<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1998
REGISTRATION NO. 333-46545
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- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CRYOLIFE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 58-2417093
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1655 ROBERTS BOULEVARD, N.W.
KENNESAW, GEORGIA 30144
(770) 419-3355
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEVEN G. ANDERSON
CHIEF EXECUTIVE OFFICER
CRYOLIFE, INC.
1655 ROBERTS BOULEVARD, N.W.
KENNESAW, GEORGIA 30144
(770) 419-3355
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
B. JOSEPH ALLEY, JR., ESQ. WILLIAM T. WHELAN, ESQ.
ARNALL GOLDEN & GREGORY, LLP PALMER & DODGE LLP
2800 ONE ATLANTIC CENTER ONE BEACON STREET
1201 WEST PEACHTREE STREET BOSTON, MASSACHUSETTS 02108
ATLANTA, GEORGIA 30309 (617) 573-0100
(404) 873-8500
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
Subject to completion, dated March 3, 1998
- --------------------------------------------------------------------------------
2,500,000 Shares
[LOGO OF CRYOLIFE APPEARS HERE]
CRYOLIFE, INC.
Common Stock
LOGO
- --------------------------------------------------------------------------------
Of the 2,500,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby (this "Offering"), 2,263,000 shares are being offered
by CryoLife, Inc. ("CryoLife" or the "Company"), and 237,000 shares are being
offered by certain shareholders of the Company (the "Selling Shareholders").
The Company will not receive any net proceeds from the sale of the shares of
Common Stock offered by the Selling Shareholders.
The Common Stock is quoted on the New York Stock Exchange ("NYSE") under the
symbol "CRY." On March 2, 1998, the last reported sale price of the Common
Stock on the NYSE was $14 1/8 per share. See "Price Range of Common Stock."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON
STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 6-11.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to Proceeds to
Public Commissions(/1/) Company(/2/) Selling Shareholders
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
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<S> <C> <C> <C> <C>
Total(3) $ $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company estimated
to be $700,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms per share
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public will be $ , total Underwriting Discounts
and Commissions will be $ and the total Proceeds to the Company will be
$ . See "Underwriting."
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of the certificates
therefor will be made at the offices of SBC Warburg Dillon Read Inc., New York,
New York, on or about , 1998. The Underwriters include:
SBC WARBURG DILLON READ INC. PIPER JAFFRAY INC.
<PAGE>
--------------------------------------------------------
CRYOLIFE CRYOPRESERVATION OF HUMAN TISSUE FOR TRANSPLANT
--------------------------------------------------------
HUMAN VASCULAR TISSUES
HUMAN HEART VALVES & CONDUITS ----------------------
- -----------------------------
Coronary Artery bypass
[Image of Heart Valves] ----------------------
[Image of
- ----------------------- Coronary Artery
.Normal hemodynamics Bypass]
.Low incidence of ---------------------
calcification .Largest provider of
.Anti-coagulation drug allograft
therapy not required [Image of a alternatives to
.Reduced incidence of human shadow patient's own
endocarditis figure] tissue
HUMAN CONNECTIVE Peripheral
TISSUE FOR THE KNEE Revascularization
- ----------------------- -------------------
---------------- [Image of
[Image of Orthopaedic Peripheral Vascular
Tissue] Reconstruction]
- ----------------------- --------------------
.Only U.S. provider of .Only available
meniscal tissue small diameter
allograft for below-
the-knee vascular
reconstruction
Dialysis Access
Grafts
-------------------
[Image of
Dialysis Access
Graft]
-------------------
.Allograft alternative
to synthetic grafts
Venous Valve
Transplant
--------------------
[Image of
Venous Valve
Transplant]
--------------------
.Only commercially
available venous
valve substitute
to treat venous
insufficiency
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS AND THE
IMPOSITION OF A PENALTY BID, DURING AND AFTER THIS OFFERING. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company's logo, CryoLife(R), BioGlue(R), FibRx(R) and SynerGraft(R) are
registered trademarks of the Company, and CryoLife-O'Brien(TM), CryoLife-
O'Brien SG(TM), CryoLife-Ross(TM) and CryoLife-Ross SG(TM) are trademarks of
the Company. All other trademarks, service marks and trade names referred to
in this Prospectus are the property of their owners.
2
<PAGE>
---------------------------------------------
CRYOLIFE BIOPROSTHETIC CARDIOVASCULAR DEVICES
---------------------------------------------
Stentless Porcine Heart Valves
------------------------------
CryoLife-O'Brien(TM) Aortic Valve CryoLife-Ross(TM) Pulmonary Valve
------------------------- .Absence of -------------------------
[Image of synthetic [Image of
CryoLife-O'Brien(TM) material reduces CryoLife-Ross(TM)
Aortic Valve] the risk of Pulmonary Valve]
------------------------- bacterial -------------------------
.Matched composite leaflet infection .Valve with attached
design approximates human .Porcine tissue conduit
hemodynamics mimics structure
.Single suture line of human heart
simplifies surgical valve
implant technique
Synergraft(R) Technology
Depopulation of Porcine Heart Valve
-----------------------------------
- ------------- .Reduces transplant recipient's ------------------
[Image of immune response and [Image of
CryoLife- calcification CryoLife-Ross(TM)
O'Brien(TM) .Provides a platform for the patient's Pulmonary Valve]
Aortic Valve] own cells to populate the implant -------------------
- -------------
Repopulation of
Porcine Heart Valve
-------------------
- ------------- .Reseeds porcine tissues -------------------
[Image of with viable human cells [Image of
CryoLife- prior to implantation CryoLife-Ross(TM)
O'Brien(TM) Pulmonary Valve]
Aortic Valve] -------------------
- -------------
The products above, with the exception of the CryoLife Single-Use Medical
Devices, are under development and have not been approved by the FDA for
commercial sale in the U.S. The process of obtaining FDA approval may be
lengthy, and there can be no assurance that the products will be approved by
the FDA.
<PAGE>
---------------------------------
CRYOLIFE IMPLANTABLE BIOMATERIALS
---------------------------------
BIOGLUE(R) SURGICAL ADHESIVE FIBRX(R) SURGICAL SEALANT
- ----------------- ------------------
Designed to be used Designed to be used
[Image of for cardiovascular [Image of for hemostasis and
BioGlue] and vascular repair FibRx] adhesion applications
.Double syringe .Light activated
- ----------------- mixing ------------------ .Single syringe or
.CE Mark approval spray applicator
-----------------------------------
CRYOLIFE SINGLE USE MEDICAL DEVICES
-----------------------------------
-------------------------------
[Image of IFM
product line]
- -------------------------- --------------------------
-------------------------------
[Image of Pruitt- [Image of Dual Lumen
Inahara(TM) Shunt] Embolectomy Catheters]
- -------------------------- --------------------------
Dual Lumen
Pruitt-Inahara(TM) Embolectomy
Shunt Catheters
.Balloon occlusion reduces .Irrigation capability
plaque migration and trauma assists in the location
to the artery and removal of blood
clots
The products above, with the exception of the Cryolife Single-Use Medical
Devises, are under development and have not been approved by the FDA for
commercial sale in the U.S. The process of obtaining FDA approval may be
lengthy, and there can be no assurance that the products will be approved by
the FDA.
<PAGE>
PROSPECTUS SUMMARY
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The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus or incorporated herein by reference,
including the information under "Risk Factors." Unless otherwise indicated, all
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised and that the Selling Shareholders sell 237,000 shares.
See Glossary on page 57 for definitions of certain terms used herein.
THE COMPANY
CryoLife is the leader in the cryopreservation of viable human tissues for
cardiovascular, vascular and orthopaedic transplant applications, and develops
and commercializes additional implantable products and single-use medical
devices. The Company estimates that it provided approximately 80% of the
cryopreserved human tissue implanted in the U.S. in 1997. The Company uses its
expertise in biochemistry and cell biology, and its understanding of the needs
of the cardiovascular, vascular and orthopaedic surgery medical specialties, to
continue expansion of its core cryopreservation business and to develop or
acquire complementary implantable products and technologies for these fields.
The Company develops bioprosthetic cardiovascular devices including a novel
design stentless porcine heart valve currently marketed in the European
Community. The Company also develops proprietary implantable surgical
bioadhesives, including BioGlue surgical adhesive, which it has begun
commercializing for vascular applications within the European Community. In
addition, the Company manufactures and distributes, through its Ideas For
Medicine, Inc. ("IFM") subsidiary, single-use medical devices for use in
vascular surgical procedures. The Company has generated compound annual growth
rates in revenues and earnings per share, including contributions from
acquisitions, of 24% and 68%, respectively, since 1993.
CryoLife processes and distributes for transplantation cryopreserved human
heart valves and conduits, human vascular tissue and human connective tissue
for the knee. Revenues from these services, which were $44.2 million, or 87% of
total revenues, in 1997, have grown at a compound annual growth rate of 24%
since 1993. Management believes that cryopreserved human heart valves and
conduits offer certain advantages over mechanical, synthetic and animal-derived
alternatives. Depending on the alternative, these advantages include more
natural functionality, elimination of a chronic need for anti-coagulation drug
therapy, reduced incidence of reoperation and reduced risk of catastrophic
failure, thromboembolism (stroke) or calcification. The Company estimates that
the potential U.S. market for implantable products targeting indications
addressed by the Company's cryopreserved tissues was approximately $950 million
in 1997. Since 1993, cryopreserved human tissues have captured an increasing
share of this market as the total U.S. replacement heart valve market and
CryoLife's revenues from cryopreservation of human heart valves and conduits
grew at compound annual growth rates of approximately 7% and 21%, respectively.
The Company seeks to expand the availability of human tissue through its
established relationships with over 250 tissue banks and organ procurement
agencies nationwide.
CryoLife develops and markets outside of the U.S. bioprosthetic cardiovascular
devices for transplantation, currently consisting of fixed stentless porcine
heart valves. Fixed porcine heart valves are often preferred by surgeons for
procedures involving elderly patients because they eliminate the risk of
patient non-compliance with long-term anti-coagulation drug therapy associated
with mechanical valves, are less expensive than human heart valves and their
shorter longevity is more appropriately matched with these patients' life
expectancies. Fixed porcine heart valves address a worldwide target market
estimated to have been $175 million in 1997. Unlike most other available
porcine heart valves, the Company's stentless porcine heart valves do not
contain synthetic materials which increase the risk of endocarditis, a
debilitating and potentially fatal bacterial infection. The Company's CryoLife-
O'Brien aortic heart valve, currently marketed in the European Community and
certain other territories outside the U.S., is a stentless porcine heart valve
which contains a matched composite leaflet design that approximates human heart
valve blood flow characteristics and requires only a single suture line
3
<PAGE>
which simplifies surgical implantation. The Company intends to submit a CE Mark
application for the CryoLife-Ross pulmonary heart valve, another of the
Company's fixed stentless porcine valves, for marketing in the European
Community. The Company plans to apply its proprietary SynerGraft technology to
its stentless porcine heart valves. SynerGraft involves the depopulation of
living cells from the structure of non-viable animal heart tissue and the
repopulation of such tissue with human cells. This process is designed to
reduce calcification of porcine heart valves, thereby increasing longevity, and
more generally to improve the biocompatibility and functionality of such
tissue. The Company believes that its porcine heart valves, when treated with
SynerGraft technology, will expand its opportunity to address the broader
international and U.S. heart valve markets, estimated to be $348 million and
$395 million, respectively, in 1997.
CryoLife is developing implantable biomaterials for use as surgical adhesives
and sealants. The Company's patent protected BioGlue surgical adhesive,
designed for cardiovascular and peripheral vascular applications, is a polymer
based on a derivative of a blood protein and a cross-linking agent. The
Company's patent protected FibRx surgical sealant, designed for tissue
hemostasis and suture line sealing, is a light activated, biodegradable
surgical sealant under development which is based on a derivative of the human
blood factors fibrinogen and thrombin. Both of these products may be used with
or without sutures or staples, and may offer advantages over sutures and
staples, including more effective sealing and easier application. The Company
estimates that the annual worldwide market for surgical sutures and staples in
1997 was in excess of $2 billion. The Company recently received CE Mark
Certification for its BioGlue surgical adhesive which permits the Company to
begin marketing this product in the European Community for vascular
applications.
CryoLife manufactures and distributes, through its IFM subsidiary, single-use
medical devices including endarterectomy surgical instruments, intravascular
shunts, infusion ports, accessories utilized in laparoscopic procedures and a
wide range of single and dual lumen balloon catheters. The Company believes
that many of its existing single-use medical devices have novel proprietary
features that offer clinical advantages over competing products. For example,
the Company's Pruitt-Inahara Shunt was the first endarterectomy shunt available
to surgeons which contains a barrier feature designed to reduce migration of
plaque particles to the brain and trauma to the carotid artery during surgery.
Another example is the Company's dual lumen embolectomy catheter incorporating
a novel water irrigation mechanism which enables physicians to remove whole
blood clots more effectively than with single lumen embolectomy catheters. The
Company is benefiting from, and intends to utilize, its design and
manufacturing expertise to develop single-use medical devices for use in
conjunction with its cryopreserved human tissue and biomaterial products.
Examples of such devices under development include a family of balloon
catheters designed to assist in applying the BioGlue surgical adhesive and a
human heart valve holder designed to provide physicians greater control in
implantation procedures.
In the U.S., the Company markets its cryopreservation services for human heart
valves and conduits and human vascular tissue through its in-house technical
service representatives and relies on independent orthopaedic sales
representatives to market its cryopreservation services for human connective
tissue for the knee. Also in the U.S., the Company markets its single-use
medical devices through its in-house technical service representatives.
Internationally, cryopreserved human tissues, bioprosthetic cardiovascular
devices and single-use medical devices are distributed through independent
representatives located in several countries in Europe, South America and Asia.
The Company plans to market and distribute its BioGlue surgical adhesive
internationally through its existing independent representatives and, if
approved for sale in the U.S., through its in-house technical service
representatives.
The Company's primary objective is to continue its consistent growth in
revenues and profitability. The Company has generated compound annual growth
rates in revenues and net income of approximately 21% and 71%, respectively,
since 1993, excluding revenues and net income from IFM, which the Company
acquired in March 1997. The Company's strategy to generate continued growth is
based on increasing the use of cryopreserved tissues as an alternative to
mechanical and synthetic implantable products, developing new markets for
existing products and technologies and developing new products and technologies
for new and existing markets. The Company also selectively considers strategic
acquisitions of complementary technologies and businesses to supplement its
internal growth.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company.......................... 2,263,000 shares(1)
Common Stock offered by the
Selling Shareholders............. 237,000 shares(1)
Total Offering.................... 2,500,000 shares(1)
Common Stock to be outstanding
after this Offering.............. 12,028,930 shares(1)(2)
Use of Proceeds................... For repayment of indebtedness, expansion of
facilities, general corporate purposes and
potential acquisitions.
New York Stock Exchange Symbol.... CRY
</TABLE>
- --------
(1) The Selling Shareholders may elect not to sell any or all of the shares to
be sold by them in this Offering. In such event, the Company has agreed to
increase the number of shares it is selling in this Offering by the number
of shares not sold by Selling Shareholders. See "Principal and Selling
Shareholders."
(2) Based on the number of outstanding shares at February 27, 1998. Excludes an
aggregate of 745,000 shares of Common Stock issuable upon exercise of stock
options outstanding on that date. See "Description of Capital Stock" and
the Notes to the Consolidated Financial Statements. Includes 50,000 shares
of Common Stock issuable upon conversion by a Selling Shareholder of
$607,000 of a convertible debenture and 2,000 shares to be issued to a
Selling Shareholder pursuant to the exercise of outstanding options.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995 1996(1) 1997(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................. $21,341 $23,810 $29,226 $37,228 $50,869
Cost and expenses.................... 20,448 22,046 25,930 31,145 43,236
------- ------- ------- ------- -------
Income before income taxes........... 893 1,764 3,296 6,083 7,633
Income tax expense................... 339 498 1,094 2,156 2,908
------- ------- ------- ------- -------
Net income........................... $ 554 $ 1,266 $ 2,202 $ 3,927 $ 4,725
======= ======= ======= ======= =======
Earnings per share of common stock:
Basic.............................. $ .06 $ .14 $ .23 $ .41 $ .49
======= ======= ======= ======= =======
Diluted............................ $ .06 $ .14 $ .23 $ .40 $ .48
======= ======= ======= ======= =======
Weighted average number of shares of
common stock outstanding:
Basic.............................. 9,018 9,312 9,379 9,505 9,642
Diluted............................ 9,114 9,373 9,568 9,906 9,942
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 111(3) $17,687
Total assets........................................ 53,749 71,325
Long-term debt, including current maturities........ 18,362 5,978
Retained earnings................................... 12,627 12,627
Total shareholders' equity.......................... 30,227 60,187
</TABLE>
- --------
(1) Includes United Cryopreservation Foundation Inc. ("UCFI") and IFM from
their dates of acquisition, September 11, 1996 and March 5, 1997,
respectively.
(2) Adjusted to give effect to (i) the receipt of the net proceeds from the
sale of 2,263,000 shares of Common Stock offered by the Company hereby (at
an assumed offering price of $14 1/8 per share) after deduction of
underwriting discounts and commissions and estimated expenses payable by
the Company in connection with this Offering, (ii) the repayment of the
$11,777,000 outstanding principal balance under the Company's credit
facility, (iii) the conversion of $607,000 of a convertible debenture into
50,000 shares of Common Stock and (iv) the issuance of 2,000 shares to be
sold by a Selling Shareholder pursuant to the exercise of outstanding
options. See "Use of Proceeds," "Principal and Selling Shareholders" and
"Description of Capital Stock--Convertible Debenture."
(3) At December 31, 1997, $3.2 million was available to be borrowed under the
Company's bank credit agreements.
5
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
Prospective investors in the shares of Common Stock offered hereby should
carefully consider the following risk factors, as well as the other information
contained in this Prospectus, or incorporated by reference herein, before
purchasing any of the Common Stock offered hereby.
DEPENDENCE ON CRYOPRESERVATION OF HUMAN TISSUE
A significant portion of the Company's current revenues is derived from the
cryopreservation of human tissue, particularly heart valves and conduits. The
success of this business depends upon, among other factors, the availability of
sufficient quantities of tissue from human donors. Any material reduction in
the supply of donated human heart tissue could restrict the Company's growth.
The Company relies primarily upon the efforts of third- party procurement
agencies (all of which are not-for-profit) and others to educate the public and
foster a willingness to donate tissue. Based on the Company's experience with
human heart valves, management believes that once the use by physicians of a
particular transplantable tissue gains acceptance, demand for that tissue will
exceed the amount of tissue available from human donors. While availability is
not currently a limiting factor for most vascular tissue and connective tissue
for the knee, growth in these areas could ultimately be limited by tissue
availability, in addition to other factors. Failure of the Company to maintain
its supply of tissue for cryopreservation could have a material adverse effect
on the Company's business, financial condition and results of operations.
Furthermore, a reduction in the demand for the Company's cryopreserved human
tissue could also have a material adverse effect on the Company's business,
financial condition and results of operations. Such reduction could occur if
competitors' products were perceived as either functionally superior or more
cost effective, if the number of procedures in which cryopreserved tissues are
used declines or if hospitals acquire sufficient inventories of cryopreserved
tissue to allow a reduction in new orders. See "--Intense Competition" and "--
Uncertainties Regarding Future Health Care Reimbursements."
INTENSE COMPETITION
The Company faces competition from other companies that cryopreserve human
tissue, as well as companies that market mechanical valves and synthetic and
animal tissue for implantation. Management believes that at least three tissue
banks offer cryopreservation services for human heart valves and many companies
offer processed porcine heart valves and mechanical heart valves. A few
companies dominate portions of the mechanical and porcine heart valve markets,
including St. Jude Medical, Inc., Medtronic, Inc. and Baxter International Inc.
The Company also faces competition from a number of competitors in the area of
single-use medical devices and is aware that several companies have surgical
adhesive products under development. Competitive products may also be under
development by other large medical device, pharmaceutical and biopharmaceutical
companies. Many of the Company's competitors have greater financial, technical,
manufacturing and marketing resources than the Company and are well established
in their markets. There can be no assurance that the Company's products and
services will be able to compete successfully with the products of these or
other companies. Any products developed by the Company that gain regulatory
clearance or approval will have to compete for market acceptance and market
share. Failure of the Company to compete effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE
The technologies underlying the Company's products and services are subject to
rapid and profound technological change. The Company expects competition to
intensify as technical advances in each field are made and become more widely
known. There can be no assurance that others will not develop products or
processes with significant advantages over the products and processes that the
Company offers or is seeking to develop. Any such occurrence could have a
material adverse effect on the Company's business, financial condition and
results of operations.
6
<PAGE>
UNCERTAINTIES REGARDING PRODUCTS IN DEVELOPMENT
The Company's growth and profitability will depend, in part, upon its ability
to complete development of and successfully introduce new products. The Company
may be required to undertake time consuming and costly development activities
and seek regulatory clearance or approval for new products. See "--Extensive
Government Regulation." Although the Company has conducted pre-clinical studies
on many of its products under development which indicate that such products may
be effective in a particular application, there can be no assurance that the
results obtained from expanded clinical studies will be consistent with earlier
trial results or be sufficient for the Company to obtain any required
regulatory approvals or clearances. There can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products, that regulatory
clearance or approval of these or any new products will be granted on a timely
basis, if ever, or that the new products will adequately meet the requirements
of the applicable market or achieve market acceptance. The completion of the
development of any of the Company's products remains subject to all of the
risks associated with the commercialization of new products based on innovative
technologies, including unanticipated technical or other problems,
manufacturing difficulties and the possible insufficiency of the funds
allocated for the completion of such development. Consequently, there can be no
assurance that any of the Company's products under development will be
successfully developed or manufactured or, if developed and manufactured, that
such products will meet price or performance objectives, be developed on a
timely basis or prove to be as effective as competing products. The inability
to complete successfully the development of a product or application, or a
determination by the Company, for financial, technical or other reasons, not to
complete development of any product or application, particularly in instances
in which the Company has made significant capital expenditures, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's porcine heart valve products are currently only offered for sale
outside of the U.S., and beginning in the second quarter of 1998, the Company
expects to begin shipping its BioGlue surgical adhesive for distribution in the
European Community. The Company's porcine heart valves and BioGlue surgical
adhesive are subject to the risk that the Company may be unable to obtain
regulatory approval necessary to permit commercial distribution of these
products in the U.S.
The Company's research and development efforts are time consuming and expensive
and there can be no assurance that these efforts will lead to commercially
successful products or services. Even the successful commercialization of a new
service or product in the medical industry can be characterized by slow growth
and high costs associated with marketing, under-utilized production capacity
and continuing research, development and education costs. Generally, the
introduction of new human tissue products requires significant physician
training and years of clinical evidence derived from follow-up studies on human
implant recipients in order to gain acceptance in the medical community.
EXTENSIVE GOVERNMENT REGULATION
Government regulation in the U.S., the European Community and other
jurisdictions represents a potentially determinative factor in the success of
the Company's efforts to market and develop its products. See "Business--
Government Regulation." The human heart valves to which the Company applies its
cryopreservation services are currently regulated as Class II medical devices
by the U.S. Food and Drug Administration ("FDA") and are subject to significant
regulatory requirements, including Quality System Regulations and recordkeeping
requirements. There can be no assurance that changes in regulatory treatment or
the adoption of new statutory or regulatory requirements will not occur, which
could adversely impact the marketing or development of these products or could
adversely affect market demand for these products.
Other allograft tissues processed and distributed by the Company are currently
regulated as "human tissue" under a rule promulgated by the FDA pursuant to the
Public Health Services Act. This rule establishes requirements for donor
testing and screening of human tissue and recordkeeping relating to these
activities. Although the Company's other human tissue allografts are not
currently regulated as medical devices, such tissue
7
<PAGE>
may in the future become subject to more extensive FDA regulation, which could
include premarket approval ("PMA") or product licensing requirements.
Although the regulatory status of the Company's BioGlue surgical adhesive and
FibRx surgical sealant is not certain, the Company believes that FibRx
surgical sealant will be regulated as a biologic and anticipates that BioGlue
surgical adhesive will be regulated as a Class III medical device, as a
biologic or in some other capacity by the FDA. These products have not been
approved for distribution within the U.S. To date, the FDA has never approved
for sale in the U.S. a surgical adhesive or sealant which, like FibRx surgical
sealant, is composed of human blood components. Management believes that
concerns over viral transmission may have hindered FDA approval of such
products. There can be no assurance that CryoLife's quality control protocols
will sufficiently address FDA concerns or that CryoLife will be able to
develop viral inactivation processes acceptable to the FDA or license such
processes at an acceptable cost. Fixed porcine heart valve products are
classified as Class III medical devices. There can be no assurance that the
Company will be able to obtain the FDA approval required to distribute its
surgical adhesives, surgical sealants or porcine heart valve products in the
U.S. Distribution of these products within the European Community is dependent
upon the Company maintaining its CE Mark and ISO 9001 certifications, of which
there can be no assurance.
Most of the Company's products in development, if successfully developed, will
require regulatory approvals from the FDA and perhaps other regulatory
authorities before they may be commercially distributed. The process of
obtaining required regulatory approvals from the FDA normally involves
clinical trials and the preparation of an extensive PMA application and often
takes many years. The process is expensive and can vary significantly based on
the type, complexity and novelty of the product. There can be no assurance
that any products developed by the Company, independently or in collaboration
with others, will receive the required approvals for manufacturing and
marketing. Delays in obtaining U.S. or foreign approvals could result in
substantial additional cost to the Company and adversely affect the Company's
competitive position. The FDA may also place conditions on product approvals
that could restrict commercial applications of such products. Product
marketing approvals or clearances may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Delays imposed by the governmental clearance process may materially
reduce the period during which the Company has the exclusive right to
commercialize patented products. Also, delays or rejections may be encountered
during any stage of the regulatory approval process based upon the failure of
the clinical or other data to demonstrate compliance with, or upon the failure
of the product to meet, the regulatory agency's requirements for safety,
efficacy and quality, and those requirements may become more stringent due to
changes in applicable law, regulatory agency policy or the adoption of new
regulations. Clinical trials may also be delayed due to unanticipated side
effects, inability to locate, recruit and qualify sufficient numbers of
patients, lack of funding, the inability to locate or recruit scientists, the
redesign of clinical trial programs, the inability to manufacture or acquire
sufficient quantities of the particular product candidate or any other
components required for clinical trials, changes in the Company's or its
collaborative partners' development focus and disclosure of trial results by
competitors. To date, the Company has never had to submit clinical trials for
any of its products. In the event that it should be required to perform
clinical trials, there can be no guarantee that it will be able to do so
effectively and efficiently. Even if regulatory approval is obtained for any
of the Company's products or services, the scope of the approval may
significantly limit the indicated usage for which such products or services
may be marketed.
Products marketed by the Company pursuant to FDA or foreign oversight or
approval are subject to pervasive and continuing regulation. In the U.S.,
devices and biologics must be manufactured in registered and, in the case of
biologics, licensed establishments and must be produced in accordance with
Quality System Regulations. Manufacturing facilities and processes are subject
to periodic FDA inspection. Labeling and promotional activities are also
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. The export of devices and biologics is also subject to regulation
and may require FDA approval. From time to time, the FDA may modify such
regulations, imposing additional or different requirements. Failure to comply
with any applicable FDA requirements, which may be ambiguous, could result in
civil and criminal enforcement actions, product recalls or detentions and
other penalties and could have a material adverse effect on the
8
<PAGE>
Company's business, financial condition and results of operations. In addition,
the National Organ Transplant Act ("NOTA") prohibits the acquisition or
transfer of human organs for "valuable consideration" for use in human
transplantation. NOTA permits the payment of reasonable expenses associated
with the removal, transportation, processing, preservation, quality control and
storage of human organs. There can be no assurance that restrictive
interpretations of NOTA will not be adopted in the future that will challenge
one or more aspects of the Company's methods of charging for its
cryopreservation services. The Company's laboratory operations are subject to
the U.S. Department of Labor, Occupational Safety and Health Administration and
Environmental Protection Agency requirements for prevention of occupational
exposure to infectious agents and hazardous chemicals and protection of the
environment. Some states have enacted statutes and regulations governing the
processing, transportation and storage of human organs and tissue. While
management believes that the Company is presently in compliance in all material
respects with all such applicable statutes and regulations, there can be no
assurance that more restrictive state laws or regulations will not be adopted
in the future that could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Government Regulation."
UNCERTAINTIES RELATED TO PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company owns several patents, patent applications and licenses relating to
its technologies, which it believes provide important competitive advantages.
There can be no assurance that the Company's pending patent applications will
issue as patents or that challenges will not be instituted concerning the
validity or enforceability of any patent owned by the Company, or, if
instituted, that such challenges will not be successful. The cost of litigation
to uphold the validity and prevent infringement of a patent could be
substantial. Furthermore, there can be no assurance that competitors will not
independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There can be no assurance that the Company's proposed
technologies will not infringe patents or other rights owned by others. In
addition, under certain of the Company's license agreements, if the Company
fails to meet certain contractual obligations, including the payment of minimum
royalty amounts, such licenses may become nonexclusive or terminable by the
licensor, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, the Company
protects its proprietary technologies and processes in part by confidentiality
agreements with its collaborative partners, employees and consultants. There
can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or independently discovered by
competitors, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTIES REGARDING FUTURE HEALTH CARE REIMBURSEMENT
Even though the Company does not receive payments directly from third-party
health care payors, their reimbursement methods and policies impact demand for
the Company's cryopreserved tissue and other services and products. The
Company's cryopreservation services may be particularly susceptible to third-
party cost containment measures. In particular, the initial cost of a
cryopreserved human heart valve generally exceeds the cost of a mechanical,
synthetic or animal-derived valve. The Company is unable to predict what
changes will be made in the reimbursement methods and policies utilized by
third-party health care payors or their effect on the Company. Changes in the
reimbursement methods and policies utilized by third-party health care payors,
including Medicare, with respect to cryopreserved tissues provided for implant
by the Company and other Company services and products, could have a material
adverse effect on the Company. Significant uncertainty exists as to the
reimbursement status of newly approved health care products and services and
there can be no assurance that adequate third-party coverage will be available
for the Company to maintain price levels sufficient for realization of an
appropriate return on its investment in developing new products. Government and
other third-party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new products
approved for marketing by the FDA and by refusing in some cases to provide any
coverage for uses of approved products for indications for which the FDA has
not granted marketing approval. If adequate coverage and reimbursement levels
are not provided by government and other third-party
9
<PAGE>
payors for uses of the Company's new products and services, market acceptance
of these products would be adversely affected, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company's business and future operating results depend in significant part
upon the continued contributions of its key technical personnel and senior
management, many of whom would be difficult to replace. The Company's business
and future operating results also depend in significant part upon its ability
to attract and retain qualified management, processing, technical, marketing,
sales and support personnel for its operation. Competition for such personnel
is intense and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of key employees, the failure
of any key employee to perform adequately or the Company's inability to attract
and retain skilled employees as needed could have a material adverse effect on
the Company's business, financial condition and results of operations.
PRODUCT LIABILITY AND INSURANCE
The use of the Company's products involves the possibility of adverse effects
that could expose the Company to product liability claims. A recent U.S.
Supreme Court decision held that product liability may exist despite FDA
approval, and future court decisions may also increase the Company's risk of
product liability. From time to time, the Company is involved in legal
proceedings based on product liability claims of a nature considered normal to
its business. The Company is currently involved in one such proceeding. The
Company's products are used by health care providers in connection with the
treatment of patients, who will, on occasion, sustain injury or die as a result
of their condition or medical treatment. If a lawsuit is filed because of such
an occurrence, the Company, along with physicians and nurses, hospitals and
other medical suppliers, may be named as a defendant, and whether or not the
Company is ultimately determined to be liable, the Company may incur
significant legal expenses. In addition, such litigation could damage the
Company's reputation and therefore impair its ability to market its products or
obtain product liability insurance and could cause the premiums for such
insurance to increase. Although the Company has incurred minimal losses due to
product liability claims to date, there can be no assurance that it will not
incur significant losses in the future. The Company currently maintains product
liability insurance in the aggregate amount of $14 million per year. There can
be no assurance that such coverage will continue to be available on terms
acceptable to the Company or will be adequate to cover any losses due to
product claims if actually incurred. Furthermore, if any such claim is
successful, it could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Legal
Proceedings."
MANAGEMENT DISCRETION IN USE OF PROCEEDS
The Company will have broad discretion as to the use of the net proceeds to the
Company of this Offering, including approximately 60% of such net proceeds not
designated for the repayment of indebtedness (assuming an offering price of $14
1/8). As a result of such discretion, the Company's management could allocate
the net proceeds to the Company of this Offering for uses that the shareholders
may not deem desirable. In addition, there can be no assurance that the net
proceeds can or will be invested to yield an acceptable return. See "Use of
Proceeds."
USE AND DISPOSAL OF HAZARDOUS MATERIAL
The Company's research, development and processing activities involve the
controlled use of small quantities of radioactive compounds, chemical solvents
and other hazardous materials. The Company's activities also include the
preservation and growth of human cells and the processing of human tissue.
Although the Company believes that its safety procedures for handling,
processing and disposing of hazardous materials and human tissue comply with
the standards prescribed by federal, state and local regulations, the risk of
accidental contamination, injury or disease transmission from these materials
cannot be completely eliminated. In the event of such an accident or
transmission, the Company could be held liable for resulting damages and any
liability could have a material adverse effect on the Company's business,
financial condition and results of operations. Also, any failure to comply with
applicable regulations could result in the imposition of penalties, fines and
sanctions, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
10
<PAGE>
VOLATILITY OF SECURITIES PRICES
The trading price of the Company's Common Stock has been subject to wide
fluctuations from time to time and may continue to be subject to such
volatility in the future. Trading price fluctuations can be caused by a variety
of factors, including quarter to quarter variations in operating results,
announcement of technological innovations or new products by the Company or its
competitors, governmental regulatory acts, developments with respect to patents
or proprietary rights, general conditions in the medical device or service
industries, actions taken by government regulators, changes in earnings
estimates by securities analysts or other events or factors, many of which are
beyond the Company's control. If the Company's revenues or operating results in
future quarters fall below the expectations of securities analysts and
investors, the price of the Company's Common Stock would likely decline,
perhaps substantially. Changes in the trading price of the Company's Common
Stock may bear no relation to the Company's actual operational or financial
results.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws contain provisions that may
discourage or make more difficult any attempt by a person or group to obtain
control of the Company, including provisions authorizing the issuance of
preferred stock ("Preferred Stock") without shareholder approval, restricting
the persons who may call a special meeting of the shareholders and prohibiting
shareholders from taking action by written consent. In addition, the Company is
subject to certain provisions of Florida law that may discourage or make more
difficult takeover attempts or acquisitions of substantial amounts of the
Company's Common Stock. Further, pursuant to the terms of a shareholder rights
plan adopted in 1995, each outstanding share of Common Stock has one attached
right. The rights will cause substantial dilution of the ownership of a person
or group that attempts to acquire the Company on terms not approved by the
Board and may have the effect of deterring hostile takeover attempts. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Substantially all of the Company's outstanding Common Stock is available for
sale in the public marketplace. As of February 27, 1998, there were also
outstanding stock options to purchase an aggregate of 747,000 shares of Common
Stock at various exercise prices per share. The majority of the shares to be
received upon exercise of these options will be available for immediate resale
in the public markets. No prediction can be made as to the effect, if any, that
sales of shares of Common Stock or the availability of such shares for sale
will have on the market prices prevailing from time to time. The possibility
exists that substantial amounts of Common Stock may be sold in the public
market, which may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities. See "Shares Eligible for Future Sale."
ABSENCE OF DIVIDENDS
The Company has not paid, and does not presently intend to pay, cash dividends.
The Company's major credit agreement contains, and future credit agreements may
contain, financial covenants, including covenants to maintain certain levels of
net worth and certain leverage ratios, which could have the effect of
restricting the amount of dividends that the Company may pay. It is not likely
that any cash dividends will be paid in the foreseeable future. See "Dividend
Policy."
