Cardiogenesis Acquisition

12 Months Ended

Dec. 31, 2011

Cardiogenesis Acquisition [Abstract]

Cardiogenesis Acquisition

4. Cardiogenesis Acquisition

Overview

     On May 17, 2011 CryoLife completed its acquisition of all of the outstanding shares of Cardiogenesis for $0.457 per share or approximately $21.7 million. CryoLife used cash on hand to fund the transaction and operates Cardiogenesis as a wholly owned subsidiary.

     Cardiogenesis is a leading developer of surgical products used in the treatment of patients with severe angina resulting from diffuse coronary artery disease. Cardiogenesis markets its revascularization technologies, which include the Holmium: YAG laser console and single use, fiber-optic handpieces. The system is FDA approved for performing a surgical procedure known as Transmyocardial Revascularization , used for treating patients with stable angina that is not responsive to conventional therapy.

Accounting for the Transaction

     The Company has recorded an allocation of the $21.7 million purchase price to Cardiogenesis' tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of May 17, 2011. The allocation of the purchase price to intangible assets was based on valuations performed to determine the fair value of such assets as of the acquisition date. Goodwill has been recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired. The liability amounts recorded include the Company's estimate of contingent liabilities assumed. The accuracy of the amounts recorded is based on information available to the Company. If the value of the assets acquired or liabilities assumed by the Company is determined to be significantly different from the amounts previously recorded in purchase accounting, the Company may need to record additional expenses or write-downs in future periods.

The purchase price allocation as of December 31, 2011 is as follows (in thousands):

		Opening
		Balance Sheet
Cash and cash equivalents	$	650
Receivables		1,055
Inventory		852
Property and equipment		248
Intangible assets		11,900
Goodwill		4,220
Net deferred tax assets		5,002
Other assets		230
Liabilities assumed		(2,445	)
Total purchase price	$	21,712

     CryoLife incurred approximately $3.0 million in transaction and integration costs related to the acquisition in the year ended December 31, 2011.

Pro Forma

     Cardiogenesis' revenues of $5.7 million from the date of acquisition are included in the Company's Consolidated Statement of Operations for the year ended December 31, 2011. Selected unaudited pro forma results of operations for the years ended December 31, 2011, 2010, and 2009 assuming the Cardiogenesis acquisition had occurred as of January 1, 2009, are presented for comparative purposes below (in thousands, except per share data):

	Year Ended December 31,
		2011		2010		2009
Total revenues	$	123,951	$	127,935	$	122,039
Net income		7,962		3,176		5,610

     Pro forma results for the year ended December 31, 2009 include CryoLife's acquisition and integration related costs of approximately $3.0 million, on a pre-tax basis, and other costs as appropriate. Pro forma disclosures were calculated using a tax rate of approximately 36%.

Legal Action

     On February 19, 2008 CardioFocus, Inc. ("CardioFocus") filed a complaint in the U.S. District Court for the District of Massachusetts (the "Massachusetts Court") against Cardiogenesis, CryoLife's wholly owned subsidiary, acquired on May 17, 2011 and a number of other companies. In the complaint CardioFocus alleges that Cardiogenesis and the other defendants had previously violated patent rights allegedly held by CardioFocus directed to the use of holmium-doped YAG lasers in connection with low-hydroxyl content silica fibers for use in performing surgery. All of the asserted patents have now expired and the Company is the sole remaining defendant in the action. CardioFocus seeks a reasonable royalty pursuant to the Georgia Pacific factors for Cardiogenesis' sales of its accused products, namely, the SolarGen, TMR, and New Star lasers and lasers systems, during the period 2002 to 2007.

     Since the filing of the lawsuit in February of 2008, Cardiogenesis has filed numerous requests for reexamination of the two patents being asserted against Cardiogenesis with the U.S. Patent and Trademark Office ("USPTO"). Through these reexaminations three asserted claims from two patents have survived. Specifically, Claim 2 of U.S. Patent No. 6,547,780 (the "'780 Patent") and Claims 2 and 7 of U.S. Patent No. 5,843,073 (the "'073 Patent") were confirmed by the USPTO. Notwithstanding the confirmation of the asserted claims, CryoLife and Cardiogenesis believe that significant issues concerning the validity, enforceability, and non-infringement of the asserted patents continue to exist.

     On August 15, 2011 at the request of both parties, the Massachusetts Court lifted the stay and entered a Scheduling Order. Pursuant to the Scheduling Order, a claims construction hearing or so-called "Markman Hearing" occurred on October 21, 2011. On November 3, 2011 the Massachusetts Court issued a claim construction ruling that construed certain claim terms in favor of CardioFocus's position. On November 14, 2011 Cardiogenesis filed a motion for reconsideration of the Massachusetts Court's construction of certain claim terms. In addition, Cardiogenesis has filed additional reexamination requests for the three claims with the USPTO, but the USPTO has denied the reexamination requests. Cardiogenesis has filed petitions with the USPTO for reconsideration of those denials. The parties are currently in the expert witness phase of discovery, with trial scheduled for June 18, 2012.

     The Company intends to defend itself vigorously in this action. At this time the Company is unable to predict the outcome of this matter and believes that the outcome of this matter will not have a material adverse effect on the Company's results of operations or cash flows as there are still many pre-trial motions to be addressed and expert witness testimony to be analyzed. However, as this matter is ongoing, there is no assurance that this matter will be resolved favorably by the Company or will not result in a material liability to the Company, which could materially affect its results of operations and cash flows.