NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Business
CryoLife, Inc. (CryoLife, the Company, we, or us),
incorporated January 19, 1984 in Florida, develops and commercializes biomaterials and implantable medical devices and preserves and distributes human tissues for cardiac and vascular transplant applications. The Companys biomaterials and
implantable medical devices include BioGlue
®
Surgical Adhesive (BioGlue), CryoLife-OBrien
®
Stentless Porcine
Aortic Bioprosthesis, and ProPatch Soft Tissue Repair Matrix (ProPatch). Additionally, the Company distributes CardioWrap
®
for MAST BioSurgery, Inc (MAST).
Historically, the Company preserved and distributed human orthopaedic tissue for transplant applications. CryoLife ceased processing human orthopaedic tissue effective January 1, 2007 but will continue to market and distribute its existing
orthopaedic tissues through June 30, 2008.
CryoLife distributes preserved
human cardiac, vascular, and orthopaedic tissue to implanting institutions throughout the U.S., Canada, and Europe, although distribution of orthopaedic tissue is being phased out. On February 7, 2008 the Company received 510(k) clearance from
the FDA for its CryoValve
®
SG pulmonary human heart valve processed with the Companys proprietary SynerGraft technology. CryoLife is authorized to distribute BioGlue throughout the
United States and in more than 70 other countries for designated applications. In the U.S. BioGlue is U.S. Food and Drug Administration (FDA) approved as an adjunct to sutures and staples for use in adult patients in open surgical repair
of large vessels. CryoLife distributes BioGlue under Conformité Européene (CE) Mark product certification in the European Economic Area (EEA) for soft tissue repair procedures (which includes cardiac, vascular,
pulmonary, and additional soft tissue repair procedures). CryoLife has also received approval and distributes BioGlue for soft tissue repairs in Canada and Australia. Additional marketing approvals have been granted for specified applications in
several other countries in Central and South America, and Asia. CryoLife also distributes the CryoLife-OBrien Stentless Porcine Aortic Bioprosthesis in Europe. In December 2006 CryoLife received 510(k) clearance from the FDA for its
ProPatch
Soft Tissue Repair Matrix (ProPatch). In 2007 CryoLife began exclusive distribution of CardioWrap, a product of MAST, in the U.S. and the United Kingdom. CardioWrap
is a bioresorbable sheet used to replace the pericardium in cardiac reconstruction and other cardiac surgeries where the patient may face re-operation within six months.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates and assumptions are used when accounting for depreciation, allowance for doubtful accounts, deferred preservation
costs, valuation of long-lived tangible and intangible assets, valuation of deferred income taxes, commitments and contingencies, including product liability claims, claims incurred but not reported, and amounts recoverable from insurance companies,
cost of share based payments and the related income statement expense or pro-forma expense, and certain accrued expenses, including accrued procurement fees, income taxes, and derivative instruments.
Revenue Recognition
The Company recognizes
revenue in accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104), which provides guidance on applying generally accepted
accounting principles to revenue recognition issues. Revenues for preservation services are recognized when services are completed and tissue is shipped to the customer. Revenues for products are recognized at the time the product is shipped, at
which time title passes to the customer and there are no further performance obligations. The Company assesses the likelihood of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness
of the customer. Revenues from research grants are recognized in the period the associated costs are incurred. Revenues from upfront licensing agreements are recognized ratably over the period the Company expects to fulfill its obligations.
F-9
Shipping and Handling Charges
Fees charged to customers for shipping and handling of preserved tissues and products are included in preservation services revenues and product revenues, respectively. The costs for shipping and handling of preserved
tissues and products are included as a component of cost of preservation services and cost of products, respectively.
Advertising Costs
The costs to produce and communicate the Companys advertising are expensed as incurred and are classified as general, administrative,
and marketing expenses in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 93-7 Reporting on Advertising Costs (SOP 93-7). The Company records the cost of
certain sales materials as a prepaid expense and amortizes these costs as advertising expense over the period they are expected to be used, typically six months to one year. The total amount of advertising expense included in the Companys
Consolidated Statements of Operations was $1.0 million, $796,000, and $700,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
Cash and Cash Equivalents
Cash equivalents consist primarily of highly liquid investments with maturity dates of 90
days or less at the time of acquisition. The carrying value of cash equivalents approximates fair value.
The Companys cash
equivalents include advance funding received under the U.S. Congress 2005 Defense Appropriations Conference Report (the 2005 DOD Grant) and the U.S. Congress 2006 Defense Appropriations Conference Report (the 2006 DOD Grant)
for the continued development of protein hydrogel technology for use on the battlefield. The advance funding is accounted for as deferred income on the Consolidated Balance Sheets and is recognized as other revenue as expenses are incurred related
to these grants. As of December 31, 2007 and 2006 $1.0 million and $770,000, respectively, of cash equivalents and deferred income were recorded on the Companys Consolidated Balance Sheets related to the 2005 and 2006 DOD grants.
Supplemental disclosures of cash flow information for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
691
|
|
$
|
635
|
|
$
|
276
|
Income taxes
|
|
|
416
|
|
|
34
|
|
|
216
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Payment of make whole payments in common stock
|
|
$
|
1,056
|
|
$
|
|
|
$
|
786
|
Non-cash acquisition of intangibles
|
|
|
|
|
|
2,909
|
|
|
|
Assets acquired under capital leases
|
|
|
|
|
|
180
|
|
|
|
Payment of legal settlement in stock
|
|
|
|
|
|
|
|
|
1,973
|
Accounts payable and accrued expenses for the purchase of property and equipment
|
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|
|
|
|
|
|
|
21
|
Marketable Securities
The Company maintains investments in several large, well-capitalized financial institutions, and the Companys policy excludes investment in any securities rated less than investment-grade by national
rating services. Management determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such designations quarterly.
Debt securities are classified as held-to-maturity when the Company has the intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Trading securities are
securities that are acquired principally for the purpose of generating a profit from short-term fluctuations in price. Trading securities are stated at their fair values, with the realized and unrealized gains and losses, interest, and dividends
included in other income. Debt securities not classified as held-to-maturity or marketable equity securities not classified as trading are classified as available-for-sale. Available-for-
F-10
sale securities are stated at their fair values, with the unrealized gains and losses, net of applicable income taxes, reported in a separate component of
shareholders equity. Interest, dividends, realized gains and losses, and declines in value judged to be other than temporary are included in other income. The cost of securities sold is based on the specific identification method.
The Company uses the market approach to measure the fair value of its marketable securities in accordance with Statement of Financial Accounting
Standards (SFAS) 115 (as amended) Accounting For Certain Investments in Debt and Equity Securities (SFAS 115). Each month the Companys investment broker provides quoted prices in active markets for each
available-for-sale security. The Company then adjusts each investment to its quoted price and records the unrealized gains or losses in accumulated other comprehensive income for these securities.
As of December 31, 2007 $3.0 million of marketable securities were designated as available-for-sale. As of December 31, 2006 $4.0 million of
marketable securities were designated as available-for-sale, and $571,000 of marketable securities were designated as held-to-maturity. These securities were designated as held-to-maturity due to a contractual commitment to hold the securities as
pledged collateral relating to one of the Companys product liability insurance policies and, therefore, they were reported as restricted securities on the December 31, 2006 Consolidated Balance Sheet.
Deferred Preservation Costs
By federal law,
human tissues cannot be bought or sold. Therefore, the tissues the Company preserves and further processes cannot be held as inventory. Tissue is procured from deceased human donors by organ and tissue procurement agencies, which consign the tissue
to the Company for processing, preservation, and distribution. Preservation costs consist primarily of direct labor and materials (including salary and fringe benefits, laboratory expenses, tissue procurement fees, and freight-in charges) and
indirect costs (including allocations of costs from departments that support processing activities and facility allocations). Although the Company cannot own human tissue, the preservation process is a manufacturing process that is accounted for in
accordance with ARB No. 43 Chapter 4, Inventory Pricing (ARB 43). Preservation costs are stated at the lower of cost or market on a first-in, first-out basis and are deferred until revenue is recognized upon shipment of
the tissue to the implanting facilities. Cost of preservation services also includes idle facility expense, excessive spoilage, double freight, and rehandling costs and requires allocation of fixed production overheads to be based on the normal
capacity of the production facilities in accordance with SFAS No. 151 Inventory Costs (SFAS 151).
The
calculation of deferred preservation costs involves a high degree of judgment and complexity. The costs included in deferred preservation costs contain several estimates due to the timing differences between the occurrence of the cost and receipt of
final bills for services. Costs that contain estimates include tissue procurement fees, which are estimated based on the Companys contracts with independent procurement agencies, and freight-in charges, which are estimated based on the
Companys prior experiences with these charges. These costs are adjusted for differences between estimated and actual fees when invoices for these services are received. Management believes that its estimates approximate the actual costs of
these services, but estimates could differ from actual costs. Total deferred preservation costs are then allocated among the different tissues processed during the period based on specific cost drivers such as the number of donors and the number of
tissues processed. At each balance sheet date a portion of the deferred preservation costs relates to tissues currently in active processing or held in quarantine pending release to implantable status. The Company applies a yield estimate to all
tissues in process and in quarantine to estimate the portion of tissues that will ultimately become implantable. Management determines this estimate of quarantine yields based on its experience in prior periods and reevaluates this estimate
periodically. Due to the nature of this estimate and the length of the processing times experienced by the Company, actual yields could differ from the Companys estimates. A significant change in quarantine yields could materially impact the
amount of deferred preservation costs on the Companys Consolidated Balance Sheets and the cost of preservation services, including the lower of cost or market write-down, described below, on the Companys Consolidated Statements of
Operations.
The Company regularly evaluates its deferred preservation costs to determine if the costs are appropriately recorded at the
lower of cost or market value and to determine if there are any impairments to the book value of the Companys deferred preservation costs. CryoLife records a charge to cost of preservation services to write-down the amount of deferred
preservation costs that are not deemed to be recoverable. These write-downs are permanent impairments that create a new cost basis, which cannot be restored to its previous levels when tissues are shipped or become available for shipment.
The Company recorded write-downs of $453,000, $1.2 million, and $1.8 million in the years ended December 31, 2007, 2006, and 2005,
respectively, for the value of certain deferred preservation costs that exceeded market value. The amount of these write-downs are primarily due to excess current period tissue processing costs that exceeded market value based on recent average
service fees. Actual results may differ from these estimates.
F-11
The Company also recorded write-downs of $366,000 for the year ended December 31, 2007 due to the
impairment of certain vascular and orthopaedic tissues. The Company also recorded write-downs of $588,000 for the year ended December 31, 2006 due to the impairment of certain orthopaedic tissues. The tissues were impaired in the period that
the Company determined that the tissues were not expected to ship prior to the expiration date of the tissues packaging. The Company also recorded a write-down of $2.8 million in the year ended December 31, 2006 due to the impairment of
certain orthopaedic tissues and processing materials as a result of the exchange and service agreement with Regeneration Technologies, Inc., (the RTI Agreement) discussed in Note 2 below. This write-down was based on the Companys
estimate of the tissues that would be shipped during the 18-month period subsequent to December 31, 2006 in which the Company can continue to distribute its existing orthopaedic tissues.