11
<PAGE>
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the Private Securities Litigation Reform Act of 1995. All statements,
other than statements of historical facts, included or incorporated by
reference in this Prospectus which address activities, events or developments
which the Company expects or anticipates will or may occur in the future,
including statements regarding the Company's competitive position, the timing
of the application to the FDA for approval of the stentless CryoLife-O'Brien
porcine heart valves, BioGlue surgical adhesive and FibRx surgical sealant,
other estimated dates relating to the Company's proposed regulatory
submissions, estimates regarding 1998 research and development expenditures,
the Company's expectations regarding the adequacy of current financing
arrangements, product demand and market growth, and other statements regarding
future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts are forward-
looking statements. These statements are based on certain assumptions and
analyses made by the Company in light of its experience and its perception of
historical trends, current conditions and expected future developments as well
as other factors it believes are appropriate in the circumstances. However,
whether actual results and developments will conform with the Company's
expectations and predictions is subject to a number of risks and uncertainties
which could cause actual results to differ materially from the Company's
expectations, including the risk factors discussed in this Prospectus and other
factors, many of which are beyond the control of the Company. Consequently, all
of the forward-looking statements made in this Prospectus are qualified by
these cautionary statements and there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations. The Company assumes no
obligation to update publicly any such forward-looking statements, whether as a
result of new information, future events or otherwise.
12
<PAGE>
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The net proceeds to the Company from the sale of shares of Common Stock offered
by the Company hereby are estimated to be approximately $29,347,000
($34,326,000 if the Underwriters' over-allotment option is exercised in full
and $37,473,000 if the Underwriters' over-allotment option is exercised in full
and the Selling Shareholders sell no shares), based on an assumed public
offering price of $14 1/8 per share, and after deduction of the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company will not receive any proceeds from the sale of shares of
Common Stock offered hereunder by the Selling Shareholders. The Company has,
however, agreed to offer for sale all or any portion of the 237,000 shares not
sold hereunder by the Selling Shareholders.
The Company anticipates that a portion of the net proceeds will be used to
repay all outstanding indebtedness under its credit facility (the "Credit
Facility") with NationsBank N.A. This indebtedness was incurred pursuant to a
term note and revolving note, and was used, in part, to finance the Company's
new headquarters facility and its new IFM manufacturing facility. At February
27, 1998, approximately $11.5 million in principal and accrued and unpaid
interest was outstanding under the Credit Facility at interest rates ranging
from approximately 7.4% to 8.5% per annum. See Note 4 to Notes to Consolidated
Financial Statements contained elsewhere in this Prospectus. Such borrowings
under the Credit Facility are repayable over time in varying amounts with the
final payment due December 31, 2004. The balance of the net proceeds will be
used for manufacturing facilities expansion and general corporate purposes,
including working capital, and may be used for potential acquisitions. The
Company selectively considers strategic acquisitions of complementary
technologies, but it currently has no specific plans for any such acquisition.
See "Business--Manufacturing and Operations." Pending such uses, the Company
expects to invest the net proceeds in short-term, interest-bearing, investment
grade securities.
The Company anticipates that its current resources, together with the net
proceeds of this Offering and continued revenue from sales of its products and
services at present levels will be sufficient to meet the Company's operating
and capital requirements for the next 12 months. However, there can be no
assurance that the Company will not need to obtain additional financing prior
to such time, or that such financing will be available on terms acceptable to
the Company, or at all. The Company's actual cash requirements may vary
materially from those now planned, and will depend upon numerous factors,
including the Company's results of operations, the results of the Company's
development and commercialization programs, the timing and results of pre-
clinical and clinical trials, the timing and costs of obtaining regulatory
approvals, the level of resources that the Company commits to the development
of manufacturing, marketing and sales capabilities, the technological advances
and activities of competitors and other factors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Risk Factors--Management Discretion in Use of
Proceeds."
13
<PAGE>
PRICE RANGE OF COMMON STOCK
- --------------------------------------------------------------------------------
The Company's Common Stock is traded on the NYSE under the symbol "CRY." Prior
to July 15, 1997, the Company's Common Stock was traded on the Nasdaq National
Market under the symbol "CRYL." The following table sets forth, for the periods
indicated, the intra-day high and low sale prices per share of Common Stock on
the NYSE or the Nasdaq National Market, as applicable:
<TABLE>
<CAPTION>
HIGH LOW
--------- --------
<S> <C> <C>
1998
First Quarter (through March 2, 1998)..................... $17 15/16 $12 1/4
1997
Fourth Quarter............................................ 19 13
Third Quarter............................................. 16 1/8 11 1/4
Second Quarter............................................ 13 1/4 7 5/8
First Quarter............................................. 14 1/4 8
1996
Fourth Quarter............................................ 15 3/4 12 3/16
Third Quarter............................................. 20 1/2 11 1/4
Second Quarter............................................ 20 3/4 10 4/5
First Quarter............................................. 12 5/8 7
1995
Fourth Quarter............................................ 9 1/16 6 1/8
Third Quarter............................................. 9 1/8 5 3/8
Second Quarter............................................ 5 5/8 3 3/8
First Quarter............................................. 4 1/4 3 1/8
</TABLE>
The last reported sales price per share for the Common Stock on the NYSE on
March 2, 1998 was $14 1/8. As of February 27, 1998, there were approximately
410 holders of record, and approximately 7,000 beneficial holders, of the
Company's Common Stock.
DIVIDEND POLICY
- --------------------------------------------------------------------------------
The Company has never declared or paid any cash dividends on its Common Stock.
The Company currently intends to retain any future earnings for funding growth
and, therefore, does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The holders of any shares of Preferred Stock
issued by the Company will have a preference as to the payment of dividends
over the holders of shares of Common Stock. No shares of Preferred Stock are
currently issued and outstanding. See "Description of Capital Stock." The
Credit Facility contains, and future credit agreements may contain, financial
covenants, including covenants to maintain certain levels of net worth and
certain leverage ratios, which could have the effect of restricting the amount
of dividends that the Company may pay.
14
<PAGE>
CAPITALIZATION
- --------------------------------------------------------------------------------
The following table sets forth as of December 31, 1997 (i) the actual
capitalization of the Company and (ii) the capitalization as adjusted to give
effect to (a) the receipt of the net proceeds from the sale of 2,263,000 shares
of Common Stock offered by the Company hereby (at an assumed offering price of
$14 1/8 per share) after deduction of underwriting discounts and commissions
and estimated expenses payable by the Company in connection with this Offering,
(b) the repayment of $11,777,000 in principal under the Credit Facility, (c)
the conversion of $607,000 of the convertible debenture into 50,000 shares of
Common Stock and (d) the issuance of 2,000 shares to be sold by a Selling
Shareholder pursuant to the exercise of outstanding options. This table should
be read in conjunction with the Consolidated Financial Statements of the
Company and Notes thereto included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Current maturities of long-term debt................. $ 1,496,000 $ 496,000
Long-term debt:
Bank loans......................................... 10,777,000 --
Convertible debenture.............................. 5,000,000 4,393,000
Other long-term debt............................... 1,089,000 1,089,000
Shareholders' equity:
Preferred stock, $.01 par value per share;
authorized 5,000,000 shares including 2,000,000
shares of Series A junior participating preferred
stock; no shares issued........................... -- --
Common stock, $.01 par value per share; authorized
50,000,000 shares; 10,242,961 shares issued;
12,564,791 shares issued as adjusted(1)........... 102,000 125,000
Additional paid-in capital......................... 17,694,000 47,631,000
Treasury stock, 543,000 shares, at cost............ (180,000) (180,000)
Retained earnings.................................. 12,627,000 12,627,000
Notes receivable from shareholder.................. (16,000) (16,000)
----------- -----------
Total shareholders' equity....................... 30,227,000 60,187,000
----------- -----------
Total capitalization........................... $48,589,000 $66,165,000
=========== ===========
</TABLE>
- --------
(1) Excludes an aggregate of 754,000 Shares of Common Stock issuable upon
exercise of options outstanding as of December 31, 1997 at a weighted
average exercise price of $8.95 per share, of which options to purchase
308,000 shares were exercisable. See "Shares Eligible for Future Sale."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following Selected Consolidated Financial Data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included elsewhere in
this Prospectus or incorporated herein by reference. The data set forth below
with respect to the Company's Consolidated Income Statements and Balance Sheets
for, and as of the end of, the years ended December 31, 1996 and 1997 are
derived from the Company's Consolidated Financial Statements which have been
audited by Ernst & Young LLP, independent auditors, and which are included
elsewhere in this Prospectus and are qualified by reference to such
Consolidated Financial Statements and Notes thereto. The selected data
presented below for, and as of the end of, each of the years in the three-year
period ended December 31, 1995, are derived from the Consolidated Financial
Statements of the Company, which Consolidated Financial Statements have been
audited by KPMG Peat Marwick LLP, independent auditors. The Consolidated Income
Statement for the year ended December 31, 1995, and the report thereon, are
included elsewhere in this Prospectus. The historical results are not
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Cryopreservation...... $18,938 $22,818 $27,994 $36,293 $44,242
Bioprosthetic
cardiovascular
devices.............. 933 414 263 385 576
Single-use medical
devices.............. -- -- -- -- 5,591
Other income.......... 1,470 578 969 550 460
------- ------- ------- ------- -------
Total Revenues...... 21,341 23,810 29,226 37,228 50,869
Expenses:
Cost of
cryopreservation and
products............. 8,759 8,965 10,485 12,593 17,764
Research and
development.......... 1,384 1,975 2,634 2,807 3,946
General,
administrative and
marketing............ 10,282 11,085 12,807 15,673 20,548
Interest expense...... 23 21 4 72 978
------- ------- ------- ------- -------
Total Expenses...... 20,448 22,046 25,930 31,145 43,236
Income before income
taxes.................. 893 1,764 3,296 6,083 7,633
Income tax expense...... 339 498 1,094 2,156 2,908
------- ------- ------- ------- -------
Net income............ $ 554 $ 1,266 $ 2,202 $ 3,927 $ 4,725
======= ======= ======= ======= =======
Earnings per share of
common stock:
Basic................. $ .06 $ .14 $ .23 $ .41 $ .49
======= ======= ======= ======= =======
Diluted............... $ .06 $ .14 $ .23 $ .40 $ .48
======= ======= ======= ======= =======
Weighted average number
of shares of common
stock outstanding:
Basic................. 9,018 9,312 9,379 9,505 9,642
Diluted............... 9,114 9,373 9,568 9,906 9,942
<CAPTION>
DECEMBER 31, AS ADJUSTED
--------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997(1)
------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities............. $ 5,079 $ 6,366 $ 6,182 $ 1,370 $ 111(2) $17,687
Total assets............ 20,075 21,417 24,132 34,973 53,749 71,325
Long-term debt,
including current
maturities............. -- -- -- 3,326 18,362 5,978
Retained earnings....... 506 1,773 3,975 7,902 12,627 12,627
Total shareholders'
equity................. 16,615 17,933 20,465 24,929 30,227 60,187
</TABLE>
- --------
(1) Adjusted to give effect to (a) the receipt of the net proceeds from the
sale of 2,263,000 shares of Common Stock offered by the Company hereby (at
an assumed offering price of $14 1/8 per share) after deduction of
underwriting discounts and commissions and estimated expenses payable by
the Company in connection with this Offering, (b) the repayment of
$11,777,000 in principal under the Credit Facility, (c) the conversion of
$607,000 of the convertible debenture into 50,000 shares of Common Stock
and (d) the issuance of 2,000 shares to be sold by a Selling Shareholder
pursuant to the exercise of outstanding options
(2) At December 31, 1997, $3.2 million was available to be borrowed under the
Credit Facility.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion of the financial condition and results of operations
of CryoLife should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in the Prospectus.
See Glossary on page 57 for definitions of certain terms used herein.
OVERVIEW
The Company was organized in 1984 to address market opportunities in the area
of biological implantable products and materials, and today is the leader in
the cryopreservation of viable human tissue for cardiovascular, vascular and
orthopaedic applications. A majority of the Company's current revenues are
derived from the cryopreservation of human heart valves and conduits,
reflecting CryoLife's initial exclusive focus on this area. The Company began
cryopreserving aortic heart valves in 1984, pulmonary heart valves in 1986 and
mitral heart valves in 1995. CryoLife has also expanded into the
cryopreservation of other human tissue, including vascular tissue and
connective tissue for the knee.
The Company pays a fee to an organ procurement agency or tissue bank at the
time such organization consigns human tissue to the Company. The Company
generates revenues from cryopreservation services by charging hospitals a fee,
which covers the Company's services, the associated procurement fee and
applicable shipping expenses. The Company records revenue upon shipping tissue.
Costs associated with the procurement, processing and storage of tissue are
accounted for as deferred preservation costs on the Company's balance sheet and
are expensed when the tissue is shipped. The Company continually monitors
cryopreserved tissue in its possession to determine its viability. Tissue
determined not to be suitable for implantation is disposed of properly, and the
associated deferred preservation costs are expensed. As part of an effort to
reduce its working capital needs, while simultaneously facilitating the use of
cryopreserved tissue, the Company provides liquid nitrogen freezers to a number
of hospitals. The Company retains ownership of the liquid nitrogen freezers
and, consequently, incurs associated depreciation charges. The hospitals are
responsible for operating expenses related to the use of the liquid nitrogen
freezers.
The Company has expanded, and intends to continue to expand, its portfolio of
products and services. Much of this expansion has been accomplished through
acquisitions of intellectual property and businesses. In 1992, the Company
purchased for $730,000 the exclusive distribution rights for a line of
stentless porcine heart valves which the Company currently markets in the
European Community. In 1996, the Company purchased for $275,000 a patent for an
advanced design stentless pulmonary porcine heart valve. Also in 1996, the
Company acquired the assets of UCFI, a tissue processor, for $750,000 in cash
and a $1.3 million note. In 1997, the Company acquired IFM and its line of
single-use medical devices for $4.5 million in cash, a $5.0 million convertible
debenture and a commitment to pay additional cash consideration (not to exceed
$1.8 million) if certain target net revenues of IFM are exceeded.
The composition of the Company's revenues is expected to change in future
years, reflecting, among other things, the anticipated growth in shipments of
human vascular tissue and human connective tissue for the knee, the acquisition
of IFM and the introduction into the European Community of BioGlue surgical
adhesive as well as other expected new products.
17
<PAGE>
The following table outlines product shipment and revenue data for the
Company's major product lines from 1995 to 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
UNITS SHIPPED AND REVENUES BY MAJOR PRODUCT LINE 1995 1996 1997
------------------------------------------------ ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Human Heart Valves and Conduits:
Units shipped.................................. 3,499 4,528 5,244
Revenues....................................... $19,767 $24,763 $29,046
Human Vascular Tissue:
Units shipped.................................. 1,765 2,147 2,621
Revenues....................................... $ 6,771 $ 8,172 $10,469
Human Connective Tissue for the Knee:
Units shipped.................................. 573 1,562 1,859
Revenues....................................... $ 1,456 $ 3,358 $ 4,727
Bioprosthetic Cardiovascular Devices:
Units shipped.................................. 198 256 532
Revenues....................................... $ 263 $ 385 $ 576
</TABLE>
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues increased 37% to $50.9 million in 1997 from $37.2 million in 1996. The
increase in revenues was primarily due to the growing acceptance in the medical
community of cryopreserved tissues, the Company's ability to procure greater
amounts of tissue, price increases for certain cryopreservation services and
revenues attributable to the Company's line of single-use medical devices
following the IFM acquisition in March 1997. Revenues attributable to IFM were
$5.6 million in 1997.
Revenues from human heart valve and conduit cryopreservation services increased
17% to $29.0 million in 1997 from $24.8 million in 1996, representing 57% and
67%, respectively, of total revenues during such years. This increase in
revenues was primarily due to a 16% increase in the number of heart allograft
shipments.
Revenues from human vascular tissue cryopreservation services increased 28% to
$10.5 million in 1997 from $8.2 million in 1996, representing 21% and 22%,
respectively, of total revenues during such years. This increase in revenues
was primarily due to a 22% increase in the number of vascular allograft
shipments resulting from the introduction of cryopreserved tissues for new
procedures and an increased demand for the Company's existing cryopreservation
services.
Revenues from human connective tissue for the knee cryopreservation services
increased 38% to $4.7 million in 1997 from $3.4 million in 1996, representing
9% of total revenues during each year. This increase in revenues was primarily
due to a 19% increase in the number of allograft shipments and a greater
proportion of the 1997 shipments consisting of cryopreserved menisci, which
have a significantly higher per unit revenue than the Company's cryopreserved
tendons.
Revenues from the sale of bioprosthetic cardiovascular devices in 1997 were
$576,000 compared to $385,000 in 1996, representing 1% of revenues during each
year. Other revenues decreased to $460,000 in 1997 from $550,000 in 1996. Other
revenues in 1997 consisted primarily of research grant award revenues related
to the Company's SynerGraft technology.
Cost of cryopreservation services and products increased to $17.8 million in
1997 from $12.6 million in 1996. Cost of cryopreservation services and products
as a percentage of revenues increased to 35% in 1997 from 34% in 1996. This
increase was primarily due to the increased overhead costs associated with the
new corporate headquarters and the addition of the IFM product line, partially
offset by efficiencies gained with the increase in the number of allografts
processed.
18
<PAGE>
General, administrative and marketing expenses increased 31% to $20.5 million
in 1997 from $15.7 million in 1996, representing 40% and 42%, respectively, of
total revenues during such years. The increased expenses of approximately $4.8
million were primarily attributable to increased costs associated with the
Company's new corporate headquarters, increased fees paid to technical
representatives and other related marketing expenses relating to the growth in
revenues and increases in general overhead expenses to support the growth in
revenues.
The Company has continued its commitment to research and development activity,
spending approximately $3.9 million in 1997 and $2.8 million in 1996,
representing 8% of total revenues during each year. The Company's research and
development expenditures during 1997 were primarily for the development of
bioadhesives for surgical applications and its SynerGraft technology.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues increased 27% to $37.2 million in 1996 from $29.2 million in 1995. The
increase in revenues was primarily due to growing acceptance in the medical
community of cryopreserved tissues, the Company's ability to procure greater
amounts of tissue and price increases for certain services.
Revenues from human heart valve and conduit cryopreservation services increased
25% to $24.8 million in 1996 from $19.8 million in 1995, representing 67% and
68%, respectively, of total revenues during such years. This increase in
revenues was primarily due to a 29% increase in the number of heart allograft
shipments.
Revenues from human vascular tissue cryopreservation services increased 21% to
$8.2 million in 1996 from $6.8 million in 1995, representing 22% and 23%,
respectively, of total revenues during such years. This increase in revenues
was primarily due to a 22% increase in the number of vascular allograft
shipments.
Revenues from human connective tissue for the knee cryopreservation services
increased 127% to $3.4 million in 1996 from $1.5 million in 1995, representing
9% and 5%, respectively, of total revenues during each year. This increase in
revenues was primarily due to a 173% increase in the number of allograft
shipments partially offset by a decrease in the unit revenue of cryopreserved
tendons.
Revenues from the sale of bioprosthetic cardiovascular devices in 1996 were
$385,000 compared to $263,000 in 1995, representing 1% of revenues during each
year. This increase in revenues was primarily due to a 29% increase in the
number of units shipped.
Other revenues decreased to $550,000 in 1996 from $969,000 in 1995. Other
revenues in 1996 consisted primarily of research grant award revenues and a fee
from a terminated agreement with Bayer Corporation. Research grant award
revenues in 1996 were primarily related to the development of bioadhesives for
surgical application and the Company's SynerGraft technology. The decrease
compared to 1995 was primarily attributable to the sale of the Company's
patented Viral Inactivation Process ("VIP") technology to Osteotech, Inc. for
approximately $450,000 in 1995. The Company had developed its VIP technology to
eliminate potential viruses from human bone processed by the Company. The
Company sold its bone processing business in 1993.
Costs of cryopreservation services and products increased to $12.6 million in
1996 from $10.5 million in 1995. Cost of cryopreservation services and products
as a percentage of cryopreservation revenues decreased to 34% in 1996 from 36%
in 1995. This decrease was primarily due to an increase in the volume of
processed tissue and more efficient processing methods.
General, administrative and marketing expenses increased 23% to $15.7 million
in 1996 from $12.8 million in 1995, representing 42% and 44%, respectively, of
total revenues during such years. The increased expenses of approximately $2.9
million were primarily attributable to additional regulatory and quality
assurance costs related to the Company's CE Mark and ISO 9001 certifications,
increased fees paid to technical representatives and other related marketing
expenses resulting from the growth in revenues and increases in general
overhead expenses to support the growth in revenues.
19
<PAGE>
The Company continued its commitment to research and development activity,
spending approximately $2.8 million and $2.6 million in 1996 and 1995,
representing 8% and 9%, respectively, of total revenues during such years. The
Company's research and development expenditures during 1996 were primarily for
the development of bioadhesives for surgical applications and the SynerGraft
technology.
Seasonality
The demand for the Company's human heart valve and conduit cryopreservation
services is seasonal, with peak demand generally occurring in the second and
third quarters. Management believes that this demand trend for human heart
valve and conduit cryopreservation services is primarily due to the high number
of surgeries scheduled during the summer months. Management believes that the
trends experienced by the Company to date for its human connective tissue for
the knee cryopreservation services indicate that this business may also be
seasonal because it is an elective procedure that may be performed less
frequently during the fourth quarter holiday months. However, the demand for
the Company's vascular tissue cryopreservation services, bioprosthetic
cardiovascular devices and single-use medical devices does not appear to
experience this seasonal trend.
Quarterly Results
The Company achieved record revenues and earnings in both the year and three
months ended December 31, 1997, as compared to comparable prior periods, with
the fourth quarter of 1997 being the Company's tenth consecutive quarter of
record revenues and earnings as compared to the same quarter for prior years.
In the opinion of management, the information set forth in the table below has
been prepared on a basis consistent with the Company's audited Consolidated
Financial Statements appearing elsewhere in the Prospectus, and all necessary
adjustments (consisting only of normal recurring adjustments) have been
included to present fairly the unaudited quarterly results in accordance with
generally accepted accounting principles. The results for any quarter are not
necessarily indicative of results to be expected in any future period.
20
<PAGE>
The following table presents selected unaudited quarterly income statement data
for each of the eight quarters in the period ended December 31, 1997:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
1996 1997
--------------------------------- ---------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Cryopreservation
services.............. $8,103 $9,544 $10,067 $8,579 $9,725 $10,910 $12,689 $10,918
Bioprosthetic
cardiovascular
devices............... 157 75 71 82 104 135 177 160
Single-use medical
devices............... -- -- -- -- 554 1,596 1,703 1,738
Interest and other
income................ 174 79 273 24 30 82 72 276
------ ------ ------- ------ ------ ------- ------- -------
Total Revenues......... 8,434 9,698 10,411 8,685 10,413 12,723 14,641 13,092
EXPENSES:
Cost of
cryopreservation
services and
products.............. 2,879 3,289 3,563 2,862 3,426 4,550 5,112 4,676
Research and
development........... 690 701 616 800 849 857 1,243 997
General, administrative
and marketing......... 3,626 4,181 4,239 3,627 4,479 5,165 5,620 5,284
Interest expense....... -- -- 39 33 132 296 317 233
------ ------ ------- ------ ------ ------- ------- -------
Total Expenses......... 7,195 8,171 8,457 7,322 8,886 10,868 12,292 11,190
------ ------ ------- ------ ------ ------- ------- -------
INCOME BEFORE INCOME
TAXES.................. 1,239 1,527 1,954 1,363 1,527 1,855 2,349 1,902
Income tax expense..... 457 539 693 467 575 695 891 747
------ ------ ------- ------ ------ ------- ------- -------
NET INCOME.............. $ 782 $ 988 $ 1,261 $ 896 $ 952 $ 1,160 $ 1,458 $ 1,155
====== ====== ======= ====== ====== ======= ======= =======
EARNINGS PER SHARE OF
COMMON STOCK:
Basic.................. $ .08 $ .11 $ .13 $ .09 $ .10 $ .12 $ .15 $ .12
====== ====== ======= ====== ====== ======= ======= =======
Diluted................ $ .08 $ .10 $ .13 $ .09 $ .10 $ .12 $ .15 $ .12
====== ====== ======= ====== ====== ======= ======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING:
Basic.................. 9,433 9,491 9,529 9,575 9,581 9,615 9,670 9,694
Diluted................ 9,756 9,933 9,925 9,943 9,877 9,889 9,978 10,023
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, net working capital was $18.8 million, compared to $10.8
million at December 31, 1996, with a current ratio of 4-to-1 at December 31,
1997. The Company's primary capital requirements arise out of general working
capital needs, capital expenditures for facilities and equipment and funding of
research and development projects. The Company historically has funded these
requirements through bank credit facilities, cash generated by operations and
equity offerings.
Net cash used in operating activities was $2.2 million for the year ended
December 31, 1997, as compared to net cash provided by operating activities of
$3.2 million for the year ended December 31, 1996. This decrease resulted from
an increase in deferred cryopreservation costs to support the growing
acceptance of the Company's existing cryopreserved tissues as well as new
cryopreserved tissue offerings in 1997.
Net cash used in investing activities was $9.6 million for the year ended
December 31, 1997, as compared to $4.2 million for the year ended December 31,
1996. This increase primarily resulted from the Company's acquisition of IFM.
Net cash provided by financing activities was $10.6 million for the year ended
December 31, 1997, as compared to $1.8 million for the year ended December 31,
1996. This increase was primarily attributable to borrowings under the
Company's credit facility in connection with the acquisition of IFM and the
construction of the new Company and IFM facilities and increased deferred
cryopreservation costs.
21
<PAGE>
The Company anticipates that the net proceeds from this Offering, together with
borrowings under its existing credit agreements and cash generated from
operations will be sufficient to meet its operating and development needs for
the next 12 months. However, the Company's future liquidity and capital
requirements beyond that period will depend upon numerous factors, including
the timing of the Company's receipt of FDA approvals to begin clinical trials
for its products currently in development, the resources required to further
develop its marketing and sales capabilities if, and when, those products gain
approval, the resources required to expand manufacturing capacity and the
extent to which the Company's products generate market acceptance and demand.
There can be no assurance that the Company will not require additional
financing or will not seek to raise additional funds through bank facilities,
debt or equity offerings or other sources of capital to meet future
requirements. These additional funds may not be available when needed or on
terms acceptable to the Company, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
INFLATION
Although the Company cannot determine the precise effects of inflation,
management does not believe it has had a significant effect on revenues or
results of operations and does not expect it to have a significant effect in
the near future.
YEAR 2000
The Company is aware of the issues that many computer systems will face as the
millennium (year 2000) approaches. The Company, however, believes that its own
internal software and hardware is year 2000 compliant. The Company believes
that any year 2000 problems encountered by procurement agencies, hospitals and
other customers and vendors are not likely to have a material adverse effect on
the Company's operations. The Company anticipates no other year 2000 problems
which are reasonably likely to have a material adverse effect on the Company's
operations. There can be no assurance, however, that such problems will not
arise.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. These new standards require that all items recognized as components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Statement 130 is
effective for fiscal years beginning after December 15, 1997. The adoption of
Statement 130 will not have a significant impact on the Company's Consolidated
Financial Statements.
In June 1997, the FASB issued Statement 131, Disclosures About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 changes the
way public companies report segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial reports. Statement 131 is effective for years beginning after
December 15, 1997. The adoption of Statement 131 will not have a significant
impact on the Company's consolidated financial position and results of
operations, but will require additional disclosure in the notes to the
Company's Consolidated Financial Statements.
22
<PAGE>
BUSINESS
- --------------------------------------------------------------------------------
See Glossary on page 58 for definitions of certain terms used herein.
OVERVIEW
CryoLife is the leader in the cryopreservation of viable human tissues for
cardiovascular, vascular and orthopaedic transplant applications, and develops
and commercializes additional implantable products and single-use medical
devices. The Company estimates that it provided approximately 80% of the
cryopreserved human tissue implanted in the U.S. in 1997. The Company uses its
expertise in biochemistry and cell biology, and its understanding of the needs
of the cardiovascular, vascular and orthopaedic surgery medical specialties, to
continue expansion of its core cryopreservation business and to develop or
acquire complementary implantable products and technologies for these fields.
The Company develops bioprosthetic cardiovascular devices including a novel
design stentless porcine heart valve currently marketed in the European
Community. The Company also develops proprietary implantable surgical
bioadhesives, including BioGlue surgical adhesive, which it has begun
commercializing for vascular applications within the European Community. In
addition, the Company manufactures and distributes, through its Ideas For
Medicine, Inc. ("IFM") subsidiary, single-use medical devices for use in
vascular surgical procedures. The Company has generated compound annual growth
rates in revenues and earnings per share, including contributions from
acquisitions, of 24% and 68%, respectively, since 1993.
CryoLife processes and distributes for transplantation cryopreserved human
heart valves and conduits, human vascular tissue and human connective tissue
for the knee. Revenues from these services, which were $44.2 million, or 87% of
total revenues, in 1997, have grown at a compound annual growth rate of 24%
since 1993. Management believes that cryopreserved human heart valves and
conduits offer certain advantages over mechanical, synthetic and animal-derived
alternatives. Depending on the alternative, these advantages include more
natural functionality, elimination of a chronic need for anti-coagulation drug
therapy, reduced incidence of reoperation and reduced risk of catastrophic
failure, thromboembolism (stroke) or calcification. The Company estimates that
the potential U.S. market for implantable products targeting indications
addressed by the Company's cryopreserved tissues was approximately $950 million
in 1997. Since 1993, cryopreserved human tissues have captured an increasing
share of this market as the total U.S. replacement heart valve market and
CryoLife's revenues from cryopreserved human heart valves and conduits grew at
compound annual growth rates of approximately 7% and 21%, respectively. The
Company seeks to expand the availability of human tissue through its
established relationships with over 250 tissue banks and organ procurement
agencies nationwide.
CryoLife develops and markets outside of the U.S. bioprosthetic cardiovascular
devices for transplantation, currently consisting of fixed stentless porcine
heart valves. Fixed porcine heart valves are often preferred by surgeons for
procedures involving elderly patients because they eliminate the risk of
patient non-compliance with long-term anti-coagulation drug therapy associated
with mechanical valves, are less expensive than human heart valves and their
shorter longevity is more appropriately matched with these patients' life
expectancies. Fixed porcine heart valves address a worldwide target market
estimated to have been $175 million in 1997. Unlike most other available
porcine heart valves, the Company's stentless porcine heart valves do not
contain synthetic materials which increase the risk of endocarditis, a
debilitating and potentially fatal bacterial infection. The Company's CryoLife-
O'Brien aortic heart valve, currently marketed in the European Community and
certain other territories outside the U.S., is a stentless porcine heart valve
which contains a matched composite leaflet design that approximates human heart
valve blood flow characteristics and requires only a single suture line which
simplifies surgical implantation. The Company intends to submit a CE Mark
application for the CryoLife-Ross pulmonary heart valve, another of the
Company's fixed stentless porcine valves, for marketing in the European
Community. The Company plans to apply its proprietary SynerGraft technology to
its stentless porcine heart valves. SynerGraft involves the depopulation of
living cells from the structure of non-viable animal heart tissue and the
repopulation of such tissue with human cells. This process is designed to
reduce calcification of
23
<PAGE>
porcine heart valves, thereby increasing longevity, and more generally to
improve the biocompatibility and functionality of such tissue. The Company
believes that its porcine heart valves, when treated with SynerGraft
technology, will expand its opportunity to address the broader international
and U.S. heart valve markets, estimated to be $348 million and $395 million,
respectively, in 1997.
CryoLife is developing implantable biomaterials for use as surgical adhesives
and sealants. The Company's patent protected BioGlue surgical adhesive,
designed for cardiovascular and peripheral vascular applications, is a polymer
based on a derivative of a blood protein and a cross-linking agent. The
Company's patent protected FibRx surgical sealant, designed for tissue
hemostasis and suture line sealing, is a light activated, biodegradable
surgical sealant under development which is based on a derivative of the human
blood factors fibrinogen and thrombin. Both of these products may be used with
or without sutures or staples, and may offer advantages over sutures and
staples, including more effective sealing and easier application. The Company
estimates that the annual worldwide market for surgical sutures and staples in
1997 was in excess of $2 billion. The Company recently received CE Mark
Certification for its BioGlue surgical adhesive which permits the Company to
begin marketing this product in the European Community for vascular
applications.
CryoLife manufactures and distributes, through its IFM subsidiary, single-use
medical devices including endarterectomy surgical instruments, intravascular
shunts, infusion ports, accessories utilized in laparoscopic procedures and a
wide range of single and dual lumen balloon catheters. The Company believes
that many of its existing single-use medical devices have novel proprietary
features that offer clinical advantages over competing products. For example,
the Company's Pruitt-Inahara Shunt was the first endarterectomy shunt available
to surgeons which contains a barrier feature designed to reduce migration of
plaque particles to the brain and trauma to the carotid artery during surgery.
Another example is the Company's dual lumen embolectomy catheter incorporating
a novel water irrigation mechanism which enables physicians to remove whole
blood clots more effectively than with single lumen embolectomy catheters. The
Company is benefiting from, and intends to utilize, its design and
manufacturing expertise to develop single-use medical devices for use in
conjunction with its cryopreserved human tissue and biomaterial products.
Examples of such devices under development include a family of balloon
catheters designed to assist in applying the BioGlue surgical adhesive and a
human heart valve holder designed to provide physicians greater control in
implantation procedures.
In the U.S., the Company markets its cryopreservation services for human heart
valves and conduits and human vascular tissue through its in-house technical
service representatives and relies on independent orthopaedic sales
representatives to market its cryopreservation services for human connective
tissue for the knee. Also in the U.S., the Company markets its single-use
medical devices through its in-house technical service representatives.
Internationally, cryopreserved human tissues, bioprosthetic cardiovascular
devices and single-use medical devices are distributed through independent
representatives located in several countries in Europe, South America and Asia.
The Company plans to market and distribute its BioGlue surgical adhesive
internationally through its existing independent representatives and, if
approved for sale in the U.S., through its in-house technical service
representatives.
The Company was incorporated in Florida in 1984. The Company's principal
executive offices are located at 1655 Roberts Boulevard, N.W., Kennesaw,
Georgia 30144. Its telephone number is (770) 419-3355 and its fax number is
(770) 590-3754.
GROWTH STRATEGY
The Company's primary objective is to continue its consistent growth in
revenues and profitability. The Company has generated compound annual growth
rates in revenues and net income of approximately 21% and 71%, respectively,
since 1993, excluding revenues and net income from IFM, which the Company
acquired in March 1997. The Company's strategy to generate continued growth is
based on increasing the use of cryopreserved tissues as an alternative to
mechanical and synthetic implantable products, developing new markets for
existing products and technologies and developing new products and technologies
for new and existing markets. The Company also selectively considers strategic
acquisitions of complementary technologies to supplement its internal growth.
The key elements of the Company's business and growth strategy are to:
. Continue Leadership in Cryopreservation of Human Heart Valves and
Conduits. The Company intends to increase the market penetration of its
cryopreserved human heart valves and conduits by
24
<PAGE>
(i) expanding awareness of clinical advantages of cryopreserved human
tissues through continuing educational efforts directed to physicians,
prospective heart valve and conduit recipients and tissue procurement
agencies, (ii) expanding its relationships with the more than 250 tissue
banks and procurement agencies across the U.S. which direct tissue to
the Company for cryopreservation and (iii) expanding its physician
training activities.
. Expand Distribution of Cryopreserved Human Vascular Tissue and
Connective Tissue for the Knee. Using the same strategy it has
successfully employed to expand its distribution of cryopreserved human
heart valves and conduits, the Company intends to increase its
cryopreservation revenues from human vascular tissue and connective
tissue for the knee through continuing educational efforts directed to
vascular and orthopaedic surgeons about the clinical advantages of
cryopreserved vascular and orthopaedic tissue, expanding its
relationships with tissue banks and procurement agencies and expanding
its programs for training physicians in the use of tissue cryopreserved
by the Company.
. Broaden Application of Cryopreservation Services. The Company will
continue to collect, monitor and evaluate implant data to (i) develop
expanded uses for the human tissues currently cryopreserved by the
Company and (ii) identify new human tissues as candidates for
cryopreservation. The Company has recently begun providing cryopreserved
human vascular tissue to be used as dialysis access replacement grafts
for patients undergoing long-term dialysis, and separately, as venous
valve replacements for patients suffering from diseases of the venous
system. The Company has ongoing projects for cryopreserving the
posterior tibialis and anterior tibialis tendons for use in knee
repairs. The Company is also investigating the use of cryopreserved
human osteochondral grafts to repair articular defects, and the use of
cryopreserved human endothelial cells, peripheral nerves and spinal
disks in various surgical applications.
