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, 2000
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 $398,777,000 at March 27, 2001 (16,060,309 shares).
The number of common shares outstanding at March 27, 2001 was 18,750,704
(exclusive of treasury shares).
Documents Incorporated By Reference
Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be filed not later than April 30, 2001.
PART I
Item 1. Business.
Overview
CryoLife, Inc. ("CryoLife" or the "Company") 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 surgical bioadhesives. The Company estimates
that it provided in excess of 70% of the cryopreserved human heart valve tissue
implanted in the U.S. in 2000. 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 and
markets proprietary implantable biomaterials, including BioGlue(R) surgical
adhesive, which it began commercializing within the European Community ("EC") in
April 1998 and within the U.S. in December 1999. Additionally the Company
develops bioprosthetic cardiovascular devices including two novel design
stentless porcine heart valves currently marketed in the EC. In November 2000
the Company received a Conformite Europeene ("CE") Mark (product certification)
for commercial distribution of its SynerGraft(R) heart valve in the EC.
Domestically the Company began applying its proprietary SynerGraft technology in
February 2000 to enhance the preservation of human heart valves.
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 a more
natural functionality, the elimination of a long-term need for anti-coagulation
drug therapy, a reduced incidence of reoperation and a reduced risk of
catastrophic failure, thromboembolism (stroke) or calcification. The Company
estimates that the potential U.S. market for implantable products targeting
indications addressed by the cryopreserved tissues processed by the Company was
in excess of $1 billion in 2000. The Company seeks to expand the availability of
human tissue through its established relationships with over 100 tissue banks
and organ procurement agencies nationwide.
CryoLife is developing implantable biomaterials for use as surgical adhesives
and sealants. The Company's patent protected BioGlue surgical adhesive, designed
for cardiovascular, vascular and pulmonary applications, is a polymer based on a
derivative of an animal blood protein and a cross-linking agent. BioGlue offers
advantages over sutures and staples, including more effective sealing and easier
application. The Company estimates that the annual worldwide market for surgical
sutures and staples in 2000 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 EC. In March
1999 the Company was awarded a second CE Mark allowing the use of BioGlue in
pulmonary indications, including the repair of air leaks in lungs. In December
1999 the Company received U.S. Food and Drug Administration ("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
and immediately began marketing this product in the U.S. pursuant to the HDE.
The Company completed its clinical trial for the use of BioGlue in all vascular
repair in the fall of 2000, and filed a premarket approval ("PMA") with the FDA
on February 1, 2001 that, if approved, would allow for the broad commercial
distribution of BioGlue in the U.S.
CryoLife has developed and markets outside of the U.S. bioprosthetic
cardiovascular devices for implantation, currently consisting of glutaraldehyde
fixed stentless porcine heart valves. Glutaraldehyde 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.
Glutaraldehyde fixed porcine and bovine heart valves address a worldwide target
market estimated to have been $325 million in 2000. Unlike most other available
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porcine heart valves, the Company's stentless porcine heart valves do not
contain synthetic materials which increase the risk of endocarditis, a
debilitating and potentially fatal infection. The Company's CryoLife-O'Brien(R)
aortic heart valve, currently marketed in the EC and certain other territories
outside the U.S., is a stentless porcine heart valve which contains a matched
composite leaflet design that approximates human heart valve blood flow
characteristics and requires only a single suture line which simplifies surgical
implantation. The Company's CryoLife-Ross(R) pulmonary heart valve, another of
the Company's fixed stentless porcine valves, is also marketed in the EC and
certain countries outside the U.S. The Company has applied its proprietary
SynerGraft technology to the processing of human heart valves and conduits and
to some of the Company's stentless porcine heart valves. SynerGraft involves the
depopulation of cells from the structure of human heart tissue and non-viable
animal heart tissue leaving a collagen matrix that has the potential to be
repopulated with the implant recipient's cells. This process is designed to
reduce calcification of heart valves, thereby increasing longevity, and to
improve the biocompatibility and functionality of such tissue. In November 2000
the Company received CE Mark approval for its SynerGraft porcine pulmonary heart
valves, which allowed the Company to begin commercial distribution into the EC.
The Company believes that its porcine heart valves, treated with the SynerGraft
technology, will expand its opportunity to address the broader international and
U.S. heart valve markets, estimated to have been $390 million and $400 million,
respectively, in 2000.
Beginning in 1998, the Company began seeking to complete a potential private
placement of equity or equity-oriented securities representing a majority
investment in its wholly-owned subsidiary company, AuraZyme Pharmaceuticals,
Inc. ("AuraZyme"), for the commercial development of its Activation Control
Technology ("ACT") technology. The ACT technology is a reversible linker
technology that has potential uses in the areas of cancer therapy, blood clot
dissolving, heart attack therapies and other drug delivery applications. This
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, SynerGraft technology
and other products under development.
In the U.S., the Company markets its cryopreservation services for human heart
valves and conduits, human vascular tissue and its BioGlue surgical adhesive
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, including SynerGraft, 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
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:
o 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 100
tissue banks and procurement agencies across the U.S. which send
tissue to the Company for cryopreservation, (iii) expanding its
physician training activities and (iv) expanding its product offerings
by applying its SynerGraft technology to human heart valves and
conduits for antigen reduction properties and the potential for
recipient cell repopulation.
3
o Expand Distribution of Cryopreserved Human Vascular Tissue and
Connective Tissue for the Knee. Using the same strategy it has
successfully employed to expand its cryopreservation services for
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.
o 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 chronic 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 and 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
grafts. The Company is also investigating the use of cryopreserved
human endothelial cells, peripheral nerves and other connective
tissues in various surgical applications.
o Develop and Commercialize Biomaterials for Surgical Adhesive and
Sealant Applications. In the second quarter of 1998 the Company began
commercial marketing of its patent protected BioGlue surgical adhesive
in the EC through its independent representatives. In December 1999
the Company received FDA approval to distribute BioGlue surgical
adhesive under a HDE for use as an adjunct in the repair of acute
thoracic aortic dissections. The Company completed its clinical trial
for the use of BioGlue in all vascular repair in the fall of 2000, and
filed a PMA with the FDA on February 1, 2001, that, if approved, would
allow for the broad commercial distribution of BioGlue in the U.S. In
addition to the adhesive and sealant applications of these
biomaterials, the Company intends to pursue, either directly or
through strategic alliances, certain drug delivery applications of
BioGlue surgical adhesive and its ACT technology, such as
administering antibiotics, attaching chemotherapy drugs to tumors,
delivering bone material for orthopaedic bone repair, and as a
replacement for spinal discs.
o 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, which 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. In October 2000 the Company received a CE Mark allowing for
commercial distribution of the new tissue-engineered SynerGraft heart
valve throughout the European Community. The Company has expanded its
production capacity for its bioprosthetic cardiovascular devices to
address the increased demand it is currently experiencing.
o 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 valve and conduit cryopreservation expertise and its
stentless porcine heart valves as a platform for the development and
commercialization of the Company's SynerGraft technology.
Services and Products
Cryopreservation of Human Tissue for Transplant
The Company's proprietary and patent protected cryopreservation process involves
the procurement of tissue from deceased human donors, the timely and controlled
delivery of such tissue to the Company, the screening, disinfection, dissection
4
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 of the Company's 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 and its procurement partners. 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 the human tissues
cryopreserved by the Company, as well as its programs whereby surgeons train
other surgeons in best demonstrated techniques. The Company also assists organ
procurement agencies and tissue banks through training and development of
protocols and provides necessary materials to improve their tissue processing
techniques and to increase efficiency and the yield of usable tissue.
Human Heart Valves and Conduits. The human heart valves and conduits
cryopreserved by the Company are used in reconstructive heart valve replacement
surgery. CryoLife shipped approximately 46,500 cryopreserved human heart valves
and conduits from 1984 through 2000. 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 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 processing and distributing in
the U.S. decellularized human heart valves and conduits utilizing the first of
its SynerGraft technology applications, which involves developing depopulated
heart valves with antigen reduction properties and the potential for recipient
cell repopulation.
In February of 2000 CryoLife began processing some human allograft heart valves
using its SynerGraft technology. The SynerGraft technology effectively removes
cells from the heart valve leaving the collagen matrix intact. The CryoValve(R)
SG valve is especially designed to benefit patients, both children and adults,
who have had a minor immune response to transplanted tissues. Early clinical
data indicates that the new SynerGraft processing method mitigates the increase
of PRA (panel reactive antibodies) experienced by some of the patients who
receive allograft heart valves. The absence of an immunologic response to the
decellularized allograft has the potential of improved long-term function of the
allograft heart valves. Advanced animal studies of both allograft and porcine
heart valves that have been treated with the SynerGraft process show that these
valves have the potential to repopulate themselves in vivo with the patient's
own cells.
The Company estimates that the total heart valve and conduit replacement market
in the U.S. in 2000 was approximately $400 million. Management believes that
approximately 88,000 heart valve and conduit surgeries were conducted in the
U.S. in 2000. Of the total number of heart valve and conduit surgeries,
approximately 43,000, or 49%, involved mechanical heart valves, and
approximately 45,000, or 51%, involved tissue heart valves or conduits,
5
including porcine and cryopreserved human tissues. Approximately 5,400 human
heart valves and conduits cryopreserved by the Company were shipped for
implantation in 2000.
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 may harbor
bacteria leading to endocarditis. Furthermore, endocarditis is difficult to
treat with antibiotics, and this usually necessitates the surgical removal of
these valves at considerable cost, morbidity and risk of mortality.
Consequently, for many physicians, human heart valves are the preferred
alternative to mechanical and stented porcine valves for patients who have, or
are at risk to contract, endocarditis.
