FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13165
CRYOLIFE, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2417093
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1655 Roberts Boulevard N.W., Kennesaw, GA 30144
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (770) 419-3355
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
Common Stock, $.01 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $119,519,000 at March 25, 1999 (10,743,292 shares).
The number of common shares outstanding at March 25, 1999 was
12,415,991(exclusive of treasury shares).
Documents Incorporated By Reference
Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be filed not later than April 30, 1999.
<PAGE>
PART I
Item 1. Business.
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 70% of the
cryopreserved human tissue implanted in the U.S. in 1998. 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 two novel
design stentless porcine heart valves currently marketed in the European
Community. The Company also develops proprietary implantable surgical
bioadhesives, including BioGlue(R) surgical adhesive, which it began
commercializing for vascular applications within the European Community in April
1998. In addition, the Company serves as an Original Equipment Manufacturer
("OEM") manufacturer, through its Ideas For Medicine, Inc. ("IFM") subsidiary,
of single-use medical devices for use in vascular surgical procedures.
CryoLife processes and distributes for transplantation cryopreserved human heart
valves and conduits, human vascular tissue and human connective tissue for the
knee. 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. 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 has developed and markets outside of the U.S. bioprosthetic
cardiovascular devices for implantation, 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 or mechanical
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(R) 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's CryoLife-Ross
pulmonary heart valve, another of the Company's fixed stentless porcine valves,
is also marketed in the European Community and certain territories outside the
U.S. The Company plans to apply its proprietary SynerGraft(R) technology to some
of 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 have been $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,peripheral vascular and pulmonary applications, is a polymer
based on a derivative of a blood protein and a cross linking agent. The
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Company's patent protected FibRx(R) 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 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 1998 was in excess of $2 billion. The Company received CE
Mark Certification in 1998 for use of its BioGlue surgical adhesive in vascular
applications and began marketing this product in April 1998 in the European
Community. In 1998, the Company engaged a firm to provide financial advisory
services in connection with a potential private placement of up to $30 million
in equity or equity-oriented securities to form a minority-owned subsidary
company, AuraZyme Pharmaceuticals, LLC (AuraZyme), for the commercial
development of its photo-activated reversible inhibitor technology (FibRx),
including the FibRx adhesive. Such strategy is designed to allow the Company to
continue development of this technology without incurring additional research
and development expenditures, other than through Aurazyme, and allow the Company
to focus its resources on the commercial development of its surgical adhesive
and other products under development.
Prior to October 1, 1998 CryoLife manufactured and distributed, 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. On September 30, 1998, the Company sold substantially all of its IFM
product line to Horizon Medical Products, Inc. ("Horizon") pursuant to an asset
purchase agreement. As part of this agreement, the Company committed to continue
manufacturing the IFM product line as an OEM manufacturer of such products for
Horizon for four years. 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.
An example of such a device under development includes a family of balloon
catheters designed to assist in applying BioGlue surgical adhesive.
In the U.S., the Company markets its cryopreservation services for human heart
valves and conduits and human vascular tissue through its direct technical
service representatives and relies on independent orthopaedic sales
representatives to market its cryopreservation services for human connective
tissue for the knee. Internationally, cryopreserved human tissues, bioprosthetic
cardiovascular devices and BioGlue surgical adhesive 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, if approved for sale in the U.S., through its direct
technical service representatives.
Growth Strategy
The Company's primary objective is to continue its consistent growth in revenues
and profitability. 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.
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 (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.
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- 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. In 1997, the Company began 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 recently begun providing cryopreserved
posterior tibialis and anterior tibialis tendons for use in knee
repairs, and preserved human osteochondral grafts to repair articular
defects. The Company is also investigating 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 has expanded 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 stentless porcine heart valves 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 began
commercializing its patent protected BioGlue surgical adhesive in the
European Community through its existing independent representatives
and in April 1998 received approval under an Investigational Device
Exemption (IDE) to conduct clinical trials for BioGlue surgical
adhesive in the U.S. The Company has formed a minority-owned
subsidiary to raise equity or equity-related capital in order 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 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 modified single and
double lumen balloon catheters for use in delivering the Company's
implantable bioadhesives.
4
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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.
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
35,000 cryopreserved human heart valves and conduits from 1984 through 1998.
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.
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 5,500
human heart valves and conduits cryopreserved by the Company were shipped for
implantation in 1998.
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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 Mechanical Pericardium
------------- ---------- ------------
Stented Stentless(1)
------- ------------
<S> <C> <C> <C> <C> <C>
Materials: human tissue Glutaraldehyde- pyrolitic carbon Glutaraldehyde-
Fixed pig tissue bi-leaflet and fixed cow tissue
Synthetic glutaraldehyde- synthetic and synthetic
sewing ring fixed pig tissue sewing ring sewing ring
---------------- ---------------- ----------------- ----------------
Blood Flow Dynamics: normal moderate nearly normal high elevation high
elevation elevation
(Required Pressure) (2) (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.: $7,000 $4,228 $5,500 $4,100(3) $4,500
</TABLE>
(1) Limited long-term clinical data is available since stentless porcine heart
valves only recently became commercially available.
(2) Pressure measured in mm/Hg.
(3) Mechanical valves also require chronic anti-coagulation drug therapy at a
cost of approximately $450 per year.
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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 12,900 human vascular tissues
from 1986 through 1998.
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. The Company
estimates that, in 1998, approximately 20,000 coronary artery bypass surgeries
using the patient's own vascular tissue 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. The Company estimates
that, in 1998, approximately 20,000 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 estimates that, in 1998, 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 therapy or compression stockings. The Company estimates that, in 1998,
approximately 25,000 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 7,600 human connective tissues
for the knee through 1998.
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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 1998 approximately
165,000 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 has other projects 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 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 have been $348 million and $395 million, respectively, in
1997.
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The following table sets forth the bioprosthetic cardiovascular devices
currently marketed by the Company, along with the product features and market
status for each.
<TABLE>
Fixed Steneless Porcine Valves Features Regulatory/Market Status
-------- ------------------------
<S> <C> <C>
CryoLife-O'Brien aortic valve of matched currently marketed in Europe with
composite leaflet design; regulatory approval under CE Mark
single suture line
CryoLife-Ross pulmonary valve with currently marketed in Europe with
attached conduit regulatory approval under CE Mark
</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 valve 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(TM)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 began manufacturing and distributing the Cryolife-Ross
pulmonary heart valve, another of the Company's fixed stentless porcine valves,
in the European Community in September 1998.
The Company plans to apply its proprietary SynerGraft technology to 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 immune response to the remaining
depopulated tissues. The auto-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.
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.
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.
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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 physician must operate through small
access devices, it can be difficult and time consuming for the physician 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
has developed and begun 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, peripheral vascular, and pulmonary repair. A derivative of the
BioGlue technology is BioLastic(TM), an implantable biomaterial under
development which is capable of exchanging oxygen and carbon dioxide. BioLastic
is being developed for use in reinforcing or patching vascular tissue, repairing
air leaks in lungs, and replacing or sealing holes in dura mater. 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 Company is currently
seeking funding for FibRx and other photo-activated reversible inhibitors
through AuraZyme.
The following table summarizes certain important features, targeted applications
and regulatory and market status of BioGlue surgical adhesive and FibRx surgical
sealant:
<TABLE>
<CAPTION>
FibRx Surgical
BioGlue Surgical Adhesive Sealant
------------------------- --------------
<S> <C> <C>
Composition: animal albumin and glutaraldehyde thrombin, fibrinogen and a thrombin
inhibitor
Method of Application: double syringe; mixing device light activated single syringe; or
provided light activated spray applicator
Targeted Clinical vascular repair; anastomotic hemostasis in cardiovascular
Applications: sealing; aortic proceduresmodified tPA, drug delivery
dissection repair; carotid
endarterectomy
patching; tissue bonding; pulmonary
repair
Performance high tensile strength; strength of normal human blood clot;
Characteristics: non-biodegradable biodegradable; flexible, easily
manipulated
Regulatory/Market Approved for cardiovascular, regulatory pathway to be determined
Status vascular and pulmonary repair pending AuraZymefunding
Europe: applications
United States: clinical trials began in second regulatory pathway to be determined
quarter of 1998 pending AuraZyme funding
</TABLE>
The Company estimates that the worldwide market for surgical sutures and staples
in 1998 was in excess of $2 billion. The Company began shipping BioGlue surgical
adhesive for distribution in the European Community in the second quarter of
1998 for use in vascular applications. The regulatory pathway for FibRx surgical
sealant will be determined upon the funding of Aurazyme.
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Single-Use Medical Devices
The Company serves as an OEM manufacturer, through its IFM subsidiary, of
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 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. An example of such a single-use
medical device under development includes a family of balloon catheters designed
to assist in applying the BioGlue surgical adhesive.
The Company plans to expand sales of the single-use medical devices which it has
retained 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 double
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.
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(Degree)C. The entire cryopreservation process is rigidly controlled
by guidelines established by the Company.
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<PAGE>
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 2,000 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 over 100 independent technical service representatives
and sub-representatives (who deal primarily with orthopaedic surgeons and who
are paid on a commission basis) as well as 40 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 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 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.
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<PAGE>
Bioprosthetic Cardiovascular Devices
The Company markets the CryoLife-O'Brien and CryoLife-Ross stentless porcine
heart valves in the European Community and Australia. The Company's European
sales, distribution and marketing force consists of 15 independent
representatives, representing each of the Benelux countries, France, Germany,
Greece, Denmark, Norway, Finland, Sweden, Italy, Turkey and the United Kingdom.
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.
BioGlue Surgical Adhesive
The Company markets and distributes its BioGlue surgical adhesive
internationally, excluding Japan, through its existing independent
representatives, and if approved for sale in the U.S., will market it through
its direct technical service representatives. During 1998, the Company signed a
five-year exclusive agreement with Century Medical, Inc. for the introduction
and distribution of BioGlue in Japan. Under the terms of the agreement, Century
Medical will be responsible for the applications and clearances through the
Japanese Ministry of Health and Welfare. Marketing efforts are directed almost
exclusively toward cardiovascular, vascular and thoracic surgeons, and the
Company conducts training sessions for European doctors with respect to the
application and administration of BioGlue surgical adhesive.
Single-Use Medical Devices
The Company serves as an OEM manufacturer for single-use medical devices for
Horizon Medical Products, Inc. The Company plans to expand sales of its
single-use medical devices by continuing new product development and leveraging
its established cryopreservation services and product marketing and sales staff
to market the products
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 10 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 to license these
products to corporate partners for further development of such applications or
seek funding from outside sources to continue the commercial develoment of such
technologies. 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.
13
<PAGE>
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 1996, 1997 and 1998, the Company spent approximately $2.8
million, $3.9 million and $4.7 million, respectively, on research and
development activities on new and existing products. These amounts represented
approximately 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 FibRx
laboratory and the bioprosthetic manufacturing operation, has four main
laboratory facilities: human tissue processing BioGlue manufacturing, 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 or
Bioglue manufacturing, 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 43 technicians employed
in this area, and the laboratory is staffed for two shifts, 365 days per year.
In 1998, the laboratory processed approximately 21,000 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 and CryoLife-Ross stentless porcine heart valves. 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. Currently, this laboratory employs 21
technicians and is scheduled to manufacture approximately 2,000 CryoLife-O'Brien
and CryoLife-Ross valves in 1999. The recently renovated facility's capacity is
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 4 technicians. This laboratory contains approximately 11,000 square
feet, including 4,000 square feet of laboratory space and a suite of eight clean
rooms. BioGlue surgical adhesive is presently manufactured at the Company's
headquarters facility, which has an annual capacity of approximately 300,000
units. This laboratory contains approximately 12,900 square feet, including a
suite of 2 cleanrooms.
14
<PAGE>
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 approximately 130 employees at this facility. 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 U.S. Food and Drug Administration ("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.
15
<PAGE>
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 to 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 19 U.S.
patents and nine 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
14 pending foreign applications that relate to areas including heart valve and
tissue processing technology and delivery of bioadhesives for anastomosis and
other uses. In connection with the sale of the IFM product line to Horizon, the
Company sold all patents related to such product line. 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 3
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 technologies.
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<PAGE>
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 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
17
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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.
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 or preserved osteochondral grafts..
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 by Immuno AG, a subsidiary of Baxter
Healthcare Company, 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
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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."
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 premarket approval ("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 investigational device exemption ("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 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
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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 the public health and
safety.
Single-Use Medical Devices. The products manufactured 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.
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BioGlue Surgical Adhesive. BioGlue surgical adhesive is regulated as a Class III
medical device by the FDA. The Company is currently conducting clinical trials
for BioGlue surgical adhesive. There can be no assurance that BioGlue will
receive FDA approval.
