AMENDMENT NO. 1
FORM 10-K/A
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, 2002
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 Section 229.405 of this chapter 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ X ] Yes [ ] No
As of June 30, 2002, the aggregate market value of the voting stock of the
Registrant held by non-affiliates of the registrant was $272,880,824 computed
using the closing price of $16.06 per share of Common Stock on June 28, 2002,
the last trading day of the registrant's most recently completed second fiscal
quarter, as reported by NYSE, based on the assumption that directors and
executive officers are affiliates.
As of February 24, 2003 the number of outstanding shares of Common Stock of the
registrant was 19,573,970.
This Amendment to Form 10-K is being filed solely to correct the Company's
Consolidated Statement of Operations. As previously filed, the entry "(including
write-down of $32,715 in 2002)" was beneath "Human Tissue Preservation Services"
under "Revenues." As corrected, that entry is below "Human Tissue Preservation
Services" under "Costs and Expenses." All other information remains unchanged.
Except as modified herein, the Company incorporates into this Form 10-K/A the
contents of the annual report on Form 10-K filed on February 27, 2003. The
Company does not undertake to update any item on that annual report, as amended.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and supplementary data required by this item are
submitted as a separate section of this amendment to our annual report on Form
10-K. See "Financial Statements" commencing on page F-1.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following are filed as part of this report:
(a) 1. Financial Statements
Independent Auditors' Report-Deloitte & Touche LLP, Report of Independent
Public Accountants-Arthur Andersen LLP, Copy of Report of Independent
Public Accountants, Consolidated Balance Sheets as of December 31, 2002 and
2001, Consolidated Statements of Operations as of December 31, 2002, 2001
and 2000, Consolidated Statements of Cash Flows as of December 31, 2002,
2001 and 2000, Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2002, 2001, 2000, and 1999, and Notes to
Consolidated Financial Statements.
2. Financial Statement Schedule
Independent Auditors' Report 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
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2.1 Asset Purchase Agreement among the Company and United Cryopreservation
Foundation, Inc., United Transplant Foundation, Inc. and QV, Inc.
dated September 11, 1996. (Incorporated by reference to Exhibit 2.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
2.2 Agreement and Plan of Merger dated as of March 5, 1997 among Ideas for
Medicine, Inc., J. Crayton Pruitt, Sr., M.D., Thomas Benham, Thomas
Alexandris, Tom Judge, Natalie Judge, Helen Wallace, J. Crayton
Pruitt, Jr., M.D., and Johanna Pruitt, and CryoLife, Inc. and CryoLife
Acquisition Corporation. (Incorporated by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed on March 19, 1997.)
2
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. (Incorporated by reference to Exhibit 2.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)
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.
(Incorporated by reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000).
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.)
10.1(b) Eighth 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 November 18, 1998.
(Incorporated by reference to Exhibit 10.12 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.)
10.1(c) Ninth 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 July 25, 2001.
(Incorporated by reference to Exhibit 10.13 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.)
10.1(d) Tenth 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 June 25, 2002.
(Incorporated by reference to Exhibit 10.42 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.)
3
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.)
10.2(a) First Amendment to Lease dated July 23, 1993, by and between Newmarket
Partners I, Laing Properties, Inc. and Laing Management Company,
General Partner, as Landlord, and the Company as Tenant dated June 9,
1994. (Incorporated by reference to Exhibit 10.15 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.)
10.2(b) Second Amendment to Lease dated July 23, 1993, by and between
Newmarket Partners I, Laing Properties, Inc. and Laing Management
Company, General Partner, as Landlord, and the Company as Tenant dated
June 6, 1998. (Incorporated by reference to Exhibit 10.16 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.2(c) Third Amendment to Lease dated July 23, 1993, by and between Newmarket
Partners I, Laing Properties, Inc. and Laing Management Company,
General Partner, as Landlord, and the Company as Tenant dated August
3, 2001. (Incorporated by reference to Exhibit 10.17 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.2(d) Fourth Amendment to Lease dated July 23, 1993, by and between
Newmarket Partners I, Laing Properties, Inc. and Laing Management
Company, General Partner, as Landlord, and the Company as Tenant dated
June 25, 2002. (Incorporated by reference to Exhibit 10.18 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.3 1993 Employee Stock Incentive Plan adopted on July 6, 1993.
(Incorporated by reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.)
10.4 1989 Incentive Stock Option Plan for the Company, adopted on March 23,
1989. (Incorporated by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
10.5 Incentive Stock Option Plan, dated as of April 5, 1984. (Incorporated
by reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1 (No. 33-56388).)
10.6 Form of Stock Option Agreement and Grant under the Incentive Stock
Option and Employee Stock Incentive Plans. (Incorporated by reference
to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1
(No. 33-56388).)
10.7 CryoLife, Inc. Profit Sharing 401(k) Plan, as adopted on December 17,
1991. (Incorporated by reference to Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
10.8 Form of Supplemental Retirement Plan, by and between the Company and
its Officers-- Parties to Supplemental Retirement Plans: Steven G.
Anderson, David M. Fronk, 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. (Incorporated by reference to Exhibit 10.9(c)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)
4
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.)
10.9(g) Employment Agreement, by and between the Company and Sidney B.
Ashmore. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001.)
10.9(h) Employment Agreement, by and between the Company and D. Ashley Lee,
dated September 3, 2002. (Incorporated by reference to Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.9(i) Employment Agreement, by and between the Company and Sidney B.
Ashmore, dated September 3, 2002. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.)
10.9(j) Employment Agreement, by and between the Company and Kirby S. Black,
dated September 3, 2002. (Incorporated by reference to Exhibit 10.6 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.9(k) Employment Agreement, by and between the Company and Albert E. Heacox,
dated September 3, 2002. (Incorporated by reference to Exhibit 10.7 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.9(l) Employment Agreement, by and between the Company and David M. Fronk,
dated September 3, 2002. (Incorporated by reference to Exhibit 10.8 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.9(m) Employment Agreement, by and between the Company and James C. Vander
Wyk, dated September 3, 2002. (Incorporated by reference to Exhibit
10.9 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.)
10.9(n) Employment Agreement, by and between the Company and Steven G.
Anderson, dated September 3, 2002. (Incorporated by reference to
Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.)
10.10 Form of Secrecy and Noncompete Agreement, by and between the Company
and it's 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.)
5
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.
(Incorporated by reference to Exhibit 10.16(b) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000.)
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.)
6
10.24(a) First Amendment of Third Amended and Restated Loan Agreement between
CryoLife, Inc., as Borrower and NationsBank, N.A. (South), as Lender,
dated April 14, 1997. (Incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.)
10.24(b) Second Modification of Third Amended and Restated Loan Agreement dated
December 16, 1997 by and between the Registrant and NationsBank, N.A.
(Incorporated by reference to Exhibit 4.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.)
10.24(c) 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.)
10.33(a) Second Amendment to Construction Loan and Permanent Financing
Agreement, dated July 30, 2002 by and between the Company and Bank of
America. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.33(b) Promissory Note by and between the Company and Bank of America, dated
July 30, 2002. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
7
10.34 Sublease Agreement between Horizon and IFM, dated October 9, 2000.
(Incorporated by reference to Exhibit 10.34 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.)
10.35 Terms of Agreement between Ronald C. Elkins, MD and CryoLife, Inc.,
dated November 7, 2000. (Incorporated by reference to Exhibit 10.35 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 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.
(Incorporated by reference to Exhibit 10.36 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.)
10.37 International Distribution Agreement, dated September 17, 1998,
between the Company and Century Medical, Inc. (Incorporated by
reference to Exhibit 10.37 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.)
10.38 Assignment and Assumption Agreement, dated March 30, 2001, by and
among Horizon, Vascutech and IFM. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001.)
10.39 Assignment of Sublease, dated March 30, 2001, by and among Horizon,
Vascutech, and IFM. (Incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001.)
10.40 Security Agreement, dated March 30, 2001, by Vascutech in favor of
IFM. (Incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.)
10.41 2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.)
10.42 Settlement and Release Agreement, dated August 2, 2002, by and between
Colorado State University Research Foundation, the Company and Dr. E.
Christopher Orton. (Incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.)
10.43 Letter Agreement between the Company and FDA, dated September 5, 2002.
(Incorporated by reference to Exhibit 10.38 to the registrant's report
on Form 8-K filed on September 6, 2002).
10.44* Letter Agreement between the Company and FDA, dated November 8, 2002.
10.45* Letter Agreement between the Company and FDA, dated January 8, 2003.
21.1* Subsidiaries of CryoLife, Inc.
23.1* Consent of Deloitte & Touche LLP.
23.2* Notice regarding consent of Arthur Andersen LLP.
99.1** Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002.
- --------------------
* Filed with the original Form 10-K for fiscal year ending December 31, 2002,
which was filed on February 27, 2003.
** Filed herewith.
+ In accordance with Item 601(b)(2) of Regulation S-K, the schedules and certain
exhibits to this exhibit have been omitted and a list of the schedules and
exhibits has been placed at the end of the Exhibit. The Registrant will furnish
supplementally a copy of any omitted schedule or exhibit to the Commission upon
request.
8
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,
David M. Fronk, Sidney B. Ashmore, James C. Vander Wyk, Albert E. Heacox,
Kirby S. Black and David Ashley Lee. (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.
(Incorporated by reference to Exhibit 10.7(c) to the Registrant's
Registration Statement on Form S-1 (No. 33-56388).)
10. Reserved.
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.
(Incorporated by reference to Exhibit 10.9(c) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000.)
13. Employment Agreement, by and between the Company and Sidney B. Ashmore.
(Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.)
14. 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.)
15. 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.)
16. 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.)
17. 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.)
9
18. 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.)
19. Terms of Agreement between Ronald C. Elkins, MD and CryoLife, Inc., dated
November 7, 2000. (Incorporated by reference to Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 2000.)
20. 2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.)
21. Employment Agreement, by and between the Company and D. Ashley Lee, dated
September 3, 2002. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.)
22. Employment Agreement, by and between the Company and Sidney B. Ashmore,
dated September 3, 2002. (Incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.)
23. Employment Agreement, by and between the Company and Kirby S. Black, dated
September 3, 2002. (Incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.)
24. Employment Agreement, by and between the Company and Albert E. Heacox,
dated September 3, 2002. (Incorporated by reference to Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.)
25. Employment Agreement, by and between the Company and David M. Fronk, dated
September 3, 2002. (Incorporated by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.)
26. Employment Agreement, by and between the Company and James C. Vander Wyk,
dated September 3, 2002. (Incorporated by reference to Exhibit 10.9 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.)
27. Employment Agreement, by and between the Company and Steven G. Anderson,
dated September 3, 2002. (Incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.)
(b) Reports on Form 8-K
1. NONE.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to the registrant's
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
CRYOLIFE, INC.
April 30, 2003
By /s/ Steven G. Anderson
----------------------------------------
Steven G. Anderson,
President, Chief Executive
Officer and Chairman of
the Board of Directors
11
CERTIFICATIONS
I, Steven G. Anderson, Chairman, President, and Chief Executive Officer, certify
that:
1. I have reviewed this annual report on Form 10-K of CryoLife, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 30, 2003
/s/ Steven G. Anderson
-----------------------------------
Steven G. Anderson
Chairman, President, and Chief
Executive Officer
12
I, David Ashley Lee, Vice President, Treasurer, and Chief Financial Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of CryoLife, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 30, 2003
/s/ David Ashley Lee
-----------------------------------
David Ashley Lee
Vice President, Treasurer, and Chief
Financial Officer
13
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
CryoLife, Inc.
We have audited, the accompanying consolidated balance sheet of CRYOLIFE, INC.