The following table sets forth the characteristics of alternative heart valve
implants that management believes make cryopreserved human heart valves the
preferred replacement for most patients:
Porcine
-----------------------------------
Cryopreserved Bovine
Human Stented Stentless(1) Mechanical Pericardium
----------------- ------------------ ------------------- --------------- ----------------
Materials: human glutaraldehyde glutaraldehyde pyrolitic carbon glutaraldehyde
tissue fixed pig tissue fixed pig tissue bi-leaflet and fixed cow tissue
and synthetic and synthetic and synthetic
sewing ring sewing ring sewing ring
Blood Flow Dynamics normal moderate nearly normal high elevation high elevation
(Required Pressure): (2) (0-5) elevation (5-15) (10-25) (10-30)
Mode of Failure: gradual gradual expected to be catastrophic gradual
gradual
Longevity: 15-20 10-15 years expected to 15-20 years 10-15 years
years exceed stented
porcine valves
Increased Risk of Bleeding no occasional occasional yes occasional
or Thromboembolic Events
(strokes or other
clotting):
Anti-Coagulation Drug none short-term short-term chronic short-term
Therapy Required:
Responsiveness to high low low low low
Antibiotic
Treatment of
Endocarditis:
Average Valve Cost in $6,900 $4,500 $5,500 $4,100(3) $4,500
U.S.:
(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 17 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 is
contraindicated.
Human Vascular Tissues. The Company cryopreserves human saphenous and
superficial femoral veins and arteries 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
6
believes it offers the only available small diameter conduit product for
below-the-knee vascular reconstruction. The Company also cryopreserves
aortoiliac arteries for the reconstruction of infected abdominal synthetic
grafts. The Company shipped approximately 22,800 human vascular tissues from
1986 through 2000, which includes 5,200 shipments in 2000.
A surgeon's first choice for replacing diseased or damaged vascular tissue is
generally the patient's tissue. However, in cases of advanced vascular disease,
the patient's tissue is often unusable and the surgeon may consider using
synthetic grafts or transplanted human vascular tissue. Small diameter synthetic
vascular grafts are generally not suitable for below-the-knee surgeries because
they have a tendency to occlude 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 to
remain open longer and as such are used in indications where synthetics fail.
The Company's cryopreserved human vascular tissues are used for coronary artery
bypass surgeries, peripheral vascular reconstruction, dialysis access graft
replacement, venous valve transplantation and infected abdominal graft
replacement.
In 1986, the Company began a program to cryopreserve saphenous veins for use in
coronary artery bypass surgeries. Although the Company's cryopreserved human
tissue was used in only a small percentage of the nearly 500,000 coronary artery
bypass procedures estimated to have been performed in 2000, the Company believes
it is the only commercially available alternative to the patient's tissue. The
Company estimates that, in 1998, approximately 20,000 coronary artery bypass
surgeries using the patient's vascular tissue were performed in which human
vascular tissues cryopreserved by the Company could have been used.
In 1989, the Company began a program to cryopreserve long segment saphenous
veins for use in peripheral vascular reconstruction. In cases of peripheral
arteriosclerosis, a cryopreserved saphenous vein can be implanted as a bypass
graft for the diseased artery in order to improve blood flow and maintain a
functional limb. Analysis of the Company's data on file of approximately 425
implants has shown that approximately 80% of patients receiving CryoLife's
preserved vascular tissues in this type of surgical procedure still have the use
of the affected leg four years after surgery. The only alternative for many of
these patients was amputation. The Company estimates that, in 2000,
approximately 130,000 peripheral vascular reconstruction surgeries were
performed in which its cryopreserved human vascular tissues could have been
used.
In 1996, the Company began a program for the cryopreservation of human
superficial femoral veins for use in dialysis access graft replacement as an
alternative for synthetic grafts which have a higher risk of infection than
human tissue. The Company estimates that, in 2000, approximately 30,000 dialysis
access graft replacements were performed in which its cryopreserved human
vascular tissues could have been used.
Human Connective Tissue for the Knee. The Company provides cryopreservation
services for surgical replacements for the meniscus and the anterior and
posterior cruciate ligaments, which are critical to the proper operation of the
human knee, as well as osteochondral grafts used for the repair of cartilage
defects in the knee. CryoLife has shipped approximately 16,600 human connective
tissues for the knee through 2000, which includes 5,300 shipments in 2000.
Human menisci cryopreserved by the Company provide orthopaedic surgeons with an
alternative treatment in cases where a patient's meniscus has been completely
removed. When a patient has a damaged meniscus, the current surgical
alternatives are to repair, partially remove or completely remove the patient's
meniscus, with partial removal being the most common procedure. Meniscal removal
increases the risk of premature knee degeneration and arthritis and typically
results in the need for knee replacement surgery at some point during the
patient's life. Management believes that the Company is the only provider of
cryopreserved meniscal tissue and that there are no synthetic menisci on the
market. The Company estimates that in 2000 in the U.S. approximately 700,000
patients underwent partial or total meniscectomies. The Company believes up to
30% of these patients could become candidates for meniscal replacement within
five years.
Tendons cryopreserved by the Company are used for the reconstruction of anterior
cruciate ligaments in cases where the patient's ligaments are irreparably
damaged. Surgeons have traditionally removed a portion of the patient's patellar
tendon from the patient's undamaged knee for use in repairing a damaged anterior
cruciate ligament. Tendons cryopreserved by the Company provide an alternative
7
to this procedure. Because surgeries using cryopreserved tissue do not involve
the removal of any of the patient's own patellar tendon, the patient recovery
period is typically shorter. The Company estimates that in 2000 approximately
175,000 cruciate ligament reconstruction surgeries were performed.
Other Allograft Tissue Research and Development. The Company is engaged in
research and development on other projects for the use of cryopreserved human
endothelial cells, peripheral nerves and other connective tissues, in various
surgical applications.
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-operative 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. The
BioGlue surgical adhesive is a polymeric surgical bioadhesive based on a
derivative of an animal blood protein and a cross-linking agent. BioGlue
surgical adhesive has a tensile strength that is four to five times that of
fibrin sealants. Clinical applications for BioGlue surgical adhesive include
cardiovascular, vascular and pulmonary repair. Other potential applications for
BioGlue surgical adhesive include neurosurgery, orthopaedic indications, general
surgery and as a replacement for spinal discs. 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.
The Company estimates that the worldwide market for surgical sutures and staples
in 2000 was in excess of $2 billion. The Company began shipping BioGlue surgical
adhesive for distribution in the EC in the second quarter of 1998 for use in
vascular applications and in the first quarter of 1999 for use in pulmonary
applications. In December 1999 the Company began shipping BioGlue surgical
adhesive in the U.S. pursuant to an HDE for use as an adjunct in repair of acute
thoracic aortic dissections.
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 infection.
Glutaraldehyde 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, they are less expensive than allograft valves and their shorter
8
longevity is more appropriately matched with these patients' life expectancies.
Glutaraldehyde fixed porcine and bovine heart valves address a worldwide target
market estimated to have been $325 million in 2000.
The Company's SynerGraft technology involves the removal of cells from the
structure of non-viable animal tissue, leaving a collagen matrix that has the
potential to repopulate in vivo with the recipient's own cells. This process is
designed to reduce calcification of porcine heart valves, thereby increasing
their longevity, and more generally to improve the biocompatibility and
functionality of such tissue. The Company believes that its porcine heart
valves, when treated with SynerGraft technology, will expand its opportunity to
address the broader international and U.S. heart valve markets, estimated to
have been $390 million and $400 million, respectively, in 2000. Potential future
SynerGraft technology applications involve developing stentless porcine heart
valves repopulated in vitro with viable human cells prior to implantation.
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
------------------------------ ------------------------------------------ --------------------------------------
SynerGraft depopulated aortic pulmonary valve
currently marketed in Europe with of
composite leaflet design; no regulatory
approval under CE Mark synthetic material;
normal hemodynamics
CryoLife-O'Brien aortic valve of matched composite currently marketed in Europe with
leaflet design; single suture line regulatory approval under CE Mark;
implantation technique; no currently marketed in Canada with
synthetic material; normal regulatory approval under Therapeutic
hemodynamics Products Programme
CryoLife-Ross pulmonary valve with attached currently marketed in Europe with
conduit; no synthetic material; regulatory approval under CE Mark
normal hemodynamics
The SynerGraft heart valve is a depopulated stentless porcine heart valve with
antigen reduction properties. CryoLife obtained a CE Mark for the SynerGraft
heart valve in November 2000. This technology removes cells from animal tissues,
thereby reducing the transplant recipient's immune response to the implanted
tissue. Typically calcium is deposited through an immune response, which reduces
the useful life of the implant. By removing animal cells from the tissue while
maintaining the underlying structural strength of the porcine heart valve, this
SynerGraft application is designed to provide a platform for a patient's own
cells to potentially repopulate the implant.
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 EC 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, in the EC in September 1998.
9
Single-Use Medical Devices
On October 9, 2000 the Company sold substantially all of the remaining assets of
Ideas for Medicine, Inc. ("IFM") to Horizon Medical Products, Inc. See Item 7:
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a more detailed discussion.
Sales, Distribution and Marketing
Cryopreservation Services
CryoLife markets its cryopreservation services to tissue procurement agencies,
implanting physicians and prospective tissue recipients. The Company works with
tissue banks and organ procurement agencies to ensure consistent and continued
availability of donated human tissue for transplant and educates physicians and
prospective tissue recipients with respect to the benefits of cryopreserved
human tissues.