The Company intends to submit an application for a Humanitarian Device Exemption
(HDE) in May 1999 for BioGlue surgical adhesive for use in repair of aortic
dissections. If successful, the Company would be able to commercially distribute
BioGlue in the US for this indication and would likely discontinue clinical
trials of BioGlue under its current IDE. Additionally, the Company intends to
submit a 510(k) Premarket Notification during the second quarter of 1999 for
BioLastic Patch (BioLastic) for sealing air leaks in lungs. If successful, the
Company would be able to commercially distribute BioLastic for this indication
in the US. However, there can be no assurance that the Company will be
successful in gaining approval for either the HDE or clearance for the 510(k).
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
National Organ Transplant Act ("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.
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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 and CryoLife-Ross porcine heart valves, BioGlue
surgical adhesive and IFM single-use medical devices that it has retained 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 is
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 400 employees. These employees include
13 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.
RISK FACTORS
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 Reimbursement."
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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 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.
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 and its BioGlue surgical adhesive are
currently only offered for sale outside of the U.S . 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.
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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, and 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 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 may in the future become subject to more
extensive FDA regulation, which could include PMA or product licensing
requirements.
BioGlue surgical adhesive is regulated as a Class III medical device and the
Company believes that FibRx surgical sealant will be regulated as a biologic by
the FDA. These products have not been approved for distribution within the U.S.
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. 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.
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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 and 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 Company's business,
financial condition and results of operations. In addition, 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,
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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 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'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."
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.
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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.
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 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.
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.
Forward-Looking Statements
This Form 10-K 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 Form 10-K 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 and of the
application to the FDA for the stentless CryoLife-O'Brien and CryoLife-Ross
porcine heart valves, and for BioGlue and the BioLastic Patch and FibRx surgical
27
<PAGE>
sealant, other estimated dates relating to the Company's proposed regulatory
submissions, estimates regarding 1999 research and development expenditures, the
Company's expectations regarding the adequacy of current financing arrangements,
product demand and market growth, the impact of the introduction of BioGlue in
Europe or marketing opportunities for the Company's single-use medical devices
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 Form 10-K
and other factors, many of which are beyond the control of the Company.
Consequently, all of the forward-looking statements made in this Form 10-K 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.
Item 2. Properties.
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 30,000 square feet are dedicated
to laboratory work areas. The primary facility, which does not include the FibRx
laboratory and the bioprosthetic manufacturing operation, has four main
laboratory facilities: human tissue processing, BioGlue manufacturing, 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. The human tissue processing
laboratory contains approximately 7,700 square feet with a suite of seven clean
rooms. The Bioglue manufacturing laboratory contains approximately 12,900 square
feet with a suite of 2 clean rooms. The research and development laboratory is
approximately 5,500 square feet with a suite of five clean rooms. The
microbiology laboratory is approximately 3,200 square feet with a suite of three
clean rooms. The FibRx laboratory facility contains approximately 11,000 square
feet, including approximately 4,000 square feet of laboratory space with a suite
of eight clean rooms. The Company's porcine heart valves are manufactured in the
Company's bioprosthesis laboratory, which 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's single-use medical devices are
manufactured at the Company's IFM subsidiary located in St. Petersburg, Florida.
This facility is approximately 30,000 square feet and is leased from the former
principal shareholder of IFM.
Item 3. 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.
Item 4. Submission of Matters to Vote of Security Holders.
Inapplicable.
28
<PAGE>
Item 4A. Executive Officers of the Registrant.
Each of the executive officers of the Registrant was elected by the Board of
Directors to serve until the Board of Directors' meeting immediately following
the next annual meeting of shareholders or until their earlier removal by the
Board of Directors or their resignation. The following table lists the executive
officers of the Registrant and their ages, positions with the Registrant, and
the dates from which they have continually served in their present positions
with the Registrant.
<TABLE>
<CAPTION>
Date First Elected to
Name Age Position Present Office
- ---- --- -------- --------------
<S> <C> <C> <C>
Steven G. Anderson 60 President, Chief Executive Officer and Chairman February, 1984
Kirby S. Black, PhD 44 Vice President, Research and Development July, 1995
Edwin B. Cordell, Jr., CPA 40 Vice President and Chief Financial Officer December, 1994
David M. Fronk 35 Vice President, Clinical Research December, 1998
Albert E. Heacox, PhD 48 Vice President, Laboratory Operations June, 1995
Gerald B. Seery 42 Vice President, Marketing August, 1995
James C. Vander Wyk, PhD 54 Vice President, Regulatory Affairs and Quality February, 1996
Assurance
Ronald D. McCall, Esq. 62 Director, Secretary and Treasurer January, 1984
</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 1983 of Intermedics,
Inc. (now Guidant, 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 over 125 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 publically held consumer electronics manufacturing and
distribution company. Mr.
Cordell received his BS in Accounting from the University of Tennessee.
David M. Fronk was appointed to the position of Vice President of Clinical
Research in December 1998 and has been with the Company since 1992. Mr. Fronk is
responsible for managing the preclinical and clinical investigations for all
products, as well as monitoring product performance. Prior to joining the
Company, Mr. Fronk held engineering positions with Zimmer Inc. from 1986 until
1988 and Baxter Healthcare Corporation from 1988 until 1991. Mr Fronk served as
a market manager with Baxter Healthcare Corporation from 1991 until 1992. Mr.
Fronk received his BS in Mechanical Engineering at The Ohio State University in
1985 and his MS in Biomedical Engineering at The Ohio State University in 1986.
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
29
<PAGE>
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, and 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
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 D. McCall 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 D. McCall, Attorney At
Law, 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.
30
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The response to Item 5 is incorporated herein by reference to the information
set forth under the caption "Market Price of Common Stock" on page 33 of the
annual shareholders report for the year ended December 31, 1998.
Item 6. Selected Financial Data.
The response to Item 6 is incorporated herein by reference to the information
set forth under the caption "Selected Financial Information" on page 34 of the
annual shareholders report for the year ended December 31, 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The response to Item 7 is incorporated herein by reference to the information
set forth under the caption "Management's Discussion and Analysis" on pages 14
though 19 of the annual shareholders report for the year ended December 31,
1998.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The response to Item 7A is incorporated herein by reference to the information
set forth under the caption "Quantitative and Qualitative Disclosures About
Market Risk" appearing on page 19 of the annual shareholders report for the year
ending December 31, 1998.
Item 8. Financial Statements and Supplementary Data.
The report of independent auditors and consoldiated financial statements
included on pages 20 through 33 of the annual shareholders report for the year
ended December 31, 1998 are incorporated herein by reference. Quarterly Results
of Operations on page 34 of the annual shareholders report for the year ended
December 31, 1998 is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accounts on Accounting and Financial
Disclosure.
Inapplicable.
31
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to Item 10, applicable to the Directors of the Company, is
incorporated herein by reference to the information set forth under the caption
"Election of Directors" in the Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Commission not later than April 30, 1999.
Information concerning executive officers is included in Part I, Item 4A of this
Form 10-K.
The response to Item 10, applicable to Section 16(a) of the Securities Exchange
Act of 1934, as amended, is incorporated herein by reference to the information
set forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement for the Annual Meeting of Shareholders to be
filed with the Commission not later than April 30, 1999.
Item 11. Executive Compensation.
The response to Item 11 is incorporated herein by reference to the information
set forth under the caption "Executive Compensation" in the Proxy Statement for
the Annual Meeting of Shareholders to be filed with the Commission not later
than April 30, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to Item 12 is incorporated herein by reference to the information
set forth under the captions "Ownership of Principal Shareholders and Certain
Executive Officers" and "Election of Directors" in the Proxy Statement for the
Annual Meeting of Shareholders to be filed with the Commission not later than
April 30, 1999.
Item 13. Certain Relationships and Related Transactions0 .
The response to Item 13 is incorporated herein by reference to the information
set forth under the caption "Executive Compensation" in the Proxy Statement for
the Annual Meeting of Stockholders to be filed with the Commission not later
than April 30, 1999.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The following are filed as part of this report:
(a) 1. Financial Statements
The report of independent auditors and consoldiated financial statements
included on pages 20 through 33 of the annual shareholders report for the
year ended December 31, 1998 are incorporated herein by reference.
2. Financial Statement Schedule
Independent Auditors' Report on Schedule
Schedule II--Valuation and Qualifying Accounts
33
<PAGE>
All other financial statement schedules not listed above are omitted, as the
required information is not applicable or the information is presented in the
consolidated financial statements or related notes.
3. A. Exhibits
The following exhibits are filed herewith or incorporated herein by reference:
Exhibit
Number Description
- ------- -----------
2.1 Sale Agreement dated August 16, 1996 between the Company and Donald
Nixon Ross. (Incorporated by reference to Exhibit 2.1 to the
Registrant's Quarterly report on form 10-Q for the quarter ended
September 30, 1996.)
2.2 Asset Purchase Agreement among the Company and United Cryopreservation
Foundation, Inc., United Transplant Foundation, Inc. and QV, Inc.
dated September 11, 1996. (Incorporated by reference to Exhibit 2.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
2.3 Agreement and Plan of Merger dated as of March 5, 1997 among Ideas for
Medicine, Inc., J. Crayton Pruitt, Sr., M.D., Thomas Benham, Thomas
Alexandris, Tom Judge, Natalie Judge, Helen Wallace, J. Crayton
Pruitt, Jr., M.D., and Johanna Pruitt, and CryoLife, Inc. and CryoLife
Acquisition Corporation. (Incorporated by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed on March 19, 1997.)
2.4 Asset Purchase Agreement by and between Horizon Medical Products, Inc.
and Ideas for Medicine, Inc. dated September 30, 1998. (Incorporated
by reference to Exhibit 2 to Horizon Medical Products, Inc.'s
Current Report on Form 8K-filed with the Securities and Exchange
Commission on October 14, 1998.)
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 4.1 to the Registrant's Registration Statement on
Form S-1 (No. 33-56388).)
4.2 Form of Certificate for the Company's Common Stock. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.)
34
<PAGE>
Exhibit
Number Description
- ------- -----------
10.1 Lease, by and between New Market Partners III, Laing Properties, Inc.,
General Partner, as Landlord, and the Company, as Tenant, dated
February 13, 1986, as amended by that Amendment to Lease, by and
between the parties, dated April 7, 1986, as amended by that Amendment
to Lease, by and between the parties, dated May 15, 1987, as amended
by that Second Amendment to Lease, by and between the parties, dated
June 22, 1988, as amended by that Third Amendment to Lease, by and
between the parties, dated April 4, 1989, as amended by that Fourth
Amendment to Lease, by and between the parties, dated April 4, 1989 as
amended by that Fifth Amendment to Lease, by and between the parties,
dated October 15, 1990. (Incorporated by reference to Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1 (No. 33-56388).)
10.1(a) Seventh Amendment to Lease dated February 13, 1986, by and between New
Market Partners III, Laing Properties, Inc., General Partner, as
Landlord, and the Company as tenant, dated May 15, 1996. (Incorporated
by reference to Exhibit 10.1(a) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.)
10.2 Lease by and between Newmarket Partners I, Laing Properties, Inc. and
Laing Management Company, General Partner, as Landlord, and the
Company as Tenant, dated July 23, 1993. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.)
10.3 1993 Employee Stock Incentive Plan adopted on July 6, 1993.
(Incorporated by reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.)
10.4 1989 Incentive Stock Option Plan for the Company, adopted on March 23,
1989. (Incorporated by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
10.5 Incentive Stock Option Plan, dated as of April 5, 1984. (Incorporated
by reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1 (No. 33-56388).)
10.6 Form of Stock Option Agreement and Grant under the Incentive Stock
Option and Employee Stock Incentive Plans. (Incorporated by reference
to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1
(No. 33-56388).)
10.7 CryoLife, Inc. Profit Sharing 401(k) Plan, as adopted on December 17,
1991. (Incorporated by reference to Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
10.8 Form of Supplemental Retirement Plan, by and between the Company and
its Officers -- Parties to Supplemental Retirement Plans: Steven G.
Anderson, David M. Fronk, Gerald B. Seery, James C. Vander Wyk, Albert
E. Heacox, Kirby S. Black, and Edwin B. Cordell, Jr. (Incorporated by
reference to Exhibit 10.6 to the Registrant's Registration Statement
on Form S-1 (No. 33-56388).)
10.9(a)* Employment Agreement, by and between the Company and Steven G.
Anderson.
35
<PAGE>
Exhibit
Number Description
- ------- -----------
10.9(b) Employment Agreement, by and between the Company and Albert E. Heacox.
(Incorporated by reference to Exhibit 10.7(c) to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
10.9(c) Employment Agreement, by and between the Company and Edwin B. Cordell,
Jr. (Incorporated by reference to Exhibit 10.9(f) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994.)
10.9(d) Employment Agreement, by and between the Company and Gerald B. Seery.
(Incorporated by reference to Exhibit 10.9(e) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.9(e) Employment Agreement, by and between the Company and James C. Vander
Wyk, Ph.D. (Incorporated by reference to Exhibit 10.9(f) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
10.9(f) Employment Agreement, by and between the Company and Kirby S. Black,
Ph.D. (Incorporated by reference to Exhibit 10.9(g) to the
Registrant's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1996.)
10.9(g)* Employment Agreement, by and between the Company and David M. Fronk.