As of December 31, 2007 deferred preservation costs consisted of $7.6 million for allograft heart valve tissues, $2.1 million for non-valved cardiac
tissues, $17.1 million for vascular tissues, and $123,000 for orthopaedic tissues. As of December 31, 2006 deferred preservation costs consisted of $4.7 million for allograft heart valve tissues, $1.0 million for non-valved cardiac tissues,
$11.3 million for vascular tissues, and $2.3 million for orthopaedic tissues.
Inventories
Inventories are comprised of implantable surgical adhesives and other implantable medical devices and are valued at the lower of cost or market on a
first-in, first-out basis. Cost of products also includes idle facility expense, excessive spoilage, double freight, and rehandling costs and requires allocation of fixed production overheads to be based on the normal capacity of the production
facilities as necessary in accordance with SFAS 151.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided over the estimated useful lives of the assets, generally three to ten years, on a
straight-line basis. Leasehold improvements are amortized on a straight-line basis over the lease term or the estimated useful lives of the assets, whichever is shorter.
Intangible Assets
The Companys intangible assets consist of patents, trademarks,
customer lists, non-compete agreements, procurement contracts, and access to the procurement of cardiac and vascular human tissues previously received by RTI as a result of the RTI Agreement discussed in Note 2 below. The Company amortizes its
definite lived intangible assets over their expected useful lives using the straight-line method. The Companys indefinite lived intangible assets do not amortize, but are instead subject to periodic impairment testing in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142).
As of December 31, 2007 and 2006 gross values,
accumulated amortization, and approximate amortization periods of the Companys definite lived intangible assets are as follows (in thousands):
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Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Amortization
Period
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
5,554
|
|
$
|
1,648
|
|
17 Years
|
Customer lists
|
|
|
611
|
|
|
187
|
|
3 Years
|
Non-compete agreement
|
|
|
381
|
|
|
38
|
|
10 Years
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
5,598
|
|
$
|
1,372
|
|
17 Years
|
Customer lists
|
|
|
515
|
|
|
|
|
3 Years
|
Non-compete agreement
|
|
|
381
|
|
|
|
|
10 Years
|
As of December 31, 2007 and 2006 the carrying values of the Companys indefinite lived
intangible assets are as follows (in thousands):
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|
|
|
|
|
|
|
2007
|
|
2006
|
Trademarks
|
|
$
|
433
|
|
$
|
453
|
Procurement contracts
|
|
|
2,013
|
|
|
2,013
|
F-12
As of December 31, 2007 scheduled amortization of intangible assets for the next five years is as
follows (in thousands):
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2008
|
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2009
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2010
|
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2011
|
|
2012
|
|
Total
|
Amortization expense
|
|
$
|
549
|
|
$
|
547
|
|
$
|
357
|
|
$
|
334
|
|
$
|
318
|
|
$
|
2,105
|
Impairments of Long-Lived Assets
The Company assesses the potential impairment of its long-lived assets whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors that could trigger an impairment review include the following:
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Significant underperformance relative to expected historical or projected future operating results,
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|
Significant negative industry or economic trends,
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Significant decline in the Companys stock price for a sustained period, or
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Significant decline in the Companys market capitalization relative to net book value.
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SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), requires the write-down of a
long-lived asset to be held and used if the carrying value of the asset or the asset group to which the asset belongs is not recoverable. The carrying value of the asset or asset group is not recoverable if it exceeds the sum of the undiscounted
future cash flows expected to result from the use and eventual disposition of the asset or asset group. For the year ended December 31, 2007 the Company did not experience any factors that indicated an SFAS 144 impairment review was warranted.
For the years ended December 31, 2006 and 2005, the Company performed an SFAS 144 impairment analysis, due to a variety of triggering factors including its operating performance. In these periods the undiscounted future cash flows of the
Companys asset groups exceeded their carrying values. Therefore, management concluded that there was not an impairment of the Companys long-lived tangible and amortizing intangible assets.
SFAS No. 142 requires that goodwill resulting from business acquisitions and other non-amortizing intangible assets be subject to annual impairment
testing. The Companys non-amortizing intangible assets as of December 31, 2007 consist of trademarks and, as a result of the RTI Agreement discussed in Note 2 below, procurement contracts and access to the procurement of cardiac and
vascular human tissues previously received by RTI. In accordance with SFAS 142, the Company performed an analysis on its non-amortizing intangible assets as of December 31, 2007. Based of the results of its analysis, the Company does not
believe that an impairment existed related to its non-amortizing intangible assets as of December 31, 2007. Management will continue to evaluate the recoverability of these non-amortizing intangible assets on an annual basis in accordance with
SFAS 142.
Accrued Procurement Fees
Tissue is procured from deceased human donors by organ and tissue procurement agencies (Agencies), which consign the tissue to the Company for processing, preservation, and distribution. The Company reimburses the Agencies for
their costs to recover the tissue and passes on these costs to the customer when the tissue is shipped and the service is complete. The Company accrues the estimated procurement fees due to the Agencies at the time the tissue is received based on
contractual agreements between the Company and the Agencies.
Product Liability Claims
In the normal course of business as a medical device and services company, the Company has product liability complaints filed against it. The Company
maintains claims-made insurance policies to mitigate its financial exposure to product liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the
policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. The Company periodically evaluates
its exposure to unreported product liability claims, and records accruals as necessary for the estimated cost of unreported claims related to services performed and products used. In January 2008 the Company retained an independent actuarial firm to
perform revised estimates of the unreported claims, the latest of which was performed as of December 31, 2007. The independent firm estimated the unreported product loss liability using a frequency-severity approach, whereby, projected losses
were calculated by multiplying the estimated number of claims by the estimated average cost per claim. The estimated claims were calculated based on the reported claim development method and the Bornhuetter-Ferguson method using a blend of the
Companys historical claim experience and industry data. The estimated cost per claim was calculated using a lognormal
F-13
claims model blending the Companys historical average cost per claim with industry claims data. The Company records accruals for estimated costs for
unreported product liability claims based on the information included in the actuarial valuation.
In addition to the Companys
evaluation of its exposure related to unreported product liability claims, the Company periodically evaluates its exposure related to settled but unpaid claims and pending product liability claims based on settlement negotiations to date, advice
from counsel, and historical claim settlements. The Company then records accruals for settled but unpaid claims and pending product liability claims based on its analysis.
Uncertain Tax Positions
On January 1, 2007 the Company adopted the provisions of FASB
Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 establishes a threshold for recognizing tax benefits if they are
more-likely-than-not to be upheld upon review by the appropriate taxing authority and the requirement that companies recognize the maximum amount of tax benefit that has a greater than 50 percent likelihood of ultimately
being realized. See Note 14 for further discussion of the Companys uncertain tax liabilities.
Deferred Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and tax return purposes. The Company generated deferred tax assets primarily as a result of write-downs of deferred preservation costs, accruals for product liability claims, and operating losses. The Company periodically assesses the
recoverability of its deferred tax assets, in accordance with SFAS No. 109 Accounting for Income Taxes (SFAS 109), as necessary, when the Company experiences changes that could materially affect its determination of the
recoverability of its deferred tax assets. Management provides a valuation allowance when, as a result of this analysis, management believes it is more likely than not that its deferred tax assets will not be realized. In assessing the
recoverability of its deferred tax assets at December 31, 2007 the Company reviewed its historical operating results, including the reasons for its operating losses in prior years and uncertainties regarding projected future operating results.
Based on the results of this analysis, discussed further below, at December 31, 2007 the Company determined that it was more likely than not that the Companys deferred tax assets would not be realized.
Based on the Companys results for the year ended December 31, 2007 and its projections for 2008, the Company anticipates that it will utilize
a portion of its net operating loss carryforwards in the 2008 income tax year to offset its U.S. taxable income, as it did in the 2007 and 2006 tax years. Although CryoLife is beginning to utilize its net operating loss carryforwards, the Company
currently believes that a change in its determination of the recoverability of its deferred tax assets is not yet warranted. CryoLife will continue to evaluate its determination in accordance with the guidance in SFAS 109, which indicates the
Companys net losses in recent years constitute significant evidence against the recoverability of its deferred tax assets that is difficult to overcome. CryoLife will reverse the remaining valuation allowance, or a portion thereof, when and if
its deferred tax assets meet the SFAS 109 more likely than not standard for recognition. Also, the realizability of the Companys deferred tax assets could be limited in future periods following a change in control as mandated by
382 of the Internal Revenue Code of 1986, as amended.
As of December 31, 2007 the Company had a total of $28.2 million in valuation
allowances against deferred tax assets and a net deferred tax liability of $27,000. As of December 31, 2006 the Company had a total of $33.0 million in valuation allowances against deferred tax assets and a net deferred tax liability of
$226,000 related to taxes in a foreign jurisdiction.
The tax years 2004-2007 remain open to examination by the major taxing jurisdictions
to which the Company is subject.
Income (Loss) Per Common Share
Income (loss) per common share is computed in accordance with SFAS No. 128, Earnings Per Share (SFAS 128) on the basis of the
weighted average number of common shares outstanding plus, if applicable, the dilutive effects of outstanding stock options and contingently returnable shares, computed using the treasury stock method, the dilutive effect of outstanding convertible
preferred stock, computed using the if converted method, and the dilutive effect of contingent stock awards.
Stock-Based Compensation
The Company has stock option and stock incentive plans that provide for grants to employees and directors of shares and options to
purchase shares of the Companys common stock at exercise prices generally equal to the fair values of such stock at the dates of grant.
F-14
The Company adopted SFAS 123 Revised Share-Based Payment (SFAS 123R) on
October 1, 2005. SFAS 123R requires companies to recognize the cost of all share-based payments in the financial statements using a fair-value based measurement method. The Company adopted SFAS 123R using the modified version of
prospective application, as defined in SFAS 123R.
In periods prior to October 1, 2005 the Company elected to follow Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations (APB 25) in accounting for its employee stock options. Under APB 25, because the exercise price of
the Companys employee stock options equaled the market price of the underlying stock on the date of the grant, no compensation expense was recognized. In accordance with APB 25 the compensation recorded for employee stock grants was equal to
the value of the grant on the measurement date, the date of the grant, as determined by the closing price of the Companys common stock on that date. Some employee stock grants vest in future periods based on a requirement of continued service
to the Company. For these stock grants the amount of the stock grant was recorded as additional paid-in capital in the equity section of the Companys Consolidated Balance Sheets, and was expensed over the vesting period.