(a Florida corporation) AND SUBSIDIARIES ("the Company") as of December 31, 2002
and the related consolidated statement of operations, shareholders' equity, and
cash flows for the year ended December 31, 2002. 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. The financial
statements of the Company as of December 31, 2001 and for each of the two years
then ended were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements in their
report dated March 27, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2002 and the results of their operations and their cash flows for the year ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets to
conform to Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets", which was adopted by the Company as of January 1,
2002.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 24, 2003
F-1
The following report of Arthur Andersen LLP ("Andersen") is a copy of the report
previously issued by Andersen on March 27, 2002. The report of Andersen is
included in this annual report on Form 10-K pursuant to rule 2-02(e) of
regulation S-X. The Company has not been able to obtain a reissued report from
Andersen. Andersen has not consented to the inclusion of its report in this
annual report on Form 10-K. Because Andersen has not consented to the inclusion
of its report in this annual report, it may be difficult to seek remedies
against Andersen, and the ability to seek relief against Andersen may be
impaired.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CryoLife, Inc.
We have audited, the accompanying consolidated balance sheets of CYROLIFE, INC.
(a Florida corporation) AND SUBSIDIARIES as of December 31, 2001 and 2000 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CryoLife, Inc. and subsidiaries
as of December 31, 2001 and 2000 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 27, 2002
F-2
CryoLife, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
ASSETS
December 31, 2002 2001
- ----------------------------------------------------------------------------------------------------------
Current assets:
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 10,277 $ 7,204
Marketable securities, at market 14,583 26,483
Receivables:
Trade accounts, less allowance for doubtful accounts
of $75 in 2002 and $100 in 2001 6,930 13,305
Note receivable, less allowance of $250 in 2001 -- 1,169
Income taxes 11,312 1,557
Other 512 1,263
- ----------------------------------------------------------------------------------------------------------
Total receivables 18,754 17,294
- ----------------------------------------------------------------------------------------------------------
Deferred preservation costs, net 4,332 24,199
Inventories 4,585 6,259
Prepaid expenses 2,413 2,341
Deferred income taxes 6,734 688
- ----------------------------------------------------------------------------------------------------------
Total current assets 61,678 84,468
- ----------------------------------------------------------------------------------------------------------
Property and equipment:
- ----------------------------------------------------------------------------------------------------------
Land 1,009 1,009
Equipment 22,403 18,998
Furniture and fixtures 5,275 5,347
Leasehold improvements 32,971 24,990
Construction in progress 189 7,767
- ----------------------------------------------------------------------------------------------------------
61,847 58,111
Less accumulated depreciation and amortization 23,717 18,865
- ----------------------------------------------------------------------------------------------------------
Net property and equipment 38,130 39,246
- ----------------------------------------------------------------------------------------------------------
Other assets:
- ----------------------------------------------------------------------------------------------------------
Goodwill, less accumulated amortization of $501 in 2001 -- 1,399
Patents, less accumulated amortization
of $1,014 in 2002 and $1,102 in 2001 5,324 2,919
Other, less accumulated amortization
of $397 in 2002 and $135 in 2001 1,282 1,278
- ----------------------------------------------------------------------------------------------------------
Total assets $ 106,414 $ 129,310
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
CryoLife, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 2002 2001
- ----------------------------------------------------------------------------------------------------------
Current liabilities:
- ----------------------------------------------------------------------------------------------------------
Accounts payable $ 3,874 $ 555
Accrued expenses and other current liabilities 6,823 1,491
Accrued compensation 1,627 2,560
Accrued procurement fees 3,769 6,592
Current maturities of capital lease obligation 2,169 609
Current maturities of long-term debt 5,600 1,600
Convertible debenture -- 4,393
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 23,862 17,800
- ----------------------------------------------------------------------------------------------------------
Capital lease obligations, less current maturities 971 3,140
Bank line of credit, less current maturities -- 5,600
Deferred income taxes 986 449
Other long-term liabilities 795 882
- ----------------------------------------------------------------------------------------------------------
Total liabilities 26,614 27,871
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity:
- ----------------------------------------------------------------------------------------------------------
Preferred stock $.01 par value per share; authorized 5,000 shares
including 2,000 shares of series A junior participating preferred stock;
no shares issued -- --
Common stock $.01 par value per share; authorized 75,000 shares;
issued 20,935 in 2002 and 20,172 shares in 2001 209 202
Additional paid-in capital 73,630 66,828
Retained earnings 12,786 40,547
Deferred compensation (21) (33)
Accumulated other comprehensive income, net of tax 282 (145)
Treasury stock; 1,361 shares in 2002 and
1,286 shares in 2001, at cost (7,086) (5,960)
- ---------- -----------------------------------------------------------------------------------------------
Total shareholders' equity 79,800 101,439
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 106,414 $ 129,310
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
CryoLife, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended
December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Revenues:
- --------------------------------------------------------------------------------------------------------
Human tissue preservation services $ 55,373 $ 75,552 $ 67,096
Products 21,597 11,130 9,384
Research grants and distribution revenue 825 989 616
- --------------------------------------------------------------------------------------------------------
Total revenues 77,795 87,671 77,096
- --------------------------------------------------------------------------------------------------------
Costs and expenses:
- --------------------------------------------------------------------------------------------------------
Human tissue preservation services
(including write-down of $32,715 in 2002) 55,363 31,165 27,500
Products 10,270 5,464 5,847
General, administrative, and marketing 47,530 33,844 28,731
Research and development 4,597 4,737 5,207
Nonrecurring charges 1,399 -- --
Interest expense 692 96 299
Interest income (895) (1,967) (1,952)
Other expense (income), net 273 852 (169)
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses 119,229 74,191 65,463
- --------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (41,434) 13,480 11,633
Income tax (benefit) expense (13,673) 4,314 3,816
- --------------------------------------------------------------------------------------------------------
Net (loss) income $ (27,761) $ 9,166 $ 7,817
- --------------------------------------------------------------------------------------------------------
(Loss) earnings per share:
- --------------------------------------------------------------------------------------------------------
Basic $ (1.43) $ 0.49 $ 0.42
- --------------------------------------------------------------------------------------------------------
Diluted $ (1.43) $ 0.47 $ 0.41
- --------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
- --------------------------------------------------------------------------------------------------------
Basic 19,432 18,808 18,541
- --------------------------------------------------------------------------------------------------------
Diluted 19,432 19,660 19,229
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
CryoLife, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Net cash flows from operating activities:
- --------------------------------------------------------------------------------------------------------
Net (loss) income $ (27,761) $ 9,166 $ 7,817
Adjustments to reconcile net (loss) income to net cash
flows (used by) provided by operating activities:
Loss (gain) on sale of marketable equity securities 240 (9) --
Depreciation of property and equipment 5,222 4,203 3,023
Amortization 201 404 199
Provision for doubtful accounts 50 304 21
Write-down of deferred preservation costs and inventories 35,816 -- --
Other non-cash adjustments to income 1,419 348 --
Deferred income taxes (5,568) 624 1,658
Tax effect of non-qualified option exercises 481 421 595
Changes in operating assets and liabilities:
Trade and other receivables 7,076 (2,707) 469
Income taxes (9,755) (983) (543)
Deferred preservation costs (12,848) (3,888) (2,659)
Inventories (1,427) (2,265) (1,433)
Prepaid expenses and other assets (59) (1,121) 234
Accounts payable 3,313 (1,814) 535
Accrued expenses and other liabilities 1,489 3,796 367
- --------------------------------------------------------------------------------------------------------
Net cash flows (used by) provided by operating activities (2,111) 6,479 10,283
Net cash flows from investing activities:
- --------------------------------------------------------------------------------------------------------
Capital expenditures (4,100) (14,329) (9,491)
Other assets (2,598) (689) 39
Purchases of marketable securities (9,970) (29,336) (5,729)
Sales and maturities of marketable securities 21,780 24,235 8,542
Proceeds from notes receivable 1,169 2,020 360
- --------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities 6,281 (18,099) (6,279)
- ---------------------------------------------------------------------------------------------------------
Net cash flows from financing activities:
- --------------------------------------------------------------------------------------------------------
Principal payments of debt (1,600) (1,050) (287)
Proceeds from debt issuance -- 1,165 6,835
Principal payments on obligations under capital leases (609) (291) (180)
Proceeds from exercise of options and issuance of stock 1,472 1,502 1,660
Purchase of treasury stock (663) -- (612)
- --------------------------------------------------------------------------------------------------------
Net cash flows (used in) provided by financing activities (1,400) 1,326 7,416
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 2,770 (10,294) 11,420
Effect of exchange rate changes on cash 303 18 (68)
Cash and cash equivalents, beginning of year 7,204 17,480 6,128
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 10,277 $ 7,204 $ 17,480
- --------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information - cash paid during the year for:
- --------------------------------------------------------------------------------------------------------
Interest $ 636 $ 896 $ 471
Income taxes 2,874 4,996 2,215
- --------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
- --------------------------------------------------------------------------------------------------------
Conversion of convertible debenture $ 4,393 $ -- $ --
Establishment of capital lease obligation $ -- $ 2,506 $ --
Purchase of property and equipment
in accounts payable and accrued expenses $ 6 $ 203 $ 844
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
CryoLife, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
Accumulated
Common Shares Additional Other Total
Outstanding Paid-In Retained Deferred Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Compensation Income (Loss) Shares Amount Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 20,041 $200 $64,359 $23,564 $ (57) $(785) (1,701) $(7,055) $80,226
- ----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 7,817 -- -- -- -- 7,817
Other comprehensive loss,
net of taxes -- -- -- -- -- (303) -- -- (303)
--------------
Comprehensive income 7,514
Exercise of options 36 1 338 -- -- -- 356 1,389 1,728
Employee stock purchase plan -- -- 239 -- -- -- 67 288 527
Amortization of deferred
compensation -- -- -- -- 12 -- -- -- 12
Purchase of treasury stock -- -- -- -- -- -- (78) (612) (612)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 20,077 201 64,936 31,381 (45) (1,088) (1,356) (5,990) 89,395
- ----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 9,166 -- -- -- -- 9,166
Other comprehensive income,
net of taxes -- -- -- -- -- 943 -- -- 943
--------------
Comprehensive income 10,109
Exercise of options 87 1 1,268 -- -- -- 46 (78) 1,191
Employee stock purchase plan 8 -- 624 -- -- -- 24 108 732
Amortization of deferred
compensation -- -- -- -- 12 -- -- -- 12
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 20,172 202 66,828 40,547 (33) (145) (1,286) (5,960) 101,439
==================================================================================================================================
Net loss -- -- -- (27,761) -- -- -- -- (27,761)
Other comprehensive income,
net of taxes -- -- -- -- -- 427 -- -- 427
--------------
Comprehensive loss (27,334)
Exercise of options 119 1 1,578 -- -- -- (23) (541) 1,038
Employee stock purchase plan 98 1 836 -- -- -- 16 78 915
Conversion of convertible
debenture 546 5 4,388 -- -- -- -- -- 4,393
Amortization of deferred
compensation -- -- -- -- 12 -- -- -- 12
Purchase of treasury stock -- -- -- -- -- -- (68) (663) (663)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 20,935 $209 $73,630 $12,786 $(21) $282 (1,361) $(7,086) $79,800
==================================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
CRYOLIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Founded in 1984, CryoLife, Inc. (the "Company") is a leader in the development
and commercialization of implantable living human tissues for use in
cardiovascular and vascular surgeries throughout the U.S. and Canada.