10.10 Form of Secrecy and Noncompete Agreement, by and between the Company
and its Officers. (Incorporated by reference to Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 (No. 33-56388).)
10.11 Registration Rights Agreement, by and among the Company, Galen
Partners, L.P., and Galen Partners International, L.P., both Delaware
limited partnerships, dated August 22, 1991. (Incorporated by
reference to Exhibit 10.13 to the Registrant's Registration Statement
on Form S-1 (No. 33-56388).)
10.12 Technology Acquisition Agreement between the Company and Nicholas
Kowanko, Ph.D., dated March 14, 1996. (Incorporated by reference to
Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
10.13 Option Agreement, by and between the Company and Duke University,
dated July 9, 1990, as amended by that Option Agreement Extension, by
and between the parties, dated July 9, 1991. (Incorporated by
reference to Exhibit 10.20 to the Registrant's Registration Statement
on Form S-1 (No. 33-56388).)
10.14 Research and License Agreement by and between Medical University of
South Carolina and CryoLife dated November 15, 1985, as amended by
Amendment to the Research and License Agreement dated February 25,
1986 by and between the parties and an Addendum to Research and
License Agreement by and between the parties, dated March 4, 1986.
(Incorporated by reference to Exhibit 10.23 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
36
<PAGE>
Exhibit
Number Description
- ------- -----------
10.15 CryoLife, Inc. Non-Employee Directors Stock Option Plan, as amended.
(Incorporated by reference to Appendix 2 to the Registrant's
Definitive Proxy Statement filed with the Securities and Exchange
Commission on April 17, 1998.)
10.16 Lease Agreement between the Company and Amli Land Development--I
Limited Partnership, dated April 18, 1995. (Incorporated by reference
to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.)
10.17 Funding Agreement between the Company and Amli Land Development--I
Limited Partnership dated April 18, 1995. (Incorporated by reference
to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.)
10.18 CryoLife, Inc. Employee Stock Purchase Plan (Incorporated by reference
to Exhibit "A" of the Registrant's Definitive Proxy Statement filed
with the Securities and Exchange Commission on April 10, 1996.)
10.19 Noncompetition Agreement between the Company and United
Cryopreservation Foundation, Inc. dated September 11,1996.
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.)
10.20 Noncompetition Agreement between the Company and QV, Inc. dated
September 11, 1996. (Incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
10.21 RevolvingTerm Loan Facility between the Company and NationsBank N.A.,
dated August 30, 1996. (Incorporated by reference to Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
10.22 Technology License Agreement between the Company and Colorado State
University Research Foundation dated March 28, 1996. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.)
10.23 Noncompetition Agreement between the Company and United Transplant
Foundation, Inc. dated September 11, 1996. (Incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996.)
10.24(a) First Amendment of Third Amended and Restated Loan Agreement between
CryoLife, Inc., as Borrower and NationsBank, N.A. (South), as Lender,
dated April 14, 1997. (Incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.)
10.24(b) Second Modification of Third Amended and Restated Loan Agreement dated
December 16, 1997 by and between the Registrant and NationsBank, N.A.
(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.)
10.25 Consulting Agreement dated January 1, 1998 by and between Robert T.
McNally and the Registrant. . (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.)
37
<PAGE>
Exhibit
Number Description
- ------- -----------
10.26 CryoLife, Inc. 1998 Long-Term Incentive Plan. (Incorporated by
reference to Appendix 2 to the Registrant's Definitive Proxy Statement
filed with the Securities and Exchange Commission on April 17, 1998.)
10.27 Consulting Agreement dated March 5, 1997 between CryoLife Acquisition
Corporation and J. Crayton Pruitt, Sr., M.D. (Incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.)
10.28 Subordinated Convertible Debenture dated March 5, 1997 between the
Company and J. Crayton Pruitt, Sr., M.D. (Incorporated by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.)
10.29 Lease Agreement dated March 5, 1997 between the Company and J. Crayton
Pruitt, Sr., M.D. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.)
10.30 Lease Guaranty dated March 5, 1997 between J. Crayton Pruitt Family
Trust U/T/A and CryoLife, Inc., as Guarantor for CryoLife Acquisition
Corporation. (Incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.)
10.31 Form of Non-Competition Agreement dated March 5, 1997 between the
Company and J. Crayton Pruitt, Sr., M.D., Thomas Benham, Thomas
Alexandris, Tom Judge, Natalie Judge, Helen Wallace, J. Crayton Pruitt,
Jr., M.D., and Johanna Pruitt. (Incorporated by reference to Exhibit
10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.)
13.1* Portions of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1998 which are incorporated by reference
herein.
21.1* Subsidiaries of CryoLife, Inc.
23.1* Consent of Independent Auditors.
27.1* Financial Data Schedule
- --------------------
* Filed herewith.
3.B. Executive Compensation Plans and Arrangements.
1. 1993 Employee Stock Incentive Plan adopted on July 6, 1993. (Exhibit 10.2
to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.)
2. 1989 Incentive Stock Option Plan for the Company, adopted on March 23, 1989
(Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (No.
33-56388).)
3. Incentive Stock Option Plan, dated as of April 5, 1984 (Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 (No. 33-56388).)
4. Form of Stock Option Agreement and Grant under the Incentive Stock Option
and Employee Stock Incentive Plans (Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
38
<PAGE>
5. CryoLife, Inc. Profit Sharing 401(k) Plan, as adopted on December 17, 1991
(Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (No.
33-56388).)
6. Form of Supplemental Retirement Plan, by and between the Company and its
Officers -- Parties to Supplemental Retirement Plans: Steven G. Anderson,
Robert T. McNally, Gerald B. Seery, James C. Vander Wyk, Albert E. Heacox,
Kirby S. Black and Edwin B. Cordell, Jr. (Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
7. Employment Agreement, by and between the Company and Steven G. Anderson
8. Employment Agreement, by and between the Company and David M. Fronk.
9. Employment Agreement, by and between the Company and Albert E. Heacox.
(Exhibit 10.7(c) to the Registrant's Registration Statement on Form S-1
(No. 33-56388).)
10. Employment Agreement, by and between the Company and Gerald B. Seery.
(Incorporated by reference to Exhibit 10.9(e) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.)
11. Employment Agreement, by and between the Company and James C. Vander Wyk,
Ph.D. (Incorporated by reference to Exhibit 10.9(f) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.)
12. Employment Agreement, by and between the Company and Edwin B. Cordell, Jr.
(Incorporated by reference to Exhibit 10.9(f) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.)
13. CryoLife, Inc. Non-Employee Directors Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.15 to this Form 10-K.)
14. CryoLife, Inc. Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit "A" of the Registrant's Definitive Proxy Statement filed with the
Securities and Exchange Commission on April 10, 1996.)
15. Employment Agreement by and between the Company and Kirby S. Black
(Incorporated by reference to Exhibit 10.9(g) to the Registrant's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1996.)
16. CryoLife, Inc. 1998 Long-Term Incentive Plan. (Incorporated by reference to
Exhibit 10.26 to this Form 10-K).
(b) Reports on Form 8-K
1. The Registrant filed a Current Report on Form 8-K with respect to the
Asset Purchase Agreement by and between Horizon Medical Products, Inc. and
Ideas for Medicine, Inc. dated September 30, 1998 with the Securities and
Exchange Commission on October 15, 1998.
2. The Registrant filed a Current Report on Form 8-K/A with respect to the
Asset Purchase Agreement by and between Horizon Medical Products, Inc. and
Ideas for Medicine, Inc. dated September 30, 1998 with the Securities and
Exchange Commission on November 14, 1998.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CRYOLIFE, INC.
March 26, 1999
By /S/ STEVEN G. ANDERSON
____________________________
Steven G. Anderson,
President, Chief Executive
Officer and Chairman of
the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ STEVEN G. ANDERSON President, Chief Executive Officer March 26, 1999
----------------------
Steven G. Anderson and Chairman of the Board of
Directors (Principal Executive
Officer)
/s/ EDWIN B. CORDELL, JR. Vice President and Chief Financial March 26, 1999
-------------------------
Edwin B. Cordell, Jr. Officer (Principal Financial and
Accounting Officer)
/s/ RONALD D. MCCALL Director March 26, 1999
---------------------
Ronald D. McCall
/s/ BENJAMIN H. GRAY Director March 26, 1999
---------------------
Benjamin H. Gray
/s/ VIRGINIA C. LACY Director March 26, 1999
---------------------
Virginia C. Lacy
/s/ RONALD CHARLES ELKINS, M.D. Director March 26, 1999
-------------------------------
Ronald Charles Elkins, M.D.
</TABLE>
<PAGE>
SCHEDULE II
CRYOLIFE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Balance end
Balance beginning of
Description of period Additions Deductions Period
----------- ----------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful accounts........... $ 103,000 $171,000 $18,000 $256,000
Deferred preservation costs............... 152,000 - 99,000 53,000
Year ended December 31, 1997
Allowance for doubtful accounts........... $ 94,000 $ 46,000 $ 37,000 $ 103,000
Deferred preservation costs............... 278,000 -- 126,000 152,000
Year ended December 31, 1996
Allowance for doubtful accounts........... $ 30,000 $ 88,000 $ 24,000 $ 94,000
Allowance for doubtful note receivable.... 225,000 -- 225,000 --
Deferred preservation costs............... 247,000 140,000 109,000 278,000
</TABLE>
EXHIBIT 10.9(a)
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the 18th day of January, 1999 by and between
STEVEN G. ANDERSON (hereinafter referred to as "EMPLOYEE"), and CRYOLIFE, INC.,
a Florida Corporation (hereinafter referred to as "EMPLOYER"):
WITNESSETH:
1. Employment: Employer hereby employs Employee and Employee hereby
accepts employment upon the terms and conditions as set forth hereinafter. It is
agreed that this Employment Agreement shall replace the previous Employment
Agreement dated April 10, 1995.
2. Term of Employment: Subject to the provisions of termination as
hereinafter provided, the term of this Agreement shall begin on the 18th day of
January, 1999, and terminate on the 18th day of January, 2004 and shall
automatically be renewed for one successive five (5) year term unless either
party gives the other notice to terminate the Employment Agreement at the
expiration of the original term, which notice must be given at least sixty (60)
days prior to the expiration of said original five year term.
3. Compensation: The Employer shall pay to the Employee the following
compensation:
(a) A base salary of $442,750.00 per year which may be increased
annually during the term of this agreement. Said salary may be
increased annually by the Compensation Advisory Committee of the
Company, pursuant to its annual review. In this agreement all
references to "salary" shall be defined as the "base salary" and
any increases thereof of the Employee at the time involved,
whether the amount set forth above, or the amount hereafter set
by the said Compensation Advisory Committee. Nothing in this
agreement shall be deemed to preclude the Employee from receiving
raises in salary or options to purchase stock during the term of
this agreement. The salary will be reviewed annually by the
Compensation Committee of the Company, being guided by the
Radford study and his performance;
(b) Additional compensation may be paid to Employee in the form of
salary increases and stock option grants, depending upon his
performance as determined by Employer;
(c) The Employee may receive an annual bonus in addition to said
salary; and
(d) The Employer agrees to reimburse the Employee for the costs of
the motor vehicle that he drives by making payments to Employee
to reimburse him for the down payment and monthly payments on the
motor vehicle purchased by him, together with payments to
reimburse him for the gasoline, oil and repairs of the Employee's
motor vehicle and for all other reasonable motor vehicle
expenses. Employee shall maintain the motor vehicle in good
operating condition.
<PAGE>
4. Duties: Employee is engaged as President and Chief Executive Officer
for the Employer and shall serve as a Director and Chairman of the Board of
Directors, and shall perform such duties of those positions including but not
limited to the following:
(a) Employee shall have such duties as may from time to time be
assigned to him by the Employer;
(b) Employee shall devote his full time to the performance of his
duties as the President and Chief Executive Officer of the
Employer and shall not enter into competition with Employer
and/or any of its subsidiaries or affiliates during the term of
this Agreement; and
(c) Employee's duties shall include acting as Chief Executive Officer
for the Employer and he shall be responsible for the operation of
all of the business of the Employer. The requirements imposed in
this paragraph are not intended to be all inclusive and Employee
will perform all of the duties associated with being Chairman,
President and Chief Executive Officer for this enterprise. The
titles "President", "CEO", and "Chairman" will not be assigned to
any other person.
5. Extent of Service: Employee shall be employed on a full time basis
and exercise his efforts to the optimum benefit of the Employer. Employee shall
be granted a vacation of up to four (4) weeks per year and shall be eligible for
such vacation upon the signing of this agreement. Scheduling of such vacation
shall be arranged at least fifteen (15) days in advance thereof if possible. Any
vacation time unused during any one year period of employment may be carried
forward to the next year. Employee shall be compensated for any unused vacation
time remaining at the end of the contract.
6. Illness and Incapacity: Employee shall receive compensation for any
period of illness or incapacity during the terms of this Agreement, at the same
rate provided under this agreement.