Procurement of Tissue. Donated human tissue is procured from deceased human
donors by organ procurement agencies and tissue banks. After procurement, the
tissue is packed and shipped, together with certain information about the tissue
and its donor, to the Company in accordance with the Company's protocols. The
tissue is transported to the Company's laboratory facilities via commercial
airlines pursuant to arrangements with qualified courier services. Timely
receipt of procured tissue is important, as tissue that is not received promptly
cannot be cryopreserved successfully. The procurement agency is reimbursed by
the Company, for the costs associated with these procurement services. The
procurement fee and related shipping costs, together with the charges for the
cryopreservation services of the Company, are ultimately paid to the Company by
the hospital with which the implanting physician is associated. The Company has
developed relationships with over 100 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.
The Company employs approximately 14 individuals to work with organ procurement
agencies and tissue banks, six of whom are employed as procurement relations
managers and are stationed throughout the country. The Company's central office
for procurement relations 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
Company's comprehensive quality assurance program. This program may identify
characteristics which would disqualify the tissue for cryopreservation.
Human heart valves and conduits, vascular tissue and connective tissue for the
knee are cryopreserved in a proprietary freezing process conducted according to
strict Company protocols. After the cryopreservation process, the specimens are
transferred to liquid nitrogen freezers for long-term storage at temperatures
below -135(Degree)C. The entire cryopreservation process is rigidly controlled
by guidelines established by the Company.
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.
10
The Company provides 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 support to implanting institutions and surgeons. The Company
currently has over 150 independent technical service representatives and
sub-representatives (who deal primarily with orthopaedic surgeons and who are
paid on a commission basis) as well as 45 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 leading 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 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.
To assist procurement agencies and tissue banks, the Company provides
educational materials and training on 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.
European Distribution
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.
BioGlue Surgical Adhesive
The Company markets and distributes its BioGlue surgical adhesive in the U.S.
through its existing direct technical representatives. The Company markets and
distributes its BioGlue surgical adhesive in international markets, excluding
Japan, through Europa and other existing independent representatives. The
Company's European, Middle East and African sales, marketing and distribution
activities directed through Europa are channeled through 26 independent
distributors located in the United Kingdom, Germany, France, Norway, Sweden,
Denmark, Finland, Latvia, Benelux, Switzerland, Austria, Poland, Czech Republic,
Hungary, Solvenia, Spain, Portugal, Italy, Greece, Turkey, Lebanon, Israel,
Jordan, Syria, Kuwait, UAE and South Africa. 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.
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 applications
and clearances with the Japanese Ministry of Health and Welfare.
11
Bioprosthetic Cardiovascular Devices
The Company markets the CryoLife-O'Brien and CryoLife-Ross stentless porcine
heart valves in Europe, the Middle East and Africa. The CryoLife-O'Brien valve
is marketed in Canada. The Company commenced marketing the SynerGraft heart
valve in Europe during the fourth quarter of 2000. Marketing efforts are
primarily directed toward cardiac, cardio-thoracic 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.
Research and Development
The Company uses its expertise in immunology, 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, including seven 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 additional applications of the SynerGraft technology and
additional applications of BioGlue surgical adhesive, as well as its ACT
technology. The Company is currently investigating certain drug delivery
applications for BioGlue surgical adhesive and its ACT technology, such as
administering antibiotics, attaching chemotherapy drugs to tumors, delivering
growth agents or delivering bone material 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 development of such technologies. The Company's research
and development strategy is to allocate available resources among the Company's
core market areas of cryopreservation services, bioprosthetic cardiovascular
devices and implantable biomaterials, 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 1998, 1999 and 2000, the Company spent approximately $4.7
million, $4.4 million and $5.2 million, respectively, on research and
development activities on new and existing products. These amounts represented
approximately 8%, 7% 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 are located in suburban Atlanta, Georgia, and consist
of three separate locations totaling approximately 130,000 square feet of leased
office, laboratory and warehouse space. Approximately 17,500 square feet are
dedicated to laboratory work areas. The primary facility, which does not include
the biomedical products 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. In February 2000 the Company began construction of a 100,000 square
foot expansion of its corporate headquarters and manufacturing facilities, which
is expected to be fully completed and occupied in the fourth quarter of 2001.
12
Human Tissue Processing
The human tissue processing laboratory is responsible for the processing and
cryopreservation of human tissue for transplant, including the processing of
SynerGraft treated human heart valves and conduits and certain vascular tissues.
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 58 technicians employed in this area, and the laboratory is staffed
for two shifts, 365 days per year. In 2000 the laboratory processed
approximately 17,200 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 14,500 square feet, including a
suite of four cleanrooms. Currently, there are six technicians employed in this
area. The Company conducts research on its ACT technology in the biomedical
products laboratory, which is located in Marietta, Georgia, and employs two
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 20,500 square feet, with about
2,100 square feet of laboratory space and a suite of six clean rooms for tissue
processing. Currently, this laboratory employs 36 technicians and is scheduled
to manufacture approximately 1,600 CryoLife-O'Brien, CryoLife-Ross and
SynerGraft valves in 2001.
Quality Assurance
The Company's operations encompass the provision of cryopreservation services
and the manufacturing of bioprosthetics and bioadhesives. In all of its
facilities, the Company is subject to regulatory standards for good
manufacturing practices, including current Quality System Regulations, which are
FDA regulatory requirements for medical device manufacturers. The FDA
periodically inspects Company facilities to ensure Company compliance with these
regulations. The Company also operates according to ISO 9001 Quality System
Requirements, an internationally recognized voluntary system of quality
management for companies that design, develop, manufacture, distribute and
service products. The Company maintains a Certification of Approval to the ISO
9001, as well as EN46001 and ANSI/ISO/ASQC/Q9001, the European and U.S. versions
of the international standard, respectively. This approval is issued by Lloyd's
Register Quality Assurance Limited ("LRQA"). LRQA is a Notified Body officially
recognized by the EC 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.
13
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
processing operations are additionally regulated by the FDA and periodically
inspected for compliance to Quality System Regulations. Other human tissue
processed by the Company is periodically inspected for compliance with the Code
of Federal Regulation ("CFR") Part 1270. CFR 1270 is an FDA regulation which
sets forth the requirements with which the Company must comply in determining
the suitability of human tissue for implantation.
Bioprosthetic and Bioadhesive 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.
14
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 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 35 U.S. patents and 33
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; BioGlue
surgical adhesive; ACT; organ storage solution; and packaging. The Company has
20 pending U.S. patent applications and in excess of 78 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 in 1998, the Company
sold all patents related to such product line. There can be no assurance that
any patents pending will result in issued patents. The Company also has
exclusive licensing rights for technology relating to light-sensitive enzyme
inhibitors. The remaining duration of the Company's issued patents ranges from 3
to 17 years. The Company has licensed from third parties certain technologies
used in the development of its ACT technology 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 ACT 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
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.
15
Competition
Cryopreserved Human Tissues and Bioprosthetic Cardiovascular Devices
The Company faces competition from at least one for profit company and a small
number of 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 non-profit tissue bank for supplies of
cryopreserved human heart valves. Edwards Life Sciences, Inc. is the leading
supplier of bovine heart valves. In addition, management believes that at least
three tissue banks offer cryopreservation services for human heart valves in
competition with the Company. The Company presently distributes its stentless
porcine heart valves only outside the U.S. These stentless porcine heart valves
compete with mechanical valves, human heart valves and processed bovine
pericardium. The Company is aware of at least three 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.
Implantable Biomedical Devices for Use as Surgical Adhesives and Sealants
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
16
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, Focal, Inc., Fusion Medical Technologies
Inc. and Cohesion, 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 been 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 and BioGlue surgical bioadhesives are, and other
Company products may be, regulated in the future as, medical devices, the
Company and these products are subject to the provisions of the Federal Food,
Drug and Cosmetic Act ("FDCA") and implementing regulations. Pursuant to the
FDCA, the FDA regulates the manufacture, distribution, labeling and promotion of
medical devices in the U.S. In addition, various foreign countries in which the
Company's products are or may be distributed impose additional regulatory
requirements.
The FDCA provides that, unless exempted by regulation, medical devices may not
be distributed in the U.S. unless they have been approved or cleared for
marketing by the FDA. There are two review procedures by which medical devices
can receive such approval or clearance. Some products may qualify for clearance
to be marketed under a Section 510(k) ("510(k)") procedure, in which the
manufacturer provides a premarket notification that it intends to begin
marketing the product, and shows that the product is substantially equivalent to
another legally marketed product (i.e., that it has the same intended use and
that it is as safe and effective as a legally marketed device and does not raise
different questions of safety and effectiveness than does a legally marketed
device). In some cases, the submission must include data from clinical studies.
Marketing may commence when the FDA issues a clearance letter finding such
substantial equivalence.
If the product does not qualify for the 510(k) procedure (either because it is
not substantially equivalent to a legally marketed device or because it is a
Class III device required by the FDCA and implementing regulations to have an
approved application for PMA, the FDA must approve a PMA application before
marketing can begin. PMA applications must demonstrate, among other matters,
that the medical device is safe and effective. A PMA application is typically a
17
complex submission, usually including the results of human clinical studies, and
preparing an application is a detailed and time-consuming process. Once a PMA
application has been submitted, the FDA's review may be lengthy and may include
requests for additional data. By statute and regulation, the FDA may take 180
days to review a PMA application although such time may be extended.
Furthermore, there can be no assurance that a PMA application will be reviewed
within 180 days or that a PMA application will be approved by the FDA.