Historically, the Company has been a leader in the development and
commercialization of implantable living human tissues for use in orthopaedic
surgeries throughout the U.S. and Canada. The Company suspended processing of
orthopaedic tissue from August 2002 until late February 2003 as a result of a
recall order from the FDA. (See Note 2 for further discussion). The Company's
human tissue cryopreservation services are marketed in North America, Europe,
South America, and Asia. The Company's BioGlue(R) Surgical Adhesive is FDA
approved in the U.S. as an adjunct to sutures and staples for use in adult
patients in open surgical repair of large vessels, is CE marked in the European
Community and is approved in Canada, Australia and certain countries within the
Middle East, South America, Asia, and South Africa for use in cardiovascular,
vascular, pulmonary, and soft tissue repair. The Company's bioprosthetic
implantable devices include stentless porcine heart valves marketed in Europe,
South America, the Middle East, Canada, and South Africa, and SynerGraft(R)
processed bovine vascular grafts, which are CE marked in the European Community.
Until October 9, 2000 the Company served as an original equipment manufacturer
for single-use medical devices for use in vascular surgical procedures.
In February 2001 the Company formed a wholly owned subsidiary, AuraZyme
Pharmaceuticals, Inc., to foster the commercial development of the Company's
light-activated drug delivery systems that have potential application in cancer
treatment and fibrinolysis (blood clot dissolving) and other drug delivery
applications.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances are
eliminated.
USE OF ESTIMATES
The preparation of the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Estimates and assumptions are used when accounting for depreciation, allowance
for doubtful accounts, write-downs of deferred preservation costs, valuation of
long-lived tangible and intangible assets, commitments and contingencies,
disclosure of the fair value of stock based compensation, and the related
pro-forma expense and income taxes.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which
provides guidance on applying generally accepted accounting principles to
revenue recognition issues. Revenues for human tissue preservation services are
recognized when services are completed and tissue is delivered to the customer.
The Company has recorded the estimated amount of credits issued and to be issued
for tissues recalled pursuant to the FDA Order as a service revenue return.
Revenues for products are recognized at the time the product is shipped, at
which time title passes to the customer. There are no further performance
obligations and delivery occurs upon shipment. Revenues from research grants are
recognized in the period the associated costs are incurred. The Company assesses
the likelihood of collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
SHIPPING AND HANDLING CHARGES
Fees charged to customers for shipping and handling of preserved tissues and
products are included in human tissue preservation service revenues and product
F-8
revenues, respectively. The costs for shipping and handling of preserved human
tissues and products are included as a component of cost of human tissue
preservation services and cost of products, respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and maturity dates of 90 days or less at the
time of acquisition. The carrying value of cash equivalents approximates fair
value.
MARKETABLE SECURITIES
The Company maintains cash equivalents and investments in several large,
well-capitalized financial institutions, and the Company's policy disallows
investment in any securities rated less than "investment-grade" by national
rating services.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Debt securities not
classified as held-to-maturity or trading and marketable equity securities not
classified as trading are classified as available-for-sale. At December 31, 2002
and 2001 all marketable equity securities and debt securities were designated as
available-for-sale.
Available-for-sale securities are stated at their fair values, with the
unrealized gains and losses, net of tax, reported in a separate component of
shareholders' equity. Interest income, dividends, realized gains and losses, and
declines in value judged to be other than temporary are included in investment
income. The cost of securities sold is based on the specific identification
method.
DEFERRED PRESERVATION COSTS
Tissue is procured from deceased human donors by organ and tissue procurement
agencies, which consign the tissue to the Company for processing and
preservation. Preservation costs related to tissue held by the Company are
deferred until revenue is recognized upon shipment of the tissue to the
implanting hospital. Deferred preservation costs consist primarily of laboratory
expenses, tissue procurement fees, fringe and facility allocations, and
freight-in charges, and are stated, net of reserve, on a first-in, first-out
basis.
As of December 31, 2002 the deferred preservation costs were $2.0 million for
allograft heart valve tissues, $620,000 for non-valved cardiac tissues, $1.7
million for vascular tissues, and zero for orthopaedic tissues. For the year
ended December 31, 2002, the Company recorded a write-down of deferred
preservation costs of $8.7 million for valved cardiac tissues, $2.9 million for
non-valved cardiac tissues, $11.9 million for vascular tissues, and $9.2 million
for orthopaedic tissue totaling $32.7 million. These write-downs were recorded
as a result of the matters discussed in Note 2, FDA Order on Human Tissue
Preservation. The amount of these write-downs reflects management's estimate
based on information currently available to it. These estimates may prove
inaccurate, as the scope and impact of the FDA Order are determined. Management
will continue to evaluate the recoverability of these deferred preservation
costs based on the factors discussed in Note 2 and record additional write-downs
if it becomes clear that additional impairments have occurred. The write-down
creates a new cost basis which cannot be written back up if these tissues become
saleable. The cost of human tissue preservation services may be favorably
impacted depending on the future level of tissue shipments related to previously
written-down deferred preservation costs. The shipment levels of these
written-down tissues will be affected by the amount and timing of the release of
tissues processed after September 5, 2002, as a result of the Agreement with the
FDA, since written-down tissues may be shipped if tissues processed after the
Agreement are not available for shipment.
INVENTORIES
Inventories are comprised of implantable surgical adhesives and bioprosthetic
products and are valued at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets, generally five to ten years, on a
straight-line basis. Leasehold improvements are amortized on a straight-line
basis over the lease term or the estimated useful lives of the assets, whichever
is shorter. Interest is capitalized in connection with the expansion of the
corporate headquarters and manufacturing facility.
F-9
INTANGIBLE ASSETS
Beginning with the Company's adoption of Statement of Financial Accounting
Standards ("SFAS") No. 142,"Goodwill and Other Intangible Assets" ("SFAS 142")
on January 1, 2002 the goodwill resulting from business acquisitions is not
amortized, but is instead subject to periodic impairment testing in accordance
with SFAS 142. Patent costs are amortized over the expected useful lives of the
patents (primarily 17 years) using the straight-line method. Other intangibles,
which consist primarily of manufacturing rights and agreements, are amortized
over the expected useful lives of the related assets (primarily five years). As
a result of the FDA Order, the Company determined that an evaluation of the
possible impairment of intangible assets under SFAS 142 was necessary. The
Company engaged an independent valuation expert to perform the valuation using a
discounted cash flow methodology, and as a result of this analysis, the Company
determined that goodwill related to its tissue processing reporting unit was
fully impaired as of September 30, 2002. Therefore, the Company recorded a
write-down of $1.4 million in goodwill during the quarter ended September 30,
2002. Management does not believe an impairment exists related to the other
intangible assets that were assessed in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
Scheduled amortization of intangible assets for the next five years is as
follows (in thousands):
2003 $ 180
2004 150
2005 150
2006 136
2007 109
-------------
$ 725
=============
LONG-LIVED ASSETS
SFAS 144 requires the write-down of a long-lived asset to be held and used if
the carrying value of the asset or the asset group to which the asset belongs is
not recoverable. The carrying value of the asset or asset group is not
recoverable if it exceeds the sum of the undiscounted future cash flows expected
to result from the use and eventual disposition of the asset or asset group. As
of September 30, 2002, in applying SFAS 144, the Company determined that the
asset groups consisted of the long-lived assets related to the Company's two
reporting segments, as these asset groups represent the lowest level at which
identifiable cash flows are largely independent of the cash flows of other
assets and liabilities. The Company used a fourteen-year period for the
undiscounted future cash flows. This period of time was selected based upon the
remaining life of the primary assets of the asset groups, which are leasehold
improvements. The undiscounted future cash flows related to these asset groups
exceeded their carrying values as of September 30, 2002 and December 31, 2002
and therefore management has concluded that there is not an impairment of the
Company's long-lived intangible, except for goodwill discussed above, and
tangible assets related to the tissue preservation business or medical device
business. However, depending on the Company's ability to rebuild demand for its
tissue preservation services, the outcome of discussions with the FDA regarding
the shipping of orthopaedic tissues, and the future effects of adverse publicity
surrounding the FDA Order and reported infections on preservation revenues,
these assets may become impaired. Management will continue to evaluate the
recoverability of these assets in accordance with SFAS 144.
ACCRUED PROCUREMENT FEES
Tissue is procured from deceased human donors by organ procurement agencies and
tissue banks ("Agencies"), which consign the tissue to the Company for
processing and preservation. The Company reimburses the Agencies for their costs
to recover the tissue and passes on these costs to the customer when the tissue
is shipped and the service is complete. The Company accrues the procurement fees
due to the Agencies at the time the tissue is received based on contractual
agreements between the Company and the Agencies.
PRODUCT LIABILITY CLAIMS
In the normal course of business as a medical device and services company the
Company has product liability complaints filed against it. The Company maintains
claims-made insurance policies to mitigate its financial exposure to product
liability claims. Claims-made insurance policies cover only those asserted
claims and incidents that are reported to the insurance carrier while the policy
is in effect. Thus, a claims-made policy does not represent a transfer of risk
for claims and incidents that have been incurred but not reported to the
insurance carrier. The Company periodically evaluates its exposure to unreported
product liability claims, and records accruals as necessary for the estimated
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cost of unreported claims related to services performed and products sold. As of
December 31, 2002 the Company accrued $3.6 million in estimated costs for
unreported product liability claims related to services performed and products
sold prior to December 31, 2002. The Company engaged an independent actuarial
firm to perform an analysis of the unreported product claims as of December 31,
2002. The unreported product loss liability was estimated using a
frequency-severity approach; whereas, projected losses were calculated by
multiplying the estimated number of claims by the estimated average cost per
claim. The estimated claims were calculated based on the reported claim
development method and the Bornhuetter-Ferguson method using a blend of the
Company's historical claim emergence and industry data. The estimated cost per
claim was calculated using a lognormal claims model blending the Company's
historical average cost per claim with industry claims data. The expense was
recorded in general, administrative, and marketing expenses and was included as
a component of accrued expenses and other current liabilities on the
Consolidated Balance Sheet.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. A
valuation allowance is established when it is more likely than not that the full
value of a deferred tax asset will not be recovered.
EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average number of
common shares outstanding plus the effect of outstanding stock options, computed
using the treasury stock method.
STOCK-BASED COMPENSATION
On December 31, 2002 the Company was required to adopt SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for companies that voluntarily elect to adopt
the fair value recognition and measurement methodology prescribed by SFAS 123.
In addition, regardless of the method a company elects to account for
stock-based compensation arrangements, SFAS 148 requires additional disclosures
in the Summary of Significant Accounting Policies footnote of both interim and
annual financial statements regarding the method the company uses to account for
stock-based compensation and the effect of such method on the Company's reported
results. The Company has determined that the adoption of SFAS 148 will not have
a material effect on the financial position, results of operations, and cash
flows of the Company.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations ("APB
25") in accounting for its employee stock options because, as discussed below,
the alternative fair value accounting provided for under SFAS 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, which requires that the information be determined as if the Company
has accounted for its employee stock options granted under the fair value method
of that statement. The fair values for these options were estimated at the dates
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
2002 2001 2000
------------- -------------- -------------
Expected dividend yield 0% 0% 0%
Expected stock price volatility .630 .600 .540
Risk-free interest rate 3.67% 4.73% 6.39%
Expected life of options 5.3 Years 4.2 Years 4.3 Years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
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the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair values of the options
are amortized to expense over the options' vesting periods. The Company's pro
forma information follows (in thousands, except per share data):
2002 2001 2000
------------- ------------- -------------
Net (loss) income--as reported $ (27,761) $ 9,166 $ 7,817
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards,
net of tax 1,287 2,232 1,183
------------- -------------- -------------
Net (loss) income--pro forma $ (29,048) $ 6,934 $ 6,634
============= ============== =============
(Loss) earnings per share--as reported:
Basic $ (1.43) $ 0.49 $ 0.42
Diluted $ (1.43) $ 0.47 $ 0.41
(Loss) earnings per share--pro forma:
Basic $ (1.49) $ 0.37 $ 0.36
Diluted $ (1.49) $ 0.35 $ 0.35
STOCK SPLIT
On November 27, 2000 the Board of Directors declared a three-for-two stock
split, effected in the form of a stock dividend, payable on December 27, 2000,
to shareholders of record on December 8, 2000. All share and per share
information in the accompanying consolidated financial statements has been
adjusted to reflect this split.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), established
standards for the reporting and display of comprehensive income and its
components in a full set of comparative general-purpose financial statements.