7. Disability Insurance: Employer agrees to provide to the Employee
appropriate disability insurance coverage, providing the Employee with
disability benefits appropriate to his position in the company and his earnings
therefor. Employee agrees to obtain quotations for disability insurance and
provide them to Employer for its consideration. The decision as to which
disability insurance carrier to select remains in the sole discretion of
Employer. The coverage obtained shall provide disability benefits to Employee
appropriate to his income at the time of disability. The disability policy shall
be owned by the Employee, but the annual premium shall be paid by the Employer.
The Employer shall have the right to terminate this Agreement if such illness or
incapacity shall be of such a character as to totally prohibit Employee from
rendering substantially all services to the Employer for a period of more than
one hundred eighty (180) days in one calendar year, by giving at least sixty
(60) days written notice of intention to do so. For the purposes of determining
ability or inability to render substantial services, the criterion to be used
shall be that which is used in determining total disability under the Social
Security Act of 1934 as Amended. If Employee shall resume his duties within
sixty (60) days following receipt of such notice, and shall perform such duties
on a regular basis for 180 consecutive days thereafter, this Agreement and
Employee's employment shall continue and the notice of intention to terminate
shall have no further force, effect or validity.
2
<PAGE>
8. Termination Upon Disability: Employer may terminate the employment
of Employee in the event of the disability of Employee. As used herein,
"Disability" shall mean a mental or physical condition of Employee which, in the
professional determination of an independent physician chosen by Employer,
renders Employee incapable of performing his duties under this Agreement for a
continuous period of six (6) months or longer. In the event Employee (or his
custodian) disagrees with the determination of the independent physician,
Employee may obtain the determination of another physician, reasonably
acceptable to Employee and Employer, whose opinion shall be conclusive.
9. Major Medical and Life Insurance: Employer agrees to provide major
medical and life insurance coverage for Employee. The major medical policy shall
designate Employee's wife, Ann B. Anderson, as an insured under the said policy
in addition to Employee. Said insurance coverage shall be provided to Employee
and his wife, Ann B. Anderson, during the employment of Employee and as
otherwise provided for hereinafter. A life insurance policy shall be provided to
Employee by Employer provided Employee meets the requirements of the insurer for
coverage. Said policy shall provide benefits in an amount up to two (2) times
Employee's current salary or more. Employee shall designate the beneficiaries of
said life insurance policy. Employee agrees to cooperate with the Company to
obtain key-man life insurance on Employee's life should Employer desire to
purchase same for its benefit.
10. Death and Survivor Benefits: If Employee should die during the term
of his employment, the employment is terminated and the Employer shall pay to
the spouse of the Employee, or other survivor designated by Employee, including
the Employee's estate if so designated, the compensation which would otherwise
be payable to Employee through to the end of the month in which his death
occurs, plus one (1) year's salary. The Employer shall have no other financial
obligations to Employee's spouse or other designated survivor, or estate with
the exception of the provisions for health insurance to Employee's wife, Ann B.
Anderson. In the event of Employee's demise prior to the termination of this
agreement, Employer agrees to continue the major medical insurance as described
hereinabove for Employee's wife, Ann B. Anderson, for the duration of her life.
11. Termination of Employment: Notwithstanding any provision stated in
Paragraph 3 hereinabove, the Employee may terminate this Agreement upon giving
adequate notice thereof as described herein. In the event the Employee
terminates this Agreement, he shall be required to give one hundred eighty (180)
days written notice. Said termination shall be effective upon the expiration of
said one hundred eighty (180) days.
Employer may terminate the employment of the Employee hereunder with or
without good cause (as defined hereinbelow, and also sometimes referred to as
"cause") by giving one hundred eighty (180) days written notice of its intention
to do so. If the termination of the employment of Employee is without good
cause, Employer shall pay compensation to Employee consisting of the base salary
and any increase thereof for the period remaining on the agreement or for two
3
<PAGE>
(2) years whichever is greater. If the Employer gives notice of termination
without good cause, or if the termination is without good cause, the Employer
will be required to pay to the Employee the sum due to Employee for his base
salary, plus any increase thereof, for the year(s) remaining on the contract or
for a period of twenty four (24) months, whichever is greater, as reasonable
compensation for the reminder of the term of this agreement and its renewal
term. The said compensation shall be paid in a lump sum within one hundred
eighty (180) days from the date of the notice of termination. The termination
shall be effective as of the date set forth by the Employer in the Notice of
Termination, which may not be less than one hundred eighty (180) days after
delivery of the notice.
In the event of termination for good cause, the Employee will be paid
his base salary and increases thereof for one hundred eighty (180) days, but no
other compensation shall be due under this agreement for the remainder of the
term of this agreement, however, Employee shall be entitled to a hearing before
the board of directors of the Company within one hundred eighty (180) days, and
Employee may sue for damages claiming the termination was not for good cause and
seek damages and he may pursue such other remedies as may be available.
Employer may terminate Employee's employment under this agreement for
good cause which shall mean (i) Employee's willful and wanton wrongful act
having a substantial material adverse effect on the Employer; (ii) Employee's
acts amounting to gross negligence to the material detriment and substantial
material adverse effect on the Employer; (iii) Embezzlement of funds of the
Employer; or (iv) Employee's conviction of a felony. In order to terminate the
employment of Employee pursuant to this paragraph, Employer must first provide
Employee with written notice of termination which notice shall specifically
identify the circumstances which constitute cause for termination as defined
herein. In the event of termination for cause under the provisions set forth in
subsections (i) or (ii) of this paragraph, Employee shall have one hundred
eighty (180) days in which to cure such default. In the event the Notice of
Termination states that it is "for good cause", then during the one hundred
eighty (180) days, Employee shall be entitled to meet with the directors at a
meeting called for the purpose of reconsidering the termination. At that
meeting, the Employee may present such information or evidence as may bear upon
the issue of cause for termination. Upon the Employee making such presentation,
the directors shall reconsider the issue of termination and determine whether
the Employee is or is not terminated at the close of said directors' meeting. If
the Employer's notice of termination is for good cause the employee may make the
above presentation and if the directors do not reconsider and withdraw the
termination, then the Employee may sue at law for damages or may pursue such
other remedies available. If the notice of termination is withdrawn then the
Employee will remain employed pursuant to this agreement. Nothing set forth
above shall require that the Employee request a meeting with the directors for
reconsideration or present any evidence at such a meeting. If no meeting is
requested by Employee he shall be entitled to file suit at law for damages for
breach of contract or to pursue any other remedies available to him.
In the event that Employer terminates this agreement, the employment
shall cease one hundred eighty (180) days after such notice is delivered and
this agreement shall be terminated. The Employer reserves the right to discharge
the Employee without good cause and without hearing provided the Employee is
paid the base salary, plus any increases thereof for the period specified above,
together with any earned but unpaid salary, earned but unused vacation time,
bonus or other compensation, as of the date of the termination. Both parties
shall be bound to honor any and all bonuses,
4
<PAGE>
allowances, unpaid but earned vacation time, loans and separate agreements which
have previously been specified in writing. The Employer's notice of termination
must state whether the termination is "for good cause" or "without good cause".
The parties agree that any termination by the Employer which fails to state
whether it is "for good cause" or "without good cause" shall be deemed as being
"without good cause" and shall be treated as a termination "without good cause".
The parties agree that the Employer may not change its Notice of Termination
from being "without good cause" to being "with good cause". Upon delivery of the
Notice of Termination by the Employer to the Employee, Employee may request
reconsideration or he may sue at law for damages or he may do both.
12. Personal Information: Employee agrees to provide the Employer with
complete pertinent information upon request. Such information shall be in the
form of a completed application for employment as requested. Employee agrees to
supplement or update such information in writing upon request of Employer.
13. Approval: Employer shall be the sole judge as to whether the
Employee is performing his duties in a satisfactory manner.
Employee covenants and agrees that he will treat as confidential and
will not, without the prior written approval of Employer, use (other than in the
performance of his designated duties of Employer) or disclose in any manner
either during or after the term of his employment hereunder any Trade Secret.
All records, notes, files, memoranda, reports, price lists, client
lists, drawings, plans, sketches, documents, equipment, apparatus and like
items, and all copies thereof, relating to the business of Employer or Trade
Secrets, which shall be prepared by Employee or which shall be disclosed to or
which shall come into the possession of the Employee, shall be and remain the
sole and exclusive property of Employer. Employee agrees that at any time upon
request from Employer, he will promptly deliver to Employer, as the case may be,
the originals and all copies of any of the foregoing that are in his possession,
custody or control, and any other property belonging to Employer.
14. Reproduction Rights: The Employer shall have the exclusive right
to reproduce any design or invention completed by Employee during the term of
his employment and to reproduce any design or invention produced from such
design work, or to make any and all modifications to such design work and
modifications produced therefrom which the Employer, in its sole discretion, may
feel necessary or desirable.
15. Employee's Warranties: By executing this Agreement, Employee
warrants:
(a) That Employee shall not infringe upon any statutory copyright,
common law right, proprietary right, patent right, or any
other right whatsoever in performing his duties;
(b) That any design work to be done by Employee shall contain no
matter contrary to law; and
5
<PAGE>
(c) That Employee will not invade the right of privacy by
depicting persons or places in any design work without first
obtaining the written release of privacy rights from all such
persons or owners of such places and shall remit the originals
of such release to the Employer.
Employee agrees that the warranties contained herein are true as of
the date of the execution of this Employment Agreement and shall remain true
throughout the term of his employment, and Employee further agrees to indemnify
and hold harmless the Employer from any and all claims arising from breaches of
the aforesaid warranties.
16. Intellectual Property: The Employee specifically waives any rights
he might be construed to have as a consequence of that industry convention which
grants an employee the right to use for his, in whole or in part, after
termination of his employment, any inventions, innovations or designs, etc.
(hereinafter referred to as "Intellectual Property") susceptible to patent,
registrations, copyright or other legal protection (hereinafter referred to as
"Protection"), whether domestic or foreign, which he may originate during the
term of his employment, using facilities or any other form of assistance
provided by the Employer.
In the specialized case in which the Employee may originate on his own
time, on other than Employer's premises, and with no assistance from Employer,
including use of Employer's facilities, any Intellectual Property susceptible to
Protection, it is understood that he shall have the right to exploit the same
for his personal account (provided he personally undertakes the expense involved
in establishing Protection). In such specialized case, however, the Employer
shall have, and is hereby granted, a fully-paid royalty-free license to use in
its own operation such Intellectual Property for the period of employment and
for two (2) years thereafter.
With further respect to any item of Intellectual Property developed in
the manner defined by the immediately preceding paragraph, in the event the
Employee does not wish or is unable personally to pay for such Protection of any
Intellectual Property, the Employer shall have the option to do so, but shall
not be required to do so, and shall thereafter enjoy the sole proprietorship and
ownership of such Intellectual Property without any duty or liability to
Employee. The Employee shall make available to the Employer all the information
at his disposal relating to such Intellectual Property, and shall cooperate with
it in every way necessarily implied to obtain such Protection for the Employer.
Employee further agrees to execute whatever conveyances, assignments,
bills of sale or other documents that may at any time become necessary to
execute or to provide whatever further assurances Employer deems necessary in
its sole discretion in order to perfect Employer's title to the rights to such
Intellectual Property that Employer has been granted by this Agreement. Employee
agrees not to incorporate in any writings composed by him such Intellectual
Property or any other information of a proprietary nature or trade secrets
(including but not limited to ideas or items susceptible to Protection) that may
6
<PAGE>
belong to the Employer or subsequently come to, belong or be possessed by the
Employer without the prior written consent of the Employer, which consent may be
arbitrarily, unreasonably or capriciously withheld. In order to effectuate the
rights granted to the Employer, pursuant to this paragraph, Employee agrees to
submit all tracts, manuscripts, texts and writings he intends to publish to
Employer prior to submitting them for publication to any publisher or causing
them to be published himself. In the event the Employer determines the material
submitted violates the provisions of this paragraph, the offending portions
shall be deleted. It is further provided that if Employee disputes the
Employer's decision, the dispute shall be decided by arbitration pursuant to the
Florida Arbitration Code.