The FDCA also provides for an investigational device exemption ("IDE") which
authorizes distribution for clinical evaluation of devices that lack a PMA or
510(k). Devices subject to an IDE are subject to various restrictions imposed by
the FDA. The number of patients that may be treated with the device is limited,
as are the number of institutions at which the device may be used. Patients must
give informed consent to be treated with an investigational device. The device
must be labeled that it is for investigational use and may not be advertised, or
otherwise promoted, and the price charged for the device may be limited.
Unexpected adverse experiences must be reported to the FDA.
Under certain circumstances, 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 treatment of rare conditions that affect small
patient populations. An approval by the FDA exempts such devices from full
compliance with clinical study requirements for premarket approval.
The FDCA requires all medical device manufacturers and distributors to register
with the FDA annually and to provide the FDA with a list of those medical
devices which they distribute commercially. The FDCA also requires manufacturers
of medical devices to comply with labeling requirements and to manufacture
devices in accordance with Quality System Regulations, which require that
companies manufacture their products and maintain their documents in a
prescribed manner with respect to good manufacturing practices, design, document
production, process, labeling and packaging controls, process validation and
other quality control activities. The FDA's medical device reporting regulation
requires that a device manufacturer provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its products,
as well as product malfunctions that would likely cause or contribute to death
or serious injury if the malfunction were to recur. The FDA's medical device
tracking regulation requires the adoption of a method of device tracking by
manufacturers of life-sustaining or implantable products, the failure of which
would be reasonably likely to have serious adverse health consequences. The
manufacturer must adopt methods to ensure that such devices can be traced from
the manufacturing facility to the ultimate user, the patient. The FDA further
requires that certain medical devices not cleared for marketing in the U.S.
follow certain procedures before they are exported.
The FDA inspects medical device manufacturers and distributors and has authority
to seize noncomplying medical devices, to enjoin and/or to impose civil
penalties on manufacturers and distributors marketing non-complying medical
devices, to criminally prosecute violators and to order recalls in certain
instances.
Human Heart Valves. The Company's human heart valves became subject to
regulation by the FDA in June 1991, when the FDA published a notice stating that
human heart valves were 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, BioGlue and SynerGraft
devices, none of the Company's other tissue services or tissue-based 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
18
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. In January 2001 the FDA published a final rule to
require establishments that process or produce human tissue and cellular-based
products to register with the agency and list the tissue and cellular products
they process or manufacture. 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, in
November 2000 the FDA published a proposed rule for good tissue manufacturing
practices. Moreover, the FDA may determine that the veins and connective tissue
that are currently processed by the Company are medical devices, or the FDA may
determine to regulate human heart valves as "human tissue" rather than medical
devices, but the FDA has not done so at this time. Complying with FDA regulatory
requirements or obtaining required FDA approvals or clearances may entail
significant time delays and expenses or may not be possible, any of which may
have a material adverse effect on the Company. In addition, the U.S. Congress is
expected to consider legislation that would regulate human tissue for transplant
or the FDA could impose a separate regulatory scheme for human tissue. Such
legislation or regulation could have a material adverse effect on the Company.
Porcine Heart Valves. Porcine heart valves are Class III medical devices, and
FDA approval of a PMA is required prior to commercial distribution of such
valves in the U.S. The porcine heart valves currently marketed by the Company
have not been approved by the FDA for commercial distribution in the U.S. but
may be manufactured in the U.S. and exported to foreign countries if the valves
meet the specifications of the foreign purchaser, do not conflict with the laws
of and are approved by the country to which they will be exported and the FDA
determines that their exportation is not contrary to the public health and
safety.
BioGlue Surgical Adhesive. BioGlue surgical adhesive is regulated as a Class III
medical device by the FDA. The Company received a HDE in December 1999 for
BioGlue surgical adhesive for use as an adjunct in repair of acute thoracic
aortic dissections. The Company commercially distributes BioGlue in the U.S. for
this indication, subject to the limitations imposed by the FDA under an HDE. The
Company commenced and completed enrollment of a clinical trial under a
supplemental IDE for BioGlue surgical adhesive for use in vascular and cardiac
surgery, and on February 1, 2001, the Company submitted a PMA to the FDA. If
successful, the Company would be able to commercially distribute BioGlue in the
U.S. for these indications. However, there can be no assurance that the Company
will be successful in gaining approval for the PMA.
Possible Other FDA Regulation. Other products and processes under development by
the Company are likely to be subject to regulation by the FDA. 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.
19
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 commercial distribution 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 EC recognizes a single
approval, called a CE Mark, which allows for distribution of an approved product
throughout the EC (15 countries) without additional general applications to each
country. However, individual EC members reserve the right to require additional
data to address particular patient safety issues prior to allowing importation.
France and an increasing number of EC members require such additional data for
products containing material of animal origin. 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 EC accept the CE Mark in lieu of clinical data
submission as an addendum to that country's application process. The Company has
been issued CE Marks for its CryoLife-O'Brien and CryoLife-Ross porcine heart
valves, BioGlue surgical adhesive, and its SynerGraft pulmonary heart valve. The
Company's porcine heart valves may be exported to specified developed nations,
including countries in the EC, Australia, Canada, Israel, Japan, New Zealand,
South Africa and Switzerland if they comply with the laws of that country and
have valid marketing authorization by the appropriate authority in that country.
Beginning in July 1998, CE Mark Certification is required to market porcine
heart valves and other bioprosthetics in the EC.
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, 2001 the Company had approximately 340 employees. These employees
included 11 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.
20
RISK FACTORS
Dependence on Cryopreservation of Human Tissue
A significant portion of the Company's current revenues is derived from the
cryopreservation of human tissues. 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 and tissue banks (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 and
vascular and orthopaedic tissues, 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 and companies that market wound closure products.
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 Edwards Life Sciences. The Company is aware that several
companies have surgical adhesive products under development. Competitive
products may also be under development by other large medical device,
pharmaceutical and biopharmaceutical companies. Many of the Company's
competitors have greater financial, technical, manufacturing and marketing
resources than the Company and are well established in their markets. There can
be no assurance that the Company's products and services will be able to compete
successfully with the products of these or other companies. Any products
developed by the Company that gain regulatory clearance or approval will have to
compete for market acceptance and market share. Failure of the Company to
compete effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
See "Business--Competition."
Rapid Technological Change
The technologies underlying the Company's products and services are subject to
rapid and profound technological change. The Company expects competition to
intensify as technical advances in each field are made and become more widely
known. There can be no assurance that others will not develop products or
processes with significant advantages over the products and processes that the
Company offers or is seeking to develop. Any such occurrence could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Uncertainties Regarding Products in Development
The Company's growth and profitability will depend, in part, upon its ability to
complete development of and successfully introduce new products, including
additional applications of its BioGlue and SynerGraft technologies and its ACT
technology. The Company may be required to undertake time consuming and costly
21
development activities and seek regulatory clearance or approval for new
products. See "--Extensive Government Regulation." Although the Company has
conducted pre-clinical studies on many of its products under development which
indicate that such products may be effective in a particular application, there
can be no assurance that the results obtained from expanded clinical studies
will be consistent with earlier trial results or be sufficient for the Company
to obtain any required regulatory approvals or clearances. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of new products,
that regulatory clearance or approval of these or any new products will be
granted on a timely basis, if ever, or that the new products will adequately
meet the requirements of the applicable market or achieve market acceptance. The
completion of the development of any of the Company's products remains subject
to all of the risks associated with the commercialization of new products based
on innovative technologies, including unanticipated technical or other problems,
manufacturing difficulties and the possible insufficiency of the funds allocated
for the completion of such development. Consequently, there can be no assurance
that any of the Company's products under development will be successfully
developed or manufactured or, if developed and manufactured, that such products
will meet price or performance objectives, be developed on a timely basis or
prove to be as effective as competing products. The inability to complete
successfully the development of a product or application, or a determination by
the Company, for financial, technical or other reasons, not to complete
development of any product or application, particularly in instances in which
the Company has made significant capital expenditures, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's BioGlue surgical adhesive is currently offered for sale in the
U.S. pursuant to an HDE approval, which provides for limited distribution. On
February 1, 2001 the Company submitted a PMA to the FDA for the use of BioGlue
in vascular and cardiac surgery. There can be no assurance that the Company will
obtain this or other necessary approvals to allow for general distribution of
its BioGlue surgical adhesive in the U.S.
The Company's porcine heart valve products, including its SynerGraft treated
porcine valves, 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.
Uncertainties Regarding the Funding of the ACT Technology
The ACT technology is a reversible linker technology that has potential uses in
the areas of cancer therapy, blood clot dissolving, heart attack therapies and
other drug delivery applications. The Company has formed AuraZyme, a
wholly-owned subsidiary, in order to seek funding for the development of the ACT
technology. This strategy is designed to allow the Company to continue
development of this technology without incurring additional research and
development expenditures, other than through AuraZyme. There can be no guarantee
that such funding can be obtained on acceptable terms, if at all. If such
funding is not obtained, the Company may be unable to effectively test and
22
develop the ACT technology, and may therefore be unable to determine its
effectiveness. Even if such financing is obtained, there is no guarantee that
the ACT technology will in fact prove to be effective in the above applications.
Failure to obtain the desired financing, or failure of the ACT technology to
perform as anticipated in future tests, could have a material adverse effect on
our future expansion plans and could limit future growth.
Uncertainties Regarding the SynerGraft Technology
The Company currently processes both porcine and human tissues with the
SynerGraft process. In animal studies, explanted porcine heart valves have been
shown to repopulate with the hosts' cells. However, should SynerGraft-treated
tissues implanted in humans not repopulate with the human host cells, the
SynerGraft-treated tissues may not have the longevity that the Company currently
expects. This could have a material adverse effect on future expansion plans and
could limit future growth.
