1217270v3
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, 1999
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 $231,500,000 at March 24, 2000 (10,522,762 shares).
The number of common shares outstanding at March 24, 2000 was 12,286,196
(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 29, 2000.
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, including bioprosthetic
cardiovascular products and surgical bioadhesives, 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 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 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. Unlike most other available porcine heart valves,
the Company's stentless porcine heart valves do not contain synthetic stents
which increase the risk of endocarditis, a debilitating and potentially fatal
bacterial infection. The Company's CryoLife-O'Brien aortic heart valve,
currently marketed in the European Community and certain other countries 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 countries outside the U.S. The Company has applied its proprietary
SynerGraft technology to its human heart valves and conduits and to some of its
stentless porcine heart valves. SynerGraft involves the depopulation of living
cells from the structure of heart tissues to allow the potential for
repopulation of such tissue with recipient cells. In animal studies, porcine
valves which were depopulated by the SynerGraft process were repopulated with
cells from the valve recipient. This process is designed to reduce calcification
of 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.
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
Company's patent protected FibRx surgical sealant, designed for tissue
hemostasis and suture line sealing, is a light activated, biodegradable surgical
sealant under development which is based on a derivative of the human blood
factors fibrinogen and thrombin. Both of these products may offer advantages
over sutures and staples, including more effective sealing and easier
application. The Company estimates that the annual worldwide market for surgical
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sutures and staples in 1999 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. Following the approval of the Food and Drug Administration to conduct
human clinical studies for BioGlue surgical adhesive as an adjunct in the
surgical repair of acute thoracic aortic dissections, the Company filed an
application with FDA to market the product for this use under a Humanitarian
Service Exemption. In December, 1999, the Company received US FDA approval of
the HDE and immediately began marketing this product for use in the repair of
acute thoracic aortic dissections in the U.S. pursuant to the HDE. Beginning in
1998, the Company began seeking to complete a potential private placement of
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 BioGlue surgical adhesive and
other products under development. As of December 31, 1999 a portion of the
Company's assets relating to the development of FibRx have been classified as
available for sale pending the identification of a corporate partner to fund
future 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. Thereafter, responsibility for such manufacturing is to
be assumed by Horizon. On June 22, 1999, IFM notified Horizon that it was in
default of certain provisions of its OEM Manufacturing Agreement with the
Company. The Company has been negotiating with Horizon in order to reach a
mutually agreeable solution to the default; however, due to the significant
uncertainties related to the Company's ability to realize its investment in IFM,
the Company determined in the fourth quarter of 1999 that it had incurred an
impairment loss on its IFM assets. See "Management's Discussions and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this
Annual Report on Form 10-K .
In the U.S., the Company markets its cryopreservation services for human heart
valves and conduits, human vascular tissue and its BioGlue surgical adhesive for
use in the repair of acute thoracic aortic dissections 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, Canada,
South America and Asia.
Growth Strategy
The Company's primary objective is to continue its consistent revenue growth and
its 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, (iii) expanding its physician training activities,
and (iv) expanding its product offerings by utilizing the first of its
3
SynerGraft technology applications to develop depopulated human heart valves and
conduits with antigen reduction properties and the potential for recipient
cell repopulation.
- 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. In 1998, in addition to patellar and achilles tendons, the
Company began providing cryopreserved posterior tibialis, anterior
tibialis and semi t/gracilis tendons for use in knee repairs, and in
1999 began providing preserved human osteoarticular grafts to repair
articular defects and aortoiliac grafts to repair infected abdominal
aortic aneurysms. The Company is also investigating the use of
cryopreserved human endothelial cells, peripheral nerves and spinal
disks in various surgical applications.
- 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.
In April 1998 the Company received approval under an Investigational
Device Exemption (IDE) to conduct clinical trials for BioGlue surgical
adhesive in the U.S., and in December 1999 received US FDA approval to
distribute BioGlue surgical adhesive under a Humanitarian Device
Exemption ("HDE") for use as an adjunct in the repair of acute
thoracic aortic dissections. The Company has received U.S. FDA
approval to and will commence clinical trials under a supplemental IDE
for use in general vascular and selected cardiac repairs. The Company
has formed a 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 potential 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.