. Develop and Commercialize Bioprosthetic Cardiovascular Devices. The
Company intends to leverage its expertise with stentless human heart
valves to expand commercialization of its stentless porcine heart valves
and to use its stentless porcine heart valves as a platform for the
development and commercialization of the Company's SynerGraft
technology. The Company is expanding its production capacity for its
bioprosthetic cardiovascular devices to address the increased demand it
is currently experiencing. Separately, the Company's patent protected
SynerGraft technology is being developed to expand the target market for
the CryoLife-O'Brien aortic heart valve and the CryoLife-Ross pulmonary
heart valve by minimizing calcification often associated with porcine
tissues and thereby increasing their longevity.
. Develop and Commercialize Biomaterials for Surgical Adhesive and Sealant
Applications. In the second quarter of 1998, the Company plans to ship
its patent protected BioGlue surgical adhesive for distribution in the
European Community through its existing independent representatives and
to file an application to conduct clinical trials for BioGlue surgical
adhesive in the U.S. The Company also plans to continue development of
its patent protected FibRx surgical sealant. In addition to the adhesive
and sealant applications of these biomaterials, the Company intends to
pursue, either directly or through strategic alliances, certain drug
delivery applications of BioGlue surgical adhesive and FibRx surgical
sealant, such as administering antibiotics, attaching chemotherapy drugs
to tumors, delivering growth agents or delivering bone chips for
orthopaedic bone repair.
. Leverage Existing Capability across Product Lines. The Company plans to
expand sales of its single-use medical devices by leveraging its
established cryopreservation services marketing and sales staff and by
introducing new complementary products. The Company intends to apply its
expertise with stentless human heart valves to expand commercialization
of its stentless porcine heart valves and to use its stentless porcine
heart valves as a platform for the development and commercialization of
the Company's SynerGraft technology. New complementary products under
development include a stentless human heart valve holder being designed
to provide greater physician control in implantation procedures and
modified single and dual lumen balloon catheters for use in delivering
the Company's implantable bioadhesives.
25
<PAGE>
SERVICES AND PRODUCTS
Cryopreservation of Human Tissue for Transplant/Living Biologic Devices
The Company's proprietary and patent protected cryopreservation process
involves the procurement of tissue from deceased human donors, the timely and
controlled delivery of such tissue to the Company, the screening, disinfection,
dissection and cryopreservation of the tissue by the Company, the storage and
shipment of the cryopreserved tissue and the controlled thawing of the tissue.
Thereafter, the tissue is surgically implanted into a human recipient.
The transplant of human tissue that has not been preserved must be accomplished
within extremely short time limits (not to exceed eight hours for transplants
of the human heart). Prior to the advent of human tissue cryopreservation,
these time constraints resulted in the inability to use much of the tissue
donated for transplantation. The application by the Company of its
cryopreservation technologies to donated tissue expands the amount of human
tissue available to physicians for transplantation. Cryopreservation also
expands the treatment options available to physicians and their patients by
offering alternatives to implantable mechanical, synthetic and animal-derived
devices. The tissues presently cryopreserved by the Company include human heart
valves and conduits, vascular tissue and connective tissue for the knee. The
following table sets forth, for the types of tissues cryopreserved by the
Company, the cumulative number of units shipped, the number of units shipped in
1997 and the total number of target market procedures performed annually in the
United States:
<TABLE>
<CAPTION>
NUMBER OF TARGET
NUMBER OF CRYOLIFE UNITS SHIPPED MARKET PROCEDURES
------------------------------------- PERFORMED IN THE
SINCE INCEPTION DURING 1997 U.S. IN 1997
------------------ --------------- -----------------
<S> <C> <C> <C>
Human Heart Valves and
Conduits............... 29,500 5,244 95,000
Human Vascular Tissue... 9,300 2,621 34,000
Human Connective Tissue
for the Knee........... 4,800 1,859 270,000
</TABLE>
CryoLife maintains and collects extensive clinical data on the use and
effectiveness of implanted human tissues that it has cryopreserved, and shares
this data with implanting physicians. The Company also uses this data to help
direct its continuing efforts to improve its cryopreservation services through
ongoing research and development. Its research staff and technical
representatives assist physicians by providing educational materials, seminars
and clinics on methods for handling and implanting the tissue cryopreserved by
the Company and the clinical advantages, indications and applications for those
tissues. The Company has ongoing efforts to train and educate physicians on the
indications for and uses of its cryopreserved tissues, as well as its programs
whereby surgeons train other surgeons in necessary techniques. The Company also
assists organ procurement agencies through training and development of
protocols and provides necessary materials to improve their internal tissue
processing techniques and to increase efficiency and the yield of usable
tissue.
Human Heart Valves and Conduits. The Company's revenues have been primarily
derived from the cryopreservation of human heart valves and conduits for use in
reconstructive heart valve replacement surgery. CryoLife shipped approximately
29,500 cryopreserved human heart valves and conduits from 1984 to 1997. Based
on CryoLife's records of documented implants, management believes that the
Company's success in the allograft heart valve market is due in part to
physicians' recognition of the longevity and natural functionality of the
Company's cryopreserved human tissues as compared to mechanical and porcine
heart valve alternatives in certain applications. The Company currently applies
its cryopreservation services to human aortic, pulmonary and, more recently,
mitral heart valves for implantation by cardiac surgeons. In addition, the
Company provides cryopreserved conduit tissue, which is the only source of
tissue available to surgeons who wish to perform certain specialized cardiac
repair procedures. Each of these human heart valves and conduits maintains a
viable tissue structure which more closely resembles and performs like the
patient's own tissue than non-human tissue alternatives.
Based on available market data, the Company estimates that of all heart valve
replacement surgeries performed in the U.S. in 1997, 69%, 30% and 1% involved
the replacement of diseased or damaged aortic valves, mitral
26
<PAGE>
valves and pulmonary valves, respectively. Due to the success of a procedure
known as the Ross Switch Procedure, 53% of the valves which CryoLife shipped in
1997 were pulmonary valves. In the Ross Switch Procedure, the surgeon replaces
the patient's damaged aortic valve with the patient's own pulmonary valve. The
patient's pulmonary valve is then replaced with a cryopreserved pulmonary
valve. The advantage of this procedure is the use of the patient's own valve in
the more stressful aortic position. The resulting benefit to CryoLife and the
surgical community is a more even demand and distribution of the processed
human aortic and pulmonary valves.
The Company estimates that the total heart valve and conduit replacement market
in the U.S. in 1997 was approximately $395 million. Management believes that
approximately 95,000 heart valve and conduit surgeries were conducted in the U.
S. in 1997. Of the total number of heart valve and conduit surgeries,
approximately 64,000, or 67%, involved mechanical heart valves, and
approximately 31,500, or 33%, involved tissue heart valves or conduits,
including porcine and cryopreserved human tissues. Of these tissue heart valve
or conduit replacements, management believes that approximately 6,500, or 21%,
involved cryopreserved human heart valve or conduit replacements. Over 5,200
human heart valves and conduits cryopreserved by the Company were shipped for
implantation in 1997. Since 1993, the total U.S. replacement heart valve market
grew at a compound annual growth rate of approximately 7%, while CryoLife's
revenues from cryopreservation of human heart valves and conduits grew at a
compound annual growth rate of approximately 21%.
Management believes cryopreserved human heart valves and conduits have
characteristics that make them the preferred replacement for most patients.
Specifically, human heart valves, such as those cryopreserved by the Company,
allow for more normal blood flow and provide higher cardiac output than porcine
and mechanical heart valves. Human heart valves are not as susceptible to
progressive calcification, or hardening, as are porcine heart valves, and do
not require anti-coagulation drug therapy, as do mechanical valves. The
synthetic sewing rings contained in mechanical and stented porcine valves are
difficult to treat with antibiotics after they have become infected, a
condition which usually necessitates the surgical removal of these valves at
considerable cost, morbidity and risk of mortality. Consequently, for many
physicians, human heart valves are the preferred alternative to mechanical and
stented porcine valves for patients who have, or are at risk to contract,
endocarditis.
The following table sets forth the characteristics of alternative heart valve
implants that management believes make cryopreserved human heart valves the
preferred replacement for most patients:
<TABLE>
<CAPTION>
PORCINE
CRYOPRESERVED -------------------------------- BOVINE
HUMAN STENTED STENTLESS(1) MECHANICAL PERICARDIUM(2)
------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Materials: human tissue glutaraldehyde- glutaraldehyde- pyrolitic glutaraldehyde-
fixed pig fixed pig carbon bi- fixed cow
tissue and tissue leaflet and tissue and
synthetic synthetic synthetic
sewing ring sewing ring sewing ring
Blood Flow Dynamics: moderate high
normal elevation nearly normal elevation high elevation
(Required Pressure) (3) (0-5) (10-20) (5-15) (10-25) (10-30)
Mode of Failure: gradual gradual expected to be catastrophic gradual
gradual
Longevity: 20 years 7-10 years expected to 20 years 10-15 years
exceed stented
porcine valves
Increased Risk of
Thromboembolic Events
(strokes or other expected to be
clotting): no occasional rare yes occasional
Anti-Coagulation Drug
Therapy Required: none short-term short-term chronic short-term
Responsiveness to
Antibiotic Treatment of
Endocarditis: high low low low low
Average Valve Cost in
U.S.: $6,850 $4,228 $5,500 $4,100(4) $4,500
</TABLE>
- --------
(1) Limited long-term clinical data is available since stentless porcine heart
valves only recently became commercially available.
(2) Management believes that bovine pericardium heart valves have experienced
mixed clinical results and are generally not considered a preferred
alternative for most patients.
(3) Pressure measured in mm/Hg.
(4) Mechanical valves also require chronic anti-coagulation drug therapy at a
cost of approximately $450 per year.
27
<PAGE>
While the clinical benefits of cryopreserved human heart valves discussed above
are relevant to all patients, they are particularly important for (i) pediatric
patients (newborn to 14 years) who are prone to calcification of porcine
tissue, (ii) young or otherwise active patients who face an increased risk of
severe blood loss or even death due to side effects associated with the anti-
coagulation drug therapy required with mechanical valves and (iii) women in
their childbearing years for whom anti-coagulation drug therapy would interfere
with normal pregnancy.
Human Vascular Tissues. The Company cryopreserves human saphenous and
superficial femoral veins for use in vascular surgeries that require small
diameter conduits (3mm to 6mm), such as coronary bypass surgery and peripheral
vascular reconstructions. Failure to bypass or revascularize an obstruction in
such cases may result in death or the loss of a limb. The Company believes it
offers the only available small diameter conduit product for below-the-knee
vascular reconstruction and shipped approximately 9,300 human vascular tissues
from 1986 to 1997.
A surgeon's first choice for replacing diseased or damaged vascular tissue is
generally the patient's own tissue. However, in cases of advanced vascular
disease, the patient's own tissue is often unusable and the surgeon may
consider using synthetic grafts or transplanted human vascular tissue.
Synthetic small diameter vascular grafts are not available for below-the-knee
surgeries and, in other procedures, have a tendency to shut down due to
occlusion because the synthetic materials in these products attract cellular
material from the blood stream which in turn closes off the vessel to normal
blood flow. Cryopreserved vascular tissues tend not to occlude as quickly
because of the presence of an endothelial cell lining in the donor vein which
remains intact following the cryopreservation process. The Company's
cryopreserved human vascular tissues are used for coronary artery bypass
surgeries, peripheral vascular reconstruction, dialysis access graft
replacement and venous valve transplantation.
In 1986, the Company began a program to cryopreserve saphenous veins for use in
coronary artery bypass surgeries. Although the Company's cryopreserved human
tissue was used in only a small percentage of the nearly 310,000 coronary
artery bypass procedures performed in 1997, the Company believes it is the only
commercially available alternative to the patient's own tissue. Approximately
950 cryopreserved human saphenous veins for use in coronary artery bypass
surgeries were shipped for this application in 1997, representing approximately
36% of all the human vascular tissue shipped by the Company during such period.
The Company estimates that, in 1997, approximately 20,000 coronary artery
bypass surgeries were performed in which human vascular tissues cryopreserved
by the Company could have been used.
In 1989, the Company began a program to cryopreserve long segment saphenous
veins for use in peripheral vascular reconstruction. In cases of peripheral
arteriosclerosis, a cryopreserved saphenous vein can be implanted as a bypass
graft for the diseased artery in order to improve blood flow and maintain a
functional limb. Analysis of clinical data has shown that 80% of patients
receiving CryoLife's preserved vascular tissues in this type of surgical
procedure still have the use of the affected leg three years after surgery. The
alternative for many of these patients was amputation. Approximately 1,570
cryopreserved human saphenous veins were shipped for this application in 1997.
The Company estimates that, in 1997, approximately 22,000 peripheral vascular
reconstruction surgeries were performed in which its cryopreserved human
vascular tissues could have been used.
In 1996, the Company began a program for the cryopreservation of human
superficial femoral veins for use in dialysis access graft replacement as an
alternative for synthetic grafts which have a higher risk of infection than
human tissue. The Company shipped less than 100 cryopreserved human superficial
femoral veins for this application in 1997. The Company estimates that, in
1997, approximately 30,000 dialysis access graft replacements were performed in
which its cryopreserved human vascular tissues could have been used.
In 1997, the Company began a program for the cryopreservation of human
superficial femoral veins for venous valve transplant. The cryopreservation of
these human tissues is designed for patients suffering from chronic venous
insufficiency, a condition in which the blood flow returning to the heart from
the legs is compromised due to absent, improperly functioning or destroyed
venous valves. Prior to the introduction of CryoLife's cryopreserved venous
valves, treatment for patients suffering from this ailment generally was
limited to drug
28
<PAGE>
therapy or compression stockings. The Company shipped less than 100
cryopreserved human superficial femoral veins for this application in 1997. The
Company estimates that, in 1997, approximately 20,000 patients with chronic
venous insufficiency could have benefitted from venous valve transplant
procedures using its cryopreserved human vascular tissues.
Human Connective Tissue for the Knee. The Company provides cryopreserved
surgical replacements for the meniscus and the anterior and posterior cruciate
ligaments, which are connective tissues critical to the proper operation of the
human knee. CryoLife has shipped approximately 4,800 human connective tissues
for the knee through 1997.
Human menisci cryopreserved by the Company provide orthopaedic surgeons with an
alternative treatment in cases where a patient's meniscus has been completely
removed. When a patient has a damaged meniscus, the current surgical
alternatives are to repair, partially remove or completely remove the patient's
meniscus, with partial removal being the most common procedure. Meniscal
removal increases the risk of premature knee degeneration and arthritis and
typically results in the need for knee replacement surgery at some point during
the patient's life. Management believes that the Company is the only provider
of cryopreserved meniscal tissue and that there are no synthetic menisci on the
market. The Company estimates that in 1997 in the U.S. approximately 683,000
patients underwent partial or total meniscectomies. The Company believes up to
30% of these patients could become candidates for meniscal replacement within
five years.
Tendons cryopreserved by the Company are used for the reconstruction of
anterior cruciate ligaments in cases where the patient's ligaments are
irreparably damaged. Surgeons have traditionally removed a portion of the
patient's patellar tendon from the patient's undamaged knee for use in
repairing a damaged anterior cruciate ligament. Tendons cryopreserved by the
Company provide an alternative to this procedure. Because surgeries using
cryopreserved tissue do not involve the removal of any of the patient's own
patellar tendon, the patient recovery period is typically shorter. The Company
estimates that in 1997 approximately 175,000 cruciate ligament reconstruction
surgeries were performed.
Based on its experience with human heart valves and conduits, management
believes that as the body of clinical data builds regarding the use of
cryopreserved human connective tissues for the knee, the use of such tissues
will increase, although there can be no assurance that this will be the case.
Other Allograft Tissues Under Development. The Company currently has ongoing
projects for cryopreserving the posterior and anterior tibialis tendons for use
in the repair of anterior cruciate ligaments. The Company has other projects
for using preserved osteochondral grafts to repair articular defects and for
the use of cryopreserved human endothelial cells, peripheral nerves and spinal
discs, in various surgical applications.
Bioprosthetic Cardiovascular Devices
The Company is developing bioprosthetic cardiovascular devices based on its
experience with cryopreserved human tissue implants. Like human heart valves,
the Company's porcine heart valves are stentless with the valve opening, or
annulus, retaining a more natural flexibility. Stented porcine and mechanical
heart valves are typically fitted with synthetic sewing rings which are rigid
and can impede normal blood flow. Unlike most other available porcine heart
valves, the Company's stentless porcine heart valves do not contain synthetic
materials which increase the risk of endocarditis, a debilitating and
potentially deadly bacterial infection.
Fixed porcine heart valves are often preferred by surgeons for procedures
involving elderly patients because they eliminate the risk of patient non-
compliance with anti-coagulation drug therapy associated with mechanical
valves, are less expensive than allograft valves and their shorter longevity is
more appropriately matched with these patients' life expectancies. Fixed
porcine heart valves address a worldwide target market estimated to have been
$175 million in 1997.
The Company's SynerGraft technology involves the removal of living cells from
the structure of non-viable animal tissue and the repopulation of such tissue
with human cells. This process is designed to reduce
29
<PAGE>
calcification of porcine heart valves, thereby increasing their longevity, and
more generally to improve the biocompatibility and functionality of such
tissue. The Company believes that its porcine heart valves, when treated with
SynerGraft technology, will expand its opportunity to address the broader
international and U.S. heart valve markets, estimated to be $348 million and
$395 million, respectively, in 1997.
The following table sets forth the bioprosthetic cardiovascular devices
currently marketed or under development by the Company, along with the product
features and regulatory or market status for each:
<TABLE>
<CAPTION>
FEATURES REGULATORY/MARKET STATUS
--------------------- ----------------------------
<C> <C> <S>
FIXED STENTLESS PORCINE VALVES:
CryoLife-O'Brien aortic valve of currently marketed in Europe
matched composite with regulatory approval
leaflet design; under CE Mark
single suture line
CryoLife-Ross pulmonary valve with submission of application
attached conduit for CE Mark for European
marketing approval
anticipated in mid-1998
DEPOPULATED STENTLESS PORCINE VALVES:
CryoLife-O'Brien SG aortic valve, as submission of application
above, with antigen for CE Mark for European
reduction properties marketing approval
anticipated in fourth
quarter 1998
CryoLife-Ross SG pulmonary valve, as submission of application
above, with antigen for CE Mark for European
reduction properties marketing approval
anticipated in fourth
quarter 1998
REPOPULATED STENTLESS PORCINE VALVES:
CryoLife-O'Brien SynerGraft aortic valve, as pre-clinical
above, repopulated
with human cells
CryoLife-Ross SynerGraft pulmonary valve, as pre-clinical
above, repopulated
with human cells
</TABLE>
The CryoLife-O'Brien aortic valve, is a stentless porcine valve with design
features which management believes provide significant advantages over other
stentless porcine heart valves. CryoLife began exclusive worldwide distribution
of this value in 1992 and acquired all rights to the underlying technology in
1995. The Company's CryoLife-O'Brien aortic heart valve, currently marketed in
the European Community and certain other territories outside the U.S., contains
a matched composite leaflet design that approximates human heart valve blood
flow characteristics and requires only a single suture line thereby simplifying
surgical implantation. Other stentless porcine valves require a more
complicated implant procedure.
The CryoLife-Ross pulmonary valve, the patent for which the Company acquired in
October 1996, is an advanced design stentless porcine heart valve within an
attached conduit of porcine tissue, which mimics the structure of a human heart
valve. The Company intends to submit a CE Mark application during 1998 for
marketing the Cryolife-Ross pulmonary heart valve, another of the Company's
fixed stentless porcine valves, in the European Community.
The Company plans to apply its proprietary SynerGraft technology to its
stentless porcine heart valves. The first of the SynerGraft technology
applications involves developing depopulated stentless porcine heart valves
with antigen reduction properties. This technology removes viable cells from
animal tissues thereby reducing the transplant recipient's auto-immune response
to the remaining depopulated tissues. The immune response typically deposits
calcium which attaches to and hardens implanted porcine heart valve tissue, a
process known as calcification, which reduces the useful life of the implant.
By removing viable animal cells from the tissue while maintaining the
underlying structural strength of the porcine heart valve, this SynerGraft
application is designed to provide a platform for a patient's own cells to
naturally populate the implant. This SynerGraft depopulation technology is
being applied to both the CryoLife-O'Brien aortic heart valve and the CryoLife-
Ross pulmonary heart valve for products under development anticipated to be
known as the CryoLife-O'Brien S.G. and the CryoLife-Ross S.G.
30
<PAGE>
The second of the SynerGraft technology applications involves developing
stentless porcine heart valves repopulated with viable human cells prior to
implantation. This technology uses porcine tissues that have been depopulated
of viable animal cells as in the CryoLife-O'Brien S.G. and the CryoLife-Ross
S.G. This SynerGraft repopulation technology is being applied to both the
CryoLife-O'Brien aortic heart valve and the CryoLife-Ross pulmonary heart valve
for products anticipated to be known as the CryoLife-O'Brien SynerGraft and the
CryoLife-Ross SynerGraft.
Implantable Biomaterials for Use as Surgical Adhesives and Sealants
The effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of tissue and to the ultimate
success of the surgical procedure. Failure to effectively seal surgical wounds
can result in leakage of air in lung surgeries, cerebral spinal fluids in
neurosurgeries, blood in cardiovascular surgeries and gastrointestinal contents
in abdominal surgeries. Air and fluid leaks resulting from surgical procedures
can lead to significant post-surgical morbidity resulting in prolonged
hospitalization, higher levels of post-operative pain and a higher mortality
rate.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and fluid
leakage at the wound site. This is particularly the case when sutures and
staples are used to close tissues containing air or fluids under pressure, such
as the lobes of the lung, the dural membrane surrounding the brain and spinal
cord, blood vessels and the gastrointestinal tract. In addition, in minimally
invasive surgical procedures, where the surgeon must operate through small
access devices, it can be difficult and time consuming for the surgeon to apply
sutures and staples. The Company believes that the use of surgical adhesives
and sealants with or without sutures and staples could enhance the efficacy of
these procedures through more effective and rapid wound closure.
In order to address the inherent limitations of sutures and staples, the
Company is developing and commercializing its BioGlue surgical adhesive and is
developing its FibRx surgical sealant. The BioGlue surgical adhesive is a
polymeric surgical bioadhesive based on a derivative of a blood protein and a
cross-linking agent. BioGlue surgical adhesive is nonbiodegradable and has a
tensile strength that is four to five times that of FibRx surgical sealant.
Target clinical applications for BioGlue surgical adhesive include
cardiovascular and vascular peripheral repair. FibRx surgical sealant is a
light activated surgical sealant based on a derivative of the human blood
factors fibrinogen and thrombin. The Company believes that FibRx is the only
surgical sealant under development offering ease of use to the surgeon through
either single-syringe or spray applicators.
The following table summarizes certain important features, targeted
applications and regulatory and market status of BioGlue surgical adhesive and
FibRx surgical sealant:
<TABLE>
<CAPTION>
BIOGLUE SURGICAL ADHESIVE FIBRX SURGICAL SEALANT
------------------------------ ------------------------------
<S> <C> <C>
COMPOSITION: animal albumin and thrombin, fibrinogen and a
glutaraldehyde thrombin inhibitor
METHOD OF APPLICATION: double syringe; mixing device light activated single
provided syringe; or light activated
spray applicator
TARGETED CLINICAL vascular repair; anastomotic hemostasis in cardiovascular
APPLICATIONS: sealing; aortic dissection procedures, skin grafts and
repair; carotid endarterectomy breast reconstruction;
patching; tissue bonding adhesion for skin grafts and
breast reconstruction
PERFORMANCE high tensile strength; non- strength of normal human blood
CHARACTERISTICS: biodegradable clot; biodegradable; flexible,
easily manipulated
REGULATORY/MARKET STATUS
Europe: CE Mark received for vascular regulatory pathway not
repair applications; expect to determined; expected to be
commence marketing in Europe evaluated in 1998
in second quarter 1998
United States: submission of application with submission of IND application
the FDA for approval to with the FDA for approval to
conduct clinical trials conduct U.S. clinical trials
anticipated in second quarter anticipated in third quarter
1998 1998
</TABLE>
31
<PAGE>
The Company estimates that the worldwide market for surgical sutures and
staples in 1997 was in excess of $2 billion. The Company intends to begin
shipping BioGlue surgical adhesive for distribution in the European Community
in the second quarter of 1998. FibRx surgical sealant is progressing through
pre-clinical trials and is presently undergoing toxicology validation
procedures mandated by the FDA prior to the commencement of clinical trials.
Single-Use Medical Devices
CryoLife manufactures and distributes, through its IFM subsidiary, single-use
medical devices including endarterectomy surgical instruments, intravascular
shunts, infusion ports, accessories utilized in laparoscopic procedures and a
wide range of single and dual lumen balloon catheters. The Company believes
that many of its existing single-use medical devices have novel proprietary
features that offer clinical advantages over competing products. For example,
the Company's Pruitt-Inahara Shunt was the first endarterectomy shunt available
to surgeons which contains a barrier feature designed to reduce migration of
plaque particles to the brain and trauma to the carotid artery during surgery.
Another example is the Company's dual lumen embolectomy catheter incorporating
a novel water irrigation mechanism which enables physicians to remove whole
blood clots more effectively than with single lumen embolectomy catheters. The
Company is benefiting from, and intends to utilize, its design and
manufacturing expertise in developing single-use medical devices for use in
conjunction with its human tissue and biomaterial products. Examples of such
single-use medical devices under development include a family of balloon
catheters designed to assist in applying the BioGlue surgical adhesive and a
human heart valve holder designed to provide physicians greater control in
implantation procedures.
The Company plans to expand sales of its single-use medical devices by
leveraging its established cryopreservation services marketing and sales staff
to market existing products and by introducing new products. New complementary
products under development include modified single and dual lumen balloon
catheters to be used to deliver the Company's implantable bioadhesives. The
Company is working to develop single-use medical devices for use with its
BioGlue surgical adhesive. The Company believes that the introduction of
BioGlue surgical adhesive in the European Community for vascular repair will
create additional marketing opportunities for its single-use medical devices.
SALES, DISTRIBUTION AND MARKETING
Cryopreservation Services
CryoLife markets its cryopreservation services to tissue procurement agencies,
implanting physicians and prospective tissue recipients. The Company works with
tissue banks and organ procurement agencies to ensure consistent and continued
availability of donated human tissue for transplant and educates physicians and
prospective tissue recipients with respect to the benefits of cryopreserved
human tissues.
Procurement of Tissue. Donated human tissue is procured from deceased human
donors by organ procurement agencies and tissue banks. After procurement, the
tissue is packed and shipped, together with certain information about the
tissue and its donor, to the Company in accordance with the Company's
protocols. The tissue is transported to the Company's laboratory facilities via
commercial airlines pursuant to arrangements with qualified courier services.
Timely receipt of procured tissue is important, as tissue that is not received
promptly cannot be cryopreserved successfully. The procurement agency receives
a fee for its services, which is paid by the Company. The procurement fee and
related shipping costs are ultimately reimbursed to the Company by the hospital
with which the implanting physician is associated. The Company has developed
relationships with over 250 tissue banks and organ procurement agencies
throughout the U.S. Management believes the establishment of these
relationships is critical for a growing business in the cryopreservation
services industry and that the breadth of these existing relationships provides
the Company a significant advantage over potential new entrants to this market.
As a result of its maintaining and developing these relationships, the Company
has consistently increased its annual human heart valve procurement since its
inception. The Company employs approximately 14 individuals in the area of
tissue procurement, seven of whom are employed as procurement relations
managers and are stationed throughout the country. The Company's central
procurement office is staffed 24 hours per day, 365 days per year.
32
<PAGE>
Preservation of Tissue. Upon receiving tissue, a Company technician completes
the documentation control for the tissue prepared by the procurement agency and
gives it a control/inventory number. The documentation identifies, among other
things, donor age and cause of death. A trained technician then removes the
portion or portions of the delivered tissue that will be cryopreserved. These
procedures are conducted under aseptic conditions in clean rooms. At the same
time, additional samples are taken from the donated tissue and subjected to the
Company's comprehensive quality assurance program. This program may identify
characteristics which would disqualify the tissue for cryopreservation.
Human heart valves and conduits, vascular tissue and connective tissue for the
knee are cryopreserved in a proprietary freezing process conducted according to
strict Company protocols. After the cryopreservation process, the specimens are
transferred to liquid nitrogen freezers for long-term storage at temperatures
below -135(degrees)C. The entire cryopreservation process is rigidly controlled
by guidelines established by the Company.
Distribution of Tissue to Implanting Physicians. After cryopreservation, tissue
is stored by the Company or is delivered directly to hospitals at the
implanting physician's request. Cryopreserved tissue must be transported under
stringent handling conditions and maintained within specific temperature
tolerances at all times. Cryopreserved tissue is packaged for shipment using
the Company's proprietary processes. At the hospital, the tissue is held in a
liquid nitrogen freezer according to Company protocols pending implantation.
The Company provides a detailed protocol for thawing the cryopreserved tissue.
The Company also makes its technical personnel available by phone or in person
to answer questions. After the Company transports the tissue to the hospital,
the Company invoices the institution for its services, the procurement fee and
transportation costs.
The Company encourages hospitals to accept the cryopreserved tissue quickly by
providing Company-owned liquid nitrogen freezers to client hospitals without
charge. The Company has currently installed more than 300 of these freezers.
Participating hospitals pay the cost of liquid nitrogen and regular
maintenance. The availability of on-site freezers makes it easier for a
hospital's physicians to utilize the Company's cryopreservation services by
making the cryopreserved tissue more readily available. Because fees for the
Company's cryopreservation services become due upon the delivery of tissue to
the hospital, the use of such on-site freezers also reduces the Company's
working capital needs.
Marketing, Educational and Technical Support. The Company maintains active
relationships with approximately 1,600 cardiovascular, vascular and orthopaedic
surgeons who have active practices implanting cryopreserved human tissues and
markets to a broader group of physicians within these medical specialties.
Because the Company markets its cryopreservation services directly to
physicians, an important aspect of increasing the distribution of the Company's
cryopreservation services is educating physicians on the use of cryopreserved
human tissue and on proper implantation techniques. Trained field support
personnel provide back-up and support to implanting institutions and surgeons.
The Company currently has approximately 98 independent technical service
representatives and sub-representatives (who deal primarily with orthopaedic
surgeons and who are paid on a commission basis) as well as 37 persons employed
as technical service representatives (who deal primarily with cardiovascular
and vascular surgeons and receive a base salary with a performance bonus) all
of whom provide field support.
The Company sponsors physician training seminars where physicians teach other
physicians the proper technique for handling and implanting cryopreserved human
tissue. The Company conducted seven of these seminars in 1997. Physicians pay
their own expenses to attend these seminars in addition to paying the Company a
fee for attendance. The Company also produces educational videotapes for
physicians. The Company coordinates live surgery demonstrations at various
medical schools. The Company also coordinates laboratory sessions that utilize
animal tissue to demonstrate the respective surgical techniques. Members of the
Company's Medical Advisory Board often lead the surgery demonstrations and
laboratory sessions. Management believes that these activities improve the
medical community's acceptance of the cryopreserved human tissue processed by
the Company.
In order to increase the Company's supply of human tissue for cryopreservation,
the Company educates and trains procurement agency personnel in procurement,
dissection, packaging and shipping techniques. The
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Company also produces educational videotapes and coordinates laboratory
sessions on procurement techniques for procurement agency personnel. To
supplement its educational activities, the Company employs in-house technical
specialists that provide technical information and assistance and maintains a
staff 24 hours per day, 365 days per year for customer support.
Bioprosthetic Cardiovascular Devices
The Company markets the CryoLife-O'Brien stentless porcine heart valves in the
European Community. The Company's European sales, distribution and marketing
force consists of eight independent representatives, representing each of the
Benelux countries, France, Germany, Greece, Scandinavia, Turkey and the United
Kingdom. Each of these representatives is paid on a commission basis. Marketing
efforts are directed almost exclusively toward cardiovascular and vascular
surgeons, and the Company conducts educational seminars and conferences to
train these surgeons and educate them with respect to the uses and benefits of
its porcine stentless heart valves. In 1997, the Company conducted one workshop
and participated in three European conferences. The Company intends to market
its CryoLife-Ross stentless porcine heart valves, if CE Mark approval is
obtained, through this same European sales force.
BioGlue Surgical Adhesive
The Company plans to market and distribute its BioGlue surgical adhesive
internationally through its existing independent representatives, and if
approved for sale in the U.S., through its in-house technical service
representatives. The initial shipments of BioGlue surgical adhesive to
CryoLife's European distributors, which are currently distributing the
CryoLife-O'Brien stentless porcine heart valve and single-use medical devices
product lines, are scheduled for the second quarter of 1998. The Company
conducts training sessions for European doctors with respect to the application
and administration of BioGlue surgical adhesive.
Single-Use Medical Devices
Following its acquisition of IFM in March 1997, the Company terminated the
majority of IFM's sales representatives and began transitioning the sales and
distribution of single-use medical devices to its in-house technical service
representatives. The Company plans to expand sales of its single-use medical
devices by continuing new product development and leveraging its established
cryopreservation services marketing and sales staff to market the products. The
Company conducted two training seminars for these representatives during 1997.
RESEARCH AND DEVELOPMENT
The Company uses its expertise in biochemistry and cell biology, and its
understanding of the needs of the cardiovascular, vascular and orthopaedic
surgery medical specialties, to continue to expand its core cryopreservation
business in the U.S. and to develop or acquire implantable products and
technologies for these fields. The Company seeks to identify market areas that
can benefit from preserved living tissues and other related technologies, to
develop innovative techniques and products within these areas, to secure their
commercial protection, to establish their efficacy and then to market these
techniques and products. The Company employs approximately 26 people in its
research and development department. There are seven PhDs with specialties as
diverse as immunology, molecular biology, protein chemistry, organic chemistry
and vascular biology.
In order to expand the Company's service and product offerings, the Company is
currently in the process of developing or investigating several technologies
and products, including FibRx surgical sealant, SynerGraft and additional
applications of BioGlue surgical adhesive. The Company is currently
investigating certain drug delivery applications for BioGlue surgical adhesive
and FibRx surgical sealant, such as administering antibiotics, attaching
chemotherapy drugs to tumors, delivering growth agents or delivering bone chips
for orthopaedic bone repair. To the extent the Company identifies additional
applications for these products, the Company may attempt
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to license these products to corporate partners for further development of such
applications. The Company's research and development strategy is to allocate
available resources among the Company's four core market areas of
cryopreservation services, bioprosthetic cardiovascular devices, implantable
biomaterials and single-use medical devices, based on the size of the potential
market for any specific product candidate and the estimated development time
and cost required to bring the product to market.
Research on these and other projects is conducted in the Company's research and
development laboratory or at universities or clinics where the Company sponsors
research projects. In 1995, 1996 and 1997, the Company spent approximately $2.6
million, $2.8 million and $3.9 million, respectively, on research and
development activities on new and existing products. These amounts represented
approximately 9%, 8% and 8% of the Company's revenues for those respective
years. The Company's research and development program is overseen by its
medical and scientific advisory boards. The Company's pre-clinical studies are
conducted at universities and other locations outside the Company's facilities
by third parties under contract with the Company. In addition to these efforts,
the Company may, as situations develop, pursue other research and development
activities.
MANUFACTURING AND OPERATIONS
The Company's facilities (other than its single-use medical device
manufacturing plant) are located in suburban Atlanta, Georgia, and consist of
three separate locations totaling approximately 130,000 square feet of leased
office, laboratory and warehouse space. Approximately 17,500 square feet are
dedicated to laboratory work areas. The primary facility, which does not
include the bioadhesive laboratory and the bioprosthetic manufacturing
operation, has three main laboratory facilities: human tissue processing,
research and development and microbiology. Each of these areas consists of a
general technician work area and adjoining "clean rooms" for work with human
tissue and for aseptic processing. The clean rooms are supplied with highly
filtered air which provides a near-sterile environment.
Human Tissue Processing
The human tissue processing laboratory is responsible for the processing and
cryopreservation of human tissue for transplant. This includes all processing
of heart valves and conduits, vascular tissue and connective tissue for the
knee supplied by CryoLife. This laboratory contains approximately 7,700 square
feet with a suite of seven clean rooms. Currently there are 37 technicians
employed in this area, and the laboratory is staffed for two shifts, 365 days
per year. In 1997, the laboratory processed approximately 14,000 human tissues
for distribution and transplant. The current staffing level is estimated to be
at about half of total capacity. Increasing this capacity could be accomplished
by increasing employees and expanding to three shifts.
