CryoLife Sends Letter to Medafor, Inc. Shareholders
March 11 2010 - 8:41AM
PR Newswire (US)
ATLANTA, March 11 /PRNewswire-FirstCall/ -- CryoLife, Inc. , an
implantable biological medical device and cardiovascular tissue
processing company, announced today that it has sent a letter to
Medafor shareholders, which is included below. CryoLife is being
advised by Leerink Swann, LLC as financial advisors. Important
Information for Medafor Shareholders March 10, 2010 Dear Fellow
Medafor Shareholder: In their communications to Medafor
shareholders, Medafor's management and board have repeatedly
mischaracterized CryoLife's motives for filing a lawsuit against
Medafor as well as our reasons for proposing to acquire Medafor for
$2.00 per share in a combination of cash and CryoLife stock. I
would like to take this opportunity to set the record straight.
CryoLife filed a lawsuit against Medafor to protect its rights and
the rights of its shareholders after discovering several
misrepresentations and encountering repeated failures on the part
of Medafor management to honor commitments under the exclusive
distribution agreement ("EDA") Medafor entered into with CryoLife.
CryoLife attempted to resolve its differences with Medafor in a
constructive manner via numerous in-person meetings and written
communications. Each time we urged Medafor to address its
misrepresentations and breaches of the EDA and to adhere to the
EDA's terms going forward. We viewed litigation as a last resort
and only filed our lawsuit, for among other things, breach of
contract, fraud and negligent misrepresentations and violations of
the Georgia Racketeer Influenced and Corrupt Organizations Act,
after it became clear that Medafor management was either unwilling
or unable to take appropriate action to address Medafor's numerous
violations of the EDA. Specifically, Medafor's misrepresentations
and violations of the EDA relate to and include selling directly
and indirectly into CryoLife's territories and fields, agreeing to
provide exclusive territories to CryoLife despite having
conflicting agreements already in place with other distributors
(after denying there were conflicting agreements in place), failing
to protect the intellectual property behind HemoStase and failing
to pursue regulatory approval for HemoStase in other markets around
the world, as required by the EDA. Unfortunately, all of our
attempts to resolve our differences with Medafor were unsuccessful,
and Medafor persisted in violating the EDA. Regardless of the
outcome of our proposal to acquire Medafor, we will pursue
enforcement of the EDA to the fullest extent. CryoLife believes
that Medafor's compliance with the EDA is in the best interest of
Medafor shareholders. While Medafor has claimed that CryoLife's
lawsuit is an attempt to pressure Medafor into selling the company,
this is simply untrue. In fact, CryoLife's offer to acquire Medafor
was initially motivated in large part by a desire to avoid costly
litigation. Of course, as we have said before, we continue to
believe that a combination of the two companies would create value
for both CryoLife and Medafor shareholders. To ensure that Medafor
shareholders are fully informed, we have created a new section on
our Web site that provides information concerning the events
leading up to the lawsuit and the steps CryoLife took in order to
try to avoid litigation. We encourage shareholders to review the
information, which is located at
http://www.cryolife.com/medaforoffer/litigationoverview. As
Medafor's largest shareholder and largest customer, CryoLife cannot
be passive as Medafor's board and management continue to damage the
value of HemoStase's underlying technology and the value of
Medafor's shares. If the existing management team and board
continue to pursue their current policies, CryoLife believes
Medafor shareholders have the following to look forward to: --
Continued share dilution - Medafor management has repeatedly and
substantially diluted shareholders, issuing new shares to fund the
substantial operating expenses of the company without receiving
adequate value in return. The result of this has been the
enrichment of management and its hand-picked consultants at the
expense of shareholders. As you know, the more new shares Medafor
issues without receiving adequate value the less existing shares
are worth. Medafor has issued more than 13 million new shares since
2004, diluting Medafor shareholders that held shares in 2004 by
approximately 63 percent. Furthermore, CryoLife's decades of
experience in biomaterials leads us to believe that Medafor's
management will need to raise significant additional equity capital
to pursue their "go-it-alone" strategy. -- A company unable to
invest in or support its products - Medafor's capital constraints
prevent it from adequately investing in the commercialization of
its products in a meaningful way or conducting the R&D required
to maximize the long-term value of its technology. The hemostatic
market has many competitive products, including Thrombin JMI,
Recothrom, Evithrom, Gelfoam, Avitene, FloSeal, and Surgicel,
Surgiflo, and Surgifoam products. There are also at least three
companies with starch based hemostatics at various stages of
completion, such as Starch Medical, HemoStasis, LLC and BioCur.