- 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.
- 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
human heart valves and conduits and 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.
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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 timely and controlled delivery of tissue procured from deceased
human donors 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
41,100 cryopreserved human heart valves and conduits from 1984 through 1999.
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 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. In February 2000, the Company began distributing
in the U.S. human heart valves processed by using the first of its SynerGraft
technology applications, which involves depopulating the donor cells from the
valve to produce antigen reduction properties and the potential for repopulation
with the implant recipient's cells.
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
5
table sets forth the characteristics of alternative heart valve implants that
management believes make cryopreserved human heart valves the preferred
replacement for most patients:
Porcine Bovine
Cryopreserved -------------------------------- Mechanical Pericardium
Human ---------------- ----------------
-------------
Stented Stentless(1)
--------------- ---------------
Materials: human glutaraldehyde- glutaraldehyde- pyrolitic carbon glutaraldehyde-
tissue fixed pig fixed pig bi- fixed cow
tissue and tissue leaflet and tissue
synthetic sewing synthetic and synthetic
ring 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 no occasional expected to be yes occasional
clotting): rare
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
(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.
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 17,600 human vascular tissues
from 1986 through 1999.
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.
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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 coronary artery bypass
procedures performed in 1999, the Company believes it is the only commercially
available alternative to the patient's own tissue.
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.
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.
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.
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 11,300 human connective tissues
for the knee through 1999.
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 there are no synthetic menisci on the
market.
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.
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.
7
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.
The Company's SynerGraft technology applies to its porcine heart valves and
involves the removal of living cells from the structure of non-viable animal
tissue to allow the potential repopulation of such tissue with the implant
recipient's own cells. In animal studies, porcine valves that were depopulated
by the SynerGraft process were repopulated with cells from the valve recipient.
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.
Potential future SynerGraft technology applications may involve developing
stentless porcine heart valves repopulated with viable human cells prior to
implantation. This technology will use porcine tissues that have been
depopulated of viable animal cells using the SynerGraft process.
The following table sets forth the bioprosthetic cardiovascular devices
currently marketed by the Company, along with the product features and market
status for each.
Fixed Stentless Porcine Valves Features Regulatory/Market Status
------------------------------ ------------ -------------------------
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
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. Most other stentless porcine valves require a more
complicated implant procedure.
The CryoLife-Ross pulmonary valve, the patent for which the Company acquired in
October 1996, is an advanced design stentless porcine heart valve within an
attached conduit of porcine tissue, which mimics the structure of a human heart
valve. The Company 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 with the potential to naturally
populate the implant.
8
The second of the SynerGraft technology applications involves an attempt to
develop 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 using the SynerGraft process.
Implantable Biomaterials for Use as Surgical Adhesives and Sealants
The effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of tissue and to the ultimate
success of the surgical procedure. Failure to effectively seal surgical wounds
can result in leakage of air in lung surgeries, cerebral spinal fluids in
neurosurgeries, blood in cardiovascular surgeries and gastrointestinal contents
in abdominal surgeries. Air and fluid leaks resulting from surgical procedures
can lead to significant post-surgical morbidity resulting in prolonged
hospitalization, higher levels of post-operative pain and a higher mortality
rate.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and fluid
leakage at the wound site. This is particularly the case when sutures and
staples are used to close tissues containing air or fluids under pressure, such
as the lobes of the lung, the dural membrane surrounding the brain and spinal
cord, blood vessels and the gastrointestinal tract. In addition, in minimally
invasive surgical procedures, where the 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.
Clinical applications for BioGlue surgical adhesive include cardiovascular,
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, its
wholly owned subsidiary. In March 2000, the Company announced that it had
entered into an agreement with Viragen, Inc. to conduct a project to research
the feasibility of site-specifc delivery and activation of Viragen's anti-cancer
proteins using the Company's light activation technology.