Bioprosthetic Cardiovascular Devices
The bioprosthesis laboratory is responsible for the manufacturing of the
CryoLife-O'Brien stentless porcine aortic heart valve. This laboratory is
located in Marietta, Georgia and contains approximately 13,000 square feet,
with about 3,500 square feet of laboratory space and a suite of four clean
rooms for tissue processing. The Company plans renovation to this facility in
1998 which would double the size of the processing area and plans to add the
production of the CryoLife-Ross stentless porcine pulmonary heart valve to its
product line this summer. Currently, this laboratory employs nine technicians
and is scheduled to manufacture approximately 1,500 CryoLife-O'Brien valves in
1998. The planned renovation, with additional staffing, is expected to expand
capacity at this facility to over 6,000 valves.
Implantable Biomedical Devices
The Company produces limited quantities of FibRx surgical sealant in the
biomedical products laboratory, which is located in Marietta, Georgia and
employs 11 technicians. This laboratory contains approximately 11,000 square
feet, including 4,000 square feet of laboratory space and a suite of eight
clean rooms. The Company is also planning an addition of about 8,000 to 15,000
square feet of laboratory and clean room space to support the
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manufacture of BioGlue surgical adhesive. BioGlue surgical adhesive is
presently manufactured at the Company's headquarters facility, which has an
annual capacity of approximately 30,000 units. The facility expansion is
expected to allow the manufacture of over 300,000 units of BioGlue surgical
adhesive each year, with modest staff additions.
Single-Use Medical Devices
The manufacturing of single-use medical devices is conducted at the Company's
IFM subsidiary located in St. Petersburg, Florida. IFM was purchased by
CryoLife in 1997 and has recently moved to a renovated 30,000 square foot
facility. The Company has 91 employees at this facility. At nearly full
capacity in 1997, production was about 180,000 units. In the new facility, a
single shift can produce approximately 300,000 units annually with full
capacity expected to be nearly 800,000 units annually.
QUALITY ASSURANCE
The Company's operations encompass the provision of cryopreservation services
and the manufacturing of bioprosthetics, bioadhesives and single-use medical
devices. In all of its facilities, the Company is subject to regulatory
standards for good manufacturing practices, including current Quality System
Regulations, which are FDA regulatory requirements for medical device
manufacturers. The FDA periodically inspects Company facilities to ensure
Company compliance with these regulations. The Company also operates according
to ISO 9001 Quality System Requirements, an internationally recognized
voluntary system of quality management for companies that design, develop,
manufacture, distribute and service products. The Company maintains a
Certification of Approval to the ISO 9001, as well as EN46001 and
ANSI/ISO/ASQC/Q9001, the European and U.S. versions of the international
standard, respectively. This approval is issued by Lloyd's Register Quality
Assurance Limited ("LRQA"). LRQA is a Notified Body officially recognized by
the European Community to perform assessments of compliance with ISO 9001 and
its derivative standards. LRQA performs semi-annual on-site inspections of the
Company's quality systems.
The Company's quality assurance staff is comprised primarily of experienced
professionals from the medical device and pharmaceutical manufacturing
industries. The quality assurance department, in conjunction with the Company's
research and development and select university research staffs, routinely
evaluates the Company's processes and procedures.
Cryopreservation Services
The Company employs a comprehensive quality assurance program in all of its
tissue processing activities. The Company is subject to Quality System
Regulations, additional FDA regulations and ISO 9001. The Company's quality
assurance program begins with the development and implementation of training
courses for the employees of procurement agencies. To assure uniformity of
procurement practices among the tissue recovery teams, the Company provides
procurement protocols, transport packages and tissue transport liquids to the
donor sites.
Upon receipt by the Company, each tissue is assigned a unique control number
that provides traceability of tissue from procurement through the processing
and preservation processes, and ultimately to the tissue recipient. Blood
samples from each tissue donor are subjected to a variety of tests to screen
for infectious diseases. Samples of certain tissues are also sent to
independent laboratories for pathology testing. Following removal of the tissue
to be cryopreserved, a separate disinfection procedure is begun during which
the removed tissue is treated with proprietary antibiotic solutions. A trained
technician then removes samples from the disinfected tissue upon which serial
cultures are performed to identify bacterial or fungal growth.
The materials and solutions used by the Company in processing tissue are pre-
screened to determine if they are of desired quality as defined by Company
protocols. Only materials and solutions that meet the Company's requirements
are approved by quality assurance personnel for use in processing. Throughout
tissue processing, detailed records are maintained and reviewed by quality
assurance personnel.
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The Company's tissue processing facilities are annually licensed by the States
of Georgia, New York, Florida and California as facilities that process, store
and distribute human tissue for implantation. The regulatory bodies of these
states perform appropriate inspections of the facilities to ensure compliance
with state law and regulations. In addition, the Company's human heart valve
operations are additionally regulated by the FDA and periodically inspected for
compliance with Quality System Regulations. Other human tissue processed by the
Company is periodically inspected for compliance with the Code of Federal
Regulation ("CFR") Part 1270. CFR 1270 is a FDA regulation which sets forth the
requirements with which the Company must comply in determining the suitability
of human tissue for implantation.
Bioprosthetic, Bioadhesive and Single-Use Medical Device Manufacturing
The Company employs a comprehensive quality assurance program in all of its
manufacturing activities. The Company is subject to Quality System Regulations,
additional FDA regulations and ISO 9001.
All materials and components utilized in the production of the Company's
products are received and thoroughly inspected by trained quality control
personnel, according to written specifications and standard operating
procedures. Only materials and components found to comply with Company
procedures are accepted by quality control and utilized in production.
All materials, components and resulting sub-assemblies are traced throughout
the manufacturing process to assure that appropriate corrective actions can be
implemented if necessary. Each process is documented along with all inspection
results, including final finished product inspection and acceptance. Records
are maintained as to the consignee of product to facilitate product removals or
corrections, if necessary. All processes in manufacturing are validated by
quality engineers to assure that they are capable of consistently producing
product meeting specifications. The Company maintains a rigorous quality
assurance program of measuring devices used for manufacturing and inspection to
ensure appropriate accuracy and precision.
Each manufacturing facility is subject to periodic inspection by the FDA and
LRQA to independently assure the Company's compliance with its systems and
regulatory requirements.
PATENTS, LICENSES AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patents, trade secrets, trademarks and
confidentiality agreements to protect its proprietary products, processing
technology, rights and know-how. The Company believes that its patents, trade
secrets, trademarks and technology licensing rights provide it with important
competitive advantages. The Company owns or has licensed rights to 14 U.S.
patents and three foreign patents, including patents relating to its technology
for human heart valve and conduit, vascular tissue and connective tissue for
the knee preservation; tissue revitalization prior to freezing; tissue
transport; fibrin adhesive; organ storage solution; and packaging. Certain of
the above patents relate to the Company's BioGlue surgical adhesive and FibRx
surgical sealant. The Company has eight pending U.S. patent applications and in
excess of 20 pending foreign applications that relate to areas including heart
valve and tissue processing technology and delivery of bioadhesives for
anastomosis and other uses. The Company holds six patents and has seven patents
pending with respect to its single-use medical devices. There can be no
assurance that any patents pending will result in issued patents. The Company
also has exclusive licensing rights for technology relating to light-sensitive
enzyme inhibitors. The remaining duration of the Company's issued patents
ranges from 5 to 17 years. The Company has licensed from third parties certain
technologies used in the development of its FibRx surgical sealant and
SynerGraft technology. These licenses call for the payment of both development
milestones and royalties based on product sales, when and if such products are
approved for marketing. The loss of these licenses could adversely affect the
Company's ability to successfully develop its FibRx surgical sealant and
SynerGraft technology.
There can be no assurance that the claims allowed in any of the Company's
existing or future patents will provide competitive advantages for the
Company's products, processes and technologies or will not be successfully
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challenged or circumvented by competitors. To the extent that any of the
Company's products are not patent protected, the Company's business, financial
condition and results of operations could be materially adversely affected.
Under current law, patent applications in the U.S. are maintained in secrecy
until patents are issued and patent applications in foreign countries are
maintained in secrecy for a period after filing. The right to a patent in the
U.S. is attributable to the first to invent, not the first to file a patent
application. The Company cannot be sure that its products or technologies do
not infringe patents that may be granted in the future pursuant to pending
patent applications or that its products do not infringe any patents or
proprietary rights of third parties. The Company may incur substantial legal
fees in defending against a patent infringement claim or in asserting claims
against third parties. In the event that any relevant claims of third-party
patents are upheld as valid and enforceable, the Company could be prevented
from selling certain of its products or could be required to obtain licenses
from the owners of such patents or be required to redesign its products to
avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be on terms acceptable to the Company or that
the Company would be successful in any attempt to redesign its products or
processes to avoid infringement. The Company's failure to obtain these licenses
or to redesign its products could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors to maintain
the confidentiality of trade secrets and proprietary information. There can be
no assurance that the obligations of employees of the Company and third parties
with whom the Company has entered into confidentiality agreements will
effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets or
proprietary information will not be independently developed by the Company's
competitors. Litigation may be necessary to defend against claims of
infringement, to enforce patents and trademarks of the Company, or to protect
trade secrets and could result in substantial cost to, and diversion of effort
by, the Company. There can be no assurance that the Company would prevail in
any such litigation. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the U.S.
COMPETITION
Cryopreserved Human Tissues and Bioprosthetic Cardiovascular Devices
The Company faces competition from non-profit tissue banks that cryopreserve
and distribute human tissue, as well as from companies that market mechanical,
porcine and bovine heart valves for implantation. Many established companies,
some with resources greater than those of the Company, are engaged in
manufacturing, marketing and selling alternatives to cryopreserved human
tissue. Management believes that it competes favorably with other entities that
cryopreserve human tissue on the basis of technology, customer service and
quality assurance. As compared to mechanical, porcine and bovine heart valves,
management believes that the human heart valves cryopreserved by the Company
compete on the factors set forth above, as well as by providing a tissue that
is the preferred replacement alternative with respect to certain medical
conditions, such as pediatric cardiac reconstruction, valve replacements for
women in their child-bearing years and valve replacements for patients with
endocarditis. Although human tissue cryopreserved by the Company is initially
higher priced than are mechanical alternatives, these alternatives typically
require that the patient take anti-coagulation drug therapy for the lifetime of
the implant. As a result of the costs associated with anti-coagulants,
mechanical valves are generally, over the life of the implant, more expensive
than tissue cryopreserved by the Company. Notwithstanding the foregoing,
management believes that, to date, price has not been a significant competitive
factor.
Generally, for each procedure that may utilize other human tissue that the
Company cryopreserves, there are alternative treatments. Often, as in the case
of veins and ligaments, these alternatives include the repair, partial removal
or complete removal of the damaged tissue and may utilize other tissues from
the patients themselves or synthetic products. The selection of treatment
choices is made by the attending physician in consultation with the patient.
Any newly developed treatments will also compete with the use of tissue
cryopreserved by the Company.
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Human and Stentless Porcine Heart Valves. Alternatives to human heart valves
cryopreserved by the Company include mechanical valves, porcine valves and
valves constructed from bovine pericardium. St. Jude Medical, Inc. is the
leading supplier of mechanical heart valves, and has a marketing and
distribution arrangement with a tissue bank for supplies of cryopreserved human
heart valves and Baxter International Inc. is the leading supplier of porcine
heart valves. In addition, management believes that at least three tissue banks
offer cryopreservation services for human heart valves in competition with the
Company. The Company presently distributes its stentless porcine heart valves
only outside the U.S. These stentless porcine heart valves compete with
mechanical valves, human heart valves and processed bovine pericardium. The
Company is aware of at least two other companies that offer stentless porcine
heart valves.
Human Vascular Tissue. Synthetic alternatives to veins cryopreserved by the
Company are available primarily in medium and large diameters. Currently,
management believes that there are no other providers of cryopreserved human
vascular tissue in competition with the Company. Companies offering either
synthetic or allograft products may enter this market in the future.
Human Connective Tissue for the Knee. The Company's competition in the area of
connective tissue for the knee varies according to the tissue involved. When
transplant is indicated, the principal competition for human tissues
cryopreserved by the Company are freeze-dried and fresh frozen human connective
tissues. These alternative allografts are distributed by distributors of
Osteotech, Inc. and various tissue banks, among others. Ligaments and tendons
cryopreserved by the Company constitute the principal treatment options for
injuries which require anterior cruciate ligament repair. To management's
knowledge, there are presently no processed or synthetic alternatives to
menisci cryopreserved by the Company.
Implantable Biomedical Devices
The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical adhesive and
surgical sealant area, the Company will compete with existing methodologies,
including traditional wound closure products such as sutures and staples,
marketed by companies such as Johnson & Johnson, United States Surgical
Corporation, Sherwood, Davis & Geck and others. Other products currently being
marketed include fibrin glue, sold in Europe, and the Pacific Rim countries by
Immuno AG, a subsidiary of Baxter Healthcare Corporation, Chemo-Sero
Therapeutic Research Institute, Hoechst AG and others, and management believes
other products are under development by Baxter Healthcare Corporation, Bristol-
Myers Squibb Company, V.I. Technologies, Inc. and others. Other competitors in
the surgical sealant market include Closure Medical Corporation, B. Braun GmbH
and Focal, Inc. Competitive products may also be under development by other
large medical device, pharmaceutical and biopharmaceutical companies. Many of
the Company's current and potential competitors have substantially greater
financial, technological, research and development, regulatory and clinical,
manufacturing, marketing and sales, and personnel resources than the Company.
These competitors may also have greater experience in developing products,
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing such products. Certain of these competitors may obtain patent
protection, approval or clearance by the FDA or foreign countries or product
commercialization earlier than the Company, any of which could materially
adversely affect the Company. Furthermore, if the Company commences significant
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it
currently has limited experience.
Other recently developed technologies or procedures are, or may in the future
be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and non-
competitive in these fields. In such event, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Risk Factors--Rapid Technological Change."
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Single-Use Medical Devices
The Company competes in this market with many larger companies such as Boston
Scientific's SciMed Life Systems, Guidant Corporation's Advanced Cardiovascular
Systems, C.R. Bard, Inc. and Baxter Healthcare Corporation. Many of these
companies are larger and carry broader product lines than CryoLife which allows
them to bundle products to hospitals. Bundling device products has become a
cost-effective way of marketing several products in a line and of providing
incentives for the customer to use several products in a product line. At
present, CryoLife does not bundle its single-use medical devices but instead
offers novel product enhancements.
GOVERNMENT REGULATION
U.S. Federal Regulation
Because human heart valves are, and other Company products may be regulated in
the future as, medical devices, the Company and these products are subject to
the provisions of the Federal Food, Drug and Cosmetic Act ("FDCA") and
implementing regulations. Pursuant to the FDCA, the FDA regulates the
manufacture, distribution, labeling and promotion of medical devices in the
U.S. In addition, various foreign countries in which the Company's products are
or may be distributed impose additional regulatory requirements.
The FDCA provides that, unless exempted by regulation, medical devices may not
be distributed in the U.S. unless they have been approved or cleared for
marketing by the FDA. There are two review procedures by which medical devices
can receive such approval or clearance. Some products may qualify for clearance
to be marketed under a Section 510(k) ("510(k)") procedure, in which the
manufacturer provides a premarket notification that it intends to begin
marketing the product, and shows that the product is substantially equivalent
to another legally marketed product (i.e., that it has the same intended use
and that it is as safe and effective as a legally marketed device and does not
raise different questions of safety and effectiveness than does a legally
marketed device). In some cases, the submission must include data from clinical
studies. Marketing may commence when the FDA issues a clearance letter finding
such substantial equivalence.
If the product does not qualify for the 510(k) procedure (either because it is
not substantially equivalent to a legally marketed device or because it is a
Class III device required by the FDCA and implementing regulations to have an
approved application for PMA), the FDA must approve a PMA application before
marketing can begin. PMA applications must demonstrate, among other matters,
that the medical device is safe and effective. A PMA application is typically a
complex submission, usually including the results of human clinical studies,
and preparing an application is a detailed and time-consuming process. Once a
PMA application has been submitted, the FDA's review may be lengthy and may
include requests for additional data. By statute and regulation, the FDA may
take 180 days to review a PMA application although such time may be extended.
Furthermore, there can be no assurance that a PMA application will be reviewed
within 180 days or that a PMA application will be approved by the FDA.
The FDCA also provides for an IDE which authorizes distribution for clinical
evaluation of devices that lack a PMA or 510(k). Devices subject to an IDE are
subject to various restrictions imposed by the FDA. The number of patients that
may be treated with the device is limited, as are the number of institutions at
which the device may be used. Patients must give informed consent to be treated
with an investigational device. The device must be labeled that it is for
investigational use and may not be advertised, or otherwise promoted, and the
price charged for the device may be limited. Unexpected adverse experiences
must be reported to the FDA.
The FDCA requires all medical device manufacturers and distributors to register
with the FDA annually and to provide the FDA with a list of those medical
devices which they distribute commercially. The FDCA also requires
manufacturers of medical devices to comply with labeling requirements and to
manufacture devices in accordance with Quality System Regulations, which
require that companies manufacture their products and maintain their documents
in a prescribed manner with respect to good manufacturing practices, design,
document production, process, labeling and packaging controls, process
validaiton and other quality control activities. The
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FDA's medical device reporting regulation requires that a device manufacturer
provide information to the FDA on death or serious injuries alleged to have
been associated with the use of its products, as well as product malfunctions
that would likely cause or contribute to death or serious injury if the
malfunction were to recur. The FDA's medical device tracking regulation
requires the adoption of a method of device tracking by manufacturers of life-
sustaining or implantable products, the failure of which would be reasonably
likely to have serious adverse health consequences. The manufacturer must adopt
methods to ensure that such devices can be traced from the manufacturing
facility to the ultimate user, the patient. The FDA further requires that
certain medical devices not cleared for marketing in the U.S. follow certain
procedures before they are exported.
The FDA inspects medical device manufacturers and distributors and has
authority to seize noncomplying medical devices, to enjoin and/or to impose
civil penalties on manufacturers and distributors marketing non-complying
medical devices, to criminally prosecute violators and to order recalls in
certain instances.
Human Heart Valves. The Company's human heart valves became subject to
regulation by the FDA in June 1991, when the FDA published a notice stating
that human heart valves are Class III medical devices under the FDCA. The June
1991 notice provided that distribution of human heart valves for
transplantation would violate the FDCA unless they were the subject of an
approved PMA or IDE on or before August 26, 1991.
On October 14, 1994, the FDA announced in the Federal Register that neither an
approved application for PMA nor an IDE is required for processors and
distributors who had marketed heart valve allografts before June 26, 1991. This
action by the FDA has resulted in the allograft heart valves being classified
as Class II Medical Devices and has removed them from clinical trial status. It
also allows the Company to distribute such valves to cardiovascular surgeons
throughout the U.S.
Other Tissue. Other than human and porcine heart valves, none of the Company's
other tissue services or products are currently subject to regulation as
medical devices under the FDCA or FDA regulation. Heart valves are one of a
small number of processed human tissues over which the FDA has asserted medical
device jurisdiction. In July 1997, the FDA published a final rule, which became
effective in January 1998, regulating "human tissue." The rule clarifies and
modifies an earlier interim rule and defines human tissue as any tissue derived
from a human body which is (i) intended for administration to another human for
the diagnosis, cure, mitigation, treatment or prevention of any condition or
disease and (ii) recovered, processed, stored or distributed by methods not
intended to change tissue function or characteristics. The FDA definition
excludes, among other things, tissue that currently is regulated as a human
drug, biological product or medical device and excludes kidney, liver, heart,
lung, pancreas or any other vascularized human organ. Human tissue is regulated
by the FDA in a manner the agency has deemed necessary to protect the public
health from the transmission of HIV infection and hepatitis infection through
transplantation of tissue from donors with or at risk for these diseases.
Unlike certain drugs, biologicals and medical devices, human tissue is not
subject to premarket notification or approval by the FDA. It is likely,
moreover, that the FDA will expand its regulation of processed human tissue in
the future. For example, the FDA may determine that the veins and connective
tissue that are currently processed by the Company are medical devices, or the
FDA may determine to regulate human heart valves as "human tissue" rather than
medical devices, but the FDA has not done so at this time. Complying with FDA
regulatory requirements or obtaining required FDA approvals or clearances may
entail significant time delays and expenses or may not be possible, any of
which may have a material adverse effect on the Company. In addition, the U.S.
Congress is expected to consider legislation that would regulate human tissue
for transplant or the FDA could impose a separate regulatory scheme for human
tissue. Such legislation or regulation could have a material adverse effect on
the Company.
Porcine Heart Valves. Porcine heart valves are Class III medical devices, and
FDA approval of a PMA is required prior to commercial distribution of such
valves in the U.S. The porcine heart valves currently marketed by the Company
have not been approved by the FDA for commercial distribution in the U.S. but
may be manufactured in the U.S. and exported to foreign countries if the valves
meet the specifications of the foreign purchaser, do not conflict with the laws
of and are approved by the country to which they will be exported and the FDA
determines that their exportation is not contrary to public health and safety.
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Single-Use Medical Devices. The products offered by the Company through IFM are
regulated as Class I and Class II medical devices by the FDA. These products
require clearance under a 510(k) procedure. All products currently marketed by
IFM have received a 510(k) clearance from the FDA. In addition, the IFM
facilities are subject to periodic review by the FDA, as are the Company's
records on returned products and reported problems.
BioGlue Surgical Adhesive. It is anticipated that BioGlue surgical adhesive
will be regulated as a Class III medical device, as a biologic or in some other
capacity by the FDA. The Company is currently preparing to submit an
application with the FDA for approval to conduct clinical trials for BioGlue
surgical adhesive. There can be no assurance that approval of this application
will be obtained.
Possible Other FDA Regulation. Other products and processes under development
by the Company are likely to be subject to regulation by the FDA (e.g.,
SynerGraft and FibRx surgical sealant). Some may be classified as medical
devices; others may be classified as drugs or biological products or subject to
a regulatory scheme for human tissue that the FDA may adopt in the future.
Regulation of drugs and biological products is substantially similar to
regulation of medical devices. Obtaining FDA approval to market these products
is likely to be a time consuming and expensive process, and there can be no
assurance that any of these products will ever receive FDA approval, if
required, to be marketed.
NOTA Regulation. The Company's activities in processing and transporting human
hearts and certain other organs are also subject to federal regulation under
the NOTA, which makes it unlawful for any person to knowingly acquire, receive
or otherwise transfer any human organ for valuable consideration for use in
human transplantation if the transfer affects interstate commerce. NOTA
excludes from the definition of "valuable consideration" reasonable payments
associated with the removal, transportation, implantation, processing,
preservation, quality control and storage of a human organ. The purpose of this
statutory provision is to allow for compensation for legitimate services. The
Company believes that to the extent its activities are subject to NOTA, it
meets this statutory provision relating to the reasonableness of its charges.
There can be no assurance, however, that restrictive interpretations of NOTA
will not be adopted in the future that would call into question one or more
aspects of the Company's methods of charging for its preservation services.
State Licensing Requirements
Some states have enacted statutes and regulations governing the processing,
transportation and storage of human organs and tissue. The activities engaged
in by the Company require it to be licensed as a clinical laboratory and tissue
bank under Georgia, New York, California and Florida law. The Company has such
licenses, and the Company believes it is in compliance with applicable state
laws and regulations relating to clinical laboratories and tissue banks which
store, process and distribute human tissue designed to be used for medical
purposes in human beings. There can be no assurance, however, that more
restrictive state laws or regulations will not be adopted in the future that
could adversely affect the Company's operations. Certain employees of the
Company have obtained other required licenses.
Foreign Approval Requirements
Sales of medical devices and biological products outside the U.S. are subject
to foreign regulatory requirements that vary widely from country to country.
Approval of a product by comparable regulatory authorities of foreign countries
must be obtained prior to commercialization of the product in those countries.
The time required to obtain foreign approvals may be longer or shorter than
that required for FDA approval. The European Community recognizes a single
approval, called a CE Mark, which allows for distribution of an approved
product throughout the European Community (15 countries) without additional
applications to each country. The CE Mark is awarded by third parties called
Notified Bodies. These Notified Bodies are approved and subject to review by
the Competent Authorities of their respective countries. A number of countries
outside of the European Community accept the CE Mark in lieu of clinical data
submission as an addendum to that country's application process. The Company
has been issued CE Marks for its CyroLife-O'Brien porcine heart valves, BioGlue
42
<PAGE>
surgical adhesive and IFM single-use medical devices by LRQA. The Company's
porcine heart valves may be exported to specified developed nations, including
countries in the European Community, Australia, Canada, Israel, Japan, New
Zealand, South Africa and Switzerland if they comply with the laws of that
country and have valid marketing authorization by the appropriate authority in
that country. Beginning in July 1998, CE Mark Certification will be required to
market porcine heart valves and other bioprosthetics in the European Community.
ENVIRONMENTAL MATTERS
The Company's tissue processing activities generate some biomedical wastes
consisting primarily of human pathological and biological wastes, including
human tissue and body fluids removed during laboratory procedures. The
biomedical wastes generated by the Company are placed in appropriately
constructed and labeled containers and are segregated from other wastes
generated by the Company. The Company contracts with third parties for
transport, treatment and disposal of biomedical waste. Although the Company
believes it is in compliance with applicable laws and regulations promulgated
by the U.S. Environmental Protection Agency and the Georgia Department of
Natural Resources, Environmental Protection Division, the failure by the
Company to comply fully with any such regulations could result in an imposition
of penalties, fines or sanctions, which could have a material adverse effect on
the Company's business.
EMPLOYEES
The Company presently has approximately 330 employees. These employees include
nine persons with PhD degrees. None of the Company's employees is represented
by a labor organization or covered by a collective bargaining agreement, and
the Company has never experienced a work stoppage or interruption due to labor
disputes. Management believes its relations with its employees are good.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Management
believes that no currently ongoing litigation, if determined adversely to the
Company, will have a material adverse effect on the Company's business,
financial condition or results of operations.
43
<PAGE>
MANAGEMENT
- --------------------------------------------------------------------------------
The following sets forth the name, age and position of executive officers and
directors of the Company as of March 2, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven G. Anderson...... 59 President, Chief Executive Officer and Chairman
Kirby S. Black, PhD..... 43 Vice President, Research and Development
Edwin B. Cordell, Jr.,
CPA.................... 39 Vice President and Chief Financial Officer
Albert E. Heacox, PhD... 47 Vice President, Laboratory Operations
Gerald B. Seery......... 41 Vice President, Marketing
James C. Vander Wyk,
PhD.................... 53 Vice President, Regulatory Affairs and Quality Assurance
Ronald C. Elkins, MD.... 61 Director
Benjamin H. Gray........ 47 Director
Virginia C. Lacy........ 56 Director
Ronald D. McCall, Esq... 61 Director, Secretary and Treasurer
</TABLE>
STEVEN G. ANDERSON, a founder of the Company, has served as the Company's
President, Chief Executive Officer and Chairman since its inception. Mr.
Anderson has more than 30 years of experience in the implantable medical device
industry. Prior to joining the Company, Mr. Anderson was Senior Executive Vice
President and Vice President, Marketing, from 1976 until 1982 of Intermedics,
Inc., a manufacturer and distributor of pacemakers and other medical devices.
Mr. Anderson received his BA from the University of Minnesota.
KIRBY S. BLACK, PHD, has served as Vice President of Research and Development
since July 1995. Dr. Black is responsible for the continued development of the
Company's current products as well as the evaluation of new technologies. Dr.
Black is listed on three patents and has authored 118 publications. Prior to
joining the Company, Dr. Black was Director, Medical Information and Project
Leader from July 1993 until July 1994 at Advanced Tissue Sciences, LaJolla,
California. Dr. Black has also held a number of positions at the University of
California at Irvine, including Director, Transplantation and Immunology
Laboratories, Department of Surgery. Dr. Black received his BS degree from the
University of California, Los Angeles, and his PhD degree from the University
of California at Irvine.
EDWIN B. CORDELL, JR., CPA, has served as Vice President and Chief Financial
Officer of the Company since November 1994. From August 1987 to November 1994,
Mr. Cordell served as Controller and Chief Financial Officer of Video Display
Corporation, a cathode ray tube remanufacturing and distribution company. Mr.
Cordell received his BS in Accounting from the University of Tennessee.
ALBERT E. HEACOX, PHD, has served as Vice President, Laboratory Operations
since June 1988 and has been with the Company since June of 1985. Dr. Heacox
has been responsible for developing protocols and procedures for both
cardiovascular and connective tissues, implementing upgrades in procedures in
conjunction with the Company's quality assurance programs, and overseeing all
production activities of the Company's laboratories. Prior to joining the
Company, Dr. Heacox worked as a researcher with the U.S. Department of
Agriculture and North Dakota State University, developing methods for the
cryopreservation of cells and animal germ plasm storage. Dr. Heacox received a
BA and an MS in Biology from Adelphi University, received his PhD in Biology
from Washington State University and completed his post-doctorate training in
cell biology at the University of Cologne, West Germany.
GERALD B. SEERY has served as Vice President of Marketing since August 1995 and
has been with the Company since July 1993. Mr. Seery is responsible for
developing and implementing the Company's sales and marketing plans and
supervising all tissue procurement activities. Prior to joining the Company,
Mr. Seery held senior marketing management positions with Meadox Medicals from
1982 until 1985, Electro Catheter Corporation from 1985 until 1989 and Daig
Corporation from 1992 until 1993, accumulating fifteen years of specialized
44
<PAGE>
marketing experience in cardiovascular medical devices. Mr. Seery received his
BA in International Economics at The Catholic University of America in
Washington, D.C. in 1978 and completed his MBA at Columbia University in New
York in 1980.
JAMES C. VANDER WYK, PHD, has served as Vice President, Regulatory Affairs and
Quality Assurance of the Company since February 1996. Prior to joining the
Company, Dr. Vander Wyk held senior management positions at Schneider (USA),
Inc. from 1993 until 1996, Pharmacia Deltec, Inc. from 1985 until 1993, Delmed,
Inc. from 1980 until 1985 and Pharmaco, Inc. from 1975 to 1979, gaining 20
years of experience in Regulatory Affairs and Quality Assurance. Dr. Vander Wyk
received his BS in Pharmacy from the Massachusetts College of Pharmacy and his
PhD in Microbiology from the University of Massachusetts. Dr. Vander Wyk
performed his NIH Postdoctoral Fellowship at the University of Illinois.
RONALD C. ELKINS, MD, has served as a Director of the Company since January
1994. Dr. Elkins is Professor and Vice Head of the Department of Surgery and
Chief of Thoracic and Cardiovascular Surgery, University of Oklahoma Health
Science Center. Dr. Elkins has been a physician at the Health Science Center
since 1971, and has held his present position since 1975.
BENJAMIN H. GRAY has served as a Director of the Company since January 1991.
Mr. Gray is Chief Financial Officer of Columbia Corporation, an operator of
long-term care facilities. Prior to joining Columbia Corporation in 1997, Mr.
Gray was a principal of Massey Burch Capital Corp. and Vice President of Massey
Burch Investment Group, Inc., a Nashville-based venture capital firm
specializing in the health care industry. Mr. Gray joined Massey Burch in 1987
and was responsible for evaluating and managing various investments in the
portfolio. Mr. Gray was previously with Chemical Bank of New York from 1973 to
1987.
VIRGINIA C. LACY has served as a Director of the Company since August 1997.
Mrs. Lacy is President and a Director of American Industries, a company she co-
founded with her husband in 1986. American Industries, located in West Chicago,
Illinois, is a manufacturer and distributor of personal identification cards
used by a variety of industries, both domestically and internationally. Mrs.
Lacy has served as Chairman of the Board of Directors of Precision Devices
Corporation, a distributor of pacemakers and other implantable medical devices,
since its founding in 1974. Mrs. Lacy received her BA degree from Northwestern
University in 1963.
RONALD D. MCCALL, ESQ, has served as a Director of the Company and as the
Secretary and Treasurer of the Company since January 1984. From 1985 to the
present, Mr. McCall has been the proprietor of the law firm of Ronald McCall,
Attorney At Law, based in Tampa, Florida. Mr. McCall was admitted to the
practice of law in Florida in 1961. Mr. McCall received his BA and JD degrees
from the University of Florida.
45
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
- --------------------------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 27, 1998, and as
adjusted to reflect the sale by the Selling Shareholders of the shares of
Common Stock offered hereby, by (a) each person who is known by the Company to
own beneficially more than five percent of the outstanding shares of Common
Stock, (b) each Director of the Company, (c) each executive officer of the
Company, (d) all executive officers and Directors of the Company as a group and
(e) each Selling Shareholder. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power
with respect to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING (1) NUMBER OF AFTER OFFERING (1)
------------------------- SHARES ------------------------------
BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT(2)
- ----------------- ------------- ----------- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Steven G.
Anderson(3)(4)........ 1,194,703 12.2% 50,000 1,144,703 9.5%
Kirby S. Black,
PhD(5)................ 12,507 * 0 12,507 *
Edwin B. Cordell,
Jr(6)................. 20,300 * 5,000 15,300 *
Albert E. Heacox,
PhD(7)................ 78,000 * 5,000 73,000 *
Gerald G. Seery(8)..... 16,200 * 3,000 13,200 *
James C. Vander Wyk,
PhD(9)................ 12,000 * 0 12,000 *
Ronald C. Elkins,
MD(3)(10)............. 47,200 * 0 47,200 *
Benjamin H.
Gray(3)(11)........... 61,312 * 0 61,312 *
Virginia C.
Lacy(3)(12)........... 395,086 4.1 30,000 365,086 3.0
Ronald D. McCall,
Esq(3)(13)............ 119,792 1.2 20,000 99,792 *
All executive officers
and Directors as a
group
(10 people)(14)....... 1,957,100 19.7 113,000 1,844,100 15.0
Dr. J. Crayton
Pruitt(15)............ 423,107 4.2 50,000 373,107 3.0
Robert T. McNally,
PhD(16)............... 180,000 1.8 74,000 106,000 *
-------
Total shares offered
by Selling
Shareholders........ 237,000
=======
</TABLE>
- --------
*Less than 1%.
(1) Shares of Common Stock which were not outstanding but which could be
acquired by a person upon exercise of an option within 60 days of February
27, 1998 are deemed outstanding for the purpose of computing the percentage
of outstanding shares beneficially owned by such person. Such shares,
however, are not deemed to be outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option. The number
of shares of Common Stock deemed outstanding after this Offering assumes
2,263,000 shares of Common Stock are sold by the Company in this Offering.
The Selling Shareholders may elect not to sell all or any of the shares
proposed to be sold in this Offering. In such event, the Company has agreed
to increase the number of shares it is selling in this Offering by the
number of shares not sold by such Selling Shareholders.
(3) The shareholders' address is 1655 Roberts Boulevard, N.W., Kennesaw, GA
30144.
(4) Includes 105,133 shares held of record by Ms. Ann B. Anderson, Mr.
Anderson's spouse. Also includes 46,000 shares subject to options which are
presently exercisable or will become exercisable within 60 days after the
date of this Prospectus.
(5) Includes 270 shares held by minor children and 12,000 shares subject to
options which are either presently exercisable or will become exercisable
within 60 days after the date of this Prospectus.
(6) Includes 2,300 shares in a trading account as to which Mr. Cordell has
signature authority and 6,000 shares subject to options which are either
presently exercisable or will become exercisable within 60 days after the
date of this Prospectus.
46
<PAGE>
(7) Includes 12,000 shares subject to options which are either presently
exercisable or will become exercisable within 60 days after the date of
this Prospectus.
(8) Includes 15,000 shares subject to options which are either presently
exercisable or will become exercisable within 60 days after the date of
this Prospectus.
(9) Includes 12,000 shares subject to options which are presently exercisable
or will become exercisable within 60 days after the date of this
Prospectus.
(10) Includes 28,170 shares subject to options which are presently exercisable
or will become exercisable within 60 days after the date of this
Prospectus.
(11) Includes 55,000 shares subject to options which are presently exercisable
or will become exercisable within 60 days after the date of this
Prospectus.
(12) Includes 215,500 shares held as beneficiary of a trust, and 110,586
shares held as beneficiary of an IRA, of Ms. Lacy's deceased spouse.