Prior to the adoption of SFAS 123R, the Company followed the provisions of SFAS 123 which required that the Company provide pro forma information
regarding net income (loss) and income (loss) per common share and that the pro forma information be determined as if the Company had accounted for its employee stock options granted under the fair value method of that statement. The fair values for
the options accounted for under APB 25 were estimated at the dates of grant using a Black-Scholes option-pricing model. For purposes of pro forma disclosures, the estimated fair values of the options were amortized to expense over the options
vesting periods.
Translation of Foreign Currencies
Assets and liabilities of the Company denominated in foreign currencies are translated at the exchange rate in effect as of the balance sheet date. Translation adjustments are recorded as a separate component of other
comprehensive income in the shareholders equity section of the Companys Consolidated Balance Sheets. All revenue and expense accounts are translated as transactions occur at exchange rates in effect at the time of each transaction.
Derivative Instruments
In
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), the Company was required to separate and account for the Dividend Make-Whole Payment feature, as defined in Note 6,
of its 6% convertible preferred stock as an embedded derivative. At issuance, the Company determined the fair value of its derivative and recorded the value as a current liability on the Companys Consolidated Balance Sheet. Prior to the
conversion of the preferred stock, changes in the fair value of the derivative were recognized as a non-operating income (expense) on the Companys Consolidated Statements of Operations.
Fair Values of Financial Instruments
SFAS
No. 107, Disclosures about Fair Value of Financial Instruments (SFAS 107) requires the Company to disclose estimated fair values for its financial instruments. The carrying amounts of receivables and accounts payable
approximate their fair values due to the short-term maturity of these instruments. The carrying value of the Companys other financial instruments, including the Companys debt and derivative liabilities, approximated fair value at
December 31, 2007 and 2006.
New Accounting Pronouncements
In December 2007 the FASB issued SFAS No. 141 Revised Business Combinations (SFAS 141R). SFAS 141R revises the accounting and disclosure requirements for business combinations and is
effective for fiscal years beginning after December 15, 2008. The Company is in the process of evaluating the impact of SFAS 141R on its results of operations and financial position.
The Company will be required to adopt SFAS No. 157 Fair Value Measurements (SFAS 157) for the fiscal year beginning
January 1, 2008. SFAS 157 provides a single definition of fair value and a hierarchical framework for measuring it, as well as establishing additional disclosure requirements about the use of fair value to measure assets and liabilities. The
Company does not anticipate that the adoption of SFAS 157 will have a material affect on its results of operations or financial position.
F-15
The Company will be required to adopt SFAS No. 159 The Fair Value Option for Financial Assets
and Liabilities (SFAS 159) for the fiscal year beginning January 1, 2008. SFAS 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial
reporting that can occur when related assets and liabilities are measured differently. The Company does not expect to voluntarily implement the optional fair value measurements portions of SFAS 159 for eligible items. Therefore, the Company does not
anticipate that the adoption of SFAS 159 will have a material affect on its results of operations or financial position.
2. Exchange and Service
Agreement
On December 19, 2006 CryoLife announced that it had entered into an exchange and service agreement (the RTI
Agreement) with Regeneration Technologies, Inc., and certain of its affiliates, (collectively, RTI), respecting procurement, processing, and distribution activities for cardiac and vascular tissue processed and distributed by RTI
and orthopaedic tissue for the knee processed and distributed by CryoLife. In accordance with the RTI Agreement, CryoLife ceased accepting donated human orthopaedic tissue for processing commencing January 1, 2007 and began work to transition
existing arrangements for recovery of human orthopaedic tissue to RTI. Likewise, on January 1, 2007 RTI ceased accepting donated human cardiac and vascular tissues for processing and began work to transition its arrangements for recovery of
these tissues to CryoLife. No cash was exchanged in the transaction. CryoLife will continue to distribute its existing orthopaedic tissue inventory, and RTI will continue to distribute its existing cardiac and vascular tissue inventory, through
June 30, 2008. After that date CryoLife will become entitled to distribute RTIs remaining cardiac and vascular tissue inventory, and RTI will become entitled to distribute CryoLifes remaining orthopaedic tissue inventory. CryoLife
will pay RTI a commission with respect to any of CryoLifes orthopaedic tissue distributed by RTI and will receive a commission from RTI with respect to any RTI cardiac tissue distributed by CryoLife. Under the RTI Agreement, from July 1,
2008 through December 31, 2016, except as set forth above, CryoLife has agreed not to market or solicit orders for certain human orthopaedic tissues and RTI has agreed not to market or solicit orders for human cardiac and vascular tissues. The
agreement also provides for a non-exclusive license of technology from CryoLife to RTI, and contains customary provisions regarding indemnification and confidentiality.
As a result of the RTI Agreement, the Company recorded a net $159,000 loss during the fourth quarter of 2006, which was composed of a write-down of $2.8 million in cost of preservation services and a $2.6 million gain
on exit activities on the Companys Consolidated Statement of Operations.
The $2.8 million write-down was due to the impairment of
certain orthopaedic tissues and processing materials. The write-down of deferred tissue preservation costs was based on an estimate of the tissues that would be shipped during the 18-month period subsequent to December 31, 2006 in which the
Company can continue to distribute its existing orthopaedic tissues.
The $2.6 million gain on exit activities was primarily due to a gain
on the recording of intangible assets received from RTI, partially offset by several individually immaterial asset write-downs and expense accruals incurred as a result of the transaction. The intangibles acquired from RTI in the transaction include
procurement contracts and access to the procurement of cardiac and vascular human tissues previously received by RTI, customer lists, and a non-compete agreement. The assets transferred to RTI were internally developed intangible assets, and as
such, had no book value on CryoLifes Consolidated Balance Sheets prior to the transaction. The RTI Agreement was accounted for as a non-monetary exchange in accordance with Accounting Principles Board Opinion No. 29 (As Amended)
Accounting for Nonmonetary Transactions, as clarified by Emerging Issues Task Force (EITF) 01-2 Interpretations of APB Opinion No. 29 and SFAS 153 Exchanges of Nonmonetary Assets and based upon a
valuation study prepared by an independent valuation consultant.
F-16
3. Cash Equivalents and Marketable Securities
The following is a summary of cash equivalents and marketable securities (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
Cost Basis
|
|
Unrealized
Holding
Gains
|
|
Estimated
Market
Value
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
11,724
|
|
$
|
|
|
$
|
11,724
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
Government entity sponsored debt securities
|
|
$
|
2,984
|
|
$
|
3
|
|
$
|
2,987
|
|
|
|
|
December 31, 2006
|
|
Cost Basis
|
|
Unrealized
Holding
Gains
|
|
Estimated
Market
Value
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,484
|
|
$
|
|
|
$
|
2,484
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
Government entity sponsored debt securities
|
|
$
|
3,964
|
|
$
|
1
|
|
$
|
3,965
|
Restricted securities:
|
|
|
|
|
|
|
|
|
|
Government entity sponsored debt securities
|
|
$
|
571
|
|
$
|
|
|
$
|
571
|
There were no gross realized gains or losses on sales of available-for-sale securities for the
years ended December 31, 2007 and 2006. Differences between cost and market listed above, consisting of a net unrealized holding gain of $3,000 and $1,000 at December 31, 2007 and 2006, respectively, are included as a separate component of
other comprehensive income in the shareholders equity section of the Consolidated Balance Sheets.
At December 31, 2007 and 2006
all of the Companys marketable securities had a maturity date within 90 days.
4. Inventories
Inventories at December 31 are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Raw materials
|
|
$
|
2,956
|
|
$
|
3,048
|
Work-in-process
|
|
|
650
|
|
|
479
|
Finished goods
|
|
|
2,001
|
|
|
1,626
|
|
|
|
|
|
|
|
Total Inventories
|
|
$
|
5,607
|
|
$
|
5,153
|
|
|
|
|
|
|
|
5. Debt
On February 8, 2005 CryoLife and its subsidiaries entered into a credit agreement with Wells Fargo Foothill, Inc. as lender (the Credit Agreement). The Credit Agreement provided for a revolving credit
facility in an aggregate amount equal to the lesser of $15.0 million (including a letter of credit sub facility of up to an aggregate of $2.0 million) or a borrowing base determined in accordance with the terms of the Credit Agreement. Generally,
the borrowing base was 20% of the appraised value of the business of CryoLife, reduced by specified lender reserves. The Credit Agreement placed limitations on the amount that the Company could borrow, and included various affirmative and negative
covenants, including financial covenants such as a requirement that CryoLife either (i) maintain quarterly a minimum aggregate borrowing availability under the Credit Agreement, less certain payables incurred outside the Companys
historical practices, plus unrestricted cash and cash equivalents, as defined (Availability), of at least $12.5 million or (ii) achieve as of each quarter end a minimum level of earnings before extraordinary gains, interest, taxes,
depreciation, and amortization (EBITDA), BioGlue gross margins of at least 70% for the preceding twelve months, as well as Availability of at least $5.0 million. In the first quarter of 2007 the
F-17
Company obtained a $500,000 letter of credit sub facility relating to one of the Companys product liability insurance policies. This reduced the
Companys aggregate borrowing capacity under the Credit Agreement to $14.5 million. The Credit Agreement also included customary conditions on incurring new indebtedness and prohibited payments of cash dividends on the Companys common
stock. There was no restriction on the payment of stock dividends. Commitment fees were paid based on the unused portion of the facility.
Amounts borrowed under the Credit Agreement were secured by substantially all of the tangible and intangible assets of CryoLife and its subsidiaries and bore interest at the banks prime rate plus 1%, which aggregated 8.25% as of
December 31, 2007 and 9.25% as of December 31, 2006. As of December 31, 2007 and 2006 the outstanding balance of the Credit Agreement was $4.5 million.
The Credit Agreement expired on February 8, 2008, at which time the outstanding principal balance of $4.5 million was paid from cash on hand. The Company also remitted approximately $500,000 as collateral to
cover the remaining term of the letter of credit agreement discussed above.
The Company routinely enters into agreements to finance
insurance premiums for periods not to exceed the terms of the related insurance policies. In the second quarter of 2007 the Company entered into two agreements to finance approximately $1.4 million and $478,000 in insurance premiums associated with
the yearly renewal of certain of the Companys insurance policies. The amounts financed accrued interest at 7.027% and were payable in equal monthly payments over a nine month and an eight month period, respectively. As of December 31,
2007 the aggregate outstanding balance under these agreements was zero.
In the second quarter of 2006 the Company entered into two
agreements to finance approximately $1.6 million and $715,000 in insurance premiums associated with the yearly renewal of certain of the Companys insurance policies. The amounts financed accrued interest at 6.71% and 6.7%, respectively, and
were payable in equal monthly payments over a nine month and an eight month period, respectively. As of December 31, 2007 the aggregate outstanding balance under these agreements was zero.
Total interest expense was $677,000, $657,000, and $346,000 in 2007, 2006, and 2005 respectively.
6. Convertible Preferred Stock
On March 18 and
April 19, 2005 the Company completed a public offering of 417,000 shares of 6% convertible preferred stock (the Preferred Stock) at a price to the public of $50.00 per share. Net proceeds from the offering, after deducting
underwriting discounts and offering-related expenses, totaled approximately $19.1 million.