The following table summarizes certain important features, targeted applications
and regulatory and market status of BioGlue surgical adhesive and FibRx surgical
sealant:
BioGlue Surgical Adhesive FibRx Surgical
Sealant
------------------------------------ -----------------------------------------
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 procedures; modified 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
Status
Europe, Canada and Approved for cardiovascular, regulatory pathway to be determined
certain other vascular and pulmonary repair pending AuraZyme funding
countries: applications
United States: FDA approved as a Humanitarian Use regulatory pathway to be determined
Device for use as an adjunct in pending AuraZyme funding
repair of acute thoracic aortic
dissections; clinical trials for
general vascular and selected
cardiac repairs will begin in second
quarter of 2000
9
The Company estimates that the worldwide market for surgical sutures and
staples in 1999 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, and in the U.S. in December
1999 pursuant to an HDE for use in repair of thoracic aortic dissections. The
regulatory pathway for FibRx surgical sealant will be determined upon the
funding of Aurazyme.
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 families of balloon catheters and
applicator tips designed to assist in applying the BioGlue surgical adhesive.
HMP has defaulted on its OEM manufacturing agreement with IFM. See "Management's
Discussions and Analysis of Financial Condition and Results of Operations"
contained elsewhere in this Annual Report on Form 10-K.
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, tissue banks and subject to required
testing and donor screening procedures. 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 18 individuals in the area of tissue procurement, five 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 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
10
Company's comprehensive quality assurance program that includes review of donor
screening information and further testing of the tissue to determine if it is
free of infectuous diseases. 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. The tissue is not released for
distribution until all quality assurance procedures have been satisfied and the
tissue has been determined to be suitable for transplant.
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 41 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.
11
Bioprosthetic Cardiovascular Devices
In September 1999 the Company established its European subsidiary, CryoLife
Europa Ltd ("Europa"), to provide distribution and technical services to the
Company's network of European representatives, institutional customers and
surgeons. In February 2000 Europa officially opened its headquarters located
near London, England.
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 21 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 in the U.S.
under the HDE for use in the repair of acute thoracic aortic dissections through
its existing direct technical representatives. The Company markets and
distributes its BioGlue surgical adhesive in the European Community through
Europa and its existing independent representatives, and in other international
markets, excluding Japan, through its existing independent 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
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 own
single-use medical devices, which include BioGlue extender tips and aortic
balloon catheters, 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 22 people in its
research and development department. There are 10 PhDs with specialties in the
fields of 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, additional applications of
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
12
cryopreservation services, bioprosthetic cardiovascular devices, implantable
biomaterials and single-use medical devices, based on the size of the potential
market for any specific product candidate and the estimated development time and
cost required to bring the product to market.
Research on these and other projects is conducted in the Company's research and
development laboratory or at universities or clinics where the Company sponsors
research projects. In 1997, 1998 and 1999, the Company spent approximately $3.9
million, $4.7 million and $4.4 million, respectively, on research and
development activities on new and existing products. These amounts represented
approximately 8%, 8% and 7% 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. In February 2000 the Company began construction
of a 100,000 square foot expansion of its corporate headquarters and
manufacturing facilities. 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, including human heart valves
and conduits processed by applying SyneGraft technology. 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 53
technicians employed in this area, and the laboratory is staffed for two shifts,
365 days per year. In 1999, the laboratory processed approximately 27,300 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.
Implantable Biomaterials for Use as Surgical Adhesives and Sealants
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. The Company conducts research on its FibRx surgical
sealant in the biomedical products laboratory, which is located in Marietta,
Georgia and employs 2 technicians. This laboratory contains approximately 11,000
square feet, including 4,000 square feet of laboratory space and a suite of
eight clean rooms.
Bioprosthetic Cardiovascular Devices
The bioprosthesis laboratory is responsible for the manufacturing of the
CryoLife-O'Brien and CryoLife-Ross stentless porcine heart valves, as well as
for the manufacturing of SynerGraft porcine 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 25 technicians and is scheduled
to manufacture approximately 1,200 CryoLife-O'Brien and CryoLife-Ross valves in
2000. The recently renovated facility's capacity is over 6,000 valves.
13
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 moved to a renovated
30,000 square foot facility in January 1998. The Company has approximately 105
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 dissection of the tissue to be
cryopreserved, a separate disinfection procedure is begun during which the
dissected 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.