The statement became effective for the Company in 1998. Comprehensive income is
defined in SFAS 130 as net income plus other comprehensive income, which, under
existing accounting standards, includes foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities are translated at the exchange rate as of the balance
sheet date. All revenue and expense accounts are translated at a
weighted-average of exchange rates in effect during the year. Translation
adjustments are recorded as a separate component of other comprehensive income
in shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will be required to adopt SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143") on January 1, 2003. SFAS 143 addresses
accounting and reporting for retirement costs of long-lived assets resulting
from legal obligations associated with acquisition, construction, or development
transactions. The Company has determined that the adoption of SFAS 143 will not
have a material effect on the results of operations or financial position of the
Company, as the Company does not currently have any relevant transactions.
The Company will be required to adopt SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections" ("SFAS 145"), on January 1, 2003. SFAS 145 rescinds SFAS No. 4, 44
and 64, which required gains and losses from extinguishments of debt to be
classified as extraordinary items. SFAS 145 also amends SFAS No. 13 eliminating
inconsistencies in certain sale-leaseback transactions. The provisions of SFAS
145 are effective for fiscal years beginning after May 15, 2002. The Company has
determined that the adoption of SFAS 145 will not have a material effect on the
results of operations or financial position of the Company, as the Company does
not currently have any relevant transactions.
F-12
The Company will be required to adopt SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") on January 1, 2003.
SFAS 146 requires that costs associated with exit or disposal activities be
recorded at their fair values when a liability has been incurred. Under previous
guidance, certain exit costs were accrued upon management's commitment to an
exit plan, which is generally before an actual liability has been incurred. The
Company will adopt SFAS 146 for restructuring plans entered into after December
31, 2002.
2. FDA ORDER ON HUMAN TISSUE PRESERVATION
On August 13, 2002 the Company received an order from the Atlanta district
office of the FDA regarding the non-valved cardiac, vascular, and orthopaedic
tissue processed by the Company since October 3, 2001 (the "FDA Order"). The FDA
Order followed an April 2002 FDA Form 483 Notice of Observations ("FDA 483") and
an FDA Warning Letter dated June 17, 2002 (the "Warning Letter"). Subsequently,
the Company responded to the Warning Letter. Revenue from human tissue
preservation services accounted for 78% of the Company's revenues for the six
months ended June 30, 2002, and of those revenues 67% or $26.9 million was
derived from preservation of tissues subject to the FDA Order. The FDA Order
contains the following principal provisions:
o The FDA alleges that, based on its inspection of the Company's
facility on March 25 through April 12, 2002, certain human tissue
processed and distributed by the Company may be in violation of 21
Code of Federal Regulations ("CFR") Part 1270. (Part 1270 requires
persons or entities engaged in the recovery, screening, testing,
processing, storage, or distribution of human tissue to perform
certain medical screening and testing on human tissue intended for
transplantation. The rule also imposes requirements regarding
procedures for the prevention of contamination or cross-contamination
of tissues during processing and the maintenance of certain records
related to these activities.)
o The FDA alleges that the Company has not validated procedures for the
prevention of infectious disease contamination or cross-contamination
of tissue during processing at least since October 3, 2001.
o Non-valved cardiac, vascular, and orthopaedic tissue processed by the
Company from October 3, 2001 to September 5, 2002 must be retained
until it is recalled, destroyed, the safety is confirmed, or an
agreement is reached with the FDA for its proper disposition under the
supervision of an authorized official of the FDA.
o The FDA strongly recommends that the Company perform a retrospective
review of all tissue in inventory (i.e. currently in storage at the
Company) that is not referenced in the FDA Order to assure that it was
recovered, processed, stored, and distributed in conformance with 21
CFR 1270.
o The Center for Devices and Radiological Health ("CDRH"), a division of
the FDA, is evaluating whether there are similar risks that may be
posed by the Company's allograft heart valves, and will take further
regulatory action if appropriate.
Pursuant to the FDA Order, the Company placed non-valved cardiac, vascular, and
orthopaedic tissue subject to the FDA Order on quality assurance quarantine and
recalled the non-valved cardiac, vascular, and orthopaedic tissues subject to
the FDA Order (i.e. processed since October 3, 2001) that had been distributed
but not implanted. In addition, the Company ceased processing non-valved
cardiac, vascular, and orthopaedic tissues. The Company appealed the FDA Order
on August 14, 2002 and requested a hearing with the FDA, which was originally
set for December 12, 2002. Due to the Agreement discussed below, the Company
withdrew its request for a hearing with the FDA. After the FDA issued its order
regarding the recall, Health Canada also issued a recall on the same types of
tissue and other countries have inquired about the circumstances surrounding the
FDA Order.
After receiving the FDA Order, the Company met with representatives of the FDA's
CDRH division regarding CDRH's review of the Company's processed allograft heart
valves, which are not subject to the FDA Order. On August 21, 2002 the FDA
publicly stated that allograft heart valves have not been included in the FDA
Order as these devices are essential for the correction of congenital cardiac
lesions in neonate and pediatric patients and no satisfactory alternative device
exists. However, the FDA also publicly stated that it then still had serious
concerns regarding the Company's processing and handling of allograft heart
valves. The FDA also recommended that surgeons carefully consider using
F-13
processed allografts from alternative sources, that surgeons inform prospective
patients of the FDA's concerns regarding the Company's allograft heart valves,
and that patients be carefully monitored for both fungal and bacterial
infections.
On September 5, 2002 the Company reached an agreement with the FDA (the
"Agreement") that supplements the FDA Order and allows the tissues subject to
recall (processed between October 3, 2001 and September 5, 2002) to be released
for distribution after the Company completes steps to assure that the tissue is
used for approved purposes and that patients are notified of risks associated
with tissue use. Specifically, the Company must obtain physician prescriptions,
and tissue packaging must contain specified warning labels. The Agreement calls
for the Company to undertake to identify third-party records of donor tissue
testing, and to destroy tissue from donors in whom microorganisms associated
with an infection are found. The Agreement allowing distribution of tissues
subject to the recall had a 45-business day term and was renewed on November 8,
2002 and on January 8, 2003. This most recent renewal expires on March 20, 2003.
The Company is unable to predict whether or not the FDA will grant further
renewals of the Agreement. In addition, pursuant to the Agreement, the Company
agreed to perform additional procedures in the processing of non-valved cardiac
and vascular tissues and subsequently resumed processing these tissues. The
Agreement contained the requirement that tissues subject to the FDA Order be
replaced with tissues processed under validated methods. The Company also agreed
to establish a corrective action plan within 30 days from September 5, 2002 with
steps to validate processing procedures. The corrective action plan was
submitted on October 5, 2002.
As a result of the adverse publicity surrounding the FDA Warning Letter and FDA
Order and related tissue infections, the Company's procurement of cardiac
tissues, from which heart valves and non-valved cardiac tissues are processed,
decreased 25% in the fourth quarter of 2002 as compared to the fourth quarter of
2001. Although the Company expects to be able to maintain the current level of
cardiac tissue procurement, there is no guarantee that sufficient tissue will be
available. The Company has continued to process and distribute heart valves
since the receipt of the FDA Order, as these tissues are not subject to the FDA
Order.
On September 17, 2002 the Company resumed the procurement and processing of
vascular tissues. The Company limited its vascular procurement until it
addressed the observations detailed in the FDA 483 and had fully evaluated the
demand for the vascular tissues. The Company's procurement of vascular tissue
decreased 65% in the fourth quarter of 2002 as compared to the fourth quarter of
2001. The Company expects that vascular procurement will increase significantly
following the close out of the FDA 483.
On December 31, 2002 the FDA clarified the Agreement noting that non-valved
cardiac and vascular tissues processed since September 5, 2002 are not subject
to the FDA Order. Specifically, for non-valved cardiac and vascular tissue
processed since September 5, 2002, the Company is not required to obtain
physician prescriptions, label the tissue as subject to a recall, or require
special steps regarding procurement agency records of donor screening and
testing beyond those required for all processors of human tissue. A renewal of
the Agreement that expires on March 20, 2003 is therefore not needed in order
for the Company to continue to distribute non-valved cardiovascular and vascular
tissues processed since September 5, 2002.
On February 14, 2003 the FDA confirmed that the Company has completed the
corrective actions necessary to close out the April 2002 FDA 483 that preceded
the Warning Letter and FDA Order. The close out of the 483 followed a two-week
inspection of the Company's processing operations. As a result of the close out
of the 483, the Company believes it can resume processing and distributing
orthopaedic tissues but has not received confirmation of this from the FDA. The
Company resumed processing orthopaedic tissues in late February 2003. Prior to
shipment of orthopaedic tissues, the Company will confirm with the FDA that they
do not disagree with the Company regarding its interpretation of the close out
of the FDA 483. The Company will continue to process vascular tissues on a
limited basis until it can fully evaluate the demand level for its vascular
tissue preservation services.
A new FDA 483 was issued in connection with the inspection, but corrective
action was implemented on most of its observations during the inspection. The
Company believes the observations, most of which focus on the Company's systems
for handling complaints, will not materially affect the Company's operations.
As a result of the FDA Order, the Company recorded a reduction to pretax income
of $12.6 million in the quarter ended June 30, 2002. The reduction was comprised
of a net $8.9 million increase to cost of human tissue preservation services, a
$2.4 million reduction to revenues (and accounts receivable) for the estimated
return of the tissues subject to recall by the FDA Order, and a $1.3 million
F-14
accrual recorded in general, administrative, and marketing expenses for
retention levels under the Company's product liability and directors' and
officers' insurance policies of $1.2 million (see Note 9), and for estimated
expenses of $75,000 for packaging and handling for the return of affected
tissues under the FDA Order. The net increase of $8.9 million to cost of
preservation services was comprised of a $10.0 million write-down of deferred
preservation costs for tissues subject to the FDA Order, offset by a $1.1
million decrease in cost of preservation services due to the estimated tissue
returns resulting from the FDA Order (the costs of such recalled tissue are
included in the $10.0 million write-down). The Company evaluated many factors in
determining the magnitude of impairment to deferred preservation costs as of
June 30, 2002, including the impact of the FDA Order, the possibility of
continuing action by the FDA or other U.S. and foreign government agencies, and
the possibility of unfavorable actions by physicians, customers, procurement
organizations, and others. As a result of this evaluation, management believed
that since all non-valved cardiac, vascular, and orthopaedic allograft tissues
processed since October 3, 2001 were under recall pursuant to the FDA Order, and
since the Company did not know if it would obtain a favorable resolution of its
appeal and request for modification of the FDA Order, the deferred preservation
costs for tissues subject to the FDA Order had been significantly impaired. The
Company estimated that this impairment approximated the full balance of the
deferred preservation costs of the tissues subject to the FDA Order, which
included the tissues stored by the Company and the tissues to be returned to the
Company, and therefore recorded a write-down of $10.0 million for these assets.
In the quarter ended September 30, 2002 the Company recorded a reduction to
pretax income of $24.6 million as a result of the FDA Order. The reduction was
comprised of a net $22.2 million increase to cost of human tissue preservation
services, a $1.4 million write-down of goodwill, and a $1.0 million reduction to
revenues (and accounts receivable) for the estimated return of the tissues
shipped during the third quarter subject to recall by the FDA Order. The net
$22.2 million increase to cost of preservation services was comprised of a $22.7
million write-down of deferred preservation costs, offset by a $0.5 million
decrease in cost of preservation services due to the estimated and actual tissue
returns resulting from the FDA Order (the costs of such recalled tissue are
included in the $22.7 million write-down).