Dividends on the Preferred Stock were
cumulative from the date of original issue at the annual rate of 6% of the liquidation preference of the Preferred Stock, payable quarterly on the first day of January, April, July, and October, commencing July 1, 2005. Any dividends were
required to be declared by the Companys Board of Directors and to come from funds legally available for dividend payments. On March 13, 2007 the Company declared a dividend of $0.75 per share on its Preferred Stock. The dividend of
approximately $243,000 was paid on April 2, 2007 to shareholders of record on March 22, 2007. No dividends were declared in the remainder of 2007. The Company made cash payments of $486,000, $973,000, and $533,000 in the years ended
December 31, 2007, 2006, and 2005, respectively, for dividends declared.
The Preferred Stock was convertible at the option of the
holder at any time into the Companys common stock at a conversion rate of approximately 6.2189 shares of common stock for each share of Preferred Stock, based on an initial conversion price of $8.04. The Company had reserved 4,600,000 shares
of common stock for issuance upon conversion. Through June 4, 2007 holders had voluntarily converted a cumulative 139,000 shares of Preferred Stock into 867,000 shares of common stock, of which 47,000 shares of Preferred Stock were voluntarily
converted into 292,000 shares of common stock in the second quarter of 2007.
The Preferred Stock contained provisions that allowed the
Company to automatically convert its Preferred Stock into common stock if the closing price of the Companys common stock exceeded $12.06, which is 150% of the conversion price of the Preferred Stock, for at least 20 trading days during any
30-day trading period, ending within five trading days prior to notice of automatic conversion. This condition was satisfied on June 4, 2007 and on that day the Company exercised its right to automatically convert the Preferred Stock into
common stock. As a result, on June 25, 2007 the Company automatically converted the remaining 278,000 shares of Preferred Stock into 1,726,000 shares of common stock at the conversion rate of approximately 6.2189 shares of common stock per
share of Preferred Stock.
F-18
The Company was required to make additional payments for both the voluntary and automatic conversions of
Preferred Stock equal to the aggregate amount of dividends that would have been payable on the Preferred Stock through April 1, 2008, less any dividends already paid on the Preferred Stock (the Dividend Make-Whole Payment). The
Dividend Make-Whole Payment was payable in cash or, at the Companys option, in shares of the Companys common stock, or a combination of cash and shares of common stock. The Dividend Make-Whole Payment is discussed further in Note 7
below.
As of December 31, 2007 there were no outstanding shares of Preferred Stock as a result of the second quarter automatic
conversion of the Preferred Stock to common stock.
7. Derivatives
In accordance with SFAS 133, the Company was required to separate and account for the Dividend Make-Whole Payment feature of its Preferred Stock as an embedded derivative (the Derivative). As an embedded
derivative instrument, the Dividend Make-Whole Payment feature was measured at fair value and reflected as a current liability on the Companys Consolidated Balance Sheets prior to the conversion of the Preferred Stock as discussed in Note 6
above. Changes in the fair value of the Derivative were recognized in the line item change in valuation of derivative as a non-operating income/expense on the Companys Consolidated Statements of Operations.
The Company determined the fair value of the Derivative to be $1.0 million on March 18, 2005, the date of issuance. The Company determined the fair
value of the Derivative related to the issuance of additional Preferred Stock upon exercise of the underwriters over allotment option to be $32,000 on April 19, 2005, the date of issuance. The proceeds from the Preferred Stock recorded on
the Consolidated Balance Sheets were reduced by these amounts, which were allocated to the Derivative.
As discussed in Note 6 above, on
June 25, 2007 the Company automatically converted the remaining shares of the Preferred Stock into common stock, thereby triggering the payment of the remaining Dividend Make-Whole Payment. Through June 4, 2007 the Company had issued
132,000 shares of common stock to converting holders in satisfaction of the Dividend Make-Whole Payment. The value of voluntary conversions during 2007 was $178,000 based on the share prices on the respective dates of conversion. On June 25,
2007 the Company issued 69,000 shares of common stock to preferred shareholders to satisfy the Dividend Make-Whole Payment due to the automatic conversion. The value of the Dividend Make-Whole Payment was $878,000 based on the share price of $12.71
on the date of conversion.
The Company recorded other expense totaling $821,000 for the year ended December 31, 2007 related to the
first quarter revaluation of the Derivative and the second quarter automatic and voluntary conversions of the Preferred Stock to common stock. The 2007 expenses for the voluntary and automatic conversions represent the value of the Dividend
Make-Whole Payments paid by the Company that exceeded the derivative liability accrued in prior periods.
The Company recorded other
expense of $121,000 for the year ended December 31, 2006 related to the quarterly revaluations of the Derivative. The Company recorded other income of $140,000 for the year ended December 31, 2005 related to voluntary conversions of the
Preferred Stock to common stock and the quarterly revaluations of the Derivative.
At December 31, 2007 there was no remaining
derivative liability as a result of the second quarter automatic conversion of the Preferred Stock into common stock.
8. Commitments and Contingencies
Leases
The Companys
capital lease obligations result from the financing of certain of the Companys equipment. The Companys operating lease obligations result from the lease of land and buildings that comprise the Companys corporate headquarters and
manufacturing facilities, leases related to additional office, and warehouse space rented by the Company, leases on housing for expatriated employees, leases on Company vehicles, and leases on a variety of office equipment.
The term of the lease of the land and buildings that comprise the Companys corporate headquarters was originally 15 years and was later extended to
19 years. This lease expires in 2015. Certain leases contain escalation clauses and renewal options for
F-19
additional periods. Rent expense is computed on the straight-line method over the lease term with the offsetting accrual of $1.3 million for the years ended
December 31, 2007 and 2006, respectively, recorded in other long-term liabilities.
Future minimum lease payments under non-cancelable
leases as of December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Capital
|
|
Operating
|
2008
|
|
$
|
53
|
|
$
|
2,415
|
2009
|
|
|
52
|
|
|
2,275
|
2010
|
|
|
35
|
|
|
2,153
|
2011
|
|
|
|
|
|
2,145
|
2012
|
|
|
|
|
|
2,187
|
Thereafter
|
|
|
|
|
|
6,337
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
140
|
|
$
|
17,512
|
|
|
|
|
|
|
|
Less amount representing interest at a weighted average 9% interest rate
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
124
|
|
|
|
Less current maturities
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, less current maturities
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
The gross amount of property acquired under capital leases included in the Consolidated Balance
Sheets consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Equipment
|
|
$
|
937
|
|
$
|
937
|
Furniture and fixtures
|
|
|
765
|
|
|
765
|
Leasehold improvements
|
|
|
1,244
|
|
|
1,244
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,946
|
|
$
|
2,946
|
|
|
|
|
|
|
|
The amortization of the Companys assets acquired under capital leases is recorded as
depreciation expense based on the life of the lease. Total rental expense for operating leases was $2.3 million, $2.3 million, and $2.4 million for 2007, 2006, and 2005 respectively. In 2005 the Company recorded rental income of $258,000 under a
sublease that terminated during 2005.
Litigation, Claims, and Assessments
Product Liability Claims
In the normal course of business as a medical device and services
company, the Company has product liability complaints filed against it. As of February 15, 2008 two product liability lawsuits were pending against the Company arising out of the Companys allograft heart valve and orthopaedic tissue
preservation services. These lawsuits are covered by product liability insurance and are in the pre-discovery or discovery stages. Other parties have made complaints that may result in lawsuits in future periods.
The Company performed an analysis as of December 31, 2007 of the pending product liability lawsuits and other claims based on settlement
negotiations to date and advice from counsel. As of December 31, 2007 the Company had accrued a total of approximately $330,000 for the pending product liability lawsuits. The $330,000 accrual was included as a component of accrued expenses and
other current liabilities on the December 31, 2007 Consolidated Balance Sheet. As of December 31, 2006 the Company had accrued a total of approximately $330,000 for a pending product liability lawsuit. The lawsuit to which this accrual
related was settled in the first quarter of 2007. The $330,000 accrual was included as a component of accrued expenses and other current liabilities on the December 31, 2006 Consolidated Balance Sheet.
On April 1, 2007 the Company bound coverage for the 2007/2008 insurance policy year. This policy is a five-year claims-made insurance policy, i.e.
claims incurred during the period April 1, 2003 through March 31, 2008 and reported during the period April 1, 2007 through March 31, 2008 are covered by this policy. Claims incurred prior to April 1, 2003 that have not been
reported are uninsured.
The Company maintains claims-made insurance policies to mitigate its financial exposure to product liability
claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for
claims and
F-20
incidents that have been incurred but not reported to the insurance carrier during the policy period. The Company periodically evaluates its exposure to
unreported product liability claims and records accruals as necessary for the estimated cost of unreported claims related to services performed and products used. In January 2008 the Company retained an independent actuarial firm to perform
estimates of the unreported claims as of December 31, 2007. The independent firm estimated the unreported product loss liability using a frequency-severity approach, whereby projected losses were calculated by multiplying the estimated number
of claims by the estimated average cost per claim. The estimated claims were calculated based on the reported claim development method and the Bornhuetter-Ferguson method using a blend of the Companys historical claim experience and industry
data. The estimated cost per claim was calculated using a lognormal claims model blending the Companys historical average cost per claim with industry claims data. The independent actuarial firm used a number of assumptions in order to
estimate the unreported product loss liability including:
|
|
|
A ceiling of $5.0 million was selected for actuarial purposes in determining the liability per claim given the uncertainty in projecting claim losses in excess of
$5.0 million,
|
|
|
|
The future claim reporting lag time would be a blend of the Companys experiences and industry data,
|
|
|
|
The frequency of unreported claims for accident years 2001 through 2007 would be lower than the Companys experience in the 2002/2003 policy year, but higher
than the Companys historical claim frequency prior to the 2002/2003 policy year,
|
|
|
|
The average cost per claim would be lower than the Companys experience since the 2002/2003 policy year, but higher than the Companys historical cost per
claim prior to the 2002/2003 policy year,
|
|
|
|
The average cost per BioGlue claim would be consistent with the Companys overall historical exposures until adequate historical data is available on this
product line, and
|
|
|
|
The number of BioGlue claims per million dollars of BioGlue revenue would be 50% lower than non-BioGlue claims per million dollars of revenue. The 50% factor was
selected based on BioGlue claims experience to date and consultation with the actuary.
|
The Company believes that these
assumptions provide a reasonable basis for the calculation of the unreported product liability loss, but the accuracy of the actuarial firms estimates is limited by the general uncertainty that exists for any estimate of future activity due to
uncertainties surrounding the assumptions used and due to Company specific conditions and the scarcity of industry data directly relevant to the Companys business activities. Due to these factors, actual results may differ significantly from
the assumptions used and amounts accrued.