Extensive Government Regulation
Government regulation in the U.S., the EC 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 rules promulgated by the FDA pursuant to the
Public Health Services Act. These rules establish requirements for donor testing
and screening of human tissue and recordkeeping relating to these activities and
impose certain registration and product listing requirements on establishments
that process or distribute human tissue or cellular-based products. 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 its ACT technology may be regulated as a biologic or drug
by the FDA. BioGlue surgical adhesive has been approved for distribution in the
U.S. under a Humanitarian Device Exemption while the ACT technology 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 EC 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
23
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 investigators, 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.
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 establishments (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
24
cryopreserved human heart valve generally exceeds the cost of a mechanical,
synthetic or animal-derived valve. The Company is unable to predict what changes
will be made in the reimbursement methods and policies utilized by third-party
health care payors or their effect on the Company. Changes in the reimbursement
methods and policies utilized by third-party health care payors, including
Medicare, with respect to cryopreserved tissues provided for implant by the
Company and other Company services and products, could have a material adverse
effect on the Company. Significant uncertainty exists as to the reimbursement
status of newly approved health care products and services and there can be no
assurance that adequate third-party coverage will be available for the Company
to maintain price levels sufficient for realization of an appropriate return on
its investment in developing new products. Government and other third-party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA and by refusing in some cases to provide any coverage for uses of
approved products for indications for which the FDA has not granted marketing
approval. If adequate coverage and reimbursement levels are not provided by
government and other third-party 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 and human tissue processed by the Company
involves the possibility of adverse effects that could expose the Company to
product liability claims. A recent U.S. Supreme Court decision held that product
liability may exist despite FDA approval, and future court decisions may also
increase the Company's risk of product liability. From time to time, the Company
is involved in legal proceedings based on product liability claims of a nature
considered normal to its business. The Company's products are used by health
care providers in connection with the treatment of patients, who will, on
occasion, sustain injury or die as a result of their condition or medical
treatment. If a lawsuit is filed because of such an occurrence, the Company,
along with physicians and nurses, hospitals and other medical suppliers, may be
named as a defendant, and whether or not the Company is ultimately determined to
be liable, the Company may incur significant legal expenses. In addition, such
litigation could damage the Company's reputation and therefore impair its
ability to market its products or obtain product liability insurance and could
cause the premiums for such insurance to increase. Although the Company has
incurred minimal losses due to product liability claims to date, there can be no
assurance that it will not incur significant losses in the future. The Company
currently maintains product liability insurance in the aggregate amount of $14
million per year. There can be no assurance that such coverage will continue to
be available on terms acceptable to the Company or will be adequate to cover any
losses due to product claims if actually incurred. Furthermore, if any such
claim is successful, it could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Legal
Proceedings."
Use and Disposal of Hazardous Material
The Company's research, development and processing activities involve the
controlled use of small quantities of radioactive compounds, chemical solvents
and other hazardous materials. The Company's activities also include the
preservation and growth of human cells and the processing of human tissue.
25
Although the Company believes that its safety procedures for handling,
processing and disposing of hazardous materials and human tissue comply with the
standards prescribed by federal, state and local regulations, the risk of
accidental contamination, injury or disease transmission from these materials
cannot be completely eliminated. In the event of such an accident or
transmission, the Company could be held liable for resulting damages and any
liability could have a material adverse effect on the Company's business,
financial condition and results of operations. Also, any failure to comply with
applicable regulations could result in the imposition of penalties, fines and
sanctions, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Volatility of Securities Prices
The trading price of the Company's Common Stock has been subject to wide
fluctuations from time to time and may continue to be subject to such volatility
in the future. Trading price fluctuations can be caused by a variety of factors,
including quarter to quarter variations in operating results, announcement of
technological innovations or new products by the Company or its competitors,
governmental regulatory acts, developments with respect to patents or
proprietary rights, general conditions in the medical device or service
industries, actions taken by government regulators, changes in earnings
estimates by securities analysts or other events or factors, many of which are
beyond the Company's control. If the Company's revenues or operating results in
future quarters fall below the expectations of securities analysts and
investors, the price of the Company's Common Stock would likely decline, perhaps
substantially. Changes in the trading price of the Company's Common Stock may
bear no relation to the Company's actual operational or financial results.
Anti-Takeover Provisions
The Company's Articles of Incorporation and Bylaws contain provisions that may
discourage or make more difficult any attempt by a person or group to obtain
control of the Company, including provisions authorizing the issuance of
preferred stock without shareholder approval, restricting the persons who may
call a special meeting of the shareholders and prohibiting shareholders from
taking action by written consent. In addition, the Company is subject to certain
provisions of Florida law that may discourage or make more difficult takeover
attempts or acquisitions of substantial amounts of the Company's Common Stock.
Further, pursuant to the terms of a shareholder rights plan adopted in 1995,
each outstanding share of Common Stock has one attached right. The rights will
cause substantial dilution of the ownership of a person or group that attempts
to acquire the Company on terms not approved by the Board and may have the
effect of deterring hostile takeover attempts.
Absence of Dividends
The Company has not paid, and does not presently intend to pay, cash dividends.
The Company's major credit agreement contains, and future credit agreements may
contain, financial covenants, including covenants to maintain certain levels of
net worth and certain leverage ratios, which could have the effect of
restricting the amount of dividends that the Company may pay. It is not likely
that any cash dividends will be paid in the foreseeable future.
Forward-Looking Statements
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the Private Securities Litigation Reform Act of 1995. All statements,
other than statements of historical facts, included or incorporated by reference
in this Form 10-K which address activities, events or developments which the
26
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 the ACT technology, other estimated dates relating to the
Company's proposed regulatory submissions, the timing of the completion of the
expansion of the Company's corporate headquarters and manufacturing facilities,
the Company's expectations regarding the adequacy of current financing
arrangements, product demand and market growth, the potential of the ACT
technologies for use in cancer therapies, blood clot dissolving, heart attack
therapies and other drug delivery applications and other statements regarding
future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results and developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties which could cause
actual results to differ materially from the Company's expectations, including
the risk factors discussed in this Form 10-K and other factors, many of which
are beyond the control of the Company. Consequently, all of the forward-looking
statements made in this Form 10-K are qualified by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on the Company or
its business or operations. The Company assumes no obligation to update publicly
any such forward-looking statements, whether as a result of new information,
future events or otherwise.
Item 2. Properties.
The Company's facilities are located in suburban Atlanta, Georgia, and in
Fareham, United Kingdom. The Atlanta facility consists of three separate
locations totaling approximately 130,000 square feet of leased office,
laboratory and warehouse space. Approximately 17,500 square feet are dedicated
to laboratory work areas. The primary facility, which does not include the
biomedical products 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
4,500 square feet with a suite of four 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 biomedical products 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 20,500 square feet, with about 2,100 square feet of
laboratory space and a suite of six clean rooms for tissue processing.
Subsequent to the sale of the remaining IFM assets, the Company continues to
lease the 30,000 square foot IFM facility in St. Petersburg, Florida from the
former principal shareholder of IFM. A wholly-owned subsidiary of Vascutech,
Inc. currently subleases the IFM facility from the Company. The Company's lease
and sublease on its IFM facility expires in 2007. The Europa facility located in
Fareham, United Kingdom contains approximately 5,600 square feet of office,
warehousing and training laboratory space.
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 consists of a two-story 100,000 square foot
manufacturing facility for BioGlue surgical adhesive and SynerGraft products, as
well as physician training laboratories and additional corporate office space.
The Company anticipates completion of the project in mid to late 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.
27
Item 4. Submission of Matters to Vote of Security Holders.
Inapplicable.
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 62 President, Chief Executive Officer and Chairman February, 1984
Sidney B. Ashmore 42 Vice President, Marketing March, 2001
Kirby S. Black, PhD 46 Senior Vice President, Research and Development July, 1995
David M. Fronk 37 Vice President, Clinical Research December, 1998
Albert E. Heacox, PhD 50 Senior Vice President, Laboratory Operations June, 1995
D. Ashley Lee, CPA 36 Vice President and Chief Financial Officer April, 2000
James C. Vander Wyk, PhD 56 Vice President, Regulatory Affairs and Quality February, 1996
Assurance
Ronald D. McCall, Esq. 64 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.
Sydney B. Ashmore has served as Vice President of Marketing since March 2001 and
has been with the Company since September 1996 as Director of Marketing. Mr.
Ashmore 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. Ashmore held senior marketing positions with Baxter
Healthcare from 1991 to 1996, and general management positions with Amorient
Aquafarms from 1985 - 1989. Mr. Ashmore received his BA from Vanderbilt
University in 1981, his MS from the University of Hawaii in 1985 and his MBA
from Northwestern University in 1991.
Kirby S. Black, PhD, has served as Vice President of Research and Development
since July 1995. Dr. Black was promoted to Senior Vice President in December of
2000. 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 six patents and has authored over 130 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 BSME degree from the University of
California, Los Angeles, and his PhD degree in immunology from the University of
California at Irvine.
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 pre-clinical 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
28
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 was
promoted to Senior Vice President in December of 2000. Dr. Heacox has been
responsible for developing protocols and procedures for both cardiovascular and
connective tissues, implementing upgrades in procedures in conjunction with the
Company's quality assurance programs, and overseeing all production activities
of the Company's laboratories. Prior to joining the Company, Dr. Heacox worked
as a researcher with the U.S. Department of Agriculture and North Dakota State
University, developing methods for the cryopreservation of cells and animal germ
plasm storage. Dr. Heacox received a BA and an MS in Biology from Adelphi
University, received his PhD in Biology from Washington State University and
completed his post-doctorate training in cell biology at the University of
Cologne, West Germany.