Without sufficient resources to market products and create a strong
market position - resources CryoLife can provide - Medafor's
product is likely to end up a marginal player in the hemostatic
arena, offering limited long-term value to Medafor shareholders. --
An absentee management team whose interests are not aligned with
shareholders - Medafor's senior management team consisting of its
CEO, CFO, VP of Sales and Chief Technology Officer do not reside in
Minnesota. As a result, Medafor shareholders pay their senior
management team's living and traveling expenses as they travel back
and forth between their homes and Medafor's headquarters. This
travel helps explains why Medafor's most recent set of audited
financials (fiscal 2008) reveals that nearly 32 cents of every
revenue dollar was spent on general and administrative costs,
pushing the company to a significant net loss for the year. We do
not believe a company of approximately 20 employees should be
generating $3.1 million of administrative costs. To put this in
perspective, the raw material and manufacturing costs associated
with producing HemoStase were $3.6 million in 2008 and sales and
marketing expenses were $3.2 million. Medafor management's outsized
total compensation relative to performance, shareholder funded
lifestyle, and de minimis ownership stake has clearly created an
environment where management's interests are not aligned with
shareholders. -- A company unable to protect its intellectual
property (IP) - There are several products in existence or in
development that may violate the core IP related to Medafor's
hemostatic technology. Because Medafor chooses not to challenge
these technologies and protect its IP, the value of Medafor's
products and technology will diminish. Furthermore, Medafor's MPH
technology currently only has IP protection in the U.S., Germany
and France. Without additional patentable inventions to protect its
technology, we believe Medafor will lose sales to companies with
better delivery devices, new and innovative products, or variations
on Medafor's core technology. Protecting and developing
intellectual property is costly, and we believe that Medafor simply
does not have the financial resources to do so. -- Inadequate
financial controls - Medafor has not been able to produce audited
financial statements for its investors in a timely manner. In fact,
Medafor was unable to release its 2008 audited financials until
September of 2009 (and these financials contained a going concern
qualification from Medafor's independent auditors). This delay
violated Medafor's loan covenants and required it to obtain a
waiver from its lender. Medafor is currently unable to state when
or how it will release its audited financials for 2009. -- No exit
strategy - Despite numerous significant operating and financial
challenges, including: (i) a going concern qualification from its
auditors, (ii) a lack of adequate financial controls, (iii) an
apparent lack of alternative strategic buyer interest and (iv) an
obvious need for significant additional capital to properly
commercialize the business (with shareholder dilution being the
likely result of obtaining that capital), Medafor's management team
and board has informed its shareholders that it will not even
explore strategic discussions for the foreseeable future. Medafor's
own audit committee has stated that its auditors intend to move
away from auditing Medafor as if it were a public company. This
implies that Medafor is likely years away from contemplating a
public offering as a liquidity event, if at all. We believe
Medafor's management team and board are more focused on protecting
their outsized compensation and preserving their lifestyles than
meeting their fiduciary duty to shareholders. In previous letters
we have detailed the financial strength, experienced management
team, strong direct sales force and international distribution
network that CryoLife would bring to Medafor. We believe that we
are best positioned to drive additional growth of HemoStase and
related products. Simply put, CryoLife will be a better steward of
the product and help create more value for Medafor shareholders. As
evidenced by our most recent earnings release, CryoLife has
demonstrated consistent financial strength and is well positioned
to continue to create significant value for its shareholders. While
Medafor talks of its "financial success" and notes that it has
raised capital, as discussed above, it has been unable to produce
audited 2009 financial results and has not provided any detail on
the amount or terms of its most recent dilutive capital raise, if
there was one. As Medafor's largest shareholder and on behalf of
all Medafor shareholders, CryoLife requests that Medafor management
and the board produce audited financial statements for 2009 as soon
as possible. With a timely review of audited financials, all
Medafor shareholders will be able to understand Medafor's true
financial situation. Based on the failure of Medafor to provide
shareholders with current information and our belief that Medafor
does not have the necessary capital to maximize the potential of
its technology and address competitive challenges in the hemostatic
market, CryoLife feels further shareholder dilution is on the way.