17. Restrictive Covenant: Employee recognizes that opportunities
afforded him by Employer are valuable assets and of great personal benefit to
him in his line of work, and therefor, provide sufficient basis for the
restrictive covenants contained in this paragraph. In recognition of the above,
and in further consideration of his employment by Employer, Employee further
agrees that during the term of this Agreement and for a period of two (2) years
from the date of any termination of his employment, whether by termination of
this Agreement, by wrongful discharge, or otherwise, shall not directly or
indirectly, in the United States or on offshore islands, engage in competition
which the Employer or its affiliates of which at the time of such termination is
conducting or has conducted business, nor in any State, territory or other
countries in which the Employee knows that the Employer intends to extend, carry
on, or is carrying on, business by expansion of its activities. Competition of
the Employer as referred to in this paragraph shall include but not be limited
to business of the Employer as it now exists or may exist in the future, either
as an individual on his own account, as a partner, joint venture, employee,
agent, salesman or contractor for any person; an officer, director or
stockholder of a corporation or otherwise. Solicitation or acceptance of
business outside the restricted territories for purchase of, shipment to, or
delivery of materials in any of the restricted territories shall constitute
"engaging in business" in the restricted territories and by all reasons of this
paragraph, be a violation of this paragraph. This covenant on the part of
Employee shall be construed as an agreement independent of any other provision
of this Agreement. The existence of any claim or cause of action of Employee
against the Employer, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Employer of this covenant. It
is agreed by the parties hereto that if any portion of this non-compete covenant
is held to be unreasonable, arbitrary or against public policy, the covenant
herein shall be considered divisible both as to time and geographical area. Each
month of the specified period shall be deemed a separate period of time. Each
state of the United States of America, any other country, or territory shall be
deemed a separate geographical area so that the lesser period of time or
geographical area shall remain effective so long as the same is not
unreasonable, arbitrary, or against public policy. The parties hereto agree
that, in the event any court determines the specified time period or the
specified geographical area to be unreasonable, arbitrary or against public
policy, then a lesser time period or geographical area which is determined to be
reasonable, non-arbitrary and not against public policy may be enforced against
Employee.
18. Resolution of Disputes: In case of any conflicts or disputes,
normal industry practices shall be considered but the decision of the Employer
shall be final.
19. Entire Agreement: This Agreement represents the entire agreement
between the parties with respect to employment and any matters not specifically
mentioned herein shall not be binding on the parties.
7
<PAGE>
20. Governing Law: This contract shall be governed by the laws of the
State of Florida.
21. Miscellaneous: Whenever used, the singular number shall include the
plural, the plural the singular, and the use of any gender shall include all
genders.
22. Waiver of Breach: The waiver by the Employer of a breach of any
condition of this Agreement by Employee shall not be construed as a waiver of
any subsequent breach by Employee.
23. Effective Date: This Agreement shall be effective as of January 18,
1999.
24. Notice: Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by certified or
registered mail, return receipt requested, to the parties at the following
addresses:
To the Employer: CryoLife, Inc.
c/o: Ronald McCall, Esquire
Secretary/Treasurer
1655 Roberts Boulevard, N.W.
Kennesaw, Georgia 30144
To the Employee: Steven G. Anderson
President & CEO
5040 Northside Drive
Atlanta, Georgia 30327
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
WITNESSES: CRYOLIFE, INC./EMPLOYER:
____________________________ BY: /s/ Ronald D. McCall
---------------------
RONALD D. MCCALL
It's: Secretary/Treasurer
____________________________
Attest: (SEAL)
/s/ Suzanne K. Gabbert
---------------------
SUZANNE GABBERT
It's: Assistant Secretary
EMPLOYEE:
____________________________ /s/ Steven G. Anderson
---------------------
STEVEN G. ANDERSON
____________________________ Print or type name of Employee
8
EXHIBIT 10.9(g)
EMPLOYMENT AGREEMENT
In consideration of the promises hereinafter contained, CryoLife, Inc., a
Florida corporation ("we", "our" and "us") and David M. Fronk ("you") hereby
agree as of this 24th day of August, 1992 to the following:
1. Employment. We hereby employ you and you hereby accept employment on the
terms and conditions set forth below. Your duties and compensation are set forth
on the Exhibit attached hereto.
2. Extent of Services. During your employment, you agree to devote your
full and exclusive time and attention to your employment duties and not to
engage in any other business activity which conflicts or competes with our
business or which reduces your effectiveness in performing your duties under
this Agreement unless you have first obtained our prior written consent.
3. Benefits and Absences. You are entitled to all benefits offered by us
for which you meet the eligibility requirements. You are subject to the
obligations concerning absences due to disability, sick leave, and other
absences, described in the current benefit summary schedule, and as revised
hereafter.
4. Term and Termination. Your employment shall commence on the date of this
Agreement. Both you and we shall have the right upon giving 30 days written
notice to the other to terminate with or without cause the employment under this
Agreement. However, if one party to this Agreement terminates the employment,
the other party may at his option effect the separation immediately. This
Agreement shall automatically terminate in the event of your death. Such
automatic termination shall discharge both parties hereto from any and all
further liability or responsibility to the other under this Agreement.
5. Right to Change Duties. We reserve the right to change the nature and
scope of your duties. In the event of any transfer to another corporate
facility, we shall defray the reasonable cost of transporting you and your
family with household furnishings to your new location.
6. Secrecy and Noncompetition. Your employment and continued employment
with us is conditioned upon your signing our standard Secrecy and Noncompete
Agreement whose terms and agreements you agree to be bound by. You agree that
under no condition will any breach or infraction of this Agreement be assertable
as a defense to any action or responsibility incurred by you under the Secrecy
and Noncompete Agreement.
7. Your Warranties. You present and warrant that you will not utilize or
disclose any trade secrets or proprietary information of others to us and that
the only secrecy and/or noncompetition agreements you have with others are
identified on the attached exhibit.
<PAGE>
8. Miscellaneous. This Agreement may not be changed or terminated orally
and no change, termination or attempted waiver of the provisions hereof shall be
binding unless in writing and signed by the parties against whom the same is
sought to be enforced; provided, however, that the compensation paid to you
hereunder may be increased at any time by us without in any way affecting any
other term or condition of this Agreement which in all other respects shall
remain in force and effect. This Agreement shall be governed by the laws of the
State of Georgia.
IN WITNESS WHEREOF, this Agreement has been duly executed on the day
and year first above written.
CRYOLIFE, INC.
By: /s/ Steven G. Anderson
-------------------------------
Its: President
EMPLOYEE
/s/ David M. Fronk
-----------------------------------
EXHIBIT 13.1
MARKET PRICE OF COMMON STOCK
The Company's Common Stock is traded in 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.
1998 High Low
- -----------------------------------------------------------------------
First quarter 17 15/16 12 1/4
Second quarter 18 1/4 14 3/4
Third quarter 16 1/4 12 1/16
Fourth quarter 15 11/16 9 3/16
- -----------------------------------------------------------------------
1997 High Low
- -----------------------------------------------------------------------
First quarter 14 1/4 8
Second quarter 13 1/4 7 5/8
Third quarter 16 1/8 11 1/4
Fourth quarter 19 13
- -----------------------------------------------------------------------
<PAGE>
SELECTED FINANCIAL INFORMATION (In thousands except share data) December 31.
<TABLE>
<CAPTION>
OPERATIONS 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $60,691 $50,571 $36,866 $29,226 $28,810
Net income 6,486 4,725 3,927 2,202 1,266
Research and development
as a percent of revenues 7.8% 7.8% 7.6% 9.0% 8.3%
EARNINGS PER SHARE (1),(2)
- -----------------------------------------------------------------------------------------------------
Basic $0.54 $0.49 $0.41 $0.23 $0.14
Diluted $0.53 $0.48 $0.40 $0.23 $0.14
YEAR-END FINANCIAL POSITION
- -----------------------------------------------------------------------------------------------------
Total assets $98,390 $54,402 $34,973 $24,132 $21,417
Working capital 62,313 19,478 10,787 15,217 14,279
Long-term liabilities 8,577 17,846 2,799 0 0
Shareholders' equity 80,424 30,227 24,929 20,465 17,933
Current ratio 8:1 4;1 3:1 5:1 5:1
Shareholders' equity
per diluted common shares (1),(2) $6.56 $3.04 $2.52 $2.14 $1.91
</TABLE>
SELECTED QUARTERLY FINANCIAL INFORMATION (In thousands except share data)
<TABLE>
<CAPTION>
First Second Third Fourth
REVENUES Year Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $14,561 $15,554 $16,014 $14,562
1997 10,411 12,641 14,569 12,950
1996 8,372 9,644 10,211 8,639
NET INCOME
- -------------------------------------------------------------------------------------------------
1998 $1,172 $2,048 $1,902 $1,364
1997 952 1,160 1,458 1,155
1996 782 988 1,261 896
EARNINS PER SHARE - DILUTED (1),(2)
- --------------------------------------------------------------------------------------------------
1998 0.12 0.16 0.15 0.11
1997 0.10 0.12 0.15 0.12
1996 0.08 0.10 0.13 0.09
</TABLE>
-------------------------------
(1) Reflects adjustment for the 2-for-1 stock split effected June 28, 1996.
(2) Presented, and where appropriate, restated to conform to Statement 128
requirements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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
orthopedic 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 consolidated 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 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 the 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
aortic porcine heart valves and in 1996 purchased for $275,000 a patent for an
advanced design stentless pulmonary porcine heart valve, both of which the
Company currently markets in Europe, South America, the Middle East and South
Africa. Also in 1996, the Company purchased the patent for BioGlue, a surgical
adhesive which the Company currently markets in Europe, South America, Asia,
South Africa and the Middle East, and 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 Ideas for Medicine, Inc. ("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 $1.75
million) if certain target net revenues of IFM are exceeded.
On September 30, 1998 the Company completed the sale of substantially all of the
IFM product line and certain related assets to Horizon Medical Products, Inc.
("Horizon"), for $15 million in cash pursuant to an asset purchase agreement.
<PAGE>
Concurrently, IFM and Horizon signed a manufacturing agreement which provides
for the manufacture by IFM of specified minimum dollar amounts of IFM products
to be purchased exclusively by Horizon over each of the four years following the
sale. Thereafter, responsibility for such manufacturing is to be assumed by
Horizon. The Company recorded deferred revenue at the transaction date totaling
$2.9 million, representing the selling price less the net book value of the
assets sold, which included $7.7 million of goodwill, net of accumulated
amortization, and the costs related to the sale. The revenue was deferred
because the sale and manufacturing agreements represent, in the aggregate, a
single transaction for which the related income should be recognized over the
term of the manufacturing agreement. Accordingly, the deferred revenue is being
reflected in cost of goods sold over the four-year term of the manufacturing
agreement in a manner which is expected to result in approximately equal margins
over the four-year period on the products manufactured and sold by IFM to
Horizon. During 1998 amortization of deferred revenue totaled $387,000.
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, and the introduction
into international markets of BioGlue Surgical Adhesive as well as other
expected new products.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues increased 20% to $60.7 million in 1998 from $50.6 million in 1997. The
increase in revenues was primarily due to the growing acceptance in the medical
community of cryopreserved tissues, the Company's ability to procure greater
amounts of tissue, price increases for certain cryopreservation services,
revenues attributable to the Company's line of single-use medical devices
following the IFM acquisition in March of 1997, and revenues attributable to the
Company's introduction of BioGlue Surgical Adhesive in international markets in
April 1998.
Revenues from human heart valve and conduit cryopreservation services increased
6% to $30.8 million in 1998 from $29.0 million in 1997, representing 51% and
57%, respectively, of total revenues during such periods. This increase in
revenues was primarily due to a 6% increase in the number of heart allograft
shipments due to an increased demand and the Company's ability to procure
greater amounts of tissue.
Revenues from human vascular tissue cryopreservation services increased 36% to
$14.3 million in 1998 from $10.5 million in 1997, representing 24% and 21%,
respectively, of total revenues during such periods. This increase in revenues
was primarily due to a 37% increase in the number of vascular allograft
shipments due to an increased demand and the Company's ability to procure
greater amounts of tissue.
Revenues from human connective tissue for the knee cryopreservation services
increased 63% to $7.7 million in 1998 from $4.7 million in 1997, representing
13% and 9%, respectively, of total revenues during such periods. This increase
2
<PAGE>
in revenues was primarily due to a 50% increase in the number of allograft
shipments due to increased demand and the Company's ability to procure greater
amounts of tissue. Additional revenue increases resulted from a greater
proportion of the 1998 shipments consisting of cryopreserved menisci, which have
a significantly higher per unit revenue than the Company's cryopreserved
tendons, and price increases for the cryopreservation of menisci and tendons.
Revenues from IFM increased 1% to $5.7 million in 1998 from $5.6 million in
1997, representing 9% and 11%, respectively, of total revenues during such
periods. This increase in revenues is due to 1998 having two extra months of IFM
revenue than 1997 due to the IFM acquisition closing on March 5, 1997, partially
offset by the sale of the IFM product line to Horizon Medical Products, Inc.,
pursuant to which the Company became an OEM manufacturer of such products on
October 1, 1998.
Revenues from bioprosthetic cardiovascular devices increased 33% to $764,000 in
1998 from $576,000 in 1997, representing 1% of total revenues during such
periods. This increase in revenues was primarily due to a 36% increase in the
number of bioprosthetic cardiovascular device shipments due to increased
manufacturing capacity. Revenues in 1998 also benefited from the introduction of
the CryoLife-Ross Pulmonary Valve into international markets in October 1998.
Revenues from BioGlue were $883,000 for 1998. The Company introduced the product
into international markets in April 1998.
Grant revenues increased to $512,000 in 1998 from $162,000 in 1997. This
increase in grant revenues is primarily attributable to the SynerGraft research
and development programs.
Other income increased to $1,078,000 in 1998 from $290,000 in 1997. Other income
in 1998 relates primarily to proceeds from the sale of the Company's port
product line.