Based on the actuarial valuation performed in January 2008 as of December 31, 2007, the
Company estimated that its liability for unreported product liability claims was $6.3 million as of December 31, 2007. The $6.3 million balance is included as a component of accrued expenses and other current liabilities of $3.2 million and
other long-term liabilities of $3.1 million on the December 31, 2007 Consolidated Balance Sheet. Further analysis indicated that the liability could be estimated to be as high as $11.9 million, after including a reasonable margin for
statistical fluctuations calculated based on actuarial simulation techniques. Based on the actuarial valuation, the Company estimated that as of December 31, 2007, $2.4 million of the accrual for unreported liability claims would be recoverable
under the Companys insurance policies. The $2.4 million insurance recoverable is included as a component of other receivables of $1.1 million and other long-term assets of $1.3 million on the December 31, 2007 Consolidated Balance Sheet.
These amounts represent managements estimate of the probable losses and anticipated recoveries for unreported product liability claims related to services performed and products sold prior to December 31, 2007. Actual results may differ
from this estimate.
As of December 31, 2006 the Company accrued $6.6 million for unreported product liability claims and recorded a
receivable of $2.3 million for unreported liability claims estimated to be recoverable under the Companys insurance policies. This $6.6 million accrual was included as a component of accrued expenses and other current liabilities of $3.3
million and other long-term liabilities of $3.3 million on the December 31, 2006 Consolidated Balance Sheet. The $2.3 million insurance recoverable was included as a component of other current receivables of $1.1 million and other long-term
assets of $1.2 million on the December 31, 2006 Consolidated Balance Sheet.
F-21
Insurance Coverage Dispute
In September 2006 the Company favorably settled insurance coverage disputes with former insurance carriers for $2.1 million, net of associated legal fees. The disputes involved losses stemming from approximately $11.3
million paid in 2005 by the Company in settlement of outstanding claims. No party admitted any liability as part of the September 2006 settlement. The net proceeds of $2.1 million were received in October 2006 and are included as a component of
general, administrative, and marketing expenses on the Consolidated Statements of Operations for the year ended December 31, 2006.
Class Action
Lawsuit
Several putative class action lawsuits were filed in July through September 2002 against the Company and certain officers
of the Company, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on a series of purportedly materially false and misleading statements to the market. The suits were consolidated, and a consolidated amended
complaint filed, that principally alleged that the Company made misrepresentations and omissions relating to product safety and the Company did not comply with certain FDA regulations regarding the handling and processing of certain tissues and
other product safety matters. The consolidated complaint sought certification of a class of purchasers between April 2, 2001 and August 14, 2002, compensatory damages, and other expenses of litigation.
On July 21, 2005 the Company reached an agreement in principle to settle the securities class action lawsuit. The settlement resolved all claims
asserted against the Company and the individual defendants in this case. The terms of the settlement included a total settlement of $23.25 million in cash and stock. The cash payment, which included approximately $12.0 million in insurance proceeds
and approximately $9.3 million in Company funds, was paid in the third and fourth quarters of 2005. The Company transferred 500,000 shares valued at $2.0 million in the fourth quarter of 2005 in payment of the stock portion of the settlement. The
Company and the individual defendants have denied any wrongdoing and liability whatsoever, and the settlement does not contain any admission of liability.
9. Stock Compensation
Overview
The Company has stock option and stock incentive plans for employees and non-employee Directors that provide for grants of shares and options to purchase shares of Company common stock at exercise prices generally
equal to the fair values of such stock at the dates of grant. The Company maintains a shareholder approved Employee Stock Purchase Plan (the ESPP) for the benefit of its employees. The ESPP allows eligible employees the right to purchase
common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period.
As
of December 31, 2007 the Company is authorized to grant under the Companys plans up to the following number of shares:
|
|
|
Plan
|
|
Shares
|
1998 Long-Term Incentive Plan
|
|
900,000
|
2002 Stock Incentive Plan
|
|
974,000
|
2004 Employee Stock Incentive Plan
|
|
2,000,000
|
As of December 31, 2007 and 2006 there were 1.3 million and 1.9 million,
respectively, shares of common stock reserved for future issuance under the Companys stock option and stock incentive plans after considering prior grants. Upon the exercise of stock options, the Company may issue the required shares out of
authorized but unissued common stock or out of treasury stock, at managements discretion. As of May 2, 2007 the Board of Directors terminated the 2004 Non-Employee Directors Stock Option Plan. Therefore, no further grants of shares will
be made out of this plan.
Stock Grants
In February 2007 the Compensation Committee of the Companys Board of Directors approved the terms of the Companys 2007 performance-based bonus plans to recognize the performance of the Companys executives and managers. A
portion of the awards to be issued under these plans will be paid in Company stock pursuant to the Companys existing stock incentive plans, if the required performance is achieved. The Company recorded a liability of $788,000 related to this
stock grant during the year ended December 31, 2007. The Company expects to pay out cash and stock related to these bonus plans in the first quarter of 2008.
F-22
In 2007 the Compensation Committee of the Companys Board of Directors authorized grants of stock
from approved stock incentive plans to certain Company executives and non-employee Directors totaling 172,000 shares of common stock. The stock, which had an aggregate value of $1.6 million, was valued based on the stock prices on the respective
grant dates. The grants of stock in 2007 include 68,000 shares of common stock valued at $587,000 issued as part of the 2006 performance-based bonus plan for certain Company executives. The Company recorded the entire expense related to the 2006
performance-based bonus plan during the year ended December 31, 2006. The remaining value of the stock granted will be recorded as an expense on the Companys Consolidated Statements of Operations over the respective vesting periods in
accordance with SFAS 123R as discussed below.
In 2006 the Compensation Committee of the Companys Board of Directors authorized
grants of stock from approved stock incentive plans to certain Company executives and non-employee Directors totaling 54,000 shares of common stock. The stock, which had an aggregate value of $254,000, was valued based on the stock prices on the
respective grant dates. The value of the stock granted will be recorded as an expense on the Companys Consolidated Statements of Operations over the respective vesting periods in accordance with SFAS 123R as discussed below.
In 2005 there were no stock grants issued by the Compensation Committee of the Companys Board of Directors.
As of December 31, 2007 and 2006 CryoLife had a total of $606,000 and $73,000, respectively, in additional paid-in capital related to stock grants
in the shareholders equity section of the Companys Consolidated Balance Sheets.
A summary of stock grant activity for the
years ended December 31, 2007, 2006, and 2005 is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested at December 31, 2004
|
|
32,000
|
|
|
$
|
6.91
|
Vested
|
|
(29,000
|
)
|
|
|
6.91
|
Canceled
|
|
(3,000
|
)
|
|
|
6.91
|
|
|
|
|
|
|
|
Unvested at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
54,000
|
|
|
|
4.70
|
Vested
|
|
(41,000
|
)
|
|
|
4.45
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
13,000
|
|
|
|
5.47
|
|
|
|
|
|
|
|
Granted
|
|
172,000
|
|
|
|
9.61
|
Vested
|
|
(82,000
|
)
|
|
|
8.06
|
Canceled
|
|
(15,000
|
)
|
|
|
9.26
|
|
|
|
|
|
|
|
Unvested at December 31, 2007
|
|
88,000
|
|
|
$
|
10.48
|
|
|
|
|
|
|
|
Stock Options
The Compensation Committee of the Companys Board of Directors authorized grants of stock options from approved stock incentive plans to certain Company executives and employees totaling 383,000, 948,000, and
115,000 shares in 2007, 2006, and 2005, respectively, with exercise prices equal to the stock prices on the respective grant dates. The value of the stock options granted will be recorded as an expense on the Companys Consolidated Statements
of Operations over the respective vesting periods in accordance with SFAS 123R as discussed below.
F-23
A summary of Companys stock option transactions under the plans as of and for the year ended
December 31, 2007, 2006, and 2005 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2004
|
|
2,293,000
|
|
|
$
|
11.04
|
|
2.78
|
|
$
|
3,354,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
115,000
|
|
|
|
7.08
|
|
|
|
|
|
Exercised
|
|
(36,000
|
)
|
|
|
3.14
|
|
|
|
|
|
Forfeited
|
|
(126,000
|
)
|
|
|
5.62
|
|
|
|
|
|
Expired
|
|
(492,000
|
)
|
|
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
1,754,000
|
|
|
|
11.55
|
|
2.42
|
|
|
505,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
948,000
|
|
|
|
4.98
|
|
|
|
|
|
Exercised
|
|
(101,000
|
)
|
|
|
2.25
|
|
|
|
|
|
Forfeited
|
|
(103,000
|
)
|
|
|
5.09
|
|
|
|
|
|
Expired
|
|
(310,000
|
)
|
|
|
26.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
2,188,000
|
|
|
|
7.29
|
|
3.03
|
|
|
5,328,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
383,000
|
|
|
|
8.64
|
|
|
|
|
|
Exercised
|
|
(410,000
|
)
|
|
|
3.49
|
|
|
|
|
|
Forfeited
|
|
(124,000
|
)
|
|
|
8.27
|
|
|
|
|
|
Expired
|
|
(179,000
|
)
|
|
|
28.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
1,858,000
|
|
|
$
|
6.31
|
|
3.19
|
|
$
|
3,993,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest
|
|
1,777,000
|
|
|
$
|
6.33
|
|
0.84
|
|
$
|
3,817,000
|
Exercisable at December 31, 2007
|
|
809,000
|
|
|
$
|
6.74
|
|
1.92
|
|
$
|
1,768,000
|
The following table summarizes information concerning outstanding and exercisable options at
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise
Price
|
|
Average
Number
Outstanding
|
|
Weighted
Average
Remaining
Contract Life
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
$
|
2.20-4.78
|
|
381,000
|
|
2.52
|
|
$
|
3.95
|
|
162,000
|
|
$
|
3.48
|
|
4.88-5.05
|
|
455,000
|
|
3.54
|
|
|
5.02
|
|
152,000
|
|
|
5.00
|
|
5.27-5.80
|
|
403,000
|
|
2.96
|
|
|
5.56
|
|
183,000
|
|
|
5.43
|
|
6.16-8.70
|
|
482,000
|
|
3.87
|
|
|
7.87
|
|
200,000
|
|
|
7.28
|
|
9.06-30.86
|
|
137,000
|
|
2.20
|
|
|
13.89
|
|
112,000
|
|
|
14.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.20-30.86
|
|
1,858,000
|
|
3.19
|
|
$
|
6.31
|
|
809,000
|
|
$
|
6.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information concerning stock options for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Weighted average fair value of options granted
|
|
$
|
3.98
|
|
$
|
2.64
|
|
$
|
3.51
|
Intrinsic value of options exercised
|
|
$
|
3,106,000
|
|
$
|
362,000
|
|
$
|
148,000
|
Employees purchased common stock totaling 46,000, 76,000, and 50,000 shares in 2007, 2006, and
2005, respectively, through the Companys ESPP. The value of the option portion of the stock purchased was recorded as an expense on the Companys Consolidated Statements of Operations in each quarterly period in accordance with SFAS 123R
as discussed below.