The Company evaluated multiple factors in determining the magnitude of
impairment to deferred preservation costs at September 30, 2002, including the
impact of the FDA Order, the possibility of continuing action by the FDA or
other U.S. and foreign government agencies, the possibility of unfavorable
actions by physicians, customers, procurement organizations, and others, the
progress made to date on the corrective action plan, and the requirement in the
Agreement that tissues subject to the FDA Order be replaced with tissues
processed under validated methods. As a result of this evaluation, management
believed that all tissues subject to the FDA Order, as well as the majority of
tissues processed prior to October 3, 2001, including heart valves, which were
not subject to the FDA Order, were fully impaired. Management believed that most
of the Company's customers would only order tissues processed after the
September 5, 2002 Agreement or tissues processed under future procedures
approved by the FDA once those tissues were available. The Company anticipated
that the tissues processed under the Agreement would be available early to
mid-November. Thus, the Company recorded a write-down of deferred preservation
costs for processed tissues in excess of the supply required to meet demand
prior to the release of these interim processed tissues. The Company did not
record any further write-downs of deferred preservation costs in the fourth
quarter of 2002. As of December 31, 2002 the balance of deferred preservation
costs were $2.0 million for allograft heart valve tissues, $620,000 for
non-valved cardiac tissues, $1.7 million for vascular tissues, and zero for
orthopaedic tissues.
As a result of the write-down of deferred preservation costs, the Company
recorded $6.3 million in income tax receivables and $4.5 million in deferred tax
assets. Upon destruction or shipment of the remaining tissues associated with
the deferred preservation costs write-down, the deferred tax asset will become
deductible in the Company's tax return. An expected refund of approximately $8.5
million will be generated through a carry back of operating losses and
write-downs of deferred preservation costs. In addition, the Company recorded
$2.5 million in income tax receivables related to estimated tax payments for
2002. The Company received payment of the $2.5 million in January of 2003.
On September 3, 2002 the Company announced a reduction in employee force of
approximately 105 employees. In the third quarter of 2002 the Company recorded
accrued restructuring costs of approximately $690,000, for severance and related
costs of the employee force reduction. The expense was recorded in general,
administrative, and marketing expenses and was included as a component of
accrued expenses and other current liabilities on the Consolidated Balance
Sheet. During the year ended December 31, 2002 the Company utilized $580,000 of
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the accrued restructuring costs, including $505,000 for salary and severance
payments, $64,000 for placement services for affected employees, and $11,000 in
other related costs. As of December 31, 2002, the remaining balance of accrued
restructuring costs was $110,000.
The Company expects its liquidity to decrease significantly over the next year
due to the anticipated significant decrease in revenues throughout at least the
first half of 2003 as compared to the prior year period, as a result of the
reported tissue infections, the FDA Order and associated adverse publicity, and
an expected decrease in cash due to the anticipated increased legal and
professional costs relating to the defense of lawsuits (discussed in Note 9) and
ongoing FDA compliance. The Company believes that anticipated revenue
generation, expense management including the cessation of the development of the
bioprosthetic valves, savings resulting from the reduction in the number of
employees to reflect the reduction in revenues, tax refunds expected to be at
least $11 million ($2.5 million of estimated tax payments remitted for the 2002
tax year which were received in January of 2003, and approximately $8.5 million
of loss carrybacks generated from operating losses and write-downs of deferred
preservation costs), and the Company's existing cash and marketable securities
will enable the Company to meet its liquidity needs through at least December
31, 2003, even if the term loan is called in its entirety. There is no assurance
that the Company will be able to return to the level of demand for its tissue
services that existed prior to the FDA Order due to the adverse publicity or as
a result of customers and to tissue banks switching to competitors. Failure of
the Company to maintain sufficient demand for its services, would have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows.
3. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash equivalents and marketable securities, all of
which are classified as available-for-sale (in thousands):
UNREALIZED ESTIMATED
ADJUSTMENTS ADJUSTED HOLDING MARKET
DECEMBER 31, 2002 COST BASIS TO COST BASIS COST BASIS GAINS/(LOSSES) VALUE
------------- ------------- -------------- -------------- --------------
Cash equivalents:
Money market funds $ 52 $ -- $ 52 $ -- $ 52
Municipal obligations 7,175 -- 7,175 -- 7,175
------------- ------------- -------------- ------------- --------------
$ 7,227 $ -- $ 7,227 $ -- $ 7,227
============= ============= ============== ============= ==============
Marketable securities:
Municipal obligations $ 14,276 $ -- $ 14,276 $ 307 $ 14,583
============= ============= ============== ============= ==============
UNREALIZED ESTIMATED
ADJUSTMENTS ADJUSTED HOLDING MARKET
DECEMBER 31, 2001 COST BASIS TO COST BASIS COST BASIS GAINS/(LOSSES) VALUE
------------- ------------- -------------- -------------- --------------
Cash equivalents:
Money market funds $ 1,301 $ -- $ 1,301 $ -- $ 1,301
Municipal obligations 500 -- 500 -- 500
------------- ------------- -------------- ------------- --------------
$ 1,801 -- $ 1,801 -- $ 1,801
============= ============= ============== ============= ==============
Marketable securities:
Municipal obligations 17,696 -- 17,696 147 17,843
Debt securities 6,227 (1,217) 5,010 -- 5,010
Equity securities 3,900 (343) 3,557 10 3,567
Certificates of deposit 63 -- 63 -- 63
------------- ------------- -------------- ------------- --------------
$ 27,886 (1,560) $ 26,326 $ 157 $ 26,483
============= ============= ============== ============= ==============
The Adjustments to Cost Basis column includes a $1.6 million loss recorded in
2001 for an other than temporary decline in the market value of debt and equity
securities. Gross realized losses on sales of available-for-sale securities
totaled $240,000 in 2002 and gross realized gains on sales of available-for-sale
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securities totaled $9,000 in 2001. Differences between cost and market listed
above, consisting of a net unrealized holding gain less deferred taxes of
$104,000 and $50,000, at December 31, 2002 and 2001, respectively, are included
as a separate component of other comprehensive income in shareholders' equity.
At December 31, 2002 and 2001 approximately $1.2 million and zero, respectively,
of marketable securities had a maturity date of less than 90 days, approximately
$8.0 million and $3.4 million, respectively, had a maturity date between 90 days
and 1 year, and approximately $5.4 million and $14.5 million, respectively, had
a maturity date between 1 and 5 years, and approximately zero and $8.6 million,
respectively, matured in more than 5 years or did not have a maturity date.
4. IDEAS FOR MEDICINE, INC.
On March 5, 1997 the Company acquired the stock of Ideas for Medicine, Inc.
("IFM"), a medical device company specializing in the manufacture and
distribution of single-use medical devices, for consideration of approximately
$4.5 million in cash and approximately $5.0 million in convertible debentures
plus related expenses. The acquisition was recorded under the purchase method of
accounting. The cash portion of the purchase price was financed by borrowings
under the Company's revolving term loan agreement. Pursuant to the purchase
agreement, an additional consideration of $700,000 was paid in January 2000. In
connection with this acquisition, the Company also entered into a consulting
agreement with the former majority shareholder of IFM requiring monthly payments
to such shareholder of approximately $17,000 until March 2002.
On September 30, 1998 the Company completed the sale of substantially all of the
IFM product line and certain related assets, consisting of inventory, equipment,
and intellectual property, 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") that 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 deferred income at the transaction date totaling $2.9
million, representing the selling price less the net book value of the assets
sold, which included $7.7 million of goodwill, net of accumulated amortization,
and the costs related to the sale. The income was deferred because the sale and
manufacturing agreements represented, in the aggregate, a single transaction for
which the related income should be recognized over the term of the manufacturing
agreement. Accordingly, the deferred income was reflected in cost of goods sold
during 1999 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 amortization of deferred income totaled $1.2 million.
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 called 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 meet the minimum purchase requirements outlined
in the Agreement. At December 31, 1999, the Company determined that it had
incurred an impairment loss on its IFM assets due to the significant
uncertainties related to the Company's ability to realize its investment in IFM.
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 income recorded in
connection with the sale of the IFM product line to HMP. The net pretax effect
of the above nonrecurring charges was $2.2 million and has been included under
the caption "Nonrecurring charges" in the 1999 Consolidated Statement of
Operations.
F-17
On October 9, 2000 the Company sold substantially all of the remaining assets of
IFM to 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 terms of the transaction required 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 required an additional $1 million
principal payment at any time prior to April 3, 2001. If the $1 million payment
was made when due, and no other defaults existed under the note, then $1 million
of the non-interest-bearing portion of the note would 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 had recorded as
notes receivable only the balances owed on the interest-bearing portion of the
note. Due to uncertainties regarding HMP's ability to pay the full amount of the
note, the Company also recorded reserves against these notes such that the gain
from the sale is deferred until the full amount of the note is deemed
collectible. In addition, the Company entered into a sublease agreement with HMP
under which HMP assumed responsibility for the IFM manufacturing facility. Also,
substantially all of the employees of IFM have become employees of HMP.
On March 30, 2001, HMP sold the IFM assets to a wholly owned subsidiary of
LeMaitre Vascular, Inc. ("LeMaitre"), and the remaining portion of the Company's
note receivable from HMP and the sublease agreement was assumed by the LeMaitre
subsidiary and the payment schedule was restructured. On April 2, 2001 the
Company received a scheduled $1 million principal payment from LeMaitre and, as
a result, $1 million of the non-interest-bearing portion of the note was
forgiven in accordance with the terms of the assumed note. At December 31, 2001
the Company reassessed the collectibility of the note receivable based on the
payment record and general creditworthiness of LeMaitre. As a result, the
Company reduced the reserve on the note receivable to $250,000 from $963,000,
and recorded a non-recurring pretax gain of $713,000 in the fourth quarter of
2001 that is included within Other Income in the Consolidated Statements of
Operations. During 2002, LeMaitre remitted payment for the remaining balance of
the note receivable. During 2002, the Company reduced the reserve on the note
receivable to zero, and recorded a $250,000 non-recurring pretax gain that is
included within Other Income in the Consolidated Statements of Operations.
5. INVENTORIES
Inventories at December 31 are comprised of the following (in thousands):
2002 2001
------------- --------------
Raw materials $ 2,341 $ 1,987
Work in process 306 1,183
Finished goods 1,938 3,089
------------- --------------
$ 4,585 $ 6,259
============= ==============
6. LONG-TERM DEBT
Long-term debt at December 31 consists of the following (in thousands):
2002 2001
------------- --------------
5-year term loan, bearing interest equal to the Adjusted LIBOR
plus 1.5%, to be adjusted monthly $ 5,600 $ 7,200
7% convertible debenture, due in March 2002 -- 4,393
------------- --------------
Total debt 5,600 11,593
Less current maturities 5,600 5,993
------------- --------------
Total long-term debt $ -- $ 5,600
============= ==============
On April 25, 2000 the Company entered into a loan agreement permitting the
Company to borrow up to $8 million under a line of credit during the expansion
of the Company's corporate headquarters and manufacturing facilities. Borrowings
under the line of credit accrued interest equal to Adjusted LIBOR plus 2%
F-18
adjusted monthly. On June 1, 2001, the line of credit was converted to a term
loan (the "Term Loan") to be paid in 60 equal monthly installments of principal
plus interest computed at Adjusted LIBOR plus 1.5% (2.94% at December 31, 2002).
At December 31, 2002 the principal balance of the Term Loan was $5.6 million.