The Company's tissue processing facilities are annually licensed by the States
of Georgia, New York, Florida and California as facilities that process, store
and distribute human tissue for implantation. The regulatory bodies of these
states perform appropriate inspections of the facilities to ensure compliance
with state law and regulations. In addition, the Company's human heart valve
operations are additionally regulated by the FDA and periodically inspected for
compliance with Quality System Regulations. Other human tissue processed by the
Company is periodically inspected for compliance with the Code of Federal
Regulation ("CFR") Part 1270. CFR 1270 is an FDA regulation which sets forth the
requirements with which the Company must comply in determining the suitability
of human tissue for implantation.
14
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 30 U.S.
patents and 26 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 15 pending U.S. patent applications and in excess of 43
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 2
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.
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
15
may be granted in the future pursuant to pending patent applications or that its
products do not infringe any patents or proprietary rights of third parties. The
Company may incur substantial legal fees in defending against a patent
infringement claim or in asserting claims against third parties. In the event
that any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from selling certain of its products
or could be required to obtain licenses from the owners of such patents or be
required to redesign its products to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be on
terms acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. The
Company's failure to obtain these licenses or to redesign its products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors to maintain the
confidentiality of trade secrets and proprietary information. There can be no
assurance that the obligations of employees of the Company and third parties
with whom the Company has entered into confidentiality agreements will
effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets or
proprietary information will not be independently developed by the Company's
competitors. Litigation may be necessary to defend against claims of
infringement, to enforce patents and trademarks of the Company, or to protect
trade secrets and could result in substantial cost to, and diversion of effort
by, the Company. There can be no assurance that the Company would prevail in any
such litigation. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the U.S.
Competition
Cryopreserved Human Tissues and Bioprosthetic Cardiovascular Devices
The Company faces competition from non-profit tissue banks that cryopreserve and
distribute human tissue, as well as from companies that market mechanical,
porcine and bovine heart valves for implantation. Many established companies,
some with resources greater than those of the Company, are engaged in
manufacturing, marketing and selling alternatives to cryopreserved human tissue.
Management believes that it competes favorably with other entities that
cryopreserve human tissue on the basis of technology, customer service and
quality assurance. As compared to mechanical, porcine and bovine heart valves,
management believes that the human heart valves cryopreserved by the Company
compete on the factors set forth above, as well as by providing a tissue that is
the preferred replacement alternative with respect to certain medical
conditions, such as pediatric cardiac reconstruction, valve replacements for
women in their child-bearing years and valve replacements for patients with
endocarditis. Although human tissue cryopreserved by the Company is initially
higher priced than are mechanical alternatives, these alternatives typically
require that the patient take anti-coagulation drug therapy for the lifetime of
the implant. As a result of the costs associated with anti-coagulants,
mechanical valves are generally, over the life of the implant, more expensive
than tissue cryopreserved by the Company. Notwithstanding the foregoing,
management believes that, to date, price has not been a significant competitive
factor.
Generally, for each procedure that may utilize other human tissue that the
Company cryopreserves, there are alternative treatments. Often, as in the case
of veins and ligaments, these alternatives include the repair, partial removal
or complete removal of the damaged tissue and may utilize other tissues from the
patients themselves or synthetic products. The selection of treatment choices is
made by the attending physician in consultation with the patient. Any newly
developed treatments will also compete with the use of tissue cryopreserved by
the Company.
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 St. Jude Medical, Inc., Baxter International Inc. and
Medtronics, Inc. are the leading suppliers 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
16
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
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.
17
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. The device
may not be used until the Institutional Review Boiard for the clinical site has
given its approval for the clinical study and patients have given informed
consent to be treated with the 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.
Under certain circumstances, where human clinical studies have established the
safety of a device, the FDA may grant a Humanitarian Device Exemption. HDE's are
granted by the FDA in an attempt to encourage the development of medical devices
for use in the treatement of rare conditions that affect small populations. If a
device is determined to be for humanitarian use by the FDA, the manufacturer is
required to show only that the device is safe and has a probable benefit to
patients, but not a demonstration of safety. An approval by the FDA allows such
devices to be distributed before completion of clinical studies to establish the
effectiveness of the device.