Stock Compensation Expense
The Company adopted SFAS 123R on October 1, 2005. SFAS 123R requires companies to recognize the cost of all share-based payments in the financial statements using a fair-value based measurement method. The
Company adopted SFAS 123R using the modified version of prospective application, as defined in SFAS 123R, and, as such, the adoption did not affect prior interim or year end periods.
F-24
In anticipation of the adoption of SFAS 123R on September 30, 2005, the Companys Board of
Directors approved the accelerated vesting of unvested and out-of-the-money options with an exercise price equal to or greater than $6.97, the closing price of the Companys common stock on September 29, 2005. Vesting was
accelerated on a total of 167,000 options for 29 employees with a range of exercise prices from $7.03 to $31.99. As a result of this accelerated vesting, the Company recorded on a pro forma basis an additional expense of $1.4 million for the three
and nine months ended September 30, 2005. This expense is deducted from the net loss applicable to common shares as reported to calculate net loss applicable to common shareholders pro forma and the corresponding pro forma loss
per share amounts in the tables below. The decision to initiate the accelerated vesting, which the Company believed to be in the best interest of the Company and its shareholders, was made primarily to reduce compensation expense related to unvested
out-of-the-money options that might be recorded in future periods following the Companys adoption of SFAS 123R on October 1, 2005.
Beginning October 1, 2005 both the Companys 15% discount and the look back portion of ESPP stock purchases are considered a stock option, and as such, must be expensed as stock compensation on the
Companys Consolidated Statements of Operations in accordance with SFAS 123R.
The Company uses the Black-Scholes model to value its
stock option grants under SFAS 123R and expenses the related compensation cost using the straight-line method over the vesting period. The fair value of the Companys ESPP options is also determined using the Black-Scholes model and is expensed
quarterly at the end of the purchase period, as the option is fully vested at that time. The fair value of stock options is determined on the grant date using assumptions for the expected term, expected volatility, dividend yield, and the risk free
interest rate. The term assumption is primarily based on the contractual term of the option and historic data related to exercise and post-vesting cancellation history experienced by the Company, adjusted based on managements expectations of
future results. The expected term is determined separately for options issued to the Companys directors and to employees. The Companys anticipated volatility level is primarily based on the historic volatility of the Companys
common stock, adjusted to remove the effects of certain periods of unusual volatility not expected to recur, and adjusted based on managements expectations of future volatility, for the life of the option or option group. The Companys
model includes a zero dividend yield assumption, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The risk free interest rate is based on recent U.S. treasury note auction results with a similar
life to that of the option. The Companys model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such restrictions. The period expense is then determined based on the valuation of the options
and, at that time, an estimated forfeiture rate is used to reduce the expense recorded. The Companys estimate of pre-vesting forfeitures is primarily based on the recent historical experience of the Company and is adjusted to reflect actual
forfeitures at each vesting date.
During the fourth quarter of 2007 the Companys valuation analyst performed its annual review of
the underlying assumptions the Company uses in its Black-Scholes model for the valuation of options in accordance with SFAS 123R. During this review the Company evaluated the volatility, expected term, and forfeitures. The Company began using these
revised assumptions for all options granted beginning in the fourth quarter of 2007.
The following weighted-average assumptions were used
to determine the fair value of options under SFAS 123R:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31, 2007
|
|
|
Twelve Months Ended
December 31, 2006
|
|
|
|
Stock Options
|
|
|
ESPP Options
|
|
|
Stock Options
|
|
|
ESPP Options
|
|
Expected dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Expected stock price volatility
|
|
.600
|
|
|
.527
|
|
|
.650
|
|
|
.417
|
|
Risk-free interest rate
|
|
4.62
|
%
|
|
4.64
|
%
|
|
4.80
|
%
|
|
4.39
|
%
|
Expected life of options
|
|
3.4 Years
|
|
|
.24 Years
|
|
|
4.1 Years
|
|
|
.24 Years
|
|
|
|
|
|
|
|
Three Months Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
ESPP Options
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
|
|
|
|
|
Expected stock price volatility
|
|
.650
|
|
|
.525
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
4.32
|
%
|
|
3.55
|
%
|
|
|
|
|
|
|
Expected life of options
|
|
5 Years
|
|
|
.25 Years
|
|
|
|
|
|
|
|
The modified prospective approach requires that the Company expense over the remaining vesting
period the value it previously calculated under the fair value method for stock options issued prior to the adoption of SFAS 123R. As of October 1, 2005, the date of adoption, there was approximately $593,000 in total unrecognized compensation
cost related to
F-25
unvested stock, before considering estimated forfeitures. That cost is expected to be recognized based on the vesting of the underlying option awards through
the quarter ended June 30, 2010.
The following table summarizes stock compensation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Stock grant expense
|
|
$
|
1,262,000
|
|
$
|
768,000
|
|
$
|
202,000
|
Stock option expense
|
|
|
865,000
|
|
|
852,000
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense
|
|
$
|
2,127,000
|
|
$
|
1,620,000
|
|
$
|
322,000
|
|
|
|
|
|
|
|
|
|
|
Included in this total stock compensation expense were expenses related to common stock grants,
options issued prior and subsequent to the adoption of SFAS 123R, and compensation related to the Companys ESPP. These amounts were recorded as compensation expense and were subject to the Companys normal allocation of expenses to
inventory and deferred preservation costs. The Company capitalized $87,000, $75,000, and $37,000 in the years ended December 31, 2007, 2006, and 2005, respectively, of the stock compensation expense into its deferred preservation costs and
inventory costs. The Company did not recognize a tax benefit, or a related operating cash outflow and financing cash inflow, related to the compensation expense recorded in the years ended December 31, 2007, 2006, and 2005 as the Company is
maintaining a full valuation allowance on its deferred tax assets. See Note 14 for additional discussions of the Companys income tax valuation.
As of December 31, 2007, 2006, and 2005 there was approximately $2.7 million, $2.1 million, and $495,000, respectively, in total unrecognized compensation costs related to nonvested share-based compensation
arrangements, before considering the effect of expected forfeitures. As of December 31, 2007, 2006, and 2005 this expense is expected to be recognized over a weighted average period of 1.6 years, 2.0 years, and 1.5 years, respectively.
In periods prior to October 1, 2005 the Company elected to follow APB 25 in accounting for its employee stock options. Under APB 25,
because the exercise price of the Companys employee stock options equaled the market price of the underlying stock on the date of the grant, no compensation expense was recognized. In accordance with APB 25, the compensation recorded for
employee stock grants was equal to the value of the grant on the measurement date, the date of the grant, as determined by the closing price of the Companys common stock on that date. Some employee stock grants vested in future periods based
on a requirement of continued service to the Company. For these stock grants, the amount of the stock grant was recorded as additional paid-in capital in the equity section of the Companys Consolidated Balance Sheets, and was expensed on a
straight-line basis over the vesting period.
Pro forma information regarding net loss and loss per share was required by SFAS 123 for
options accounted for under APB 25. SFAS 123 required that option valuation information be disclosed as if the Company accounted for its employee stock options granted under the fair value method of that statement. The fair values for these options
were estimated at the dates of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions were used:
|
|
|
|
|
|
Nine Months Ended
September 30,
2005
|
|
|
|
(unaudited)
|
|
Expected dividend yield
|
|
0
|
%
|
Expected stock price volatility
|
|
.519
|
|
Risk-free interest rate
|
|
3.36
|
%
|
Expected life of options
|
|
3.2 Years
|
|
F-26
For purposes of pro forma disclosures, the estimated fair values of the options are amortized to expense
over the options vesting periods on a ratable basis. The Companys pro forma information follows (in thousands, except per share data):
|
|
|
|
|
|
|
Nine Months Ended
September 30,
2005
|
|
|
|
(unaudited)
|
|
Basic net loss applicable to common sharesas reported
|
|
$
|
(19,387
|
)
|
Stock-based employee compensation:
|
|
|
|
|
Add expense included in the determination of net loss
|
|
|
166
|
|
Deduct expense determined under the fair value based method for all awards
|
|
|
3,253
|
|
|
|
|
|
|
Basic net loss applicable to common sharespro forma
|
|
$
|
(22,474
|
)
|
|
|
|
|
|
Basic weighted-average shares
|
|
|
23,839
|
|
Basic loss per common share:
|
|
|
|
|
As reported
|
|
$
|
(0.81
|
)
|
|
|
|
|
|
Pro forma
|
|
$
|
(0.94
|
)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
2005
|
|
|
|
(unaudited)
|
|
Diluted net loss applicable to common sharesas reported
|
|
$
|
(19,387
|
)
|
Stock-based employee compensation:
|
|
|
|
|
Add expense included in the determination of net loss
|
|
|
166
|
|
Deduct expense determined under the fair value based method for all awards
|
|
|
3,253
|
|
|
|
|
|
|
Diluted net loss applicable to common sharespro forma
|
|
$
|
(22,474
|
)
|
|
|
|
|
|
Diluted weighted-average shares
|
|
|
23,839
|
|
Diluted loss per common share:
|
|
|
|
|
As reported
|
|
$
|
(0.81
|
)
|
|
|
|
|
|
Pro forma
|
|
$
|
(0.94
|
)
|
|
|
|
|
|
10. Shareholder Rights Plan
On November 1, 2005 the CryoLife, Inc. Board of Directors approved the amendment and restatement of the shareholder rights agreement, which was previously adopted by the Board in 1995. The Board of Directors
determined that the amendment and extension of the rights agreement protected the long-term share value for the Companys shareholders. Under the rights agreement each share of the Companys common stock outstanding on December 11,
1995 is entitled to one Right, as defined in, and subject to, the terms of the rights agreement. A Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A junior participating preferred
stock (Series A Stock) of the Company at $33.33 per one one-hundredth of a Preferred Share, subject to adjustment. Additionally, each common share that has or shall become outstanding after December 11, 1995 is also entitled to a
Right, subject to the terms and conditions of the rights agreement. The Rights, which expire on November 23, 2015, may be exercised only if certain conditions are met, such as the acquisition of 15% or more of the Companys common stock by
a person or affiliated group (together with its affiliates, associates, and transferees, an Acquiring Person). Rights beneficially owned by an Acquiring Person become void from and after the time such persons become Acquiring Persons,
and Acquiring Persons have no rights whatsoever under the rights agreement.
Each share of Series A Stock purchasable upon exercise of a
Right will be entitled, when, as, and if declared, to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock. In the event of
liquidation each share of the Series A Stock will be entitled to a minimum preferential liquidation payment of 100 times the payment made per share of common stock. Finally in the event of any merger, consolidation, or other transaction in which
shares of common stock are exchanged, each share of Series A Stock
F-27
will be entitled to receive 100 times the amount received per share of common stock. These rights are protected by customary antidilution provisions.