The Term Loan is secured by substantially all of the Company's assets. The Term
Loan contains certain restrictive covenants including, but not limited to,
maintenance of certain financial ratios, a minimum tangible net worth
requirement, and the requirement that no materially adverse event has occurred.
The lender has notified the Company that the FDA Order, as described in Note 2,
and the inquiries of the SEC, as described in Note 9, have had a material
adverse effect on the Company that constitutes an event of default.
Additionally, as of December 31, 2002, the Company is in violation of the debt
coverage ratio and net worth financial covenants. As of February 24, 2003 the
lender has elected not to declare an event of default, but reserves the right to
exercise any such right under the terms of the Term Loan. Therefore, all amounts
due under the Term Loan as of December 31, 2002 are reflected as a current
liability on the Consolidated Balance Sheets.
In March 1997 the Company issued a $5.0 million convertible debenture in
connection with the Ideas for Medicine, Inc. acquisition. The debenture accrued
interest at 7% and was convertible into common stock of the Company at any time
prior to the due date of March 5, 2002 at $8.05 per common share. On March 30,
1998 $607,000 of the convertible debenture was converted into 75,000 shares of
the Company's common stock, and on March 4, 2002 the remaining $4.4 million was
converted into 546,000 shares of the Company's common stock.
On July 30, 2002 the Company entered into a line of credit agreement with the
same lender as for the Term Loan, permitting the Company to borrow up to $10
million. Borrowings under the line of credit agreement accrue interest equal to
Adjusted LIBOR plus 1.25% adjusted monthly. This loan is secured by
substantially all of the Company's assets. On August 21, 2002 the lender
notified the Company that, as a result of the FDA Order, as discussed in Note 2,
it was not entitled to any further advances under the line of credit. On
November 27, 2002 the lender notified the Company that it had cancelled the
unfunded commitment of the line of credit, as the Company was in default of
certain provisions and financial covenants of the line of credit agreement. The
Company had no outstanding borrowings on the line of credit at the time of
cancellation.
Scheduled maturities of long-term debt for the next five years are as follows
(in thousands):
2003 $ 1,600
2004 1,600
2005 1,600
2006 800
2007 --
Thereafter --
-------------
$ 5,600
Total interest costs were $692,000, and $915,000, and $528,000, in 2002, and
2001, and 2000 which included zero, $819,000, and $229,000, respectively, of
interest capitalized in connection with the expansion of the corporate
headquarters and manufacturing facilities.
7. DERIVATIVES
The Company's Term Loan, which accrues interest computed at Adjusted LIBOR plus
1.5%, exposes the Company to changes in interest rates going forward. On March
16, 2000, the Company entered into a $4.0 million notional amount
forward-starting interest swap agreement, which took effect on June 1, 2001 and
expires in 2006. This swap agreement was designated as a cash flow hedge to
effectively convert a portion of the Term Loan balance to a fixed rate basis,
thus reducing the impact of interest rate changes on future income. This
agreement involves the receipt of floating rate amounts in exchange for fixed
rate interest payments over the life of the agreement, without an exchange of
the underlying principal amounts. The differential to be paid or received is
recognized in the period in which it accrues as an adjustment to interest
expense on the Term Loan.
On January 1, 2001 the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") as amended. SFAS 133 requires
the Company to recognize all derivative instruments on the balance sheet at fair
F-19
value, and changes in the derivative's fair value must be recognized currently
in earnings or other comprehensive income, as applicable. The adoption of SFAS
133 impacts the accounting for the Company's forward-starting interest rate swap
agreement. Upon adoption of SFAS 133, the Company recorded an unrealized loss of
approximately $175,000 related to the interest rate swap, which was recorded as
part of long-term liabilities and accumulated other comprehensive income as the
cumulative effect of adopting SFAS 133 within the Statement of Shareholders'
Equity.
In August 2002 the Company determined that changes in the derivative's fair
value could no longer be recorded in other comprehensive income, as a result of
the uncertainty of future cash payments on the Term Loan caused by the lender's
ability to declare an event of default as discussed in Note 6. Beginning in
August 2002 the Company began recording all changes in the fair value of the
derivative into other expense/income on the Consolidated Statements of
Operations, and is amortizing the amounts previously recorded in other
comprehensive income of $292,000 into other expense/income over the remaining
life of the swap agreement through June 2006. If the lender accelerates the
payments due under the term loan by declaring an event of default, any remaining
balance in other comprehensive income will be reclassed into other
expense/income during that period.
At December 31, 2002 the notional amount of this swap agreement was $2.8
million, and the fair value of the interest rate swap agreement, as estimated by
the bank based on its internal valuation models, was a liability of $280,000.
The fair value of the swap agreement is recorded as part of short-term
liabilities. For the year ended December 31, 2002 the Company recorded a loss of
$20,000 on the interest rate swap. The unamortized value of the swap agreement,
recorded in the accumulated other comprehensive income account of shareholders'
equity, was $260,000 at December 31, 2002.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
the Company to disclose estimated fair values for its financial instruments. The
carrying amounts of receivables and accounts payable approximate their fair
values due to the short-term maturity of these instruments. The carrying value
of the Company's other financial instruments approximated fair value at December
31, 2002 and 2001.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment, furniture, office, and manufacturing space under
various leases with terms of up to 15 years. Commencing January 5, 1998 the
Company leased office and manufacturing facilities under a capital lease for
$24,125 per month with an interest rate at 8% per annum through January 2008
from the former majority shareholder of IFM. This lease is subject to a sublease
agreement as discussed in Note 4. Certain leases contain escalation clauses and
renewal options for additional periods. Rent expense is computed on the
straight-line method over the term of the lease with the offsetting accrual
recorded in other long-term liabilities. Future minimum lease payments under
noncancelable leases as of December 31, 2002 are as follows (in thousands):
Capitalized Operating
Leases Leases
--------------------------------------------------------------------------------------------------
2003 $ 843 $ 2,294
2004 843 2,115
2005 843 2,091
2006 843 1,943
2007 265 1,981
Thereafter -- 16,856
----------------------------------------------------------------------------------------------
Total minimum lease payments 3,637 $ 27,280
=============
Less amount representing interest 497
----------------------------------------------------------------
Present value of net minimum lease payments 3,140
Less current portion 2,169
Capital lease obligation, less current portion $ 971
================================================================
F-20
Property acquired under capital leases through December 31, 2002 consists of the
following (in thousands):
Equipment $ 403
Furniture and fixtures 890
Leasehold improvements 3,199
Accumulated depreciation (907)
---------------
$ 3,585
===============
Total rental expense for operating leases amounted to $2,470,000, $2,243,000,
and $1,478,000, for 2002, 2001, and 2000, respectively. Total rental income
under the sublease was $310,000 in 2002, $310,000 in 2001, and $95,000 in 2000.
Due to cross default provisions included in the Company's debt agreements, as of
December 31, 2002 the Company was in default of certain capital lease agreements
maintained with the lender of the Term Loan. Therefore, all amounts due under
these capital leases are reflected as a current liability on the Consolidated
Balance Sheets as of December 31, 2002.
LITIGATION, CLAIMS, AND ASSESSMENTS
In the normal course of business as a medical device and services company the
Company has product liability complaints filed against it. As of February 24,
2003 21 cases had been filed against the Company between May 18, 2000 and
January 30, 2003. The cases are currently in the pre-discovery or discovery
stages. Of these cases, 14 allege product liability claims arising out of the
Company's orthopaedic tissue services, six allege product liability claims
arising out of the Company's allograft heart valve tissue services, and one
alleges product liability claims arising out of the non-tissue products made by
Ideas for Medicine, when it was a subsidiary of the Company.
Included in these cases is the complaint filed against the Company in the
Superior Court of Cobb County, Georgia, on July 12, 2002 by Steve Lykins, as
Trustee for the benefit of next of kin of Brian Lykins. This complaint alleges
strict liability, negligence, professional negligence, and breach of warranties
related to tissue implanted in November of 2001. The plaintiff seeks unspecified
compensatory and punitive damages.
The Company maintains claims-made insurance policies, which the Company believes
to be adequate to defend against these suits. The Company's insurance company
has been notified of these actions. The Company intends to vigorously defend
against these claims. Nonetheless, an adverse judgment or judgments imposing
aggregate liabilities in excess of the Company's insurance coverage could have a
material adverse effect on the Company's financial position, results of
operations, and cash flows.
Claims-made insurance policies cover only those asserted claims and incidents
that are reported to the insurance carrier while the policy is in effect. Thus,
a claims-made policy does not represent a transfer of risk for claims and
incidents that have been incurred but not reported to the insurance carrier. The
Company periodically evaluates its exposure to unreported product liability
claims, and records accruals as necessary for the estimated cost of unreported
claims related to services performed and products sold. During the year ended
December 31, 2002 the Company accrued $3.6 million in estimated costs for
unreported product liability claims related to services performed and products
sold during 2002 and prior years. The expense was recorded in general,
administrative, and marketing expenses and was included as a component of
accrued expenses and other current liabilities on the Consolidated Balance
Sheets.
Several putative class action lawsuits were filed in July through September 2002
against the Company and certain officers of the Company alleging that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated there under. During the third quarter of 2002
the U.S. District Court for the Northern District of Georgia consolidated the
suits, and on November 14, 2002 lead plaintiffs were named. A consolidated
complaint was filed on January 15, 2003, seeking the Court's certification of
the litigation as a class action on behalf of all purchasers of the Company's
stock between April 2, 2001 and August 14, 2002. The consolidated complaint also
seeks recovery of compensatory damages in an unspecified amount and various fees
and expenses of litigation, including attorneys' fees. The principal allegations
of the consolidated complaint are that the Company failed to disclose its
alleged lack of compliance with certain FDA regulations regarding the handling
F-21
and processing of certain tissues and other product safety matters. Although the
Company considers all of the claims in the consolidated complaint to be without
merit and intends to defend against them vigorously, the Company is unable to
predict at this time the final outcome of these claims. The Company carries
directors' and officers' liability insurance policies, which the Company
currently believes should be adequate to address these claims. Nonetheless, an
adverse judgment in excess of the Company's insurance coverage could have a
material adverse effect on the Company's financial position, results of
operations, and cash flows.
The Company received notice in October 2002 that a complaint had been filed
instituting a shareholder derivative action against the Company and Company
officers and directors Steven G. Anderson, Albert E. Heacox, John W. Cook,
Ronald C. Elkins, Virginia C. Lacy, Ronald D. McCall, Alexander C. Schwartz, and
Bruce J. Van Dyne. The suit was filed in the Superior Court of Gwinnett County,
Georgia, by Rosemary Lichtenberger. The suit alleges the individual defendants
breached their fiduciary duties to the Company by causing or allowing the
Company to engage in practices that caused the Company to suffer damages by
being out of compliance with FDA guidelines, and by causing the Company to issue
press releases that erroneously portrayed CryoLife's products, operations,
financial results, and future prospects. The complainant seeks undisclosed
damages, costs and attorney's fees, punitive damages, and prejudgment interest
against the individual defendants derivatively on behalf of the Company as a
nominal defendant. By an order entered on January 21, 2003, the lawsuit was
stayed until discovery commences in the consolidated complaint of the class
action lawsuit. In January 2003 the Company received notice that another
shareholder derivative lawsuit was filed in the Superior Court of Fulton County,
Georgia by Robert F. Frailey against the Company as a nominal defendant, and
Company officers and directors Steven G. Anderson, Bruce J. Van Dyne, John W.
Cook, Ronald D. McCall, Ronald C. Elkins, Virginia C. Lacy and Alexander C.