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, process,
labeling and packaging controls, process validation, record keeping, and other
quality control activities. The FDA's medical device tracking regulation
requires that a device manufacturer provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its products,
as well as product malfunctions that would likely cause or contribute to death
or serious injury if the malfunction were to recur. The FDA's medical device
tracking regulation requires the adoption of a method of device tracking by
manufacturers of certain 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.
18
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" or biological products 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 has considered 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 manufactured
by IFM have received a 510(k) clearance from the FDA. In addition, the IFM
facilities are subject to period inspection by the FDA, as are certain of the
Company's records, including reports on returned products and problems
associated with use of its products.
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 in the U.S. There can be no assurance that BioGlue
will receive FDA approval.
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The Company received a Humanitarian Device Exemption (HDE) in December 1999 for
BioGlue surgical adhesive for use in repair of acute thoracic aortic
dissections. The Company commercially distributes BioGlue in the US for this
indication, subject to the limitations imposed by the FDA under an HDE, and will
likely discontinue clinical trials of BioGlue under its current IDE. The Company
has received U.S. FDA approval to and will commence clinical trials under a
supplemental IDE for BioGlue surgical adhesive for use in general vascular and
selected cardiac repairs. If successful, the Company would be able to
commercially distribute BioGlue in the US for these indications. However, there
can be no assurance that the Company will be successful in gaining approval for
the IDE.
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
heart valves 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.
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 issued by LRQA for the distribution of its CyroLife-O'Brien and
CryoLife-Ross porcine heart valves, BioGlue surgical adhesive and IFM single-use
medical devices in the European Community. The Company's porcine heart valves
may be exported to specified developed nations, including countries in the
European Community, Australia, Canada,
20
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.
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
At March 20, 2000 the Company had approximately 410 employees. These employees
included 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. 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 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.
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."
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
21
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, including
additional applications of its SynerGraft technology and its FibRx technology
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 human clinical studies will be
consistent with earlier pre-clinical 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 BioGlue surgical adhesive is currently offered for sale in the
U.S. pursuant to an HDE approval, which provides for limited distribution for
use only as an adjunct in the repair of acute thoracic aortic dissections. There
can be no assurance that the Company will obtain the necessary approvals to
allow for general distribution of its BioGlue surgical adhesive in the U.S.
The Company's porcine heart valve products are currently only offered for sale
outside of the U.S. The Company's porcine heart valves are subject to the risk
that the Company may be unable to obtain regulatory approval necessary to permit
commercial distribution of these products in the U.S.
The Company's research and development efforts are time consuming and expensive
and there can be no assurance that these efforts will lead to commercially
successful products or services. Even the successful commercialization of a new
service or product in the medical industry can be characterized by slow growth
and high costs associated with marketing, under-utilized production capacity and
continuing research, 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.
22
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. BioGlue surgical adhesive has been approved for limited distribution in
the U.S. under a Humanitarian Device Exemption while FibRx surgical sealant has
not been approved for commercial distribution in the U.S. or elsewhere. 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 sealants or porcine heart valve products in
the U.S., or the approval for unlimited distribution of its BioGlue surgical
adhesive 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 clinical investigation, 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.
23
Products marketed by the Company pursuant to FDA or foreign oversight or
approval are subject to pervasive and continuing regulation. In the U.S.,
devices and biologics must be manufactured in registered and, in the case of
biologics, licensed establishments and must be produced in accordance with
Quality System Regulations. Manufacturing facilities and processes are subject
to periodic FDA inspection. Labeling and promotional activities are also subject
to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. The export of devices and biologics is also subject to regulation
and may require FDA approval. From time to time, the FDA may modify such
regulations, imposing additional or different requirements. Failure to comply
with any applicable FDA requirements, which may be ambiguous, could result in
civil and criminal enforcement actions, product recalls or detentions and other
penalties and could have a material adverse effect on the 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,
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
24
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 prior FDA approval or clearance of the product did not
preempt product liability actions involving the product. FDA 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.