In the event the Rights become exercisable, each Right will enable the owner, other than Acquiring Persons, to purchase shares of the
Companys Series A Stock as described above. Alternatively, if the Rights become exercisable, the holder of a Right may elect to receive, upon exercise of the Right and in lieu of receiving Series A Stock, that number of shares of common stock
of the Company having an exercise value of two times the exercise price of the Right. In the event that, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or
more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise of a Right, and in lieu of Series A Stock of the Company, that
number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) that at the time of such transaction will have a market value of two times the exercise price of the Right. In addition,
after any person or group becomes an Acquiring Person and prior to the acquisition by the person or group of 50% or more of the outstanding common stock, the Board of Directors may elect to exchange all outstanding Rights at an exchange ratio of one
share of common stock (or fractional share of Series A Stock or other preferred shares) per Right (subject to adjustment).
11. Comprehensive Income
(Loss)
Components of comprehensive income (loss) consist of the following, net of applicable taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
Net income (loss)
|
|
$
|
7,201
|
|
|
$
|
365
|
|
$
|
(19,535
|
)
|
Unrealized gain (loss) on investments
|
|
|
2
|
|
|
|
3
|
|
|
(34
|
)
|
Translation adjustment
|
|
|
(162
|
)
|
|
|
34
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
7,041
|
|
|
$
|
402
|
|
$
|
(19,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effect on the change in unrealized gain (loss) on investments is zero, zero, and $11,000
for the years ended December 31, 2007, 2006, and 2005, respectively.
At December 31, 2007, components of accumulated other
comprehensive income consists of the following, (in thousands):
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
Unrealized gain on investments
|
|
$
|
3
|
|
|
$
|
1
|
Translation adjustment
|
|
|
(3
|
)
|
|
|
159
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
|
|
|
$
|
160
|
|
|
|
|
|
|
|
|
12. Employee Benefit Plans
The Company has a 401(k) savings plan (the Plan) providing retirement benefits to all employees who have completed at least three months of service. The Company made matching contributions of 50% of each
participants contribution for up to 4% of each participants salary in 2007, 2006, and 2005. Total Company contributions approximated $357,000, $340,000, and $296,000 for 2007, 2006, and 2005, respectively. Additionally, the Company may
make discretionary contributions to the Plan that is allocated to each participants account. In 2006 discretionary contributions of $56,000 were made by the plan administrator on behalf of the Company. No discretionary contributions were made
in 2007 or 2005.
On May 16, 1996 the Companys shareholders approved the CryoLife, Inc. ESPP. The ESPP allows eligible employees
the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. As of December 31, 2007 and 2006 there were 158,000 and 205,000, respectively, shares
of common stock reserved under the ESPP and there were 742,000 and 695,000, respectively, shares issued under the plan.
F-28
13. Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted income (loss) per common share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Numerator for basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,201
|
|
|
$
|
365
|
|
|
$
|
(19,535
|
)
|
Effect of preferred stock
a
|
|
|
(243
|
)
|
|
|
(973
|
)
|
|
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
|
$
|
6,958
|
|
|
$
|
(608
|
)
|
|
$
|
(20,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
26,331
|
|
|
|
24,829
|
|
|
|
23,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
0.26
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,201
|
|
|
$
|
365
|
|
|
$
|
(19,535
|
)
|
Effect of preferred stock
a, b
|
|
|
(243
|
)
|
|
|
(973
|
)
|
|
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
|
$
|
6,958
|
|
|
$
|
(608
|
)
|
|
$
|
(20,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
26,331
|
|
|
|
24,829
|
|
|
|
23,959
|
|
Effect of dilutive convertible preferred stock
b
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options
c
|
|
|
582
|
|
|
|
|
|
|
|
|
|
Effect of contingently returnable shares
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Effect of contingent stock awards
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average common shares
|
|
|
26,974
|
|
|
|
24,829
|
|
|
|
23,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share
|
|
$
|
0.26
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
|
The amount of the accumulated dividend on the Preferred Stock reduced the Companys net income applicable to common
shares by $243,000 for the year ended December 31, 2007, offset the Companys net income and resulted in a net loss applicable to common shares with a total unfavorable effect of $973,000 for the year ended December 31, 2006, and
increased the net loss applicable to common shares by $777,000 for the year ended December 31, 2005.
|
b
|
The amount of the accumulated dividend on the Preferred Stock reduced the Companys net income applicable to common
shares by $243,000 for the year ended December 31, 2007. The adjustment for the Dividend Make-Whole Payment for conversions during the period and the adjustment for the quarterly revaluation of the derivative liability would have instead
increased net income applicable to common shareholders by $821,000 for the year ended December 31, 2007. The common shares that would have been issued to shareholders at the beginning of the year for the conversion of the remaining Preferred
Stock and in payment of the remaining Dividend Make-Whole Payment would have increased the weighted-average shares by 976,000 for the year ended December 31, 2007. These adjustments were excluded from the calculation above, as they were
anti-dilutive pursuant to the provisions of SFAS 128.
|
The amount of the accumulated dividend on Preferred Stock offset
the Companys net income and resulted in a net loss applicable to common shares with a total unfavorable effect of $973,000 for the year ended December 31, 2006. The adjustment for the quarterly revaluation of the derivative liability,
would have instead increased the net income applicable to common shareholders by $121,000 for the year ended December 31, 2006, and the common shares that would be issued to shareholders upon conversion of the remaining Preferred Stock and in
payment of the remaining Dividend Make-Whole Payment would have increased the weighted-average common shares by 2.2 million for the year ended December 31, 2006. These adjustments were excluded from the calculation above, as they were
anti-dilutive pursuant to the provisions of SFAS 128.
The amount of the accumulated dividend on Preferred Stock increased the
Companys net loss by $777,000 for the year ended December 31, 2005. The adjustment for voluntary conversions of Preferred Stock which took place during the period March 18, 2005 through December 31, 2005, and the adjustment for
the quarterly revaluation of the derivative liability, would have instead increased the net loss applicable to common shareholders by $140,000 for the year ended December 31, 2005. The common shares that would be issued to shareholders upon
conversion of the remaining
F-29
Preferred Stock and in payment of the remaining Dividend Make-Whole Payment would have increased the weighted-average common shares by 2.0 million for
the year ended December 31, 2005. These adjustments were excluded from the calculation above, as they were anti-dilutive pursuant to the provisions of SFAS 128.
c
|
Outstanding options to purchase the Companys common stock that would have resulted in additional dilutive common
shares of 229,000 and 331,000 for the years ended December 31, 2006 and 2005, respectively, were excluded from the calculation above, as they were anti-dilutive pursuant to the provisions of SFAS 128.
|
In future periods the basic and diluted earnings per common share are expected to be affected by stock option transactions including the exercise of
stock options and the issuance of additional stock options, contingently returnable shares, and contingent stock awards, as well as fluctuations in the fair value of the Companys common stock.
14. Income Taxes
Income (loss) before income taxes
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
Domestic
|
|
$
|
7,570
|
|
|
$
|
358
|
|
$
|
(19,956
|
)
|
Foreign
|
|
|
(1
|
)
|
|
|
292
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
7,569
|
|
|
$
|
650
|
|
$
|
(19,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
253
|
|
$
|
85
|
|
|
$
|
(557
|
)
|
State
|
|
|
36
|
|
|
(58
|
)
|
|
|
70
|
|
Foreign
|
|
|
79
|
|
|
(17
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368
|
|
|
10
|
|
|
|
(364
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
275
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
|
(64
|
)
|
Income tax expense (benefit)
|
|
$
|
368
|
|
$
|
285
|
|
|
$
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys income tax expense of $368,000 for 2007 was primarily due to alternative
minimum tax on the Companys U.S. taxable income for 2007 that cannot be offset by the Companys net operating loss carryforwards, as well as taxes on the Companys wholly owned European subsidiary and certain state tax obligations.
Such amounts differ from the amounts computed by applying the U.S. federal income tax rate of 34% in 2007, 2006, and 2005 to pretax income
as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Tax expense (benefit) at statutory rate
|
|
$
|
2,573
|
|
|
$
|
221
|
|
|
$
|
(6,787
|
)
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
|
(3,257
|
)
|
|
|
(330
|
)
|
|
|
6,493
|
|
Research and development credit
|
|
|
(70
|
)
|
|
|
(126
|
)
|
|
|
(100
|
)
|
Extraterritorial income exclusion
|
|
|
|
|
|
|
(49
|
)
|
|
|
(54
|
)
|
State income taxes, net of federal benefit
|
|
|
359
|
|
|
|
3
|
|
|
|
(142
|
)
|
Loss (gain) on preferred stock dividend make-whole payments
|
|
|
279
|
|
|
|
41
|
|
|
|
(48
|
)
|
Equity compensation
|
|
|
275
|
|
|
|
175
|
|
|
|
30
|
|
Non-deductible entertainment expenses
|
|
|
99
|
|
|
|
81
|
|
|
|
74
|
|
Disallowed executive compensation deduction
|
|
|
82
|
|
|
|
|
|
|
|
|
|
Foreign income taxes
|
|
|
8
|
|
|
|
258
|
|
|
|
59
|
|
Other
|
|
|
20
|
|
|
|
11
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
368
|
|
|
$
|
285
|
|
|
$
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
The tax effects of temporary differences which give rise to deferred tax liabilities and assets at
December 31 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for bad debts
|
|
$
|
67
|
|
|
$
|
50
|
|
Property
|
|
|
851
|
|
|
|
62
|
|
Accrued expenses
|
|
|
3,579
|
|
|
|
2,926
|
|
Loss carryforwards
|
|
|
19,300
|
|
|
|
23,603
|
|
Credit carryforwards
|
|
|
4,223
|
|
|
|
5,372
|
|
Deferred preservation costs and inventory reserves
|
|
|
1,106
|
|
|
|
1,467
|
|
Other
|
|
|
384
|
|
|
|
237
|
|
Less valuation allowance
|
|
|
(28,228
|
)
|
|
|
(32,978
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,282
|
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(872
|
)
|
|
|
(239
|
)
|
Prepaid items
|
|
|
(410
|
)
|
|
|
(441
|
)
|
Other
|
|
|
(27
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(1,309
|
)
|
|
|
(965
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
(27
|
)
|
|
$
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
The Company periodically assesses the recoverability of its deferred tax assets, in accordance
with SFAS No. 109, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. Management provides a valuation allowance when, as a result of this analysis,
management believes it is more likely than not that its deferred tax assets will not be realized. In assessing the recoverability of its deferred tax assets at December 31, 2007 the Company reviewed its historical operating results, including
the reasons for its operating losses in prior years and uncertainties regarding projected future operating results. Based on the results of this analysis, discussed further below, at December 31, 2007 the Company determined that it was more
likely than not that the Companys deferred tax assets would not be realized.