Schwartz. The complaint asserts claims for breach of fiduciary duty, abuse of
control, gross mismanagement, and waste of corporate assets. As in the
Lichtenberger action, the Frailey action alleges that the defendant officers and
directors caused the Company to suffer damages by being out of compliance with
FDA guidelines, and by causing the Company to issue press releases that
erroneously portrayed CryoLife's products, operations, financial results, and
future prospects. The complaint also alleges improper insider trading by certain
Company officers and directors. The complainant seeks declaratory relief,
damages of unspecified amount, litigation expenses including attorneys' and
experts' fees, and unspecified equitable or injunctive relief against the
individual defendants derivatively on behalf of the Company as a nominal
defendant. The Frailey complaint has not yet been served on any of the named
defendants.
The Company's Board of Directors has established a committee that is independent
of management to investigate the Claims asserted in the Lichtenberger and
Frailey complaints and report back to the Board with its recommendations for
action in response to the shareholders' demands. The independent committee has
engaged independent legal counsel to assist in the investigation. The committee
is in the process of its investigation.
On August 7, 2002 the Company announced the settlement of its ongoing litigation
with Colorado State University Research Foundation ("CSURF") over the ownership
of the Company's SynerGraft technology. The settlement resolves all disputes
between the parties and extinguishes all CSURF ownership claims to any aspect of
the Company's SynerGraft technology. The settlement includes an unconditional
assignment to the Company of CSURF tissue engineering patents, trade secrets and
know-how relating to tissue decellularization and recellularization. The
technology assignment supercedes the 1996 technology license, which was
terminated by the terms of the settlement. Payment terms include a nonrefundable
advance of $400,000 paid by the Company to CSURF that will be applied to earned
royalties as they accrue through March 2011. The Company recorded these amounts
as prepaid royalties and will expense the amounts as the royalties accrue. The
earned royalty rate is a maximum of 0.75% of net revenues from products or
tissue services utilizing the SynerGraft technology. Royalties earned under the
agreement for revenues through December 31, 2002 were approximately $37,000.
On August 17, 2002 the Company received a letter from the U.S. Securities and
Exchange Commission (the "SEC Letter") that stated that the Company was subject
to an investigation related to the Company's August 14, 2002 announcement of the
FDA Order and requesting information from the Company from the period between
September 1, 2001 through the date of the Company's response to the SEC Letter.
The SEC Letter stated, in part, that "We are trying to determine whether there
have been any violations of the federal securities laws. The investigation and
the subpoena do not mean that we have concluded that anyone has broken the law.
Also, the investigation does not mean that we have a negative opinion of any
F-22
person, entity or security." The staff of the SEC subsequently confirmed that
its investigation was informal in nature, and that it did not have subpoena
power. At the present time, the Company is unable to predict the outcome of this
matter.
The Company has concluded that it is probable that it will incur losses relating
to claims and litigation of at least $1.2 million, which represents the
aggregate amount of the Company's deductibles under its product liability and
directors' and officers' insurance policies. Therefore the Company has recorded
an accrual of $1.2 million as of December 31, 2002.
10. STOCK OPTION PLANS
The Company has stock option plans which provide for grants of options to
employees and directors to purchase shares of the Company's common stock at
exercise prices generally equal to the fair values of such stock at the dates of
grant, which generally become exercisable over a five-year vesting period and
expire within ten years of the grant dates. Under the 1993 Employee Incentive
Stock Option Plan, the 1998 Long-Term Incentive Plan, the 2002 Stock Incentive
Plan, and the amended and restated Nonemployee Director's Plan, the Company has
authorized the grant of options of up to 1,050,000, 900,000, 974,000, and
594,000 shares of common stock, respectively. As of December 31, 2002 and 2001,
there were 427,000 and 128,000, respectively, shares of common stock reserved
for future issuance under the Company's stock option plans. A summary of stock
option transactions under the plans follows:
Exercise Weighted Average
Shares Price Exercise Price
------------- ------------------ ------------------
Outstanding at December 31, 1999 1,519,000 $ 2.33-11.50 $ 7.67
Granted 492,000 11.50-29.15 13.99
Exercised (416,000) 2.33-9.00 3.85
Canceled (45,000) 6.83-9.00 8.64
-------------- ------------------ ------------------
Outstanding at December 31, 2000 1,550,000 $ 5.67-29.15 $ 10.67
Granted 370,000 23.68-34.10 30.02
Exercised (145,000) 5.67-11.63 7.68
Canceled (13,000) 8.50-29.15 16.38
-------------- ------------------ ------------------
Outstanding at December 31, 2001 1,762,000 $ 6.83-34.10 $ 14.94
Granted 1,133,000 2.20-29.25 9.94
Exercised (119,000) 6.83-11.63 9.21
Canceled (390,000) 2.20-34.10 19.55
-------------- ------------------ ------------------
Outstanding at December 31, 2002 2,386,000 $ 2.20-31.99 $ 12.10
============= ================== ==================
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contract Life Exercise Price Exercisable Exercise Price
--------------- ------------- -------------- ------------- ------------- -------------
$ 2.20-2.20 644,000 5.02 $ 2.20 180,000 $ 2.20
6.59-8.50 551,000 3.14 7.75 269,000 8.22
9.00-11.63 635,000 2.45 11.38 466,000 11.32
12.92-30.86 425,000 4.34 27.65 157,000 27.04
31.99-31.99 131,000 3.48 31.99 103,000 31.99
--------------- ------------- -------------- ------------- ------------- -------------
$ 2.20-31.99 2,386,000 3.70 $ 12.10 1,175,000 $ 13.12
============= =============
In September 1999, the Company granted options to a nonemployee to purchase
18,000 shares of common stock at an exercise price of $8.21 per share. In
connection with the issuance of these options, the Company recognized $60,000 as
deferred compensation for the estimated fair value of the options. Deferred
compensation is amortized ratably over the vesting period of the options in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
F-23
Other information concerning stock options follows:
2002 2001 2000
------------- -------------- -------------
Weighted average fair value of options
granted during the year $ 4.23 $ 15.20 $ 6.97
Number of shares as to which options are
exercisable at end of year 1,175,000 915,000 791,000
11. SHAREHOLDER RIGHTS PLAN
On November 27, 1995 the Board of Directors adopted a shareholder rights plan to
protect long-term share value for the Company's shareholders. Under the plan,
the Board declared a distribution of one Right for each outstanding share of the
Company's Common Stock to shareholders of record on December 11, 1995.
Additionally, the Company has further authorized and directed the issuance of
one Right with respect to each Common Share that shall become outstanding
between December 11, 1995 and the earliest of the Right's exercise date or
expiration date. Each Right entitles the registered holder to purchase from the
Company one-thirtieth of a share of a newly created Series A Junior
Participating Preferred Stock at an exercise price of $100. The Rights, which
expire on November 27, 2005, may be exercised only if certain conditions are
met, such as the acquisition of 15% or more of the Company's Common Stock by a
person or affiliated group ("Acquiring Person").
In the event the Rights become exercisable, each Right will enable the owner,
other than the Acquiring Person, to purchase, at the Right's then current
exercise price, that number of shares of Common Stock with a market value equal
to twice the exercise price times the number of one-tenth's of a share of Series
A Junior Participating Preferred Stock for which the Right is then exercisable.
In addition, unless the Acquiring Person owns more than 50% of the outstanding
shares of Common Stock, the Board of Directors may elect to exchange all
outstanding Rights (other than those owned by such Acquiring Person) at an
exchange ratio of one share of Common Stock per Right appropriately adjusted to
reflect any stock split, stock dividend or similar transaction.
12. STOCK REPURCHASE
On July 18, 2002 the Company's Board of Directors authorized the purchase of up
to $10 million in shares of its common stock. The purchase of shares was to be
made from time-to-time in open market or privately negotiated transactions on
such terms as management deemed appropriate. As of December 31, 2002 the Company
had repurchased 68,000 shares of its common stock for an aggregate purchase
price of $663,000. No further purchases are anticipated in the near term.
On October 14, 1998 the Company's Board of Directors authorized the Company to
purchase up to 1.5 million shares of its common stock. As of December 31, 2001,
and 2000, the Company had purchased an aggregate of 1,159,000 and 1,159,000
shares, respectively, of its common stock for an aggregate purchase price of
$8,258,000 and $8,258,000, respectively. No further purchases are anticipated
under this authorization.
F-24
13. ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of comprehensive income/(loss) consist of the following, net of tax
(in thousands):
December 31,
------------------------------
2002 2001
------------------------------
Net (loss) income $ (27,761) $ 9,166
Unrealized gain on investments 95 1,124
Change in fair value of interest rate swap (including
cumulative effect of adopting SFAS 133 in 2001) 30 (200)
Translation adjustment 303 18
------------------------------
Comprehensive income $ (27,333) $ 10,108
==============================
The tax effect on the change in unrealized gain/loss on investments is $55,000
and $575,000 for the years ended December 31, 2002 and 2001, respectively. The
tax effect on the change in fair value of the interest rate swap is $4,000 and
$93,000 for the years ended December 31, 2002 and 2001, respectively. The
translation adjustment is not currently adjusted for income taxes, as it relates
to a permanent investment in a foreign subsidiary.
14. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan (the "Plan") providing retirement benefits
to all employees who have completed at least three months of service. The
Company makes matching contributions of 50% of each participant's contribution
up to 5% of each participant's salary. Total company contributions approximated
$404,000, $384,000, and $355,000, for 2002, 2001, and 2000, respectively.
Additionally, the Company may make discretionary contributions to the Plan that
are allocated to each participant's account. No such discretionary contributions
were made in 2002, 2001, or 2000.
On May 16, 1996 the Company's shareholders approved the CryoLife, Inc. Employee
Stock Purchase Plan (the "ESPP"). The ESPP allows eligible employees the right
to purchase common stock on a quarterly basis at the lower of 85% of the market
price at the beginning or end of each three-month offering period. As of
December 31, 2002 and 2001 there were 543,000 and 657,000, respectively, shares
of common stock reserved under the ESPP and there had been 357,000 and 243,000,
respectively, shares issued under the plan.
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
2002 2001 2000
-------------- ------------- --------------
Numerator for basic and diluted earnings per share:
(loss) income available to common shareholders $ (27,761) $ 9,166 $ 7,817
============== ============= ==============
Denominator for basic earnings per share:
weighted-average shares 19,432 18,808 18,541
Effect of dilutive stock options -- 852 688
-------------- ------------- --------------
Denominator for diluted earnings per share:
adjusted weighted-average shares 19,432 19,660 19,229
============== ============= ==============
(Loss) earnings per share:
Basic $ (1.43) $ 0.49 $ 0.42
============== ============= ==============
Diluted $ (1.43) $ 0.47 $ 0.41
============== ============= ==============
F-25
Since the Company has a net loss in the current year, all common stock
equivalents are anti-dilutive. For the year ended December 31, 2002 the Company
had stock options that are considered common stock equivalents and would have
resulted in 966,000 additional dilutive shares pursuant to the provisions of
SFAS 128.
On July 23, 2002 the Company's Board of Directors authorized the purchase of up
to $10 million of its common stock. As of February 24, 2003 the Company had
repurchased 68,000 shares of its common stock for $663,000. No further purchases
are anticipated in the near term.