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,
25
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 successful
development of its SynerGraft porcine valves, the funding to continue
development of FibRx surgical sealant, other estimated dates relating to the
Company's proposed regulatory submissions, the timing of the Company's clinical
trials for the approval of BioGlue surgical adhesive for general vascular
repair, the timing of the completion of the expansion of the Company's corporate
headquaters and manufacturing facilities, the Company's expectations regarding
the adequacy of current financing arrangements, product demand and market
growth, the impact of the introduction of BioGlue in the U.S. 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
26
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 manufactures single-use medical devices
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. The Company's lease on its IFM facility expires in
2007.
In February 2000, the Company began construction of a major new addition to its
corporate headquarters and manufacturing facilities located in suburban Atlanta,
Georgia. The new addition will consist of a two-story 100,000 square foot
manufacturing facility for BioGlue surgical adhesive and SynerGraft heart
valves, as well as physician training laboratories and additional corporate
office space. The Company anticipates completion of the project in mid 2001.
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.
27
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 his earlier removal by the
Board of Directors or his 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.
Date First Elected to
Name Age Position Present Office
- - ------- --- --------- ---------------------
Steven G. Anderson 61 President, Chief Executive Officer and Chairman February, 1984
Kirby S. Black, PhD 45 Vice President, Research and Development July, 1995
Edwin B. Cordell, Jr., CPA 41 Vice President and Chief Financial Officer December, 1994
David M. Fronk 36 Vice President, Clinical Research December, 1998
Albert E. Heacox, PhD 49 Vice President, Laboratory Operations June, 1995
Gerald B. Seery 43 Vice President, Marketing August, 1995
James C. Vander Wyk, PhD 55 Vice President, Regulatory Affairs and Quality February, 1996
Assurance
Ronald D. McCall, Esq. 63 Director, Secretary and Treasurer January, 1984
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
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.
28
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.
29
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 35 of the
annual shareholders report for the year ended December 31, 1999.
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 36 of the
annual shareholders report for the year ended December 31, 1999.
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 16
though 21 of the annual shareholders report for the year ended December 31,
1999.
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 20 of the annual shareholders report for the year
ending December 31, 1999.
Item 8. Financial Statements and Supplementary Data.
The report of independent auditors and consolidated financial statements
included on pages 22 through 35 of the annual shareholders report for the year
ended December 31, 1999 are incorporated herein by reference. Quarterly Results
of Operations on page 37 of the annual shareholders report for the year ended
December 31, 1999 is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None required to be reported in this Form 10-K.
30
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 29, 2000.
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 29, 2000.
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, 2000.
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 29, 2000.
Item 13. Certain Relationships and Related Transactions.
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 29, 2000.
31
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 consolidated financial
statements included on pages 22 through 35 of the annual
shareholders report for the year ended December 31, 1999 are
incorporated herein by reference and the report of independent
auditors for each of the two years in the period ended December 31,
1998 is set forth below.
Report of Independent Auditors
The Board of Directors and Shareholders
CryoLife, Inc.
We have audited the accompanying consolidated balance sheet of CryoLife, Inc. as
of December 31, 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CryoLife, Inc. at December 31, 1998, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 2, 1999
2. Financial Statement Schedule
Independent Auditors' Report on Schedule
Schedule II-Valuation and Qualifying Accounts
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.
32
3. A. Exhibits
The following exhibits are filed herewith or incorporated herein by reference:
Exhibit
Number Description
- - ----- -------------
2.1 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.)
2.2 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.)
2.3 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.
3.2 ByLaws of the Company, as amended. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
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.)
33
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. (Incorporated by reference to Exhibit 10.9(a) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.)
34
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.
(Incorporated by reference to Exhibit 10.9(g) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.)
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* Terms of Agreement Between Bruce J. Van Dyne, M.D. and CryoLife,
Inc. dated November 1, 1999.
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).)
35
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.)
10.16(a)* First Amendment to Lease Agreement Agreement, dated April 18, 1995,
between the Company and Amli Land Development-I Limited Partnership
dated August 6, 1999.