Includes 30,000 shares held as administrator of a pension plan. Includes
15,000 shares subject to options which are presently exercisable or will
become exercisable within 60 days after the date of this Prospectus.
(13) Includes 10,000 shares of Common Stock owned of record by Ms. Marilyn B.
McCall, Mr. McCall's spouse. Includes 35,000 shares of subject to options
which are presently exercisable or will become exercisable within 60 days
after the date of this Prospectus.
(14) Includes 236,170 shares subject to options which are presently exercisable
or will become exercisable within 60 days after the date of this
Prospectus. Includes 2,300 shares held by the parents of an executive
officer for which such executive officer has shared voting control.
Includes 270 shares held as trustee by an executive officer. Includes
215,500 shares held as beneficiary of a trust, and 110,586 shares held as
beneficiary of an IRA, of Ms. Lacy's deceased spouse. Includes 30,000
shares held as administrator of a pension plan. Includes 115,133 shares
held of record by the spouses of executive officers and Directors.
(15) Includes 413,907 shares issuable upon conversion of the convertible
debenture, Dr. Pruitt intends to convert $607,000 of the convertible
debenture into 50,000 shares of Common Stock to be included in this
Offering. Dr. Pruitt was the sole stockholder of IFM, which was acquired
by the Company in March 1997. In connection with the acquisition, the
Company issued a convertible debenture to Dr. Pruitt. See "Description of
Capital Stock--Convertible Debenture." Dr. Pruitt serves a consultant to
the Company pursuant to a consulting agreement.
(16) Includes 25,000 shares held of record by Ms. Gertrude McNally, Dr.
McNally's spouse. Includes 24,000 shares subject to options which are
presently exercisable. Mr. McNally retired as an executive officer of the
Company, and entered into a consulting agreement with the Company,
effective as of January 2, 1998.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
- --------------------------------------------------------------------------------
The Company is authorized to issue up to 50,000,000 shares of Common Stock,
$.01 par value, and 5,000,000 shares of Preferred Stock, $.01 par value. As of
February 27, 1998, there were 9,713,930 shares of Common Stock outstanding held
by approximately 410 shareholders of record and no shares of Preferred Stock
outstanding.
The following summary is qualified in its entirety by reference to the
Company's Amended and Restated Articles of Incorporation, the Company's Bylaws,
as amended, and the Florida Business Corporation Act (the "FBCA").
COMMON STOCK
Holders of Common Stock are entitled to one vote per share of Common Stock held
of record on all matters to be voted upon by the Company's shareholders
generally. Holders of Common Stock are not entitled to cumulative voting
rights. As a result, the holders of a majority of the shares of Common Stock
voting for the election of directors may elect all of the Company's directors
if they choose to do so, and, in such event, the holders of the remaining
shares of Common Stock will not be able to elect any person or persons to the
Board of Directors. See "Principal and Selling Shareholders."
Holders of Common Stock are entitled to receive, on a pro rata basis, such
dividends and distributions, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor, subject to any
preferential dividend right of any issued and outstanding shares of Preferred
Stock. In the event of liquidation, dissolution or winding up of the Company,
after payment of creditors, holders of Common Stock are entitled to share
ratably in all assets, subject to the payment of any liquidation preference of
any issued and outstanding shares of Preferred Stock. The shares of Common
Stock currently outstanding are, and the shares of Common Stock to be issued
upon the completion of this Offering will be, validly issued, fully paid and
non-assessable.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
Company's shareholders, to cause shares of Preferred Stock (the "Preferred
Stock") to be issued in one or more series and to fix and determine the
relative rights and preferences of the shares of any such series, subject to
the limits of Florida law. Because the Board of Directors has the power to
establish the preferences and rights of each series, it may afford the holders
of any series of Preferred Stock preferences, powers and rights, voting or
otherwise, senior to the rights of holders of Common Stock. The issuance of
Preferred Stock could have the effect of delaying or preventing a change in
control of the Company. The Board of Directors has no present plans to issue
any shares of Preferred Stock.
CONVERTIBLE DEBENTURE
In connection with the acquisition of IFM, the Company issued a 7%, Five-Year
Subordinated Convertible Debenture dated March 5, 1997 (the "Debenture") in the
original principal amount of $4,999,999 in favor of J. Clayton Pruitt, the
former sole stockholder of IFM. The Debenture is convertible, at any time
between March 5, 1998 and March 5, 2002, into 413,907 shares of Common Stock
("Conversion Shares"). The conversion feature is subject to customary anti-
dilution provisions for stock splits or dividends. Dr. Pruitt has registration
rights with respect to the Conversion Shares. See "Shares Eligible For Future
Sale--Registration Rights."
STOCK OPTIONS
As of February 27, 1998, the Company has issued and outstanding options to
purchase an aggregate of 747,000 shares of Common Stock (net of forfeitures,
expirations and cancellations) pursuant to its Stock Option Plans, at exercise
prices between $3.00 and $18.43. Of such options, 301,000 were exercisable as
of February 27, 1998.
48
<PAGE>
ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of the Articles of Incorporation and Bylaws of the Company,
which are summarized below, could have the effect of making it more difficult
to change the composition of the Company's Board of Directors or for any person
or entity to acquire control of the Company.
Special Meetings
Pursuant to the Company's Articles of Incorporation and Bylaws, special
meetings of the shareholders may be called only by the President or Secretary
at the request in writing of a majority of the Board of Directors then in
office or at the request in writing of shareholders owning not less than 50% of
all votes entitled to be cast at the special meeting.
Prohibition of Shareholder Action without Meeting
Under the Company's Articles of Incorporation, the shareholders may not take
action by written consent. Any and all action by the shareholders is required
to be taken at the annual shareholders' meeting or at a special shareholders'
meeting. See "Risk Factors--Anti-Takeover Provisions."
ANTI-TAKEOVER STATUTES
The Company is subject to several anti-takeover provisions of the FBCA that
apply to a public corporation organized under Florida law unless the
corporation has elected to opt out of such provision in its Articles of
Incorporation or (depending on the provision in question) its Bylaws. The
Company has not elected to opt out of these provisions. The Common Stock of the
Company is subject to the "affiliated transaction" and "control-share
acquisition" provisions of the FBCA, which are Sections 607.0901 and 607.0902,
respectively. These provisions provide that, subject to certain exceptions, an
"affiliated transaction" must be approved by the holders of two-thirds of the
voting shares other than those beneficially owned by an "interested
shareholder" and that "control shares" acquired in specified shareholders,
excluding holders of shares defined as "interested shares." These provisions of
the FBCA may have the effect of making it more difficult for any person or
group to acquire the Company or substantial amounts of the Company's Common
Stock. See "Risk Factors--Anti-Takeover Provisions."
ABILITY TO CONSIDER OTHER CONSTITUENCIES
The Directors of the Company are subject to the "general standards for
Directors" provisions set forth in Section 607.0830 of the FBCA. These
provisions provide that, among other things, in discharging his or her duties
and determining what is in the best interests of the Company, a Director may
consider such factors as the Director deems relevant, including the long-term
prospects and interests of the Company and its shareholders, and the social,
economic, legal or other effects of any proposed action on the employees,
suppliers or customers of the Company, the communities in which the Company
operates and the economy in general. Consequently, in connection with any
proposed corporate action, the Board of Directors is empowered to consider
interests of other constituencies in addition to the interests of the Company's
shareholders. Shareholders should be aware that Directors who take into account
these other factors may make decisions which are less beneficial to the
shareholders than if the law did not permit consideration of such other
factors.
SHAREHOLDER RIGHTS PLAN
In November 1995, the Board of Directors of the Company established a rights
plan, pursuant to which one preferred share purchase right (a "Right") is
attached to each outstanding share of Common Stock. Each Right entitles the
registered holder to purchase from the Company one one-tenth of a share of
Series A Junior Participating Preferred Stock, par value $.01 per share (the
"Preferred Stock"), of the Company at a price of $100.00 per one-tenth of a
share of Preferred Stock (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement dated
as of November 27, 1995, as
49
<PAGE>
amended as of May 30, 1997 (the "Rights Agreement") between the Company and
American Stock Transfer & Trust Company as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement that
a person or group of affiliated or associated persons (an "Acquiring Person")
have acquired beneficial ownership of 15% or more of the outstanding Common
Stock or (ii) 10 business days (or such later date as may be determined by
action of the Board of Directors prior to such time as any person or group of
affiliated persons becomes an Acquiring Person) following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of the outstanding Common Stock (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced by Common
Stock certificates.
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with
and only with the Common Stock. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Stock certificates issued
after the Record Date upon transfer or new issuance of Common Stock will
contain a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates for Common Stock, even without such
notation or a copy of a summary of Rights being attached thereto, will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Stock as of
the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on November 27, 2005 (the "Expiration Date"), unless the Expiration Date
is extended or unless the Rights are earlier redeemed or exchanged by the
Company, in each case, as described below.
The Purchase Price payable, and the number of shares of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of
certain rights or warrants to subscribe for or purchase Preferred Stock at a
price, or securities convertible into Preferred Stock with a conversion price,
less than the then-current market price of the Preferred Stock or (iii) upon
the distribution to holders of the Preferred Stock of evidences of indebtedness
or assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Stock) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of shares of Preferred Stock
issuable upon exercise of each Right (presently one-tenth of a share) are also
subject to adjustment in the event of a stock split of the Common Stock or a
stock dividend on the Common Stock payable in Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Distribution Date.
Shares of Preferred Stock purchasable upon exercise of the Rights will not be
redeemable. The Preferred Stock will be entitled to a minimum preferential
quarterly dividend payment of $.01 per share but will be entitled to an
aggregate dividend of 10 times the dividend declared per share of Common Stock.
In the event of liquidation, the holders of the Preferred Stock will be
entitled to a minimum preferential liquidation payment of $10.00 per share but
will be entitled to an aggregate payment of 10 times the payment made per share
of Common Stock. The Preferred Stock will have one vote, voting together with
the Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which Common Stock is exchanged, the Preferred Stock will be
entitled to receive 10 times the amount received per share of Common Stock.
These Rights are protected by customary antidilution provisions.
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<PAGE>
Because of the nature of the Preferred Stock, dividend, liquidation and voting
rights, the value of the one-tenth interest in the Preferred Stock purchasable
upon exercise of each Right should approximate the value of one share of Common
Stock.
In the event that 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 after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void),
will thereafter have the right to receive, upon the exercise thereof at the
then current exercise price of the Right, that number of shares of common stock
of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right. In the event that
any person or group of affiliated or associated persons becomes an Acquiring
Person, proper provision shall be made so that each holder of a Right, other
than Rights beneficially owned by the Acquiring Person (which will thereafter
be void), will thereafter have the right to receive upon exercise the number of
shares of Common Stock having a market value of two times the exercise price of
the Right.
At any time after any person or group becomes an Acquiring Person and prior to
the acquisition by such person or group of 50% or more of the outstanding
Common Stock, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by such person or group which will have become void),
in whole or in part, at an exchange ratio of one share of Common Stock, or one-
tenth of a share of Preferred Stock (or of a share of a class or series of the
Company's Preferred Stock having equivalent rights, preferences and
privileges), per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments require an adjustment of at least 1% in such
Purchase Price.
No fractional shares of Preferred Stock will be issued (other than fractions
which are integral multiples of one-tenth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depository receipts) and
in lieu thereof, an adjustment in cash will be made based on the market price
of the Preferred Stock on the last trading day prior to the date of exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
Common Stock, the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $.001 per Right (the "Redemption Price").
The redemption of the Rights may be made effective at such time on such basis
with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be
to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the Company
without the consent of the holders of the Rights, including an amendment to
lower certain thresholds described above to not less than the sum of .001% and
the largest percentage of the outstanding Common Shares then known to the
Company to be beneficially owned by any person or group of affiliated or
associated persons, except that from and after such time as any person or group
of affiliated or associated persons becomes an Acquiring Person no such
amendment may adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a shareholder of the Company, including, without limitation, the right to vote
or to receive dividends.
The description of the Rights contained herein is qualified in its entirety by
reference to the Rights Agreement which is incorporated by reference into the
registration statement of which this Prospectus forms a part.
51
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company. It is located at 40 Wall Street, 46th Floor, New
York, NY 10005, and its telephone number is (718) 921-8200.
SHARES ELIGIBLE FOR FUTURE SALE
- --------------------------------------------------------------------------------
Upon the completion of this Offering, the Company will have 12,028,930 shares
of Common Stock outstanding. Substantially all of these shares will be
transferable without restriction or registration under the Securities Act or
pursuant to the volume and other limitations of Rule 144 promulgated under the
Securities Act as described below.
SALE OF RESTRICTED SHARES
Holders of approximately shares 1,785,125 ("Restricted Shares") are entitled to
sell their shares in the public securities markets without registration under
the Securities Act to the extent permitted by Rule 144 as promulgated
thereunder. In general, under Rule 144, a person (together with persons whose
shares are aggregated with that person pursuant to Rule 144) who has held
Restricted Shares for at least one year, but less than two years, or who may be
deemed an affiliate may sell within any three-month period a number of shares
that does not exceed the greater of (i) one percent of the then outstanding
shares of Common Stock or (ii) the average weekly trading volume during the
four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission. The one-year holding period with
respect to 83,700 of the currently outstanding shares of Common Stock will
expire within 180 days of the date of this Prospectus. Rule 144 also permits
the sale of Restricted Shares, without the quantity limitation or other
restrictions, by a person who (i) is not an affiliate of the Company, (ii) has
not been an affiliate for at least three months and (iii) has satisfied a two-
year holding period. Pursuant to these provisions, approximately 187,123 of the
Restricted Shares may be sold immediately.
Approximately 1,962,000 shares are subject to lock-up agreements between the
holders thereof and the Representatives of the Underwriters, pursuant to which
the holders of these shares (the "Lock-up Shares") have agreed not to offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
Common Stock until 90 days after the date of this Prospectus (the "Lock-up
Period") without the prior written consent of SBC Warburg Dillon Read Inc.,
subject to limited exceptions. See "Underwriting." Following the expiration of
the Lock-up Period, substantially all of the Lock-up Shares will become
available for immediate resale in the public market subject to the volume and
other limitations of Rule 144.
OPTIONS
At February 27, 1998, options to purchase a total of 747,000 shares of Common
Stock pursuant to the Company's stock option plans were outstanding, of which
301,000 were exercisable. Of the shares subject to options, 616,000 are subject
to lock-up agreements which restricts sales of the underlying shares during the
Lock-up Period. The Company has filed registration statements with the
Commission with respect to substantially all of these shares.
STOCK PURCHASE PLAN
In July 1996, the Company adopted the Stock Purchase Plan. The aggregate number
of shares of Common Stock that may be purchased by all participants under the
Stock Purchase Plan may not exceed 600,000, subject to certain adjustments. The
Company has filed a registration statement with the Commission with respect to
the shares subject to the Stock Purchase Plan. Under the terms of the Stock
Purchase Plan, participants may sell shares of Common Stock without
restriction.
52
<PAGE>
REGISTRATION RIGHTS
The Massey Burch Investment Group, Inc. and certain other investors
(collectively, the "Massey Burch Investors") and the Company are parties to a
securities purchase agreement dated December 17, 1985, pursuant to which the
Company is required to give the Massey Burch Investors notice of any proposed
registration by the Company of shares of its Common Stock pursuant to a
registration statement to be filed under the Securities Act and to permit the
Massey Burch Investors, subject to certain restrictions, to sell shares of
Common Stock pursuant to any such registration statement. The Massey Burch
Investors hold approximately 118,000 shares of Common Stock. All of the
expenses of such registration under the securities purchase agreement, other
than the fees and expenses of counsel for the Massey Burch Investors,
underwriting discounts and selling commissions, will be paid by the Company.
All of the Massey Burch Investors have waived their right to sell shares of
Common Stock pursuant to the Registration Statement of which this Prospectus
forms a part.
In connection with the acquisition of IFM, the Company issued a subordinated
convertible debenture convertible into 413,907 shares of the Company's Common
Stock to Dr. Pruitt. Dr. Pruitt has registration rights with respect to the
Conversion Shares. Dr. Pruitt is selling 50,000 of the Conversion Shares in
this Offering. See "Principal and Selling Shareholders." The Company is
required upon request by the holder of the Debenture to use its best efforts to
file a registration statement to register up to one-third of the Conversion
Shares. The holder of the Conversion Shares may request up to three such
registrations. Generally, the Company is required to bear the expenses of all
such registrations, except that the holder will be required to bear his pro
rata share of the underwriters' discounts and filing fees related to the
inclusion of such Registrable Securities in such registration statement. See
"Description of Capital Stock--Convertible Debentures."
In connection with the retirement of Robert McNally, former Senior Vice
President Clinical Research, the Company entered into a Consulting Agreement
dated January 1, 1998 with Dr. McNally. The Consulting Agreement provides that
the Company will use its best efforts to enable Dr. McNally to sell up to
24,000 shares of Common Stock through May 15, 1998 either on the open market or
through participation in an underwritten public offering. Dr. McNally is
selling 74,000 shares in this Offering. Assuming at least 24,000 of these
shares are sold, the Company will have fullfilled these obligations under the
Consulting Agreement. See "Principal and Selling Shareholders."
53
<PAGE>
UNDERWRITING
- --------------------------------------------------------------------------------
The names of the Underwriters of the shares of Common Stock offered hereby and
the aggregate number of shares of Common Stock which each has severally agreed
to purchase from the Company, subject to the terms and conditions specified in
the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
SBC Warburg Dillon Read Inc...............................
Piper Jaffray Inc.........................................
---------
Total................................................... 2,500,000
=========
</TABLE>
The Managing Underwriters are SBC Warburg Dillon Read Inc. and Piper Jaffray
Inc.
If any shares of Common Stock offered hereby are purchased by the Underwriters,
all such shares will be so purchased. The Underwriting Agreement contains
certain provisions whereby if any Underwriter defaults in its obligation to
purchase such shares and if the aggregate obligations of the Underwriters so
defaulting do not exceed ten percent of the shares offered hereby, the
remaining Underwriters, or some of them, must assume such obligations.
The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not to exceed $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not to exceed $ per share on sales to certain other dealers. The offering of
the shares of Common Stock is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of the shares. After the shares are released
for sale to the public, the public offering price, the concession and the
reallowance may be changed by the Managing Underwriters.
The Company has granted to the Underwriters an option to purchase up to an
additional 375,000 shares of Common Stock at the offering price less the
underwriting discount set forth on the cover page of this Prospectus. Such
option is exercisable during the 30 days beginning on the date of the
Underwriting Agreement. The Underwriters may exercise such option only to cover
over-allotments made of the shares in connection with the Offering. To the
extent the Underwriters exercise this option, each of the Underwriters will be
obligated, subject to certain conditions, to purchase the number of additional
shares proportionate to such Underwriter's initial commitment.
The Company, each of its Directors and officers and certain of its shareholders
have agreed that they will not sell, contract to sell, grant any option to sell
or otherwise dispose of, directly or indirectly, any shares of the Common Stock
or any securities convertible into or exchangeable for Common Stock or warrants
or other rights to purchase Common Stock, for a period of at least 90 days
after the date of this Prospectus, without the prior written consent of SBC
Warburg Dillon Read Inc., except for (i) bona fide gifts to individuals or
entities who deliver an agreement substantially to the effect set forth in this
paragraph, (ii) exercises of in-the-money, currently outstanding options or
warrants to purchase Common Stock or conversions of debentures convertible into
Common Stock, (iii) transfers which occur by operation of law provided the
transferee is bound by the terms of an agreement substantially to the effect
set forth in this paragraph and (iv) the grant of options and other rights by
the Company to purchase up to an aggregate of 161,900 shares of Common Stock to
the Company's employees, officers and Directors pursuant to the Stock Plans.
54
<PAGE>
The Company has agreed to indemnify the Underwriters against certain
liabilities, including any liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
In connection with this Offering, the Managing Underwriters, on behalf of the
Underwriters, may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock. Specifically, the Managing Underwriters
may over-allot this Offering, creating a syndicate short position. In addition,
the Managing Underwriters may bid for and purchase shares of Common Stock in
the open market to cover syndicate short positions or to stabilize the price of
the Common Stock. Finally, the Managing Underwriters may reclaim selling
concessions from syndicate members in this Offering if the syndicate
repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilizing transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Managing Underwriters are not required to engage
in these activities, and may end any of these activities at any time.
LEGAL MATTERS
- --------------------------------------------------------------------------------
The validity of the Common Stock offered hereby is being passed upon for the
Company by Arnall Golden & Gregory, LLP, Atlanta, Georgia. Certain legal
matters in connection with this Offering are being passed upon for the
Underwriters by Palmer & Dodge LLP, Boston, Massachusetts.
EXPERTS
- --------------------------------------------------------------------------------
The consolidated financial statements of CryoLife, Inc. as of December 31, 1997
and 1996, and for the years then ended, and the financial statements of IFM as
of and for the year ended December 31, 1996, have been included herein and in
the Registration Statement in reliance upon the reports of Ernst & Young LLP,
independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of CryoLife, Inc. for the year ended
December 31, 1995 have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Company has filed with the Commission, through the Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR"), a Registration Statement on
Form S-3 under the Securities Act with respect to the Common Stock offered
hereby (the "Registration Statement"). This Prospectus, filed as part of the
Registration Statement, does not contain all of the information included in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is hereby made to the Registration Statement
and the exhibits and schedules filed therewith or incorporated by reference
thereto. Statements contained in this Prospectus as to the contents of any
contract, agreement, or other document are not necessarily complete and in each
such instance, reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the Registration Statement, including
documents incorporated by reference, for a more complete description of the
matters involved and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge and copied at the
offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional
55
<PAGE>
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials may be obtained at the prescribed rates from
the Commission's Public Reference Section at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Electronic registration statements
filed through EDGAR may also be accessed electronically through the
Commission's home page on the World Wide Web at http://www.sec.gov.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and in accordance therewith, it files reports, proxy statements, and other
information required thereby to the Commission via EDGAR. Copies of such
material may be inspected and copied at the offices of the Commission and
accessed electronically through the Commission's home page on the World Wide
Web. Reports, proxy statements, other required information statements, and
other information concerning the Company may also be inspected at the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
The Company's Annual Report on Form 10-K for the year ended December 31, 1997,
and the description of the Company's Common Stock contained in its registration
statement on Form 8-A, File No. 001-13165, including any amendment or report
filed for the purpose of updating such description, are hereby incorporated by
reference in this Prospectus.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to termination of this Offering shall be deemed to be incorporated in this
Prospectus by reference and to be a part hereof from the respective dates of
the filing of such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any subsequently filed document which also
is, or is deemed to be, incorporated by reference herein, modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute part of this
Prospectus.
The Company will provide, upon written or oral request, without charge to each
person to whom a copy of this Prospectus has been delivered, including any
beneficial owner, a copy of any or all of the documents which have been or may
be incorporated in this Prospectus by reference other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference into
such documents). Requests for such copies should be directed to: Assistant
Secretary, CryoLife, Inc., 1655 Roberts Boulevard, N.W., Kennesaw, Georgia
30144, (770) 419-3355.
56
<PAGE>
GLOSSARY
- -------------------------------------------------------------------------------
Allograft--A graft of tissue taken from a donor of the same species as the
recipient.
Albumin--Protein existing in blood plasma involved in the coagulation process.
Anastomosis--Surgical formation of a passage between two normally unconnected
vessels.
Anti-Coagulant--Drug treatment to prevent blood from clotting.
Antigen Reduction--Reduction of protein or carbohydrate substances capable of
stimulating an immune response.
Aortic Valve--The heart valve between the left ventricle and the ascending
aorta.
Arteriosclerosis--A chronic disease characterized by abnormal thickening and
hardening of the arterial walls with resulting loss of elasticity.
Bioadhesive--Glue or sealant composed of human or animal blood factors.
Bioprosthesis--A replacement, made of biological materials, for a limb, organ
or other part of the body.
Calcification--Deposits of calcium which attach to body tissues and accelerate
the degeneration such tissues.
Catheter--A tubular surgical instrument for withdrawal or introduction of
fluids.
Coronary Artery--The vessel which delivers oxygenated blood to the heart
muscle.
Cruciate Ligament--A ligament that helps to stabilize the knee.
Cryopreservation--Preservation of tissue by use of special freezing
techniques.
Embolectomy--Surgical removal of a clot which impedes blood flow.
Endarterectomy--Surgical removal of the inner layer of an artery.
Endocarditis--Inflammation, caused by bacteria, of the lining of heart valves
and surrounding tissue.
Endothelial Cells--A single layer of cells that line the internal walls of
veins, arteries and other internal body cavities.
Femoral Vein--The vein which accompanies the main artery in the thigh.
Fibrinogen--A component of plasma which is essential to the clotting process.
Fixed Porcine Valve--A porcine valve treated with glutaraldehyde which renders
the animal cells inert while preserving the mechanical structure of the valve
for implantation.
Glutaraldehyde--A chemical agent of the aldehyde group used in cross-linking
proteins and fixing porcine valve tissues.
Heart Conduits--Portions of the aorta or other vessels which include a heart
valve within their walls.
Hemostasis--The stoppage of blood flow.
Infusion Port--A device with a catheter which can be implanted under the skin
to administer medicine.
Laparoscopy--Minimally invasive surgical technique designed to minimize the
trauma of the operative site.
Lumen--The inner open space of a tubular device or organ.
Meniscus--A crescent-shaped, fibrous cartilage pad positioned within the knee
between the surface of the femur and tibia.
Mitral Valve--The heart valve positioned between the left atrium and left
ventricle.
Osteochondral Graft--Surgical implant relating to or composed of bone and
cartilage.
Patellar Tendon--A tendon extending from the patella (kneecap) to the tibia
(shin bone).
Peripheral Vascular--Relating to the blood vessels, or circulatory system, of
the limbs.
Porcine--Of or related to pigs.
Pulmonary Valve--The heart valve separating the non-oxygenated, or pulmonary,
trunk from the right ventricle.
Saphenous Vein--A vein that runs the full length of the leg.
Shunt--Surgical device used to facilitate an anastomosis.
Stentless Heart Valve--Heart valve that does not contain a sewing ring to
support the valve opening.
SynerGraft--Proprietary CryoLife technology for depopulating animal tissue of
its viable cells and repopulating it with viable human cells.
Thrombin--An enzyme that facilitates the clotting of blood.
Thrombin Inhibitor--An agent that slows or interferes with a chemical reaction
associated with the clotting of blood.
Thromboembolism--Catastrophic blockage of blood flow caused when a particle is
trapped in a vein or artery.
Tibialis Tendon--Tendon connecting the bones and muscles of the lower leg and
foot.
Viable Tissue--Cells capable of living, growing or developing.
57
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
CryoLife, Inc.
Report of Independent Auditors........................................ F-2
Independent Auditors' Report.......................................... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... F-4
Consolidated Income Statements for the Years Ended December 31, 1997,
1996 and 1995........................................................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996
and 1995............................................................. F-7
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995..................................... F-8
Notes to Consolidated Financial Statements............................ F-9
Ideas for Medicine, Inc.
Report of Independent Auditors........................................ F-18
Balance Sheet as of December 31, 1996................................. F-19
Statement of Income and Retained Earnings for the Year Ended December
31, 1996............................................................. F-20
Statement of Cash Flows for the Year Ended December 31, 1996.......... F-21
Notes to the Financial Statements..................................... F-22
Pro Forma Condensed Consolidated Income Statement for the Year Ended
December 31, 1997 (Unaudited).......................................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
CryoLife, Inc.
We have audited the accompanying consolidated balance sheets of CryoLife, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of
CryoLife, Inc. for the year ended December 31, 1995 were audited by other
auditors whose report dated February 14, 1996 expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of CryoLife, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 9, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
CryoLife, Inc.
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of CryoLife, Inc. and subsidiaries for the
year ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of CryoLife, Inc. and subsidiaries for the year ended December 31, 1995,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
February 14, 1996
F-3
<PAGE>
CRYOLIFE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 111,000 $ 1,370,000
Receivables:
Trade accounts, less allowance for doubtful accounts
of $103,000 in 1997 and $94,000 in 1996............ 9,224,000 6,572,000
Income taxes........................................ 230,000 404,000
Other............................................... 311,000 1,518,000
----------- -----------
Total receivables.................................. 9,765,000 8,494,000
----------- -----------
Deferred preservation costs, less allowances of
$152,000 in 1997 and $278,000 in 1996............... 12,257,000 7,178,000
Inventories.......................................... 1,761,000 260,000
Prepaid expenses..................................... 1,260,000 697,000
Deferred income taxes................................ -- 33,000
----------- -----------
Total current assets............................... 25,154,000 18,032,000
----------- -----------
Property and equipment:
Equipment............................................ 10,533,000 8,515,000
Furniture and fixtures............................... 1,828,000 1,493,000
Leasehold improvements............................... 8,247,000 7,495,000
Construction in progress............................. 2,509,000 --
----------- -----------
23,117,000 17,503,000
Less accumulated depreciation and amortization....... 7,630,000 5,788,000
----------- -----------
Net property and equipment......................... 15,487,000 11,715,000
----------- -----------
Other assets:
Goodwill, less accumulated amortization of $468,000
in 1997 and $27,000 in 1996......................... 9,809,000 1,846,000
Patents, less accumulated amortization of $531,000 in
1997 and $352,000 in 1996........................... 2,196,000 2,081,000
Other, less accumulated amortization of $483,000 in
1997 and
$289,000 in 1996.................................... 1,103,000 1,299,000
----------- -----------
Total assets....................................... $53,749,000 $34,973,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CRYOLIFE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 1,612,000 $ 3,696,000
Accrued expenses................................... 222,000 720,000
Accrued compensation............................... 1,122,000 878,000
Accrued fees to technical service representatives.. 312,000 214,000
Accrued procurement fees........................... 1,565,000 1,210,000
Current maturities of long-term debt............... 1,496,000 527,000
----------- -----------
Total current liabilities........................ 6,329,000 7,245,000
----------- -----------
Deferred income taxes................................ 327,000 --
Bank loans........................................... 10,777,000 1,250,000
Convertible debenture................................ 5,000,000 --
Other long-term debt................................. 1,089,000 1,549,000
----------- -----------
Total liabilities................................ 23,522,000 10,044,000
----------- -----------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $.01 par value per share;
authorized 5,000,000 shares including 2,000,000
shares of series A junior participating preferred
stock; no shares issued........................... -- --
Common stock, $.01 par value per share; authorized
50,000,000 shares; issued 10,242,961 shares in
1997 and 10,110,326 shares in 1996................ 102,000 101,000
Additional paid-in capital......................... 17,694,000 17,128,000
Retained earnings.................................. 12,627,000 7,902,000
Unrealized gain (loss) on marketable securities.... -- (1,000)
Treasury stock, 543,000 shares, at cost............ (180,000) (180,000)
Notes receivable from shareholders................. (16,000) (21,000)
----------- -----------
Total shareholders' equity....................... 30,227,000 24,929,000
----------- -----------
Total liabilities and shareholders' equity..... $53,749,000 $34,973,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CRYOLIFE, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Cryopreservation and products............ $50,409,000 $36,678,000 $28,257,000
Research grants, licenses and other
revenues................................ 460,000 361,000 713,000
Interest income.......................... -- 189,000 256,000
----------- ----------- -----------
50,869,000 37,228,000 29,226,000
----------- ----------- -----------
Costs and Expenses:
Cryopreservation and products............ 17,764,000 12,593,000 10,485,000
General, administrative and marketing.... 20,548,000 15,673,000 12,807,000
Research and development................. 3,946,000 2,807,000 2,634,000
Interest expense......................... 978,000 72,000 4,000
----------- ----------- -----------
43,236,000 31,145,000 25,930,000
----------- ----------- -----------
Income before income taxes................. 7,633,000 6,083,000 3,296,000
Income tax expense......................... 2,908,000 2,156,000 1,094,000
----------- ----------- -----------
Net income................................. $ 4,725,000 $ 3,927,000 $ 2,202,000
=========== =========== ===========
Earnings per share:
Basic.................................... $ 0.49 $ 0.41 $ 0.23
=========== =========== ===========
Diluted.................................. $ 0.48 $ 0.40 $ 0.23
=========== =========== ===========
Weighted average shares outstanding:
Basic.................................... 9,642,000 9,505,000 9,379,000
Diluted.................................. 9,942,000 9,906,000 9,568,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CRYOLIFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income................................ $4,725,000 $3,927,000 $2,202,000
Adjustments to reconcile net income to net
cash flows (used in) provided by
operating activities:
Depreciation and amortization of property
and equipment........................... 1,842,000 973,000 769,000
Amortization............................. 814,000 383,000 211,000
Provision for doubtful accounts.......... 46,000 167,000 266,000
Deferred income taxes.................... 360,000 242,000 (107,000)
Changes in operating assets and
liabilities:
Trade and other receivables............. (530,000) (2,561,000) (1,780,000)
Income taxes............................ 174,000 (614,000) 106,000
Deferred preservation costs............. (5,079,000) (1,053,000) 379,000
Inventories............................. (864,000) 163,000 432,000
Prepaid expenses........................ (506,000) (326,000) (146,000)
Accounts payable........................ (2,756,000) 1,197,000 38,000
Accrued expenses........................ (468,000) 740,000 39,000
---------- ---------- ----------
Net cash flows (used in) provided by
operating activities..................... (2,242,000) 3,238,000 2,409,000
---------- ---------- ----------
Net cash flows from investing activities:
Capital expenditures...................... (5,059,000) (8,481,000) (1,573,000)
Cash paid for acquisitions, net of cash
acquired................................. (4,418,000) (722,000) --
Other assets.............................. (148,000) (939,000) (1,002,000)
Net sales (purchases) of marketable
securities............................... -- 5,942,000 (2,175,000)
---------- ---------- ----------
Net cash flows used in investing
activities............................... (9,625,000) (4,200,000) (4,750,000)
---------- ---------- ----------
Net cash flows from financing activities:
Principal payments of debt................ (6,607,000) (750,000) --
Proceeds from debt issuance............... 16,643,000 2,000,000 --
Proceeds from exercise of options and
issuance of stock........................ 567,000 561,000 265,000
Net payments on notes receivable from
shareholders............................. 5,000 5,000 --
---------- ---------- ----------
Net cash flows provided by financing
activities............................... 10,608,000 1,816,000 265,000
---------- ---------- ----------
(Decrease) increase in cash................ (1,259,000) 854,000 (2,076,000)
Cash and cash equivalents, beginning of
year...................................... 1,370,000 516,000 2,592,000
---------- ---------- ----------
Cash and cash equivalents, end of year..... $ 111,000 $1,370,000 $ 516,000
========== ========== ==========
Supplemental disclosures of cash flow
information--cash paid during the year
for:
Interest................................. $ 920,000 $ 34,000 $ 4,000
========== ========== ==========
Income taxes............................. $2,380,000 $2,529,000 $1,089,000
========== ========== ==========
Noncash investing and financing activities:
Purchases of property and equipment in
accounts payable......................... $ 440,000 $ 888,000
========== ==========
Note issued for patent.................... $ 826,000
==========
Fair value of assets acquired............. $1,768,000 $ 534,000
Cost in excess of assets acquired......... 8,541,000 1,873,000
Liabilities assumed....................... (891,000) (435,000)
Notes issued for assets acquired.......... (5,000,000) (1,250,000)
---------- ----------
Net cash paid for acquisition............. $4,418,000 $ 722,000
========== ==========
</TABLE>
F-7
<PAGE>
CRYOLIFE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Common Stock:
Balance, beginning of year, (9,567,000,
9,431,000 and 9,326,000 shares
outstanding, at January 1, 1997, 1996
and 1995, respectively)............... $ 101,000 $ 100,000 $ 99,000
Issuances of common stock:
Employee stock purchase plan (30,000
and 2,000 shares in 1997 and 1996,
respectively)........................ -- -- --
Purchase of other assets (10,000
shares in 1996)...................... -- -- --
Exercise of options (105,000, 124,000,
and 105,000 shares in 1997, 1996 and
1995, respectively).................. 1,000 1,000 1,000
----------- ----------- -----------
Balance, end of year................... 102,000 101,000 100,000
----------- ----------- -----------
Additional Paid-in Capital:
Balance, beginning of year............. 17,128,000 16,568,000 16,304,000
Issuances of common stock:
Employee stock purchase plan.......... 268,000 21,000 --
Purchase of other assets.............. -- 130,000 --
Exercise of options................... 298,000 409,000 264,000
----------- ----------- -----------
Balance, end of year................... 17,694,000 17,128,000 16,568,000
----------- ----------- -----------
Retained Earnings:
Balance, beginning of year............. 7,902,000 3,975,000 1,773,000
Net income............................. 4,725,000 3,927,000 2,202,000
----------- ----------- -----------
Balance, end of year................... 12,627,000 7,902,000 3,975,000
----------- ----------- -----------
Unrealized Gain (Loss) on Marketable Se-
curities:
Balance, beginning of year............. (1,000) 28,000 (38,000)
Unrealized gain (loss)................. 1,000 (29,000) 66,000
----------- ----------- -----------
Balance, end of year................... -- (1,000) 28,000
----------- ----------- -----------
Treasury Stock:
----------- ----------- -----------
Balance, beginning and end of year..... (180,000) (180,000) (180,000)
----------- ----------- -----------
Notes Receivable From Shareholders:
Balance, beginning of year............. (21,000) (26,000) (26,000)
Additions to shareholder notes......... (21,000) -- --
Payments on shareholder notes.......... 26,000 5,000 --
----------- ----------- -----------
Balance, end of year................... (16,000) (21,000) (26,000)
----------- ----------- -----------
Total shareholders' equity, end of
year................................... $30,227,000 $24,929,000 $20,465,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Founded in 1984, CryoLife, Inc. (the "Company") is the leader in the
cryopreservation of viable human tissues for transplant, and is developing and
commercializing additional implantable and single-use non-implantable devices
for use in vascular, cardiovascular and orthopaedic applications. The Company
markets its viable human tissues in North and South America, Europe and Asia.