D. Ashley Lee, CPA, has served as Vice President and Chief Financial Officer of
the Company since April 2000 and had previously served as controller of the
Company since December 1994. Mr. Lee is responsible for the financial affairs of
the Company, as well as information technology, human resources, and purchasing.
From 1993 to 1994, Mr. Lee served as the Assistant Director of Finance for
Compass Retail Inc, a wholly-owned subsidiary of Equitable Real Estate. From
1987 to 1993, Mr. Lee was employed as a certified public accountant with Ernst &
Young, LLP. Mr. Lee received his BS in Accounting from the University of
Mississippi.
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, 2000.
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, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
CryoLife, Inc. was organized in 1984 to address market opportunities in the area
of biological implantable products and materials, and today is the leader in the
preservation of viable human tissue for cardiovascular, vascular, and
orthopaedic applications. The Company pays a fee to an organ procurement agency
or tissue bank at the time such organization consigns human tissue to the
Company. The Company generates revenues from preservation services by charging
hospitals a fee, which covers the Company's services, the associated procurement
fee, and applicable shipping expenses. The Company records revenue upon shipping
tissue. Costs associated with the procurement, processing, and storage of tissue
are accounted for as deferred preservation costs on the Company's consolidated
balance sheet and are expensed when the tissue is shipped.
Through a series of acquisitions of intellectual property and businesses, the
Company has expanded its portfolio of products and services. As a result, the
Company also develops implantable biomaterials, including BioGlue surgical
adhesive, which is approved for distribution in 42 countries; SynerGraft, a
tissue engineering technology which incorporates the use of decellularized
animal tissues with the potential to remodel in vivo; and other stentless
porcine heart valves that are approved for distribution internationally. In
1996, the Company also acquired the assets of UCFI, a tissue processor, for
$750,000 in cash and a $1.3 million note. In 1997, the Company acquired Ideas
for Medicine, Inc. ("IFM") and its line of single-use medical devices for $4.5
million in cash, and a $5.0 million convertible debenture.
On September 30, 1998 the Company completed the sale of substantially all of the
IFM product line and certain related assets to Horizon Medical Products, Inc.
("HMP") for $15 million in cash pursuant to an asset purchase agreement.
Concurrently, IFM and HMP signed a Manufacturing Agreement (the "Agreement")
which provided for the manufacture by IFM of specified minimum dollar amounts of
IFM products to be purchased exclusively by HMP over each of the four years
following the sale. Thereafter, responsibility for such manufacturing was to be
assumed by HMP. The Company recorded a deferred gain at the transaction date
totaling $2.9 million, representing the selling price less the net book value of
the assets sold, which included $7.7 million of goodwill, net of accumulated
30
amortization, and the costs related to the sale. The gain was deferred because
the sale and the manufacturing agreements represent, in the aggregate, a single
transaction for which the related income should be recognized over the term of
the Agreement. Accordingly, the deferred gain was reflected in cost of goods
sold during 1999 and 1998 to maintain margins that would have been approximately
equal over the four-year period of the Agreement on the products manufactured
and sold by IFM to HMP. During 1999 and 1998 amortization of deferred revenue
totaled $1.2 million and $387,000, respectively. As more fully discussed under
nonrecurring charges in the Results of Operations section, HMP defaulted on the
Agreement in June of 1999.
On October 9, 2000 the Company sold substantially all of the remaining assets of
Ideas for Medicine, Inc. ("IFM") to Horizon Medical Products, Inc. ("HMP"). The
assets consisted primarily of inventory, equipment and leasehold improvements
which had a net book value of $2.4 million at the date of sale. The transaction
provided for HMP to pay the Company the sum of approximately $5.9 million,
payable in equal monthly installments of principal and interest of $140,000. The
note consists of a portion, approximately $3.8 million, which bears interest at
9% per year, and a non-interest-bearing portion of approximately $2.1 million.
The note also requires an additional $1 million principal payment at any time
prior to April 3, 2001. If the $1 million payment is made when due, and no other
defaults exist under the note, then $1 million of the non-interest-bearing
portion of the note will be forgiven. In addition, at such time as the principal
balance has been paid down to $1.1 million and there have been no defaults under
the promissory note, the remainder of the note will be forgiven and the note
will be canceled. The Company has recorded reserves against these notes such
that the gain from the sale is deferred until the full amount of the note is
deemed collectible. On March 30, 2001, HMP transferred the IFM assets to a
wholly-owned subsidiary of Vascutech, Inc. and the HMP note was assumed by the
Vascutech subsidiary. The assumed note is guaranteed by Vascutech, Inc.
The composition of the Company's revenues is expected to change in future years,
reflecting, among other things, the anticipated growth in shipments of human
vascular tissue and human connective tissue for the knee, and the introduction
of BioGlue surgical adhesive into domestic and international markets, as well as
other expected new products.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues increased 16% to $77.1 million in 2000 from $66.7 million in 1999. The
increase in revenues was primarily due to increased acceptance in the medical
community of preserved tissues which has resulted in increased demand for the
Company's preservation services, the Company's ability to procure greater
amounts of tissue, revenues attributable to the Company's introduction of
BioGlue surgical adhesive in domestic markets in January of 2000, and other
reasons discussed below. These increases in revenues have been offset by certain
decreases in revenues as discussed below.
Revenues from human heart valve and conduit cryopreservation services increased
2% to $29.7 million in 2000 from $29.0 million in 1999, representing 39% and
44%, respectively, of total revenues during such periods. This increase in
revenues resulted from a 5% increase in the number of heart allograft shipments
due to increased demand.
Revenues from human vascular tissue cryopreservation services increased 10% to
$21.3 million in 2000 from $19.3 million in 1999, representing 28% and 29%,
respectively, of total revenues during such periods. This increase in revenues
was primarily due to an 11% increase in the number of vascular allograft
shipments due to an increased demand for saphenous vein, the Company's ability
to procure greater amounts of tissue, and the growth in demand for the Company's
cryopreserved femoral vein for dialysis access.
Revenues from human connective tissue of the knee cryopreservation services
increased 44% to $16.1 million in 2000 from $11.2 million in 1999, representing
21% and 17%, respectively, of total revenues during such periods. This increase
in revenues was primarily due to a 45% increase in the number of allograft
shipments due to increased acceptance of osteoarticular grafts and non-bone
tendons by the orthopaedic surgeon community and the Company's ability to
procure greater amounts of tissue.
31
Revenues from the sale of BioGlue surgical adhesive increased 287% to $6.4
million for 2000 from $1.7 million in 1999, representing 8% and 2%,
respectively, of total revenues during such periods. The increase in revenues is
due to a 177% increase in the number of milliliter shipment s of BioGlue. The
increase in shipments was primarily due to the introduction of BioGlue in
domestic markets in January of 2000 pursuant to a Humanitarian Use Device
Exemption for the use of BioGlue as an adjunct in the repair of acute thoracic
aortic dissections, as well as greater product awareness since the introduction
of BioGlue in international markets in April of 1998, increased surgeon
training, and the receipt of the CE approval for pulmonary indications in Europe
in March 1999.
Revenues from bioprosthetic cardiovascular devices decreased 19% to $771,000 in
2000 from $955,000 in 1999, representing 1% of total revenues during such
periods. This decrease in revenues is primarily due to the Company's focus on
the start-up of the SynerGraft heart valve manufacturing process, which
adversely impacted its ability to manufacture other bioprosthetic cardiovascular
devices.
Revenues from IFM decreased 41% to $2.2 million in 2000 from $3.7 million in
1999, representing 3% and 6%, respectively, of total revenues during such
periods. The decrease in revenues is due to HMP's default under its
manufacturing agreement and to the sale of the remaining assets of IFM to HMP.
Grant revenues decreased to $616,000 in 2000 from $877,000 in 1999. Grant
revenues are primarily attributable to the SynerGraft research and development
programs.
Cost of cryopreservation services and products aggregated $33.3 million in 2000
compared to $30.2 million in 1999, representing 44% and 46%, respectively, of
total cryopreservation and product revenues. The decrease in the 2000 cost of
cryopreservation services and products as a percentage of revenues results from
an increase in revenues from BioGlue surgical adhesive, which carry higher gross
margins than cryopreservation services, and from a greater portion of 2000
orthopaedic cryopreservation revenues being derived from services that have
higher gross margins than other orthopaedic cryopreservation services, partially
offset by a lesser portion of 2000 revenues being derived from human heart valve
and conduit cryopreservation services, which carry higher gross margins than
other cryopreservation services.
General, administrative, and marketing expenses increased 16% to $28.7 million
in 2000, compared to $24.7 million in 1999, representing 38% of total
cryopreservation and product revenues for each period. The increase in
expenditures in 2000 resulted from expenses incurred to support the increase in
revenues and expenses associated with the establishment of the Company's
European headquarters.
Research and development expenses increased 18% to $5.2 million in 2000,
compared to $4.4 million in 1999, representing 7% of total cryopreservation and
product revenues for each period. Research and development spending relates
principally to the Company's ongoing human clinical trials for its BioGlue
surgical adhesive and to its focus on its SynerGraft and BioGlue technologies.
As more fully discussed in the following comparison of years ended December 31,
1999 and December 31, 1998, the Company recorded a nonrecurring charge of $2.4
million in 1999 primarily as a result of HMP's default on its manufacturing
contract with IFM.
Net interest income was $1.7 million and $1.2 in 2000 and 1999, respectively.
This increase in interest income was due primarily to the increase in cash
generated from operations during the year ended December 31, 2000.