Cost of cryopreservation services and products aggregated $25.3 million in 1998
compared to $17.8 million in 1997, representing 42% and 35%, respectively, of
total cryopreservation and product revenues. The increase in 1998 of the cost of
cryopreservation services and products as a percentage of revenues results from
a lesser portion of 1998 revenues being derived from human heart valve and
conduit cryopreservation services, which carry a significantly higher gross
margins than other cryopreservation services, from increased manufacturing
overhead costs associated with the Company's new manufacturing facilities, from
the switch in October of 1998 to OEM manufacturing of single-use medical
devices, which generates lower gross margins than cryopreservation services and
lower gross margins than the IFM products generated prior to the sale of the IFM
product line, compared with ten months of IFM sales in 1997, and from a one-time
charge of $500,000 associated with the start-up of the bioprosthetic
3
<PAGE>
cardiovascular device manufacturing facility. The increase in the cost of
cryopreservation services and products as a percentage of revenues was partially
offset by a decrease in the IFM products sold in 1998 relative to those sold in
1997, which products generate lower gross margins than cryopreservation
services, and the impact of the fourth quarter amortization of deferred revenue
resulting from the sale of the IFM product line, which has the impact of
reducing cost of goods sold.
General, administrative and marketing expenses increased 16% to $23.9 million in
1998, compared to $20.5 million in 1997, representing 40% and 41%, respectively,
of total cryopreservation and product revenues in such periods. The increase in
expenditures in 1998 resulted from expenses incurred to support the increase in
revenues and costs associated with the introduction of BioGlue into
international markets.
Research and development expenses increased 19% to $4.7 million in 1998,
compared to $3.9 million in 1997, representing 8% of total cryopreservation and
product revenues for each period. Research and development spending relates
principally to the Company's focus on its bioadhesives and SynerGraft
technologies.
Net interest income was $820,000 in 1998 compared to net interest expense of
$970,000 in 1997. This variance is due to the repayment of certain indebtedness
with the proceeds from the follow-on equity offering completed in April 1998, as
well as the conversion of a portion of a convertible debenture into common stock
of the Company, and the receipt of interest income on the invested proceeds from
the follow-on equity offering (the "Offering").
The decline in the effective income tax rate to 25% in 1998 from 38% in 1997, is
due to the implementation of certain income tax planning strategies including
the recognition of approximately $600,000 of research and development tax
credits during the fourth quarter of 1998, during which period studies were
completed which quantified the amounts related thereto.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues increased 37% to $50.6 million in 1997 from $36.9 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 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 and the Company's ability to procure greater amounts of tissue.
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, an
increased demand for the Company's existing cryopreservation services and the
Company's ability to procure greater amounts of tissue.
4
<PAGE>
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,
and the Company's ability to procure greater amounts of tissue.
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.
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 and increased fees paid to technical
representatives and other marketing expenses relating to the growth in revenues
and increases in general overhead expenses to support the growth in revenues.
Research and development expenses increased 19% to $3.9 million in 1997,
compared to $2.8 million in 1996, representing 8% of total cryopreservation and
product revenues for 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.
Seasonality
The demand for the Company's human heart valve and conduit cryopreservation
services is seasonal, with peak demand generally occurring in the second and
third quarters. Management believes this demand trend for human heart valve and
conduit cryopreservation services is primarily due to the high number of
surgeries scheduled during the summer months. Management believes the trends
experienced by the Company to date for its human connective tissue for the knee
cryopreservation services indicate this business may also be seasonal because it
is an elective procedure which may be performed less frequently during the
fourth quarter holiday months. However, the demand for the Company's vascular
tissue cryopreservation services, bioprosthetic cardiovascular devices,
single-use medical devices and BioGlue Surgical Adhesive does not appear to
experience this seasonal trend.
5
<PAGE>
Liquidity and Capital Resources
At December 31, 1998 net working capital was $62.3 million, compared to $19.5
million at December 31, 1997, with a current ratio of 8 to 1. The Company's
primary capital requirements arise out of general working capital needs, capital
expenditures for facilities and equipment, funding of research and development
projects and a common stock repurchase plan approved by the board of directors
in October of 1998. The Company historically has funded these requirements
through bank credit facilities, cash generated by operations and equity
offerings.
Net cash provided by operating activities was $1.2 in 1998, as compared to net
cash used in operating activities of $2.2 million in 1997. This increase
primarily resulted from an increase in net income, a decrease in the growth of
deferred preservation costs due to more stringent inventory management policies,
a decrease in the amount of accounts payable liquidated in the first quarter of
1998 as compared to the first quarter of 1997 due to shorter accounts payable
payment terms, and a decrease in income taxes receivable, partially offset by an
increase in receivables related to the increase in revenues and an increase in
inventories to support the increase in sales of bioprosthetic valves and the
introduction of BioGlue Surgical Adhesive.
Net cash used in investing activities was $18.9 million in 1998, as compared to
net cash used in investing activities of $9.6 million in 1997. This increase was
primarily attributable to the purchase of investments with the proceeds from the
Company's follow-on equity offering and the absence of a business acquisition
during 1998, partially offset by the net proceeds from the sale of the IFM
product line.
Net cash provided by financing activities was $30.5 million in 1998, as compared
to $10.6 million in 1997. This increase was primarily attributable to proceeds
of $45.4 million from the Offering, partially offset by the repayment of
borrowings on the Company's bank loans, and accrued interest thereon, totaling
$13.3 million.
In October 1998 the Company entered into an agreement with an investment banking
firm to provide financial advisory services related to a potential private
placement of equity or equity-oriented securities to form a separate company for
the commercial development of its serine proteinase light activation (FibRx(R))
technologies. This strategy will allow an affiliated entity to fund the FibRx
technology and should expedite the commercial development of its blood clot
dissolving and surgical sealant product applications without additional R&D
expenditures by the Company. This strategy, if successful, will favorably impact
the Company's liquidity going forward.
The Company anticipates its cash, short-term investments and cash generated from
operations will be sufficient to meet its operating and development needs for at
least 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,
6
<PAGE>
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 the Company will not require additional financing or will not seek to
raise additional funds through bank facilities, debt or equity offerings or
other sources of capital to meet future requirements. These additional funds may
not be available when needed or on terms acceptable to the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Year 2000
The Company is aware of the issues that many companies will face as the year
2000 approaches. In order to become year 2000 compliant, the Company has set up
a project team to address the issue and has taken the following steps:
Impact Assessment: The Company has identified potential year 2000 issues and the
associated potential risks. The Company has assessed the impact of the year 2000
issue and believes that its business products and services will not be
significantly impacted. Additionally, the Company has determined that, with the
exception of the Company's clinical tracking database, all of the Company's
financial and operational applications have been upgraded to or replaced with
year 2000 compliant software.
Third Party Impact Assessments: The Company has begun to verify the readiness of
its significant suppliers through the distribution of a questionnaire. This
process was substantially completed by January 1, 1999. The Company does not
anticipate that a lack of compliance of the vendors will significantly affect
the Company's daily operations.
Project Plan: The Company began its compliance strategy in October 1997. With
the exception of the clinical tracking database, all of the "off the shelf"
software packages have been upgraded to compliant releases. Older internally
developed software has been replaced with new systems that are year 2000
compliant. The remaining clinical tracking system will be internally rewritten,
and implemented by the end of the first quarter 1999. The Company estimates all
modifications and testing for year 2000 issues will be completed at a cost of
less than $50,000 including expenditures to date.
Contingency Plan: The principal risk the Company faces is a delay in the
implementation of the new clinical tracking system. Although the clinical
tracking system is not critical to the day-to-day operations of the Company, it
is important for FDA compliance regarding follow-up procedures after transplant.
A delay in the implementation of the new clinical tracking system would result
in the Company having to rely on its paper support for required FDA data.
Although the Company is uncertain what the costs associated with a delay would
be or the related impact on operations, liquidity and financial condition, the
Company does not expect the impact to be material. The Company expects to have a
contingency plan completed by April 15, 1999.
7
<PAGE>
The Company believes it is diligently addressing the year 2000 issue and expects
that, through its actions, year 2000 problems are not reasonably likely to have
a material adverse effect on its operations. However, there can be no assurance
that such problems will not arise.
Recent Accounting Pronouncements
In 1997 the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement 130")
which established standards for the reporting and display of comprehensive
income and its components in a full set of comparative general-purpose financial
statements. The statement became effective for the Company in 1998.
Comprehensive income is defined in Statement 130 as net income plus other
comprehensive income, which, under existing accounting standards includes
foreign currency items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities.
Comprehensive income disclosures are included in the Consolidated Statements of
Shareholders' Equity and Comprehensive Income.
In June 1997, the FASB issued Statement No. 131 ("Statement 131"), "Disclosures
about Segments of an Enterprise and Related Information", which requires public
business enterprises to disclose certain information about reportable operating
segments in complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods. It also requires public
enterprises to present certain "enterprise-wide" information, including revenues
related to products and services and geographic areas in which they operate.
Management does not review operating results on a "component" basis as described
under the statement; accordingly, no separate disclosures have been made for
segment information during the year ended December 31, 1998.
Quantitative and Qualitative Disclosures About Market Risk
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents of $12.9
million and short-term investments of $16.1 million in municipal obligations as
of December 31, 1998 as well as interest paid on its debt. To mitigate the
impact of fluctuations in U.S. interest rates, the Company generally maintains
80% to 90% of its debt as fixed rate in nature. As a result, the Company is
subject to a risk that interest rates will decrease and the Company may be
unable to refinance its debt.
Forward-Looking Statement
This Annual Report 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, including without limitation, (1) the
effects on the Company of year 2000 issues including unanticipated expenses in
connection therewith, (2) the Company's ability to find an equity investor in
8
<PAGE>
the FibRx technology and the impact of such an investment on the Company's
liquidity, (3) the adequacy of the Company's financing arrangements over the
next twelve months, (4) the ability of the Synergraft heart valve to grow with
the recipient and provide surgeons with a near-permanent heart valve
replacement, (5) the impact of CryoLife's surgical adhesives on operating room
procedures and (6) forecasted increases in international BioGlue Surgical
Adhesive sales 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 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, many of
which are beyond the control of the Company. Consequently, all of the
forward-looking statements made in this Annual Report are qualified by these
risks and uncertainies, including without limitation, (1) government regulation
of the Company's business, (2) the Company's competitive position, (3) the
availability of tissue for implant, (4) the status of the Company's products
under development, (5) the protection of the Company's proprietary technology
and (6) the reimbursement of health care costs by third-party payors and there
can be no assurance that the actual results or developments anticipated by the
Company will be realized or 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.
9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ERNST & YOUNG LLP
Board of Directors and Shareholders
CryoLife, Inc.
We have audited the accompanying consolidated balance sheets of CryoLife, Inc.
as of December 31, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ending December 31, 1998. 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.
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 1998 and 1997 consolidated financial statements referred to
above present fairly, in all material aspects, the consolidated financial
position of CryoLife, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 2, 1999
<PAGE>
825065v1
CryoLife, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
December 31, 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
- ---------------------------------------------------------------------------------------
Cash and cash equivalents $ 12,885 $ 111
Marketable securities, at market 26,713 40
Receivables:
Trade accounts, less allowance for doubtful accounts of
$256 in 1998 and $103 in 1997 10,733 9,224
Income taxes 71 842
Other 383 271
- ---------------------------------------------------------------------------------------
Total receivables 11,187 10,337
- ---------------------------------------------------------------------------------------
Deferred preservation costs, less allowances
of $53 in 1998 and $152 in 1997 14,239 12,257
Inventories 3,385 1,761
Prepaid expenses 1,945 1,260
Deferred income taxes 1,348 41
- ---------------------------------------------------------------------------------------
Total current assets 71,702 25,807
- ---------------------------------------------------------------------------------------
Property and equipment:
- ---------------------------------------------------------------------------------------
Equipment 12,145 10,533
Furniture and fixtures 3,011 1,828
Leasehold improvements 14,254 8,247
Construction in progress 2,266 2,509
- ---------------------------------------------------------------------------------------
31,676 23,117
Less accumulated depreciation and amortization 10,216 7,630
- ---------------------------------------------------------------------------------------
Net property and equipment 21,460 15,487
- ---------------------------------------------------------------------------------------
Other assets:
- ---------------------------------------------------------------------------------------
Goodwill, less accumulated amortization
of $215 in 1998 and $468 in 1997 1,685 9,809
Patents, less accumulated amortization
of $660 in 1998 and $531 in 1997 2,216 2,196
Other, less accumulated amortization
of $566 in 1998 and $483 in 1997 1,327 1,103
- ---------------------------------------------------------------------------------------
Total assets $ 98,390 $ 54,402
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CryoLife, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1998 1997
- -------------------------------------------------------------------------------
Current liabilities:
- -------------------------------------------------------------------------------
Accounts payable $ 1,652 $ 1,612
Accrued expenses 2,968 222
Accrued compensation 726 952
Accrued fees to technical service representatives 459 482
Accrued procurement fees 1,806 1,565
Current maturities of capital lease obligation 224 --
Current maturities of long-term debt 516 1,496
Deferred income 1,038 --
- -------------------------------------------------------------------------------
Total current liabilities 9,389 6,329
- -------------------------------------------------------------------------------
Deferred income, less current amount 1,525 --
Deferred income taxes 410 980
Capital lease obligations, less current maturities 1,714 --
Revolving term loan -- 6,777
Convertible debenture 4,393 5,000
Other long-term debt 535 5,089
- -------------------------------------------------------------------------------
Total liabilities 17,966 24,175
- -------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' equity:
Preferred stock $.01 par value per share;
authorized 5,000 shares including 2,000
shares of series A junior participating preferred
stock; no shares issued. -- --
Common stock $.01 par value per share;
authorized 50,000 shares; issued 13,361
shares in 1998 and 10,245 shares in 1997 134 102
Additional paid-in capital 64,350 17,694
Retained earnings 19,113 12,627
Unrealized gain on marketable securities 139 --
Treasury stock; 845 shares in 1998 and 543
shares in 1997, at cost (3,312) (180)
Note receivable from shareholder -- (16)
- -------------------------------------------------------------------------------
Total shareholders' equity 80,424 30,227
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 98,390 $ 54,402
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
<PAGE>
CryoLife, Inc.