Based on the Companys results for the year ended
December 31, 2007 and its projections for 2008, the Company anticipates that it will utilize a portion of its net operating loss carryforwards in the 2008 income tax year to offset its U.S. taxable income, as it did in the 2007 and 2006 tax
years. Although CryoLife is beginning to utilize its net operating loss carryforwards, the Company currently believes that a change in its determination of the recoverability of its deferred tax assets is not yet warranted. CryoLife will continue to
evaluate its determination in accordance with the guidance in SFAS 109, which indicates the Companys net losses in recent years constitute significant evidence against the recoverability of its deferred tax assets that is difficult to
overcome. CryoLife will reverse the remaining valuation allowance, or a portion thereof, when and if its deferred tax assets meet the SFAS 109 more likely than not standard for recognition. Also, the realizability of the Companys
deferred tax assets could be limited in future periods as mandated by 382 of the Internal Revenue Code of 1986, as amended.
The Company
adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, the Company recorded $1.7 million in liabilities for unrecognized tax benefits plus estimated interest and penalties of $283,000. The aggregate $2.0
million liability was accounted for as a decrease to the January 1, 2007 balance of retained earnings of $762,000 and a reclassification of a portion of the valuation allowances against the Companys deferred tax assets of $1.2 million to
an uncertain tax liability which was recorded as a reduction to certain deferred tax assets on the Companys Consolidated Balance Sheet. To the extent these unrecognized tax benefits are ultimately recognized, it would not affect the annual
effective income tax rate due to the existence of the valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
2007
|
|
Balance at January 1, 2007
|
|
$
|
1,694
|
|
Increases related to prior year tax positions
|
|
|
18
|
|
Increases related to current year tax positions
|
|
|
42
|
|
Settlements
|
|
|
(18
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,736
|
|
|
|
|
|
|
F-31
The Company recognized interest and penalties related to uncertain tax positions of $64,000 for the year
ended December 31, 2007 in other income and expense on the Companys Consolidated Statements of Operations. As of December 31, 2007 the Company has approximately $347,000 of accrued interest and penalties related to uncertain tax
positions. The total uncertain tax liability of $2.1 million as of December 31, 2007 was recorded as a reduction to deferred tax assets of $1.2 million and a non current liability of $839,000 on the Companys Consolidated Balance Sheet.
As of December 31, 2007 the Company had a total of $28.2 million in valuation allowances against deferred tax assets and a net
deferred tax liability of $27,000.
The tax years 2004-2007 remain open to examination by the major taxing jurisdictions to which the
Company is subject.
As of December 31, 2007, the Company had approximately $37.0 million of U.S. federal net operating loss
carryforwards that will begin to expire in the 2023 tax year, approximately $6.5 million of state net operating loss carryforwards that will begin to expire in 2008, $2.9 million in research and development tax credit carryforwards that will begin
to expire in 2009, and $2.0 million of capital loss carryforwards that will begin to expire in 2008. Additionally, at December 31, 2007 the Company had $2.4 million in alternative minimum tax credit carryforwards that do not expire.
15. Executive Insurance Plan
Pursuant to a
supplemental life insurance program for certain executive officers of the Company, the Company and the executives shared in the premium payments and ownership of insurance policies on their lives. At death, policy proceeds equal to the premium
contribution were due to the Company with the remaining proceeds due to the designated beneficiaries of the insured party. In 2003 the Company suspended all contributions to the plan in order to evaluate the plan in relation to Section 402(a)
of the Sarbanes-Oxley Act of 2002. The Companys Board of Directors terminated this plan during 2005, and awarded as a bonus the Companys remaining interest in the plan to three executive officers who had participated in the plan. As a
result the Company recorded compensation expense of approximately $253,000 related to this plan in 2005.
16. Transactions with Related Parties
The Company expensed $12,000, $135,000, and $27,000 in 2007, 2006, and 2005, respectively, relating to supplies for clinical trials
purchased from a company whose CFO and Senior VP is a member of the Companys Board of Directors and a shareholder of the Company. The Company recorded products and preservation services revenue of $666,000, $151,000, and $18,000 in 2007, 2006,
and 2005, respectively, and recorded research and development expenses of $5,000 and $26,000 in 2007 and 2006, respectively, relating to a company whose former Chief of Thoracic Surgery is a member of the Companys Board of Directors and a
shareholder of the Company.
17. Segment and Geographic Information
The Company has two reportable segments organized according to its products and services: Preservation Services and Implantable Medical Devices.
The Preservation Services segment includes external services revenue from preservation of cardiac, vascular, and orthopaedic allograft tissues. The
Implantable Medical Devices segment includes external revenue from product sales of BioGlue and bioprosthetic devices, including the CryoLife-OBrien Stentless Aortic Bioprosthesis, SynerGraft processed bovine vascular grafts, and CardioWrap.
There are no intersegment revenues.
The primary measure of segment performance, as viewed by the Companys management, is segment
gross margin, or net external revenues less cost of preservation services and products. The Company does not segregate assets by segment; therefore, asset information is excluded from the segment disclosures below.
F-32
The following table summarizes revenues, cost of preservation services and products, and gross margins
for the Companys operating segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Preservation services
|
|
$
|
49,002
|
|
$
|
40,078
|
|
$
|
30,307
|
Implantable medical devices
|
|
|
44,712
|
|
|
41,037
|
|
|
38,932
|
All other
a
|
|
|
1,049
|
|
|
196
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,763
|
|
$
|
81,311
|
|
$
|
69,282
|
|
|
|
|
|
|
|
|
|
|
Cost of preservation services and products:
|
|
|
|
|
|
|
|
|
|
Preservation services
|
|
$
|
28,433
|
|
$
|
29,958
|
|
$
|
24,357
|
Implantable medical devices
|
|
|
7,108
|
|
|
7,463
|
|
|
8,065
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,541
|
|
$
|
37,421
|
|
$
|
32,422
|
|
|
|
|
|
|
|
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
Preservation services
|
|
$
|
20,569
|
|
$
|
10,120
|
|
$
|
5,950
|
Implantable medical devices
|
|
|
37,604
|
|
|
33,574
|
|
|
30,867
|
All other
a
|
|
|
1,049
|
|
|
196
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,222
|
|
$
|
43,890
|
|
$
|
36,860
|
|
|
|
|
|
|
|
|
|
|
a
|
All other designation includes 1) grant revenue and 2) revenues related to the licensing of the Companys
technology to a third party.
|
Net revenues by product for the years ended December 31, 2007, 2006, and 2005 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Preservation services:
|
|
|
|
|
|
|
|
|
|
Cardiac tissue
|
|
$
|
22,098
|
|
$
|
15,988
|
|
$
|
13,762
|
Vascular tissue
|
|
|
22,702
|
|
|
16,956
|
|
|
11,453
|
Orthopaedic tissue
|
|
|
4,202
|
|
|
7,134
|
|
|
5,092
|
|
|
|
|
|
|
|
|
|
|
Total preservation services
|
|
|
49,002
|
|
|
40,078
|
|
|
30,307
|
Products:
|
|
|
|
|
|
|
|
|
|
BioGlue
|
|
|
43,884
|
|
|
40,025
|
|
|
37,985
|
Other implantable medical devices
|
|
|
828
|
|
|
1,012
|
|
|
947
|
|
|
|
|
|
|
|
|
|
|
Total products
|
|
|
44,712
|
|
|
41,037
|
|
|
38,932
|
All other
a
|
|
|
1,049
|
|
|
196
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,763
|
|
$
|
81,311
|
|
$
|
69,282
|
|
|
|
|
|
|
|
|
|
|
a
|
All other designation includes 1) grant revenue and 2) revenues related to the licensing of the Companys
technology to a third party.
|
Net revenues by geographic location attributed to countries based on the location of the
customer for the years ended December 31, 2007, 2006, and 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
U.S.
|
|
$
|
81,023
|
|
$
|
69,467
|
|
$
|
58,869
|
International
|
|
|
13,740
|
|
|
11,844
|
|
|
10,413
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,763
|
|
$
|
81,311
|
|
$
|
69,282
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, 2006, and 2005, over 95% of the long-lived assets of the Company were
held in the U.S., where all Company manufacturing facilities and the corporate headquarters are located.
F-33
18. Subsequent Events
On February 7, 2008 CryoLife received 510(k) clearance from the FDA for its CryoValve SG pulmonary human heart valve processed with the Companys proprietary SynerGraft technology. CryoLifes
proprietary SynerGraft technology is designed to remove donor cells and cellular remnants from the valve without compromising the integrity of the underlying collagen matrix. The CryoValve SG pulmonary human heart valve is indicated for the
replacement of diseased, damaged, malformed, or malfunctioning native pulmonary valves. The valve can be used in conjunction with right ventricular outflow tract reconstruction procedures (RVOT), commonly performed in children with
congenital heart defects. In addition, the valve can be used for pulmonary valve replacement during the Ross Procedure, an operation in which a patients defective aortic valve is removed and replaced with his own pulmonary valve. The CryoValve
SG is then surgically implanted in place of the removed native pulmonary valve.
At the FDAs request, CryoLife is planning a
post-clearance study to seek evidence for the potential and implied long-term benefits of the SynerGraft process. Data to be collected is expected to include long-term safety and hemodynamic function, immune response, and explant analysis. CryoLife
believes that this information may help it ascertain whether the SynerGraft process reduces the immune response of the transplanted heart valve and allows for the collagen matrix to recellularize with the recipients own cells.
F-34
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
24,524
|
|
|
$
|
23,011
|
|
|
$
|
22,160
|
|
|
$
|
25,068
|
|
2006
|
|
|
19,449
|
|
|
|
20,754
|
|
|
|
20,018
|
|
|
|
21,090
|
|
2005
|
|
|
17,665
|
|
|
|
17,198
|
|
|
|
16,458
|
|
|
|
17,961
|
|
GROSS MARGIN:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
14,944
|
|
|
$
|
14,154
|
|
|
$
|
13,970
|
|
|
$
|
16,154
|
|
2006
|
|
|
10,763
|
|
|
|
11,638
|
|
|
|
11,488
|
|
|
|
10,001
|
|
2005
|
|
|
9,650
|
|
|
|
9,049
|
|
|
|
8,503
|
|
|
|
9,658
|
|
NET INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
1,354
|
|
|
$
|
1,291
|
|
|
$
|
1,907
|
|
|
$
|
2,649
|
|
2006
|
|
|
(1,780
|
)
|
|
|
217
|
|
|
|
1,978
|
|
|
|
(50
|
)
|
2005
|
|
|
(1,357
|
)
|
|
|
(14,379
|
)
|
|
|
(3,118
|
)
|
|
|
(681
|
)
|
INCOME (LOSS) PER COMMON SHAREDILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
0.10
|
|
2006
|
|
|
(0.08
|
)
|
|
|
(0.00
|
)
|
|
|
0.07
|
|
|
|
(0.01
|
)
|
2005
|
|
|
(0.06
|
)
|
|
|
(0.61
|
)
|
|
|
(0.14
|
)
|
|
|
(0.04
|
)
|
F-35