The effective income tax rate was 33% and 32% for the years ended December 31,
2000 and 1999, respectively.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues increased 10% to $66.7 million in 1999 from $60.7 million in 1998. The
increase in revenues was primarily due to increased acceptance in the medical
community of cryopreserved tissues, the Company's ability to procure greater
amounts of tissue, price increases for certain cryopreservation services
instituted during the third quarter of 1998 which continued during 1999, a full
32
year of BioGlue international revenue in 1999 as compared to nine months in
1998, and revenues attributable to the Company's introduction of osteoarticular
grafts in January 1999. These increases in revenues have been offset by certain
decreases in revenues as discussed below.
Revenues from human heart valve and conduit cryopreservation services decreased
6% to $29.0 million in 1999 from $30.8 million in 1998, representing 44% and
51%, respectively, of total revenues during such periods. This decrease in
revenues resulted from an 8% decrease in the number of heart allograft
shipments, which decrease consisted primarily of a 9% decrease in the number of
pulmonary heart valve shipments due to a decrease in the number of Ross
procedures being performed and competitive price pressures on pulmonary valves.
In a Ross procedure, the patient's pulmonary valve is transplanted into the
aortic position and a human pulmonary allograft is transplanted into the
patient's pulmonary position. The Company has attempted to promote the positive
clinical results of the Ross procedure by hosting science forums around the
country with its cardiovascular surgeon customers.
Revenues from human vascular tissue cryopreservation services increased 35% to
$19.3 million in 1999 from $14.3 million in 1998, representing 29% and 24%,
respectively, of total revenues during such periods. This increase in revenues
was primarily due to a 32% increase in the number of vascular allograft
shipments attributable to an increased demand for preserved vascular tissue, the
Company's ability to procure greater amounts of tissue, and the introduction of
the femoral vein program for use as A-V shunts in dialysis patients. The
increase in revenues was also due to the Company's focus on procuring and
distributing long segment veins, which have a higher per unit revenue than the
short segment veins.
Revenues from human connective tissue of the knee cryopreservation services
increased 45% to $11.2 million in 1999 from $7.7 million in 1998, representing
17% and 13%, respectively, of total revenues during such periods. This increase
in revenues was primarily due to a 31% increase in the number of allograft
shipments due to increased demand, the Company's ability to procure greater
amounts of tissue, and the introduction of preserved osteoarticular grafts in
January of 1999. Additional revenue increases resulted from price increases for
the cryopreservation of menisci and tendons during the third quarter of 1998.
Revenues from IFM decreased 34% to $3.7 million in 1999 from $5.7 million in
1998, representing 6% and 9%, respectively, of total revenues during such
periods. The decrease in revenues is due to HMP's failure to meet the minimum
purchase requirements set forth in the Agreement as more fully discussed below.
Revenues from BioGlue surgical adhesive increased 88% to $1.7 million for 1999
from $883,000 in 1998, representing 2% and 1%, respectively, of total revenues
during such periods. The increase in revenues is due to a 95% increase in the
volume of milliliter shipments of BioGlue due to increased product awareness as
a result of the introduction of BioGlue in international markets in April of
1998, increased surgeon training, and the receipt of the CE mark approval for
the use of BioGlue for pulmonary indications in Europe in March 1999.
Revenues from bioprosthetic cardiovascular devices increased 20% to $955,000 in
1999 from $798,000 in 1998, representing 1% of total revenues during such
periods. This increase in revenues was due to a 7% increase in the number of
bioprosthetic cardiovascular device shipments due to an increase in demand, a
full year of international revenues from the CryoLife-Ross Pulmonary Valve in
1999 as compared to three months of revenues in 1998, and price increases in
November of 1998 that continued throughout 1999.
Grant revenues increased to $877,000 in 1999 from $512,000 in 1998. This
increase in grant revenues is primarily attributable to the SynerGraft research
and development programs.
Other income decreased to $224,000 in 1999 from $1.1 million in 1998. Other
income in 1998 relates primarily to proceeds from the sale of the Company's port
product line.
Cost of cryopreservation services and products aggregated $30.2 million in 1999
compared to $25.3 million in 1998, representing 46% and 42%, respectively, of
total cryopreservation and product revenues. The increase of the cost of
cryopreservation services and products as a percentage of revenues in 1999
33
results from a smaller percentage of 1999 revenues being derived from human
heart valve and conduit cryopreservation services, which carry a significantly
higher gross margin than other cryopreservation services. An additional reason
for the increase in costs in 1999 results from the switch in October of 1998 to
OEM manufacturing of single-use medical devices, which generates lower gross
margins than cryopreservation services and lower gross margins than the IFM
products generated prior to the sale of the IFM product line.
General, administrative, and marketing expenses increased 3% to $24.7 million in
1999, compared to $23.9 million in 1998, representing 38% and 40%, respectively,
of total cryopreservation and product revenues in such periods. The increase in
expenditures in 1999 resulted from expenses incurred to support the increase in
revenues, partially offset by increased absorption of overhead expenses
associated with increased production of new products.
Research and development expenses decreased 7% to $4.4 million in 1999, compared
to $4.7 million in 1998, representing 7% and 8%, respectively, of total
cryopreservation and product revenues for each period. Research and development
spending relates principally to the Company's focus on its bioadhesives and
SynerGraft technologies.
The Company recorded a nonrecurring pretax charge of $2.4 million in 1999
primarily as a result of HMP's default on its manufacturing contract with IFM.
On June 22, 1999 IFM notified HMP that it was in default of certain provisions
of the Agreement. Specifically, HMP was in violation of the payment provisions
contained within the Agreement, which calls for inventory purchases to be paid
for within 45 days of delivery. Additionally, HMP was in violation due to
nonpayment of interest related to such past due accounts receivable.
After notification of the default, HMP indicated to the Company that it would
not be able to meet and did not met the minimum purchase requirements outlined
in the Agreement. Due to the significant uncertainties related to the Company's
ability to realize its investment in IFM, the Company determined that it had
incurred an impairment loss on its IFM assets. In calculating the amount of the
impairment loss, management used its best estimate to determine the realizable
value of its increase in working capital due to the HMP default, and the
recoverability of IFM's long-lived assets, consisting primarily of leasehold
improvements and equipment. As a result, management recorded a $2.1 million
impairment loss on working capital and a $2.6 million impairment loss on
leasehold improvements. Additionally, the Company offset the above charges with
$2.5 million of deferred gain recorded in connection with the sale of the IFM
product line to HMP. The net pretax effect of the above nonrecurring charges is
$2.2 million, and has been included under the caption "Nonrecurring charges" in
the accompanying Consolidated Income Statements.
As previously discussed in the Overview section, on October 9, 2000 the Company
sold substantially all of the remaining assets of IFM to HMP.
Net interest income was $1.2 million and $820,000 in 1999 and 1998,
respectively. This increase in interest income is due to recording a full year
of interest income on the invested proceeds from the follow-on equity offering
(the "Offering") completed in April 1998, lower interest expense resulting from
the repayment of certain indebtedness with the proceeds from the Offering, and
the conversion of certain convertible debentures into common stock of the
Company.
The increase in the effective income tax rate to 32% in 1999 from 25% in 1998,
is the result of the nonrecurrence of income tax benefits realized in 1998 from
the implementation of certain income tax planning strategies in the fourth
quarter, which had a significant one-time impact on 1998 taxes. Despite the
increase in the tax rate between 1999 and 1998, the 1999 effective tax rate is
reflective of the ongoing impact of these tax planning strategies.
Seasonality
The demand for the Company's human heart valve and conduit cryopreservation
services is seasonal, with peak demand generally occurring in the second and
third quarters. Management believes this trend for human heart valve and conduit
cryopreservation services is primarily due to the high number of surgeries
34
scheduled during the summer months. However, the demand for the Company's human
connective tissue of the knee cryopreservation services, human vascular tissue
cryopreservation services, bioprosthetic cardiovascular devices, and BioGlue
surgical adhesive does not appear to experience seasonal trends.
Liquidity and Capital Resources
At December 31, 2000 net working capital was $68.5 million, compared to $59.6
million at December 31, 1999, with a current ratio of 7 to 1. The Company's
primary capital requirements arise out of general working capital needs, capital
expenditures for facilities and equipment, funding of research and development
projects, and a common stock repurchase plan approved by the board of directors
in October of 1998. The Company historically has funded these requirements
through bank credit facilities, cash generated by operations, and equity
offerings.
Net cash provided by operating activities was $10.3 million in 2000, as compared
to net cash provided by operating activities of $1.3 million in 1999. This
increase primarily resulted from 1) an increase in net income, 2) a decrease in
accounts receivable despite increased revenues, 3) a reduction in the growth of
deferred preservation costs and inventories, and 4) an increase in the amount of
accounts payable due to the timing of payments of outstanding invoices,
partially offset by a decrease in accrued expenses.
Net cash used in investing activities was $6.6 million in 2000, as compared to
$3.6 million in 1999. This increase in cash used was primarily attributable to a
increase in capital expenditures due to the expansion of the Company's corporate
headquarters and manufacturing facilities, partially offset by an increase in
sales of marketable equity securities during 2000.
Net cash provided by financing activities was $7.8 million in 2000, as compared
to net cash used in financing activities of $4.5 million in 1999. This increase
was primarily attributable to the proceeds received on the bank line of credit
to finance the expansion of the Company's headquarters and manufacturing
facilities, a reduction in the Company's repurchase of treasury stock during
2000 and an increase in the proceeds from stock option exercises.