Consolidated Income Statements
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
- ---------------------------------------------------------------------------------------------
Preservation services and products $ 60,179 $ 50,409 $ 36,678
Research grants and licenses 512 162 188
- ---------------------------------------------------------------------------------------------
60,691 50,571 36,866
- ---------------------------------------------------------------------------------------------
Costs and Expenses:
- ---------------------------------------------------------------------------------------------
Preservation services and products 25,303 17,764 12,593
General, administrative and marketing 23,907 20,548 15,673
Research and development 4,708 3,946 2,807
Interest expense 670 978 72
Interest income (1,490) (8) (189)
Other income, net (1,078) (290) (173)
- ----------------------------------------------------------------------------------------------
52,020 42,938 30,783
- ---------------------------------------------------------------------------------------------
Income before income taxes 8,671 7,633 6,083
Income tax expense 2,185 2,908 2,156
- ---------------------------------------------------------------------------------------------
Net income $ 6,486 $ 4,725 $ 3,927
- ---------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.54 $ 0.49 $ 0.41
- ---------------------------------------------------------------------------------------------
Diluted $ 0.53 $ 0.48 $ 0.40
- ---------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 11,974 9,642 9,505
- ---------------------------------------------------------------------------------------------
Diluted 12,264 9,942 9,906
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CryoLife, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended
December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash flows from operating activities:
- -----------------------------------------------------------------------------------------------------
Net income $ 6,486 $ 4,725 $ 3,927
- -----------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
flows provided by (used in) operating activities:
Deferred income recognized (387) -- --
Depreciation of property and equipment 2,586 1,842 973
Amortization 905 814 383
Provision for doubtful accounts 176 46 167
Deferred income taxes (1,948) 972 242
Changes in operating assets and liabilities:
Trade and other receivables (1,797) (533) (2,561)
Income taxes 771 (438) (614)
Deferred preservation costs (1,982) (5,079) (1,053)
Inventories (3,010) (864) 163
Prepaid expenses and other assets (706) (506) (326)
Accounts payable 295 (2,756) 1,197
Accrued expenses (158) (468) 740
- -----------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) operating activities 1,231 (2,245) 3,238
- -----------------------------------------------------------------------------------------------------
Net cash flows from investing activities:
- -----------------------------------------------------------------------------------------------------
Capital expenditures (6,693) (5,059) (8,481)
Cash paid for acquisitions, net of cash acquired -- (4,418) (722)
Net proceeds from sale of IFM product line 15,000 -- --
Other assets (752) (148) (939)
Purchases of marketable securities (34,277) -- (3,013)
Sales of marketable securities 7,604 3 8,955
Gross unrealized gain on marketable equity securities 210 -- --
- -----------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (18,908) (9,622) (4,200)
- -----------------------------------------------------------------------------------------------------
Net cash flows from financing activities:
- -----------------------------------------------------------------------------------------------------
Principal payments of debt (13,990) (6,607) (750)
Proceeds from debt issuance 1,680 16,643 2,000
Principal payments on obligations under capital leases (203) -- --
Proceeds from exercise of options and issuance of stock 46,298 567 561
Purchase of treasury stock (3,350) -- --
Net payments on notes receivable from shareholders 16 5 5
- -----------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities: 30,451 10,608 1,816
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash 12,774 (1,259) 854
Cash and cash equivalents, beginning of year 111 1,370 516
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 12,885 $ 111 $ 1,370
- -----------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information - cash paid during the year for:
- -----------------------------------------------------------------------------------------------------
Interest $ 742 $ 920 $ 34
Income taxes 3,568 2,380 2,529
- -----------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Establishing capital lease obligation $ 2,141 $ -- $ --
- -----------------------------------------------------------------------------------------------------
Debt conversion into common stock $ 608 $ -- $ --
- -----------------------------------------------------------------------------------------------------
Purchase of property and equipment
in accounts payable $ 185 $ 440 $ 888
- -----------------------------------------------------------------------------------------------------
Note issued for patent $ -- $ -- $ 826
- -----------------------------------------------------------------------------------------------------
Net cash paid for acquisition $ -- $ 1,768 $ 534
Cost in excess of assets acquired -- 8,541 1,873
Liabilities assumed -- (891) (435)
Notes issued for assets acquired -- (5,000) (1,250)
- -----------------------------------------------------------------------------------------------------
Fair value of assets acquired $ -- $ 4,418 $ 722
- -----------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
CryoLife, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Common Shares Notes
Outstanding Additional Unrealized Receivables Total
------------- Paid-In Retainted Gains on Treasury from Shareholders'
Shares Amount Capital Earnings Investments Stock Shareholders Equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 9,431 $100 $16,568 $3,975 $28 $(180) $(26) $20,465
- ------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 3,927 -- -- -- 3,927
Unrealized gains on investments -- -- -- -- (29) -- -- (29)
-----------
Comprehensive income 3,898
Exercise of options 124 1 409 -- -- -- -- 410
Employee stock purchase plan 2 -- 21 -- -- -- -- 21
Purchase of other assets 10 -- 130 -- -- -- -- 130
Payments on shareholder notes -- -- -- -- -- -- 5 5
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 9,567 101 17,128 7,902 (1) (180) (21) 24,929
- ------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 4,725 -- -- -- 4,725
Unrealized gains on investments -- -- -- -- 1 -- -- 1
----------
Comprehensive income 4,726
Exercise of options 105 1 298 -- -- -- -- 299
Employee stock purchase plan 30 -- 268 -- -- -- -- 268
Additions to shareholder notes -- -- -- -- -- -- (21) (21)
Payments on shareholder notes -- -- -- -- -- -- 26 26
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 9,702 102 17,694 12,627 -- (180) (16) 30,227
- ------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 6,486 -- -- -- 6,486
Unrealized gains on investments -- -- -- -- 139 -- -- 139
----------
Comprehensive income 6,625
Follow-on equity offering,
net of $703 of offering costs 2,976 30 45,417 -- -- -- -- 45,447
Exercise of options 100 1 338 -- -- 121 -- 460
Employee stock purchase plan 31 -- 294 -- -- 97 -- 391
Convertible debenture 50 1 607 -- -- -- -- 608
Purchase of treasury stock (343) -- -- -- -- (3,350) -- (3,350)
Payment on shareholder note -- -- -- -- -- -- 16 16
========================================================================================================================
Balance at December 31, 1998 12,516 $134 $64,350 $19,113 $139 $(3,312) $ -- $80,424
========================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
CRYOLIFE, INC. AND SUBSIDIARIES
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 implantable products include stentless porcine heart
valves marketed in Europe, South America, the Middle East and South Africa as
well as a proprietary project to transplant human cells onto the structure of
animal tissue. The Company also serves as an OEM manufacturer for single use
medical devices for use in vascular surgical procedures. In addition, the
Company develops proprietary implantable bioadhesives, including BioGlue
surgical adhesive, which it has begun commercializing for vascular applications
in Europe, South America, Asia, South Africa, and the Middle East. International
revenues were $4.0 million and $2.7 million for 1998 and 1997, respectively.
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 1998
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 and 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. The carrying value of cash equivalents approximates fair
value.
Investments
The Company maintains cash equivalents and investments in several large
well-capitalized financial institutions, and the Company's policy disallows
investment in any securities rated less than "investments-grade" by national
rating services.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
6
<PAGE>
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Debt securities not
classified as held-to-maturity or trading and marketable equity securities not
classified as trading are classified as available-for-sale. Available-for-sale
securities are stated at their fair values, with the unrealized gains and
losses, net of tax, reported in a separate component of shareholders' equity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other than temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income. At
December 31, 1998 and 1997, all marketable equity securities and debt securities
were designated as available-for-sale.
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, bioprosthetic
implantable products, and implantable bioadhesives and are valued at the lower
of cost (first-in, first-out) or market.
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 non-current tangible
and 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.
7
<PAGE>
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 has been adjusted to reflect
such split.
Comprehensive Income
In 1997 the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement 130")
which established standards for the reporting and display of comprehensive
income and its components in a full set of comparative general-purpose financial
statements. The statement became effective for the Company in 1998.
Comprehensive income is defined in Statement 130 as net income plus other
comprehensive income, which, under existing accounting standards, includes
foreign currency items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities.
Comprehensive income disclosures are included in the Consolidated Statements of
Shareholders' Equity and Comprehensive Income.
8
<PAGE>
2. Follow-on Equity Offering
On April 3, 1998 the Company completed a follow-on equity offering (the
"Offering") of 2,588,000 new shares of its common stock resulting in net
proceeds of $39.4 million. On April 16, 1998 the Company issued an additional
387,500 shares of common stock pursuant to the underwriters' overallotment
option resulting in $6.0 million of additional net proceeds to the Company. A
portion of the net proceeds were used to repay $13.3 million of principal and
interest outstanding under the Company's bank loans.
3. Ideas For Medicine, Inc.
On March 5, 1997 the Company acquired the stock of Ideas for Medicine, Inc.
("IFM"), a medical device company specializing in the manufacture and
distribution of single use medical devices, for consideration of approximately
$4.5 million in cash and approximately $5.0 million in convertible debentures
plus related expenses. The cash portion of the purchase price was financed by
borrowings under the Company's Revolving Term Loan Agreement. Pursuant to the
purchase agreement, additional consideration equal to 10 percent of IFM's net
annual revenues in excess of $7.5 million is to be paid each year for a 10 year
period, limited to $1.75 million in the aggregate. The acquisition was accounted
for as a purchase; accordingly, the results of operations have been included in
the accompanying 1998 and 1997 consolidated income statements from the date of
acquisition. Based on the allocation of the purchase price, the Company's
unaudited condensed pro forma results of operations for 1997, assuming
consummation of the purchase as of January 1, 1997 and 1996, are as follows (in
thousands, except per share data):
1997 1996
--------- ----------
Revenues $52,082 $43,574
Net income 4,756 3,511
Earnings per share:
Basic $0.49 $0.37
Diluted 0.48 0.35
In connection with this acquisition, the Company also entered into a consulting
agreement with the former majority shareholder of IFM requiring monthly payments
to such shareholder of approximately $17,000 until March 2002.
On September 30, 1998 the Company completed the sale of substantially all of the
IFM product line and certain related assets to Horizon Medical Products, Inc.
("Horizon"), for $15 million in cash pursuant to an asset purchase agreement.
Concurrently, IFM and Horizon signed a manufacturing agreement which provides
for the manufacture by IFM of specified minimum dollar amounts of IFM products
to be purchased exclusively by Horizon over each of the four years following the
sale. Thereafter, responsibility for such manufacturing is to be assumed by
Horizon.
9
<PAGE>
The Company recorded deferred revenue at the transaction date totaling $2.9
million, representing the selling price less the net book value of the assets
sold, which included $7.7 million of goodwill, net of accumulated amortization,
and the costs related to the sale. The revenue was deferred because the sale and
manufacturing agreements represent, in the aggregate, a single transaction for
which the related income should be recognized over the term of the manufacturing
agreement. Accordingly, the deferred revenue is being reflected in cost of goods
sold over the four-year term of the manufacturing agreement in a manner which is
expected to result in approximately equal margins over the four-year period on
the products manufactured and sold by IFM to Horizon. During 1998 amortization
of deferred revenue totaled $387,000.
4. Marketable Securities
The following is a summary of available-for-sale securities (in thousands):
Unrealized Estimated
December 31, 1998 Cost Holding Gains Market Value
------------- ----------------- -----------------
Municipal obligations $ 24,963 $ 35 $ 24,998
Equity securities 10,440 175 10,615
------------ ---------------- ----------------
$ 35,403 $ 210 $ 35,613
============ ================ ================
Unrealized Estimated
December 31, 1997 Cost Holding Gains Market Value
------------- ----------------- -----------------
Debt securities $ 40 $ -- $ 40
============ ================ ================
The gross realized gains on sales of available-for-sale securities totaled
$4,000 and $0 in 1998 and 1997, respectively. Differences between cost and
market of $210,000 (less deferred taxes of $71,000) are included as a separate
component of shareholders' equity as of December 31, 1998.