16. INCOME TAXES
Income tax (benefit) expense consists of the following (in thousands):
2002 2001 2000
------------- ------------- -------------
Current:
Federal $ (8,000) $ 4,680 $ 2,272
State (164) 115 (114)
-------------- ------------- --------------
(8,164) 4,795 2,158
Deferred (5,509) (481) 1,658
-------------- -------------- -------------
$ (13,673) $ 4,314 $ 3,816
============== ============= =============
Such amounts differ from the amounts computed by applying the U.S. federal and
state income tax rate of 34% in 2002, 35% in 2001, and 34% in 2000 to pretax
income as a result of the following (in thousands):
2002 2001 2000
-------------- -------------- --------------
Tax (benefit) expense at statutory rate $ (14,088) $ 4,718 $ 3,955
Increase (reduction) in income taxes
Resulting from:
Entertainment expenses 83 50 47
State income taxes, net of federal benefit (167) 108 231
Nontaxable interest income (202) (242) (264)
Research and development credits -- (200) (125)
Foreign sales corporation (27) (60) --
Other 728 (60) (28)
-------------- -------------- --------------
$ (13,673) $ 4,314 $ 3,816
============== ============== ==============
For the year ended December 31, 2002, the Company generated federal income tax
losses of approximately $27 million. These losses will be carried back to prior
years to offset income taxes paid and should result in approximately $8.5
million in refunds to the Company.
F-26
The tax effects of temporary differences which give rise to deferred tax
liabilities and assets at December 31 are as follows (in thousands):
2002 2001
------------- -------------
Long-term deferred tax (liabilities) assets:
Property $ (865) $ (550)
Intangible assets (210) 153
Impairment of IFM long-lived assets -- (52)
Other 89 --
------------- -------------
(986) (449)
Current deferred tax assets (liabilities):
Unrealized loss on interest rate swap 88 93
Unrealized loss on marketable securities (104) 449
Allowance for bad debts 26 32
Accrued expenses 1,875 13
Prepaid items (56) --
Deferred preservation costs and inventory reserves 4,845 96
Other 60 5
------------- -------------
6,734 688
------------- -------------
Net deferred tax assets $ 5,748 $ 239
============= =============
At December 31, 2002 the Company has recorded a net deferred tax asset of $5.7
million. If the temporary differences that generated the net deferred tax asset
become fully deductible in 2003, the Company will have sufficient pre-tax
earnings in 2001 to carryback these losses and realize the deferred tax asset.
If some of the temporary differences become deductible in future years, the
realization of the deferred tax asset may be dependent on generating sufficient
taxable income in future periods. Although realization is not ensured, the
Company believes that it is more likely than not that the deferred tax asset
will be realized.
17. EXECUTIVE INSURANCE PLAN
Pursuant to a supplemental life insurance program for certain executive officers
of the Company, the Company and the executives share in the premium payments and
ownership of insurance policies on the lives of such executives. Upon death of
the insured party, policy proceeds equal to the premium contribution are due to
the Company with the remaining proceeds due to the designated beneficiaries of
the insured party. The Company's aggregate premium contributions under this
program were $74,000, $75,000, and $53,000, for 2002, 2001, and 2000,
respectively.
18. EQUIPMENT ON LOAN TO IMPLANTING HOSPITALS
The Company consigns liquid nitrogen freezers with certain implanting hospitals
for tissue storage. The freezers are the property of the Company. At December
31, 2002 freezers with a total cost of approximately $2.3 million and related
accumulated depreciation of approximately $1.5 million were located at the
implanting hospitals' premises. Depreciation is provided over the estimated
useful lives of the freezers on a straight-line basis.
19. TRANSACTIONS WITH RELATED PARTIES
The Company expensed $90,000, $87,000, and $78,000 during 2002, 2001, and 2000,
respectively, relating to services performed by a law firm whose sole proprietor
is a member of the Company's Board of Directors and a shareholder of the
Company. The Company expensed $100,000, $100,000, and $102,000 in 2002, 2001 and
2000, respectively, relating to consulting services performed by a member of the
Company's Board of Directors and a shareholder of the Company. In addition, the
Company expensed $240,000, $473,000 and $44,000 in 2002, 2001, and 2000,
respectively, relating to research performed by the university where the same
Director and shareholder holds a significant position. The Company expensed
$4,500, zero, and zero in 2002, 2001 and 2000, respectively, relating to
consulting services performed by a member of the Company's Board of Directors
and a shareholder of the Company. The Company paid $35,000, $210,000 and
$210,000, in 2002, 2001, and 2000, respectively, relating to consulting services
performed by a shareholder of the Company.
F-27
20. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: Human Tissue Preservation Services and
Implantable Medical Devices. The Company's segments are organized according to
services and products.
The HUMAN TISSUE PRESERVATION SERVICES segment includes external revenue from
cryopreservation services of cardiovascular, vascular, and orthopaedic human
tissue. The IMPLANTABLE MEDICAL DEVICES segment includes external revenue from
product sales of BioGlue Surgical Adhesive and bioprosthetic devices, including
stentless porcine heart valves, SynerGraft treated porcine heart valves, and
SynerGraft treated bovine vascular grafts. There are no intersegment sales.
The primary measure of segment performance, as viewed by the Company's
management, is segment gross margin, or net external revenues less cost of
preservation services and products. The Company does not segregate assets by
segment; therefore asset information is excluded from the segment disclosures
below.
The following table summarizes revenues, cost of preservation services and
products, and gross margin for the Company's operating segments (in thousands):
Cost of Preservation Gross
2002: Revenue Services and Products Margin
------------- --------------------- --------------
Human Tissue Preservation Services $ 55,373 $ 55,363 $ 10
Implantable Medical Devices 21,597 10,270 11,327
All Other a 825 -- 825
------------- ------------- --------------
$ 77,795 $ 65,633 $ 12,162
============= ============= ==============
2001:
Human Tissue Preservation Services $ 75,552 $ 31,165 $ 44,387
Implantable Medical Devices 11,130 5,464 5,666
All Other a 989 -- 989
------------- ------------- --------------
$ 87,671 $ 36,629 $ 51,042
============= ============= ==============
2000:
Human Tissue Preservation Services $ 67,096 $ 27,500 $ 39,596
Implantable Medical Devices 7,176 4,068 3,108
All Other a 2,824 1,779 1,045
------------- ------------- --------------
$ 77,096 $ 33,347 $ 43,749
============= ============= ==============
a The All Other designation includes 1) grant revenue and 2) distribution
revenues and 3) revenues and cost of sales of IFM, a single-use medical device
business, through October 9, 2000, the date of the sale of substantially all of
the remaining assets of IFM.
F-28
Net revenues by product for the years ended December 31, 2002, 2001 and 2000
were as follows (in thousands):
Revenue 2002 2001 2000
------------- ------------- --------------
Human tissue preservation services:
Cardiovascular tissue $ 23,413 $ 28,606 $ 29,685
Vascular tissue 17,826 24,488 21,279
Orthopaedic tissue 14,134 22,458 16,132
------------- ------------- --------------
Total preservation services 55,373 75,552 67,096
BioGlue surgical adhesive 20,898 10,595 6,405
Bioprosthetic devices 699 535 771
Single-use medical devices -- 2,208
Grant and distribution revenue 825 989 616
------------- ------------- --------------
$ 77,795 $ 87,671 $ 77,096
------------- ------------- --------------
Net revenues by geographic location for the years ended December 31, 2002, 2001
and 2000 were as follows (in thousands):
Revenue b 2002 2001 2000
------------- ------------- --------------
U.S. $ 71,188 $ 81,657 $ 72,010
International 6,607 6,014 5,086
------------- ------------- --------------
$ 77,795 $ 87,671 $ 77,096
------------- ------------- --------------
b Net external revenues are attributed to countries based on the location of the
customer.
At December 31, 2002, 2001, and 2000, over 95% of the long-lived assets of the
Company were held in the U.S., where all Company manufacturing facilities and
the corporate headquarters are located.
20. SUBSEQUENT EVENTS
On February 20, 2003 the Company received a letter from the FDA that stated that
a 510(k) premarket notification should be filed for the Company's CryoValve SG
and that premarket approval marketing authorization should be obtained for the
Company's CryoVein SG when used for arteriovenous ("A-V") access. The agency's
position is that use of the SynerGraft technology in the processing of allograft
heart valves represents a modification to the Company's legally marketed
CryoValve allograft, and that femoral veins used for A-V access are medical
devices that require premarket approval. CryoLife will be providing the agency
with information to demonstrate that femoral veins used for A-V access should
continue to be regulated as human tissue under Parts 1270 and 1271 of the FDA's
regulations. The FDA letter did not question the safety or efficacy of the
SynerGraft process or the CryoVein A-V access implant.
The Company has advised the FDA that it will voluntarily suspend use of the
SynerGraft technology in the processing of allograft heart valves and vascular
tissue until the regulatory status of the CryoValve SG and CryoVein SG is
resolved. The FDA has not suggested that these tissues be recalled. Until such
time as the issues surrounding the SG tissue are resolved, the Company will
employ its traditional processing methods on these tissues. Distribution of
allograft heart valves and vascular tissue processed using the Company's
traditional processing protocols will continue. The outcome of the discussions
with the FDA regarding the use of the SynerGraft process on human tissue could
result in a reduction in SynerGraft processed cardiovascular and vascular tissue
which would reduce the revenues and gross margins with respect to cardiovascular
and vascular tissues.
F-29
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands except per share data)
First Second Third Fourth
REVENUE Year Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
2002 $ 25,471 $ 23,264 $ 16,889 $ 12,171
2001 21,432 21,697 22,567 21,975
2000 19,623 19,454 19,524 18,495
NET INCOME (LOSS)
- --------------------------------------------------------------------------------------------------------
2002 $ 3,104 $ (5,522) $ (19,646) $ (5,697)
2001 1,970 2,540 2,692 1,964
2000 1,604 1,979 2,308 1,926
EARNINGS (LOSS) PER SHARE - DILUTED
- --------------------------------------------------------------------------------------------------------
2002 $ 0.16 $ (0.28) $ (1.01) $ (0.29)
2001 0.10 0.13 0.14 0.10
2000 0.09 0.10 0.12 0.10
F-30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CryoLife, Inc.
We have audited the consolidated financial statements of CryoLife, Inc. and
Subsidiaries as of and for the year ended December 31, 2002 and have issued our
report thereon dated February 24, 2003 which report includes an explanatory
paragraph because the Company changed its method of accounting for goodwill and
other intangible assets to conform to Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets", which was adopted by
the Company as of January 1, 2002; such report is included elsewhere in this
Form 10-K. Our audit also included the 2002 financial statement schedules of
CryoLife, Inc., listed in Item 14. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. The financial statements of the Company as of
December 31, 2001 and 2000 and for the years then ended were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on the 2001 and 2000 financial statements in their report dated March
29, 2002. Those auditors also audited the 2001 and 2000 financial statement
schedules listed in Item 14, and their report dated March 29, 2002 expressed an
unqualified opinion on those financial statement schedules.
In our opinion, such 2002 financial statement schedules, when considered in
relation to the basic 2002 financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/Deloitte & Touche LLP
Atlanta, Georgia
February 24, 2003
S-1
SCHEDULE II
CRYOLIFE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
BALANCE BALANCE
BEGINNING END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- ------------------------------------ ------------- ------------- ------------- -------------
Year ended December 31, 2002
Allowance for doubtful accounts $ 100,000 $ 53,000 $ 78,000 $ 75,000
Deferred preservation costs 300,000 320,000 570,000 50,000
Year ended December 31, 2001
Allowance for doubtful accounts $ 85,000 $ 338,000 $ 323,000 $ 100,000
Deferred preservation costs 229,000 280,000 209,000 300,000
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
S-2
1610455
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CryoLife Inc. (the "Company") on Form
10-K for the year ending December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), each of Steven G.
Anderson, the Chairman, President, and Chief Executive Officer of the Company,
and David Ashley Lee, the Vice President, Treasurer, and Chief Financial Officer
of the Company, hereby certifies, pursuant to and for purposes of 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Steven G. Anderson /s/ David Ashley Lee
- ------------------------------------ ----------------------------------
STEVEN G. ANDERSON DAVID ASHLEY LEE
Chairman, President, and Vice President, Treasurer, and
Chief Executive Officer Chief Financial Officer
April 30, 2003 April 30, 2003
1610455