Management is currently seeking to complete a potential private placement of
equity or equity-oriented securities to form a subsidiary company for the
commercial development of its serine proteinase light activation technologies
through its wholly-owned subsidiary AuraZyme Pharmaceutical, Inc. This strategy,
if successful, will allow an affiliated entity to fund the light activation
technology and should expedite the commercial development of its blood clot
dissolving and surgical sealant product applications without additional research
and development expenditures by the Company (other than through the affiliated
company). This strategy, if successful, will favorably impact the Company's
liquidity going forward. The Company has ceased further material development of
light activation technology pending the identification of a corporate partner to
fund future development.
The Company anticipates that current cash and marketable securities, cash
generated from operations and its $10 million of bank facilities (of which $8.0
million was drawn as of March 31, 2001) will be sufficient to meet its operating
and development needs for at least the next 12 months, including the expansion
of the Company's corporate headquarters and manufacturing facilities. However,
the Company's future liquidity and capital requirements beyond that period will
depend upon numerous factors, including the timing of the Company's receipt of
FDA approvals to begin clinical trials for its products currently in
development, the resources required to further develop its marketing and sales
capabilities if and when those products gain approval, the resources required
for any additional expansion of its corporate headquarters and manufacturing
facility, and the extent to which the Company's products generate market
acceptance and demand. There can be no assurance the Company will not require
additional financing or will not seek to raise additional funds through bank
facilities, debt or equity offerings, or other sources of capital to meet future
requirements. These additional funds may not be available when needed or on
terms acceptable to the Company, which could have a material adverse effect on
the Company's business, financial condition, and results of operations.
35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents of $8.3
million and short-term investments of $17.8 million in municipal obligations as
of December 31, 2000, as well as interest paid on its debt. At March 31, 2001,
approximately $8 million of the Company's debt charged interest at a variable
rate. To mitigate the impact of fluctuations in U.S. interest rates, the Company
generally maintains approximately 50% (approximately $4.6 million at March 31,
2001) of its debt as fixed rate in nature. As a result, the Company is subject
to a risk that interest rates will decrease and the Company may be unable to
refinance its debt.
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, 2000 are incorporated herein by reference. Quarterly Results
of Operations on page 36 of the annual shareholders report for the year ended
December 31, 2000 is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None required to be reported in the Form 10-K.
36
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to Item 10, applicable to the Directors of the Company, is
incorporated herein by reference to the information set forth under the caption
"Election of Directors" in the Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Commission not later than April 30, 2001.
Information concerning executive officers is included in Part I, Item 4A of this
Form 10-K.
The response to Item 10, applicable to Section 16(a) of the Securities Exchange
Act of 1934, as amended, is incorporated herein by reference to the information
set forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement for the Annual Meeting of Shareholders to be
filed with the Commission not later than April 30, 2001.
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, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to Item 12 is incorporated herein by reference to the information
set forth under the captions "Ownership of Principal Shareholders and Certain
Executive Officers" and "Election of Directors" in the Proxy Statement for the
Annual Meeting of Shareholders to be filed with the Commission not later than
April 30, 2001.
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 30, 2001.
37
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 public accountants and consolidated financial
statements included on pages 22 through 35 of the annual shareholders
report for the year ended December 31, 2000 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 statements of income,
shareholders' equity, and cash flows of CryoLife, Inc. for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated statements of income, shareholders' equity and
cash flows of CryoLife, Inc. referred to above present fairly, in all material
respects, the consolidated results of its operations and its cash flows for the
year ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Atlanta, GA
February 2, 1999
2. Financial Statement Schedule
Report of Independent Public Accountants on Schedule II
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.
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. CraytonPruitt, 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-Kfiled on
March 19, 1997.)
38
Exhibit
Number Description
- -------- -----------
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 8-K filed with the Securities and
Exchange Commission on October 14, 1998.)
2.4*+ Asset Purchase Agreement, dated October 9, 2000, by and between
Horizon and IFM.
3.1 Restated Certificate of Incorporation of the Company. (Incorporated
by reference to Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)
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.)
3.3* Articles of Amendment to the Articles of Incorporation of the
Company.
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.)
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).)
39
Exhibit
Number Description
- -------- -----------
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, Sidney B. Ashmore, James C. Vander Wyk,
Albert E. Heacox, Kirby S. Black, and David Ashley Lee.
(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.)
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 D. Ashley Lee,
dated December 12, 1994.
10.9(d) 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(e) 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(f) 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. (Incorporated by reference to Exhibit
10.11 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 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.)
40
Exhibit
Number Description
- -------- -----------
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).)
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, dated April 18, 1995, between
the Company and Amli Land Development--I Limited Partnership dated
August 6, 1999. (Incorporated by reference to Exhibit 10.16(a) to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.)
10.16(b)* Restatement and Amendment to Funding Agreement between the Company
and Amli Land Development- I Limited Partnership, dated August 6,
1999.
10.18 CryoLife, Inc. Employee Stock Purchase Plan (Incorporated by
reference to Exhibit "A" of the Registrant's Definitive Proxy
Statement filed with the Securities and Exchange Commission on April
10, 1996.)
10.19 Noncompetition Agreement between the Company and United
Cryopreservation Foundation, Inc. dated September 11,1996.
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.)
10.20 Noncompetition Agreement between the Company and QV, Inc. dated
September 11, 1996. (Incorporated by reference to Exhibit 10.3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
10.21 Revolving Term Loan Facility between the Company and NationsBank
N.A., dated August 30, 1996. (Incorporated by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.)
10.22 Technology License Agreement between the Company and Colorado State
University Research Foundation dated March 28, 1996. (Incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996.)
10.23 Noncompetition Agreement between the Company and United Transplant
Foundation, Inc. dated September 11, 1996. (Incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.)
10.24(a) First Amendment of Third Amended and Restated Loan Agreement between
CryoLife, Inc., as Borrower and NationsBank, N.A. (South), as
Lender, dated April 14, 1997. (Incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.)
10.24(b) Second Modification of Third Amended and Restated Loan Agreement
dated December 16, 1997 by and between the Registrant and
NationsBank, N.A. . (Incorporated by reference to Exhibit 4.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.)
41
Exhibit
Number Description
- -------- -----------
10.24 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. (Incorporated by reference to Exhibit 10.24 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended 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.)
10.31 Form of Non-Competition Agreement dated March 5, 1997 between the
Company and J. Crayton Pruitt, Sr., M.D., Thomas Benham, Thomas
Alexandris, Tom Judge, Natalie Judge, Helen Wallace, J. Crayton
Pruitt, Jr., M.D., and Johanna Pruitt. (Incorporated by reference to
Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.)
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. (Incorporated by reference to Exhibit 10.32 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999)
10.33 Construction Loan and Permanent Financing Agreement with Bank of
America dated April 25, 2000. (Incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.)
10.34* Sublease Agreement between Horizon and IFM, dated October 9, 2000.
10.35* Terms of Agreement between Ronald C. Elkins, MD and CryoLife, Inc.,
dated November 7, 2000.
10.36* Rights Agreement between the Company and Chemical Mellon Shareholder
Services, L.L.C., as Rights Agent, dated as of November 27, 1995.
10.37* International Distribution Agreement, dated September 17, 1998,
between the Company and Century Medical, Inc.
13.1* Portions of the Registrant's Annual Report to Shareholders for the
year ended December 31, 2000 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.
- ---------------------
* Filed herewith.
+ In accordance with Item 601(b)(2) of Regulation S-K, the schedules and certain
exhibits have been omitted and a list of the schedules and exhibits is at the
end of the Exhibit. The Registrant will furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request.
42
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 D. Ashley Lee.
13. CryoLife, Inc. Non-Employee Directors Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.)
14. CryoLife, Inc. Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit "A" of the Registrant's Definitive Proxy
Statement filed with the Securities and Exchange Commission on April
10, 1996.)
15. Employment Agreement by and between the Company and Kirby S. Black
(Incorporated by reference to Exhibit 10.9(g) to the Registrant's
Annual Report on Form 10-K/A for the fiscal year ended December 31,
1996.)
16. CryoLife, Inc. 1998 Long-Term Incentive Plan. (Incorporated by
reference to Exhibit 10.34 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.)
17. Terms of Agreement Between Bruce J. Van Dyne, M.D. and CryoLife, Inc.,
dated November 1, 1999.
18. Terms of Agreement between Ronald C. Elkins, MD and CryoLife, Inc.,
dated November 7, 2000.
(b) Reports on Form 8-K
1. NONE.
43
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.
April 2, 2001
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 April 2, 2001
- ------------------------------- and Chairman of the Board of
Steven G. Anderson Directors (Principal Executive
Officer)
/s/ D. ASHLEY LEE Vice President and Chief Financial April 2, 2001
- ------------------------------- Officer (Principal Financial and
D. Ashley Lee Accounting Officer)
/s/ RONALD D. MCCALL Director April 2, 2001
- -------------------------------
Ronald D. McCall
/s/ VIRGINIA C. LACY Director April 2, 2001
- -------------------------------
Virginia C. Lacy
/s/ RONALD CHARLES ELKINS, M.D. Director April 2, 2001
- -------------------------------
Ronald Charles Elkins, M.D.
/s/ JOHN M. COOK Director April 2, 2001
- -------------------------------
John M. Cook
44
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 2000 annual report to stockholders and this Form 10-K and have issued our
report thereon dated February 7, 2001. 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 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.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 7, 2001
S-1
SCHEDULE II
CRYOLIFE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2000, 1999, and 1998
Balance beginning Balance end of
Description of period Additions Deductions Period
----------- ----------------- --------- ---------- ---------------
Year ended December 31, 2000
Allowance for doubtful accounts........... $ 528,000 $21,000 $464,000 $85,000
Deferred preservation costs............... 151,000 230,000 152,000 229,000
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
S-2
1345392