The Company's bioprosthetic cardiovascular devices include fixed stentless
porcine heart valves recently introduced into the European Community as well
as a proprietary project to transplant human cells onto the structure of
animal tissue. The Company also manufactures and distributes, principally
through its recently acquired Ideas for Medicine, Inc. ("IFM") of Clearwater,
Florida subsidiary, single-use medical devices for use in vascular surgical
procedures. In addition, the Company is developing and commercializing within
the European Community a proprietary surgical adhesive designed for vascular
sealing.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances are eliminated.
Reclassifications
Certain prior year balances have been reclassified to conform to the 1997
presentation.
Use of Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts based
on informed estimates and judgments of management with consideration given to
materiality. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and maturity dates of 90 days or less at the
time of acquisition.
Deferred Preservation Costs and Revenue Recognition
Tissue is procured from deceased human donors by organ procurement
organizations and tissue banks which consign the tissue to the Company for
processing and preservation. Preservation costs related to tissue held by the
Company are deferred until shipment to the implanting hospital. Deferred
preservation costs consist primarily of laboratory expenses, tissue
procurement fees, and freight-in charges and are stated at average cost,
determined annually, on a first-in, first-out basis. When the tissue is
shipped to the implanting hospital, revenue is recognized and the related
deferred preservation costs are charged to operations. The Company does not
require collateral or other security for its receivables.
Inventories
Inventories are comprised of single-use medical devices and bioprosthetic
cardiovascular devices and are valued at the lower of cost (first-in, first-
out) or market.
F-9
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets, generally 5 to 10 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
Goodwill resulting from business acquisitions is amortized on a straight-line
basis over 20 years. Patent costs are amortized over the expected useful lives
of the patents (primarily 17 years) using the straight-line method. Other
intangibles, which consist primarily of manufacturing rights and agreements,
are being amortized over the expected useful lives of the related assets
(primarily five years).
The Company periodically evaluates the recoverability of intangible assets and
measures the amount of impairment, if any, by assessing current and future
levels of income and cash flows as well as other factors, such as business
trends and prospects and market and economic conditions.
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Research Grant and License Revenues
Revenues from research grants are recognized in the period the associated
costs are incurred. License revenues are recognized in the period the cash is
received and all licenser obligations have been fulfilled.
Earnings Per Share and Stock Split
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
On May 16, 1996, the Board of Directors declared a two-for-one stock split,
effected in the form of a stock dividend, payable on June 28, 1996 to
shareholders of record on June 7, 1996. All share and per share information in
the accompanying consolidated financial statements have been adjusted to
reflect such split.
2. ACQUISITION OF IDEAS FOR MEDICINE
On March 5, 1997, the Company acquired the stock of IFM, a medical device
company specializing in the manufacture and distribution of single-use medical
devices, for approximately $9.5 million in cash ($4.5 million) and convertible
debentures ($5.0 million) plus related expenses. The cash portion of the
purchase price was financed by borrowings under the Company's loan agreement
described in Note 4. Additional consideration equal to 10 percent of IFM's net
revenues in excess of $7.5 million shall be payable each year for a 10-year
period,
F-10
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
limited to $1.75 million in the aggregate. The acquisition has been accounted
for as a purchase; accordingly, the results of operations are included in the
accompanying 1997 consolidated income statement from the date of acquisition.
Based on the allocation of the purchase price, the Company's unaudited
condensed pro forma results of operations for the years ended December 31,
1997 and 1996, assuming consummation of the purchase as of January 1, 1997 and
1996, respectively, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues............................................. $52,082,000 $43,574,000
Net income........................................... 4,756,000 3,511,000
Earnings per share:
Basic.............................................. $ 0.49 $ 0.37
Diluted............................................ 0.48 0.35
</TABLE>
In connection with this acquisition, the Company also entered into a
consulting agreement with the former majority shareholder requiring monthly
payments of approximately $17,000 until March 2002.
3. INVENTORIES
Inventories at December 31 are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Raw material............................................. $ 262,000 $ --
Work-in-process.......................................... 358,000 --
Finished goods........................................... 1,141,000 260,000
---------- --------
$1,761,000 $260,000
========== ========
</TABLE>
4. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Bank loans:
Revolving loan..................................... $ 6,777,000 $1,250,000
Term loan due in equal monthly installments of
$83,000 plus interest at prime through December
31, 2002.......................................... 5,000,000 --
7% convertible debenture, due in March 2002.......... 5,000,000 --
8.25% note payable due in equal annual installments
of $250,000......................................... 1,000,000 1,250,000
Note payable due in 2000 with an effective interest
rate of 8%, net of unamortized discount of $35,000
in 1997 and $84,000 in 1996......................... 585,000 826,000
----------- ----------
18,362,000 3,326,000
Less current maturities.............................. 1,496,000 527,000
----------- ----------
Total long-term debt................................. $16,866,000 $2,799,000
=========== ==========
</TABLE>
On August 30, 1996, the Company executed a loan agreement (the "Agreement")
with a bank which, as amended on December 16, 1997, permits the Company to
borrow up to $10,000,000 under a revolving loan and includes $5,000,000 under
a term loan. Borrowings under the Agreement provide for interest at either the
bank's prime rate (8.5% at December 31, 1997) or at Adjusted LIBOR, as
defined, plus an applicable LIBOR margin. The Agreement expires on December
31, 1999; all borrowings outstanding on that date under the revolving loan
F-11
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
convert to a term loan to be paid in 60 equal monthly installments of
principal plus interest computed as described above. The Agreement contains
certain restrictive covenants including, but not limited to, maintenance of
certain financial ratios and a minimum tangible net worth requirement. The
Agreement is secured by substantially all of the Company's assets, including
IFM's stock but excluding intellectual property. Commitment fees are paid
based on the unused portion of the revolving loan. At December 31, 1997 an
additional $3,223,000 was available to be borrowed under the revolving loan.
In March 1997, the Company issued a $5,000,000 convertible debenture in
connection with the IFM acquisition. The debenture is convertible into common
stock of the Company at any time prior to the due date at $12.08 per common
share.
On September 12, 1996, the Company acquired the assets of United
Cryopreservation Foundation, Inc. ("UCFI"), a processor and distributor of
cryopreserved human heart valves and saphenous veins for transplant. The
Company issued a $1,250,000 note in connection with the acquisition. The note
bears interest at prime, as adjusted annually on the anniversary date of the
acquisition.
In April 1996 the Company issued a $910,000 non-interest bearing note in
connection with the technology underlying its BioGlue surgical adhesive. The
note is payable in four annual installments of $290,000, plus a final payment
of $40,000 at maturity.
Scheduled maturities of long-term debt for the next five years and thereafter
are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 1,496,000
1999............................................................. 1,516,000
2000............................................................. 2,678,000
2001............................................................. 2,605,000
2002............................................................. 7,355,000
Thereafter....................................................... 2,712,000
-----------
$18,362,000
===========
</TABLE>
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("Statement 107"), requires the Company to
disclose estimated fair values for its financial instruments. The carrying
amounts of cash and cash equivalents, receivables and accounts payable
approximate their fair values due to the short term maturity of these
instruments.
The Company enters into short-term interest rate swap agreements with the
lender under the Agreement which effectively fix the interest rate on
$5,000,000 of borrowings. The estimated fair values of the Company's interest
rate swap agreements (which expired in January 1998) and outstanding debt
approximate their carrying amounts at December 31, 1997.
F-12
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES
The Company leases equipment and office space under various operating leases
with terms of up to 15 years. Certain leases contain escalation clauses and
renewal options for additional periods. Future minimum lease payments under
noncancelable operating leases as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 1,443,000
1999............................................................. 1,361,000
2000............................................................. 1,220,000
2001............................................................. 1,237,000
2002............................................................. 1,205,000
Thereafter....................................................... 10,390,000
-----------
$16,856,000
===========
</TABLE>
Total rental expense for operating leases amounted to $1,282,000, $714,000 and
$740,000 for 1997, 1996 and 1995, respectively.
Commencing January 5, 1998, IFM leases office and manufacturing facilities
under a capital lease for $28,500 per month through January 2008 from the
former majority shareholder of IFM.
7. STOCK OPTION PLANS
The Company has stock option plans which provide for grants of options to
employees and directors to purchase shares of the Company's Common Stock at
exercise prices generally equal to the fair values of such stock at the dates
of grant, which generally become exercisable over a five-year vesting period
and expire within ten years of the grant dates. Under the 1993 Employee
Incentive Stock Option Plan and the Non-employee Director's Plan, the Company
has authorized the grant of options of up to 700,000 and 360,000 shares of
Common Stock, respectively. A summary of stock option transactions under the
plans follows:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE EXERCISE PRICE
-------- ----------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1994....... 414,000 $ 2.25-4.13
Granted................................ 321,000 3.63-7.74 $ 4.90
Exercised.............................. (105,000) 2.25-4.13 2.53
Canceled............................... (40,000) 2.25-4.13 3.10
--------
Outstanding at December 31, 1995....... 590,000 2.25-7.74 4.21
Granted................................ 247,000 8.5-18.43 15.70
Exercised.............................. (124,000) 2.26-7.26 3.31
Canceled............................... (5,000) 2.25-3.75 3.68
--------
Outstanding at December 31, 1996....... 708,000 2.25-18.43 7.36
Granted................................ 201,000 10.25-15.88 11.97
Exercised.............................. (105,000) 2.25-7.50 2.85
Canceled............................... (50,000) 2.25-16.75 10.06
--------
Outstanding at December 31, 1997....... 754,000 3.00-18.43 8.95
========
</TABLE>
F-13
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.00- 8.50......... 429,000 2.5 $ 4.93 248,000 $ 4.35
10.25-13.50......... 181,000 5.0 11.88 23,000 10.75
15.88-18.43......... 144,000 3.3 17.14 37,000 17.21
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations ("APB
25") in accounting for its employee stock options because, as discussed below,
the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market prices of the underlying stock on the date of the grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by Statement 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 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 with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Expected dividend yield.................................... 0% 0% 0%
Expected stock price volatility............................ .591 .552 .515
Risk-free interest rate.................................... 6.13% 6.48% 5.91%
Expected life of options (years)........................... 4.3 4.8 4.0
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair values of the option
are amortized to expense over the options' vesting periods. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income--as reported................... $4,725,000 $3,927,000 $2,202,000
Net income--pro forma..................... 4,308,000 3,632,000 2,123,000
Earnings per share--as reported:
Basic................................... $ 0.49 $ 0.41 $ 0.23
Dilutive................................ 0.48 0.40 0.23
Earnings per share--pro forma:
Basic................................... 0.45 0.38 0.23
Dilutive................................ 0.43 0.37 0.22
</TABLE>
F-14
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other information concerning stock options follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Weighted average fair value of options granted
during the year.................................. $6.34 $7.97 $2.36
Number of shares as to which options are
exercisable at end of year....................... 308,000 157,000 74,000
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1999.
8. SHAREHOLDER RIGHTS PLAN
On November 27, 1995, the Board of Directors adopted a shareholder rights plan
to protect long-term share value for the Company's shareholders. Under the
plan, the Board declared a distribution of one Right for each outstanding
share of the Company's Common Stock to shareholders of record on December 11,
1995. Each Right entitles the registered holder to purchase from the Company
one-tenth of a share of a newly created Series A Junior Participating
Preferred Stock, at an exercise price of $100. The rights, which expire on
November 27, 2005, may be exercised only if certain conditions are met, such
as the acquisition of 15 percent or more of the Company's Common Stock by a
person or affiliated group ("Acquiring Person").
In the event the Rights become exercisable, each Right will enable the owner,
other than the Acquiring Person, to purchase, at the Right's then current
exercise price, that number of shares of Common Stock with a market value
equal to twice the exercise price. In addition, unless the Acquiring Person
owns more than 50% of the outstanding shares of Common Stock, the Board of
Directors may elect to exchange all outstanding Rights (other than those owned
by such Acquiring Person) at an exchange ratio of one share of Common Stock,
or one-tenth of a Preferred Share per Right.
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan (the "Plan") providing retirement
benefits to all employees who have completed at least six months of service.
The Company makes matching contributions of 50% of each participant's
contribution up to 5% of each participant's salary. Total Company
contributions approximated $139,000, $123,000 and $131,000 for 1997, 1996, and
1995, respectively. Additionally, the Company may make discretionary
contributions to the Plan that are allocated to each participant's account. No
such discretionary contributions were made in 1997, 1996 or 1995.
On May 16, 1996, the Company's shareholders approved the CryoLife, Inc.
Employee Stock Purchase Plan (the "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, 1997 and 1996 there were 568,000 and 598,000 shares of
Common Stock reserved for the ESPP and there had been 32,000 and 2,000 shares
issued under the plan, respectively.
F-15
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted earnings
per share--income available to common
shareholders.............................. $4,725,000 $3,927,000 $2,202,000
========== ========== ==========
Denominator for basic earnings per share--
weighted-average basis.................... 9,642,000 9,505,000 9,379,000
Effect of dilutive stock options........... 300,000 401,000 189,000
---------- ---------- ----------
Denominator for diluted earnings per
share--adjusted weighted-average shares... 9,942,000 9,906,000 9,568,000
========== ========== ==========
Basic earnings per share................... $ 0.49 $ 0.41 $ 0.23
========== ========== ==========
Diluted earnings per share................. $ 0.48 $ 0.40 $ 0.23
========== ========== ==========
</TABLE>
11. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $2,145,000 $1,573,000 $1,012,000
State.................................... 403,000 341,000 189,000
---------- ---------- ----------
2,548,000 1,914,000 1,201,000
Deferred................................... 360,000 242,000 (107,000)
---------- ---------- ----------
$2,908,000 $2,156,000 $1,094,000
========== ========== ==========
</TABLE>
Such amounts differ from the amounts computed by applying the U.S. Federal
income tax rate of 34% to pretax income as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax expense at statutory rate......... $2,593,000 $2,068,000 $1,121,000
Increase (reduction) in income taxes
resulting from:
Change in valuation allowance for
deferred tax assets................. (30,000) (129,000) (52,000)
Entertainment expenses............... 42,000 30,000 33,000
State income taxes, net of federal
benefit............................. 266,000 241,000 126,000
Non-taxable interest income.......... -- (50,000) (74,000)
Other................................ 37,000 (4,000) (60,000)
---------- ---------- ----------
$2,908,000 $2,156,000 $1,094,000
========== ========== ==========
</TABLE>
F-16
<PAGE>
CRYOLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences which give rise to deferred tax
liabilities and assets at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation........................................... $399,000 $ 99,000
Other.................................................. 80,000 44,000
-------- --------
479,000 143,000
Deferred tax assets:
Deferred preservation costs and inventory reserves..... 58,000 87,000
Intangible assets...................................... 38,000 62,000
Other.................................................. 56,000 57,000
-------- --------
152,000 206,000
Less valuation allowance............................... -- 30,000
-------- --------
Net deferred tax assets................................ 152,000 176,000
-------- --------
Net deferred tax liabilities (assets).................... $327,000 $(33,000)
======== ========
</TABLE>
12. FDA REGULATION
Human heart valves historically have not been subject to regulation by the
U.S. Food and Drug Administration (the "FDA"). However, in June 1991 the FDA
published a notice stating that human heart valves for transplantation are
medical devices subject to Premarket Approval (PMA) or an Investigational
Device Exemption (IDE). In October 1994 the FDA announced in the Federal
Register that neither an approved application for PMA nor an IDE is required
for processors and distributors who had marketed heart valve allografts before
June 1991. This action by the FDA has removed allograft heart valves from
clinical trial status thus allowing the Company to distribute such valves to
cardiovascular surgeons throughout the U.S.
13. EXECUTIVE INSURANCE PLAN
Pursuant to a supplemental life insurance program for certain executive
officers of the Company, the Company and the executives share in the premium
payments and ownership of insurance policies on the lives of such executives.
The Company's aggregate premium contributions under this program were $38,000,
$37,000 and $31,000 for 1997, 1996 and 1995, respectively.
14. EQUIPMENT ON LOAN TO IMPLANTING HOSPITALS
The Company consigns liquid nitrogen freezers with certain implanting
hospitals for tissue storage. The freezers are the property of the Company. At
December 31, 1997 freezers with a total cost of approximately $1,339,000 and
related accumulated depreciation of approximately $781,000 were located at the
implanting hospitals' premises. Depreciation is provided over the estimated
useful lives of the freezers on a straight-line basis.
15. TRANSACTIONS WITH RELATED PARTIES
The Company expensed $65,000, $39,000 and $67,000 during 1997, 1996 and 1995,
respectively, relating to services performed by a law firm whose sole
proprietor is a member of the Company's Board of Directors and a shareholder
of the Company.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Ideas for Medicine, Inc.
We have audited the accompanying balance sheet of Ideas for Medicine, Inc.
as of December 31, 1996, and the related statements of income and retained
earnings and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ideas for Medicine, Inc.
at December 31, 1996, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 5, 1997
F-18
<PAGE>
IDEAS FOR MEDICINE, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................. $ 180,408
Accounts receivable, net of allowance for doubtful accounts of
$10,590.......................................................... 741,352
Inventories....................................................... 651,882
Prepaid expenses.................................................. 47,311
----------
Total current assets................................................ 1,620,953
Property and equipment, net......................................... 200,065
Other assets, net................................................... 6,586
----------
$1,827,604
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 220,240
Accrued liabilities............................................... 64,020
----------
Total current liabilities........................................... 284,260
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 150,000 shares authorized; 105,590
shares issued and outstanding.................................... 1,056
Additional paid-in capital........................................ 642,768
Retained earnings................................................. 899,520
----------
Total shareholders' equity.......................................... 1,543,344
----------
$1,827,604
==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
IDEAS FOR MEDICINE, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Net sales........................................................... $6,344,114
Cost of sales....................................................... 3,331,669
----------
Gross profit........................................................ 3,012,445
Selling, general and administrative expenses........................ 2,660,051
----------
Operating income.................................................... 352,394
Other income, net................................................... 1,805
----------
Net income.......................................................... 354,199
Retained earnings at beginning of year.............................. 1,095,321
----------
1,449,520
Less distributions paid............................................. 550,000
----------
Retained earnings at end of year.................................... $ 899,520
==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
IDEAS FOR MEDICINE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Operating activities:
Net income......................................................... $ 354,199
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 153,952
Provision for doubtful accounts.................................. 11,272
Loss on disposal of assets....................................... 5,181
Changes in operating assets and liabilities:
Accounts receivable............................................ 61,023
Inventories.................................................... (35,856)
Other assets................................................... 16,046
Accounts payable and accrued liabilities....................... 93,029
---------
Net cash provided by operating activities.......................... 658,846
Investing activities:
Purchases of property and equipment................................ (107,579)
---------
Net cash used in investing activities.............................. (107,579)
Financing activities:
Payments of note................................................... (12,398)
Distributions paid................................................. (550,000)
---------
Net cash used in financing activities.............................. (562,398)
---------
Net decrease in cash............................................... (11,131)
Cash at beginning of year.......................................... 191,539
---------
Cash at end of year................................................ $ 180,408
=========
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ 157
=========
</TABLE>
See accompanying notes.
F-21
<PAGE>
IDEAS FOR MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
1. NATURE OF BUSINESS
Ideas for Medicine, Inc. ("IFM") is a closely-held Florida corporation. IFM
designs and manufactures a variety of surgical devices. The devices are
marketed primarily to hospitals in the U.S. and throughout the world through
stocking and non-stocking distributors. IFM's corporate offices and
manufacturing facilities are located in Clearwater, Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Sales are recorded when the related goods are shipped.
Inventories
Inventories are stated at the lower of average cost or market.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed primarily
using accelerated methods over the following useful lives:
<TABLE>
<S> <C>
Manufacturing Equipment...................................... 5-7 years
Office furniture and equipment............................... 5-7 years
Leasehold improvements....................................... Life of lease
</TABLE>
Patents
Patent costs are expensed in the period in which they are incurred.
Income Taxes
IFM operates as an "S" Corporation under the Internal Revenue Code and,
consequently, is not subject to federal income tax. IFM's shareholders include
their proportionate shares of IFM's income in their individual income tax
returns.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. INVENTORIES
Inventories consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Finished Goods.................................................... $317,757
Work-in-process................................................... 53,663
Raw Materials..................................................... 280,462
--------
$651,882
========
</TABLE>
F-22
<PAGE>
IDEAS FOR MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Manufacturing equipment.......................................... $450,390
Office furniture and equipment................................... 215,334
Leasehold improvements........................................... 101,750
--------
767,474
Less accumulated depreciation and amortization................... 567,409
--------
$200,065
========
</TABLE>
5. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses, aggregating $260,000 in 1996 are expensed
as incurred.
6. CREDIT ARRANGEMENTS
Under a revolving line of credit arrangement dated September 27, 1996 with a
bank, IFM may borrow up to $250,000 with borrowings due and payable on demand.
No amounts were borrowed under such line during 1996.
7. COMMITMENTS AND CONTINGENCIES
During 1996, IFM leased its facilities under a non-cancelable operating lease
which expired December 31, 1996. Rent expense for 1996 totaled $172,000.
Effective January 1, 1997, IFM leases its manufacturing facilities on a month-
to-month basis (see Note 8) and its office facility is leased under a non-
cancelable operating lease expiring on December 31, 1997. Minimum rent
payments under this one-year lease total $20,000.
8. RELATED PARTY TRANSACTIONS
IFM leases its manufacturing facilities from shareholders of IFM under month-
to-month leases for $7,000 per month.
9. CONCENTRATION OF CREDIT RISK
IFM maintains the majority of its cash balances at one financial institution.
These balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. The uninsured balance on deposit at the financial institution
totaled $220,000 at December 31, 1996.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, and accounts payable approximate their fair values.
11. LEGAL COSTS
During 1996, IFM incurred legal expenses aggregating $117,000 relating to the
settlement of three separate lawsuits.
F-23
<PAGE>
IDEAS FOR MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
12. GEOGRAPHIC AREA
IFM produces surgical devices for hospitals in the U.S. and throughout the
World. All sales are to unaffiliated customers. Sales to international
distributors aggregated $1,304,000 in 1996.
13. PROPOSED MERGER
IFM is involved in negotiations with a third-party corporation for a proposed
merger of IFM with and into a wholly-owned subsidiary of CryoLife, Inc. The
accompanying financial statements do not include any adjustments which may be
required upon the successful completion of such a merger.
14. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
On March 5, 1997, CryoLife, Inc. acquired the stock of IFM for consideration
of approximately $4.5 million in cash and approximately $5 million in
convertible debentures plus related expenses. The acquisition was accounted
for as a purchase. Following the acquisition, IFM became a wholly-owned
subsidiary of CryoLife, Inc. and will be taxed as a C corporation.
F-24
<PAGE>
CRYOLIFE, INC.
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IDEAS FOR PRO FORMA
CRYOLIFE MEDICINE TWO CONSOLIDATED
YEAR ENDED MONTHS ENDED PRO FORMA YEAR ENDED
12/31/97 2/28/97 ADJUSTMENTS 12/31/97
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Cryopreservation and
product................... $50,409 $1,213 $51,622
Other...................... 460 460
------- ------ -------
Total revenues............... 50,869 1,213 52,082
COST AND EXPENSES:
Preservation costs and cost
of goods sold............. 17,764 510 18,274
General and
administrative............ 20,548 423 $ 35 (A) 21,029
81 (B)
(58)(C)
Research and development... 3,946 50 3,996
Interest expense........... 978 122 (D) 1,100
------- ------ ----- -------
Total costs and expenses..... 43,236 983 180 44,399
------- ------ ----- -------
Income before income taxes... 7,633 230 (180) 7,683
Income tax expense........... 2,908 19 (E) 2,927
------- ------ ----- -------
Net income................... $ 4,725 $ 230 $(199) $ 4,756
======= ====== ===== =======
Earnings per share:
Basic...................... $ 0.49 $ 0.49
======= =======
Diluted.................... $ 0.48 $ 0.48
======= =======
Weighted average shares
outstanding:
Basic...................... 9,642 9,642
Diluted.................... 9,942 9,942
</TABLE>
- --------
(A) Represents costs associated with new consulting agreement with former
principal owner of IFM.
(B) Represents amortization of intangible assets acquired in connection with
the acquisition of IFM.
(C) Elimination of salary and related costs for IFM personnel who are no
longer with CryoLife as a result of the acquisition of IFM.
(D) Adjustments to interest expense to reflect borrowings and indebtedness
related to the acquisition of IFM.
(E) Income tax effects related to (A) through (D) above and IFM's change in
status from an S corporation to a C corporation.
F-25
<PAGE>
---------------------------------
CRYOLIFE CRYOPRESERVATION PROCESS
---------------------------------
Shipping
---------------- Implantation
-------------------
----------------- [Image of ----------------
| shipping] [Image of valve
| --------------- implantation]
|
| -------------------
| |
| |
| |
Storage |
- ------------ |
|
[Image of --------------- |
Freezers] [LOGO OF |
CRYOLIFE APPEARS HERE] |
- ------------ --------------- Recovery
| -------------------
|
| [Image of
Cryopreservation Biker]
- ------------
-------------------
[Image of
cryopreserva-
tion process]
- ------------
|
|
| Dissection Procurement
| --------------- ---------------
|
---------- [Image of ------------------------ [Image of
dissection] Procurement]
--------------- ---------------
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer contained herein, and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company, any Selling shareholder or any Underwriter. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, shares of Common Stock in any jurisdiction to any person to whom it is
not lawful to make such offer or solicitation in such jurisdiction or in which
the person making such offer or solicitation is not qualified to do so. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date of this Prospectus.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Forward-Looking Statements................................................ 12
Use of Proceeds........................................................... 13
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 23
Management................................................................ 44
Principal and Selling Shareholders........................................ 46
Description of Capital Stock.............................................. 48
Shares Eligible for Future Sale........................................... 52
Underwriting.............................................................. 54
Legal Matters............................................................. 55
Experts................................................................... 55
Additional Information.................................................... 55
Incorporation of Certain Documents by Reference........................... 56
Glossary.................................................................. 57
Index to Financial Statements............................................. F-1
</TABLE>
PROSPECTUS , 1998
2,500,000 Shares
LOGO
Common Stock
LOGO SBC WARBURG DILLON READ INC.
PIPER JAFFRAY INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
A reasonable estimate of the costs to be incurred in connection with this
Registration Statement and Prospectus, to be borne entirely by the Registrant,
is as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 12,245
NASD Filing Fee.................................................... 4,875
Accounting Fees and Expenses....................................... 175,000
Legal Fees and Expenses............................................ 300,000
Printing and Publication Expenses.................................. 100,000
Transfer Agent's Fee............................................... 10,000
Miscellaneous Expenses............................................. 97,880
--------
TOTAL............................................................ $700,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company is a Florida corporation. The following summary is qualified in
its entirety by reference to the complete text of the Florida Business
Corporation Act (the "FBCA"), the Company's Restated Articles of
Incorporation, and the Company's Bylaws.
Under Section 607.0850(1) of the FBCA, a corporation may indemnify any of its
directors and officers against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding
(including any appeal thereof) (i) if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, and (ii) with respect to any criminal action or
proceeding, he or she had no reasonable cause to believe his or her conduct
was unlawful. In actions brought by or in the right of the corporation,
however, Section 607.0850(2) provides that no indemnification shall be made in
respect of any claim, issue or matter as to which the director or officer
shall have been adjudged to be liable unless, and only to the extent that, the
court in which such proceeding was brought, or any other court of competent
jurisdiction, shall determine upon application that, despite the adjudication
of liability but in view of all circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper. Article X of the Company's Restated Articles of
Incorporation and Article VI of the Company's Bylaws require that, if in the
judgment of the majority of the Board of Directors (excluding from such
majority any director under consideration for indemnification) the criteria
set forth under Section 607.0850 have been met, then the Company shall
indemnify its directors and officers for certain liabilities incurred in the
performance of their duties on behalf of the Company to the maximum extent
allowed by Section 607.0850 of the FBCA (formerly Section 607.014 of the
Florida General Corporation Act).
The Securities Purchase Agreement dated December 17, 1985 between the Company
and certain shareholders of the Company provides that any investors exercising
registration rights pursuant to such agreement must indemnify the officers and
directors signing the registration statement against any liability arising
from statements or omissions made in reliance upon information furnished by
such investors to the Company for use in such registration statement.
The registration rights agreement dated August 22, 1991, among the Company,
Galen Partners, L.P. ("Galen"), and Galen Partners International, L.P. ("Galen
International") provides that if Galen or Galen International exercises its
registration rights, then such prospective seller and any underwriter acting
on its behalf shall have agreed to indemnify the Company and each officer and
director signing such registration statement for any liability arising from
any untrue statement or omission made in such registration statement in
reliance upon
II-1
<PAGE>
written information provided to the Company for use in such registration
statement. The registration rights agreement further specifies that the
indemnification rights granted therein shall be inoperative if, in connection
with an underwritten public offering, an underwriting agreement is executed
containing provisions covering indemnification among the partners thereto.
The Company has purchased insurance to insure (i) the Company's directors and
officers against damages from actions and claims incurred in the course of
their duties, and (ii) the Company against expenses incurred in defending
lawsuits arising from certain alleged acts of its directors and officers.
Pursuant to the Underwriting Agreement entered into by the Company in
connection with its initial public offering of Common Stock, the Underwriters
thereunder have agreed to indemnify the directors and officers of the Company
and certain other persons against certain civil liabilities.
ITEM 16. EXHIBITS
The following exhibits have been filed (except where otherwise indicated) as
part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
* 3.1 Restated Certificate of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
* 3.2 Amendment to Articles of Incorporation of the Company dated November
29, 1995. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
* 3.3 Amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of common stock from 20 million to 50
million shares and to delete the requirement that all preferred shares
have one vote per share. (Incorporated by reference to Exhibit 3.3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.)
* 3.4 ByLaws of the Company, as amended. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
* 4.1 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-
K for the fiscal year ended December 31, 1997.)
* 4.2 Rights Agreement, dated as of November 27, 1995 among Registrant and
Rights Agent. (Incorporated by reference to Exhibit (1) to the
Registrant's Current Report on Form 8-K dated November 27, 1995).
5.1 Opinion of Arnall Golden & Gregory, LLP.
23.1 Consents of Ernst & Young LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Arnall Golden & Gregory, LLP. (included in Exhibit 5.1)
24.1 Powers of Attorney.
</TABLE>
- --------
* previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant, or otherwise, the Securities and Exchange Commission has
informed the Registrant that such indemnification is against public policy as
expressed in the Act and is therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF KENNESAW, STATE OF GEORGIA ON MARCH 2, 1998.
Cryolife, Inc.
/s/ Steven G. Anderson
By: _________________________________
STEVEN G. ANDERSON
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND
CHAIRMAN OF THE BOARD OF DIRECTORS
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
PRINCIPAL EXECUTIVE, FINANCIAL & ACCOUNTING OFFICERS AND DIRECTORS:
NAME TITLE DATE
/s/ Steven G. Anderson President, Chief
- ------------------------------------- Executive Officer March 2, 1998
STEVEN G. ANDERSON and Chairman of the
Board of Directors
(Principal
Executive Officer)
/s/ Edwin B. Cordell, Jr. Vice President and
- ------------------------------------- Chief Financial March 2, 1998
EDWIN B. CORDELL, JR. Officer (Principal
Financial and
Accounting Officer)
* Director
- -------------------------------------
RONALD D. MCCALL
* Director
- -------------------------------------
BENJAMIN H. GRAY
* Director
- -------------------------------------
VIRGINIA C. LACY
* Director
- -------------------------------------
RONALD CHARLES ELKINS, M.D.
/s/ Edwin B. Cordell, Jr. March 2, 1998
*By: ___________________________
EDWIN B. CORDELL, JR.
ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
*3.1 Restated Certificate of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
*3.2 Amendment to Articles of Incorporation of the Company dated November
29, 1995. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
*3.3 Amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of common stock from 20 million to 50
million shares and to delete the requirement that all preferred shares
have one vote per share. (Incorporated by reference to Exhibit 3.3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.)
*3.4 ByLaws of the Company, as amended. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
*4.1 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-
K for the fiscal year ended December 31, 1997.)
*4.2 Rights Agreement, dated as of November 27, 1995 among Registrant and
Rights Agent. (Incorporated by reference to Exhibit (1) to the
Registrant's Current Report on Form 8-K dated November 27, 1995).
5.1 Opinion of Arnall Golden & Gregory, LLP.
23.1 Consents of Ernst & Young LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Arnall Golden & Gregory, LLP. (included in Exhibit 5.1)
24.1 Powers of Attorney
</TABLE>
- --------
* Previously filed
<PAGE>
EXHIBIT 1.1
CRYOLIFE, INC.
2,500,000 Shares
Common Stock
($0.01 Par Value)
UNDERWRITING AGREEMENT
___________________, 1998
<PAGE>
UNDERWRITING AGREEMENT
_________________, 1998
SBC WARBURG DILLON READ INC.
PIPER JAFFRAY INC.
as Managing Underwriters
c/o SBC WARBURG DILLON READ INC.
535 Madison Avenue
New York, New York 10022
Dear Sirs:
CryoLife Inc. (the "Company") proposes to issue and sell and the
persons named in Schedule B annexed hereto (the "Selling Shareholders") propose
to sell to the underwriters named in Schedule A annexed hereto (the
"Underwriters") an aggregate of 2,500,000 shares (the "Firm Shares") of Common
Stock, $0.01 par value per share (the "Common Stock"), of the Company, of which
________________ shares are to be issued and sold by the Company and an
aggregate of ________________ shares are to be sold by the Selling Shareholders
in the respective amounts set forth under the caption "Firm Shares" in Schedule
B annexed hereto. In addition, solely for the purpose of covering over-
allotments, the Company proposes to grant to the Underwriters the option to
purchase from the Company up to an additional 375,000 shares of Common Stock
(the "Additional Shares"). The Firm Shares and the Additional Shares are
hereinafter collectively sometimes referred to as the Shares. The Shares are
described in the Prospectus which is referred to below.