Sincerely, Steven G. Anderson Founder, CEO and President IMPORTANT
This letter is provided for informational purposes only and is not
an offer to purchase nor a solicitation of offers to sell shares of
Medafor or CryoLife. Subject to future developments, CryoLife may
file a registration statement and/or tender offer documents and/or
proxy statement with the SEC in connection with the proposed
combination of the two companies. Shareholders should read those
filings, and any other filings made by CryoLife with the SEC in
connection with the combination, as they will contain important
information. Those documents, if and when filed, as well as
CryoLife's other public filings with the SEC, may be obtained
without charge at the SEC's website at http://www.sec.gov/ and at
CryoLife's website at http://www.cryolife.com/. About CryoLife,
Inc. Founded in 1984, CryoLife, Inc. is a leader in the processing
and distribution of implantable living human tissues for use in
cardiac and vascular surgeries throughout the U.S. and Canada. The
Company's CryoValve ® SG pulmonary heart valve, processed
using CryoLife's proprietary SynerGraft ® technology, has FDA
510(k) clearance for the replacement of diseased, damaged,
malformed, or malfunctioning native or prosthetic pulmonary valves.
The Company's CryoPatch ® SG pulmonary cardiac patch has FDA
510(k) clearance for the repair or reconstruction of the right
ventricular outflow tract (RVOT), which is a surgery commonly
performed in children with congenital heart defects, such as
tetralogy of Fallot, truncus arteriosus, and pulmonary atresia.
CryoPatch SG is distributed in three anatomic configurations:
pulmonary hemi-artery, pulmonary trunk, and pulmonary branch. The
Company's BioGlue ® Surgical Adhesive is FDA approved as an
adjunct to sutures and staples for use in adult patients in open
surgical repair of large vessels. BioGlue is also CE Marked in the
European Community and approved in Canada and Australia for use in
soft tissue repair. The Company's BioFoam(TM) Surgical Matrix is CE
Marked in the European Community for use as an adjunct in the
sealing of abdominal parenchymal tissues (liver and spleen) when
cessation of bleeding by ligature or other conventional methods is
ineffective or impractical. BIOGLUE Aesthetic ® Medical
Adhesive is CE Marked in the European Community for periosteal
fixation following endoscopic browplasty (brow lift) in
reconstructive plastic surgery and is distributed by a third party
for this indication. CryoLife distributes HemoStase ® a
hemostatic agent, in much of the U.S. for use in cardiac and
vascular surgery and in many international markets for cardiac,
vascular, and general surgery, subject to certain exclusions. For
additional information about the company, visit CryoLife's Web
site: http://www.cryolife.com/. Media Contacts: D. Ashley Lee
Executive Vice President, Chief Financial Officer and Chief
Operating Officer Phone: 770-419-3355 Nina Devlin Edelman Phone:
212-704-8145 DATASOURCE: CryoLife, Inc. CONTACT: D. Ashley Lee,
Executive Vice President, Chief FinancialOfficer and Chief
Operating Officer of CryoLife, +1-770-419-3355; Nina
Devlin,Edelman, +1-212-704-8145 Web Site: http://www.cryolife.com/
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