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.)
10.2 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)* Third Amended and Restated Loan Agreement between CryoLife, Inc, as
Borrower and NationsBank, N.A., as Lender, dated August 30, 1996.
10.24(b) 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(c) 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 10.32(b)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.)
36
Exhibit
Number Description
- - -------- -----------------
10.24(d)* Third Modification of Third Amended and Restated Loan Agreement
dated June 12, 1998 by and between the Registrant and NationsBank,
N.A.
10.24(e)* Fourth Modification of Third Amended and Restated Loan Agreement
dated December 16, 1997 by and between the Company and Bank of
America, N.A. and First Modification of Revolving Note dated
December 31, 1999.
10.25 Reserved.
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.)
10.3 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.)
10.32* Standard Form of Agreements Between Owner and Design/Builder by and
between the Company and Choate Design and Build Company dated
January 19, 2000.
13.1* Portions of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1999 which are incorporated by reference
herein.
21.1* Subsidiaries of CryoLife, Inc.
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Ernst & Young LLP
27.1* Financial Data Schedule
________________________________
* Filed herewith.
37
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).)
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.
(Incorporated by reference to Exhibit 10.9(a) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.)
8. Employment Agreement, by and between the Company and David M. Fronk.
(Incorporated by reference to Exhibit 10.9(g) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.)
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. (Exhibit 10.34 to this Form
10-K).
17. Terms of Agreement Between Bruce J. Van Dyne, M.D. and CryoLife, Inc. dated
November 1, 1999.
38
(b) Reports on Form 8-K
1. The Registrant filed a Current Report on Form 8-K with respect to the
change in its Independent Auditors with the Securities and Exchange
Commission on June 4, 1999.
2. The Registrant filed a Current Report on Form 8-K/A with respect to the
change in its Independent Auditors with the Securities and Exchange
Commission on June 9, 1999.
39
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 27, 2000
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.
Signature Title Date
------------- ---------- -------
/s/ Steven G. Anderson President, Chief Executive Officer March 27, 2000
- - ----------------------- and Chairman of the Board of Directors
Steven G. Anderson (Principal Executive Officer)
/s/ Edwin B. Cordell, Jr. Vice President and Chief Financial March 27, 2000
- - ------------------------ Officer (Principal Financial and
Edwin B. Cordell, Jr. Accounting Officer)
/s/ Ronald D. McCall Director March 27, 2000
- - ------------------------
Ronald D. McCall
/s/ Benjamin H. GRAY Director March 27, 2000
- - ------------------------
Benjamin H. Gray
/s/ Virginia C. Lacy Director March 27, 2000
- - ------------------------
Virginia C. Lacy
/s/ Ronald Charles Elkins, M.D. Director March 27, 2000
- - --------------------------------
Ronald Charles Elkins, M.D.
/s/ Bruce j. Van dyne, M.D. Director March 27, 2000
- - --------------------------------
Bruce J. Van Dyne, M.D.
/s/ John M. Cook Director March 27, 2000
- - --------------------------
John M. Cook
/s/ Alexander C. Schwartz, jr. Director March 27, 2000
- - ------------------------
Alexander C. Schwartz, Jr.
40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CryoLife, Inc.
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in CryoLife,
Inc.'s 1999 annual report to stockholders and this Form 10-K and have issued our
report thereon dated February 7, 2000. Our audit was made for the purpose of
forming an opinion on those financial statements taken as a whole. The schedule
listed in Item 14(a) of this Form 10-K is the responsibility of the Company's
management, is presented for purposes of complying with the Securities and
Exchange Commission's rules, and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN, LLP
Atlanta, Georgia
February 7, 2000
S-1
1216257v1
1217270v3
SCHEDULE II
CRYOLIFE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1999, 1998, and 1997
Balance beginning Balance end of
Description of period Additions Deductions period
- - --------------------------------------------- ----------------- --------- ---------- ---------------
Year ended December 31, 1999
Allowance for doubtful accounts........... $ 256,000 $521,000 $249,000 $528,000
Deferred preservation costs............... 53,000 235,000 137,000 151,000
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
S-2