The Company has filed, in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively called the "Act"), with the Securities and Exchange Commission
(the "Commission") a registration statement (the "initial registration
statement") on Form S-3, including a prospectus, relating to the Shares, which
incorporates by reference documents which the Company has filed or will file in
accordance with the provisions of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder (collectively called the
"Exchange Act"). All of the Shares have been duly registered under the Act
pursuant to such initial registration statement or, if an additional
registration statement has been, or is proposed to be, filed pursuant to Rule
462(b) of the Act, all of the Shares have been or will be, on the date of this
Agreement, duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If an additional
registration statement has been, or is proposed to be, filed with the Commission
pursuant to Rule 462(b), such additional registration statement was or will be
prepared by the Company in conformity with the requirements of the Act, has
become or will become, on the date of this Agreement, effective under the Act
and copies thereof have been or will be, prior to or concurrently with, filing
with the Commission, delivered by the Company to you. As used in this
Agreement, "Effective Time" means the date and the time as of which the initial
registration statement, or the most recent post-effective amendment thereto, if
any, was declared effective by the Commission or has become effective upon
filing pursuant to Rule 462(c); "Effective Date" means the date of the Effective
<PAGE>
Time; the "Initial Registration Statement" means the initial registration
statement as amended as of the Effective Time, including any documents
incorporated by reference therein at such time and including (i) all portions of
any additional registration statement filed pursuant to Rule 462(b) under the
Act which are deemed to be a part of such initial registration statement and
(ii) all information contained in any final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section
5(c)(ii) hereof and deemed to be a part of such initial registration statement
as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and
Regulations; the "Rule 462(b) Registration Statement" means the additional
registration statement, if any, relating to the Common Stock and filed pursuant
to Rule 462(b) under the Act at the time it becomes effective pursuant to the
Rules and Regulations, including (i) the contents of the Initial Registration
Statement incorporated therein by reference and (ii) all information deemed to
be a part of such additional registration statement pursuant to paragraph (b) of
Rule 430A of the Rules and Regulations; and the "Registration Statements" means
the Initial Registration Statement and the Rule 462(b) Registration Statement,
if any. "Preliminary Prospectus" means each prospectus included in the initial
registration statement, or amendments thereof, before it became effective under
the Act and any prospectus filed with the Commission by the Company with your
consent pursuant to Rule 424(a) of the Act, and "Prospectus" means such final
prospectus, as first filed with the Commission pursuant to paragraph (1) or (4)
of Rule 424(b) of the Act or, if no such filing is required, the form of final
prospectus included in the Initial Registration Statement. Reference made
herein to any Preliminary Prospectus or to the Prospectus shall be deemed to
refer to and include any documents incorporated by reference therein pursuant to
Item 12 of Form S-3 under the Act, as of the date of such Preliminary Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to any Preliminary Prospectus or the Prospectus shall be deemed to
refer to and include any document filed under the Exchange Act after the date of
such Preliminary Prospectus or the Prospectus, as the case may be, and
incorporated by reference in such Preliminary Prospectus or the Prospectus, as
the case may be; and any reference to any amendment to a Registration Statement
shall be deemed to include any annual report of the Company filed with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act after the
Effective Time that is incorporated by reference in such Registration Statement.
The Company, the Selling Shareholders and the
Underwriters agree as follows:
1. Sale and Purchase. Upon the basis of the warranties and
-----------------
representations and the other terms and conditions herein set forth, the Company
and each of the Selling Shareholders, severally and not jointly, agree to sell
to the respective Underwriters and each of the Underwriters, severally and not
jointly, agrees to purchase from the Company and each Selling Shareholder the
respective number of Firm Shares (subject to such adjustment as you may
determine to avoid fractional shares) which bears the same proportion to the
number of Firm Shares to be sold by the Company or by such Selling Shareholders,
as the case may be, as the number of Firm Shares set forth opposite the name of
such Underwriter in Schedule A annexed hereto bears to the total number of Firm
Shares to be sold by the Company and the Selling Shareholders, in each case at a
purchase price of $____________ per Share. The Company and each Selling
Shareholder is advised by you that the Underwriters intend (i) to make a public
offering of their respective portions of the Firm Shares as soon after the
Effective Date as in your judgment is advisable and (ii) initially to offer the
Firm Shares upon the terms set forth in the Prospectus. You may from time to
time increase or decrease the public offering price after the initial public
offering to such extent as you may determine.
<PAGE>
In addition, the Company hereby grants to the several Underwriters the
option to purchase, and upon the basis of the warranties and representations and
the other terms and conditions herein set forth, the Underwriters shall have the
right to purchase, severally and not jointly, from the Company ratably in
accordance with the number of Firm Shares to be purchased by each of them
(subject to such adjustment as you shall determine to avoid fractional shares),
all or a portion of the Additional Shares as may be necessary to cover over-
allotments made in connection with the offering of the Firm Shares, at the same
purchase price per share to be paid by the Underwriters to the Company for the
Firm Shares. This option may be exercised at any time (but not more than once)
on or before the thirtieth day following the date hereof, by written notice to
the Company. Such notice shall set forth the aggregate number of Additional
Shares as to which the option is being exercised, and the date and time when the
Additional Shares are to be delivered (such date and time being herein referred
to as the "additional time of purchase"); provided, however, that the additional
-------- -------
time of purchase shall not be earlier than the time of purchase (as defined
below) nor earlier than the second business day* after the date on which the
option shall have been exercised nor later than the tenth business day after the
date on which the option shall have been exercised. The number of Additional
Shares to be sold to each Underwriter shall be the number which bears the same
proportion to the aggregate number of Additional Shares being purchased as the
number of Firm Shares set forth opposite the name of such Underwriter on
Schedule A hereto bears to the total number of Firm Shares (subject, in each
case, to such adjustment as you may determine to eliminate fractional shares).
Pursuant to powers of attorney, which shall be satisfactory to counsel
for the Underwriters, granted by each Selling Shareholder, Steven G. Anderson
and Edwin B. Cordell, Jr. will act as representatives of the Selling
Shareholders. The foregoing representatives (the "Representatives of the
Selling Shareholders") are authorized, on behalf of each Selling Shareholder, to
execute any documents necessary or desirable in connection with the sale of the
Shares to be sold hereunder by each Selling Shareholder, to make delivery of the
certificates of such Shares, to receive the proceeds of the sale of such Shares,
to give receipts for such proceeds, to pay therefrom the expenses to be borne by
each Selling Shareholder in connection with the sale and public offering of the
Shares, to distribute the balance of such proceeds to each Selling Shareholder
in proportion to the number of Shares sold by each Selling Shareholder, to
receive notices on behalf of each Selling Shareholder and to take such other
action as may be necessary or desirable in connection with the transactions
contemplated by this Agreement.
2. Payment and Delivery. Payment of the purchase price for the Firm
--------------------
Shares shall be made to the Company and one or both of the Representatives of
the Selling Shareholders (for the account of each Selling Shareholder) by check
or, if wire instructions are given on or prior to the time this Agreement is
executed, by wire transfer of immediately available funds, against delivery of
the certificates for the Firm Shares to you for the respective accounts of the
Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York
City time, on __________________, 1998 (unless another time shall be agreed to
by you, the Company and the Representatives of the Selling Shareholders or
unless postponed in accordance with the provisions of Section 10 hereof). The
time at which such payment and delivery are actually made is hereinafter
sometimes called the time of purchase. Certificates for the Firm Shares shall
be delivered to you in definitive form in such names and in such denominations
as you shall specify on the second business day preceding the time of purchase.
For the purpose of expediting the checking of the certificates for the Firm
Shares by you, the Company and the Selling Shareholders
- --------
* As used herein "business day" shall mean a day on which the New York Stock
Exchange is open for trading.
<PAGE>
agree to make such certificates available to you for such purpose at least one
full business day preceding the time of purchase.
Payment of the purchase price for the Additional Shares shall be made
at the additional time of purchase in the same manner as the payment for the
Firm Shares. Certificates for the Additional Shares shall be delivered to you
in definitive form in such names and in such denominations as you shall specify
on the second business day preceding the additional time of purchase. For the
purpose of expediting the checking of the certificates for the Additional Shares
by you, the Company agrees to make such certificates available to you for such
purpose at least one full business day preceding the additional time of
purchase.
3. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the Underwriters that:
(a) The Registration Statements, as of the Effective Date, and
Prospectus, and any further amendments or supplements thereto, fully
comply, or will fully comply, in all material respects with the provisions
of the Act, no part of a Registration Statement as of its effective date
will contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, as of its filing
date, will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no warranty
-------- -------
or representation with respect to any statement contained in a Registration
Statement or the Prospectus in reliance upon and in conformity with
information concerning the Underwriters and furnished in writing by or on
behalf of any Underwriter through you to the Company expressly for use in
the Registration Statements or the Prospectus; the documents incorporated
by reference in the Prospectus, at the time they were filed with the
Commission, complied in all material respects with the requirements of the
Exchange Act, and do not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; no document relating to the offering of the
Shares has been filed, or transmitted for filing, with the Commission,
unless previously delivered to you, and no document has been or will be
prepared, distributed or filed in reliance on Rule 434 under the Act. The
Company and the offering of the Shares meet the eligibility requirements
for the use of Form S-3.
(b) As of the date specified in such table, the Company had the
capitalization set forth under the heading entitled "Actual" in the section
of the Prospectus entitled "Capitalization" and, as of such date, on a pro
forma basis, giving effect to the sale of the Shares (including the
exercise of options and the partial conversion of the convertible debenture
described in a footnote to the table) and the application of the net
proceeds as contemplated in the Prospectus, the Company had the
capitalization set forth under the heading entitled "As Adjusted" in the
section of the Prospectus entitled "Capitalization"; between the date
specified in such table and the date of this Agreement, there has not been,
and from the date specified in such table until the time of purchase and
the additional time of purchase, as the case may be, there will not be (i)
any change in the number of shares of capital stock outstanding other than
shares of Common Stock issued pursuant to currently outstanding options or
(ii) any significant change in the amount of
<PAGE>
debt outstanding; all of the issued and outstanding shares of capital stock
including Common Stock of the Company have been duly and validly authorized
and issued and are fully paid and non-assessable; the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Florida, with full power and authority to
own its properties and conduct its business as described in the Prospectus,
to execute and deliver this Agreement and to issue and sell the Shares as
herein contemplated;
(c) The Company and each of its subsidiaries (the "Subsidiaries")
are duly qualified or licensed by and are in good standing in each
jurisdiction in which they conduct their respective businesses and in which
the failure, individually or in the aggregate, to be so licensed or
qualified could have a material adverse effect on the business, financial
condition or results of operations of the Company and its Subsidiaries,
taken as a whole; and the Company and each of its Subsidiaries are in
compliance with the laws, orders, rules, regulations and directives issued
or administered by such jurisdictions and for which the failure,
individually or in the aggregate, to be in compliance could have a material
adverse effect on the business, financial conditions or results of
operations of the Company and its Subsidiaries, taken as a whole;
(d) Neither the Company nor any of its Subsidiaries is in breach
of, or in default under (nor has any event occurred which with notice,
lapse of time, or both would constitute a breach by the Company or a
Subsidiary, or default by the Company or a Subsidiary under) its respective
charter or by-laws or, in a manner which could have a material adverse
effect on the financial condition or results of operations of the Company
and its Subsidiaries, taken as a whole, in the performance or observance of
any obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, bank loan or credit agreement or other
agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which any of them is bound, and the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not conflict with, or result in any breach of or
constitute a default under (nor constitute any event which with notice,
lapse of time, or both would constitute a breach of, or default under), any
provisions of the charter or by-laws of the Company or any of its
Subsidiaries or under any provision of any license, indenture, mortgage,
deed of trust, bank loan or credit agreement or other agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties may be bound or affected,
or under any federal, state, local or foreign law, regulation or rule or
any decree, judgment or order applicable to the Company or any of its
Subsidiaries;
(e) This Agreement has been duly authorized, executed and
delivered by the Company and is a legal, valid and binding agreement of the
Company enforceable in accordance with its terms;
(f) The Shares have been duly and validly authorized; the Shares
being sold by the Selling Shareholders, to the extent currently issued,
are, and the Shares being sold by the Company and the remaining Shares
being sold by the Selling Shareholders, when issued and delivered pursuant
to this Agreement, will be, duly and validly issued and fully paid and non-
assessable; the Shares conform to the description thereof contained in
<PAGE>
the Registration Statement and the Shares will conform to the description
thereof contained in the Prospectus;
(g) The capital stock of the Company, including the Shares,
conforms in all material respects to the description thereof contained in
the Prospectus, and the certificates for the Shares are in due and proper
form and the holders of the Shares will not be subject to personal
liability by reason of being such holders;
(h) No approval, authorization, consent or order of or filing
with any national, state or local governmental or regulatory commission,
board, body, authority or agency is required in connection with the
issuance and sale of the Shares as contemplated hereby other than
registration of the Shares under the Act, approval required from the New
York Stock Exchange (the "NYSE") and any necessary qualification under the
securities or blue sky laws of the various jurisdictions in which the
Shares are being offered by the Underwriters;
(i) Except as disclosed in the Prospectus, waived or satisfied,
no person has the right, contractual or otherwise, to cause the Company to
issue to it, or register pursuant to the Act, any shares of capital stock
of the Company upon the issue and sale of the Shares to the Underwriters
hereunder, nor does any person have preemptive rights, rights of first
refusal or other rights to purchase any of the Shares;
(j) Ernst & Young LLP, whose reports on the consolidated
financial statements of the Company and its Subsidiaries are filed with the
Commission as part of the Initial Registration Statement and Prospectus,
are independent public accountants as required by the Act and the
applicable published rules and regulations thereunder;
(k) KPMG Peat Marwick LLP, whose reports on the consolidated
financial statements of the Company and its Subsidiaries are filed with the
Commission as part of the Initial Registration Statement and Prospectus,
are independent public accountants as required by the Act and the
applicable published rules and regulations thereunder;
(l) Each of the Company and its Subsidiaries has all licenses,
authorizations, consents and approvals and has made all filings required
under any federal, state, local or foreign law, regulation or rule, and has
obtained all authorizations, consents and approvals from other persons, in
order to conduct its respective business, in all cases, at least to the
extent the failure of having, obtaining or making such license,
authorization, consent, approval or filing could, individually or in the
aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Company, and its Subsidiaries,
taken as a whole; neither the Company nor any of its Subsidiaries is in
violation of, or in default under, any license, authorization, consent or
approval or any federal, state, local or foreign law, regulation or rule or
any decree, order or judgment applicable to the Company or any of its
Subsidiaries the effect of which could have a material adverse effect on
the business, financial condition or results of operations of the Company
and its Subsidiaries taken as a whole;
(m) All legal or governmental proceedings, contracts or documents
of a character required to be described in a Registration Statement or the
Prospectus (including
<PAGE>
any document incorporated by reference) or to be filed as an exhibit to a
Registration Statement have been so described or filed as required;
(n) There are no actions, suits or proceedings pending or
threatened against the Company or any of its Subsidiaries or any of their
respective properties, at law or in equity, or before or by any federal,
state, local or foreign governmental or regulatory commission, board, body,
authority or agency which could result in a judgment, decree or order
having a material adverse effect on the business, financial condition or
results of operations of the Company and its Subsidiaries taken as a whole;
(o) The financial statements included in the Initial Registration
Statement and the Prospectus present fairly in all material respects the
consolidated financial position of the Company and its Subsidiaries as of
the dates indicated and the consolidated results of operations and changes
in financial position of the Company and its Subsidiaries for the periods
specified; such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
during the periods involved, except that unaudited financial statements do
not contain footnotes and are subject to normal year-end adjustments;
(p) The pro forma financial statements and other pro forma
financial information (including the notes thereto) included in the
Registration Statements and the Prospectus have been prepared in accordance
with the Commission's rules and guidelines with respect to pro forma
financial statements and have been properly computed on the basis described
therein. The assumptions used in the preparation of the pro forma
financial statements and other pro forma information in the Registration
Statements and the Prospectus are set forth therein and are believed to be
reasonable by the Company (based upon its consultations with its
independent public accountants about each of its assumptions underlying the
pro forma information), and the adjustments used therein are believed to be
appropriate by the Company (based upon its consultations with its
independent public accountants about each of its assumptions underlying the
pro forma information) to give pro forma effect to the transactions or
circumstances referred to therein. The pro forma financial and operating
information does not purport to represent what the Company's results of
operations would have been if the transactions described had in fact
occurred, nor does it purport to indicate the future financial position or
results of future operations of the Company. The other financial and
statistical information and data relating to the Company set forth in the
Registration Statements and the Prospectus have been prepared on a basis
consistent with the financial statements and books and records of the
Company;
(q) Subsequent to the respective dates as of which information is
given in the Registration Statements and Prospectus, and except as may be
otherwise stated therein, there has not been (A) any material and
unfavorable change, financial or otherwise, in the business, properties,
prospects, regulatory environment, results of operations or condition
(financial or otherwise), present or prospective, of the Company and its
Subsidiaries taken as a whole, (B) any transaction, which is material to
the Company and its Subsidiaries taken as a whole, contemplated or entered
into by the Company or any of its Subsidiaries or (C) any obligation,
contingent or otherwise, directly or indirectly incurred by the Company or
any of its Subsidiaries which is material to the Company and its
Subsidiaries taken as a whole;
<PAGE>
(r) Each of the Company and its Subsidiaries has good title to
all tangible properties and assets owned by it, in each case, except as set
forth in the Registration Statements and the Prospectus, free and clear of
all pledges, liens, encumbrances, security interests, charges, mortgages
and defects of title other than liens for taxes which taxes are not yet due
and payable, with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such properties and assets by
the Company and its Subsidiaries; the properties and assets leased by the
Company and its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such properties and
assets by the Company and its Subsidiaries;
(s) The Company has not violated any foreign, federal, state or
local law, regulation, decree, order, directive, requirement or judgment
applicable to the Company relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), nor any federal or state
law relating to discrimination in the hiring, promotion or pay of employees
nor any applicable federal or state wages and hours laws, nor any
provisions of the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder, which violation could have a material
adverse effect on the business, financial condition or results of
operations of the Company and the Company has not received any notice which
is pending alleging any violation thereof or liability thereunder;
(t) Each of the Company and its Subsidiaries has such permits,
licenses, consents, approvals, franchises and authorizations as are
required by federal, state, local, foreign or other governmental or
regulatory authorities ("Permits") and for which the failure to have such
permit, license, consent, approval, franchise or authorization,
individually or in the aggregate, could have a material adverse effect on
the business, financial condition or results of operations of the Company
and its Subsidiaries, taken as a whole. Each of the Company and its
Subsidiaries has made such filings as are required to own, lease and
operate its properties and to conduct its business and for which the
failure to have made such filing, individually or in the aggregate, could
have a material adverse effect on the business, financial condition or
results of operations of the Company and its Subsidiaries, taken as a
whole. Neither the Company nor any of its Subsidiaries is in violation of,
or has failed to fulfill or perform, any of its obligations with respect to
its Permits, which violation or failure, individually or in the aggregate,
could have a material adverse effect on the business, financial condition
or results of operations of the Company and its Subsidiaries, taken as a
whole. Neither the Company nor any Subsidiary has received notice from any
governmental authority of the revocation or termination, or threatened
revocation or termination, of any Permits or any other material impairment
of the rights of the holder of any Permit, which revocation, termination or
impairment, individually or in the aggregate, could have a material adverse
effect on the business, financial condition or results of operations of the
Company or its Subsidiaries, taken as a whole; and, except as described in
the Prospectus, the Permits contain no restrictions that are burdensome to
the Company or its Subsidiaries in a manner which could have a material
adverse effect on the business, financial condition or results of
operations of the Company and its Subsidiaries, taken as a whole;
(u) There is no claim pending or, to the best knowledge of the
<PAGE>
Company, threatened or contemplated under any Environmental Laws against
the Company which, if adversely determined, individually or in the
aggregate, could have a material adverse effect on the business, financial
condition or results of operations of the Company; there are no past or
present actions or conditions, including, without limitation, the release
of any hazardous substance or waste regulated under any Environmental Law
that are likely to form the basis of any such claim against the Company, if
adversely determined, individually or in the aggregate could have a
material adverse effect on the business, financial condition or results of
operations of the Company;
(v) Neither the Company, nor to the best of the Company's
knowledge, any employee of the Company has made any payment of funds of the
Company prohibited by law, and no funds of the Company have been set aside
to be used for any payment prohibited by law;
(w) The Company has filed all federal or state income and
franchise tax returns required to be filed and has paid all taxes shown
thereon as due, and there is no material tax deficiency which has been or
might be asserted against the Company; all material tax liabilities of the
Company are adequately provided for on the books of the Company;
(x) Neither the Company nor any of its affiliates has incurred
any liability for any finder's fees or similar payments in connection with
the transactions herein contemplated;
(y) Except as specifically disclosed in the Prospectus, the
Company and its Subsidiaries own, possess, have enforceable licenses to
use, or can acquire on terms which the Company believes will be
commercially reasonable, adequate rights to use all patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names
and copyrights (collectively, "Intellectual Property Rights") the absence
of which could have a materially adverse effect on the conduct of the
businesses of the Company and its Subsidiaries as described or contemplated
in the Registration Statements and Prospectus; neither the Company nor any
Subsidiary has received any notice of, or has knowledge of, any
infringement of or conflict with asserted rights of the Company or a
Subsidiary by others with respect to any Intellectual Property Rights;
neither the Company nor any Subsidiary has received any notice of, or has
knowledge of, any infringement of or conflict with asserted rights of
others with respect to any Intellectual Property Rights which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a material adverse effect on the business, financial
condition or results of operations of the Company and its Subsidiaries,
taken as a whole; and to the knowledge of the Company, none of the patents
owned by the Company or any of its Subsidiaries are unenforceable or
invalid. The Company has duly and properly filed or caused to be filed
with the United States Patent and Trademark Office (the "PTO") and
applicable foreign and international patent authorities all patent
applications described or referred to in the Prospectus, and the Company
believes it and each Subsidiary has complied with the PTO's duty of candor
and disclosure for each of the United States patent applications described
or referred to in the Prospectus; the Company is unaware of any facts which
would preclude the grant of a patent from each of the patent applications
described or referred to in the Prospectus; and the Company has no
knowledge of any facts which would preclude it or the applicable Subsidiary
from having clear title to patent applications described or referred
<PAGE>
to in the Prospectus;
(z) No labor disturbance by the employees of the Company exists
or, to the Company's knowledge, is imminent which could be expected to have
a material adverse effect on the business, financial condition or results
of operations of the Company. No collective bargaining agreements exists
with any of the Company's employees and, to the best of the Company's
knowledge, no such agreement is imminent;
(aa) The Company has made all material filings and received all
material regulatory authorizations necessary to conduct the Company's
business as it is currently conducted in any foreign countries, based on
all available information provided to the Company through the date hereof
by applicable regulatory authorities; the Company is not in violation of
any such regulatory authorizations, any of which violations could have a
material adverse effect on the business, financial condition or results of
operations of the Company and the Company has no reason to believe that any
party granting any such authorization is considering limiting, suspending
or revoking the same and knows of no basis for any such limitation,
suspension or revocation;
(ab) The Company has obtained agreements (which are subject to
certain exceptions previously agreed to by the Managing Underwriters) from
each of the Selling Shareholders and of each of its directors and officers
and certain of its other shareholders not to sell, contract to sell, grant
any option to sell or otherwise dispose of, directly or indirectly, any
shares of Common Stock or securities convertible into or exchangeable for
Common Stock or warrants or other rights to purchase Common Stock for a
period of 90 days after the date of the Prospectus;
(ac) Neither the Company nor any of its subsidiaries is, or will
be, after giving effect to the issuance and sale of the Shares by the
Company, an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of
1940, as amended; and
(ad) The Shares have been approved for listing on the New York
Stock Exchange subject to official notice of issuance.
4. Representations and Warranties of the Selling Shareholders. Each
----------------------------------------------------------
Selling Shareholder, severally and not jointly, represents and warrants to each
Underwriter that:
(a) Such Selling Shareholder is either the lawful owner of the
number of Shares to be sold by such Selling Shareholder pursuant to this
Agreement or is the lawful owner of securities convertible into or
exercisable for at least the number of Shares to be sold by such Selling
Shareholder, will be the lawful owner of the number of Shares to be sold by
such Selling Shareholder pursuant to this Agreement at the time of purchase
and will have valid and marketable title to such Shares at the time of
purchase; upon delivery of and payment for such Shares the Underwriters
will acquire valid and marketable title to such Shares free and clear of
any claim, lien, encumbrance, security interest, community property right,
restriction on transfer or other defect in title;
(b) Such Selling Shareholder has and at the time of delivery of
such Shares (whether the time of purchase or additional time of purchase,
as the case may be)
<PAGE>
will have, full legal right, power and capacity, and any approval required
by law (other than those imposed by the Act, the NYSE and the securities or
blue sky laws of certain jurisdictions), to sell, assign, transfer and
deliver such Shares in the manner provided in this Agreement;
(c) This Agreement and the Custody Agreement and Power-of-
Attorney among the Company, as custodian and the Selling Shareholders and
the Representatives of the Selling Shareholders (the "Custody Agreement")
have been duly executed and delivered by or on behalf of such Selling
Shareholder and each is a legal, valid and binding agreement of such
Selling Shareholder enforceable in accordance with its terms, subject to
the bankruptcy, insolvency, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors rights and to
general equitable principles;
(d) When each part of a Registration Statement became or will
become effective and at all times subsequent thereto through the latest of
the time of purchase or the termination of the offering of the Shares, the
Registration Statements and Prospectus, and any supplements or amendments
thereto will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading to the extent any statement or
omission relates to such Selling Shareholder;
(e) Such Selling Shareholder has duly and irrevocably authorized
the Representatives of the Selling Shareholders, on behalf of such Selling
Shareholder, to execute and deliver this Agreement and any other document
necessary or desirable in connection with the transactions contemplated
thereby and to deliver the Shares to be sold by such Selling Shareholder
and receive payment therefor pursuant hereto; and
(f) The sale of such Selling Shareholder's Shares pursuant to
this Agreement is not prompted by any information concerning the Company
which is not set forth in the Prospectus.
5. Certain Covenants of the Company. The Company hereby agrees:
--------------------------------
(a) To furnish such information as may be required and otherwise
to cooperate in qualifying the Shares for offering and sale under the
securities or blue sky laws of such states as you may designate and to
maintain such qualifications in effect so long as required for the
distribution of the Shares, provided that the Company shall not be required
to qualify as a foreign corporation or to consent to the service of process
under the laws of any such state (except service of process with respect to
the offering and sale of the Shares); and to promptly advise you of the
receipt by the Company of any notification with respect to the suspension
of the qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose;
(b) To make available to you in New York City, as soon as
practicable after the Initial Registration Statement becomes effective, and
thereafter from time to time to furnish to the Underwriters, as many copies
of the Prospectus (or of the Prospectus as amended or supplemented if the
Company shall have made any amendments or supplements thereto after the
Effective Date) as the Underwriters may reasonably request
<PAGE>
for the purposes contemplated by the Act;
(c) To advise you promptly and (if requested by you) to confirm
such advice in writing, (i) when a Registration Statement has become
effective and when any post-effective amendment thereto becomes effective
and (ii) if Rule 430A under the Act is used, when the Prospectus is filed
with the Commission pursuant to Rule 424(b) under the Act (which the
Company agrees to file in a timely manner under the Act);
(d) To advise you promptly, confirming such advice in writing, of
any request by the Commission for amendments or supplements to a
Registration Statement or the Prospectus or for additional information with
respect thereto, or of notice of institution of proceedings for, or the
entry of, a stop order suspending the effectiveness of a Registration
Statement and, if the Commission should enter a stop order suspending the
effectiveness of a Registration Statement, to make every reasonable effort
to obtain the lifting or removal of such order as soon as possible; to
advise you promptly of any proposal to amend or supplement a Registration
Statement or the Prospectus including by filing any documents that would be
incorporated therein by reference and to file no such amendment or
supplement to which you shall object in writing;
(e) To furnish to you and, upon request, to each of the other
Underwriters for a period of five years from the date of this Agreement (i)
copies of any reports or other communications which the Company shall send
to its shareholders or shall from time to time publish or publicly
disseminate, (ii) copies of all annual, quarterly and current reports filed
with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar form
as may be designated by the Commission and such other documents, if any, as
may be incorporated by reference into a registration statement, and (iii)
such other information as you may reasonably request regarding the Company
or its Subsidiaries;
(f) To advise the Underwriters promptly of the happening of any
event known to the Company within the time during which a prospectus
relating to the Shares is required to be delivered under the Act which, in
the judgment of the Company, would require the making of any change in the
Prospectus then being used, or in the information incorporated therein by
reference, so that the Prospectus would not include an untrue statement of
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they are
made, not misleading, and, during such time, to prepare and furnish, at the
Company's expense, to the Underwriters promptly such amendments or
supplements to such Prospectus as may be necessary to reflect any such
change and to furnish you a copy of such proposed amendment or supplement
before filing any such amendment or supplement with the Commission;
(g) To make generally available to its security holders, and to
deliver to you, an earnings statement of the Company (which need not be
audited but must satisfy the provisions of Section 11(a) of the Act or Rule
158 thereunder) covering a period of twelve months beginning after the
Effective Date, as soon as is reasonably practicable after the termination
of such twelve-month period and, in any event, not later than 45 days after
the end of the fiscal quarter in which the first anniversary of the
Effective Date falls;
(h) To furnish to you three manually signed copies of each
Registration Statement, as initially filed with the Commission, and of all
amendments thereto (including
<PAGE>
all exhibits thereto and documents incorporated by reference therein) and
sufficient conformed copies of the foregoing (other than exhibits) for
distribution of a copy to each of the other Underwriters; and to maintain
in the Company's files manually signed copies of such documents for at
least five years from the date of filing;
(i) To furnish to you as early as practicable prior to the time
of purchase and the additional time of purchase, as the case may be, but
not later than two business days prior thereto, a copy of the latest
available unaudited interim consolidated financial statements, if any, of
the Company and its Subsidiaries which have been read by the Company's
independent certified public accountants, as stated in their letter to be
furnished pursuant to Section 8(d) of this Agreement;
(j) To apply the net proceeds from the sale of the Shares in the
manner set forth under the caption "Use of Proceeds" in the Prospectus;
(k) To furnish to you, before filing with the Commission
subsequent to the Effective Date and during the period referred to in
paragraph (f) above, a copy of any document proposed to be filed by the
Company pursuant to Sections 13, 14 or 15(d) of the Exchange Act;
(l) Not to sell, contract to sell, grant any option to sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
securities convertible into or exchangeable for Common Stock or warrants or
other rights to purchase Common Stock or permit the registration under the
Act of any shares of Common Stock, except for the registration of the
Shares and the sales to the Underwriters pursuant to this Agreement and
except for issuances of Common Stock upon the exercise of outstanding
options, warrants and debentures, for a period of 90 days after the date
hereof, without the prior written consent of the Managing Underwriters;
provided, however, during such 90-day period, the Company may grant options
-------- -------
to purchase shares of Common Stock under the Company's existing stock
option plans from amounts currently reserved therefore and in amounts
consistent with past practice, so long as no such options are exercisable
during such 90-day period; and
(m) To use its best efforts to cause the Shares to be listed on
the New York Stock Exchange.
6. Certain Covenants of the Company and the Selling Shareholders.
-------------------------------------------------------------
The Company and each of the Selling Shareholders agree with each Underwriter as
follows:
(a) The Company will pay all expenses, fees and taxes (other than
any transfer taxes and fees and disbursements of counsel for the
Underwriters except as set forth under Section 7 hereof or (iii) or (iv)
below) in connection with (i) the preparation and filing of the
Registration Statement, each Preliminary Prospectus, the Prospectus, and
any amendments or supplements thereto, and the printing and furnishing of
copies of each thereof to the Underwriters and to dealers (including costs
of mailing and shipment), (ii) the issuance, sale and delivery of the
Shares by the Company and the Selling Shareholders, (iii) the word
processing and/or printing of this Agreement, any Agreement Among
Underwriters, any dealer agreements, any Statements of Information, the
Custody Agreement and the Powers of Attorney and the reproduction and/or
printing and
<PAGE>
furnishing of copies of each thereof to the Underwriters and to dealers
(including costs of mailing and shipment), (iv) the qualification of the
Shares for offering and sale under state laws and the determination of
their eligibility for investment under state law as aforesaid (including
the reasonable legal fees and filing fees and other disbursements of
counsel to the Underwriters) and the printing and furnishing of copies of
any blue sky surveys or legal investment surveys to the Underwriters and to
dealers, (v) any listing of the Shares on the NYSE and any registration
thereof under the Exchange Act, (vi) the filing for review of the public
offering of the Shares by the National Association of Securities Dealers,
Inc. (the "NASD"), and (vii) the performance of the Company's and the
Selling Shareholders' other obligations hereunder; and
(b) At the time of purchase, all transfer taxes that are required
to be paid in connection with the sale or transfer of Shares to the
Underwriters by each Selling Shareholder will be paid or provided for by
such Selling Shareholder.
7. Reimbursement of Underwriters' Expenses. If the Shares are not
---------------------------------------
delivered for any reason other than the termination of this Agreement pursuant
to the default by one or more of the Underwriters in its or their respective
obligations hereunder, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
their counsel.
8. Conditions of Underwriters' Obligations. The several obligations
---------------------------------------
of the Underwriters hereunder are subject to the accuracy of the representations
and warranties on the part of the Company and the Selling Shareholders on the
date hereof and at the time of purchase (and the several obligations of the
Underwriters at the additional time of purchase are subject to the accuracy of
the representations and warranties on the part of the Company and the Selling
Shareholders on the date hereof and at the time of purchase (unless previously
waived) and at the additional time of purchase, as the case may be), the
performance by the Company and the Selling Shareholders of their obligations
hereunder and to the following conditions:
(a) The Company shall furnish to you at the time of purchase and
at the additional time of purchase, as the case may be, an opinion of
Arnall Golden & Gregory, LLP, counsel for the Company, addressed to the
Underwriters, and dated the time of purchase or the additional time of
purchase, as the case may be, with reproduced copies for each of the other
Underwriters and in form satisfactory to Palmer & Dodge LLP, counsel for
the Underwriters, stating that:
(i) The Company has been incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Florida, with adequate corporate power and authority to own its
properties and conduct its business as described in the Prospectus, to
execute and deliver this Agreement and to issue, sell and deliver the
Shares as herein contemplated;
(ii) Each of the Subsidiaries has been incorporated and
is validly existing as a corporation in good standing under the laws
of its respective jurisdiction of incorporation with adequate
corporate power and authority to own its respective properties and to
conduct its respective business;
(iii) The Company and its Subsidiaries are qualified or
licensed
<PAGE>
and are in good standing in each jurisdiction in which they conduct
their respective businesses and in which they own or lease real
property or maintain an office, except where the failure to so qualify
or be licensed individually or in the aggregate, would not have a
material adverse effect on the business, financial condition or
results of operations of the Company;
(iv) This Agreement has been duly authorized, executed
and delivered by the Company;
(v) The Shares, when issued and delivered to and paid
for by the Underwriters, will be duly and validly authorized and
issued and will be fully paid and non-assessable;
(vi) The Company has an authorized capitalization as set
forth under the heading "Capitalization" in the Prospectus; the
outstanding shares of capital stock of the Company have been duly and
validly authorized and issued, and are fully paid, nonassessable and
free of statutory and contractual preemptive rights; the Shares when
issued will be free of statutory and contractual preemptive rights;
the certificates for the Shares are in due and proper form and the
holders of the Shares will not be subject to personal liability by
reason of being such holders;
(vii) The capital stock of the Company, including the
Shares, conforms in all material respects to the description thereof
contained in the Prospectus;
(viii) The Registration Statements and the Prospectus
(except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by reference
therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the requirements of the Act;
(ix) Each Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order
proceedings with respect thereto are pending or threatened under the
Act;
(x) No approval, authorization, consent or order of or
filing with any national, state or local governmental or regulatory
commission, board, body, authority or agency is required in connection
with the issuance and sale of the Shares as contemplated hereby other
than registration of the Shares under the Act, application to list
additional shares with the NYSE and qualification by brokers and
dealers under state securities or blue sky laws;
(xi) The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby do not and will not if consummated
on the date of this opinion conflict with, or result in any breach of,
or constitute a default under (nor constitute any event which with
notice, lapse of time, or both, would constitute a breach of or
default under), any provisions of the charter or by-laws of the
Company or any of its Subsidiaries or
<PAGE>
under any provision of any license, indenture, mortgage, deed of
trust, bank loan, credit agreement or other agreement or instrument
known to such counsel to which the Company or any of its Subsidiaries
is a party or by which any of them or their respective properties may
be bound or affected, or under any law, regulation or rule or any
decree, judgment or order applicable to the Company or any of its
Subsidiaries;
(xii) To such counsel's knowledge, neither the Company
nor any of its Subsidiaries is in breach of, or in default under (nor
has any event occurred which with notice, lapse of time, or both would
constitute a breach of, or default under), its charter or by-laws or,
in a manner which could have a material adverse effect on the
business, financial condition or results of operations of the Company
and its Subsidiaries, taken as a whole, any license, indenture,
mortgage, deed of trust, bank loan or any other agreement or
instrument to which the Company or any of its Subsidiaries is a party
or by which any of them or their respective properties may be bound or
affected or under any law, regulation or rule or any decree, judgment
or order applicable to the Company or any of its Subsidiaries;
(xiii) To such counsel's knowledge, there are no
contracts, licenses, agreements, leases or documents of a character
which are required to be filed as exhibits to a Registration Statement
(including any document incorporated by reference) or to be described
in any document incorporated by reference into the Prospectus or
required to be summarized or described in the Prospectus pursuant to
Item 11 of Form S-3 which have not been so filed, summarized or
described;
(xiv) To such counsel's knowledge, there are no actions,
suits or proceedings pending or threatened against the Company or any
of its Subsidiaries or any of their respective properties, at law or
in equity or before or by any commission, board, body, authority or
agency which are required to be described in any document incorporated
by reference into the Prospectus or required to be described in the
Prospectus pursuant to Item 11 of Form S-3 but are not so described;
(xv) The documents incorporated by reference in the
Registration Statements and Prospectus, when they were filed (or, if
an amendment with respect to any such document was filed when such
amendment was filed), complied as to form in all material respects
with the Exchange Act (except as to the financial statements and
schedules and other financial and statistical data contained or
incorporated by reference therein as to which such counsel need
express no opinion);
(xvi) The statements in the Prospectus relating to
requirements and procedures under the Federal Food, Drug and Cosmetic
Act or Food and Drug Administration regulations are accurate and
complete in all materials respects and present fairly matters set
forth therein;
(xvii) Such counsel has no actual knowledge of any
action, suit or
<PAGE>
proceeding pending or threatened by the FDA or other federal
regulatory authority, except in each case as described in the
Prospectus; and
In addition, such counsel shall state that such counsel
have participated in conferences with officers and other
representatives of the Company, representatives of the independent
public accountants of the Company and representatives of the
Underwriters at which the contents of the Registration Statements and
Prospectus were discussed and, although such counsel is not passing
upon and does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statements
or Prospectus (except as and to the extent stated in subparagraphs
(vi) and (vii) above), on the basis of the foregoing (relying as to
materiality to a large extent upon the opinions of officers and other
representatives of the Company) nothing has come to the attention of
such counsel that causes them to believe that the Initial Registration
Statement, including any documents incorporated therein by reference,
any 462(b) Registration Statement or any amendment to such
registration statements or documents, on the Effective Date, contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus or any supplement
thereto at the date of such Prospectus or such supplement, and at all
times up to and including the time of purchase or additional time of
purchase, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no opinion with
respect to the financial statements and schedules and other financial
and statistical data included in a Registration Statement or
Prospectus).