At December 31, 1998 approximately $8.9 million of debt securities with original
maturities of 90 days or less at their acquisition dates were included in cash
and cash equivalents. At December 31, 1998 approximately $16.1 million of
investments mature between one and five years. The market values of these
securities approximate cost.
10
<PAGE>
5. Inventories
Inventories at December 31 are comprised of the following (in thousands):
1998 1997
----------- ---------
Raw materials $ 1,296 $ 262
Work-in-process 1,037 358
Finished goods 1,052 1,141
----- -----
$ 3,385 $ 1,761
===== =====
6. Long-Term Debt
Long-term debt at December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Revolving loan $ -- $6,777
Term loan due in equal monthly installments of $83,000 plus interest
at prime through December 31, 2002 -- 5,000
7% convertible debenture, due in March 2002 4,393 5,000
8.25% note payable due in equal annual installments of $250,000 750 1,000
Note payable due in 2000 with an effective interest rate
of 8%, net of unamortized discount of $29,000 in 1998
and $35,000 in 1997 301 585
------ ------
5,444 18,362
Less current maturities 516 1,496
----- ------
Total long-term debt $4,928 $16,866
====== =======
</TABLE>
On August 30, 1996 the Company executed a $10 million revolving loan agreement
(the "Agreement") with a bank which, as amended on June 12, 1998, permits the
Company to borrow up to $2.0 million at either the bank's prime rate of interest
(7.75% at December 31, 1998) or at Adjusted LIBOR, as defined, plus an
applicable LIBOR margin. The Agreement expires on December 31, 1999; all
borrowings outstanding on that date convert to a term loan to be paid in 60
equal monthly installments of principal plus interest at either the bank's prime
rate of interest or at Adjusted LIBOR, as defined, plus an applicable LIBOR
11
<PAGE>
margin. 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 facility. In
December 1997 the Company amended the Agreement to also include a $5.0 million
term loan facility with the bank at the bank's prime rate of interest or
Adjusted LIBOR, as defined, plus an applicable LIBOR margin. In conjunction with
the Offering, the revolving and term loans were paid in full in April 1998.
In March 1997 the Company issued a $5.0 million convertible debenture in
connection with the IFM acquisition. The debenture bears interest at 7% and is
due in March 2002. The debenture is convertible into common stock of the Company
at any time prior to the due date at $12.08 per common share. In conjunction
with the Offering, $608,000 of the convertible debenture was converted into
50,000 shares of the Company's common stock on March 30, 1998.
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 $1.25
million 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 acquisition of its BioGlue(R) technology. The note is
payable in three 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 are as follows
(in thousands):
1999 $516
2000 285
2001 250
2002 4,393
-----
$5,444
=====
7. 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 receivables and accounts payable approximate their fair values due to
the short term maturity of these instruments.
In 1997 the Company entered into two interest rate swap agreements with the
lender under the Agreement, maturing on dates through January 1999, which
effectively fixes the interest rate on $2.0 million of available borrowings
through such dates. The estimated fair values of the Company's interest rate
swap agreements and its outstanding debt approximate their carrying amounts at
December 31, 1998.
12
<PAGE>
8. Leases
The Company leases equipment, furniture, and office space under various leases
with terms of up to 15 years. Commencing January 5, 1998 IFM leased office and
manufacturing facilities under a capital lease for $24,125 per month through
January 2008 from the former majority shareholder of IFM. Certain leases contain
escalation clauses and renewal options for additional periods. Future minimum
lease payments under noncancelable leases as of December 31, 1998 are as follows
(in thousands):
Capitalized Operating
Leases Leases
- ------------------------------------------------------------------------------
1999 $ 371 $ 1,369
2000 310 1,368
2001 290 1,281
2002 290 984
2003 290 966
Thereafter 1,132 8,025
---------------------------------------------------------------------------
Total minimum lease payments 2,683 $ 13,993
============
Less amount representing interest 745
------------------------------------------------------
Present value of net minimum
lease payments 1,938
Less current portion 224
-------------------------------------------------------
$ 1,714
======================================================
Property acquired under capital leases at December 31, 1998 consists of the
following (in thousands):
Buildings $ 1,987
Furniture and fixtures 150
------------
2,137
Accumulated depreciation 255
------------
$ 1,882
============
Total rental expense for operating leases amounted to $1,321,000, $1,282,000 and
$714,000 for 1998, 1997 and 1996, respectively.
13
<PAGE>
9. 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, the 1998 Long-Term Incentive Plan, and the amended and
restated Non-employee Director's Plan, the Company has authorized the grant of
options of up to 700,000, 300,000, and 396,000 shares of common stock,
respectively. As of December 31, 1998 and 1997, there were 569,000 and 306,000
shares of common stock reserved for future issuance under the Company's stock
option plans. A summary of stock option transactions under the plans follows:
<TABLE>
<CAPTION>
Exercise Weighted Average
Shares Price Exercise Price
-------------- ----------------- ------------------------
<S> <C> <C> <C>
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
Granted 331,000 12.00-17.13 15.48
Exercised (103,000) 3.12-10.25 4.80
Canceled (155,000) 3.12-18.43 16.03
==============
Outstanding at December 31, 1998 827,000 3.00-17.13 10.73
==============
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Exercise Remaining Average Average
Prices Number Contractual Life Exercise Number Exercise
Outstanding Price Exercisable Price
- ------------------- ---------------- ---------------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$ 3.00-7.75 293,000 1.5 $ 4.68 206,000 $ 4.50
8.50-13.50 295,000 4.5 11.66 115,000 11.19
14.19-17.13 239,000 5.4 17.01 184,000 17.05
</TABLE>
14
<PAGE>
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 price
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:
1998 1997 1996
-------------------------------------------
Expected dividend yield 0% 0% 0%
Expected stock price volatility .520 .533 .561
Risk-free interest rate 5.30% 5.75% 6.51%
Expected life of options 3.8 Years 4.7 Years 4.8 Years
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 options
are amortized to expense over the options' vesting periods. The Company's pro
forma information follows (in thousands, except per share data):
1998 1997 1996
--------------------------------------
Net income--as reported $6,486 $4,725 $3,927
Net income--pro forma $5,705 $4,164 $3,542
Earnings per share--as reported:
Basic $ .54 $ .49 $ .41
Dilutive $ .53 $ .48 $ .40
Earnings per share--pro forma:
Basic $ .48 $ .43 $ .37
Dilutive $ .47 $ .42 $ .36
15
<PAGE>
Other information concerning stock options follows:
1998 1997 1996
------------------------------------
Weighted average fair value of options
granted during the year $6.54 $6.69 $8.34
Number of shares as to which options are
exercisable at end of year 505,000 308,000 157,000
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.
10. 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.
Additionally, the Company has further authorized and directed the issuance of
one Right with respect to each Common Share that shall become outstanding
between December 11, 1995 and the earliest of the Right's exercise date or
expiration date. 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.
11. Stock Repurchase
On October 14, 1998, the Company's Board of Directors authorized the Company to
purchase up to 1 million shares of its common stock. The purchase of shares will
be made from time to time in open market or privately-negotiated transactions on
such terms as management deems appropriate. As of December 31, 1998, the Company
had purchased 343,000 shares of its common stock for an aggregate purchase price
of $3,350,000.
16
<PAGE>
12. Employee Benefit Plans
The Company has a 401(k) savings plan (the "Plan") providing retirement benefits
to all employees who have completed at least 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 $241,000,
$139,000 and $123,000 for 1998, 1997, and 1996, 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
1998, 1997 or 1996.
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, 1998 and 1997 there were 543,000 and 566,000 shares of common stock
reserved under the ESPP and there had been 57,000 and 34,000 shares issued under
the plan, respectively.
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- -----------
Numerator for basic and diluted earnings
per share - income available to common
shareholders $6,486 $4,725 $3,927
=========== ========== ===========
Denominator for basic earnings per share
- weighted-average basis 11,974 9,642 9,505
Effect of dilutive stock options 290 300 401
----------- ---------- -----------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 12,264 9,942 9,906
=========== ========== ===========
Basic earnings per share $ 0.54 $ 0.49 $ 0.41
=========== ========== ===========
Diluted earnings per share $ 0.53 $ 0.48 $ 0.40
=========== ========== ===========
</TABLE>
17
<PAGE>
14. Income Taxes
Income tax expense consists of the following (in thousands):
1998 1997 1996
------------------ ---------------- ----------------
Current:
Federal $3,854 $1,533 $1,573
State 279 403 341
----- ----- -----
4,133 1,936 1,914
Deferred (1,948) 972 242
------- ----- -----
$2,185 $2,908 $2,156
====== ====== ======
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 (in
thousands):
1998 1997 1996
---- ---- ----
Tax expense at statutory rate $2,947 $2,593 $2,068
Increase (reduction) in income taxes
resulting from:
Change in valuation allowance for
deferred tax assets -- (30) (129)
Entertainment expenses 90 42 30
State income taxes, net of federal benefit 173 266 241
Non-taxable interest income (63) -- (50)
Research and development credits (585) -- --
State and local tax refunds (256) -- --
Other (121) 37 (4)
----- ----- -----
$2,185 $2,908 $2,156
====== ====== ======
18
<PAGE>
The tax effects of temporary differences which give rise to deferred tax
liabilities and assets at December 31 are as follows (in thousands):
1998 1997
-------- -------
Long-term deferred tax liabilities/(assets):
Depreciation $1,537 $1,018
Deferred income (580) --
Intangible assets (547) (38)
----- ----
410 980
Current deferred tax assets/(liabilities):
Accrued expenses 872 --
Deferred income 394 --
Allowance for bad debts 97 --
Deferred preservation costs and inventory reserves 20 58
Unrealized gain on marketable securities (71) --
Other 36 (17)
------ -----
1,348 41
----- -----
Net deferred tax assets /(liabilities) $938 $ (939)
==== ======
15. FDA Regulation
Human heart valves historically have not been subject to regulation by the
United States 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 United States.
16. 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 $43,000, $38,000 and
$37,000 for 1998, 1997 and 1996, respectively.
19
<PAGE>
17. 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, 1998 freezers with a total cost of approximately $1,540,000 and related
accumulated depreciation of approximately $901,000 were located at the
implanting hospitals' premises. Depreciation is provided over the estimated
useful lives of the freezers on a straight-line basis.
18. Transactions with Related Parties
The Company expensed $68,000, $65,000 and $39,000 during 1998, 1997 and 1996,
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. The Company expensed $75,000 in 1998 relating to consulting services
performed by a member of the Company's Board of Directors and a shareholder of
the Company. The Company expensed $ 210,000 and $175,000 in 1998 and 1997
relating to consulting services performed by a shareholder of the Company.
20
EXHIBIT 21.1
SUBSIDIARIES OF CRYOLIFE, INC.
Subsidiary Jurisdiction
- ---------- ------------
Ideas for Medicine, Inc. Florida
CryoLife Technology, Inc. Nevada
CryoLife Foreign Sales, Inc. Barbados
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of CryoLife, Inc. of our report dated February 2, 1999, included in the 1998
Annual Report to Shareholders of CryoLife, Inc.
Our audits also included the financial statement schedule of CryoLife, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, as of the date of our report referred to in the preceding
paragraph, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in Registration Statement No.
333-16581 on Form S-3 and Registration Statement Nos. 33-83996, 33-84048,
333-03513, 333-59853, 333-59849, 333-06141 and 333-34025 on Form S-8, of our
report dated February 2, 1999, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of CryoLife, Inc.
Atlanta, Georgia
March 26, 1999
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CRYOLIFE, INC. FOR THE YEAR ENDED DECEMBER 31 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,885,000
<SECURITIES> 26,713,000
<RECEIVABLES> 10,733,000
<ALLOWANCES> 256,000
<INVENTORY> 3,385,000
<CURRENT-ASSETS> 71,702,000
<PP&E> 31,676,000
<DEPRECIATION> 10,216,000
<TOTAL-ASSETS> 98,390,000
<CURRENT-LIABILITIES> 9,389,000
<BONDS> 7,382,000
0
0
<COMMON> 134,000
<OTHER-SE> 80,290,000
<TOTAL-LIABILITY-AND-EQUITY> 98,390,000
<SALES> 7,353,000
<TOTAL-REVENUES> 60,691,000
<CGS> 5,118,000
<TOTAL-COSTS> 25,303,000
<OTHER-EXPENSES> 26,717,000
<LOSS-PROVISION> 176,000
<INTEREST-EXPENSE> 670,000
<INCOME-PRETAX> 8,671,000
<INCOME-TAX> 2,185,000
<INCOME-CONTINUING> 6,486,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,486,000
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
</TABLE>
