company's proprietary technology and (6) the reimbursement of health care
costs by third-party payors. See the "Business-Risk Factors" section of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 for a
more detailed discussion of these and other factors which might affect the
Company's future performance.
Item 3. Qualitative and Quantitative Discussion About Market Risk.
Not Applicable.
546079.1
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
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.)
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K.
None
546079.1
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)
May 6, 1998 EDWIN B. CORDELL, JR.
- ------------------ ----------------------------------
DATE EDWIN B. CORDELL, JR.
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
5
0000784199
CRYOLIFE, INC.
3-MOS
DEC-31-1998
mar-31-1998
114,000
0
9,644,000
127,000
2,820,000
66,826,000
26,216,000
8,237,000
98,556,000
7,511,000
21,001,000
0
0
129,000
71,431,000
98,556,000
1,785,000
14,625,000
825,000
5,481,000
7,268,000
24,000
430,000
1,876,000
704,000
1,172,000
0
0
0
1,172,000
.12
.12