In rendering such opinion, such counsel may rely (to the extent such
counsel deems proper) as to matters specified in paragraphs (i) and (ii)
upon the opinion of Ronald D. McCall, Esq., or other counsel satisfactory
to counsel for the Underwriters.
(b) The Company shall furnish to you at the time of purchase and
at the additional time of purchase, as the case may be, opinions of patent
counsel for the Company, addressed to the Underwriters, and dated the time
of purchase or the additional time of purchase, as the case may be, with
reproduced copies for each of the other Underwriters and in form
satisfactory to Palmer & Dodge LLP, counsel for the Underwriters, stating
substantially the following:
(i) All patents and pending patent applications with
respect to which such counsel has provided legal representation and
all contracts with respect to which such counsel has provided legal
representation and pursuant to which the Company has rights to any
patents or pending patent applications are listed on Schedule A;
(ii) Based upon such counsel's (a) inquiry of the
Company's representatives responsible for patent matters, (b) such
counsel's review of the chain of title in the PTO of the Company's
United States patents and patent applications listed in Schedule A:
(i) the patents listed on Schedule A (the
<PAGE>
"Patents") and patent applications listed on Schedule A (the
"Applications") have been validly assigned to the Company and (ii)
except as indicated on Schedule A, the Company is listed as the sole
holder of record in the records of the PTO of each of the Patents and
each of the Applications. Such counsel knows of no claims of third
parties to any ownership interest or lien with respect to any of the
Patents or Applications and such counsel has no knowledge of any facts
which would preclude the Company from having clear title and
unencumbered right to the Patents and Applications. None of the
pending Applications has been abandoned;
(iii) To the best of such counsel's knowledge, the
Company has complied with the PTO's duty of candor and disclosure for
each of the United States Patents and Applications;
(iv) To the best of such counsel's knowledge, there are
no legal or governmental proceedings relating to the Company's patent
rights, other than PTO review of Applications or comparable foreign
proceedings, and to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or others. To the best of such counsel's knowledge, there is no
pending or threatened interference proceeding or public use proceeding
with respect to any Application;
(v) No facts have come to such counsel's attention that
cause such counsel to believe that any of the claims of the Patents or
Applications is unenforceable or invalid. To the best of such
counsel's knowledge, there is no pending action, suit, proceeding or
claim by others challenging the validity or enforceability of any
claim of the Patents;
(vi) Specified statements in the Prospectus which apply
to Patents and Applications, insofar as such statements constitute a
summary of legal matters, documents or proceedings, are accurate and
complete in all material respects and present fairly the matters set
forth therein; and
(vii) Such counsel is not aware of any action, claim or
proceeding pending or threatened against the Company that the Company
is infringing or otherwise violating any patents owned by others; such
counsel is not aware of any contractual rights granted by the Company
to third parties in respect to any of the Patents or Applications; and
such counsel has not been consulted by the Company regarding any
infringement by any third parties of any of the Patents.
In addition, such counsel shall state that no facts have
come to such counsel's attention which cause such counsel to believe
that specific statements in the Prospectus contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or as of the
date hereof, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in
order to make the statements therein in the light of the circumstances
under which they were made, not misleading.
(c) The Selling Shareholders shall furnish to you at the time of
<PAGE>
purchase and at the additional time of purchase, as the case may be, an
opinion of Arnall Golden & Gregory, LLP, counsel for the Selling
Shareholders, addressed to the Underwriters, and dated the time of purchase
or the additional time of purchase, as the case may be, with reproduced
copies for each of the other Underwriters, and in form and substance
satisfactory to Palmer & Dodge LLP, counsel for the Underwriters, stating
that:
(i) This Agreement and the Custody Agreement have been
duly executed and delivered by or on behalf of each of the Selling
Shareholders;
(ii) Each Selling Shareholder has adequate legal right
and power, and, to such counsel's knowledge, has not failed to obtain
any authorization or approval required by law (other than those
imposed by the Act and the securities or blue sky laws of certain
jurisdictions), to sell, assign, transfer and deliver the Shares to be
sold by such Selling Shareholder in the manner provided in this
Agreement;
(iii) Assuming the Underwriters are purchasers in good
faith without notice of any adverse claim, upon payment for and
delivery of the Shares to be sold by the Selling Shareholders in
accordance with this Agreement, the Underwriters will acquire all of
the rights of the Selling Shareholders in said Shares and will also
acquire interests in said Shares free of any adverse claim (within the
meaning of Section 8-302 of the Uniform Commercial Code).
(iv) Each of the Representatives of the Selling
Shareholders has been duly authorized by each Selling Shareholder to
execute and deliver on behalf of such Selling Shareholder this
Agreement and any other document necessary or desirable in connection
with the transactions contemplated hereby and to deliver the Shares to
be sold by such Selling Shareholder; and
(v) To such counsel's knowledge, the statements in the
Prospectus under the caption "Principal and Selling Shareholders"
insofar as such statements relate to such Selling Shareholders present
fairly the information with respect to such matters.
In rendering such opinion, Arnall Golden & Gregory, LLP
may rely upon the opinions of other counsel to the extent Arnall, Golden &
Gregory, LLP acknowledges such reliance in their opinion and states in
their opinion that they believe it is reasonable for both you and them to
rely upon such opinion or opinions.
(d) You shall have received from Ernst & Young LLP letters dated,
respectively, the date of this Agreement and the time of purchase and
additional time of purchase, as the case may be, and addressed to the
Underwriters (with reproduced copies for each of the Underwriters) in the
forms heretofore approved by the Managing
<PAGE>
Underwriters.
(e) You shall have received from KPMG Peat Marwick LLP letters
dated, respectively, the date of this Agreement and the time of purchase
and additional time of purchase, as the case may be, and addressed to the
Underwriters (with reproduced copies for each of the Underwriters) in the
forms heretofore approved by the Managing Underwriters.
(f) You shall have received at the time of purchase and at the
additional time of purchase, as the case may be, the favorable opinion of
Palmer & Dodge LLP, counsel for the Underwriters, dated the time of
purchase or the additional time of purchase, as the case may be, as to the
matters referred to in subparagraphs (iv), (v), (vii), (viii) and (ix) of
paragraph (a) of this Section 8.
In addition, such counsel shall state that such counsel have
participated in conferences with officers and other representatives of the
Company, counsel for the Company, representatives of the independent public
accountants of the Company and representatives of the Underwriters at which
the contents of the Registration Statements and Prospectus and related
matters were discussed and, although such counsel is not passing upon and
does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in a Registration Statement or the
Prospectus (except as to matters referred to under subparagraph (vii) of
paragraph (a) of this Section 8), on the basis of the foregoing (relying as
to materiality to a large extent upon the opinions of officers and other
representatives of the Company), no facts have come to the attention of
such counsel which lead them to believe that any part of a Registration
Statement or any amendment thereto at the time such part or amendment
became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus as of
its date or any supplement thereto as of its date contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no comment with respect to the
financial statements and schedules and other financial and statistical data
included in the Registration Statements or Prospectus).
(g) No amendment or supplement to a Registration Statement or the
Prospectus, including documents deemed to be incorporated by reference
therein, shall be filed prior to the time any 462(b) Registration Statement
becomes effective, or, if none, the Initial Registration Statement, to
which you object in writing, which objection shall be timely and
reasonable.
(h) The Initial Registration Statement shall become effective, or
if Rule 430A under the Act is used, the Prospectus shall have been filed
with the Commission pursuant to Rule 424(b) under the Act, at or before
5:00 P.M., New York City time, on the date of this Agreement, unless a
later time (but not later than 5:00 P.M., New York City time, on the second
full business day after the date of this Agreement) shall be agreed to by
the Company, the Representatives of the Selling Shareholders and you in
writing or by telephone, confirmed in writing; provided, however, that the
-------- -------
Company, the Representatives of the Selling Shareholders and you and any
group of Underwriters, including you, who have agreed hereunder to purchase
in the aggregate at least 50% of the Firm Shares may from time to time
agree on a later date. The Company agrees to file any additional
registration statement which is proposed to be filed pursuant to Rule
462(b) with the Commission, in accordance with the Rules and Regulations,
by 10:00 p.m., Eastern Standard Time or Eastern Daylight Savings Time,
whichever is currently in effect, on the date of this Agreement, and,
concurrently with or prior to filing such additional
<PAGE>
registration statement, to pay the associated filing fee or give
irrevocable instructions for payment in accordance with Rule 111(b) of the
Act.
(i) Prior to the time of purchase or the additional time of
purchase, as the case may be, (i) no stop order with respect to the
effectiveness of a Registration Statement shall have been issued under the
Act or proceedings initiated under Section 8(d) or 8(e) of the Act; (ii)
the Registration Statements and all amendments thereto, or modifications
thereof, if any, shall not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and (iii) the Prospectus and
all amendments or supplements thereto, or modifications thereof, if any,
shall not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they are
made, not misleading.
(j) Between the time of execution of this Agreement and the time
of purchase or the additional time of purchase, as the case may be, (i) no
material and unfavorable change, financial or otherwise (other than as
referred to in the Prospectus), in the business, condition or prospects of
the Company and its Subsidiaries taken as a whole shall occur or become
known and (ii) no transaction which is material and unfavorable to the
Company shall have been entered into by the Company or any of its
Subsidiaries.
(k) The Company will, at the time of purchase or additional time
of purchase, as the case may be, deliver to you a certificate of two of its
executive officers (including its agent for service of process) to the
effect that the representations and warranties of the Company as set forth
in this Agreement and the conditions set forth in paragraph (i) and
paragraph (j) have been met and that they are true and correct as of each
such date.
(l) You shall have received signed letters, dated on or prior to
the date of this Agreement, from each of the Selling Shareholders and each
of the directors and officers of the Company and certain of its other
shareholders to the effect that, subject to certain exceptions previously
agreed to by the Managing Underwriters, such persons shall not sell,
contract to sell, grant any option to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock of the Company or
securities convertible into or exchangeable for Common Stock or warrants or
other rights to purchase Common Stock for a period including the 90 days
after the date of the Prospectus without the prior written consent of SBC
Warburg Dillon Read Inc.
(m) The Company and the Selling Shareholders shall have furnished
to you such other documents and certificates as to the accuracy and
completeness of any statement in the Registration Statement and the
Prospectus as of the time of purchase and the additional time of purchase,
as the case may be, as you may reasonably request; provided no Selling
Shareholder shall be required to provide documents or certificates
regarding information unrelated to such Selling Shareholder and his, her or
its sales of Shares.
(n) The Company and the Selling Shareholders shall perform such
of their respective obligations under this Agreement as are to be performed
by the terms
<PAGE>
hereof at or before the time of purchase and at or before the additional
time of purchase, as the case may be.
(o) The Shares shall have been approved for listing on the New
York Stock Exchange, subject only to notice of issuance at or prior to the
time of purchase.
(p) The Selling Shareholders will at the time of purchase and the
additional time of purchase, as the case may be deliver to you a
certificate of the Representatives of the Selling Shareholders to the
effect that the representations and the warranties of the Selling
Shareholders as set forth in this Agreement are true and correct as of each
such date.
(q) Between the time of execution of this Agreement and the time
of purchase or additional time of purchase, as the case may be, there shall
not have occurred any downgrading, nor shall any notice have been given of
(i) any intended or potential downgrading or (ii) any review or possible
change that does not indicate an improvement, in the rating accorded any
securities of or guaranteed by the Company or any subsidiary of the Company
by any nationally recognized statistical rating organization.
9. Effective Date of Agreement; Termination. This Agreement shall become
----------------------------------------
effective (i) if Rule 430A under the Act is not used, when you shall have
received notification of the effectiveness of the Initial Registration
Statement, or (ii) if Rule 430A under the Act is used, when the parties hereto
have executed and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be subject to
termination in the absolute discretion of you or any group of Underwriters
(which may include you) which has agreed to purchase in the aggregate at least
50% of the Firm Shares, if, since the time of execution of this Agreement or the
respective dates as of which information is given in the Registration Statements
and Prospectus, (x) there has been any material adverse and unfavorable change,
financial or otherwise (other than as referred to in the Prospectus), in the
business, condition or prospects of the Company and its Subsidiaries taken as a
whole, which would, in your judgment or in the judgment of such group of
Underwriters, make it impracticable to market the Shares, or (y) there shall
have occurred any downgrading, or any notice shall have been given of (i) any
intended or potential downgrading or (ii) any review or possible change that
does not indicate an improvement, in the rating accorded any securities of or
guaranteed by the Company or any subsidiary of the Company by any nationally
recognized statistical rating organization or (z) if, at any time prior to the
time of purchase or, with respect to the purchase of any Additional Shares, the
additional time of purchase, as the case may be, trading in securities on the
New York Stock Exchange shall have been suspended or minimum prices shall have
been established on the New York Stock Exchange, or if a banking moratorium
shall have been declared either by the United States or New York State
authorities, or if the United States shall have declared war in accordance with
its constitutional processes or there shall have occurred any material outbreak
or escalation of hostilities or other national or international calamity or
crisis of such magnitude in its effect on the financial markets of the United
States as, in your judgment or in the judgment of such group of Underwriters, to
make it impracticable to market the Shares.
If you or any group of Underwriters elects to terminate this Agreement as
provided in this Section 9, the Company, the Representatives of the Selling
Shareholders and each other Underwriter shall be notified promptly by letter or
telegram.
<PAGE>
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company or the
Selling Shareholders, as the case may be, shall be unable to comply with any of
the terms of this Agreement, the Company or the Selling Shareholders, as the
case may be, shall not be under any obligation or liability under this Agreement
(except to the extent provided in Sections 6(a), 7 and 11 hereof), and the
Underwriters shall be under no obligation or liability to the Company and the
Selling Shareholders under this Agreement (except to the extent provided in
Section 11 hereof) or to one another hereunder.
10. Increase in Underwriters' Commitments. If any Underwriter shall
-------------------------------------
default in its obligation to take up and pay for the Firm Shares to be purchased
by it hereunder and if the number of Firm Shares which all Underwriters so
defaulting shall have agreed but failed to take up and pay for does not exceed
10% of the total number of Firm Shares, the non-defaulting Underwriters shall
take up and pay for (in addition to the aggregate principal amount of Firm
Shares they are obligated to purchase pursuant to Section 1 hereof) the number
of Firm Shares agreed to be purchased by all such defaulting Underwriters, as
hereinafter provided. Such Shares shall be taken up and paid for by such non-
defaulting Underwriter or Underwriters in such amount or amounts as you may
designate with the consent of each Underwriter so designated or, in the event no
such designation is made, such Shares shall be taken up and paid for by all non-
defaulting Underwriters pro rata in proportion to the aggregate number of Firm
Shares set opposite the names of such non-defaulting Underwriters in Schedule A.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company and the Selling Shareholders agree with the non-
defaulting Underwriters that they will not sell any Firm Shares hereunder unless
all of the Firm Shares are purchased by the Underwriters (or by substituted
Underwriters selected by you with the approval of the Company or selected by the
Company with your approval, which approval will not be unreasonably withheld or
delayed).
If a new Underwriter or Underwriters are substituted by the Underwriters or
by the Company for a defaulting Underwriter or Underwriters in accordance with
the foregoing provision, the Company or you shall have the right to postpone the
time of purchase for a period not exceeding five business days in order that any
necessary changes in the Registration Statements and Prospectus and other
documents may be effected.
The term Underwriter as used in this agreement shall refer to and include
any Underwriter substituted under this Section 10 with like effect as if such
substituted Underwriter had originally been named in Schedule A.
11. Indemnity by the Company, the Selling Shareholders and the
----------------------------------------------------------
Underwriters.
- ------------
(a) The Company and the Selling Shareholders jointly and severally agree to
indemnify, defend and hold harmless each Underwriter, its directors and
officers, and any person who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, from and against any
loss, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, any such Underwriter or any such
person may incur under the Act, the Exchange Act or otherwise insofar as such
loss, expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material
<PAGE>
fact contained in a Registration Statement (or in a Registration Statement as
amended by any post-effective amendment thereof by the Company) or in a
Prospectus (the term Prospectus for the purpose of this Section 11 being deemed
to include any Preliminary Prospectus, the Prospectus and the Prospectus as
amended or supplemented by the Company), or arises out of or is based upon any
omission or alleged omission to state a material fact required to be stated in
either the Registration Statement or the Prospectus or necessary to make the
statements made therein not misleading, except insofar as any such loss,
expense, liability or claim arises out of or is based upon any untrue statement
or alleged untrue statement of a material fact contained in and in conformity
with information furnished in writing by any Underwriter through you to the
Company expressly for use with reference to such Underwriter in such
Registration Statement or such Prospectus or arises out of or is based upon any
omission or alleged omission to state a material fact in connection with such
information required to be stated in either such Registration Statement or
Prospectus or necessary to make such information not misleading, provided,
--------
however, that the indemnity agreement contained in this subsection (a) with
- -------
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) from
whom the person asserting any such loss, expense, liability or claim purchased
the Shares which is the subject thereof if the Prospectus corrected any such
alleged untrue statement or omission and if such Underwriter failed to send or
give a copy of the Prospectus to such person at or prior to the written
confirmation of the sale of such Shares to such person; provided, further, that
-------- -------
no Selling Shareholder shall be responsible, either pursuant to this indemnity
or as a result of any breach of this Agreement, for losses, expenses, liability
or claims arising out of or based upon such untrue statement or omission or
allegation thereof based upon information furnished by any party other than such
Selling Shareholder and, in any event, no Selling Shareholder shall be
responsible, either pursuant to this indemnity or as a result of any breach of
this Agreement, for losses, expenses, liability or claims for an amount in
excess of the proceeds to be received by such Selling Shareholder (before
deducting expenses) from the sale of Shares hereunder.
If any action is brought against an Underwriter or any such person in
respect of which indemnity may be sought against the Company or any Selling
Shareholder pursuant to the foregoing paragraph, such Underwriter or such person
shall promptly notify the Company and the Representatives of the Selling
Shareholders in writing of the institution of such action and the Company or
such Selling Shareholder, as the case may be, shall assume the defense of such
action, including the employment of counsel reasonably satisfactory to such
indemnified party and payment of all fees and expenses, provided, however, that
the omission to so notify the Company or the Representative of the Selling
Shareholders shall not relieve the Company or any Selling Shareholder from any
liability which they may have to any Underwriter or any such person or
otherwise. Such Underwriter or such controlling person shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such Underwriter or of such person
unless the employment of such counsel shall have been authorized in writing by
the Company or such Selling Shareholder in connection with the defense of such
action or the Company or such Selling Shareholder shall not have employed
counsel to have charge of the defense of such action or such indemnified party
or parties shall have reasonably concluded that there may be defenses available
to it or them which are different from or additional to those available to the
Company or such Selling Shareholder (in which case the Company or such Selling
Shareholder shall not have the right to direct the defense of such action on
behalf of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by the Company or such Selling Shareholder, as the
case may be, and paid as incurred (it being understood, however, that the
Company or such Selling Shareholder
<PAGE>
shall not be liable for the expenses of more than one separate counsel in any
one action or series of related actions in the same jurisdiction representing
the indemnified parties who are parties to such action). The Company or such
Selling Shareholder shall not be liable for any settlement of any such claim or
action effected without its written consent but if settled with the written
consent of the Company or such Selling Shareholder, the Company or such Selling
Shareholder agrees to indemnify and hold harmless any Underwriter and any such
person from and against any loss or liability by reason of such settlement. The
first clause of the foregoing sentence shall not be applicable if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
sentence of this paragraph and (i) such settlement is entered into more than 60
business days after receipt by such indemnifying party of the aforesaid request,
(ii) such indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement and (iii) such
indemnified party shall have given the indemnifying party at least 30 days'
prior notice of its intention to settle; in such a situation the indemnifying
party agrees that it shall be liable for any settlement of any proceeding
effected without its written consent. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(b) Each Underwriter severally agrees to indemnify, defend and hold
harmless the Company, its directors and officers, each Selling Shareholder and
any person who controls the Company or any Selling Shareholder within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act from and
against any loss, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, the Company, any Selling Shareholder
or any such person may incur under the Act or otherwise, insofar as such loss,
expense, liability or claim arises out of or is based upon any untrue statement
or alleged untrue statement of a material fact contained in and in conformity
with information furnished in writing by or on behalf of such Underwriter
through you to the Company expressly for use with reference to such Underwriter
in a Registration Statement (or in a Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus, or arises
out of or is based upon any omission or alleged omission to state a material
fact in connection with such information required to be stated either in such
Registration Statement or Prospectus or necessary to make such information not
misleading.
If any action is brought against the Company, any Selling Shareholder or
any such person in respect of which indemnity may be sought against any
Underwriter pursuant to the foregoing paragraph, the Company, such Selling
Shareholder or such person shall promptly notify such Underwriter in writing of
the institution of such action and such Underwriter shall assume the defense of
such action, including the employment of counsel reasonably satisfactory to such
indemnified party and payment of all fees and expenses, provided, however, that
the omission to so notify such Underwriter shall not relieve such Underwriter,
from any liability which they may have to the Company, any Selling Shareholder
or any such person or otherwise. The Company, such Selling Shareholder or such
person shall have the right to employ its own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of the Company, such
Selling Shareholder or such person unless the employment of such counsel shall
have been authorized in writing by such Underwriter in connection with the
defense of such action or such Underwriter shall not have employed counsel to
have charge of the defense of such action
<PAGE>
or such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from or additional
to those available to such Underwriter (in which case such Underwriter shall not
have the right to direct the defense of such action on behalf of the indemnified
party or parties, but such Underwriter may employ counsel and participate in the
defense thereof but the fees and expenses of such counsel shall be at the
expense of such Underwriter), in any of which events such fees and expenses
shall be borne by such Underwriter and paid as incurred (it being understood,
however, that such Underwriter shall not be liable for the expenses of more than
one separate counsel in any one action or series of related actions in the same
jurisdiction representing the indemnified parties who are parties to such
action). No Underwriter shall be liable for any settlement of any such claim or
action effected without the written consent of such Underwriter but if settled
with the written consent of such Underwriter, such Underwriter agrees to
indemnify and hold harmless the Company, any Selling Shareholder and any such
person from and against any loss or liability by reason of such settlement. The
first clause of the foregoing sentence shall not be applicable if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
sentence of this paragraph; and (i) such settlement is entered into more than 60
business days after receipt by such indemnifying party of the aforesaid request,
(ii) such indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement and (iii) such
indemnified party shall have given the indemnifying party at least 30 days'
prior notice of its intention to settle; in such a situation the indemnifying
party agrees that it shall be liable for any settlement of any proceeding
effected without its written consent. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(c) If the indemnification provided for in this Section 11 is unavailable
to an indemnified party under subsections (a) and (b) of this Section 11 in
respect of any losses, expenses, liabilities or claims referred to therein, then
each applicable indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, expenses, liabilities or claims (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Shareholders on
the one hand and of the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, expenses, liabilities or
claims, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and the
Selling Shareholders bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the Company and the Selling
Shareholders on the one hand and of the Underwriters on the other shall be
determined by reference to, among other things, whether the untrue statement or
alleged untrue statement of a material fact or omission or alleged omission
relates to information supplied by the Company, by the Selling Shareholders or
by the Underwriters and the parties' relative intent, knowledge, access
<PAGE>
to information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, expenses,
liabilities and claims referred to above shall be deemed to include any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any claim or action.
(d) The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
11 were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in subsection (c)
above. Notwithstanding the provisions of this Section 11, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by such Underwriter and distributed to
the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue
statements or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriter's obligations to
contribute pursuant to this Section 11 are several in proportion to their
respective underwriting commitments and not joint.
(e) The indemnity and contribution agreements contained in this
Section 11 and the covenants, warranties and representations of the Company and
the Selling Shareholders contained in this Agreement shall remain in full force
and effect regardless of any investigation made by or on behalf of any
Underwriter, its directors and officers or any person who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, or by or on behalf of the Company, its directors and officers, any
Selling Shareholder or any person who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and shall survive any
termination of this Agreement or the issuance and delivery of the Shares. The
Company, each Selling Shareholder and each Underwriter agree promptly to notify
the others of the commencement of any litigation or proceeding against it and,
in the case of the Company, against any of the Company's officers and directors
in connection with the issuance and sale of the Shares, or in connection with
the Registration Statement or Prospectus.
12. Notices. Except as otherwise herein provided, all statements,
-------
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
SBC Warburg Dillon Read Inc., 535 Madison Avenue, New York, N.Y. 10022,
Attention: Syndicate Department, if to the Company, shall be sufficient in all
respects if delivered or sent to the Company at the offices of the Company at
1655 Roberts Boulevard, N.W., Kennesaw, Georgia 30144, Attention: Chief
Financial Officer and, if to any of the Selling Shareholders, shall be
sufficient in all respects if delivered or sent to the Representatives of the
Selling Shareholders at 1655 Roberts Boulevard, N.W., Kennesaw, Georgia 30144,
Attention: Edwin B. Cordell, Jr.
13. Construction. This Agreement shall be governed by, and construed in
------------
accordance with, the laws of the State of New York. The Section headings in
this Agreement have been inserted as a matter of convenience of reference and
are not a part of this Agreement.
14. Submission to Jurisdiction. The Company irrevocably submits to the
--------------------------
nonexclusive jurisdiction of any State or Federal court sitting in New York over
any suit, action or
<PAGE>
proceeding arising out of or relating to this agreement. The Company irrevocably
waives, to the fullest extent permitted by law, any objection it may now or
thereafter have to the laying of venue of any such court and any claim that any
such suit, action or proceeding brought in such a court has been brought in an
inconvenient forum. The Company agrees that a final judgment in any such suit,
action or proceeding brought in any such court shall be conclusive and binding
upon the Company and may be enforced in any other court to the jurisdiction of
which the Company is or may be subject, by suit upon such judgment.
15. Parties at Interest. The Agreement herein set forth has been and is
-------------------
made solely for the benefit of the Underwriters, the Company, the Selling
Shareholders and the controlling persons, directors and officers referred to in
Section 11 hereof, and their respective successors, assigns, executors and
administrators. No other person, partnership, association or corporation
(including a purchaser, as such purchaser, from any of the Underwriters) shall
acquire or have any right under or by virtue of this Agreement.
16. Counterparts. This agreement may be signed by the parties in
------------
counterparts which together shall constitute one and the same agreement among
the parties.
17. Miscellaneous. SBC Warburg Dillon Read Inc., an indirect, wholly
-------------
owned subsidiary of Swiss Bank Corporation, is not a bank and is separate from
any affiliated bank, including any U.S. branch or agency of Swiss Bank
Corporation. Because SBC Warburg Dillon Read Inc. is a separately incorporated
entity, it is solely responsible for its own contractual obligations and
commitments, including obligations with respect to sales and purchases of
securities. Securities sold, offered or recommended by SBC Warburg Dillon Read
Inc. are not deposits, are not insured by the Federal Deposit Insurance
Corporation, are not guaranteed by a branch or agency, and are not otherwise an
obligation or responsibility of a branch or agency.
A lending affiliate of SBC Warburg Dillon Read Inc. may have lending
relationships with issuers of securities underwritten or privately placed by SBC
Warburg Dillon Read Inc. To the extent required under the securities laws,
prospectuses and other disclosure documents for securities underwritten or
privately placed by SBC Warburg Dillon Read Inc. will disclose the existence of
any such lending relationships and whether the proceeds of the issue will be
used to repay debts owed to affiliates of SBC Warburg Dillon Read Inc.
On December 8, 1997, Swiss Bank Corporation announced its intention to
merge with Union Bank of Switzerland. References in this document to Swiss Bank
Corporation include references to its successor entity following completion of
the merger.
References to the parties include references to their successors,
including, without limitation, an entity which assumes the rights and
obligations of the relevant party by operation of the law of the jurisdiction of
incorporation or domicile of such party.
If the foregoing correctly sets forth the understanding among the Company,
the Selling Shareholders and the Underwriters, please so indicate in the space
provided below for the purpose, whereupon this letter and your acceptance shall
constitute a binding agreement among the Company, the Selling Shareholders and
the Underwriters, severally.
<PAGE>
Very truly yours,
CRYOLIFE, INC.
By:
Title:
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE B ATTACHED HERETO
By:
Attorney-in-Fact
Accepted and agreed to as of the date first above written, on behalf of
themselves and the other several Underwriters named in Schedule A
SBC WARBURG DILLON READ INC.
PIPER JAFFRAY INC.
By: SBC WARBURG DILLON READ INC.
By:
Title:
By:
Title:
<PAGE>
SCHEDULE A
Number of
Underwriter Firm Shares
- ----------- -----------
Total
<PAGE>
SCHEDULE B
Number of
Selling Shareholders Firm Shares
- -------------------- -----------
Total
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF ARNALL GOLDEN & GREGORY, LLP APPEARS HERE]
March 3, 1998
CryoLife
1655 Roberts Boulevard, N.W.
Kennesaw, Georgia 30144
Re: Registration Statement on Form S-3 (Registration No. 333-46545)
---------------------------------------------------------------
Gentlemen:
This opinion is rendered in connection with the proposed issue and sale
by CryoLife, Inc., a Florida corporation (the "Company"), and certain selling
shareholders of the Company ("Selling Shareholders"), of up to 2,875,000 shares
(including an over-allotment for up to 375,000 shares) of the Company's Common
stock, $.01 par value (the "Shares"), upon the terms and conditions set forth in
Registration Statement on Form S-3 (the "Registration Statement") bearing file
number 333-46545 filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. We have acted as
counsel for the Company and the Selling Shareholders in connection with the
issuance and sale of up to 2,638,000 Shares (including the over-allotment) by
the Company (the "Company's Shares") and the sale of up to 237,000 Shares by the
Selling Shareholders (the "Selling Shareholders' Shares").
In rendering the opinion contained herein, we have relied in part upon
examination of the Company's corporate records, documents, certificates and
other instruments and an examination of such questions of law as we have
considered necessary or appropriate for the purpose of this opinion. Based upon
the foregoing, we are of the opinion that (1) the Company's Shares have been
duly and validly authorized and, when sold in the manner contemplated by the
underwriting agreement (the "Underwriting Agreement") filed as an exhibit to the
Registration Statement, and upon receipt by the Company of payment therefor as
provided in the Underwriting Agreement, the Company's Shares will be legally
issued, fully paid and nonassessable; and (2) the Selling Shareholder's Shares
have been duly and validly authorized and, when sold in the manner contemplated
in the Underwriting Agreement, and upon receipt of payment therefor as provided
in the Underwriting Agreement, the Selling Shareholders' Shares will be legally
issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement (and any additional registration statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, at or before
10:00 p.m. EST on the date such Registration Statement becomes effective) and to
the reference to this firm under the caption "Legal Matters" in the Prospectus
contained therein. This consent is not to be construed as an admission that we
are a party whose consent is required to be filed with the Registration
Statement under the provisions of the Securities Act of 1933, as amended.
Sincerely,
/s/ Arnall Golden & Gregory, LLP
ARNALL GOLDEN & GREGORY, LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 9, 1998, in Amendment No. 1 to the Registration Statement (Form S-3,
333-46545) and related Prospectus of CryoLife, Inc. and any additional
Registration Statement filed pursuant to Rule 462(b) of the Securities Act of
1933 at or before 10:00 pm EST on the date the Registration Statement referred
to above becomes effective.
/s/ Ernst & Young LLP
--------------------
Ernst & Young LLP
Atlanta, Georgia
March 2, 1998
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 5, 1997 with respect to the financial
statements of Ideas for Medicine, Inc. included in Amendment No. 1 to the
Registration Statement (Form S-3, 333-46545) and related Prospectus of CryoLife,
Inc. and any additional Registration Statement filed pursuant to Rule 462(b) of
the Securities Act of 1933 at or before 10:00 pm EST on the date the
Registration Statement referred to above becomes effective.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Atlanta, Georgia
March 2, 1998
<PAGE>
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors
CryoLife, Inc.
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 2, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Steven G. Anderson and Edwin B. Cordell, Jr. and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Form S-3 Registration Statement filed by
CryoLife, Inc. with the Securities and Exchange Commission on February 19, 1998
registering 2,875,000 shares of common stock, and any related registration
statement filed pursuant to Rule 462 promulgated pursuant to the Securities Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, including any related registration statement filed under
Rule 462(b), with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or either of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 18th day of February, 1998.
/s/ Ronald D. McCall
-----------------------------------
Ronald D. McCall
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Steven G. Anderson and Edwin B. Cordell, Jr. and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Form S-3 Registration Statement filed by
CryoLife, Inc. with the Securities and Exchange Commission on February 19, 1998
registering 2,875,000 shares of common stock, and any related registration
statement filed pursuant to Rule 462 promulgated pursuant to the Securities Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, including any related registration statement filed under
Rule 462(b), with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or either of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 18th day of February, 1998.
/s/ Benjamin H. Gray
-----------------------------------
Benjamin H. Gray
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Steven G. Anderson and Edwin B. Cordell, Jr. and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Form S-3 Registration Statement filed by
CryoLife, Inc. with the Securities and Exchange Commission on February 19, 1998
registering 2,875,000 shares of common stock, and any related registration
statement filed pursuant to Rule 462 promulgated pursuant to the Securities Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, including any related registration statement filed under
Rule 462(b), with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or either of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 18th day of February, 1998.
/s/ Virginia C. Lacy
-----------------------------------
Virginia C. Lacy
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Steven G. Anderson and Edwin B. Cordell, Jr. and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Form S-3 Registration Statement filed by
CryoLife, Inc. with the Securities and Exchange Commission on February 19, 1998
registering 2,875,000 shares of common stock, and any related registration
statement filed pursuant to Rule 462 promulgated pursuant to the Securities Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, including any related registration statement filed under
Rule 462(b), with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or either of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 18th day of February, 1998.
/s/ Ronald Charles Elkins, M.D.
---------------------------------------
Ronald Charles Elkins, M.D.
